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Employee Benefits Security Administration

EBSA Federal Register Notice

Northwest Airlines Pension Plan for Salaried Employees (Salaried Plan) [08/19/2003]

[PDF Version]

Volume 68, Number 160, Page 49792-49808

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption (PTE) 2003-26, Exemption Application 
Numbers D-11137, 11138, and 11139]

 
Northwest Airlines Pension Plan for Salaried Employees (Salaried 
Plan), the Northwest Airlines Pension Plan for Pilot Employees (Pilot 
Plan), and the Northwest Airlines Pension Plan for Contract Employees 
(Contract Plan) (Collectively, the Plans), Located in Eagan, MN

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Grant of individual exemption.

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SUMMARY: This document contains a final exemption issued by the 
Department of Labor (the Department) from certain prohibited 
transaction restrictions of the Employee Retirement Income Security Act 
of 1974 (ERISA or the Act) and from certain taxes imposed by the 
Internal Revenue Code of 1986 (the Code).
    The exemption permits: (1) The in-kind contribution(s) of the 
common stock of Pinnacle Airlines Corp.\1\ (Pinnacle Stock) to the 
Plans by Northwest Airlines, Inc. (Northwest), a party in interest with 
respect to such Plans; (2) the holding of the Pinnacle Stock by the 
Plans; (3) the sale of the Pinnacle Stock by the Plans to Northwest; 
(4) the acquisition, holding, and exercise by the Plans of a put option 
(the Put Option) granted to the Plans by Northwest; and (5) the 
guaranty to the Plans by Northwest Airlines Corporation (NWA Corp.) of 
Northwest's obligation to honor the Put Option (the Exemption 
Transactions). The exemption affects participants and beneficiaries of, 
and fiduciaries with respect to, the Plans.
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    \1\ Pinnacle Airlines Corp. is the holding company of Pinnacle 
Airlines, Inc.

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DATES: This exemption is effective as of January 15, 2003.

FOR FURTHER INFORMATION CONTACT: Wendy M. McColough of the Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, telephone (202) 693-8540. (This is not a 
toll-free number.)

SUPPLEMENTARY INFORMATION: On January 17, 2003, the Department 
published a notice in the Federal Register (68 FR 2578) of a proposed 
individual exemption (the Proposed Exemption). The Proposed Exemption 
was requested in an application filed on

[[Page 49793]]

behalf of Northwest pursuant to 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, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (5 U.S.C. App. 1, 1995) transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Accordingly, this final exemption is issued 
solely by the Department.
    The notice set forth a summary of the facts and representations 
contained in Northwest's November 6, 2002 application for exemptive 
relief (Application) and referred interested persons to the Application 
for a complete statement of the facts and representations. The 
Application has been available for public inspection at the Department 
in Washington, DC.
    The notice also invited interested persons to submit comments on 
the proposed exemption and/or to request that a public hearing be held. 
In response to the solicitation of comments from interested persons, 
the Department received over 1,700 letters, e-mails, faxes and phone 
calls, of which more than 1,000 requested that a public hearing be held 
on the Proposed Exemption. Many of the commenters expressed concern 
about the effect of the Proposed Exemption on the Plans. The concerns 
expressed generally related to the proposed contribution of Pinnacle 
Stock instead of a cash contribution to the Plans; the value and method 
of valuation of the Pinnacle Stock; the effects of the proposed 
transactions on the Plans; and the adequacy of the proposed safeguards 
that are intended to protect the Plans' interests. In view of the 
comments requesting a hearing, on March 11, 2003, the Department 
published in the Federal Register (68 FR 11589) a notice of hearing on 
the Proposed Exemption. The hearing on the Proposed Exemption was held 
on May 5 and 6, 2003 at the Department of Labor (the Hearing). Upon 
consideration of all of the comments received and testimony offered at 
the Hearing, the Department has determined to grant the proposed 
exemption subject to certain modifications. These modifications and the 
major comments are discussed below.

Discussion of the Comments

Northwest March 3, 2003 Comment

    By letter dated March 3, 2003, Northwest described the Northwest 
contribution of Pinnacle Stock made to the Contract Plan on January 15, 
2003 (the March 3 Comment). Northwest represents that the contribution 
was effected after the date on which the Department had completed work 
on the Proposed Exemption. The details of the Pinnacle Stock 
contribution were provided in the March 3, 2003 letter. Northwest also 
provided more detail about the final terms of the transactions as 
agreed to by Northwest and the Plans' independent fiduciary, Aon 
Fiduciary Counselors, Inc. (Fiduciary Counselors or Independent 
Fiduciary). Northwest states that, in this regard, some refinements 
were made to the provisions of the ``Term Sheet'' when the parties 
negotiated and entered into the final ``Omnibus Agreement'' (executed 
on January 15, 2003). The changes incorporated into the Omnibus 
Agreement were requested and approved by Fiduciary Counselors. In this 
regard, Northwest believes that this provided even more favorable terms 
for the Plans than those reflected in the Term Sheet.\2\
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    \2\ Northwest notes that the Omnibus Agreement, while consistent 
with the Term Sheet, provides specific terms for: the contribution 
transactions; transferability of Pinnacle Stock; corporate 
governance; voting rights; the Put Option; representations and 
warranties; and a number of other matters.
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Contribution of Pinnacle Stock
    Northwest reported that the Omnibus Agreement was executed between 
Pinnacle Airlines Corporation (Pinnacle), Northwest Airlines, Inc. 
(Northwest), Northwest Airlines Corporation (NWA Corp.) and Aon 
Fiduciary Counselors, Inc (Fiduciary Counselors). Pursuant to the terms 
of the Omnibus Agreement, Northwest contributed Pinnacle Stock to the 
Contract Plan. The Omnibus Agreement provided for two contributions to 
be made to the Contract Plan on January 15, 2003. An ``Initial 
Contribution'' was made in the amount of $41,149,911. The Initial 
Contribution was comprised of 1,819,833 shares valued at $22.61 per 
share.\3\ The amount of the Initial Contribution is equal to the amount 
that was required to meet the quarterly funding requirements under 
ERISA section 302 and Code section 412(l) for the Contract Plan due on 
January 15, 2003. The Omnibus Agreement also provided for an 
``Additional Initial Contribution'' to the Contract Plan in the amount 
of $2,671,983 (118,167 shares valued at $22.61 per share).
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    \3\ Northwest represents that the amount of shares necessary to 
satisfy the required contribution was based upon a final valuation 
of Pinnacle by Fiduciary Counselors, relying on a valuation report 
prepared by Eclat Consulting. Northwest notes that, while Fiduciary 
Counselors received and reviewed valuation information provided by 
Morgan Stanley & Co. Inc. (Morgan Stanley), Fiduciary Counselors 
retained Eclat to provide valuation services.
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    The Term Sheet did not provide for the Additional Initial 
Contribution. This additional contribution was agreed upon as a result 
of a technical concern raised by Fiduciary Counselors regarding 
covenants in Northwest's $1.125 billion Credit and Guarantee Agreement 
dated October 24, 2000, as amended under which Northwest is the 
borrower (the Credit Agreement), with Northwest's bank lenders. The 
Additional Initial Contribution served to provide the Plans with added 
protection until Northwest obtained written assurances from the bank 
lenders that the Put Option does not violate the Credit Agreement. On 
February 14, 2003, Northwest obtained formal written confirmation from 
the bank lenders that none of the rights afforded to the Plans in the 
Omnibus Agreement nor the exercise of such rights would violate the 
Credit Agreement. Accordingly, Northwest notes that, consistent with 
the Omnibus Agreement's terms, the Additional Initial Contribution will 
be treated as a credit balance and be applied toward future 
contributions to the Contract Plan.
    The total value of the Initial Contribution and Additional Initial 
Contributions made to the Contract Plan was $43,821,894. Pinnacle Stock 
in that amount was transferred to State Street Bank, the trustee for 
the Northwest Master Trust for Defined Benefit Plans that holds the 
assets of all of the Northwest Plans (the Master Trust). Northwest 
instructed State Street Bank to establish an ``Investment Fund'' in 
connection with the Plans' Master Trust. The Investment Fund holds 
Pinnacle Stock on behalf of the Contract Plan and the Salaried Plan. As 
a result of instructions given to State Street, after the contribution 
was made to the Investment Fund, the Contract Plan owns 83.5% of the 
Investment Fund, while the Salaried Plan owns 16.5% of the Investment 
Fund. Each Plan's percentage ownership reflects the relative size of 
each Plan to each other. At that time, the Pilot Plan did not 
participate in the Pinnacle Stock Investment Fund.\4\
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    \4\ Northwest states, as noted in the Proposed Exemption, that 
the Master Trust is established in a manner such that all Plans hold 
an undivided and commingled interest in the assets of the Trust. 
Since Northwest was prohibited from investing the Pilot Plan's 
assets in employer stock, the Pilot Plan at that time, did not 
participate in the investment fund. However, Northwest notes that it 
has received the consent of the Air Line Pilots Association (ALPA), 
the union representing Northwest pilots, to permit the Pilot Plan to 
hold Pinnacle Stock (see below for discussion of the Northwest and 
ALPA Letter Agreement).

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[[Page 49794]]

Description of the Put Option
    Northwest noted that the description of the Put Option in the first 
and second columns at 68 FR 2580 of the Federal Register notice 
accurately describes the structure of the Put Option as described in 
Northwest's Application. However, as noted in Northwest's Application, 
the final terms of the Put Option were subject to negotiation with 
Fiduciary Counselors. Northwest believes that the final terms for the 
Put Option, which are more favorable to the Plans, are more completely 
and accurately stated in the description of the Put Option contained in 
the description of the Term Sheet as set forth at 68 FR 2587.
Fair Market Value of Pinnacle Stock
    Northwest noted that, as reflected in the Term Sheet, Fiduciary 
Counselors will determine the fair market value of the Pinnacle Stock 
contributed to the Plans on an annual basis and in advance of each 
contribution to the Plans. Fiduciary Counselors will also determine 
fair market value at the time it exercises the Put Option so long as 
the shares of Pinnacle Stock are not publicly traded. Accordingly, the 
reference in the first column at 68 FR 2585 to quarterly valuations is 
no longer correct. Northwest notes that quarterly valuations were 
contemplated in the Application, but a change to annual valuations was 
made when Northwest and Fiduciary Counselors agreed to the Term Sheet.
Corporate Governance Rights
    Northwest explained that the Omnibus Agreement granted the Plans 
additional rights in order to protect their interest in the Pinnacle 
Stock. Omnibus Agreement at section 7.2, Certain Approval Rights. In 
this regard, beginning at such time as the Plans hold more than 50% of 
the issued and outstanding Pinnacle Stock, and until the earlier of (i) 
the date the Plans hold less than 25% of such shares or (ii) the Put 
Option with respect to such shares has terminated, the affirmative vote 
of the Plan s director will be required to (1) approve the election, 
appointment and compensation of any new Chief Executive Officer (CEO), 
(2) approve any modification or other changes to the Note Pinnacle has 
issued to Northwest (3) approve any amendment to Pinnacle s bylaws that 
affects the Plans shares of Pinnacle Stock in a manner different from 
other shares of Pinnacle Stock or otherwise amends the Series A 
Preferred Stock, and (4) unless Pinnacle is publicly traded, approve 
the issuance of shares of capital stock of Pinnacle or otherwise effect 
changes in the capital structure of Pinnacle. Thus, the fourth bullet 
point in the second column at 68 FR 2585 (describing certain voting 
rights) should be modified accordingly.
    The requirement (detailed in the last bullet point in the second 
column of the Proposed Exemption at 68 FR 2585) that Plan shares of 
Pinnacle Stock be voted in favor of certain corporate actions is now 
set to expire upon the occurrence of an Early Termination Event. See 
Omnibus Agreement at section 7.3.
Independent Directors
    Northwest noted that the second bullet point in the third column at 
68 FR 2585 (respecting the obtainment of fairness opinions) has been 
revised. In this regard, section 11.3(b) of the Omnibus Agreement now 
provides that at the request of a majority of Pinnacle's independent 
directors, a fairness opinion will be obtained from an investment bank 
respecting certain Affiliate Transactions. The Term Sheet originally 
placed the right to request this fairness opinion solely on the Plans' 
director, who asked that this duty be placed on the independent 
directors of which the Plans' director is a member.
Valuation in Connection With the Right of First Refusal
    Northwest noted that the Omnibus Agreement added certain valuation 
details that expand the discussion of the Right of First Refusal at 68 
FR 2586. The description of Northwest's right of first refusal with 
respect to Pinnacle Stock is accurate; however, if the Plans negotiate 
the sale of Pinnacle Stock to a third party for non-cash consideration, 
the Omnibus Agreement includes a specific valuation mechanism with 
respect to such consideration. See Omnibus Agreement at section 6.2. 
First, the Plans must provide Northwest with an ``Offer Notice'' which 
shall contain an independent valuation of the consideration by a 
nationally recognized valuation expert acceptable to Fiduciary 
Counselors and Northwest. If Fiduciary Counselors and Northwest are 
unable to agree on the valuation expert, the Omnibus Agreement sets 
forth a dispute mechanism to arrive at a final determination. In this 
process, Northwest and Fiduciary Counselors each select their own 
nationally recognized valuation expert (Principals' Experts), which 
experts submit their appraisals to a third expert chosen by the 
Principals' Experts. The third expert then determines which of the two 
assessed values should be assigned to such non-cash consideration.
Modification of Final Deferral Rule
    Northwest observed that the Term Sheet, as reflected in the 
Proposed Exemption, allows Northwest to defer the closing date with 
respect to Pinnacle Stock repurchased pursuant to the Put Option (such 
delay, a ``Deferral''). The length of the Deferral varies based upon a 
function of (1) the ``liquidity'' of Northwest (as defined in the 
Omnibus Agreement) and (2) the value of Pinnacle Stock contributed to 
the Plans. In the Proposed Exemption, it was noted that the length of 
the Deferral would be shortened if Pinnacle Stock was publicly traded 
at the time that the Put Option is exercised. As with the Term Sheet, 
the final Omnibus Agreement provides that the Deferral shall be 
shortened if Pinnacle Stock is publicly traded. However, the Omnibus 
Agreement revises this provision to provide that, if Pinnacle Stock is 
publicly traded, the Deferral will be reduced, in each case, by thirty 
days except that in no event shall Northwest have less than a 30 day 
Deferral in which to close the transactions contemplated by the Put 
Option. This change generally reduces the length of the available 
Deferral when the Plans hold more than $325 million in Pinnacle Stock 
(measured as of the date of each contribution). See Omnibus Agreement 
at section 8.2.

