This Article Has Been Updated and Superceded by Field Assistance Bulletin 2009-3

DOL Advisory Opinion (AO) 2003-11A States
Mutual Fund Profiles Will Satisfy 404(c) Compliance
Rev. 09/25/03, E-mail Alert 2003-18

The Department of Labor (DOL) was asked to rule on whether mutual fund profiles would satisfy the SEC requirements for providing a prospectus and the ERISA 404(c) requirements. On September 8, 2003, DOL released an Advisory Opinion (AO 2003-11A) that did not rule on the SEC issue but did state that mutual fund profiles would generally meet the compliance requirements of ERISA 404(c)

ERISA 404(c) Background
Section 404(c) of ERISA provides a plan fiduciary relief from liability for investment losses on an individual account plan that permits participants or beneficiaries to exercise control over their account assets. To comply with the 404(c) regulations requirements, a participant or beneficiary must be provided with, or have the opportunity to obtain, sufficient information on each of the plan's investment alternatives to make informed investment decisions. With respect to a mutual fund, the fiduciary (or his or her designee) is required to provide a copy of the most recent prospectus that was provided to the plan, either immediately before or after the participant’s or beneficiary’s initial investment in such investment alternative. The 404(c) regulations also require that a participant or beneficiary be provided, either directly or upon request, with the following latest information available to the plan: copies of any prospectuses, financial statements and reports, and any other materials relating to the investment alternatives available under the plan, to the extent such information is provided to the plan.

Securities Background
Under the Securities Act, a "10(b)" summary prospectus (Profile) may be provided to an investor with an offer to sell a registered security. However, a "10(a)" full prospectus must be provided to an investor at or before any sale of a registered security. Thus, under the federal securities laws, a Profile may be delivered for purposes of an offer, but a full prospectus is required to be delivered in order to sell a registered security to an investor.

Profile Requirements
On March 13, 1998, under newly adopted Securities Act Rule 498, a Profile, may be delivered to investors in connection with an offer to purchase or sell mutual fund shares. Under this rule, a Profile is intended to be a standardized summary of key information contained in a full prospectus. However, the SEC did not permit the Profile to be substituted for a full prospectus for purposes of a mutual fund sale.

Securities Act Rule 498 Requires a Profile to Provide:

• clear, concise information formatted to communicate information effectively,
  avoiding excessive detail, technical or legal terms, and long sentences and paragraphs
  
• 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.
  

NOTE: Rule 498 provides that a mutual fund Profile, intended for use with a 401(k) plan, may modify or omit 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. (Regarding Rule 498, the SEC stated that investors within participant-directed defined contribution plans may find a Profile helpful in evaluating and comparing funds offered as investment alternatives.)

The Request (and a Summary of Its Basis in 404(c))
Will delivery of a Profile 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? Yes, According to the DOL, the information in a Profile meets the ERISA 404(c) requirements as stated in 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(ii) and (iii)).

The DOL based its ruling on the grounds that a Profile provides a concise summary of a mutual fund’s investment objectives, risk and return characteristics, and type and diversification of assets, and will provide participants and beneficiaries with the information necessary for them to make informed investment decisions with respect to investment in mutual funds and identifies the investment manager. The fact that a 10(a) full prospectus will be sent to any requesting participant or beneficiary within three days of receipt of such request reinforced the DOL's position.

The DOL's AO Ruling

1. The DOL does not define the term “prospectus” in ERISA 404(c) or elsewhere.
   
2. The DOL took no position with respect to the application of the federal securities laws in regard to the question whether providing a profile instead of a prospectus would satisfy the SEC's prospectus requirements.
   
3. It is the view of the DOL that, under the 404(c) regulations, the term “prospectus” includes a Profile.
   
4. The DOL believes that 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).
   
5. 5. A Profile provides participants with the information the DOL intended a participant in a section 404(c) plan to receive both automatically and upon request with respect to a relevant investment. For a participant who wishes additional information, the cover page of the Profile shows how to obtain a full prospectus from the offeror.
   
6. Most recent prospectus in plan's possession, whether a profile or a full prospectus, is to be provided:
   If 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 full prospectus, 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii) would require the delivery of a full prospectus.
   
7. 7. 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 full prospectus, the most recent full prospectus must be provided.

DOL Advisory Opinion 2003-11A

Bill Grossman