Release No. 33-6188

February 1, 1980

EMPLOYEE BENEFIT PLANS

ACTION: Interpretations of statute

SUMMARY: The Commission has authorized the issuance of a release setting forth the views of its staff on the application of the Securities Act of 1933 to employee benefit plans. The purpose of the release is to provide guidance to the public and thereby assist employers and plan participants in complying with the Act.

FOR FURTHER INFORMATION CONTACT: Peter J. Romeo, Division of Corporation Finance, Securities and Exchange Commission, Washington, D.C. 20549, (202)272-2573.

SUPPLEMENTARY INFORMATION: On January 16, 1979, The Supreme Court issued a decision in which it addressed for the first time in its history the application of the Securities Act of 1933 ("the Act") 15 U.S.C. 77a et seq. to participation interests in a private pension plan. The decision, which was rendered in the case of International Brotherhood of Teamsters v. Daniel ("Daniel"), ¹ has generated considerable controversy and comment. ² Moreover, it has raised questions about the application of the Act to many types of employee benefit plans ³ not covered by the decision. In an effort to resolve the uncertainty which has developed and thereby assist employers and plan participants in complying with the 1933 Act, the Commission has authorized the issuance of this release setting forth the views of its Division of Corporation Finance (hereinafter, the "staff") ⁴ on the application of the Act to such plans.

The release initially discusses the circumstances under which interests in plans and related entities may be subject to the requirements of the 1933 Act. In this connection, an analysis is provided of the criteria to be used in determining when an offer or sale of a security will occur. There is also a discussion of the various exemptions from the Acts registration provisions that may be available for such offers or sales. This is followed by a brief discourse on the application of the Act both to the various types of securities transactions in which plans may engage and to resales by plan participants of securities acquired through the operation of plans. Finally, the release describes the methods of registration under the Act of securities issued by plans and related entities.

Although this release is intended to provide guidance to the public on the application of the 1933 Act to employee benefit plans, it should not be viewed as an exhaustive or all-inclusive treatment of the subject. The complexity and ever-increasing variety of such plans precludes the issuance of a release sufficiently comprehensive to cover all issues that might arise. Because this release is necessarily limited in its scope, the Commissions staff will continue its past practice of providing interpretive advice and assistance to the public regarding such plans upon request, except where otherwise indicated herein.

The staff recognizes that many of the issues discussed herein are controversial and that differences of opinion can exist with respect to them. Although it believes the positions described in the release are in accord with the general policies and purposes of the 1933 Act, the staff nevertheless invites interested members of the public who wish to express an opinion on such positions to submit their views in writing. ⁵ All comments received from the public will be given serious consideration by the staff and, to the extent they are persuasive, could result in a revision of some of the views expressed herein.

Because of the length of this release, the staff believes it would be helpful at the outset to summarize briefly the positions expressed herein. The summary, however, should not be read without also referring to the explanatory section of the release, where the various positions are discussed in detail.

SUMMARY

The registration and antifraud provisions of the 1933 Act are applicable to the offer and sale of securities. Registration, however, would not be necessary if one of the exemptions specified in the Act is available.

1. The Term "Security"

There are two types of securities that may be issued in connection with employee benefit plans: (1) participation interests of employees in their respective plans, ⁶ and (2) participation interests of plans in the collective investment vehicles in which such plans invest their assets.

The interests of plans in collective investment vehicles are in all instances securities, generally in the form of investment contracts. They are therefore subject to both the registration and antifraud provisions of the 1933 Act. The interests of employees in a plan, however, are securities only when the employees voluntarily participate in the plan and individually contribute thereto. Thus, employee interests in plans which are not both voluntary and contributory are not securities and therefore are not subject to the Act.

2. The Term "Sale"

A sale of interests in voluntary, contributory plans occurs where there is both an investment decision and the furnishing of value by participating employees. Consistent with this view, the staff does not believe a sale occurs when an existing plan is converted into an ESOP ⁷ or other type of plan, except where employees are given a choice in the matter and therefore have the opportunity to make an investment decision. Similarly, there is no sale under noncontributory plans when employees make elections as to the manner of investing the employers contributions.

The definition of "sale" in the 1933 Act also encompasses any "solicitation of an offer to buy" securities of the employer. Such solicitations sometimes will be attributed to employers in the context of certain employee stock purchase plans which acquire the employers securities in the open market. If the employers involvement in such a plan is limited to performing ministerial-type functions, no solicitation of an offer to buy is deemed to exist. But if the employers involvement is so substantial that there are significant differences between acquiring stock under the plan and acquiring it in ordinary brokerage transactions, the employer will be deemed to be soliciting its employees to buy its securities, and registration generally will be necessary. An exception to this general rule, however, exists in the case of a TRASOP ⁸ where the employers involvement is limited primarily to performing ministerial-type functions and paying half the price of stock purchased by employees under the plan.

3. Exemptions from Registration

Registration of securities offered or sold pursuant to employee benefit plans is necessary unless an exemption is available. In most instances, an exemption is available and registration therefore is not required. Some of the exemptions that are frequently relied upon are those provided by the 1933 Act for nonpublic offerings, intrastate offerings, and certain small offerings. The only exemption, however, which is specifically designed for interests issued in connection with employee benefit plans is the one provided by Section 3(a)(2) of the Act.

The Section 3(a)(2) exemption applies both to the interests of plans in certain investment vehicles maintained by banks and insurance companies and to the interests of participants in the plans themselves. Interests issued in connection with Keogh plans, however, are specifically excluded from the exemption, although the Commission can exempt such interests from registration under certain conditions.

Although the language of Section 3(a)(2) can be read to suggest otherwise, the staff does not believe that a single trust fund for a plan must be maintained by a bank in order for the exemption to be available. However, if the trust fund involves a single employer and invests employee monies in securities of the employer, the exemption cannot be utilized. For purposes of Section 3(a)(2), the term "single employer" is deemed to include the employer and any entity controlling, controlled by, or under common control with, the employer. Thus, a parent and its subsidiaries are considered a single employer under this interpretation.

While the Section 3(a)(2) exemption is not available by its terms for so-called "guaranteed investment contracts" issued to plans by insurance companies, the staff has taken a no-action position with respect to the offer and sale of such contracts if certain specified conditions are met. A similar position, again subject to certain conditions, also has been taken with respect to the offer and sale of interests in multiple-employer trusts established by insurance companies for the offering of various forms of annuity contracts to unrelated employers.

4. Securities Transactions by Plans

In addition to issuing participation interests to employees or fostering the purchase of employer stock by such persons, a plan may engage in various other transactions involving the purchase, sale or distribution of securities. It may, for instance, acquire stock of the employer from various sources, including the company. For a variety of reasons, however, registration usually would not be necessary with respect to the acquisition transaction.

A plan also may offer or sell securities of the employer or other entities held in its portfolio. If the plan is considered to be an affiliate ⁹ of the employer, sales by it of the employers securities would be subject to the registration provisions of the 1933 Act in the same manner as if the employer were engaging in the transaction. Sales by the plan of non-employer securities, however, usually would not have to be registered because of the availability of the exemption provided by Section 4(1) of the Act for transactions not involving issuers, underwriters or dealers.

The distribution, or actual delivery, of employer stock by a plan to individual participants would not be subject to registration, although any offers or sales of such stock to participants prior to actual delivery would have to be registered, unless an exemption were available.

5. Resales by Plan Participants

Employees who receive securities under a plan may freely resell such securities without restriction if the securities have been registered and they are not affiliates of the issuer. If the securities have not been registered, they generally must either be registered or sold in reliance upon some exemption, such as that provided by Section 4(1) of the 1933 Act. An exception to this general rule occurs when non-affiliates receive unregistered securities under a plan which satisfies certain conditions.

6. Methods of Registration

If the securities to be issued under a plan must be registered, Form S-8 17CFR 239.16b would be the appropriate form for this purpose if the employer were able to satisfy the requirements for its use. If Form S-8 cannot be used, the issuer would then consider other forms, such as S-1 17 CFR 239.11 or S-18 17 CFR 239.28.

Affiliates who receive securities under a plan and wish to have them registered for resale may utilize a Form S-16 17 CFR 239.27 reoffer prospectus for this purpose if the securities were originally issued pursuant to a Form S-8 filing. If the securities were not so issued, Form S-1 may be utilized, assuming the issuer is agreeable to a filing on that form, or the securities may be resold pursuant to Rule 144 17 CFR 240.144 under the 1933 Act.