Fiduciary Counselors March 5, 2003 Comment

    On March 5, 2003, Jones Day submitted comments on behalf of 
Fiduciary Counselors, the Independent Fiduciary (the March 5 Comment).
Restrictions on Transfer and Voting
    The Independent Fiduciary notes that the Proposed Exemption, in the 
first column of 68 FR 2580 (first full paragraph), makes reference to 
voting restrictions and limits on the ability of the Plans to dispose 
of the Pinnacle Stock, except pursuant to an initial public offering 
(IPO) initiated by Northwest or by exercise of the Put Option. In 
addition, as reflected in the Omnibus Agreement, the Independent 
Fiduciary has negotiated a lapse of all transfer restrictions on the 
Pinnacle Stock held by the Plans on July 1, 2006, and upon an ``Early 
Termination Event'' (including a breach of the Omnibus Agreement by 
Northwest or Pinnacle or Northwest's failure to honor its Put Option 
obligations, but excluding violations of the ``scope clause'' 
limitations in certain of Northwest's collective bargaining agreements 
\5\). A

[[Page 49795]]

breach of the Omnibus Agreement by Pinnacle constitutes an Early 
Termination Event if such breach continues because Northwest fails to 
exercise its rights as a stockholder to cause the Pinnacle directors to 
cure the breach or to replace such directors. See Omnibus Agreement, 
Definition of ``Early Termination Event'' at section 1.1.
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    \5\ Section 1C of the Northwest Pilots Agreement, the Collective 
Bargaining Agreement between Northwest and the Air Line Pilots 
Association dated as of September 13, 1998, as amended, or any 
successor agreement. This Section requires that all ``revenue 
flying'' for Northwest and its affiliates must be performed by 
pilots on the integrated Pilots System Seniority List in accordance 
with the collective bargaining agreement, except for revenue flying 
by an airline that at all times operates only aircraft that are 
certified with a maximum passenger capacity of 60, and a maximum 
gross takeoff weight of less than 70,000 pounds.
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Eclat Consulting Valuation
    The Independent Fiduciary represents that the description of the 
valuation by Eclat Consulting (Eclat) of Pinnacle in the Proposed 
Exemption commencing in the second column of 68 FR 2580 (the Eclat 
Report) should be updated to reflect Eclat's valuation of Pinnacle as 
of January 15, 2003. The January 15, 2003 Eclat valuation report 
(January 15, 2003 Valuation) was attached to the Independent 
Fiduciary's report submitted to the Department on April 25, 2003 (see 
below for a discussion of these documents).
Put Option
    As previously mentioned in the March 3 Comment, the changes to the 
description of the Put Option in the Proposed Exemption are noted by 
the Independent Fiduciary who adds that the Proposed Exemption should 
be revised in accordance with the definition of ``Market Value'' in 
section 1.1 and the language of section 8.3 of the Omnibus Agreement. 
In particular, subparagraph (i) at 68 FR 2580 of the Proposed Exemption 
should reflect that, prior to an IPO, the Plans will be entitled to the 
greatest of (1) the value of the stock when contributed, (2) the fair 
market value of the stock on the date that the determination of fair 
market value is made (e.g., with respect to the Put Option, the date 
the Put Option is exercised), or, if greater, (3) the value as of the 
closing date of the Put Option.
    Similarly, subparagraph (iii) at 68 FR 2580 should reflect that, 
after an IPO, the Plans will be entitled to the greatest of the value 
of the stock at the time of the contribution, or the average of the 
closing price for the Pinnacle Stock on the public market for the 10 
trading days (or such other number if fewer than 10) preceding the 
exercise date, or as of the last trading day before the closing date of 
the Put Option.
    In addition, in the paragraph immediately following subparagraph 
(iii) in the second column of 68 FR 2580, the reference to the price of 
Pinnacle Stock being determined as of the exercise date should be 
expanded to reflect these concepts. Similarly, in the second column of 
68 FR 2588 (third full paragraph), the reference in subclause (II) to 
the closing price of Pinnacle shares on the closing date should refer 
to the last trading day before the closing date.
Plan Director
    As also mentioned in the March 3 Comment, the Independent Fiduciary 
notes that at the fifth paragraph of the ``Voting Provisions'' section 
in the Proposed Exemption at column 2 of 68 FR 2585, the description of 
the required affirmative vote of the director designated by the Plans 
should be expanded to include the approval of: amending the Note, 
amending Pinnacle's charter or by-laws in certain respects, 
implementing certain changes in Pinnacle's capital structure, or 
issuing capital stock prior to an IPO, as set forth in the Omnibus 
Agreement. See Omnibus Agreement at section 7.2. Additionally, the 
Independent Fiduciary corrects language in the fifth paragraph of the 
``Voting Provisions'' of the Proposed Exemption that states a majority 
of Pinnacle's board is needed for the approval of compensation of 
Pinnacle's CEO. Section 7.2(b) of the Omnibus Agreement requires only 
that the appointment of a new CEO be approved by a majority of 
Pinnacle's board (excluding the Northwest Director), and does not make 
reference to the compensation of Pinnacle's CEO.
Additional Comments
    The Independent Fiduciary reports that it negotiated the following 
additional requirements.
    1. A comprehensive set of representations and warranties relating 
to both Pinnacle, Northwest and its affiliates. See Omnibus Agreement 
at sections 5.1 and 5.2.
    2. An additional provision that would prohibit Northwest from using 
its rights under the Series A Preferred Share to block a Transfer of 
Pinnacle Stock following an Early Termination Event. See Omnibus 
Agreement at section 6.3.
    3. Northwest Airlines Corporation (NWA Corp.) will guarantee 
Northwest's obligations under the Omnibus Agreement, including the Put 
Option. See Omnibus Agreement at section 8.8.
    4. The right to engage an investment banker on behalf of the Plans 
in an IPO, at Northwest's expense. See Omnibus Agreement at section 
9.1(d).
    5. A provision providing that the exercise price of any options on 
Pinnacle Stock granted to its executive employees under its stock 
incentive plan at the time of an IPO would be at the greater of the 
value of the stock at the time it was contributed to the Plans or the 
IPO price. See Omnibus Agreement at section 11.2.
    Finally, Fiduciary Counselors requests that in Section III. 
Definitions at (a) of the Proposed Exemption in column 1 of 68 FR 2590, 
the reference to ``5 percent (5%) of such fiduciary's gross income, for 
Federal income tax purposes, in its prior tax year, will be paid by 
Northwest'' should read ``5 percent (5%) of such fiduciary's annual 
gross revenue in the year of its engagement, will be paid by 
Northwest.''
    The Department has determined that it would be appropriate to 
modify the definition of independent fiduciary as follows:
    ``(3) the annual gross revenue received by such fiduciary, during 
any year of its engagement, from Northwest and its affiliates exceeds 5 
percent (5%) of the independent fiduciary's annual gross revenue from 
all sources for its prior tax year.''

Fiduciary Counselors and Eclat April 25, 2003 Submissions

    On April 25, 2003, Fiduciary Counselors provided to the Department 
the Independent Fiduciary Report on Contribution of Pinnacle Airlines 
Corp. Stock to the Northwest Airlines Pension Plan For Contract 
Employees dated March 16, 2003 (the IF Report), the January 15, 2003 
Eclat valuation of Pinnacle (the January 15, 2003 Valuation), and an 
explanation of the valuation of the Put Option.
The Independent Fiduciary Report
    The Independent Fiduciary represents that after extensive 
negotiations during November and December, 2002, and January, 2003, 
Fiduciary Counselors and Northwest, along with Pinnacle and NWA Corp., 
Northwest's ultimate parent company, entered into an Omnibus Agreement, 
dated January 15, 2003, which sets forth the terms and conditions 
pursuant to which Fiduciary Counselors will accept the Pinnacle Stock 
(the Contribution).\6\
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    \6\ Fiduciary Counselors notes that immediately prior to the 
transaction, NWA Inc. (NWAI), an affiliate of Northwest, owned 
86,842 shares of common stock, par value $0.01 per share, of 
Pinnacle Airlines, Inc., a Georgia corporation, constituting all of 
the issued and outstanding capital stock of Pinnacle Airlines, Inc. 
Pursuant to the transaction, Pinnacle Airlines, Inc. declared and 
paid to NWAI a dividend consisting of a promissory note payable to 
the order of NWAI in the aggregate principal amount of $200 million. 
NWAI then transferred the shares of Pinnacle Airlines, Inc. to 
Pinnacle in exchange for its issuance to NWAI of (i) 15,000,000 
shares of Pinnacle's common stock, par value $0.01 per share 
(Pinnacle Stock), and one share of Series A Preferred Stock, par 
value $0.01 per share, of Pinnacle (the ``Series A Preferred 
Share''), which, upon issuance and together with the Pinnacle Stock, 
constitutes all of the issued and outstanding capital stock of 
Pinnacle. NWAI then transferred the Pinnacle Shares and the Series A 
Preferred Share to Northwest as a contribution to the capital of 
Northwest.

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[[Page 49796]]

