[Federal Register Volume 76, Number 12 (Wednesday, January 19, 2011)]
[Notices]
[Pages 3165-3174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-974]



[[Page 3165]]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration


Proposed Exemptions From Certain Prohibited Transaction 
Restrictions

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the 
Internal Revenue Code of 1986 (the Code). This notice includes the 
following proposed exemptions: D-11580, Robert W. Baird & Co. 
Incorporated and its Current and Future Affiliates and subsidiaries 
(collectively, Baird); and D-11611, Security Benefit Mutual Holding 
Company (MHC) Benefit Life Insurance Company (SBL, and together with 
the Applicants), et al.

DATES: All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice.

ADDRESSES: Comments and requests for a hearing should state: (1) The 
name, address, and telephone number of the person making the comment or 
request, and (2) the nature of the person's interest in the exemption 
and the manner in which the person would be adversely affected by the 
exemption. A request for a hearing must also state the issues to be 
addressed and include a general description of the evidence to be 
presented at the hearing.
    All written comments and requests for a hearing (at least three 
copies) should be sent to the Employee Benefits Security Administration 
(EBSA), Office of Exemption Determinations, Room N-5700, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No.------, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
[email protected], or by FAX to (202) 219-0204 by the end of the 
scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.
    Warning: If you submit written comments or hearing requests, do not 
include any personally-identifiable or confidential business 
information that you do not want to be publicly-disclosed. All comments 
and hearing requests are posted on the Internet exactly as they are 
received, and they can be retrieved by most Internet search engines. 
The Department will make no deletions, modifications or redactions to 
the comments or hearing requests received, as they are public records.

SUPPLEMENTARY INFORMATION: 

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).
    The proposed exemptions were requested in applications filed 
pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the 
Code, and in accordance with procedures set forth in 29 CFR part 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990). Effective December 31, 
1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 
(1996), transferred the authority of the Secretary of the Treasury to 
issue exemptions of the type requested to the Secretary of Labor. 
Therefore, these notices of proposed exemption are issued solely by the 
Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Robert W. Baird and Co. Incorporated and Its Current and Future 
Affiliates and Subsidiaries (Collectively, Baird), Located in 
Milwaukee, Wisconsin

[Application No. D-11580]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code and in accordance with the procedures set forth in 29 CFR 
2570, subpart B (55 FR 32836, 32847, August 10, 1990).

Section I. Transactions

    If the proposed exemption is granted, the restrictions of section 
406(a) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply, effective October 9, 2009, to the 
cash sale (the Sale) by a Plan (as defined in Section II(d)) of an 
Auction Rate Security (as defined in Section II(b)) to Baird, provided 
that the following conditions are met: \1\
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    \1\ For purposes of this proposed exemption, references to 
section 406 of ERISA to refer as well to the corresponding 
provisions of section 4975 of the Code.
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    (a) The Sale was a one-time transaction made on a delivery versus 
payment basis in the amount described in paragraph (b);
    (b) The Plan received an amount equal to par value of the Auction 
Rate Securities (the ARS or the Securities) plus accrued but unpaid 
income (interest or dividends, as applicable) as of the date of the 
Sale;
    (c) The last auction for the Securities was unsuccessful;
    (d) The Sale was made in connection with a written offer (the 
Offer) by Baird containing all of the material terms of the Sale;
    (e) The Plans did not bear any commissions or transaction costs 
with respect to the Sale;
    (f) The decision to accept the Offer or retain the Auction Rate 
Security was made by a Plan fiduciary or Plan participant or an 
individual retirement account (an IRA (as defined in Section II(d)) 
owner who is independent (as defined in Section II(c)) of Baird. 
Notwithstanding the foregoing, in the case of an IRA which is 
beneficially owned by an employee, officer, director or partner of 
Baird, the decision to accept the Offer or retain the Auction Rate 
Security may be made by such employee, officer, director or partner if 
all of the other conditions of this Section I have been met;
    (g) The Plan does not waive any rights or claims in connection with 
the Sale;
    (h) The Sale is not part of an arrangement, agreement or 
understanding designed to benefit a party in interest with respect to 
the Plan;
    (i) If the exercise of any of Baird's rights, claims or causes of 
action in

[[Page 3166]]

connection with its ownership of the Securities results in Baird 
recovering from the issuer of the Securities, or any third party, an 
aggregate amount that is more than the sum of:
    (1) The purchase price paid to the Plan for the Securities by 
Baird; and
    (2) The income (interest or dividends, as applicable) due on the 
Securities from and after the date Baird purchased the Securities from 
the Plan, at the rate specified in the respective offering documents 
for the Securities or determined pursuant to a successful auction with 
respect to the Securities, Baird will refund such excess amount 
promptly to the Plan (after deducting all reasonable expenses incurred 
in connection with the recovery);
    (j) Neither Baird nor any affiliate exercises investment discretion 
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to the decision to accept the written Offer or 
retain the Security (unless the Sale involves an IRA whose owner is an 
employee, officer, director or partner of Baird);
    (k) Baird and its affiliates, as applicable, maintain, or cause to 
be maintained, for a period of six (6) years from the date of the Sale 
such records as are necessary to enable the person described below in 
paragraph (l)(i), to determine whether the conditions of this proposed 
exemption, if granted, have been met, except that--
    (i) No party in interest with respect to a Plan which engages in a 
Sale, other than Baird and its affiliates, shall be subject to a civil 
penalty under section 502(i) of the Act or the taxes imposed by section 
4975(a) and (b) of the Code, if such records are not maintained, or not 
available for examination, as required, below, by paragraph (l)(i);
    (ii) A separate prohibited transaction shall not be considered to 
have occurred solely because due to circumstances beyond the control of 
Baird, such records are lost or destroyed prior to the end of the six-
year period.
    (l)(i) Except as provided, below, in paragraph (l)(ii), and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to, above, in paragraph (k) are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or the Securities and 
Exchange Commission;
    (B) Any fiduciary of any Plan that engages in the covered 
transactions, or any duly authorized employee or representative of such 
fiduciary;
    (C) Any employer of participants and beneficiaries and any employee 
organization whose members are covered by a Plan that engages in the 
covered transactions, or any authorized employee or representative of 
these entities; or
    (D) Any IRA owner, participant or beneficiary of a Plan that 
engages in the Sale, or duly authorized representative of such IRA 
owner, Plan participant or beneficiary;
    (ii) None of the persons described, above, in paragraph (l)(i)(B)-
(D) shall be authorized to examine trade secrets of Baird, or 
commercial or financial information which is privileged or 
confidential; and
    (iii) Should Baird refuse to disclose information on the basis that 
such information is exempt from disclosure, Baird shall, by the close 
of the thirtieth (30th) day following the request, provide a written 
notice advising that person of the reasons for the refusal and that the 
Department may request such information.

Section II. Definitions

    (a) The term ``affiliate'' of another person means: Any person 
directly or indirectly, through one or more intermediaries, 
controlling, controlled by, or under common control with such other 
person;
    (b) The term ``Auction Rate Security'' means a security:
    (1) That is either a debt instrument (generally with a long-term 
nominal maturity) or preferred stock; and
    (2) with an interest rate or dividend that is reset at specific 
intervals through a ``Dutch Auction'' process.
    (c) The term ``Independent'' means a person who is not Baird or an 
affiliate (as defined in Section II(a)).
    (d) The term ``Plan'' means an individual retirement account or 
similar account described in section 4975(e)(1)(B) through (F) of the 
Code (an IRA); or an employee benefit plan as defined in section 3(3) 
of the Act.
    Effective Date: If this proposed exemption is granted, it will be 
effective October 9, 2009.

