[Federal Register Volume 61, Number 101 (Thursday, May 23, 1996)]
[Notices]
[Pages 25899-25909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12985]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09990, et al.


Proposed Exemptions; Blue Cross and Blue Shield of Virginia

AGENCY: Pension and Welfare Benefits 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 restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request 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. Comments and 
request for a hearing should state: (1) the name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing. A request for a hearing must also state

[[Page 25900]]

the issues to be addressed and include a general description of the 
evidence to be presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Blue Cross and Blue Shield of Virginia (the Company), Located in 
Richmond, VA

[Application No. D-09990]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).<SUP>1
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    \1\ For purposes of this exemption, reference to provisions of 
Title I of the Act, unless otherwise specified, refer also to the 
corresponding provisions of the Code.
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Section I. Covered Transactions

    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of 
the Code, shall not apply to the proposed receipt of cash and/or common 
stock (the Stock) of Trigon Healthcare, Inc. (Trigon), the Company's 
sole owner, by any employee benefit plan policyholder of the Company 
(the Plan), other than an employee benefit plan sponsored by the 
Company or its affiliates, in exchange for such policyholder's 
membership interest in the Company, in accordance with the terms of a 
plan of reorganization (the Demutualization; the Demutualization Plan) 
adopted by the Company and implemented pursuant to the insurance laws 
of the State of Virginia.
    This proposed exemption is subject to the conditions set forth 
below in Section II.

Section II. General Conditions

    (a) The Demutalization Plan is implemented in accordance with 
procedural and substantive safeguards that are imposed under Virginia 
law and is subject to the review and supervision by the Virginia State 
Corporation Commission (the Commission).
    (b) The Commission reviews the terms of the options that are 
provided to certain policyholders of the Company (the Eligible 
Members), as part of such Commission's review of the Demutualization 
Plan, and the Commission only approves the Demutualization Plan 
following a determination that such Demutualization Plan is fair and 
equitable to all Eligible Members.
    (c) Each Eligible Member has an opportunity to comment on the 
Demutualization Plan and decide whether to vote to approve such 
Demutualization Plan after full written disclosure is given such 
Eligible Member by the Company, of the terms of the Demutualization 
Plan.
    (d) Any election by an Eligible Member to receive cash and/or 
Trigon Stock pursuant to the terms of the Demutualization Plan is made 
by one or more independent fiduciaries (the Independent Fiduciaries) of 
such Plan and neither the Company nor any of its affiliates exercises 
any discretion or provides investment advice with respect to such 
election.
    (e) After an Eligible Member entitled to receive stock is allocated 
at least 16 shares of Trigon Stock for each vote, additional 
consideration is allocated to an Eligible Member who owns a 
participating policy based on actuarial formulas that take into account 
each participating policy's contribution to the equity (the Equity 
Contribution) of the Company which formulas have been approved by the 
Commission.
    (f) All Eligible Members participate in the transactions on the 
same basis within their class groupings as other Eligible Members that 
are not Plans.
    (g) No Eligible Member pays any brokerage commissions or fees in 
connection with their receipt of Trigon Stock or in connection with the 
implementation of the commission-free sales program.
    (h) All of the Company's policyholder obligations remain in force 
and are not affected by the Demutualization Plan.

Section III. Definitions

    For purposes of this proposed exemption:
    (a) The term ``Company'' means Blue Cross and Blue Shield of 
Virginia and any affiliate of the Company as defined in paragraph (b) 
of this Section III.
    (b) An ``affiliate'' of the Company includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the Company. (For purposes of this paragraph, the term ``control'' 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual.)
    (2) Any officer, director or partner in such person, and
    (3) Any corporation or partnership of which such person is an 
officer, director or a 5 percent partner or owner.
    (c) The term ``Effective Date'' means the date on which the 
certificate of merger is issued by the Commission and the 
Demutualization occurs.
    (d) The term ``Eligible Member'' means a member which will receive 
a distribution of Trigon Stock in the Demutualization. A ``Member'' is 
a policyholder which has a policy of insurance directly from the 
Company, which policy entitles the policyholder to vote. To be eligible 
for a distribution of Trigon Stock, the Member must have had a policy 
in effect on May 31, 1995, on the Effective Date, and at all times 
between those dates.

[[Page 25901]]

    (e) The term ``Record Date'' is the date on which the determination 
of an Eligible Member's status for voting on the Demutualization is 
made.

Summary of Facts and Representations

    1. The Company is a mutual insurance corporation organized under 
the laws and regulations of the Commonwealth of Virginia. It is a 
member of the national organization, Blue Cross and Blue Shield 
Association (Blue Cross and Blue Shield). Blue Cross and Blue Shield, 
as part of its efforts to promote the Blue Cross and Blue Shield name, 
licenses to each member, the exclusive right to use the Blue Cross and 
Blue Shield service marks within restricted geographic areas. Except 
for a small part of Northern Virginia, Blue Cross and Blue Shield is 
the exclusive licensee of the Blue Cross and Blue Shield service marks 
in Virginia. The Company maintains its headquarters in Richmond, 
Virginia.
    The Company is obligated to make basic health insurance available 
to all individuals in its service areas through a system of open 
enrollment. On December 31, 1994, the Company had total assets in 
excess of $1 billion. The Company's main sources of income are the sale 
of health insurance policies to employee benefit plans, employers and 
individuals (the Members) and the generation of investment income. As 
of March 30, 1995, the Company had approximately 20,000 policies in 
force and 725,000 Members which were Plans covered by the Act.
    As a mutual health care insurance company, the Company's 
policyholders have certain rights as Members. These rights, which are 
referred to as membership interests, include the right to vote on 
matters submitted to a vote of the Members.
    2. The Company represents that it has been successful in offering 
health care insurance to its Members at affordable rates. However, it 
notes that there has been an increase in the level of competition. To 
maintain its position in the industry, the Company believes that it 
must expand and, in so doing, it will require an infusion of funds. As 
a mutual insurance company, the Company states that it is precluded 
from obtaining funds from the capital markets. Therefore, the Company 
proposes to convert from a mutual insurance company to a stock 
insurance company because it believes that demutualization is the most 
effective means of accessing the capital markets. The Company also 
believes that access to the capital markets will enhance its ability to 
grow, remain competitive and provide essential insurance to its 
Members.
    In addition, the Company represents that its Members would derive 
benefits from the Demutualization. One of these benefits is that 
Members would receive cash and/or shares of Trigon Stock which would be 
publicly-traded. The Company represents that the Demutualization would 
not have any effect on the rights of the Members as insureds. In this 
regard, all policies in effect before the Demutualization would remain 
in force after the Demutualization.
    Accordingly, on June 20, 1995, the Board of Directors of the 
Company formally decided to proceed with the Demutualization by 
authorizing the filing of the Demutualization Plan with the Virginia 
State Corporation Commission. The actual filing of the Demutualization 
Plan with the Commission occurred on June 27, 1995. The actual 
procedures that will be followed in implementing the Demutualization 
Plan are described below.
    3. Under Virginia law, insurance companies are primarily regulated 
by the Bureau of Insurance (the BOI) which is part of the Commission. 
The Commission is charged with the duty to ensure that licensed 
insurance companies comply with the requirements of law under its 
jurisdiction. The Commission will conduct an extensive review and 
analysis of the Demutualization Plan and make required findings under 
Virginia law before the Demutualization can be accomplished. In this 
regard, the Demutualization must comply with four provisions in the 
Virginia statutes which relate to--
    (a) The Conversion from a Mutual Insurance Company to a Stock 
Company. According to Va. Stat. Sec. 38.2-1005.1, a mutual insurance 
company may convert to a stock insurer under a plan of conversion 
approved by the Commission. In addition, the Commission shall approve 
the plan of conversion if it determines that the following conditions 
are met:

