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Secretary of Labor Thomas E. Perez
Proposed Exemptions; First Bank System Personal Retirement Account (the Plan) [Notices] [11/04/1997]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; First Bank System Personal Retirement Account (the Plan) [11/04/1997]

[PDF Version]

Volume 62, Number 213, Page 59740-59743

[DOCID:fr04no97-92]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application No. D-10471, et al.]

 
Proposed Exemptions; First Bank System Personal Retirement 
Account (the Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register notice. Comments and requests for 
a hearing should state: (1) The name, address, and telephone number of 
the person making the comment or request, and (2) the nature of the 
person's interest in the exemption and the manner in which the person 
would be adversely affected by the exemption. A request for a hearing 
must also state the issues to be addressed and include a general 
description of the evidence to be presented at the hearing.

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

Notice to Interested Persons

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

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of

[[Page 59741]]

proposed exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

First Bank System, Personal Retirement Account (the Plan), Located in 
Minneapolis, Minnesota

[Application No. D-10471]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 C.F.R. part 
2570, subpart B (55 F.R. 32836, 32847, August 10, 1990). If the 
exemption is granted the restrictions of sections 406(a), 406(b)(1) and 
(b)(2) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1) (A) through 
(E) of the Code, shall not apply to (1) the proposed contribution to 
the Plan by U.S. Bancorp (the Employer), formerly First Bank System, 
Inc., the sponsor of the Plan, of the Employer's interests in two 
limited partnership funds (the Interests) organized and managed by 
Kohlberg Kravis Roberts & Co. (KKR); and (2) the grant by the Employer 
to the Plan of an option (the Put) under which the Plan is empowered at 
any time to require the Employer to repurchase the Interests from the 
Plan at any time; provided that the following conditions are satisfied:
    (a) The Interests are valued at their fair market value as of the 
date of contribution by a qualified, independent appraiser;
    (b) The sum of the fair market value of the Interests plus the fair 
market value of any other KKR-related investments held by the Plan does 
not exceed ten percent of the fair market value of the Plan's total 
assets at the time of the contribution of the Interests to the Plan;
    (c) The Plan is represented for all purposes with respect to the 
Interests by a qualified independent fiduciary (the Fiduciary), as 
described below, for the duration of the Plan's holding of any of the 
Interests;
    (d) The Fiduciary takes whatever action is necessary, as determined 
by the Fiduciary in its sole discretion, to enforce the conditions of 
this exemption and to protect the Plan's investment in the Interests, 
including, but not limited to the exercise of the Put;
    (e) The Fiduciary retains the right under the Put to require the 
Employer, at any time, to purchase some or all of the Interests from 
the Plan for the greater of (1) the Interests' fair market value as of 
the contribution date, or (2) the fair market value of the Interests as 
of the date of such sale pursuant to the Put; and
    (f) For the duration of the Plan's investment in the Interests, the 
Employer's obligations under the Put are secured by the Collateral (as 
described below) in escrow representing no less than one third of the 
fair market value of the Interests at the time of their contribution to 
the Plan, and the Fiduciary requires additional Collateral to be 
deposited in the escrow whenever the value of the Interests increases.

