SEC Division of Investment Management staff letter: American Mutual Life Insurance — SEC — US

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June 13 i 1996

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: American Mutual Life Insurance Company (the "Company")

Incoming letter dated June 10, 1996

On the basis of the facts presented, but without necessarily

agreeing with your analysis, the Division will not recommend any

enforcement action to the Commission if: (1) pursuant to the

described reorganization (the "Reorganization") the membership

interests of existing policyholders in the Company become

membership interests in American Mutual Holding Company (the

"Holding Company"); and (2) after the Reorganization, new

policyholders automatically receive membership interests in the

Holding Company as the result of purchasing new Policies (as

defined in your letter.) from the Company,.. without registration of

these membership interests under the Securities Act of 1933 or

the Securities Exchange Act of 1934.

In arriving at this position, we have taken particular note

of your representations that: (1) the Reorganization will/be

undertaken in accordance with the referenced Iowa legislation

regarding the formation of mutual insurance holding companies

(the "Iowa Statute"); (2) the membership rights of the holders of

membership interests in the Holding Company will be substantially

the same as those they had as holders of. membership interests in

the Company, as required by the Iowa Statute ; (3) after the

Reorganization, holders of the Policies automatically will become

members of the Holding Company in accordance with the Iowa

. Statute and the Holding Company's articles of incorporation and

bylaws; (4) the Reorganization is subject to the approval of the

Iowa Co~missioner of Insurance after providing notice to

policyholders and conducting a public hearing at which

policyholders and other interested parties may appear and be

heard; (5) the approval referenced in (4), above, may be granted

only after a determination that the Reorganization is fair and

equitable to existing policy holders; (~) the Holding Company

will be subj ect to regulation by the Iówa Commissioner of

Insurance at a level equal to that of an Iowa domestic insurance

company (e.g., the Holding Company's ability to engage in.noninsurance related activities is limited to the same extent as an

Iowa domestic insurance company and the Holding Company may not.

American Mutual Life Insurance Company

Page Two

merge with, be acquired by or acquire another entity without

approval of the Iowa Insurance Commissioner and the Iowa Attorney

General); and (7) the Holding Company will not be permitted to

make any paYment of income, dividends, or any other distributions

of profits, except as directed or approved by the Iowa

Commissioner of Insurance or pursuant to a voluntary dissolution

or liquidation approved by the Iowa Commissioner of Insurance.

The Division of Investment Management has asked us to inform

you that, on the basis of the facts presented but without

necessarily agreeing with your legal analysis, it would not

recommend enforcement action to the Commission under the

Investment Company Act of 1940 (the "1940 Act") if the Holding

Company is operated in the manner you describe without

registration under the 1940 Act, in reliance upon your opinion as

counsel that the Holding Company is not an investment company

under Section 3 of the 1940 Act.

Because these positions are based on the representations

made to .the Divisions in your letter, it should be noted that any

different facts or conditions might require different conclusions. Moreover, this response represents the Divisions i posi tion on enforcement action only and does not express any legal conclusions on the questions presented.

Sincerely,
William H. Carter

vJ~ 4. ~
Special Counsel

SIDLEY & AUSTIN
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

ONE FIRST NATIONAL PLAZA

CHICAGO, ILLINOIS 60603
LOS ANGELES LONDON TELEPHONE 312: 853-7000

NEW YORK SINGAPORE
WASHINGTON, D,C. FACSIM 312: 853-7036 TELEX 25-4364

TOKYO
FOUNDED 1866

WRITER'S DIRECT ~UMBER June 10, 1996

1933 Act / § § 2 ( 1) ¡ 3 (a) (8) 1934 Act/ § 12 (g) 1940 Act / § § 2 (a) (17), ( 2 2), ( 3 6) ¡ 3(a)¡ 3(b)(1)¡ 3(c)(3) '.0 (:
(:i" '.. -T~ Office of Chief Counsel , ") Division of Corporation Finance ~-.:

.. " (?~ Securities and Exchange Commission

., ':- .-~ Washington, D.C. 20549 ,", ::'~ '=:
.'-. ... "".: -ÇJ ~... ~T": r- -:. , r-")Ci , Re: American Mutual Life Insurance Company ui . ,-~

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,
Dear Sir/Madam:

We are counsel to American Mutual Life Insurance

Company (the "Company"), an Iowa mutual insurance company, and a

proposed company to be known as American Mutual Holding Company

(the "Holding Company"). The Holding Company will be formed

under the laws of the State of Iowa. The Company is engaged in

the business of issuing policies of life and health insurance and annuity contracts ("Policies").
I. REOUEST:

We respectfully request that the Division of Corporate

Finance (the "Staff") advise us that no enforcement action will

be recommended by the Staff to the Securities and Exchange

Commission (the "Commission") if (i) the reorganization of the

Company and operation of the Holding Company is undertaken,

(ii) the membership interests of the policyholders in the Company

become membership interests of the Holding Company and (iii) the

policyholders receive membership interests in the Holding Company

automatically by operation of law as a result of purchasing

Policies from time to time without registration under the

, SlpLEY & AUSTIN CHICAGO
Office of Chief Counsel

Division of Corporation Finance

Securities Act of 1933 (the "1933 Act"), the Securities Exchange

Act of 1934 (the "1934 Act"), or the Investment Company Act of

194 0 (the " 1940 Act") .

II. STATEMENT OF FACTS:

A. Backqround

Driven by a variety of economic and regulatory factors,

change in the insurance industry has eroded profit margins and is

generating increased competition from all types of financial

institutions. Further, the marketplace is placing additional

emphasis on the financial strength of insurance companies as

measured and evaluated by rating agencies and other industry

observers. The maintenance of superior risk-based capital ratios

is increasingly important to companies and their customers, and

the need to make large capital investments in technology and

automated processes is growing. Moreover, the critical mass

necessary to remain competi ti ve continues to increase as both the

insurance and banking industries consolidate. These and other

factors have made it necessary for insurance companies to seek

additional capital to enhance their financial strength and

flexibility and to support long term growth through creative

internal strategies and mergers and acquisitions, both of which

are essential elements for future survival in the insurance industry as it presently exists. i Raising capital poses monumental difficulties for

mutual companies, however, because they are constrained by their organizational form. Except for surplus notes (a type of subordinated debt security), which are subject to restrictions

and are not feasible for all but the very largest mutual

companies, a mutual's ability to raise capital is limited to

internally generating funds.

