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

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.2

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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