Summary of Facts and Representations

    1. Founded in 1919, Robert W. Baird & Co. Incorporated (``Baird'') 
is an employee-owned wealth management, capital markets, asset 
management and private equity firm. With its headquarters in Milwaukee, 
Wisconsin, Baird has offices in the United States, Europe and Asia. 
Baird is a registered broker-dealer under the Securities Exchange Act 
of 1934 and a member of the Financial Industry Regulatory Authority. 
Baird is also a federally registered investment adviser. It provides 
trade execution, custody and other standard brokerage services, as well 
as investment advice and asset management services to individual, 
trust, institutional, corporate and other clients, including pension, 
profit-sharing and retirement plans and accounts.
    2. In October 2009, Baird communicated in writing to its clients, 
including the Plans, its offer (the Offer) to purchase certain auction 
rate securities (i.e., the Securities) for an amount equal to the par 
value of the applicable Security, plus any accrued and unpaid income 
(interest or dividends, as applicable) thereon. The purchase 
transactions occurred on the first regular auction date for the 
applicable Security that followed the Plan's submission to Baird of its 
written acceptance of the Offer.
    3. The Plans that have so far purchased the Securities from Baird 
pursuant to the Offer include sixty-six Individual Retirement Accounts 
(IRAs), subject to section 4975 of the Code, for which Baird serves as 
a nonbank custodian or trustee.
    4. Baird represents that the Securities are debt or preferred 
equity auction rate securities issued with an interest or dividend rate 
that is reset on a regular basis (generally between every 7 and 35 
days) through a ``Dutch Auction'' process. Historically, by means of 
such auction process, the interest or dividend rate was periodically 
adjusted to a level at which demand for the Security depleted the 
available supply at a purchase price equal to the par value of the 
Securities. In this way, the auctions served as a form of secondary 
market for the Securities, by providing liquidity at par on a regular, 
periodic basis to any holder who wished to sell the Securities. The 
applicant represents that the Securities were frequently purchased by, 
or for the benefit of, clients seeking a reasonable short-term return 
and a high degree of liquidity.
    5. If an auction for one of the Securities fails (e.g., because 
there is insufficient demand for the Security), the interest or 
dividend rate will be reset to the ``maximum rate'' or ``failed auction 
rate'' (in either case, ``default rate'') for that Security as 
specified in the offering documents for such Security. In some cases, 
the default rate changes from time to time as specified in the relevant 
documents.
    6. Baird states that auctions for the Securities have failed 
consistently since approximately February, 2008. In addition, because 
the auctions have failed consistently since February, 2008 and given 
the absence of any other

[[Page 3167]]

meaningful secondary market for the Securities, the Securities no 
longer provide the liquidity that had been anticipated when they were 
acquired. The proposed exemption, if granted, will be retroactive to 
October 9, 2009, the date of the written Offer by Baird to acquire the 
Securities from the Plans.
    7. Baird represents that the Securities that were held by the IRAs 
were issued by a variety of issuers.
    8. Generally, the IRAs purchased the Securities through Baird or 
another broker-dealer.
    9. Baird states that the terms of the Offer expressly provided that 
a client is not obligated to sell Securities and must affirmatively 
agree to enter into a sale of Securities to Baird, (i.e., a Sale). 
Baird represents that any IRA's decision to sell the Securities to 
Baird pursuant to its Offer has been made by the IRA owner.
    10. Baird estimates that the total aggregate par value plus accrued 
and unpaid income (interest or dividends, as applicable) thereon for 
Securities held by the IRAs represent $8.125 million.
    11. Baird represents that the Sale of the Securities by an IRA 
benefited the IRA because of the IRA's inability to sell the Securities 
at par as a result of continuing failed auctions. In addition, Baird 
states that each transaction was a one-time Sale for cash in connection 
with which such IRA did not bear any brokerage commissions, fees or 
other expenses.
    12. Baird states that, pursuant to the terms of the Offer, the Sale 
of Securities by an IRA to Baird resulted in an assignment of all of 
the IRA's rights, claims, and causes of action against an issuer or any 
third party arising in connection with or out of the client's purchase, 
holding or ownership of the Securities. This assignment did not include 
any rights, claims or other causes of action against Baird. Rather, 
such assignment was limited to rights, claims and causes of action 
against the issuers of the Securities and any third parties unrelated 
to Baird. This has been the case at all times with respect to the 
subject Securities from the date as of which retroactive relief has 
been requested. Baird states further that if the exercise of any of the 
foregoing rights, claims or causes of action results in Baird 
recovering from the issuer or any third party an aggregate amount that 
is more than the sum of (a) the purchase price paid for the Securities 
by Baird and (b) the income (interest or dividends, as applicable) due 
on the Securities from and after the date on which Baird purchased the 
Securities from the IRA, Baird will refund such excess amount promptly 
to the IRA (after deducting all reasonable expenses incurred in 
connection with the recovery).
    13. In summary, Baird represents that the transactions satisfied 
the statutory criteria of section 4975(c)(2) of the Code because: (a) 
Each Sale was a one-time transaction for cash; (b) each IRA received an 
amount equal to the par value of the Securities, plus accrued but 
unpaid income (interest or dividends, as applicable), which was 
beneficial to the IRA due to the IRA's inability to sell the Securities 
at par because of continuing failed auctions; (c) no IRA paid any 
commission or other transaction expenses with respect to the Sale; (d) 
each IRA voluntarily entered into the Sale, as determined in the 
discretion of the IRA owner; and (e) Baird will promptly refund to the 
applicable Plan any amounts recovered from the issuer or any third 
party in connection with its exercise of any rights, claims or causes 
of action as a result of its ownership of the Securities, if such 
amounts are in excess of the sum of (i) the purchase price paid for the 
Securities by Baird and (ii) the income (interest or dividends, as 
applicable) due on the Securities from and after the date on which 
Baird purchased the Securities from the Plan, at the rate specified in 
the offering documents for the ARS or determined pursuant to a 
successful auction with respect to the Securities.

FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the 
Department, telephone (202) 693-8546. (This is not a toll-free number.)

Security Benefit Mutual Holding Company (MHC) and Security Benefit Life 
Insurance Company (SBL, and Together With MHC, the Applicants), Located 
in Topeka, Kansas

[Application No. D-11621]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847 August 10, 1990).

Section I. Covered Transaction

    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code,\2\ shall not apply, effective July 30, 2010, to the receipt of 
cash or policy credits (Policy Credits), by or on behalf of a policy 
owner of SBL that is an eligible member (Eligible Member), which is an 
employee benefit plan or retirement arrangement that is subject to 
section 406 of the Act and/or section 4975 of the Code (a Plan), other 
than a Plan maintained by MHC and/or its affiliates, in exchange for 
the extinguishment of such Eligible Member's membership interest in 
MHC, in accordance with the terms of a plan of demutualization and 
dissolution (the D&D Plan), adopted by MHC and implemented in 
accordance with Kansas Insurance Law.
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    \2\ For purposes of this proposed exemption, references to the 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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    This proposed exemption is subject to the general conditions set 
forth below in Section II.