    (1) The terms and conditions of the plan are fair and equitable 
to the policyholders of the issuer; (2) the plan is approved by more 
than two-thirds of the votes cast at a meeting of the members of the 
insurer at which a quorum is present; (3) the entire stock ownership 
interests or other consideration is distributed to policyholders, 
except as expressly otherwise provided; (4) for a mutual insurer 
that converted from a health services plan in existence prior to 
December 31, 1987, the Virginia State Treasurer is allocated stock 
or cash equal to the surplus on December 31, 1987 plus ten million 
dollars (Virginia may also be entitled to stock or cash as a 
policyholder. This condition will apply to Trigon.); and (5) 
immediately after the conversion, the insurer will have the required 
amounts of fully paid capital stock and surplus.

    (b) A Change in Control as Part of the Demutualization. 
Contemporaneous with the Demutualization, there will be an acquisition 
of control of the Company through the creation of a holding company. 
Va. Stat. Sec. 38.2-1323A provides that--

    No person shall acquire or attempt to acquire, through merger or 
otherwise, control of any domestic insurer, or any person 
controlling a domestic insurer, unless the person has previously 
filed with the Commission and has sent to the insurer an application 
for approval of acquisition of control of the insurer, and the 
Commission has issued an order approving the application.

    The Commission's standard of review for an acquisition of control 
of an insurance company is set forth in Va. Stat. Sec. 38.2-1326. These 
provisions require the Commission to review the following issues and 
deny the application if the Commission makes any of the following 
findings: (1) after the change of control, the insurer would not 
satisfy the requirements for the issuance of a license; (2) the 
acquisition of control would lessen competition substantially or tend 
to create a monopoly in insurance in Virginia; (3) the financial 
condition of the acquiring person might jeopardize the financial 
stability of the insurer, or prejudice the interest of the 
policyholders; (4) any plans or proposals of the acquiring party to 
make any material change in the company's business or corporate 
structure or management, are unfair and unreasonable to policyholders 
of the insurer and are not in the public interest; (5) the competence, 
experience and integrity of those persons who would control the 
operation of the insurer are such that it would not be in the interest 
of policyholders of the insurer and of the public to permit the 
acquisition of control; or (6) after the change of control, the 
insurer's surplus to policyholders would not be reasonable in relation 
to its outstanding liabilities and adequate to its financial needs.
    (c) The Treatment of the Demutualization as a Material Transaction. 
The Commission must approve the Demutualization as a ``material 
transaction'' as defined in the Va. Stat. Sec. 38.2-1322. The 
Commission, in reviewing any material transaction, will consider 
whether the material transaction complies with the standards set forth 
below and whether it may adversely affect the interest of

[[Page 25902]]

policyholders. (Va. Stat. Sec. 38.2-1331C). These standards are that: 
(1) the terms of the transaction are fair and reasonable to the 
companies; (2) charges of fees for services performed will be 
reasonable; (3) expenses incurred and payments received will be 
allocated to the insurer in conformity with customary insurance 
accounting practices consistently applied; (4) the books, accounts and 
records of each party shall disclose clearly and accurately the precise 
nature and details of the transactions; and (5) the insurer's surplus 
to policyholders following any dividends or distributions to 
shareholder affiliates shall be reasonable in relation to the insurer's 
outstanding liabilities and adequate to its financial needs.
    4. Although the Company has finalized the Demutualization Plan, it 
still must be approved by the Commission and the Company's Members. The 
Commission will conduct a public hearing on the Demutualization Plan. 
Interested Members and other parties will be given an opportunity to 
present their views about the Demutualization Plan. The Commission will 
then make a finding as to the approval or disapproval of the 
Demutualization Plan. At present, the dates for the hearing and the 
special Member meeting have not been established.
    5. For purposes of approving the Demutualization Plan, a Member who 
is the owner of the policy is entitled to vote. In general, the owner 
of an individual insurance policy is the person specified in the policy 
or contract as the owner or contract holder. The owner of a group 
policy of insurance is the person or persons specified in the group 
policy as the holder (usually the employer who has entered into the 
group policy to provide for health care insurance for its employees).
    Members will vote on the Demutualization Plan at a special meeting. 
On matters submitted to a vote of the Members, the number of votes that 
a Member has depends on the type of policy. Each Member who has an 
individual group policy of insurance is entitled to as many votes as 
there are employees or other persons primarily insured under the 
policy. To be approved, the Demutualization Plan must receive two-
thirds of the votes that are cast at the meeting in person or by proxy.
    Notice of the special meeting to vote on the Demutualization Plan 
will be provided to Members with health insurance policies in force on 
the Record Date. In addition to receiving advance notice of the special 
meeting, Members will receive a comprehensive informational packet 
about the Demutualization. The contents of the informational packet 
will be reviewed by the BOI.
    6. In conjunction with receiving required approvals from the 
Members and the Commission, the Company contemplates that several 
corporate transactions have or will occur. In this regard, the Company 
has formed Trigon as a Virginia stock corporation and a wholly owned 
subsidiary of the Company. In addition, the Company has formed Trigon 
Merger Sub, Inc. (TMSI) as a wholly owned subsidiary of Trigon. The 
final step in the Demutualization process is for the Commission to 
issue a certificate of merger to effectuate the corporate merger needed 
to complete the conversion. The date on which the Commission issues the 
certificate of merger will be the Effective Date.
    7. On the Effective Date, the following events will occur 
simultaneously under the Demutualization Plan:
    (a) Merger of TMSI into the Company. TMSI will merge into the 
Company and the Company will be the survivor. As a result, the Company 
will become a wholly owned subsidiary of Trigon.
    (b) Change of the Company's Name. The Company will then change its 
name to ``Trigon Insurance Company'' and become a Virginia stock 
corporation when its Restated Articles of Incorporation and New Bylaws 
are adopted by operation of the Demutualization Plan.
    (c) Cancellation of Membership Interests in the Company. In 
accordance with the Demutualization Plan, all membership interests 
which Members had in the Company will be cancelled and converted into 
common stock of Trigon and/or cash for all Eligible Members. In 
addition, all issued and outstanding shares of capital stock which the 
Company owned in Trigon will be cancelled.
    The Demutualization Plan provides that all elections by Eligible 
Members which are Plans to receive cash and/or shares of Trigon Stock 
will be made by Independent Fiduciaries. Neither the Company nor any of 
its affiliates will exercise any discretion nor provide investment 
advice with respect to such elections by the Independent Fiduciaries. 
In addition, no Eligible Members will be required to pay any brokerage 
fees or commissions in connection with the receipt of Trigon Stock.\2\
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    \2\ The Company represents that an insurance policy that 
provides benefits under an employee benefit plan typically 
designates the employer that sponsors the plan, or a trustee acting 
on behalf of the plan, as the policyholder. With respect to 
insurance policies that designate the employer or trustee as 
policyholder, the Company asserts that, as required under the 
Demutualization Plan, the Company will make distributions to the 
employer or trustee with one exception. Where a group policy has 
been issued to the Company providing coverage for its own employees 
under a welfare benefit plan, the company will ensure that the 
distribution is made to an independent fiduciary acting on behalf of 
the Company's plan or will be distributed directly to participants.
    In general, it is the Department's view that, if an insurance 
policy is purchased with assets of an employee benefit plan, and if 
there exist any participants covered under the plan (as defined at 
29 CFR 2510.3-3) at the time when the Company incurs the obligation 
to distribute Trigon Stock, then such consideration would constitute 
an asset of the plan. Under these circumstances, the appropriate 
plan fiduciaries must take all necessary steps to safeguard the 
assets of the plan in order to avoid engaging in a violation of the 
fiduciary responsibility provisions of the Act.
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    (d) The Initial Public Offering (the IPO). The Company will conduct 
an IPO of the shares of Trigon Stock. The Demutualization Plan provides 
that the maximum size of the IPO will be such that 49 percent of the 
Trigon Stock outstanding after the IPO will have been issued in the 
IPO.\3\
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    \3\ The Company projects that there will be a total of 64 
million shares of Trigon Stock available for distribution to 
Eligible Members as part of the Demutualization. However, the 
Company notes that exact number of shares offered may be subject to 
further adjustment.
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    8. The Company has hired the international accounting firm of KPMG 
Peat Marwick to prepare the actuarial calculations for the 
Demutualization Plan. The purpose of the actuarial calculations is to 
provide a reasonable and fair allocation of the Trigon Stock to the 
Eligible Members. The Company has been working with its actuaries to 
formulate the allocation methodology for the Demutualization Plan. The 
Members and the Commission will have to approve the final allocation 
among the Members.
    The allocation of the Trigon Stock will be based on two 
components--voting rights (Voting Rights) and the Equity Contribution 
by the policies. Under the proposed Demutualization Plan, 15 percent of 
the Trigon Stock will be allocated based on the Voting Rights of the 
Members.<SUP>4 This portion of the Trigon Stock will be allocated based 
on the proportion of each Eligible Member's vote or votes compared to 
the total votes. It is anticipated that there will be 743,300 votes. 
Based on an allocation of 9,600,000 shares for Voting Rights, it is 
currently anticipated that

