Notice2022-17995
Proposed Exemptions From Certain Prohibited Transaction Restrictions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 24, 2022
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
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). If granted, these proposed exemptions allow designated parties to engage in transactions that would otherwise be prohibited provided the conditions stated there in are met. This notice includes the following proposed exemptions: Blue Cross and Blue Shield Association, D-12077; Blue Cross and Blue Shield of Kansas City, D-12039; Blue Cross and Blue Shield of Arizona, Inc., D-12035; Blue Cross and Blue Shield of Vermont, D-12055; Hawaii Medical Service Association, D-12038; BCS Financial Corporation, D-12036; Blue Cross and Blue Shield of Mississippi, D-12040; Blue Cross and Blue Shield of Nebraska, Inc., D-12041; BlueCross BlueShield of Tennessee, Inc., D-12045; Triple-S Management Corporation, D-12042; National Account Service Company LLC, D-12049.
Full Text
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<title>Federal Register, Volume 87 Issue 163 (Wednesday, August 24, 2022)</title>
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[Federal Register Volume 87, Number 163 (Wednesday, August 24, 2022)]
[Notices]
[Pages 52118-52180]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-17995]
[[Page 52117]]
Vol. 87
Wednesday,
No. 163
August 24, 2022
Part II
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
Federal Register / Vol. 87 , No. 163 / Wednesday, August 24, 2022 /
Notices
[[Page 52118]]
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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). If granted, these proposed
exemptions allow designated parties to engage in transactions that
would otherwise be prohibited provided the conditions stated there in
are met. This notice includes the following proposed exemptions: Blue
Cross and Blue Shield Association, D-12077; Blue Cross and Blue Shield
of Kansas City, D-12039; Blue Cross and Blue Shield of Arizona, Inc.,
D-12035; Blue Cross and Blue Shield of Vermont, D-12055; Hawaii Medical
Service Association, D-12038; BCS Financial Corporation, D-12036; Blue
Cross and Blue Shield of Mississippi, D-12040; Blue Cross and Blue
Shield of Nebraska, Inc., D-12041; BlueCross BlueShield of Tennessee,
Inc., D-12045; Triple-S Management Corporation, D-12042; National
Account Service Company LLC, D-12049.
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: All written comments and requests for a hearing should be
sent to the Employee Benefits Security Administration (EBSA), Office of
Exemption Determinations, U.S. Department of Labor, Attention:
Application No. __, stated in each Notice of Proposed Exemption via
email to <a href="/cdn-cgi/l/email-protection#47226a0802030723282b69202831"><span class="__cf_email__" data-cfemail="96f3bbd9d3d2d6f2f9fab8f1f9e0">[email protected]</span></a> or online through <a href="http://www.regulations.gov">http://www.regulations.gov</a> by
the end of the scheduled comment period. Any such comments or requests
should be sent 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 Disclosure Room of the Employee
Benefits Security Administration, U.S. Department of Labor, Room N-
1515, 200 Constitution Avenue NW, Washington, DC 20210. See
SUPPLEMENTARY INFORMATION below for additional information regarding
comments.
SUPPLEMENTARY INFORMATION:
Comments
In light of the current circumstances surrounding the COVID-19
pandemic caused by the novel coronavirus which may result in disruption
to the receipt of comments by U.S. Mail or hand delivery/courier,
persons are encouraged to submit all comments electronically and not to
follow with paper copies. Comments should state the nature of the
person's interest in the proposed exemption and the manner in which the
person would be adversely affected by the exemption, if granted. A
request for a hearing can be requested by any interested person who may
be adversely affected by an exemption. A request for a hearing must
state: (1) The name, address, telephone number, and email address of
the person making the request; (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; and (3) a statement of the issues to be
addressed and a general description of the evidence to be presented at
the hearing. The Department will grant a request for a hearing made in
accordance with the requirements above where a hearing is necessary to
fully explore material factual issues identified by the person
requesting the hearing. A notice of such hearing shall be published by
the Department in the Federal Register. The Department may decline to
hold a hearing where: (1) The request for the hearing does not meet the
requirements above; (2) the only issues identified for exploration at
the hearing are matters of law; or (3) the factual issues identified
can be fully explored through the submission of evidence in written
(including electronic) form.
Warning: All comments received will be included in the public
record without change and may be made available online at <a href="http://www.regulations.gov">http://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as Social Security number or an unlisted phone number)
or confidential business information that you do not want publicly
disclosed. However, if EBSA cannot read your comment due to technical
difficulties and cannot contact you for clarification, EBSA might not
be able to consider your comment. Additionally, the <a href="http://www.regulations.gov">http://www.regulations.gov</a> website is an ``anonymous access'' system, which
means EBSA will not know your identity or contact information unless
you provide it in the body of your comment. If you send an email
directly to EBSA without going through <a href="http://www.regulations.gov">http://www.regulations.gov</a>, your
email address will be automatically captured and included as part of
the comment that is placed in the public record and made available on
the internet.
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, unless otherwise stated in the Notice of Proposed
Exemption, 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 (76 FR 66637, 66644, October 27, 2011).\1\ 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.
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\1\ The Department has considered exemption applications
received prior to December 27, 2011 under the exemption procedures
set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August
10, 1990).
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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.
[[Page 52119]]
Blue Cross and Blue Shield Association
Located in Chicago, Illinois
[Application No. D-12077]
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, as amended (ERISA), and Section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code). The proposed exemption
relates to legal actions and claims (the Claims) against Allianz Global
Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon), that
arose from certain losses incurred by the Non-Contributory Retirement
Program for Certain Employees of Blue Cross and Blue Shield Association
(the Plan) in the first quarter of 2020.\2\
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\2\ In proposing this exemption, the Department is not
expressing an opinion regarding the merits of any Claim against
Allianz and Aon, or whether the Plan's fiduciaries met their
fiduciary duties with respect to Plan assets that are the subject of
the Claims. Further, in proposing this exemption, the Department is
not limiting any party's claim, demand and/or cause of action
arising from the Plan's 2020 first quarter losses in any way. Among
other things, this exemption preserves any right, claim, demand and/
or cause of action the Plan may have against the following: (1) any
fiduciary of the Plan; (2) any fiduciary of the Trust; (3) Blue
Cross and Blue Shield Association; and/or (4) any person or entity
related to a person or entity described in (1)-(3).
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This proposed exemption would permit the Plan sponsor, Blue Cross
and Blue Shield Association (BCBSA), to make a series of payments to
the Plan, including: (1) the past payment of $69,000,000, made on March
12, 2021; and (2) the past payment of $13,500,000, made on March 28,
2022 (the Restorative Payments). If the Plan receives litigation
proceeds from the Claims, the Plan will transfer the lesser of the
ligation proceeds amount or the Restorative Payments amount, plus
reasonable attorney fees to BCBSA.
Summary of Facts and Representations <SUP>3</SUP>
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\3\ The Department notes that availability of this exemption is
subject to the express condition that the material facts and
representations contained in application D-12077 are true and
complete at all times and accurately describe all material terms of
the transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption or in a material
fact or representation described in the application, the exemption
will cease to apply as of the date of such change. The Summary of
Facts and Representations is based on the Applicant's
representations, as well as factual representations contained in the
Claims' cause of action (as described below) and does not reflect
factual findings or opinions of the Department, unless indicated
otherwise.
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1. BCBSA is a national association of 35 independent, community-
based and locally operated Blue Cross Blue Shield companies. BCBSA owns
and manages the Blue Cross and Blue Shield trademarks and names in more
than 170 countries around the world and also grants licenses to
independent companies to use the trademarks and names in exclusive
geographic areas.
2. The Plan is a defined benefit pension plan that covers eligible
employees or participants of BCBSA who, as of December 31, 2006, had
completed one year of service, reached the age of 21, and remained
continuously employed. The Plan was amended effective January 1, 2007
to close participation to new entrants as of December 31, 2006. As of
August 31, 2020, the Plan held $104,789.042 in total assets.
3. The Plan holds a beneficial interest in the Blue Cross and Blue
Shield National Retirement Trust (the Trust). The Trust is a master
trust that holds the assets of 16 defined benefit pension plans that
participate in the BCBSA's National Retirement Program (the
Participating Plans). Northern Trust serves as Trustee and asset
custodian to the Trust and maintains separate records that reflect the
net asset value of each Participating Plan. The Trust's earnings,
market adjustments, and administrative expenses are allocated among the
Participating Plans based on the respective Participating Plan's share
of the Trust's assets. A Participating Plan's interest in the Trust's
net assets is based on its share of the Trust.
4. The Committee serves as named fiduciary and administrator for
each Participating Plan. The Committee is a standing committee of the
BCBSA's board of directors. In 2011, the Committee invested a portion
of the Trust's assets in funds managed by Allianz Global Investors U.S.
LLC (Allianz), as part of a Structured Alpha Investment Strategy. These
funds included: (a) AllianzGI Structured Alpha Multi-Beta Series LLC I;
(b) AllianzGI Structured Alpha Emerging Markets Equity 350 LLC; and (c)
AllianzGI Structured Alpha 1000 LLC (collectively, the Structured Alpha
Funds).
5. The Applicant represents that the Allianz Structured Alpha
strategy consisted of alpha and beta components. According to the
Applicant, the alpha component was an options trading strategy that
Allianz claimed would seek targeted positive return potential while
maintaining structural risk protections. The beta component was
intended to provide broad market exposure to a particular asset class
through investments in financial products similar to an exchange-traded
fund that replicates the performance of a market index, such as the S&P
500. According to the Applicant, Allianz represented that the
Structured Alpha Strategy would capitalize on the return-generating
features of option selling (short volatility) while simultaneously
benefitting from the risk-control attributes associated with option
buying (long volatility). According to the Applicant, Allianz
represented further that the alpha component would include position
hedging consisting of long-volatility positions designed to protect the
portfolio in the event of a market crash.
6. As of December 31, 2019, the total market value of the Plan's
portion of the Trust's investment in the Allianz Structured Alpha Funds
was $224,525,108. At the time, this represented 77.66% of total Plan
assets.\4\
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\4\ By proposing this exemption, the Department does not, in any
way, suggest a conclusion that the Plan's fiduciaries met their
ERISA Section 404 duties when they caused the Trust to invest 77.66%
of the Plan's total assets in the Allianz Structured Alpha Funds.
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7. In 2009, the Committee retained Aon (then called Ennis Knupp) to
provide investment advice regarding the investment of Plan assets held
in the Trust. The Applicant represents that Aon provided regular
investment advice pursuant to a written contract between it and the
Committee. Pursuant to its engagement, Aon agreed to provide the
following: ``recommendations to [the Committee] regarding asset
allocation'' within the Trust; ``recommendations to [the Committee]
regarding the specific asset allocation and other investment
guidelines'' for the Trust's investment managers such as Allianz; and
advice ``regarding the diversification of assets'' held in the Trust.''
The Applicant represents that Aon agreed to: conduct ``active, ongoing
monitoring'' of Allianz to ``identify any forward-looking'' risks
``that could impact performance;'' and ``inform itself'' of any
information necessary to discharge its duty to monitor, including
information about the actual options positions Allianz had constructed.
8. The Applicant represents that when equity markets sharply
declined in February and March of 2020, volatility spiked and the
options positions held within the Structured Alpha Strategy were
exposed to a heightened risk of loss. The Applicant represents that,
unbeknownst to the Committee, and in violation of Allianz's stated
investment strategy, Allianz abandoned the hedging strategy that was
the supposed cornerstone of the Structured Alpha Strategy, leaving the
portfolio almost entirely unhedged against a spike in
[[Page 52120]]
market volatility. As described in the Claims, although Allianz had
represented that it would buy hedges at strike prices ranging from 10%
to 25% below the market, the hedges it actually held at the end of
February 2020 were as much as 60% below the market.
The Applicant represents that, as of January 31, 2020, the Trust
had invested approximately $2,916,049,486 in the Structured Alpha
Strategy. Six weeks later, the Trust faced a margin call, which the
Applicant states left it no choice but to liquidate the investment. The
Trust was ultimately able to redeem only $646,762,678 of its
$2,916,049,486 investment, resulting in a total loss of $2,269,286,808.
Specifically, regarding the Plan's portion of the loss, as of
December 31, 2019, the market value for the Plan's assets totaled
$289,100,229. As of March 31, 2020, the market value of total assets
for the Plan decreased to $97,181,664. The Applicant represents that
the Plan's total losses from the Allianz Structured Alpha Strategy was
$183,368,144, which caused the Plan to be underfunded.
9. On September 16, 2020, the Committee filed a cause of action in
the United States District Court for the Southern District of New York
(Case number 20-CIV-07606) against Allianz and Aon for Breach of
Fiduciary Duty under ERISA Section 404, Breach of Co-Fiduciary Duty
under ERISA Section 405, and violation of ERISA Section 406(b) for
managing the Plan assets in its self-interest and breach of contract.
It is possible that resolution of this claim and other legal actions
against Allianz and Aon in connection with the Plan's losses (the
Claims) could take an extended period of time.
10. The Applicant states that rather than wait for the Claims to be
resolved, BCBSA took steps to protect Plan benefits and avoid onerous
benefit restrictions under Code section 436 that could apply to the
Plan as a result of a funding shortfall. Therefore, on November 24,
2020, BCBSA and the Plan entered into a Contribution and Assignment
Agreement (the Contribution and Assignment Agreement).
11. Pursuant to the Contribution and Assignment Agreement, BCBSA
agreed to make the Restorative Payments to the Plan consisting of: (a)
a payment not to exceed $74,000,000 by September 30, 2021; (b) a
payment not to exceed $20,000,000 by September 30, 2022; and (c) a
payment not to exceed $31,000,000 by September 30, 2023. Thereafter,
BCBSA made Restorative Payments to the Plan of $69,000,000 on March 12,
2021, and $13,500,000 on March 28, 2022.
12. On June 22, 2022, BCBSA and the Plan amended the Restorative
Payments provision of the Contribution and Assignment Agreement to
provide that BCBSA's Restorative Payments under the Agreement will
consist only of the $69,000,000 payment made on March 12, 2021, and the
$13,500,000 payment made on March 28, 2022.
13. In exchange for the Restorative Payments, the Plan assigned to
BCBSA its right to retain certain litigation and/or settlement proceeds
recovered from the Claims (the Assigned Interests).\5\ Per the
assignment, once the Allianz/Aon litigation is resolved and if the Plan
receives litigation proceeds from the Claims, the Plan will transfer to
BCBSA a repayment (the Repayment) that does not exceed the total
Restorative Payments made by BCBSA, plus reasonable attorney fees paid
by BCBSA on behalf of the Plan in connection with the Claims, if such
fees are reviewed and approved by a qualified independent fiduciary who
confirms that the fees were reasonably incurred and paid by BCBSA to
unrelated third parties (the Attorney Fees). For the purposes of this
exemption, Attorney Fees reimbursable to BCBSA do not include: (a)
legal expenses paid by the Plan; and (b) legal expenses paid by BCBSA
for representation of its own interests or the interests of any party
other than the Plan. For purposes of determining the amount of Attorney
Fees the Plan may reimburse to BCBSA under this exemption, the amount
of reasonable attorney fees paid by BCBSA on behalf of the Plan in
connection with the Claims must be reduced by the amount of legal fees
received by BCBSA in connection with the Claims from any non-Plan party
(for example, from a third party pursuant to a court award).
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\5\ Under the Contribution and Assignment Agreement, if the Plan
receives litigation or settlement proceeds from the Claims, the
proceeds would first flow to the Trust, and then each Plan's pro
rata portion of the proceeds would be deposited into the individual
trust funding that Plan.
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14. The Plan must ultimately receive at least the full value of the
promised Restorative Payments ($82,500,000), minus the Attorney Fees.
The Plan may ultimately receive more than the Restorative Payment
amount required under the Contribution and Assignment Agreement. If the
Plan receives litigation or settlement proceeds that exceed the amount
of Restorative Payments that BCBSA has made to the Plan, the Plan's
Repayment to BCBSA will be limited to the amount of Restorative
Payments actually made by BCBSA, plus Attorney Fees. For example, if
BCBSA reasonably incurred $100,000 in Attorney Fees and the Plan
receives $120,000,000 in litigation proceeds, the Plan will make a
Repayment to BCBSA totaling $82,600,000.
15. Alternatively, if the Plan receives less litigation or
settlement proceeds than the amount of Restorative Payments that BCBSA
has made to the Plan, the Plan will transfer to BCBSA the lesser amount
of litigation or settlement proceeds, plus Attorney Fees. For example,
if BCBSA has reasonably incurred $100,000 in Attorney Fees and the Plan
receives $50,000,000 in litigation proceeds, the Plan will make a
Repayment to BCBSA totaling $50,100,000.
16. The Department notes that if the Plan receives any restitution
that is tied to the conduct underlying the Claims but was ordered
pursuant to a proceeding or directive that is external to Case number
20-CIV-07606, the disposition of such proceeds must conform to the
requirements of this exemption.
17. BCBSA retained Gallagher Fiduciary Advisors, LLC (Gallagher or
the Independent Fiduciary) of New York, New York, to serve as the
Plan's independent fiduciary with respect to the Required Restorative
Payments and the potential repayment by the Plan of those Payments
(collectively, the Proposed Transactions). Gallagher represents that it
has extensive experience in institutional investment consulting and
fiduciary decision-making regarding traditional and alternative
investments. Gallagher further represents that its independent
fiduciary decision-making work involves acting as a fiduciary advisor
or decision-maker for plans and other ERISA-regulated asset pools and
that it has experience with a wide range of asset classes and
litigation claims.
18. Gallagher represents that it understands its duties and
responsibilities under ERISA in acting as a fiduciary on behalf of the
Plan. Gallagher also acknowledges that it is authorized to take all
appropriate actions to safeguard the Plan's interests, and that it will
monitor the Proposed Transactions on the Plan's behalf on a continuous
basis and throughout the term required by this exemption.
19. Gallagher represents that it does not have any prior
relationship with any parties in interest to the Plan, including BCBSA
and any BCBSA affiliates. Gallagher further represents the total
revenues it has received from the Plan and from parties in interest to
the Plan in connection with its engagement as Independent Fiduciary
represents
[[Page 52121]]
approximately 0.78% of Gallagher's total revenue.
20. Gallagher represents that no party associated with this
exemption application has or will indemnify it, in whole or in part,
for negligence of any kind and/or any violation of state or federal law
that may be attributable to Gallagher's performance of its duties as
Independent Fiduciary to the Plan with respect to the Proposed
Transactions. In addition, no contract or instrument entered into by
Gallagher as Independent Fiduciary may purport to waive any liability
under state or federal law for any such violation.
21. On November 23, 2020, Gallagher completed an Independent
Fiduciary Report (the Independent Fiduciary Report) finding that the
massive losses caused by the Trust's investment in the Allianz
Structured Alpha Strategy resulted in a significant reduction to the
Plan's total assets and funding level. Gallagher represents that the
Required Restorative Payments, which will be received by the Plan
substantially in advance of a final resolution of the Claims against
Allianz and Aon, should restore the Plan's funded percentage to its
pre-loss funded percentage as of January 1, 2019. The restoration of
the Plan's funding status will secure ongoing benefit payments to
participants and beneficiaries.
