[Federal Register Volume 76, Number 50 (Tuesday, March 15, 2011)]
[Notices]
[Pages 14083-14099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5911]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration


Proposed Exemptions From Certain Prohibited Transaction 
Restrictions

AGENCY: Employee Benefits Security 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 (ERISA or the Act) and/or the 
Internal Revenue Code of 1986 (the Code). This notice includes the 
following proposed exemptions: D-11468 & D-11469 The Krispy Kreme 
Doughnut Corporation Retirement Savings Plan, The Krispy Kreme Profit-
Sharing Stock Ownership Plan; D-11632 Millenium Trust Co. LLC, 
Custodian FBO William Etherington IRA; D-11642 H-E-B Brand Savings & 
Retirement Plan and H.E. Butt Grocery Company; and L-11625 The 
International Union of Painters and Allied Trades Finishing Institute.

DATES: All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice.

ADDRESSES: 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.
    All written comments and requests for a hearing (at least three 
copies) should be sent to the Employee Benefits Security Administration 
(EBSA), Office of Exemption Determinations, Room N-5700, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No.--------, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
<a href="/cdn-cgi/l/email-protection#e38e8c85858a9797cd818697979aa3878c8fcd848c95"><span class="__cf_email__" data-cfemail="472a2821212e333369252233333e0723282b69202831">[email protected]</span></a>, or by FAX to (202) 219-0204 by the end of the 
scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

    Warning: If you submit written comments or hearing requests, do 
not include any personally-identifiable or confidential business 
information that you do not want to be publicly-disclosed. All 
comments and hearing requests are posted on the Internet exactly as 
they are received, and they can be retrieved by most Internet search 
engines. The Department will make no deletions, modifications or 
redactions to the comments or hearing requests received, as they are 
public records.


SUPPLEMENTARY INFORMATION: 

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).
    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, 5 U.S.C. App. 1 
(1996), transferred the authority of the Secretary of the Treasury to 
issue exemptions of the type requested to the Secretary of Labor. 
Therefore, these notices of proposed exemption are issued solely by the 
Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

[[Page 14084]]

The Krispy Kreme Doughnut Corporation Retirement Savings Plan (the 
Savings Plan) and the Krispy Kreme Profit-Sharing Stock Ownership Plan 
the KSOP; Together, the Plans or the Applicants)

Located in Winston-Salem, North Carolina

[Application Nos. D-11468 and D-11469, Respectively]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 
1990).\1\ If the exemption is granted, the restrictions of section 
406(a)(1)(A), (D), (E), section 406(a)(2), section 406(b)(2) and 
section 407(a) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) and (D) of the Code, shall not apply, effective January 
16, 2007, to (1) the release by the Plans of their claims against 
Krispy Kreme Doughnut Corporation (KKDC), the sponsor of the Plans and 
a party in interest, in exchange for cash, shares of common stock (the 
Common Stock) and warrants (the Warrants) issued by Krispy Kreme 
Doughnuts, Inc. (KKDI), the parent of KKDC and also a party in 
interest, in settlement of certain litigation (the Securities 
Litigation) between the Plans and KKDC; and (2) the holding of the 
Warrants by the Plans.
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    \1\ For purposes of this proposed exemption, references to the 
provisions of Title I of the Act, unless otherwise specified, refer 
also to the corresponding provisions of the Code.
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    This proposed exemption is subject to the following conditions:
    (a) The receipt and holding of cash, the Common Stock and the 
Warrants occurred in connection with a genuine controversy in which the 
Plans were parties.
    (b) An independent fiduciary was retained on behalf of the Plans to 
determine whether or not the Plans should have joined in the Securities 
Litigation and accept cash, the Common Stock and the Warrants pursuant 
to a settlement agreement (the Settlement Agreement). Such independent 
fiduciary--
    (1) Had no relationship to, or interest in, any of the parties 
involved in the Securities Litigation that might affect the exercise of 
such person's judgment as a fiduciary;
    (2) Acknowledged, in writing, that it was a fiduciary for the Plans 
with respect to the settlement of the Securities Litigation; and
    (3) Determined that an all cash settlement was either not feasible 
or was less beneficial to the participants and beneficiaries of the 
Plans than accepting all or part of the settlement in non-cash assets.
    (4) Thoroughly reviewed and determined whether it would be in the 
best interests of the Plans and their participants and beneficiaries to 
engage in the covered transactions.
    (5) Determined whether the decision by the Plans' fiduciaries to 
cause the Plans not to opt out of the Securities Litigation was more 
beneficial to the Plans than having the Plans file a separate lawsuit 
against KKDC.
    (c) The terms of the Settlement Agreement, including the scope of 
the release of claims, the amount of cash and the value of any non-cash 
assets received by the Plans, and the amount of any attorney's fee 
award or any other sums to be paid from the recovery were reasonable in 
light of the Plans' likelihood of receiving full recovery, the risks 
and costs of litigation, and the value of claims foregone.
    (d) The terms and conditions of the transactions were no less 
favorable to the Plans than comparable arm's length terms and 
conditions that would have been agreed to by unrelated parties under 
similar circumstances.
    (e) The transactions were not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (f) All terms of the Settlement Agreement were specifically 
described in a written document approved by the United States District 
Court for the Middle District of North Carolina (the District Court).
    (g) Non-cash assets, which included the Common Stock and Warrants 
received by the Plans from KKDC under the Settlement Agreement, were 
specifically described in the Settlement Agreement and valued as 
determined in accordance with a court-approved objective methodology;
    (h) The Plans did not pay any fees or commissions in connection 
with the receipt or holding of the Common Stock and the Warrants.
    (i) KKDC maintains, or causes to be maintained, for a period of six 
years such records as are necessary to enable the persons described in 
paragraph (j)(1) below to determine whether the conditions of this 
exemption have been met, except that--
    (1) If the records necessary to enable the persons described in 
paragraph (j)(1) to determine whether the conditions of this exemption 
have been met are lost, or destroyed, due to circumstances beyond the 
control of KKDC, then no prohibited transaction will be considered to 
have occurred solely on the basis of the unavailability of those 
records; and
    (2) No party in interest with respect to the Plans other than KKDC 
shall be subject to the civil penalty that may be assessed under 
section 502(i) of the Act or to the taxes imposed by section 4975(a) 
and (b) of the Code if such records are not maintained or are not 
available for examination as required by paragraph (i).
    (j)(1) Except as provided in this paragraph (j) and notwithstanding 
any provision of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (i) above are unconditionally available at 
their customary locations for examination during normal business hours 
by:
    (A) Any duly authorized employee, agent or representative of the 
Department or the Internal Revenue Service, or the Securities and 
Exchange Commission (SEC);
    (B) Any fiduciary of the Plans or any duly authorized 
representative of such participant or beneficiary;
    (C) Any participant or beneficiary of the Plans or duly authorized 
representative of such participant or beneficiary;
    (D) Any employer whose employees are covered by the Plans; or
    (E) Any employee organization whose members are covered by such 
Plans.
    (2) None of the persons described in paragraph (j)(1)(B) through 
(E) shall be authorized to examine trade secrets of KKDC or commercial 
or financial information which is privileged or confidential.
    (3) Should KKDC refuse to disclose information on the basis that 
such information is exempt from disclosure, KKDC shall, by the close of 
the thirtieth (30th) day following the request, provide written notice 
advising that person of the reason for the refusal and that the 
Department may request such information.
    Effective Date: If granted, this proposed exemption will be 
effective as of January 16, 2007.

Summary of Facts and Representations

KKDI and KKDC

    1. KKDI is a branded retailer and wholesaler of doughnuts. KKDI's 
principal business, which began in 1937, is franchising and owning 
Krispy Kreme doughnut stores. KKDI's principal, wholly-owned operating 
subsidiary is KKDC. KKDI Common Stock is publicly traded on the New

[[Page 14085]]

York Stock Exchange under the ticker symbol ``KKD''. Both KKDI and KKDC 
are located in Winston-Salem, North Carolina.

The Plans

    2. Effective February 1, 1999, KKDC established the KSOP, a defined 
contribution employee stock ownership plan. Under the terms of this 
qualified plan, KKDC could contribute a discretionary percentage of 
each employee's compensation, subject to Code limits, to each eligible 
employee's account under the KSOP. The contribution could be made in 
the form of cash or newly-issued shares of the Common Stock. If cash 
was contributed, the KSOP could acquire the Common Stock on the open 
market. As of December 31, 2006, the KSOP had total assets, consisting 
primarily of the Common Stock and having a fair market value of 
$4,705,581, and 1,471 participants. The trustee of the KSOP was Branch 
Banking and Trust Company of Winston-Salem, North Carolina (BB&T).
    3. On February 1, 1982, KKDC established the Savings Plan, which is 
subject to the provisions of section 401(k) of the Code.\2\ Under the 
Savings Plan, employees may contribute up to 100% of their salary and 
bonus to this plan on a tax-deferred basis, subject to statutory 
limitations. Effective August 1, 2004, KKDC began matching employee 
contributions to the Savings Plan in cash. KKDC matches 50% of the 
first 6% of compensation contributed by each employee. Participants in 
the Savings Plan are permitted to self-direct the investment of their 
account balances (including matching account balances) among a number 
of investment options, including the Krispy Kreme Stock Fund (the Stock 
Fund) (whose assets consist of the Common Stock and cash). As of 
December 31, 2006, the Savings Plan had total assets of $24,529,174 and 
4,188 participants. Of the Saving Plan's assets, approximately 3.5% was 
invested in shares of the Common Stock. The trustee of the Savings Plan 
was also BB&T.
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    \2\ The Savings Plan and the KSOP were not parties in interest 
with respect to each other.
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    4. The documents for each Plan provided that KKDC would be the 
``named fiduciary'' for investment purposes, except with respect to the 
Stock Fund for which U.S Trust Company, N.A. (U.S. Trust) would serve 
as the independent fiduciary.\3\ KKDC's responsibilities included broad 
oversight of and ultimate decision-making authority over the management 
and administration of the Plans' assets, as well as the appointment, 
removal and monitoring of other fiduciaries of the Plans. KKDC could 
also exercise its authority as named fiduciary through an eight-member 
Investment Committee established for the Plans. The Investment 
Committee selected investment alternatives into which participants in 
the KSOP and participants in the Savings Plan could diversify their 
interests in their Participant accounts.
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    \3\ In such capacity, U.S Trust was given specific authority and 
responsibility to: (a) Impose any restriction on the investment of 
participant accounts in the Stock Fund; (b) eliminate the Stock Fund 
as an investment option under the Savings Plan and to sell or to 
otherwise dispose of all of any portion of the Common Stock held in 
the Stock Fund; (c) designate an alternate investment fund under the 
Plans for the investment of any proceeds from any sale or other 
disposition of the Common Stock; and (d) instruct the Trustees of 
the Plans with respect to the foregoing matters.
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Merger of the Plans and the ERISA Litigation

    5. Effective June 1, 2007, KKDC merged the KSOP into the Savings 
Plan. The merger occurred due to separate litigation commenced by 
different plaintiffs on March 3, 2005. The plaintiffs alleged 
violations of the Act in a class action lawsuit captioned as Smith v. 
Krispy Kreme Doughnut Corporation, M.D.N.C. No. 1:05CV00187 (i.e., the 
ERISA Litigation), that was brought in the District Court. The 
plaintiffs' complaint alleged the defendant, KKDC, had breached its 
fiduciary duty with respect to investment in KKDI stock within the 
Plans and had caused the Plans to suffer losses. The parties litigated 
for over two years and ultimately reached a settlement (the ERISA 
Settlement), which was reviewed and approved by the Department's 
Atlanta Regional Office and by Independent Fiduciary Services, Inc. 
(IFS), a qualified independent fiduciary. The ERISA Settlement, which 
received the District Court's approval on January 10, 2007, required 
both a monetary recovery of $4.75 million and structural relief valued 
at approximately $3.82 million for the class.\4\ Finally, the ERISA 
Settlement stipulated the merger of the Plans. As of December 31, 2009, 
the Savings Plan had $26,986,884 in total assets and 2,491 
participants. (Notwithstanding the merger, for convenience of 
reference, this proposed exemption is meant to cover both the post-
merger KSOP and the Savings Plan which are treated as separate plans).
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    \4\ The ERISA Settlement is not the subject of this proposed 
exemption. It is discussed here as part of the historic background 
of this proposed exemption.
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The Securities Litigation

    6. On May 12, 2004, certain plaintiff investors filed another class 
action lawsuit in the District Court on behalf of all persons who had 
purchased securities issued by KKDI between August 21, 2003 and May 7, 
2004 (a timeframe that was later extended from March 8, 2001 to April 
18, 2005 and referred to herein as the ``Class Period''). The class 
members included the Savings Plan and the KSOP. On October 6, 2004, the 
District Court appointed the Pompano Beach Police & Firefighters 
Retirement Systems, the Alaska Electrical Pension Fund, the City of St. 
Clair Shores Police and Fire Retirement System, the City of Sterling 
Heights General Employees Retirement System and James Hennessey as the 
lead plaintiffs (the Class Lead Plaintiffs) to represent the class 
plaintiffs (the Class Plaintiffs). None of the Class Plaintiffs were 
parties in interest with respect to the Plans. The District Court also 
appointed Coughlin Stoia Gellar Rudman & Robbins, LLP as lead counsel 
(the Class Lead Counsel) for the Class Plaintiffs. The class action 
defendants (the Class Defendants) included KKDC, PriceWaterhouseCoopers 
(PwC) and Michael Phalen, who served as the Chief Financial Officer of 
KKDI and a member of each Plan's committee.
    The complaint alleged that the Class Defendants had violated 
Federal securities laws by issuing materially false and misleading 
statements throughout the Class Period that had the effect of 
artificially inflating the market price of KKDI's securities. On June 
14, 2004, the class action lawsuit and other related cases were 
consolidated by the District Court into the Securities Litigation. 
Newer cases were later consolidated by the District Court in an order 
dated June 25, 2004.