Table of Contents

I. GENERAL STRUCTURE OF THE ACT

According to its preamble, the 1933 Act is intended "to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof..." Sections 5 and 17 of the Act are the principal provisions used to implement the Acts disclosure and antifraud purposes. Section 5 provides that every offer or sale of a security made through the use of the mails or interstate commerce must be accomplished through the use of a registration statement ¹⁰ meeting the Acts disclosure requirements, ¹¹ unless one of the several exemptions from registration set out in Sections 3 and 4 of the Act is available. ¹² Section 17 of the Act prohibits the use of fraud or misrepresentation in the offer or sale of a security. ¹³

To promote compliance with the registration and antifraud requirements, the Act provides for both civil liabilities and potential criminal penalties in the event violations occur. The civil liabilities are specified in Sections 11 and 12 and basically give the buyer the right to rescind the sale and recover the net cost of the security, the criminal penalties are prescribed in Section 24 and consist of a fine of up to $10,000 or imprisonment for up to five years, or both, if the Act is willfully violated. In addition, Section 20(b) of the Act authorizes the Commission to bring injunctive actions whenever it appears a person is engaged, or is about to engage, in violations of the Act.

II. THE TERM "SECURITY"

In order for the registration and antifraud provisions of the 1933 Act to be applicable, there must be an offer or sale of a security. The term "security" is defined in Section 2(1) of the Act ¹⁴ and includes, among other things, stocks, bonds and investment contracts. The Commission believes that two types of securities, generally in the form of investment contracts, may be issued in connection with employee benefit plans: (1) interests of participants in their respective plans, and (2) interests of plans in collective investment media, such as bank collective trust funds and insurance company separate accounts, in which such plans invest their assets. ¹⁵ Each of these interests will be discussed in detail in the sections which follow.

A. Interests of Participants in Plans

An investment contract involves "an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." ¹⁶ The Commission has traditionally applied this test, which is often called the "Howeytest" because it was first articulated in the case of S.E.C. v. W.J. Howey Co., ¹⁷ to the interest of employees in pension, profit-sharing and similar plans. In this regard, it has in the past determined that such interests are investment contracts because the plans are in essence investment vehicles designed to produce profits in the form of retirement or other benefits for the employees through the effort of plan managers. ¹⁸

Although the Commission has believed that employee interests in pension and profit-sharing plans generally are securities, it has required such interests to be registered only where a plan is both voluntary ¹⁹ and contributory ²⁰ and invests in securities of the employer an amount greater than that paid into the plan by the employer. ²¹ The basis for this administrative practice, which was codified by Congress in 1970 in Section 3(a)(2) of the 1933 Act, ²² is a follows:

(1) Registration serves no purpose where a plan is involuntary, since a participant is not permitted to make an investment decision in such a circumstance; and

(2) The costs of registration are a significant burden to an employer and should be imposed only where the employer has a direct financial interest in soliciting voluntary employee contributions, as in the case where such contributions will be used to purchase the employers securities.

The Commissions belief that the registration provisions of the 1933 Act should be applicable to voluntary, contributory plans which involve the purchase by employees of employer stock is supported by the legislative history of the Act. In 1934 Congress considered and rejected a proposed amendment to the Act that would have exempted employee stock investment and stock option plans from the Acts registration provision. The amendment, which had been passed by the Senate but was eliminated in conference, was not adopted "on the ground that the participants in employees stock investment plans may be in as great need of the protections afforded by the availability of information concerning the issuer for which they work as are most members of the public. ²³

The decision by the Supreme Court in the Daniel case, in which the Court held that the interests of employees in involuntary, noncontributory pension plans are not securities, has raised questions concerning the applicability of the 1933 Act to other types of employee benefit plans not covered by the decision. ²⁴ In the interest of providing guidance to the public and because of uncertainty with respect to the implications of Daniel, ²⁵ the staff believes it is appropriate at this time to set forth its own views regarding the application of the 1933 Act to employee benefit plans. Those views are expressed according to the major categories into which pension and profit-sharing plans may fall (i.e., defined benefit and defined contribution, corporate, Keogh, IRA, and miscellaneous plans).

1. Defined Benefit and Defined Contribution Plans

Employee benefit plans are of an infinite variety. All such plans, however, can be reduced to two broad categories: defined benefit plans and defined contributions plans.

A defined benefit plan ²⁶ pays fixed or determinable benefits. ²⁷ The benefits ordinarily are described in a formula which specifies the amount payable in monthly or annual installments to participants who retire at a certain age. ²⁸ As long as the plan and the employer(s) contributing to the plan remain solvent, and the plan continues to be operated, vested participants will receive the benefits specified. In the event the investment results of the plan do not meet expectations, the employer(s) usually will be required, on the basis of actuarial computations, to make additional contributions to fund the promised benefits. ²⁹ Conversely, if plan earnings are better than anticipated, the employer(s) may be permitted to make contributions that are less than the projected amounts.

A defined contribution plan ³⁰ does not pay any fixed or determinable benefits. Instead, benefits will vary, depending on the amount of plan contributions, the investment success of the plan, and allocations made of benefits forfeited by non-vested participants who terminate employment. Thus, the amount of benefits is based, in part, on the earning generated by the plan.

Both defined benefit and defined contribution plans can provide for employee contributions. In addition, defined contribution plans maintain individual accounts for all participating employees. ³¹ These accounts reflect each participants share in the underlying trust assets and are adjusted annually to take into account plan contributions, earnings and forfeitures. In contrast, defined benefit plans ordinarily do not maintain individual accounts, except to the extent necessary under the Internal Revenue Code to record benefits attributable to voluntary contributions by employees. ³²

The Daniel decision dealt with an involuntary, noncontributory plan which was also a defined benefit plan. The Supreme Courts opinion in that case, however, did not rest on the fact that the plan was a defined benefit one. Instead, the Court based its decision on the involuntary nature of the plan (unlike all prior cases of the Court involving securities, the employees did not have a choice whether to participate) ³³ and the fact that the plan did not provide for direct, identifiable contributions by employees (the employees labor could be considered a contribution "only in the most abstract sense"). ³⁴ This view is supported both by the Courts statement of the issue presented by the case ("whether a noncontributory, compulsory pension plan constitutes a security'") ³⁵ and by its later statement that "We hold the Securities Acts do not apply to a noncontributory, compulsory pension plan." ³⁶ In neither instance did the Court refer to the defined benefit nature of the plan.

In light of the foregoing, the staff is of the view that the defined benefit or defined contribution nature of a plan is not dispositive in determining whether a security is present. Other factors, such as whether the plan is voluntary or involuntary, and contributory or noncontributory, must be taken into consideration, as indicated in the analysis of the major types of plans which follows. ³⁷

2. Corporate Plans

Perhaps the largest single category of plans in terms of the number of participants are so-called "corporate" plans. Such plans may be defined benefit or defined contribution in nature, but all share the common characteristic of being established by corporations. Common types of corporate plans are pension, profit-sharing, bonus, thrift, savings and similar plans. Almost all such plans are established pursuant to Section 401 of the Internal Revenue Code. ³⁸

To determine whether or not a participants interest in a corporate plan is a security, the Court in Daniel indicated that it is necessary to demonstrate that a participant "chose" to give up "specific" consideration in return for a "separable financial interest" that had "substantially the characteristics of a security." ³⁹ A participation interest possesses the essential characteristics of a security when the elements of an investment contract are present. ⁴⁰

The foregoing suggests that some of the key factors to be considered in connection with the "security" question are whether a plan is voluntary or involuntary, and whether it is contributory or noncontributory. There are four possible combinations in which these elements can appear, each of which is separately discussed in the sections which follow.

a. Involuntary, Noncontributory Plans

The Court in Daniel held that "...the Securities Acts do not apply to a noncontributory, compulsory pension plan." ⁴¹ This holding clearly precludes a finding that interests in such plans are securities. Accordingly, the 1933 Act is not applicable to such interests.

b. Involuntary, Contributory Plans

Where a plan requires direct contributions by employees, it would be possible to take the position that there is an "investment" (in the form of employee contributions) "in a common enterprise" (the plan) "with an expectation of profits" (the excess of benefits over contributions) "from the efforts of others" (the plan managers). In the Daniel decision, however, the Supreme Court based its decision that no investment contract was present at least in part on the involuntary nature of the plan involved in that case. The Court noted in this regard that in its other decisions involving investment contracts the person found to have been an investor "chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security." ⁴²

After consideration of the foregoing, the staff believes it is appropriate from an administrative standpoint for it to take the position that the interests of employees in involuntary, contributory plans are not securities ⁴³ and that the registration and antifraud provisions of the 1933 Act do not apply to them.

c. Voluntary, Noncontributory Plans

Plans in which employees may voluntarily participate without making any personal contributions generally arise in rather limited circumstances. ⁴⁴ The staff traditionally has not required participation interests in such plans to be registered. ⁴⁵ In its view, no practical purpose is served by requiring registration of such interests, since in almost all instances employees would choose to participate, due to the fact that they would receive benefits without incurring any out-of-pocket expenses. ⁴⁶

Whether interests in voluntary, noncontributory plans are securities is a matter that has not been addressed by a court. As previously indicated, the "security" question depends to some extent on whether a plan is voluntary. But the mere presence of a voluntary feature in a plan would not, by itself, necessarily indicate the presence of a security, since the other elements of an investment contract also must be present.