    The IF Report states that on January 15, 2003, Fiduciary Counselors 
determined that the Master Trust could accept a contribution by 
Northwest of 1,938,000 shares of Pinnacle Stock, valued at 
$43,821,894.00, on behalf of the Contract Plan on terms and conditions 
set forth in the Omnibus Agreement. Pursuant to its engagement letter 
with Northwest, the scope of Fiduciary Counselors' engagement includes 
determining whether to accept the Contribution on behalf of the Plans, 
and if so, to value the Pinnacle Stock for Plan funding purposes. 
Fiduciary Counselors' duties also include the discretionary authority 
to manage the Pinnacle Stock as investment manager.
    The IF Report notes that the Independent Fiduciary drew upon the 
resources of its affiliate, Aon Investment Counseling, Inc. (AIC), to 
assist it in its financial analysis and valuation of the Pinnacle 
Stock. The Independent Fiduciary also engaged the law firm of Jones Day 
as legal counsel to advise it in connection with its negotiations with 
Northwest regarding its engagement and Eclat, to provide financial 
expertise and to value the Pinnacle Stock. Eclat furnished to the 
Independent Fiduciary its report and opinion as to the value of the 
contributed Pinnacle Stock at the time of the Initial Contribution on 
January 15, 2003 (January 15, 2003 Valuation). Eclat will furnish a 
similar valuation report with respect to each subsequent contribution. 
In negotiating the terms of the Contributions and determining whether 
to accept the Initial Contribution, the Independent Fiduciary, with its 
financial advisors and legal counsel, reviewed those documents that it 
deemed relevant, participated in meetings and telephone conferences 
with officers and other representatives of Northwest, and considered 
aspects of the Contribution that it deemed pertinent to its engagement, 
including without limitation Northwest's current and future ability to 
honor the Put Option. Because the value of the Pinnacle Stock is based 
on the financial performance of Pinnacle, the Independent Fiduciary 
reviewed and considered the business of Pinnacle, and the contractual 
relationship between Pinnacle and Northwest. The Independent Fiduciary 
and its advisors also met with the senior officers of Pinnacle.
    The Independent Fiduciary and its advisors reviewed various 
documents relevant to the Contribution, including without limitation, 
Northwest's certificate of incorporation; Northwest's corporate bylaws; 
the certificate of incorporation of Pinnacle; the Master Trust 
agreement pursuant to which the Plan assets are currently held and 
managed; audited financial statements of the Plans for 2000 and 2001; 
the current Plan documents; the Plans' annual reports on Forms 5500 for 
2000 and 2001; other information provided by Northwest regarding the 
Plans' assets (including the Plans' investment guidelines and portfolio 
composition); a statement prepared by the Plans' actuaries of the 
Plans' liquidity needs to pay benefits and administrative expenses in 
the near future and the sources of funds (other than the Pinnacle 
Stock) available to satisfy such liquidity needs; and certain of 
Pinnacle's collective bargaining agreements. In addition, the 
Independent Fiduciary reviewed a number of other documents, including 
SEC Form S-1 filed with the Securities Exchange Commission on February 
25, 2002 registering shares of Pinnacle Stock for an IPO and the 
Airline Services Agreement dated March 1, 2002. As a result of its 
review, certain changes were incorporated in the new Airline Services 
Agreement entered into on January 14, 2003 (ASA).
    The IF Report provides that the Independent Fiduciary and its 
advisors participated in numerous telephone conferences with 
representatives of Northwest and Pinnacle through November, December 
and early January concerning the Independent Fiduciary's engagement, 
the proposed Contribution, the status of Northwest's minimum funding 
waiver applications to the Internal Revenue Service and the Proposed 
Exemption. On January 11, 2003, the Independent Fiduciary and its 
advisors conducted a telephone interview with Pinnacle's chief 
executive officer and chief financial officer as part of its due 
diligence.
    The Independent Fiduciary and its advisors analyzed the voting, 
transfer and put right features of the Pinnacle Stock and engaged in 
significant negotiations on those features with Northwest. The 
Independent Fiduciary was also advised on the requirements of the U.S. 
Department of Transportation regarding restrictions on directors of 
airlines. In its determinations, the Independent Fiduciary has also 
taken into account Northwest's request for a minimum funding waiver 
with respect to Plan contributions in 2003 and 2004, and considered the 
likelihood that such waiver will be granted.
    The IF Report states that under the ASA, Northwest has committed 95 
regional jet aircraft financed by Bombardier to be delivered to 
Pinnacle by December 31, 2004. As of December 31, 2002, the carrier had 
taken possession of 51 regional jets. The addition of the regional jets 
has more than doubled the size of the airline. According to the IF 
Report, Eclat estimates that Pinnacle's value to the Northwest domestic 
system is between $520 million and $540 million annually as the carrier 
exists today. Pinnacle itself had revenues of approximately $345.2 
million for 2002.
    The IF Report explains that, because Pinnacle's operations are so 
entwined with Northwest's, Eclat evaluated Northwest as well as 
Pinnacle in its November 27, 2002 report to the PBGC (The Eclat 
Report). Despite the turmoil in the industry in recent years, Eclat 
felt that Northwest has emerged as, perhaps, the most stable airline in 
the industry. While all of the ``Big 6'' network airlines are losing 
money, Northwest has suffered the smallest loss of any carrier. 
Northwest reported a net loss of $46 million, with operating income of 
$8 million in the 3rd quarter of 2002. Northwest ended the 3rd quarter 
with over $2.5 billion in cash and short-term receivables.
    The IF Report notes that Northwest is a global carrier through its 
alliance with KLM and its Amsterdam hub, and its own hub in Tokyo. 
While the U.S. market has suffered tremendous losses due to the 
slowdown in the U.S. economy and the terrorist attacks of 9/11, the 
global market has rebounded much quicker. Northwest's presence in 
international markets has helped offset the losses in the U.S. domestic 
market. As with all domestic U.S. carriers, Northwest has been hit by 
the drop in revenue due to lower overall yields and depressed passenger 
levels. The drop-off in premium passenger traffic, the weak U.S. 
economy, and the increased presence of low-cost carriers has impacted 
the ability of the network carriers to generate high yield revenue. 
Through reduced employment levels and other cost-cutting measures, 
Northwest has been able to minimize the ongoing impact of reduced 
revenue levels, which the Independent Fiduciary believes are likely a 
permanent change in the industry. The labor situation is

[[Page 49797]]

stable. One of the strengths of the Northwest network is that the 
airline has the least exposure of any major carrier to low-cost 
carriers in the industry. This is primarily due to the fact that 
Southwest Airlines does not serve 2 of the 3 Northwest hubs--Memphis 
(Pinnacle's largest market) and Minneapolis. Southwest has a small 
operation in Detroit with only 2 gates. The IF Report states that Eclat 
expects that low-cost carriers will expand and gain share in the future 
but feels that Northwest is in the best shape of any network carrier to 
compete.
The Eclat Report and the January 15, 2003 Valuation
    Fiduciary Counselors and Eclat represent that Eclat was originally 
retained by PBGC to value Pinnacle and to evaluate the financial 
viability of Northwest. Eclat is an aviation-consulting firm that 
specializes in detailed analysis of the economic and financial issues 
that surround the industry. The IF Report states that Eclat's clients 
come from almost every sector of the aviation industry--airports, 
airlines, labor organizations and aerospace/aeronautics corporations. 
With PBGC's consent, Eclat was subsequently retained by the Independent 
Fiduciary to value the Pinnacle Common Stock.
    Eclat states in the January 15, 2003 Valuation that the valuation 
includes competitive, operational and financial elements essential to 
validating Pinnacle's current market viability as a Northwest regional 
partner and as a stand-alone airline and that the valuation describes 
the state of the regional airline industry, delves into some of the 
more important issues surrounding Pinnacle specifically, provides a 
brief financial review of the carrier, explains the valuation 
methodology, compares Pinnacle to Continental Express, and comments on 
the stability of Northwest. Appendices were attached that illustrate 
the valuation model used and highlight some of the additional 
information used to conduct the analysis.
    The IF Report summarizes that, in order to determine the value of 
Pinnacle, Eclat created a model based on the Three-Stage Free Cash Flow 
to Equity valuation technique. This model is designed to value firms, 
like Pinnacle, that are expected to go through three phases of growth--
an initial phase of high growth, a transitional period where the growth 
rate declines, and a steady-state period where growth is stable. Once 
these growth assumptions are made, the present value of expected free 
cash flow is calculated.
    The IF Report notes that in the Eclat Report, Eclat's valuation of 
the Pinnacle Common Stock was considerably lower than the value it 
ultimately determined for the Independent Fiduciary in the January 15, 
2003 Valuation. Eclat's original valuation for PBGC was based on 
publicly available information, primarily a draft S-1 Registration 
Statement which contained financial information only for the first nine 
months of 2002. As a result of its engagement by the Independent 
Fiduciary, Eclat was given access to non-public information including 
the ASA, Pinnacle's full 2002 revenue figures and information 
concerning the delivery schedule for delivery of regional jets to 
Pinnacle. The IF Report represents that, in the January 15, 2003 
Valuation, Eclat determined that the net equity value (before 
discounts) of Pinnacle was $412,923,928.00. Based on input from AIC, 
Eclat then applied a 15 percent liquidity discount and a 5 percent 
minority discount. AIC valued the Put Option at $20,680,684 using a 
Black-Scholes American option-pricing model. The value of the 
transaction was also adjusted for the period between the exercise of 
the put and the Plan's receipt of the funds. This period could range 
between 30 and 180 days depending on Northwest's liquidity position. 
The result was a net value of $339,178,820.00 for the purposes of 
determining the value of the stock contributed on January 15, 2003.
Negotiation of the Term Sheet and Omnibus Agreement
    The Independent Fiduciary recognizes that all aspects of its 
engagement involved fiduciary actions, and, for that reason, 
representatives of the Independent Fiduciary and its financial and 
legal advisors actively participated in the negotiations relating to 
the Omnibus Agreement and in the evaluation of the decision of whether 
to accept the Contribution. From a fiduciary standpoint, Independent 
Fiduciary was required to determine whether the terms it negotiated in 
the Omnibus Agreement and its decision whether to accept the 
Contribution were prudent, for the benefit of, and in the interest of, 
Plan participants and their beneficiaries. In this regard, the 
Independent Fiduciary represented that it negotiated terms that it 
determined were no less favorable to the Plans than terms negotiated at 
arm's length with an unrelated third party under similar circumstances.
    The terms of the transaction negotiated between the Independent 
Fiduciary and Northwest were embodied in a Term Sheet, which was 
provided to the Department on January 10, 2003. The Term Sheet formed 
the basis for the Omnibus Agreement, which was executed on January 15, 
2003, after the Independent Fiduciary received confirmation from the 
Department that the Proposed Exemption had been issued.
    Fiduciary Counselors states that the Omnibus Agreement provides:
    [sbull] For purposes of the funding standard account of each Plan, 
the value of the shares of Pinnacle Stock contributed to each Plan will 
be determined by the Independent Fiduciary. In addition to determining 
the value of Pinnacle Stock at the time of a proposed contribution, the 
Independent Fiduciary will provide an annual written valuation of the 
per share value of all Pinnacle Stock held by the Plans as of each 
December 31 and at any time the Independent Fiduciary exercises the Put 
Option described below.
    [sbull] Subject to the further conditions and restrictions set 
forth in the Omnibus Agreement, the Plans may transfer the Pinnacle 
Stock prior to July 1, 2006, (1) only in the event of an IPO or sale to 
a third party initiated by Northwest, (2) by exercise of the Put Option 
(as described below), or (3) because of an Early Termination Event 
(including a breach of the Omnibus Agreement by Northwest or Pinnacle 
which is not cured timely or Northwest's failure to honor the Put 
Option).
    [sbull] The Plans will be granted a Put Option with respect to each 
share of Pinnacle Stock contributed to the Plans, which may be 
exercised by the Independent Fiduciary at any time. To exercise the Put 
Option, the Independent Fiduciary must provide written notice to 
Northwest of its election to put to Northwest any or all of the shares 
of Pinnacle Stock then held by the Plans. The closing date of the 
purchase and sale of shares with respect to which the Put Option has 
been exercised will be the 30th calendar day after such notice is 
given. However, if Pinnacle has not yet consummated the IPO by the date 
that would otherwise be the closing date, Northwest will have the right 
to defer such closing date for up to 150 days, depending on Northwest's 
liquidity. The closing date may be further deferred and deferred 
payments may be made by Northwest as agreed to by the Independent 
Fiduciary if Northwest posts collateral in an amount and on terms 
satisfactory to the Independent Fiduciary. Alternatively, Northwest may 
arrange for the stock to be purchased by a third party.
    [sbull] If the Pinnacle Stock is not publicly traded, the Plans 
will receive the

[[Page 49798]]