[[Page 25903]]

each Eligible Member will receive 16 shares for each vote.
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    \4\ The right to vote on the proposal to approve the 
Demutualization Plan is based on a voting Member's status on the 
Record Date for the special meeting. Voting Members are those 
Members holding an individual or group policy issued by the Company 
which is in force on the Record Date. To date, the Record Date has 
not been established.
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    The remaining 85 percent of the Trigon Stock will be allocated 
based on the Equity Contribution of the policies. In this regard, the 
Demutualization Plan assigns each policy to a strategic business unit 
(SBU) (e.g., Major Accounts, Regional Business, etc.) and a major 
product line (MPL) under that SBU (e.g., Partially Self-Insured, 
Experience Rated, etc.). The Demutualization Plan divides the Eligible 
Members into 4 SBUs and 11 MPLs that could receive an allocation of 
Trigon Stock. In this regard, all Eligible Members will be treated the 
same within their class groupings.
    9. The Company has provided a hypothetical example to illustrate 
the manner in which shares of Trigon Stock would be calculated for an 
Eligible Member. The Company notes that the example does not take into 
consideration such factors as the actual experience of an Eligible 
Member, the MPL or the total experience of the Company. The example is 
presented as follows:

    Assume that an Eligible Member's group policy was in force from 
1985 until 1995. Thus, the first step in the allocation methodology 
is to compute the Voting Rights allocation. The second step in the 
allocation methodology is to determine the Equity Contribution 
allocation.
    Voting Rights Allocation. Assume that the policy has a total of 
30 votes as of the Record Date. At a rate of 16 shares per vote, the 
Voting Rights allocation would be 480 shares of Trigon Stock.

30 votes  x  16 shares of Trigon Stock = 480 shares of Trigon Stock

    Equity Contribution Allocation. The following table represents 
the number of covered lives and the Equity Contribution Factor (the 
ECF) <SUP>5 derived for the Eligible Member's MPL for each year.
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    \5\ The ECF is determined by dividing the Equity Contribution of 
the MPL by the total number of covered lives. For example, assume 
that in 1989, an MPL had an Equity Contribution of $10 million and 
50,000 covered lives. The 1989 ECF for that MPL would be $200 (i.e., 
$10 million divided by 50,000).

------------------------------------------------------------------------
                                        Covered                Equity   
                Period                   lives        ECF   contribution
------------------------------------------------------------------------
Pre-1989..............................       22   x                     
                                                       $50      $1,100  
1989..................................       22   x                     
                                                        60       1,320  
1990..................................       30   x                     
                                                        60       1,800  
1991..................................       28   x                     
                                                        40       1,120  
1992..................................       35   x                     
                                                        70       2,450  
1993..................................       35   x                     
                                                        60       2,100  
1994..................................       40   x                     
                                                        80       3,200  
Future................................       40   x                     
                                                        60       2,400  
                                                           -------------
  Total Equity Contribution...........  .......  ..  .....     $15,490  
------------------------------------------------------------------------

    Assume that the total Equity Contribution for all Eligible 
Members is
500,000,000 and the total number of shares of Trigon Stock to be 
allocated for Equity Contributions is 50,000,000. The Eligible Member's 
allocation of Equity Contribution Shares would be 1,549 and is 
calculated as follows:

$15,490/$500,000,000  x  50,000,000 shares = 1,549 Equity 
Contribution Shares.

    The total number of shares of Trigon Stock that will be received 
by the Eligible Member is the sum of the Voting Rights Shares and 
the Equity Contribution Shares.

480 + 1549 = 2,029 Total Shares Received.

