[Federal Register Volume 66, Number 242 (Monday, December 17, 2001)]
[Notices]
[Pages 65011-65013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30977]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25316; 812-12696]


Blue Cross and Blue Shield of Kansas, Inc.; Notice of Application

December 11, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under sections 6(c) and 
6(e) of the Investment Company Act of 1940 (the ``Act'') exempting an 
escrow account established by the applicant from all provisions of the 
Act, except section 9 and sections 36 through 53 of the Act, and the 
rules and regulations under those sections.

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SUMMARY OF APPLICATION: Applicant requests an order on behalf of an 
escrow account (the ``Escrow Account'') to be established in connection 
with applicant's conversion to a stock life insurance company and its 
subsequent acquisition by Anthem Insurance Companies, Inc. 
(``Anthem''). The Escrow Account will hold a portion of the cash 
consideration from the sale pending the resolution of a specified 
litigation matter involving applicant. The order would exempt the 
Escrow Account from certain provisions of the Act and the rules and 
regulations under those provisions.
    Applicant: Blue Cross and Blue Shield of Kansas, Inc. (the 
``Company'').
    Filing Date: The application was filed on November 23, 2001 and 
amended on December 10, 2001.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on January 7, 2002, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicant: Kenneth J. Berman, Debevoise & Plimpton, 555 
13th Street, NW., Washington, DC 20004.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
942-0614, or Nadya B. Roytblat, Assistant Director, at (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. The Company is a Kansas mutual life insurance company that 
proposes to convert to a stock life insurance company (the 
``Conversion'') pursuant to a plan of conversion (the ``Plan'') in 
accordance with Kansas law. As a mutual life insurance company, the 
Company has no authorized, issued or outstanding capital stock. The 
policyholders of the Company, through the purchase of insurance 
policies and contracts, acquire insurance coverage and ``Membership 
Interests'' which consist principally of the right to vote in the 
election of directors of the Company and the right to share in any 
residual value of the Company if the Company were to undergo 
liquidation in the future.
    2. Pursuant to an Alliance Agreement between the Company and 
Anthem, an Indiana stock insurance company (the ``Alliance 
Agreement''), Anthem or an affiliate of Anthem will acquire the Company 
upon the Company's Conversion (the ``Acquisition''). On the date of 
effectiveness of the Conversion and the closing of the Acquisition (the 
``Conversion Date''), the Membership Interests of the Company 
policyholders will be extinguished, the Company's policyholders 
eligible to vote and receive consideration in the Conversion 
(``Eligible Policyholders'') will be entitled to receive consideration 
as provided in the Alliance Agreement and the Plan, and the Company 
will become a direct or indirect wholly-owned subsidiary of Anthem.
    3. The Company's board of directors has adopted the Plan. The Plan 
has been submitted to the Commissioner of Insurance of the State of 
Kansas (the ``Commissioner'') for approval. Article 40 of Chapter 40 of 
the Kansas Statutes Annotated (the ``Kansas Conversion Law'') requires 
the Commissioner to hold a public hearing at which the Company's 
policyholders would have the right to appear and be heard. The 
Commissioner must approve the Plan if the Commissioner finds that (a) 
the Plan is fair and equitable to policyholders, (b) the Plan complies 
with the provisions of the Kansas Conversion Law, (c) the Plan does not 
unjustly enrich any director, officer, agent or employee of the Company 
and (d) the Company would meet minimum requirements to be issued a 
certificate of authority by the Commissioner to transact business in 
Kansas and the continued operations of the Company would not be 
hazardous to existing or future policyholders or the public.
    4. Eligible Policyholders also must approve the Plan, including the 
establishment of the Escrow Account. As required by the Kansas 
Conversion Law, Eligible Policyholders will have received from the 
Company a comprehensive information booklet

[[Page 65012]]

