[Federal Register: September 27, 2001 (Volume 66, Number 188)]
[Notices]
[Page 49400-49418]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27se01-100]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10954, et al.]
Proposed Exemptions; Metropolitan Life Insurance Company (Metlife
Insurance Company) et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No.____, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Metropolitan Life Insurance Company, (MetLife Insurance Company)
and Its Affiliates (collectively, MetLife), Located in New York, NY
[Application No. D-10954]
Proposed Exemption
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
[[Page 49401]]
2570, subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ For purposes of this proposed exemption, references to
provisions of the Act refer also to corresponding provisions of the
Code.
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Section I. Retroactive Exemption for the Acquisition, Holding and
Disposition of MetLife, Inc. Common Stock
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and section 406(b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the Code by
reason of section 4975(c)(1)(D) and (E) of the Code, shall not apply,
as of December 7, 2000 until the date this proposed exemption is
granted, to the acquisition, holding and disposition of the common
stock of MetLife, Inc. (the MetLife, Inc. Stock), by Index and Model-
Driven Funds (collectively, the Funds) that are managed by MetLife, in
which client plans of MetLife invest, provided that the following
conditions and the General Conditions of Section III are met:
(a) The acquisition or disposition of MetLife, Inc. Stock is for
the sole purpose of maintaining strict quantitative conformity with the
relevant index upon which the Index or Model-Driven Fund is based, and
does not involve any agreement, arrangement or understanding regarding
the design or operation of the Fund acquiring MetLife, Inc. Stock which
is intended to benefit MetLife or any party in which MetLife may have
an interest.
(b) All aggregate daily purchases of MetLife, Inc. Stock by the
Funds do not exceed on any particular day the greater of--
(1) 15 percent of the average daily trading volume for the MetLife,
Inc. Stock, occurring on the applicable exchange and automated trading
system (as described in Section I(c) below) for the previous 5 business
days, or
(2) 15 percent of the trading volume for MetLife, Inc. Stock
occurring on the applicable exchange and automated trading system on
the date of the transaction, as determined by the best available
information for the trades occurring on that date.
(c) All purchases and sales of MetLife, Inc. Stock occur (i) either
on a recognized U.S. securities exchange (as defined in Section IV(j)
below), so long as the broker is acting on an agency basis; (ii)
through an automated trading system (as defined in Section IV(i) below)
operated by a broker-dealer independent of MetLife that is registered
under the Securities Exchange Act of 1934 (the 1934 Act) and thereby
subject to regulation by the Securities and Exchange Commission (SEC),
or an automated trading system operated by a recognized U.S. securities
exchange, which, in either case, provides a mechanism for customer
orders to be matched on an anonymous basis without the participation of
a broker-dealer, or (iii) in a direct, arm's length transaction entered
into on a principal basis with a broker-dealer, in the ordinary course
of its business, where such broker-dealer is independent of MetLife and
is registered under the 1934 Act, and thereby subject to regulation by
the SEC.
(d) No transactions by a Fund involve purchases from, or sales to,
MetLife (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption).
(e) No more than 5 percent of the total amount of MetLife, Inc.
Stock, that is issued and outstanding at any time, is held in the
aggregate by Index and Model-Driven Funds managed by MetLife.
(f) MetLife, Inc. Stock constitutes no more than 5 percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based.
(g) A fiduciary of a plan, which is independent of MetLife,
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds MetLife, Inc. Stock, pursuant
to the procedures described herein.
(h) A fiduciary independent of the MetLife directs the voting of
MetLife, Inc. Stock held by an Index or Model-Driven Fund on any matter
in which shareholders of MetLife, Inc. Stock are required or permitted
to vote.
Section II. Prospective Exemption for the Acquisition, Holding and
Disposition of MetLife, Inc. Stock and/or the Common Stock of a MetLife
Affiliate
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and section 406(b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the Code by
reason of section 4975(c)(1)(D) and (E) of the Code, shall not apply to
the acquisition, holding and disposition of MetLife, Inc. Stock and/or
common stock issued by a MetLife affiliate (the MetLife Affiliate
Stock; together, the MetLife Stock), by Index and Model-Driven Funds
that are managed by MetLife, in which client plans of MetLife invest,
provided that the following conditions and the General Conditions of
Section III are met:
(a) The acquisition or disposition of MetLife Stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Index or Model-Driven Fund is based, and does not
involve any agreement, arrangement or understanding regarding the
design or operation of the Fund acquiring MetLife Stock which is
intended to benefit MetLife or any party in which MetLife may have an
interest.
(b) Whenever MetLife Stock is initially added to an index on which
an Index or Model-Driven Fund is based, or initially added to the
portfolio of an Index or Model-Driven Fund, all acquisitions of MetLife
Stock necessary to bring the Fund's holdings of such stock either to
its capitalization-weighted or other specified composition in the
relevant index, as determined by the independent organization
maintaining such index, or to its correct weighting as determined by
the model which has been used to transform the index, occur in the
following manner:
(1) Purchases are from, or through, only one broker or dealer on a
single trading day;
(2) Based on the best available information, purchases are not the
opening transaction for the trading day;
(3) Purchases are not effected in the last half hour before the
scheduled close of the trading day;
(4) Purchases are at a price that is not higher than the lowest
current independent offer quotation, determined on the basis of
reasonable inquiry from non-affiliated brokers;
(5) Aggregate daily purchases do not exceed 15 percent of the
average daily trading volume for the security, as determined by the
greater of either (i) the trading volume for the security occurring on
the applicable exchange and automated trading system on the date of the
transaction, or (ii) an aggregate average daily trading volume for the
security occurring on the applicable exchange and automated trading
system for the previous 5 business days, both based on the best
information reasonably available at the time of the transaction;
(6) All purchases and sales of MetLife Stock occur either (i) on a
recognized U.S. securities exchange (as defined in Section IV(j)
below), (ii) through an automated trading system (as defined in Section
IV(i) below) operated by a broker-dealer independent of MetLife that is
registered under the 1934 Act, and thereby subject to regulation by the
SEC, which provides a mechanism for customer orders to be matched on an
[[Page 49402]]
anonymous basis without the participation of a broker-dealer, or (iii)
through an automated trading system (as defined in Section IV(i) below)
that is operated by a recognized U.S. securities exchange (as defined
in Section IV(j) below), pursuant to the applicable securities laws,
and provides a mechanism for customer orders to be matched on an
anonymous basis without the participation of a broker-dealer; and
(7) If the necessary number of shares of MetLife Stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Fund to require MetLife Stock, MetLife appoints a
fiduciary which is independent of MetLife to design acquisition
procedures and monitor compliance with such procedures.
(c) Subsequent to acquisitions necessary to bring a Fund's holdings
of MetLife Stock to its specified weighting in the index or model
pursuant to the restrictions described in Section II(b) above, all
aggregate daily purchases of MetLife Stock by the Funds do not exceed
on any particular day the greater of:
(1) 15 percent of the average daily trading volume for MetLife
Stock occurring on the applicable exchange and automated trading system
(as defined below) for the previous 5 business days, or
(2) 15 percent of the trading volume for MetLife Stock occurring on
the applicable exchange and automated trading system (as defined below)
on the date of the transaction, as determined by the best available
information for the trades that occurred on such date.
(d) All transactions in MetLife Stock not otherwise described above
in Section II (b) are either--(i) entered into on a principal basis in
a direct, arm's length transaction with a broker-dealer, in the
ordinary course of its business, where such broker-dealer is
independent of MetLife and is registered under the 1934 Act, and
thereby subject to regulation by the SEC, (ii) effected on an automated
trading system (as defined in Section IV(i) below) operated by a
broker-dealer independent of MetLife that is subject to regulation by
either the SEC or another applicable regulatory authority, or an
automated trading system operated by a recognized U.S. securities
exchange (as defined in Section IV(j) below) which, in either case,
provides a mechanism for customer orders to be matched on an anonymous
basis without the participation of a broker-dealer, or (iii) effected
through a recognized U.S. securities exchange (as defined in Section
IV(j) below), so long as the broker is acting on an agency basis.
(e) No transactions by a Fund involve purchases from, or sales to,
MetLife (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption).
(f) No more than 5 percent of the total amount of MetLife Stock,
that is issued and outstanding at any time, is held in the aggregate by
Index and Model-Driven Funds managed by MetLife.
(g) MetLife Stock constitutes no more than 5 percent of any
independent third party index on which the investments of an Index or
Model-Driven Fund are based.
(h) A fiduciary of a plan which is independent of MetLife
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds MetLife Stock, pursuant to the
procedures described herein.
(i) A fiduciary independent of the MetLife directs the voting of
MetLife Stock held by an Index or Model-Driven Fund on any matter in
which shareholders of MetLife Stock are required or permitted to vote.
Section III. General Conditions
(a) MetLife maintains or causes to be maintained for a period of
six years from the date of the transaction the records necessary to
enable the persons described in paragraph (b) of this Section III to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of MetLife, the
records are lost or destroyed prior to the end of the six year period,
and (2) no party in interest other than MetLife shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act or
to the taxes imposed by section 4975(a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) of this Section III
and notwithstanding any provisions of section 504(a)(2) and (b) of the
Act, the records referred to in paragraph (a) of this Section III 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 SEC,
(B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of
the plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer to any plan participating in an Index
or Model-Driven Fund or any duly authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Index or Model-Driven Fund, or a representative of such participant or
beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this Section III(b)(1) shall be authorized to examine trade secrets
of MetLife or commercial or financial information which is considered
confidential.
Section IV. Definitions
(a) The term ``Index Fund'' means any investment fund, account or
portfolio sponsored, maintained, trusteed, or managed by MetLife, in
which one or more investors invest, and--
(1) Which is designed to track the rate of return, risk profile and
other characteristics of an independently maintained securities Index,
as described in Section IV(c) below, by either (i) replicating the same
combination of securities which compose such Index or (ii) sampling the
securities which compose such Index based on objective criteria and
data;
(2) For which MetLife does not use its discretion, or data within
its control, to affect the identity or amount of securities to be
purchased or sold;
(3) That contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and,
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund which is intended to
benefit MetLife or any party in which MetLife may have an interest.
(b) The term ``Model-Driven Fund'' means any investment fund,
account or portfolio sponsored, maintained, trusteed, or managed by
MetLife, in which one or more investors invest, and--
(1) Which is composed of securities the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of MetLife, to transform an independently maintained
Index, as described in Section IV(c) below;
[[Page 49403]]
(2) Which contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(3) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund or the utilization of any
specific objective criteria which is intended to benefit MetLife or any
party in which MetLife may have an interest.
(c) The term ``Index'' means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States, but only if--
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients,
(B) A publisher of financial news or information, or
(C) A public stock exchange or association of securities dealers;
and,
(2) The index is created and maintained by an organization
independent of MetLife; and,
(3) The index is a generally-accepted standardized index of
securities which is not specifically tailored for the use of MetLife.
(d) The term ``opening date'' means the date on which investments
in or withdrawals from an Index or Model-Driven Fund may be made.
(e) The term ``Buy-up'' means an acquisition of MetLife Stock by an
Index or Model-Driven Fund in connection with the initial addition of
such stock to an independently maintained index upon which the Fund is
based or the initial investment of a Fund in such stock.
(f) The term ``MetLife'' refers to Metropolitan Life Insurance
Company, its parent, MetLife, Inc. and their current or future
affiliates, as defined below in paragraph (g).
(g) An ``affiliate'' of MetLife includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
the person;
(2) Any officer, director, employee or relative of such person, or
partner of any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(h) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(i) The term ``automated trading system'' means an electronic
trading system that functions in a manner intended to simulate a
securities exchange by electronically matching orders on an agency
basis from multiple buyers and sellers, such as an ``alternative
trading system'' within the meaning of the SEC's Reg. ATS [17 CFR Part
242.300], as such definition may be amended from time to time, or an
``automated quotation system'' as described in Section 3(a)(51)(A)(ii)
of the 1934 Act [15 U.S.C. 8c(a)(51)(A)(ii)].
(j) The term ``recognized U.S. securities exchange'' means a U.S.
securities exchange that is registered as a ``national securities
exchange'' under Section 6 of the 1934 Act (15 U.S.C. 78f), as such
definition may be amended from time to time, which performs with
respect to securities the functions commonly performed by a stock
exchange within the meaning of definitions under the applicable
securities laws (e.g., 17 CFR Part 240.3b-16).
Effective Date: If granted, this proposed exemption will be
effective as of December 7, 2000 with respect to the transactions
described in Section I above, and as of the date grant notice is
published in the Federal Register for the transactions described in
Section II above.
Summary of Facts and Representations
1. MetLife Insurance Company (or the Applicant) is a life insurance
company organized under the laws of the State of New York and subject
to supervision and examination by the Superintendent of Insurance of
the State of New York. MetLife Insurance Company is a wholly owned
subsidiary of MetLife, Inc., a publicly-held Delaware corporation. As
of December 31, 2000, MetLife Insurance Company, including its
insurance company subsidiaries, had total assets under management of
approximately $302.3 billion and had approximately $2 trillion of life
insurance in force.
