Collective Investment Funds

ERISA

In addition to complying with tax and securities laws, a bank must also comply with the Employee Retirement Income Security Act of 1974 (ERISA) if one or more employee benefit plans regulated by ERISA participate in the CIF. In general, ERISA prohibits an ERISA fiduciary (such as a bank trustee) from making fiduciary decisions from which it might benefit or from engaging in certain transactions with parties in interest (e.g., certain entities that are related to the plan or provide services to the plan or their affiliates).

ERISA section 408(b)(8) exempts certain transactions from the statutory prohibitions in section 406 of ERISA that restrict transactions between a CIF and a bank administering a CIF (party-in-interest). Section 408(b)(8) allows otherwise prohibited transactions between participating accounts and a CIF if three conditions are met:

• The transaction is a sale or purchase of an interest in the fund;

• The bank does not receive more than reasonable compensation; and

• The instrument under which the plan is maintained, or a fiduciary (other than the bank or bank affiliate) that has authority to control and manage assets of the plan, expressly permits the transaction.

In 1980, the Department of Labor (DOL) granted a class exemption for bank CIFs in Prohibited Transaction Exemption (PTE) 80-51. PTE 80-51permits bank-maintained CIFs with employee benefit plan participants to do business with plan-related parties under certain conditions. DOL amended PTE 80-51 in 1991 and restated it as PTE 91-38. These PTEs allow more types of transactions with related parties if the plan holds no more than a 10 percent interest in the CIF. DOL has issued other class exemptions that a bank may use when it causes a CIF to engage in a transaction that provides some benefit to the bank or its affiliates, or to engage in transactions with a party in interest. ^[2]

A bank must ensure, however, that it does not violate section 406 of ERISA by causing the CIF to engage in a transaction that benefits the bank, a bank insider, or any other party-in-interest unless the CIF qualifies for either ERISA’s statutory exemption (section 408(b)(8)) or one of DOL’s class exemptions, or unless the bank obtains an exemption from DOL specifically for its CIF.

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