greatest of (i) the initial contribution value (the ``Floor Price''), 
(ii) the fair market value as determined by the Independent Fiduciary 
at the time of the exercise of the Put Option, or, if greater, at the 
closing date of the Put Option, and, (iii) if a third party sale is 
elected for the Plans (under the limited circumstances described above) 
and Northwest does not exercise its right of first refusal, the 
proceeds from the sale of Pinnacle Stock held by the Plans to such 
third party. If the Pinnacle Stock is publicly traded, the Plans will 
receive the greater of (i) the Floor Price, or (ii) the average closing 
price for the stock on the public market for the 10 trading days 
preceding the exercise date or, if greater, the closing price on the 
day before the Put Option closing date.
    [sbull] Once Pinnacle Stock is publicly traded, the Put Option will 
be suspended if all of the remaining shares of Pinnacle Stock held by 
the Plans have a market value not less than 110% of the Floor Price and 
such shares are freely tradable. Fiduciary Counselors and its advisors 
negotiated with Northwest and Pinnacle concerning the ability of the 
Plans to transfer the Pinnacle Stock and the rights of the Plans to 
cause Northwest to register the shares of Pinnacle Stock under Federal 
and State securities laws for resale to third parties. In negotiating 
the rights and restrictions set forth in the transfer and registration 
rights provisions of the Omnibus Agreement, Fiduciary Counselors 
balanced the need of the Plans to achieve greater diversification in 
light of the anticipated holdings of shares of Pinnacle Stock with the 
need to maximize the value of the investment in such stock.
    [sbull] In addition, the Independent Fiduciary negotiated that 
Northwest Airlines Corporation (NWA Corp), Northwest's ultimate parent 
company, will guarantee Northwest's obligations under the Omnibus 
Agreement, including the consummation of the Put Option.
    [sbull] As a condition to any such contribution by Northwest, the 
Independent Fiduciary must determine on behalf of the Plans that the 
acceptance of the contributed shares is prudent and in the interests of 
the Plans' participants and beneficiaries and otherwise consistent with 
the fiduciary standards of ERISA. In addition, the Independent 
Fiduciary will monitor on an ongoing basis the prudence of the Plans' 
continued holding of Pinnacle Stock consistent with the fiduciary 
standards of ERISA. The appropriate fiduciary of the Plans (other than 
the Independent Fiduciary) will determine that such investment will not 
impair the liquidity of the Plans such that the Plans would not be able 
to pay benefits and expenses when due. If such appropriate Plan 
fiduciary determines the liquidity of the Plans is impaired, such 
fiduciary shall direct the Independent Fiduciary to dispose of all or a 
portion of the Pinnacle Stock consistent with the terms of the Omnibus 
Agreement to the extent commercially reasonable.
    [sbull] All transactions involving the Plans in connection with the 
contribution of Pinnacle shares will be no less favorable to the Plans 
than arm's length transactions involving unrelated parties.
    [sbull] No commissions, fees, costs, charges or other expenses will 
be borne by the Independent Fiduciary or the Plans in connection with 
any acquisition, holding or disposition of Pinnacle shares to or from 
the Plans, other than the underwriters' discount or other broker-dealer 
fees or commissions charged in any sale of such shares. In addition, 
the Independent Fiduciary negotiated the right to engage an investment 
banker on behalf of the Plans in an IPO, at Northwest's expense.
    [sbull] Northwest will provide at least quarterly notice to the 
Independent Fiduciary of its cash liquidity. More frequent notice will 
be required based on Northwest's liquidity and the value of the 
Pinnacle Stock contributed to the Plans. In addition, Northwest will 
provide the Independent Fiduciary with the information required to be 
provided to its lenders under its credit agreement. In addition, 
Northwest shall provide it with copies of any amendments to the credit 
agreement.
    [sbull] The Independent Fiduciary negotiated a comprehensive set of 
governance rights accorded to the Plans as a condition of acceptance of 
Pinnacle Stock. In this regard, as long as the Plans hold at least 5 
percent of the Pinnacle Stock, the Plans will have the right to 
designate one nominee to Pinnacle's board of directors, and Northwest 
will vote the Series A Preferred Share held by it in favor of such 
designee. The director designated by the Plans will have the right to 
serve on Pinnacle's audit committee to the extent permitted under 
applicable SEC and stock exchange rules. Once the Plans hold more than 
50 percent of the Pinnacle Stock, the affirmative vote of the director 
designated by the Plans shall be required to approve the appointment of 
any new CEO of Pinnacle and compensation of any CEO, any amendments to 
the $200 million Note of Pinnacle Airlines, Inc. held by Northwest, the 
amendment of Pinnacle's charter or by-laws in certain respects, or the 
implementation of certain changes in Pinnacle's capital structure or 
the issuance of capital stock prior to an IPO. The Independent 
Fiduciary negotiated further powers with respect to the Plan director, 
including the right to object to Business Combinations involving 
Northwest's affiliates.
    [sbull] Any change to the ASA, including any early termination of 
the ASA by Pinnacle, must be approved by a majority of Pinnacle's 
independent directors, which majority must include the director 
designated by the Plans. Any transaction involving Northwest outside 
the ordinary course of business that involves more than $2 million and 
any ordinary course transaction that involves more than $5 million must 
be approved by a majority of the independent directors. In this event, 
a majority of the independent directors may require a fairness opinion 
from a nationally recognized investment banking firm.
    [sbull] The Independent Fiduciary negotiated a comprehensive set of 
representations and warranties relating to both Pinnacle Corp. and 
Northwest and its affiliates relating to Northwest's ability to honor 
the Put Option and to the value of Pinnacle Corp. The representations 
and warranties must be true at the time of any Contribution. The 
Independent Fiduciary negotiated the survival of the representations 
and warranties in general for 24 months after the Closing Date and 
indefinitely with respect to those relating to Northwest's ownership of 
the Pinnacle Stock and Pinnacle's ownership of the outstanding shares 
of Pinnacle Airlines, Inc. prior to the Initial Contribution; 
Northwest's ownership of the Pinnacle Stock prior to any subsequent 
Contribution; and Northwest's and NWA's representation that the 
contemplated transactions do not violate or result in a default under 
any of their material contracts, including without limitation, the 
Credit Agreement.
Valuation of the Put Option
    Fiduciary Counselors stated that, in conjunction with Northwest's 
contribution of Pinnacle stock to the Plans, Northwest has provided the 
Plans with a Put Option to protect them from a possible decline in 
Pinnacle's shares' value. The value of the transaction is enhanced due 
to the downside protection that this Put Option provides. In valuing 
the Pinnacle shares, it was necessary to assign a value, not only to 
Pinnacle, but also to the Put Option.
    Prior to valuing the put option, Eclat's estimate of the value of 
Pinnacle was $333,436,072, after application of an illiquidity discount 
of 15% and a minority discount of 5%. This value was further discounted 
by 4.48%, to

[[Page 49799]]

$318,498,136, to reflect Northwest's ability to delay payment on the 
put for up to 6 months. Although the Plan's option is exercisable at 
anytime, unlike a normal option, Northwest does not have to immediately 
settle. Northwest has from 30 to 180 days to settle the option. The 
4.48% discount represents what Eclat used for Pinnacle's pre-tax cost 
of debt (9.6%) adjusted for a six-month period. Fiduciary Counselors 
assumed that since Northwest could take up to 180 days to settle the 
option that it would. Although Eclat cannot know what market conditions 
might be like during this settlement period, this rate also exceeds the 
Plan's assumed asset earnings rate.
    The value was then increased to reflect the value of the put. The 
Put Option is exercisable at any time by the Plan. Eclat used the 
Black-Scholes option-pricing model to determine the value of the Put 
Option. Using the Black-Scholes American option pricing model, Eclat 
determined the value of the Put Option to be $20,680,684.
The Independent Fiduciary's Determinations
    Fiduciary Counselors notes that under section 404(a)(1) of ERISA, a 
fiduciary must discharge its duties with respect to a plan solely in 
the interest of plan participants and beneficiaries. In addition, a 
fiduciary must act for the exclusive purpose of providing benefits to 
participants and beneficiaries; must act prudently; and must diversify 
the investment of plan assets to minimize the risk of large losses, 
unless under the circumstances it is clearly prudent not to do so. For 
the reasons set forth below, the Independent Fiduciary has concluded 
that it is prudent for the Plans to accept the Contribution and that 
the Contribution is in the interest of the Plans and their participants 
and beneficiaries:
    [sbull] Participants and beneficiaries of the Plans stand to 
benefit from an IPO of the Pinnacle Stock. The ASA provides a range of 
revenues to be paid by Northwest to Pinnacle, and Eclat valued the 
Company based on the minimum revenues, which would result from the ASA. 
If Pinnacle in fact achieves the maximum operating margin provided 
under the ASA, Eclat estimated that the value of Pinnacle would be 
approximately 20 percent greater than the value used for purposes of 
the contribution.
    [sbull] In valuing Pinnacle Stock, the Independent Fiduciary 
specifically applied a 15% liquidity discount and a 5% discount to take 
into account that, for some period, the Plans would be a minority 
shareholder.
    [sbull] The Independent Fiduciary negotiated the terms of the Put 
Option which provide downside protection by permitting the Plans to 
sell the Pinnacle Stock back to Northwest for the greater of the 
original value at which it was credited to the funding standard account 
or its fair market value at the time it is sold back to Northwest.
    Transfer restrictions on Pinnacle Stock held by the Plans are 
reasonable in light of the Put Option. Specifically, the Independent 
Fiduciary negotiated a limited period for the transfer restrictions 
(until July 1, 2006) and the elimination of such restrictions upon the 
occurrence of an Early Termination Event.
    [sbull] The Independent Fiduciary negotiated voting and governance 
rights to be accorded to the Plans that protect the interests of the 
Plans (e.g. protect the plans from adverse changes in the ASA, in 
Pinnacle's capital structure, etc.).
    [sbull] Registration rights and Plan director's rights preserve the 
value of the Pinnacle Stock while held by the Plans.
    [sbull] The Independent Fiduciary retained an independent, expert 
airlines valuation firm, Eclat, to provide valuation services. Eclat 
determined that Pinnacle and Northwest are healthy companies, even in 
light of current economic conditions in the airline industry.
    [sbull] The terms of the ASA and related agreements are more 
favorable to Pinnacle than an arm's length transaction between 
unrelated parties, and substantially determine and enhance the value of 
Pinnacle. The requirement that the director nominated by the Plans 
approve any changes in the ASA will ensure that any modification of 
those terms is done only if the changes, taken as a whole, are 
favorable to Pinnacle and its shareholders, including the Plans.
    [sbull] Participants and beneficiaries of the Plans benefit from 
Northwest's improved liquidity and continued viability and 
competitiveness in the current economic environment.
    [sbull] The Independent Fiduciary considered, and determined, that 
the Plans' holding of Pinnacle Stock was consistent with the Plans' 
investment guidelines and would not impair the Plans' diversification. 
The Pension Investment Committee informed the Independent Fiduciary 
that the holding of Pinnacle Stock constituting the Initial 
Contribution to the Plans would not and was not expected in the 
foreseeable future to impair the liquidity of the Plans and that the 
Plans would be able to pay benefits and expenses when due.
    [sbull] Based on the Eclat and AIC valuations, the Independent 
Fiduciary determined that the contribution of 1,938,000 shares of 
Pinnacle Stock should be valued at $43,821,894 as of January 15, 2003, 
the date the contribution occurred.

Duties of the Independent Fiduciary

    The Department notes that the appointment of an independent 
fiduciary to represent the interests of the Plans with respect to the 
transactions that are the subject of the exemption request was a 
material factor in its determination to propose exemptive relief. In 
response to the commenters' concerns about the role of the independent 
fiduciary, the Department believes that it would be helpful to provide 
its views on the responsibilities of an independent fiduciary in 
connection with the in-kind contribution of property to an employee 
benefit plan.
    As noted in the Department's Interpretive Bulletin, 29 CFR 2509.94-
3(d) (59 FR 66736, December 28 1994), apart from consideration of the 
prohibited transaction provisions, plan fiduciaries must determine that 
acceptance of an in-kind contribution is consistent with ERISA's 
general standards of fiduciary conduct. It is the view of the 
Department that acceptance of an in-kind contribution is a fiduciary 
act subject to section 404 of ERISA. In this regard, section 
404(a)(1)(A) and (B) of ERISA requires that fiduciaries discharge their 
duties to a plan solely in the interests of the participants and 
beneficiaries, for the exclusive purpose of providing benefits to 
participants and beneficiaries and defraying reasonable administrative 
expenses, and with the care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent person acting in a like 
capacity and familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims. In addition, section 
404(a)(1)(C) requires that fiduciaries diversify plan investments so as 
to minimize the risk of large losses, unless under the circumstances it 
is clearly prudent not to do so. Accordingly, the fiduciaries of a plan 
must act ``prudently,'' ``solely in the interest'' of the plan's 
participants and beneficiaries, and with a view to the need to 
diversify plan assets when deciding whether to accept an in-kind 
contribution. If accepting an in-kind contribution is not ``prudent,'' 
not ``solely in the interest'' of the participants and beneficiaries of 
the plan, or would result in an improper lack of diversification of 
plan assets, the responsible fiduciaries of the plan

[[Page 49800]]