Settlement Fund Consideration

    7. The Securities Litigation was eventually settled. Pursuant to 
the Settlement Agreement signed on October 30, 2006, a $75 million 
Settlement Fund (the Settlement Fund) comprised of $39,167,000 in cash, 
$17,916,500 in shares of the Common Stock, and $17,916,500 in KKDI 
freely tradable Warrants was established for the benefit of the 
settlement class (the Settlement Class), which included all persons, 
including the Plans, who had purchased the Common Stock during the 
Class Period. The District Court designated Class Lead Counsel to 
manage the Settlement Fund.\5\
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    \5\ The Applicants represent that the Settlement Fund was 
managed by the Class Lead Counsel for the benefit of the Settlement 
Class and ultimately under the direction of the District Court as 
the entire Settlement Fund was deemed to be in custodia legis of the 
District Court. As approved by the Court, some of the cash portion 
of the Settlement Fund was used to pay costs and expenses including 
taxes actually incurred in distributing the Settlement Notice to the 
Settlement Class members and the administration and distribution of 
the Settlement Fund.

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[[Page 14086]]

    8. Under the District Court-ordered formula, the number of shares 
of the Common Stock issued to the Settlement Fund was determined by 
dividing $17,916,500 by the ``Measurement Price.'' The ``Measurement 
Price'' was defined in the Settlement Agreement as ``the average of the 
daily closing prices for each trading day of Common Stock for the ten 
trading day period commencing on the fifth trading day next preceding 
the date KKDI filed its Form 10-K'' (Annual Report Pursuant to Section 
13 or 15(d) of the Securities and Exchange Act of 1934) with the SEC 
for Fiscal Year 2006 (Ten Day Method). The Settlement Agreement defined 
the ``Closing Price'' for each day as the last reported sales price for 
the Common Stock on the New York Stock Exchange.
    Thus, the Measurement Price was established on a ten-day Closing 
Price average ending November 7, 2006. This date represented five days 
before and five days after the filing of the KKDI's Form 10-K with the 
SEC. As a result, a Measurement Price of $9.77 was selected. The dollar 
amount of $17,916,500 was divided by the Measurement Price which 
yielded 1,833,828 shares of the Common Stock for the Settlement Fund.
    9. Pursuant to the Settlement Agreement, the number of Warrants 
issued to the Settlement Fund was determined by dividing $17,916,500 by 
the fair market value of one Warrant, based on an independent valuation 
analysis as of the last day of the ten-trading day period referred to 
in Representation 8. This valuation was also based on the Black-Scholes 
Model \6\ and certain assumptions \7\ specified in the Settlement 
Agreement. Under the terms of the Settlement Agreement, the Warrants 
were required to be listed on the New York Stock Exchange within ten 
days of their distribution to the Class Lead Plaintiffs. Thus, a 
generally recognized market for the Warrants would have existed upon 
distribution to the Plans.
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    \6\ The Black-Scholes Model is an option pricing model developed 
by Fischer Black and Myron Scholes using the research of Robert 
Merton. The Black-Scholes Model assumes that there is a continuum of 
stock prices, and therefore to replicate an option, an investor must 
continuously adjust their holding in the stock. The formula also 
makes several simplifying assumptions including that the risk-free 
rate of return and the stock price volatility are constant over time 
and that the stock will not pay dividends during the life of the 
option.
    \7\ These assumptions included basing (a) the volatility of the 
Common Stock on the historical and implied volatilities of the 
Common Stock and the common stock of companies similar to KKDC; (b) 
basing the risk free rate of interest on the Treasury bill rate most 
closely corresponding to the 5-year term of the Warrants; and (c) 
the dividend yield at 0%. The price per share of the Common Stock 
utilized in the Black-Scholes Model would be equal to the 
Measurement Price.
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Appraisal of the Warrants

    10. KKDI retained Huron Consulting Group of Chicago, Illinois 
(Huron), on behalf of all Class Plaintiffs, to provide the fair market 
value of the Warrants in order to determine how many Warrants to issue 
the Settlement Fund. Huron represented that its appraisal report, dated 
for March 12, 2007, which ``looked back'' to November 7, 2006 (the 
Huron Appraisal), was made in conformance with the Uniform Standards of 
Professional Appraisal Practice of The Appraisal Foundation. Huron 
Managing Director James Dondero, Huron Director John Sawtell CPA, ASA, 
and Huron Manager Derick Champagne, CPA certified the Huron Appraisal. 
The Applicants represented that Mr. Dondero has 20 years of experience 
in financial and economic analysis, corporate finance, valuation and 
operations. Mr. Dondero also serves on the Appraisal Issues Task Force 
advising both the Financial Accounting Standards Board and the SEC on 
valuation-related issues.
    Furthermore, in the Huron Appraisal, Huron represented that it had 
no present or prospective interest in the Warrants that were the 
subject of its appraisal and no personal interest with respect to the 
parties involved. Huron also stated that it had no bias with respect to 
the Warrants or to the parties involved and that its engagement was not 
contingent upon developing or reporting predetermined results.
    Using the Black-Scholes Model and the assumptions described in the 
footnote references in Representation 9, the Huron Appraisal placed the 
fair market value of a single Warrant at $4.17 per share as of November 
7, 2006. Based on the settlement amount of $17,916,500, Huron stated 
that KKDC could issue 4,296,523 Warrants.

Notice and Effect of the Settlement

    11. A Notice of Pendency and Proposed Settlement of Class Action 
(the Settlement Notice) was mailed to class members (including the 
Plans) on November 15, 2006. The Settlement Notice gave class members 
until January 16, 2007 to exclude themselves from the class and 
preserve their right to file an individual action. The Plans did not 
exclude themselves as class members by the January 16, 2007 deadline.
    By operation of the Settlement Agreement, all class members were 
deemed to fully, finally and forever release all known or unknown 
claims, demands, rights, liabilities and causes of action, arising out 
of, relating to, or in connection with the acquisition of KKDI Common 
Stock and Warrants during the Class Period. Thus, in effect, by failing 
to exclude themselves from the class, the Plans (like all other class 
members) were bound by the release contained in the Settlement 
Agreement. After a hearing, the District Court approved the Settlement 
Agreement and entered final judgment on February 15, 2007.

Appointment of an Independent Fiduciary

    12. On April 5, 2007, KKDC formally retained IFS, a Delaware 
corporation based in Washington, DC, and a registered investment 
adviser under the Investment Advisers Act of 1940, to serve as 
independent fiduciary to the Plans with respect to the Plans' interest 
in the Settlement Agreement. In an agreement entitled ``Independent 
Fiduciary Engagement Between Krispy Kreme Doughnut Corporation and 
Independent Fiduciary Services, Inc.'' (the IFS Agreement), IFS 
accepted its independent fiduciary duties and responsibilities as an 
fiduciary under the Act on behalf of the Plans.
    IFS provides fiduciary decision-making and advisory services to 
institutional investors, including employee benefit plans subject to 
ERISA. In this capacity, IFS has evaluated potential claims for 
investment losses suffered by such plans, including claims arising from 
State and Federal securities laws. More particularly, IFS has served as 
independent fiduciary under the ``Class Exemption for the Release of 
Claims and Extensions of Credit in Connection with Litigation,'' (PTE 
2003-39, 68 FR 75632, December 31, 2003),\8\ to decide whether to grant 
a release in favor of the plans' parties in interest of securities law 
claims similar to the claims asserted above in the Securities 
Litigation. IFS

[[Page 14087]]

has had no business relationship with KKDC or the Plans other than its 
service under the IFS Agreement and its service in 2006 pursuant to a 
separate agreement as independent fiduciary to the Plans pursuant to 
PTE 2003-39 claims arising under ERISA that were related to the 
allegations made in the ERISA Litigation. In this regard, the fees IFS 
derived from KKDC and its affiliates represented less than 1% of IFS' 
gross revenue for 2006 and less than 1.5% of IFS' gross revenue for 
2007.
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    \8\ On June 15, 2010, the Department published an amendment (the 
Amendment) to PTE 2003-39 at 75 FR 33830. The Amendment modifies PTE 
2003-39 and it expands the categories of assets that plans may 
accept in the settlement of litigation, subject to certain 
conditions. Among other things, the Amendment permits the receipt by 
a plan of non-cash assets in settlement of a legal claim (including 
the promise of future employer contributions) but only in instances 
where the consideration can be objectively valued. The Amendment is 
prospectively effective June 15, 2010 and it does not cover the 
transactions described herein due to the retroactive nature of the 
submission.
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    13. As stated in the IFS Agreement, IFS proposed to attempt, on 
behalf of the Plans, to obtain an agreement from KKDC, which provided 
that, in the event IFS should determine that a claim in the class 
action suit should not be filed on behalf of the Plans, KKDC would 
waive and forego benefits of any release it had obtained from each of 
the Plans by virtue of the fact that the Plans did not timely seek 
exclusion from the settlement class. Moreover, KKDC would support all 
efforts by the Plans to obtain a reasonable extension of time to file 
claims on their behalf, including if necessary, an application to the 
District Court. Thus, IFS had an opportunity to pursue either a class 
action lawsuit or an individual lawsuit on behalf of the Plans.
    14. By letter dated July 25, 2007, (the IFS Letter), IFS stated 
that it had reviewed the Settlement Agreement and determined, 
consistent with PTE 2003-39, that the terms and conditions were in 
substance essentially fair and reasonable from the perspective of the 
settlement class members, including the Plans. As stated briefly above, 
PTE 2003-39 provides, in part, exemptive relief for the release by a 
plan or a plan fiduciary, of a legal or equitable claim against a party 
in interest in exchange for consideration, given by, or on behalf of, a 
party in interest to the plan in partial or complete settlement of the 
plan's or the fiduciary's claim. The relevant conditions of PTE 2003-39 
require among other things, that (a) there be a genuine controversy 
involving the plan, (b) an independent fiduciary authorize the terms of 
the settlement; (c) the settlement is reasonable and no less favorable 
to the plan than the terms offered to similarly-situated unrelated 
parties on an arm's length basis; (d) the settlement is set forth in a 
written agreement or consent decree; (e) the transaction is not part of 
an agreement, arrangement or understanding designed to benefit a party 
in interest; and (f) the transaction is not described in Section A.I. 
of PTE 76-1 (relating to delinquent employer contributions to 
multiemployer and multiple employer collectively-bargained plans).
    In the IFS letter, IFS identified two instances by which the 
Settlement Agreement's terms would not allow the Plan to take advantage 
of PTE 2003-39. First, IFS noted that under PTE 2003-39, Section III(c) 
states that assets other than cash may only be received by a plan from 
a party in interest in connection with a settlement if: (a) It is 
necessary to rescind a transaction that is the subject of the 
litigation; or (b) such assets are securities for which there is a 
generally recognized market, as defined in section 3(18)(A) of the Act, 
and which can be objectively valued. IFS stated that the receipt of the 
Warrants by the Plans did not necessarily comply with Section III(c) of 
PTE 2003-39, because such receipt was not necessary to rescind any 
transaction that was the subject of litigation and the Warrants would 
not become subject to a generally recognized market until after their 
distribution to the Plans. Additionally, IFS determined that the 
Warrants were not qualifying employer securities under section 
407(d)(5) of the Act.
    Secondly, IFS noted that under Section III(d) of PTE 2003-39, to 
the extent assets, other than cash, are received by a plan in exchange 
for the release of the plan's or the plan fiduciary's claims, such 
assets must be specifically described in the written settlement 
agreement and valued at their fair market value, as determined in 
accordance with section 5 of the Voluntary Fiduciary Correction (VFC) 
Program, 67 FR 15062 (March 28, 2002).\9\ According to PTE 2003-39, the 
methodology for determining fair market value, including the 
appropriate date for such determination, must be set forth in the 
written settlement agreement. For example, under Section 5 of the VFC 
Program, the valuation must meet either of the following conditions: 
(a) If there is a generally recognized market for the property (e.g., 
the New York Stock Exchange), the fair market value of the asset is the 
average value of the asset on such market on the applicable date, 
unless the plan document specifies another objectively determined value 
(e.g. closing price); or (b) if there is no generally recognized market 
for the asset, the fair market value of the asset must be determined in 
accordance with generally accepted appraisal standards by a qualified, 
G73 independent appraiser and reflected in a written appraisal report 
signed by the appraiser.
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    \9\ By amendment, the Department revised and updated the VFC 
Program at 71 FR 20262 (April 19, 2006).
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    IFS stated that it was not satisfied that the terms of Section 
III(d) of PTE 2003-39 were met because the terms of the Settlement 
Agreement provided for a payment to the members of the class consisting 
of cash, the Common Stock and the Warrants.\10\ Moreover, IFS noted 
that the Settlement Agreement valued the Common Stock over a 10-day 
period rather than at the closing or average price on a specific day. 
Also, the documents for each Plan did not specify another objectively 
determined value for the Common Stock. Accordingly, because the terms 
of the Settlement Agreement did not meet all of the requirements of PTE 
2003-39, IFS could not conclude that the Plans should file claims with 
respect to the Settlement Notice.
---------------------------------------------------------------------------