Gallagher notes that the Contribution and Assignment Agreement
provides that the Trust must reimburse BCBSA only up to the Required
Restorative Payment Amount already received, plus any reasonable legal
expense paid to non-BCBSA-related parties that were incurred by, or
allocated to, BCBSA as a result of the Claims.\6\ Thus, if the Plan's
ultimate recovery amount from the Claims is less than the Required
Restorative Payment Amount, plus related litigation expenses that were
allocated to the Plan, BCBSA, not the Plan, will suffer the loss.
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\6\ Currently, legal fees and expenses associated with the
Claims are being paid by most of the Participating Plan's trusts on
a pro rata basis according to each Participating Plan's total
invested assets held in the Master Trust's Allianz Structured Alpha
Strategy before the losses were incurred in the first quarter 2020.
The Applicant represents that the Committee reviews and approves
these legal fees before passing them through to each Participating
Plan.
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Gallagher states that the Proposed Transactions and the terms of
the Contribution and Assignment Agreement were negotiated and approved
by Gallagher in its role as the Plan's Independent Fiduciary. Gallagher
states that it approved the Proposed Transactions only after conducting
an extensive analysis of the damages suffered by the Plan as a result
of the failed Allianz Structured Alpha Strategy. Gallagher represents
that it conducted numerous discussions with Trust representatives and
counsel, along with the Plan's representatives and counsel to ensure
that the interests of the Plan's participants and beneficiaries were
protected with respect to all aspects of the Proposed Transactions.
Based upon its assessment, Gallagher approved the Plan's receipt of the
Required Restorative Payments from BCBSA in exchange for the
Assignment.
ERISA Analysis
22. Absent an exemption, the Plan's receipt of the Restorative
Payments from BCBSA in exchange for the Plan's transfer of litigation
or settlement proceeds to BCBSA would violate ERISA. In this regard,
ERISA Section 406(a)(1)(A) prohibits a plan fiduciary from causing the
plan to engage in a transaction if the fiduciary knows or should know
that such transaction constitutes a direct or indirect sale or exchange
of any property between a plan and a party in interest. BCBSA, as an
employer whose employees are covered by the Plan, is a party in
interest with respect to the Plan under ERISA Section 3(14)(C). The
Required Restorative Payments to the Plan and the Plan's potential
repayment to BCBSA with litigation or settlement proceeds would
constitute impermissible exchanges between the Plan and a party-in-
interest (BCBSA) in violation of ERISA Section 406(a)(1)(A).
ERISA Section 406(a)(1)(D) prohibits a plan fiduciary from causing
a plan to engage in a transaction if the fiduciary knows or should know
that the transaction constitutes a direct or indirect transfer to, or
use by or for the benefit of, a party-in-interest, of the income or
assets of the plan. The transfer of Plan assets to BCBSA in connection
with the Repayment would constitute an impermissible transfer of Plan
assets to a party-in-interest in violation of ERISA Section
406(a)(1)(D).
Conditions
23. This proposed exemption contains a number of conditions that
must be met. For example, the proposed exemption mandates that the
Independent Fiduciary, in full accordance with its obligations of
prudence and loyalty under ERISA Section 404(a)(1)(A) and (B) must:
(a) review, negotiate, and approve the terms and conditions of the
Required Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement, before the Plan enters into such payments and the
agreement;
(b) determine that the terms and conditions of the Required
Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement are prudent, in the interest of the Plan and its
participants and beneficiaries, and protective of the rights of the
Plan's participants and beneficiaries;
(c) confirm that the Required Restorative Payments are fully and
timely made;
(d) monitor the Claims and confirm that the Plan receives its
proper share of any litigation or settlement proceeds received by the
Trust in connection with the Claims;
(e) ensure that any Repayment by the Plan to BCBSA fully complies
with the terms of this exemption and is for no more than the lesser of
the total Restorative Payments actually made to the Plan by BCBSA or
the amount the Plan received from the Claims, plus Attorney Fees;
(f) ensure that any Repayment by the Plan to BCBSA for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBSA to unrelated third parties for
representation of the Plan and its interests (as opposed to
representation of BCBSA or the interests of any party other than the
Plan) where BCBSA was not otherwise reimbursed from a non-Plan party;
(g) monitor the Plan's Assigned Interests on an ongoing basis to
determine and confirm that any excess recovery amount from the Claims
(i.e., any amount that exceeds the Required Restorative Payment Amount)
is retained by the Plan;
(h) ensure that all of the conditions and definitions of this
proposed exemption are met; and
(i) represent that it has not and will not enter into any agreement
or instrument that violates ERISA Section 410 or Department Regulations
codified at 29 CFR 2509.75-4.\7\
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\7\ ERISA Section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of Title I of ERISA] shall be
void as against public policy.''
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24. This proposed exemption also requires Gallagher to respond in
writing to any information requests from the Department regarding
Gallagher's activities as the Plan's Independent Fiduciary.
Additionally, no later than 90 days after the resolution of the
litigation, Gallagher must submit a written report to the Department
demonstrating that all terms and
[[Page 52122]]
conditions of the exemption have been met.
25. This proposed exemption requires that the Plan has not and will
not release any claims, demands and/or causes of action it may have
against: (a) any fiduciary of the Plan; (b) any fiduciary of the Trust;
(c) BCBSA; and/or (d) any person or entity related to a person or
entity described in (a)-(c) of this paragraph. Additionally, any
Repayment by the Plan to BCBSA must be made in a manner designed to
minimize unnecessary costs and disruption to the Plan and its
investments.
26. The Plan may not make any Repayment to BCBSA before the date:
the Plan has received from BCBSA the entire amount of the Restorative
Payments agreed to in the Amended Contribution and Assignment
Agreement; and all the Claims are settled. Furthermore, the Plan may
not pay any interest to BCBSA in connection with its receipt of the
Required Restorative Payments, nor pledge Plan assets to secure any
portion of the Required Restorative Payments.
27. Pursuant to this proposed exemption, the Plan may not incur any
expenses, commissions or transaction costs in connection with the
Proposed Transactions. However, as noted above, under certain
circumstances the Plan may reimburse BCBSA for reasonable legal
expenses arising from the Claims that BCBSA paid to non-BCBSA-related
parties for representation of the Plan and its interests (as opposed to
representation of BCBSA or the interests of any party other than the
Plan) where BCBSA was not otherwise reimbursed by a non-Plan party.
28. Finally, the exemptive relief provided under this proposed
exemption is conditioned upon the Department's assumption that the
material facts and representations set forth above in the Summary of
Facts and Representation section are true and accurate at all times. In
the event that a material fact or representation detailed above is
untrue or inaccurate, the exemptive relief provided under this
exemption will cease immediately.
Statutory Findings
29. ERISA Section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such participants and beneficiaries. Each of these criteria is
discussed below.
a. The Proposed Exemption Is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible because, among other things, the Independent
Fiduciary will represent the interests of the Plan for all purposes
with respect to the Proposed Transactions.\8\ In this regard, not later
than 90 days after the resolution of the litigation, the Independent
Fiduciary must submit a written report to the Department demonstrating
that all of the requirements of this exemption have been met.
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\8\ This proposed exemption would require that if the
Independent Fiduciary resigns, is removed, or for any reason is
unable to serve as an Independent Fiduciary, the successor
Independent Fiduciary must, among other things, assume all of the
duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent
Fiduciary, the Plan Sponsor and the Plan must notify the
Department's Office of Exemption Determinations of the change in
Independent Fiduciaries. The notification must contain all material
information including the qualifications of the successor
Independent Fiduciary.
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b. The Proposed Exemption Is ``In the Interests of the Plan.'' The
Department has tentatively determined that the proposed exemption is in
the interest of the Plan because, among other things, the Plan's
receipt of the Required Restorative Payments substantially improved the
Plan's funding status, which enhanced the Plan's ability to meet its
obligations to fund benefit obligations to participants and
beneficiaries and helped the Plan avoid the imposition of benefit
limitations imposed under Code section 436.
c. The Proposed Exemption Is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the rights of the Plan's participants and beneficiaries
because, among other things, the Plan will repay BCBSA the lesser of
the Required Restorative Payment Amount, or the amount the Plan
receives in proceeds from the Claims, ensuring that the Proposed
Transactions will result in an increase in Plan assets of at least the
total amount of Restorative Payments (less reasonable legal expenses
related to the Claims paid by BCBSA to unrelated third parties, as
confirmed and approved by the Independent Fiduciary). Further, this
exemption preserves any right, claim, demand and/or cause of action the
Plan may have against: (a) any fiduciary of the Plan; (b) any fiduciary
of the Trust; (c) BCBSA; and/or (d) any person or entity related to a
person or entity described in (a)-(c).
Summary
30. Based on the conditions described above, the Department has
tentatively determined that the relief sought by the Applicant
satisfies the statutory requirements under ERISA Section 408(a) for the
Department to make findings that support its issuance of a proposed
exemption.
Proposed Exemption
The Department is considering granting an exemption under the
authority of ERISA Section 408(a) and Code Section 4975(c)(2) and in
accordance with the procedures set forth in the Department's exemption
procedure regulation.\9\
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\9\ 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
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Section I. Definitions
(a) The term ``Attorney Fees'' means reasonable legal expenses paid
by BCBSA on behalf of the Plan in connection with the Claims, if such
fees are reviewed and approved by a qualified independent fiduciary who
confirms that the fees were reasonably incurred and paid by BCBSA to
unrelated third parties. For the purposes of this exemption, the
Attorney Fees reimbursable to BCBSA do not include: (1) legal expenses
paid by the Plan; and (2) legal expenses paid by BCBSA for
representation of BCBSA or the interests of any party other than the
Plan.
(b) The term ``BCBSA'' means Blue Cross and Blue Shield
Association.
(c) The term ``Claims'' means the legal claims against Allianz
Global Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon),
to recover certain losses incurred by the Plan in the first quarter of
2020.
(d) The term ``Contribution and Assignment Agreement'' means the
written agreement dated November 24, 2020, and its amendment that
became effective on June 22, 2022, containing all material terms
regarding BCBSA's agreement to make Required Restorative Payments to
the Plan in return for the Plan's potential Repayment to BCBSA of an
amount that is no more than lesser of the Required Restorative Payment
Amount (as described in Section I(h)) or the amount of litigation
proceeds the Plan receives from the Claims, plus reasonable attorney
fees paid to unrelated third parties by BCBSA in connection with the
Claims.
(e) The term ``Independent Fiduciary'' means Gallagher Fiduciary
Advisors, LLC (Gallagher) or a successor Independent Fiduciary to the
extent Gallagher or the successor Independent
[[Page 52123]]
Fiduciary continues to serve in such capacity who:
(1) Is not an affiliate of BCBSA and does not hold an ownership
interest in BCBSA or affiliates of BCBSA;
(2) Was not a fiduciary with respect to the Plan before its
appointment to serve as the Independent Fiduciary;
(3) Has acknowledged in writing that it:
(i) is a fiduciary with respect to the Plan and has agreed not to
participate in any decision regarding any transaction in which it has
an interest that might affect its best judgment as a fiduciary; and
(ii) Has appropriate technical training or experience to perform
the services contemplated by the exemption;
(4) Has not entered into any agreement or instrument that violates
the prohibitions on exculpatory provisions in ERISA Section 410 or the
Department's regulation relating to indemnification of fiduciaries;
\10\
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\10\ 29 CFR 2509.75-4.
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(5) Has not received gross income from BCBSA or its affiliates
during any fiscal year in an amount that exceeds two percent (2%) of
the Independent Fiduciary's gross income from all sources for the prior
fiscal year. This provision also applies to a partnership or
corporation of which the Independent Fiduciary is an officer, director,
or 10 percent (10%) or more partner or shareholder, and includes as
gross income amounts received as compensation for services provided as
an independent fiduciary under any prohibited transaction exemption
granted by the Department; and
(6) No organization or individual that is an Independent Fiduciary,
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent (10%) or more
partner or shareholder, may acquire any property from, sell any
property to, or borrow any funds from BCBSA or from affiliates of BCBSA
while serving as an Independent Fiduciary. This prohibition will
continue for six months after the party ceases to be an Independent
Fiduciary and/or the Independent Fiduciary negotiates any transaction
on behalf of the Plan during the period that the organization or
individual serves as an Independent Fiduciary.
(f) The ``Plan'' means the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield Association.
(g) The term ``Plan Losses'' means the $183,368,144 in Plan losses
the BCBSA's National Employee Benefits Committee alleges were the
result of breaches of fiduciary responsibilities and breaches of
contract by Allianz Global Investors U.S. LLC and/or Aon Investments
USA Inc.
(h) The term ``Restorative Payments'' means the payments made by
BCBSA to the Plan in connection with the Plan Losses, defined above,
consisting of: (1) the past payment of $69,000,000 on March 12, 2021;
and (2) the past payment of $13,500,000 on March 28, 2022. The sum of
(1)-(2) is the Required Restorative Payment Amount.
(i) The ``Repayment'' means the payment, if any, that the Plan will
transfer to BCBSA following the Plan's receipt of proceeds from the
Claims, where the Repayment is made following the full and complete
resolution of the Claims; and in a manner that is consistent with the
terms of the exemption.
Section II. Proposed Transactions
If the proposed exemption is granted, the restrictions of ERISA
Sections 406(a)(1)(A), (B) and (D) and the sanctions resulting from the
application of Code Section 4975, by reason of Code Sections
4975(c)(1)(A), (B) and (D), shall not apply, effective November 24,
2020, to the following transactions: BCBSA's transfer of Restorative
Payments to the Plan; and, in return, the Plan's Repayment of an amount
to BCBSA, which must be no more than the lesser of the Restorative
Payment Amount or the amount of litigation proceeds the Plan received
from the Claims, plus reasonable Attorney Fees, provided that the
Definitions set forth in Section I and the Conditions set forth in
Section III are met.
Section III. Conditions
(a) The Plan received the entire Restorative Payment Amount no
later than March 28, 2022;
(b) In connection with its receipt of the Required Restorative
Payments, the Plan does not release any claims, demands and/or causes
of action the Plan may have against the following: (1) any fiduciary of
the Plan; (2) any fiduciary of the Trust; (3) BCBSA; and/or (4) any
person or entity related to a person or entity identified in (1)-(3) of
this paragraph;
(c) The Plan's Repayment to BCBSA is for no more than the lesser of
the total Restorative Payments received by the Plan or the amount of
litigation proceeds the Plan receives from the Claims. The Plan's
Repayment to BCBSA may only occur after the Independent Fiduciary has
determined that: all the conditions of the exemption are met; the Plan
has received all the Restorative Payments it is due; and the Plan has
received all the litigation proceeds it is due. The Plan's Repayment to
BCBSA must be carried out in a manner designed to minimize unnecessary
costs and disruption to the Plan and its investments;
(d) A qualified independent fiduciary (the Independent Fiduciary,
as further defined in Section II(e)), acting solely on behalf of the
Plan in full accordance with its obligations of prudence and loyalty
under ERISA Sections 404(a)(1)(A) and (B) must:
(1) Review, negotiate and approve the terms and conditions of the
Restorative Payments and the Repayment and the Contribution and
Assignment Agreement, all of which must be in writing, before the Plan
enters into those transactions/agreement;
(2) Determine that the Restorative Payments, the Repayment, and the
terms of the Contribution and Assignment Agreement, are prudent and in
the interest of the Plan and its participants and beneficiaries;
(3) Confirm that the Required Restorative Payment Amount was fully
and timely made;
(4) Monitor the litigation related to the Claims and confirm that
the Plan receives, in a timely manner, its proper share of any
litigation or settlement proceeds received by the Trust;
(5) Ensure that any Repayment by the Plan to BCBSA for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBSA to unrelated third parties;
(6) Ensure that all of the conditions and definitions of this
proposed exemption are met;
(7) Submit a written report to the Department's Office of Exemption
Determinations demonstrating and confirming that the terms and
conditions of the exemption were met, within 90 days after the
Repayment; and
(8) Not enter into any agreement or instrument that violates ERISA
Section 410 or the Department's Regulations codified at 29 CFR Section
2509.75-4.
(f) The Plan pays no interest in connection with the Restorative
Payments;
(g) The Plan does not pledge any Plan assets to secure any portion
of the Restorative Payments;
(h) The Plan does not incur any expenses, commissions, or
transaction costs in connection with the Proposed Transactions.
However, if first approved by the Independent Fiduciary, the Plan may
reimburse BCBSA for reasonable legal expenses paid in connection with
the Claims by BCBSA to non-BCBSA-related parties. For purposes of
determining the amount of Attorney
[[Page 52124]]
Fees the Plan may reimburse to BCBSA under this proposal, the amount of
reasonable attorney fees paid by BCBSA on behalf of the Plan in
connection with the Claims must be reduced by the amount of legal fees
received by BCBSA in connection with the Claims from any non-Plan party
(i.e., pursuant to a court award);
(i) The proposed transactions do not involve any risk of loss to
either the Plan or the Plan's participants and beneficiaries;
(j) No party associated with this exemption has or will indemnify
the Independent Fiduciary and the Independent Fiduciary will not
request indemnification from any party, in whole or in part, for
negligence and/or any violation of state or federal law that may be
attributable to the Independent Fiduciary in performing its duties to
the Plan with respect to the Proposed Transactions. In addition, no
contract or instrument may purport to waive any liability under state
or federal law for any such violation.
(k) If an Independent Fiduciary resigns, is removed, or for any
reason is unable to serve as an Independent Fiduciary, the Independent
Fiduciary must be replaced by a successor entity that: (1) meets the
definition of Independent Fiduciary detailed above in Section II(e);
and (2) otherwise meets all of the qualification, independence,
prudence and diligence requirements set forth in this exemption.
Further, any such successor Independent Fiduciary must assume all of
the duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent Fiduciary,
BCBSA must notify the Department's Office of Exemption Determinations
of the change in Independent Fiduciary and such notification must
contain all material information regarding the successor Independent
Fiduciary, including the successor Independent Fiduciary's
qualifications; and
(l) All of the material facts and representations set forth in the
Summary of Facts and Representation are true and accurate at all times.
Notice to Interested Persons
The Applicant will give notice of the proposed exemption to all
interested persons and all of the parties to the litigation described
above, within fifteen calendar days after the publication of the notice
of proposed exemption in the Federal Register. The notice will contain
a copy of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to the
Department's regulations codified at 29 CFR 2570.43(a)(2). The
supplemental statement will inform interested persons of their right to
comment on the pending exemption. Written comments are due by October
11, 2022.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as a Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the internet and can
be retrieved by most internet search engines.
For Further Information Contact: Mr. Frank Gonzalez of the
Department, telephone (202) 693-8553. (This is not a toll-free number.)
