COMPLIANCE WITH FEDERAL
SECURITIES LAW REQUIREMENTS
FOR QUALIFIED PLANS AND SERPS
Pension, Profit-Sharing, Welfare, and
Other Compensation Plans
ALI-ABA
October 20-22, 2005
Washington, D.C.
Pamela Baker
Sonnenschein Nath & Rosenthal LLP
© 2005 by Pamela Baker All Rights Reserved
Table of Contents
I. INTRODUCTION ... 1
II. REGISTRATION ISSUES FOR EMPLOYEE BENEFIT PLANS – IN GENERAL ... 1
A. Registration Requirements Under the Securities Act of 1933. ... 1
B. Registration Requirements Under State “Blue Sky” Laws... 2
C. Is There a Security? ... 2
D. Is There a Sale?... 5
E. Is an Exemption Available? ... 6
F. How is Registration Effected? ... 12
G. How Many Shares Should Be Registered? ... 15
H. What is the Penalty for Non-Registration? ... 17
I. Resales and Rule 144... 20
J. State Blue Sky Laws ... 23
III. SHORT SWING PROFIT LIABILITY AND RULE 16b-3 ... 23
A. Background... 23
B. Persons Subject to Section 16. ... 25
C. Reporting Requirements. ... 26
D. Rule 16b-3 in General... 30
E. Tax Conditioned Plans. (Rule 16b-3(c).)... 30
F. Acquisitions from the Issuer. (Rule 16b-3(d).)... 30
G. Dispositions to the Issuer. (Rule 16b-3(e).) ... 31
H. Discretionary Transactions. (Rule 16b-3(f).)... 31
I. Definitions. (Rule 16b-3(b).) ... 31
IV. APPLICABILITY OF RULE 16b-3 TO “TAX CONDITIONED” PLANS... 34
A. General Rule ... 34
B. Analysis of Typical 401(k) Plan Transactions... 34
C. Analysis of Participant-Directed Investments in Company Stock in Qualified Individual Account Plan in a Spin-off. ... 37
D. Analysis of Employee Stock Purchase Plan Transactions... 37
E. Analysis of Nonqualified 401(k) “Mirror” Plan Transactions... 38
V. SHAREHOLDER APPROVAL ... 39
A. Shareholder Approval in General. ... 39
B. New York Stock Exchange Shareholder Approval Rules. ... 39
VI. PROXY DISCLOSURE RULES... 41
A. Background... 41
B. Whose Compensation Must Be Disclosed? ... 41
C. What Compensation Must Be Disclosed?... 41
VII. FORM 8-K ... 42
VIII. RULE 10b5-1 PLANS ... 42
A. Statutory and Regulatory Background... 42
B. Rule 10b5-1... 43
C. Applicability of Rule 10b5-1. ... 45
I. INTRODUCTION
Federal Securities laws affect employee benefit plans, including executive compensation arrangements, employee stock purchase plans and tax-qualified retirement plans, in several ways.
Companies with registered securities must disclose compensation of executive officers in their proxy statements. The disclosure includes information about retirement plans and other employee benefit arrangements, in addition to salary and bonus information about the top executives.
Tax-qualified retirement plans containing company stock may be subject to registration separately, and may have to be registered even if stock of the company is not otherwise subject to registration.
Non-retirement arrangements for acquiring company stock, such as option plans and employee stock purchase plans (sometimes called “423 plans”) may need to be registered.
Non-qualified deferred compensation arrangements, whether or not they are funded, and whether or not they provide a rate of return based on the company’s stock performance, need to be evaluated for possible registration.
The Sarbanes-Oxley Act, with its emphasis on executives and company stock, has
imposed additional considerations, and the stock exchanges (New York Stock Exchange, Nasdaq and the American Stock Exchange) also impose requirements on plans with company stock investment alternatives.
Further, there may be limitations or restrictions on an employee’s ability to resell stock, whether or not the stock is registered.
Finally, “insiders” with respect to a publicly held company are subject to further requirements and limitations, including a requirement that they report their company stock holdings and disgorge any profits from short-swing trading.