describing the Plan, including all material aspects of the Escrow 
Account, at least 30 days prior to a special meeting to be held on 
January 11, 2002 at which the Eligible Policyholders will be required 
to vote on the Plan. The information booklet was reviewed and approved 
by the staff of the Kansas Insurance Department.
    5. Under the proposed transaction, Eligible Policyholders will be 
entitled to receive $142 million of the $190 million purchase price 
paid by Anthem for the stock of the Company upon the Conversion, with 
the remaining $48 million of the purchase price deposited into the 
Escrow Account on the Conversion Date. The Escrow Account will be 
established to address issues arising from a subpoena, dated February 
28, 2001, that the Company received from the Office of the Inspector 
General, U.S. Department of Health and Human Services (the ``Contingent 
Litigation Matter'').\1\ The amounts held in the Escrow Account will be 
used to pay all costs, expenses and liabilities related to the 
Contingent Litigation Matter, pay related taxes which might become 
payable, and pay all costs and expenses of the Escrow Account. Any 
remaining amounts will be distributed to Eligible Policyholders 
following final resolution of the Contingent Litigation Matter.
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    \1\ The subpoena seek documents in connection with an 
investigation of possible improper claims against Medicare pursuant 
to 5 U.S.C. App. 3 Section 6(a)(4).
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    6. The Escrow Account will be a separately designated investment 
account established on or prior to the Conversion Date pursuant to an 
escrow agreement (the ``Escrow Agreement'') to be entered into among 
the Company, Anthem and an escrow agent (the ``Escrow Agent''). The 
Escrow Agent will be a bank, savings and loan association or trust 
company. The sole purpose of the Escrow Account will be to liquidate 
its assets and distribute the income to the Eligible Policyholders in 
as prompt and orderly a fashion as possible following the resolution of 
the Contingent Litigation Matter. Amounts held in the Escrow Account 
will be invested by the Escrow Agent solely in obligations of, or 
obligations fully guaranteed as to timely payment of principal and 
interest by, the United States of America or an agency or 
instrumentality thereof with a maturity date of one year or less from 
the date of the investment (``Government Securities''). The Escrow 
Agent will not have the authority to borrow funds from, or on behalf of 
the Escrow Account, sell securities to, or acquire securities from, the 
Escrow Account, or, acquire any other assets except for Government 
Securities. The rights of the Eligible Policyholders to amounts held in 
the Escrow Account will not be represented by any form of certificate 
or instrument and will not be transferable or assignable except by 
will, the laws of intestacy or by other operation of law. The 
Commissioner will retain regulatory oversight over the Escrow Account, 
including the investment and distribution of the assets held in the 
Escrow Account to ensure that the interests of Eligible Policyholders 
are protected.
    7. The Escrow Account will continue until the Contingent Litigation 
Matter has been finally disposed of by binding settlement, court order 
or otherwise, all tax amounts have been finally determined, all amounts 
that are reasonably recoverable from any insurer in respect of the 
Contingent Litigation Matter are recovered, and all amounts in the 
Escrow Account have been paid or distributed by the Escrow Agent in 
accordance with the Escrow Agreement and the Alliance Agreement. Any 
amounts remaining in the Escrow Account will be distributed to Eligible 
Policyholders in accordance with the distribution principles set forth 
in the Plan.

Applicant's Legal Analysis

    1. Section 3(a)(1)(A) of the Act defines the term ``investment 
company'' to include an issuer that is or holds itself out as being 
engaged primarily, or proposes to engage primarily, in the business of 
investing, reinvesting or trading in securities. Because the assets 
held in the Escrow Account will be invested exclusively in Government 
Securities and the Escrow's sole source of income will be investment 
income attributable to such securities, applicant states that it is 
possible that the Escrow Account could be deemed to be an investment 
company as defined in section 3(a)(1)(A).
    2. Section 6(c) of the Act provides, in relevant part, that the 
Commission may exempt any person or persons, or any transaction or 
transactions, from any provisions of the Act if and to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    3. Section 7 of the Act generally prohibits investment companies 
that are not registered under section 8 of the Act from selling or 
redeeming their securities.\2\ Section 6(e) of the Act provides that, 
in connection with any order exempting an investment company from any 
provision of section 7, the Commission may specify that certain 
provisions of the Act will be applicable to the company and other 
persons dealing with the company as though the company were registered 
under the Act. Applicant contends that the costs involved in 
registering and operating the Escrow Account under the Act are not 
necessary to protect the interests of the Eligible Policyholders and 
would reduce the amount of cash consideration actually distributed to 
the Eligible Policyholders. Because of the limited nature of the Escrow 
Account's activities, the Company believes that most provisions of the 
Act are not relevant to the Escrow Account. The Escrow Account is being 
organized for a limited purpose, will have a limited life, and will be 
subject to the Commissioner's oversight. Moreover, management of the 
Escrow Account's assets by the Escrow Agent will be severely 
restricted. Accordingly, applicant states that the requested order 
meets the requirements of section 6(c) of the Act.
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    \2\ Applicant notes that the last sentence of section 7(b) of 
the Act provides that the broad injunction against actions by 
unregistered investment companies contained in section 7 of the Act 
does not apply to ``transactions of an investment company which are 
merely incident to its dissolution.'' Applicant states that due to 
the nature of the Contingent Litigation Matter, it is likely that 
the life of the Escrow Account may need to extend beyond three years 
and that applicant therefore may be unable to rely on this provision 
in section 7(b).
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Applicant's Conditions

    Applicant agrees that any order granting the requested relief shall 
be subject to the following conditions:
    1. The Escrow Account will not hold itself out as being an 
investment company, but instead will hold itself out as an escrow 
account in the process of liquidating and distributing its assets to 
the Eligible Policyholders.
    2. The Escrow Account will be limited to making temporary 
investments in Government Securities.
    3. The Escrow Account will terminate, in accordance with the terms 
of the Escrow Agreement, upon final disposition of the Contingent 
Litigation Matter by binding settlement, court order or otherwise, 
final determination of certain tax matters, reasonable recovery from 
any insurer of costs associated with the Contingent Litigation Matter 
and distribution of all amounts in the Escrow Account by the Escrow 
Agent.


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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30977 Filed 12-14-01; 8:45 am]
BILLING CODE 8010-01-P