    \10\ KKDC represents the noncompliance with Sections III(c) and 
(d) of PTE 2003-39 did not result in harm to the Plans. Instead of 
using a measurement ``such of a single date'' as specified by PTE 
2003-39, KKDC used the Ten Day Method. In contrast, had the parties 
used the January 16, 2007 (i.e., the last day for claimants to 
exclude themselves from the Securities Litigation) to calculate the 
Common Stock's share price, the Common Stock's share price of $11.42 
would have been used as the Measurement Price. Consequently, the 
Settlement Fund would have received 1,568,870 shares of the Common 
Stock or 250,000 fewer shares. Accordingly, the Ten Day Method did 
not result in harm to the Plans.
---------------------------------------------------------------------------

    15. Despite the foregoing, IFS represented that the terms of the 
Settlement Agreement were in substance essentially fair and reasonable 
and that it would be in the interest of the Plans to obtain 
consideration equal to their proportionate share of the value of the 
Settlement Fund in exchange for granting a release to the Class 
Defendants, including KKDC and Mr. Phalen, and that it would likely not 
be practical for the Plans to pursue separate litigation against the 
KKDC and Mr. Phalen to obtain that result.
    IFS also suggested three options designed to enable the Plans to 
receive the appropriate amounts of recovery from the Settlement Fund. 
The first option involved having the Plans obtain from KKDC, Mr. 
Phalen, and PwC an agreement to forego the benefits of the release 
which the Plans could provide by filing a claim with the Settlement 
Funds, so that the Plans would not be releasing a party in interest to 
the Plans and therefore the Plans could file such claims, accordingly.
    The second option suggested by IFS would be for the Plans to enter 
into a separate agreement with KKDC, PwC and Mr. Phalen under which 
KKDC would agree to provide a payment to the Plans equal to the Plans' 
proportionate share of the Settlement Fund calculated

[[Page 14088]]

as though the entire settlement payment of $75 million had been made in 
cash, rather than a combination of cash, the Common Stock and the 
Warrants. In consideration of that payment, the Plans could assign/
offset to KKDC the value of their respective claims, and the Settling 
Defendants would receive the releases that would otherwise be 
associated with the filing of the Plans' claims. Such separate 
agreement would need to be approved by IFS and otherwise structured to 
meet the requirements of PTE 2003-39. IFS recommended that under this 
second option, the separate agreement should be executed and become 
effective before the Plans filed their claims.
    The third option suggested by IFS, would be for KKDC to apply to 
the Department for an individual exemption to allow the Plans to file a 
claim with the Settlement Fund and accept cash and non-cash assets as a 
settling class member, notwithstanding the lack of compliance with 
Section III(c) and Section III(d) of PTE 2003-39.
    16. In an addendum to the IFS letter, IFS explained, that it 
reached its recommendation for KKDC to exercise the third option based 
upon a thorough review of the available facts. IFS retained legal 
assistance from outside counsel. With assistance from outside counsel, 
IFS reviewed the operative complaint as well as a number of documents, 
which included motions to dismiss the Securities Litigation, the Class 
Defendant's mediation statements and damage analysis, the Class 
Plaintiffs' application for attorneys' fees and the Settlement 
Agreement. IFS also reviewed records of the Plans' holdings and 
transactions in the Common Stock, KKDC's insurance policies and it 
interviewed attorneys for the parties to the Securities Litigation. IFS 
stated that it took into account the recovery the Plans received from 
the ERISA Litigation.
    Based on its investigation and supported by analysis by outside 
counsel, IFS concluded that the Settlement Agreement's terms and 
conditions were in substance essentially fair and reasonable from the 
perspective of the Plans. IFS also concluded, based on its 
investigation and analysis, that pursing separate litigation in lieu of 
accepting consideration equal to the Plan's proportionate share of the 
value of the Settlement Agreement ``would likely not be practical.''
    IFS stated that it reached its conclusion in light of the following 
factors:
    <bullet> The Plans Would Receive Small Recoverable Damages as a 
Result of Their De Minimus Holdings of the Common Stock. IFS noted that 
the Plans' relatively small holdings of the Common Stock and in 
particular the KSOP's de minimus purchases of the Common Stock rendered 
the Plans' potentially recoverable damages in a separate action 
relatively small. IFS also represented that even if the Class 
Plantiffs' most optimistic projections for the damages totaled $800 
million, the Plans' share would have come to some $4.8 million, a 
figure that assumes no offset for the Plans' net cash recovery (i.e., 
less attorneys' and other fees) from the ERISA Settlement. 
Significantly, IFS noted that the Settlement Agreement did not require 
that the Plans reduce their claims based on the proceeds from the ERISA 
Settlement.
    <bullet> KKDC Had Limited Financial Resources to Satisfy a Separate 
Claim by the Plans. IFS noted that KKDC had limited financial resources 
available to satisfy a separate claim by the Plans had such a claim 
been substantial. Pursuant to the Settlement Agreement, KKDC had 
released all claims under its applicable insurance policies for 
payments in excess of what the carriers, who had disputed coverage for 
the claims in the Securities Litigation. IFS represented that, at the 
time of its determination, KKDC's most recent SEC Form 10-Q showed that 
KKDC's total cash assets as of April 29, 2007 were less than $31 
million, down from $36 million three months earlier.
    <bullet> The Plans Would Incur Great Costs in Proving Complex 
Allegations Against KKDC. IFS explained that the allegations asserted 
against KKDC in the Securities Litigation raised complex issues 
regarding the proper accounting treatment of a series of intricate 
franchising, financing, leasing and derivative transactions. IFS 
represented that proving such allegations would have required extensive 
discovery and costly retention of accounting and other experts. IFS 
noted that the potential defendants also had significant defenses 
available to the claims that would have been asserted by the Plans. The 
Fourth Circuit, where such action would have been brought, would not 
favor an allegation that the misapplication of accounting principles 
established the state of mind to support a claim of fraud under Federal 
securities laws.
    <bullet> No Opt Outs or Separate Lawsuits Were Filed by Securities 
Litigation Class Members. At the time of its determination in the IFS 
Letter, IFS stated that it knew of no material opt outs from the 
Securities Litigation by class members. Moreover, IFS asserted that 
there were no separate lawsuits outside of the Securities Litigation 
brought by any party to recover damages based on the allegations. The 
only objection, according to IFS, by an institutional investor to the 
Settlement Agreement addressed the plaintiff's attorney fees which the 
District Court rejected. The only individual investor who objected to 
the settlement asserted that investors should not receive anything 
because equity investors take risks. Thus, IFS stated no party with a 
financial stake in the matter had asserted that class members would 
have been better off with more litigation as opposed to the Settlement 
Agreement.
    In light of these factors, IFS represented that pursuing separate 
litigation in lieu of participating in the Settlement Agreement would 
have entailed significant expense for the Plans. There would also have 
been a substantial risk that the Plans would recover little or nothing. 
In light of the relatively small size of the Plans' potential claims, 
the fact the Plans had already achieved a material recovery through the 
ERISA Settlement, and the complexity of the case, IFS concluded that 
the claims would not be attractive to law firms that litigate 
securities fraud cases on a contingency fee basis. Finally, IFS stated 
that the reasonableness of these conclusions is further evidenced by 
the fact that as of July 2010, no cases had been brought against KKDC 
outside the Securities Litigation that asserted the claims that were 
settled.

Request for Exemptive Relief

    17. The Applicants represent that the Plans' decision to grant the 
release was primarily based on the advice of IFS. Instead of filing by 
the January 16, 2007 deadline, stipulated in the Settlement Notice, the 
Plans filed their Proof of Claim and Release with the District Court on 
August 8, 2007, and subsequently applied for an administrative 
exemption from the Department.
    If granted, the exemption would apply effective January 16, 2007, 
to (a) the release by the Plans of their claims against KKDC in 
exchange for cash, the Common Stock and the Warrants in settlement of 
the Securities Litigation; and (b) the holding of the Warrants by the 
Plans.\11\
---------------------------------------------------------------------------

    \11\ The Department is expressing no opinion herein on whether 
the cash, the Common Stock and the Warrants that were being held on 
behalf of the Plans in the Settlement Fund would constitute ``plan 
assets'' within the meaning of 29 CFR 2510.3-101. Nevertheless, the 
Department is providing exemptive relief with respect to the 
release, by the Plans, of their claims against KKDC in settlement of 
the Securities Litigation, in exchange for the consideration 
allocated to the Plans in the Settlement Fund. The Department is 
also proposing exemptive relief for the holding of the Warrants by 
the Settlement Fund for the Plans.

