Proposed Exemptions From Certain Prohibited Transaction Restrictions, 14083-14099 [2011-5911]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 76, Number 50 (Tuesday, March 15, 2011)]
[Notices]
[Pages 14083-14099]
From the Federal Register Online via the Government Printing 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: 
moffitt.betty@dol.gov, 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:
     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.
     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.
     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.
     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\
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    \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.
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    (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