Federal Register / Vol. 66, No. 242 / Monday, December 17, 2001 / Notices 65011

to be added to the distribution, please

contact the Office of the Secretary,

Washington, DC 20555 (301–415–1969).

In addition, distribution of this meeting

notice over the Internet system is

available. If you are interested in

receiving this Commission meeting

schedule electronically, please send an

electronic message to dkw@nrc.gov.

Dated: December 12, 2001.

David Louis Gamberoni,

Technical Coordinator, Office of the

Secretary.

[FR Doc. 01–31160 Filed 12–13–01; 2:47 pm]

BILLING CODE 7590–01–M

POSTAL SERVICE BOARD OF

GOVERNORS

Sunshine Act Meeting; Notification of

Item Added to Meeting Agenda

DATE OF MEETING: December 3, 2001.

STATUS: Closed.

PREVIOUS ANNOUNCEMENT: 66 FR 59035,

November 26, 2001.

ADDITION: Rate Case R2001–1.

At its meeting on December 3, 2001,

the Board of Governors of the United

States Postal Service voted unanimously

to add this item to the agenda of its

closed meeting and that no earlier

announcement was possible. The

General Counsel of the United States

Postal Service certified that in her

opinion discussion of this item could be

properly closed to public observation.

CONTACT PERSON FOR MORE INFORMATION:

David G. Hunter, Secretary of the Board,

U.S. Postal Service, 475 L’Enfant Plaza,

SW., Washington, DC.

David G. Hunter,

Secretary.

[FR Doc. 01–31169 Filed 12–13–01; 2:47 pm]

BILLING CODE 7710–12–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. IC–25316; 812–12696]

Blue Cross and Blue Shield of Kansas,

Inc.; Notice of Application

December 11, 2001.

AGENCY: Securities and Exchange

Commission (‘‘Commission’’).

ACTION: Notice of an application for an

order under sections 6(c) and 6(e) of the

Investment Company Act of 1940 (the

‘‘Act’’) exempting an escrow account

established by the applicant from all

provisions of the Act, except section 9

and sections 36 through 53 of the Act,

and the rules and regulations under

those sections.

SUMMARY OF APPLICATION: Applicant

requests an order on behalf of an escrow

account (the ‘‘Escrow Account’’) to be

established in connection with

applicant’s conversion to a stock life

insurance company and its subsequent

acquisition by Anthem Insurance

Companies, Inc. (‘‘Anthem’’). The

Escrow Account will hold a portion of

the cash consideration from the sale

pending the resolution of a specified

litigation matter involving applicant.

The order would exempt the Escrow

Account from certain provisions of the

Act and the rules and regulations under

those provisions.

Applicant: Blue Cross and Blue

Shield of Kansas, Inc. (the ‘‘Company’’).

Filing Date: The application was filed

on November 23, 2001 and amended on

December 10, 2001.

Hearing or Notification of Hearing: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing by writing to the

Commission’s Secretary and serving

applicants with a copy of the request,

personally or by mail. Hearing requests

should be received by the Commission

by 5:30 p.m. on January 7, 2002, and

should be accompanied by proof of

service on applicants, in the form of an

affidavit or, for lawyers, a certificate of

service. Hearing requests should state

the nature of the writer’s interest, the

reason for the request, and the issues

contested. Persons who wish to be

notified of a hearing may request

notification by writing to the

Commission’s Secretary.

ADDRESSES: Secretary, Commission, 450

Fifth Street, NW., Washington, DC

20549–0609. Applicant: Kenneth J.

Berman, Debevoise & Plimpton, 555

13th Street, NW., Washington, DC

20004.

FOR FURTHER INFORMATION CONTACT: Jaea

F. Hahn, Senior Counsel, at (202) 942–

0614, or Nadya B. Roytblat, Assistant

Director, at (202) 942–0564 (Division of

Investment Management, Office of

Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee at the

Commission’s Public Reference Branch,

450 Fifth Street, NW., Washington, DC

20549–0102 (tel. 202–942–8090).

Applicant’s Representations

1. The Company is a Kansas mutual

life insurance company that proposes to

convert to a stock life insurance

company (the ‘‘Conversion’’) pursuant

to a plan of conversion (the ‘‘Plan’’) in

accordance with Kansas law. As a

mutual life insurance company, the

Company has no authorized, issued or

outstanding capital stock. The

policyholders of the Company, through

the purchase of insurance policies and

contracts, acquire insurance coverage

and ‘‘Membership Interests’’ which

consist principally of the right to vote in

the election of directors of the Company

and the right to share in any residual

value of the Company if the Company

were to undergo liquidation in the

future.

