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2003-11A
ERISA Sec. 404(c)
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Stephen M. Saxon
Groom Law Group, Chartered
1701 Pennsylvania Ave., NW
Washington, DC 20006-5893
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Dear Mr. Saxon:
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This is in response to your request for guidance under
the Employee Retirement Income Security Act of 1974 (ERISA). In
particular, you ask whether a participant-directed individual account plan’s
delivery of a mutual fund Profile, as described below, to participants and
beneficiaries immediately before or immediately after their investment in
the mutual fund would satisfy regulations issued by the Department of
Labor (Department) pursuant to section 404(c) of ERISA.
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You represent that the Principal Financial Group (Principal) provides
investment products and administrative services to tax-qualified defined
contribution plans established pursuant to section 401(a) of the Internal
Revenue Code of 1986 (the Code), including plans that permit employee
elective deferrals under section 401(k) of the Code (401(k) plans). Many of
these 401(k) plans permit participants to direct the investments of the
amounts in their individual accounts. These 401(k) plans are typically
designed and administered by Principal to comply with regulations issued by
the Department pursuant to section 404(c) of ERISA (404(c) regulations).(1)
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Section 404(c) of ERISA provides that, in the case of an individual account
plan that permits participants or beneficiaries to exercise control over
assets in their accounts, no person who is otherwise a fiduciary shall be
liable under part 4 of Title I of ERISA for any loss, or by reason of any
breach, which results from such participant’s or beneficiary’s exercise
of control. The 404(c) regulations require, among other things, that a
participant or beneficiary shall be provided or have the opportunity to
obtain sufficient information to make informed decisions with regard to
investment alternatives available under the plan.(2)
In the case of an investment alternative subject to the registration
requirements of the Securities Act of 1933 (Securities Act) such as a mutual
fund, the 404(c) regulations provide that a participant or beneficiary shall
be provided by the identified plan fiduciary (or a person or persons
designated by the plan fiduciary to act on his behalf), a copy of the most
recent prospectus that was provided to the plan, either immediately before
the participant’s or beneficiary’s initial investment in such investment
alternative, or immediately following the participant’s or beneficiary’s
initial investment.(3) The 404(c)
regulations also provide that a participant or beneficiary shall be
provided, either directly or upon request, the following information, which
shall be based on the latest information available to the plan: copies of
any prospectuses, financial statements and reports, and of any other
materials relating to the investment alternatives available under the plan,
to the extent such information is provided to the plan.(4)
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Section 2(a)(10) of the Securities Act generally
defines the term “prospectus” to include any notice, circular,
advertisement, letter, or communication that offers any security for sale
or confirms the sale of any security.(5)
Section 10(a) of the Securities Act generally provides that a prospectus
relating to a security (10(a) prospectus) shall contain much of the same
information that is contained in the registration statement of the
security.(6) Section 10(a) of
the Securities Act specifies the information that a prospectus must
contain and the information that a prospectus may omit.(7)
Section 10(b) of the Securities Act provides that the Securities and
Exchange Commission (SEC) shall, by rules or regulations deemed necessary
or appropriate in the public interest or for the protection of investors,
permit the use of a summary document (10(b) prospectus) which omits in
part or summarizes information provided in a 10(a) prospectus.
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Under section 5(b)(1) of the Securities Act, a 10(b) prospectus may be
provided to an investor in connection with an offer to sell a registered
security.(8) Under section 5(b)(2)
of the Securities Act, however, a 10(a) prospectus must be provided to an
investor at or before any sale of a registered security.(9)
Thus, under the federal securities laws, while a summary document under
section 10(b) of the Securities Act may be delivered for purposes of an
offer, a 10(a) prospectus would, in any event, also be required to be
delivered in order to sell a registered security.
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On March 13, 1998, the SEC adopted Rule 498 under the Securities Act
(Securities Act Rule 498). Under Securities Act Rule 498, a summary
prospectus, or a Profile, designed to comply with section 10(b) of the
Securities Act, may be delivered to investors in connection with an offer to
purchase or sell mutual fund shares.(10)
Paragraph (b) of Securities Act Rule 498 provides that a Profile is intended
to be a standardized summary of key information contained in a 10(a)
prospectus. Securities Act Rule 498 requires a Profile to provide clear and
concise information in a format designed to communicate information
effectively, while avoiding excessive detail, technical or legal terms, and
long sentences and paragraphs.(11)
A Profile is specifically required to include, among other things:
identifying information; an explanation that the Profile summarizes key
information included in the prospectus; information regarding how investors
can obtain the prospectus; investment objectives, strategies, and risks;
fees and expenses; identities of investment advisers and managers;
information regarding purchase and sale of shares; investment requirements;
distributions and tax information; and other services available.