    10. It is represented that the Company is a party in interest with 
respect to many Plans affected by the Demutualization because the 
Company provides a variety of services to Plans, some of which may 
constitute fiduciary services. In this regard, it is represented that a 
substantial portion of the policies in certain of the Company's SBUs 
are part of employee welfare benefit plans or employee pension benefit 
plans. Therefore, the Company requests an administrative exemption from 
the Department that would cover the receipt of cash and/or Trigon Stock 
by Eligible Members with respect to their membership interest in the 
Company as it existed in the form of a mutual insurance company.
    11. As stated above, the form of distribution that will be made by 
the Company to Eligible Members is currently intended to be cash and/or 
shares of Trigon Stock in exchange for such Members' membership 
interests in the Company. The cash or stock will be paid to Eligible 
Members as soon as possible after the Effective Date. The form of 
payment and all other procedures with respect to the Demutualization 
will be the same for Plans as for other Members. The Company currently 
estimates that approximately 70 percent of the Trigon Stock will be 
distributed to Plans which participate with other Eligible Members in 
many of the SBUs.<SUP>6
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    \6\ The applicant represents that there is no alternative 
available if an Eligible Member decides not to participate in the 
Demutualization since it is governed by Virginia law. However, as 
discussed in Representation 7, there are several opportunities for 
an Eligible Member to receive cash instead of shares of Trigon Stock 
under the Demutualization Plan.
    In addition, as noted in Representation 13, at the end of each 
Lockup Period, shares of Trigon Stock will be automatically 
distributed to Eligible Members. If the Eligible Member cannot be 
located, the stock will be returned to the Trigon transfer agent and 
held for the benefit of the Eligible Member. Assuming however the 
Eligible Member refuses to accept the Trigon Stock when it is 
distributed at the end of the Lockup Period, the applicant 
represents that it will continue to be held in the Eligible Member's 
name, possibly until the shares become abandoned property under 
Virginia escheat laws.
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    Although the Demutualization Plan provides that all Eligible 
Members may elect to receive their consideration in cash rather than in 
Trigon Stock, it is possible that certain Eligible Members will receive 
both forms of consideration. Certain Eligible Members, referred to as 
``Mandatory Cash Members,'' will receive cash in lieu of Trigon Stock 
once the value of such stock can be established.<SUP>7 Trigon Stock 
allocated to this class of Eligible Members is termed ``Mandatory Cash 
Shares.''
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    \7\ The criteria for being a Mandatory Cash Member are the same 
for all Eligible Members. The classification of a Mandatory Cash 
Member is (a) an Eligible Member whom the Company knows is subject 
to a lien or bankruptcy proceeding or whose consideration for the 
shares will be subject to a lien or bankruptcy proceeding; (b) an 
Eligible Member with a mailing address outside the District of 
Columbia or any State of the United States of America; or (c) an 
Eligible Member with a mailing address within a state in which there 
are fewer than 10 Eligible Members and the total stock allocated to 
such Eligible Members is less than 2,000 shares, if the Company 
determines that the issuance of shares to these Eligible Members 
would result in unreasonable delay or excessive hardship or delay.
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    Other Eligible Members may also be provided with cash instead of 
Trigon Stock or, with a combination of both. Eligible Members in this 
category who elect to receive cash are called ``Preferred Cash 
Members'' <SUP>8 and the Trigon Stock otherwise allocable to them is 
termed ``Preferred Cash Shares.'' To the extent that cash is less than 
the full consideration payable to the Eligible Member, shares of Trigon 
Stock will also be issued to such Eligible Member as the remaining 
consideration.
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    \8\ A Preferred Cash Member is simply an Eligible Member, other 
than a Mandatory Cash Member, who has affirmatively elected, on a 
form that has been furnished and returned to the Company, to receive 
cash in lieu of Trigon Stock.
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    The amount of cash which a Mandatory Cash Member or a Preferred 
Cash Member will receive in lieu of Trigon Stock will equal the number 
of shares of Trigon Stock multiplied by the initial stock price (the 
ISP). The ISP means the proceeds per share of Trigon Stock obtained by 
Trigon from the sale of Trigon Stock to the public in the IPO minus all 
underwriting discounts, costs and expenses incurred in connection with 
the IPO, divided by the number of shares of Trigon Stock sold in the 
IPO.
    On or immediately preceding the Effective Date, Trigon will 
determine the amount of cash available to pay all Eligible Members who 
are required or permitted to receive cash. If the amount of cash is 
insufficient to pay all of the Mandatory Cash Members and all of the 
Preferred Cash Members, then the cash available will be allocated in 
the following manner: First, the cash will be used to pay all Mandatory 
Cash Members. Second, any remaining cash

[[Page 25904]]

will be used to pay all Preferred Cash Members who are Odd Lot 
Holders.<SUP>9 If the cash is insufficient to pay all Odd Lot Holders 
in full, the cash available will be divided among the Odd Lot Holders 
pro rata based on the total number of shares allocated to each Odd Lot 
Holder. Third, any remaining cash will be used to pay all Preferred 
Cash Members who are not Odd Lot Holders. If the cash remaining is 
insufficient, the cash available will be divided among the Preferred 
Cash Members pro rata based on the total number of shares allocated to 
each non- Odd Lot Member. Then, the remaining amount that is not paid 
in cash will be distributed in the form of Trigon Stock.
---------------------------------------------------------------------------

    \9\ An Odd Lot Holder is an Eligible Member who will receive 
more than 0 and less than 100 shares of Trigon Stock.
---------------------------------------------------------------------------

    12. After Demutualization, the Company will become a wholly owned 
subsidiary of Trigon. Persons holding policies of insurance issued by 
the Company will cease to be Members of the Company and will become 
stockholders of Trigon. As stated above, this change will not affect 
the rights and privileges of the Members in their insurance contracts. 
All policies in effect before the Demutualization will continue in 
force after the Demutualization. All Members will continue to receive 
health care insurance through Trigon.
    Trigon will seek a listing for Trigon Stock on a major national 
stock exchange. The majority of the stockholders of Trigon will consist 
of Eligible Members who received shares of stock in Trigon in the 
Demutualization.
    13. To protect the interest of all Eligible Members and to ensure 
the orderly trading and value of Trigon Stock after the IPO, the 
Demutualization Plan includes limitations on the sales of such stock 
issued to Eligible Members in the form of a Lockup. All shares of 
Trigon Stock that are issued to Eligible Members will be subject to the 
Lockup during two Lockup Periods. During each Lockup Period, Trigon 
Stock issued to an Eligible Member will be registered in uncertificated 
form on the books of Trigon as beneficially owned by the Eligible 
Member. A Trigon transfer agent will have computerized records that 
will show the amount of Trigon Stock, if any, that is available for 
each Eligible Member. Although the Eligible Member will not have 
physical custody of the Trigon Stock certificate, at all times during 
the Lockup Period, the Eligible Member will have the right to vote the 
shares and be entitled to receive all dividends or any other 
distributions relating to the Trigon Stock issued to such Eligible 
Member.
    As soon as practicable after the expiration of each Lockup Period, 
a certificate for Trigon Stock will be issued to Eligible Members or 
their permitted transferors. Eligible Members who are Odd Lot Holders 
may request a certificate from Trigon's transfer agent.
    The first Lockup Period will end on the six month anniversary date 
of the Effective Date. Upon the termination of the first Lockup Period, 
one-half of the Trigon Stock will be freely-tradeable by Eligible 
Members and may be disposed of on a stock exchange at the public market 
price or in any manner that the Eligible Member wishes, subject to 
applicable securities laws.<SUP>10 The second Lockup Period will 
terminate on the twelve month anniversary of the Effective Date. At 
that time, the remaining one-half of Trigon Stock issued to Eligible 
Members will again be freely-tradeable.<SUP>11
---------------------------------------------------------------------------