would be liable for any losses resulting from such a breach of 
fiduciary responsibility, even if a contribution in kind does not 
constitute a prohibited transaction under section 406 of ERISA.
    The selection of an independent qualified appraiser to determine 
the value of an in-kind contribution and the acceptance of the 
resulting valuation are fiduciary decisions governed by the provisions 
of Part 4 of Title I ERISA. In discharging its obligations under 
section 404(a)(1), the independent fiduciary must take steps calculated 
to obtain the most accurate valuation available. In addition, the 
fiduciary obligation to act prudently requires, at a minimum, that the 
independent fiduciary conduct an objective, thorough, and analytical 
critique of the valuation. In conducting such verification, the 
independent fiduciary must evaluate a number of factors relating to the 
accuracy and methodology of the valuation and the expertise of the 
independent qualified appraiser. Reliance solely on the valuation 
provided by the appraiser would not be sufficient to meet this prudence 
requirement.
    In considering whether to accept an in-kind contribution, the 
Independent Fiduciary's responsibilities include the following:
    1. The Independent Fiduciary must prudently determine the fair 
market value of the Pinnacle Stock as of the date it is contributed to 
the Plans. In determining the fair market value of the stock, the 
Independent Fiduciary must obtain an appraisal by a qualified 
independent appraiser, and must ensure that the appraisal is consistent 
with sound principles of valuation.
    2. The Independent Fiduciary must ensure that each appraisal, at a 
minimum, includes the following elements:
    (a) A summary of the appraiser's qualifications to evaluate 
Pinnacle Stock,
    (b) A statement that the appraiser is independent of Pinnacle and 
Northwest, and that the appraiser has no interest in the securities 
issued by Pinnacle or Northwest,
    (c) A statement that the appraisal is being conducted to determine 
the fair market value of Pinnacle Stock, which is defined as the price 
at which the stock would change hands between a willing buyer and a 
willing seller when the former is not under any compulsion to buy and 
the latter is not under any compulsion to sell, and both parties are 
able, as well as willing, to trade and are well informed about the 
stock and the market for the stock,
    (d) A statement of the stock's value, the methodologies used in 
determining the value, the reasons for the valuation in light of the 
methodologies, and the reasons that the appraiser chose to apply 
particular valuation methods rather than others,
    (e) A statement of the relevance or significance accorded to the 
valuation methodologies taken into account,
    (f) The effective date of the valuation,
    (g) a description of the nature of Pinnacle's business and history,
    (h) A description of the economic outlook in general, and of the 
condition and outlook of Pinnacle's industry in particular,
    (i) An analysis of Pinnacle's financial condition and earning 
capacity,
    (j) A description of all of the factors taken into account in 
making the valuation, including any restrictions, understandings, 
agreements or obligations limiting the Plans' ability to dispose of the 
stock,
    (k) A statement of past transactions involving Pinnacle Stock, 
including dates, amounts, price, and whether the transactions were at 
arms-length, as well as a description of any attempts to buy or sell 
Pinnacle Stock over the last five years, including a description of any 
previous plans for initial public offerings,
    (l) An analysis of the market price of securities of corporations 
engaged in the same or similar lines of business as Pinnacle, which are 
actively traded on a recognized exchange or automated broker-dealer 
quotation system,
    (m) An analysis of the marketability, or lack thereof of the 
Pinnacle Stock, with specific reference to any restrictions, 
understandings, agreements, or obligations limiting the Plans' ability 
to dispose of the Pinnacle Stock,
    (n) An analysis of the degree to which actual control (both in form 
and in substance) will pass to any of the Plans as a result of any of 
the contemplated transactions,
    (o) To the extent that Pinnacle's current or projected revenues and 
expenses are related to, or dependent upon, contracts, agreements, or 
understandings between Northwest and Pinnacle, an analysis of 
Northwest's financial condition, the likelihood of a Northwest 
bankruptcy, and the potential impact of a Northwest bankruptcy on those 
contracts, agreements, or understandings, and on the market value of 
Pinnacle Stock, and
    (p) Any other factors necessary for a prudent determination of the 
market value of Pinnacle Stock.
    3. The Independent Fiduciary must investigate the facts and 
assumptions underlying the appraisals to ensure that stock 
contributions are not valued at more than fair market value. The 
Independent Fiduciary must not simply defer to the conclusions reached 
by the appraiser, but rather will take appropriate action to ensure:
    (a) That the appraisal is based upon complete, accurate, and 
current data;
    (b) That the appraiser is appropriately qualified to conduct the 
valuation;
    (c) That the valuation methodologies are appropriate and adequately 
explained and that the appraiser has adequately justified its decision 
not to use alternative methodologies;
    (d) That any variables used in the valuation analysis such as 
projected revenues, expenses, operating margins, depreciation, discount 
rates, capitalization rates, and multipliers are adequately supported 
by market data;
    (e) That the stock's value is calculated with appropriate discounts 
for lack of marketability and control after a reasoned evaluation of 
the relevant market data concerning such discounts, as well as of each 
Plan's actual ability to effectively dispose of its stock or to control 
Pinnacle;
    (f) That the appraisal's reasoning and assumptions are consistent, 
logical, and supported by appropriate financial and economic data and 
that any calculations are accurate;
    (g) That the valuation is based on complete, accurate, and audited 
financial statements, which have been properly analyzed;
    (h) That the assumptions underpinning the valuation are properly 
identified, and a careful analysis is performed of the impact of 
changes in those assumptions on the value of Pinnacle Stock;
    (i) That the valuation has appropriately considered Northwest's 
financial condition in valuing Pinnacle Stock, as well as the impact of 
a Northwest bankruptcy on the value of Pinnacle Stock; and
    (j) That the fair market value of the stock has been determined by 
way of a prudent investigation.
    4. The Independent Fiduciary must ensure that all of the conditions 
above are satisfied with respect to any past contributions of Pinnacle 
Stock, as well as any future contributions. If previous valuations or 
analyses do not comport with these conditions, the Independent 
Fiduciary must perform any additional work necessary to make the 
valuations and analyses consistent with the conditions of this 
exemption. In no circumstance, however, may the parties treat Pinnacle 
Stock previously contributed to the Plans as if it had a higher value 
than was attributed to it at the time of the original contribution.

[[Page 49801]]

    Northwest represents that, if the Independent Fiduciary determines 
that the Pinnacle Stock previously contributed to the Plans was worth 
less at the time of the contribution than the amount attributed to it 
at the time of the contribution, Northwest shall contribute additional 
Pinnacle Stock or cash in amounts sufficient to make up the shortfall.
    Lastly, the Department notes that the above described 
responsibilities to be undertaken by the Independent Fiduciary are 
material factors in the Department's determination to grant a final 
exemption.

Additional Comments and Submissions

Northwest April 10, 2003 Submission

    On April 10, 2003, Northwest submitted additional documentation to 
the Department in connection with the January 15, 2003 contribution of 
Pinnacle Stock to the Contract Plan (April 10 Submission Documents). 
Northwest noted that the Pinnacle Stock is being held in an Investment 
Fund established in connection with the Master Trust, and the amounts 
were allocated to the Contract Plan and Salaried Plan consistent with 
the provisions of the Master Trust, as described in the Proposed 
Exemption. Northwest appointed Fiduciary Counselors investment manager 
of the Investment Fund and Fiduciary Counselors has accepted this 
appointment.

Northwest April 26, 2003 Comment

    By letter dated April 26, 2003, Northwest responded to many of the 
comments the Department had received concerning the Proposed Exemption 
(April 26 Comment). Northwest observed that the comments submitted to 
the Department raised several concerns regarding the contribution of 
Pinnacle Stock to the Plans, as contemplated by the Proposed Exemption. 
Because many of the comments raise common concerns, Northwest organized 
its responses to address these common concerns.
Airline Industry and Northwest Financial Condition
    Comment: A number of comments noted that the airline industry is 
experiencing significant financial troubles and that some other 
airlines are in bankruptcy. The comments expressed concern that 
Northwest is exposed to bankruptcy risk and that the Pinnacle Stock 
would have greatly reduced value if Northwest were to file for 
bankruptcy, because Pinnacle serves Northwest.
    Northwest Response: Northwest responded that Northwest recognizes 
that it and the airline industry face significant financial challenges. 
Northwest sought the exemption to permit the Pinnacle Stock 
contribution as part of its overall strategy of managing the current 
economic uncertainty. By permitting the contribution of Pinnacle Stock, 
Northwest is able to preserve needed cash so that it can withstand 
several years of losses. Maintaining liquidity is key to Northwest's 
strategy for avoiding bankruptcy.
    Northwest strongly believes that Pinnacle Stock has significant 
value and that the value of Pinnacle Stock will increase when the IPO 
market improves for regional airlines. Regional airlines play an 
indispensable role in providing major airlines with important access to 
passengers, largely from markets too small to be serviced by a major 
airline. Pinnacle contributed over $500 million in revenue to Northwest 
in 2002 and is expected to grow its regional jet flying approximately 
30 percent per year through 2005. As Pinnacle grows to 95 aircraft, the 
number of passengers and revenue will more than double.
    Northwest has entered into a 10-year ASA with Pinnacle through 2012 
that provides substantial value. Pinnacle's compensation formula within 
the ASA contractually provides for a target operating margin of 14 
percent from 2003 through 2007, with a guaranteed floor of 12 to 13 
percent during this period. In 2008, the target operating margin will 
be reset to a market-based percentage, but it will be no less than 10 
percent and no higher than 14 percent. Northwest will no longer 
guarantee a minimum operating margin in 2008. The target margin will be 
reset after 2008 based on historical and expected operating costs.
    Northwest asserts that its beliefs in this regard have been 
independently verified. In connection with the Exemption Transactions, 
Northwest does not determine the value of Pinnacle Stock. The value of 
Pinnacle Stock is determined by an independent fiduciary, Fiduciary 
Counselors, based on the valuation provided by their independent 
valuation firm, Eclat. The valuation prepared by Eclat took into 
consideration current industry conditions. If the markets return, 
substantial upside will benefit the Plans. Future contributions of 
Pinnacle Stock will continue to be subject to independent review and 
valuation.
    Northwest adds that under ERISA sections 406 and 407, Northwest 
could have contributed the stock of its parent company (traded under 
the symbol NWAC) to satisfy its funding obligations without seeking an 
exemption. However, Northwest has proposed to contribute Pinnacle Stock 
because it believes that it is a superior investment for the Plans. The 
stock has long term upside potential because of the planned IPO. 
Indeed, the January 15, 2003 Valuation indicates that the Plans could 
receive a 20 percent IPO premium in connection with the Pinnacle Stock 
investment.
    Finally, Northwest notes that regional airline stocks have 
generally been less volatile and better performing than the stocks of 
major airlines. Since September 10, 2001, regional airlines have lost 
48% of their value while the major airlines have lost 78% (excluding 
U.S. Airways and United that have filed for Chapter 11 bankruptcy 
protection). Northwest also believes that the value of Pinnacle Stock 
is less exposed to bankruptcy risk than Northwest stock. This is 
because a regional airline derives its value from the value of its ASA 
with the major carrier and the major carrier is unlikely to terminate 
the ASA in bankruptcy because it would severely disrupt the flow of 
high yield passengers. In the case of United Airlines, for example, the 
airline has not rejected the ASAs it has entered into with its regional 
airline partners Atlantic Coast Airlines, SkyWest and Air Wisconsin. 
Similarly, U.S. Airways did not reject its ASA with its regional 
airline partners Mesa and Chautauqua. In addition, U.S. Airways has 
recently signed an agreement with Mesa for more regional aircraft. Wall 
Street analysts also look favorably on ExpressJet, the Continental 
Airlines regional airline partner. However, Northwest understands that 
some of United's airline services agreements have been renegotiated and 
that it has been reported that the airline services agreement between 
United and Atlantic Coast Airlines is the subject of current 
negotiations. Moreover, in connection with the Omnibus Agreement 
entered into between Fiduciary Counselors and Northwest, Fiduciary 
Counselors negotiated for limitations on Northwest's ability to 
unilaterally amend or terminate the ASA.
Valuation of Pinnacle Stock
    Comment: A number of comments expressed concerns that Pinnacle 
Stock is a risky and illiquid investment and hard to value because 
there is no established market for the security.
    Northwest Response: Northwest represents that it did not value 
Pinnacle Airlines for purposes of the Exemption Transactions. As a 
condition of the Proposed Exemption, Fiduciary Counselors, using the 
services of its independent appraisal firm Eclat,

[[Page 49802]]

determined the value of Pinnacle Stock. In doing so, Fiduciary 
Counselors' legal obligations run exclusively to the Plans, not to 
Northwest. As the Plans' independent fiduciary, Fiduciary Counselors 
must act prudently and in the interests of the Plans and their 
participants.
    Northwest asserts that in valuing Pinnacle Stock, there are well-
established valuation methodologies available to the valuation experts 
to assess the value of non-public securities like Pinnacle Stock. Such 
techniques were employed by Fiduciary Counselors and Eclat in this 
circumstance. In particular, the risk and the liquidity of the Pinnacle 
Stock were taken into account and are explained in the reports issued 
by Fiduciary Counselors and Eclat. Equally important, Fiduciary 
Counselors negotiated for special rights associated with the Plans' 
acquisition of Pinnacle Stock that limit the risks associated with 
Pinnacle Stock. For example, the Plans obtained a Put Option, corporate 
governance rights, voting rights in Pinnacle and the right to initiate 
an IPO or sale of Pinnacle Stock.
Collateral for Pinnacle Stock Contribution
    Comment: Some comments suggested that Northwest be required to post 
collateral in order to contribute Pinnacle Stock to the Plans.
    Northwest Response: Northwest explains that, while the Proposed 
Exemption and the Omnibus Agreement negotiated with Fiduciary 
Counselors do not require collateral, the Proposed Exemption and the 
Omnibus Agreement include provisions designed to limit the need for 
collateral. The purpose of collateral would be to protect the Plans 
from declines in the value of Pinnacle Stock and secure the Put Option 
accorded to the Plans. In this case, the Omnibus Agreement provides the 
Plans with a Put Option that allows Fiduciary Counselors at any time to 
``put'' Pinnacle Stock back to Northwest at the greater of the price at 
the time the stock was contributed or the price at the time of the 
put.\7\ The Omnibus Agreement further requires that Northwest provide 
regular notice of its liquidity to Fiduciary Counselors. Thus, the Put 
Option serves to protect the Plans from declines in the value of 
Pinnacle Stock and the liquidity notice feature ensures that the 
Independent Fiduciary has sufficient notice so that it may exercise the 
Put Option at a time when Northwest has sufficient financial resources 
to meet its obligation under the Put Option.
---------------------------------------------------------------------------

    \7\ Northwest notes that specifically, if the Pinnacle Stock is 
not publicly traded, the Plans will receive the greatest of (i) the 
initial contribution value (the Floor Price), (ii) the fair market 
value as determined by the Independent Fiduciary at the time of the 
exercise of the Put Option, or, if greater, at the closing date of 
the Put Option, and, (iii) if a third party sale is elected by the 
Plans and Northwest does not exercise its right of first refusal, 
the proceeds from the sale of Pinnacle Stock held by the Plans to 
such third party. If the Pinnacle Stock is publicly traded, the 
Plans will receive the greater of (i) the Floor Price, or (ii) the 
average closing price for the stock on the public market for the 10 
trading days preceding the exercise date or, if greater, the closing 
price on the day before the Put Option closing date.
---------------------------------------------------------------------------

