Company Name: First Bank System, Inc.
Public Availability Date: July 30, 1997 

INQUIRY LETTER

FIRST BANK SYSTEM, INC.
FIRST BANK PLACE
SUITE 2800, 601 SECOND AVENUE SOUTH
MINNEAPOLIS, MN 55402-4302
(612) 973-0359

June 09, 1997

Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: First Bank System, Inc.

Ladies and Gentlemen:

On behalf of First Bank System, Inc., a Delaware corporation (the "Company"), I am writing to request the interpretive advice of the Staff of the Division of Corporation Finance (the "Staff") with respect to Rule 144 promulgated under the Securities Act of 1933, as amended (the "Act"). Specifically, I request the concurrence of the Staff in the view that, if an affiliate of an issuer has pledged "control securities" to a bank to secure a loan, the bank, upon lawfully foreclosing on the pledge and taking possession of the securities, may sell the securities publicly for its own account in compliance with all requirements of Rule 144, except the holding period requirement of Rule 144(d).

A. Facts

The Company is a regional, multi-state bank holding company headquartered in Minneapolis, Minnesota, providing complete financial services to individuals and institutions through four banks and other financial companies with over 350 offices, located primarily in 11 states. Customers obtain loans from the Companys various bank affiliates (each, a "Bank") in the ordinary course of business. Pursuant to pledge agreements between the Bank and these customers, the customer pledge securities to the Bank as collateral to secure amounts owed by the customers under the loans. From time to time, an affiliate of an issuer pledges to the Bank securities that are not "restricted securities" (as defined in Rule 144(a)(3)) to secure a loan. Because such unrestricted securities are held by an affiliate, they are "control securities." As control securities, the affiliate would be able to sell such securities publicly under Rule 144 without compliance with the holding period requirement of Rule 144(d). The pledge agreement provides that, in the event the customer defaults or certain other events occur, the Bank has various remedies, including foreclosing on the pledge, taking possession of the securities and then selling them for its own account in order to satisfy the customers obligations. For purposes of this letter, you may assume that the Bank is able to tack the holding period of the pledgor under Rule 144(d)(3)(iv) (i.e., that the loans made are with full recourse against the customer and that the pledges are bona fide) and that the Bank is not itself an affiliate of the issuer.

Control securities acquired from an affiliate by the Bank in this manner could be deemed restricted in the hands of the Bank because they might be viewed as having been acquired from an affiliate in a transaction not involving any public offering. See Rule 144(a)(3)(i). Accordingly, if the securities became restricted in the Banks hands, the Bank would be required to comply with all provisions of Rule 144 in order to sell the securities publicly. If the combined holding period of the pledgor and the Bank does not total at least two years, the Bank would be unable to rely on rule 144(k) in selling the securities. See, e.g., In the Matter of Morgan Stanley & Co., Inc., SEC Release No. 34-29625 (August 29, 1991). Further, if the combined holding period does not total at least one year, the holding period requirement of Rule 144(d) applicable to restricted securities would prevent the Bank from reselling any of the securities, even though such requirement would not apply to the affiliate/pledgor.

Please note that this request does not address the situation in which, rather than foreclosing on the pledge and taking possession of the control securities upon the affiliates default, a pledgee instead exercises the authority granted in the pledge agreement to sell the securities for the account of the affiliate/pledgor (as opposed to for the pledgees own account) and satisfy the affiliates obligations with the proceeds of the sale. Such a sale of control securities for the account of the affiliate/pledgor would be made publicly in accordance with all requirements of Rule 144, other than the holding period requirement of Rule 144(d), which would not apply. We are not requesting the interpretive advice of the Staff with respect to this situation.

B. Issue

The issue raised, therefore, is whether the one-year holding period requirement of Rule 144(d) is applicable to subsequent sales by the Bank, as pledgee, when such requirement is not applicable to sales by the affiliate, as pledgor. We are unaware of any Staff interpretations issued to date specifically addressing this issue. In our view, the holding period requirement of Rule 144(d) should not be imposed on the Bank, as pledgee, because the Bank would then be in a position worse than the affiliate/pledgor (who could have sold the same securities under Rule 144 without complying with the holding period requirement).