Recognizing the capital-raising difficulties faced by

mutual insurers and the present competi ti ve state of the

insurance industry, the Iowa legislature in 1995 amended Iowa's

insurance law to permit mutual insurance companies to reorganize

See Robert stein, Industry Faces Roadblocks in Profitable

Search, National Underwriter (Jan. 22, 1996) ¡ Lucy Barnes

McDowell, The Future of the Industry: A Rating Company

Perspective, Resource (Nov. 1995) ¡ Moody's Investors Services,

Research Report on the Life Insurance Industry (Sept. 1995).

, ,SIDLEY & AUSTIN CHICAGO
Off ice of Chief Counsel

Division of Corporation Finance

Securi ties and Exchange Commission

into a mutual insurance holding company structure. The

legislation provides a potentially significant alternative

structure to help strengthen the Iowa mutual insurance industry.

The legislation was recommended by the Iowa Insurance Development

Board (whose membership includes the Iowa Director of Economic

Development) and was supported by the Iowa Commissioner of

Insurance, who presented the proposed legislation in the Iowa

Senate Commerce Committee.

The legislation permits an Iowa mutual insurer to

reorganize into two separate entities -- a mutual insurance

holding company and a stock life insurance company (which would

be a subsidiary of the holding company). As recognized by

various observers of the mutual insurance industry, the

legislation offers at least two significant advantages. First,

such a structure would enable the mutual insurance holding

company to raise equity capital on the basis of the subsidiary

stock life company's assets and prior earnings history, as

opposed to a structure requiring it to raise capital using a new,

start-up sUbsidiary which would lack the financial size and

history to raise significant amounts of equity capital. In

addition, such a structure would facilitate potential

acquisitions by the issuance of stock to consummate acquisitions

of stock companies, while at the same time maintaining the

ability to effect mergers with mutual insurance companies.

The Iowa mutual insurance holding company law was

patterned after legislation passed by Congress in 1987

authorizing savings associations operating in mutual form to

reorganize so as to become a mutual holding company which owns a

stock savings association. See 12 U.S.C.A. § 1467a(o) (West 1989

& Supp. 1995) ¡ 12 C. F. R. Part 575 (1995). The charter of a

mutual holding company formed to own a stock savings association

must confer upon existing and future depositors of the resulting

stock association the same membership rights in the mutual

holding company as was conferred upon the depositors by the

charter of the reorganizing association in the mutual form as in

effect immediately prior to the reorganization. 12 C. F .R. §

575.5 (1995). At least twelve states have also adopted

legislation authorizing mutual holding companies to own stock

savings associations. To the Company's knowledge, there have

been at least 40 reorganizations by savings institutions into the

mutual holding company form since 1988.

At present, the Company is organized and operates as a

mutual life insurance company. Every policyowner has rights both

as an insured and as a member of the Company. As an insured, a

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel

Division of Corporation Finance

policyowner is entitled to insurance coverage or annuity benefits

to the extent and in the amount specified in the insured's

Policy. In addition to a policyowner's right as insured, each

policyowner has a membership interest which consists of the right

to vote as provided in the Company's articles of incorporation

and bylaws and such other rights as are provided by law. The

Company proposes to reorganize in a manner similar to the

reorganizations in which savings associations in mutual form are

reorganized into mutual holding companies owning stock savings

associations with the membership interests being held in the

mutual holding company. In such reorganization, a mutual insurance holding company would be formed which would own a stock

life insurance company.

As is customary for a mutual insurance company, the

Company has no authority to issue shares of capital stock and has

no access to market sources of equity capital. Only by

generating and retaining earnings from year-to-year business

operations is the Company able to increase its surplus position.

The principal purpose of the Company's reorganization

is to enhance the Company's strategic and financial flexibility

by creating, among other things, an opportunity for obtaining

additional capital from sources currently unavailable to it as a

mutual insurance company and by creating a corporate structure

which will facilitate mergers and acquisitions. At present, the

Company can increase its capital primarily through retained

surplus contributed by its business. However, the Company

believes that this source of capital will not be sufficient on a

long-term basis to achieve the growth required to execute its

strategic plan successfully. Upon reorganization, the Company

will have a corporate structure potentially enabling it to access

capital markets through the sale of a portion of the capital

stock of a stock 1 if e insurance company. In addition, such a structure will facilitate potential acquisitions by the issuance

of stock to consummate acquisitions of stock companies, while at

the same time maintaining the ability to effect mergers with

mutual insurance companies.

B. Iowa Leqislation

In 1995, the Iowa Legislature enacted Iowa Code

§ 521A. 14, which enables a domestic mutual insurance company (the

"Mutual Company") to reorganize into a mutual insurance holding

SIDLEY & AUSTIN CHICAGO
Office of Chief Counsel

company structure. Iowa Code § 521A.14 (1) (a) (supp. 1995).2 Reorganization under this statute is accomplished by:

(1) reorganizing a Mutual Company into two separate entities, a

mutual insurance holding company and a stock life insurance

company, and (2) separating the membership interests and

contractual rights of Mutual Company policyholders. The Mutual

Company's policyholders' membership interests are transferred to

the holding company, while their contractual rights remain at the

Mutual Company, which converts into a stock life insurance

company as a wholly owned stock subsidiary (the "Stock Life

Company") of the holding company. § 521A.14(2) (a). Holders of

insurance policies of the Stock Life Company, through their

status as policyholders, automatically become members of the

holding company in accordance with the Iowa Code and the holding company's articles of incorporation and bylaws. § 521A.14 (1) (b) . Membership interests in a mutual insurance holding company are

not securities under Iowa law. § 521A. 14 (6) .
All of the Stock Life Company's initial shares of

capi tal stock must be issued to the holding company.

