Proposed Exemptions; EBPLife Insurance Company, et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-09685, et al.]

Proposed Exemptions; EBPLife Insurance Company, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

-----------------------------------------------------------------------

SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the notice of proposed exemption, within 45 days from the

date of publication of this Federal Register notice. Comments and

request for a hearing should state: (1) The name, address, and

telephone number of the person making the comment or request, and (2)

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

request for a hearing must also state the issues to be addressed and

include a general description of the evidence to be presented at the

hearing. A request for a hearing must also state the issues to be

addressed and include a general description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, NW., Washington, DC

20210. Attention: Application No. stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

[[Page 37300]]

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

EBPLife Insurance Company Located in Minneapolis, Minnesota

[Application No. D-09685]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act in accordance with the

procedures set forth in 29 C.F.R. part 2570, subpart B (55 FR 32836,

32847, August 10, 1990).

Section I--Transaction

If the exemption is granted, the restrictions of section 406(a) of

the Act shall not apply, effective April 15, 1994, to the reinsurance

of risks and the receipt of premiums therefrom by EBPLife Insurance

Company (EBPLife) in connection with certain stop-loss policies (the

Stop-Loss Policy or Stop-Loss Policies) issued by unrelated third party

insurance carriers (the Carriers or Carrier) to employers (the

Employers or Employer) any of whose employees were covered by various

employee welfare benefit plans (the Plans or Plan) 1, when

at the time EBPLife reinsured risks and received premiums, Affiliates

of EBPLife, as defined in paragraph (a) of section III below or the

predecessors of such Affiliates also provided non-discretionary

administrative services to such Plans for a fee, provided that the

conditions set forth in section II below were satisfied.

---------------------------------------------------------------------------

\1\ The Department, herein, is not proposing relief for

transactions involving any plans sponsored by EBPLife or its

affiliates (the Affiliates), as defined in paragraph (a) of section

III below, or any predecessors of such Affiliates. In this regard,

EBPLife represents that it may have issued or may issue stop-loss or

other insurance contracts in connection with welfare benefit plans

that cover or may have covered employees of EBPLife, its Affiliates

or predecessors of such Affiliates. However, in all cases, EBPLife

represents that it either satisfies the requirements of the

statutory exemption provided by section 408(b)(5) of the Act, or it

ensures that the insurance contracts are not ``plan assets'' within

the meaning of the Act.

---------------------------------------------------------------------------

Section II--Conditions

This exemption is conditioned upon the adherence to the material

facts and representations described herein and upon the satisfaction of

the following requirements, as of the effective date of this proposed

exemption and thereafter:

(a) Each transaction was effected by EBPLife in the ordinary course

of its business as an insurance company;

(b) The terms of each transaction were at least as favorable to the

Plans as those negotiated at arm's-length with unrelated third parties

under similar circumstances;

(c) The combined total of all fees and other consideration received

by EBPLife, its Affiliates, and predecessors of such Affiliates for the

provision of services to Employers and their Plans and in connection

with the purchase of insurance contracts was not in excess of

``reasonable compensation'' within the meaning of sections 408(b)(2)

and 408(c)(2) of the Act.

(d) EBPLife, its agents or Affiliates, or the predecessors to such

Affiliates have not served as: (1) Trustees to any of the Plans (other

than as non-discretionary trustees, as defined in paragraph (f) in

section III below, who do not render investment advice with respect to

any of the assets of such Plans); (2) plan administrators, within the

meaning of section 3(16)(A) of the Act; (3) fiduciaries who are

expressly authorized in writing to manage, acquire, or dispose of the

assets of any of the Plans; or (4) employers any of whose employees are

covered by any of the Plans.

(e) EBPLife, its Affiliates, or the predecessors of such Affiliates

have not acted as fiduciaries in connection with the decision by the

Employer to purchase Stop-Loss Policies reinsured by EBPLife;

(f) As of the effective date of this exemption, if an Employer

executed an agreement (the Administration Agreement) with the

Affiliates of EBPLife or with the predecessors of such Affiliates to

provide services to an Employer or Plan; and such Employer also

purchased or renewed a Stop-Loss Policy reinsured by EBPLife for the

purpose of funding a Plan, then the fiduciaries of such Plan (the Plan

Fiduciaries or Plan Fiduciary), as defined in paragraph (g) of section

III below, must have received prior to the decision which resulted in

the retention of Affiliates of EBPLife or the predecessors of such

Affiliates to provide services and stop-loss insurance reinsured by

EBPLife, a full and detailed written disclosure, including but not

limited to a copy of the Administration Agreement which, among other

things, disclosed whether EBPLife reinsured risk under a Stop-Loss

Policy issued to the Employer of such Plan and described all of the

services provided by EBPLife, its Affiliates, or the predecessors of

such Affiliates to such Plan or such Employer. Such disclosures have

been provided by EBPLife or its Affiliates or by the predecessors of

such Affiliates, in a form calculated to be understood by such Plan

Fiduciaries who have no special expertise in insurance.

(g)(1) As of the effective date of this exemption, and prior to the

execution of a transaction described in this exemption, following

receipt of the disclosures, described in paragraph (f) of this section

II, the Plan Fiduciary, by signing the Administration Agreement,

acknowledged receipt of such disclosures and acknowledged that the

decision to engage in a transaction which is the subject of this

exemption was a decision made in a fiduciary capacity, and that such

Plan Fiduciary approved of the subject transaction.

(2) With respect to the renewal by Employers of expired Stop-Loss

Policies reinsured by EBPLife where Affiliates of EBPLife or the

predecessors of such Affiliates were parties in interest with respect

to a Plan by reason of the provision of services to such Plan, the

written disclosures required under paragraph (f) of this section II

need not have been repeated, unless--

(A) More than three years had passed since such disclosures were

made with respect to the same kind of services provided by the

Affiliates of EBPLife or by predecessors of such Affiliates or the same

kind of reinsurance of the risk on the Stop-Loss Policies, or

(B) The reinsurance of the risk on such Stop-Loss Policies by

EBPLife or the receipt of compensation for services by Affiliates of

EBPLife or by predecessors of such Affiliates thereto was materially

different from that for which approval described in paragraph (g) of

this section II was obtained.

(h) The Plans have paid no commission with respect to the

reinsurance by EBPLife of the Stop-Loss Policies.

(i) Each of the Plan Fiduciaries have not received, directly or

indirectly (i.e. through any Affiliates), any compensation or other

consideration for his or her own personal account from EBPLife, any of

its Affiliates, any predecessors of such Affiliates, or other party

dealing with any of the Plans in connection with a transaction

described in this exemption.

(j) EBPLife and its Affiliates and any predecessors of such

Affiliates followed

[[Page 37301]]

the standard claims processing practices regarding any claims submitted

with respect to benefits under any of the Plans covered by any of the

Stop-Loss Policies reinsured by EBPLife;

(k) The Employer had final authority regarding the payment or

nonpayment of any and all claims submitted with respect to benefits

under any of the Plans covered by the Stop-Loss Policies reinsured by

EBPLife;

(l) EBPLife or its Affiliates or the predecessors of such

Affiliates have made available upon request by the Employers of each of

the Plans at no additional charge full and detailed written reports

which detail any and all of the following information:

(1) The average turn-around time from the date that a claim was

initially received to the date that the claim was processed for

payment;

(2) The percentage of claims processed within the target period, as

set forth in the Administration Agreement;

(3) The average turn-around time from the date that a claim was

received to the date that a claim was actually paid; and

(4) A summary of pending claims that were received but not paid

accompanied by a code indicating the reason why each claim had not yet

been paid.

(m) Regarding its operations and reserves, EBPLife complied with

all applicable requirements of law and insurance regulations of the

State of Oklahoma, where it is domiciled and licensed to do business;

(n) EBPLife has been subject to a financial audit by the Department

of Insurance of the State of Oklahoma, where it is domiciled and

licensed to do business no less frequently than once every three years;

(o) The issuing Carriers of the Stop-Loss Policies are fully liable

for all claims covered by the Stop-Loss Policies in excess of the

applicable stop-loss limits under such Stop-Loss Policies;

(p) Where the Stop-Loss Policies are reinsured by EBPLife, EBPLife,

as reinsurer, is fully liable for the payments of claims under such

Stop-Loss Policies;

(q) Independent insurance consultants (the Consultants), who were

unrelated to EBPLife, its Affiliates, or to the predecessors of such

Affiliates, solicited bids for administrative services and/or Stop-Loss

Policies on behalf of Employers and served as brokers or agents to

Employers with respect to the purchase by Employers of Stop-Loss

Policies reinsured by EBPLife;

(r)(1) EBPLife or its Affiliates retain or the predecessors of such

Affiliates have retained for a period of six (6) years from the date of

any transaction covered by this exemption, the records necessary to

enable the persons, as described in paragraph (s) of this section II,

to determine whether the conditions of this exemption have been met.