2. Pursuant to an Alliance Agreement

between the Company and Anthem, an

Indiana stock insurance company (the

‘‘Alliance Agreement’’), Anthem or an

affiliate of Anthem will acquire the

Company upon the Company’s

Conversion (the ‘‘Acquisition’’). On the

date of effectiveness of the Conversion

and the closing of the Acquisition (the

‘‘Conversion Date’’), the Membership

Interests of the Company policyholders

will be extinguished, the Company’s

policyholders eligible to vote and

receive consideration in the Conversion

(‘‘Eligible Policyholders’’) will be

entitled to receive consideration as

provided in the Alliance Agreement and

the Plan, and the Company will become

a direct or indirect wholly-owned

subsidiary of Anthem.

3. The Company’s board of directors

has adopted the Plan. The Plan has been

submitted to the Commissioner of

Insurance of the State of Kansas (the

‘‘Commissioner’’) for approval. Article

40 of Chapter 40 of the Kansas Statutes

Annotated (the ‘‘Kansas Conversion

Law’’) requires the Commissioner to

hold a public hearing at which the

Company’s policyholders would have

the right to appear and be heard. The

Commissioner must approve the Plan if

the Commissioner finds that (a) the Plan

is fair and equitable to policyholders, (b)

the Plan complies with the provisions of

the Kansas Conversion Law, (c) the Plan

does not unjustly enrich any director,

officer, agent or employee of the

Company and (d) the Company would

meet minimum requirements to be

issued a certificate of authority by the

Commissioner to transact business in

Kansas and the continued operations of

the Company would not be hazardous to

existing or future policyholders or the

public.

4. Eligible Policyholders also must

approve the Plan, including the

establishment of the Escrow Account.

As required by the Kansas Conversion

Law, Eligible Policyholders will have

received from the Company a

comprehensive information booklet

65012 Federal Register / Vol. 66, No. 242 / Monday, December 17, 2001 / Notices

1The subpoena seek documents in connection

with an investigation of possible improper claims

against Medicare pursuant to 5 U.S.C. App. 3

Section 6(a)(4).

2Applicant notes that the last sentence of section

7(b) of the Act provides that the broad injunction

against actions by unregistered investment

companies contained in section 7 of the Act does

not apply to ‘‘transactions of an investment

company which are merely incident to its

dissolution.’’ Applicant states that due to the nature

of the Contingent Litigation Matter, it is likely that

the life of the Escrow Account may need to extend

beyond three years and that applicant therefore may

be unable to rely on this provision in section 7(b).

describing the Plan, including all

material aspects of the Escrow Account,

at least 30 days prior to a special

meeting to be held on January 11, 2002

at which the Eligible Policyholders will

be required to vote on the Plan. The

information booklet was reviewed and

approved by the staff of the Kansas

Insurance Department.

5. Under the proposed transaction,

Eligible Policyholders will be entitled to

receive $142 million of the $190 million

purchase price paid by Anthem for the

stock of the Company upon the

Conversion, with the remaining $48

million of the purchase price deposited

into the Escrow Account on the

Conversion Date. The Escrow Account

will be established to address issues

arising from a subpoena, dated February

28, 2001, that the Company received

from the Office of the Inspector General,

U.S. Department of Health and Human

Services (the ‘‘Contingent Litigation

Matter’’).1 The amounts held in the

Escrow Account will be used to pay all

costs, expenses and liabilities related to

the Contingent Litigation Matter, pay

related taxes which might become

payable, and pay all costs and expenses

of the Escrow Account. Any remaining

amounts will be distributed to Eligible

Policyholders following final resolution

of the Contingent Litigation Matter.

6. The Escrow Account will be a

separately designated investment

account established on or prior to the

Conversion Date pursuant to an escrow

agreement (the ‘‘Escrow Agreement’’) to

be entered into among the Company,

Anthem and an escrow agent (the

‘‘Escrow Agent’’). The Escrow Agent

will be a bank, savings and loan

association or trust company. The sole

purpose of the Escrow Account will be

to liquidate its assets and distribute the

income to the Eligible Policyholders in

as prompt and orderly a fashion as

possible following the resolution of the

Contingent Litigation Matter. Amounts

held in the Escrow Account will be

invested by the Escrow Agent solely in

obligations of, or obligations fully

guaranteed as to timely payment of

principal and interest by, the United

States of America or an agency or

instrumentality thereof with a maturity

date of one year or less from the date of

the investment (‘‘Government

Securities’’). The Escrow Agent will not

have the authority to borrow funds

from, or on behalf of the Escrow

Account, sell securities to, or acquire

securities from, the Escrow Account, or,

acquire any other assets except for

Government Securities. The rights of the

Eligible Policyholders to amounts held

in the Escrow Account will not be

represented by any form of certificate or

instrument and will not be transferable

or assignable except by will, the laws of

intestacy or by other operation of law.