§ 521A. 14 (1) (b). Moreover, the holding company must at all times own, directly or indirectly through one or more intermediate

holding companies, a majority of the voting shares of the capital

stock of the Stock Life Company. 3 Id. ¡ see also 1996 Amended

Code § 521A.14 (7) (any transfer or pledge of a majority interest

2 section 521A.14 was amended in April of 1996. See Iowa

General Assembly Act, House File 2363, Acts of 1996 Regular

Session of the General Assembly of the State of Iowa ("1996

Amended Code ") .
3 The phrase "majority of the voting shares of the capital

stock of the reorganized insurance company" is defined under the

statute to mean the shares of the capital stock of the

reorganized insurance company subsidiary which carry the right to

cast a majority of the votes entitled to be cast by all of the

outstanding shares of the capital stock of the reorganized

insurance company subsidiary for the election of directors and on

all other matters submitted to a vote of the shareholders of the

reorganized insurance company subsidiary. See 1996 Amended Code

§ 521A. 14 (7) .
An intermediate holding company subsidiary of a mutual

insurance holding company is subject to the jurisdiction of the

Iowa Commissioner as if it were a mutual insurance holding

company. 1996 Amended Code § 521A.14 (7) .

SIDLEY & AUSTIN CHICAGO

Off ice of Chief Counsel

Division of Corporation Finance
Securi ties and Exchange Commission

shall be deemed void to extent necessary for the holding company

to maintain unencumbered majority control). A holding company

may own a majority of the voting shares of more than one stock

insurance company.

Any reorganization undertaken pursuant to § 521A.14 is

subject to the approval of the Iowa Commissioner of Insurance

(the "Iowa Commissioner"). Before approving a reorganization, the Iowa Commissioner must provide notice and conduct a pUblic

hearing at which policyowners and other interested parties may

appear and be heard. If satisfied that the proposed

reorganization is fair and equitable to existing policyholders

and that their interests are properly protected, the Iowa

Commissioner may approve the reorganization. § 521A.14 (2) (a) . The Iowa Commissioner may also require, as a condition for

approval, modifications to a proposed plan as the Iowa

Commissioner finds necessary for the protection of the

policyholders' interests. Id. The Iowa Commissioner retains

jurisdiction at all times over any mutual insurance holding

company to assure that policyholders' interests are protected.

Id . Additionally, a holding company's articles of incorporation

and any amendments to such articles are subj ect to approval by

the Iowa Commissioner and the Iowa Attorney General in the same

manner as those of a domestic insurance company. § 521A. 14 (3). A mutual insurance holding company cannot dissolve or

liquidate without the approval of the Iowa Commissioner or as

ordered by a court. § 521A. 14 (4) . In the unlikely event of a

voluntary dissolution, the articles of incorporation provide that

at the time of such dissolution any surplus which remains after

paYment of the liabilities shall be distributed to the members in

a manner as determined by the holding company's board of

directors and as approved by the Iowa Commissioner.

Section 521A. 14 (4) of the Iowa Code provides that the

~utual insurance holding company is automatically a party in any

proceeding commenced against the stock Life Company under Chapter

507C of the Iowa Code for the purpose of liquidating,

rehabilitating, conserving or otherwise reorganizing the stock

Life Company. section 521A. 14 (4) further provides that the

assets of the mutual insurance holding company are available to

satisfy the claims of Stock Life Company's policyowners.

An initial public offering of stock by the holding

company's reorganized stock insurance subsidiary or an

intermediate insurance holding company would require the prior

SIDLEY & AUSTIN CHICAGO

Off ice of Chief Counsel
Division of Corporation Finance approval of the Iowa Commissioner. See Iowa Administrative Code § 46.1(3). Pursuant to Chapter 508B of the Iowa Code, a mutual

insurance holding company can be demutualized in the same manner

as a mutual life insurance company and must be similarly approved

by the Iowa Commissioner. In the event a plan of conversion were

to be adopted and approved in the future, section 508B.3 of the

Iowa Code permits various methods of conversion, each of which is

subj ect to approval by the Iowa Commissioner. The Company has no

plans to convert or demutualize the Holding Company.

A mutual insurance holding company is subject to regulation at a level equal to that of an Iowa domestic insurance company. A mutual insurance holding company is governed by the following statutory and regulatory requirements, which are identical to, or which parallel, the regulatory requirements imposed upon domestic insurance companies:
( i) the Iowa Commissioner retains jurisdiction at all times over a mutual insurance holding company to assure that policyholders' interests are protected; Iowa Code § 5 21A. 14 (2 ) (a) ; ( ii) a mutual insurance holding company's articles of incorporation and any amendments to such articles are subject to approval by the Iowa Commissioner and the Iowa Attorney General in the same manner as those of a domestic insurance company; Iowa Code § 521A.14 (3); ( iii) a mutual insurance holding company is deemed to be an insurer subj ect to the Iowa Insurer Supervision, Rehabilitation and Liquidation Act, Iowa Code Chapter 507C, in the same manner as domestic insurance companies; Iowa Code § 521A.14(4); (iv) a mutual insurance holding company is subject to the provisions of the Iowa Insurance Holding Company Systems Act to the same extent as domestic insurance companies; accordingly, its ability to engage in noninsurance related activities through its subsidiaries is limited to the same extent as a domestic insurance company; see Iowa Code,

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel
Division of Corporation Finance
Secur i ties and Exchange commission

(v)
(vi)
(vii)
(viii)
(ix)
Chapter 521A. 2; Iowa Administrative Code §

46.6(1) ; a mutual insurance holding company's assets

are available to satisfy claims of

policyholders in a liquidation in the same

manner as a domestic insurance company; Iowa

Code § 521A. 14 (4) ; a mutual insurance holding company may not

merge with, be acquired by or acquire another

entity without approval of the Iowa

Commissioner in accordance with Chapter 521

of the Iowa Code (relating to Consolidation

and Reinsurance) and Chapter 521A of the Iowa

Code (the Insurance Holding Company Systems

Act); see Iowa Code §§ 521.5 and 521A.3; in

addi tion, in the case of a merger or

consolidation, separate approval by the Iowa

Attorney General is required; Iowa Code

§ 521.5;

a mutual insurance holding company is

required to provide to the Iowa Division of

Insurance an annual report containing

historical and prospective information,

including financial statements, an investment

plan covering all assets, any intention it

has of borrowing money and information

regarding any "closed block" formed as part

of a reorganization; see Iowa Administrative

Code § 46. 6 ( 4) ; the majority of the voting shares of the

capital stock of the reorganized insurance

company subsidiary (which is required at all

times to be owned, directly or indirectly, by

the mutual insurance holding company) may not

be conveyed, transferred, assigned, pledged,

subjected to a security interest or lien,

encumbered, or otherwise hypothecated or

alienated by the mutual insurance holding

company or any intermediate holding company;