Such records shall include, but not be limited to, the following

information:

(A) A copy of the information disclosed by EBPLife, its Affiliates,

or by the predecessors of such Affiliates to the Plan Fiduciaries,

pursuant to paragraph (f) of section II above;

(B) A copy of the Administration Agreement which discloses, among

other things, whether EBPLife reinsures risk under a Stop-Loss Policy

issued to an Employer;

(C) Any additional information or documents provided to any Plan

Fiduciary with respect to a transaction covered by this exemption;

(D) Evidence of the written acknowledgment of receipt of

disclosures by the Plan Fiduciary as described in paragraph (g) of this

section II.

(2) A prohibited transaction will not be deemed to have occurred

if, due to circumstances beyond the control of EBPLife, its Affiliates,

or the predecessors of such Affiliates, such records were or are lost

or destroyed prior to the end of the six (6) year period.

(3) No party in interest, other than EBPLife, its Affiliates, and

the predecessors of such Affiliates, shall be subject to the civil

penalty that may be assessed under section 502(i) of the Act, if the

records are not maintained, or are not available for examination as

required by paragraph (s) of this section II; and

(S)(1) Except as provided in paragraph (s)(2) of this section II

and notwithstanding any provisions of subsections (a)(2) and (b) of

section 504 of the Act, the records referred to in paragraph (r) of

section II above are unconditionally available for examination during

normal business hours by--

(A) Any duly authorized employee or representative of the

Department of Labor;

(B) Any fiduciary of each of the Plans or any duly authorized

employee or representative of such fiduciary; and

(C) Any Employer of Plan participants and beneficiaries, any

participant or beneficiary of the Plans or duly authorized employee or

representative of such participant or beneficiary; any employee

organization any of whose members are covered by a Plan.

(2) None of the persons described in paragraph (s)(1) (B) and (C)

of section II shall be authorized to examine trade secrets of EBPLife,

its Affiliates, or the predecessors of such Affiliates or commercial or

financial information which is privileged or confidential.

Section III--Definitions

For purposes of this exemption:

(a) An ``Affiliate'' or ``Affiliates'' of a person includes:

(1) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with the person;

(2) any officer, director, employee, relative, or partner in any

such person; and

(3) Any corporation or partnership of which such person is an

officer, director, partner, or employee.

(b) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual;

(c) The term, ``relative,'' means a ``relative'' as that term is

defined in section 3(15) of the Act, or a brother, a sister, or a

spouse of a brother or a sister.

(e) The term ``non-discretionary services'' means custodial

services and services ancillary to custodial services, none of which

services are discretionary.

(f) The term ``non-discretionary trustee'' of a Plan means a

trustee whose powers and duties with respect to any assets of the Plan

are limited to (1) the provision of non-discretionary trust services,

as defined in paragraph (e) of this section III, to the Plan, and (2)

duties imposed on the trustee by any provision or provisions of the

Act.

(g) The term ``Plan Fiduciary'' or ``Plan Fiduciaries'' means a

person(s) who are independent of EBPLife, its Affiliates, and any

predecessors of such Affiliates, are sufficiently knowledgeable with

respect to administration, benefits, funding, and any matters related

thereto concerning such Plan, are capable of making an informed and

independent decision, and are responsible for executing the

Administration Agreement and for deciding to purchase or renew the

Stop-Loss Policies reinsured by EBPLife.

EFFECTIVE DATE: If the proposed exemption is granted, the exemption

will be effective, as of April 15, 1994, the date the application was

filed.

Summary of Facts and Representations

1. Employee Benefit Plans, Inc. (EBP), incorporated under the laws

of Delaware in February 1986, is a managed healthcare company

headquartered in Minneapolis, Minnesota. Prior to the fall of 1995, EBP

was the holding company for a number

[[Page 37302]]

of subsidiaries, including EBPLife and EBPHealth Plans, Inc.

(EBPHealth), described more fully below. The common stock of EBP along

with its subordinated debentures, are traded on the New York Stock

Exchange. As of December 31, 1993, EBP and its Affiliates had aggregate

assets of approximately $200 million and provided products and services

for approximately 2,600 Employers who sponsor self-funded employee

welfare benefit plans nationwide.

2. EBPLife, a wholly owned subsidiary of EBP, was formed from the

merger of two companies, First Security Life Insurance Company and

Sooner Life Insurance Company, after such companies were acquired by

EBP in 1986 and 1991, respectively. EBPLife is a life and health

insurance company domiciled in the State of Oklahoma and is subject to

the insurance laws and regulation of that state which requires EBPLife

to maintain minimum capital and surplus ratios and minimum reserves. In

addition, it is represented that EBPLife is currently licensed to sell

health and life insurance in forty (40) other states and is seeking

licensure in most of the remaining states in the United States.

As of December 31, 1993, EBPLife had assets of approximately $110

million, including insurance loss reserves of approximately $22

million. It is represented that EBPLife has received Standard and

Poor's highest rating for capital adequacy. Further, EBPLife, as of

December 31, 1993, maintained a level of risk-based capital percentage

in excess of the amount required under rules promulgated by the

National Association of Insurance Commissioners. It is represented that

in July 1996, EBPLife was issued a B+ rating by the A.M. Best Company,

the leading national rating organization that evaluates the financial

strength of insurance companies.

As of December 31, 1993, the investment portfolio of EBPLife

consisted primarily of investment grade bonds, all of which are rated A

or higher by Standard & Poor's, with an average duration of 4.7 years.

It is represented that the investment policy of EBPLife is generally

more restrictive than that required under applicable insurance laws and

regulations.

EBPLife directly issues stop-loss insurance and offers fully

insured group health insurance, group term life insurance, accidental

death and dismemberment insurance, and individual major medical and

life insurance conversion policies.2 In addition, EBPLife

reinsures Stop-Loss Policies issued by other Carriers in connection

with self-funded health benefit programs offered by Employers to their

employees. It is represented that all of the insurance policies issued

or reinsured by EBPLife are offered for one-year periods, with annual

repricing and renewals.

---------------------------------------------------------------------------

\2\ It is represented that where EBPLife issued or issues any of

these policies directly to employee benefit plans, the sale of the

insurance policy is eligible for exemptive relief under PTCE 84-24.

The applicant is not requesting relief for such transactions, nor is

the Department, herein, proposing such relief.

---------------------------------------------------------------------------

3. Until 1996, EBPHealth was a wholly owned subsidiary of EBPLife

and a contract administrator to approximately 1,700 Employers who

sponsored self-funded welfare benefit plans covering approximately

775,000 plan participants nationwide.

It is represented that the principal business of EBPHealth as

contract administrator consisted of providing administrative services

to Employers in connection with the establishment and operation of

Plans. The administrative services provided by EBPHealth included

benefit claims processing, benefit disbursement, data analysis. For its

services as contract administrator, EBPHealth received a fee generally

in the form of a fixed monthly amount per eligible employee. In this

regard, the Employers, and not the Plans, paid directly for claims

administration services provided by EBPHealth. It is represented that

EBPHealth did not act as a plan administrator. In this regard, it is

represented that the provisions of Administration Agreements between

EBPHealth and Employers made clear that EBPHealth did not have final

authority to adjudicate benefit claims.

It is represented that prior to 1996, EBPHealth had divisions

operating in the western, central, northeast, and southeast regions of

the United States and employed approximately 855 employees at thirteen

(13) claims processing service centers in these regions. It is

represented that EBPHealth processed claims for health, dental,

disability, vision, and prescription drug programs in excess of $2

billion annually for its clients.

EBPHealth also engaged in the preparation of utilization and claims

experience reports, and offered to Employers the services of several

computerized claims processing and reporting systems which generated

statistical reports. It is represented that these reports provided

information on benefit utilization, claims processing activity, and

accounting data, and other summary and detailed information for use by

Employers. In addition, EBPHealth developed a computerized database

system that permitted customers who elected to participate, among other

things, to review preliminary benefit eligibility determinations and to

create reports comparing health claims expenditures with other

statistical data maintained by EBPHealth.

It is represented that EBPHealth maintained a separate training and

claims auditing staff which conducted routine internal audits of claims

examiners and monitored and updated claims processing methods and

procedures consistent with industry standards. In addition, EBPHealth

was subject to audit by Employers and the Carriers whose Stop-Loss

Policies are reinsured by EBPLife.