2. Among the insurance products and services offered, MetLife
Insurance Company and certain of its affiliates provide funding, asset
management and other services for thousands of ERISA-covered employee
benefit plans. The Applicant also maintains pooled and single plan
separate accounts in which ERISA-covered plans invest. Alone or with
its affiliates, MetLife Insurance Company may manage all or a portion
of the separate account assets. Further, MetLife Insurance Company has
a number of subsidiaries and affiliates that provide a variety of
financial services, including investment management and brokerage
services.
MetLife Insurance Company is also the investment manager, adviser
or an affiliate of the investment manager or adviser with respect to
various portfolios subject to ERISA that are invested in a strategy
which tracks or transforms an index maintained by a third party. The
index may include the stock issued by MetLife, Inc. or an affiliate.
3. MetLife acts as investment manager of institutional accounts,
including employee benefit plans with assets totaling approximately $28
billion. Additionally, MetLife provides directed trust or investment
management services to various employee benefit plans. MetLife is, to
the extent of the provision of investment management services, a
fiduciary of these plans.
As a fiduciary, MetLife may be either directed by an independent
plan fiduciary or plan participants that have the ability to direct
investments for their own plan accounts. Alternatively, in those cases
in which MetLife manages the investments, the Applicant represents that
it does not exercise any discretionary authority over whether an
employee benefit plan invests in particular Index or Model-Driven
Funds.
4. MetLife manages different collective investment funds, trusts
and separate accounts in various ways to enable plan assets to be
diversified to reduce risk and to be invested in the types of
investments that a particular manager for a plan may determine is
appropriate at a particular time. Index Funds and Model-Driven Funds
are two examples of MetLife's separate account products which include
plan investors.
An Index Fund, as defined above, may be a separately-managed
account, an insurance company separate account, a collective investment
fund, or collective trust, the objective of which is the replication of
the performance of an independently-maintained stock or bond index
representing the performance of a specific segment of the public market
for equity or debt securities. The Index Funds are passively-managed,
in that the choice of stocks or bonds purchased and sold, and the
volume purchased and sold, are made according to predetermined third
party indexes rather than according to active evaluation of the
investments. Since December 7, 2000, there have been 5 Index Funds
holding the assets of ERISA-covered plans that have acquired, held and/
or disposed of MetLife, Inc. Stock.
A Model-Driven Fund, as defined above, may be a separately-managed
[[Page 49404]]
account, an insurance company separate account, a collective trust or a
collective investment fund, the performance of which is based on
computer models using prescribed objective criteria to transform an
independently-maintained stock or bond index representing the
performance of a specific segment of the public market for equity or
debt securities. The portfolio of a Model-Driven Fund is determined by
the details of the computer model, which examines structural aspects of
the stock or bond market rather than the underlying values of such
securities. An example of a Model-Driven Fund would include a fund
which ``transforms'' an index, making investments according to a
computer model which uses such data as earnings, dividends and price
earnings ratios for common stocks included in the index.
According to the Applicant, the process for the establishment and
operation of all Funds, which are model-driven, is disciplined.
Objective rules are established for each model. Such Funds operate
pursuant to pre-specified computer programs, the rules and programs are
changed only infrequently.
5. MetLife currently offers a number of separate account products
that are invested according to the criteria of various third party
indexes or are model-driven based on such indexes. These indexes are
compiled by financial information agencies that are engaged in the
provision of financial information or securities brokerage services to
institutional investors and/or are publishers of financial information.
For example, some Funds track the Russell 2000 Index,\2\ while other
funds track the Standard & Poor's 500 Composite Stock Price Index (the
S&P 500 Index).\3\ Most of the Funds track stock indexes, although some
Funds track indexes of debt securities, such as the Lehman Brothers
Bond Indexes.\4\ In each instance, the indexes are compiled by
organizations that are independent of MetLife and are generally-
accepted standardized indexes of securities that are not tailored for
the use of MetLife.
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\2\ The Russell 2000 Index was established and is maintained by
the Frank Russell Company, which is not an affiliate of MetLife. The
Russell 2000 Index is a subset of the larger Russell 3000 Index. The
Russell 3000 Index consists of the largest 3,000 publicly-traded
stocks of U.S. domiciled corporations, identified by the Frank
Russell Company, and includes large, medium and small stocks.
\3\ The S&P 500 Index is composed of 500 stocks that are traded
on the New York Stock Exchange and the NASDAQ National Market
System. The S&P 500 Index is a market-weighted index (i.e., shares
outstanding times the stock price) in which each company's influence
on the Index's performance is directly proportional to its market
value.
\4\ The indexes of debt securities used for the Funds, such as
the Lehman Brothers Bond Index, consist primarily of high quality
fixed-income securities representing the U.S. Government, corporate,
and mortgage-backed securities sectors of the bond market in the
U.S. In this regard, MetLife's fixed income Index Fund portfolios
are currently managed against the Lehman Aggregate Bond Index and
the Lehman Government/Credit Index. However, MetLife is not
represented in either Lehman Brothers Bond Index nor does MetLife
hold any of its debt securities in its separate accounts.
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6. In addition to Funds that are separate accounts or collective
investment funds, MetLife may have investment responsibility for
individual investment funds which are separate portfolios for various
client accounts, including employee benefit plans, where the portfolio
is invested in accordance with a third party index or a model based on
that index. The Applicant represents that the ability of all Funds to
invest in MetLife Stock when the stock is included in an index would
improve the tracking of such indexes.
7. Accordingly, the Applicant requests an administrative exemption
from the Department. If granted, the exemption will permit the
Applicant and its current or future affiliates to maintain separate
accounts, collective funds or trusts that hold securities issued by
MetLife, Inc. and/or the affiliated entities, provided certain
conditions enumerated in the operative language of the exemption are
met. For purposes of the exemption, the Applicant and its affiliates
are collectively referred to as ``MetLife.''
Specifically, the exemption will allow Index and Model-Driven Funds
which are managed by the Applicant or its affiliates, in which client
plans of MetLife participate, to invest in MetLife Stock if such stock
is included among the securities listed in the index utilized by the
Fund. The Applicant is not requesting, nor is the Department providing,
administrative exemptive relief herein for plans sponsored by MetLife.
MetLife believes that investments on behalf of its in house plans in
Index and Model-Driven Funds have been made (and will be made) in
accordance with the statutory exemption provided under section 408(e)
of the Act.\5\ Therefore, the subject exemption will apply to client
plans of MetLife only. With respect to its client plans, the Applicant
states that plan fiduciaries which are independent of MetLife have
authorized or will authorize the investment of a plan's assets in an
Index or Model-Driven Fund which purchases and/or holds MetLife Stock
pursuant to procedures described herein.
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\5\ The Department is not providing an opinion in this proposed
exemption on whether the conditions of section 408(e) of the Act
have been or will be met for such transactions.
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The Applicant requests that the proposed exemption be made
effective as of December 7, 2000 with respect to investments in
MetLife, Inc. Stock by the subject Funds. The Applicant is not
requesting retroactive relief for investments by the Funds in MetLife
Affiliate Stock inasmuch as these Funds have not held such stock.\6\
Further, the Applicant states that any exemptive relief for cross-
trades of securities, including MetLife, Inc. Stock, by Index and
Model-Driven Funds maintained by it should be considered separately.\7\
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\6\ See 29 CFR 2510.3-101; Definition of ``plan assets''--plan
investments.
\7\ In this regard, the Department directs interested persons to
the Proposed Class Exemption for Cross-Trades of Securities by Index
and Model-Driven Funds (the Cross-Trading Proposal) which was
published in the Federal Register on December 15, 1999 (64 FR
70057).
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8. The Applicant states that the proposed exemption is necessary to
allow Funds holding ``plan assets'' to purchase and hold MetLife Stock
in order to replicate the capitalization-weighted or other specified
composition of MetLife Stock in an independently-maintained, third
party index used by an Index Fund or to achieve the desired
transformation of an index used to create a portfolio for a Model-
Driven Fund.
In addition, the Applicant represents that when MetLife Stock is
added to an index on which a Fund is based, or when MetLife Stock is
added to the portfolio of a Fund which tracks an index that includes
MetLife Stock, all acquisitions necessary, as an initial matter, to
bring the Fund's holdings of MetLife Stock to its capitalization or
other specified weighting in the applicable index,\8\ will comply with
conditions (see Section I(b)(1)-(7) above) that are designed to prevent
possible market price manipulation and which are based, in part, on the
restrictions of SEC Rule 10b-18.\9\
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\8\ These instances are referred to herein as a ``Buy-up.'' The
Applicant anticipates that acquisitions of MetLife Stock by an Index
or Model-Driven Fund in a ``Buy-up'' will occur within 10 business
days from the date of the event which causes the particular Fund to
acquire MetLife Stock. MetLife does not anticipate that the amounts
of MetLife Stock acquired by a Fund in a ``Buy-up'' will be
significant. In this regard, the Department notes that the
conditions required herein are designed to minimize the market
impact of purchases made by the Funds in any ``Buy-up'' of MetLife
Stock.
\9\ SEC Rule 10b-18 provides a ``safe harbor'' for issuers of
securities from section 9(a)(2) of the 1934 Act and SEC Rule 10b-5
(which generally prohibits persons from manipulating the price of a
security and engaging in fraud in connection with the purchase or
sale of a security).
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The conditions required for a ``Buy-up'' of MetLife Stock are as
follows:
[[Page 49405]]
Purchases will be from, or through, only one broker or
dealer on a single trading day;
Based on the best available information, purchases will
not be the opening transaction for the trading day;
Purchases will not be effected in the last half hour
before the scheduled close of the trading day;
Purchases will be at a price that is not higher than the
lowest current independent offer quotation, determined on the basis of
reasonable inquiry from non-affiliated brokers;
Aggregate daily purchases will not exceed 15 percent of
the average daily trading volume for the security, as determined by the
greater of either (i) the trading volume for the security occurring on
the applicable exchange and automated trading system on the date of the
transaction, or (ii) an aggregate average daily trading volume for the
security occurring on the applicable exchange and automated trading
system for the previous 5 business days, both based on the best
information reasonably available at the time of the transaction;
All purchases and sales of MetLife Stock will occur either
(i) on a recognized U.S. securities exchange [as defined in Section
IV(j)], (ii) through an automated trading system [as defined in Section
IV(i)] operated by a broker-dealer independent of MetLife that is
registered under the 1934 Act, and thereby subject to regulation by the
SEC, which provides a mechanism for customer orders to be matched on an
anonymous basis without the participation of a broker-dealer, or (iii)
through an automated trading system [as defined in Section IV(i)] that
is operated by a recognized U.S. securities exchange [as defined in
Section IV(j)], pursuant to the applicable securities laws, and
provides a mechanism for customer orders to be matched on an anonymous
basis without the participation of a broker-dealer; and
If the necessary number of shares of MetLife Stock cannot
be acquired within 10 business days from the date of the event which
causes the particular Fund to require MetLife Stock, MetLife will
appoint an independent fiduciary to design acquisition procedures and
monitor compliance with such procedures.
9. MetLife states that the independent fiduciary and its principals
must be completely unrelated to MetLife. The independent fiduciary must
also be experienced in developing and operating investment strategies
for individual and collective investment vehicles that track third
party indexes. Furthermore, the independent fiduciary must not act as
the broker for any purchases or sales of MetLife Stock and will not
receive any consideration as a result of the initial acquisition
program.
As its primary goal, the independent fiduciary will develop trading
procedures that minimize the market impact of purchases made pursuant
to the initial acquisition program by the particular Fund. Thus, the
Applicant expects that, under the trading procedures established by the
independent fiduciary, the trading activities will be conducted in a
low profile, mechanical, non-discretionary manner and would involve a
number of small purchases over the course of each day, randomly-timed.
The Applicant further expects that such a program will allow it to
acquire the necessary shares of MetLife Stock for the Funds with
minimum impact on the market and in a manner that will be in the best
interests of any employee benefit plans that participate in such Funds.
The independent fiduciary will also be required to monitor
compliance with the trading program and procedures developed for the
initial acquisition of MetLife Stock. During the course of any initial
acquisition program, the independent fiduciary will be required to
review the activities weekly to determine compliance with the trading
procedures and notify MetLife should any non-compliance be detected.
Should the trading procedures need modifications due to unforeseen
events or consequences, the independent fiduciary will be required to
consult with MetLife and must approve in advance any alteration of the
trading procedures.
10. Subsequent to the initial acquisitions necessary to bring a
Fund's holdings of MetLife Stock to their specified weightings in the
index or model pursuant to the restrictions described above, all
aggregate daily purchases of MetLife Stock by the Funds will not exceed
on any particular day the greater of--
15 percent of the average daily trading volume for MetLife
Stock occurring on the applicable exchange and automated trading system
for the previous 5 business days, or
15 percent of the trading volume for MetLife Stock
occurring on the applicable exchange and automated trading system on
the date of the transaction, as determined by the best available
information for the trades that occurred on such date.
