The Securities and Exchange Commission (SEC)
has long taken the position that interests in voluntary contributory plans,
such as salary reduction deferred compensation plans, are securities but has
required registration only when the employee contributions were to be invested
in employer securities. Based on the SEC's position, employers have proceeded
under the assumption that the Securities Act of 1933 did not require them to
register obligations to make payments under nonqualified deferred compensation
plans. There have been recent indications that the SEC staff now feels that
nonqualified deferred compensation is available on a much broader basis than
in the past, making it less likely that such plans qualify for an exemption
from the registration requirements. For example, the SEC recently declined to
issue no-action letters on filing requirements on the salary reduction
deferred compensation plans of two large employers, Merrill Lynch & Co., Inc.
and Raychem Corporation. The Merrill Lynch 1995 Deferred Compensation Plan for
a Select Group of Eligible Employees involved over 2,000 brokers. The Raychem
1995 Executive Deferred Compensation Plan involved a large number of
participants and used a rabbi trust under which each participant could direct
the investment of his or her account among available investment funds. Both
Merrill Lynch and Raychem chose to register these plans after receiving the
SEC's response.
Based on signs that the SEC's position may now be that employers with
nonqualified deferred compensation plans covering a relatively large number of
participants may need to be registered, employers should consider the
registration requirements and available exemptions. Possible exemptions
include those that apply to intrastate offerings, certain small offerings,
transactions that do not involve a public offering and the issuance of
securities in limited amounts by private companies for compensation purposes.
Certain of these exemptions are implemented in part by Regulation D, which
contains safe harbors when limitations as to the aggregate dollar amount,
number of purchasers and sophistication of purchasers are satisfied. Assuring
that the conditions for availability of these exemptions have been satisfied
is often complex and should involve the assistance of securities counsel.
Employers with deferred compensation plans covering only a few employees
should be able to rely on one of the available exemptions. However, all
employers should review their existing deferred compensation plans with
counsel to be sure that registration is not required. Employers with salary
reduction deferred compensation plans that do not fall within an exemption and
who fail to comply with the registration requirement not only will be subject
to sanctions for failure to register but might face adverse tax consequences
as a result of the one-year right of rescission created by failure to
register.
For more information, please call or e-mail the attorneys in
Poyner & Spruill's Employee
Benefits Section.
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information about legal developments. Because the facts in each situation vary,
any legal precedents noted may not be applicable to individual circumstances.
This information is not offered as legal advice.