see 1996 Amended Code § 521A. 14 (7); and any conveyance, transfer, assignment, pledge,

security interest, lien, encumbrance or

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel

Division of Corporation Finance

hypothecation or alienation by a mutual

insurance holding company or any intermediate

holding company, in or on the majority of the

voting shares of the reorganized insurance

company shall be deemed void in inverse

chronological order of the date of such

transaction to the extent necessary to give

the mutual insurance holding company

'unencumbered direct or indirect ownership of

a majority of such voting shares¡ see 1996

Amended Code § 521A.14 (7) .
c. ProDosed Reorqanization

Pursuant to § 521A.14, the Company has prepared a Plan

of Reorganization (the "Plan") pursuant to which it intends to

reorganize into a mutual insurance holding company (the

"Reorganization"). Upon consummation of the Plan (the "Effective

Time"), the Company would concurrently restate its Articles of

Incorporation to become a stock life insurance company and would

change its corporate name. At the Effective Time, the membership

interests and the contractual rights of the Company's

policyholders would be separated. The membership interests of

the policyholders in the Company would become membership

interests in the Holding Company. The contractual rights would

remain with the Stock Life Company, which would become a wholly

owned stock subsidiary of the Holding Company. 4

At the Effective Time, each member's membership

interest in the Holding Company would follow and not be severable

from the Policy by virtue of which the member's membership in the

Holding Company is derived. The Company does not intend to issue

certificates evidencing the membership interests in the HOlding

4 A hearing was held on the Reorganization on November 21,

1995 and the Plan was subsequently approved by the Iowa

Commissioner on December 13, 1996. The Plan was approved by the

Company's policyowners at a special meeting which was held on

November 28, 1995. Each policyowner of record as of September

30, 1995 was entitled to cast one vote at the special meeting,

irrespective of the number of Policies owned by such policyowners

as of such date. Prior to the special meeting, the Company

distributed to each voting policyowner a copy of the Plan,

together with a "Policyowner Information Statement" setting forth

the terms and conditions of the Plan and background information

relating to the Reorganization.

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel

Division of Corporation Finance

Company nor does Iowa law require such issuance. Rather, a list

of members will be kept on the books and records of the Holding

Company.
Membership interests in the Holding Company are not

transferable or alienable in any manner whatsoever except if

ownership of the insurance policy itself is transferred.

Moreover, upon lapse or termination of the Policy by virtue of

which the member's membership in the Holding Company is derived,

the member's membership in the Holding Company shall

automatically terminate and cease and the member shall not be

enti tled to receive any distribution or compensation from the

Holding Company for the member's membership in the Holding

Company. In other words, all membership interests would remain

in force only so long as the individual remained a policyholder

of the Stock Life Company. When the stock Life Company sells

additional Policies, the holders of designated Policies which

satisfy certain requirements automatically by operation of law

would acquire membership interests in the Holding Company,

effecti ve as of the second anniversary of the consummation of the

Reorganization.
Members are entitled to vote in the election of

directors of the Holding Company and to vote on such other

matters as are presented to them from time to time by the HOlding

Company's board of directors. In addition, in the event that any

of the following actions has not been approved by a resolution

duly adopted by the Holding Company's board of directors, the

affirmative vote of at least seventy-five percent (75%) of the

members is required to approve: (i) the sale, lease or exchange

of all or a substantial part of the assets of the Holding

Company¡ (ii) the distribution of all or any part of the surplus

of the Holding Company ¡ (iii) the dissolution or liquidation of

the Holding Company¡ (iv) the acquisition, merger or

consolidation of the Holding Company, or any similar proposal ¡

(v) the demutualization of the Holding Company ¡ and

(vi) amendments to the articles of incorporation of the HOlding

Company. The board of directors of the HOlding Company may, in

its sole discretion, determine whether (and when) any of the

actions set forth in (i) - (vi) above, which has not been

approved by a resolution duly adopted by the board of directors,

irrespective of how or by whom the proposition was initiated,

will be submitted to the members. Votes would be cast by ballot

which would be distributed to voting policyowners at least twenty

days prior to the meeting at which such vote is to be taken.

Each member would be entitled to only one vote , irrespective of

SIDLEY & AUSTIN CHICAGO
Off ice of Chief Counsel

Securi ties and Exchange Commission

the number of policies owned by such member. Votes may not be

cast by proxy.

The HOlding Company would at all times, directly or

indirectly through one or more intermediate holding companies,

control the stock Life Company by owning at least a majority of

the voting shares of the stock Life Company. The Holding

Company, as a mutual insurance holding company, would not have

any capital stock.

Pursuant to the Reorganization, the Holding Company

will receive all of the initial shares of the stock Life

Company's capital stock. Under its proposed Articles of

Incorporation, the Holding Company will be prohibited from

selling, transferring, or otherwise alienating, subjecting to a

lien, mortgaging, granting a security interest in, using as

collateral or hypothecating in any manner a majority of the

voting shares of the stock Life Company. 5 See also 1996 Amended

Code § 521A. 14 (7) (prohibiting same).

The Holding Company will not be permitted to make any

paYment of income, dividends contingent upon an apportionment of

profits, or any other distributions or profits, except to the

limited extent provided in section 7.3 of the Holding Company's

Articles of Incorporation or as otherwise directed or approved by

the Commissioner of Insurance of the state of Iowa. 6 The Company

has no intention of causing the Holding Company to pay dividends

or other distr ibutions to its members.

5 By statute, any conveyance, transfer, assignment, pledge,

security interest, lien, encumbrance or hypothecation or

alienation by a mutual insurance holding company or one of its

affiliates of, in or on the majority of the voting shares of the

reorganized insurance company will be deemed void in inverse

chronological order of the date of such transaction to the extent

necessary to give the mutual insurance holding company

unencumbered direct or indirect ownership of a majority of such

voting shares. See 1996 Amended Code § 521A.14 (7) .

6 section 7.3 of the Holding Company's Articles of

Incorporation provides that in the event of a voluntary

dissolution or liquidation, any surplus which remains after

paYment of the Holding company's liabilities shall be distributed

to the members in a manner as determined by the HOlding Company's

board of directors and as approved by the Commissioner of

Insurance of the State of Iowa.