    \10\ It should be noted that there is no provision in the 
Demutualization Plan requiring Trigon to purchase any of the shares 
of Trigon Stock from an Eligible Member at the end of a Lockup 
Period.
    \11\ In general, Trigon will not recognize most sales, pledges 
or other transfers by any Eligible Member of any rights or interest 
in the Trigon Stock or other distributions subject to the Lockup. 
Because of special circumstances, however, the Demutualization Plan 
will permit certain limited transfers. One of these special 
circumstances will allow an Eligible Member to transfer Trigon Stock 
to a trust created under a Plan. After the transfer to the trust, 
the Trigon Stock would continue to be subject to the same Lockup 
restrictions as described above.
    Notwithstanding the foregoing, the Department notes, however, 
that the applicant has not requested, nor is the Department 
providing, exemptive relief with respect to the transfer of Trigon 
Stock by an Eligible Member to a Plan to the extent that the 
transaction violates the provisions of section 406 of the Act.
---------------------------------------------------------------------------

    14. Prior to the ending of the first Lockup Period, Trigon will 
establish a commission-free sales and round-up program for small 
holders of Trigon Stock (the Small Holders Program). The purpose of the 
Small Holders Program is to allow certain Eligible Members either to 
sell all of their shares of Trigon Stock or to purchase sufficient 
shares of Trigon Stock that will enable such Eligible Members to round-
up their holdings to 100 shares of Trigon Stock. The Small Holders 
Program will continue for 90 days unless otherwise extended.
    Trigon will determine the maximum number of shares (not to exceed 
99) that will entitle an Eligible Member to participate in the Small 
Holders Program. All purchases and sales under the Small Holders 
Program will be at prevailing market prices and free of brokerage 
commissions or other administrative or similar expenses.
    15. In summary, it is represented that the proposed transactions 
will satisfy the statutory criteria for an exemption under section 
408(a) of the Act because:
    (a) The Demutualization Plan will be implemented in accordance with 
procedural and substantive safeguards that are imposed under Virginia 
law and will be subject to the review and supervision by the 
Commission.
    (b) The Commission will review the terms of the options that are 
provided to Eligible Members of the Company as part of such 
Commission's review of the Demutualization Plan, and will approve the 
Demutualization Plan following a determination that such 
Demutualization Plan is fair and equitable to all Eligible Members.
    (c) Each Eligible Member will have an opportunity to comment orally 
or in writing on the Demutualization Plan and decide whether to vote to 
approve in writing such Demutualization Plan after full written 
disclosure is given such policyholder by the Company, of the terms of 
the Demutualization Plan.
    (d) Any election by an Eligible Member which is a Plan to receive 
shares of Trigon Stock pursuant to the terms of the Demutualization 
Plan will be made by one or more Independent Fiduciaries of such Plan 
and neither the Company nor any of its affiliates will exercise any 
discretion or provides investment advice with respect to such election.
    (e) After each Eligible Member is allocated at least 16 shares of 
Trigon Stock, additional consideration allocated to Eligible Members 
who own participating policies will be based on actuarial formulas that 
take into account each participating policy's contribution to the 
surplus of the Company which formulas have been approved by the 
Director.
    (f) All Plans that are Eligible Members will participate in the 
transactions on the same basis within their class groupings as other 
Eligible Members that are not Plans.
    (g) No Eligible Member will pay any brokerage commissions or fees 
in connection with such Eligible Member's receipt of Trigon Stock or in 
connection with the implementation of the commission-free sales 
program.
    (h) All of the Company's policyholder obligations will remain in 
force and will not be affected by the Demutualization Plan.

Notice to Interested Persons

    The Company will provide notice of the proposed exemption to all 
Eligible Members which are Plans within 35 days of the publication of 
the notice of pendency in the Federal Register. Such

[[Page 25905]]

notice will be provided to interested persons by first class mail and 
will include a copy of the notice of proposed exemption as published in 
the Federal Register as well as a supplemental statement, as required 
pursuant to 29 CFR 2570.43(b)(2), which shall inform interested persons 
of their right to comment on the proposed exemption. Comments with 
respect to the notice of proposed exemption are due within 65 days 
after the date of publication of this exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Smith Barney, Located in New York, New York

[Application No. D-10126]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of section 406(a) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply to the lending of securities, under certain ``exclusive 
borrowing'' arrangements, to Smith Barney, and to any affiliate of 
Smith Barney who is a U.S. registered broker-dealer or a government 
securities broker or dealer (Affiliates; collectively Smith Barney), by 
employee benefit plans (Plans) with respect to which Smith Barney is a 
party in interest, provided that the following conditions are 
satisfied:
    (a) For each Plan, neither Smith Barney nor its Affiliates has 
discretionary authority or control over the Plan's investment in the 
securities available for loan, nor do they render investment advice 
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those 
assets;
    (b) Smith Barney directly negotiates an exclusive borrowing 
agreement (Borrowing Agreement) with a Plan fiduciary which is 
independent of Smith Barney;
    (c) In exchange for granting Smith Barney the exclusive right to 
borrow certain securities, the Plan either (i) Receives a reasonable 
fee, which is specified in the Borrowing Agreement for each category of 
securities available for loan and is a flat fee, a set percentage rate, 
or a percentage rate established by reference to an objective formula, 
or (ii) has the opportunity to derive compensation through the 
investment of cash collateral posted by Smith Barney;
    (d) Any change in the rate that Smith Barney pays to the Plan with 
respect to any securities loan requires the prior written consent of 
the independent fiduciary, except that consent is presumed where the 
rate changes pursuant to an objective formula specified in the 
Borrowing Agreement and the independent fiduciary is notified at least 
24 hours in advance of such change and does not object in writing 
thereto, prior to the effective time of such change;
    (e) On or before the day the loaned securities are delivered, the 
Plan receives from Smith Barney (by physical delivery, book entry in a 
securities depository, wire transfer, or similar means) collateral 
consisting of cash, securities issued or guaranteed by the U.S. 
Government or its agencies, irrevocable bank letters of credit issued 
by persons other than Smith Barney or its Affiliates, or other 
collateral permitted under PTCE 81-6, as it may be amended or 
superseded; \12\
---------------------------------------------------------------------------

    \12\  PTCE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 
FR 18754, May 19, 1987) provides an exemption under certain 
conditions from section 406(a)(1) (A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker-dealers or banks which are parties in interest.
---------------------------------------------------------------------------

    (f) The market value of the collateral initially equals at least 
102 percent of the market value of the loaned securities and, if the 
market value of the collateral at any time falls below 100 percent, 
Smith Barney delivers additional collateral on the following day to 
bring the level of the collateral back to 102 percent;
    (g) Before entering into a Borrowing Agreement, Smith Barney 
furnishes to the Plan the most recent publicly available audited and 
unaudited statements of its financial condition, as well as any 
publicly available information which it believes is necessary for the 
independent fiduciary to determine whether the Plan should enter into 
or renew the Borrowing Agreement;
    (h) The Borrowing Agreement contains a representation by Smith 
Barney that as of each time it borrows securities, there has been no 
material adverse change in its financial condition since the date of 
the most recently furnished financial statements;
    (i) The Plan receives the equivalent of all distributions made 
during the loan period, including, but not limited to, cash dividends, 
interest payments, shares of stock as a result of stock splits, and 
rights to purchase additional securities, that the Plan would have 
received (net of tax withholdings) \13\ had it remained the record 
owner of the securities;
---------------------------------------------------------------------------

