In the midst of the chaos of the presidential election, vicious attacks from Senator Warren, and goodness knows what else, the SEC continues to crank out requests for comment, rules and interpretations.
It’s the latter category that has attracted our attention lately, as the Staff has focused on some technical matters that securities counsel have been pondering for a while.
401(k) plans with a self-directed “brokerage window”
First, in September, the SEC published updated Compliance and Disclosure Interpretations, including one on 401(k) plans that feature a so-called “brokerage window”. It’s been generally assumed that if a plan does not include an employer stock fund in which employee funds can be invested, Securities Act registration is not required. This CDI says “maybe not” – if the plan (a) permits employer and employee contributions to be invested through a self-directed “brokerage window”, and (b) the plan does not prohibit investments in employer stock through the window, registration may be required.
In response to the obvious question – when will registration be required? – the SEC’s answer is “it depends”. And what it depends on is “the degree and type of participation by issuers or their affiliates in the particular program”. So, for example, if the company does no more than describe the self-directed brokerage window, make payroll deductions, and pay administrative expenses not tied to particular investments selected by employees, and if the company takes no action to draw employees’ attention to the possibility of investing in employer securities through the brokerage window, registration is not required. However, anything more may lead to the opposite conclusion.
While this interpretation does not necessarily change prior law, it may come as a surprise to some. In any case, it’s a reminder that where registration is concerned, “caveat issuer” is a sound motto.
Moving rapidly into the 20th Century: posting – not mailing – annual reports is OK
In another CDI, the Staff brings one aspect of the proxy and 10-K rules into the 20th Century (if not the 21st). Specifically, the proxy rules (Rules 14a-3(c) and 14c-3(b)) and 10-K instructions require copies of a company’s annual report to security holders to be mailed to the SEC “for its information”. Since very few companies still distribute traditional glossy annual reports but increasingly post something like them on their websites, it’s been unclear what exactly a company is expected to mail. This CDI makes it clear that posting the report on the company website and keeping it available for one year will suffice.