11. MetLife represents that as of December 7, 2000 until the date
this proposed exemption is granted, all purchases and sales of MetLife,
Inc. Stock by the Funds, other than acquisition of such stock in a Buy-
up have occurred or will continue to occur in one of the following
ways: (a) On a principal basis with a broker-dealer, in the ordinary
course of its business, where such broker-dealer is independent of
MetLife and is registered under the 1934 Act, and thereby subject to
regulation by the SEC; (b) through an automated trading system (as
defined in Section IV(i) below) operated by a broker-dealer independent
of MetLife that is subject to regulation by the SEC or another
applicable regulatory agency or on an automated trading system operated
by a recognized U.S. securities exchange (as defined in Section IV(j))
which, in either case, provides a mechanism for customer orders to be
matched on an anonymous basis without the participation of a broker-
dealer, or (c) through a recognized U.S. securities exchange (as
defined in Section IV(j)), so long as the broker is acting on an agency
basis.\10\
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\10\ The Department notes that no relief is being provided
herein for purchases and sales of securities between a Fund and a
broker-dealer acting as principal, which may be considered
prohibited transactions as a result of such broker-dealer being a
party in interest under section 3(14) of the Act, with respect to
any plans that are investors in the Fund. However, such transactions
may be covered by one or more of the Department's existing class
exemptions. For example, Prohibited Transaction Class Exemption 84-
14 (49 FR 9497, March 13, 1984) permits, under certain conditions,
parties in interest to engage in various transactions with plans
whose assets are invested in an investment fund managed by a
``qualified professional asset manager'' (i.e., a QPAM) who is
independent of the parties in interest (with certain limited
exceptions) and meets specified financial standards.
---------------------------------------------------------------------------
In addition, MetLife represents that as of the date this proposed
exemption is granted, all future transactions by the Funds involving
MetLife Stock which do not occur in connection with a Buy-up of such
stock by a Fund, as described above, will be either (a) entered into on
a principal basis in a direct, arm's length transaction with a broker-
dealer, in the ordinary course of its business, where such broker-
dealer is independent of MetLife and is registered under the 1934 Act,
and thereby subject to regulation by the SEC; (b) effected on an
automated trading system (as defined in Section IV(j) above) operated
by a broker-dealer independent of MetLife that is either registered
under the 1934 Act, and thereby subject to regulation by the SEC, or an
automated trading system operated by a recognized U.S. securities
exchange (as defined above) which, in either case, provides a mechanism
for customer order to be matched on an anonymous basis without the
participation of a broker-dealer; or (c) effected through a recognized
U.S.
[[Page 49406]]
securities exchange (as defined in Section IV(j) above) so long as the
broker is acting on an agency basis.
12. With respect to all acquisitions and dispositions of MetLife
Stock by the Funds since December 7, 2000, the Applicant states that no
such transactions have involved purchases from or sales to MetLife
(including officers, directors or employees thereof), or any party in
interest that is a fiduciary with discretion to invest assets into the
Fund. The Applicant represents that all future acquisitions and
dispositions of MetLife Stock by any Index or Model-Driven Funds
maintained by MetLife will also not involve any purchases from or sales
to MetLife (including officers, directors or employees thereof), or any
party in interest that is a fiduciary with discretion to invest assets
into the Fund (unless the transaction by the Fund with such party in
interest would otherwise be subject to an exemption).\11\
---------------------------------------------------------------------------
\11\ In this regard, the Department is providing no opinion
herein on whether such principal transactions would be covered by
any existing exemption.
---------------------------------------------------------------------------
13. The Applicant represents that no more than 5 percent of the
total outstanding shares of MetLife Stock will be held in the aggregate
by the Index or Model-Driven Funds managed by MetLife. In addition, the
Applicant states that MetLife Stock will not constitute more than 5
percent of the value of any independent third party index on which
investments of an Index or Model-Driven Fund are based.
For purposes of the acquisition and holding of MetLife, Inc. Stock
by all of the Funds since December 7, 2000 until the date this proposed
exemption is granted, the Applicant states that such stock will
constitute no more than 5 percent of any independent third party index
on which the investments in Index or Model-Driven Funds are based. For
example, the Applicant notes that the current weighting of MetLife,
Inc. Stock in the S&P 500 Index is 0.213 percent and its weighting in
the Barra Value Index is 0.41 percent. Although some indexes include
MetLife, Inc. Stock in percentages that exceed 3 percent of the index,
MetLife does not currently utilize such indexes for its Index and
Model-Driven Funds with ``plan assets'' subject to the Act.
For purposes of future acquisitions and holdings of MetLife Stock
by the Funds once this proposed exemption is granted, neither MetLife,
Inc. Stock nor MetLife Affiliate Stock will constitute more than 5
percent of any independent third party index on which the investments
of an Index or Model-Driven Fund are based. In this regard, the
Applicant has identified 5 indexes which include MetLife, Inc. Stock
where the current approximate capitalization weight of the index
represented by MetLife, Inc. Stock exceeds 3 percent. Therefore, the
Applicant requests that the proposed exemption allow MetLife to design
a passive investment strategy for an Index or Model-Driven Fund which
seeks to track an index that contains MetLife Stock, or which
transforms such an index into a model-prescribed way, as long as the
MetLife Stock does not constitute more than 5 percent of the index.
With respect to an index's specified composition of particular
stocks in its portfolio, the Applicant states that future Funds may
track an index where the weighting for stocks listed in the index is
not capitalization-weighted. However, the Applicant notes that Funds
maintained by it or its affiliates may track indexes where the
selection of a particular stock by the index and the amount of stock to
be included in the index is not established based on the market
capitalization of the corporation issuing such stock. Therefore, since
an independent organization may choose to create an index where there
are other index weightings for stocks composing the index, the
Applicant requests that the proposed exemption allow for MetLife Stock
to be acquired by a Fund in the amounts which are specified by the
particular index, subject to the other restrictions imposed under this
proposed exemption. In addition, the Applicant represents that, in all
instances, acquisitions or dispositions of MetLife Stock by a Fund will
be for the sole purpose of maintaining quantitative conformity with the
relevant index upon which the Fund is based, or in the case of a Model-
Driven Fund, a modified version of such an index as created by a
computer model based on prescribed objective criteria and third party
data.
14. The Applicant will appoint an independent fiduciary to direct
the voting of any MetLife Stock held by the Funds. The independent
fiduciary will be a consulting firm specializing in corporate
governance issues and proxy voting on behalf of public and private
pension funds. The independent fiduciary will be required to develop
and follow standard guidelines and procedures for the voting of proxies
by institutional fiduciaries.
The Applicant will provide the independent fiduciary with all
necessary information regarding the Funds that hold MetLife Stock on
the record date for MetLife's shareholder meetings, and all proxy and
consent materials with respect to MetLife Stock. The independent
fiduciary will maintain records with respect to its activities as an
independent fiduciary on behalf of the Funds, including the number of
shares of MetLife Stock voted, the manner in which such shares were
voted, and the rationale for the vote if the vote was not consistent
with the independent fiduciary's procedures and current voting
guidelines in effect at the time of the vote. The independent fiduciary
will supply MetLife with the information after each shareholder
meeting. The independent fiduciary will be required to acknowledge that
it will be acting as a fiduciary with respect to the plans which invest
in the Funds which own MetLife Stock, when voting such stock.\12\
---------------------------------------------------------------------------
\12\ Currently, the Applicant is utilizing the Investor
Responsibility Research Center to vote proxies related to MetLife,
Inc. Stock. However, any independent fiduciary duly appointed by the
Applicant has satisfied or will satisfy, in the case of a successor
independent fiduciary, the criteria described above.
---------------------------------------------------------------------------
15. In summary, with respect to all acquisitions, holdings and
dispositions of MetLife Stock by the Funds since December 7, 2000, it
is represented that the subject transactions meet the statutory
criteria for an exemption under section 408(a) of the Act because:
(a) Each Index or Model-Driven Fund involved is based on an index,
as defined in Section IV(c) above;
(b) The acquisition, holding and disposition of MetLife, Inc. Stock
by the Index or Model-Driven Fund is for the sole purpose of
maintaining strict conformity with the relevant index upon which an
Index or Model-Driven Fund is based, and will not involve an agreement,
arrangement or understanding regarding the design or operation of the
Fund acquiring MetLife, Inc. Stock which is intended to benefit MetLife
or any party in which MetLife may have an interest;
(c) All aggregate daily purchases of MetLife, Inc. Stock by the
Funds do not exceed, on any particular day, the greater of (i) 15
percent of the average daily trading volume for the MetLife, Inc. Stock
occurring on the applicable exchange and automated trading system for
the previous 5 business days, or (ii) 15 percent of the trading volume
for MetLife, Inc. Stock occurring on the applicable exchange and
automated trading system on the date of the transaction, as determined
by the best available information for the trades that occurred on such
date;
(d) All purchases and sales of MetLife, Inc. Stock, other than
acquisitions of such stock in a Buy-up described above,
[[Page 49407]]
occur either (i) on a recognized securities exchange, as defined
herein, (ii) through an automated trading system (as defined herein)
operated by a broker-dealer independent of MetLife that is subject to
regulation by either the SEC, which provides a mechanism for customer
orders to be matched on an anonymous basis without the participation of
a broker-dealer, or (iii) in a direct, arm's length transaction entered
into on a principal basis with a broker-dealer, in the ordinary course
of its business, where such broker-dealer is independent of MetLife and
is registered under the 1934 Act, and thereby subject to regulation by
the SEC.
(e) No transactions by a Fund involve purchases from or sales to
MetLife (including officers, directors or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption);
(f) No more than 5 percent of the total amount of MetLife, Inc.
Stock that is issued and outstanding at any time is held, in the
aggregate, by Index or Model-Driven Funds managed by MetLife;
(g) MetLife, Inc. Stock constitutes no more than 5 percent of the
value of any independent third party index on which investments of an
Index or Model-Driven Fund are based;
(h) A plan fiduciary independent of MetLife will authorize the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds MetLife, Inc. Stock; and
(i) A fiduciary independent of MetLife directs the voting of
MetLife, Inc. Stock held by an Index or Model-Driven Fund on any matter
in which shareholders of MetLife, Inc. Stock are required or permitted
to vote.
With respect to all acquisitions, holdings and dispositions of
MetLife Stock by the Funds after this proposed exemption is granted,
MetLife represents that such transactions will meet the statutory
criteria for an exemption under section 408(a) of the Act because:
(a) Each Index or Model-Driven Fund involved will be based on an
index, as defined in Section IV(c) above;
(b) The acquisition, holding and disposition of MetLife Stock by
the Index or Model-Driven Fund will be for the sole purpose of
maintaining strict conformity with the relevant index upon which an
Index or Model-Driven Fund is based, and will not involve an agreement,
arrangement or understanding regarding the design or operation of the
Fund acquiring MetLife Stock which is intended to benefit MetLife or
any party in which MetLife may have an interest;
(c) Whenever MetLife Stock is initially added to an index on which
a Fund is based, or initially added to the portfolio of a Fund (i.e., a
Buy-up), all acquisitions of MetLife Stock necessary to bring the
Fund's holdings of such stock either to its capitalization-weighted or
other specified composition in the relevant index, as determined by the
independent organization maintaining such index, or its correct
weighting as determined by the computer model which has been used to
transform the index, will be restricted by conditions which are
designed to prevent possible market price manipulations;
(d) Subsequent to acquisitions necessary to bring a Fund's holdings
of MetLife Stock to its specified weighting in the index or model,
pursuant to the restrictions above, all aggregate daily purchases of
MetLife Stock by the Funds will not exceed the greater of (i) 15
percent of the average daily trading volume for the MetLife Stock
occurring on the applicable exchange and automated trading system for
the previous 5 business days, or (ii) 15 percent of the trading volume
for MetLife Stock occurring on the applicable exchange and automated
trading system on the date of the transaction, as determined by the
best available information for the trades that occurred on such date;
(e) All transactions in MetLife Stock, other than acquisitions of
such stock in a Buy-up described above, will be either (i) entered into
on a principal basis with a broker-dealer, in the ordinary course of
its business, where such broker-dealer is independent of MetLife and is
registered under the 1934 Act, and thereby subject to regulation by the
SEC, (ii) effected on an automated trading system operated by a broker-
dealer independent of MetLife that is subject to regulation by either
the SEC or another applicable regulatory authority, or an automated
trading system operated by a recognized U.S. securities exchange which,
in either case, provides a mechanism for customer orders to be matched
on an anonymous basis without the participation of a broker-dealer, or
(iii) effected through a recognized U.S. securities exchange (as
described herein) so long as the broker is acting on an agency basis;
(f) No transactions by a Fund will involve purchases from or sales
to MetLife (including officers, directors or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the Fund with such
party in interest would otherwise be subject to an exemption);
(g) No more than 5 percent of the total amount of MetLife Stock
that is issued and outstanding at any time will be held, in the
aggregate, by Index or Model-Driven Funds managed by MetLife;
(h) MetLife Stock will constitute no more than 5 percent of the
value of any independent third party index on which investments of an
Index or Model-Driven Fund are based;
(i) A plan fiduciary independent of MetLife will authorize the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds MetLife Stock, pursuant to the procedures
described herein; and
(j) A fiduciary independent of MetLife will direct the voting of
MetLife Stock held by an Index or Model-Driven Fund on any matter in
which shareholders of MetLife Stock are required or permitted to vote.