Blue Cross and Blue Shield of Kansas City
Located in Kansas City, Missouri
[Application No. D-12039]
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, as amended (ERISA), and Section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code). The proposed exemption
relates to legal actions and claims (the Claims) against Allianz Global
Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon), that
arose from certain losses incurred by the Non-Contributory Retirement
Program for Certain Employees of Blue Cross and Blue Shield of Kansas
City (the Plan) in the first quarter of 2020.\11\
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\11\ In proposing this exemption, the Department is not
expressing an opinion regarding the merits of any Claim against
Allianz and Aon, or whether the Plan's fiduciaries met their
fiduciary duties with respect to Plan assets that are the subject of
the Claims. Further, in proposing this exemption, the Department is
not limiting any party's claim, demand and/or cause of action
arising from the Plan's 2020 first quarter losses in any way. Among
other things, this exemption preserves any right, claim, demand and/
or cause of action the Plan may have against the following: (1) any
fiduciary of the Plan; (2) any fiduciary of the Trust; (3) Blue
Cross and Blue Shield of Kansas City; and/or (4) any person or
entity related to a person or entity described in (1)-(3).
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This proposed exemption would permit the Plan sponsor, Blue Cross
and Blue Shield of Kansas City (BCBS KC), to make a series of payments
to the Plan, including the past payment of $87,000,000 made to the Plan
on September 9, 2021, and additional payments to the Plan totaling
$13,000,000 by December 31, 2024. If the Plan receives litigation
proceeds from the Claims, the Plan will transfer the lesser of the
ligation proceeds amount or the Restorative Payments amount already
received by the Plan, plus reasonable attorney fees to BCBS KC.
Summary of Facts and Representations <SUP>12</SUP>
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\12\ The Department notes that availability of this exemption is
subject to the express condition that the material facts and
representations contained in application D-12039 are true and
complete at all times and accurately describe all material terms of
the transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption or in a material
fact or representation described in the application, the exemption
will cease to apply as of the date of such change. The Summary of
Facts and Representations is based on the Applicant's
representations, as well as factual representations contained in the
Claims' cause of action (as described below) and does not reflect
factual findings or opinions of the Department, unless indicated
otherwise.
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1. BCBS KC is a not-for-profit company that provides health
insurance products and services. BCBS KC is an independent licensee of
the Blue Cross Blue Shield Association (BCBSA).
2. The Plan is an ERISA-covered qualified defined benefit pension
plan that covers eligible employees of BCBS KC and employees of
affiliated employers. On June 30, 2013, the Plan was closed to new
entrants. As of August 31, 2020, the Plan covered 1,212 participants
and held $80,441,432 in total assets.
3. The Plan holds a beneficial interest in the Blue Cross and Blue
Shield National Retirement Trust (the Trust). The Trust is a master
trust that holds the assets of 16 defined benefit pension plans that
participate in the BCBSA's National Retirement Program (the
Participating Plans). Northern Trust serves as Trustee and asset
custodian to the Trust and maintains separate records that reflect the
net asset value of each Participating Plan. The Trust's earnings,
market adjustments, and administrative expenses are allocated among the
Participating Plans based on the respective Participating Plan's share
of the Trust's assets. A Participating Plan's interest in the Trust's
net assets is based on its share of the Trust.
4. The Committee serves as named fiduciary and administrator for
each Participating Plan. The Committee is a standing committee of the
BCBSA's board of directors. In 2011, the Committee invested a portion
of the Trust's assets in funds managed by Allianz Global Investors U.S.
LLC
[[Page 52125]]
(Allianz), as part of a Structured Alpha Investment Strategy. These
funds included: (a) AllianzGI Structured Alpha Multi-Beta Series LLC I;
(b) AllianzGI Structured Alpha Emerging Markets Equity 350 LLC; and (c)
AllianzGI Structured Alpha 1000 LLC (collectively, the Structured Alpha
Funds).
5. The Applicant represents that the Allianz Structured Alpha
strategy consisted of alpha and beta components. According to the
applicant, the alpha component was an options trading strategy that
Allianz claimed would seek targeted positive return potential while
maintaining structural risk protections. The beta component was
intended to provide broad market exposure to a particular asset class
through investments in financial products similar to an exchange-traded
fund that replicates the performance of a market index, such as the S&P
500. According to the Applicant, Allianz represented that the
Structured Alpha Strategy would capitalize on the return-generating
features of option selling (short volatility) while simultaneously
benefitting from the risk-control attributes associated with option
buying (long volatility). According to the Applicant, Allianz
represented further that the alpha component would include position
hedging consisting of long-volatility positions designed to protect the
portfolio in the event of a market crash.
6. As of December 31, 2019, the total market value of the Plan's
portion of the Trust's investment in the Allianz Structured Alpha Funds
was $170,800,689, which represented 77.66% of total Plan assets.\13\
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\13\ By proposing this exemption, the Department does not, in
any way, suggest a conclusion that the Plan's fiduciaries met their
ERISA Section 404 duties when they caused the Trust to invest 77.66%
of the Plan's total assets in the Allianz Structured Alpha Funds.
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7. In 2009, the Committee retained Aon (then called Ennis Knupp) to
provide investment advice regarding the investment of Plan assets held
in the Trust. The Applicant represents that Aon provided regular
investment advice pursuant to a written contract between it and the
Committee. Pursuant to its engagement, Aon agreed to provide the
following: ``recommendations to [the Committee] regarding asset
allocation'' within the Trust; ``recommendations to [the Committee]
regarding the specific asset allocation and other investment
guidelines'' for the Trust's investment managers such as Allianz; and
advice ``regarding the diversification of assets'' held in the Trust.''
The Applicant represents that Aon agreed to: conduct ``active, ongoing
monitoring'' of Allianz to ``identify any forward-looking'' risks
``that could impact performance;'' and ``inform itself'' of any
information necessary to discharge its duty to monitor, including
information about the actual options positions Allianz had constructed.
8. The Applicant represents that when equity markets sharply
declined in February and March of 2020, volatility spiked and the
options positions held within the Structured Alpha Strategy were
exposed to a heightened risk of loss. The Applicant represents that,
unbeknownst to the Committee, and in violation of Allianz's stated
investment strategy, Allianz abandoned the hedging strategy that was
the supposed cornerstone of the Structured Alpha Strategy, leaving the
portfolio almost entirely unhedged against a spike in market
volatility. As described in the Claims, although Allianz had
represented that it would buy hedges at strike prices ranging from 10%
to 25% below the market, the hedges it actually held at the end of
February 2020 were as much as 60% below the market.
The Applicant represents that, as of January 31, 2020, the Trust
had invested approximately $2,916,049,486 in the Structured Alpha
Strategy. Six weeks later, the Trust faced a margin call, which the
Applicant states left it no choice but to liquidate the investment. The
Trust was ultimately able to redeem only $646,762,678 of its
$2,916,049,486 investment, resulting in a total loss of $2,269,286,808.
Specifically, regarding the Plan's portion of the loss, as of
December 31, 2019 the market value of Plan assets was $219,924,260. As
of March 31, 2020, the market value of Plan assets decreased to
$73,641,344. The Applicant represents that the Plan's total losses from
the Allianz Structured Alpha Strategy were $139,613,178, which caused
the Plan to be underfunded.
9. On September 16, 2020, the Committee filed a cause of action in
the United States District Court for the Southern District of New York
(Case number 20-CIV-07606) against Allianz and Aon for Breach of
Fiduciary Duty under ERISA Section 404, Breach of Co-Fiduciary Duty
under ERISA Section 405, and violation of ERISA Section 406(b) for
managing the Plan assets in its self-interest and breach of contract.
It is possible that resolution of this claim and other legal actions
against Allianz and Aon in connection with the Plan's losses (the
Claims) could take an extended period of time.
10. The Applicant states that rather than wait for the Claims to be
resolved, BCBS KC took steps to protect Plan benefits and avoid onerous
benefit restrictions under Code section 436 that could apply to the
Plan as a result of a funding shortfall. Therefore, on November 5,
2020, BCBS KC and the Plan entered into a Contribution and Assignment
Agreement (the Contribution and Assignment Agreement).
11. Pursuant to the Contribution and Assignment Agreement, BCBS KC
agreed to make $100,000,000 in Restorative Payments to the Plan by
September 30, 2021. On September 9, 2021, BCBS KC made an $87,000,000
Restorative Payment to the Plan. Subsequently, on September 23, 2021,
BCBS KC and the Plan amended the Restorative Payments provision of the
Contribution and Assignment Agreement to state that BCBS KC will make
$100,000,000 in Restorative Payments to the Plan by December 31, 2024.
The prior payment of $87,000,000 together with the required future
payment of $13,000,000 constitutes the Required Restorative Payments
under this exemption.
12. In exchange for the Restorative Payments, the Plan assigned to
BCBS KC its right to retain certain litigation and/or settlement
proceeds recovered from the Claims (the Assigned Interests).\14\ Per
the assignment, once the Allianz/Aon litigation is resolved and if the
Plan receives litigation proceeds from the Claims, the Plan will
transfer to BCBS KC a repayment (the Repayment) that does not exceed
the total Restorative Payments made by BCBS KC as of that date, plus
reasonable attorney fees paid by BCBS KC on behalf of the Plan in
connection with the Claims, if such fees are reviewed and approved by a
qualified independent fiduciary who confirms that the fees were
reasonably incurred and paid by BCBS KC to unrelated third parties (the
Attorney Fees).
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\14\ Under the Contribution and Assignment Agreement, if the
Plan receives litigation or settlement proceeds from the Claims, the
proceeds would first flow to the Trust, and then each Plan's pro
rata portion of the proceeds would be deposited into the individual
trust funding that Plan.
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For the purposes of this exemption, Attorney Fees reimbursable to
BCBS KC do not include: (a) legal expenses paid by the Plan; and (b)
legal expenses paid by BCBS KC for representation of its own interests
or the interests of any party other than the Plan. For purposes of
determining the amount of Attorney Fees the Plan may reimburse to BCBS
KC under this exemption, the amount of reasonable attorney fees paid by
BCBS KC on behalf of the Plan in connection with the Claims must be
reduced by the amount of legal fees received by BCBS
[[Page 52126]]
KC in connection with the Claims from any non-Plan party (for example,
from a third party pursuant to a court award).
13. The Plan must ultimately receive at least the full value of the
promised Restorative Payments, minus the Attorney Fees. The Plan may
ultimately receive more than the Restorative Payment amount required
under the Contribution and Assignment Agreement. If the Plan receives
litigation or settlement proceeds that exceed the amount of Restorative
Payments that BCBS KC has made to the Plan, the Plan's Repayment to
BCBS KC will be limited to the amount of Restorative Payments actually
made by BCBS KC, plus Attorney Fees. For example, if BCBS KC has made
$100,000,000 in Restorative Payments to the Plan and has reasonably
incurred $100,000 in Attorney Fees, and if the Plan receives
$120,000,000 in litigation proceeds, the Plan will make a Repayment to
BCBS KC totaling $100,100,000.
14. Alternatively, if the Plan receives less litigation or
settlement proceeds than the amount of Restorative Payments that BCBS
KC has made to the Plan, the Plan will transfer to BCBS KC the lesser
amount of litigation or settlement proceeds, plus Attorney Fees. For
example, if BCBS KC has made $100,000,000 in Restorative Payments to
the Plan and has reasonably incurred $100,000 in Attorney Fees, and if
the Plan receives $50,000,000 in litigation proceeds, the Plan will
make a Repayment to BCBS KC totaling $50,100,000.
15. The Department notes that if the Plan receives any restitution
that is tied to the conduct underlying the Claims but was ordered
pursuant to a proceeding or directive that is external to Case number
20-CIV-07606, the disposition of such proceeds must conform to the
requirements of this exemption.
16. BCBS KC retained Gallagher Fiduciary Advisors, LLC (Gallagher
or the Independent Fiduciary) of New York, New York, to serve as the
Plan's independent fiduciary with respect to the Required Restorative
Payments and the potential repayment by the Plan of those Payments
(collectively, the Proposed Transactions). Gallagher represents that it
has extensive experience in institutional investment consulting and
fiduciary decision-making regarding traditional and alternative
investments. Gallagher further represents that its independent
fiduciary decision-making work involves acting as a fiduciary advisor
or decision-maker for plans and other ERISA-regulated asset pools and
that it has experience with a wide range of asset classes and
litigation claims.
17. Gallagher represents that it understands its duties and
responsibilities under ERISA in acting as a fiduciary on behalf of the
Plan. Gallagher also acknowledges that it is authorized to take all
appropriate actions to safeguard the Plan's interests, and that it will
monitor the Proposed Transactions on the Plan's behalf on a continuous
basis and throughout the term required by this exemption.
18. Gallagher represents that it does not have any prior
relationship with any parties in interest to the Plan, including BCBS
KC and any BCBS KC affiliates. Gallagher further represents the total
revenues it has received from the Plan and from parties in interest to
the Plan in connection with its engagement as Independent Fiduciary
represents approximately 0.78% of Gallagher's total revenue.
19. Gallagher represents that no party associated with this
exemption application has or will indemnify it, in whole or in part,
for negligence of any kind and/or any violation of state or federal law
that may be attributable to Gallagher's performance of its duties as
Independent Fiduciary to the Plan with respect to the Proposed
Transactions. In addition, no contract or instrument entered into by
Gallagher as Independent Fiduciary may purport to waive any liability
under state or federal law for any such violation.
20. On November 5, 2020, Gallagher completed an Independent
Fiduciary Report (the Independent Fiduciary Report) finding that the
massive losses caused by the Trust's investment in the Allianz
Structured Alpha Strategy resulted in a significant reduction to the
Plan's total assets and funding level. Gallagher represents that the
Required Restorative Payments, which will be received by the Plan
substantially in advance of a final resolution of the Claims against
Allianz and Aon, should restore the Plan's funded percentage to its
pre-loss funded percentage as of January 1, 2019. The restoration of
the Plan's funding status will secure ongoing benefit payments to
participants and beneficiaries.
Gallagher notes that the Contribution and Assignment Agreement
provides that the Trust must reimburse BCBS KC only up to the Required
Restorative Payment Amount by the Plan, plus any reasonable legal
expense paid to non-BCBS KC-related parties that were incurred by, or
allocated to, BCBS KC as a result of the Claims.\15\ Thus, if the
Plan's ultimate recovery amount from the Claims is less than the
Required Restorative Payment Amount, plus related litigation expenses
that were allocated to the Plan, BCBS KC, not the Plan, will suffer the
loss.
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\15\ Currently, legal fees and expenses associated with the
Claims are being paid by most of the Participating Plan's trusts on
a pro rata basis according to each Participating Plan's total
invested assets held in the Master Trust's Allianz Structured Alpha
Strategy before the losses were incurred in the first quarter 2020.
The Applicant represents that the Committee reviews and approves
these legal fees before passing them through to each Participating
Plan.
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Gallagher states that the Proposed Transactions and the terms of
the Contribution and Assignment Agreement were negotiated and approved
by Gallagher in its role as the Plan's Independent Fiduciary. Gallagher
states that it approved the Proposed Transactions only after conducting
an extensive analysis of the damages suffered by the Plan as a result
of the failed Allianz Structured Alpha Strategy. Gallagher represents
that it conducted numerous discussions with Trust representatives and
counsel, along with the Plan's representatives and counsel to ensure
that the interests of the Plan's participants and beneficiaries were
protected with respect to all aspects of the Proposed Transactions.
Based upon its assessment, Gallagher approved the Plan's receipt of the
Required Restorative Payments from BCBS KC in exchange for the
Assignment.
ERISA Analysis
21. Absent an exemption, the Plan's receipt of the Restorative
Payments from BCBS KC in exchange for the Plan's transfer of litigation
or settlement proceeds to BCBS KC would violate ERISA. In this regard,
ERISA Section 406(a)(1)(A) prohibits a plan fiduciary from causing the
plan to engage in a transaction if the fiduciary knows or should know
that such transaction constitutes a direct or indirect sale or exchange
of any property between a plan and a party in interest. BCBS KC, as an
employer whose employees are covered by the Plan, is a party in
interest with respect to the Plan under ERISA Section 3(14)(C). The
Required Restorative Payments to the Plan and the Plan's potential
repayment to BCBS KC with litigation or settlement proceeds would
constitute impermissible exchanges between the Plan and a party-in-
interest (BCBS KC) in violation of ERISA Section 406(a)(1)(A).
ERISA Section 406(a)(1)(B) prohibits the lending of money or other
extension of credit between a plan and a party-in-interest. BCBS KC's
promise to make
[[Page 52127]]
additional Required Restorative Payments to the Plan, over time,
constitutes an impermissible extension of credit between the Plan and a
party-in-interest in violation of ERISA Section 406(a)(1)(B).
ERISA Section 406(a)(1)(D) prohibits a plan fiduciary from causing
a plan to engage in a transaction if the fiduciary knows or should know
that the transaction constitutes a direct or indirect transfer to, or
use by or for the benefit of, a party-in-interest, of the income or
assets of the plan. The transfer of Plan assets to BCBS KC in
connection with the Repayment would constitute an impermissible
transfer of Plan assets to a party-in-interest in violation of ERISA
Section 406(a)(1)(D).
Conditions
22. This proposed exemption contains a number of conditions that
must be met. For example, the proposed exemption mandates that the
Independent Fiduciary, in full accordance with its obligations of
prudence and loyalty under ERISA Section 404(a)(1)(A) and (B) must:
(a) review, negotiate, and approve the terms and conditions of the
Required Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement, before the Plan enters into such payments and the
agreement;
(b) determine that the terms and conditions of the Required
Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement are prudent, in the interest of the Plan and its
participants and beneficiaries, and protective of the rights of the
Plan's participants and beneficiaries;
(c) confirm that the Required Restorative Payments are fully and
timely made;
(d) monitor the Claims and confirm that the Plan receives its
proper share of any litigation or settlement proceeds received by the
Trust in connection with the Claims;
(e) ensure that any Repayment by the Plan to BCBS KC fully complies
with the terms of this exemption and is for no more than the lesser of
the total Restorative Payments actually made to the Plan by BCBS KC or
the amount the Plan received from the Claims, plus Attorney Fees;
(f) ensure that any Repayment by the Plan to BCBS KC for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBS KC to unrelated third parties for
representation of the Plan and its interests (as opposed to
representation of BCBS KC or the interests of any party other than the
Plan) where BCBS KC was not otherwise reimbursed from a non-Plan party;
(g) monitor the Plan's Assigned Interests on an ongoing basis to
determine and confirm that any excess recovery amount from the Claims
(i.e., any amount that exceeds the Required Restorative Payment Amount)
is retained by the Plan;
(h) ensure that all of the conditions and definitions of this
proposed exemption are met; and
(i) represent that it has not and will not enter into any agreement
or instrument that violates ERISA Section 410 or Department Regulations
codified at 29 CFR 2509.75-4.\16\
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\16\ ERISA Section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of Title I of ERISA] shall be
void as against public policy.''
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23. This proposed exemption also requires Gallagher to respond in
writing to any information requests from the Department regarding
Gallagher's activities as the Plan's Independent Fiduciary.
Additionally, no later than 90 days after the resolution of the
litigation, Gallagher must submit a written report to the Department
demonstrating that all terms and conditions of the exemption have been
met.
24. This proposed exemption requires that the Plan has not and will
not release any claims, demands and/or causes of action it may have
against: (a) any fiduciary of the Plan; (b) any fiduciary of the Trust;
(c) BCBS KC; and/or (d) any person or entity related to a person or
entity described in (a)-(c) of this paragraph. Additionally, any
Repayment by the Plan to BCBS KC must be made in a manner designed to
minimize unnecessary costs and disruption to the Plan and its
investments.
