[Federal Register Volume 61, Number 101 (Thursday, May 23, 1996)]
[Notices]
[Pages 25899-25909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12985]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09990, et al.
Proposed Exemptions; Blue Cross and Blue Shield of Virginia
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state
[[Page 25900]]
the issues to be addressed and include a general description of the
evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Blue Cross and Blue Shield of Virginia (the Company), Located in
Richmond, VA
[Application No. D-09990]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).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
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
(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.
---------------------------------------------------------------------------
(j) The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty,
whereupon Smith Barney returns any borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization, or
merger of the issuer of the borrowed securities) to the Plan within
five business days of written notice of termination;
(k) In the event that Smith Barney fails to return the borrowed
securities, Smith Barney indemnifies the Plan with respect to the
difference, if any, between the replacement cost of the borrowed
securities and the market value of the collateral on the date the loan
is declared in default, together with expenses not covered by the
collateral plus applicable interest at a reasonable rate;
(l) All procedures regarding the securities lending activities, at
a minimum, conform to the applicable provisions of PTCE 81-6, as it may
be amended or superseded;
(m) Only Plans, which together with related Plans,\14\ having
assets with an aggregate market value in excess of $50 million may lend
securities to Smith Barney under an exclusive borrowing arrangement;
and
---------------------------------------------------------------------------
\14\ The Department notes the applicant's representation that
the term ``related Plans'' refers to plans within the jurisdiction
of Title I of the Act that are maintained by an entity or its
affiliates, as ``affiliate'' is defined in section 407(d)(7) of the
Act.
---------------------------------------------------------------------------
(n) Prior to any Plan's approval of the lending of its securities
to Smith Barney, a copy of this exemption, if granted, (and the notice
of pendency) are provided to the Plan, and Smith Barney informs the
independent fiduciary that Smith Barney is not acting as a fiduciary of
the Plan in connection with its borrowing securities from the Plan.\15\
---------------------------------------------------------------------------
\15\ The Department notes the applicant's representation that,
under the proposed exclusive borrowing arrangements, Smith Barney
will not perform the functions of a securities lending agent, nor
will Smith Barney perform any services ancillary to securities
lending, such as monitoring the level of collateral and the value of
the loaned securities.
EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of September 25, 1995.
[[Page 25906]]
Summary of Facts and Representations
1. Smith Barney is an investment services firm which is a member of
the New York Stock Exchange and other principal securities exchanges in
the United States and a member of the National Association of
Securities Dealers. Smith Barney is one of the largest investment
services firms in the United States, with $44 billion in assets and $3
billion in stockholders' equity.
2. Smith Barney, acting as principal, actively engages in the
borrowing and lending of securities. Smith Barney utilizes borrowed
securities either to satisfy its own trading requirements or to re-lend
to other broker-dealers and entities which need a particular security
for a certain period of time. As described in the Federal Reserve
Board's Regulation T, borrowed securities are often used in short sales
or in the event of a failure to receive securities that a broker-dealer
is required to deliver.
3. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or bank in order to earn
a fee while continuing to enjoy the benefits of owning the securities,
(e.g., from the receipt of any interest, dividends, or other
distributions due on those securities and from any appreciation in the
value of the securities). The lender generally requires that the
securities loan be fully collateralized, and the collateral usually is
in the form of cash or high quality liquid securities, such as U.S.
Government or Federal Agency obligations or irrevocable bank letters of
credit. When cash is the collateral, the lender invests the cash and
rebates a previously agreed upon amount to the borrower. The ``fee''
received by the lender as compensation for the loan of its securities
then consists of the excess, if any, of the earnings on the collateral
over the amount of the rebate. When the collateral consists of
obligations other than cash, the borrower pays a fee directly to the
lender.
4. Smith Barney requests an exemption for the lending of
securities, under certain exclusive borrowing arrangements, by Plans
with respect to which Smith Barney is a party in interest, for example,
by virtue of its providing fiduciary, custodial, or other services to
such Plans. For each Plan, neither Smith Barney nor its Affiliates will
have discretionary authority or control over the Plan's investment in
the securities available for loan, nor will they render investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.\16\ However, because Smith Barney, by exercising its
contractual rights under the proposed exclusive borrowing arrangements,
will have discretion with respect to whether there is a loan of
particular Plan securities to Smith Barney, the lending of securities
to Smith Barney may be outside the scope of relief provided by PTCE 81-
6.
---------------------------------------------------------------------------
\16\ Condition 1 of PTCE 81-6 requires, in part, that neither
the borrower nor an affiliate of the borrower may have discretionary
authority or control over the investment of the plan assets involved
in the transaction.
---------------------------------------------------------------------------
5. For each Plan, Smith Barney will directly negotiate a Borrowing
Agreement with a Plan fiduciary which is independent of Smith Barney.
Under the Borrowing Agreement, Smith Barney will have exclusive access
for a specified period of time to borrow certain securities of the Plan
pursuant to certain conditions. The Borrowing Agreement will specify
all material terms of the agreement, including the basis for
compensation to the Plan under each category of securities available
for loan. The Borrowing Agreement will also contain a requirement that
Smith Barney pay all transfer fees and transfer taxes relating to the
securities loans.