Notice to Interested Persons
Notice of the proposed exemption will be mailed by first-class mail
to interested persons, including the appropriate fiduciaries of
employee benefit plans currently invested in the Index and/or Model-
Driven Funds that acquire and hold MetLife Stock. The notice will
include a copy of the notice of proposed exemption, as published in the
Federal Register, and a supplemental statement, as required under 29
CFR 2570.43(b)(2), which shall inform interested persons of their right
to comment and/or to request a hearing with respect to the proposed
exemption. All notices will be sent to interested persons within 30
days of the publication of the proposed exemption in the Federal
Register. Any written comments and/or requests for a hearing are due
within 60 days after the date of publication of the pendency notice in
the Federal Register.
In addition, MetLife will provide, upon request, a copy of the
proposed exemption and, if granted, a copy of the final exemption to
all ERISA-covered plans which invest in any Index or Model-Driven Fund
containing MetLife Stock in their respective portfolios after the date
the final exemption is published 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.)
[[Page 49408]]
The Prudential Insurance Company of America; (Prudential
Insurance), Located in Newark, NJ
[Application No. D-10984]
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).\13\
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\13\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
---------------------------------------------------------------------------
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, effective September 27, 2001, to (1) the receipt
of shares of common stock (Common Stock) issued by Prudential
Financial, Inc. (Prudential Financial or the Holding Company) or (2)
the receipt of cash (Cash) or policy credits (Policy Credits) by any
eligible policyholder (the Eligible Policyholder) of Prudential
Insurance, which is an employee benefit plan (the Plan), including
Plans sponsored by Prudential Insurance and/or its affiliates for the
benefit of their own employees (collectively, the Prudential
InsurancePlans),\14\ in exchange for such Eligible Policyholder's
mutual membership interest in Prudential Insurance, pursuant to a plan
of conversion (the Plan of Reorganization) adopted by Prudential
Insurance and implemented in accordance with section 17:17C-2 of the
New Jersey Insurance Law.
---------------------------------------------------------------------------
\14\ Unless otherwise noted, references to the term ``Plan'' are
meant to include ``outside'' Plan policyholders of Prudential
Insurance as well as the Prudential Welfare Plan.
---------------------------------------------------------------------------
In addition, if the exemption is granted, the restrictions of
section 406(a)(1)(E) and (a)(2) and section 407(a)(2) of the Act shall
not apply, effective September 27, 2001, to the receipt and holding, by
the Prudential Welfare Benefits Plan (the Prudential Welfare Plan), of
Common Stock, whose fair market value exceeds 10 percent of the value
of the total assets held by such Plan.
The proposed exemption is subject to the general conditions set
forth below in Section II.
Section II. General Conditions
(a) The Plan of Reorganization is implemented in accordance with
procedural and substantive safeguards that are imposed under New Jersey
Insurance Law and is subject to review and supervision by the New
Jersey Commissioner of Banking and Insurance (the Commissioner).
(b) The Commissioner reviews the terms of any options that are
provided to Eligible Policyholders of Prudential Insurance as part of
such Commissioner's review of the Plan of Reorganization, and the
Commissioner only approves the Plan of Reorganization following a
determination that the Plan of Reorganization is fair and equitable to
all Eligible Policyholders.
(c) Except as provided below, each Eligible Policyholder has an
opportunity to comment on and vote to approve the Plan of
Reorganization after full written disclosure of the terms of the Plan
of Reorganization is given to such policyholder by Prudential
Insurance. As provided under the Plan of Reorganization and approved by
the Commissioner,
(1) Eligible Policyholders of policies issued by designated
subsidiaries (the Designated Subsidiaries) of Prudential Insurance will
not have the opportunity to comment and vote on the Plan of
Reorganization, and
(2) Prudential Insurance will be precluded from voting on the Plan
of Reorganization where a group policy is issued to Prudential
Insurance as trustee for a multiple employer, or similar, trust (the
MET) which is not a plan described in section 3(3) of the Act or
section 4975(e)(1) of the Code.
(d) Any election by an Eligible Policyholder which is a Plan to
receive Common Stock pursuant to the terms of the Plan of
Reorganization, or any decision by such Eligible Policyholder to
participate in the commission-free purchase and sale program (the
Program), is made by one or more fiduciaries of such Plan that are
independent of Prudential Insurance and neither Prudential Insurance
nor any of its affiliates exercises any discretion or provides
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c) with
respect to such election or decision-making.
(e) In the case of the Prudential Insurance Plans, the independent
fiduciary--
(1) Conducts a due diligence review of the subject transactions;
and
(2) Votes whether to approve or disapprove the Plan of
Reorganization, on behalf of such Plan.
(f) In the case of the Prudential Welfare Plan, the independent
fiduciary--
(1) Votes shares of Common Stock that are held by such Plan, which
exceed the limitation of section 407(a) of the Act;
(2) Disposes of Common Stock in excess of the limitation set forth
under section 407(a)(2) of the Act as soon as reasonably practicable,
but in no event later than six months after the effective date of the
Plan of Reorganization;
(3) Provides the Department with a complete and detailed final
report as it relates to such Plan prior to the effective date of the
Plan of Reorganization; and
(4) Takes all actions that are necessary and appropriate to
safeguard the interests of such Plan.
(g) After each Eligible Policyholder entitled to receive Common
Stock is allocated at least 8 shares (or the equivalent value of 10
shares of Common Stock for Eligible Policyholders receiving Cash or
Policy Credits), additional consideration is allocated to Eligible
Policyholders who own eligible policies based on a methodology that
takes into account each eligible policy's contribution to Prudential
Insurance's surplus, which methodology has been reviewed by the
Commissioner.
(h) All Eligible Policyholders that are Plans participate in the
transactions on the same basis within their class groupings as other
Eligible Policyholders that are not Plans.
(i) No Eligible Policyholder pays any brokerage commissions or fees
in connection with the receipt of Common Stock or in connection with
the implementation of the Program.
(j) All of Prudential Insurance's policyholder obligations remain
in force and are not affected by the Plan of Reorganization.
(k) The terms of the transactions are at least as favorable to the
Plans as an arm's length transaction with an unrelated party.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Prudential Insurance'' means The Prudential
Insurance Company of America and any affiliate of Prudential Insurance
as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of Prudential Insurance includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Prudential Insurance. (For purposes of this paragraph, the term
``control'' means the
[[Page 49409]]
power to exercise a controlling influence over the management or
policies of a person other than an individual.); and
(2) Any officer, director or partner in such person.
(c) The term ``Eligible Policyholder'' means a policyholder who is
eligible to receive compensation under Prudential Insurance's Plan of
Reorganization. Eligible Policyholders are policyholders of Prudential
Insurance on the day the Plan of Reorganization is adopted by the Board
of Directors of Prudential Insurance.
(d) The term ``Designated Subsidiary'' means stock life insurance
company subsidiaries of Prudential Insurance whose policyholders,
pursuant to section 17:17C-1 of New Jersey Insurance Law, have been
deemed eligible under the Plan of Reorganization to receive
compensation, but which are not qualified to vote on the Plan of
Reorganization.
(e) The term ``Holding Company'' refers to a New Jersey stock
business corporation which will be named ``Prudential Financial, Inc.''
Under the Plan of Reorganization, Prudential Insurance will become an
indirect, wholly owned stock life insurance company subsidiary of the
Holding Company.
(f) The term ``Policy Credit'' means a dividend accumulation, an
additional dividend, an increase in the policy's account value, an
extension of the policy's expiration date, or an additional payment
under an annuity contract.
(g) The term ``Plan'' refers to employee benefit plans covered by
ERISA or section 4975(e) of the Code.
(h) The term ``demutualization'' refers to the process of an
insurance company's reorganizing or converting from a mutual life
insurance company to a stock life insurance company.'' As used herein,
``reorganization'' and ``conversion'' also refer to a demutualization.
Effective Date: If granted, this proposed exemption will be effective
as of September 27, 2001.
Summary of Facts and Representations
Description of the Parties
1. Prudential Insurance is a mutual life insurance company
organized under the laws of the state of New Jersey. Its principal
place of business is located at Prudential Plaza, Newark, New Jersey.
The company is licensed to conduct insurance business in all 50 states
and the District of Columbia. As of December 31, 1999, Prudential
Insurance and its subsidiaries had total assets of about $285 billion,
total liabilities of about $266 billion, and equity of about $19
billion. Also as of December 31, 1999, Prudential Insurance had
approximately 1 million individual and group insurance contracts in
force which were issued to, or on behalf of, employee benefit plans.
Currently, Prudential Insurance's financial strength ratings are as
follows: ``A-1,'' Moody's; ``A+,'' Standard & Poor's; and ``A,'' A.M.
Best.
Prudential Insurance's principal products include individual and
group life insurance contracts, endowment contracts, insurance
contracts, annuities, including tax deferred annuities described in
section 403(b) of the Code (TDAs), and individual retirement annuities
described in section 408(b) of the Code (IRAs), and a variety of
pension contracts. Additionally, Prudential Insurance has a number of
affiliates and subsidiaries that provide financial services and
products, including investment management, brokerage, and mutual funds,
as well as real estate services.
As a mutual life insurance company, Prudential Insurance has no
authorized, issued, or outstanding stock. Instead, its policyholders
are both customers and owners of the company. In this regard, the life
insurance, endowment, annuity, and certain other insurance and pension
plan contracts issued by Prudential Insurance combine both insurance
coverage with proprietary rights, which are referred to as ``membership
interests.'' These membership interests entitle Prudential Insurance
policyholders to vote for the Board of Directors and on other matters
at annual and special meetings, as well as on the conversion of the
company from a mutual life insurance company to a stock life insurance
company. Further, the membership interests accord most policyholders of
Prudential Insurance the right to share in the annual, divisible
surplus of the company that is distributed in the form of policyholder
dividends. A membership interest cannot be sold separately from the
underlying insurance policy and it is extinguished automatically when
the policy ends.
2. Prudential Insurance and its affiliates provide fiduciary and
other services to Plans described in section 3(3) of ERISA and to other
plans described in section 4975(e)(1) of the Code, many of which are
Prudential Insurance policyholders. As a result, Prudential Insurance
may be considered a party in interest or a disqualified person with
respect to such Plans under section 3(14)(A) and (B) of the Act as well
as the related derivative provisions of section 3(14) of the Act. At
present, approximately 800,000 policyholders of Prudential Insurance
are Plans.
3. Although Prudential and its affiliates sponsor a number of in-
house Plans (i.e., the Prudential Insurance Plans) for the benefit of
their employees, the only Plan that will be covered by the subject
exemption is the Prudential Welfare Plan.\15\ This Plan provides
medical, dental and insurance benefits to its employees. Benefits under
the Plan are paid either through a combination of employer and employee
contributions, or they consist entirely of employee contributions. As
of December 31, 1999, the Prudential Welfare Plan had total assets of
$1.97 billion and approximately 63,170 participants.
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\15\ As discussed later in this proposed exemption, Prudential
Insurance states that exemptive relief under section 408(e) of the
Act is available with respect to distributions of Common Stock to
its in-house, ERISA-covered plans, namely, the Prudential Merged
Retirement Plan, the Prudential Employee Savings Plan, the PSI Long
Term Care Plan, the PSI Life/Disability Plan and the PSI Dental
Plan. Nevertheless, the Department has decided to extend the
exemption to cover all Prudential Insurance Plans in order to
mitigate inadvertent prohibited transactions that may arise in
connection with the demutualization.
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Benefits under the Prudential Welfare Plan are funded through group
insurance policies issued by Prudential Insurance, through insurance
contracts issued by unaffiliated insurers, or on a self-insured basis.
In addition, Prudential Insurance has established a number of voluntary
employee beneficiary associations (VEBAs) to hold assets of the
Prudential Welfare Plan, including Prudential Insurance group and
individual policies and individual securities, such as equities or
bonds. Prudential Insurance or its affiliates generally manage assets
held by the VEBAs that are not insurance contracts.
Reasons for the Reorganization
4. Prudential Insurance represents that it has grown from a company
primarily focused on selling life insurance to a financial services
institution that provides a wide range of insurance, asset management,
securities and other financial products and services. Although the
mutual company structure has worked well in the past, Prudential
Insurance explains that its Board of Directors has had to reexamine
retaining this structure in light of changes occurring in the global
financial services market, such as increased competition from companies
outside the United States and from non-insurance companies, changes in
distribution channels for financial services products, and the
reorganization into stock companies (through demutualization) of
[[Page 49410]]
many of Prudential Insurance's competitors.
