Mutual Fund Company Exempt from ‘Party in Interest’ Liability

A court ruled that a mutual fund company that engaged in a fee agreement with its investment adviser is not a “party in interest″ under the Employee Retirement Income Security Act (ERISA).

A multi-employer plan charged that the Massachusetts Financial Services Company (MFS) engaged in a fee agreement with investment adviser Michael Bullock, allegedly an advisory affiliate of SAI, a general securities broker/dealer. The U.S. District Court for the Central District of California agreed with MFS that it is not a “party in interest,” because ERISA creates a specific exemption for mutual funds and their advisers to the “party-in-interest” definition.

The court said it was dismissing the ERISA claims with prejudice because the multi-employer plan made clear that its only basis for asserting that MFS is a “party in interest’ is that MFS provided the opportunity for others to invest plan assets in mutual funds, which is not a sufficient basis for invoking an exception to the statutory exemption.

Specifically, according to the opinion, ERISA said: “If any money or other property of an employee benefit plan is invested securities issued by an investment company registered under the Investment Company Act of 1940 [15 U.S.C.A. § 80a-1 et seq.], such investment shall not by itself cause such investment company or such investment company’s investment adviser or principal underwriter to be deemed to be a fiduciary or a party in interest.’

In addition, the court concluded that when such an adviser receives fees in return for providing “the opportunity to invest’ in mutual funds, the transaction is not sufficiently distinct from the investment itself to create an exception to ERISA’s party in interest exemption. Finally, the court asserted that the “legislative history of 29 U.S.C. § 1002(21)(B) makes clear that Congress did not want mutual funds generally to be held liable under ERISA … Congress carved mutual funds and their advisers out of ERISA’s “fiduciary’ and “party in interest’ definitions because the mutual funds were already subject to regulation under other statutes.’

The IATSE Local 33 Section 401(k) Plan hired defendant Bullock to provide objective investment advice, to assist the Trustees in complying with their fiduciary responsibilities, and to ensure that investment options offered to plan participants were reasonable and prudent.

The plan trustees alleged that MFS, a registered investment adviser and a mutual fund company that owns and operates various mutual funds, engaged in undisclosed negotiated agreements with Bullock and SAI whereby Bullock and SAI would promote the sale of MFS funds in return for additional commission fees paid by MFS. In October, the court held that the claims against Bullock and SAI must be arbitrated by the Financial Industry Regulatory Authority (FINRA).

MFS brought a motion to dismiss the claims with prejudice, contending it is neither a plan fiduciary nor a “party in interest.’

The case is IATSE Local 33 Section 401(k) Plan Board of Trustees v. Bullock, C.D. Cal., No. CV 08-3949 AMH (SSx), 11/5/08.