In most instances, the fact that a plan is noncontributory would mean that the "investment of money" aspect of the Howey test is not met. ⁴⁷ Even where a noncontributory plan meets the "investment" requirement, it may not satisfy the "profit" element of the Howey test. The Court in Daniel seemed to dismiss the earnings generated by the plan managers as being too insignificant in relation to employer contributions to qualify as "profits" in the investment contract sense. ⁴⁸ Moreover, the Court seemed to believe that any participation by employees in the earnings of the plan at issue in that case depended primarily on the personal efforts of the employees to meet the vesting requirements, rather than on the plan actually generating such earnings.

Although a commentator has suggested that a security may be present in some voluntary, noncontributory plans, ⁴⁹ the staff, as a matter of administrative practice, will assume that such plans do not involve securities. Accordingly, the registration and antifraud provisions of the 1933 Act are not considered by the staff to be applicable to such plans.

d. Voluntary, Contributory Plans

Since 1941, the Commission and its staff have adhered to the position that interests in voluntary, contributory pension and profit-sharing plans are securities. ⁵⁰ The articulated basis for this view is that such interests constitute investment contracts, although it also has been suggested that they may be "certificates of interest or participation in a profit-sharing agreement" as well. ⁵¹

The Commission recently confirmed its view in the testimony of its Chairman before the Senate Committee on Human Resources on the antifraud provisions of the proposed ERISA Improvements Act of 1979 (S. 209), ⁵² wherein it was noted that

...An employee who is given a choice whether to participate in a voluntary pension plan, and decides to contribute a portion of his earnings or savings to such plan, has clearly made an investment decision, particularly when his contribution is invested in securities issued by his employer. Employees making such decisions should continue to be afforded the protections of the antifraud provisions of the federal securities laws.

The Commissions view that the interests of employees in voluntary, contributory plans are investment contracts appears to be supported by the reasoning used in the Daniel decision. Certainly, where a plan is voluntary, the requirement that employees be able to choose whether or not to invest has been met. And the other elements of an investment contract would also appear to be present where a plan is contributory, regardless of whether the plan is defined contribution or defined benefit in nature, as the following analysis indicates.

(1) Investment of money. The payment of cash or its equivalent by an employee to a contributory plan clearly satisfies the "investment" requirement in that the consideration paid is "specific, tangible and definable." ⁵³

(2) In a common enterprise. The opinion in Daniel suggests that a plan will satisfy the common enterprise requirement where the interests of employees therein are "separable" and possess "substantially the characteristics of a security."

With regard to the separability aspect, it appears the Court believed that where there is an investment contract, it is possible to segregate the non-investment (or employment) portion of a persons total compensation package from the investment (or pension) portion. In contributory plans, the amount set aside for investment purposes can be readily identified by examining the contributions made by each individual participant. A record of such contributions is always available in defined contribution plans because such plans maintain individual accounts for participants. And it also should be present in defined benefit plans, by virtue of the requirement that, in order to qualify for favorable tax treatment, ⁵⁴ such plans must return to non-vested employees who cease being participants accrued benefits based upon the employees contributions. Thus, in both defined contribution and defined benefit plans, there is, in effect, a separate account maintained for each participant to the extent of such persons contributions to the plan. Accordingly, the investment aspects of an employees compensation package are segregated under both types of plans.

(3) With an expectation of profits. An employee who voluntarily contributes his own funds to a pension or profit-sharing plan can expect that in return for his contributions the plan will generate earnings through the efforts of the plan managers that will result in his receiving pension or similar benefits that will exceed his total contributions. In terms of economic realities, the excess of benefits over contributions, to the extent they are dependent on earnings by the plan, may be deemed a profit which the employee fully expects to receive as a result of his payments to the plan. By deciding to participate in the plan voluntarily, the employee implicitly has made an investment decision to the effect that his contributions will achieve investment results that will be equal to or superior to those he could obtain from investing his funds elsewhere. Accordingly, from the employees standpoint, there would appear to be an "expectation of profits" in the investment contract sense.

The foregoing analysis clearly appears to be valid when applied to a defined contribution plan, for the level of benefits under such a plan is directly related to the plans investment success. Further analysis, however, is necessary for defined benefit plans. ⁵⁵

In Daniel, the Court indicated there was no "expectation of profits" with respect to the defined benefit plan at issue in that case because (1) the plan did not depend substantially on earnings to meet its benefit obligations, since it could rely on increased employer contributions to cover any shortfalls in earnings, and (2) the vesting requirements for the plan were so substantial that an employees participation in the plans earnings depended more on his own efforts to meet the vesting requirements than it did on the plan actually generating the earnings. ⁵⁶ The Courts statements can be interpreted to suggest that unless a defined benefit plan has a substantial dependency on earnings, as well as vesting requirements that are not excessively difficult to satisfy, there may be no expectation of profits in the investment contract sense.

Several points should be kept in mind with respect to the Courts statements. First, they were made in the context of an involuntary, noncontributory defined benefit plan, in which employees neither invested any funds of their own nor had any investment choice to make. The situation is materially different in voluntary, contributory plans, where employees clearly make investment decisions by deciding to invest their funds in such plans rather than in other investment media. An employee who participates in such a plan implicitly does so because he expects the plan to generate earnings that will be sufficient to provide him with a return on his investment, in the form of certain promised benefits, that will be equal to or superior to other investment alternatives available to him.

Second, many, if not most, defined benefit plans substantially depend on earnings to pay the benefits promised by them. ⁵⁷ Quite often, in the case of multi-employer plans, a shortfall in earnings (and thus a shortfall in assets to pay benefits) results not in increased employer contributions, as the Court suggested is usually the case, ⁵⁸ but in a revision downward of the level of benefits to be paid. ⁵⁹ Or, in some instances, the plan itself may be terminated and benefits may be paid only to the extent that the Pension Benefit Guaranty Corporation ⁶⁰ is able to do so within its prescribed limitations. The fact that a plan may reduce its level of benefits or terminate altogether in the event earnings are insufficient to pay benefits underscores the dependency which many plans have on such earnings.

Third, vesting requirements under ERISA (which was not applicable to Daniel) are much less strict than the requirement of 20 years continuous service with which Daniel had to comply. ⁶¹ Because the ERISA requirements are substantially less difficult to satisfy than the vesting provision in Daniel, the staff takes the position that the ERISA requirements would not be a barrier to finding an investment contract present.

On the basis of all of the foregoing, the staff is of the view that where a plan is both voluntary and contributory, regardless of whether it is defined contribution or defined benefit in nature, a participant generally would have an expectation of profits from it in the investment contract sense.

(4) From the efforts of others. Any earnings generated by a plan would, of course, result from the efforts of the plan managers. Thus, the requirement of an investment contract that there be reliance on the efforts of others to produce profits would seem to be satisfied in the context of a voluntary, contributory plan.

* * * * *

As a result of the foregoing analysis, the staff believes that the interests of employees in voluntary, contributory, corporate pension and profit-sharing plans are securities within the meaning of Section 2(1) of the 1933 Act. Moreover, as indicated in Part III of this release, such securities are deemed to be offered and sold to employees within the meaning of Section 2(3) of the Act. Accordingly, they are subject to both the registration and antifraud requirements of the Act. But, as indicated in the discussion of Section 3(a)(2) in Part IV of the release, such securities generally would be required to be registered only where the plan invests in employer securities an amount greater than that contributed to the plan by the employer.

3. Keogh Plans

Keogh plans (also known as "H.R. 10 plans") are tax-deferred retirement plans established by self-employed individuals ⁶² for the benefit of themselves and their employees. They were authorized by Congress in 1962 ⁶³ to permit such individuals to share some of the favorable tax benefits ⁶⁴ which prior thereto were available only in connection with certain corporate plans.

There are two types of securities that may be issued in connection with Keogh plans: (1) interests in collective funding vehicles arising from investments made by the plans, and (2) interests of employee participants in the plan themselves.

With respect to the interests of Keogh plans in collective funding vehicles, these clearly are securities, often in the form of investment contracts. There is an investment of money by the plan in a common enterprise (the funding vehicle) with the expectation that the managers of the funding vehicle will generate earnings on that investment.

Congress gave implicit recognition to the fact that interests in collective funding vehicles maintained for Keogh plans are securities when it amended Section 3(a)(2) of the 1933 Act in 1970. In both the Senate and House reports relating to the 1970 Amendments, it was indicated that such interests were not being exempted under Section 3(a)(2) "because of their fairly complex nature as an equity investment and because of the likelihood that they could be sold to self-employed persons, unsophisticated in the securities field." ⁶⁵ Clearly, the reference to such interests in the reports (and in Section 3(a)(2) as well) was based on the belief that they are securities. As explained in Part IV of this release, however, the Commission possesses authority under Section 3(a)(2) to exempt interests or participations issued in connection with Keogh plans from the registration requirements of the 1933 Act.