The Commissioner will retain regulatory

oversight over the Escrow Account,

including the investment and

distribution of the assets held in the

Escrow Account to ensure that the

interests of Eligible Policyholders are

protected.

7. The Escrow Account will continue

until the Contingent Litigation Matter

has been finally disposed of by binding

settlement, court order or otherwise, all

tax amounts have been finally

determined, all amounts that are

reasonably recoverable from any insurer

in respect of the Contingent Litigation

Matter are recovered, and all amounts in

the Escrow Account have been paid or

distributed by the Escrow Agent in

accordance with the Escrow Agreement

and the Alliance Agreement. Any

amounts remaining in the Escrow

Account will be distributed to Eligible

Policyholders in accordance with the

distribution principles set forth in the

Plan.

Applicant’s Legal Analysis

1. Section 3(a)(1)(A) of the Act defines

the term ‘‘investment company’’ to

include an issuer that is or holds itself

out as being engaged primarily, or

proposes to engage primarily, in the

business of investing, reinvesting or

trading in securities. Because the assets

held in the Escrow Account will be

invested exclusively in Government

Securities and the Escrow’s sole source

of income will be investment income

attributable to such securities, applicant

states that it is possible that the Escrow

Account could be deemed to be an

investment company as defined in

section 3(a)(1)(A).

2. Section 6(c) of the Act provides, in

relevant part, that the Commission may

exempt any person or persons, or any

transaction or transactions, from any

provisions of the Act if and to the extent

that such exemption is necessary or

appropriate in the public interest and

consistent with the protection of

investors and the purposes fairly

intended by the policy and provisions of

the Act.

3. Section 7 of the Act generally

prohibits investment companies that are

not registered under section 8 of the Act

from selling or redeeming their

securities.2 Section 6(e) of the Act

provides that, in connection with any

order exempting an investment

company from any provision of section

7, the Commission may specify that

certain provisions of the Act will be

applicable to the company and other

persons dealing with the company as

though the company were registered

under the Act. Applicant contends that

the costs involved in registering and

operating the Escrow Account under the

Act are not necessary to protect the

interests of the Eligible Policyholders

and would reduce the amount of cash

consideration actually distributed to the

Eligible Policyholders. Because of the

limited nature of the Escrow Account’s

activities, the Company believes that

most provisions of the Act are not

relevant to the Escrow Account. The

Escrow Account is being organized for

a limited purpose, will have a limited

life, and will be subject to the

Commissioner’s oversight. Moreover,

management of the Escrow Account’s

assets by the Escrow Agent will be

severely restricted. Accordingly,

applicant states that the requested order

meets the requirements of section 6(c) of

the Act.

Applicant’s Conditions

Applicant agrees that any order

granting the requested relief shall be

subject to the following conditions:

1. The Escrow Account will not hold

itself out as being an investment

company, but instead will hold itself

out as an escrow account in the process

of liquidating and distributing its assets

to the Eligible Policyholders.

2. The Escrow Account will be

limited to making temporary

investments in Government Securities.

3. The Escrow Account will

terminate, in accordance with the terms

of the Escrow Agreement, upon final

disposition of the Contingent Litigation

Matter by binding settlement, court

order or otherwise, final determination

of certain tax matters, reasonable

recovery from any insurer of costs

associated with the Contingent

Litigation Matter and distribution of all

amounts in the Escrow Account by the

Escrow Agent.

Federal Register / Vol. 66, No. 242 / Monday, December 17, 2001 / Notices 65013

1See, e.g., Accounting Principles Board Opinion

No. 22, ‘‘Disclosure of Accounting Policies’’ (Apr.

1972); AICPA Statement of Position No. 94–6,

‘‘Disclosure of Certain Significant Risks and

Uncertainties’’ (Dec. 1994).

2The underlying purpose of MD&A is to provide

investors with ‘‘information that the registrant

believes to be necessary to an understanding of its

financial condition, changes in financial condition

and results of operations.’’ Item 303(a) of Regulation

S–K [17 CFR 229.303(a)]. As we have previously

stated, ‘‘ ‘[i]t is the responsibility of management [in

MD&A] to identify and address those key variables

and other qualitative and quantitative factors which

are peculiar to and necessary for an understanding

and evaluation of the company.’ ’’ Securities Act

Rel. No. 6835 (May 18, 1989) [54 FR 22427]

(quoting Securities Act Rel. No. 6349 (Sept. 28,

1981) [not published in the Federal Register]).