After considering these changes and evaluating other possible
courses of action, Prudential Insurance states that its Board of
Directors concluded that a stock company structure would have many
business and organizational advantages. Accordingly, on February 10,
1998, Prudential Insurance's Board of Directors initiated the process
of reorganizing into a stock company by authorizing the officers of
Prudential Insurance to study the feasibility of a reorganization and
to prepare a Plan of Reorganization for the Board's consideration. On
December 15, 2000, the Board of Directors unanimously approved and
adopted the Plan of Reorganization (which was subsequently amended and
restated as of the December 15, 2000 date) to effect the change in
Prudential Insurance's business structure through demutualization. The
Board's reasons were as follows:
First, it was believed that a publicly-traded stock
company could compete more effectively in the global financial services
industry. Access to capital through sales of Common Stock would
facilitate the funding of new products, services and sales channels
that are consistent with Prudential Insurance's overall business
strategy. Also, in lieu of using cash, Common Stock would be available
to acquire other companies for future growth.
Second, the demutualization would enable Prudential
Insurance to distribute the total value of the company to Eligible
Policyholders pursuant to the Plan of Reorganization, thereby affording
Eligible Policyholders the opportunity to realize economic value, in
the form of Common Stock, Cash or Policy Credits, in exchange for such
policyholders' illiquid membership interests. Eligible Policyholders
receiving Common Stock would be able to retain their shares of Common
Stock or sell it for cash at market value.
Third, the Holding Company would be able to use stock-
based compensation programs to recruit and retain high-quality
employees and to align their long-term interests with shareholders'
interests.
Fourth, having publicly-traded Common Stock would require
that Prudential Insurance report its financial performance to the
financial markets periodically and be compared with similar
institutions by financial analysts.
5. Accordingly, Prudential Insurance requests an administrative
exemption from the Department that will permit certain of its Plan
policyholders to engage in transactions related to the implementation
of the Plan of Reorganization.\16\ Specifically, Prudential Insurance
requests a prospective exemption that will cover the receipt of Common
Stock issued by the Holding Company, Cash or Policy Credits by Eligible
Policyholders that are Plans, including the Prudential Welfare Plan, in
exchange for such Eligible Member's membership interest in Prudential
Insurance.\17\ Prudential Insurance represents that the receipt of
Common Stock, Cash, or Policy Credits by the Plan can viewed as a
prohibited sale or exchange of property between it and a Plan, or as a
transfer or use of the Plan's assets by or for the benefit of
Prudential Insurance in violation of section 406(a)(1)(A) and (D) of
the Act.
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\16\ In connection with its demutualization, it should be noted
that Prudential Insurance has received advisory opinions from the
Department regarding (a) whether it would be deemed to be a
fiduciary when implementing policyholder decisions to allocate
compensation among plan participants or among plans where the policy
funds more than one plan (ERISA Advisory Opinion 2001-02A (Feb. 15,
2001)); and (b) whether the exercise of certain, limited
policyholder duties in connection with the receipt of compensation
by TDA and IRA policyholders would affect the availability of the
Department's ``safe harbor'' regulations for TDAs and IRAs (ERISA
Advisory Opinion 2001-03A (Feb. 15, 2001)). In addition, in a letter
dated February 15, 2001, which responded to a request for guidance
on behalf of Prudential Insurance, the Department noted that it
would not assert a violation of the Act in any enforcement
proceeding solely because of a failure to hold demutualization
proceeds in trust, provided that the plan fiduciary took specific
steps to safeguard that asset. In this regard, (a) such assets would
consist solely of proceeds received by the policyholder in
connection with the demutualization; (b) such assets, and any
earnings thereon would be placed in the name of the plan in an
interest-bearing account, in the case of cash, or a custodial
account, in the case of stock, as soon as reasonably possible
following receipt, and such proceeds would be applied for the
payment of participant premiums or applied to plan benefit
enhancements or distributed to plan participants as soon as
reasonably possible but no later than twelve months following
receipt; (c) such assets would be subject to the control of a
designated plan fiduciary; (d) the plan would not otherwise be
required to maintain a trust under section 403 of the Act; and (e)
the designated fiduciary would be required to maintain such
documents and records as deemed necessary under the Act with respect
to the foregoing.
\17\ Prudential Insurance represents that the shares of Common
Stock that will be issued to the Prudential Insurance Plans, other
than the Prudential Welfare Plan, will constitute ``qualifying
employer securities'' within the meaning of section 407(d)(5) of the
Act and that section 408(e) of the Act will apply to such
distributions. As such, Prudential Insurance explains that there
will be no violation of section 407(a) of the Act with respect to
the acquisition of Common Stock by these Plans. The Department
however, expresses no opinion herein, on whether the Common Stock
will constitute qualifying employer securities and whether such
distributions will satisfy the terms and conditions of section
408(e) of the Act.
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In addition, Prudential Insurance has requested that the exemption
apply to distributions of Common Stock to the Prudential Welfare Plan.
Prudential Insurance recognizes that there may be an ``excess'' holding
problem with respect employer stock that is received and held by this
Plan which would be in violation of section 406(a)(1)(E) and (a)(2) of
the Act and section 407(a)(2) of the Act, in addition to section
406(a)(1)(A) and (D) of the Act.\18\ Prudential Insurance states that,
if the Prudential Welfare Plan were to accept Common Stock as
demutualization consideration, the fair market value of such stock
would cause the aforementioned violations of the Act. To avoid this
problem, Prudential Insurance represents that U.S. Trust Company, N.A.
(U.S. Trust) will serve on behalf of the Prudential Welfare Plan as the
independent fiduciary and it will represent the interests of such Plan
with respect to the Plan's acquisition, holding and disposition of
shares of Common Stock.\19\ Finally, Prudential Insurance has confirmed
that the shares of Common Stock that are issued to the Prudential
Welfare Plan will not violate the provisions of section 407(f) of the
Act.\20\ Therefore, no further exemptive relief is required.
Procedural Requirements for Demutualization
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\18\ Section 406(a)(1)(E) of the Act prohibits the acquisition
by a plan of any employer security which would be in violation
section 407(a) of the Act. Section 406(a)(2) of the Act states that
no fiduciary who has authority or discretion to control the assets
of a plan shall permit the plan to hold any employer security if he
[or she] knows that holding such security would violate section
407(a) of the Act. Section 407(a)(1) of the Act prohibits the
acquisition by a plan of any employer security which is not a
qualifying employer security. Section 407(a)(2) of the Act provides
that a plan may not acquire 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.
\19\ As noted in Representation 18, U.S. Trust has also agreed
to serve, in a limited capacity, as independent fiduciary for the
Prudential Merged Retirement Plan, the Prudential Employee Savings
Plan, the PSI Long Term Care Plan, the PSI Life/Disability Plan and
the PSI Dental Plan, which are also Prudential Insurance Plans. In
this regard, U.S. Trust is required to conduct a due diligence
review of the demutualization and vote whether to approve or
disapprove the Plan of Reorganization on behalf of such Plans,
including the Prudential Welfare Plan.
\20\ Section 407(f) of the Act, which is applicable to the
holding of a qualifying employer security by a plan other than an
eligible individual account plan, requires that (a) immediately
following its acquisition by a plan, no more than 25 percent of the
aggregate amount of stock of the same class issued and outstanding
at the time of acquisition is held by the plan; and (b) at least 50
percent of the stock be held by persons who are independent of the
issuer.
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6. Prudential Insurance proposes to reorganize under section
17:17C-2 of New Jersey Insurance Law. In this
[[Page 49411]]
regard, Prudential Insurance's Board of Directors adopted the Plan of
Reorganization on December 15, 2000 under which Prudential Insurance
will, subject to the approval of its policyholders and the Commissioner
(who was provided with a copy of the Plan of Reorganization on March
14, 2001), and after satisfying certain other conditions set forth in
the Plan of Reorganization, be reorganized as a stock life insurance
company. Simultaneously with this corporate reorganization, the shares
of Prudential Insurance will be issued to the Holding Company, in
exchange for Holding Company Common Stock, thereby making Prudential
Insurance an indirect, wholly owned subsidiary of the Holding Company.
The Common Stock will be distributed to Eligible Policyholders of
Prudential Insurance and such stock will be offered to the public
through a concurrent Initial Public Offering (IPO). The Common Stock
will also be listed on the New York Stock Exchange (the NYSE).
New Jersey Insurance Law establishes an approval process for the
conversion of a mutual life insurance company to a stock life insurance
company. Such conversion must be initiated by the board of directors of
the mutual company, which must adopt a plan of reorganization by a vote
of at least three-fourths of the members of the insurer's entire board
of directors upon an express finding that the plan is fair and
equitable to policyholders. Once adopted by the company's board of
directors, the plan of reorganization must be submitted to the
Commissioner for review and approval. In reviewing the plan of
reorganization, the Commissioner is required to appoint one or more
qualified and independent actuaries to provide a certification
regarding the reasonableness of the allocation methodology. The
Commissioner is also permitted to engage the services of other advisors
to advise him or her on matters relating to the reorganization. In the
Prudential Insurance demutualization, the Commissioner has retained the
law firm of Saul Ewing LLP to provide legal services; Fox-Pitt, Kelton,
Inc. and Townsend & Shupp Co. to provide investment banking services;
and Ernst & Young and Arthur Andersen to provide actuarial and
accounting services.
7. Under New Jersey Insurance Law, the Commissioner is required to
hold a public hearing on a plan of reorganization no later than 90 days
after the Commissioner determines the application for reorganization is
complete. Notice of the public hearing must be provided to each
policyholder of the insurance company within 45 days of the hearing.
The notice must be in the form, and provided in the manner, that was
submitted in the company's application materials and approved by the
Commissioner. The purpose of a public hearing is to allow interested
persons to comment on the fairness of the terms of the plan of
reorganization, and to consider whether the reorganization is in the
best interest of the insurer and its policyholders.
The policyholders of the mutual life insurance company generally
must also approve the plan of reorganization. New Jersey Insurance Law
provides that the policyholders who may qualify to vote on the plan are
the ``qualified voters'' of the mutual life insurance company.\21\ Each
qualified voter is entitled to one vote and the plan must be approved
by a vote of not less than two-thirds of all the votes cast by the
mutual insurer's qualified voters. The qualified voters of the mutual
life insurance company must be provided with notice of their
opportunity to vote on the plan of reorganization, which notice must be
approved by the Commissioner and accompanied by a copy of the plan of
reorganization or a summary thereof. Such notice may also be combined
with a notice of the hearing.
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\21\ As further described herein, New Jersey Insurance Law
provides that certain policyholders who otherwise may not be
eligible to receive compensation in connection with Prudential
Insurance's reorganization may be ``deemed'' eligible to receive
such compensation. However, the New Jersey demutualization statute
does not grant Prudential Insurance or the Commissioner similar
authority to ``deem'' certain policyholders qualified to vote on the
Plan of Reorganization. As such, ``deemed'' eligible policyholders
will be eligible to receive compensation but will not be qualified
to vote on the Plan of Reorganization. The ``deemed'' eligible
policyholders represent a small percentage of all eligible
policyholders.
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8. Once a plan of reorganization has been adopted by the company's
board of directors, and after any public hearing and policyholder vote
on the plan of reorganization, the Commissioner is required to approve
the plan if he or she finds that: (a) the plan is fair and equitable to
policyholders; (b) the plan promotes the best interest of the mutual
insurer and its policyholders; (c) the plan provides for the
enhancement of the operations of the reorganized insurer; (d) the plan
is not contrary to law; (e) the plan is not detrimental to the public;
and (f) after giving effect to the reorganization, the reorganized
insurer will have an amount of capital and surplus the Commissioner
deems to be reasonably necessary for its future solvency. A decision by
the Commissioner to approve a reorganization plan is subject to
judicial review in the New Jersey courts.
The Reorganization
9. Prudential Insurance anticipates that the Plan of Reorganization
will be approved or disapproved by the Commissioner and Prudential
Insurance's policyholders by the end of 2001. However, the main
features of the Plan of Reorganization require the formation of the
Holding Company, i.e., Prudential Financial, which has been organized
initially as a subsidiary of Prudential Insurance with Prudential
Insurance owning all of the formation shares of the Holding Company. On
the effective date of the reorganization, Prudential Insurance will be
become a stock life insurance company, and issue common stock to the
Holding Company in exchange for the Common Stock, which will be
distributed by Prudential Insurance in accordance with the Plan of
Reorganization. At that time, Prudential Insurance will surrender to
the Holding Company, which will cancel, all of the formation shares of
the Holding Company initially held by Prudential Insurance. A second
holding company, Prudential Holdings, LLC (Prudential Holdings), has
been formed as a subsidiary of the Holding Company. As part of the
reorganization, the Holding Company will contribute shares of
Prudential Insurance to Prudential Holdings and Prudential Insurance
will become an indirect wholly owned subsidiary of the Holding Company.