Section II. General Conditions

    (a) The D&D Plan was implemented in accordance with procedural and 
substantive safeguards that were imposed under the laws of the State of 
Kansas and was subject to review, approval, and supervision by the 
Kansas Commissioner of Insurance (the Commissioner).
    (b) The Commissioner reviewed the terms that were provided to 
Eligible Members as part of such Commissioner's review of the D&D Plan, 
and the Commissioner approved the D&D Plan following a determination 
that such D&D Plan was fair and equitable to all Eligible Members.
    (c) Each Eligible Member had an opportunity to comment on the D&D 
Plan at the Commissioner's public comment meeting or evidentiary 
hearing on the D&D Plan.
    (d) Each Eligible Member had an opportunity to vote to approve the 
D&D Plan after full written disclosure was given to the Eligible 
Members by MHC.
    (e) Pursuant to the D&D Plan, an Eligible Member generally received 
cash, except that an Eligible Member received Policy Credits, and not 
cash, to the extent that--
    (1) Consideration was allocable to the Eligible Member based on 
ownership of a Tax-Qualified Contract; or
    (2) SBL made an objective determination that payment of 
Consideration in the form of cash would be disadvantageous to such 
Eligible Member in respect of applicable income or other taxation 
provisions.
    (f) Any determination made by SBL under Paragraphs (e)(1) or (e)(2) 
above was based upon objective criteria that was applied consistently 
to similarly situated Eligible Members.

[[Page 3168]]

    (g) Any act or determination undertaken by an Eligible Member that 
was a Plan with respect to attending and/or submitting comments for the 
Commissioner's public comment meeting and/or evidentiary hearing, 
attending MHC's special meeting to consider the D&D Plan, and/or voting 
on the D&D Plan, was made by one or more Plan fiduciaries that were 
independent of SBL and its affiliates, and neither SBL nor any of its 
affiliates provided investment advice within the meaning of 29 CFR 
2510.3-21(c) or exercised investment discretion with respect to such 
act or determination.
    (h) All Eligible Members that were Plans participated in the 
demutualization of MHC (the Demutualization) on the same basis as all 
other Eligible Members that were not Plans.
    (i) No Eligible Member paid any brokerage commissions or fees in 
connection with the receipt of Policy Credits.
    (j) All of SBL's policyholder obligations remained in force and 
were not affected by the D&D Plan.
    (k) The terms of the Demutualization were at least as favorable to 
the Plans as the terms of an arm's length transaction between unrelated 
parties.
    (l) Any Plan Eligible Member whose Consideration was placed in a 
trust, escrow account, or other similar arrangement (the Escrow 
Arrangement), pursuant to the D&D Plan, will receive a distribution of 
such Consideration from the Escrow Arrangement, and will not forfeit 
such Consideration.
    (m) SBL maintains or causes to be maintained, for a period of (6) 
six years, the records necessary to enable the persons described in 
paragraph (n)(1) of this section to determine whether the applicable 
conditions of this exemption have been met. Such records are readily 
available to assure accessibility by the persons identified in 
paragraph (n)(1) of this section.
    (n)(1) Notwithstanding any provisions of section 504(a)(2) and (b) 
of the Act, the records referred to in paragraph (m) of this section 
are unconditionally available at their customary location for 
examination during normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (B) Any fiduciary of an Eligible Member that is a Plan or any duly 
authorized representative of such fiduciary;
    (C) Any contributing employer to any Eligible Member that is a Plan 
or any duly authorized employee representative of such employer; and
    (D) Any participant or beneficiary of any Eligible Member that is a 
Plan, or any duly authorized representative of such participant or 
beneficiary.
    (2) A prohibited transaction is not deemed to have occurred if, due 
to circumstances beyond the control of SBL, the records are lost or 
destroyed prior to the end of the six-year period, and no party in 
interest other than SBL is subject to the civil penalty that may be 
assessed under section 502(i) of the Act or to the taxes imposed by 
sections 4975(a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (n)(1) of 
this section.
    (3) None of the persons described in paragraphs (B)-(D) of section 
(n)(1) are authorized to examine the trade secrets of SBL or commercial 
or financial information which is privileged or confidential.
    (4) Should SBL refuse to disclose information on the basis that 
such information is exempt from disclosure, SBL shall, by the close of 
the thirtieth (30th) day following the request, provide written notice 
advising that person of the reason for the refusal and that the 
Department may request such information.

Section III. Definitions

    For purposes of this proposed exemption:
    (a) The term ``MHC'' means Security Benefit Mutual Holding Company, 
and any affiliate of MHC, as defined below in Section III(b).
    (b) An ``affiliate'' of a person includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with such entity (for purposes of this paragraph, the term ``control'' 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual); and
    (2) Any officer of, director of, or partner in such person.
    (c) The ``Adoption Date'' refers to March 2, 2010, the date that 
MHC's Board of Directors adopted the D&D Plan.
    (d) The term ``Consideration'' means the cash or Policy Credits 
receivable by an Eligible Member in exchange for the extinguishment of 
such Eligible Member's membership interest in MHC, in accordance with 
the terms of the D&D Plan.
    (e) The ``D&D Plan'' means the plan of demutualization and 
dissolution adopted by MHC and implemented in accordance with Kansas 
Insurance Law, dated as of March 2, 2010.
    (f) The term ``Eligible Member'' means a person, other than MHC or 
its subsidiaries, who, as reflected in the records of SBL or other 
relevant entities, is the owner of one or more Eligible Policies on the 
Adoption Date.
    (g) The term ``Eligible Policy'' or ``Eligible Policies'' means a 
policy that, as reflected in the records of SBL or other relevant 
entities, is in force on the Adoption Date, unless the policy is 
excluded pursuant to the D&D Plan.
    (h) The term ``Policy Credit'' means consideration to be paid in 
the form of an increase in cash value, account value, dividend 
accumulations or benefit payment, as appropriate, depending upon the 
policy.
    (i) The term ``SBL'' means Security Benefit Life Insurance Company 
and any affiliate of SBL, as defined in Section III(b).
    (j) The term ``Tax-Qualified Contract'' means an Eligible Policy in 
one of the following forms, that is held, other than through a trust, 
on the date that Consideration is distributed--
    (1) An annuity contract that qualifies for the treatment described 
in section 403(b) of the Code;
    (2) An individual retirement annuity within the meaning of section 
408(b) of the Code;
    (3) An individual annuity contract or an individual life insurance 
policy issued directly to a Plan participant pursuant to a Plan 
qualified under section 401(a) or section 403(a) of the Code;
    (4) A group annuity contract issued to an employer, designed to 
fund benefits under a Plan sponsored by the employer that qualifies 
under section 401(a) or section 403(a) of the Code;
    (5) An annuity contract issued in connection with a Plan 
established by a governmental entity that qualifies for the treatment 
described in section 457 of the Code; or
    (6) Any other form of contract MHC determines must receive Policy 
Credits in order to retain the contract's tax-favored status.

Section IV. Effective Date

    If granted, this proposed exemption will be effective as of July 
30, 2010.