4. It is represented that in 1995 and 1996, EBP, EBPLife, and

EBPHealth were the subjects of several mergers and acquisitions. In

this regard, on October 19, 1995, First Financial Management

Corporation (FFMC), a Georgia corporation, acquired EBP and its

Affiliates, EBPLife and EBPHealth. As a result of this merger, EBP

became a wholly-owned subsidiary of FFMC, while EBPLife and EBPHealth

remained wholly-owned subsidiaries, respectively, of EBP and EBPLife.

Subsequently, through a stock merger approved by shareholders on

October 25, 1995, FFMC and its Affiliates, EBP, EBPLife, and EBPHealth,

were acquired by First Data Corporation (FDC). FDC, a Fortune 100

company, is engaged in over 102 countries in providing a variety of

services, including information and financial transaction processing

services, health claims administration, data imaging and information

management.

As a result of the merger on October 25, 1995, FFMC became a

wholly-owned subsidiary of FDC, while EBP and EBPLife, and EBPHealth

remained subsidiaries of FFMC. As of November 21, 1995, it was

estimated that FFMC and FDC had combined annual earnings of more than

$400 million and employed approximately 36,000 persons. It is

represented that, as of December 12, 1996, FDC has assets in excess of

$12.2 billion.

It is represented that prior to the mergers described above that

FFMC had a subsidiary known as First Health Strategies (TPA), Inc.

(First Health), a Utah corporation which was formerly known as Alta

Health Strategies, Inc. (ALTA).3 First Health from its

corporate

[[Page 37303]]

headquarters in Salt Lake City, Utah, and from a number of separate

processing centers around the country, employs sophisticated technology

to integrate claims administration, data analysis, medical case

management, and other services. Subsequent to the mergers described

above, FDC converted all of EBPHealth's clients to the integrated and

automated claim and administration computer system provided by First

Health. It is represented that the conversion required the execution of

new Administration Agreements between First Health and Employers. In

addition, as a result of the conversion, EBPHealth's clients became

eligible to participate in all of the health-related services and

benefits offered by First Health. Accordingly, upon completion of the

conversion in 1996, EBPHealth was formally merged into First Health and

ceased to operate as a third party administrator.

---------------------------------------------------------------------------

\3\ It is represented that ALTA and ALTA Reinsurance Company

(ALTA RE) were granted Prohibited Transaction Exemption 89-75 (PTE

89-75; 54 FR 35959, Aug. 30, 1989; proposed 54 FR 26266, June 22,

1989) by the Department for certain reinsurance transactions

involving stop-loss insurance.

---------------------------------------------------------------------------

It is represented that after the conversion and the two mergers

were completed, the new corporate structure of FDC consisted of a new

health services group comprised of: (1) GENEX Services, Inc., a

workers' compensation managed care company; (2) VIPS, Inc., an

information systems development and consulting company; (3) First

Health, a provider of integrated health care cost management services

to private, self-funded, and government markets; and (4) EBPLife, a

risk-bearing organization through which stop-loss insurance products,

group life insurance products, and other health-related insurance

products are provided to clients of First Health.

Notwithstanding the changes that resulted from the conversion and

mergers, as described above, it is represented that EBPLife did not

change its name nor its domicile. EBPLife intends to maintain its

headquarters in Minneapolis, Minnesota and will continue to maintain

its underwriting, contracts, compliance, premium and billing, finance

and accounting, and insurance claim processing departments separate

from the claim administration functions maintained by First Health.

5. It is represented that Employers who sponsor self-funded Plans

4 often choose to limit exposure to claims by purchasing

stop-loss insurance. Some such stop-loss insurance may be issued by

unrelated Carriers, may be issued directly by EBPLife, or may be issued

by Carriers with which EBPLife has an active reinsurance

arrangement.5 It is represented that where EBPLife is the

issuing carrier, the acquisition of the stop-loss insurance is eligible

for exemptive relief under PTCE 84-24, to the extent such relief is

required.6 If stop-loss insurance is issued by a Carrier

with which EBPLife has an active reinsurance arrangement, EBPLife may

choose to reinsure all or a major portion of the risk under such policy

under two circumstances: (1) Where EBPLife is not licensed to issue

such insurance directly in the state where an Employer does business;

or (2) where the Carrier has greater name recognition. It is

represented that often simultaneous with the purchase or renewal of

Stop-Loss Policies insured or reinsured by EBPLife, Employers have

chosen Affiliates of EBPLife or have chosen predecessors of such

Affiliates to provide services to their Plans. In this regard, it is

represented that, as of August 2, 1994, approximately 70 percent (70%)

of the clients of EBPHealth purchased Stop-Loss Policies which were

insured or reinsured by EBPLife. Further, it is represented that, as of

the same date, approximately 55 percent (55%) of the Stop-Loss Policies

reinsured by EBPLife were sold to Employers who sponsored Plans with

respect to which EBP or its Affiliates were retained to provide claims

administration or other services, although EBP or its Affiliates might

not have been providing such services at the time such Stop-Loss Policy

was reinsured by EBPLife.

---------------------------------------------------------------------------

\4\ It is represented that Plans involved in the transactions

which are the subject of this exemption are maintained by Employers

unrelated to EBPLife, its Affiliates, or the predecessors of such

Affiliates. In this regard, however, the applicant represents that

it could not supply a list of Plans or any specific information on

such Plans in the application, because the Employers and the Plans

change from time to time, and because of the large number of

Employers and Plans nationwide for which EBPLife, its Affiliates

provide products or services or for which the predecessors of such

Affiliates have provided products or services.

\5\ It is represented that the unaffiliated insurance Carriers

with whom EBPLife, as of December 12, 1996, had reinsurance

arrangements are Insurance Company of North America, and the CNA

Insurance Companies. It is further represented that in the past

EBPLife has also had reinsurance arrangements with ITT/Hartford

Insurance Company, and Fortis Benefits Insurance Company.

\6\ The applicant states that because PTCE 84-24 covers the

purchase of any ``insurance or annuity contract'' from an insurance

company, the purchase of Stop-Loss Policies by the Employers should

be eligible for exemptive relief thereunder where EBPLife is the

issuing carrier of such a policy. The Department is expressing no

opinion, herein, whether such transaction satisfies the conditions

as set forth under PTCE 84-24, nor is the Department, herein,

proposing any relief for such transaction.

---------------------------------------------------------------------------

6. It is represented that prior to the mergers described above, EBP

focused on selling products and services to smaller Employers. For this

purpose, EBP employed a sales force of approximately fifty (50)

employees who marketed products and services offered by EBPLife and by

EBPHealth primarily to unaffiliated Consultants who served as brokers

or agents to such Employers. These Consultants received as compensation

for the sale of a Stop-Loss Policy a commission based on a percentage

of gross premiums. In addition, these Consultants may have received a

fee from the Employer for services performed on behalf of such

Employer.

The products and services offered by EBP or its Affiliates included

benefit plan design and consulting, claims administration and

processing, data analysis and reporting, medical cost containment

programs, and underwriting of insurance coverage, including Stop-Loss

Policies issued directly by EBPLife and Stop-Loss Policies issued by

other Carriers but reinsured by EBPLife. It is represented that EBPLife

reinsured the risk under the Stop-Loss Policies, pursuant to the terms

of a reinsurance agreement between the Carrier and EBPLife which

provided that the Carrier issuing the Stop-Loss Policy cede to EBPLife

all or most of the balance of the premiums paid to the Carriers after

various fees, commissions, and taxes had been paid. In this regard, it

is represented that EBPLife paid the issuing Carrier a fee ranging from

one percent (1%) to three and a half percent (3\1/2\%) of the

applicable premium.

7. After the conversion and mergers described above, it is

represented that First Health focused on selling products and services

to larger Employers, generally companies with over 250 employees. In

this regard, almost all of the Employers who were interested in

maintaining a self-funded Plan retained Consultants to advise them on

the purchase of services and products necessary to maintain such Plans.

Once retained by the Employer, these Consultants who were independent

of First Health put together a request for proposal (RFP) for

submission to multiple vendors of services and products, including

stop-loss insurance, for self-funded Plans. It is represented that

First Health may have been one of these vendors.

Upon receipt of a RFP, First Health sales representatives

determined the appropriate pricing for administrative and managed care

services offered through First Health. These services included claims

administration, preferred provider networks, medical utilization

management programs, pharmacy card benefits, and disability

[[Page 37304]]

management services. In addition, First Health sales representatives

may have contacted several stop-loss insurers for quotations for stop-

loss coverage. In this regard, Employers or their Consultants could

have identified an insurance company from which they wished First

Health to obtain a quotation as part of First Health's proposal. The

quotations collected by First Health may often have included Stop-Loss

Policies directly issued by EBPLife; may have included Stop-Loss

Policies issued by Carriers with which EBPLife had a reinsurance

relationship; or may have included Stop-Loss Policies issued by

insurance companies completely unrelated to EBPLife. In addition,

Consultants were free to obtain quotations themselves from any other

insurance company.

