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SEC Lets Converting Mutual Avoid Securities Registration

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The U.S. Securities and Exchange Commission has cleared a hurdle facing a Midwestern mutual insurer that is trying to convert into a stock company controlled by a mutual insurance holding company.

Fidelity Life Association, Oak Brook, Ill., wants to go through the conversion without having to treat the “membership interests” of its policyholder owners, or the membership interests of the new mutual insurance holding company, Members Mutual Holding Company, as securities, according to J. Brett Pritchard, the lawyer representing Fidelity Life.

Fidelity will not be paying policyholders for their membership interests, and the company believes that at least 2 U.S. Supreme Court cases provide guidelines indicating that Fidelity Life policyholder membership interests are not securities, Pritchard writes.

Kim McManus, special counsel to the SEC’s Division of Corporation Finance, has replied with a letter stating that the division “will not recommend enforcement action to the commission if, in reliance on your opinion of counsel that membership interests in Members Mutual are not securities within the meaning of the Securities Act or the Exchange Act, Fidelity Life causes its current and future policyholders to become members of Members Mutual in connection with and after the reorganization without registration under the Securities Act or the Exchange Act.”

McManus says the division does not necessarily agree with Pritchard’s analysis, but he says the division will not recommend taking action in part because membership rights in Members Mutual will be substantially the same as rights in Fidelity Life, and the reorganization is subject to a public hearing and approval by the Illinois insurance director.

A copy of the SEC no-action letter is on the Web Document Link