SIDLEY & AUSTIN CHICAGO

Off ice of Chief Counsel

Division of Corporation Finance

Accordingly, as is the case for mutual holding

companies in the savings and loan context, it is intended that

the Holding Company will reinvest earnings in the Holding Company

or in the stock Life Company or other subsidiaries. The Board of

Directors of the Holding Company may, in its sole discretion,

from time to time waive receipt by the Holding Company of any or

all dividends, or any part thereof, from stock Life Company upon

the condition that the amount of any dividends waived be held by

the Stock Life Company for the sole benefit of those

policyholders who are members.

Under its proposed Articles of Incorporation, the

Holding Company shall have the power to conduct any lawful

business and shall have perpetual existence unless sooner dissol ved as provided by law. Each person who is the owner of a Policy issued or assumed by the Company which is in force at the

time of the reorganization shall automatically become a member of

the Holding Company by operation of law so long as such Policy

remains in force. Each person who becomes the owner of a

designated Policy issued by the stock Life Company after the

Reorganization shall become a member of the Holding Company and

have a membership interest in the Holding Company by operation of law so long as the Policy remains in force. After the Reorganization, merger and acquisition

acti vi ty of the Holding Company would be subj ect to regulation at

a level which is at least equal to the level of regulation which

is currently imposed on the Company. The Holding Company would

be permitted to acquire another company only if the business of

such company was reasonably ancillary to the insurance business.

§ 521A.2. A proposed merger or acquisition would be subject to prior approval by the Iowa Commissioner, the Board of Directors

of the Holding Company and, in certain cases, by the members. In

addition, a proposed merger or consolidation would be subject to

prior approval by the Iowa Attorney General. § 521.5.

In accordance with Iowa law, the Holding Company would

at all times be subject to the jurisdiction and oversight of the

Iowa Commissioner. § 521A.14.

SIDLEY & AUSTIN CHICAGO
Office of Chief Counsel

Division of Corporation Finance

III. DISCUSSION:

A. Reqistration Pursuant to the Securities Act of 1933 Based upon the foregoing facts and the analysis set

forth herein, it is our opinion that the membership interests

created from time to time in the Holding Company and the

insurance policies to be offered by and through the Stock Life

Company would not constitute the offer or sale of a "security" as

that term is defined in the 1933 Act.

section 2 (1) of the 1933 Act, as amended, defines a

"security" as including:

any note, stock, treasury stock, bond, debenture,

evidence of indebtedness, certificate of interest or

participation in any profit-sharing agreement,

collateral-trust certificate, preorganization

certificate or subscription, transferable share,

investment contract, voting-trust certificate,

certificate of deposit for a security, fractional

undivided interest in oil, gas, or other mineral

rights, . . . or, in general, any interest or

instrument commonly known as a 'security,' or any

certificate of interest or participation in, temporary

or interim certificate for, receipt for, guarantee of,

or warrant or right to subscr ibe to or purchase, any of

the foregoing.

15 U.S.C.A. § 77b(1) (West 1981 & Supp. 1995).

The Insurance Policies are not Securities

The Stock Life Company will offer various types of

insurance including life or health insurance and annuities.

Insurance policies, including those offered by stock insurance

companies such as the Stock Life Company, are not considered

securities. Congress explicitly stated this in the 1933 Act.

section 3 (a) (8) of the 1933 Act exempts insurance policies, from
the registration requirements of the 1933 Act if the policies are

"issued . . . subj ect to the supervision of the insurance

commissioner . . . of any state . . . of the United States . . .

." 15 U.S.C.A. § 77c(8) (West 1981 & Supp. 1995). As the facts

indicate, the Holding Company and the Stock Life Company would be

subject to the supervision of the Iowa Commissioner. This

exemption, by its terms, applies to all insurance policies issued

by stock companies, mutual companies, and, as in the instant

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel

Securities and Exchange commission'

case, both insurance by and membership in a mutual insurance

holding company.

The fact that the policyholders are members of the

Holding Company while their insurance policies are written by the

Stock Life Company does not appear to be pertinent. The House

Report on the 1933 Act states that the purpose of the exemption in section 3 (a) (8) "makes clear what is already implied in the act, namely, that insurance policies are not to be regarded as

securities subject to the provisions of the act." H.R. Rep. No.

85, 73rd Cong., 1st Sess. 15 (1933), cited in SEC v. Variable

Life Ins. Co. of Am., 359 U.S. 65, 74 n.4 (1959) (Brennan, J.,

concurring) . Professor Louis Loss, who testified on behalf of

the Commission before the Subcommittee of the Senate Committee on

Banking and Currency concerning the scope of section 3 (a) (8) stated that, in effect, the exemption is "supererogation." S.

Rep. No. 2408, 81st Cong., 2d Sess. 33 (1950). Cf. Tcherepnin v.

Kniqht, 389 U.S. 332, 342 n.30 (1967) (referring to the exemption

as "clearly supererogation").

certain types of insurance products that offer the

prospect of a variable investment return tied to a separate

investment account, such as var iable annuities, may constitute

securities. See SEC v. united Benefit Life Ins. Co., 387 U.S.

202 (1967) ¡ Variable Life Ins. Co. of Am., 359 U.S. 65 (1959).

Thus, where the prospect of a variable investment return is

significant and the policyholder assumes the investment risk, a

security is involved. See 387 U.S. at 210-11¡ 359 U.S. at 71.

However, in this case, conventional insurance would be purchased

through the Stock Life Company and, as a result, a policyholder

by operation of law would become a Holding Company member. This

arrangement for the sale of conventional insurance is not within

the legislative intent of the definition of a security.

Accordingly, the policies available from the Stock Life Company

would constitute "insurance," not "securities," as those terms

are commonly understood.

