Does Brokerage Window Require Company Stock Offering Registration?

The Securities and Exchange Commission (SEC) Division of Corporate Finance issued a Compliance and Disclosure Interpretation (CDI) saying a 401(k) plan sponsor that does not offer an employer securities fund in the plan but offers a brokerage window through which investments in employer securities can be made does not have to register an offer of employer securities if no attempt to direct investments in employer securities is made.

According to the CDI, whether this situation involves an offer of employer securities requiring Securities Act registration depends on the extent of the employer company’s involvement.

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

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