The interests of covered employees in Keogh plans also appear to be securities. Although many such plans involve only one individual, a significant number cover more than one person (as would occur, for example, where a law partnership institutes a plan in which all employees can participate). Using the analysis already described with respect to corporate plans, the staff is of the view that voluntary contributions by participants to such plans would create securities in the form of investment contracts.

Although the interests of participants in voluntary, contributory Keogh plans are deemed to be securities, the staff has not required the separate registration of such interests. Most plans can rely on an exemption from registration for the offer and sale of employee interests. ⁶⁶ For those relatively few plans that do not have a readily available exemption, the staff, as a matter of administrative discretion, will not require such interests to be registered. The antifraud provisions of the 1933 Act, however, would continue to apply to the offer and sale of such interests to employees.

4. IRAs and Simplified Employee Pension Plans

IRAs (or "Individual Retirement Accounts") are a relatively new form of tax deductible retirement savings created by ERISA in 1974. They are intended to allow employees who are not covered under a corporate or Keogh plan to obtain tax benefits similar to those provided under such plans. ⁶⁷

Although IRAs commonly are established by individuals, they also may be sponsored by employers and unions for their employees and members, respectively. In an effort to encourage the establishment of employer-sponsored IRAs, the Revenue Act of 1978 ⁶⁸ introduced the concept of "Simplified Employee Pensions". ⁶⁹ Simplified pensions have been characterized as plans with a minimum of paper work and red tape, ⁷⁰ and, in this context, the Revenue Act provides for simplified employer reports to the IRS and to employees. ⁷¹ For the purposes of this discussion, IRAs and Simplified Employee Pensions will be considered the same.

The applicability of the federal securities laws to IRAs was specifically considered by Congress at the time ERISA was pending congressional approval. In that regard, the conference report on ERISA stated:

The conferees intend that this legislation with respect to individual retirement accounts is not to limit in any way the application of the federal securities laws to individual retirement accounts or the application to them of the laws relating to common trusts or investment funds maintained by any institution. As a result, the Securities and Exchange Commission will have the authority to act on the issues arising with respect to individual retirement accounts independently of this legislation. ⁷²

The status of IRAs under the securities laws was further commented upon by the Senate Subcommittee on Securities of the Committee on Banking, Housing and Urban Affairs in a study conducted in 1975. The Subcommittee expressed the belief that "IRAs and collective investment funds for IRAs clearly are not exempt from registration under...the Securities Act of 1933." ⁷³ While the question of whether or not an exemption would be available would depend on the facts and circumstances of each case, it is clear that IRAs which involve the placement of an individuals funds in the hands of another person with reliance on that person to produce profits are securities which are subject to the registration and antifraud requirements of the 1933 Act.

Many IRAs involve a direct investment by an individual in an exempt security (such as one issued by a bank) ⁷⁴ or in a medium that is not considered to be a security (such as a traditional fixed annuity). In neither instance would registration be necessary, and only in the former would the antifraud provisions be applicable.

Beyond the foregoing are two other situations in which the registration of IRAs is considered unnecessary. The first of these involves IRAs which are funded solely by specific mutual fund shares that are registered under the 1933 Act. The staff has stated that, so long as these shares are offered pursuant to current prospectuses which contain appropriate disclosure of the IRAs to which they may be offered, no separate registration of the IRAs is necessary. ⁷⁵

The second situation involves so-called master trust or prototype plan arrangements ⁷⁶ which are used to market IRAs and Keogh plans. Where these types of trusts or arrangements exist, the sponsoring organization usually limits its own involvement to establishing the plan and/or setting up a separate account for each individual participant. The commingling of account assets is generally prohibited and, for the most part, complete investment discretion is vested in each account holder. Participants usually are afforded several investment alternatives, such as savings accounts or other bank instruments, insurance products or the like. The sponsor generally limits its role to that of a custodian and does not render any investment advice.

An argument often made is that interests in these types of plans do not constitute securities within the meaning of Section 2(1). The theory underlying this view is that each individual relies on his own efforts to earn a profit in his account, rather than on the efforts of others, and therefore one of the key elements of an investment contract is missing. ⁷⁷ Although in practice this theory does not apply where an IRA or Keogh plan is funded through the use of a pooled investment medium, it has more validity where the sponsor acts as a mere custodian for a participants separate account (the assets of which are not commingled) and the participant retains complete investment power or control over his account. Recognizing that the existence of an investment contract in such circumstances may be open to question, the staff generally has taken a no-action position regarding the registration of such interest. ⁷⁸

5. Miscellaneous Plans

In addition to the plans already mentioned, there are four types of employee benefit plans that merit a separate discussion, either because they involve issues of special interest or because they are somewhat unique.

a. Stock Purchase Plans

Stock purchase plans permit employees to purchase stock of their employer through payroll deductions or otherwise. ⁷⁹ The stock may be acquired either directly from the employer or in open market purchases effected by the plan. Clearly, the stock is a security, and where it is supplied by the employer or an affiliate for purchase by employees under the plan registration is necessary absent an exemption. Where the stock is obtained through open market purchases, registration may not be required, as indicated in Part III of this release.

The only significant question presented by stock purchase plans under Section 2(1) of the 1933 Act is whether the interests of participants therein are securities. In Release No. 33-4790 (July 13, 1965) 30 FR 9059, the Commission indicated that employee interests in stock purchase plans which acquire the employers stock in the open market might be securities where there are substantial differences between the manner of acquiring stock under the plan and the manner of acquiring it in ordinary brokerage transactions. Some of the variations which might be considered substantial, according to the release, are (1) limitations on the rights of employees to withdraw from the plan or to withdraw securities held in custody, (2) the granting of management discretion to someone other than the individual participants, (3) the accumulation of sums by the plan manager for material periods of time before investment, (4) the payment of special fees or charges, such as a front-end load, and (5) the diminution of the employees rights or privileges as a shareholder.

The staff continues to believe that the presence of some or all of the foregoing factors in a stock purchase plan may create a separate security in the form of a participation interest. The reason is that such factors tend to place the employee in a position where he is relying on the plan managers to maintain or protect his investment. Accordingly, where such participation interests are deemed to be securities, they would be subject to the registration and antifraud provisions of the 1933 Act upon their offer or sale.

b. Bond Purchase Plans

Bond purchase plans are authorized under Section 405 of the Internal Revenue Code. They permit employers to purchase a special series of United States bonds for the benefit of employees or their beneficiaries. Although the bonds are securities, they are exempt from the registration requirements of the 1933 Act by virtue of Section 3(a)(2) thereof. ⁸⁰ Similarly, the interests of employees in such plans are not required by the staff to be registered, because of the nature of the bonds underlying them and the congressional policy to encourage the establishment of these plans.

c. Annuity Plans

Section 403(b) of the Internal Revenue Code permits public school systems and charitable organizations to enter into deferred compensation arrangements with their employees that are funded through the purchase of annuity contracts ⁸¹ or mutual fund shares for the covered employees. Variable annuity contracts are securities ⁸² as are mutual fund shares, and both are therefore subject to the registration and antifraud provisions of the 1933 Act. Whether the interests of employees in these plans also are securities in all instances is problematical.

Participation interests in Section 403(b) plans that are both voluntary and contributory on the part of participating employees would appear to be securities, for the reasons already discussed under the section entitled "Voluntary, Contributory Plans." As a matter of administrative practice, however, the staff does not require such interests to be registered. The antifraud provisions, however, would be applicable to the offer and sale of such interests

d. Stock Bonus Plans

Stock bonus plans are plans under which an employer awards shares of its stock to covered employees at no direct cost to the employees. These plans can take various forms, such as Employee Stock Ownership Plans ("ESOPs"), Tax Reduction Act Ownership Plans ("TRASOPs"), ⁸³ stock appreciation right plans ("SARs"), and other variations as well.

While the stock awarded to employees under the above types of plans is a security, the staff generally has not required it to be registered. The basis for this position generally has been that there is no "sale" in the 1933 Act sense to employees, since such persons do not individually bargain to contribute cash or other tangible or definable consideration to such plans. ⁸⁴ It also is justified by the fact that registration would serve little purpose in the context of a bonus plan, since employees in almost all instances would decide to participate if given the opportunity. Similarly, the interests of employees in bonus plans have not been subjected to registration.

B. Interests of plans in Collective Investment Media

The contributions made to employee benefit plans frequently are invested in pools of assets managed by other entities. These pools of assets may take the form, for example, of bank collective trust funds or insurance company separate accounts. In the staffs view, the participation interests of plans in these collective investment vehicles are securities, generally in the form of investment contracts. ⁸⁵ That is, they involve an investment of money (the assets of the investing plan) in a common enterprise (the fund) with an expectation of profits (the earnings generated by the fund) from the efforts of others (the fund managers). In effect, plans which invest in such funds choose "to give up a specific consideration in return for a separable financial interest with the characteristics of a security." ⁸⁶ Support for the fact that these interests are securities can be found in Section 3(a)(2) of the 1933 Act, which provides a specific exemption from registration for them if certain specified conditions are met. Clearly, there would be no need to provide such an exemption unless the interests were securities.