II. REGISTRATION ISSUES FOR EMPLOYEE BENEFIT PLANS – IN GENERAL
A. Registration Requirements Under the Securities Act of 1933.
1. In General. Under Section 5 of the Securities Act of 1933, (the “1933 Act”), unless an exemption applies, any offer or sale of a security must be registered with the Securities and Exchange Commission (the “SEC”).
The key issues for employee benefit plans are thus: 1. Is there a security?
2. Is there a sale? (If so, the sale will inherently be preceded by an “offer.”)
4. If there is no exemption, how is registration effected?
B. Registration Requirements Under State “Blue Sky” Laws.
Each state has its own securities laws, generically referred to as “blue sky” laws. While most state blue sky laws have exemptions from registration for tax-qualified retirements plans and other arrangements that are exempt from federal registration, some do not, and a few require notice or a streamlined registration procedure. The laws of each state where any “purchaser” (generally a plan participant) resides must be checked. This includes states to which participants have moved or retired, if they have left account balances or credits in the plan.
C. Is There a Security?
1. Statutory Definition. Section 2(1) of the Securities Act of 1933 (the “1993 Act”) defines a security as:
any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
2. Traditional Option Plans. Generally, where a participant acquires a direct interest in employer stock or other instrument commonly recognized as a security, whether through a grant of shares or the exercise of an option, it is clear that a security involved.
3. Tax-Qualified Retirement Plans. With respect to tax-qualified retirement plans, in 1980 the SEC issued an extensive release discussing the issue of when employee benefit plan participation interests are securities. SEC Release No. 33-6188 (February 1, 1980). According to the release, whether a plan participation interest involves the sale of a security depends on whether participation is voluntary and whether employees
contribute. The analysis, which grew out of a U.S. Supreme Court case, International
Brotherhood of Teamsters v. Daniel, 439 U.S. 551 (1979), can be summarized in the
following chart:
Are Plan Participation Interests Securities?
Employee Contributions No Employee Contributions
Compulsory Participation NO NO
For federal securities laws purposes, employee contributions include pre-tax (401(k)) contributions, as well as after-tax contributions, even though 401(k) contributions are specifically referred to in the Internal Revenue Code as employer contributions. Diasonics (avail. 12/29/82).
4. Non-Qualified Deferred Compensation Plans.1
a. Investment Contract. With respect to non-qualified deferred compensation arrangements, the focus is on whether participation in such arrangements constitutes an “investment contract.” A four-part definition of the term “investment contract” was set forth by the Supreme Court in SEC v. W.J.
Howey Co., 328 U.S. 293 (1946). According to the Court in Howey, an
investment contract for purposes of the 1933 Act exists when (1) there is an investment of money, (2) in a common enterprise,
(3) made with the expectation of profits,
(4) with the profits expected to arise solely from the efforts of persons other than the investor.
Where the employee is expecting to receive not only his principal amount deferred (the investment of money), but also earnings on that amount (the expectation of profits), and where the source of payment of those amounts is the employer’s assets (a common enterprise with profits to arise solely from the
1 Non-qualified deferred compensation, for purposes of this outline, is compensation earned currently, the
payment of which is deferred, at the election of the employee, to a later year under an arrangement that is not “qualified” for special tax treatment (such as under Section 401(a) of the Internal Revenue Code). Typically this will be carried out under an arrangement whereunder an employee has an account in the plan which is credited with the principal amount of compensation deferred and also with earnings. This definition, in part because it depends on an employee deferral election, is not the same as the definition applicable under Internal Revenue Code Section 409A.
For tax and ERISA reasons, the account is usually not “funded” with assets set aside for the benefit of the employee. Typically, either the employee merely has a contractual right to collect the funds from the employer, or the funds are set aside in a so-called “rabbi” trust, which is subject to the claims of the employer’s creditors.
Earnings are sometimes credited to an employee’s account at a fixed or indexed rate, or at the same rate as though invested in the employer’s stock. In some arrangements, employees elect the rate at which they wish to have their account credited, usually with reference to a mutual fund or other investment.
Usually the value of an employee’s account is paid at retirement or other termination of employment or at a fixed future date (e.g., ten years from the date of the deferral). Arrangements that result in the deferral of income to the termination of employment or beyond are technically “pension plans” as defined in ERISA. However, most of ERISA's substantive requirements do not apply if an arrangement is unfunded, and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees; that is, if it is a so-called “top hat plan.”
