Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 25899

• Minimize the burden of the

collection of information on those who

are to respond, including through the

use of appropriate automated,

electronic, mechanical, or other

technological collection techniques or

other forms of information technology,

e.g., permitting electronic submissions

of responses.

ADDRESSEE: Mary Ann Wyrsch, Director,

Unemployment Insurance Service,

Employment and Training

Administration, U.S. Department of

Labor, Room S4231, 200 Constitution

Avenue, N.W., Washington, D.C. 20210,

telephone number (202) 219–7831 (this

is not a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background

Public Law 100–707 (Sections 410

and 423) provide for benefit assistance

to ‘‘any individual unemployed as a

result of a major disaster.’’ SESA’s,

through agreements between the States

and the Secretary of Labor, act as agents

of the Secretary for the purpose of

providing assistance to applicants in the

various States who are unemployed as

a result of a major disaster. The forms

in Chapters III through VII of the

Disaster Unemployment Assistance

Handbook are used in connection with

the provision of this benefit assistance.

(Previously cleared for use thru OMB by

ETA under OMB No. 1205–0051.)

Form ETA 81 is an application form

which is required to be completed by

every applicant for Disaster

Unemployment Assistance (DUA); DUA

Form ETA 81A is a supplemental form

to be completed by self-employed (or

self employed prior to the disaster)

applicants only; Form ETA 82 is used

by the State agency in making a

determination of each applicant’s

entitlement to DUA and to notify the

applicant of the determination; Section

A of Form ETA 83 is completed by the

applicant each time (weekly or biweekly) he/she continues to request

assistance to ensure continued

entitlement, and Section B is completed

by the State agency to notify the

applicant of his/her current eligibility

status; and Form ETA 84 is used by the

State agency to notify overdrawn

participants in the DUA program of the

weeks and the cause of overpayment.

These forms are prescribed by the

Secretary under 20 CFR 625.8 and 625.9

and are all necessary to the operation of

the program.

II. Current Actions

The forms (described above) are used

by SESA’s in operating the program and

are not reports per se. The continuation

of this existing use of these forms by

SESA’s is essential to the operation of

the DUA program. Because time is of the

essence in making benefit payments due

as a result of a major disaster,

application data relating to the disaster

are requested by State agencies through

a number of appropriate forms. As

previously indicated, if data were

requested less frequently,

determinations as to eligibility would be

much more erratic, and the overall

monitoring of the program as required

by the Robert T. Stafford Disaster Relief

and Emergency Assistance Act, in order

to insure adequate administration—yet

expeditious administration—would be

greatly impaired. Effective accounting of

disaster unemployment assistance

benefits and other emergency

expenditures would also be hampered.

Type of Review: Extension.

Agency: Employment and Training

Administration.

Title: Disaster Unemployment

Assistance (DUA) Program Operating

Forms.

OMB Number: 1205–0051.

Agency Number(s): ETA 81, ETA 81A,

ETA 82, ETA 83, and ETA 84.

Affected Public: Individuals/State

Government.

Cite/reference Total

respondents Frequency Totalresponses

Average time

per response

(hours)

Burden in hours

ETA 81 ............................................................................. 11,000 Annually ....... 11,000 1⁄3 3,666

ETA 81A ........................................................................... 3,800 Annually ....... 3,800 1⁄4 950

ETA 82 ............................................................................. 11,000 Annually ....... 11,000 1⁄4 2,750

ETA 83 ............................................................................. 11,000 Annually ....... 66,000 1⁄4 16,500

ETA 84 ............................................................................. 235 Annually ....... 235 1⁄2 117

Totals ......................................................................... 11,000 ...................... 92,035 ........................ 23,983

Total Burden Cost (capital/startup):

$0.00.

Total Burden Cost (operating/

maintaining): $148,922.

Comments submitted in response to

this comment request will be

summarized and/or included in the

request for Office of Management and

Budget approval of the information

collection request; they will also

become a matter of public record.

Dated: May 15, 1996.

Mary Ann Wyrsch,

Director, Unemployment Insurance Service,

Employment and Training Administration.

[FR Doc. 96–13008 Filed 5–22–96; 8:45 am]

BILLING CODE 4510–30–M

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.

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
25900 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

1For 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.

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).1

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.
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 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. § 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. § 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. § 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. § 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
25902 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

2The 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.

3The 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.

4The 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.

policyholders. (Va. Stat. § 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

(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

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.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
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 25903

5The 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).

6The 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.

7The 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.

8A 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.

each Eligible Member will receive 16

shares for each vote.

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 × 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) 5 derived for the Eligible

Member’s MPL for each year.