C. Analysis

As a general matter, a pledgee stands in the shoes of the pledgor. See, e.g., SEC Release No. 33-5223 (January 11, 1972). Similarly, a donee generally stands in the shoes of a donor in the case of a gift of securities. Id. See also, Analysis & Technology, Incorporated (February 12, 1979). For this reason, the Staff has previously held in the gift context that, when an affiliate makes a gift of securities that are not restricted in the affiliates hands (i.e., control securities), the donee acquires restricted securities because they were acquired from an affiliate in a non-public transaction and must comply with all requirements of Rule 144 for public resales of the donated securities, except the holding period requirement of Rule 144(d). Norfolk Southern Corporation (September 1, 1986). It was argued in Norfolk Southern Corporation that the non-affiliate/donee should be in no worse position than the affiliate/donor for subsequent sales under Rule 144. The Staff concurred in this view, and found that because the holding period would not be applicable to the affiliate/donor, it should also not apply to the non-affiliate/donee. Id.

We find the reasoning of Norfolk Southern Corporation to be compelling in the analogous case of a pledge selling control securities acquired from an affiliate/pledgor. We do not believe that the pledgee should be put in a position worse then the affiliate/pledgor by having the holding period requirement made applicable where it does not apply to the affiliate/pledgor. Assuming that the Rule 144(d) holding period does not apply to the pledgee, securities can only flow into the secondary market under the exact same circumstances as when sold by the affiliate/pledgor (i.e., in accordance with paragraphs (c) (current public information); (e) (volume limitation); (f) (manner of sale); and (h) notice of sale) of Rule 144). Under these same circumstances, the affiliate/pledgor is not deemed to be engaged in a distribution and therefore is not an underwriter for purposes of Section 4(1) of the Act. The pledgee similarly should not be deemed engaged in a distribution and therefore should not be an underwriter. There is no logical basis for distinguishing between the two transactions and describing one as a distribution and the other as mere ordinary trading. Where the securities are otherwise sold under the very same circumstances, there is no reason to impose the holding period to protect secondary market investors against a distribution if the pledgee is the seller but not if the affiliate/pledgor is the seller. If the requirements of paragraphs (c), (e), (f) and (h) of Rule 144 are sufficient protection in the latter case, they should also be sufficient in the former.

D. Conclusion

Because a pledgee stands in the shoes of the pledgor, the pledgee should be in no worse position than the pledgor in attempting to sell pledged securities. In our view, if an affiliate of an issuer has pledged control securities to a Bank to secure a loan, the Bank, upon lawfully foreclosing on the pledge and taking possession of the securities, should be able to sell the securities publicly for its own account in compliance with all requirements of Rule 144, except the holding period requirement of Rule 144(d). We respectfully request that the Staff concur in this view.

If for any reason you believe that you are not able to issue a favorable response, we request the opportunity to discuss with you the question raised in this letter prior to your issuing a written response. If you have any questions concerning this letter or require any additional information, please call the undersigned at 612/973-0359.

In accordance with SEC Release No. 33-6269 (December 5, 1980), I enclose seven additional copies of this letter for your use. Thank you for your consideration.

Very truly yours,

James L. Chosy

Enclosures

STAFF REPLY LETTER

July 30, 1997

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: First Bank System, Inc.

Incoming letter dated June 9, 1997

Based on the facts presented, it is the view of the Division that when an affiliate pledgor defaults on a loan that is collateralized by securities that are not "restricted" in the hands of the pledgor, and the pledgee bank forecloses on the pledge, the pledgee bank may sell those securities without regard to the holding period requirement of Rule 144.

This position is based on the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion.

Sincerely,

Cecilia D. Blye

Special Counsel