2 . The MembershiD Interests are not Securities

The definition of a security in section 2 (1) of the 1933 Act includes both interests whose names have commonly accepted meanings, such as any note, stock, bond or debenture, as well as interests of "more variable character (that) were necessarily designated by more descriptive terms." SEC v. C.M. Joiner Leasinq Corp., 320 U.S. 344, 351 (1943). The term "membership interest" is not enumerated as a traditional class of secur i ty in section 2 ( 1). However, certain non-traditional

SIDLEY & AUSTIN CHICAGO
Office of Chief Counsei

Division of Corporation Finance

equity interests or participations have been found to be

securities by virtue of being "investment contracts," a term listed in Section 2 (1) . Investment contracts have come to be interpreted as the

general or catch-all classification of interest which in

substance, if not form, are intended to be included within the

congressional definition of the term "security" and, thus,

subject to regulation. Accordingly, the question of whether a

membership interest in the Holding Company is a security under

the 1993 Act turns on whether such an interest constitutes an

investment contract.
In Joiner Leasinq, the Supreme Court indicated that the

substance of a transaction would control whether a particular

interest is a security, and not the particular form or name of

such interest. 344 U. S. at 352-53. Following the general

approach established in Joiner Leasinq, the Supreme Court

articulated the criteria necessary for determining the existence

of an investment contract in SEC v. W. J. Howey Co., 328 U. S. 293

(1946). The Howey test focuses on the economic realities of a

transaction. See,~, Tcherepnin v. Kniqht, 389 U. S. at 336

(stating in interpreting the term "security" "form should be

disregarded for substance and the emphasis should be on economic

reality") (citing Howey, 328 U. S. at 298)). An interest

constitutes an investment contract when it: (1) involves an

investment of money, (2) in a common enterprise, (3) with profits

to come solely from the efforts of others. Howey, 328 U.S. at

Although the Supreme Court defined only an investment

contract in Howey, it subsequently stated that the economic

realities test "embodies the essential attributes that run

through all of the Court's decisions defining a security."

united Housinq Foundation. Inc. v. Forman, 421 U.S. 837, 852

(1975); see also Landreth Timber Co. v. Landreth, 471 U.S. 681,

691 n.5 (1985) (stating that "investment contracts" and an

"instrument commonly known as a security" are properly analyzed

by applying the Howey test) ¡ Marine Bank v. Weaver, 455 U.S. 551,

559 (1982) (holding that a certificate of deposit is not a

security) .
The membership interests in the Holding Company resul ting from the Reorganization (or created by operation of law in the future as new insurance policies are issued) do not meet

the first and third criteria for "investment contracts"

established in Howey.

SIDLEY & AUSTIN CHICAGO
Off ice of Chief Counsel

The first criterion is that there be an investment of

money. The proposed Reorganization does not require current

Company policyholders or future Stock Life Company policyholders

to pay cash or any other property to acquire their membership

interests in the Holding Company. The membership interests would

come with the Policies previously written by the Company or to be

written in the future by the Stock Life Company by operation of

law and would at the time of the issuance of the Policies have no

value separate and apart from the insurance policies. Any monies

paid by current Company or future Stock Life Company

policyholders would be in the form of premiums paid to the

Company or Stock Life Company with the intent to obtain

insurance, and not with any profit-making, profit-sharing or

investment intent with respect to membership in the Holding 7 Additionally, the membership interests will not be Company. marketed as investments. Selling efforts will focus exclusively

on explaining to Company policyholders the insurance programs to

be offered through the Stock Life Company.

Moreover, current and prospective members must be

qualified and accepted as insureds by the stock Life Company.

Such qualification is an independent requirement that must be

satisfied on the basis of objective underwriting criteria.

Because the membership interests in the Holding Company are nontransferable under the Holding Company's Articles of

Incorporation, there is no basis for the current or prospective

members to regard the membership interests as investments.

The third criterion of Howey is that the members have

an expectation of profits to come from the efforts of others.

The Supreme Court has defined "profits" as: (1) capital

appreciation resulting from the development of the initial

investment, or (2) participation in earnings resulting from the

use of investor funds. Forman, 421 U.S. at 852. In such cases,

because an investor is '" attracted solely by the prospects of a

return on their investment,'" the securities laws are applicable.

Id. (citing Howev, 328 U.S. at 300). By contrast, "when a

purchaser is motivated by a desire to use or consume the item

purchased. . . the securities laws do not apply." Id. at 852 53. 7 If the Stock Life Company were' to offer variable annuities,

such insurance products would be registered with the Commission

in the same manner as other variable annuity contracts.

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel
Secur i ties and Exchange Commission

There is no expectation of prof it with respect to the

Holding Company membership interests. The membership interests,

in and of themselves, give the member nothing except limited

voting rights and such other rights as may be provided under Iowa

law. Membership in the Holding Company is an automatic result of

obtaining insurance coverage through the stock Life Company.

Accordingly, the membership interests are not securities because

the economic reality of becoming a HOlding Company member is that

policyholders part with their money not for the purpose of

reaping profits from the efforts of others, but for the purpose

of purchasing insurance, a commodity for personal consumption.

See Forman, 421 U.S. at 858.

As the above facts indicate, the Holding Company will

not be permitted to make any direct payment of income, dividends

contingent upon an apportionment of profits, or any other

distributions of profits to a member with respect to any Holding

Company membership interest, other than as directed or approved

by the Iowa Commissioner. Addi tionally, because the membership

interests are non-transferable independent of the related Policy

and remain in force only so long as the member remains a

policyholder in the Stock Life Company, there is no potential for

realization of a profit by transferring the membership interest

to a third party.

Finally, the Supreme Court's most recent opinion on the

subject of what constitutes a "note" under federal securities

laws is also instructive on whether the Membership Interests are

securities. See Reves v. Ernst & Younq, 494 U.S. 56 (1990). The

Court in Reves considered whether promissory notes issued by a

farmers' cooperative constituted "notes" under the 1934 Act's

definition of security.8 Id. at 58¡ see also 1934 Act,

8 The Court in Reves adopted the Second Circuit's "family

resemblance" test for analyzing whether a note is within the

definition of "security." Reves, at 64-65¡ see also Exchanqe

Nat'l Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1137

(2d Cir. 1976). Under the family resemblance test, a note is not

a security if it bears a resemblance to notes which have been

previously designated by courts as not constituting securities.

See Exchanqe Nat'l Bank, at 1138. The Court in Reves refined the

Second Circuit's family resemblance analysis by adding the

requirement that any resemblance between the interest in question

and the list of pre-approved non-securities must be based upon an

analysis of factors which are tradi tionaiiy considered in

determining whether a security exists. Reves, at 66-67.

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Division of Corporation Finance

§ 3 (a) (10) (defining security). In so doing, the Court analyzed

the notes using four factors which, the Court stated, were "the

same factors which this Court has held apply in deciding whether

a transaction involves a security." Id. at 66.