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[[Page 14089]]

    Section 407(a)(1) of the Act states that a plan may not acquire or 
hold any ``employer security'' which is not a ``qualifying employer 
security.'' Both the Common Stock and the Warrants are ``employer 
securities'' within the meaning of section 407(d)(1) of the Act in that 
they are ``securities issued by an employer of employees covered by the 
plan, or by an affiliate of such employer.'' The Common Stock, but not 
the Warrants, is also a ``qualifying employer security.'' Section 
407(d)(5) of the Act defines a ``qualifying employer security,'' as 
stock, a marketable obligation, or an interest in a publicly-traded 
partnership (provided that such partnership is an existing partnership 
as defined in the Code). Moreover, section 406(a)(1)(E) of the Act 
prohibits the acquisition, on behalf of a plan, of any ``employer 
security'' in violation of section 407(a) of the Act. Finally, section 
406(a)(2) of the Act prohibits a fiduciary who has authority or 
discretion to control or manage the assets of a plan to permit the plan 
to hold any ``employer security'' that violates section 407(a) of the 
Act.
    Section 408(e) of the Act provides, in part, a statutory exemption 
from the provisions of sections 406 and 407 of the Act with respect to 
the acquisition by a plan of ``qualifying employer securities'' (1) if 
such acquisition is for adequate consideration, (2) if no commission is 
charged with respect thereto, and (3) if the plan is an ``eligible 
individual account plan'' (as defined in section 407(d)(3) of the Act, 
e.g., a profit sharing, stock bonus, thrift, savings plan, an employee 
stock ownership plan, or a money purchase plan).
    It appears that the Plans' acquisition of the Common Stock from 
KKDC through the Settlement Fund would not be covered by section 408(e) 
of the Act because this provision does not cover the acquisition of 
qualifying employer securities by a plan in exchange for such plan's 
release of claims against a party in interest. Additionally, an issue 
remains as to whether the ``adequate consideration'' requirement of 
section 408(e)(1) of the Act was satisfied insomuch as the Measurement 
Price for the Common Stock of $9.77 per share was calculated on the 
basis of the Ten Day Method. Therefore, the Department has decided to 
provide exemptive relief with respect to the Plans' acquisition of such 
stock from KKDC in connection with the Plans' release of claims against 
KKDC.
    Furthermore, the Department has decided to propose exemptive relief 
for the Plans' acquisition of the Warrants from KKDC through the 
Settlement Fund because the Warrants are not ``qualifying employer 
securities'' and the statutory exemption under section 408(e) of the 
Act would not be available.
    Finally, the Department is providing exemptive relief with respect 
to the Plans' holding of the Warrants in the Settlement Fund to the 
extent such holding violated the provisions of sections 406(a)(2) and 
407(a) of the Act. Conversely, the Plans' holding of the Common Stock 
in the Settlement Fund does not appear to violate these provisions. 
Therefore, exemptive relief is limited to the Plans' holding of the 
Warrants.
    Absent relief, the Applicants state that the Plans' participation 
in the Settlement Fund would have to be reversed. This reversal would 
likely result in the Plans' losing the economic benefit of the 
significant appreciation in the value of the settlement proceeds after 
their sale. Furthermore, the Applicants represent, that based on IFS' 
conclusions, it would not be practical for the Plans to pursue separate 
litigation in this matter. The Applicants conclude that absent 
exemptive relief, the Plans would risk losing out on their share of the 
Settlement Fund or having a potential separate settlement diminished by 
the costs of pursuing separate litigation.

Settlement Fund Consideration Received by the Plans

    18. The 1,833,828 shares of the Common Stock that were held in the 
Settlement Fund were sold after the January 16, 2007 deadline, 
approximately in February 2007. Pursuant to the terms of the Settlement 
Agreement, Class Lead Counsel had ``the rights to take any measure they 
deem[ed] appropriate to protect the overall value of the Krispy Kreme 
Settlement Stock prior to distribution to Authorized Claimants.'' This 
included the right to sell the Common Stock. Based on representations 
from Class Lead Counsel, the Applicants represent that all of the 
Common Stock in the Settlement Fund was sold on the New York Stock 
Exchange at prices higher than the Measurement Price of $9.77 per 
share. The cash proceeds from the sale of the Common Stock was 
deposited with the cash portion of the Settlement Fund. This amount 
earned interest while the claims process was in effect. Then, each 
claimant was entitled to receive a portion of the cash amount 
(reflecting both the cash and the Common Stock portions of the 
Settlement Fund) in accordance with the Plan of Allocation.
    The Applicants represent that the Plans were entitled to receive 
approximately 8,675 shares of the 1,833,828 shares of the Common Stock. 
Following the sale of the Common Stock, the Plans received a total of 
$262,097.94 from the Settlement Fund. This amount included unclaimed 
cash proceeds in addition to proceeds from the sale of Common Stock. Of 
the total amount, $101,634.42 was attributable to the Savings Plan and 
$160,463.52 was attributable to the KSOP.
    With respect to the Warrants, the Applicants state that 4,296,523 
Warrants were distributed to the Settlement Fund on February 4, 2009. 
Of the 20,324 Warrants allocated to the Plans, 12,443 Warrants were 
allocated to the KSOP and 7,881 Warrants were allocated to the Savings 
Plan. Although the Plans had acquired and held the Warrants through the 
Settlement Fund, the Applicants believed they could reduce the 
likelihood of a prohibited transaction if the Settlement Fund 
distributed cash instead of the Warrants to the Plans. Therefore, IFS 
requested Class Lead Counsel sell the 20,324 Warrants and distribute 
the cash proceeds to the Plans.
    Therefore, Gilardi & Co. (Gilardi), the Claims Administrator for 
the Settlement Fund, agreed to sell the Plans' Warrants at the 
direction of Class Lead Counsel. The Claims Administrator sold the 
Warrants allocated to the Plans on September 16, 2009 for a total price 
of $1,300.09, or an average price of $0.0639 per Warrant. The 
Applicants represent that the sale was executed on the OTC Bulletin 
Board at the best available market price. After deducting fees and 
commissions of $41.79, Gilardi distributed $770.37 in cash to the KSOP 
and $487.93 to the Savings Plan, or total net proceeds of $1,258.30 on 
September 29, 2009.
    In addition, the Settlement Fund made several small distributions 
to the Plans (i.e., $5,920.66) to the KSOP and $3,750.03 to the Savings 
Plan) related to certain unclaimed funds.
    After taking into account the Common Stock, cash proceeds, 
unclaimed funds distribution and the Warrants, the Plans received 
aggregate proceeds from the Settlement Fund of $273,026.93. Of this 
amount, the KSOP received $105,872.38 and the Savings Plan received 
$167,154.55 from the Settlement Fund.

Summary

    19. In summary, it is represented that the transactions satisfied 
the statutory criteria for an exemption under section 408(a) of the Act 
because:
    (a) The receipt and holding of cash, the Common Stock and the 
Warrants

[[Page 14090]]

occurred in connection with a genuine controversy involving the Plans 
were parties.
    (b) An independent fiduciary retained on behalf of the Plans to 
determine whether or not the Plans should file claims against KKDC 
pursuant the Settlement Agreement and accept cash, Common Stock and 
Warrants --
    (1) Had no relationship to, or interest in, any of the parties 
involved in the Securities Litigation that might affect the exercise of 
such person's judgment as a fiduciary;
    (2) Acknowledged, in writing, that it was a fiduciary for the Plans 
with respect to the settlement of the Securities Litigation; and
    (3) Determined that an all cash settlement was either not feasible 
or was less beneficial to the participants and beneficiaries of the 
Plans than accepting all or part of the settlement in non-cash assets.
    (4) Thoroughly reviewed and determined whether it would be in the 
best interests of the Plans and their participants and beneficiaries to 
engage in the covered transactions.
    (5) Determined whether the decision by the Plans' fiduciaries to 
cause the Plans not to opt out of the Securities Litigation was more 
beneficial to the Plans than having the Plans file a separate lawsuit 
against KKDC.
    (c) The terms of the Settlement Agreement, including the scope of 
the release of claims, the amount of cash and the value of any non-cash 
assets received by the Plans, and the amount of any attorney's fee 
award or any other sums to be paid from the recovery were reasonable in 
light of the Plans' likelihood of receiving full recovery, the risks 
and costs of litigation, and the value of claims foregone.
    (d) The terms and conditions of the transactions were no less 
favorable to the Plans than comparable arm's length terms and 
conditions that would have been agreed to by unrelated parties under 
similar circumstances.
    (e) The transactions were not part of an agreement, arrangement, or 
understanding designed to benefit a party in interest.
    (f) All terms of the Settlement Agreement were specifically 
described in a written document approved by the District Court.
    (g) Non-cash assets, which included the Common Stock and the 
Warrants received by the Plans from KKDC under the Settlement 
Agreement, were specifically described in the Settlement Agreement and 
valued as determined in accordance with a court-approved objective 
methodology;
    (h) The Plans did not pay any fees or commissions in connection 
with the receipt or holding of the Common Stock and the Warrants.
    (i) KKDC maintains, or causes to be maintained, for a period of six 
years records as are necessary to enable persons, such as duly 
authorized employees, agents or representatives of the Department, 
fiduciaries of the Plans, participants and beneficiaries of the Plans, 
or any employer whose employees are covered by the Plans, to determine 
whether the conditions of this exemption have been met.

Notice to Interested Parties

    Notice of the proposed exemption will be given to interested 
persons within 10 days of the publication of the notice of proposed 
exemption in the Federal Register. The notice will be given to 
interested persons by first class mail or personal delivery. Such 
notice will contain a copy of the notice of proposed exemption, as 
published in the Federal Register, and a supplemental statement, as 
required pursuant to 29 CFR 2570.43(b)(2). The supplemental statement 
will inform interested persons of their right to comment on and/or to 
request a hearing with respect to the pending exemption. Written 
comments and hearing requests are due within 40 days of the publication 
of the notice of proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Anh-Viet Ly of the Department at 
(202) 693-8648. (This is not a toll-free number.)

William W. Etherington IRA (the IRA)

Located in Park City, Utah

[Application No. D-11632]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 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 
the sale (the Sale) by the IRA to William W. Etherington and his wife, 
Paula D. Etherington (the Applicants), disqualified persons with 
respect to the IRA,\12\ of the IRA's 80% interest (the Interest) in 
certain residential real property (the Property); provided that:
---------------------------------------------------------------------------

    \12\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the 
jurisdiction of Title I of the Employee Retirement Income Security 
Act of 1974 (the Act). However, there is jurisdiction under Title II 
of the Act pursuant to section 4975 of the Code.
---------------------------------------------------------------------------

    (a) The terms and conditions of the Sale are at least as favorable 
to the IRA as those obtainable in an arm's length transaction with an 
unrelated party;
    (b) The Sale is a one-time transaction for cash;
    (c) As consideration, the IRA receives the fair market value of the 
Interest as determined by a qualified, independent appraiser, in an 
updated appraisal on the date of Sale; and
    (d) The IRA pays no real estate commissions, costs, fees, or other 
expenses with respect to the Sale.

Summary of Facts and Representations

Background

    1. The Applicants reside in Park City, Utah. From 1994 through 
February, 2010, Mr. Etherington owned and managed a construction 
company, Northland Excavation LLC, which was forced to close as the 
result of a deep and lengthy downturn in the local building market. In 
addition, Mrs. Etherington has owned her own retail business, 
``Changing Hands,'' a consignment store specializing in the sale of 
used clothing, since 1992. According to the Applicants, the recent 
adverse economic conditions have also forced her business into decline 
and it is winding up its operations.
    2. Mr. Etherington is also a retired commercial airlines pilot, who 
ended work with Delta Airlines (Delta) on December 1, 2004 with full 
retirement benefits. At the time of his retirement, Mr. Etherington 
opted to receive 50% of his pension benefit in a lump sum payment, 
which was invested in an individual retirement account held with 
Fidelity Investments and held a portfolio comprised of an assortment of 
long term investments. Delta subsequently terminated its retirement 
plan as a result of its bankruptcy and the remainder of Mr. 
Etherington's pension was turned over to the Pension Benefit Guaranty 
Corporation (PBGC) on December 31, 2006. On May 7, 2010, the PBGC 
issued a final benefit determination letter to Mr. Etherington, which 
states that the remainder of his monthly pension benefit is equal to 
zero.
    3. The IRA was established on May 12, 2009 at Millenium Trust 
Company, LLC (Millenium), located in Oak Brook, Illinois, in the name 
of William W. Etherington. As of December 11, 2010, the IRA held assets 
worth $961,880.17. According to the Applicants, the IRA

[[Page 14091]]

was established for the sole purpose of purchasing the Property, 
located at 67-324 Kaiea Place, Waialua, Hawaii. The Property is legally 
described as ``Lot 717, Kamananui, Wailua, Honolulu County, Oahu, 
Hawaii, LC App. 1089, Maps 7, 19, and 29.'' The Property is situated on 
an ocean front lot consisting of 7,699 total square feet with a 
residential building comprised of a gross living area of 1,250 square 
feet. The residence is a single-level house built in 1985 containing 
three bedrooms and two baths and a large deck off the back door 
overlooking the beach. The Property is not located in close proximity 
to other real property owned by the Applicants.
    4. The Applicants represent that the goal of the IRA's investment 
in the Property was twofold. First, the Applicants desired to make a 
long-term investment for appreciation and cash flow by capitalizing on 
the recent downturn in the Hawaiian real estate market. Second, the 
Applicants planned to take ownership of the Property through a series 
of distributions from the IRA.\13\ In this regard, the purchase was 
structured by the Applicants as a co-investment between themselves and 
the IRA, as tenants in common.\14\ The Applicants explain that at a 
future date, they would begin taking 10% annual distributions of the 
Interest over a 10 year period, whereupon at the end of the 10 year 
period they would own the Property outright. At such point, according 
to the Applicants, they planned to either sell the Property or occupy 
it as their residence.
---------------------------------------------------------------------------