Summary of Facts and Representations

MHC and Affiliated Entities

    1. MHC, which is no longer in existence, was the Topeka, Kansas-
based, former common parent of a consolidated group of companies that 
included Security Benefit Corporation (SBC), which in turn was the 
parent corporation of a consolidated group of companies that included 
Security

[[Page 3169]]

Benefit Life Insurance Company (SBL).\3\ MHC was formed in 1998 as a 
mutual holding company for SBL and its affiliates. At the time of MHC's 
formation, SBL converted from a mutual life insurance company to a 
stock life insurance company within a mutual holding company structure 
pursuant to a plan of conversion (the Prior Conversion). The Prior 
Conversion had the effect of separating policyholders' contract rights 
and membership interests under SBL's policies such that the contract 
rights under the policies remained with SBL and the membership 
interests transferred to MHC.
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    \3\ MHC wholly owned SBC, which in turn was the common parent 
corporation of SBL, First Security Benefit Life Insurance and 
Annuity Company of New York, Security Financial Resources, Inc. 
SFR), Security Distributors, Inc., Rydex Holdings, LLC, Security 
Investors, LLC, Security Global Investors, LLC, and se2, Inc.
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    2. As a mutual holding company, MHC could not issue common or 
preferred stock. Instead, SBL policyholders, by reason of their 
ownership of SBL policies, became members of MHC (the Members) and had 
certain rights under Kansas law. These rights (Membership Interests) 
entitled the Members to vote on members of the Board of Directors of 
MHC and on extraordinary transactions and to receive assets in the 
event of the demutualization, dissolution or liquidation of MHC. The 
rights inherent in each Membership Interest were created by operation 
of Kansas law solely as a result of the policyholder's acquisition of 
the underlying SBL policy. Further, if an SBL policyholder surrendered 
his or her SBL policy, or if the contract terminated by the payment of 
benefits to the policy beneficiary, the policyholder's Membership 
Interest would terminate without payment of any consideration.
    3. The Applicants explain that, as a mutual insurance holding 
company, MHC was not authorized to engage in the business of insurance. 
It was also not authorized to pay dividends or to make any other 
distributions or payments of income or profit, except as was directed 
or approved by the Commissioner or was provided by MHC's Articles of 
Incorporation in the event of MHC's liquidation or dissolution.
    4. SBL, a direct wholly-owned subsidiary of SBC and an indirect 
wholly-owned subsidiary of MHC, is the largest Kansas-domiciled stock 
life insurance company, and is licensed to sell insurance products in 
every state except New York. Also based in Topeka, Kansas, SBL was 
founded in 1892 and became a mutual life insurance company in 1950, 
assuming its present name. SBL remained a mutual life insurance company 
until it converted to a stock company within a mutual holding company 
structure in 1998 in the Prior Conversion.
    5. According to the Applicants, a major part of SBL's business 
involves the sale of (a) Annuity contracts that are held as part of 
tax-qualified and tax-sheltered retirement plans described in section 
401(a), section 403(a), and section 403(b) of the Code, (b) annuities 
as part of individual retirement accounts or as individual retirement 
annuities described in section 408 of the Code and (c) annuity 
contracts held as part of plans described in section 457 of the Code. 
The Applicants represent that certain affiliates of MHC and SBL provide 
services to retirement plans, including SFR, which provides 
recordkeeping and related non-discretionary administrative services to 
retirement plan policyholders of SBL. The Applicants state that the SBL 
policyholders do not include any plans sponsored by MHC, SBL and/or any 
of their respective affiliates.

The Party in Interest Relationship/Request for Exemptive Relief

    6. The Applicants represent that neither MHC nor SBL is a ``party 
in interest,'' as that term is defined in the Act, with respect to any 
Eligible Member which is an employee benefit plan or retirement 
arrangement that is subject to section 406 of the Act and/or section 
4975 of the Code merely because SBL has issued an insurance policy to 
such Plan. However, according to the Applicants, affiliates of MHC and 
SBL provide a variety of services to Plans that are Eligible Members. 
The Applicants state that the provision of such services may cause MHC 
and/or SBL, due to their relationship with the service providers, to be 
parties in interest with respect to such Plans by reason of the 
derivative provisions of section 3(14) of the Act.
    7. The Applicants note that, as a practical matter, it is not 
possible to identify all of the party in interest relationships that 
may exist between MHC and SBL and the Plans. Accordingly, the 
Applicants are seeking a broad exemption from the prohibited 
transaction restrictions of the Act in order to resolve inadvertent 
prohibited transactions that may occur in connection with 
implementation of the D&D Plan. As such, the Applicants have requested 
exemptive relief to cover the receipt of cash or Policy Credits by both 
trusteed and non-trusteed Plans upon the extinguishment of their 
existing Membership Interests in MHC, which may be viewed as a 
prohibited sale or exchange of property between such Plan and MHC and/
or SBL in violation of section 406(a)(1)(A) of the Act and could also 
be construed as a transfer of plan assets to, or a use of plan assets 
by or for the benefit of, a party in interest in violation of section 
406(a)(1)(D) of the Act. If granted, the exemption will be effective as 
of July 30, 2010.

The Decision To Demutualize

    8. The Applicants state that, as of December 31, 2009, SBL's 
policyholder surplus, as reflected in its statutory financial 
statement, was approximately $427 million. Furthermore, SBL's financial 
strength rating from Standard & Poor's Ratings Services, a Standard & 
Poor's Financial Services, LLC business (S&P), as of February 26, 2010, 
was ``BB+.'' The Applicants represent that SBL's capital and surplus 
position deteriorated significantly in 2008 and 2009 as a result of, 
among other things, realized and unrealized losses on collateralized 
debt obligations and other investments. According to the Applicants, 
when combined with the impact of lower equity markets on revenues and 
reserve requirements, these losses resulted in a decline of more than 
50% in SBL's capital and surplus between the middle of 2008 and 
September 30, 2009.
    9. In response to the deterioration of SBL's financial condition in 
2008 and 2009, MHC's Board of Directors considered, and management 
pursued, a variety of strategic initiatives aimed at (a) Ensuring that 
obligations to policyholders would continue to be met, (b) raising 
significant amounts of new capital, (c) increasing liquidity and risk 
based capital at SBL, and (d) obtaining an investment grade financial 
strength rating from the rating agencies. Potential capital raising 
initiatives included, among other things, reinsurance transactions and 
other strategic combinations, the sale of various MHC subsidiaries and 
affiliates, and a merger or demutualization of MHC. MHC's Board of 
Directors also considered the viability of retaining MHC's current 
structure.
    10. At the time, the Kansas Insurance Department had been closely 
monitoring SBL's financial condition and efforts to secure additional 
capital, in order to determine whether regulatory action was warranted 
or required. Based on the results of the strategic initiatives, and 
following discussions with the Kansas Insurance Department, MHC's Board 
of Directors determined that it would not be possible to secure the 
significant capital infusion needed by SBL to ensure that the

[[Page 3170]]