Once First Health sales representatives received stop-loss premium

quotations from insurers, it reviewed these quotations for price as

well as other policy variables, such as limitations on coverage.

Depending on these variables, it is represented that Stop-Loss Policies

issued or reinsured by EBPLife may or may not have been included in a

proposal by First Health. If First Health's proposal included a quote

for a Stop-Loss Policy reinsured by EBPLife, it is represented that

such information was disclosed in the proposal.

It is represented that Consultants reviewed the proposals provided

by First Health, by other vendors, by third party administrators, or by

other insurers. Based on this review, the Consultants advised Employers

in selecting an insurance company to provide stop-loss coverage, as

well as other products and services. In this regard, the Consultants

may have recommended a different vendor to provide each service and

product. In the event an Employer determined to purchase administrative

services from First Health, the Administration Agreement included a

disclosure of the relationship, if any, between First Health and the

issuer of the Stop-Loss Policy purchased by the Employer. It is further

represented that no employees of First Health received commissions as a

result of the reinsurance arrangement between EBPLife and an issuing

Carrier where an Employer for which First Health provided services also

purchased a Stop-Loss Policy reinsured by EBPLife.

8. It is represented that subsequent to the mergers described

above, instances in which First Health deals directly with an Employer

accounts for less than one percent (1%) of all sales of EBPLife's

products. In this regard, it is represented that any direct dealing

with Employers usually involved one of First Health's larger clients.

First Health maintains that it did not have an opportunity to influence

any Employer's decision to purchase a Stop-Loss Policy reinsured by

EBPLife, because First Health did not offer Stop-Loss Policies

reinsured by EBPLife in any instance in which it dealt directly with an

Employer.

9. EBPLife requests retroactive exemptive relief, effective April

15, 1994, to ensure that the purchase by Employers of Stop-Loss

Policies reinsured by EBPLife, as of such effective date, have not

resulted in a prohibited use of ``plans assets'' for the benefit of

parties in interest.7 The purchase by the Employer of a

Stop-Loss Policy reinsured by EBPLife may have constituted a prohibited

use of the assets of such Plans for the benefit of EBPLife, as

described in section 406(a)(1)(D), because under a reinsurance

arrangement all or most of the balance of the premiums after various

fees were subtracted were paid to EBPLife, as reinsurer.

---------------------------------------------------------------------------

\7\ In this regard, it is represented that FDC and FFMC have

been parties in interest, respectively, by reason of direct or

indirect ownership of First Health. While it is represented that

prior to the conversion and mergers in 1995 and 1996, as described

above, EBPLife was also a party in interest by reason of its direct

ownership of EBPHealth, after the corporate restructuring, the

applicant maintains that EBPLife is not a party in interest with

respect to the Plans for which First Health provided services,

because EBPLife and First Health are related solely through a

brother-sister controlled group relationship not described in

section 3(14) of the Act.

---------------------------------------------------------------------------

It is represented that neither EBPLife nor its Affiliates,

including First Health, have acted as fiduciaries, nor have the

predecessors of such Affiliates acted as fiduciaries in connection with

the decision by any Employer to purchase a Stop-Loss Policy reinsured

by EBPLife. Moreover, it is represented that First Health has not had

discretionary authority, nor has EBPHealth had any discretionary

authority over the funds of the Employers or the funds of the Plans.

For this reason, EBPLife maintains that none of the concerns addressed

by the prohibitions of section 406(b) of the Act have arisen, nor will

such prohibitions arise under the circumstances as described, and no

relief from section 406(b) of the Act is requested by the

applicant.8

---------------------------------------------------------------------------

\8\ The Department is proposing relief, pursuant to section

408(a) of the Act, only for those transactions described herein and

expresses no opinion whether fiduciary violations of section 406(b)

of the Act may arise, or have arisen, under the circumstances.

---------------------------------------------------------------------------

10. It is represented that prior to the conversion and the mergers,

described above, EBP and its Affiliates had implemented procedures

designed to ensure that, where exemptive relief was needed, full and

detailed written disclosures had been provided by EBP or its Affiliates

to the Consultants, where such Consultants who solicited bids for

services and insurance were retained as agents by the Employer. In this

regard, such disclosure, included but was not limited to information

concerning the services provided by EBP and its Affiliates to the

Employer and the Plan, the Carriers which issued the Stop-Loss Policies

and, if applicable, the reinsurance arrangements between such Carriers

and EBPLife. Further, EBP encouraged Consultants to disclose to Plan

Fiduciaries the commissions and fees to be earned by such Consultants

in a manner consistent with the terms and conditions as set forth in

PTCE 84-24. In addition EBPLife provided Employers with information

required to be reported on the Schedule A filed as part of the form

5500 Series.

Subsequent to the conversion and mergers, First Health and EBPLife

have provided to the independent Consultant or broker a complete

description of all services, commissions, and fees paid by the Plan or

by the Employer. In addition, First Health and EBPLife have disclosed

the relationship between EBPLife and the issuing Carrier, if any.

Specifically, EBPLife represents that it has disclosed any reinsurance

arrangements and its affiliation with First Health in each stop-loss

insurance proposal. Further, First Health also has disclosed these

relationships in each Administration Agreement. It is represented that

the proposal and the Administration Agreement are provided to the

broker or the Consultant in every case where a prospective client has

retained such parties. In these cases, EBPLife represents that it

confirmed in writing with the broker or the Consultant that such

parties have delivered information outlining the disclosure of

EBPLife's relationship to First Health and any and all reinsurance

arrangements to the prospective client prior to the making of a

decision to purchase services performed by First Health and any Stop-

Loss Policy reinsured by EBPLife. It is represented that this written

record has been and will be kept in EBPLife's files for at least six

(6) years.

11. It is represented that the proposed exemption is subject to a

number of conditions that protect the interests of the Plans. In this

regard, the Plan Fiduciaries must have acknowledged in writing receipt

of the information, required to be disclosed by EBPLife and its

Affiliates, or required to have been disclosed by predecessors of such

Affiliates, and must have approved any

[[Page 37305]]

transaction which is the subject of this exemption. In this regard,

because the disclosures were made in writing in the Administration

Agreement, if a Plan Fiduciary signed such agreement, such Plan

Fiduciary will be deemed to have acknowledged receipt of such

disclosures and have acknowledged that, as of the effective date of

this exemption, the decision to engage in transactions which are the

subject of this exemption was a decision made in a fiduciary capacity,

and that, as of the effective date of this exemption, such Plan

Fiduciary approved of the subject transaction. It is represented that

the Plan Fiduciaries were independent of EBPLife and its Affiliates,

and were independent of predecessors of such Affiliates, and were

sufficiently knowledgeable with respect to administration, benefits,

funding, and any matters related thereto concerning the Plans. Further,

it is represented that the Plan Fiduciaries were capable of making

informed and independent decisions on matters affecting the Plans and

were responsible for deciding whether to hire Affiliates of EBPLife or

have been responsible for hiring predecessors of such Affiliates to

provide non-discretionary administrative services to Plans where such

fiduciaries have also purchased or renewed Stop-Loss Policies reinsured

by EBPLife.

Where Affiliates of EBPLife or predecessors of such Affiliates

provided services to an Employer or Plan, in the event Employers

purchased Stop-Loss Policies reinsured by EBPLife after the initial

purchase of such a policy or renewed expired Stop-Loss Policies

reinsured by EBPLife, the written disclosures initially required need

not have been repeated, unless--more than three (3) years had passed

since such disclosures were made or unless the services, products, or

compensation involved were materially different from that for which

approval was originally obtained.