    Northwest asserts that, while the Department has required 
collateral for some similar exemptions in the past, it has not required 
collateral in all cases. Here, they assert, the purpose of the 
exemption, to provide the Plans with a valuable security while 
maintaining Northwest's liquidity, would be undermined if assets were 
required to be used as collateral in connection with contributions of 
Pinnacle Stock. Moreover, to the extent that Northwest has assets to 
secure the contributions, such assets will be used to maintain the 
liquidity necessary for Northwest to weather the ongoing economic 
challenges.
Conflicts of Interest
    Comments: Commenters expressed a concern that the contribution of 
Pinnacle Stock involves a conflict of interest on the part of 
Northwest.
    Northwest Response: Northwest states that, because there is a 
potential for a conflict of interest, the Proposed Exemption required 
that Northwest appoint an independent fiduciary who is vested with the 
discretion to determine whether the Plans should acquire, hold or 
dispose of Pinnacle Stock. The Proposed Exemption included specific 
conditions that ensure that the independent fiduciary is free from 
conflicts of interest. The Proposed Exemption further required that the 
independent fiduciary obtain expert valuation advice from an 
independent valuation firm. Thus, to eliminate the potential for a 
conflict of interest, two parties completely independent of Northwest--
Fiduciary Counselors and Eclat--represented the interests of the Plans 
in connection with the transaction.
    Northwest represents that the final terms of the Omnibus Agreement 
reflect the fact that Fiduciary Counselors has represented the Plans' 
interests. In this regard, the Plans acquired Pinnacle Stock at a 
favorable price and the Plans obtained voting and management rights, 
anti-dilution rights, limits on Northwest's ability to terminate the 
ASA, rights to sell the Pinnacle Stock or dispose of it in an IPO in a 
variety of circumstances, and a protective Put Option. In addition, 
Pinnacle has an independent Board of Directors with one member 
appointed by Fiduciary Counselors, and the Fiduciary Counselors-
appointed Board member is entitled to special voting rights on certain 
matters.
Exposure to Future Underfunding
    Comment: Several commenters expressed concern that the exemption 
would expose the Plans to increased underfunding in the future.
    Northwest Response: Northwest notes that it has never before sought 
a prohibited transaction exemption and has never missed a pension 
funding payment. Indeed, during the 1990's, Northwest contributed to 
its pension plans millions of dollars more than the required amount of 
contributions. As Northwest's track record demonstrates, Northwest 
agrees that the Plans need to be soundly funded. The Proposed Exemption 
is part of Northwest's strategy to achieve that goal. Through the 
contribution of Pinnacle Stock, Northwest will be able to meet up to 
$330 million (based on the current valuation) in near term funding 
obligations while maintaining the airline's ability to weather 
difficult times, to the benefit of all concerned. Moreover, when the 
IPO of Pinnacle Stock occurs, the Plans may benefit from a potentially 
significant IPO premium with respect to their holdings of Pinnacle 
Stock. In the absence of the contribution of Pinnacle Stock, the Plans 
could suffer from increased underfunding. This is because a cash 
contribution is not a viable alternative given the company's liquidity 
needs.
Preference for Cash Contribution
    Comment: A number of commenters expressed a preference that pension 
contributions be made with cash rather than Pinnacle Stock.
    Northwest Response: Northwest notes that like other major airlines, 
Northwest is in a temporary period of extraordinary airline revenue 
weakness and volatility. In this environment, it is necessary to 
maintain high liquidity reserves to ensure the viability of the airline 
and protect the long-term interests of the pension plans and plan 
participants.
    Northwest asserts that, if its current cash needs were not so 
great, Northwest would make its pension contributions in cash as it has 
in the past. However, because of its liquidity needs, a cash 
contribution is not a viable alternative.

[[Page 49803]]

Northwest stated ``[i]n the absence of an exemption, Northwest would 
have to consider the contribution of NWA Corp. stock or an IRS waiver. 
Alternatively, Northwest could consider filing for bankruptcy, which 
would suspend most pension contributions, and could result in 
termination of some or all of the Plans.''
    The goal of the Pinnacle Stock contribution is to (1) provide the 
Plans with a valuable security, (2) meet near term pension funding 
obligations, and (3) allow Northwest to preserve cash to withstand the 
current economic environment. Northwest believes this is the best 
outcome for all Plan participants and beneficiaries.

Eclat May 16, 2003 Response

    On May 16, 2003, Mr. William S. Swelbar, Managing Director of 
Eclat, responded to the Department concerning questions on the two 
valuations of Pinnacle. Eclat provided additional information in 
support of its view that the discount rates, and other factors used in 
determining the fair market value of the Pinnacle Stock were reasonable 
and theoretically sound.

Northwest May 20 and June 10, 2003 Comment Letters

    On May 20 and June 10, 2003, Northwest responded to certain issues 
raised during the Hearing that were not responded to in the April 26 
Comment.
    1. During the Hearing, the Department asked Northwest to provide 
information concerning the funded status of the Pilot Plan, Contract 
Plan and Salaried Plan at the end of 2002. Northwest provided the 
funded status of each Plan as of 1/1/03 as shown in the following 
table.

                  Northwest Airlines, Inc.--Current Liability Funded Status at January 1, 2003
----------------------------------------------------------------------------------------------------------------
                                                            Pilots plan       Contract plan      Salaried plan
----------------------------------------------------------------------------------------------------------------
Current Liability using 6.65% interest rate (IRC Sec.       $3,665,896,686     $2,673,540,738       $425,037,585
 412(l))...............................................
Market Value of Assets (with PY02 accrued                    2,253,513,119  \2\ 1,385,832,156    \3\ 254,670,253
 contributions)........................................
Actuarial Value of Assets (with PY02 accrued                 2,704,215,743  \2\ 1,662,998,587    \3\ 305,604,304
 contributions) \1\....................................
----------------------------------------------------------------------------------------------------------------
\1\ Actuarial value of assets smoothes investment gains and losses over a five-year period.
\2\ Accrued contribution of $202,626,983 for PY02.
\3\ Accrued contribution of $20,083,879 for PY02.

    2. During the Hearing, employees of Northwest referenced an 
employee stock program that was established by the company in 1993. 
Northwest explained that, as part of labor agreements reached in 1993, 
Northwest's parent company, NWA Corp., issued to trusts for the benefit 
of participating employees 9.1 million shares of a new class of Series 
C cumulative, voting, convertible, redeemable preferred stock, par 
value of $.01 per share (the Series C Preferred Stock), and 17.5 
million shares of Common Stock and provided the union groups with three 
positions on the Board of Directors. The Series C Preferred Stock ranks 
senior to Common Stock with respect to liquidation and certain dividend 
rights. As long as the Common Stock is publicly traded, no dividends 
accrue on the Series C Preferred Stock.
    The Northwest Airlines Corporation Employee Stock Plan (Employee 
Stock Plan) was established in 1993. The Employee Stock Plan is a 
profit sharing plan that is tax qualified under section 401(a) of the 
Code and subject to ERISA.\8\ The Employee Stock Plan was established 
through labor negotiations between Northwest and its unions in 1993 to 
hold contributions of Northwest Airlines Corporation Series C Preferred 
Stock. These negotiations resulted in agreements (Agreements) between 
Northwest and each of its unions under which Northwest would contribute 
to the Employee Stock Plan a newly created, special class of stock (the 
Series C Preferred Stock) in an amount that would equal the monetary 
value of certain wage and other concessions agreed to by the unions. 
Each of Northwest's three main unions at the time of the Agreements 
also was granted the right to appoint one director to the Northwest 
board of directors.
---------------------------------------------------------------------------

    \8\ The original Employee Stock Plan was established in 1993. On 
December 2, 2002, the Employee Stock Plan was divided into three 
components, which were then merged into the existing Northwest 
Airlines Retirement Savings Plan for Pilot Employees, Northwest 
Airlines Retirement Savings Plan for Contract Employees and 
Northwest Airlines Retirement Savings Plan for Salaried Employees. 
Each of these plans is a Code section 401(k) plan that is tax 
qualified under section 401(a) of the Code and subject to ERISA. For 
ease of reference, Northwest refers to the Employee Stock Plan, but 
the factual discussion of the Series C Preferred Stock remains 
accurate after the merger with the Northwest 401(k) plans.
---------------------------------------------------------------------------

    The Employee Stock Plan covers in general terms Northwest's 
employees employed from August 1, 1993 through 1996, including 
employees represented by Air Line Pilots Association (ALPA), 
International Association of Machinists and Aerospace Workers (IAM), 
International Brotherhood of Teamsters (IBT), Airline Technical Support 
Association (ATSA), Northwest Airlines Meteorologists Association 
(NAMA), Transport Workers Union of America (TWUA) and management 
employees. In 1994 through 1997, Northwest made annual contributions of 
Series C Preferred Stock to the Employee Stock Plan for the benefit of 
employees represented by the IAM and IBT (the other labor groups had 
converted their right to receive Series C Preferred Stock into Common 
Stock under the Special Conversion Option described below). The shares 
were then allocated to individual accounts established on behalf of 
each eligible employee. A total of 9.1 million shares of Series C 
Preferred Stock were contributed to the Employee Stock Plan.
    Each share of the Series C Preferred Stock is convertible at any 
time into 1.364 shares of NWA Corp. Common Stock (Common Stock). At the 
time a participant exercises conversion rights, the Series C Preferred 
Stock is converted to Common Stock, the Common Stock is sold and cash 
is allocated to participant accounts. In addition, under the 
Agreements, the trustee of each plan was given a one time Special 
Conversion Option that, if elected, resulted in the relevant trusts 
receiving Common Stock at the rate of 1.9096 shares of Common Stock for 
each share of the Series C Preferred Stock that they would have 
otherwise received. The Special Conversion Option expired on February 
9, 1994. On that day, ALPA, TWUA, NAMA, ATSA and the Company on behalf 
of its management and non-contract employees exercised the Special 
Conversion Option, with the IAM and IBT electing not to exercise the 
Special Conversion Option (63 shares are still owned by the ALPA 
trust). Thus, almost all of the Series C Preferred Stock that remains 
in the Employee Stock Plan is allocated to the accounts of employees 
represented by the IAM and IBT. As of December 31, 2002, 4.3 million 
shares of Series C Preferred Stock have been converted into Common 
Stock and the remaining

[[Page 49804]]

4.8 million shares outstanding are convertible into 6.6 million shares 
of Common Stock.
    The holders of outstanding Series C Preferred Stock have a ``put 
right'' in 2003 to require NWA Corp. to repurchase such shares for an 
amount equal to the actual wage savings achieved under the 1993 labor 
agreement (projected to be $226 million at the August 1, 2003 put 
date). NWA Corp. has the option to repurchase such shares in cash, by 
the issuance of additional Common Stock, or by the use of cash and 
stock. A decision to issue only additional Common Stock must be 
approved by a majority of the three directors elected by the holders of 
the Series C Preferred Stock. If NWA Corp. decides not to repurchase 
the Series C Preferred Stock, quarterly dividends will accrue beginning 
August 1, 2003, at 12% per annum and the employee unions will receive 
three additional Board of Directors positions. If, on August 1, 2003, 
NWA Corp. decides not to repurchase the Series C Preferred Stock, 
beginning on August 1, 2003 and on each succeeding quarter end date, 
NWA Corp. must use all ``Available Cash'' (a defined term in the 
Agreements) to effect partial repurchases of the Series C Preferred 
Stock, but only if and to the extent NWA Corp. is not prohibited from 
making such repurchases under applicable Delaware corporate law or any 
loan agreement to which NWA Corp. is a party. Any decision not to use 
all Available Cash to effect such partial purchases must be approved by 
a majority of the directors elected by the holders of the Series C 
Preferred Stock.
    On August 1, 2003, Northwest issued a press release that announced 
its decision on the Series C Preferred Stock. The Northwest board of 
directors determined that at this time the company could not legally 
redeem the 4.8 million shares of its Series C Preferred Stock still 
outstanding and made the following statement:

    After a thorough review of the legal restrictions applicable to 
the company, the board concluded that Northwest was not able to buy 
back the Series C Preferred Stock, at this time. As a board, we 
recognize the valuable contributions our employees made to the 
company during the 1993-1996 wage reduction period and acknowledge 
the company's obligation to buy back the Series C Preferred Stock. 
We want to do so as soon as possible. We devoted substantial time 
and effort to this issue. We discussed the Series C Preferred Stock 
buy back at length in our regularly scheduled April and June board 
meetings, and held two special meetings in July devoted exclusively 
to the Series C issue * * *. At the conclusion of these 
deliberations, it was clear that the legal restrictions applicable 
to stock buy backs under Delaware Law did not permit Northwest to 
proceed at this time with the buy back of the Series C Preferred 
Stock.