company would not become subject to regulatory action while maintaining 
the current mutual holding company structure.
    11. On December 23, 2009, MHC and its direct wholly-owned 
subsidiary, SBC, entered into a non-binding letter agreement (the 
Letter Agreement) with Guggenheim Partners, LLC (Guggenheim), an 
unrelated party, contemplating the following plan: (a) An interim 
recapitalization of SBL; and (b) MHC's sale of SBC to an investor group 
led by Guggenheim (the Acquisition) and the concurrent Demutualization 
and dissolution (the Dissolution) of MHC. The Demutualization and 
Dissolution, together with the Acquisition, are cumulatively referred 
to herein as the ``Transaction.'' On February 15, 2010, MHC, SBC and an 
investment vehicle for the investor group led by Guggenheim, Guggenheim 
SBC Holdings, LLC (the Investor), entered into a purchase and sale 
agreement (the Purchase and Sale Agreement) which superseded the Letter 
Agreement, pursuant to which (a) on February 25, 2010, SBC received 
$175 million from the Investor in the form of a loan in exchange for a 
secured note, and contributed the $175 million as capital to SBL (the 
Interim Recapitalization); (b) assuming that the Demutualization and 
Dissolution occurred as contemplated, the loan and all accrued interest 
thereon would be automatically converted into equity in SBC, and SBL 
would receive, through SBC, up to approximately $175 million in 
additional capital from the Investor at the closing of the Acquisition; 
(c) MHC would transfer all of SBC's issued and outstanding shares to 
the Investor; (d) Eligible Members would as a group, subject to any 
claims against MHC and certain conditions described herein, receive, in 
addition to increased capitalization of SBL, up to $20 million in cash 
or Policy Credits upon the extinguishment of their Membership Interests 
in MHC in the Demutualization and Dissolution; and (e) funds invested 
by the Investor would pay for the transaction expenses incurred by MHC, 
SBC and SBL. Thereafter, on or after the effective date of the 
Demutualization and Dissolution, MHC would dissolve.
    12. The Kansas Insurance Department was actively monitoring the 
development of the Transaction, including the Letter Agreement, the 
Purchase and Sale Agreement and the D&D Plan. According to the 
Applicants, if MHC was unable to consummate the Transaction, MHC would 
be unable to ensure that the Kansas Insurance Department would not take 
regulatory action.
    13. The Applicants note that MHC's Board of Directors believed that 
the Transaction would significantly improve SBL's financial condition. 
The Applicants explain that SBL's improved financial condition would 
allow SBL to mitigate current capital and regulatory concerns and 
permit SBL to operate with a stronger capital position, better 
prospects, higher financial strength ratings, and greater assurance 
that it will fulfill its obligations to its policyholders. In that 
regard, S&P improved its financial strength rating on SBL, first to 
``BB,'' credit watch positive (from credit watch negative), upon 
announcement of the Transaction, and then to ``BB+,'' credit watch 
positive, upon completion of the Interim Recapitalization. S&P had 
further indicated that it could upgrade SBL to as high as ``BBB+'' upon 
closing of the Transaction.\4\ In addition to strengthening the capital 
and surplus of SBL, the Applicants suggest that the cash or Policy 
Credits totaling up to $20 million in the aggregate, to be provided to 
Eligible Members upon the extinguishment of their otherwise illiquid 
Membership Interests, would enable Eligible Members to realize economic 
value from their Membership Interests that was not otherwise available 
to them.
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    \4\ On Monday, August 2, 2010, three days after the closing of 
the Transaction, S&P improved its financial strength rating on SBL 
and its affiliate to ``BBB+'' from ``BB+'' and issued a positive 
outlook report.
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    14. The Applicants note that the Transaction proceeded on a more 
expedited basis than is typical of most demutualizations, because of 
SBL's precarious financial condition. According to the Applicants, 
MHC's Board of Directors determined that an expedited process was 
essential in order to avoid SBL becoming subject to regulatory action, 
thereby imperiling SBL's obligations to its policyholders. Furthermore, 
the Applicants state that the Board of Directors of MHC was concerned 
that, as time progressed, and SBL's financial situation worsened, it 
would be more difficult to effect the sale of SBL to a third party, 
such as Guggenheim.

Regulatory Supervision

    15. Article 40 of Chapter 40 of the Kansas Insurance Code provides 
a procedural and substantive framework for the demutualization and 
dissolution of a mutual holding company.\5\ Under Section 40-4002(a) of 
the Kansas Insurance Code, the board of directors of the insurer, by 
two-thirds majority, must (a) Adopt a resolution stating the reason why 
the demutualization will benefit the insurer and be in the best 
interests of its policyholders, and (b) approve a plan of 
demutualization. Pursuant to Section 40-4002(b) of the Kansas Insurance 
Code, a draft of the plan of demutualization may be submitted to the 
Commissioner for preliminary examination and comment prior to or after 
the adoption of the resolution. In addition, the Commissioner is 
permitted to retain experts in connection with its review at the 
expense of the insurer, pursuant to Section 40-4013 of the Kansas 
Insurance Code.
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    \5\ Sections 40-4001 and 40-4003a(c)(5) of the Kansas Insurance 
Code provide the Commissioner with the authority to apply this 
framework to the demutualization of a mutual holding company.
---------------------------------------------------------------------------

    After the completion of the process of preliminary examination and 
comment and finalization of any revisions requested by the 
Commissioner, the plan of demutualization is submitted to the 
Commissioner for written approval. The plan of demutualization shall 
not become effective unless it is approved by the Commissioner pursuant 
to Section 40-4002(c) of the Kansas Insurance Code.
    Among other requirements, the Commissioner's approval is subject to 
a finding that the plan of demutualization is fair and equitable to the 
policyholders, pursuant to Section 40-4004(a)(1) of the Kansas 
Insurance Code. This provision also requires the Commissioner to order 
a hearing on the plan of demutualization, conducted in accordance with 
the Kansas Administrative Procedure Act, for which the Commissioner 
will provide no less than twenty days written notice to the insurer and 
the policyholders (by publication or otherwise).
    The plan of demutualization must be voted on by those policyholders 
who were policyholders of the mutual insurer on the day the plan of 
demutualization is initially approved by the board of directors of the 
mutual insurer, pursuant to Section 40-4002(d) and (g) of the Kansas 
Insurance Code. To be effective, the plan of demutualization must 
receive approval of two-thirds of those policyholders voting in person 
or by proxy at a meeting of the policyholders called for that purpose, 
pursuant to the bylaws of the insurer, except that if a majority of all 
the policyholders vote in person or by proxy, then approval by a 
majority of those voting shall constitute approval of the plan of 
demutualization, in accordance with Section 40-4002(d) of the Kansas 
Insurance Code.

[[Page 3171]]

    The meeting for approval of the plan of demutualization by the 
policyholders must be called by a majority of the board of directors, 
the chairperson of the board or the president, pursuant to Section 40-
4005 of the Kansas Insurance Code. That provision also requires notice 
of the meeting to be accompanied by a copy of the plan of 
demutualization and such other information the Commissioner deems 
necessary to policyholder understanding, including a summary of the 
plan of demutualization in a form approved by the Commissioner.
    16. Consistent with the requirements of the relevant portions of 
Articles 33 \6\ and 40 of Chapter 40 of the Kansas Insurance Code, on 
March 2, 2010, MHC's Board of Directors unanimously (a) adopted a 
resolution approving the Demutualization and Dissolution of MHC and (b) 
approved and adopted the D&D Plan. The D&D Plan was submitted to the 
Commissioner for preliminary examination and comment in February 2010 
and again in March 2010. On March 30, 2010, MHC's Board of Directors 
adopted a resolution approving and adopting the amended and restated 
D&D Plan, and they formally filed such plan with the Commissioner, for 
written approval, on March 31, 2010. In connection with her review of 
the D&D Plan, the Commissioner retained actuarial, financial, and legal 
advisors.
---------------------------------------------------------------------------

    \6\ Article 33 of the Kansas Insurance Code governs insurance 
holding companies.
---------------------------------------------------------------------------

    17. On March 31, 2010, at least 20 days in advance of the Public 
Comment Meeting to be held by the Commissioner, MHC provided each 
Eligible Member with a copy of the Security Benefit Member Information 
Booklet (MIB), describing in detail the transactions described herein. 
The Commissioner held the Public Comment Meeting on April 28, 2010, 
during which statements, questions, and comments were invited to be 
heard, but none were offered.
    18. In addition to the D&D Plan, the Acquisition was subject to the 
approval of the Commissioner.\7\ The Commissioner held an evidentiary 
hearing regarding the D&D Plan and the Transaction on May 5, 2010. At 
the hearing, the Commissioner incorporated all evidence, including 
exhibits submitted in support of the Transaction, into the record, and 
further announced that the record would remain open until May 11, 2010, 
to admit additional materials and statements. Subsequently, on May 18, 
2010, based on its review of the record, the Commissioner issued an 
order approving the Transaction, subject to MHC's receipt of the 
required approval of its members to demutualize and dissolve.
---------------------------------------------------------------------------

    \7\ Section 40-3304 of the Kansas Insurance Code provides that a 
domestic insurer, including any person controlling a domestic 
insurer, shall not be the target of an acquisition, take-over or 
merger unless the Commissioner approves such action following a 
hearing conducted in accordance with the Kansas Administrative 
Procedure Act.
---------------------------------------------------------------------------