    \13\ The Department notes the applicant's representation that 
dividends and other distributions on foreign securities payable to a 
lending Plan are subject to foreign tax withholdings and that Smith 
Barney will always put the Plan back in at least as good a position 
as it would have been in had it not loaned the securities.
---------------------------------------------------------------------------

    (j) The Borrowing Agreement and/or any securities loan outstanding 
may be terminated by either party at any time without penalty, 
whereupon Smith Barney returns any borrowed securities (or the 
equivalent thereof in the event of reorganization, recapitalization, or 
merger of the issuer of the borrowed securities) to the Plan within 
five business days of written notice of termination;
    (k) In the event that Smith Barney fails to return the borrowed 
securities, Smith Barney indemnifies the Plan with respect to the 
difference, if any, between the replacement cost of the borrowed 
securities and the market value of the collateral on the date the loan 
is declared in default, together with expenses not covered by the 
collateral plus applicable interest at a reasonable rate;
    (l) All procedures regarding the securities lending activities, at 
a minimum, conform to the applicable provisions of PTCE 81-6, as it may 
be amended or superseded;
    (m) Only Plans, which together with related Plans,\14\ having 
assets with an aggregate market value in excess of $50 million may lend 
securities to Smith Barney under an exclusive borrowing arrangement; 
and
---------------------------------------------------------------------------

    \14\ The Department notes the applicant's representation that 
the term ``related Plans'' refers to plans within the jurisdiction 
of Title I of the Act that are maintained by an entity or its 
affiliates, as ``affiliate'' is defined in section 407(d)(7) of the 
Act.
---------------------------------------------------------------------------

    (n) Prior to any Plan's approval of the lending of its securities 
to Smith Barney, a copy of this exemption, if granted, (and the notice 
of pendency) are provided to the Plan, and Smith Barney informs the 
independent fiduciary that Smith Barney is not acting as a fiduciary of 
the Plan in connection with its borrowing securities from the Plan.\15\
---------------------------------------------------------------------------

    \15\ The Department notes the applicant's representation that, 
under the proposed exclusive borrowing arrangements, Smith Barney 
will not perform the functions of a securities lending agent, nor 
will Smith Barney perform any services ancillary to securities 
lending, such as monitoring the level of collateral and the value of 
the loaned securities.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective 
as of September 25, 1995.

[[Page 25906]]

Summary of Facts and Representations

    1. Smith Barney is an investment services firm which is a member of 
the New York Stock Exchange and other principal securities exchanges in 
the United States and a member of the National Association of 
Securities Dealers. Smith Barney is one of the largest investment 
services firms in the United States, with $44 billion in assets and $3 
billion in stockholders' equity.
    2. Smith Barney, acting as principal, actively engages in the 
borrowing and lending of securities. Smith Barney utilizes borrowed 
securities either to satisfy its own trading requirements or to re-lend 
to other broker-dealers and entities which need a particular security 
for a certain period of time. As described in the Federal Reserve 
Board's Regulation T, borrowed securities are often used in short sales 
or in the event of a failure to receive securities that a broker-dealer 
is required to deliver.
    3. An institutional investor, such as a pension fund, lends 
securities in its portfolio to a broker-dealer or bank in order to earn 
a fee while continuing to enjoy the benefits of owning the securities, 
(e.g., from the receipt of any interest, dividends, or other 
distributions due on those securities and from any appreciation in the 
value of the securities). The lender generally requires that the 
securities loan be fully collateralized, and the collateral usually is 
in the form of cash or high quality liquid securities, such as U.S. 
Government or Federal Agency obligations or irrevocable bank letters of 
credit. When cash is the collateral, the lender invests the cash and 
rebates a previously agreed upon amount to the borrower. The ``fee'' 
received by the lender as compensation for the loan of its securities 
then consists of the excess, if any, of the earnings on the collateral 
over the amount of the rebate. When the collateral consists of 
obligations other than cash, the borrower pays a fee directly to the 
lender.
    4. Smith Barney requests an exemption for the lending of 
securities, under certain exclusive borrowing arrangements, by Plans 
with respect to which Smith Barney is a party in interest, for example, 
by virtue of its providing fiduciary, custodial, or other services to 
such Plans. For each Plan, neither Smith Barney nor its Affiliates will 
have discretionary authority or control over the Plan's investment in 
the securities available for loan, nor will they render investment 
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to 
those assets.\16\ However, because Smith Barney, by exercising its 
contractual rights under the proposed exclusive borrowing arrangements, 
will have discretion with respect to whether there is a loan of 
particular Plan securities to Smith Barney, the lending of securities 
to Smith Barney may be outside the scope of relief provided by PTCE 81-
6.
---------------------------------------------------------------------------

    \16\ Condition 1 of PTCE 81-6 requires, in part, that neither 
the borrower nor an affiliate of the borrower may have discretionary 
authority or control over the investment of the plan assets involved 
in the transaction.
---------------------------------------------------------------------------