    The board noted that the company's obligation to the holders of the 
Series C Preferred Stock continues until Northwest has the ability to 
repurchase the Series C Preferred Stock. Until the Series C stock is 
repurchased, each share will accrue a 12% per year dividend on the 
$46.96 per share buy back price.
    On August 1, 2003, in response to the Department's questions 
concerning the ``legal restrictions'' that prevented Northwest from 
repurchasing the Series C Preferred Stock and whether these legal 
restrictions were tied to Northwest's financial condition, Northwest 
explained that in making the Series C stock repurchase decision, the 
board of NWA Corp. was subject to a Delaware law that applies only to 
NWA Corp.'s repurchase of its own stock. The Delaware law does not 
apply to the repurchase of Pinnacle Stock, which is not treated as NWA 
Corp.'s own stock. The Delaware law applicable to the repurchase of the 
Series C stock requires the Board to make a finding that NWA Corp. has 
adequate surplus, defined as the net asset value of the corporation in 
excess of its capital. At the present time, the Board was unable to 
make this finding.
    The Department also questioned whether such restrictions would 
similarly preclude Northwest from honoring the Put Option. Northwest 
responded that no similar legal restriction would apply to the 
repurchase of Pinnacle Stock pursuant to the exercise of the Put 
Option. Minnesota law would not restrict the repurchase of Pinnacle 
stock by Northwest, a Minnesota corporation, which issued the Put 
Option. In addition, Delaware law would not restrict NWA Corp., a 
Delaware corporation, from repurchasing the Pinnacle Stock as the 
guarantor of the Put Option. Both the Minnesota law and the Delaware 
law relate to the repurchase of the stock issued by Northwest Airlines, 
Inc. and NWA Corp., respectively, and would not apply to the repurchase 
of stock of Pinnacle (the Pinnacle Stock). Northwest notes that the 
board previously approved the Omnibus Agreement, which includes the Put 
Option, and no further action would be required of the board in the 
event that the Put Option is exercised by the Independent Fiduciary.
    Northwest stated that the language at section 5.1(b) of the Omnibus 
Agreement contains a representation that Northwest has the corporate 
and legal authority to meet its obligations under the agreement, 
including the Put Option. Northwest asserts that it couldn't make this 
representation if there were restrictions that limited its ability to 
honor the Put Option or other aspects of the Omnibus Agreement and this 
representation was the product of the negotiations between the 
Independent Fiduciary and Northwest (as noted above).

Fiduciary Counselors' July 11, 2003 Submission

Additional Information
    Fiduciary Counselors sent additional information to the Department 
on July 11, 2003. The information addressed, among other issues, how 
the possibility of a Northwest bankruptcy was factored into the 
valuation, how the valuation was ``stress'' tested for other 
assumptions contained in the valuation, and the reasons for the 
selection of a 15% liquidity discount.
    Fiduciary Counselors, AIC and Eclat represent that the ASA between 
Northwest and Pinnacle provided the framework for the final valuation. 
There were significant changes made to the original valuation performed 
for the PBGC (the Eclat Report) based on this agreement that proved to 
be more conservative with respect to the ultimate valuation. Fiduciary 
Counselors, AIC and Eclat also noted that some of the information used 
by Eclat for the January 15, 2003 Valuation was not available during 
the initial valuation in the Eclat Report.
    Additionally, by letter dated July 15, 2003, Fiduciary Counselors 
represents that in preparing the valuation for subsequent 
contributions, Eclat will reexamine the assumptions used in preparing 
the initial valuation and will continue to stress test the assumptions 
in its valuation model to reflect the credit-worthiness of Northwest 
and changing conditions in the regional jet market.
Change of Affiliation of Fiduciary Counselors
    On July 11, 2003, Fiduciary Counselors informed the Department that 
Fiduciary Counselors Inc. (formerly Aon Fiduciary Counselors, Inc.) 
(Fiduciary Counselors) is no longer a subsidiary of Aon Corporation. As 
of June 30, 2003, Fiduciary Counselors was acquired by Fiduciary Group, 
Inc., in a management-led buyout.
    Fiduciary Counselors notes that there will be no change in its 
providing objective and independent investment management. Ellen A. 
Hennessy will

[[Page 49805]]

continue as President of Fiduciary Counselors and, as majority 
shareholder of Fiduciary Group, will continue to control management 
decisions with respect to Fiduciary Counselors. Ellen A. Hennessy will 
continue to be the primary person at Fiduciary Counselors handling its 
responsibilities as independent fiduciary to the Northwest Airlines 
defined benefit plans.
    Fiduciary Counselors adds that AIC, which remains a subsidiary of 
Aon, will continue to act as advisor in connection with this 
engagement. There will be no change in their personnel assigned to this 
engagement or in the manner in which the fees are split between the two 
organizations.
    As described in the Fiduciary Counselors letter to the Department 
on January 6, 2003, Northwest has agreed to pay Fiduciary Counselors an 
annual fee that covers both the independent fiduciary and investment 
management services provided by Fiduciary Counselors and the investment 
advisory services provided by AIC. The initial fee was remitted 
directly to Aon Consulting, Inc., then a parent company of both 
Fiduciary Counselors and AIC. Aon Consulting internally allocated 25% 
of the fee to Fiduciary Counselors, which comprised less than 5% of its 
annual gross revenue in 2002. In connection with the change in 
ownership of Fiduciary Counselors, Fiduciary Counselors and AIC have 
agreed that future payments will be allocated in the same proportions. 
Payment will be made to Fiduciary Counselors, which will remit 75% to 
AIC. Based on current client engagements, Fiduciary Counselors 
anticipates that the portion retained by it will comprise less than 5% 
of Fiduciary Counselors' gross revenue for 2003.
    Fiduciary Counselors asserts that the sale of Fiduciary Counselors 
will, if anything, increases their independence. As reflected in the 
Proposed Exemption, another Aon affiliate does provide non-plan 
services to Northwest, albeit services representing less than 1% of 
Aon's total annual revenue. In contrast, under its new ownership, 
neither Fiduciary Counselors nor any affiliate will accept any other 
engagement from Northwest while it is independent fiduciary for the 
Plans.
Termination of the Independent Fiduciary Agreement
    The Department notes that the Preamble to the Proposed Exemption 
stated that either party may terminate the Independent Fiduciary 
Agreement for any reason upon 60 days notice and that the Agreement may 
be terminated immediately for cause. As further noted in the Preamble, 
the parties to the Agreement shall notify the Department within 30 days 
of any decision regarding the resignation, termination or change in 
control of the Independent Fiduciary. The Department wishes to clarify 
that any replacement Independent Fiduciary must be acceptable to the 
Department and must assume its responsibility prior to the effective 
date of the removal of the predecessor Independent Fiduciary.

Northwest and ALPA Agreement Regarding Pinnacle Stock

    On June 27, 2003, ALPA and Northwest provided the Department with a 
Letter of Agreement between Northwest and the Northwest airline pilots 
represented by ALPA (the Letter Agreement) regarding the acquisition 
and holding of Pinnacle stock by the Northwest Pension Plan for Pilot 
Employees (the Pilot Plan). ALPA and Northwest informed the Department 
that the Letter Agreement will be executed by the parties in connection 
with a proposed voluntary contribution of Pinnacle Stock (described 
below).
    The Letter Agreement provides that:
    1. Northwest will make a voluntary contribution to the Pilot Plan 
on or before September 15, 2003 so that the funded current liability 
percentage for the Plan is at least 80% for the 2003 Plan Year. This 
voluntary contribution will eliminate the funding requirements under 
the Code and ERISA for the 2003 Plan Year that would otherwise be 
payable with respect to the Pilot Plan.
    2. The voluntary contribution to the Pilot Plan will consist 
entirely of Pinnacle Stock. At the time the voluntary contribution is 
made to the Pilot Plan, Northwest also will contribute Pinnacle Stock 
to the Salaried Plan in an amount such that the amount of the Pinnacle 
Stock held by the Salaried Plan equals the required minimum funding 
contribution due under ERISA and the Code on September 15, 2003. Any 
remaining Pinnacle stock will then be contributed to the Contract Plan.
    3. The Pinnacle Stock contributed to the Pilot Plan will be held in 
a separate, segregated subaccount of the Master Trust and held for the 
exclusive benefit of the Pilot Plan. Contributions of Pinnacle Stock to 
the Salaried Plan and the Contract Plan will likewise be held in a 
separate segregated subaccount of the Master Trust and held for the 
exclusive benefit of each respective plan.
    4. Northwest will obtain an amendment of the Omnibus Agreement so 
that the Independent Fiduciary will have first priority to sell 
Pinnacle Stock in an initial public offering, if certain conditions 
exist.
    5. The Contract Plan, the Salaried Plan and the Pilot Plan will 
have the same registration rights provided in the Omnibus Agreement 
dated January 15, 2003 between Pinnacle Airlines Corp., Northwest and 
Fiduciary Counselors.
    6. Northwest may not terminate Fiduciary Counselors as the 
Independent Fiduciary without the consent of ALPA and may not appoint a 
new Independent Fiduciary without the consent of ALPA. The Independent 
Fiduciary will have the sole responsibility to determine whether to 
acquire, hold or dispose of Pinnacle Stock on behalf of the Plans and 
whether to exercise the Put Option with respect to Pinnacle Stock.
    7. The monthly contributions required to be made to the Pilot Plan 
pursuant to the pilot collective bargaining agreement are waived for 
the 2004 and 2005 Plan Year.
    As described in the Proposed Exemption, the current provisions of 
the Pilot Plan and the pilot collective bargaining agreement prohibit 
the Pilot Plan from acquiring or holding employer securities. Without 
modifications to the pilot collective bargaining agreement, the 
Proposed Exemption contemplated that the other two Plans would receive 
a contribution of Pinnacle Stock in an amount equal to the maximum 
amount permitted under section 407(a)(2) of ERISA, while the Pilot Plan 
would receive no contributions of Pinnacle Stock.
    ALPA represents that it recognizes the need for Northwest to 
preserve liquidity so ALPA has agreed to modify the collective 
bargaining agreement and the Pilot Plan to permit the Pilot Plan to 
acquire and hold employer securities through a voluntary contribution 
to the Pilot Plan. The Proposed Exemption contemplates both voluntary 
and required contributions to the Northwest Plans, as did the 
Application filed by Northwest on November 6, 2002 and the Omnibus 
Agreement.
    Northwest and ALPA assert that the voluntary contribution gives 
Northwest the liquidity it needs, and thereby the ability to maintain 
all of its Plans, by eliminating the funding requirement for the Pilot 
Plan for the 2003 Plan Year, possibly reducing the funding requirements 
for future plan years, and by waiving the monthly contribution 
requirement under the pilot collective bargaining agreement for the 
2004 and 2005 Plan Years. The Pilot Plan and its participants benefit 
from the voluntary contribution by providing an early contribution of 
an asset with significant

[[Page 49806]]

value to more adequately fund the benefits promised under the Pilot 
Plan.
    The allocation method made pursuant to the Letter Agreement will 
result in a modest change in the percentage of the Contract and 
Salaried Plans' assets invested in Pinnacle Stock compared to the 
ratable allocation contemplated by the Proposed Exemption. Without 
modification to the pilot collective bargaining agreement, the Proposed 
Exemption contemplated that the Salaried and Contract Plans could hold 
Pinnacle Stock equal up to 10% of each Plan's assets. Under the Letter 
Agreement, the Salaried and Contract Plans will instead hold Pinnacle 
Stock with a value equal to approximately 8% of their respective 
assets.
    Northwest and ALPA believe that the Letter Agreement also enhances 
protections for participants in all three Plans by giving the 
Independent Fiduciary first priority to sell Pinnacle Stock in an IPO 
where the number of shares sought to be sold exceeds the number that 
can be sold.
    The Department asked whether Northwest intends to contribute cash 
or some other asset to satisfy the balance of the calendar year 2003 
funding requirements of the Salaried and Contract Plans that will not 
be met by the Pinnacle Stock contribution as a result of the Letter 
Agreement. Northwest represents that it will make any such 
contributions in cash. Additionally, Northwest will maintain a 
subaccount for each Plan within the Master Trust for so long as that 
Plan holds Pinnacle Stock. Once all of the Pinnacle Stock in such an 
account has been liquidated, that subaccount may be dissolved.
    As noted in the June 27, 2003 letter from Northwest and ALPA to the 
Department, Northwest states that the Letter Agreement will be executed 
in connection with the voluntary contribution. Thus, the ALPA agreement 
will be formally entered into and effective on the date of the 
voluntary contribution.