The real issue, then, with respect to interests in collective investment media is not whether they are securities, but whether they are exempt from registration by virtue of Section 3(a)(2) or some other exemption. The general exemptions that might be available are discussed separately in Part IV of this release.

III. THE TERM "SALE" AND OTHER FACTORS AFFECTING REGISTRATION

It already has been stated that the application of the registration and antifraud provisions of the 1933 Act depends on there being a "sale" or an "offer" of a security. Section 2(3) of the 1933 Act defines these terms as follows:

The term "sale" or "sell" shall include every contract of sale or disposition of a securities or interest in a security, for value. The term "offer to sell," "offer for sale," or "offer" shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value...

The key elements in the foregoing definition from the standpoint of employee benefit plans are the words "value" and "solicitation of an offer to buy," for without one or both the 1933 Act is inapplicable. Each of these terms is discussed in the following sections.

A. What Constitutes "Value"

While the term "value" is not defined in the 1933 Act, the staff generally has taken the position that it includes all ordinary forms of consideration, such as cash, property, services, or the surrender of a legal right. There are two specific situations involving the term "value" that warrant a separate discussion. These are dealt with in the sections which follow.

1. Conversions of Existing Plans

For various reasons, a company may decide to convert its pension or profit-sharing plan into an ESOP or other type of plan. When such a conversion occurs, all of the assets of the old plan are transferred to a trust established under the new plan. ⁸⁷ In terms of the application of the 1933 Act, the question arises whether the exchange of interests in the former plan for interests in the new plan constitutes "value" within the meaning of Section 2(3).

The staffs response to this question is that although "value" in the traditional sense may be present in the exchange, no useful purpose is served by applying the Acts registration provisions where employees have no investment decision to make with respect to the proposed conversion. ⁸⁸ Accordingly, the staff has indicated that it will not recommend any enforcement action concerning registration if the conversion will occur without giving employees any choice in the matter ⁸⁹ and, likewise, has declined to issue a no-action letter where the situation is otherwise. ⁹⁰ Because the staffs position on the conversion of existing plans is clear-cut, it will decline to respond to any future requests on the subject.

2. Investment Elections Under Noncontributory Plans

The application of Section 2(3) also becomes an issue in the context of noncontributory plans which provide employees with the opportunity to make various investment elections. For example, a plan may permit an employee to invest his share of the employers contribution in various investment media (including company stock), ⁹¹ or to accept cash and defer a portion of the employers award in the form of company stock, ⁹² or to elect cash or stock upon a distribution by the plan. ⁹³ Because of the nature of these elections, which appear to involve investment decisions, the staff for some time declined to take a no-action position with respect to them. ⁹⁴

As a result of the Daniel decision, which dealt with a noncontributory plan, the staff has reconsidered its position. It now is of the view that registration should not be required with respect to investment elections in noncontributory plans.

3. The Bifurcated Sale Concept

In its brief in the Daniel case, the Commission took the position that it was possible for some employee benefit plan transactions to involve a "sale" for purposes of the antifraud, but not the registration, provisions of the 1933 Act. The basis for this view was the belief that the phrase "unless the context otherwise requires," which precedes the definitional portion of the Act, allows in some cases a different construction of the term "sale" in the context of the Acts registration provisions than it does in the context of the antifraud provisions. ⁹⁵

The Supreme Court in Daniel did not specifically address the merits of the Commissions "bifurcated sale" concept. ⁹⁶ The staff, however, has revisited this issue and concluded that, for purposes of analyzing the impact of the 1933 Act on various employee benefit plans, it serves no practical purpose to apply the term "sale" in a bifurcated manner. Accordingly, the term "sale," when applied to employee benefit plans in the future, will be considered to have the same meaning for purposes of both the registration and antifraud provisions of the Act. ⁹⁷

B. Solicitations of Offers to Buy

The registration and antifraud provisions of the 1933 Act apply not only where there has been a disposition of a security for value, but also where there has been an offer to sell a security or a solicitation of an offer to buy the same for value. Insofar as employee benefit plans are concerned, the issue of whether the employer has made a solicitation of an offer to buy its securities arises most frequently in connection with employee stock purchase plans.

1. Stock Purchase Plans

As previously noted in Part II, a stock purchase plan allows an employee to purchase stock of the employer through payroll deductions or otherwise. The stock may be acquired directly from the employer, in which case registration would be necessary unless an exemption were available. Alternatively, the stock may be acquired in the open market through various types of arrangements involving payroll deductions.

The Commissions view as to whether registration by the employer will be necessary with respect to open market purchases depends on the employers degree of participation in the plan. ⁹⁸ If the employers involvement is fairly substantial, it may be deemed to be soliciting its employees to buy its securities, and registration generally would be necessary in such circumstances. On the other hand, if the employers participation is limited to ministerial-type functions so that purchases of stock under the plan are not significantly different than purchases outside the plan in ordinary brokerage transactions, registration would not be required.

In Release No. 33-4790, the Commission specified the circumstances under which an employers involvement in a stock purchase plan would be considered sufficiently limited so as not to raise a registration question. According to the release, the employer must not solicit employees to participate in the plan (only the broker or other agent of the employees may do so). It may, however, perform the following functions:

(1) Announce the existence of the plan;

(2) Make payroll deductions for the plan at the request of employees;

(3) Make available to the broker or other agent the names and addresses of employees in order to facilitate communications regarding the plan;

(4) Address communications to be sent to employees by the broker or other agent;

(5) Include the brokers communications with other announcements by the employer;

(6) Permit an initial meeting of employees regarding the plan to be held at the employers premises; and

(7) Limit its expenditures to those involved in making payroll deductions and paying the reasonable fees and charges of the broker or other agent for commissions and bookkeeping and custodial expenses.

In addition to the general caveat in Release No. 33-4790 that any deviation from the foregoing standards could necessitate registration, the staff has stated that the following requirements should be complied with in order to avoid any registration difficulties:

(1) The plan should be limited solely to employees ⁹⁹ or to persons, such as franchisees ¹⁰⁰ and independent sales representatives, ¹⁰¹ who have essentially the same degree of access to information regarding the company as do its employees; and

(2) The employer must not make contributions to the plan to defray the cost of the stock ¹⁰² or lend money to employees for the purpose of facilitating its purchase. ¹⁰³ This requirement, however, is not violated where an employee elects to supplement his personal contributions to the plan with his portion or profits distributable from the employers profit-sharing plan. ¹⁰⁴

2. TRASOPs

TRASOPs are a special form of Employee Stock Ownership Plan created by the Tax Reduction Act of 1975. ¹⁰⁵ From the employees standpoint, they are a combined stock bonus and stock purchase plan. That is, employees can receive shares of the employer at no cost to them under such a plan, and they also may be given the opportunity to purchase additional shares of the employer at half the prevailing market price.

Employers derive certain tax benefits by sponsoring TRASOPs. They can, for instance, receive up to an additional one percent investment tax credit for amounts contributed in cash or shares to the plan. In addition, they can become entitled to an extra one-half percent investment tax credit to the extent they match employee contributions for the purchase of company stock under the plan.

Generally, as pointed out in Release 33-4790, it has been the Commissions position that where an employers involvement in a stock purchase plan (which a TRASOP partially can be) extends beyond the ministerial functions outlined in the preceding section, it is deemed to be soliciting an offer to buy the securities offered through the plan. In a contributory TRASOP, this customary analysis yields the result that the shares purchased by employees under such a plan must be registered. This is based on the theory that the employers payment of half the price of stock purchased by the employees amounts to a subsidy that provides such a strong incentive to acquire the employers stock that it is deemed to be a "solicitation of an offer to buy" within the meaning of Section 2(3).

There are, however, persuasive reasons for taking the position that the registration of shares acquired in the open market under TRASOPs is neither necessary nor appropriate. First, no practical purpose appears to be served by requiring registration solely because the employer is paying half the purchase price. To hold otherwise creates the anomalous situation whereby a company is not required to provide a prospectus to employees who pay the full market price for stock under a plan which complies with the requirements of Release 33-4790, but must furnish a prospectus to employees who pay only half the market price under a TRASOP that is essentially identical to the 4790 plan.

Second, the party ultimately subsidizing half of the purchase price of shares acquired under a TRASOP is not the employer but the federal government. Through the device of an investment tax credit conditioned upon the employers participation in a TRASOP, the employers payment of half the cost of stock purchased by employees is in effect reimbursed by the U.S. Treasury. The congressional policy underlying this tax credit to encourage the purchase of the employers stock at half the market price is a further reason for not requiring registration.