    5. For each Plan, Smith Barney will directly negotiate a Borrowing 
Agreement with a Plan fiduciary which is independent of Smith Barney. 
Under the Borrowing Agreement, Smith Barney will have exclusive access 
for a specified period of time to borrow certain securities of the Plan 
pursuant to certain conditions. The Borrowing Agreement will specify 
all material terms of the agreement, including the basis for 
compensation to the Plan under each category of securities available 
for loan. The Borrowing Agreement will also contain a requirement that 
Smith Barney pay all transfer fees and transfer taxes relating to the 
securities loans.
    6. By the close of business on or before the day the loaned 
securities are delivered, the Plan will receive from Smith Barney (by 
physical delivery, book entry in a securities depository, wire 
transfer, or similar means) collateral consisting of cash, securities 
issued or guaranteed by the U.S. Government or its agencies, 
irrevocable bank letters of credit issued by persons other than Smith 
Barney or its Affiliates, or other collateral permitted under PTCE 81-
6, as it may be amended or superseded. The market value of the 
collateral on the preceding day will be at least 102 percent of the 
market value of the loaned securities. The independent fiduciary will 
monitor the level of the collateral daily and, if its market value 
falls below 100 percent, Smith Barney will deliver additional 
collateral by the close of business on the following day to bring the 
level of the collateral back to 102 percent. If the market value of the 
collateral exceeds 104 percent, Smith Barney may require the Plan to 
return sufficient collateral to reduce the market value of the 
collateral to 102 percent.
    7. Before entering into a Borrowing Agreement, Smith Barney will 
furnish to the Plan the most recent publicly available audited and 
unaudited statements of its financial condition, as well as any 
publicly available information which it believes is necessary for the 
independent fiduciary to determine whether the Plan should enter into 
or renew the Borrowing Agreement. Further, the Borrowing Agreement will 
contain a representation by Smith Barney that as of each time it 
borrows securities, there has been no material adverse change in its 
financial condition since the date of the most recently furnished 
financial statements.
    8. In exchange for granting Smith Barney the exclusive right to 
borrow certain securities, the Plan will either (i) receive a 
reasonable fee which is a flat fee, a set percentage rate, or a 
percentage rate established by reference to an objective formula, or 
(ii) have the opportunity to derive compensation through the investment 
of cash collateral posted by Smith Barney. Smith Barney proposes that 
different fee structures apply to different securities or groups of 
securities, depending upon various factors affecting their lending 
value, such as the time of year, the country of origin, and supply and 
demand. The fees with respect to any prospective or outstanding 
securities loan may be set or reset periodically pursuant to an 
objective formula agreed upon by Smith Barney and the independent 
fiduciary of the Plan at the time the parties enter into the Borrowing 
Agreement. Such formula may not be changed without the prior written 
consent of the independent fiduciary. If the rate that Smith Barney 
pays to the Plan for borrowing securities changes under a formula, 
Smith Barney will notify the independent fiduciary at least 24 hours in 
advance of such change, which may be implemented only if the 
independent fiduciary does not object in writing thereto, prior to the 
effective time of such change. No change may be made to rates not 
established pursuant to a formula, unless Smith Barney notifies the 
independent fiduciary at least 24 hours in advance of any change and 
obtains the prior written consent of the independent fiduciary.
    Under this fee arrangement, earnings generated by non-cash 
collateral will be returned to Smith Barney. The Plan will be entitled 
to the equivalent of all distributions made to holders of the borrowed 
securities during the loan period, including, but not limited to, cash 
dividends, interest payments, shares of stock as a result of stock 
splits, and rights to purchase additional securities that the plan 
would have received (net of tax withholdings in the case of foreign 
securities), had it remained the record owner of the securities.
    9. The Borrowing Agreement and/or any securities loan outstanding 
may be terminated by either party at any time without penalty. Upon 
termination of

[[Page 25907]]

any securities loan, Smith Barney will return the borrowed securities 
(or the equivalent thereof in the event of reorganization, 
recapitalization, or merger of the issuer of the borrowed securities) 
to the Plan within five business days of written notice of termination. 
If Smith Barney fails to return the securities or the equivalent 
thereof within the designated time, the Plan will have certain rights 
under the Borrowing Agreement to realize upon the collateral. If the 
collateral is insufficient to satisfy Smith Barney's obligation to 
return the Plan's securities, Smith Barney will indemnify the Plan with 
respect to the difference between the replacement cost of the 
securities and the market value of the collateral on the date a loan is 
declared to be in default, together with expenses incurred by the Plan 
plus applicable interest at a reasonable rate.
    10. All the procedures under the Borrowing Agreement will, at a 
minimum, conform to the applicable provisions of PTCE 81-6, as it may 
be amended or superseded. In addition, in order to insure that the 
independent fiduciary representing a Plan has the experience, 
sophistication, and resources necessary to adequately review the 
Borrowing Agreement and the fee arrangements thereunder, only Plans 
which, together with related Plans, having assets with an aggregate 
market value in excess of $50 million may lend securities under an 
exclusive borrowing arrangement to Smith Barney.
    The applicant represents that the opportunity for the Plans to 
enter into exclusive borrowing arrangements with Smith Barney under the 
flexible fee structures described herein is in the interests of the 
Plans because the Plans will then be able to choose among an expanded 
number of competing exclusive borrowers, as well as maximizing the 
volume of securities lent and the return on such securities.
    11. In summary, the applicant represents that the described 
transactions satisfy the statutory criteria of section 408(a) of the 
Act because: (a) Smith Barney will directly negotiate a Borrowing 
Agreement with an independent fiduciary of each Plan; (b) the Plans 
will be permitted to lend to Smith Barney, a major securities borrower 
who will be added to an expanded list of competing exclusive borrowers, 
enabling the Plans to earn additional income from the loaned securities 
on a secured basis, while continuing to enjoy the benefits of owning 
the securities; (c) in exchange for granting Smith Barney the exclusive 
right to borrow certain securities, the Plan will either (i) Receive a 
reasonable fee, which is specified in the Borrowing Agreement for each 
category of securities available for loan and is a flat fee, a set 
percentage rate, or a percentage rate established by reference to an 
objective formula, or (ii) have the opportunity to derive compensation 
through the investment of cash collateral posted by Smith Barney; (d) 
any change in the rate that Smith Barney pays to the Plan with respect 
to any securities loan will require the prior written consent of the 
independent fiduciary, except that consent will be presumed where the 
rate changes pursuant to an objective formula specified in the 
Borrowing Agreement and the independent fiduciary is notified at least 
24 hours in advance of such change and does not object in writing 
thereto, prior to the effective time of such change; (e) Smith Barney 
will provide sufficient information concerning its financial condition 
to a Plan before a Plan lends any securities to Smith Barney; (f) the 
collateral posted with respect to each loan of securities to Smith 
Barney initially will be at least 102 percent of the market value of 
the loaned securities and will be monitored daily by the independent 
fiduciary; (g) the Borrowing Agreement and/or any securities loan 
outstanding may be terminated by either party at any time without 
penalty, whereupon Smith Barney will return any borrowed securities (or 
the equivalent thereof in the event of reorganization, 
recapitalization, or merger of the issuer of the borrowed securities) 
to the Plan within five business days of written notice of termination; 
(h) neither Smith Barney nor its Affiliates will have discretionary 
authority or control over the Plan's investment in the securities 
available for loan; (i) the Plan size requirement will insure that the 
Plans will have the resources necessary to adequately review and 
negotiate all aspects of the exclusive borrowing arrangements; and (j) 
all the procedures will, at a minimum, conform to the applicable 
provisions of PTCE 81-6, as it may be amended or superseded.

Notice to Interested Persons

    Notice of the proposed exemption will be given to the independent 
fiduciary of any Plan which is interested in lending securities to 
Smith Barney. Such notice will be delivered by hand or first-class 
mail. Comments are due within 45 days of publication of this notice in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

VVP America, Inc. Incentive Savings Plan (the Plan), Located in 
Memphis, Tennessee

[Application No. D-10141]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 C.F.R. Part 
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the 
exemption is granted the restrictions of sections 406(a), 406 (b)(1) 
and (b)(2) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1) (A) 
through (E) of the Code, shall not apply to the proposed sales by the 
Plan to VVP America, Inc. (the Employer), the sponsor of the Plan, of 
universal life insurance policies (the Policies) issued by the 
Confederation Life Insurance Company (CLI); provided that the following 
conditions are satisfied:
    (A) All terms and conditions of the transactions are at least as 
favorable to the Plan as those which the Plan could obtain in arm's-
length transactions with unrelated parties;
    (B) The Plan receives cash purchase prices for the Policies of no 
less than the greater of (1) the fair market value of each Policy as of 
the sale date, or (2) each Policy's cash surrender value (as described 
below) as of the sale date; and
    (C) The Plan does not incur any expenses or suffer any loss with 
respect to the transactions.