August 6, 2003 Northwest and Independent Fiduciary Response

Audited Financial Statements
    The Department asked the Independent Fiduciary if the January 15, 
2003 Valuation was based on audited financial statements.
    Fiduciary Counselors stated that Eclat's valuation took into 
account a variety of financial data. Eclat was provided with Pinnacle's 
audited financial statements for the years 2000 and 2001. Eclat was 
also provided with unaudited interim and full year financial 
information for 2002. However, audited 2002 financial statements were 
not available at the time of Eclat's valuation for the January 15, 2003 
contribution.
Enhanced Communication with Plan Participants
    Several commenters requested that Northwest provide for enhanced 
communication with the Plan participants concerning the Exemption 
Transactions. Additionally, ALPA requested that it be involved in the 
monitoring of the Independent Fiduciary.
    In this regard, Fiduciary Counselors plans to hold periodic 
conference calls to report to the representatives of the participants 
covered by collective bargaining agreements on developments with 
respect to the Pinnacle Stock held by the plans. Additionally, 
Northwest notes that the Letter Agreement between Northwest and ALPA 
relating to a voluntary contribution of Pinnacle Stock would provide 
ALPA with a role in reviewing and approving the termination, and any 
replacement, of the independent fiduciary. This, together with the 
reporting planned by Fiduciary Counselors, will permit ALPA to monitor 
the Independent Fiduciary.
Plan Asset Investment Guidelines
    A number of commenters asked, if Pinnacle Stock is contributed to 
the Plans, how would this affect the manner in which other Plan assets 
are invested?
    Northwest noted that, as is the case for sponsors of defined 
benefit plans, Northwest has adopted investment guidelines and asset 
allocation strategies that guide the investment of the Plans' assets. 
These guidelines contemplate that a certain amount of assets will be 
allocated to securities with risk and return characteristics similar to 
Pinnacle Stock. Thus, Northwest notes that the holding of Pinnacle 
Stock by the Plans can fit within the overall investment strategy 
adopted for the Plans.
    Fiduciary Counselors notes, as described in its report, in 
accepting the Pinnacle Stock contribution, Fiduciary Counselors 
determined that Pinnacle Stock fit within the Plans' investment 
guidelines and diversification needs. Fiduciary Counselors also 
obtained a determination from Northwest's Pension Investment Committee 
that the holding of Pinnacle Stock would not impair the liquidity of 
the Plans and that the Plans would be able to pay benefits and expenses 
when due. Similar considerations will be taken into account by 
Fiduciary Counselors in determining whether to accept any future 
contribution of Pinnacle Stock.
Minimum Rate of Return
    Some commenters asked if Northwest would be willing to guarantee 
the Plans a minimum rate of return on the Pinnacle Stock such as a rate 
equal to the inflation rate.
    Northwest stated that it would not. Northwest provided that the 
Omnibus Agreement guarantees that the Plans always receive the greater 
of the initial contribution value of Pinnacle Stock or the value of the 
stock at the time of an IPO or the exercise of the Put Option. 
Northwest guarantees the ``principal'' attributable to the investment 
in Pinnacle Stock. According to Northwest, the Omnibus Agreement 
provides the Plans substantial investment risk protection, protection 
that would not be available to the Plans when investing in securities 
with similar risk and return characteristics. Moreover, the Plans will 
receive all of any investment gains attributable to their shares of 
Pinnacle Stock at the time of an IPO. Northwest also noted that it 
assumes the investment risk associated with any investment by the 
Plans, including the investment in Pinnacle Stock, and must make up any 
investment losses through future contributions to the Plans.
The IPO
    Several commenters asked whether the Plan trustees should decide 
when to initiate a public offering since the Plans will own a majority 
of Pinnacle Stock.
    Northwest noted that under the terms of the Omnibus Agreement, 
Northwest is responsible for making up the difference, if any, between 
the IPO price and the original contribution value. As a result, 
Northwest has a strong interest in ensuring that maximum value is 
obtained in connection with an IPO and Northwest believes that it is 
appropriate for it to determine the timing of an IPO. Additionally, 
Fiduciary Counselors agreed only to a limited period during which 
Northwest has the exclusive right to cause an IPO. Under the Omnibus 
Agreement, Northwest controls the timing of the IPO until the earlier 
of July 1, 2006 or the occurrence of an early termination event. After 
that date, the Omnibus Agreement provides Fiduciary Counselors with the 
right to cause an IPO of Pinnacle Stock.
Pinnacle Management
    Several commenters asked if Northwest would manage Pinnacle in a 
manner that maximizes its value.
    Northwest replied that Northwest does not manage Pinnacle. Except 
for one director appointed by Northwest, Pinnacle's board is 
independent of Northwest. Northwest expects that the

[[Page 49807]]

board, like any board fulfilling its fiduciary duties, will seek to 
maximize the value of the enterprise. In addition, Fiduciary Counselors 
negotiated comprehensive voting and governance rights specifically for 
the Plans under the Omnibus Agreement. For example, Fiduciary 
Counselors appointed a director to Pinnacle's board who sits on the 
board's audit committee. Once the Plans own 50% of the Pinnacle Stock, 
the Plans' director will exercise additional approval rights relating 
to the company's bylaws and capital structure. In addition, changes to 
the ASA and other significant transactions must be approved by a 
majority of Pinnacle's directors, which majority must include the 
Plans' director.
Modifications to the ASA
    On July 23, 2003, Northwest confirmed to the Department that the 
modifications to the ASA referred to in the Proposed Exemption have 
been made. The ASA was revised to provide that the acquisition or 
disposition of shares of Pinnacle Stock pursuant to the terms of the 
Omnibus Agreement does not constitute a Change of Control (as defined 
in the ASA). The ASA also was revised to eliminate the unilateral right 
of Northwest to terminate the ASA in the event of the bankruptcy of 
Northwest.
10% Limitation
    In the March 5 Comment, Fiduciary Counselors corrected previous 
information provided to the Department in the Proposed Exemption with 
reference to ``employer securities or employer real property'' in the 
last sentence of paragraph 14 in column 1 of 68 FR 2584 (emphasis 
added) and each other place it occurs. This phrase should be changed to 
``employer securities and employer real property''.
    In this regard, the Department wishes to note that Northwest has 
not requested, and the Department is not providing, any relief for any 
contribution of Pinnacle Stock that, when aggregated with any employer 
securities and employer real property currently held by any of the 
Plans, represents more than 10 percent of the value of that Plan's 
assets.
Best Interest Standard
    In the March 5 Comment, Fiduciary Counselors noted that, consistent 
with the statutory requirements of section 404(a) of ERISA, the 
reference in the Proposed Exemption to ``the best interests of the 
Plans' participants and beneficiaries'' (emphasis added) should be 
changed to ``the interests of the Plans' participants and 
beneficiaries''.
Entity References
    In the March 3 Comment, Northwest observed that there are three 
references to NWA Inc. in the second column at 68 FR 2584 that should 
reference Northwest (Northwest Airlines, Inc.), the wholly-owned 
subsidiary corporation of NWA Inc. The references appear almost halfway 
down the column beginning in the fourth full paragraph, and in the last 
paragraph in the column.
Jones Day
    The March 5 Comment noted that due to the firm's recent name 
change, the reference to ``Jones, Day, Reavis & Pogue'' in the first 
column of the Proposed Exemption at 68 FR 2584 should be changed to 
``Jones Day''.

Determination of the Department

    Accordingly, based upon the representations made by the Applicant, 
the written comments received in response to the Proposed Exemption, 
the record of the public hearing, and the analysis conducted by the 
Independent Fiduciary, the Department has determined to grant the 
exemption. The Department has, in transactions of this nature, placed 
emphasis on the need for an Independent Fiduciary and on such 
Independent Fiduciary's considered and objective evaluation of the 
transactions. In its deliberations, which included its analysis of all 
aspects of the transactions, the Independent Fiduciary has consistently 
represented for the record that no contribution of Pinnacle Stock will 
be accepted on behalf of the Plans unless such transactions are found 
by the Independent Fiduciary to be in the interests of the Plans. 
Finally, the Department notes that the Independent Fiduciary's 
satisfaction of its obligations in connection with the determination of 
the fair market value of the Pinnacle Stock as previously described by 
the Department in the Preamble to the final exemption is a critical 
factor in the Department's decision to grant a final exemption.
    The Application pertaining to the exemption, the Proposed 
Exemption, the comments submitted to the Department and the responses 
to the comments, the transcript of the Hearing, and all other documents 
submitted to the Department concerning this exemption have been 
included as part of the public record of the Application. The complete 
Application file, including all supplemental submissions received by 
the Department, is available for public inspection in the Public 
Disclosure Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.
    For a complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the January 17, 2003 Notice of Proposed Exemption at 68 FR 2578.

General Information

    The attention of interested person 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 section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and 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 require, among other things, a fiduciary to 
discharge his or her 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 requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) The exemption will not extend to transactions prohibited under 
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
    (3) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department finds that the exemption is 
administratively feasible, in the interests of the plans and their 
participants and beneficiaries and protective of the rights of the 
participants and beneficiaries of the plans;
    (4) This exemption is 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
    (5) The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
application are true and complete and accurately describe all material 
terms of the transactions, which are the subjects of the exemption.

[[Page 49808]]

Exemption

    In accordance with section 408(a) of the Act and section 4975(c)(2) 
of the Code and the procedures set forth in 29 CFR Part 2570, Subpart B 
(55 FR 32836, 32847, August 10, 1990) and based upon the entire record, 
the Department finds that the exemption is:
    (a) Administratively feasible;
    (b) In the interests of the plans and their participants and 
beneficiaries; and
    (c) Protective of the rights of the participants and beneficiaries 
of the plans.

Section I. Covered Transactions

    The restrictions of sections 406(a), 406(b)(1) and (b)(2), and 
407(a) of the Act and the sanctions resulting from the application of 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) 
through (E) of the Code, shall not apply to:
    (1) The transfer of the common shares of Pinnacle Airlines Corp. 
(Pinnacle Stock) to the Northwest Airlines Pension Plan for Salaried 
Employees, the Northwest Airlines Pension Plan for Pilot Employees, and 
the Northwest Airlines Pension Plan for Contract Employees (the Plans) 
through the in-kind contribution(s) of such shares by Northwest 
Airlines, Inc. (Northwest), a party in interest with respect to such 
Plans;
    (2) The holding of the Pinnacle Stock by the Plans;
    (3) The sale of the Pinnacle Stock by the Plans to Northwest;
    (4) The acquisition, holding, and exercise by the Plans of a put 
option (the Put Option) granted by Northwest which permits the Plans to 
sell the Pinnacle Stock to Northwest; and
    (5) The guaranty to the Plans by Northwest Airlines Corporation of 
Northwest's obligation to honor the Put Option.
Section II. Conditions
    This exemption is conditioned upon adherence to the material facts 
and representations described herein and upon satisfaction of the 
following requirements:
    (a) The Plans acquire the Pinnacle Stock through one or more 
contributions by Northwest during the calendar years 2003 and 2004;
    (b) An independent qualified fiduciary (the Independent Fiduciary), 
acting on behalf of the Plans, represents the Plans' interests for all 
purposes with respect to the Pinnacle Stock, and determines, prior to 
entering into any of the transactions described herein, that each such 
transaction, including the contribution of the Pinnacle Stock, is in 
the interests of the Plans;
    (c) The Independent Fiduciary negotiates and approves the terms of 
any of the transactions between the Plans and Northwest that relate to 
the Pinnacle Stock;
    (d) The Independent Fiduciary manages the holding and disposition 
of the Pinnacle Stock and takes whatever actions it deems necessary to 
protect the rights of the Plans with respect to the Pinnacle Stock;
    (e) The terms of any transactions between the Plans and Northwest 
are no less favorable to the Plans than terms negotiated at arm's-
length under similar circumstances between unrelated third parties;
    (f) The Independent Fiduciary determines the fair market value of 
the Pinnacle Stock contributed to each plan as of the date of each such 
contribution. In determining the fair market value of the Pinnacle 
Stock, the Independent Fiduciary obtains an appraisal from an 
independent qualified appraiser selected by the Independent Fiduciary, 
and ensures that the appraisal and the Independent Fiduciary's analysis 
of the appraisal are consistent with sound principles of valuation and 
with the elements described by the Department in the Preamble to this 
final exemption in the section entitled Duties of the Independent 
Fiduciary;
    (g) The terms of (1) the Put Option granted by Northwest; (2) any 
exercise of the Put Option by the Plans; and (3) any sale of the 
Pinnacle Stock by the Plans to Northwest other than through the 
exercise of the Put Option will be in accordance with the terms set 
forth in the Term Sheet and the Omnibus Agreement;
    (h) Immediately after each contribution, employer securities and 
employer real property, including the Pinnacle Stock, will represent no 
more than 10 percent (10%) of the value of each Plan's assets. For 
purposes of this requirement, the term ``employer real property'' means 
real property leased to, and the term ``employer securities'' means 
securities issued by, an employer any of whose employees are covered by 
the Plans or by an affiliate of such employer; and
    (i) The Plans incur no fees, costs or other charges as a result of 
their participation in any of the transactions described herein.
Section III. Definitions
    (a) The term ``independent fiduciary'' means a fiduciary who is: 
(1) independent of and unrelated to Northwest and its affiliates, and 
(2) appointed to act on behalf of the Plans for all purposes related 
to, but not limited to, (A) the in-kind contribution of the Pinnacle 
Stock by Northwest to the Plans, (B) the holding of the Pinnacle Stock 
by the Plans; (C) the acquisition, holding, and exercise by the Plans 
of the Put Option, and (D) any sale of the Pinnacle Stock by the Plans. 
For purposes of this exemption, a fiduciary will not be deemed to be 
independent of and unrelated to Northwest if: (1) Such fiduciary 
directly or indirectly controls, is controlled by or is under common 
control with Northwest, (2) such fiduciary directly or indirectly 
receives any compensation or other consideration in connection with any 
transaction described in this exemption; except that an independent 
fiduciary may receive compensation for acting as an independent 
fiduciary from Northwest in connection with the transactions 
contemplated herein if the amount or payment of such compensation is 
not contingent upon or in any way affected by the independent 
fiduciary's ultimate decision, and (3) the annual gross revenue 
received by such fiduciary, during any year of its engagement, from 
Northwest and its affiliates exceeds 5 percent (5%) of the independent 
fiduciary's annual gross revenue from all sources for its prior tax 
year.
    (b) The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) any officer, director, employee, relative, or partner in any 
such person; and
    (3) any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    Date: This exemption is effective as of January 15, 2003.

    Signed at Washington, DC this 14th day of August 2003.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, Department of Labor.
[FR Doc. 03-21162 Filed 8-18-03; 8:45 am]

BILLING CODE 4510-29-P