On the basis of the foregoing reasons, the staff henceforth will take the position that shares acquired in the open market by employees under a TRASOP which otherwise satisfies the requirements of Release 33-4790 need not be registered. The purchase of such shares would, of course, continue to be subject to the antifraud provisions of the 1933 and 1934 Acts.

III. EXEMPTIONS FROM REGISTRATION

If an issuer determines that an offer or sale of securities will occur in connection with an employee benefit plan, it must either register the securities or rely upon one of the several exemptions from registration contained in the 1933 Act.

A. Generally Available Exemptions

Sections 3 and 4 of the Act set forth the various exemptions from registration. ¹⁰⁶ Those most likely to be available for securities transactions involving employee benefit plans are set forth below.

(1) Section 3(a)(2). This is the only exemption in the 1933 Act which specifically refers to employee benefit plans. Because of its significance, it will be discussed in detail later in this section.

(2) Section 4(2). This provision exempts transactions by an issuer not involving any public offering. Known as the "private offering" exemption, it generally is available if an offering is made to a limited number of persons who are sophisticated in business matters and have access to the types of information that could be obtained through the registration process. In connection with the exemption provided by Section 4(2), the Commission has adopted Rule 146 17 CFR 230.146, which provides certainty, in the form of a safe harbor, that the exemption is available if all of the conditions of the rule are met.

(3) Section 3(a)(11). This section, which is commonly referred to as the "intrastate offering" exemption, exempts offerings that are confined to residents of the state in which the issuer is organized and conducts the bulk of its business. ¹⁰⁷ Rule 147 17 CFR 230.147 under the Act provides a safe harbor for reliance upon the intrastate offering exemption if all of its conditions are satisfied.

(4) Section 3(b). Under this provision, the Commission has the authority to exempt certain offerings of securities if it finds that neither the public interest nor the protection of investors warrants registration "by reason of the small amount involved or the limited character of the public offering. Pursuant to the authority provided by Section 3(b), the Commission has adopted Regulation A 17 CFR 230.251 to 230.264, Rule 240 17 CFR 230.240, and Rule 242 17 CFR 230.242, all of which may be utilized in connection with securities offered pursuant to employee benefit plans. Regulation A can be relied upon for offerings of up to $1.5 million during a 12 month period. Rule 240 is available for offerings of up to $100,000 during a similar period. Rule 242 may be used for offerings of up to $2 million of securities in a single issue if certain conditions are met.

B. Section 3(a)(2)

Congress amended Section 3(a)(2) in 1970 ¹⁰⁸ to exempt securities issued in connection with certain employee benefit plans. The relevant provisions of Section 3(a)(2) read as follows:

Section 3. (a) Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities:

* * *

(2) * * * any interest or participation in any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian; * * * or any interest or participation in a single or collective trust fund maintained by a bank or in a separate account maintained by an insurance company which interest or participation is issued in connection with (A) a stock bonus, pension or profit-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, or (B) an annuity plan which meets the requirements for the deduction of the employers contribution under section 404(a)(2) of such Code, other than any plan described in clause (A) or (B) of this paragraph (i) the contributions under which are held in a single trust fund maintained by a bank or in a separate account maintained by an insurance company for a single employer and under which an amount in excess of the employers contribution is allocated to the purchase of securities (other than interests or participations in the trust or separate account itself) issued by the employer or by any company directly or indirectly controlling, controlled by or under common control with the employer or (ii) which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of such Code. The Commission, by rules and regulations or order, shall exempt from the provisions of section 5 of this title any interest or participation issued in connection with a stock bonus, pension, profit-sharing, or annuity plan which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of the Internal Revenue Code of 1954, if and to the extent that the Commission determines this to be necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title. For purposes of this paragraph, a security issued or guaranteed by a bank shall not include any interest or participation in any collective trust fund maintained by a bank; and the term "bank" means any national bank, or any banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term "bank" has the same meaning as in the Investment Company Act of 1940.

1. Definitions

The lengthy and complex provisions of Section 3(a)(2) quoted above can best be analyzed by first defining the major terms used therein. The meaning of those terms is described below.

(a) Interest or Participation. The beneficial right or share which a participant has in a plan, or which a plan has in a single trust fund, collective trust fund, or separate account.

(b) Common Trust Fund. A trust fund maintained by a bank as an investment vehicle solely for trusts, estates or similar entities for which the bank acts in a bona fide fiduciary capacity, such as that of trustee, executor, administrator or guardian. ¹⁰⁹ Such a fund may not be used as a vehicle for direct investment by members of the public. ¹¹⁰ The staff takes the position that the exemption in Section 3(a)(2) of the 1933 Act (as well as its counterpart in Section 3(c)(3) of the 1940 Act) for interests or participations in bank-maintained common trust funds was not meant to exempt investments by a bank as trustee for employee benefit plans, including Keogh plans. ¹¹¹ Such investments were meant to be exempted by the later clause in Section 3(a)(2) dealing with collective trust funds for employee benefit plans, provided the conditions of that clause are satisfied.

(c) Collective Trust Fund. A trust fund maintained by a bank as an investment vehicle solely for corporate stock bonus, pension, or profit-sharing plans (other than Keogh plans) which meet the requirements for qualification under Section 401(a) of the Internal Revenue Code. ¹¹² Like a common trust fund, a collective trust fund may not be used for direct investment by members of the public. ¹¹³ It should be noted that the Section 3(a)(2) exemption for interests or participations in collective trust funds will not be available to a collective fund which commingles the assets of Section 401 qualified plans with those of Keogh plans. ¹¹⁴

(d) Single Trust Fund. A non-collective trust fund (i.e., a fund which is not established at the instance of, or by, a financial intermediary for the use of separate employers). ¹¹⁵ Under this definition, each of the following would be considered a single trust fund: (1) a trust fund for employees of a single employer, ¹¹⁶ (2) a trust fund for employees of employers so closely related as to be regarded as a single employer (e.g., a parent and its subsidiaries); ¹¹⁷ and (3) a trust fund established and controlled by employers and/or a union representing the employees of such employers.

(e) Bank. This term includes the following entities only: (1) a banking institution organized under the laws of the United States, (2) a member bank of the Federal Reserve System, (3) any other banking institution or trust company, whether incorporated or not, doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency and which is supervised and examined by a State or federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of the 1940 Act, and (4) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (1), (2) or (3). ¹¹⁸ In connection with the foregoing, neither a savings and loan association ¹¹⁹ nor a bank holding company will be considered a bank, but a foreign bank whose U.S. operations are subject to the regulations of domestic banking authorities will be so considered. ¹²⁰

(f) Separate Account. An account established and maintained by an insurance company pursuant to the laws of any State or territory of the United States, the District of Columbia, or of Canada or any province thereof, under which income, gains and losses, whether or not realized, from assets allocated to such account, are, in accordance with the applicable contract, credited to or charged against such account without regard to other income, gains, or losses of the insurance company. ¹²¹

(g) Insurance Company. A company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risk underwritten by insurance companies, and which is subject to supervision by the insurance commissioner, or a similar official or agency, of a State or territory or the District of Columbia; or any receiver or similar official, or any liquidating agent for such company, in his capacity as such. ¹²²

(h) Plan. The permanent ¹²³ program or arrangement under which participating employees will become entitled to benefits. The four types of plans which are specifically referred to in Section 3(a)(2) are described below. The first three must meet the requirements for qualification under Section 401(a) of the Internal Revenue Code, ¹²⁴ while the fourth must satisfy the requirements for the deduction of the employers contribution under Section 404(a)(2) of the Code.

(1) Pension Plan. A plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to its employees over a period of years, usually for life, after retirement. ¹²⁵

(2) Profit-Sharing Plan. A plan established and maintained by an employer to provide for participation in its profits by its employees or their beneficiaries. ¹²⁶

(3) Stock Bonus Plan. A plan established and maintained by an employer to provide benefits similar to those of a profit-sharing plan, except that the contributions by the employer are not necessarily dependent upon profits and the benefits are distributable in stock of the employer company. ¹²⁷

(4) Annuity Plan. A pension plan under which retirement benefits are provided under annuity or insurance contracts without a trust. ¹²⁸

(i) Single Employer. An employer and any entity controlling, controlled by, or under common control with, such employer. This definition represents a departure from prior staff interpretations and will be discussed in detail later in this section.