Summary of Facts and Representations

    1. The Plan is a defined benefit pension plan with approximately 
21,000 participants and assets of approximately $382,392,832 as of June 
30, 1997. The Plan is sponsored by the Employer, which was known as 
First Bank System, Inc. until August 1, 1997. The Employer is a 
Delaware public corporation functioning as a bank holding company with 
banks, brokerage, insurance, and credit card operations conducted 
through subsidiaries in 14 states. Numerous corporate subsidiaries of 
the Employer are also sponsors of the Plan. The trustee of the Plan is 
the First Trust National Association (the Trustee), a wholly-owned 
subsidiary of the Employer. Under the Plan document, the Employer has 
the authority, directly or through a committee of appointed officers of 
the Employer, to determine investment policy of the Plan and to appoint 
investment managers. The investment manager of the assets of the Plan 
is First Asset Management, a division of a wholly-owned subsidiary of 
the Employer.
    2. The Employer currently has investments in two investment funds 
(the KKR Funds) sponsored and managed by KKR designated as the Kohlberg 
Kravis Roberts and Co. 1986 Fund and the Kohlberg Kravis Roberts and 
Co. 1987 Fund. KKR, established in 1976, serves as manager and general 
partner, as well as management and planning services provider, for 
investment enterprises and limited partnerships, including the KKR 
Funds which are the subject of this proposed exemption. Each of the KKR 
Funds invests in, and consists solely of, holdings in five businesses 
which are publicly-traded and three business which are privately held. 
The Employer represents that its investments in the Interests were 
acquired by the Employer over time for general investment purposes. The 
Interests are not publicly traded. The Employer represents that the 
Interests have increased in value substantially since acquisition by 
the Employer, and the Employer represents that continued increases in 
value are expected. The Employer represents that investors in the KKR 
Funds include individuals, institutions and employee benefit plans. 
Because the Interests have proven to be favorable investments with 
likely future increases in value and continued favorable performance, 
the Employer desires to contribute the Interests to the Plan. 
Accordingly, the Employer proposes to contribute the Interests to the 
Plan and is requesting an exemption to permit such contribution 
transaction under the terms and conditions described herein.
    3. The Employer proposes to contribute the Interests to the Plan at 
their fair market value as of the date of the contribution transaction 
and to grant the Plan the Put, an option empowering the Plan to require 
the Employer to purchase the Interests back from the Plan in the event 
such repurchase is directed by the independent fiduciary, discussed 
below, which represents the Plan's interests with respect to the 
Interests. The fair market value of the Interests upon their 
contribution to the Plan will be determined by Piper Jaffray Inc. (the 
Appraiser), an independent investment banking services provider located 
in Minneapolis, Minnesota engaged in, among other activities, the 
valuation of securities. The Appraiser represents that as of September 
3, 1997, the Interests had a fair market value of $25.5 million. The 
Employer represents that the Plan does not yet own any interests in 
either of the KKR Funds, although the Plan does own interests in two 
other entities of which KKR is either the general partner or an 
investment advisor.\1\ The Employer represents that the total fair 
market value of the Plan's interests in these other KKR-related 
enterprises was $6.2 million as of the most recent valuation of Plan 
assets on June 30, 1997.
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    \1\ The Employer represents that the other KKR-related 
investments held by the Plan consist of interests in a limited 
partnership designated as Union Texas-UTH and another limited 
partnership designated as Auto Zone Pittco Assoc. Ltd.
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    4. The Put, which has already been executed by the Employer, 
enables the Plan, represented by the Fiduciary (discussed below), to 
sell the Interests back to the Employer at any time. The Put requires 
the Employer, upon notification by the Fiduciary, to purchase all or 
any portion of the Interests from the Plan as directed by the Fiduciary 
for a purchase price to be

[[Page 59742]]