12. In addition to the safeguards discussed in paragraph eleven

(11) above, the exemption is conditioned upon the satisfaction of

various additional requirements. First, each transaction must have been

effected by EBPLife in the ordinary course of its business as an

insurance company on terms that were at least as favorable to Plans as

those obtainable in an arm's length transaction with an unrelated

party. Second, the combined total of all fees and other consideration

which was received by EBPLife and its Affiliates and by predecessors of

such Affiliates for the provision of services to Employers and their

Plans and in connection with the purchase of insurance contracts has

not exceeded ``reasonable compensation'' within the meaning of section

408(b)(2) and 408(c)(2). Third, EBPLife, its agents or Affiliates, or

the predecessors of such Affiliates, have not been trustees, plan

administrators, fiduciaries with discretionary authority over the

assets of the Plan, or Employers of the Plans. Neither EBPLife nor its

Affiliates, nor the predecessors of such Affiliates have acted as

fiduciaries in connection with the decision by the Employer to purchase

Stop-Loss Policies reinsured by EBPLife where Affiliates of EBPLife or

predecessors of such Affiliates also provided services. Fourth, the

Plans have paid no commissions with respect to the reinsurance of the

Stop-Loss Policies, nor have the Plan Fiduciaries received, directly or

indirectly (i.e. through any Affiliates), any compensation or other

consideration for their own personal account from EBPLife, any of its

Affiliates, any predecessor of such Affiliates, or other party dealing

with any of the Plans in connection with a transaction described

herein. Finally, EBPLife is currently licensed and regulated by the

State of Oklahoma and forty (40) other states in which it does

business. It is represented that EBPLife has complied with all

applicable state insurance laws and regulations, regarding its

operations and reserves in the State of Oklahoma where it is domiciled

and licensed to do business and has been subject to financial audit by

the State of Oklahoma Department of Insurance no less frequently than

once every three years. 13. It is represented that the

reinsurance arrangement as described herein provides additional

protection to the Plans. In this regard, the issuing Carriers of the

Stop-Loss Policies are primarily liable for all claims covered by such

Stop-Loss Policies in excess of the applicable stop-loss limits under

such Stop-Loss Policies. However, EBPLife is also liable for the

payment of claims covered by the Stop-Loss Policies where such policies

have been and are reinsured by EBPLife. In this way, it is represented

that the Plans have been and will be protected by the financial

strength of two insurance companies rather than one. Further, because

in the event of EBPLife's insolvency, the Carriers remain fully liable

for any unpaid claims against the Stop-Loss Policies, it is represented

that these Carriers have every incentive to ensure that EBPLife has not

engaged in and does not engage in questionable practices which might

affect the reinsurance of the risk associated with the Stop-Loss

Policies. For this reason, EBPLife has been and will be subject to the

continuous oversight of the Carriers that issue the Stop-Loss Policies

reinsured by EBPLife.

With respect to practices regarding claims submitted under

reinsured Stop-Loss Policies, it is represented that EBPLife and its

Affiliates, and any predecessors of such Affiliates have followed

standard claims processing procedures. In this regard, it is

represented that the Employer has had the final authority regarding the

payment or nonpayment of each claim. Further, it is represented that

EBPHealth did not exercise fiduciary authority with respect to the

authorization or disallowance of any benefit claims.

In order to assist the Employer: (1) To monitor the performance of

EBPHealth in the processing of claims, prior to the conversion, and to

monitor the subsequent performance of FIRST HEALTH in the processing of

claims; (2) to prevent possible abuse involving claims avoidance; and

(3) to provide additional safeguards against possible conflicts of

interest, it is represented that EBPLife and its Affiliates have made

and will make available, or the predecessors of such Affiliates have

made available upon request by the Employers of each of the Plans at no

additional charge full and detailed written reports. Such reports have

provided and will provide certain information which permits Employers

to verify that EBPLife has not and does not delay its processing or

payment of claims in order to avoid coverage under the Stop-Loss

Policies that it reinsures.

Further, First Health maintains that the larger Employers with

which it does business can be assumed to be more sophisticated and

therefore more likely to monitor the provision of claims administration

services provided by First Health and to understand the issues involved

in this exemption. In addition, First Health represents that the

conversion of EBPHealth, as described above, eliminated the possibility

that First Health could exercise discretion in a manner intended to

reduce the potential liability of EBPLife under the Stop-Loss Policies.

In this regard, it is represented that the claims processing program

currently adopted by First Health and the implementation of its

automated claims processing system ensures that claims administration

cannot in any way be affected by the identity of the insurer or

reinsurer of the Stop-Loss Policies.

14. In summary, the applicant represents that the proposed

transactions meet the statutory criteria of section 408(a) of the Act

because:

[[Page 37306]]

(a) Each transaction was effected by EBPLife in the ordinary course

of its business as an insurance company;

(b) The terms of each transaction were at least as favorable to the

Plans as those negotiated at arm's-length with unrelated third parties

under similar circumstances;

(c) The combined total of all fees and other consideration received

by EBPLife, its Affiliates, and by the predecessors of such Affiliates

for the provision of services to the Employers and their Plans and in

connection with the purchase of insurance contracts was not in excess

of ``reasonable compensation'' within the meaning of sections 408(b)(2)

and 408(c)(2) of the Act;

(d) Neither EBPLife, its agents, its Affiliates, nor the

predecessors of such Affiliates have served as trustees (other than as

non-discretionary trustees who do not render investment advice with

respect to any of the assets of such Plans), plan administrators,

fiduciaries with discretionary authority over the assets of any of the

Plans, or Employers any of whose employees are covered by any of the

Plans;

(e) Neither EBPLife, its Affiliates, nor the predecessors of such

Affiliates have acted in connection with the decision by the Employer

to purchase Stop-Loss Policies reinsured by EBPLife;

(f) Plan Fiduciaries who are independent of EBPLife and its

Affiliates, and independent of the predecessors of such Affiliates; who

are sufficiently knowledgeable with respect to administration,

benefits, funding, and any matters related, thereto concerning such

Plans; and who are capable of making an informed and independent

decision, have been responsible for deciding to purchase or renew the

Stop-Loss Policies reinsured by EBPLife and for executing the

Administration Agreement with Affiliates of EBPLife or have been

responsible for executing Administration Agreements with predecessors

of such Affiliates to provide services to such Plans;

(g) Plan Fiduciaries have received full and detailed written

disclosures, including but not limited to a copy of the Administration

Agreement which among other things disclosed whether EBPLife reinsured

risk under a Stop-Loss Policy issued to the Employer or a Plan and

described all of the services provided by Affiliates of EBPLife, or by

the predecessors of such Affiliates to such Plan or such Employer,

prior to the decision which caused Affiliates of EBPLife or the

predecessors of such Affiliates to provide services to the Plan or the

Employer where the Employer also purchased or renewed a Stop-Loss

Policy reinsured by EBPLife;

(h) Plan Fiduciaries acknowledged in writing receipt of disclosures

with respect to the transactions described herein, and acknowledged

that the decision to engage in such transaction was a decision made in

a fiduciary capacity, and, as of the effective date of this exemption,

approved the subject transaction;

(i) The Plans paid no commissions with respect to the reinsurance

by EBPLife of the Stop-Loss Policies.

(j) The Plan Fiduciaries did not receive, directly or indirectly

(i.e. through any Affiliates), any compensation or other consideration

for his or her own personal account from EBPLife, any of its

Affiliates, any predecessor of such Affiliates, or other party dealing

with any of the Plans in connection with a transaction described in

this exemption.

(k) EBPLife and its Affiliates, and any predecessors of such

Affiliates followed standard claims processing practices regarding any

claims submitted with respect to benefits under any of the Plans

covered by any of the Stop-Loss Policies reinsured by EBPLife;

(l) The Employer had final authority regarding the payment or

nonpayment of any and all claims submitted with respect to benefits

under any of the Plans covered by the Stop-Loss Policies reinsured by

EBPLife;

(m) EBPLife and its Affiliates have made and will make available,

or the predecessors of such Affiliates have made available upon request

by the Employers of each of the Plans at no additional charge certain

information to Employers;

(n) Regarding its operations and reserves, EBPLife has complied

with all applicable requirements of law and insurance regulations of

the State of Oklahoma, where it is domiciled and licensed to do

business;

(o) EBPLife has been subject to a financial audit by the Department

of Insurance of the State of Oklahoma, where it is domiciled and

licensed to do business no less frequently than once every three years;

(p) The issuing Carriers of the Stop-Loss Policies are fully liable

for all claims covered by the Stop-Loss Policies in excess of the

applicable stop-loss limits under such Stop-Loss Policies;

(q) Where the Stop-Loss Policies are reinsured by EBPLife, EBPLife,

as reinsurer, is fully liable for the payments of claims under such

Stop-Loss Policies; and

(r) Consultants who were unrelated to EBPLife, its Affiliates, or

to the predecessors of such Affiliate, solicited bids for

administrative services and/or Stop-Loss Policies on behalf of

Employers and served as brokers or agents to Employers with respect to

the purchase by Employers of Stop-Loss Policies reinsured by EBPLife;

(s) As of December 12, 1996, EBPLife, its Affiliates, and the

predecessors and successors of such Affiliates have not and will not

offer Stop-Loss Policies reinsured by EBPLife in any instance where

EBPLife or its Affiliates deal directly with Employers, rather than

with Consultants representing such Employers, in providing services to

such Employers or their Plans;

(t) EBPLife, its Affiliates have retained or shall retain, or cause

to be retained, or the predecessors of such Affiliates have retained or

caused to be retained for a period of six (6) years from the date of

any transaction the records necessary to enable certain parties to

determine whether the conditions of this exemption have been met.

