New guidance from the Securities Exchange Commission requires issuers to take a fresh look at their 401(k) plans.  On September 22, 2016, the SEC’s Division of Corporation Finance released a Compliance and Disclosure Interpretation (“CDI”) addressing registration requirements for 401(k) plans that allow investments through a self-directed “brokerage window.” Such brokerage windows enable employees to personally tailor their 401(k) investment strategy, including investing in shares of individual companies, which may include the issuer.  The full text of the CDI is available here and set out below. 

As issuers are familiar, if their 401(k) plan offers an employer stock fund, registration on Form S-8 is required.  The new CDI advises that issuers that do not offer an employer stock fund but do offer a “brokerage window” that allows contributions to be invested in the issuer’s securities also may have to register on Form S-8. 

The determining factor as to whether registration is required is the “extent of the employer company’s involvement” in steering employees toward investing in its securities.  Drawing from the 1965 Securities Act Release No. 33-4790 regarding stock purchase plans, the SEC set out standards a 401(k) plan sponsor should follow to keep its involvement from constituting an “offer for sale” of a security such that registration would be required.  Under these standards, plan sponsors should do no more than: (1) announce the existence of the 401(k) plan (sponsors may describe the self-directed “brokerage window” as part of the investment alternatives but should take no action to draw employees’ attention to the possibility of investing in employer securities); (2) make payroll deductions; and (3) pay administrative expenses, which cannot be tied to particular investments selected by employees.  All communications of a soliciting nature should come from the broker.  Any deviation from these standards may constitute sufficient participation by the issuer in the 401(k) plan investment choice to trigger registration requirements.

In light of this guidance, issuers should review their 401(k) investment alternatives and the materials sent to employees about the 401(k) plan to determine whether to make changes and/or register shares under the 401(k) plan on Form S-8.  In particular, when reviewing materials, issuers should watch for any statements from the issuer that suggest employees can invest in issuer stock through the 401(k) plan.  

CDI Question 126.41

Q: A company sponsors a 401(k) plan that does not offer an employer securities fund in which employee contributions may be invested. The 401(k) plan permits both employer and employee contributions to be invested through a self-directed “brokerage window.” If the 401(k) plan does not prohibit employee contributions to be invested in employer securities through the “brokerage window,” would this involve an offer of employer securities requiring Securities Act registration?

A: It depends on the extent of the employer company’s involvement. In Release 33-4790, the Commission discussed whether registration is required for employer securities offered to employees through a stock purchase plan. That release framed the question as whether there is an “attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value” within the meaning of Securities Act Section 2(a)(3). The Commission said that a determination of whether registration is required turns on the degree and type of participation by issuers or their affiliates in the particular program. In the context of an open market stock purchase plan, the Commission said that registration would not be required if all communications of a soliciting character are furnished by or in the name of a broker, and the issuer or affiliate does no more than: 1) announces the existence of the plan; 2) makes payroll deductions; 3) makes names of employees available to the broker; and 4) pays no more than its expense of payroll deductions and reasonable fees and expenses for commissions, bookkeeping and custodial services.

In the context of providing a self-directed “brokerage window” in which plan participants could trade in employer securities with employee contributions, where the employer company and the 401(k) plan do no more than describe the self-directed “brokerage window” as part of the investment alternatives under the 401(k) plan, make payroll deductions, and pay administrative expenses not in any way tied to particular investments selected by employees and take no action to draw employees’ attention to the possibility of investing in employer securities through the “brokerage window,” the staff would not consider the employer company to be offering its securities to its employees for purposes of Securities Act registration. [September 22, 2016]