    19. A special meeting of the Members for approving the D&D Plan was 
called by the chairman of MHC's board of directors and took place on 
May 26, 2010. Each Member entitled to vote was entitled to only one 
vote regardless of the number of policies or amount of insurance and 
benefits held by or issued to the Member. According to the Applicants, 
there were approximately 190,784 Members eligible to vote on the D&D 
Plan.\8\ According to the Applicants, of those members voting, 
approximately 90 percent voted in favor of the Plan. On July 30, 2010, 
the Transaction closed, and $165 million of capital was injected into 
SBL following an initial $175 million infusion on February 25, 2010.
---------------------------------------------------------------------------

    \8\ Members who held policies with SBL that were in force as of 
March 2, 2010, the date on which the D&D Plan was adopted, were 
eligible to vote on the D&D Plan.
---------------------------------------------------------------------------

    20. The Applicants represent that any act or determination 
undertaken by an Eligible Member that was a Plan with respect to 
attending and/or submitting comments for the Commissioner's public 
comment meeting and/or evidentiary hearing, attending MHC's special 
meeting to consider the D&D Plan, and/or voting on the D&D Plan, was 
made by one or more Plan fiduciaries that were independent of SBL and 
its affiliates, and neither SBL nor any of its affiliates provided 
investment advice within the meaning of 29 CFR 2510.3-21(c) or 
exercised investment discretion with respect to such act or 
determination.

Distributions to Eligible Members

    21. As noted above, and as outlined in the D&D Plan, the Investor 
made available $20 million for payment as Consideration to Eligible 
Members, provided, however, that this Consideration would be reduced by 
any claims against MHC in excess of $500,000 in the aggregate that were 
not otherwise paid or provided for, with the remainder paid as 
consideration to Eligible Members upon the extinguishment of their 
Membership Interests (such remainder, the Total Aggregate 
Consideration).\9\ The cash portion of the Total Aggregate 
Consideration was distributed by check to Eligible Members entitled to 
receive cash payments, in accordance with the D&D Plan. In addition, 
pursuant to the D&D Plan, the Investor delivered the Policy Credit 
funding portion of the Total Aggregate Consideration to SBL, for 
crediting Policy Credits to Eligible Members entitled to be credited 
Policy Credits.\10\
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    \9\ According to the Applicants, as provided by the D&D Plan, 
individuals having a claim of any kind were afforded an opportunity 
to file proof of such claim with the Kansas Insurance Department and 
MHC by May 4, 2010. As part of the Commissioner's approval of the 
D&D Plan, the Commissioner found the one claim submitted to be 
invalid. As a result, the Applicants state that the contemplated 
Total Aggregate Consideration will likely equal $20 million.
    \10\ ``The proceeds of the demutualization will belong to the 
plan if they would be deemed to be owned by the plan under ordinary 
notions of property rights. See ERISA Advisory Opinion 92-02A, 
January 17, 1992 (assets of plan generally are to be identified on 
the basis of ordinary notions of property rights under non-ERISA 
law). It is the view of the Department that, in the case of an 
employee welfare benefit plan with respect to which participants pay 
a portion of the premiums, the appropriate plan fiduciary must treat 
as plan assets the portion of the demutualization proceeds 
attributable to participant contributions. In determining what 
portion of the proceeds are attributable to participant 
contributions, the plan fiduciary should give appropriate 
consideration to those facts and circumstances that the fiduciary 
knows or should know are relevant to the determination, including 
the documents and instruments governing the plan and the proportion 
of total participant contributions to the total premiums paid over 
an appropriate time period. In the case of an employee pension 
benefit plan, or where any type of plan or trust is the 
policyholder, or where the policy is paid for out of trust assets, 
it is the view of the Department that all of the proceeds received 
by the policyholder in connection with a demutualization would 
constitute plan assets.'' See ERISA Advisory Opinion 2001-02A, 
February 15, 2001.
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    22. The Applicants state that, pursuant to the D&D Plan, upon the 
extinguishment of their Membership Interests, Eligible Members had the 
opportunity to receive, in addition to the benefits of SBL's capital 
and surplus being strengthened, their share of the Total Aggregate 
Consideration. The Applicants represent that the Transaction did not 
diminish the benefits, values, guarantees and dividend eligibility of 
the Members' policies, nor did it change the premiums for such 
policies; however, the Transaction did extinguish the Membership 
Interests.
    23. As described above, the D&D Plan provided Eligible Members 
whose Membership Interests were extinguished by the Transaction with 
Consideration in the form of cash or Policy Credits. The D&D Plan 
provides that, for this purpose, (a) ``Eligible Member'' means the 
owner of an Eligible Policy, (b) ``Eligible Policy'' generally means a 
policy that was in force as of the close of business on March 2, 2010, 
the date that the D&D Plan was initially adopted

[[Page 3172]]

by MHC's Board of Directors, unless the policy is excluded pursuant to 
the terms of the D&D Plan, and (c) ``Policy Credit'' means 
Consideration to be paid in the form of an increase in cash value, 
account value, dividend accumulations or benefit payment, as 
appropriate, depending upon the policy.
    24. Each Eligible Member was allocated only a fixed component of 
Consideration in an amount determined by dividing the Total Aggregate 
Consideration by the total number of Eligible Members. The Applicants 
note that no Eligible Member received any variable component of 
Consideration, and neither MHC nor any of its subsidiaries were 
Eligible Members with respect to any policy owned by any of them.
    25. Pursuant to the D&D Plan, Consideration was generally paid to 
Eligible Members in cash; however, Consideration was paid by the 
crediting of Policy Credits, and not in cash, to each Eligible Member 
who owned an Eligible Policy that was in force and not in payout status 
on the date that the Consideration was distributed and was held, other 
than through a trust,\11\ in one of the following forms of Tax-
Qualified Contracts:
---------------------------------------------------------------------------

    \11\ According to the Applicants, the IRS takes the position 
that a mutual insurance company's payment of cash consideration to 
the holder of a tax-qualified retirement contract in connection with 
the company's demutualization could have adverse tax consequences 
for the holder, including income taxation on the proceeds, excise 
tax penalties, and potential disqualification of the contract from 
favorable tax treatment. However, the IRS has issued a number of 
private letter rulings in the context of prior demutualization 
transactions holding that policy credits can be used to compensate 
holders of tax-qualified retirement contracts for the extinguishment 
of their membership interests in a demutualization transaction 
without negatively affecting the tax-favored status of the contract. 
See, e.g., PLR 200820009 (May 16, 2008); PLR 200240051 (October 4, 
2002); PLR 200132033 August 13, 2001); PLR 200124001 (June 18, 
2001); PLR 200011035 (March 20, 2000); PLR 9512021 (December 29, 
1994); and PLR 9230033 (February 4, 1992) (involving conversions of 
mutual holding companies as well as mutual insurance companies). 
Furthermore, the Applicants explain, in situations in which a tax-
qualified retirement contract is held in a section 401(a) qualified 
trust, the IRS considers the membership interest to be held in the 
trust, which may receive consideration other than policy credits 
without experiencing adverse tax consequences.
---------------------------------------------------------------------------

    (a) An annuity contract that qualifies for the treatment described 
in section 403(b) of the Code;
    (b) An individual retirement annuity within the meaning of section 
408(b) of the Code;
    (c) An individual annuity contract or an individual life insurance 
policy issued directly to a plan participant pursuant to a plan 
qualified under section 401(a) or section 403(a) of the Code;
    (d) A group annuity contract issued to an employer, designed to 
fund benefits under a retirement plan sponsored by the employer that 
qualifies under section 401(a) or section 403(a) of the Code;
    (e) An annuity contract issued in connection with a plan 
established by a governmental entity that qualifies for the treatment 
described in section 457 of the Code; or
    (f) Any other form of contract MHC determined must receive Policy 
Credits in order to retain the contract's tax-favored status.\12\
---------------------------------------------------------------------------