the greater of (a) the fair market value of such portion of the 
Interests as of the date of its initial contribution to the Plan, as 
determined by the Appraiser, or (b) the fair market value of such 
portion of the Interests as of the date of the exercise of the Put as 
determined by the mutual agreement of the Fiduciary and the Employer 
or, if the Fiduciary and Employer are unable to agree, as determined by 
an appraiser selected by the Fiduciary. Under the terms of the Put, the 
Employer grants the Plan a first security interest in collateral in 
escrow which secures the Employer's obligations under the Put. The 
Collateral consists of debt obligations of the United States having an 
initial fair market value of not less than one third of the fair market 
value of the Interests upon their contribution to the Plan. The Put 
requires the escrow agent to execute such other instruments and perform 
such acts as the Fiduciary may reasonably request to establish and 
maintain the Plan's security interest in the Collateral.
    5. The interests of the Plan and its participants and beneficiaries 
with respect to the proposed contribution transaction, including the 
Put, are represented by the Fiduciary, which is the First State Bank of 
Bayport. The Fiduciary is a Minnesota state-chartered bank which 
represents itself to be independent of and unrelated to the Employer. 
The Fiduciary will oversee and monitor the Plan's investment in the 
Interests and the Plan's rights under the Put for the duration of the 
Plan's investment in the Interests. The Fiduciary will require an 
appraisal of the Interests for their fair market value by the Appraiser 
upon their contribution to the Plan, and will continue to require 
annual valuations of the Interests as long as the Plan remains invested 
in the Interests or any portion thereof. The Fiduciary will ensure that 
the Collateral required to secure the Employer's obligations under the 
Put is deposited in escrow in the appropriate amount, and the Fiduciary 
will require additional collateral to be deposited in the escrow from 
time to time if the value of the Interests increases. The Fiduciary 
represents that it has reviewed and evaluated the proposed contribution 
of the Interests to the Plan, including the terms of the Put, and has 
determined that the Plan's acquisition of the Interests by the 
Employer's contribution would be prudent and would add diversification 
to the Plan's assets. The Fiduciary states that due to the Put, the 
Plan will have little or no investment risk with respect to the 
Interests while the Interests offer the potential for considerable 
gain. The Fiduciary states that the contribution of the Interests to 
the Plan will comply with the Plan's investment objectives and policies 
and would not adversely affect the Plan's liquidity needs with respect 
to current and projected benefit obligations. The Fiduciary concludes 
that the contribution of the Interests to the Plan will be in the best 
interests and protective of the participants and beneficiaries of the 
Plan. The Fiduciary states that its duties with respect to the Plan's 
investment in the Interests include ongoing monitoring of the 
investment performance of the KKR Funds in comparison to performance of 
other investment alternatives to determine if continued investment in 
the Interests by the Plan is warranted, and to ensure that the 
investment objectives and strategies of the KKR Funds remain consistent 
with the needs of the Plan. The Fiduciary also states that it will 
continue to review the Plan's liquidity needs to determine they are 
consistent with continued investment in the Interests. The Fiduciary 
represents that if, at any time, it determines that the Interests 
constitute an inappropriate investment for the Plan, it will exercise 
the Put in order to protect the Plan's participants and beneficiaries 
from adverse affects.
    5. In summary, the applicant represents that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons:
    (a) The Plan's investment in the Interests will be protected by the 
Put, which will require the Employer to purchase the Interests from the 
Plan at any time for a price of no less than the greater of the fair 
market value of the Interests upon exercise of the Put or the fair 
market value of the Interests at the time of their contribution to the 
Plan;
    (b) The Employer's obligations under the Put will be secured by the 
Collateral, consisting of debt obligations of the United States having 
an initial fair market value of not less than one third of the fair 
market value of the Interests upon their contribution to the Plan;
    (c) The interests of the Plan with respect to the contribution of 
the Interests and under the terms of the Put will be represented by an 
independent fiduciary who will require annual valuations of the 
Interests and additional deposits of Collateral by the Employer 
whenever the value of the Interests increases; and
    (d) After an evaluation of the proposed transactions, the Fiduciary 
has determined that the Plan's investment in the Interests, protected 
by the Put, will be in the best interests and protective of the 
participants and beneficiaries of the Plan.

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

Profit Sharing Keogh Plan of Richard D. Wickerham, Esq. (the Plan) 
Located in Schenectady, New York

[Application No. D-10505]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to: 
(1) Two proposed loans (the Loans) totaling $50,000 by the Plan to Mr. 
Richard D. Wickerham (Mr. Wickerham), a disqualified person with 
respect to the Plan, and (2) the personal guarantee of the Loans by Mr. 
Wickerham, provided the following conditions are satisfied: (a) The 
terms of the Loans are at least as favorable to the Plan as those 
obtainable in arm's-length transactions with an unrelated party; (b) 
the Loans do not exceed 25% of the assets of the Plan; (c) the first 
Loan (Loan 1) is secured by a second mortgage on certain real property 
(the Property) which has been appraised by a qualified independent 
appraiser to have a fair market value not less than 150% of the amount 
of Loan 1 plus the balance of the first mortgage which it secures; (d) 
the second Loan (Loan 2) is secured by certain personal property (the 
Personalty) which has a fair market value, as determined by a qualified 
independent appraiser, of not less than 200% of Loan 2; (e) the fair 
market value of the collateral remains at least equal to the 
percentages described in conditions (c) and (d), above, throughout the 
duration of the Loans; and (f) Mr. Wickerham is the only Plan 
participant to be affected by the Loan transactions.<SUP>2</SUP>
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    \2\ Since Mr. Wickerham is the sole owner of the Plan sponsor 
and the only participant in the Plan, there is no jurisdiction under 
Title I of the Act pursuant to 29 CFR 2510.3-3(b). However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
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Summary of Facts and Representations

    1. Richard D. Wickerham, Attorney and Counsellor at Law (the Firm), 
is a law firm located in Schenectady, New York. The Plan is a defined 
contribution