Period

Covered

lives

ECF

Equity

contribution

Pre-1989 ...... 22 × $50 $1,100

1989 ............. 22 × 60 1,320

1990 ............. 30 × 60 1,800

1991 ............. 28 × 40 1,120

1992 ............. 35 × 70 2,450

1993 ............. 35 × 60 2,100

1994 ............. 40 × 80 3,200

Future ........... 40 × 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 × 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.6

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.7 Trigon Stock allocated to

this class of Eligible Members is termed

‘‘Mandatory Cash Shares.’’

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’’ 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.

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
25904 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

9An Odd Lot Holder is an Eligible Member who

will receive more than 0 and less than 100 shares

of Trigon Stock.

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.

will be used to pay all Preferred Cash

Members who are Odd Lot Holders.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.

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.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.11

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
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 25905

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.

13The 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.

14The 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.

15The 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.

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

(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;

(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

(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

EFFECTIVE DATE: The proposed

exemption, if granted, will be effective

as of September 25, 1995.
25906 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

16Condition 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.

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.

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
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 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
25908 Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices

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.

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.

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 $227,336.17

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.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.

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
Federal Register / Vol. 61, No. 101 / Thursday, May 23, 1996 / Notices 25909

1Unless termination was in bad faith wherein the

Manager may seek legal recourse.

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

[Prohibited Transaction Exemption 96–38;

Exemption Application No. D–09410, et al.]

Grant of Individual Exemptions;

RREEF USA Fund

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Grant of Individual Exemptions.

SUMMARY: This document contains

exemptions issued by the Department of

Labor (the Department) from certain of

the prohibited transaction restrictions of

the Employee Retirement Income

Security Act of 1974 (the Act) and/or

the Internal Revenue Code of 1986 (the

Code).

Notices were published in the Federal

Register of the pendency before the

Department of proposals to grant such

exemptions. The notices set forth a

summary of facts and representations

contained in each application for

exemption and referred interested

persons to the respective applications

for a complete statement of the facts and

representations. The applications have

been available for public inspection at

the Department in Washington, D.C. The

notices also invited interested persons

to submit comments on the requested

exemptions to the Department. In

addition the notices stated that any

interested person might submit a

written request that a public hearing be

held (where appropriate). The

applicants have represented that they

have complied with the requirements of

the notification to interested persons.

No public comments and no requests for

a hearing, unless otherwise stated, were

received by the Department.

The notices of proposed exemption

were issued and the exemptions are

being granted solely by the Department

because, 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 proposed to the

Secretary of Labor.

Statutory Findings

In accordance with section 408(a) of

the Act and/or section 4975(c)(2) of the

Code and the procedures set forth in 29

CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990) and based upon

the entire record, the Department makes

the following findings:

(a) The exemptions are

administratively feasible;

(b) They are in the interests of the

plans and their participants and

beneficiaries; and

(c) They are protective of the rights of

the participants and beneficiaries of the

plans.

RREEF USA Fund—I (The Trust),

Located in San Francisco, California

[Prohibited Transaction Exemption 96–38;

Exemption Application No. D–09410]

Exemption

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 receipt

by RREEF America L.L.C., the

investment manager of the Trust (the

Manager), of a certain performance

compensation fee (the Performance Fee)

in connection with the liquidation of

the Trust, provided that the following

conditions are satisfied:

(a) The terms and the payment of the

Performance Fee shall be approved in

writing, through approval of an

amendment to the Group Trust

Agreement, by independent fiduciaries

of the plans that participate in the Trust

(the Participating Plans);

(b) The terms of the Performance Fee

shall be at least as favorable to the

Participating Plans as those obtainable

in an arm’s-length transaction between

unrelated parties;

(c) The total fees paid to the Manager

by the Participating Plans that have

invested in the Trust, shall constitute no

more than reasonable compensation;

(d) The Performance Fee will be

payable only when all of the assets of

the Trust have been completely

liquidated;

(e) The Performance Fee received by

the Manager will be based on

distributions, adjusted for inflation and

present value, and will be calculated

using two real hurdle rates of return.

The Performance Fee will equal 10%

after the Participating Plans have earned

a 5% real return on the initial value of

their investment and 20% after the

Participating Plans have earned an 8%

real return on the initial value of their

investment;

(f) In the event of the Manager’s

resignation or termination as the

investment manager to the Trust, the

Investment Management Agreement

would also terminate 1 and the Manager

will not receive a Performance Fee;

(g) The Manager or its affiliates shall

maintain, for a period of six years, the

records necessary to enable the persons

described in paragraph (2) of this

Section (g) to determine whether the

conditions of this exemption have been

met, except that:

(1) (a) a prohibited transaction will

not be considered to have occurred if,

due to circumstances beyond the control

of the Manager or its affiliates, the

records are lost or destroyed prior to the

end of the six year period; and (b) no

party in interest, other than the

Manager, shall be subject to the civil

penalty that may be assessed under

section 502(i) of the Act or the taxes

imposed by section 4975(a) and (b) of

the Code if the records are not