25. The Plan may not make any Repayment to BCBS KC before the date:
the Plan has received from BCBS KC the entire amount of the Restorative
Payments agreed to in the Amended Contribution and Assignment
Agreement; and all the Claims are settled. Furthermore, the Plan may
not pay any interest to BCBS KC in connection with its receipt of the
Required Restorative Payments, nor pledge Plan assets to secure any
portion of the Required Restorative Payments.
26. Pursuant to this proposed exemption, the Plan may not incur any
expenses, commissions or transaction costs in connection with the
Proposed Transactions. However, as noted above, under certain
circumstances the Plan may reimburse BCBS KC for reasonable legal
expenses arising from the Claims that BCBS KC paid to non-BCBS KC-
related parties for representation of the Plan and its interests (as
opposed to representation of BCBS KC or the interests of any party
other than the Plan) where BCBS KC was not otherwise reimbursed by a
non-Plan party.
27. Finally, the exemptive relief provided under this proposed
exemption is conditioned upon the Department's assumption that the
material facts and representations set forth above in the Summary of
Facts and Representation section are true and accurate at all times. In
the event that a material fact or representation detailed above is
untrue or inaccurate, the exemptive relief provided under this
exemption will cease immediately.
Statutory Findings
28. ERISA Section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such participants and beneficiaries. Each of these criteria is
discussed below.
a. The Proposed Exemption Is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible because, among other things, the Independent
Fiduciary will represent the interests of the Plan for all purposes
with respect to the Proposed Transactions.\17\ In this regard, not
later than 90 days after the resolution of the litigation, the
Independent Fiduciary must submit a written report to the Department
demonstrating that all of the requirements of this exemption have been
met.
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\17\ This proposed exemption would require that if the
Independent Fiduciary resigns, is removed, or for any reason is
unable to serve as an Independent Fiduciary, the successor
Independent Fiduciary must, among other things, assume all of the
duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent
Fiduciary, the Plan Sponsor and the Plan must notify the
Department's Office of Exemption Determinations of the change in
Independent Fiduciaries. The notification must contain all material
information including the qualifications of the successor
Independent Fiduciary.
---------------------------------------------------------------------------
b. The Proposed Exemption Is ``In the Interests of the Plan.'' The
Department has tentatively determined that the proposed exemption is in
the interest of the Plan because, among other things, the Plan's
receipt of the Required
[[Page 52128]]
Restorative Payments will substantially improve the Plan's funding
status, which will enhance the Plan's ability to meet its obligations
to fund benefit obligations to participants and beneficiaries and help
the Plan avoid the imposition of benefit limitations imposed under Code
section 436.
c. The Proposed Exemption Is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the rights of the Plan's participants and beneficiaries
because, among other things, the Plan will repay BCBS KC the lesser of
the Required Restorative Payment Amount, or the amount the Plan
receives in proceeds from the Claims, ensuring that the Proposed
Transactions will result in an increase in Plan assets of at least the
total amount of Restorative Payments (less reasonable legal expenses
related to the Claims paid by BCBS KC to unrelated third parties, as
confirmed and approved by the Independent Fiduciary). Further, this
exemption preserves any right, claim, demand and/or cause of action the
Plan may have against: (a) any fiduciary of the Plan; (b) any fiduciary
of the Trust; (c) BCBS KC; and/or (d) any person or entity related to a
person or entity described in (a)-(c).
Summary
29. Based on the conditions described above, the Department has
tentatively determined that the relief sought by the Applicant
satisfies the statutory requirements under ERISA Section 408(a) for the
Department to make findings that support its issuance of a proposed
exemption.
Proposed Exemption
The Department is considering granting an exemption under the
authority of ERISA Section 408(a) and Code Section 4975(c)(2) and in
accordance with the procedures set forth in the Department's exemption
procedure regulation.\18\
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\18\ 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
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Section I. Definitions
(a) The term ``Attorney Fees'' means reasonable legal expenses paid
by BCBS KC on behalf of the Plan in connection with the Claims, if such
fees are reviewed and approved by a qualified independent fiduciary who
confirms that the fees were reasonably incurred and paid by BCBS KC to
unrelated third parties. For the purposes of this exemption, the
Attorney Fees reimbursable to BCBS KC do not include: (1) legal
expenses paid by the Plan; and (2) legal expenses paid by BCBS KC for
representation of BCBC KC or the interests of any party other than the
Plan.
(b) The term ``BCBS KC'' means Blue Cross and Blue Shield of Kansas
City.
(c) The term ``Claims'' means the legal claims against Allianz
Global Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon),
to recover certain losses incurred by the Plan in the first quarter of
2020.
(d) The term ``Contribution and Assignment Agreement'' means the
written agreement between BCBS KC and the Plan, dated November 5, 2020,
and its amendment that became effective on September 23, 2021,
containing all material terms regarding BCBS KC's agreement to make
Required Restorative Payments to the Plan in return for the Plan's
potential Repayment to BCBS KC of an amount that is no more than lesser
of the Required Restorative Payment Amount (as described in Section
I(h)) or the amount of litigation proceeds the Plan receives from the
Claims, plus reasonable attorney fees paid to unrelated third parties
by BCBS KC in connection with the Claims.
(e) The term ``Independent Fiduciary'' means Gallagher Fiduciary
Advisors, LLC (Gallagher) or a successor Independent Fiduciary to the
extent Gallagher or the successor Independent Fiduciary continues to
serve in such capacity who:
(1) Is not an affiliate of BCBS KC and does not hold an ownership
interest in BCBS KC or affiliates of BCBS KC;
(2) Was not a fiduciary with respect to the Plan before its
appointment to serve as the Independent Fiduciary;
(3) Has acknowledged in writing that it:
(i) is a fiduciary with respect to the Plan and has agreed not to
participate in any decision regarding any transaction in which it has
an interest that might affect its best judgment as a fiduciary; and
(ii) Has appropriate technical training or experience to perform
the services contemplated by the exemption;
(4) Has not entered into any agreement or instrument that violates
the prohibitions on exculpatory provisions in ERISA Section 410 or the
Department's regulation relating to indemnification of fiduciaries;
\19\
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\19\ 29 CFR 2509.75-4.
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(5) Has not received gross income from BCBS KC or its affiliates
during any fiscal year in an amount that exceeds two percent (2%) of
the Independent Fiduciary's gross income from all sources for the prior
fiscal year. This provision also applies to a partnership or
corporation of which the Independent Fiduciary is an officer, director,
or 10 percent (10%) or more partner or shareholder, and includes as
gross income amounts received as compensation for services provided as
an independent fiduciary under any prohibited transaction exemption
granted by the Department; and
(6) No organization or individual that is an Independent Fiduciary,
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent (10%) or more
partner or shareholder, may acquire any property from, sell any
property to, or borrow any funds from BCBS KC or from affiliates of
BCBS KC while serving as an Independent Fiduciary. This prohibition
will continue for six months after the party ceases to be an
Independent Fiduciary and/or the Independent Fiduciary negotiates any
transaction on behalf of the Plan during the period that the
organization or individual serves as an Independent Fiduciary.
(f) The ``Plan'' means the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Kansas City.
(g) The term ``Plan Losses'' means the $139,613,178 in Plan losses
the BCBSA's National Employee Benefits Committee alleges were the
result of breaches of fiduciary responsibilities and breaches of
contract by Allianz Global Investors U.S. LLC and/or Aon Investments
USA Inc.
(h) The term ``Restorative Payments'' means the payments made by
BCBS KC to the Plan in connection with the Plan Losses, defined above,
consisting of: (1) the past payment of $87,000,000 on September 9,
2021; and (2) a second installment amount of $13,000,000 due to the
Plan by December 31, 2024. The sum of (1) and (2) is the Required
Restorative Payment Amount.
(i) The ``Repayment'' means the payment, if any, that the Plan will
transfer to BCBS KC following the Plan's receipt of proceeds from the
Claims, where the Repayment is made following the full and complete
resolution of the Claims; and in a manner that is consistent with the
terms of the exemption.
Section II. Proposed Transactions
If the proposed exemption is granted, the restrictions of ERISA
Sections 406(a)(1)(A), (B) and (D) and the sanctions resulting from the
application of Code Section 4975, by reason of Code Sections
4975(c)(1)(A), (B) and (D), shall not apply, effective November 5,
2020, to the following transactions: BCBS KC's
[[Page 52129]]
transfer of Restorative Payments to the Plan; and, in return, the
Plan's Repayment of an amount to BCBS KC, which must be no more than
the lesser of the Restorative Payment or the amount of litigation
proceeds the Plan received from the Claims, plus reasonable Attorney
Fees, provided that the Definitions set forth in Section I and the
Conditions set forth in Section III are met.
Section III. Conditions
(a) The Plan receives the entire Restorative Payment Amount no
later than December 31, 2024;
(b) In connection with its receipt of the Required Restorative
Payments, the Plan does not release any claims, demands and/or causes
of action the Plan may have against the following: (1) any fiduciary of
the Plan; (2) any fiduciary of the Trust; (3) BCBS KC; and/or (4) any
person or entity related to a person or entity identified in (1)-(3) of
this paragraph;
(c) The Plan's Repayment to BCBS KC is for no more than the lesser
of the total Restorative Payments received by the Plan or the amount of
litigation proceeds the Plan receives from the Claims. The Plan's
Repayment to BCBS KC may only occur after the Independent Fiduciary has
determined that: all the conditions of the exemption are met; the Plan
has received all the Restorative Payments it is due; and the Plan has
received all the litigation proceeds it is due. The Plan's Repayment to
BCBS KC must be carried out in a manner designed to minimize
unnecessary costs and disruption to the Plan and its investments;
(d) A qualified independent fiduciary (the Independent Fiduciary,
as further defined in Section II(e)), acting solely on behalf of the
Plan in full accordance with its obligations of prudence and loyalty
under ERISA Sections 404(a)(1)(A) and (B) must:
(1) Review, negotiate and approve the terms and conditions of the
Restorative Payments and the Repayment and the Contribution and
Assignment Agreement, all of which must be in writing, before the Plan
enters into those transactions/agreement;
(2) Determine that the Restorative Payments, the Repayment, and the
terms of the Contribution and Assignment Agreement, are prudent and in
the interest of the Plan and its participants and beneficiaries;
(3) Confirm that the Required Restorative Payment Amount was fully
and timely made;
(4) Monitor the litigation related to the Claims and confirm that
the Plan receives, in a timely manner, its proper share of any
litigation or settlement proceeds received by the Trust;
(5) Ensure that any Repayment by the Plan to BCBS KC for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBS KC to unrelated third parties;
(6) Ensure that all of the conditions and definitions of this
proposed exemption are met;
(7) Submit a written report to the Department's Office of Exemption
Determinations demonstrating and confirming that the terms and
conditions of the exemption were met, within 90 days after the
Repayment; and
(8) Not enter into any agreement or instrument that violates ERISA
Section 410 or the Department's Regulations codified at 29 CFR Section
2509.75-4.
(f) The Plan pays no interest in connection with the Restorative
Payments;
(g) The Plan does not pledge any Plan assets to secure any portion
of the Restorative Payments;
(h) The Plan does not incur any expenses, commissions, or
transaction costs in connection with the Proposed Transactions.
However, if first approved by the Independent Fiduciary, the Plan may
reimburse BCBS KC for reasonable legal expenses paid in connection with
the Claims by BCBS KC to non-BCBS KC-related parties. For purposes of
determining the amount of Attorney Fees the Plan may reimburse to BCBS
KC under this proposal, the amount of reasonable attorney fees paid by
BCBS KC on behalf of the Plan in connection with the Claims must be
reduced by the amount of legal fees received by BCBS KC in connection
with the Claims from any non-Plan party (i.e., pursuant to a court
award);
(i) The proposed transactions do not involve any risk of loss to
either the Plan or the Plan's participants and beneficiaries;
(j) No party associated with this exemption has or will indemnify
the Independent Fiduciary and the Independent Fiduciary will not
request indemnification from any party, in whole or in part, for
negligence and/or any violation of state or federal law that may be
attributable to the Independent Fiduciary in performing its duties to
the Plan with respect to the Proposed Transactions. In addition, no
contract or instrument may purport to waive any liability under state
or federal law for any such violation.
(k) If an Independent Fiduciary resigns, is removed, or for any
reason is unable to serve as an Independent Fiduciary, the Independent
Fiduciary must be replaced by a successor entity that: (1) meets the
definition of Independent Fiduciary detailed above in Section II(e);
and (2) otherwise meets all of the qualification, independence,
prudence and diligence requirements set forth in this exemption.
Further, any such successor Independent Fiduciary must assume all of
the duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent Fiduciary,
BCBS KC must notify the Department's Office of Exemption Determinations
of the change in Independent Fiduciary and such notification must
contain all material information regarding the successor Independent
Fiduciary, including the successor Independent Fiduciary's
qualifications; and
(l) All of the material facts and representations set forth in the
Summary of Facts and Representation are true and accurate at all times.
Notice To Interested Persons
The Applicant will give notice of the proposed exemption to all
interested persons and all of the parties to the litigation described
above, within fifteen calendar days after the publication of the notice
of proposed exemption in the Federal Register. The notice will contain
a copy of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to the
Department's regulations codified at 29 CFR 2570.43(a)(2). The
supplemental statement will inform interested persons of their right to
comment on the pending exemption. Written comments are due by October
11, 2022.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as a Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the internet and can
be retrieved by most internet search engines.
For Further Information Contact: Mr. Nicholas Schroth of the
Department, telephone (202) 693-8571. (This is not a toll-free number.)
[[Page 52130]]
Blue Cross and Blue Shield of Arizona, Inc.
Located in Phoenix, Arizona
[Application No. D-12035]
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, as amended (ERISA), and Section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code). The proposed exemption
relates to legal actions and claims (the Claims) against Allianz Global
Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon), that
arose from certain losses incurred by the Non-Contributory Retirement
Program for Certain Employees of Blue Cross and Blue Shield of Arizona,
Inc. (the Plan) in the first quarter of 2020.\20\
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\20\ In proposing this exemption, the Department is not
expressing an opinion regarding the merits of any Claim against
Allianz and Aon, or whether the Plan's fiduciaries met their
fiduciary duties with respect to Plan assets that are the subject of
the Claims. Further, in proposing this exemption, the Department is
not limiting any party's claim, demand and/or cause of action
arising from the Plan's 2020 first quarter losses in any way. Among
other things, this exemption preserves any right, claim, demand and/
or cause of action the Plan may have against the following: (1) any
fiduciary of the Plan; (2) any fiduciary of the Trust; (3) the Blue
Cross and Blue Shield of Arizona, Inc.; and/or (4) any person or
entity related to a person or entity described in (1)-(3).
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This proposed exemption would permit the Plan sponsor, Blue Cross
and Blue Shield of Arizona, Inc. (BCBS AZ), to make a series of
payments to the Plan, including: (a) past payments totaling
$130,000,000; and (b) future amounts necessary for (i) the Plan's
assets to be equal to or greater than 100% of the Plan's current
liabilities, and (ii) the Plan to have an adjusted funding target
attainment percentage (AFTAP) of 110% (the Restorative Payments).
If the Plan receives litigation proceeds from the Claims, the Plan
will transfer the lesser of the ligation proceeds amount or the
Restorative Payments, plus reasonable attorney fees to BCBS AZ.
Summary of Facts and Representations <SUP>21</SUP>
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\21\ The Department notes that availability of this exemption is
subject to the express condition that the material facts and
representations contained in application D-12035 are true and
complete at all times and accurately describe all material terms of
the transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption or in a material
fact or representation described in the application, the exemption
will cease to apply as of the date of such change. The Summary of
Facts and Representations is based on the Applicant's
representations, as well as factual representations contained in the
Claims' cause of action (as described below) and does not reflect
factual findings or opinions of the Department, unless indicated
otherwise.
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1. Blue Cross and Blue Shield of Arizona, Inc. (BCBS AZ or the
Applicant) is a not-for-profit company that provides health insurance
products and services. BCBS AZ is an independent licensee of the Blue
Cross Blue Shield Association (BCBSA).
2. The Plan is an ERISA-covered qualified defined benefit pension
plan that covers eligible employees of BCBS AZ and employees of
affiliated employers. On June 30, 2012, the Plan was closed to new
entrants. As of August 31, 2020, the Plan held $178,703,160 in total
assets.
3. The Plan holds a beneficial interest in the Blue Cross and Blue
Shield National Retirement Trust (the Trust). The Trust is a master
trust that holds the assets of 16 defined benefit pension plans that
participate in the BCBSA's National Retirement Program (the
Participating Plans). Northern Trust serves as Trustee and asset
custodian to the Trust and maintains separate records that reflect the
net asset value of each Participating Plan. The Trust's earnings,
market adjustments, and administrative expenses are allocated among the
Participating Plans based on the respective Participating Plan's share
of the Trust's assets. A Participating Plan's interest in the Trust's
net assets is based on its share of the Trust.
4. The Committee serves as named fiduciary and administrator for
each Participating Plan. The Committee is a standing committee of the
BCBSA's board of directors. In 2011, the Committee invested a portion
of the Trust's assets in funds managed by Allianz Global Investors U.S.
LLC (Allianz), as part of a Structured Alpha Investment Strategy. These
funds included: (a) AllianzGI Structured Alpha Multi-Beta Series LLC I;
(b) AllianzGI Structured Alpha Emerging Markets Equity 350 LLC; and (c)
AllianzGI Structured Alpha 1000 LLC (collectively, the Structured Alpha
Funds).
5. The Applicant represents that the Allianz Structured Alpha
strategy consisted of alpha and beta components. According to the
applicant, the alpha component was an options trading strategy that
Allianz claimed would seek targeted positive return potential while
maintaining structural risk protections. The beta component was
intended to provide broad market exposure to a particular asset class
through investments in financial products similar to an exchange-traded
fund that replicates the performance of a market index, such as the S&P
500. According to the Applicant, Allianz represented that the
Structured Alpha Strategy would capitalize on the return-generating
features of option selling (short volatility) while simultaneously
benefitting from the risk-control attributes associated with option
buying (long volatility). According to the Applicant, Allianz
represented further that the alpha component would include position
hedging consisting of long-volatility positions designed to protect the
portfolio in the event of a market crash.
6. As of December 31, 2019, the total market value of the Plan's
portion of the Trust's investment in the Allianz Structured Alpha Funds
was $369.3 million, which represented 77.67% of total Plan assets.\22\
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\22\ By proposing this exemption, the Department does not, in
any way, suggest a conclusion that the Plan's fiduciaries met their
ERISA Section 404 duties when they caused the Trust to invest 77.67%
of the Plan's total assets in the Allianz Structured Alpha Funds.
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7. In 2009, the Committee retained Aon (then called Ennis Knupp) to
provide investment advice regarding the investment of Plan assets held
in the Trust. The Applicant represents that Aon provided regular
investment advice pursuant to a written contract between it and the
Committee. Pursuant to its engagement, Aon agreed to provide the
following: ``recommendations to [the Committee] regarding asset
allocation'' within the Trust; ``recommendations to [the Committee]
regarding the specific asset allocation and other investment
guidelines'' for the Trust's investment managers such as Allianz; and
advice ``regarding the diversification of assets'' held in the Trust.''