Notice to Interested Persons

Those persons who may be interested in the pendency of the

requested exemption include the Employers who sponsor the Plans and the

Plan fiduciaries of such Plans for which First Health and/or EBPHealth

provided non-discretionary administrative services. It is possible that

any or all such Employers also choose to purchase Stop-Loss Policies

reinsured by EBPLife. For this reason, the Department has determined

that the only practical form of providing notice to interested persons

is the distribution by the applicant by first class mail of a copy of

the notice of pendency of this proposed exemption (the notice) within

fifteen (15) days of the date of the publication of such Notice in the

Federal Register to the Employers who sponsor of any of the Plans for

which First Health and/or EBPHealth have provided services as of the

effective date of this proposed exemption. Such distribution to

interested persons shall include a copy of the Notice, as published in

the Federal Register, plus a copy of the supplemental statement, as

required, pursuant to 29 CFR 2570.43(b)(2), which shall inform such

interested persons of their right to comment.

FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the

Department, telephone (202) 219-8883 (This is not a toll-free number.)

[[Page 37307]]

Smart Chevrolet Co. Employees' Profit Sharing Retirement Plan (the

Plan) Located in Pine Bluff, Arkansas

[Application No. D-10445]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR part

2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted the restrictions of sections 406(a), 406(b)(1) and 406(b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of sections 4975(c)(1) (A) through (E) of

the Code shall not apply to: (1) The proposed secured loans (the Loans)

by the Plan to Motors Finance Company (Motors), a party in interest

with respect to the Plan, and (2) the guaranty of such Loans (the

Guaranty) by the individual partners of Motors; provided that the

following conditions are met: (a) The terms and conditions of the Loans

are at least as favorable as those which the Plan could have received

in similar transactions with an unrelated third party; (b) an

independent fiduciary negotiates, reviews, approves, and monitors the

Loans and the Guaranty under the terms and conditions, as set forth in

paragraph #6 below; and (c) the balance of all Loans will at no time

exceed 15% of the assets of the Plan.\9\

---------------------------------------------------------------------------

\9\ For purposes of this proposed exemption references to

specific provisions of Title I of the Act, unless otherwise

specified, refer also to the corresponding provisions of the Code.

---------------------------------------------------------------------------

Temporary Nature of Exemption

The proposed exemption is temporary and, if granted, will expire

five (5) years after the date of the grant. However, the exemption will

extend until the maturity of any of the 90 day Loans made within the 5

year period.

Summary of Facts and Representations

1. The Plan is a defined contribution profit sharing plan which, as

of December 31, 1995, had assets totaling $3,385,217. As of the same

date, the Plan had forty-five (45) participants. Richard L. Smart (Mr.

Smart), S. Ray West, Jr. (Mr. West), Lee Smart (Lee) and Roger Smart

(Roger) are participants in and are the Advisory Committee of the Plan.

Smart Chevrolet Company (the Employer) is the sponsor of the Plan. The

Employer sells new and used automobiles in the Pine Bluff, Arkansas

area. As of December 31, 1995, the Employer had a net worth of

$2,883,009. Mr. Smart is the president of and a shareholder in the

Employer.

2. Motors is engaged in financing the purchase of new and used

automobiles sold by the Employer to its customers. The net worth of

Motors, as of December 31, 1995, was $300,000. Certain of the principal

owners of the Employer are also partners in Motors. Mr. Smart is a five

percent (5%) managing partner in Motors. Meredith S. Maxwell, Felix

Smart, Lee, Roger and Mr. West each own a fifteen percent (15%)

partnership interest in Motors. The collective net worth of the

partners of Motors, as of December 31, 1995, was $8,500,000. The net

worth of the partners of Motors includes their respective interests in

Motors, in the Employer, and in certain notes payable to its partners

by Motors.

3. The current trustee of the Plan is Boatmen's Trust Company of

Arkansas (Boatmen's Trust), the successor in interest to Worthen Trust

Co., Inc., the trustee at the time PTE 92-43 (see rep. 4, below) was

granted. Boatmen's National Bank of Pine Bluff (BNBPB), a sister

corporation to Boatmen's Trust, participates in a line of credit to

supply the Employer and Motors with operating funds of from $100,000 to

$200,000 daily. Mr. Smart is on the Advisory Board of BNBPB and is a

shareholder in Boatmen's Bancshares, Inc., the parent of Boatmen's

Trust and of BNBPB.

4. On July 8, 1985, (50 FR 27863), the Department granted an

exemption (PTE 85-121) which permitted for a period of seven (7) years

beginning July 8, 1985, certain Loans to Motors by two employee benefit

plans (the Plans) then sponsored by the Employer, and to the guaranty

of such Loans by the Employer and the individual partners of Motors.

Subsequent to the grant of PTE 85-121, the Smart Chevrolet Employees

Retirement Plan, one of the Plans which participated in the exemption

for PTE 85-121, was merged into the Plan.\10\ On June 17, 1992, (57 FR

27073), the Department granted an exemption (PTE 92-43) which

permitted, for a period of five (5) years, certain Loans by the Plan to

Motors.

---------------------------------------------------------------------------

\10\ All references in this Summary of Fact and Representations

to the Plan will, if applicable, include both Plans prior to the

merger unless the context clearly dictates otherwise.

---------------------------------------------------------------------------

It is represented that under the two prior exemptions Motors has

made all payments on the Loans in a timely manner and has never

defaulted on any of the Loans made by the Plans. As a result of such

Loans made pursuant to PTE 92-43, the Plan received an interest rate of

between 5.50% to 7.25%, depending on the federal discount rate in

effect at the time such Loans were executed. Further, though the

principal balance of these Loans has varied from time to time, the

terms and conditions of each of the Loans complied with the

requirements set forth in the exemptions. The aggregate fair market

value of these Loans by the Plan to Motors, as of the most recent

annual report, was $818,449 which represented 24.18% of the fair market

value of the total assets of the Plan. The applicant, herein, is

requesting another exemption which will permit the continuation of such

Loans for a period of five (5) years beginning on the date of the grant

of this proposed exemption. However, PTE 85-121 and PTE 92-43 permitted

the Plan to invest up to 25% of its assets in these Loans. The

applicant has represented that with respect to Loans made pursuant to

the exemption proposed herein, the Loans will not exceed 15% of

aggregate Plan assets.

5. Jess P. Walt (Mr. Walt) has agreed to serve as the independent

fiduciary. Mr. Walt, who is a banker, represents that he is independent

in that none of the partners of Motors, or the stockholders, officers,

or directors of the Employer are officers or directors of the bank

where Mr. Walt is employed. In addition, Mr. Walt represents that none

of these persons are stockholders of the bank that employs Mr. Walt,

except Felix Smart, who owns 35 of the 7,500 outstanding shares, which

represent a .47% ownership percentage of the bank. It is represented

that the partners of Motors, the Employer and its officers, directors,

and shareholders do not have any loans or accounts outstanding at the

bank which employs Mr. Walt. Further, the bank which employs Mr. Walt

represents that it does not participate in the line of credit extended

to Motors by BNBPB.

Mr. Walt represents that he is qualified to act on behalf of the

Plan in that he, as a bank officer, has been involved for many years in

making automobile installment loans and evaluating credit and

collateral considerations related to such loans. Mr. Walt also

represents that he is knowledgeable in selecting appropriate rates of

return on short term investments and will be continuously aware of the

fluctuations in short term interest rates and the alternative low risk

short term investments that would be available to the Plan.

6. Mr. Walt will accept fiduciary responsibility with respect to

the proposed transactions. In this regard, Mr. Walt will be responsible

for determining whether it is advisable for the Plan to enter into the

Loans and the Guaranty which are the subject of this proposed exemption

and to continue to

[[Page 37308]]

participate in such transactions, taking into account the rate of

return of such investment and the liquidity and diversification of the

Plan.

It is represented that Mr. Walt will approve Loans in an amount not

to exceed fifteen percent (15%) of the assets of the Plan, provided

that all of the terms and conditions described herein are met.\11\ All

Loans will have a maturity of ninety (90) days and will bear interest

at a rate which is two percentage points above the federal discount

rate. Mr Walt represents that such interest rate reflects the

prevailing fair market interest rate on comparable investments. Mr.

Walt represents that he will receive copies of all the promissory notes

evidencing the Loans in order to insure that the interest rate is two

percent (2%) above the federal discount rate. If at any time a rate of

two percentage points above the federal discount rate is not reflective

of the prevailing fair market rate of return on a comparable ninety

(90) day investments, Mr. Walt indicates that the Loans should be

liquidated at the next maturity date, or the yield on such Loans be

increased to the then prevailing fair market rate.