First, the transaction in which the interest was

received must be reviewed to determine the motivations which

would prompt a reasonable seller and buyer to enter into it.

Reves, at 66. "If the seller's purpose is to raise money for the

general use of a business enterprise or to finance substantial

investments and the buyer is interested primarily in the profit

the note is expected to generate, the instrument is likely to be

a 'security'." Id.
Second, the "plan of distribution" must be examined to

determine "whether it is an instrument in which there is ' common

trading for speculation or investment ....'... Id. at 66.

Third, the Court in Reves noted that the "reasonable

expectations of the investing public" with respect to the

interest should be examined. Id. at 66. In this regard, the

Court noted that the marketing efforts employed in selling an

alleged security are relevant to the expectations of the general

public. Id. at 69 (noting that ..the advertisements for the notes

here characterized them as 'investments' ... and there were no

countervailing factors that would have led a reasonable person to

question this characterization").

Fourth, the Court stressed the significance of the

existence of an al ternati ve regulatory scheme which might reduce

the risks associated with the interest alleged to constitute a

security. See Id. at 67 (" (T)he existence of another regulatory

scheme" may "significantly reduce the risk of the instrument,

thereby rendering application of the Securities Act

unnecessary.") ¡ see also Marine Bank v. Weaver, 455 U. S. 551, 557-559 (1982). Under the four criteria for a "security" enunciated by

the Supreme Court in Reves, the membership interests in the

Holding Company would not constitute securities. First, as

discussed above, a reasonable buyer would not purchase a Policy

with an expectation of receiving a profit on account of the

related membership interest. Second, the membership interests

cannot be freely traded or transferred apart from the Policy to

SIDLEY & AUSTIN CHICAGO
Off ice of Chief Counsel

Division of Corporation Finance

which they relate.9 Third, a more reasonable characterization of

the membership interests is that they are an inseparable part of

the related insurance policies, which traditionally are not

regarded as securities.10 Such a characterization is warranted

for a number of reasons, including that the membership interests

will not be marketed to the general public as interests which

would give rise to a profit expectancy, no certificates will be

issued in respect of them and, under Iowa law, the Membership

Interests are not recognized as securities. See § 521A.14 (6)

(membership interests in a mutual insurance holding company are not securities). Finally, since the HOlding Company is subject to

extensive regulation by the Iowa Commissioner the fourth Reves

factor also suggests that the membership interests in the mutual

insurance holding company would not constitute secur i ties. The

articles of incorporation of, the Holding Company must be approved

in writing by both the Iowa Commissioner and the Attorney General

of Iowa "in the same manner as those of an insurance company."

§ 521A. 14 (3). The Iowa Commissioner was required by law to hold

a public hearing at which policyholders and other interested

parties were permitted to attend and be heard. The Iowa

Commissioner was also required to satisfy itself that the

interests of the policyholders will be properly protected after

9 See also United Housina Foundation. Inc.. v. Forman, 421 U.S.

837, 851-52 (1975) (traditional characteristic of a security is negotiability) .

10 In this regard, the entire transaction giving rise to the

interest must be examined. In determining that interests in a

non-contributory pension plan were not securities, the Supreme

Court stated in Teamsters v. Daniel, 439 u. S. 551, 589-560

( 1979), tha t :
In every decision of this Court recognizing the

presence of a security under the Securities Acts, the

person found to have been an investor chose to ai ve up a specific consideration in return for a separable

financial interest with the characteristics of a

securi tv.

Id. (emphasis supplied). See also Variable Annuitv Life Ins.

Co., supra (premium paid for variable-annuity contract related in

substantial part to the investment feature).

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Office of Chief Counsel

Division of Corporation Finance

the Reorganization and that the terms and conditions of the Plan

are fair and equitable to the policyholders.

After the Effective Time, the Iowa Commissioner would

retain jurisdiction over the Holding Company pursuant to Iowa

Code § 521A. 14 (1) (a). In addition, the HOlding Company would be

subj ect to the Insurance HOlding Company Systems Act and the

following additional regulatory requirements:

( i) it will be deemed to be an insurer subject to
Chapter 507C of the Iowa Code, and would
automatically be a party to any liquidation or reorganization proceeding involving the Stock Life Company; ( ii) in a proceeding under Chapter 507C, its assets would be deemed to be assets of the estate of the Stock Life Company for purposes of satisfying claims of the stock Life Company's policyholders; (iii) it may not dissolve or liquidate without the approval of the Iowa Commissioner or as ordered by a court pursuant to Chapter 507C of the Iowa Code; (iv) the Iowa Commissioner may issue orders to rehabilitate or liquidate it in the same fashion as Iowa domestic insurance companies; (v) it may not cause an initial public offering of any stock of the Stock Life Company to be made without prior approval by the Iowa Commissioner; (vi) it may not merge with, be acquired by or acquire another entity without approval by the Iowa Commissioner (and in the case of mergers or consolidations, approval by the Iowa Attorney General); (vii) it would be required to provide to the Iowa Division of Insurance an annual report containing histor ical and prospective information, including financial statements, an investment plan covering all assets, any intention it has of borrowing and information

SIDLEY & AUSTIN CHICAGO
Office of Chief Counsel

Division of Corporation Finance

Secur i ties and Exchange Commission

regarding any "closed block" formed as part

of a reorganization; and

(viii) it would be prohibited from transferring, encumbering or otherwise alienating a majority of its direct or indirect interest in the stock Life Company. Based upon the foregoing, it is evident that membership

interests in the Holding Company are not "securities" under
section 2 (1) of the 1933 Act. Thus, we believe that under the
circumstances described herein, it would be appropriate for the

Staff to take a position similar to that taken in several past

No-action letters issued by the Staff including: Construction

Trades Purchasinq Group (publicly available October 1, 1993);

Subway Owners' Mutual Insurance Company (publicly available

September 28, 1992); National Transport Assurance Alliance. Inc.

(publicly available February 22, 1989); Cal Accountants Mutual

Insurance Co. (publicly available November 16, 1988); Consortium

of Licensed-Beveraqe Retailers Association (publicly available

October 13, 1987); Medmarc Insurance Company (publicly available

October 2, 1987); First Monetary Mutual Ltd (publicly available

March 25, 1987); Home Mortgaqe Access Holdinq Corporation

(publicly available March 23, 1984); Attorney's Liability

Assurance Society Ltd. (publicly available February 12, 1979).