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In adopting Securities Act Rule 498, the SEC stated its
belief that investors in participant-directed defined contribution plans may
find a Profile helpful in evaluating and comparing funds offered as
investment alternatives in a plan.(12)
Paragraph (d)(1) of Securities Act Rule 498 provides that, in a Profile
intended for use with respect to a 401(k) plan, a mutual fund may modify or
omit certain information which may not be relevant to participants and
beneficiaries of a plan, such as information about requirements for
purchasing and selling shares, fund distributions, tax consequences with
regard to distributions, and other fund services that are not applicable to
plan participants and beneficiaries. The SEC did not, however, authorize the
use of the Profile for purposes of a sale under section 5(b)(2) of the
Securities Act.
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You represent that, because Principal’s 401(k) plan clients typically
design and administer their plans to comply with the 404(c) regulations,
administrative services provided by Principal include assistance in meeting
the disclosure and other requirements of the 404(c) regulations. With regard
to mutual funds, Principal proposes to deliver Profiles of mutual funds,
including its proprietary funds, to participants of 401(k) plans designed to
comply with the 404(c) regulations. You represent that Principal believes
that delivery of a mutual fund Profile to a participant of a 401(k) plan
designed to comply with the 404(c) regulations will satisfy the requirement
under the 404(c) regulations that a prospectus be delivered to each
participant either immediately before or immediately after the participant’s
initial investment in the mutual fund.(13)
You assert that automatic delivery of a Profile would permit plans to avoid
the additional expense of automatically providing a lengthy 10(a)
prospectus. In addition, you represent that, with regard to delivery of a
10(a) prospectus, Principal will send a 10(a) prospectus to any requesting
participant or beneficiary within three days of receipt of such request.(14)
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You assert that, consistent with the Department’s
reasoning in the preamble to the 404(c) regulations with regard to
delivery of a prospectus, the delivery of a Profile, as a concise summary
of a mutual fund’s investment objectives, risk and return
characteristics, and type and diversification of assets, will provide
participants and beneficiaries with the information necessary for them to
make informed investment decisions with respect to investment in mutual
funds. You assert that the required delivery of a prospectus under section
404(c) is intended to ensure that participants and beneficiaries are
provided with sufficient information in order to be able to make informed
decisions with respect to investment alternatives under the plan. In this
regard, you represent that a Profile conveys all the information about a
mutual fund that the 404(c) regulations require to be delivered
automatically to participants in connection with each designated
investment option (i.e., the description of investment objectives, risk
and return characteristics, type and diversification of assets, and
identification of investment manager, required by 29 CFR section
2550.404c-1(b)(2)(i)(B)(1)(ii) and (iii)).
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You specifically ask whether delivery of a Profile would satisfy a
participant-directed individual account plan’s obligation under the 404(c)
regulations to deliver a copy of the most recent prospectus to plan
participants and beneficiaries immediately before or immediately after such
individuals initially invest in mutual funds.
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The Department has not defined the term “prospectus” in the 404(c)
regulations, or elsewhere. In the preamble to the 404(c) regulations, the
Department states that the prospectus delivery requirement is intended to
ensure that, immediately before or immediately after a participant’s or
beneficiary’s initial investment in an investment alternative, such as a
mutual fund, that is required to deliver a prospectus to investors under the
federal securities laws, participants and beneficiaries must be afforded the
opportunity to review the prospectus in connection with an initial
investment in such investment alternative.(15)
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The Department takes no position with respect to the application of the
federal securities laws to your question. However, it is the view of the
Department that, under the 404(c) regulations, the term “prospectus”
includes a Profile. The Department believes that the delivery of a Profile
by an identified plan fiduciary or designee to plan participants or
beneficiaries satisfies the requirements of the 404(c) regulations because
it provides a clear summary of key information about a mutual fund that is
useful to such participants and/or beneficiaries.