As a result of the reorganization, Prudential Insurance will, by
operation of New Jersey Insurance Law, become a stock life insurance
company. Prudential Insurance's charter and by-laws will be amended and
restated, and all membership interests in Prudential Insurance will be
extinguished in accordance with New Jersey Insurance Law. Following the
reorganization, none of Prudential Insurance's insurance policies will
be terminated. All policies then in force will remain in force, and all
policyholders will be entitled to receive all of the benefits under
their policies and contracts to which they would have been entitled if
the Plan of Reorganization had not been adopted. In this regard, no
actual exchange of contracts will take place as a result of the
reorganization. The contractual terms and benefits of Prudential
Insurance's life insurance, endowment, annuity, pension plan, and other
insurance contracts, including the face values, insurance in force,
borrowing terms, amount or pattern of death benefit, premium pattern,
dividend eligibility, interest rate or rates guaranteed on issuance of
the contract,
[[Page 49412]]
and guaranteed mortality and expense charges, will be unchanged by the
reorganization.
Allocation and Distribution of Consideration to Eligible Policyholders
10. Prudential Insurance's Plan of Reorganization provides for
``Eligible Policyholders'' to receive compensation in exchange for the
surrender of membership interests in the mutual life insurance company.
Under the Plan of Reorganization, Eligible Policyholders are those
policyholders whose Prudential Insurance policies were in force on the
date of adoption of the Plan of Reorganization by Prudential
Insurance's Board of Directors, i.e., December 15, 2000.\22\ Prudential
Insurance's Plan of Reorganization generally provides that the Eligible
Policyholder is the person whose name is on the insurer's record as
owner of the policy.\23\
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\22\ Certain policyholders are ``deemed'' eligible under the
Plan of Reorganization as provided under New Jersey Insurance Law.
\23\ Under the Plan of Reorganization and New Jersey Insurance
Law, the general rule is that the group contract holder or group
insurance policy owner of an Eligible Policy, and not the
individuals or entities covered under the eligible contract or
policy, is entitled to vote on the Plan of Reorganization and to
receive any demutualization compensation payable with respect to
that contract or policy. However, there are special rules under the
Plan of Reorganization concerning Prudential Insurance's ability to
vote on the Plan of Reorganization and to receive demutualization
compensation on contracts or policies that it, or an affiliate, may
hold. In this regard, where Prudential Insurance or an affiliate is
the trustee of a MET, it is precluded under New Jersey Insurance Law
from actually voting on the Plan of Reorganization. Similarly, New
Jersey Insurance Law precludes voting on the Plan of Reorganization
by employers and individuals participating in the MET. However, the
statute requires that the demutualization consideration received on
behalf of the MET by Prudential Insurance be passed through to such
participating employers and individuals.
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Prudential Insurance anticipates that it will distribute
compensation to Eligible Policyholders within 45 days after the
effective date of the reorganization (or within 45 days after the
expiration of the top-up period for Eligible Policyholders receiving
cash or policy credits). (The effective date is the date of the closing
of the planned IPO, which will occur after the Plan of Reorganization
is approved by the Commissioner and Prudential Insurance's
policyholders, and the other conditions set forth in the Plan of
Reorganization are satisfied.)
11. Under the Plan of Reorganization, the total value of Prudential
Insurance (currently estimated to be between $18 and $20 billion) will
be allocated among Eligible Policyholders as follows:
First, each Eligible Policyholder that holds one or more
policies in the same legal capacity will receive one basic fixed
component of compensation that is equal to 8 shares of Common Stock (or
the equivalent of 10 shares of Common Stock to Eligible Policyholders
receiving Cash or Policy Credits). Each Eligible Policyholder will be
allocated this basic fixed component, and only one basic fixed
component, regardless of the number of eligible policies the Eligible
Policyholder owns (in the same legal capacity) or their value.
Second, each Eligible Policyholder may receive a basic
variable component of compensation that will be allocated to Eligible
Policyholders to reflect their policy's or policies' contribution to
Prudential Insurance's surplus, in the past, compared to all other
eligible policies, and how much their policy or policies are expected
to contribute to Prudential Insurance's surplus in the future, compared
to all other eligible policies. (If the policy or policies have made,
and are expected to make, no contribution to Prudential Insurance's
surplus, then the basic variable component will be zero).
As noted above, the allocation methodology developed by Prudential
Insurance's actuaries must be fair and equitable, a finding that the
Commissioner is also required to make before approving the Plan of
Reorganization. To assist in making this finding, the Commissioner has
retained Ernst & Young to evaluate and provide an opinion on the
fairness of the allocation methodology developed by Prudential
Insurance. In addition, Prudential Insurance has retained the actuarial
firm of Milliman & Robertson, Inc. to assist it in developing an
equitable allocation methodology.
12. Under the Plan of Reorganization, Eligible Policyholders,
except for certain Eligible Policyholders, who may elect, or are
required to receive Cash or Policy Credits, will receive Common Stock
as compensation for their membership interests in the mutual life
insurance company, which interests will be extinguished.\24\ Any
election by a plan policyholder to choose stock pursuant to the terms
of the Plan of Reorganization will be made by one or more independent
fiduciaries of the plan policyholder, and neither Prudential Insurance
nor any of its affiliates will exercise any discretion with respect to
a plan policyholder's election or provide ``investment advice,'' as
that term is defined in 29 CFR 2510.3-21(c), with respect to the
election.
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\24\ ``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, Jan.
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, Feb. 15, 2001.
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In addition to shares issued to Eligible Policyholders, the Holding
Company will offer to the public its Common Stock in an IPO. At such
time that the Holding Company sells shares in the IPO, the Common Stock
will be listed on the NYSE. Under the Plan of Reorganization, Eligible
Policyholders will not pay any brokerage commissions or similar fees in
connection with their receipt of Common Stock.
13. Under the Plan of Reorganization, certain policyholders who are
otherwise Eligible Policyholders, will receive Cash or Policy credits
in lieu of Common Stock. Eligible Policyholders who may or must receive
Cash or Policy Credits typically are policyholders who have been
allocated 50 or fewer \25\ shares of Common Stock, whose mailing
address is outside the United States or unknown, whose policies are
subject to a judgment lien, creditor lien (other than a policy loan
made by Prudential Insurance) or bankruptcy proceedings; or who hold
TDA or IRA contracts.
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\25\ Prudential Insurance represents that its Board of Directors
may adjust this number downward on or before the effective date.
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Eligible Policyholders who hold TDA or IRA contracts will receive
Policy Credits in exchange for their mutual membership interests
because such policyholders usually are not able to hold Common Stock
under the applicable tax laws. In addition, certain individual life
insurance or annuity contracts held in connection with qualified plans
(i.e., section 401(a) or 403(a) of the Code) will receive Policy
Credits.
Eligible Policyholders who are allocated 50 or fewer shares of
Common Stock (the specific number of which will be determined by
Prudential Insurance's Board of Directors on or
[[Page 49413]]
prior to the effective date) will receive Cash unless the policyholder
elects to receive Common Stock. Such election must be indicated on a
form provided by Prudential Insurance to the policyholder and returned
to Prudential Insurance prior to a date established by the Board of
Directors and approved by the Commissioner. The election can also be
made by telephonically or over the Internet.
14. Eligible Policyholders who receive all of their compensation
with respect to one or more policies held in the same legal capacity in
the form of Cash and/or Policy Credits will receive one additional
fixed component that is equal to two shares of Common Stock and an
additional variable component if the sum of their basic fixed and basic
variable components is equal to 26 or more shares of Common Stock. The
amount of the additional variable component is based on the sum of the
policyholder's basic fixed and basic variable component. As a result,
Eligible Policyholders receiving the additional fixed and additional
variable component will be provided approximately a 10 percent increase
in the number of shares of Common Stock allocated to them. The purpose
of the additional components is to distribute to Eligible Policyholders
that do not receive Common Stock the value that Prudential Insurance
anticipates will result from additional savings inherent in having a
smaller shareholder base.
15. The Plan of Reorganization also includes a ``top-up''
provision. The top-up is designed to provide Eligible Policyholders who
will receive any portion of their compensation in the form of Cash and/
or Policy Credits with a possible upward adjustment to their
compensation depending on the performance of Common Stock during the
top-up period. If the average of the closing prices of the Common Stock
during the first 20 trading days that the stock is traded on the NYSE
exceeds 110 percent of the IPO price, the excess, up to 120 percent of
the IPO share price, will be added to the IPO price and reflected in
the Cash and/or Policy Credits provided to Eligible Policyholders. The
top-up feature provides Eligible Policyholders who are receiving any
portion of their demutualization compensation in Cash or Policy Credits
with their full share of the aggregate value that is being distributed
to all Eligible Policyholders.
16. In addition to the owners of mutual insurance policies it has
issued, Prudential Insurance has determined that persons who owned in
force policies on December 15, 2000 that have been issued by certain of
its stock life insurance company subsidiaries (i.e., the Designated
Subsidiaries), namely, Pruco Life Insurance Company, Pruco Life
Insurance Company of New Jersey and Prudential Select Life Insurance
Company of America, will be ``deemed'' Eligible Policyholders under the
Plan of Reorganization for purposes of receiving compensation in the
reorganization.\26\ Prudential Insurance has concluded that ``special
circumstances'' exist with respect to these policyholders and has
determined that it would be fair and equitable to its policyholders and
in the best interest of Prudential Insurance and its policyholders to
include these policyholders as Eligible Policyholders.
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\26\ New Jersey Insurance Law provides, in pertinent part, that
an ``eligible policyholder'' is a ``policyholder who owns, or is
deemed by the plan of reorganization to own, a policy that is, or
that is deemed by the plan of reorganization to be, in force on the
adoption date, or a policyholder who is deemed eligible by the plan
of reorganization, including as a result of reinstatement in
accordance with the terms of the policy or the plan of
reorganization, or otherwise.'' (emphasis added)
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As required under New Jersey Insurance Law, the Commissioner will
have to find that inclusion of the Designated Subsidiary policyholders
is fair and equitable to all Prudential Insurance policyholders as a
whole. Moreover, all of the Eligible Policyholders of the Designated
Subsidiaries which are Plans will be treated in the same manner as any
other Eligible Policyholder that is not a Plan under the Plan of
Reorganization.
Although the policyholders of the Designated Subsidiaries will
receive compensation in connection with Prudential Insurance's
reorganization, none will be permitted to vote on the Plan of
Reorganization.\27\ Nevertheless, Prudential Insurance believes the
interests of the policyholders of the Designated Subsidiaries will be
protected because the Commissioner, with the assistance of outside
consultants, is required to find that the Plan of Reorganization is
fair and equitable. Any Plan policyholder of a Designated Subsidiary
will be treated the same under the Plan of Reorganization as any other
Designated Subsidiary policyholder. Moreover, as a condition of the
reorganization, a qualified and independent actuary appointed by
Prudential Insurance must certify that the methodology and underlying
assumptions used to allocate compensation among Eligible Policyholders
are fair and equitable to all policyholders.
---------------------------------------------------------------------------
\27\ Although New Jersey Insurance Law permits these
policyholders to be ``deemed'' eligible for compensation pursuant to
the Plan of Reorganization, there is no similar flexibility to
``deem'' such policyholders to be qualified to vote on the Plan of
Reorganization. In this regard, the New Jersey demutualization
statute provides that only ``qualified voters'' may vote on a plan
of reorganization, and makes no provision for ``deemed'' qualified
voters. A ``qualified voter'' is defined as ``every policyholder who
is 18 years of age or more and whose policy has been in force for at
least 1 year.'' Because the owners of policies issued by Designated
Subsidiaries do not qualify as ``policyholders'' of Prudential
Insurance, they do not meet the statutory definition of ``qualified
voter'' and are not, therefore, entitled to vote on the Plan of
Reorganization, according to Prudential Insurance.
---------------------------------------------------------------------------
17. The Plan of Reorganization also provides for the establishment
of a commission-free sales and purchase program under which Eligible
Policyholders who receive 99 or fewer shares of Common Stock will be
permitted to sell, on a commission-free basis, all of the stock they
have received pursuant to the Plan of Reorganization, or purchase the
additional amount of shares necessary to increase their holdings to 100
shares. The Program will commence prior to the second anniversary of
the effective date of the Plan of Reorganization. Neither Prudential
Insurance nor its affiliates will provide ``investment advice,'' as
described in 29 CFR 2510.3-21(c), or exercise investment discretion
with respect to those policyholders eligible to participate in the
Program.
Role of the Independent Fiduciary
18. Pursuant to an agreement dated January 22, 2001 (the
Agreement), Prudential Insurance appointed U.S. Trust to conduct a due
diligence review of the proposed demutualization of Prudential
Insurance and to vote on whether to approve or disapprove of the Plan
of Reorganization on behalf of all of the Prudential Insurance Plans.
Under the Agreement, U.S. Trust has acknowledged and accepted the
duties, responsibilities and liabilities of an independent fiduciary
and has agreed to act on behalf of such Prudential Insurance Plans. In
return for services rendered, Prudential Insurance will compensate U.S.
Trust. The Agreement further provides that if Prudential Insurance
requests U.S. Trust to manage the compensation received by the
Prudential Insurance Plans, such responsibilities will be the subject
of a separate engagement letter (the Supplemental Agreement).