    \13\ At 62 years of age, Mr. Etherington is currently eligible 
to receive distributions from the IRA without incurring an early 
distribution penalty under section 72(t) of the Code.
    \14\ With respect to the co-investment arrangement between the 
Applicants and the IRA, the Department notes that if an IRA 
fiduciary, such as Mr. Etherington, causes his IRA to enter into a 
transaction where, by the terms or nature of the transaction, a 
conflict of interest between the IRA and the IRA fiduciary (or 
persons in which the IRA fiduciary has an interest) exists or will 
arise in the future, that transaction would violate section 
4975(c)(1)(D) or (E) of the Code. Moreover, the IRA fiduciary must 
not rely upon and cannot be otherwise dependent upon the 
participation of the IRA in order for the IRA fiduciary (or persons 
in which the fiduciary has an interest) to undertake or to continue 
his share of the investment. Furthermore, even if at its inception 
the transaction does not involve a violation of the Code, if a 
divergence of interests develops between the IRA and the IRA 
fiduciary (or persons in which the fiduciary has an interest), such 
fiduciary must take steps to eliminate the conflict of interest in 
order to avoid engaging in a prohibited transaction. See ERISA 
Advisory Opinion Letter 2000-10A (July 27, 2000). The Department is 
not proposing relief for any violations that may have arisen in 
connection with this co-investment arrangement.
---------------------------------------------------------------------------

    5. Accordingly, after setting up the IRA, Mr. Etherington 
transferred $940,000 from his tax-qualified retirement account held 
with Fidelity to the IRA. The Applicants also set aside additional cash 
in the amount of $234,000 from their personal accounts in order to 
purchase a collective 20% share of the Property to be held in their 
personal capacities.
    6. On June 8, 2009, Mr. Etherington caused the IRA to purchase the 
Property, as a tenant in common, with his wife and himself, in an all-
cash purchase from unrelated parties, Juergen and Hilde Jenss, as 
Trustees of the Jenss Family Trust. The total price paid for the 
Property was $1,174,138.50, including closing costs. The IRA purchased 
80% of the Property for a total cash payment of $939,300.23 ($936,000 
attributable to the Interest and $3,300.23 attributable to closing 
costs). Additionally, the Applicants purchased 20% of the Property in 
their individual capacities, for a total cash payment of $234,838.27, 
or $117,419.14 each ($234,000 attributable to their 20% ownership 
interest and $838.27 attributable to closing costs). The Property has 
not been subject to any loans or other encumbrances.

Management of the Property

    7. The Applicants note that, since its purchase, the Property has 
been managed by two unrelated individuals, Vicky Hanby and Greg McCaul. 
It is attested by the Applicants that neither of these individuals were 
disqualified persons with respect to the IRA prior to their management 
of the Property.
    8. Mrs. Hanby, the owner and operator of Homes Hawaii Realty LLC, a 
real estate agency and property management company, was contracted with 
to provide management services to the Property. As the property 
manager, Mrs. Hanby was responsible for managing the Property as a 
long-term rental residence. In this regard, her responsibilities 
included finding renters, paying bills, remitting rental receipts, and 
scheduling repairs and maintenance. The Applicants explain that income 
and expenses were received and/or paid out of a general bookkeeping 
account which allocated the amounts to either party in accordance with 
its ownership percentage of the Property.
    9. Prior to renting out the Property, Mrs. Hanby arranged for the 
Property to be repainted in order to prepare it for its initial 
tenants. In this regard, Mr. Etherington contracted with Mrs. Hanby's 
husband, Rick Hanby, for the painting of the interior of the house. The 
Applicants state that Mrs. Hanby asked her husband to submit a verbal 
bid to paint the walls of the house, and based on the bid of $300, the 
Applicants accepted because they believed that Mr. Hanby's bid was the 
lowest that they would receive. In this regard, the IRA paid $240 and 
the Applicants paid $60 to compensate Mr. Hanby for his services.\15\
---------------------------------------------------------------------------

    \15\ Additionally, $79.97 was spent on painting supplies, of 
which $63.98 was paid by the IRA and $15.99 was paid by the 
Applicants.
---------------------------------------------------------------------------

    10. At the time that the contract was entered into, Mr. Hanby was a 
disqualified person with respect to the IRA pursuant to section 
4975(e)(2)(F) of the Code, because he was the husband of the Property's 
manager, Mrs. Hanby. Thus, Mr. Etherington's entering into the service 
arrangement with, and the rendering of painting services by, Mr. Hanby 
constituted a prohibited transaction in violation of sections 
4975(c)(1)(C) and (D) of the Code. However, it appears that the 
arrangement with Mr. Hanby may be covered under the statutory exemption 
found in section 4975(d)(2) of the Code.\16\
---------------------------------------------------------------------------

    \16\ Section 4975(d)(2) of the Code and section 54.4975-6 of the 
United States Treasury Regulations provide exemptive relief from the 
prohibitions described in sections 4975(c)(1)(C) and (D) of the Code 
for any contract, or reasonable arrangement, made with a 
disqualified person for services that are necessary for the 
establishment or operation of the plan, if no more than reasonable 
compensation is paid for such services. No relief is proposed herein 
for either the selection of Mrs. Hanby's husband or the provision of 
his painting services.
---------------------------------------------------------------------------

    11. In July 2009, the Property was rented out on an annual basis to 
Major Ian Schneller and his family. Major Schneller is a United States 
military officer who was stationed in Hawaii at the time. The 
Applicants represent that the Schnellers are unrelated parties with 
respect to the IRA. During the period that the Property was leased to 
the Schnellers, it earned approximately $41,933.30 in gross receipts, 
from which it paid out $23,295.00 in expenses, resulting in $18,638.30 
of net income.
    12. The Applicants state that in August 2010, Major Schneller was 
unexpectedly transferred to California and was not able to renew the 
lease, thus leaving the Property with a vacancy. Shortly thereafter, 
Mrs. Hanby announced to the Applicants that it could require several 
months to find new, suitable long-term tenants willing to pay similar 
rental fees to those that the Schnellers had paid ($3,700 per month). 
Thus, the Applicants explain, the Property was converted to a short-
term rental property. Furthermore, the Applicants note that because 
Mrs. Hanby would not manage the Property as a short-term vacation 
rental, she was replaced as the Property's manager by Mr. McCaul.

[[Page 14092]]

    13. The Applicants relate that Mr. McCaul is a self-employed 
business owner with several other properties in the near vicinity of 
the Property under his management. According to the Applicants, Mr. 
McCaul assumed full responsibility for advertising, reservations, 
collections and remittances of payments, and maintenance of the 
Property, including contracting with third party companies for its 
cleaning in between rentals. Specifically, in order to prepare the 
Property for its first vacation rental, at the end of July, 2010, Mr. 
McCaul purchased several items of furniture from the Schnellers in 
order to furnish the Property for its short-term rental clients.
    14. The Applicants state that, due to the complication of 
apportioning the proceeds between the IRA and Mr. and Mrs. Etherington 
in proportion to their respective ownership interests, recordkeeping 
responsibilities for the Property are shared between Mr. McCaul and Mr. 
Etherington. In this regard, the Applicants explain that Mr. McCaul 
collects the rental proceeds and pays for some of the maintenance out 
of said proceeds, remitting a statement of income and expenses to Mr. 
Etherington and a rental income check to the IRA's administrator, 
Millenium Trust, to be deposited in the IRA. The Applicants also note 
that they are required by U.S. tax law to maintain records related to 
their personal income tax return on a Schedule E regarding the 20% 
portion of the Property owned in their personal capacities.
    15. Commencing on August 7, 2010, the Property was rented to short-
term rental clients. The Applicants state that since its conversion to 
a daily vacation rental, the Property has had an in-season occupancy 
rate, including bookings through the end of February, 2011, of 
approximately 90% at its full nightly rate of $249. In addition, the 
Applicants point out that the Property has had an off-season occupancy 
rate of approximately 80%, with an adjustment in the rental rate to 
accommodate the slack in demand. As such, the Applicants explain that 
the Property generates more income as a vacation rental than it would 
under a long-term lease.
    16. The Applicants represent that during the period of time that 
they and the IRA have owned the Property it has earned a profit. As 
illustrated by the Property's Statement of Profit and Loss for the 
period beginning on July 1, 2009 and continuing through December 31, 
2010 (the Statement), the Applicants' and the IRA's shares of income 
were $13,188.61 and $52,474.44, respectively. In addition, their 
respective shares of expenses were $6,980.48 and $27,921.92, paid for 
items such as taxes, licensing fees, insurance, bank fees, cleaning 
costs, landscaping, pest control, property management fees, utilities, 
and costs associated with repairs and maintenance. Thus, the Applicants 
and the IRA received $6,208.13 and $24,552.52, respectively, in net 
income during the time period from July 1, 2009 through December 31, 
2010. Therefore, the IRA's net acquisition and holding costs with 
respect to the Property equal $914,747.71 for this time period.
    17. The Applicants represent that, since the purchase of the 
Property, neither they nor any other disqualified person has stayed at 
the Property or used it for any reason. Further, the Applicants state 
that neither they nor any family members own any other property in the 
State of Hawaii. However, since his retirement, Mr. Etherington has 
been visiting Hawaii approximately once every six weeks for 
recreational purposes and to perform various management tasks and light 
maintenance with regard to the Property, but he has not stayed at the 
Property. Mr. Etherington explains that on these occasions, he visually 
inspects the Property to assess its condition and periodically performs 
light lawn cleanup and landscaping maintenance. He also meets in person 
with Mr. McCaul to discuss his inspections and other issues concerning 
the Property. However, Mr. Etherington states that he has no input 
regarding Mr. McCaul's selection of, or interaction with, any of the 
Property's rental clients. Moreover, Mr. Etherington represents that he 
has not received any form of compensation for any services provided to 
the Property.

The Requested Relief

    18. The Applicants have requested an administrative exemption from 
the Department in order to allow them to purchase the Interest from the 
IRA in their personal capacities. The Sale would be a one-time cash 
transaction for no less than the fair market value of the Interest, as 
determined by a qualified, independent appraiser in an appraisal that 
would be updated on the date of the Sale. Further, the terms of the 
Sale would be at least as favorable to the IRA as those obtainable in 
an arm's length transaction with an unrelated party, and the IRA would 
pay no real estate commissions, costs, or other expenses in connection 
with the Sale.

Rationale for the Sale

    19. The Applicants state that, due to a medical condition suffered 
by Mrs. Etherington, it is necessary that they take full ownership of 
the Property now rather than wait to receive the Interest in future 
payouts from the IRA. The Applicants observe that Mrs. Etherington's 
medical condition causes her to have an acute sensitivity to 
temperature extremes and limited mobility, both conditions which can be 
treated by relocating to the Property. In this regard, the Applicants 
note that they have received advice from a doctor currently treating 
Mrs. Etherington, which recommends temperature moderation as well as 
sunlight therapy as an ideal treatment. Because the Property is a 
single-level structure located in a more temperate climate than Park 
City, Utah, the Applicants believe that it is a more suitable residence 
for Mrs. Etherington.
    20. The Applicants also assert that the recession has made the 
Property an unsuitable investment because it is not appreciating in 
value as they had anticipated. According to the Applicants, the 
purchase of the Property was made during a perceived downturn in the 
Hawaiian real estate market, in the hopes of earning significant long-
term appreciation and cash flow. Nevertheless, the Applicants point out 
that the condition of the real estate market has clouded any 
anticipation of future appreciation. Thus, they explain that would like 
to reinvest the IRA in stocks, bonds, and other liquid investments in 
order to take advantage of greater potential appreciation in value.
    21. Furthermore, the Applicants assert that the recent loss of Mr. 
Etherington's pension with Delta and the winding up of Mr. and Mrs. 
Etherington's respective businesses have left them with no current cash 
flow, thereby making the need for liquid investments extremely 
critical. As described above, on May 7, 2010, the PBGC issued a final 
benefit determination letter to Mr. Etherington informing him that he 
would not be receiving the remainder of his monthly pension benefit 
with Delta. At the same time, the Applicants note that their respective 
businesses have closed or are in the process of winding down. In fact, 
Mr. Etherington states that his only source of income going forward 
will be derived from Social Security.