The Applicant represents that Aon agreed to: conduct ``active, ongoing
monitoring'' of Allianz to ``identify any forward-looking'' risks
``that could impact performance;'' and ``inform itself'' of any
information necessary to discharge its duty to monitor, including
information about the actual options positions Allianz had constructed.
8. The Applicant represents that when equity markets sharply
declined in February and March of 2020, volatility spiked and the
options positions held within the Structured Alpha Strategy were
exposed to a heightened risk of loss. The Applicant represents that,
unbeknownst to the Committee, and in violation of Allianz's stated
investment strategy, Allianz abandoned the hedging strategy that was
the supposed cornerstone of the Structured Alpha Strategy, leaving the
portfolio almost entirely unhedged against a spike in market
volatility. As described in the
[[Page 52131]]
Claims, although Allianz had represented that it would buy hedges at
strike prices ranging from 10% to 25% below the market, the hedges it
actually held at the end of February 2020 were as much as 60% below the
market.
The Applicant represents that, as of January 31, 2020, the Trust
had invested approximately $2,916,049,486 in the Structured Alpha
Strategy. Six weeks later, the Trust faced a margin call, which the
Applicant states left it no choice but to liquidate the investment. The
Trust was ultimately able to redeem only $646,762,678 of its
$2,916,049,486 investment, resulting in a total loss of $2,269,286,808.
Specifically, regarding the Plan's portion of the loss, as of
December 31, 2019, the market value of the Plan and its Code section
401(h) Account were $416,127,759 and $59,347,737, respectively.\23\ As
of March 31, 2020, the market value of the Plan's total assets and the
Code section 401(h) Account decreased to $137,298,008 and $20,433,430,
respectively. The Applicant represents that the Plan's total losses
from the Allianz Structured Alpha Strategy were $302,470,379, which
caused the Plan to be underfunded.
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\23\ Code Section 401(h) permits a pension or annuity plan to
provide for payment of benefits for sickness, accident,
hospitalization and medical expenses for retired employees, their
spouses and dependents. In order for the pension or annuity plan to
meet the provisions of Code Section 401(h), the medical benefits
must be subordinate to pension benefits and must be established and
maintained in a separate account.
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9. On September 16, 2020, the Committee filed a cause of action in
the United States District Court for the Southern District of New York
(Case number 20-CIV-07606) against Allianz and Aon for Breach of
Fiduciary Duty under ERISA Section 404, Breach of Co-Fiduciary Duty
under ERISA Section 405, and violation of ERISA Section 406(b) for
managing the Plan assets in its self-interest and breach of contract.
It is possible that resolution of this claim and other legal actions
against Allianz and Aon in connection with the Plan's losses (the
Claims) could take an extended period of time.
10. The Applicant states that rather than wait for the Claims to be
resolved, BCBS AZ took steps to protect Plan benefits and avoid onerous
benefit restrictions under Code section 436 that could apply to the
Plan as a result of a funding shortfall. Therefore, on November 5,
2020, BCBS AZ and the Plan entered into a Contribution and Assignment
Agreement (the Contribution and Assignment Agreement).
11. Pursuant to the Contribution and Assignment Agreement, BCBS AZ
agreed to make $274 million in Restorative Payments to the Plan
pursuant to an installment payment structure (the Restorative
Payments). BCBS AZ made its first installment payment of $60 million to
the Plan on September 15, 2020. Thereafter, BCBS AZ made a Restorative
Payment to the Plan of $35,000,000 on December 28, 2020, and
$10,000,000 on July 31, 2021. Thus, as of July 31, 2021, BCBS AZ had
made Restorative Payments to the Plan totaling $105 million.
12. On October 13, 2021, BCBS AZ and the Plan amended the
Restorative Payments provision of the Contribution and Assignment
Agreement (the Restorative Payment Amendment). BCBS AZ agreed that
before December 31, 2023, it would contribute amounts necessary for the
Plan to have: (a) an adjusted funding target attainment percentage of
110% (after taking into account any waivers of the funding standard
carryover balance by the Plan Sponsor); and (b) an amount of assets
that is at least 100% of current Plan liabilities. In addition, any
minimum required contributions made by BCBS AZ to the Plan on or after
October 13, 2021, will not be included as part of the Restorative
Payments required under the Contribution and Assignment Agreement. The
prior restorative payments noted above in paragraph 11 together with
the obligations noted here in paragraph 12 constitute the Required
Restorative Payments under this exemption.
13. On December 21, 2021, BCBS AZ made a fourth Restorative Payment
to the Plan totaling $25,000,000.\24\ The Applicant represents that
after making this most recent $25,000,000 Restorative Payment, BCBS AZ
has brought the Plan's funding level to 110% of AFTAP and, thus, has
met its obligation under item (a) of the Restorative Payment Amendment
identified above. This exemption, if granted, requires BCBS AZ to make
additional Restorative Contributions to the Plan before December 31,
2023, to ensure that the Plan has an amount of assets that is at least
100% of current Plan liabilities.
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\24\ With the $25,000,000 payment, total Restorative Payments to
the Plan now total $130,000,000.
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14. In exchange for the Restorative Payments, the Plan assigned to
BCBS AZ its right to retain certain litigation and/or settlement
proceeds recovered from the Claims (the Assigned Interests).\25\ Per
the assignment, once the Allianz/Aon litigation is resolved and if the
Plan receives litigation proceeds from the Claims, the Plan will
transfer to BCBS AZ a repayment (the Repayment) that does not exceed
the total Restorative Payments made by BCBS AZ, plus reasonable
attorney fees paid by BCBS AZ on behalf of the Plan in connection with
the Claims, if such fees are reviewed and approved by a qualified
independent fiduciary who confirms that the fees were reasonably
incurred and paid by BCBS AZ to unrelated third parties (the Attorney
Fees). For the purposes of this exemption, Attorney Fees reimbursable
to BCBS AZ do not include: (a) legal expenses paid by the Plan; and (b)
legal expenses paid by BCBS AZ for representation of its own interests
or the interests of any party other than the Plan. For purposes of
determining the amount of Attorney Fees the Plan may reimburse to BCBS
AZ under this exemption, the amount of reasonable attorney fees paid by
BCBS AZ on behalf of the Plan in connection with the Claims must be
reduced by the amount of legal fees received by BCBS AZ in connection
with the Claims from any non-Plan party (for example, from a third
party pursuant to a court award).
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\25\ Under the Contribution and Assignment Agreement, if the
Plan receives litigation or settlement proceeds from the Claims, the
proceeds would first flow to the Trust, and then each Plan's pro
rata portion of the proceeds would be deposited into the individual
trust funding that Plan.
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15. The Plan must ultimately receive at least the full value of the
promised Restorative Payments, minus the Attorney Fees. The Plan may
ultimately receive more than the Restorative Payment amount required
under the Contribution and Assignment Agreement. If the Plan receives
litigation or settlement proceeds that exceed the amount of Restorative
Payments that BCBS AZ has made to the Plan, the Plan's Repayment to
BCBS AZ will be limited to the amount of Restorative Payments actually
made by BCBS AZ, plus Attorney Fees. For example, if BCBS AZ has made
$130,000,000 in Restorative Payments to the Plan and reasonably
incurred $100,000 in Attorney Fees, and the Plan receives $160,000,000
in litigation proceeds, the Plan will make a Repayment to BCBS AZ
totaling $130,100,000.
16. Alternatively, if the Plan receives less litigation or
settlement proceeds than the amount of Restorative Payments that BCBS
AZ has made to the Plan, the Plan will transfer to BCBS AZ the lesser
amount of litigation or settlement proceeds, plus Attorney Fees. For
example, if BCBS AZ has made $130,000,000 in Restorative Payments to
[[Page 52132]]
the Plan and has reasonably incurred $100,000 in Attorney Fees, and the
Plan receives $50,000,000 in litigation proceeds, the Plan will make a
Repayment to BCBS AZ totaling $50,100,000.
17. The Department notes that if the Plan receives any restitution
that is tied to the conduct underlying the Claims but was ordered
pursuant to a proceeding or directive that is external to Case number
20-CIV-07606, the disposition of such proceeds must conform to the
requirements of this exemption.
18. BCBS AZ retained Gallagher Fiduciary Advisors, LLC (Gallagher
or the Independent Fiduciary) of New York, New York, to serve as the
Plan's independent fiduciary with respect to the Required Restorative
Payments and the potential repayment by the Plan of those Payments
(collectively, the Proposed Transactions). Gallagher represents that it
has extensive experience in institutional investment consulting and
fiduciary decision-making regarding traditional and alternative
investments. Gallagher further represents that its independent
fiduciary decision-making work involves acting as a fiduciary advisor
or decision-maker for plans and other ERISA-regulated asset pools and
that it has experience with a wide range of asset classes and
litigation claims.
19. Gallagher represents that it understands its duties and
responsibilities under ERISA in acting as a fiduciary on behalf of the
Plan. Gallagher also acknowledges that it is authorized to take all
appropriate actions to safeguard the Plan's interests, and that it will
monitor the Proposed Transactions on the Plan's behalf on a continuous
basis and throughout the term required by this exemption.
20. Gallagher represents that it does not have any prior
relationship with any parties in interest to the Plan, including BCBS
AZ and any BCBS AZ affiliates. Gallagher further represents the total
revenues it has received from the Plan and from parties in interest to
the Plan in connection with its engagement as Independent Fiduciary
represents approximately 0.78% of Gallagher's total revenue.
21. Gallagher represents that no party associated with this
exemption application has or will indemnify it, in whole or in part,
for negligence of any kind and/or any violation of state or federal law
that may be attributable to Gallagher's performance of its duties as
Independent Fiduciary to the Plan with respect to the Proposed
Transactions. In addition, no contract or instrument entered into by
Gallagher as Independent Fiduciary may purport to waive any liability
under state or federal law for any such violation.
22. On November 3, 2020, Gallagher completed an Independent
Fiduciary Report (the Independent Fiduciary Report) finding that the
massive losses caused by the Trust's investment in the Allianz
Structured Alpha Strategy resulted in a significant reduction to the
Plan's total assets and funding level. Gallagher represents that the
Required Restorative Payments, which will be received by the Plan
substantially in advance of a final resolution of the Claims against
Allianz and Aon, should restore the Plan's funded percentage to its
pre-loss funded percentage as of January 1, 2019. The restoration of
the Plan's funding status will secure ongoing benefit payments to
participants and beneficiaries.
Gallagher notes that the Contribution and Assignment Agreement
provides that the Trust must reimburse BCBS AZ only up to the Required
Restorative Payment Amount, plus any reasonable legal expense paid to
non-BCBS AZ-related parties that were incurred by, or allocated to,
BCBS AZ as a result of the Claims.\26\ Thus, if the Plan's ultimate
recovery amount from the Claims is less than the Required Restorative
Payment Amount, plus related litigation expenses that were allocated to
the Plan, BCBS AZ, not the Plan, will suffer the loss.
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\26\ Currently, legal fees and expenses associated with the
Claims are being paid by most of the Participating Plan's trusts on
a pro rata basis according to each Participating Plan's total
invested assets held in the Master Trust's Allianz Structured Alpha
Strategy before the losses were incurred in the first quarter 2020.
The Applicant represents that the Committee reviews and approves
these legal fees before passing them through to each Participating
Plan.
---------------------------------------------------------------------------
Gallagher states that the Proposed Transactions and the terms of
the Contribution and Assignment Agreement were negotiated and approved
by Gallagher in its role as the Plan's Independent Fiduciary. Gallagher
states that it approved the Proposed Transactions only after conducting
an extensive analysis of the damages suffered by the Plan as a result
of the failed Allianz Structured Alpha Strategy. Gallagher represents
that it conducted numerous discussions with Trust representatives and
counsel, along with the Plan's representatives and counsel to ensure
that the interests of the Plan's participants and beneficiaries were
protected with respect to all aspects of the Proposed Transactions.
Based upon its assessment, Gallagher approved the Plan's receipt of the
Required Restorative Payments from BCBS AZ in exchange for the
Assignment.
ERISA Analysis
23. Absent an exemption, the Plan's receipt of the Restorative
Payments from BCBS AZ in exchange for the Plan's transfer of litigation
or settlement proceeds to BCBS AZ would violate ERISA. In this regard,
ERISA Section 406(a)(1)(A) prohibits a plan fiduciary from causing the
plan to engage in a transaction if the fiduciary knows or should know
that such transaction constitutes a direct or indirect sale or exchange
of any property between a plan and a party in interest. BCBS AZ, as an
employer whose employees are covered by the Plan, is a party in
interest with respect to the Plan under ERISA Section 3(14)(C). The
Required Restorative Payments to the Plan and the Plan's potential
repayment to BCBS AZ with litigation or settlement proceeds would
constitute impermissible exchanges between the Plan and a party-in-
interest (BCBS AZ) in violation of ERISA Section 406(a)(1)(A).
ERISA Section 406(a)(1)(B) prohibits the lending of money or other
extension of credit between a plan and a party-in-interest. BCBS AZ's
promise to make Required Restorative Payments to the Plan, over time,
constitutes an impermissible extension of credit between the Plan and a
party-in-interest in violation of ERISA Section 406(a)(1)(B).
ERISA Section 406(a)(1)(D) prohibits a plan fiduciary from causing
a plan to engage in a transaction if the fiduciary knows or should know
that the transaction constitutes a direct or indirect transfer to, or
use by or for the benefit of, a party-in-interest, of the income or
assets of the plan. The transfer of Plan assets to BCBS AZ in
connection with the Repayment would constitute an impermissible
transfer of Plan assets to a party-in-interest in violation of ERISA
Section 406(a)(1)(D).
Conditions
24. This proposed exemption contains a number of conditions that
must be met. For example, the proposed exemption mandates that the
Independent Fiduciary, in full accordance with its obligations of
prudence and loyalty under ERISA Section 404(a)(1)(A) and (B) must:
(a) review, negotiate, and approve the terms and conditions of the
Required Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement, before the Plan enters into such payments and the
agreement;
(b) determine that the terms and conditions of the Required
Restorative Payments, the Repayment, and the
[[Page 52133]]
Contribution and Assignment Agreement are prudent, in the interest of
the Plan and its participants and beneficiaries, and protective of the
rights of the Plan's participants and beneficiaries;
(c) confirm that the Required Restorative Payments are fully and
timely made;
(d) monitor the Claims and confirm that the Plan receives its
proper share of any litigation or settlement proceeds received by the
Trust in connection with the Claims;
(e) ensure that any Repayment by the Plan to BCBS AZ fully complies
with the terms of this exemption and is for no more than the lesser of
the total Restorative Payments actually made to the Plan by BCBS AZ or
the amount the Plan received from the Claims, plus Attorney Fees;
(f) ensure that any Repayment by the Plan to BCBS AZ for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBS AZ to unrelated third parties for
representation of the Plan and its interests (as opposed to
representation of BCBS AZ or the interests of any party other than the
Plan) where BCBS AZ was not otherwise reimbursed from a non-Plan party;
(g) monitor the Plan's Assigned Interests on an ongoing basis to
determine and confirm that any excess recovery amount from the Claims
(i.e., any amount that exceeds the Required Restorative Payment Amount)
is retained by the Plan;
(h) ensure that all of the conditions and definitions of this
proposed exemption are met; and
(i) represent that it has not and will not enter into any agreement
or instrument that violates ERISA Section 410 or Department Regulations
codified at 29 CFR 2509.75-4.\27\
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\27\ ERISA Section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of Title I of ERISA] shall be
void as against public policy.''
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25. This proposed exemption also requires Gallagher to respond in
writing to any information requests from the Department regarding
Gallagher's activities as the Plan's Independent Fiduciary.
Additionally, no later than 90 days after the resolution of the
litigation, Gallagher must submit a written report to the Department
demonstrating that all terms and conditions of the exemption have been
met.
26. This proposed exemption requires that the Plan has not and will
not release any claims, demands and/or causes of action it may have
against: (a) any fiduciary of the Plan; (b) any fiduciary of the Trust;
(c) BCBS AZ; and/or (d) any person or entity related to a person or
entity described in (a)-(c) of this paragraph. Additionally, any
Repayment by the Plan to BCBS AZ must be made in a manner designed to
minimize unnecessary costs and disruption to the Plan and its
investments.
27. The Plan may not make any Repayment to BCBS AZ before the date:
the Plan has received from BCBS AZ the entire amount of the Restorative
Payments agreed to in the Amended Contribution and Assignment
Agreement; and all the Claims are settled. Furthermore, the Plan may
not pay any interest to BCBS AZ in connection with its receipt of the
Required Restorative Payments, nor pledge Plan assets to secure any
portion of the Required Restorative Payments.
28. Pursuant to this proposed exemption, the Plan may not incur any
expenses, commissions or transaction costs in connection with the
Proposed Transactions. However, as noted above, under certain
circumstances the Plan may reimburse BCBS AZ for reasonable legal
expenses arising from the Claims that BCBS AZ paid to non-BCBS AZ-
related parties for representation of the Plan and its interests (as
opposed to representation of BCBS AZ or the interests of any party
other than the Plan) where BCBS AZ was not otherwise reimbursed by a
non-Plan party.
29. Finally, the exemptive relief provided under this proposed
exemption is conditioned upon the Department's assumption that the
material facts and representations set forth above in the Summary of
Facts and Representation section are true and accurate at all times. In
the event that a material fact or representation detailed above is
untrue or inaccurate, the exemptive relief provided under this
exemption will cease immediately.
Statutory Findings
30. ERISA Section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such participants and beneficiaries. Each of these criteria is
discussed below.
a. The Proposed Exemption Is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible because, among other things, the Independent
Fiduciary will represent the interests of the Plan for all purposes
with respect to the Proposed Transactions.\28\ In this regard, not
later than 90 days after the resolution of the litigation, the
Independent Fiduciary must submit a written report to the Department
demonstrating that all of the requirements of this exemption have been
met.
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\28\ This proposed exemption would require that if the
Independent Fiduciary resigns, is removed, or for any reason is
unable to serve as an Independent Fiduciary, the successor
Independent Fiduciary must, among other things, assume all of the
duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent
Fiduciary, the Plan Sponsor and the Plan must notify the
Department's Office of Exemption Determinations of the change in
Independent Fiduciaries. The notification must contain all material
information including the qualifications of the successor
Independent Fiduciary.
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b. The Proposed Exemption Is ``In the Interests of the Plan.'' The
Department has tentatively determined that the proposed exemption is in
the interest of the Plan because, among other things, the Plan's
receipt of the Required Restorative Payments will substantially improve
the Plan's funding status, which will enhance the Plan's ability to
meet its obligations to fund benefit obligations to participants and
beneficiaries and help the Plan avoid the imposition of benefit
limitations imposed under Code section 436.
c. The Proposed Exemption Is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the rights of the Plan's participants and beneficiaries
because, among other things, the Plan will repay BCBS AZ the lesser of
the Required Restorative Payment Amount already received, or the amount
the Plan receives in proceeds from the Claims, ensuring that the
Proposed Transactions will result in an increase in Plan assets to: (a)
an adjusted funding target attainment percentage of at least 110%; and
(b) and an amount that is at least equal to or greater than 100% of the
current liabilities of the Plan (less reasonable legal expenses related
to the Claims paid by BCBS AZ to unrelated third parties as confirmed
and approved by the Independent Fiduciary). Further, this exemption
preserves any right, claim, demand and/or cause of action the Plan may
have against: (a) any fiduciary of the Plan; (b) any fiduciary of the
Trust; (c) BCBS AZ; and/or (d)
[[Page 52134]]
any person or entity related to a person or entity described in (a)-
(c).