Summary of Facts and Representations

    1. The Plan is a defined contribution 401(k) plan with 1,637 
participants and total assets of $26,210,617 as of June 30, 1995. The 
Plan is sponsored by the Employer, VVP America, Inc., which is a 
Delaware corporation engaged in the distribution and sale of various 
glass products. The trustee of the Plan is Dean Witter Trust Company 
(the Trustee), located in Jersey City, New Jersey.
    2. The Plan provides for individual participant accounts (the 
Accounts) and participant-directed investment of the Accounts. The 
Accounts are invested pursuant to participant directions among 
investment options selected and made available by the Trustee (the 
Options). In addition to the Plan assets invested in the Options, 67 
Accounts are invested in universal life insurance policies issued by 
Confederation Life Insurance Company (CLI), a Canadian corporation 
doing business in the

[[Page 25908]]

United States through branches in Michigan and Georgia. The Employer 
represents that a universal life policy is a flexible-premium 
individual life insurance contract maintainable for the insured's 
entire life, the premiums of which fund two components: (a) a 
protection component, providing a death benefit defined under the 
policy, and (b) an investment component, which earns interest on the 
premiums invested and which is debited with withdrawals and 
administration charges.
    The Plan assets include the CLI universal life policies as the 
result of the Employer's 1992 acquisition of the Binswanger Glass 
Company (Binswanger). The Employer adopted Binswanger's 401(k) plan 
(the Predecessor Plan), which the Employer restated and renamed as the 
Plan. The Predecessor Plan had included among its investment options a 
universal life insurance option whereby participants could direct the 
purchase of individual universal life policies issued by CLI. 
Outstanding CLI policies purchased on behalf of Predecessor Plan 
participants became assets of the Plan when the Predecessor Plan was 
adopted by the Employer and renamed as the Plan. Plan participants are 
no longer able to direct the investment of their Accounts in universal 
life policies because the Options available to the Accounts in the Plan 
do not include a universal life insurance option. Of the approximately 
250 CLI policies originally acquired by the Predecessor Plan, only 67 
policies continue to be held by the Plan (the Policies), due to 
retirements and terminations of affected participants. The Employer 
represents that as of June 30, 1995, the Policies had a combined cash 
surrender value of $227,336.<SUP>17
---------------------------------------------------------------------------

    \17\  The Department notes that the decisions to offer and 
maintain Account investments in the Policies are governed by the 
fiduciary responsibility requirements of Part 4, Subtitle B, Title I 
of the Act. In this regard, the Department herein is not proposing 
relief for any violations of Part 4 which may have arisen or may 
arise as a result of offering or maintaining the Account investments 
in the Policies.
---------------------------------------------------------------------------

    3. The Employer represents that on August 11, 1994, the Canadian 
insurance regulatory authorities placed CLI in receivership, and on 
August 12, 1994, the insurance authorities of Michigan instituted legal 
rehabilitation proceedings (the Proceedings) against CLI. During the 
Proceedings, CLI is prohibited from payment of certain contractual 
obligations under life insurance policies outstanding. The Employer 
states that although the Proceedings do not affect CLI's ability to pay 
death benefits under the Policies, the Proceedings prohibit access to 
the cash surrender values of the Policies, and the Trustee is unable to 
cash in any of the Policies to fund the payment of termination benefits 
to affected participants who separate from service with the Employer 
while the Proceedings continue (Separated Participants). The Employer 
represents that the Policies of Separated Participants remain in force 
and continue to be held in their respective Accounts even though the 
cash surrender values of the Policies remain inaccessible, and that 
neither the Trustee nor the Separated Participants may gain access to 
the cash values of the Policies. The Employer represents that because 
the Accounts of the Separated Participants no longer receive employer/
employee contributions, premiums are no longer paid on those Policies, 
and administrative charges are being debited against those Policies' 
cash surrender values. The Employer represents that among active Plan 
participants whose Accounts are invested in Policies, premiums continue 
to be paid on the Policies in the Accounts of those active participants 
who have so directed. The Employer states that six active participants 
have elected to discontinue having contributions allocated to the 
payment of premiums on Policies in their Accounts, and these Policies 
will continue to experience decline in cash values as administrative 
charges are debited against those values.
    5. The Employer represents that it is unable to determine when or 
to what extent the Trustee will be able to have access to the Policies' 
cash surrender values to pay termination benefits of Separated 
Participants. Accordingly, until such time as access to the cash 
surrender values of the Policies is restored pursuant to the 
Proceedings, the Employer desires the ability to purchase Policies from 
the Accounts of Plan participants who have separated from service since 
the Proceedings commenced and those participants who separate from 
service in the future. To enable these purchase transactions, the 
Employer is requesting an exemption, as proposed herein.
    6. The Employer proposes only to purchase Policies from the 
Accounts of separating Plan participants who specifically desire the 
cash liquidation of their Policies, and any participant who prefers to 
retain the Policy in his Account would be able to do so.<SUP>18 For 
each Policy which the Employer purchases from the Account of a 
Separated Participant, the Employer will pay such Account cash for the 
Policy in the amount of the cash surrender value of the Policy as of 
the date of the purchase, according to the most recent statement of 
such value provided by CLI. The Trustee has obtained an opinion as to 
the fair market values of the Policies from the accounting firm of 
Coopers & Lybrand, L.L.P. In an opinion letter dated August 4, 1995, 
Judy A. Faucett, F.S.A., a principal with Coopers & Lybrand, stated 
that the cash surrender values of the Policies represents a premium 
purchase price for the Policies since the Plan currently is not able to 
surrender the Policies to CLI to realize the Policies' cash values. The 
Employer will bear any expenses which may be incurred with respect to 
the proposed transactions. The Employer represents that the proposed 
transactions are necessary to enable the affected participants to 
receive the full accrued benefits in their Accounts by eliminating 
future decreases in cash surrender values of the Policies of Separated 
Participants. The Employer also maintains that the proposed 
transactions will enable the affected participants to avoid any risk 
associated with the continued holding of the Policies, due to the 
uncertainties surrounding the Proceedings.
---------------------------------------------------------------------------

    \18\  For example, a terminated Plan participant whose Account 
holds one of the Policies may have become uninsurable since the 
original acquisition of the Policy and may chose to continue holding 
the Policy rather than acquiring its cash surrender value.
---------------------------------------------------------------------------

    7. In summary, the applicant represents that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons: (a) The Accounts of affected participants will 
receive cash for the Policies in the amount of the Policies' cash 
surrender value as of the sale date; (b) The transaction will enable 
the Accounts of affected participants to avoid risk of loss associated 
with continued holding of the Policies, and to avoid future decreases 
in cash surrender value of the Policies; (c) A principal of Coopers & 
Lybrand has determined that the proposed purchase price for the 
Policies represents a premium for the Policies; and (d) The Plan will 
not incur any expenses with respect to the transactions.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department, 
telephone (202)219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve

[[Page 25909]]

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

    Signed at Washington, DC, this 20th day of May 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-12985 Filed 5-22-96; 8:45 am]
BILLING CODE 4510-29-P