6. By the close of business on or before the day the loaned
securities are delivered, the Plan will receive from Smith Barney (by
physical delivery, book entry in a securities depository, wire
transfer, or similar means) collateral consisting of cash, securities
issued or guaranteed by the U.S. Government or its agencies,
irrevocable bank letters of credit issued by persons other than Smith
Barney or its Affiliates, or other collateral permitted under PTCE 81-
6, as it may be amended or superseded. The market value of the
collateral on the preceding day will be at least 102 percent of the
market value of the loaned securities. The independent fiduciary will
monitor the level of the collateral daily and, if its market value
falls below 100 percent, Smith Barney will deliver additional
collateral by the close of business on the following day to bring the
level of the collateral back to 102 percent. If the market value of the
collateral exceeds 104 percent, Smith Barney may require the Plan to
return sufficient collateral to reduce the market value of the
collateral to 102 percent.
7. Before entering into a Borrowing Agreement, Smith Barney will
furnish to the Plan the most recent publicly available audited and
unaudited statements of its financial condition, as well as any
publicly available information which it believes is necessary for the
independent fiduciary to determine whether the Plan should enter into
or renew the Borrowing Agreement. Further, the Borrowing Agreement will
contain a representation by Smith Barney that as of each time it
borrows securities, there has been no material adverse change in its
financial condition since the date of the most recently furnished
financial statements.
8. In exchange for granting Smith Barney the exclusive right to
borrow certain securities, the Plan will either (i) receive a
reasonable fee which is a flat fee, a set percentage rate, or a
percentage rate established by reference to an objective formula, or
(ii) have the opportunity to derive compensation through the investment
of cash collateral posted by Smith Barney. Smith Barney proposes that
different fee structures apply to different securities or groups of
securities, depending upon various factors affecting their lending
value, such as the time of year, the country of origin, and supply and
demand. The fees with respect to any prospective or outstanding
securities loan may be set or reset periodically pursuant to an
objective formula agreed upon by Smith Barney and the independent
fiduciary of the Plan at the time the parties enter into the Borrowing
Agreement. Such formula may not be changed without the prior written
consent of the independent fiduciary. If the rate that Smith Barney
pays to the Plan for borrowing securities changes under a formula,
Smith Barney will notify the independent fiduciary at least 24 hours in
advance of such change, which may be implemented only if the
independent fiduciary does not object in writing thereto, prior to the
effective time of such change. No change may be made to rates not
established pursuant to a formula, unless Smith Barney notifies the
independent fiduciary at least 24 hours in advance of any change and
obtains the prior written consent of the independent fiduciary.
Under this fee arrangement, earnings generated by non-cash
collateral will be returned to Smith Barney. The Plan will be entitled
to the equivalent of all distributions made to holders of the borrowed
securities during the loan period, including, but not limited to, cash
dividends, interest payments, shares of stock as a result of stock
splits, and rights to purchase additional securities that the plan
would have received (net of tax withholdings in the case of foreign
securities), had it remained the record owner of the securities.
9. The Borrowing Agreement and/or any securities loan outstanding
may be terminated by either party at any time without penalty. Upon
termination of
[[Page 25907]]
any securities loan, Smith Barney will return the borrowed securities
(or the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within five business days of written notice of termination.
If Smith Barney fails to return the securities or the equivalent
thereof within the designated time, the Plan will have certain rights
under the Borrowing Agreement to realize upon the collateral. If the
collateral is insufficient to satisfy Smith Barney's obligation to
return the Plan's securities, Smith Barney will indemnify the Plan with
respect to the difference between the replacement cost of the
securities and the market value of the collateral on the date a loan is
declared to be in default, together with expenses incurred by the Plan
plus applicable interest at a reasonable rate.
10. All the procedures under the Borrowing Agreement will, at a
minimum, conform to the applicable provisions of PTCE 81-6, as it may
be amended or superseded. In addition, in order to insure that the
independent fiduciary representing a Plan has the experience,
sophistication, and resources necessary to adequately review the
Borrowing Agreement and the fee arrangements thereunder, only Plans
which, together with related Plans, having assets with an aggregate
market value in excess of $50 million may lend securities under an
exclusive borrowing arrangement to Smith Barney.
The applicant represents that the opportunity for the Plans to
enter into exclusive borrowing arrangements with Smith Barney under the
flexible fee structures described herein is in the interests of the
Plans because the Plans will then be able to choose among an expanded
number of competing exclusive borrowers, as well as maximizing the
volume of securities lent and the return on such securities.