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A Profile, designed to comply with section 10(b) of the
Securities Act, provides participants with information of the sort that
the Department intended a participant in a section 404(c) plan to receive
both automatically and upon request with respect to a relevant investment.
Moreover, if a participant wishes to obtain additional information, the
cover page of the Profile shows how to obtain a 10(a) prospectus from the
offeror.
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Where the most recent prospectus in the plan’s
possession is a Profile, then delivering the Profile to plan participants
and beneficiaries, immediately before or immediately after such
individuals’ initial investment in a mutual fund, would satisfy a
participant-directed individual account plan’s prospectus delivery
obligation under 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii). Where
the most recent prospectus is a 10(a) prospectus, 29 CFR section
2550.404c-1(b)(2)(i)(B)(1)(viii) would require the delivery of a 10(a)
prospectus.
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Separately, under 29 CFR section 2550.404c-1(b)(2)(i)(B)(2),
the identified plan fiduciary or designee must provide, either directly or
upon request, copies of prospectuses (among other things) based on the
latest information available to the plan. Where a participant requests a
prospectus, and the most recent prospectus is a Profile, then providing
the Profile will comply with this requirement. If, however, the
participant specifically requests a 10(a) prospectus, the most recent
10(a) prospectus must be provided.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, it is subject to the provisions of that
procedure, including section 10 thereof relating to the effect of advisory
opinions.
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Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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29 CFR 2550.404c-1.
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29 CFR 2550.404c-1(b)(2)(i)(B).
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29 CFR 2550.404c-1(b)(2)(i)(B)(1)(viii).
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29 CFR 2550.404c-1(b)(2)(i)(B)(2)(ii).
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See 15 USC 77b(a)(10).
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On March 13, 1998, the SEC adopted
amendments to Form N-1A, the registration form used by mutual funds.
Pursuant to the amendments, a mutual fund prospectus must provide
investors with essential information about the mutual fund, including:
risk/return summaries; investment strategies; mutual fund performance;
management, organization, and capital structure; shareholder
information; and distribution arrangements. A mutual fund prospectus
should avoid: lengthy legal and technical discussions; a restatement
of legal or regulatory requirements to which mutual funds generally
are subject; and disproportionate emphasis on possible investments or
activities of the mutual fund that are not a significant part of the
mutual fund’s investment operations. In addition, a mutual fund
prospectus may modify or omit certain items when mutual funds are
investment options for 401(k) plans, including: procedures for
purchasing and redeeming mutual fund shares if such procedures are
inapplicable; dividend and distribution policies if such policies are
inapplicable; and tax consequences to shareholders with respect to
buying, holding, exchanging, and selling mutual fund shares if such
consequences are inapplicable. See Registration Form Used by Open-End
Management Investment Companies, Securities Act Release No. 7512
(March 13, 1998).
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See 15 USC 77j(a).
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See 15 USC 77j(b).
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See 15 USC 77e(b)
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See New Disclosure Option for
Open-End Management Investment Companies, Securities Act Release No.
7513 (March 13, 1998) (Securities Act Rule 498 Adopting Release). In
adopting Securities Act Rule 498 which permits the use of a Profile,
the SEC stated that the “profile of a fund will be a summary
prospectus under section 10(b) of the Securities Act, but the fund’s
section 10(a) prospectus will remain the primary disclosure document
under the federal securities laws.” Securities Act Rule 498 Adopting
Release. Accordingly, paragraph (c)(1)(v) of Securities Act Rule 498
requires that a Profile shall provide a toll-free (or collect)
telephone number that investors can use to obtain the prospectus and a
mutual fund may indicate, as applicable, that the prospectus and other
information is available on the mutual fund’s internet site or by
e-mail request, or that the prospectus is available through a
financial intermediary.
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See 17 CFR 230.498.
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Securities Act Rule 498 Adopting
Release, text accompanying note 124.
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See 29 CFR 2550.404c-1(b)(2)(i)(B)(1)(viii).
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We note that the Instruction to
Paragraph (c)(1)(v) of Securities Act Rule 498 provides that when a
mutual fund (or financial intermediary through which shares of the
mutual fund may be purchased or sold) receives a request for a 10(a)
prospectus, the mutual fund (or financial intermediary) must send the
10(a) prospectus within three business days.
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See 57 Fed. Reg. 46906, 46911
(October 13, 1992).
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