---------------------------------------------------------------------------

\11\ As noted above in rep. 4, PTE's 85-121 and 92-43 permitted

the Plan to invest up to 25% of its assets in these Loans. The

applicant has represented that no more than 15% of the Plan's assets

will be invested in the Loans under the exemption proposed herein.

---------------------------------------------------------------------------

The Loans will be secured by all of the installment sale contracts

(the Contracts) of Motors. As of December 31, 1995, Motors had 833

outstanding Contracts totaling $5,597,582, with an average balance of

$6,720 per Contract. Mr. Walt has represented that he will examine the

security agreement and financing statements with regard to the

Contracts and will ascertain that the Plan's security interest in all

of the Contracts is properly executed, and that such security interest

is perfected by properly filed financing statements in conformity with

the Uniform Commercial Code, as adopted in Arkansas. It is represented

that Mr. Walt, through a combination of monthly reports from Boatmen's

and monthly Certification of Compliance Statements signed by Mr. Smart,

will insure that at all times the aggregate face value of the Contracts

equals at least 200% of the total outstanding balance of the Loans. It

is further represented that if at the end of any month the report from

Boatmen's indicates that the aggregate face value of the Contracts does

not equal at least 200% of the total outstanding balance of the Loans,

Mr. Walt will direct Motors to pay the Plan an amount sufficient to

bring the Loans into compliance with the 200% collateral requirement.

Mr. Walt, on behalf of the Plan, has accepted the commitment of the

Employer and Motors that the Contracts will conform to the following

loan policy guidelines: (a) A complete credit history will be performed

for each customer; (b) a customer's credit history will be analyzed

together with the customer's equity and the terms of the Loan; (c)

depending on the use of the vehicle, a customer equity of from 10% to

30% will be required; (d) with an extension of six months available in

circumstances of minimal vehicle use, the maximum term of any of the

Contracts will be 60 months on new and current year used vehicles, 54

months, 42 months, 36 months, and 24 months, respectively, on one, two,

three, four, and five year old vehicles; (e) prior to closing on any

Contracts, a written certificate of insurance from an insurance agent

will be required showing that the automobile is covered for physical

damage with no more than a $250 deductible; (f) such insurance coverage

includes fire, theft, and other perils and shows Motors as loss payee;

and (g) Motors will employ a full time collector and strict management

supervision will be maintained daily over collections.

Motors has represented that, if at any time, it changes the above-

described loan policy guidelines it will notify Mr. Walt. Therefore, it

is the responsibility of Mr. Walt to determine whether such changes

materially affect the value of the Contracts. Mr. Walt represents that

if the value of the Contracts is materially affected, such Contracts

will be excluded from the collateral which secures the Loans by the

Plan to Motors.

The Loans will also be secured by the Guaranty of the partners of

Motors. In this regard, the partners of Motors have executed a blanket

Guaranty in order to satisfy the requirements of PTE 92-43. Mr. Walt is

responsible for ascertaining that any Loans entered by the Plan

pursuant to this proposed exemption are also covered by this blanket

Guaranty or, if necessary, a new Guaranty will be executed. In

addition, it is represented that all of the partners in Motors are

jointly and severally liable for the debts of the partnership,

specifically including the Loans.

It is represented that from time to time in order to secure its

line of credit to Motors, Boatmen's may take a security interest in the

Contracts. However, it is represented that such security interest will

at all times be subordinated to 200% of the indebtedness of Motors to

the Plan. Further, it is represented that other notes payable from

Motors to its partners will be subordinated to the Loans. As of

December 31, 1995, a total amount of $3,536,123 was due to the partners

of Motors under the terms of the notes, but such amount was

subordinated, to the indebtedness of Motors to the Plans incurred under

PTE 92-43.

In addition, it is represented that all of the Contracts provide

Motors with recourse against the Employer for the amount of any

defaulted Contracts. In this regard, should there be defaults on any of

the Contracts, it is represented that the Employer will repurchase such

Contracts from Motors after giving legal notice to the customer under

Arkansas law. Once the Employer repurchases any defaulted Contracts,

the Employer, not Motors, will repossess the vehicles. The Employer has

informed the Department that for 1995 and 1996, the average number of

Contracts equaled 818. Of these Contracts forty (40) vehicles were

repossessed in 1995 and twenty (20) vehicles were repossessed in 1996.

The Employer maintains that defaults and repossessions constitute a

very small percentage of the total number of Contracts outstanding at

any time.

In addition to the responsibilities outlined above, Mr. Walt is

responsible for monitoring Motors' compliance with the terms of the

Loans and the Guaranty. In this regard, Mr. Walt has reviewed certain

monthly reports (the Monthly Reports) which have been furnished to Joe

D. Ratliff, second successor independent fiduciary; Pine Bluff National

Bank, first successor independent fiduciary; and the First National

Bank of Altheimer, the independent fiduciary under PTE 85-121. Mr. Walt

represents that such Monthly Reports are appropriate for the purposes

of monitoring the proposed transactions. If this proposed exemption is

granted, it is represented that similar Monthly Reports will be

provided to Mr. Walt and will be reviewed monthly by Mr. Walt, or more

frequently, as Mr. Walt determines is necessary.

In addition, Mr. Walt is responsible for receiving and reviewing

the monthly financial statements for Motors and for the Employer and

annual financial statements of the partners of Motors. Mr. Walt

represents that this information will assist him in monitoring the

credit worthiness of the Employer and Motors. If there are any material

decreases in the net worth of any of the parties involved, it is

represented that Mr. Walt will liquidate the Loans at the next maturity

date. In this regard, Mr. Walt represents that he places the most

significance on the ability of the Employer to

[[Page 37309]]

repurchase any of the Contracts that are in default and considers the

net worth of the partners of Motors to be a secondary source of

protection for the Plan. Mr. Walt further represents that if, in

reviewing the monthly financial statements of the Employer, he

determines that a decrease in the net worth of the Employer has

impaired the Employer's ability to repurchase any of the Contracts, he

will carefully review the aggregate net worth of the partners of

Motors. After such review, if he determines, based on his banking

experience, judgment, and other factors, that the Plan is not properly

protected, Mr. Walt will instruct Boatmen's to liquidate the Loans at

the next maturity date. In the event of a default by Motors on the

Loans, Mr. Walt will be responsible for taking all necessary steps to

protect the Plan and for enforcing all of the rights of the Plan,

including pursuing the partners of Motors under the terms of the

Guaranty.

In the opinion of Mr. Walt, the terms and conditions of the Loans

and Guaranty are based on arm's length considerations. After reviewing

the proposed transactions, Mr. Walt represents that he would make the

Loans under the same terms to Motors. In conclusion, Mr. Walt has

determined that the proposed transactions are in the best interest of

the Plan and its participants and beneficiaries for the following

reasons: (a) The Loans by the Plan to Motors are well collateralized;

(b) the risk of loss to the Plan is almost non-existent; (c) the ninety

(90) day maturity of the Loans will enable the Plan to shift its

investments from the Loans in a short period of time, if necessary to

provide liquidity to the Plan; (d) the yield to the Plan is

approximately 227 basis points greater than that of a ninety (90) day

bank certificate of deposit; (e) the rate of return, which will at all

times be two percentage points above the federal discount rate,

prevents the Plan from becoming locked into a below market interest

rate and insures a favorable rate on a continuing basis; and (f)

administration of the proposed transactions should generate less

expense than that of other investments.

7. The applicant maintains that the wide diversity of customers

executing the Contracts significantly spreads the risk to the Plan.

Further, the Employer will bear all costs of filing the application for

exemption, providing notice to interested persons, and paying for the

services rendered by Mr. Walt, as independent fiduciary, to the Plan.

In addition, it is represented that throughout the five (5) year

duration of this proposed exemption, the Plan will not pay any fees,

expenses, or commissions in connection with the proposed transactions.

8. In summary, the applicant represents that the Loans will satisfy

the criteria of section 408(a) of the Act as follows: (a) Mr. Walt, the

independent fiduciary of the Plan, has agreed to review, approve, and

monitor the terms of the Loans and the Guaranty; (b) Mr. Walt has

represented that the Loans will be in the best interest of the

participants and beneficiaries of the Plan; (c) the Loans will be short

term loans limited to no more than 15% of the assets of the Plan; (d)

the Loans will be collateralized by a perfected security interest in

the Contracts; (f) the face amount of the Contracts will at all times

exceed 200% of the total amount of the Loans; (g) the Loans are

guaranteed by the partners of Motors; (h) the terms of the Contracts

provide Motors with recourse to the Employer in the event of a default

on any of the Contracts; and (i) the Plan will receive a return on the

Loans of at least two percentage points above the federal discount rate

which is represented to be the prevailing fair market rate of return on

comparable investments.

FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the

Department, telephone (202) 219-8881. (This is not a toll free number.)