Necessity To Sell Current Residence

    22. The Applicants state that they wish to purchase and occupy the 
Property as their primary residence. However, the Applicants explain 
that,

[[Page 14093]]

in order to do so, they need to sell their current residence to gain 
the financial resources to make such purchase. The Applicants' current 
residence carries no debt and as of October 31, 2010 was listed for 
sale at $895,000. In the event that insufficient funds are received 
from the sale of their current residence, Mr. Etherington has stated 
that he will use proceeds received from (a) the sale of certain of his 
taxable savings accounts or other non-IRA investments, (b) the sale of 
machinery owned by his now defunct excavation company, currently on the 
market for $119,000, (c) the sale of the Kamas, Utah business property, 
currently owned by BRE, LLC, of which Mr. Etherington is a one-third 
owner/member (and upon which he carries a mortgage of $368,649), and/or 
(d) a distribution of funds from his Fidelity IRA.

Appropriateness of Proposed Transaction

    23. The Applicants maintain that the Sale will benefit the IRA 
because it will allow the IRA to invest in a more diversified portfolio 
with a greater chance of appreciation. As noted in Representation 3, 
Mr. Etherington's December 11, 2010 financial statement from Millenium 
revealed that the IRA held total assets of $961,880.17, of which the 
Property constituted approximately 98% or $939,300.23. The statement 
also showed that the remaining 2% of the fair market value of the IRA's 
assets, or $22,579.94, was invested in cash and cash equivalents.\17\
---------------------------------------------------------------------------

    \17\ The cash and cash equivalents are attributable to the IRA's 
share of rental receipts received on the Property, plus interest.
---------------------------------------------------------------------------

    24. As stated above, after completing the Sale, Mr. Etherington 
plans to reinvest the IRA's proceeds from the Sale in other investments 
that are more liquid. The Applicants admit that based on current 
economic conditions, the original purchase of the Property by the IRA 
for purposes of taking advantage of depressed real estate prices may 
have been premature. Given the condition of the real estate market, the 
Applicants suggest that a broad array of stocks and bonds will have 
higher returns than the Property, partly because such investments will 
not have the additional recurring expenses such as real estate taxes, 
property management fees, insurance costs, and various maintenance 
outlays.
    25. Moreover, the Applicants explain that the Sale would be in the 
interest of the IRA because no real estate commissions or other fees 
would be payable by the IRA, nor would the IRA incur any expenses. 
According to the Applicants, a sale of the Property to an independent 
third party would necessitate that the IRA pay its share of the real 
estate commission, which would be nearly $60,000. The Applicants 
represent that the payment of such a fee would create a net loss to the 
IRA of approximately $28,000, or 3% of the IRA's initial investment. 
Alternatively, the Applicants point out that the Sale would yield the 
IRA a net profit of $32,000, comprised of $12,000 attributable to the 
Property's appreciation and $20,000 attributable to the Property's 
income, for a return of 3.4% on its initial investment.
    26. The Applicants state that they have not contemplated selling 
the Interest to an unrelated third party or subdividing the Property. 
In addition to avoiding fees and commissions, they contend that, under 
current market conditions, the Sale could take place sooner and at a 
higher price than a sale to a third party. In this regard, the 
Applicants note that no real estate in a similar category as the 
Property has sold in the last year due to poor market conditions. 
Furthermore, based on the Property's 2011 Real Property Assessment 
Notice from the State of Hawaii for the tax year July 1, 2011 to June 
30, 2012 (the Assessment), provided by the Applicants, the Property's 
assessed value decreased by approximately 15% in the last year, from 
$1,170,900 (its most recent purchase price) to $993,200. Thus, the 
Applicants suggest that a sale of the Property to a third party would 
require more time on the market, and thus sell at a significant 
discount in price due to the declining price of residential real 
estate.

The Appraisal

    27. The Applicants retained Mary Mau, of Second Opinion Hawaii, 
Inc., located in Honolulu, Hawaii, to conduct an appraisal of the 
Property. Ms. Mau is licensed in the State of Hawaii as a certified 
residential appraiser. Ms. Mau conducted an appraisal of the Property 
on February 10, 2010, and issued an appraisal report on the same date 
(the Appraisal). In the Appraisal, Ms. Mau certified that she is 
independent of the Applicants and does not have an interest in the 
Property. In a December 7, 2010 letter (the Letter) to the Department 
supplementing the Appraisal, Ms. Mau represents that her appraisal firm 
received less than one percent of its gross income, on a 2009 fiscal 
year basis, from the Applicants, inclusive of income received for the 
Appraisal. Furthermore, in the Letter, Ms. Mau indicates that she 
understands the Appraisal will be used for the purpose of obtaining an 
administrative exemption from the Department for the Sale, that she is 
unaware of any special benefit that the Applicants may derive from the 
Property, and that a follow-up appraisal will be needed on the date of 
the Sale.
    28. In conducting the Appraisal, Ms. Mau considered the Sales 
Comparison Approach and the Cost Approach to valuation. According to 
the Appraisal, the Income Approach was not used to value the Property, 
as the typical property valued under the Income Approach is owner-
occupied, there were insufficient sales of rental properties to compute 
a reliable GRM,\18\ and investors do not typically purchase residential 
properties for investment purposes due to its less than desired return 
on the investment.
---------------------------------------------------------------------------

    \18\ GRM, or ``gross rent multiplier,'' is the ratio of the 
monthly (or annual) rent divided into the selling price, and is 
useful for valuations of rental houses and simple commercial 
properties when used as a supplement to other more well developed 
methods. If several similar properties have sold in the market 
recently, then the GRM can be computed for those and applied to the 
anticipated monthly rent for the subject property.
---------------------------------------------------------------------------

    29. The Sales Comparison Approach and the Cost Approach yielded 
values of $1,185,000 and $1,189,825, respectively. Ms. Mau determined 
that the greatest reliance should be placed upon the Sales Comparison 
approach, because sales of similar properties are the best indicator of 
the current opinion of value for the Property. The Appraisal states 
that, with recent sales displaying overall similarities and making 
market reaction adjustments for the physical and other differences, an 
appraiser used the Sales Comparison Approach can arrive at an estimated 
value for the subject property. On the other hand, the Cost Approach is 
most effective in determining values for properties with newer 
improvements, where estimating physical depreciation is more precise 
than with older improvements. While the Cost Approach was not relied 
upon, the Appraisal indicates that it nevertheless was significant in 
that it supported the final opinion of value.
    30. Accordingly, Ms. Mau determined the value of the Property, as 
of February 10, 2010, to be $1,185,000. Thus, according the Applicants, 
the value of the Interest is approximately $948,000 ($1,185,000 x 80%). 
The appraised value represents an appreciation of $15,000 over the 
original purchase price since the time of purchase, $12,000 of which is 
allocable to the Interest. Ms. Mau will update the Appraisal on the 
date of the Sale.

[[Page 14094]]

Summary

    31. The Applicants represent that the proposed transaction will 
satisfy the statutory criteria for an exemption under section 
4975(c)(2) of the Code because:
    (a) The terms and conditions of the Sale will be at least as 
favorable to the IRA as those obtainable in an arm's length transaction 
with an unrelated party;
    (b) The Sale will be a one-time transaction for cash;
    (c) The IRA will receive the fair market value of the Interest as 
determined by a qualified, independent appraiser in an updated 
appraisal on the date of Sale; and
    (d) The IRA will pay no real estate commissions, costs, fees, or 
other expenses with respect to the Sale.

Notice to Interested Persons

    Because the Applicants are the sole persons with respect to the IRA 
who have an interest in the proposed transaction, it has been 
determined that there is no need to distribute the notice of proposed 
exemption (the Notice) to interested persons. Therefore, comments and 
requests for a hearing are due thirty (30) days after publication of 
the Notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Warren Blinder of the Department 
at (202) 693-8553. (This is not a toll-free number.)

H-E-B Brand Savings and Retirement Plan (the Plan) and H.E. Butt 
Grocery Company (the Company) (Together, the Applicants)

Located in San Antonio, Texas

[Application No. D-11642]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR part 
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
    If the proposed exemption is granted the restrictions of section 
406(a), section 406(b)(1), and section 406(b)(2) of the Act and the 
sanctions resulting from the application of 4975 of the Code by reason 
of section 4975(c)(1)(A) through (E) of the Code shall not apply to the 
sale of real property (the Property) by the Plan to the Company, a 
party in interest with respect to the Plan; provided the following 
conditions are satisfied:
    (a) The sale of the Property is a one-time transaction for cash;
    (b) The Plan will receive from the proceeds of the sale of the 
Property a sales price in the amount of $2,762,566, plus an amount 
equal to $432,618 (the total of all real estate taxes and expenses 
incurred by the Plan as a result of holding the Property from the date 
the Plan purchased the Property through December 31, 2009), plus an 
additional amount equal to the total of all real estate taxes and 
expenses from January 1, 2010, to the date of the sale of the Property 
to the Company;
    (c) The terms and conditions of the sale are at least as favorable 
to the Plan as those obtainable in an arm's length transaction with an 
unrelated party;
    (d) The Plan pays no fees, commissions, or other expenses in 
connection with the sale of the Property to the Company; and
    (e) Prior to entering into the subject transaction, the trustees of 
the Plan (the Trustees) determine that the sale of the Property is 
feasible, protective of, and in the interest of the Plan and its 
participants and beneficiaries.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan incorporating a 
qualified cash or deferred arrangement. The Plan had approximately 
20,454 active participants, as of December 31, 2009. As of December 31, 
2009, the Plan had total assets with a fair market value of 
$1,262,547,711.
    2. The Company has sponsored the Plan since 1956. The Company is a 
Texas corporation engaged primarily in the retail grocery business in 
Texas. The following entities which are affiliated with the Company 
have also adopted the Plan: (a) H.E. Butt Grocery Company, LP; (b) 
HEBCO Partners, Ltd.; (c) Parkway Distributors, Inc.; (d) Parkway 
Transport, Ltd.; (e) C.C. Butt Grocery Company; and (f) HiTech 
Commercial Services, Inc. It is represented that Parkway Distributors, 
Inc. and Parkway Transport, Ltd. are engaged in the business of 
intrastate and interstate trucking.
    3. The Property which is the subject of this proposed exemption is 
located at the intersection of Mystic Park Drive and Guilbeau Road in 
San Antonio, Texas. The Property consists of 5.822 acres of undeveloped 
real property. The current fair market value of the Property 
constitutes .0003 percent (.0003%) of the total assets of the Plan.
    The Plan owns the subject Property which is adjacent to a shopping 
center, owned by the Company. A portion of the shopping center is 
currently occupied by a grocery store which is operated by the Company.
    Throughout the Plan's existence, the Trustees for the Plan have 
consisted of a group of Company officers and employees. The Plan 
purchased the Property in 1986 from Ray Ellison Industries, Inc., an 
unrelated third party, for $1,077,736.25. The transaction was 
effectuated by William J. Horvath, trustee for the Plan. The Plan has 
not been able to locate an outside appraisal of the Property that was 
done at the time of the initial purchase. The acquisition of the 
Property by the Plan was a cash transaction. It is represented that no 
lender was involved.
    The Property is deed restricted for 55 years against use of the 
Property for grocery, fuel, and pharmacy product sales. These deed 
restrictions were applied to a total of 85 acres surrounding the 
Company's adjacent parcel (7.385 acres) when such adjacent parcel was 
purchased on November 27, 1985. It is represented that when in 1986 the 
Plan purchased the Property, it was subject to these restrictions in 
the deed and that such deed restrictions were reflected in the purchase 
price of the Property paid by the Plan.\19\
---------------------------------------------------------------------------

    \19\ The Department, herein, is not providing relief from the 
general fiduciary provisions of the Act or the Code with regard to 
the acquisition and holding of the Property by the Plan.
---------------------------------------------------------------------------