3See Codification of Statements on Auditing

Standards, AU § 380, Communication with Audit

Committees or Others with Equivalent Authority

and Responsibility (‘‘SAS 61’’). SAS 61 requires

independent auditors to communicate certain

matters related to the conduct of an audit to those

who have responsibility for oversight of the

financial reporting process, specifically the audit

committee. Among the matters to be communicated

to the audit committee are: (1) Methods used to

account for significant unusual transactions; (2) the

effect of significant accounting policies in

Continued

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–30977 Filed 12–14–01; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release Nos. 33–8040; 34–45149; FR–60]

Accounting Policies; Cautionary

Advice Regarding Disclosure

AGENCY: Securities and Exchange

Commission.

ACTION: Cautionary advice regarding

disclosure about critical accounting

policies.

SUMMARY: The Securities and Exchange

Commission is issuing a statement

regarding the selection and disclosure

by public companies of critical

accounting policies and practices.

FOR FURTHER INFORMATION CONTACT:

Robert A. Bayless, Special Assistant to

the Chief Accountant, 202–942–4400.

SUPPLEMENTARY INFORMATION: As public

companies undertake to prepare and file

required annual reports with us, we

wish to remind management, auditors,

audit committees, and their advisors

that the selection and application of the

company’s accounting policies must be

appropriately reasoned. They should be

aware also that investors increasingly

demand full transparency of accounting

policies and their effects.

Reported financial position and

results often imply a degree of

precision, continuity and certainty that

can be belied by rapid changes in the

financial and operating environment

that produced those measures. As a

result, even a technically accurate

application of generally accepted

accounting principles (‘‘GAAP’’) may

nonetheless fail to communicate

important information if it is not

accompanied by appropriate and clear

analytic disclosures to facilitate an

investor’s understanding of the

company’s financial status, and the

possibility, likelihood and implication

of changes in the financial and

operating status.

Of course, public companies should

be mindful of existing disclosure

requirements in GAAP and our rules.

Accounting standards require

information in financial statements

about the accounting principles and

methods used and the risks and

uncertainties inherent in significant

estimates.1 Our rules governing

Management’s Discussion and Analysis

(‘‘MD&A’’) currently require disclosure

about trends, events or uncertainties

known to management that would have

a material impact on reported financial

information.2

We have observed that disclosure

responsive to these requirements could

be enhanced. For example,

environmental and operational trends,

events and uncertainties typically are

identified in MD&A, but the

implications of those uncertainties for

the methods, assumptions and estimates

used for recurring and pervasive

accounting measurements are not

always addressed. Communication

between investors and public

companies could be improved if

management explained in MD&A the

interplay of specific uncertainties with

accounting measurements in the

financial statements. We intend to

consider new rules during the coming

year to elicit more precise disclosures

about the accounting policies that

management believes are most

‘‘critical’’—that is, they are both most

important to the portrayal of the

company’s financial condition and

results, and they require management’s

most difficult, subjective or complex

judgments, often as a result of the need

to make estimates about the effect of

matters that are inherently uncertain.

Even before new rules are considered,

however, we believe it is appropriate to

alert companies to the need for greater

investor awareness of the sensitivity of

financial statements to the methods,

assumptions, and estimates underlying

their preparation. We encourage public

companies to include in their MD&A

this year full explanations, in plain

English, of their ‘‘critical accounting

policies,’’ the judgments and

uncertainties affecting the application of

those policies, and the likelihood that

materially different amounts would be

reported under different conditions or

using different assumptions. The

objective of this disclosure is consistent

with the objective of MD&A.

Investors may lose confidence in a

company’s management and financial

statements if sudden changes in its

financial condition and results occur,

but were not preceded by disclosures

about the susceptibility of reported

amounts to change, including rapid

change. To minimize such a loss of

confidence, we are alerting public

companies to the importance of

employing a disclosure regimen along

the following lines:

1. Each Company’s Management and

Auditor Should Bring Particular Focus

to the Evaluation of the Critical

Accounting Policies Used in the

Financial Statements

As part of the normal audit process,

auditors must obtain an understanding

of management’s judgments in selecting

and applying accounting principles and

methods. Special attention to the most

critical accounting policies will enhance

the effectiveness of this process.

Management should be able to defend

the quality and reasonableness of the

most critical policies, and auditors

should satisfy themselves thoroughly

regarding their selection, application

and disclosure.

2. Management Should Ensure That

Disclosure in MD&A Is Balanced and

Fully Responsive

To enhance investor understanding of

the financial statements, companies are

encouraged to explain in MD&A the

effects of the critical accounting policies

applied, the judgments made in their

application, and the likelihood of

materially different reported results if

different assumptions or conditions

were to prevail.

3. Prior To Finalizing and Filing

Annual Reports, Audit Committees

Should Review the Selection,

Application and Disclosure of Critical

Accounting Policies

Consistent with auditing standards,

audit committees should be apprised of

the evaluative criteria used by

management in their selection of the

accounting principles and methods.3