Summary
31. Based on the conditions described above, the Department has
tentatively determined that the relief sought by the Applicant
satisfies the statutory requirements under ERISA Section 408(a) for the
Department to make findings that support its issuance of a proposed
exemption.
Proposed Exemption
The Department is considering granting an exemption under the
authority of ERISA Section 408(a) and Code Section 4975(c)(2) and in
accordance with the procedures set forth in the Department's exemption
procedure regulation.\29\
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\29\ 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
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Section I. Definitions
(a) The term ``Attorney Fees'' means reasonable legal expenses paid
by BCBS AZ on behalf of the Plan in connection with the Claims, if such
fees are reviewed and approved by a qualified independent fiduciary who
confirms that the fees were reasonably incurred and paid by BCBS AZ to
unrelated third parties. For the purposes of this exemption, the
Attorney Fees reimbursable to BCBS AZ do not include: (1) legal
expenses paid by the Plan; and (2) legal expenses paid by BCBS AZ for
representation of BCBC AZ or the interests of any party other than the
Plan.
(b) The term ``BCBS AZ'' means Blue Cross and Blue Shield of
Arizona, Inc.
(c) The term ``Claims'' means the legal claims against Allianz
Global Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon),
to recover certain losses incurred by the Plan in the first quarter of
2020.
(d) The term ``Amended Contribution and Assignment Agreement''
means the written agreement between BCBS AZ and the Plan, dated
November 5, 2020, and its amendment that became effective on October
13, 2021, containing all material terms regarding BCBS AZ's agreement
to make Required Restorative Payments to the Plan in return for the
Plan's potential Repayment to BCBS AZ of an amount that is no more than
lesser of the Required Restorative Payment Amount (as described in
Section I(h)) already received or the amount of litigation proceeds the
Plan receives from the Claims, plus reasonable attorney fees paid to
unrelated third parties by BCBS AZ in connection with the Claims.
(e) The term ``Independent Fiduciary'' means Gallagher Fiduciary
Advisors, LLC (Gallagher) or a successor Independent Fiduciary to the
extent Gallagher or the successor Independent Fiduciary continues to
serve in such capacity who:
(1) Is not an affiliate of BCBS AZ and does not hold an ownership
interest in BCBS AZ or affiliates of BCBS AZ;
(2) Was not a fiduciary with respect to the Plan before its
appointment to serve as the Independent Fiduciary;
(3) Has acknowledged in writing that it:
(i) is a fiduciary with respect to the Plan and has agreed not to
participate in any decision regarding any transaction in which it has
an interest that might affect its best judgment as a fiduciary; and
(ii) Has appropriate technical training or experience to perform
the services contemplated by the exemption;
(4) Has not entered into any agreement or instrument that violates
the prohibitions on exculpatory provisions in ERISA Section 410 or the
Department's regulation relating to indemnification of fiduciaries;
\30\
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\30\ 29 CFR 2509.75-4.
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(5) Has not received gross income from BCBS AZ or its affiliates
during any fiscal year in an amount that exceeds two percent (2%) of
the Independent Fiduciary's gross income from all sources for the prior
fiscal year. This provision also applies to a partnership or
corporation of which the Independent Fiduciary is an officer, director,
or 10 percent (10%) or more partner or shareholder, and includes as
gross income amounts received as compensation for services provided as
an independent fiduciary under any prohibited transaction exemption
granted by the Department; and
(6) No organization or individual that is an Independent Fiduciary,
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent (10%) or more
partner or shareholder, may acquire any property from, sell any
property to, or borrow any funds from BCBS AZ or from affiliates of
BCBS AZ while serving as an Independent Fiduciary. This prohibition
will continue for six months after the party ceases to be an
Independent Fiduciary and/or the Independent Fiduciary negotiates any
transaction on behalf of the Plan during the period that the
organization or individual serves as an Independent Fiduciary.
(f) The ``Plan'' means the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Arizona, Inc.
(g) The term ``Plan Losses'' means the $302,470,379 in Plan losses
the BCBSA's National Employee Benefits Committee alleges were the
result of breaches of fiduciary responsibilities and breaches of
contract by Allianz Global Investors U.S. LLC and/or Aon Investments
USA Inc.
(h) The term ``Restorative Payments'' means the payments made by
BCBS AZ to the Plan in connection with the Plan Losses, defined above,
consisting of: (1) a first installment amount of $60,000,000 that BCBS
AZ contributed to the Plan on September 15, 2020; (2) a second
installment amount of $35,000,000 that BCBS AZ contributed to the Plan
on December 28, 2020; (3) a third installment amount of $10,000,000
that BCBS AZ contributed to the Plan on July 30, 2021; (4) a fourth
installment amount of $25,000,000 that BCBS AZ contributed to the Plan
on December 21, 2021; and (5) other amounts contributed to the Plan by
BCBS AZ before December 31, 2023 that are necessary for (i) the Plan to
have an adjusted funding target attainment percentage of 110% after
taking into account any waivers of the funding standard carryover
balance by the Plan Sponsor, and (ii) the Plan's assets to be equal to
or greater than 100% of the current liabilities of the Plan. The sum of
(1)-(5) is the Required Restorative Payment Amount. The term ``Required
Restorative Payment'' will not include any required minimum
contributions that BCBS AZ makes to the Plan on and after October 13,
2021.
(i) The ``Repayment'' means the payment, if any, that the Plan will
transfer to BCBS AZ following the Plan's receipt of proceeds from the
Claims, where the Repayment is made following the full and complete
resolution of the Claims; and in a manner that is consistent with the
terms of the exemption.
Section II. Proposed Transactions
If the proposed exemption is granted, the restrictions of ERISA
Sections 406(a)(1)(A), (B) and (D) and the sanctions resulting from the
application of Code Section 4975, by reason of Code Sections
4975(c)(1)(A), (B) and (D), shall not apply, effective September 15,
2020, to the following transactions: BCBS AZ's transfer of Restorative
Payments to the Plan; and, in return, the Plan's Repayment of an amount
to BCBS AZ, which must be no more than the lesser of the Restorative
Payment Amount already received or the amount of litigation proceeds
the Plan received from the Claims, plus reasonable
[[Page 52135]]
Attorney Fees, provided that the Definitions set forth in Section I and
the Conditions set forth in Section III are met.
Section III. Conditions
(a) The Plan receives the entire Restorative Payment Amount no
later than December 31, 2023;
(b) In connection with its receipt of the Required Restorative
Payments, the Plan does not release any claims, demands and/or causes
of action the Plan may have against the following: (1) any fiduciary of
the Plan; (2) any fiduciary of the Trust; (3) BCBS AZ; and/or (4) any
person or entity related to a person or entity identified in (1)-(3) of
this paragraph;
(c) The Plan's Repayment to BCBS AZ is for no more than the lesser
of the total Restorative Payments received by the Plan or the amount of
litigation proceeds the Plan receives from the Claims. The Plan's
Repayment to BCBS AZ may only occur after the Independent Fiduciary has
determined that: all the conditions of the exemption are met; the Plan
has received all the Restorative Payments it is due; and the Plan has
received all the litigation proceeds it is due. The Plan's Repayment to
BCBS AZ must be carried out in a manner designed to minimize
unnecessary costs and disruption to the Plan and its investments;
(d) A qualified independent fiduciary (the Independent Fiduciary,
as further defined in Section II(e)), acting solely on behalf of the
Plan in full accordance with its obligations of prudence and loyalty
under ERISA Sections 404(a)(1)(A) and (B) must:
(1) Review, negotiate and approve the terms and conditions of the
Restorative Payments and the Repayment and the Contribution and
Assignment Agreement, all of which must be in writing, before the Plan
enters into those transactions/agreement;
(2) Determine that the Restorative Payments, the Repayment, and the
terms of the Contribution and Assignment Agreement, are prudent and in
the interest of the Plan and its participants and beneficiaries;
(3) Confirm that the Required Restorative Payment Amount was fully
and timely made;
(4) Monitor the litigation related to the Claims and confirm that
the Plan receives, in a timely manner, its proper share of any
litigation or settlement proceeds received by the Trust;
(5) Ensure that any Repayment by the Plan to BCBS AZ for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBS AZ to unrelated third parties;
(6) Ensure that all of the conditions and definitions of this
proposed exemption are met;
(7) Submit a written report to the Department's Office of Exemption
Determinations demonstrating and confirming that the terms and
conditions of the exemption were met, within 90 days after the
Repayment; and
(8) Not enter into any agreement or instrument that violates ERISA
Section 410 or the Department's Regulations codified at 29 CFR Section
2509.75-4.
(f) The Plan pays no interest in connection with the Restorative
Payments;
(g) The Plan does not pledge any Plan assets to secure any portion
of the Restorative Payments;
(h) The Plan does not incur any expenses, commissions, or
transaction costs in connection with the Proposed Transactions.
However, if first approved by the Independent Fiduciary, the Plan may
reimburse BCBS AZ for reasonable legal expenses paid in connection with
the Claims by BCBS AZ to non-BCBS AZ-related parties. For purposes of
determining the amount of Attorney Fees the Plan may reimburse to BCBS
AZ under this proposal, the amount of reasonable attorney fees paid by
BCBS AZ on behalf of the Plan in connection with the Claims must be
reduced by the amount of legal fees received by BCBS AZ in connection
with the Claims from any non-Plan party (i.e., pursuant to a court
award);
(i) The proposed transactions do not involve any risk of loss to
either the Plan or the Plan's participants and beneficiaries;
(j) No party associated with this exemption has or will indemnify
the Independent Fiduciary and the Independent Fiduciary will not
request indemnification from any party, in whole or in part, for
negligence and/or any violation of state or federal law that may be
attributable to the Independent Fiduciary in performing its duties to
the Plan with respect to the Proposed Transactions. In addition, no
contract or instrument may purport to waive any liability under state
or federal law for any such violation.
(k) If an Independent Fiduciary resigns, is removed, or for any
reason is unable to serve as an Independent Fiduciary, the Independent
Fiduciary must be replaced by a successor entity that: (1) meets the
definition of Independent Fiduciary detailed above in Section II(e);
and (2) otherwise meets all of the qualification, independence,
prudence and diligence requirements set forth in this exemption.
Further, any such successor Independent Fiduciary must assume all of
the duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent Fiduciary,
BCBS AZ must notify the Department's Office of Exemption Determinations
of the change in Independent Fiduciary and such notification must
contain all material information regarding the successor Independent
Fiduciary, including the successor Independent Fiduciary's
qualifications; and
(l) All of the material facts and representations set forth in the
Summary of Facts and Representation are true and accurate at all times.
Notice to Interested Persons
The Applicant will give notice of the proposed exemption to all
interested persons and all of the parties to the litigation described
above, within fifteen calendar days after the publication of the notice
of proposed exemption in the Federal Register. The notice will contain
a copy of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to the
Department's regulations codified at 29 CFR 2570.43(a)(2). The
supplemental statement will inform interested persons of their right to
comment on the pending exemption. Written comments are due by October
11, 2022.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as a Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the internet and can
be retrieved by most internet search engines.
For Further Information Contact: Mr. Frank Gonzalez of the
Department, telephone (202) 693-8553. (This is not a toll-free number.)
Blue Cross and Blue Shield of Vermont
Located in Berlin, Vermont
[Application No. D-12055]
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, as amended (ERISA), and Section 4975(c)(2) of the Internal
[[Page 52136]]
Revenue Code of 1986, as amended (the Code). The proposed exemption
relates to legal actions and claims (the Claims) against Allianz Global
Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon), that
arose from certain losses incurred by the Non-Contributory Retirement
Program for Certain Employees of Blue Cross and Blue Shield of Vermont
(the Plan) in the first quarter of 2020.\31\
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\31\ In proposing this exemption, the Department is not
expressing an opinion regarding the merits of any Claim against
Allianz and Aon, or whether the Plan's fiduciaries met their
fiduciary duties with respect to Plan assets that are the subject of
the Claims. Further, in proposing this exemption, the Department is
not limiting any party's claim, demand and/or cause of action
arising from the Plan's 2020 first quarter losses in any way. Among
other things, this exemption preserves any right, claim, demand and/
or cause of action the Plan may have against the following: (1) any
fiduciary of the Plan; (2) any fiduciary of the Trust; (3) Blue
Cross and Blue Shield of Vermont, Inc.; and/or (4) any person or
entity related to a person or entity described in (1)-(3).
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This proposed exemption would permit the Plan sponsor, Blue Cross
and Blue Shield of Vermont (BCBS VT), to make a series of payments to
the Plan over a four-year period (the Restorative Payments). The
Restorative Payments will return the Plan to at least the Plan's
funding level (126.61%) as of January 1, 2019. If the Plan receives
litigation proceeds from the Claims, the Plan will transfer the lesser
of the ligation proceeds amount or the Restorative Payments amount,
plus reasonable attorney fees to BCBS VT.
Summary of Facts and Representations <SUP>32</SUP>
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\32\ The Department notes that availability of this exemption is
subject to the express condition that the material facts and
representations contained in application D-12055 are true and
complete at all times and accurately describe all material terms of
the transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption or in a material
fact or representation described in the application, the exemption
will cease to apply as of the date of such change. The Summary of
Facts and Representations is based on the Applicant's
representations, as well as factual representations contained in the
Claims' cause of action (as described below) and does not reflect
factual findings or opinions of the Department, unless indicated
otherwise.
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1. Blue Cross and Blue Shield of Vermont (BCBS VT or the Applicant)
is a not-for-profit hospital and medical services corporation that
issues and administers health care coverage for individuals and group
health plans. BCBS VT is an independent licensee of the Blue Cross Blue
Shield Association (BCBSA).
2. The Plan is an ERISA-covered qualified defined benefit pension
plan that covers eligible employees of BCBS VT. As of August 31, 2020,
the Plan held $28,331,698 in total assets.
3. The Plan holds a beneficial interest in the Blue Cross and Blue
Shield National Retirement Trust (the Trust). The Trust is a master
trust that holds the assets of 16 defined benefit pension plans that
participate in the BCBSA's National Retirement Program (the
Participating Plans). Northern Trust serves as Trustee and asset
custodian to the Trust and maintains separate records that reflect the
net asset value of each Participating Plan. The Trust's earnings,
market adjustments, and administrative expenses are allocated among the
Participating Plans based on the respective Participating Plan's share
of the Trust's assets. A Participating Plan's interest in the Trust's
net assets is based on its share of the Trust.
4. The Committee serves as named fiduciary and administrator for
each Participating Plan. The Committee is a standing committee of the
BCBSA's board of directors. In 2011, the Committee invested a portion
of the Trust's assets in funds managed by Allianz Global Investors U.S.
LLC (Allianz), as part of a Structured Alpha Investment Strategy. These
funds included: (a) AllianzGI Structured Alpha Multi-Beta Series LLC I;
(b) AllianzGI Structured Alpha Emerging Markets Equity 350 LLC; and (c)
AllianzGI Structured Alpha 1000 LLC (collectively, the Structured Alpha
Funds).
5. The Applicant represents that the Allianz Structured Alpha
strategy consisted of alpha and beta components. According to the
applicant, the alpha component was an options trading strategy that
Allianz claimed would seek targeted positive return potential while
maintaining structural risk protections. The beta component was
intended to provide broad market exposure to a particular asset class
through investments in financial products similar to an exchange-traded
fund that replicates the performance of a market index, such as the S&P
500. According to the Applicant, Allianz represented that the
Structured Alpha Strategy would capitalize on the return-generating
features of option selling (short volatility) while simultaneously
benefitting from the risk-control attributes associated with option
buying (long volatility). According to the Applicant, Allianz
represented further that the alpha component would include position
hedging consisting of long-volatility positions designed to protect the
portfolio in the event of a market crash.
6. As of December 31, 2019, the total market value of the Plan's
portion of the Trust's investment in the Allianz Structured Alpha Funds
was $53,105,089, which represented 76.48% of total Plan assets.\33\
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\33\ By proposing this exemption, the Department does not, in
any way, suggest a conclusion that the Plan's fiduciaries met their
ERISA Section 404 duties when they caused the Trust to invest 76.48%
of the Plan's total assets in the Allianz Structured Alpha Funds.
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7. In 2009, the Committee retained Aon (then called Ennis Knupp) to
provide investment advice regarding the investment of Plan assets held
in the Trust. The Applicant represents that Aon provided regular
investment advice pursuant to a written contract between it and the
Committee. Pursuant to its engagement, Aon agreed to provide the
following: ``recommendations to [the Committee] regarding asset
allocation'' within the Trust; ``recommendations to [the Committee]
regarding the specific asset allocation and other investment
guidelines'' for the Trust's investment managers such as Allianz; and
advice ``regarding the diversification of assets'' held in the Trust.''
The Applicant represents that Aon agreed to: conduct ``active, ongoing
monitoring'' of Allianz to ``identify any forward-looking'' risks
``that could impact performance;'' and ``inform itself'' of any
information necessary to discharge its duty to monitor, including
information about the actual options positions Allianz had constructed.
8. The Applicant represents that when equity markets sharply
declined in February and March of 2020, volatility spiked and the
options positions held within the Structured Alpha Strategy were
exposed to a heightened risk of loss. The Applicant represents that,
unbeknownst to the Committee, and in violation of Allianz's stated
investment strategy, Allianz abandoned the hedging strategy that was
the supposed cornerstone of the Structured Alpha Strategy, leaving the
portfolio almost entirely unhedged against a spike in market
volatility. As described in the Claims, although Allianz had
represented that it would buy hedges at strike prices ranging from 10%
to 25% below the market, the hedges it actually held at the end of
February 2020 were as much as 60% below the market.
The Applicant represents that, as of January 31, 2020, the Trust
had invested approximately $2,916,049,486 in the Structured Alpha
Strategy. Six weeks later, the Trust faced a margin call, which the
Applicant states left it no choice but to liquidate the investment. The
Trust was ultimately able to redeem only $646,762,678 of its
$2,916,049,486 investment, resulting in a total loss of $2,269,286,808.
Specifically, regarding the Plan's portion of the loss, as of
December 31,
[[Page 52137]]
2019, the market value of the Plan's total assets was $69,439,545. As
of March 31, 2020, the market value of the Plan's total assets
decreased to $25,510,951. The Plan's total losses from the Allianz
Structured Alpha Strategy were $41,588,205, which caused the Plan to be
underfunded.
9. On September 16, 2020, the Committee filed a cause of action in
the United States District Court for the Southern District of New York
(Case number 20-CIV-07606) against Allianz and Aon for Breach of
Fiduciary Duty under ERISA Section 404, Breach of Co-Fiduciary Duty
under ERISA Section 405, and violation of ERISA Section 406(b) for
managing the Plan assets in its self-interest and breach of contract.
