Proposed Exemptions; Blue Cross and Blue Shield of Virginia

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).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.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) 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).

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Covered Equity

Period lives ECF contribution

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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

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Total Equity Contribution........... ....... .. ..... $15,490

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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.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.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'' 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.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.

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\9\ An Odd Lot Holder is an Eligible Member who will receive

more than 0 and less than 100 shares of Trigon Stock.

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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

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\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.

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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\

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\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.

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(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;

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\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.

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(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

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\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.

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(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\

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\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.

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\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.

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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 $227,336.17

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\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.

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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.

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\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.

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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