[[Page 59743]]

plan with one participant, Mr. Wickerham, who is also the Plan's 
trustee. Mr. Wickerham is also the sole owner of the Firm. As of July 
31, 1997, the fair market value of the assets in the Plan was 
approximately $343,088.
    2. Mr. Wickerham wishes to borrow $50,000 from the Plan, which 
represents approximately 15% of the current fair market value of the 
Plan. The money will be loaned to Mr. Wickerham in two separate Loans. 
The Loans will each be amortized over a 5 year period, with equal 
monthly payments of principal and interest over the 5 year term. The 
interest rate for each Loan will be 9.5% per annum. The total monthly 
payments for the Loans will be $1,050.10 per month. Mr. Anthony J. 
Lanzillo, Vice President of KeyBank (the Bank) of Clifton Park, New 
York, has represented in a letter dated October 1, 1997 that the Bank 
would lend money to Mr. Wickerham at the same terms as those of the 
Loans.
    3. Loan 1 will be secured by the Property, which consists of Mr. 
and Mrs. Wickerham's residence, which is located at 6 Delaware Bay 
Drive, Villas, Cape May County, New Jersey. The Property has been 
appraised by Ms. Dolores K. Lanzalotti of Jersey Cape Realty, Inc., an 
independent real estate broker in Cape May, New Jersey, to have a fair 
market value of $140,000 as of August 9, 1997. The Property has a first 
mortgage in the amount of $75,986. Loan 1 would be secured by a second 
mortgage on the Property in the amount of $17,000. Thus, the appraised 
fair market value of the Property would represent not less than 150% of 
the total outstanding principal amount of debt secured by the Property. 
The applicant represents that the mortgage to the Plan will be duly 
recorded in the Office of the County Clerk, Cape May County, New 
Jersey.
    4. Loan 2, which will be in the principal amount of $33,000, will 
be secured by the Personalty. The Personalty consists of eighteenth 
century antique period furniture and artifacts which are owned by Mr. 
and Mrs. Wickerham. The Personalty has been appraised by Ms. Ona 
Curran, AAA, Certified Appraiser of Personal Property, an independent 
appraiser in Esperance, New York, as having a fair market value of 
$69,190 as of August 1, 1997. This amount represents approximately 210% 
of the principal amount of Loan 2. The applicant represents that the 
Plan's security interest in the Personalty will be duly recorded in the 
appropriate County Clerk office.
    5. Mr. Wickerham represents that in addition to the collateral 
described above, he will also be giving his personal guarantee for each 
of the Loans. Mr. Wickerham further states that should the collateral-
to-loan ratio described above for either Loan fall below the described 
percentages, he will add additional collateral such that the 150% ratio 
will be maintained for Loan 1 and the 200% ratio will be maintained for 
Loan 2 throughout the five year period of the Loans.
    6. In summary, the applicant represents that the proposed 
transactions satisfy the criteria contained in section 4975(c)(2) of 
the Code for the following reasons: (a) The Loans represent 
approximately 15% of the assets of the Plan; (b) the terms of the Loans 
will be at least as favorable to the Plan as those obtainable in arm's-
length transactions with an unrelated party, as demonstrated by the 
letter from the Bank; (c) Loan 1 will be secured by a second mortgage 
on the Property, which has been determined by a qualified, independent 
appraiser to have a fair market value of not less than 150% of the 
total principal amount of the loans that it will secure; (d) Loan 2 
will be secured by the Personalty, which consists of eighteenth century 
antique period furniture and artifacts with a current fair market value 
of approximately 210% of Loan 2, as determined by a qualified, 
independent appraiser; and (e) Mr. Wickerham is the only participant in 
the Plan to be affected by the transactions, and he desires that the 
transactions be consummated.

Notice to Interested Persons

    Since Mr. Wickerham is the only Plan participant to be affected by 
the proposed transactions, the Department has determined that there is 
no need to distribute the notice of proposed exemption to interested 
persons. Comments and requests for a hearing are due within 30 days 
from the date of publication of this notice of proposed exemption in 
the Federal Register.

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

General Information

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

    Signed at Washington, DC, this 30th day of October, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 97-29174 Filed 11-3-97; 8:45 am]
BILLING CODE 4510-29-P