Court Says Mutual Fund Company not an ERISA "Party in Interest"

The court agreed with Massachusetts Financial Services Company (MFS) that it is not a “party in interest,” because ERISA creates a specific exemption to party-in-interest liability for mutual funds and mutual fund advisers. 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 says: “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 Michael L. 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. Bullock was allegedly an advisory affiliate of SAI, a general securities broker dealer.

The plan trustees alleged that MFS, a registered investment advisor 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.