    The Plan purchased the Property with the intent of developing a 
small shopping center. It is represented that the market shifted to the 
north, and the interest level diminished. No buildings were ever 
constructed on the Property. The Property has not been leased since its 
acquisition by the Plan. It is represented that the only costs incurred 
by the Plan through the Plan's holding of the Property have been the 
real estate taxes (described, below, in paragraph number 7) and the 
incidental costs of mowing the Property of approximately $500 per year.
    It is represented that access to the Property from Mystic Park 
Drive is via a single, concrete curb cut at the northeast corner of the 
Property paid for by the Company. In addition, the Company paid for the 
construction of a concrete paved driveway that extends along the north 
and west boundary of the Property and across the adjacent parcel owned 
by the Company to Guilbeau Road.
    It is represented in the appraisal of the Property, described 
below, that the primary user of the concrete driveway on the Property 
is the Company for delivery of merchandise to the adjacent parcel owned 
by the Company. While the Company acknowledges that it has in the past 
and is currently using the concrete driveway for east access

[[Page 14095]]

delivery of merchandise, the Company notes that from the adjacent 
parcel it also has south access for the delivery of merchandise. The 
Company further maintains that the concrete driveway serves as an 
improvement (thereby increasing the market value) of both the Property 
and the Company's adjacent tract.
    In addition, the Company represents that it has used an additional 
portion of the Property (approximately .25 acres) for parking. The 
Company represents that it paid for the paving of this portion of the 
Property in 1986 and maintains the parking lot at its cost.
    It is represented that the purchase price to be paid by the Company 
to the Plan for the Property includes compensation for the past and 
current uses of such Property by the Company, including the Company's 
use of the concrete driveway across the Property, and Company's use of 
a portion of the Property for parking.
    To the extent that the past and current uses of the Plan's Property 
by the Company are prohibited transactions, the Department, herein, is 
not proposing relief for such uses. Further, the Company has 
represented that within sixty (60) days of the date of the publication 
in the Federal Register of the grant of this proposed exemption, it 
will file FORM 5330 with the Internal Revenue Service (IRS), and pay to 
the IRS any applicable excise tax, which is deemed to be due and owing 
with regard to the past and current uses of the Plan's Property by the 
Company, including the Company's use of the concrete driveway across 
the Property, and Company's use of a portion of the Property for 
parking.
    4. The Company desires to purchase the Property, as it owns the 
adjacent parcel which is improved by a shopping center, including a 
Company-owned grocery store. In this regard, the Company would like to 
control the Property for a future parking area and for the possible 
expansion of its grocery store. Although there are no immediate plans 
for utilizing the Property other than for parking, it is represented 
that the Company often acquires adjacent land for future needs. As an 
employer any of whose employees are covered by the Plan, the Company is 
a party in interest with respect to the Plan, pursuant to section 
3(14)(C) of the Act. Accordingly, the sale of the Property by the Plan 
to the Company would constitute a prohibited transaction within the 
meaning of section 406(a)(1)(A), 406(a)(1)(D) and 4975(c)(1)(A), and 
4975(c)(1)(D) of the Code. The subject transaction may also constitute 
a prohibited transaction within the meaning of sections 406(b)(1) and 
406(b)(2) of the Act and 4975(c)(1)(E) of the Code, involving fiduciary 
conflicts of interest.
    5. It is represented that several attempts have been made to sell 
the Property. The Property has been listed with local real estate 
brokers who have marketed the Property both for sale and for lease. The 
Property is currently offered for sale at a sales price of $887,000. It 
is represented that there has been no interest in the Property from 
qualified third party purchasers. Based on the lack of interest, the 
Trustees of the Plan have determined that further attempts to sell or 
lease the Property would result in delay and additional expenses to the 
Plan which could be avoided by effecting the proposed transaction. 
Further, the Trustees do not believe it likely that any prospective 
third party purchaser would be willing to pay more for the Property 
than the value ($420,000) as reflected in the appraisal, discussed more 
fully, below, in paragraph number 8.
    Accordingly, the Trustees have determined that it would be in the 
interest of the Plan and its participants and beneficiaries to sell the 
Property to the Company for the following reasons: (i) The sale price 
is substantially higher than the fair market value of the Property; and 
(ii) the Trustees have concluded that alternative investments would be 
preferable for the Plan. Further, it is represented that in the current 
real estate market, there are not many retail investors seeking vacant 
land in the San Antonio area. In this regard, it is represented that an 
operating retailer, such as the Company, would be willing to pay more 
for the Property than a residential developer or a speculative retail 
developer. It is the view of the Company that the proposed sales price 
would subsume any assemblage premium over the fair market value of the 
Property which would reasonably be attributed to the Company as a 
result of owning an improved parcel of real estate that is adjacent to 
the Property.
    6. It is represented that the proposed transaction is feasible in 
that the sale of the Property by the Plan to the Company will be a one-
time cash transaction.
    7. It is represented that the proposed transaction is in the 
interest of the Plan in that the Plan will receive from the proceeds of 
the sale of the Property a purchase price in the amount of 
$2,762,566,\20\ plus an amount equal to $432,618 (the total of all real 
estate taxes and expenses incurred by the Plan as a result of holding 
the Property from the date the Plan purchased the Property through 
December 31, 2009), plus an additional amount equal to the total of all 
real estate taxes and expenses from January 1, 2010, to the date of the 
sale of the Property to the Company.
---------------------------------------------------------------------------

    \20\ In the Department's view the $2,762,566 amount is intended 
to reimburse the Plan for the original cost of the Property, plus a 
reasonable rate of return over the period of time during which the 
Plan held the Property. This amount also includes the compensation 
for the past and current uses of the Property by the Company, 
including the Company's use of the concrete driveway across the 
Property, and the Company's use of a portion of the Property for 
parking.
---------------------------------------------------------------------------

    8. The Property was appraised by Richard L. Dugger (Mr. Dugger), 
MAI, CRE and David H. Thomas III (Mr. Thomas) of Dugger, Canaday, 
Grafe, Inc. in San Antonio, Texas. After personally inspecting the 
property, Mr. Dugger and Mr. Thomas determined that the fair market 
value of the Property based on market comparables is $420,000, as of 
May 17, 2010.
    By letter dated November 3, 2010, Mr. Dugger indicated that the 
assemblage premium with reference to the Property is 10 percent (10%) 
to 20 percent (20%) above the market value for such Property. As 
referenced in his May 2010 report prepared for the Plan, Mr. Dugger 
appraised the fair market value of the 5.822 acres of the Property at 
$1.65 per square foot or $420,000. Therefore, according to Mr. Dugger 
the assemblage premium for the Property is $1.82 to $1.98 per square 
foot or $462,000 (rounded) to $502,000 (rounded).
    Both Mr. Dugger and Mr. Thomas are independent in that they have no 
present or prospective interest in or bias with respect to the Property 
that is the subject of the appraisal. Further, both Mr. Dugger and Mr. 
Thomas have no personal interest with respect to the parties involved. 
It is represented that the fees received by the appraisal firm of 
Dugger, Canaday, Grafe, Inc. from the Company and its affiliates 
comprise less than one percent (1%) of the total fees collected by 
Dugger, Canaday, Grafe, Inc. over the past twelve (12) months. It is 
further represented that Dugger, Canaday, Grafe, Inc. has collected no 
fees from the Plan during such time.
    Both Mr. Dugger and Mr. Thomas are qualified as State certified 
general real estate appraisers. Further, Mr. Dugger has been engaged in 
independent fee appraising since 1969, has earned the designations of 
MAI, and CRE, and has completed the requirements of the continuing 
education program of the Appraisal Institute.
    9. In summary, the Applicants represent that the subject 
transaction satisfies the statutory criteria of section

[[Page 14096]]

408(a) of the Act and section 4975(c)(2) of the Code because:
    (a) The sale of the Property will be a one-time transaction for 
cash;
    (b) The Plan will receive from the proceeds of the sale of the 
Property a sales price in the amount of $2,762,566, plus an amount 
equal to $432,618 (the total of all real estate taxes and expenses 
incurred by the Plan as a result of holding the Property from the date 
the Plan purchased the Property through December 31, 2009), plus an 
additional amount equal to the total of all real estate taxes and 
expenses from January 1, 2010, to the date of the sale of the Property 
to the Company;
    (c) The terms and conditions of the sale will be at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party;
    (d) The Play will pay no fees, commissions, or other expenses in 
connection with the sale of the Property to the Company; and
    (e) Before entering into the proposed transaction, the Trustees 
must determine that the sale of the Property is feasible, protective 
of, and in the interest of the Plan and its participants and 
beneficiaries.

Notice to Interested Persons

    The persons who may be interested in the publication in the Federal 
Register of the Notice of Proposed Exemption (the Notice) include all 
participants having accounts under the Plan, including but not limited 
to active employees of the Company and of affiliates of the Company 
that have adopted the Plan, former employees, beneficiaries of deceased 
employees, and alternate payees.
    It is represented that all interested persons will be notified of 
the publication of the Notice by first class mail within fifteen (15) 
days of publication of the Notice in the Federal Register.
    All first class mailings will contain a copy of the Notice, as it 
appears in the Federal Register on the date of publication, plus a copy 
of the supplemental statement, as required, pursuant to 29 CFR 
2570.43(b)(2), which will advise all interested persons, of their right 
to comment and to request a hearing.
    All written comments and/or requests for a hearing must be received 
by the Department from interested persons within 45 days of the 
publication of this proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the 
Department, telephone (202) 693-8540. (This is not a toll-free number.)

The International Union of Painters and Allied Trades Finishing Trades 
Institute (the Plan or the Applicant)

Located in Hanover, Maryland

[Application No. L-11625]

Proposed Exemption

    The Department of Labor (the Department) is considering granting an 
exemption under the authority of section 408(a) of the Act in 
accordance with procedures set forth in 29 CFR part 2570, subpart B (55 
FR 32836, 32847, August 10, 1990). If the proposed exemption is 
granted, the restrictions of sections 406(a)(1)(A), (C) and (D), 
406(b)(1), and 406(b)(2) of the Act shall not apply to the payment for 
lodging and meals by the Plan to the International Union of Painters 
and Allied Trades, AFL-CIO (the Union), a party in interest with 
respect to the Plan, in a residence hall (the Residence Hall) owned by 
the Union through its wholly-owned entity IUPAT Building Corporation 
LLC (the Building Corporation), provided that the following conditions 
are satisfied:
    (a) An independent, qualified fiduciary (the I/F), acting on behalf 
of the Plan, determines prior to entering into the transaction that the 
transaction is feasible, in the interest of, and protective of the Plan 
and the participants and beneficiaries of the Plan;
    (b) Before the Plan enters into the proposed transaction, the I/F 
reviews the transaction, ensures that the terms of the transaction are 
at least as favorable to the Plan as an arm's length transaction with 
an unrelated party, and determines whether or not to approve the 
transaction, in accordance with the fiduciary provisions of the Act;
    (c) The I/F monitors compliance with the terms and conditions of 
this proposed exemption, as described herein, and ensures that such 
terms and conditions are at all times satisfied;
    (d) The I/F monitors compliance with the terms of the written 
agreement (the Agreement) between the Plan and the Union, and takes any 
and all steps necessary to ensure that the Plan is protected, 
including, but not limited to, agreeing to extend the Agreement on an 
annual basis or exercising his authority to terminate the Agreement on 
30 days' written notice;
    (e) The payments by the Plan for the lodging at the Residence Hall 
and for the meals provided under the Agreement and under the terms of 
any subsequent extension of the Agreement are at no time greater than 
their fair market value, as determined by the I/F;
    (f) The subject transaction is on terms and at all times remains on 
terms that are at least as favorable to the Plan as those that would 
have been negotiated under similar circumstances at arm's-length with 
an unrelated third party;
    (g) The Applicant's independent auditor will perform an annual 
audit for the Plan to verify whether the Plan paid the proper amounts 
with respect to the subject transaction. In this regard, the written 
audit report for each year must identify, as applicable, any errors or 
irregularities relating to such payments, any internal control 
weaknesses that must be addressed under generally accepted auditing 
standards, and any recordkeeping matters that would impede the auditor 
from properly auditing such payments. To the extent there are any 
discrepancies as to the foregoing matters, the independent auditor will 
promptly communicate them to the Board of Trustees of the Plan (the 
Trustees), who will, in turn, promptly notify the I/F about such 
discrepancies.\21\
---------------------------------------------------------------------------

    \21\ To the extent that the independent auditor raises issues 
with respect to the payments, the Trustees have an obligation to 
address them in a manner consistent with their fiduciary 
responsibilities pursuant to section 404 of the Act.
---------------------------------------------------------------------------