2. Scope of the Exemption.

The 1970 Amendments to Section 3(a)(2) codified in part the Commissions longstanding administrative position ¹²⁹ that interests or participations issued in connection with employee benefit plans need not be registered unless employee funds are used to purchase employer securities. In the Daniel decision, however, the Supreme Court implied, in dictum, that the Section 3(a)(2) exemption extends only to the interests or participations of plans in certain funding vehicles, rather than the interests of employees in the plans themselves. ¹³⁰

The legislative history of the 1970 Amendments indicates that their original purpose was to alleviate a concern expressed by banks and insurance companies that there was no clear exemption from registration in the 1933 Act for interests in the collective funding vehicles maintained by those entities for employee benefit plans. ¹³¹ While the amendments were under consideration, however, language was added that reflected the Commissions consistent administrative practice of not requiring interests in plans to be registered except where employee money is used to buy securities of the employer. ¹³²

The inclusion of the language referred to above, as well as a recent decision by a U.S. District Court, ¹³³ would seem to support the staffs view that the implicit purpose of the 1970 Amendments was to exempt not only the interests of plans in certain investment vehicles, but also the interests of participants in the plans themselves. ¹³⁴ This position is reasonable when one considers that, from the employees standpoint, his interest in the plan is inseparable from his adequate share of the plans interest in the funding vehicle. Moreover, there is the practical consideration that if Section 3(a)(2) were not broadly construed to cover employee interests in plans as well as plan interests in funding vehicles, many plans would have no exemption from registration upon which to rely for the offer and sale of interests to employees. ¹³⁵ Accordingly, the staff believes it is appropriate to link both the plans interest in a funding vehicle and the interests of participants in the plan itself for purposes of the exemption provided by Section 3(a)(2).

The staff recognizes that the Supreme Court, in the Daniel decision, did not endorse the broad view of the 3(a)(2) exemption described above. ¹³⁶ While the statements by the Court are entitled to serious consideration, they are direct and therefore do not resolve the issue conclusively. This fact is reflected in Chief Justice Burgers concurring opinion, in which he stated that "There is no need to deal, in this case, with the scope of this exemption, since it is not an issue presented for decision." ¹³⁷ The Chief Justice further noted that "the construction of the 1970 Amendment may be problematical" and "of real importance to someone in some future case" and that, as a result, he was "reserving any expression of views" on the scope of the exemption. ¹³⁸ In light of all of the foregoing, particularly the negative effects on many plans which might flow from a narrow construction of Section 3(a)(2), the staff will continue to view the exemption as being applicable to both interests in funding vehicles and interests in plans.

3. Significant Interpretive Issues

There are several significant interpretive issues under Section 3(a)(2) that have arisen over the years. These are discussed in detail in the sections which follow.

a. "Maintained by a Bank" Requirement

Section 3(a)(2) states in part that it shall be available for interests or participations in any "common trust fund...maintained by a bank" or any "single or collective trust fund maintained by a bank," provided certain conditions are met. The word "maintained" has been interpreted by the staff to mean that the bank must exercise "substantial investment responsibility" over the trust fund administered by it. ¹³⁹ Thus, a bank which functions in a mere custodial or similar capacity will not satisfy the "maintained" requirement. ¹⁴⁰ In exercising its investment authority over a trust fund, however, a bank may hire an investment adviser to assist it, although the final decision whether or not to invest must be made by the bank. ¹⁴¹

The principal question concerning the "maintained" requirement is whether it applies to single trust funds. The language of the statute, which is the starting point in statutory construction, ¹⁴² suggests that such funds must so maintained. The staff however, has taken the position that the "maintained" requirement applies only to common and collective trust funds. ¹⁴³ Thus, interests or participations in a single trust fund which does not have a bank as trustee will be deemed exempt under Section 3(a)(2) if all other requirements of the provision are satisfied.

The staffs view that single trust funds need not be maintained by a bank is based on its perception of the intent of Congress at the time the reference to such funds was inserted in Section 3(a)(2). The reference was included in 1970 ¹⁴⁴ at the request of Sperry-Rand Corporation, ¹⁴⁵ with the Commissions full support. ¹⁴⁶ Sperry-Rand had expressed concern that a failure to refer specifically to single trust funds in the then-pending amendments to Section 3(a)(2) would create a negative inference that interests in such funds were required to be registered. Such an inference, as previously indicated, would have been contrary to the Commissions consistent position over the years that interests in such funds were subject to registration only where employee funds were invested in securities of the employer. ¹⁴⁷

To eliminate the problem raised by Sperry-Rand, it was decided to insert the words "single or" in Section 3(a)(2) immediately in front of the words "collective trust fund maintained by a bank." In retrospect, this method of resolving the issue was somewhat inartful, since it created the erroneous impression that single trust funds had to be maintained by a bank in order for interests therein to be exempt under Section 3(a)(2). Certainly, there was no intent by Congress to change the Commissions prior interpretive position that such funds did not have to be maintained by a bank in order to avoid registration. This is evident from the Conference Report on the subject, which stated that the amendment "codified a long established administrative practice of the Commission by making it clear that the Section 3(a)(2) exemption applied not only to collective trust funds, but also to single trust funds." ¹⁴⁸

Further support for the validity of the staffs interpretation can be found in Section 3(c)(11) of the 1940 Act. That section, together with its predecessor, ¹⁴⁹ was the model upon which the provisions in Section 3(a)(2) under discussion were based. ¹⁵⁰ It excludes from the operation of the 1940 Act "any employees stock bonus, pension or profit-sharing trust which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954," as well as "any collective trust fund maintained by a bank consisting solely of the assets of such trusts." Clearly, single trust funds are not required to be maintained by a bank under Section 3(c)(11). A different view of such funds under Section 3(a)(2) would result in an anomaly whereby virtually all single trust funds for Section 401 plans would have to be maintained by a bank under the 1933 Act but not under the 1940 Act. Such a result would, in the staffs view, be contradictory and counter to the apparent intent of Congress.

b. What Constitutes a "Single Employer"

The general exemption provided by Section 3(a)(2) for interests or participations issued in connection with certain employee benefit plans contains two exclusions. ¹⁵¹ One relates to interests in Keogh plans and will be discussed in the next section. The other relates to interests in plans whose contributions are held in a single trust fund or separate account for a "single employer" and which permit amounts in excess of the employers contribution ¹⁵² to be used to purchase securities of the employer or its affiliates. ¹⁵³

The purpose of the second exclusion described above is to deny the Section 3(a)(2) exemption to interests in plans which invest employee contributions in securities of the employer or related entities. It appears, however, that this purpose has been frustrated somewhat by the staffs prior interpretation of the term "single employer." Until now, the staff has viewed the term in a literal sense and stated that a parent and its subsidiaries are not a single employer for purposes of Section 3(a)(2) ¹⁵⁴ The effect of this has been to permit some plans covering a parent and its subsidiaries to invest employee funds in securities of the parent (or one of the subsidiaries) without abrogating the 3(a)(2) exemption. This has occurred because the exclusion referred to above applies only where a plan both covers a single employer and invests employee money in employer securities.

The staff announced some time ago that it was reconsidering its position concerning the single employer question. ¹⁵⁵ It has now concluded that its past interpretation of the term was incorrect and contrary to the purpose of the exclusion. A parent and its subsidiaries are in fact under common control and to consider them as separate or unrelated employers ignores reality. Accordingly, in the future, a parent and its subsidiaries will be deemed a single employer for purposes of the 3(a)(2) exclusion being discussed, as will all entities which share a control relationship. It should be noted, however, that the staffs revised view of the single employer question will be applied on a prospective basis only. Therefore, it will not be cited with respect to past activities of employers made in reliance upon the staffs former interpretation.

c. Keogh Plans

As indicated in Part II of this release, interests or participations issued in connection with Keogh plans generally are deemed to be securities which are subject to the registration and antifraud provisions of the 1933 Act. Although the intrastate exemption frequently is relied upon for the offer and sale of such interests, registration has been necessary in some instances. ¹⁵⁶

Section 3(a)(2) specifically excludes Keogh plan interests from the general exemption provided by the section ¹⁵⁷ but does provide the Commission with the authority to exempt such interests from registration where it is "necessary or appropriate in the public interest and consistent with the protection of investors and the purposes of the 1933 Act" to do so. This power was granted to the Commission in 1970 ¹⁵⁸ but was not used until November 1976, ¹⁵⁹ when an exemptive order under Section 3(a)(2) was issued for interests issued in connection with a Keogh plan for a law firm. Since that time, the Commission has issued over 50 exemptive orders ¹⁶⁰ in response to applications submitted by various law firms, accounting firms, and a medical clinic.

Almost all applications for exemptive orders under Section 3(a)(2) granted by the Commission have contained the following representations:

(1) The plan is comparable to corporate plans and would be exempt under Section 3(a)(2) if the applicant were organized in corporate, rather than partnership, form;

(2) The plan is designed specifically for the applicant and therefore is not a uniform prototype designed for mass marketing by a financial institution to numerous unrelated self-employed persons;

(3) The plan is administered by the employer, who is subject to the fiduciary and disclosure requirements of ERISA, thereby assuring that the interests of participants are protected by the provisions of ERISA; and

(4) The applicant has the resources and the financial expertise to protect its interests and those of the plan participants adequately.