    \12\ However, cash was paid to an Eligible Member who held an 
Eligible Policy that was a supplementary contract or a settlement 
option issued pursuant to an Eligible Policy on or before the 
effective date of the D&D Plan and to effect the annuitization of an 
individual deferred annuity, an immediate annuity contract or a 
deferred annuity contract in the period following deferment of 
annuity payments, if SBL determined that such cash was not subject 
to excise tax and did not constitute a prohibited transaction under 
the Code or cause a disqualification of the policy, or a related 
plan, in respect of which the cash was issued.
---------------------------------------------------------------------------

    26. In addition, Policy Credits were paid to an Eligible Member in 
the event that SBL determined that payment of Consideration in the form 
of cash would be disadvantageous to such Eligible Member in respect of 
applicable income or other taxation provisions. If an Eligible Member 
owned one or more Tax-Qualified Contracts and one or more other 
Eligible Policies, Consideration was credited to one of the Eligible 
Member's Tax-Qualified Contracts or Eligible Policies, as determined by 
SBL in accordance with operational rules established by SBL for 
allocating Consideration among one or more of such contracts. According 
to the Applicants, these rules were intended to be fixed rules that 
eliminate discretion in their application, and the overriding goal of 
the rules was to protect Eligible Members from adverse tax 
consequences.
    27. The Applicants represent that, with regard to any determination 
made by SBL whether an Eligible Member would receive cash or Policy 
Credits, described above, the form of Consideration to be received by 
an Eligible Member was determined by SBL based on objective criteria, 
including the tax-qualification status of the Eligible Policy, whether 
the Eligible Policy was in payout status, and the number and type of 
Eligible Policies held by the Eligible Member. Furthermore, the 
Applicants state that, in order to ensure consistent application and 
the absence of any discretion in making these determinations, such 
criteria were set forth in written operating rules.
    28. Under the D&D Plan, and except as described below, as soon as 
reasonably practicable and no more than 60 days following the effective 
date of the D&D Plan (i.e., July 30, 2010), unless otherwise approved 
by the Commissioner, (a) SBL or, if applicable and with funds 
transferred by SBL, any company to which SBL reinsured or coinsured any 
Eligible Policy, credited Policy Credits to the Eligible Members that 
were entitled to be credited Policy Credits under the D&D Plan and (b) 
MHC, SBC, SBL or a bank or trust company (or such other entity) 
designated by MHC and that was reasonably acceptable to the Investor 
distributed cash, by check, net of any required withholdings, to the 
Eligible Members that were entitled to receive such cash. The 
Applicants state that no interest was payable on the Consideration and 
no Eligible Member paid any commissions or fees in connection with the 
receipt of the Consideration.

The Escrow Arrangement

    29. The D&D Plan further provided that, if an exemption from the 
Department had not been granted prior to the effective date of the 
Transaction (i.e., July 30, 2010), MHC and SBL would delay distribution 
of Consideration to Eligible Members that were Plans and place the 
Consideration in an escrow, trust, or similar arrangement (i.e., the 
Escrow Arrangement) \13\ until the earlier of (a) the date the 
exemption was granted in form and substance satisfactory to SBL (or, if 
later and applicable to the Eligible Member, the date that private 
letter rulings from the IRS related to the distribution of Policy 
Credits to Eligible Members holding Tax-Qualified Contracts (the IRS 
Rulings) were obtained in form and substance satisfactory to SBL),\14\ 
(b) December 31, 2010, or (c) such later date as may be required by the 
Commissioner (i.e., June 30, 2011, see Representation 34). The D&D Plan 
further provided that, once the exemption was granted in form and 
substance satisfactory to SBL, the Consideration held in the Escrow 
Arrangement would be distributed, without interest, to the Eligible

[[Page 3173]]

Members that were Plans unless those Eligible Members had been 
allocated Consideration that was subject to further delay associated 
with the IRS Rulings. SBC or its affiliates would bear all costs and 
expenses of maintaining the Escrow Arrangement.
---------------------------------------------------------------------------

    \13\ The Applicants represent that the Escrow Arrangement was 
established with Deutsche Bank Trust Company Americas, a subsidiary 
of Deutsche Bank AG. The Applicants further represent that SBL has 
no ownership affiliation or other material relationship to Deutsche 
Bank Trust Company Americas.
    \14\ The IRS Rulings were issued on December 20, 2010.
---------------------------------------------------------------------------

    30. According to the Applicants, if Eligible Members holding 
contracts subject to the Act (ERISA Contracts) or Tax-Qualified 
Contracts were paid Consideration without having received the exemption 
or IRS Rulings, adverse consequences could result, including the 
imposition of prohibited transaction excise taxes under section 4975 of 
the Code, unanticipated taxes on distributions (including additional 
taxes under section 72(t) of the Code, excise taxes and withholding 
penalties) and the potential disqualification of Eligible Members that 
were Plans. Thus, the Applicants contend that the Escrow Arrangement 
was necessary because the delivery of Consideration to Eligible Members 
was not made contingent upon the receipt of the exemption or the IRS 
Rulings. The Applicants explain that, because time was of the essence 
in closing the Transaction, MHC could not plan for every contingency, 
such as the receipt of the exemption and the IRS Rulings.
    As noted above, MHC was cognizant of SBL's precarious financial 
situation and its need to secure a capital infusion resulting from the 
Acquisition. In addition, MHC was concerned that the Investor would 
abandon its plans to purchase SBC, and the Kansas Insurance Department 
would intervene to take regulatory action, if the Transaction was not 
consummated quickly. Consequently, the Transaction closed on July 30, 
2010, and the Escrow Arrangement was utilized to avoid the potential 
adverse consequences flowing from the receipt of Consideration by 
Eligible Members holding ERISA Contracts or Tax-Qualified Contracts in 
advance of the receipt of the exemption or the IRS Rulings.
    31. The Applicants further contend that no interest should be 
required to be paid on any form of Consideration held in the Escrow 
Arrangement, primarily because the amount of interest would be de 
minimis as to each such Eligible Member.\15\ Moreover, the Applicants 
suggest that the costs associated with calculating and adding the 
interest to the Consideration would offset any benefit to be derived 
from the interest payment.\16\
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    \15\ The Applicants state that the amount of Consideration 
allocable to each Eligible Member is approximately $100, and any 
interest on such amount would constitute cents on the dollar.
    \16\ The Applicants maintain that revised calculation 
requirements, additional tax reporting requirements, and allocation 
issues all could arise as a result of requiring the crediting of 
interest on Consideration held in escrow.
---------------------------------------------------------------------------