It is possible that resolution of this claim and other legal actions
against Allianz and Aon in connection with the Plan's losses (the
Claims) could take an extended period of time.
10. The Applicant states that rather than wait for the Claims to be
resolved, BCBS VT took steps to protect Plan benefits and avoid onerous
benefit restrictions under Code section 436 that could apply to the
Plan as a result of a funding shortfall. Therefore, on December 21,
2020, BCBS VT and the Plan entered into a Contribution and Assignment
Agreement (the Contribution and Assignment Agreement).
11. The Restorative Payments. In the Contribution and Assignment
Agreement, BCBS VT agreed to make an initial $13,000,000 lump sum
payment to the Plan which was expected to restore the Plan to an AFTAP
funding level of approximately 80% as of the January 1, 2021 valuation
of the Plan. BCBS VT also agreed to make such additional payments to
the Plan as necessary to maintain the Plan's funding level at 80% as of
such date, to the extent the preliminary $13,000,000 installment
payment fails to do so.\34\ Finally, BCBS VT stated that it intended to
make subsequent installment payments to the Plan on at least an annual
basis and over a four-year period to restore Plan funding to
approximately the level that was reported prior to the losses sustained
within the Allianz Structured Alpha strategy.
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\34\ BCBS VT has made two Restorative Payments to the Plan: a
$13,000,000 payment remitted on December 23, 2020, and a $3,100,000
payment remitted on September 14, 2021.
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12. Since the effective date of the Contribution and Assignment
Agreement, BCBS VT has made two Restorative Payments to the Plan: a
$13,000,000 payment remitted on December 23, 2020, and a $3,100,000
payment remitted on September 14, 2021.
13. Department's Note: This exemption, if granted, requires BCBS VT
to make the Restorative Payments necessary to bring the Plan's funding
percentage to at least its January 1, 2019, pre-loss funded percentage
of 126.61%, by December 31, 2024. The prior restorative payments noted
above in paragraph 12 together with the funding obligations noted here
in paragraph 13 constitute the Required Restorative Payments under this
exemption.
14. In exchange for the Restorative Payments, the Plan assigned to
BCBS VT its right to retain certain litigation and/or settlement
proceeds recovered from the Claims (the Assigned Interests).\35\ Per
the assignment, once the Allianz/Aon litigation is resolved and if the
Plan receives litigation proceeds from the Claims, the Plan will
transfer to BCBS VT a repayment (the Repayment) that does not exceed
the total Restorative Payments made by BCBS VT, plus reasonable
attorney fees paid by BCBS VT on behalf of the Plan in connection with
the Claims, if such fees are reviewed and approved by a qualified
independent fiduciary who confirms that the fees were reasonably
incurred and paid by BCBS VT to unrelated third parties (the Attorney
Fees). For the purposes of this exemption, Attorney Fees reimbursable
to BCBS VT do not include: (a) legal expenses paid by the Plan; and (b)
legal expenses paid by BCBS VT for representation of its own interests
or the interests of any party other than the Plan. For purposes of
determining the amount of Attorney Fees the Plan may reimburse to BCBS
VT under this exemption, the amount of reasonable attorney fees paid by
BCBS VT on behalf of the Plan in connection with the Claims must be
reduced by the amount of legal fees received by BCBS VT in connection
with the Claims from any non-Plan party (for example, from a third
party pursuant to a court award).
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\35\ Under the Contribution and Assignment Agreement, if the
Plan receives litigation or settlement proceeds from the Claims, the
proceeds would first flow to the Trust, and then each Plan's pro
rata portion of the proceeds would be deposited into the individual
trust funding that Plan.
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15. The Plan must ultimately receive at least the full value of the
promised Restorative Payments, minus the Attorney Fees. The Plan may
ultimately receive more than the Restorative Payment amount required
under the Contribution and Assignment Agreement. If the Plan receives
litigation or settlement proceeds that exceed the amount of Restorative
Payments that BCBS VT has made to the Plan, the Plan's Repayment to
BCBS VT will be limited to the amount of Restorative Payments actually
made by BCBS VT, plus Attorney Fees. For example, if BCBS VT made
$18,000,000 in Restorative Payments to the Plan and reasonably incurred
$100,000 in Attorney Fees, and if the Plan receives $30,000,000 in
litigation proceeds, the Plan will make a Repayment to BCBS VT totaling
$18,100,000.
16. Alternatively, if the Plan receives less litigation or
settlement proceeds than the amount of Restorative Payments that BCBS
VT has made to the Plan, the Plan will transfer to BCBS VT the lesser
amount of litigation or settlement proceeds, plus Attorney Fees. For
example, if BCBS VT made $18,000,000 in Restorative Payments to the
Plan and has reasonably incurred $100,000 in Attorney Fees, and if the
Plan receives $10,000,000 in litigation proceeds, the Plan will make a
Repayment to BCBS VT totaling $10,100,000.
17. The Department notes that if the Plan receives any restitution
that is tied to the conduct underlying the Claims but was ordered
pursuant to a proceeding or directive that is external to Case number
20-CIV-07606, the disposition of such proceeds must conform to the
requirements of this exemption.
18. BCBS VT retained Gallagher Fiduciary Advisors, LLC (Gallagher
or the Independent Fiduciary) of New York, New York, to serve as the
Plan's independent fiduciary with respect to the Required Restorative
Payments and the potential repayment by the Plan of those Payments
(collectively, the Proposed Transactions). Gallagher represents that it
has extensive experience in institutional investment consulting and
fiduciary decision-making regarding traditional and alternative
investments. Gallagher further represents that its independent
fiduciary decision-making work involves acting as a fiduciary advisor
or decision-maker for plans and other ERISA-regulated asset pools and
that it has experience with a wide range of asset classes and
litigation claims.
19. Gallagher represents that it understands its duties and
responsibilities under ERISA in acting as a fiduciary on behalf of the
Plan. Gallagher also acknowledges that it is authorized to take all
appropriate actions to safeguard the Plan's interests, and that it will
monitor the Proposed Transactions on the Plan's behalf on a continuous
basis and throughout the term required by this exemption.
20. Gallagher represents that it does not have any prior
relationship with any
[[Page 52138]]
parties in interest to the Plan, including BCBS VT and any BCBS VT
affiliates. Gallagher further represents the total revenues it has
received from the Plan and from parties in interest to the Plan in
connection with its engagement as Independent Fiduciary represents
approximately 0.78% of Gallagher's total revenue.
21. Gallagher represents that no party associated with this
exemption application has or will indemnify it, in whole or in part,
for negligence of any kind and/or any violation of state or federal law
that may be attributable to Gallagher's performance of its duties as
Independent Fiduciary to the Plan with respect to the Proposed
Transactions. In addition, no contract or instrument entered into by
Gallagher as Independent Fiduciary may purport to waive any liability
under state or federal law for any such violation.
22. On December 21, 2020, Gallagher completed an Independent
Fiduciary Report (the Independent Fiduciary Report) finding that the
massive losses caused by the Trust's investment in the Allianz
Structured Alpha Strategy resulted in a significant reduction to the
Plan's total assets and funding level. Gallagher represents that the
Required Restorative Payments, which will be received by the Plan
substantially in advance of a final resolution of the Claims against
Allianz and Aon, should restore the Plan's funded percentage to its
pre-loss funded percentage as of January 1, 2019. The restoration of
the Plan's funding status will secure ongoing benefit payments to
participants and beneficiaries.
Gallagher notes that the Contribution and Assignment Agreement
provides that the Trust must reimburse BCBS VT only up to the Required
Restorative Payment Amount received, plus any reasonable legal expense
paid to non-BCBS VT-related parties that were incurred by, or allocated
to, BCBS VT as a result of the Claims.\36\ Thus, if the Plan's ultimate
recovery amount from the Claims is less than the Required Restorative
Payment Amount, plus related litigation expenses that were allocated to
the Plan, BCBS VT, not the Plan, will suffer the loss.
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\36\ Currently, legal fees and expenses associated with the
Claims are being paid by most of the Participating Plan's trusts on
a pro rata basis according to each Participating Plan's total
invested assets held in the Master Trust's Allianz Structured Alpha
Strategy before the losses were incurred in the first quarter 2020.
The Applicant represents that the Committee reviews and approves
these legal fees before passing them through to each Participating
Plan.
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Gallagher states that the Proposed Transactions and the terms of
the Contribution and Assignment Agreement were negotiated and approved
by Gallagher in its role as the Plan's Independent Fiduciary. Gallagher
states that it approved the Proposed Transactions only after conducting
an extensive analysis of the damages suffered by the Plan as a result
of the failed Allianz Structured Alpha Strategy. Gallagher represents
that it conducted numerous discussions with Trust representatives and
counsel, along with the Plan's representatives and counsel to ensure
that the interests of the Plan's participants and beneficiaries were
protected with respect to all aspects of the Proposed Transactions.
Based upon its assessment, Gallagher approved the Plan's receipt of the
Required Restorative Payments from BCBS VT in exchange for the
Assignment.
ERISA Analysis
23. Absent an exemption, the Plan's receipt of the Restorative
Payments from BCBS VT in exchange for the Plan's transfer of litigation
or settlement proceeds to BCBS VT would violate ERISA. In this regard,
ERISA Section 406(a)(1)(A) prohibits a plan fiduciary from causing the
plan to engage in a transaction if the fiduciary knows or should know
that such transaction constitutes a direct or indirect sale or exchange
of any property between a plan and a party in interest. BCBS VT, as an
employer whose employees are covered by the Plan, is a party in
interest with respect to the Plan under ERISA Section 3(14)(C). The
Required Restorative Payments to the Plan and the Plan's potential
repayment to BCBS VT with litigation or settlement proceeds would
constitute impermissible exchanges between the Plan and a party-in-
interest (BCBS VT) in violation of ERISA Section 406(a)(1)(A).
ERISA Section 406(a)(1)(B) prohibits the lending of money or other
extension of credit between a plan and a party-in-interest. BCBS VT's
promise to make Required Restorative Payments to the Plan, over time,
constitutes an impermissible extension of credit between the Plan and a
party-in-interest in violation of ERISA Section 406(a)(1)(B).
ERISA Section 406(a)(1)(D) prohibits a plan fiduciary from causing
a plan to engage in a transaction if the fiduciary knows or should know
that the transaction constitutes a direct or indirect transfer to, or
use by or for the benefit of, a party-in-interest, of the income or
assets of the plan. The transfer of Plan assets to BCBS VT in
connection with the Repayment would constitute an impermissible
transfer of Plan assets to a party-in-interest in violation of ERISA
Section 406(a)(1)(D).
Conditions
24. This proposed exemption contains a number of conditions that
must be met. For example, the proposed exemption mandates that the
Independent Fiduciary, in full accordance with its obligations of
prudence and loyalty under ERISA Section 404(a)(1)(A) and (B) must:
(a) review, negotiate, and approve the terms and conditions of the
Required Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement, before the Plan enters into such payments and the
agreement;
(b) determine that the terms and conditions of the Required
Restorative Payments, the Repayment, and the Contribution and
Assignment Agreement are prudent, in the interest of the Plan and its
participants and beneficiaries, and protective of the rights of the
Plan's participants and beneficiaries;
(c) confirm that the Required Restorative Payments are fully and
timely made;
(d) monitor the Claims and confirm that the Plan receives its
proper share of any litigation or settlement proceeds received by the
Trust in connection with the Claims;
(e) ensure that any Repayment by the Plan to BCBS VT fully complies
with the terms of this exemption and is for no more than the lesser of
the total Restorative Payments actually made to the Plan by BCBS VT or
the amount the Plan received from the Claims, plus Attorney Fees;
(f) ensure that any Repayment by the Plan to BCBS VT for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBS VT to unrelated third parties for
representation of the Plan and its interests (as opposed to
representation of BCBS VT or the interests of any party other than the
Plan) where BCBS VT was not otherwise reimbursed from a non-Plan party;
(g) monitor the Plan's Assigned Interests on an ongoing basis to
determine and confirm that any excess recovery amount from the Claims
(i.e., any amount that exceeds the Required Restorative Payment Amount)
is retained by the Plan;
(h) ensure that all of the conditions and definitions of this
proposed exemption are met; and
(i) represent that it has not and will not enter into any agreement
or instrument that violates ERISA Section
[[Page 52139]]
410 or Department Regulations codified at 29 CFR 2509.75-4.\37\
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\37\ ERISA Section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of Title I of ERISA] shall be
void as against public policy.''
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25. This proposed exemption also requires Gallagher to respond in
writing to any information requests from the Department regarding
Gallagher's activities as the Plan's Independent Fiduciary.
Additionally, no later than 90 days after the resolution of the
litigation, Gallagher must submit a written report to the Department
demonstrating that all terms and conditions of the exemption have been
met.
26. This proposed exemption requires that the Plan has not and will
not release any claims, demands and/or causes of action it may have
against: (a) any fiduciary of the Plan; (b) any fiduciary of the Trust;
(c) BCBS VT; and/or (d) any person or entity related to a person or
entity described in (a)-(c) of this paragraph. Additionally, any
Repayment by the Plan to BCBS VT must be made in a manner designed to
minimize unnecessary costs and disruption to the Plan and its
investments.
27. The Plan may not make any Repayment to BCBS VT before the date:
the Plan has received from BCBS VT the entire amount of the Restorative
Payments agreed to in the Amended Contribution and Assignment
Agreement; and all the Claims are settled. Furthermore, the Plan may
not pay any interest to BCBS VT in connection with its receipt of the
Required Restorative Payments, nor pledge Plan assets to secure any
portion of the Required Restorative Payments.
28. Pursuant to this proposed exemption, the Plan may not incur any
expenses, commissions or transaction costs in connection with the
Proposed Transactions. However, as noted above, under certain
circumstances the Plan may reimburse BCBS VT for reasonable legal
expenses arising from the Claims that BCBS VT paid to non-BCBS VT-
related parties for representation of the Plan and its interests (as
opposed to representation of BCBS VT or the interests of any party
other than the Plan) where BCBS VT was not otherwise reimbursed by a
non-Plan party.
29. Finally, the exemptive relief provided under this proposed
exemption is conditioned upon the Department's assumption that the
material facts and representations set forth above in the Summary of
Facts and Representation section are true and accurate at all times. In
the event that a material fact or representation detailed above is
untrue or inaccurate, the exemptive relief provided under this
exemption will cease immediately.
Statutory Findings
30. ERISA Section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such participants and beneficiaries. Each of these criteria is
discussed below.
a. The Proposed Exemption Is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible because, among other things, the Independent
Fiduciary will represent the interests of the Plan for all purposes
with respect to the Proposed Transactions.\38\ In this regard, not
later than 90 days after the resolution of the litigation, the
Independent Fiduciary must submit a written report to the Department
demonstrating that all of the requirements of this exemption have been
met.
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\38\ This proposed exemption would require that if the
Independent Fiduciary resigns, is removed, or for any reason is
unable to serve as an Independent Fiduciary, the successor
Independent Fiduciary must, among other things, assume all of the
duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent
Fiduciary, the Plan Sponsor and the Plan must notify the
Department's Office of Exemption Determinations of the change in
Independent Fiduciaries. The notification must contain all material
information including the qualifications of the successor
Independent Fiduciary.
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b. The Proposed Exemption Is ``In the Interests of the Plan.'' The
Department has tentatively determined that the proposed exemption is in
the interest of the Plan because, among other things, the Plan's
receipt of the Required Restorative Payments will substantially improve
the Plan's funding status, which will enhance the Plan's ability to
meet its obligations to fund benefit obligations to participants and
beneficiaries and help the Plan avoid the imposition of benefit
limitations imposed under Code section 436.
c. The Proposed Exemption Is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the rights of the Plan's participants and beneficiaries
because, among other things, the Plan will repay BCBS VT the lesser of
the Required Restorative Payment Amount received, or the amount the
Plan receives in proceeds from the Claims, ensuring that the Proposed
Transactions will result in an increase in Plan assets of at least the
total amount of Restorative Payments (less reasonable legal expenses
related to the Claims paid by BCBS VT to unrelated third parties, as
confirmed and approved by the Independent Fiduciary). Further, this
exemption preserves any right, claim, demand and/or cause of action the
Plan may have against: (a) any fiduciary of the Plan; (b) any fiduciary
of the Trust; (c) BCBS VT; and/or (d) any person or entity related to a
person or entity described in (a)-(c).
Summary
31. Based on the conditions described above, the Department has
tentatively determined that the relief sought by the Applicant
satisfies the statutory requirements under ERISA Section 408(a) for the
Department to make findings that support its issuance of a proposed
exemption.
Proposed Exemption
The Department is considering granting an exemption under the
authority of ERISA Section 408(a) and Code Section 4975(c)(2) and in
accordance with the procedures set forth in the Department's exemption
procedure regulation.\39\
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\39\ 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
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Section I. Definitions
(a) The term ``Attorney Fees'' means reasonable legal expenses paid
by BCBS VT on behalf of the Plan in connection with the Claims, if such
fees are reviewed and approved by a qualified independent fiduciary who
confirms that the fees were reasonably incurred and paid by BCBS VT to
unrelated third parties. For the purposes of this exemption, the
Attorney Fees reimbursable to BCBS VT do not include: (1) legal
expenses paid by the Plan; and (2) legal expenses paid by BCBS VT for
representation of BCBC VT or the interests of any party other than the
Plan.
(b) The term ``BCBS VT'' means Blue Cross and Blue Shield of
Vermont.
(c) The term ``Claims'' means the legal claims against Allianz
Global Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon),
to recover certain losses incurred by the Plan in the first quarter of
2020.
(d) The term ``Contribution and Assignment Agreement'' means the
written agreement between BCBS VT
[[Page 52140]]
and the Plan, dated December 21, 2020, containing all material terms
regarding BCBS VT's agreement to make Restorative Payments (as
described in Section I(h)) to the Plan in return for the Plan's
potential Repayment to BCBS VT of an amount that is no more than the
lesser of the total Restorative Payments or the amount of litigation
proceeds the Plan receives from the Claims, plus reasonable Attorney
Fees paid to unrelated third parties by BCBS VT in connection with the
Claims.
(e) The term ``Independent Fiduciary'' means Gallagher Fiduciary
Advisors, LLC (Gallagher) or a successor Independent Fiduciary to the
extent Gallagher or the successor Independent Fiduciary continues to
serve in such capacity who:
(1) Is not an affiliate of BCBS VT and does not hold an ownership
interest in BCBS VT or affiliates of BCBS VT;
(2) Was not a fiduciary with respect to the Plan before its
appointment to serve as the Independent Fiduciary;
(3) Has acknowledged in writing that it:
(i) is a fiduciary with respect to the Plan and has agreed not to
participate in any decision regarding any transaction in which it has
an interest that might affect its best judgment as a fiduciary; and
(ii) Has appropriate technical training or experience to perform
the services contemplated by the exemption;
(4) Has not entered into any agreement or instrument that violates
the prohibitions on exculpatory provisions in ERISA Section 410 or the
Department's regulation relating to indemnification of fiduciaries;
\40\
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\40\ 29 CFR 2509.75-4.
