In Advisory Opinion 2013-04A (September 9, 2013), the U.S. Department of Labor (DOL) confirmed that, in satisfying the requirements of Prohibited Transaction Exemption (PTE) 77-4, a summary prospectus may be used in lieu of a statutory prospectus.
- The prohibited transaction rules under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (Code) generally prevent employee benefit plans from engaging in sale and lending transactions with “parties-in-interest”, and prevent plan fiduciaries from engaging in transactions that are considered self-dealing or present potential conflicts of interest.
- PTE 77-4 provides conditional relief from these prohibited transaction rules by allowing employee benefit plans to purchase or sell shares of an open-end investment company registered under the Investment Company Act of 1940 (i.e., a mutual fund), when an investment adviser for the mutual fund or one of its affiliates is (i) a plan fiduciary, and (ii) not an employer of the employees covered by the plan, provided certain requirements are met.
- Among other requirements, PTE 77-4 provides that a second fiduciary, who is independent of and unrelated to the investment adviser, must receive a current prospectus issued by the mutual fund.
- In 2009, the Securities and Exchange Commission (SEC) revised its disclosure rules for mutual funds, and provided that a summary prospectus could be used as an optional method of complying with prospectus delivery requirements under the Securities Act of 1933.
The DOL has previously determined that, in other situations, a summary prospectus or similar summary document would satisfy ERISA prospectus delivery requirements.
- In a Field Assistance Bulletin published shortly after the SEC adopted the summary prospectus rule, DOL determined that a summary prospectus would satisfy the prospectus delivery requirement under ERISA Section 404(c).
- In a 1994 Advisory Opinion, DOL found that a mutual fund registered under the Investment Company Act of 1940, but not the Securities Act of 1933, could satisfy the prospectus delivery requirement of PTE 77-4 by providing the independent fiduciary with data required by a Form N-1A Registration Statement and certain additional, relevant information normally found in a prospectus.
In Advisory Opinion 2013-04A, DOL similarly and sensibly concluded that the use of a summary prospectus would satisfy the prospectus delivery requirement of PTE 77-4, noting that (i) the term “prospectus” is not defined in PTE 77-4, and (ii) the required contents of a summary prospectus provide both key information about the fund’s investment objectives, fees, investment strategies, risk and performance, as well as a web site and other means of obtaining the statutory prospectus.