    32. The D&D Plan also provides, in Section 5.4, that, if the 
exemption is not granted in form and substance satisfactory to SBL on 
or before December 31, 2010 (or such later date as may be required by 
the Commissioner), the Consideration held in the Escrow Arrangement 
shall be released to the general account of SBL, and Eligible Members 
that are Plans and otherwise entitled to receive Consideration under 
the D&D Plan in respect of their Tax-Qualified Contracts or ERISA 
Contracts, as the case may be, will receive no Consideration in 
connection with the Transaction.
    33. According to the Applicants, the December 31, 2010 deadline for 
receipt of the IRS Rulings or the exemption constitutes a ``failsafe'' 
mechanism, in that it is designed to protect Plans from potential 
adverse tax consequences or disqualification in the event that 
Consideration is paid to Eligible Members holding Tax-Qualified 
Contracts or ERISA Contracts without the requisite regulatory 
approvals. According to the Applicants, the benefit of receiving the 
Consideration would be small (approximately $100 per Eligible Member) 
in comparison to the risk of adverse tax consequences, plan 
disqualification, and other penalties, if MHC failed to secure the 
proper regulatory approvals for the Transaction. Furthermore, the 
Applicants claim that there was a probability that only the exemption 
or the IRS Rulings would be approved (but not the other), thereby 
creating a ``catch-22'' where Consideration could neither be paid to 
Eligible Members nor kept in the Escrow Arrangement indefinitely. 
Instead, the Applicants suggest that Eligible Members would be better 
served in having Consideration flow to SBL for the benefit of SBL's 
policyholders, generally.
    34. Furthermore, the Applicants explain that, at the time that the 
D&D Plan was approved, MHC believed, based on past precedents, that the 
December 31, 2010 ``failsafe'' date would allow adequate time for full 
consideration of the applications by the IRS and the Department. They 
also contend that Members assented to the inclusion of the failsafe 
provisions in the D&D Plan when they approved the D&D Plan after full 
consideration of its terms, including having had the opportunity to 
review the MIB, to deliberate and vote on the D&D Plan, and to submit 
comments to the Commissioner through various formal processes. 
Furthermore, the Applicants note that the Commissioner approved of the 
December 31, 2010 deadline and failsafe provisions as fair and 
equitable and represented in writing to the Department that she would 
extend the deadline by at least six months if MHC had not secured the 
IRS Rulings or exemption by December 31, 2010.
    35. The Department concurs with the Applicants that the increased 
complexity and administrative cost involved with paying interest on 
such Consideration, together with the small amount of Consideration 
allocable to each Eligible Member, outweigh the benefit in receiving 
nominal interest on such Consideration.
    36. In addition, the Department understands that administrative 
impracticalities inherent in holding Consideration in the Escrow 
Arrangement for a period of time, prior to receipt of the exemption and 
the IRS Rulings, may have provided sufficient rationale for the 
failsafe provisions. However, the Department views the failsafe 
mechanism in the D&D Plan as a forfeiture of plan assets and as 
contrary to the protections afforded to plan assets and the parties who 
are entitled to such assets under the Act. Moreover, the Department 
believes that such failsafe mechanism, if employed, would fail to 
satisfy Section II(h) of the proposed exemption, which provides that 
Eligible Members that were Plans participated in the Demutualization on 
the same basis as other Eligible Members that were not Plans, and 
Section II(l) of the proposed exemption, which prohibits the forfeiture 
of Consideration. However, because the Commissioner has agreed to 
extend the December 31, 2010 deadline for an additional 6 months, the 
Department notes that it is likely that the exemption will be granted 
prior to such date.\17\ Therefore, the forfeiture of the Consideration 
in the Escrow Arrangement and its associated prohibited transaction 
implications should not arise.
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    \17\ As noted in footnote 13, the IRS Rulings were issued on 
December 20, 2010, prior to the occurrence of the December 31, 2010 
deadline.
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Merits of the Transaction

    37. As previously discussed, the Applicants assert that the 
Transaction will significantly improve SBL's financial condition, which 
will allow SBL to mitigate current capital and regulatory concerns and 
permit SBL to operate with a stronger capital position,

[[Page 3174]]

better prospects, higher financial strength ratings and greater 
assurance that it will fulfill its obligations to its policyholders. 
Therefore, according to the Applicants, SBL's policyholders, including 
those policyholders that are Plans, will derive a significant benefit 
from the Transaction.
    38. Furthermore, the Applicants note that, as part of the 
Transaction and pursuant to the D&D Plan, Eligible Members, including 
Plans, also had the opportunity to receive Consideration in the form of 
cash or Policy Credits upon the extinguishment of such Eligible 
Members' Membership Interests. These Membership Interests, note the 
Applicants, were not transferable and had no value independent of the 
policies to which they were attributable. Therefore, the Applicants 
maintain, absent the Consideration payable under the D&D Plan, Eligible 
Members received no remuneration for their Membership Interests in the 
Demutualization.
    Moreover, the Applicants declare that the D&D Plan will not 
diminish the benefits, values, guarantees and dividend eligibility of 
the Members' policies, nor will it change the premiums for such 
policies.

Summary

    39. In summary, the Applicants represent that the Transaction 
satisfied or will satisfy the statutory criteria for an exemption under 
section 408(a) of the Act because:
    (a) The D&D Plan was implemented in accordance with procedural and 
substantive safeguards that were imposed under the laws of the State of 
Kansas and was subject to review, approval, and supervision by the 
Commissioner.
    (b) The Commissioner reviewed the terms that were provided to 
Eligible Members as part of such Commissioner's review of the D&D Plan, 
and the Commissioner approved the D&D Plan following a determination 
that such D&D Plan was fair and equitable to all Eligible Members.
    (c) Each Eligible Member had an opportunity to comment on the D&D 
Plan at the Commissioner's public comment meeting or evidentiary 
hearing on the D&D Plan.
    (d) Each Eligible Member had an opportunity to vote to approve the 
D&D Plan after full written disclosure was given to the Eligible 
Members by MHC.
    (e) Pursuant to the D&D Plan, an Eligible Member generally received 
cash, except that an Eligible Member received Policy Credits, and not 
cash, to the extent that--
    (1) Consideration was allocable to the Eligible Member based on 
ownership of a Tax-Qualified Contract; or
    (2) SBL made an objective determination that payment of 
Consideration in the form of cash would be disadvantageous to such 
Eligible Member in respect of applicable income or other taxation 
provisions.
    (f) Any determination made by SBL under Paragraphs (e)(1) or (e)(2) 
of Section II of the proposed exemption was based upon objective 
criteria that was applied consistently to similarly situated Eligible 
Members.
    (g) Any act or determination undertaken by an Eligible Member that 
was a Plan with respect to attending and/or submitting comments for the 
Commissioner's public comment meeting and/or evidentiary hearing, 
attending MHC's special meeting to consider the D&D Plan, and/or voting 
on the D&D Plan, was made by one or more Plan fiduciaries that were 
independent of SBL and its affiliates, and neither SBL nor any of its 
affiliates provided investment advice within the meaning of 29 CFR 
2510.3-21(c) or exercised investment discretion with respect to such 
act or determination.
    (h) All Eligible Members that were Plans participated in the 
Demutualization on the same basis as all other Eligible Members that 
were not Plans.
    (i) No Eligible Member paid any brokerage commissions or fees in 
connection with the receipt of Policy Credits.
    (j) All of SBL's policyholder obligations remained in force and 
were not affected by the D&D Plan.
    (k) The terms of the Demutualization were at least as favorable to 
the Plans as the terms of an arm's length transaction between unrelated 
parties.
    (l) Any Plan Eligible Member whose Consideration was placed in the 
Escrow Arrangement, pursuant to the D&D Plan, will receive a 
distribution of such Consideration from the Escrow Arrangement and will 
not forfeit such Consideration.
    (m) SBL complied with and will continue to comply with, the 
recordkeeping requirements provided herein to enable certain authorized 
persons to determine whether the conditions of the exemption have been 
met, for so long as such records are required to be maintained.

FOR FURTHER INFORMATION CONTACT: Warren Blinder of the Department, 
telephone (202) 693-8553. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries, and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 13th day of January 2011.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 2011-974 Filed 1-18-11; 8:45 am]
BILLING CODE 4510-29-P