Under the Supplemental Agreement dated July 30, 2001, Prudential
Insurance has engaged U.S. Trust as an independent fiduciary
specifically for the Prudential Welfare Plan, to take all actions that
are necessary and appropriate to safeguard the interests of this Plan,
including the management and disposition of Common Stock to be received
by the Plan as demutualization consideration, to the extent such
[[Page 49414]]
securities exceed the 10 percent limitation of section 407(a)(2) of the
Act.\28\ In addition to its previous commitments set forth under the
Agreement, U.S. Trust agrees: (a) To serve as an independent fiduciary
for the Prudential Welfare Plan (including, but not limited to, being
custodian of the compensation received on behalf of such Plan and/or
serving as investment manager of any one of the VEBAs holding Common
Stock on behalf of the Prudential Welfare Plan); and (b) to be
represented as such under any prohibited transaction filing made by
Prudential Insurance with respect to the Prudential Welfare Plan. As
independent fiduciary for the Prudential Welfare Plan, U.S. Trust will
also be required dispose of any shares of Common Stock that are in
excess of the 10 percent limitation set forth under section 407(a)(2)
of the Act as soon as reasonably practicable, but in no event later
than 6 months from the effective date of the Plan of the
Reorganization. Further, U.S. Trust will be required to prepare reports
and documentation for the Department that may be required for purposes
of the examination process, including, but not limited to, reports
evaluating the Plan of Reorganization as it relates to the Prudential
Welfare Plan's holding and disposition of Common Stock in a timely
fashion. Finally, U.S. Trust will be required to vote on shares of
Common Stock that are held by the Prudential Welfare Plan which exceed
the limitation of section 407(a)(2) of the Act.
---------------------------------------------------------------------------
\28\ It is anticipated that the Prudential Welfare Plan will
receive between 6.4 million to 7.2 million shares of Common Stock,
having an initial value of ranging from $22 and $38 per share. It is
expected that such consideration will be passed on to eligible
participants in the Prudential Welfare Plan, except for a small
portion that will be used by the Plan to defray expenses
attributable to distributing compensation to participants.
Prudential Insurance states that the price at which the shares of
Common Stock will actually trade, or for that matter, whether the
Prudential Welfare Plan has exceeded the 10 percent limitation of
section 407(a) of the Act will be known at the time of the IPO.
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U.S. Trust represents that it is qualified to act as an independent
fiduciary for the Prudential Welfare Plan in connection with the Plan
of Reorganization. Its parent, U.S. Trust Corporation, was founded in
1853 and is subject to regulation as a trust company by the State of
New York. U.S. Trust is the principal subsidiary of U.S. Trust
Corporation, a member of the Federal Reserve System and the Federal
Deposit Insurance Corporation, and an entity having approximately $5
billion in assets as December 31, 1999. In addition, U.S. Trust
Corporation is a wholly-owned subsidiary of the Charles Schwab
Corporation and has over $73 billion in assets under management, a
significant percentage of which consists of ERISA retirement plan
assets. U.S. Trust has served as an independent fiduciary for numerous
employee benefit plans that acquire or hold employer securities and has
managed, at various times, over $18 billion in employer securities held
by various such plans. In managing such investments, U.S. Trust has
exercised discretionary authority over many transactions involving the
acquisition, retention and disposition of employer securities.
U.S. Trust represents that it is independent of Prudential
Insurance and its affiliates and has no business ownership or control
relationship, nor is it otherwise affiliated with Prudential Insurance.
U.S. Trust further represents that it derives less than one percent of
its annual income from Prudential Insurance or its affiliates.
U.S. Trust has conducted a preliminary review of the Plan and has
determined that nothing in the Plan of Reorganization should preclude
the Department from proposing the requested exemption. As noted above,
U.S. Trust will provide the Department with a final report evaluating
the Plan of Reorganization prior to its effective date.
19. In summary, it is represented that the transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) The Plan of Reorganization will be implemented pursuant to
stringent procedural and substantive safeguards imposed under New
Jersey Insurance Law and supervised by the Commissioner.
(b) The Commissioner will only approve the Plan of Reorganization
following a determination that, among other things, such Plan is fair
and equitable to all Eligible Policyholders.
(c) One or more independent fiduciaries of each Plan, including the
Prudential Insurance Plans, will have an opportunity to determine
whether to vote to approve and comment on the terms of the Plan of
Reorganization, and will also be solely responsible for any decisions
that may be permitted under the Plan of Reorganization regarding the
form of consideration to be received in return for their respective
membership interests.
(d) Because of all of the protections afforded to Plans under New
Jersey law, no ongoing involvement by the Department will be required
in order to safeguard the interests of Plan policyholders.
(e) The Plan of Reorganization will enable Plans to convert their
illiquid membership interests in Prudential Insurance into shares of
Common Stock, Cash, or Policy Credits.
(f) The insurance and annuity contracts affected by the Plan of
Reorganization will remain in force and there will be no changing of
premiums or compromising any of the benefits, values, guarantees, or
other policy obligations of Prudential Insurance to its policyholders
and contractholders.
Notice to Interested Persons
Pursuant to the requirements of New Jersey Insurance Law, during
May 2001, Prudential Insurance provided policyholders, including Plan
policyholders, with an advance disclosure document relating to its
conversion to a stock company. The document, known as ``The
Policyholder Information Booklet'' (or PIB) included, among other
things, (a) a notice of the date, time, and place for voting on the
Plan of Reorganization; (b) a notice of the time, place, and purpose of
a public hearing on the Plan of Reorganization, at which policyholders
could express their views on the Plan of Reorganization; and (c)
general information regarding Prudential Insurance's Plan of
Reorganization. The PIB was provided in a form and manner approved by
the Commissioner and was sent to over 11 million Prudential Insurance
policyholders, of which approximately 800,000 policyholders were Plans.
Prudential Insurance has deemed these Plan policyholders to be
``interested persons'' for purposes of this exemption.
In connection with the exemption request, Prudential Insurance
wishes to provide notice of the proposed exemption in a manner which
takes into account (a) the costs and administrative burden of providing
copies of the proposed exemption to 800,000 Plan policyholders; (b) the
notices required, and policyholder protections accorded, under state
law, and (c) the limited scope of exemptive relief that it has
requested. In this regard, Prudential Insurance has incorporated the
Department's required supplemental statement describing the exemption
proceeding (see 29 CFR 2570.43) in a slightly modified form in the PIB
under the special heading ``Notice of Application by The Prudential
Insurance Company of America for Prohibited Transaction Exemption''
(hereinafter, the ``PIB Notice''). The PIB Notice is intended to inform
Plan policyholders of the anticipated publication the proposed
exemption in the Federal Register and their right to
[[Page 49415]]
comment on the proposal. The PIB Notice states that a Plan policyholder
may call a toll-free number maintained by Prudential Insurance (1-877-
264-1163) or write to Prudential Insurance if such policyholder wishes
to be provided with a copy of the proposed exemption when it is
published in the Federal Register. In addition, the PIB Notice
indicates that the proposed exemption will be posted on Prudential
Insurance's Web site (www.prudential.com) after publication.
Any Plan policyholder requesting that Prudential Insurance provide
a copy of the proposed exemption will be sent such copy within 30 days
of its publication in the Federal Register. The copy of the proposed
exemption will be accompanied by another version of the supplemental
statement, as required under the Department's regulations. In addition,
the proposed exemption, together with a copy of the supplemental
statement, will be posted on Prudential Insurance's website within 15
days of publication.
Prudential Insurance will give Plan policyholders 90 days to file
comments with the Department. The 90 day comment period will commence
on the date the proposed exemption is published in the Federal
Register. During the comment period, Prudential Insurance will send
copies of the proposed exemption to interested persons who have
requested receiving such copies, no later than 30 days after the
publication date of the proposal in the Federal Register. Interested
persons will then have no less than 60 days from the proposal's
dissemination date in which to file comments with the Department.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Ford Motor Company (Ford), Located in Dearborn, Michigan
[Application No. L-10937]
Proposed Exemption
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Employee Retirement Income Security Act of 1974
(ERISA) shall not apply, effective August 4, 2000, to: (1) The receipt
by the Ford-UAW Benefits Trust (the VEBA) of approximately $2.9 billion
of certain securities (the Partnership Securities) pursuant to the
redemption (the Redemption) by the VEBA of its interest in the Ford
Enhanced Investment Partnership and the Ford Super-Enhanced Investment
Partnership (collectively, the Partnerships); and (2) the transfer of
the Partnership Securities by the VEBA to Ford in exchange for the
transfer of approximately $2.9 billion of certain securities (the Ford-
Owned Securities) to the VEBA (the Exchange), provided that the
following conditions were met:
(a) The terms of the Redemption and the terms of the Exchange were
at least as favorable to the VEBA as the terms that would have been
available in arm's-length transactions between unrelated parties;
(b) The total value of the Partnership Securities received by the
VEBA pursuant to the Redemption equaled the value of the VEBA's pro
rata interest in the Partnerships on the date of the Redemption;
(c) The net asset value of the VEBA's interest in the Partnerships
and each Partnership Security received by the VEBA pursuant to the
Redemption were valued in the same manner using August 4, 2000 close-
of-market bid prices as determined by an independent, recognized
pricing service;
(d) In the case of the Exchange, the VEBA received Ford-Owned
Securities equal in value to the Partnership Securities transferred to
Ford;
(e) Each Partnership Security transferred to Ford by the VEBA
pursuant to the Exchange was valued according to its August 4, 2000
close-of-market bid price as determined by an independent, recognized
pricing service;
(f) Each Ford-Owned Security transferred to the VEBA by Ford
pursuant to the Exchange was valued according to its August 4, 2000
close-of-market bid price as determined by an independent, recognized
pricing service, or to the extent that a price could not be obtained in
this manner, such security was priced according to the average of three
(or a minimum of two) August 4, 2000 close-of-market bid prices
obtained from independent market-makers;
(g) The Ford-Owned Securities transferred to the VEBA pursuant to
the Exchange were not issued by Ford and were comprised solely of cash
and marketable short-term debt securities under the management of
unrelated, independent investment managers;
(h) The Partnership Securities transferred to Ford pursuant to the
Exchange were comprised solely of cash and marketable short-term debt
securities;
(i) Upon the completion of the Exchange, no single issue of Ford-
Owned Securities accounted for more than 25% of the assets of the VEBA;
(j) State Street Bank and Trust Company (SSBT), acting as an
independent fiduciary on behalf the VEBA, monitored the Redemption and
the Exchange; and
(k) SSBT, as independent fiduciary, approved the Redemption and the
Exchange upon determining that the Redemption and the Exchange were in
the best interests of the VEBA and its participants.
Effective Date: The exemption is effective August 4, 2000.
Summary of Facts and Representations
1. Ford is the named fiduciary and the plan administrator of the
Ford-UAW Health Care Plan (the Health Care Plan). The Health Care Plan
had approximately 265,562 participants and beneficiaries as of January
1, 2000, and is funded through the VEBA, a voluntary employees'
beneficiary association described in section 501(c)(9) the Internal
Revenue Code of 1986 (the Code). The VEBA was established by Ford in
June of 1997 and, as of August 1, 2000, had assets totaling
approximately $3.1 billion.\29\
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\29\ The applicant states that, prior to the Redemption and
Exchange, the assets of the VEBA included approximately $800 million
in cash. This was the result, the applicant represents, of an
investment strategy implemented by the Ford Managers (see Footnote
2) in the second half of 2000 aimed at shortening the duration of
the VEBA's investments. As part of this strategy, the VEBA invested
in the Partnerships, whose assets included large holdings of cash
invested on a daily basis in euro time deposits, commercial paper,
agency discount notes, or repurchase agreements all of which earned
interest at approximately the federal funds rate.
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2. The applicant states that Ford customarily administers cash
investments on behalf of the employee benefit plans it maintains. Such
administration, the applicant represents, is typically accomplished in
one of two ways: (1) through the use of Ford investment managers (the
Ford Managers); \30\ or (2) through the use of certain external
investment managers (the External Managers).\31\ Prior to August 4,
2000, the applicant states, the assets of the VEBA were managed by the
Ford Managers. At the direction of the Ford Managers, the assets of the
VEBA were invested through the Partnerships. The Partnerships are two
short-term investment vehicles maintained on
[[Page 49416]]
behalf of the Health Care Plan and certain other investors. At the time
of the Redemption and Exchange, the other investors were Ford, Ford
Global Technologies, Ford Fund and Ford Holdings. The applicant states
that the Health Care Plan was the only employee benefit plan
participating in the Partnerships at the time of the Redemption and
Exchange. In addition, the applicant represents that, during the period
in which the Health Care Plan invested in the Partnerships, the
Partnerships were managed in accordance with ERISA.
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\30\ The applicant states that, pursuant to the terms of the
VEBA trust, Ford may direct the trustee to establish investment
accounts, and Ford may also direct the trustee to segregate all or a
portion of the VEBA trust into an account with respect to which Ford
has investment discretion.
\31\ Specifically, the External Managers are State Street
Research, Blackrock Financial Management, Inc., and Pacific
Investment Management Company. The applicant represents that the
External Managers are each independent of, and unrelated to, SSBT.