Ronald L. Chez (Mr. Chez) IRA and Lawrence G. Kuntz (Mr. Kuntz) IRA

(Collectively; the IRAs) Located in Chicago, Illinois and Wilmington,

Delaware, Respectively

[Application Nos. D-10359 and D-10360]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 4975(c)(2) of the Code and in accordance with the

procedures set forth in 29 C.F.R. Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990.) If the exemption is granted, the sanctions

resulting from the application of section 4975 of the Code, by reason

of section 4975(c)(1)(A) through (E) of the Code, shall not apply to:

(a) the proposed sale by the IRAs of certain closely held stock (the

Stock) to Happy Valley Corporation (the Corporation), the issuer of the

Stock and an unrelated third party with respect to the IRAs; and (b)

the subsequent repurchase of the Stock from the Corporation by

Mr. Chez and Mr. Kuntz, fiduciaries and disqualified persons with

respect to the IRAs; provided that the following conditions are met:

1. The sale and the repurchase of the Stock will be one-time

transactions for cash;

2. The transactions described in (1) above will take place on the

same business day;

3. Mr. Chez and Mr. Kuntz, in their individual capacity, will

purchase the same shares of the Stock, as those that were sold to the

Corporation by the IRAs. The stock transfer records of the Corporation

will evidence that this is the case; and

4. The amount paid to the IRAs for the Stock will be the fair

market value of the Stock determined at the time of the sale by a

qualified independent appraiser. Mr. Chez and Mr. Kuntz will purchase

the Stock from the Corporation for the same consideration as was

received by the IRAs for the sale of the Stock.

Summary of Facts and Representations

1. The IRAs are self-directed individual retirement accounts. The

Trustee for the IRAs is Delaware Charter Guarantee & Trust Company. In

December 1995, Mr. Kuntz invested $12,500 of his IRA assets in 1250

shares of the Stock, and Mr. Chez invested $50,000 of his IRA assets in

5000 shares of the Stock. The investment in the Stock represents

approximately 90% of Mr. Kuntz's IRA, and virtually 100% of Mr. Chez's

IRA is invested in the Stock.12 The IRAs hold a minority

interest in the Corporation, whereby Mr. Kuntz's IRA holds 2.25% of the

outstanding shares of the Stock, and Mr. Chez's IRA holds 9% of the

outstanding shares. The Stock is closely held.

---------------------------------------------------------------------------

\12\ It is represented that Mr. Chez has numerous IRAs, and the

investment in the Stock represents less than 1% of the aggregate

assets of these IRAs.

---------------------------------------------------------------------------

The applicant represents that Mr. Chez and Mr. Kuntz are related to

the Corporation only as investors through their IRAs and do not have

any other business or personal relationship with each other. Mr. Kuntz

and Mr. Chez learned about the investment opportunity through business

contacts and made the decision to invest in the Stock because they

anticipated capital gain appreciation.

2. The issuer of the Stock is the Corporation, an Illinois

corporation in the restaurant business. The Corporation was

incorporated in April 1995, and on May 19, 1995 it elected ``S''

Corporation status for the tax year ending December 31, 1995.

Subsequently, the Corporation determined to raise additional

capital and on May 20, 1995 prepared an offering memorandum for the

Stock (the Memorandum). The Memorandum disclosed that the Corporation

elected

[[Page 37310]]

subchapter ``S'' status and intended to operate as such. As such, the

Corporation had only one class of stock and the offering was limited to

no more than 35 potential shareholders. Under Internal Revenue Service

(IRS) rules, only qualified shareholders may hold shares of a

subchapter ``S'' corporation.

3. On July 27, 1995, the Corporation accepted a subscription

agreement from Mr. Chez. The subscription agreement stated that Mr.

Chez was purchasing the Stock as investment for his IRA. On December 4,

1995, the Corporation issued the Stock in Mr. Chez's name. However, on

December 20, 1995, at the request of Mr. Chez, the Corporation issued a

replacement stock certificate to Mr. Chez's IRA.

On August 1, 1995, Mr. Kuntz subscribed for Stock shares in his own

name. On December 20, 1995, at the request of Mr. Kuntz, the

Corporation issued a replacement stock certificate to Mr. Kuntz's IRA.

4. However, during the preparation of the Corporation's income tax

return for the year 1995, the Corporation's accountants discovered that

pursuant to IRS Revenue Ruling 92-73, the IRAs are not permissible

shareholders of a subchapter ``S'' corporation under section 1361 of

the Internal Revenue Code (the Code).13 Therefore, the

issuance of the Stock to the IRAs terminated the Corporation's

subchapter ``S'' status for the year. The applicant represents that the

Corporation has received relief from the IRS under section 1362(f) of

the Code. However, as a condition of the IRS relief, the IRAs will be

required to terminate their ownership of the Stock.

---------------------------------------------------------------------------

\13\ In this regard, Revenue Ruling 92-73 also provides that if

a shareholder inadvertently causes a termination of an ``S''

corporation by transferring stock to a trust that qualifies as an

individual retirement account under section 408(a) of the Code,

relief may be requested under section 1362(f) of the Code and the

regulations thereunder. Section 1362(f) of the Code provides that

notwithstanding an event terminating subchapter ``S'' status of a

corporation, if the IRS determines that the termination was

inadvertent the IRS can waive the effect of the terminating event

for any period, if the corporation timely corrects the event, and if

the corporation and the shareholders agree to be treated as if the

election has been in effect for such a period.

---------------------------------------------------------------------------

5. Therefore, the applicant requests exemptive relief for the sale

of the Stock by the IRAs back to the Corporation, the issuer of the

stock, and the subsequent repurchase of the Stock by Mr. Chez and Mr.

Kuntz, in their individual capacity. By letter dated May 22, 1997, the

attorneys for the Corporation (the Attorneys) represent that the

transaction must be structured through the Corporation. The Attorneys

believe that the redemption and resale of the Stock is consistent with

section 1362(f)(3) of the Code which requires that steps be taken so

that the Corporation is once more a small business corporation. Because

section 1361(b)(1) of the Code which defines ``small business

corporation'' does not permit an IRA to be a shareholder in such a

corporation, the Attorneys believe that removing non-permitted

shareholders is most effective where the transaction is completely

reversed. Because the Stock was originally issued to the IRAs by the

Corporation, the Attorneys propose to reverse the transaction through

the redemption and the resale. The Attorneys also represent that this

factual situation was examined by the IRS when it issued a ruling dated

April 11, 1997, granting the Corporation relief under section 1362(f)

of the Code.

6. The applicant submitted an appraisal dated May 7, 1997,

regarding shares of the Stock (the Appraisal). The Appraisal was

prepared by Blackman Kallick Bartelstein, LLP (BKB), certified public

accountants, who are independent of the parties involved in the subject

transactions. In the Appraisal, Michael Dorman of BKB relied primarily

on the net book value and capitalized earnings approaches, and

determined that the fair market value of the Stock was $7.20 per share

as of April 27, 1995, and $10.10 per share as of March 23, 1997. As a

result, both IRAs will realize a gain for the time period that the IRAs

held the Stock.

Pursuant to the terms of the exemption, BKB will update the

Appraisal at the time the transactions take place and the Stock will be

sold at its fair market value as of the date of sale. Mr. Chez and Mr.

Kuntz will purchase the Stock from the Corporation for the same

consideration as was received by the IRAs for the sale of the Stock.

7. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 4975(c)(2) of the Code

because:

1. The sale and the repurchase of the Stock will be one-time

transactions for cash;

2. The transactions described in (1) above will take place on the

same business day;

3. Mr. Chez and Mr. Kuntz, in their individual capacity, will

purchase the same shares of the Stock, as those that were sold to the

Corporation by the IRAs. The stock transfer records of the Corporation

will evidence that this is the case; and

4. The amount paid to the IRAs for the Stock will be the fair

market value of the Stock determined at the time of the sale by a

qualified independent appraiser. Mr. Chez and Mr. Kuntz will purchase

the Stock from the Corporation for the same consideration as was

received by the IRAs for the sale of the Stock.

Notice to Interested Persons

Because Mr. Kuntz and Mr. Chez are the sole participants of their

respective IRAs, it has been determined that there is no need to

distribute the notice of proposed exemption to interested persons.

Comments and requests for a hearing are due 30 days from the date of

publication of this notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department

at (202) 219-8883. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and

[[Page 37311]]

representations contained in each application are true and complete,

and that each application accurately describes all material terms of

the transaction which is the subject of the exemption.

Signed at Washington, DC, this 3rd day of July 1996.

Ivan Strasfeld,

Director of Exemption Determinations Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 97-18128 Filed 7-10-97; 8:45 am]

BILLING CODE 4510-29-P