Mutual fund holdings and plan diversification

P/OPINION 75-93


                                                       401
                                                       404✓


                        November 4, 1975


Dear           :

Your letter of August 15, 1975 addressed to the Securities
and Exchange Commission, has been forwarded to this office
for consideration by
together with a copy of his reply of September 22, 1975.

In your letter, you expressed concern that some attorneys
are advising clients who maintain small pension and profit-
sharing plans that investment of the assets of such a plan
exclusively in shares of a mutual fund might violate the
requirement contained in section 404(a)(1)(C) of the
Employee Retirement Income Security Act of 1974 (the Act)
that a fiduciary of an employee benefit plan discharge his
duties with respect to the plan by "diversifying the
investments of the plan so as to minimize the risk of large
losses, unless under the circumstances, it is clearly
prudent not to do so." We assume that by referring to mutual
funds in your letter, you are referring to open-end management
investment companies registered under the Investment Company
Act of 1940.

Section 401(b)(1) of the Act provides that for purposes
of Part 4 of Title I of the Act (relating to fiduciary
responsiblity), if a plan invests in a security issued
by an investment company which is registered under the
Investment Company Act of 1940, the assets of such plan
are deemed to include such investment company security,
but are not, solely by reason of such investment, deemed
to include any assets of such investment company.
Thus, when a plan invests in shares of a mutual fund,
the mutual fund shares themselves are considered to be
assets of the plan, but the securities and any other assets
owned by the mutual fund are not considered to be assets
of the plan.
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P/OPINION 75-93



However, as          pointed out in his letter, the
legislative history of the Act indicates that for
purposes of determining whether the diversification
requirement set forth in section 404(a)(1)(C) of
of the Act has been met as regards the investment by a
plan exclusively in shares of a mutual fund, the
underlying assets of such mutual fund should be taken
into consideration. The Conference Report accompanying
the Act states:

         The Conferees intend that, in general,
         whether the plan assets are sufficiently
         diversified is to be determined by examining
         the ultimate investment of the plan assets.
         For example, the conferees understand that
         for efficiency and economy plans may invest
         all their assets in a single bank or other
         pooled investment fund, but that the pooled
         fund itself could have diversified investments.
         It is intended that, in this case, the
         diversification rule is to be applied
         to the plan by examining the diversification
         of the investments in the pooled fund. The
         same is true with respect to investments in
         a mutual fund. (Joint Explanatory Statement
         of the Committee of Conference H. Rep. 93-1280,
         93d Cong. 2d Sess. (1974), at 305.)

Accordingly, if a plan trustee or other plan fiduciary
is considering whether to invest the entire amount of
plan assets, or any part thereof, in shares of a mutual
fund, such trustees or other fiduciary should examine
the securities and other assets held by the mutual fund
before such investment is made, review the statement as
to the fund's investment policy as contained in the
fund's prospectus, and periodically review the fund's
investments whenever such information is made available,
as long as plan assets are invested in such shares, to
determine whether the investment, when considered together
with other plan investments, if any, meets the diversification
requirement set forth in section 404(a)(1)(C) of the
Act.
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P/OPINION 75-93



Such trustees or other fiduciary should also examine
the features of such mutual fund in the light of the
particular objectives of the plan to determine whether
investment of plan assets in shares of the mutual fund
meets the other requirements of section 404(a)(1).

Sincerely,