Because the applications for exemptive orders under Section 3(a)(2) currently being received are essentially identical, the Commissions Division of Investment Management is drafting a proposed exemptive rule that may eliminate the need for granting exemptive orders in the future. It is anticipated that the proposed rule will be published for comment during 1980.

d. Plans Funded by Certain Insurance Contracts

A relatively new development in the pension and profit-sharing plan area is the funding of such plans through the issuance by insurance companies of so called "guaranteed investment contracts." Generally, these fixed annuity contracts are sold to trustees of plans or corporate employers establishing plans, and they are written in the form of group annuity contracts for contract periods ranging from three years to beyond twenty years. The trustee or corporate employer makes contributions, in either a single sum or on a periodic basis, which contributions are held as part of the general assets or general account of the insurance company. These contracts generally provide for guaranteed interest and annuity purchase rates, both of which may be subject to change after a specified period, commonly three to five years. Some contracts provide for the payment of interest (or dividends in the case of mutual companies) in excess of the guaranteed amount based upon an investment year method of interest allocation. The contracts also provide for or permit the optional purchase of annuities generally at the time a retirees annuity is desired.

Certain guaranteed investment contracts appear to be securities. They are not exempt from registration under Section 3(a)(2) of the 1933 Act because they are funded by insurance company general accounts, which are not referred to in that section. (Only separate accounts are mentioned.) They also are not exempt under Section 3(a)(8) of the Act in those instances where the issuing insurance company either fails to assume a meaningful mortality risk under the contract or allows the purchaser to bear a significant investment risk. ¹⁶¹

Notwithstanding the above, the Division of Investment Management has indicated that it will not recommend any enforcement action if the offer and sale of guaranteed investment contracts to pension and profit-sharing plans is not registered, provided certain specified conditions are met. ¹⁶² The conditions are:

(1) Each contract must be issued in connection with a pension or profit-sharing plan which (a) covers not less than 15 persons, or (b) involves annual contributions in excess of $10,000, or (c) is established by a corporate employer with a net worth of at least $100,000 on the last day of its fiscal year preceding the day the contract becomes effective;

(2) Each prospective contractholder must be provided with an offer by the issuer (which also should be contained in any printed sales literature used) to provide upon request financial statements and other material information; and

(3) Advertising describing or offering such contracts must be directed solely to employers who may establish tax-qualified corporate plans or to trustees of such plans.

In addition to the foregoing, a more recent development has been the formation of multiple-employer trusts by insurance companies that are funded, respectively, by fixed or variable annuity contracts, or combination contracts providing both fixed and variable annuity alternatives. The formation of a trust for the offering of such contracts to unrelated employers appears to be necessary to satisfy state insurance requirements. Moreover, because of the economies of scale involved, it has the advantages of permitting reduced group annuity rates and limiting the expenditures for complying with ERISA recordkeeping and reporting requirements.

The Division of Investment Management has indicated that it will not recommend enforcement action to the Commission if multiple-employer trust arrangements of the type described above are marketed without registration of participations in the trusts under the Securities Act of 1933 or registration of the trusts under the Investment Company Act of 1940. A number of facts and representations were important in reaching the no-action position. ¹⁶³ Specifically:

(1) Participants in the group annuity contract would tender consideration directly to the insurance company, and would receive annuity payments directly from the insurance company;

(2) The insurance company would perform all marketing, administrative and investment functions involved in funding the group annuity contracts, and any financial claim which the participants would have under the contracts would be against the insurance company itself;

(3) The insurance company would name the trustee of each trust, and reserve the right to remove them and name successor trustees;

(4) The sole responsibility of the trustee would be to serve as group annuity contract holder, and the trust would not have any financial interest in the group annuity contract.

In such circumstances, where the multiple-employer trust is passive, compliance with the federal securities laws would be unnecessary.

V. SECURITIES TRANSACTIONS BY PLANS

In addition to issuing participation interests and fostering stock purchases by employees, either of which may be subject to the registration and antifraud provisions of the 1933 Act depending on the circumstances, a plan may engage in various other transactions involving the purchase, sale or distribution of securities. These are briefly discussed in the sections which follow.

A. Acquisitions of Employer Stock

Many plans invest part or all of their assets in stock or other securities of the employer. There are three primary sources that a plan can draw upon to acquire employer securities: the employer, affiliates of the employer, and persons selling their securities in the open market. Generally, no matter from whom the securities are obtained, registration will not be necessary with respect to the acquisition transaction by the plan. The reasons for this result will vary, depending on the manner of acquisition. For instance, there may be no sale involved (as in the case of a contribution of stock or cash to the plan by the employer), ¹⁶⁴ or one of the several exemptions from registration provided by Section 4 of the Act may be available. ¹⁶⁵

Although the transaction in which a plan acquires employer securities need not be registered, the same would not necessarily be true with respect to the offer, sale or distribution of those securities to plan participants. These latter transactions are separate and distinct from the acquisition transaction and therefore must either be registered or exempt from registration. Further, the plan trustee should take into consideration, when purchasing stock of the employer in the open market, the application of the antifraud provisions of the 1934 Act ¹⁶⁶ to such purchases.

B. Sales of Employer Stock

The plan may from time-to-time offer or sell the securities of the employer held by it. If the plan is considered an affiliate ¹⁶⁷ of the employer, any such offers or sales, whether to plan participants or to persons not associated with the company, would be subject to the registration and antifraud provisions of the 1933 Act ¹⁶⁸ in the same manner as if the employer were engaging in the transaction. Thus, even if the securities to be sold were acquired on the open market, registration would be necessary under such circumstances, absent an available exemption. ¹⁶⁹

C. Distributions of Employer Stock to Plan Participants

The distribution, or actual delivery, of employer stock by a plan to individual participants is not deemed to be a registerable event. Of course, if the plan were to offer or sell such stock to participants prior to actual delivery, registration would be necessary unless an exemption were available.

D. Transactions in Non-Employer Securities

In conducting its operations, a plan may buy or sell securities of issuers other than the employer. Purchases of such securities by the plan ordinarily would not create any 1933 Act consequences, ¹⁷⁰ since the compliance provisions of the Act are directed at sellers of securities, not at buyers. Sales of such securities would, of course, have to be made in reliance upon an exemption unless they were registered. The most common exemption relied upon for sales is that provided by Section 4(1) of the Act for persons who are not issuers, underwriters ¹⁷¹ or dealers. Rule 144 17 CFR 230.144 ¹⁷² under the 1933 Act provides a safe harbor from registration for persons who wish to rely upon the Section 4(1) exemption for resales of restricted securities, ¹⁷³ provided all of its conditions are met.

Plan trustees who intend to acquire significant amounts of the equity securities of an issuer (including the employer) should bear in mind the potential applicability of Sections 13(d), 16(a), and 16(b) of the 1934 Act. Section 13(d) requires beneficial owners of more than five percent of a class of equity securities registered under Section 12 of the 1934 Act ¹⁷⁴ to report their ownership, as well as any further acquisitions, to the issuer, to any stock exchange on which the securities are traded, and to the Commission. Sections 16(a) and 16(b) apply to beneficial owners of more than 10% of a class of equity securities registered under Section 12. ¹⁷⁵ Section 16(a) requires an initial report of a persons holdings and subsequent reports of any changes in such holdings. Section 16(b) permits an issuer to recover any profits realized by persons subject to that section on purchases and sales of the issuers securities that occur within a period of less than six months.

VI. RESALES BY PLAN PARTICIPANTS

A matter of major concern to participants in a pension or profit-sharing plan is the tradeability of securities received by them under the plan. That is, can the securities be freely resold without restrictions or not? The next two sections will attempt to resolve the uncertainty that may exist regarding this issue.

A. Registered Plans

Many plans register the securities offered and sold by them on Form S-8 or some other appropriate registration form under the 1933 Act. ¹⁷⁶ Generally, such securities are freely tradeable upon distribution to participants, unless the person acquiring the securities is an affiliate of the issuer. Thus, participants in a registered plan who do not have a control relationship with the issuer may resell the shares or other securities acquired by them under the plan without any restrictions.

Affiliates are in a somewhat different position because their control relationship with the issuer subjects them to the same disabilities regarding registration that would attach to the issuer if it tried to sell the securities. Such persons may resell their shares publicly either pursuant to an effective registration statement or pursuant to Rule 144 ¹⁷⁷ under the 1933 Act. Affiliates also may resell the securities in a private transaction, ¹⁷⁸ provided it is understood that the purchaser is acquiring restricted securities which are subject to the same limitations on resale that applied to the seller.

Registration of plan securities for resale by affiliates is relatively easy to accomplish in most cases, since a Form S-16 reoffer prospectus usually can be used for this purpose. ¹⁷⁹ With respect to Rule 144, it should be noted that the two-year holding period requirement of the rule does not apply to securities acquired under a registered plan. ¹⁸⁰ Thus, some or all of the securities ordinarily could be resold by affiliates under the rule immediately upon acquisition.

B. Unregistered Plans

Other than the one exception noted below, which is based upon an administrative position of the staff, unregistered securities distributed to participants under an employee benefit plan may not be freely resold. Thus, such securities, whether he