    (h) The transaction is appropriate and helpful in carrying out the 
purposes for which the Plan is established or maintained;
    (i) The Trustees maintain, or cause to be maintained within the 
United States for a period of six (6) years in a manner that is 
convenient and accessible for audit and examination, such records as 
are necessary to enable the persons described, below, in paragraph 
(j)(1) of this proposed exemption to determine whether the conditions 
of this proposed exemption have been met; except that--
    (1) If the records necessary to enable the persons described, 
below, in paragraph (j)(1) of this proposed exemption to determine 
whether the conditions of this proposed exemption have been met are 
lost or destroyed, due to circumstances beyond the control of the 
Trustees, then a separate prohibited transaction will not be considered 
to have occurred solely on the basis of the unavailability of those 
records; and
    (2) No party in interest, other than the Trustees, shall be subject 
to the civil penalty that may be assessed under section 502(i) of the 
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if 
the records are not maintained, or are not available for examination as 
required by paragraph (i) of this proposed exemption; and

[[Page 14097]]

    (j)(1) Except as provided, below, in paragraph (j)(2) of this 
proposed exemption and notwithstanding any provisions of sections 
(a)(2) and (b) of section 504 of the Act, the records referred to in 
paragraph (i) of this proposed exemption are unconditionally available 
at their customary location for examination during normal business 
hours by:
    (A) Any duly authorized employee or representative of the 
Department, the Internal Revenue Service, or any other applicable 
Federal or State regulatory agency;
    (B) Any fiduciary of the Plan, or any duly authorized 
representative of such fiduciary;
    (C) Any contributing employer to the Plan and any employee 
organization whose members are covered by the Plan, or any duly 
authorized employee or representative of these entities; or
    (D) Any participant or beneficiary of the Plan, or any duly 
authorized representative of such participant or beneficiary.
    (2) None of the persons described, above, in paragraph (j)(1)(B)-
(D) of this proposed exemption are authorized to examine trade secrets 
or commercial or financial information that is privileged or 
confidential.

Summary of Facts and Representations

    1. The International Union of Painters and Allied Trades Finishing 
Trades Institute (the Plan) is an innovative training program which is 
governed by a board of trustees (the Trustees) consisting of members of 
the Applicant and its signatory employers. At the International 
Training Center (the Training Center) operated by the Plan, trainees 
receive continued education and training, including, but not limited 
to, skill enhancement and health and safety training.
    2. The Plan is a Taft-Hartley and ERISA plan funded by 
contributions received from employers throughout the United States 
based on the hours worked by employees in collective bargaining units 
throughout the country. The Plan represents a workforce of over 110,000 
working men and women in the United States and Canada whose members 
work in the finishing trades as painters, drywall finishers, glaziers, 
glass workers, floor covering installers, sign makers, display workers, 
convention and show decorators, and in many other occupations.
    3. At the Training Center, instructors learn new innovative 
training techniques in the finishing industry. Upon return to their 
respective local apprenticeship training centers, these instructors 
(the Trainees) can then provide journey-worker upgrade and apprentice 
training, enabling those journey-workers and apprentices to progress to 
the highest wage levels in their industry. The Trainees are all 
participants in the Plan.
    4. The International Union of Painters and Allied Trades, AFL-CIO 
(the Union), through its wholly-owned entity IUPAT Building Corporation 
LLC (the Building Corporation), owns the Training Center and other 
buildings at its Hanover, Maryland campus. The Building Corporation 
leases training space to the Plan. The Applicant represents that the 
leasing of the training facility to the Plan is covered by Prohibited 
Transaction Exemption 78-6 (PTE 78-6, 43 FR 23024, May 30, 1978). In 
this regard, the Applicant represents that the leasing has satisfied 
and will continue to satisfy all the conditions contained in PTE 78-
6.\22\ The Applicant further represents that the leasing of the 
training facilities is not prohibited under section 406(b) of the Act, 
as any decisions made with respect to the Plan's leasing of the 
facilities are made by the Plan's Board of Trustees, which is separate 
from the Union's Board of Directors. To the extent that any individual 
trustee sits on both Boards, those individuals recuse themselves from 
and abstain from any vote by the Plan's Board when decisions are being 
made by the Plan regarding leasing the training facilities from the 
Union.
---------------------------------------------------------------------------

    \22\ The Department is expressing no opinion herein as to 
whether the leasing of the training facilities to the Plan is exempt 
under PTE 78-6.
---------------------------------------------------------------------------

    5. One of the challenges that has arisen during the past few years 
is that the Trainees, most of whom fly to the Training Center, must 
reside off-campus at area hotels and, therefore, require transportation 
each day to and from the Training Center. The Plan represents that it 
incurs significant costs in housing Trainees at off-campus hotels, 
providing transportation and supplying meals. As a result, the 
Applicant wishes to begin paying for lodging at a residence hall (the 
Residence Hall) which is currently under construction. The Residence 
Hall, which is being built at the Hanover, Maryland campus, will be 
owned by the Building Corporation.
    6. An independent, qualified fiduciary has been retained by the 
Plan and has conducted a study regarding the proposed transaction. The 
independent fiduciary is John Ward, of Washington, DC. Mr. Ward is a 
solo practitioner and former partner at Dow Lohnes & Albertson, PLC. He 
has focused his professional energies on tax and ERISA matters faced by 
labor unions and their associated benefit funds. The Applicant 
represents that Mr. Ward is, therefore, highly qualified to ascertain 
whether the proposed transaction would benefit the Plan. The Applicant 
represents that Mr. Ward has never previously worked directly for 
either the Applicant or the Union, and that the Plan is paying for his 
services.
    7. Mr. Ward's study has found that the average cost of lodging at 
five area hotels, including the Embassy Suites, is $159 per night. This 
assumes that the Applicant enters into an agreement for a minimum of 
four thousand room-nights per year, and does not include the cost of 
transportation to or from the Training Center or the cost of meals 
other than breakfast. The Union proposes charging the Plan $156 per 
night per Trainee for a room, an amount which is less than the average 
market rate. The Union further proposes charging the Plan $48.25 per 
Trainee for lunch, dinner and snacks during the day. This amount is 
based upon the Federal government meals and incidentals per diem 
reimbursement rate for the Baltimore County, Maryland area (currently 
$61.00), minus $12.75 to account for the cost of breakfast and 
incidental expenses that was included in the average cost of lodging 
calculation. The Union has provided the Applicant with a proposal from 
P&P Catering, Inc., showing that the actual cost of providing meals to 
the Trainees would otherwise be $86.10 per Trainee per day. The 
Applicant represents that it will therefore be paying less than fair 
market value for the cost of the Trainees' meals. Thus, based on these 
rates, the Union proposes charging the Plan $204.25 per Trainee per day 
for lodging, meals and snacks during the day.
    8. The Plan will realize further savings in terms of transportation 
costs, as it currently pays approximately $2 per day per Trainee for 
transportation between each Trainee's accommodations and the Training 
Center. Taking this into account along with the below-market room rates 
and the discounted meals charged at government reimbursement rates, the 
Plan will benefit from the cost savings. The Applicant estimates that 
its annual savings on lodging alone would be approximately $12,000. The 
Union has represented that it will not be making a profit from charging 
the Applicant for lodging and meals. The Applicant represents that, in 
addition, if the Trainees are lodged at the Residence Hall on the same 
campus as the Training Center, they will have off-hours access to the 
Training Center's facilities and equipment, which will help develop a 
sense of unity and will

[[Page 14098]]

enhance the time for interaction between Trainees and trainer, all of 
which support the Applicant's core mission.
    9. In his analysis, Mr. Ward reaches the conclusion that: (1) the 
proposed combined rate per night of $204.25 ($156.00 for lodging and 
$48.25 for meal service) which the Union proposes to charge the Plan 
for each Trainee receiving training at the Training Center is both 
appropriate and in the best interests of the Plan's participants and 
beneficiaries; and (2) the terms on which the Union proposes to offer 
lodging and meal service to Trainees at the Residence Hall are more 
favorable to the Plan and its participants and beneficiaries than the 
terms of any similar package would--or could--be offered to the Plan by 
a combination of one of the comparable local lodging facilities that he 
investigated and by any restaurant or combination of restaurants 
located within five miles of the Training Center.
    10. As part of his engagement as an independent fiduciary, Mr. Ward 
will monitor the transaction on an annual basis to ensure that the 
transaction continues to comply with the requirements for the exemption 
proposed herein.
    11. The subject transaction will be entered into pursuant to a 
written agreement (the Agreement) between the Union and the Plan. The 
Agreement is intended to serve as an annual agreement between the Plan 
and the Union. However, each party shall have the right to withdraw 
from the Agreement by furnishing the other party with written notice 30 
days prior to withdrawing. Either party may withdraw for any reason 
without further obligations to the other party. However, if the Plan 
has prepaid for the use of rooms at the Residence Hall for dates that 
fall after the effective date of withdrawal, the Union shall reimburse 
the Plan any monies paid for such use.
    12. Peter Novak, a certified public accountant with Novak Francella 
LLP, an independent auditor in Philadelphia, PA, that is paid by the 
Applicant, has certified that, upon reviewing the estimated cost of 
renting rooms at the Residence Hall, the Applicant has sufficient 
income to pay for the proposed transaction on an on-going basis. The 
Department notes on the financial statements provided by Mr. Novak that 
the Plan currently has assets in excess of $13 million. Mr. Novak 
represents that the annual audit will ensure that there are no 
discrepancies in the amounts being paid by the Applicant to the Union.
    13. In summary, the Applicant represents that the proposed 
transaction meets the statutory criteria for an exemption under section 
408(a) of the Act because: (a) An independent, qualified fiduciary, Mr. 
Ward, acting on behalf of the Plan, has determined prior to entering 
into the proposed transaction that the transaction is administratively 
feasible, in the interest of, and protective of the Plan and the 
participants and beneficiaries of the Plan;
    (b) Mr. Ward has reviewed the transaction to ensure that its terms 
are at least as favorable to the Plan as an arm's-length transaction 
with an unrelated party, and has determined to approve the transaction, 
in accordance with the fiduciary provisions of the Act;
    (c) Mr. Ward will monitor compliance with the terms and conditions 
of this proposed exemption, as described herein, and ensure that such 
terms and conditions are at all times satisfied;
    (d) Throughout the duration of the subject transaction, Mr. Ward 
will monitor compliance with the terms of the written agreement (the 
Agreement) pursuant to which the transaction is entered into, and take 
any and all steps necessary to ensure that the Plan is protected, 
including, but not limited to, agreeing to extend the Agreement on an 
annual basis or exercising his authority to terminate the Agreement on 
30 days' written notice;
    (e) The payments paid by the Plan for lodging and meals under the 
terms of the Agreement and under the terms of any subsequent extension 
of the Agreement will at no time be greater than the fair market value 
of the lodging and meals, as determined by the independent fiduciary;
    (f) Under the provisions of the Agreement, the transaction is on 
terms and at all times remains on terms that are at least as favorable 
to the Plan as those that would have been negotiated under similar 
circumstances at arm's-length with an unrelated third party;
    (g) The Applicant's independent auditor will perform an annual 
audit for the Plan to verify whether the Plan paid the proper amounts 
with respect to the subject transaction. In this regard, the written 
audit report for each year will identify, as applicable, any errors or 
irregularities relating to such payments, any internal control 
weaknesses that must be addressed under generally accepted auditing 
standards, and any recordkeeping matters that would impede the auditor 
from properly auditing such payments. To the extent there are any 
discrepancies as to the foregoing matters, the independent auditor will 
promptly communicate them to the Board of Trustees of the Plan (the 
Trustees), who will, in turn, promptly notify the independent, 
qualified fiduciary about such discrepancies;
    (h) The transaction is appropriate and helpful in carrying out the 
purposes for which the Plan is established or maintained; and
    (i) The Trustees will maintain, or cause to be maintained within 
the United States for a period of six (6) years in a manner that is 
convenient and accessible for audit and examination, such records as 
are necessary to determine whether the conditions of this proposed 
exemption have been met.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 693-8546 (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 or 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

[[Page 14099]]

    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 9th day of March 2011.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 2011-5911 Filed 3-14-11; 8:45 am]
BILLING CODE 4510-29-P


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