B. Reqistration Pursuant to the Securities Exchange Act of

1934
section 12 (g) of the 1934 Act provides that certain

"issuers" with total assets exceeding $1,000,000 and a class of

"equity securities" held of record by 500 or more persons must

register such securities under the 1934 Act. However, section 3 (a) (8) of the 1934 Act defines "issuer" as "any person who issues or proposes to issue any secur i ty . . . ," and section 3 (a) (11) defines "equity security" as including "stock or similar security" and certain other instruments or rights, each of which

must, in itself, be a security.

Thus, to be subject to registration pursuant to section

12 (g) of the 1934 Act, a person must issue "securities." The definition of "security" in section 3 (a) (10) is in all pertinent respects identical to the definition of that term in section 2 (1)

of the 1933 Act. See Landreth Timber Co., 471 U.S. at 686 n.1

(1982) (stating that the definition of a security in the 1933 and

1934 Acts are "virtually identical and will be treated as such in

SIDLEY & AUSTIN CHICAGO

Office of Chief Counsel

our decisions dealing with the scope of the term") (citations

omi tted). Consequently, in accordance with the discussion of the

1933 Act above, we believe that the Holding Company membership

interests are not securities, and that the Holding Company

therefore will neither be an "issuer" nor have any "class of

equity securities." Accordingly, it is our view that the Holding

Company will not be subj ect to the registration requirements of

section 12 (g) of the 1934 Act.

c. Reqistration Pursuant to the Investment ComDanv Act of

1940
It is our view that the Holding Company is not required

to register as an investment company under the 1940 Act. This

view is based upon alternative grounds: (1) that the Holding

Company does not satisfy the threshold def ini tion of an

"investment company" under the 1940 Act, and (2) that even

assuming the Holding Company satisfies the threshold definition,

it falls within the statutory exclusion from that definition

provided in section 3 (b) (1) .
The prefatory language of section 3 (a) of the 1940 Act

defines an "investment company" as any "issuer" which satisfies

anyone or more of subparagraphs (1), (2) and (3) of that

section. 15 U.S.C.A. § 80a-3(a) (West 1981 & Supp. 1995).

section 2 (a) (22) defines an issuer as "every person who issues or
proposes to issue any security, or has outstanding any security which it has issued." 15 U.S.C.A. § 80a-2(22). section 2(a) (36) defines "security" in the same manner as "security" is defined in

section 2(1) of the 1933 Act. Accordingly, it is our view that

the HOlding Company membership interests are not securities under

section 2 (a) (36) ¡ that the Holding Company, therefore, is not an
issuer under section 2 (a) (22) ¡ and that the Holding Company,

therefore, is not an investment company under section 3 (a) .

Even assuming the Holding Company were to come wi thin the definition of an investment company under section 3 (a), it

would be excluded from that definition because section 3 (b) (1) provides that "any issuer primarily engaged, directly or through

a wholly-owned sUbsidiary or subsidiaries, in a business or

businesses other than that of investing, reinvesting, owning,

holding or trading in securities" is not an investment company.

15 U.S.C. § 80a-3 (b) (1). Because, as described above, the primary business of the Holding Company would be owning the Stock

Life Company and the Stock Life Company (its wholly-owned

subsidiary) would be primarily engaged in the business of

SIDLEY & AUSTIN CHICAGO
Off ice of Chief Counsel

Securi ties and Exchange Commission

insuring its members, the HOlding Company meets this statutory

exclusion from the investment company definition.

Another statutory exemption which appears applicable is

the provision of section 3 (c) (3) of the 1940 Act which provides

an exemption for an II insurance company . . . or similar

institution .. "15 U. S.C.A. § 80a-3 (c) (3). section 2 (a)

( 17) defines an insurance company as a II company which is

organized as an insurance company, whose primary and predominant

business acti vi ty is the writing of insurance . . . and which is

subject to the supervision by the insurance commissioner . . . of

a State. . . ." 15 U.S.C.A. § 80a-2(a) (17). The Holding

Company, although it will not write insurance, will be organized

under the laws of Iowa as a mutual insurance holding company.

Moreover, the Holding Company will be regulated by the Iowa

Commissioner. Iowa Code § 521A.14 (1) (a) (stating liThe commissioner shall retain jurisdiction over a mutual insurance

holding company organized pursuant to this section to assure that policyholder interests are protected. "). section 3 (c) (6) of the 1940 Act also provides an exemption, since the Stock Life Company

would be a majority-owned subsidiary of the Holding Company.

Accordingly, the Holding Company would not be an investment

company subject to registration under the 1940 Act.

Our conclusions are supported by a number of No-action

letters issued by the Staff. See Mutual Benefit Life Insurance

Comnanv et al. (publicly available April 21, 1994) ¡ AAI Holdinqs

Corn. et al. (publicly available July 1, 1991) ¡ Investment

Comnany Institute (publicly available June 9, 1987) ¡ Energy

Insurance Mutual Fund (publicly available August 16, 1986) ¡

Attorneys Insurance Mutual (publicly available July 10, 1986) ¡

Podiatric Assurance Co. (publicly available February 19, 1985) ¡

Attorney's Liability Assurance Society Ltd. (publicly available

February 12, 1979).

iV. CONCLUSION:

In consideration of the foregoing facts and our

conclusions with respect to the application of the 1933 Act, the

1934 Act, and the 1940 Act thereto, we request that the Staff

advise us whether it would recommend to the Commission that no

action be taken if the Reorganization and writing of insurance

coverage as set forth above is effected by the Holding Company

and the Stock Life Company without compliance with the

registration requirements of the 1933 Act, the 1934 Act and the

,SI:JLEY & AUSTIN CHICAGO
Office of Chief Counsel

1940 Act. Consummation of the Reorganization is subject to your

concurrence to this request.

The Staff's prompt attention to this request will be

greatly appreciated. If you have any comments or questions

relating to the request, please do not hesitate to contact the

undersigned. In the event you anticipate formulating a response

not consistent with any interpretation or position stated in the

request, we would appreciate the opportunity to discuss the

matter with the Staff prior to any final decision.

V7r~ ~
Richard G. Clemens

FIAL,3 (6/10/96 6:56)