11. In summary, the applicant represents that the described
transactions satisfy the statutory criteria of section 408(a) of the
Act because: (a) Smith Barney will directly negotiate a Borrowing
Agreement with an independent fiduciary of each Plan; (b) the Plans
will be permitted to lend to Smith Barney, a major securities borrower
who will be added to an expanded list of competing exclusive borrowers,
enabling the Plans to earn additional income from the loaned securities
on a secured basis, while continuing to enjoy the benefits of owning
the securities; (c) in exchange for granting Smith Barney the exclusive
right to borrow certain securities, the Plan will either (i) Receive a
reasonable fee, which is specified in the Borrowing Agreement for each
category of securities available for loan and is a flat fee, a set
percentage rate, or a percentage rate established by reference to an
objective formula, or (ii) have the opportunity to derive compensation
through the investment of cash collateral posted by Smith Barney; (d)
any change in the rate that Smith Barney pays to the Plan with respect
to any securities loan will require the prior written consent of the
independent fiduciary, except that consent will be presumed where the
rate changes pursuant to an objective formula specified in the
Borrowing Agreement and the independent fiduciary is notified at least
24 hours in advance of such change and does not object in writing
thereto, prior to the effective time of such change; (e) Smith Barney
will provide sufficient information concerning its financial condition
to a Plan before a Plan lends any securities to Smith Barney; (f) the
collateral posted with respect to each loan of securities to Smith
Barney initially will be at least 102 percent of the market value of
the loaned securities and will be monitored daily by the independent
fiduciary; (g) the Borrowing Agreement and/or any securities loan
outstanding may be terminated by either party at any time without
penalty, whereupon Smith Barney will return any borrowed securities (or
the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within five business days of written notice of termination;
(h) neither Smith Barney nor its Affiliates will have discretionary
authority or control over the Plan's investment in the securities
available for loan; (i) the Plan size requirement will insure that the
Plans will have the resources necessary to adequately review and
negotiate all aspects of the exclusive borrowing arrangements; and (j)
all the procedures will, at a minimum, conform to the applicable
provisions of PTCE 81-6, as it may be amended or superseded.
Notice to Interested Persons
Notice of the proposed exemption will be given to the independent
fiduciary of any Plan which is interested in lending securities to
Smith Barney. Such notice will be delivered by hand or first-class
mail. Comments are due within 45 days of publication of this notice in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
VVP America, Inc. Incentive Savings Plan (the Plan), Located in
Memphis, Tennessee
[Application No. D-10141]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the
exemption is granted the restrictions of sections 406(a), 406 (b)(1)
and (b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (E) of the Code, shall not apply to the proposed sales by the
Plan to VVP America, Inc. (the Employer), the sponsor of the Plan, of
universal life insurance policies (the Policies) issued by the
Confederation Life Insurance Company (CLI); provided that the following
conditions are satisfied:
(A) All terms and conditions of the transactions are at least as
favorable to the Plan as those which the Plan could obtain in arm's-
length transactions with unrelated parties;
(B) The Plan receives cash purchase prices for the Policies of no
less than the greater of (1) the fair market value of each Policy as of
the sale date, or (2) each Policy's cash surrender value (as described
below) as of the sale date; and
(C) The Plan does not incur any expenses or suffer any loss with
respect to the transactions.
Summary of Facts and Representations
1. The Plan is a defined contribution 401(k) plan with 1,637
participants and total assets of $26,210,617 as of June 30, 1995. The
Plan is sponsored by the Employer, VVP America, Inc., which is a
Delaware corporation engaged in the distribution and sale of various
glass products. The trustee of the Plan is Dean Witter Trust Company
(the Trustee), located in Jersey City, New Jersey.
2. The Plan provides for individual participant accounts (the
Accounts) and participant-directed investment of the Accounts. The
Accounts are invested pursuant to participant directions among
investment options selected and made available by the Trustee (the
Options). In addition to the Plan assets invested in the Options, 67
Accounts are invested in universal life insurance policies issued by
Confederation Life Insurance Company (CLI), a Canadian corporation
doing business in the
[[Page 25908]]
United States through branches in Michigan and Georgia. The Employer
represents that a universal life policy is a flexible-premium
individual life insurance contract maintainable for the insured's
entire life, the premiums of which fund two components: (a) a
protection component, providing a death benefit defined under the
policy, and (b) an investment component, which earns interest on the
premiums invested and which is debited with withdrawals and
administration charges.
The Plan assets include the CLI universal life policies as the
result of the Employer's 1992 acquisition of the Binswanger Glass
Company (Binswanger). The Employer adopted Binswanger's 401(k) plan
(the Predecessor Plan), which the Employer restated and renamed as the
Plan. The Predecessor Plan had included among its investment options a
universal life insurance option whereby participants could direct the
purchase of individual universal life policies issued by CLI.
Outstanding CLI policies purchased on behalf of Predecessor Plan
participants became assets of the Plan when the Predecessor Plan was
adopted by the Employer and renamed as the Plan. Plan participants are
no longer able to direct the investment of their Accounts in universal
life policies because the Options available to the Accounts in the Plan
do not include a universal life insurance option. Of the approximately
250 CLI policies originally acquired by the Predecessor Plan, only 67
policies continue to be held by the Plan (the Policies), due to
retirements and terminations of affected participants. The Employer
represents that as of June 30, 1995, the Policies had a combined cash
surrender value of $227,336.17
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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.
---------------------------------------------------------------------------
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