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3. The applicant states that, in addition to administering
investments on behalf of the employee benefit plans it maintains, Ford
also administers investments on its own behalf. In this regard, the
applicant represents that Ford maintains an investment portfolio (the
Ford Portfolio) to meet the needs of its automobile manufacturing
business. Prior to August 4, 2000, the Ford Portfolio was managed by
the External Managers. At the direction of the External Managers, the
Ford Portfolio held the Ford-Owned Securities, which were marketable
short-term debt securities (none of which were issued by Ford) and
cash.\32\
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\32\ The applicant represents that although certain Ford-Owned
Securities have nominal terms of up to 30 years, Ford views such
securities as being ``short-term'' since the weighted average life
of such securities is much shorter than their nominal term. In this
regard, Ford represents that the weighted average duration of these
types of securities is approximately one year or less.
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4. The applicant represents that by July of 2000, Ford decided to
shift certain investment management responsibilities with respect to
approximately $2.9 billion of the VEBA's assets. The shift involved
reassigning investment management duties from the Ford Managers to the
External Managers and was based, in part, on certain characteristics of
the VEBA. In this regard, Ford believed that given certain liquidity
characteristics historically exhibited by the VEBA, the investment
strategy implemented by the External Managers would likely provide a
greater rate of return to the VEBA than the rate of return achieved by
the Ford Managers. Specifically, Ford estimated that, to the extent the
External Managers managed $2.9 billion of the VEBA's assets, the VEBA
would receive, over time, an increased return on such assets amounting
to an incremental 30 to 50 basis points.\33\
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\33\ SSBT, the independent fiduciary, has represented that from
April, 1998 until February 13, 2001, the Ford Portfolio outperformed
the VEBA portfolio by eight basis points annually.
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5. The applicant represents that, contemporaneous with Ford's
decision to have the External Managers manage the assets of the VEBA,
Ford decided to reduce the amount of Ford Portfolio assets managed by
the External Managers. This decision was based, the applicant states,
on Ford's determination that the high-yield investment strategy
implemented by the External Managers was inappropriate as applied to
the Ford Portfolio. In this regard, Ford determined that given the
unpredictable nature of its automobile business, the investment
strategy implemented by the Ford Managers was better suited for the
Ford Portfolio's liquidity needs than the investment strategy
implemented by the External Managers. According to the applicant, Ford
thus decided to shift investment management responsibilities with
respect to the assets of the Ford Portfolio from the External Managers
to the Ford Managers.\34\
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\34\ The applicant represents that the Redemption and Exchange
were unrelated to Ford's decision to replace certain Firestone tires
on Ford-manufactured vehicles.
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6. The applicant represents that, upon deciding to shift investment
responsibilities with respect to the assets of the VEBA from the Ford
Managers to the External Managers, Ford considered the costs associated
with reallocating the assets of the VEBA. In this regard, the applicant
represents that, typically, transferring the assets of a portfolio to a
different investment manager involves: (1) The liquidation of certain
assets in a portfolio's asset selection; and (2) the acquisition of new
assets which are consistent with the investment strategies of the new
investment manager. The External Managers and SSBT, therefore,
investigated the cost of: (1) Liquidating the Partnership Securities on
the open market; and (2) acquiring securities similar to the Ford-Owned
Securities on the open market. Upon doing so, the applicant represents,
the External Managers determined that reallocating the VEBA's assets to
the External Managers through open-market transactions would result in
approximately $3.5 million in aggregate transaction costs. Of this
amount, the applicant represents, $1.75 million would have been
incurred by the VEBA and $1.75 million would have been incurred by
Ford. SSBT, meanwhile, determined that such transaction costs
approximated $2.5 million. Of this amount, the applicant represents,
$1.25 million would have been incurred by the VEBA and $1.25 million
would have been incurred by Ford.
The applicant represents that Ford, in consideration of these
estimated transaction costs, determined that transferring investment
management responsibilities with respect to the assets of the VEBA from
the Ford Managers to the External Managers through the Exchange would
benefit the VEBA. In this regard, the applicant represents that the
Exchange would enable the VEBA to avoid the substantial transaction
costs associated with such a transfer of responsibilities. The
applicant represents further that although certain transfer costs and
legal fees did arise with respect to the Redemption and Exchange, such
costs and fees were paid for solely by Ford.
7. Prior to effectuating the Exchange, Ford initiated the
Redemption. In this regard, after August 4, 2000, the VEBA received the
Partnership Securities and cash in return for the redemption by the
VEBA of a proportional interest in the Partnerships. The applicant
represents that the Partnership Securities received by the VEBA
pursuant to the Redemption were comprised solely of readily marketable
short-term debt securities.
The applicant represents that SSBT, acting on behalf of the VEBA,
monitored the pricing of the Partnership Securities for purposes of the
Redemption. The applicant represents that SSBT received less than 1% of
its annual revenue from any of the relevant parties to the transactions
described herein. SSBT, in turn, represents that it manages over $220
billion in fixed income assets, primarily for ERISA plans, and has
acted as an independent fiduciary in a wide variety of transactions
including those which are the subject of this proposal.
For purposes of the Redemption, the Partnership Securities were
priced as follows: (1) Wherever possible, a preselected recognized,
independent pricing service \35\ provided the August 4, 2000 close-of-
market bid price for each Partnership Security; (2) to the extent the
bid price could not be determined by the initial pricing service, a
second preselected recognized, independent pricing service provided the
August 4, 2000 close-of-market bid price for each such Partnership
Security. SSBT represents that this pricing methodology was fair to the
participants of the VEBA. In this regard, SSBT represents that the
assets received by the VEBA pursuant to the Redemption were equal in
value to the proportional interest the VEBA had
[[Page 49417]]
in the net asset value of the Partnerships.
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\35\ For purposes of both the Redemption and Exchange, the
services that provided the relevant prices for the Partnership
Securities and the Ford-Owned Securities were chosen by SSBT.
---------------------------------------------------------------------------
8. The applicant represents that upon the completion of the
Redemption, Ford initiated the Exchange. In so doing, on August 7,
2000, Ford caused the VEBA to transfer to Ford the cash and Partnership
Securities the VEBA received from the Redemption. The applicant
represents that each such Partnership Security was transferred at a
price equal to its respective Redemption price.
In return for the receipt by Ford of the cash and Partnership
Securities provided pursuant to the Exchange, Ford transferred
approximately $2.9 billion in Ford-Owned Securities to the VEBA.\36\
The applicant represents that SSBT, acting on behalf of the VEBA,
monitored the pricing of the Partnership Securities for purposes of the
Exchange. The applicant represents that, with respect to the Ford-Owned
Securities transferred to the VEBA by Ford, each of the Ford-Owned
Securities was priced as follows: (1) Wherever possible, an initial
preselected independent, recognized pricing service provided the August
4, 2000 close-of-market bid price for each Ford-Owned Security; (2) to
the extent that the bid price could not be determined by the initial
pricing service, a second preselected recognized, independent pricing
service provided the August 4, 2000 close-of-market bid price with
respect to each such security; (3) to the extent a Ford-Owned Security
could not be priced according to the initial or secondary pricing
services, such security was priced according to the average of three
August 4, 2000 close-of-market bid prices (if available, but in any
event not less than two such prices were used) as provided by
independent market-makers (to the extent such securities were under
their respective management).\37\
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\36\ Immediately thereafter, the applicant states, the assets of
the VEBA were managed by the External Managers and the assets of the
Ford Portfolio were managed by the Ford Managers.
\37\ The applicant represents that approximately three percent
(3%) of the Ford-owned Securities were provided according to bid
prices provided by independent market-makers.
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9. In a letter dated October 3, 2000, SSBT stated that, prior to
the Redemption and Exchange, certain SSBT analysis regarding the
Redemption and Exchange was presented to a SSBT fiduciary committee
(the Committee). This analysis included the following findings: (1) The
management style of the External Managers was likely to add value to
the VEBA in terms of enhanced performance and that the Ford Portfolio
holdings were suitable for the VEBA; (2) the bid side pricing
convention used by all parties to the Exchange was fair to the
participants in the VEBA; and (3) the off-market nature of the Exchange
would result in significant cost savings to the VEBA relative to a
similar open market exchange. Based on such analysis and findings, the
Committee determined that: (1) The in-kind exchange was consistent with
the VEBA's investment guidelines; (2) the VEBA's investment guidelines
were reasonable; (3) the pricing mechanisms used with respect to the
Redemption and Exchange were appropriate for establishing the fair
market value of the Ford-Owned Securities and the Partnership
Securities; and (4) the Exchange was in the best interests of the
participants and beneficiaries of the VEBA.
Additionally, in a letter dated February 13, 2001, SSBT stated
that, at the time of the Redemption and Exchange, the investment
guidelines for the VEBA portfolio (the VEBA Portfolio) and the Ford
portfolio were essentially the same. In this letter, SSBT also stated
that the VEBA Portfolio and the Ford Portfolio: (1) Were comprised of
fixed income investments; (2) overlapped in many Treasury and higher
rated issues; and (3) were both subject to a loss provision which
mandated that no more than one percent (1%) of asset value may be
reduced in any one quarter.\38\ SSBT stated that the securities
acquired by the VEBA pursuant to the Exchange were high quality assets
comprised primarily of government and government agency bonds, along
with investment grade corporate bonds, and would serve to position the
VEBA favorably in relation to its investment objectives.
---------------------------------------------------------------------------
\38\ The applicant represents that the investment guideline for
portfolio managers is based on a level of risk tolerance rather than
managing the total return to a specific benchmark. This risk
tolerance, the applicant states, is defined as one percent of the
portfolio value per quarter. Capital losses (including net realized
and unrealized mark-to-market losses) during any rolling three-month
period, the applicant states further, should therefore not exceed
one percent of the portfolio market value. The applicant represents
that risk tolerance is used to ensure that portfolios are being
managed consistent with their guidelines and objectives.
---------------------------------------------------------------------------
10. SSBT represents that since the Exchange was to be executed at
the bid side price for both the VEBA Portfolio and the Ford Portfolio,
SSBT determined that the pricing mechanism implemented with respect to
the Exchange was fair and represented the fair market value of the
affected securities. In addition, SSBT represents that the terms of the
Redemption and Exchange were no less favorable to the VEBA than the
terms of similar arm's-length transactions between unrelated parties.
SSBT represents that, prior to the Exchange, SSBT approved the
Exchange, and determined that the Exchange was in the best interests of
the participants of the VEBA.
11. In summary, the applicant contends that the transaction met the
statutory criteria set forth in section 408(a) of ERISA since:
(a) The terms of the Redemption and the terms of the Exchange were
at least as favorable to the VEBA as the terms that would have been
available in arm's-length transactions between unrelated parties;
(b) The total value of the Partnership Securities received by the
VEBA pursuant to the Redemption equaled the value of the VEBA's pro
rata interest in the net asset value of the Partnerships on the date of
the Redemption;
(c) The net asset value of the VEBA's interest in the Partnerships
and each Partnership Security received by the VEBA pursuant to the
Redemption were valued in the same manner using August 4, 2000 close-
of-market bid prices as determined by an independent, recognized
pricing service;
(d) In the case of the Exchange, the VEBA received Ford-Owned
Securities equal in value to the Partnership Securities transferred to
Ford;
(e) Each Partnership Security transferred to Ford by the VEBA
pursuant to the Exchange was valued according to its August 4, 2000
close-of-market bid price as determined by an independent, recognized
pricing service;
(f) Each Ford-Owned Security transferred to the VEBA by Ford
pursuant to the Exchange was valued according to its August 4, 2000
close-of-market bid price as determined by an independent, recognized
pricing service, or to the extent that a price could not be obtained in
this manner, such security was priced according to the average of three
(or a minimum of two) August 4, 2000 close-of-market bid prices
obtained from independent market-makers;
(g) The Ford-Owned Securities transferred to the VEBA pursuant to
the Exchange were not issued by Ford and were comprised solely of cash
and marketable short-term debt securities under the management of
unrelated, independent investment managers;
(h) The Partnership Securities transferred to Ford pursuant to the
Exchange were comprised solely of cash and marketable short-term debt
securities;
[[Page 49418]]
(i) Upon the completion of the Exchange, no single issue of Ford-
Owned Securities accounted for more than 25% of the assets of the VEBA;
(j) SSBT, acting as an independent fiduciary on behalf of the VEBA,
monitored the Redemption and the Exchange; and
(k) SSBT, as independent fiduciary, approved the Redemption and the
Exchange upon determining that the Redemption and the Exchange were in
the best interests of the VEBA and its participants.
Notice to Interested Persons
The applicant represents that notice to interested persons will be
made within twenty (20) business days following publication of this
notice in the Federal Register. Comments and requests for a hearing
must be received by the Department not later than sixty (60) days from
the date of publication of this notice of proposed exemption in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Christopher J. Motta of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions 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 24th day of September, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 01-24151 Filed 9-26-01; 8:45 am]
BILLING CODE 4510-29-P