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(5) Has not received gross income from BCBS VT or its affiliates
during any fiscal year in an amount that exceeds two percent (2%) of
the Independent Fiduciary's gross income from all sources for the prior
fiscal year. This provision also applies to a partnership or
corporation of which the Independent Fiduciary is an officer, director,
or 10 percent (10%) or more partner or shareholder, and includes as
gross income amounts received as compensation for services provided as
an independent fiduciary under any prohibited transaction exemption
granted by the Department; and
(6) No organization or individual that is an Independent Fiduciary,
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent (10%) or more
partner or shareholder, may acquire any property from, sell any
property to, or borrow any funds from BCBS VT or from affiliates of
BCBS VT while serving as an Independent Fiduciary. This prohibition
will continue for six months after the party ceases to be an
Independent Fiduciary and/or the Independent Fiduciary negotiates any
transaction on behalf of the Plan during the period that the
organization or individual serves as an Independent Fiduciary.
(f) The ``Plan'' means the Non-Contributory Retirement Program for
Certain Employees of Blue Cross and Blue Shield of Vermont.
(g) The term ``Plan Losses'' means the $41,588,205 in Plan losses
the BCBSA's National Employee Benefits Committee alleges were the
result of breaches of fiduciary responsibilities and breaches of
contract by Allianz Global Investors U.S. LLC and/or Aon Investments
USA Inc.
(h) The term ``Restorative Payments'' means the payments made by
BCBS VT to the Plan in connection with the Plan Losses, including: (1)
the past payment of $13,000,000 made on December 23, 2020, (2) the past
payment of $3,100,000 made on September 14, 2021, and (3) amounts
necessary to restore the Plan to its funding level of 126.91% before
December 31, 2024. The sum of (1)-(3) is the Required Restorative
Payment Amount.
(i) The ``Repayment'' means the payment, if any, that the Plan will
transfer to BCBS VT following the Plan's receipt of proceeds from the
Claims, where the Repayment is made following the full and complete
resolution of the Claims; and in a manner that is consistent with the
terms of the exemption.
Section II. Proposed Transactions
If the proposed exemption is granted, the restrictions of ERISA
Sections 406(a)(1)(A), (B) and (D) and the sanctions resulting from the
application of Code Section 4975, by reason of Code Sections
4975(c)(1)(A), (B) and (D), shall not apply, effective December 21,
2020, to the following transactions: BCBS VT's transfer of Restorative
Payments to the Plan; and, in return, the Plan's Repayment of an amount
to BCBS VT, which must be no more than the lesser of the Restorative
Payment Amount or the amount of litigation proceeds the Plan received
from the Claims, plus reasonable Attorney Fees, provided that the
Definitions set forth in Section I and the Conditions set forth in
Section III are met.
Section III. Conditions
(a) The Plan receives the entire Restorative Payment Amount no
later than December 31, 2024;
(b) In connection with its receipt of the Required Restorative
Payments, the Plan does not release any claims, demands and/or causes
of action the Plan may have against the following: (1) any fiduciary of
the Plan; (2) any fiduciary of the Trust; (3) BCBS VT; and/or (4) any
person or entity related to a person or entity identified in (1)-(3) of
this paragraph;
(c) The Plan's Repayment to BCBS VT is for no more than the lesser
of the total Restorative Payments received by the Plan or the amount of
litigation proceeds the Plan receives from the Claims. The Plan's
Repayment to BCBS VT may only occur after the Independent Fiduciary has
determined that: all the conditions of the exemption are met; the Plan
has received all the Restorative Payments it is due; and the Plan has
received all the litigation proceeds it is due. The Plan's Repayment to
BCBS VT must be carried out in a manner designed to minimize
unnecessary costs and disruption to the Plan and its investments;
(d) A qualified independent fiduciary (the Independent Fiduciary,
as further defined in Section II(e)), acting solely on behalf of the
Plan in full accordance with its obligations of prudence and loyalty
under ERISA Sections 404(a)(1)(A) and (B) must:
(1) Review, negotiate and approve the terms and conditions of the
Restorative Payments and the Repayment and the Contribution and
Assignment Agreement, all of which must be in writing, before the Plan
enters into those transactions/agreement;
(2) Determine that the Restorative Payments, the Repayment, and the
terms of the Contribution and Assignment Agreement, are prudent and in
the interest of the Plan and its participants and beneficiaries;
(3) Confirm that the Required Restorative Payment Amount was fully
and timely made;
(4) Monitor the litigation related to the Claims and confirm that
the Plan receives, in a timely manner, its proper share of any
litigation or settlement proceeds received by the Trust;
(5) Ensure that any Repayment by the Plan to BCBS VT for legal
expenses in connection with the Claims is limited to only reasonable
legal expenses that were paid by BCBS VT to unrelated third parties;
(6) Ensure that all of the conditions and definitions of this
proposed exemption are met;
(7) Submit a written report to the Department's Office of Exemption
Determinations demonstrating and confirming that the terms and
[[Page 52141]]
conditions of the exemption were met, within 90 days after the
Repayment; and
(8) Not enter into any agreement or instrument that violates ERISA
Section 410 or the Department's Regulations codified at 29 CFR Section
2509.75-4.
(f) The Plan pays no interest in connection with the Restorative
Payments;
(g) The Plan does not pledge any Plan assets to secure any portion
of the Restorative Payments;
(h) The Plan does not incur any expenses, commissions, or
transaction costs in connection with the Proposed Transactions.
However, if first approved by the Independent Fiduciary, the Plan may
reimburse BCBS VT for reasonable legal expenses paid in connection with
the Claims by BCBS VT to non-BCBS VT-related parties. For purposes of
determining the amount of Attorney Fees the Plan may reimburse to BCBS
VT under this proposal, the amount of reasonable attorney fees paid by
BCBS VT on behalf of the Plan in connection with the Claims must be
reduced by the amount of legal fees received by BCBS VT in connection
with the Claims from any non-Plan party (i.e., pursuant to a court
award);
(i) The proposed transactions do not involve any risk of loss to
either the Plan or the Plan's participants and beneficiaries;
(j) No party associated with this exemption has or will indemnify
the Independent Fiduciary and the Independent Fiduciary will not
request indemnification from any party, in whole or in part, for
negligence and/or any violation of state or federal law that may be
attributable to the Independent Fiduciary in performing its duties to
the Plan with respect to the Proposed Transactions. In addition, no
contract or instrument may purport to waive any liability under state
or federal law for any such violation.
(k) If an Independent Fiduciary resigns, is removed, or for any
reason is unable to serve as an Independent Fiduciary, the Independent
Fiduciary must be replaced by a successor entity that: (1) meets the
definition of Independent Fiduciary detailed above in Section II(e);
and (2) otherwise meets all of the qualification, independence,
prudence and diligence requirements set forth in this exemption.
Further, any such successor Independent Fiduciary must assume all of
the duties of the outgoing Independent Fiduciary. As soon as possible,
including before the appointment of a successor Independent Fiduciary,
BCBS VT must notify the Department's Office of Exemption Determinations
of the change in Independent Fiduciary and such notification must
contain all material information regarding the successor Independent
Fiduciary, including the successor Independent Fiduciary's
qualifications; and
(l) All of the material facts and representations set forth in the
Summary of Facts and Representation are true and accurate at all times.
Notice to Interested Persons
The Applicant will give notice of the proposed exemption to all
interested persons and all of the parties to the litigation described
above, within fifteen calendar days after the publication of the notice
of proposed exemption in the Federal Register. The notice will contain
a copy of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to the
Department's regulations codified at 29 CFR 2570.43(a)(2). The
supplemental statement will inform interested persons of their right to
comment on the pending exemption. Written comments are due by October
11, 2022.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as a Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the internet and can
be retrieved by most internet search engines.
For Further Information Contact: Mr. Nicholas Schroth of the
Department, telephone (202) 693-8571. (This is not a toll-free number.)
Hawaii Medical Service Association
Located in Honolulu, Hawaii
[Application No. D-12038]
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, as amended (ERISA), and Section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code). The proposed exemption
relates to legal actions and claims (the Claims) against Allianz Global
Investors U.S. LLC (Allianz) and Aon Investments USA Inc. (Aon), that
arose from certain losses incurred by the Non-Contributory Retirement
Program for Certain Employees of Hawaii Medical Service Association
(the Plan) in the first quarter of 2020.\41\
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\41\ In proposing this exemption, the Department is not
expressing an opinion regarding the merits of any Claim against
Allianz and Aon, or whether the Plan's fiduciaries met their
fiduciary duties with respect to Plan assets that are the subject of
the Claims. Further, in proposing this exemption, the Department is
not limiting any party's claim, demand and/or cause of action
arising from the Plan's 2020 first quarter losses in any way. Among
other things, this exemption preserves any right, claim, demand and/
or cause of action the Plan may have against the following: (1) any
fiduciary of the Plan; (2) any fiduciary of the Trust; (3) Hawaii
Medical Service Association; and/or (4) any person or entity related
to a person or entity described in (1)-(3).
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This proposed exemption would permit the past payment of
$50,000,000 by Hawaii Medical Service Association (HMSA), the Plan
sponsor, to the Plan (the Restorative Payment). If the Plan receives
litigation proceeds from the Claims, the Plan will transfer the lesser
of the ligation proceeds amount or the Restorative Payment amount, plus
reasonable attorney fees to HMSA.
Summary of Facts and Representations <SUP>42</SUP>
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\42\ The Department notes that availability of this exemption is
subject to the express condition that the material facts and
representations contained in application D-12038 are true and
complete at all times and accurately describe all material terms of
the transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption or in a material
fact or representation described in the application, the exemption
will cease to apply as of the date of such change. The Summary of
Facts and Representations is based on the Applicant's
representations, as well as factual representations contained in the
Claims' cause of action (as described below) and does not reflect
factual findings or opinions of the Department, unless indicated
otherwise.
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1. HMSA is a not-for-profit company that provides health insurance
products and services. HMSA is an independent licensee of the Blue
Cross Blue Shield Association (BCBSA).
2. The Plan is an ERISA-covered qualified defined benefit pension
plan that covers eligible employees of HMSA and employees of affiliated
employers. On December 31, 2014, the Plan was closed to new entrants.
In August 2020, the Sponsor elected to freeze Plan benefits for all
participants effective December 31, 2024. As of December 31, 2020, the
Plan covered 1,638 participants and held $167,536,184 in total assets.
3. Up until 2020, the Plan held a beneficial interest in the Blue
Cross and Blue Shield National Retirement Trust (the Trust).\43\ The
Trust is a master trust that holds the assets of 16 defined benefit
pension plans that participate in the BCBSA's National Retirement
[[Page 52142]]
Program (the Participating Plans). Northern Trust serves as Trustee and
asset custodian to the Trust and maintains separate records that
reflect the net asset value of each Participating Plan. The Trust's
earnings, market adjustments, and administrative expenses are allocated
among the Participating Plans based on the respective Participating
Plan's share of the Trust's assets. A Participating Plan's interest in
the Trust's net assets is based on its share of the Trust.
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\43\ The Plan withdrew substantially all of its assets from the
Trust in advance of the Trust's August 31, 2020 valuation date.
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4. The Committee serves as named fiduciary and administrator for
each Participating Plan. The Committee is a standing committee of the
BCBSA's board of directors. In 2011, the Committee invested a portion
of the Trust's assets in funds managed by Allianz Global Investors U.S.
LLC (Allianz), as part of a Structured Alpha Investment Strategy. These
funds included: (a) AllianzGI Structured Alpha Multi-Beta Series LLC I;
(b) AllianzGI Structured Alpha Emerging Markets Equity 350 LLC; and (c)
AllianzGI Structured Alpha 1000 LLC (collectively, the Structured Alpha
Funds).
5. The Applicant represents that the Allianz Structured Alpha
strategy consisted of alpha and beta components. According to the
applicant, the alpha component was an options trading strategy that
Allianz claimed would seek targeted positive return potential while
maintaining structural risk protections. The beta component was
intended to provide broad market exposure to a particular asset class
through investments in financial products similar to an exchange-traded
fund that replicates the performance of a market index, such as the S&P
500. According to the Applicant, Allianz represented that the
Structured Alpha Strategy would capitalize on the return-generating
features of option selling (short volatility) while simultaneously
benefitting from the risk-control attributes associated with option
buying (long volatility). According to the Applicant, Allianz
represented further that the alpha component would include position
hedging consisting of long-volatility positions designed to protect the
portfolio in the event of a market crash.
6. As of December 31, 2019, the total market value of the Plan's
portion of the Trust's investment in the Allianz Structured Alpha Funds
was $229,799,688, which represented 86.11% of total Plan assets.\44\
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\44\ By proposing this exemption, the Department does not, in
any way, suggest a conclusion that the Plan's fiduciaries met their
ERISA Section 404 duties when they caused the Trust to invest 86.11%
of the Plan's total assets in the Allianz Structured Alpha Funds.
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7. In 2009, the Committee retained Aon (then called Ennis Knupp) to
provide investment advice regarding the investment of Plan assets held
in the Trust. The Applicant represents that Aon provided regular
investment advice pursuant to a written contract between it and the
Committee. Pursuant to its engagement, Aon agreed to provide the
following: ``recommendations to [the Committee] regarding asset
allocation'' within the Trust; ``recommendations to [the Committee]
regarding the specific asset allocation and other investment
guidelines'' for the Trust's investment managers such as Allianz; and
advice ``regarding the diversification of assets'' held in the Trust.''
The Applicant represents that Aon agreed to: conduct ``active, ongoing
monitoring'' of Allianz to ``identify any forward-looking'' risks
``that could impact performance;'' and ``inform itself'' of any
information necessary to discharge its duty to monitor, including
information about the actual options positions Allianz had constructed.
8. The Applicant represents that when equity markets sharply
declined in February and March of 2020, volatility spiked and the
options positions held within the Structured Alpha Strategy were
exposed to a heightened risk of loss. The Applicant represents that,
unbeknownst to the Committee, and in violation of Allianz's stated
investment strategy, Allianz abandoned the hedging strategy that was
the supposed cornerstone of the Structured Alpha Strategy, leaving the
portfolio almost entirely unhedged against a spike in market
volatility. As described in the Claims, although Allianz had
represented that it would buy hedges at strike prices ranging from 10%
to 25% below the market, the hedges it actually held at the end of
February 2020 were as much as 60% below the market.
The Applicant represents that, as of January 31, 2020, the Trust
had invested approximately $2,916,049,486 in the Structured Alpha
Strategy. Six weeks later, the Trust faced a margin call, which the
Applicant states left it no choice but to liquidate the investment. The
Trust was ultimately able to redeem only $646,762,678 of its
$2,916,049,486 investment, resulting in a total loss of $2,269,286,808.
Specifically, regarding the Plan's portion of the loss, as of
December 31, 2019, the market value of the Plan was $266,849,059. As of
March 31, 2020, the market value of the Plan's total assets decreased
to $90,420,304. The Applicant represents that the Plan's total losses
from the Allianz Structured Alpha Strategy were $187,271,581, which
caused the Plan to be underfunded.
9. On September 16, 2020, the Committee filed a cause of action in
the United States District Court for the Southern District of New York
(Case number 20-CIV-07606) against Allianz and Aon for Breach of
Fiduciary Duty under ERISA Section 404, Breach of Co-Fiduciary Duty
under ERISA Section 405, and violation of ERISA Section 406(b) for
managing the Plan assets in its self-interest and breach of contract.
It is possible that resolution of this claim and other legal actions
against Allianz and Aon in connection with the Plan's losses (the
Claims) could take an extended period of time.
10. The Applicant states that rather than wait for the Claims to be
resolved, HMSA took steps to protect Plan benefits and avoid onerous
benefit restrictions under Code section 436 that could apply to the
Plan as a result of a funding shortfall. Therefore, on November 3,
2020, HMSA and the Plan entered into a Contribution and Assignment
Agreement (the Contribution and Assignment Agreement) whereby HMSA
agreed to make a $50,000,000 Restorative Payment to the Plan.
Subsequently, on December 18, 2020, HMSA made a $50,000,000 Restorative
Payment to the Plan. This $50,000,000 payment is the Required
Restorative Payment Amount under this exemption.
11. In exchange for the Restorative Payment, the Plan assigned to
HMSA its right to retain certain litigation and/or settlement proceeds
recovered from the Claims (the Assigned Interests).\45\ Per the
assignment, once the Allianz/Aon litigation is resolved and if the Plan
receives litigation proceeds from the Claims, the Plan will transfer to
HMSA a repayment (the Repayment) that does not exceed the total
Restorative Payment made by HMSA as of that date, plus reasonable
attorney fees paid by HMSA on behalf of the Plan in connection with the
Claims, if such fees are reviewed and approved by a qualified
independent fiduciary who confirms that the fees were reasonably
incurred and paid by HMSA to unrelated third parties (the Attorney
Fees).
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\45\ Under the Contribution and Assignment Agreement, if the
Plan receives litigation or settlement proceeds from the Claims, the
proceeds would first flow to the Trust, and then each Plan's pro
rata portion of the proceeds would be deposited into the individual
trust funding that Plan.
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For the purposes of this exemption, Attorney Fees reimbursable to
HMSA do not include: (a) legal expenses paid by
[[Page 52143]]
the Plan; and (b) legal expenses paid by HMSA for representation of its
own interests or the interests of any party other than the Plan. For
purposes of determining the amount of Attorney Fees the Plan may
reimburse to HMSA under this exemption, the amount of reasonable
attorney fees paid by HMSA on behalf of the Plan in connection with the
Claims must be reduced by the amount of legal fees received by HMSA in
connection with the Claims from any non-Plan party (for example, from a
third party pursuant to a court award).
12. The Plan must ultimately receive at least the full value of the
promised Restorative Payment, minus the Attorney Fees. The Plan may
ultimately receive more than the Restorative Payment amount required
under the Contribution and Assignment Agreement. If the Plan receives
litigation or settlement proceeds that exceed the $50,000,000
Restorative Payment that HMSA made to the Plan, the Plan's Repayment to
HMSA will be limited to $50,000,000 plus Attorney Fees. For example, if
the Plan receives $80,000,000 in litigation proceeds and HMSA has
reasonably incurred $100,000 in Attorney Fees, the Plan will make a
Repayment to HMSA totaling $50,100,000.
13. Alternatively, if the Plan receives less litigation or
settlement proceeds than the $50,000,000 Restorative Payment that HMSA
made to the Plan, the Plan will transfer to HMSA the lesser amount of
litigation or settlement proceeds, plus Attorney Fees. For example, if
the Plan receives $30,000,000 in litigation proceeds and HMSA has
reasonably incurred $100,000 in Attorney Fees, the Plan will make a
Repayment to HMSA totaling $30,100,000.
14. The Department notes that if the Plan receives any restitution
that is tied to the conduct underlying the Claims but was ordered
pursuant to a proceeding or directive that is external to Case number
20-CIV-07606, the disposition of such proceeds must conform to the
requirements of this exemption.
15. HMSA retained Gallagher Fiduciary Advisors, LLC (Gallagher or
the Independent Fiduciary) of New York, New York, to serve as the
Plan's independent fiduciary with r
[…truncated; see source link]Indexed from Federal Register on August 24, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.