Securities Law Exemption for Multiple Employer Plan

[Guest Lizana]

Does section 3(a) (2) of the Securities Act of 1933 exempt interests in multiple employer defined contribution plans? The terms relate to a plan "established by an employer for the exclusive benefit of its employees". Does an employer that adopts a plan maintained by an unrelated employer, thereby making the plan a multiple employer plan, "establish" a plan for its employees? Or is it simply participating in a plan established by another employer for the other employer's employees? If an employer allows an unrelated employer to participate in its plan, is the plan established "for the exclusive benefit of its employees"?

Would this be a good subject for the next update of the BNA Tax Management Portfolio on Securities Law Aspects of Employee Benefits Plans?

How about the exemption from the definition of investment company under section 3©(11) of the Investment Company Act of 1940? Is a multiple employer plan an "employee plan"?

The securities laws speak a different dialect than the tax laws and ERISA.

[GBurns]

What "interests" exist and who owns them?

How do you make a connection between an investment company and a MEP?

What securities, and what sale of securities by whom, exists in a MEP?

[Guest Lizana]

The securities laws treat a participant's interest in a qualfied plan as a security. A 401(k) plan "offers" interests in the plan for "sale" to participants, if you will.

That same 401(k) plan will be an investment company because of "sales" of interests in a fund of investment assets, unless an exemption applies.

The question relates to the wording of the exemptions. Single employer plans are generally exempt unless -- this is an oversimplification -- employer securities are available as an investment option. The application of the exemption is not so clear when multiple employer plans are involved because of uncertainty over what the plan is. Is it one plan with multiple employers or does each employer have a plan for its own employees? Multiple employer plans have both characteristics depending on what regulatory scheme is involved.

[GBurns]

I have never seen a 401(k) or any pension or retirement plan sell or offer interests in the plan. I have never seen any plan with interests to sell.

I have never seen any of these plans offer any form of security or offer anything other than participation.

I have never seen or heard of any plan that sells "interests" in a fund or fund of investment assets.

Where did you see that "The securities laws treat a participant's interest in a qualfied plan as a security" ??????

[Guest Lizana]

If you are interested in learning about the general issues, you might start with SEC Release No. 33-6188.

[GBurns]

On the other hand you might want to start understanding what 401(k) and defined contribution plans and how they operate.

Also, Why not post this on the other Forums such as the 401(k) forum where you should get some more responses.

[WDIK]

In no particular order:

1) IRC 413©(2) addresses multiple employer plans and the exclusive benefit rule.

2) Based on an article I've seen, I believe Kirk Maldonado may have some expertise in this area.

3) May I propose a question to GBurns on behalf of J.C. Fogerty and CCR:

I want to know, Have you ever seen the rain?

I want to know, Have you ever seen the rain

Comin' down on a sunny day?

[JanetM]

GBurns, I strongly advise you get off your high horse and read the notice Lizana posted before you post a response. You are looking like a bad tempered jerk right now.

Then again, you can continue to entertain us with your hair trigger temper and sometimes stupid, sometimes brilliant postes that pound on folks trying learn or help others.

Your choice.

[GBurns]

JanetM

I must have misunderstood the post, so let me ask you, What does a defined contribution plan sell to participants that would make it an investment company or which would be a security?

Better yet, I am curious as to why you did not bother to respond to anything in any of the posts but instead resort to a personal attack? If you understood and/or agreed with the post why not respond or address that?

[Kirk Maldonado]

GBurns:

As the moderator of this Message Board, I am asking you to do all of us a favor and don't post anything unless you know something about the topic. Your posts on this message thread achieved nothing but demonstrating to all of us that you not only know nothing about the topic, but you think that all of us have a duty to answer every inane question that comes into your mind.

Your comment to Lizana about learning about how retirement plans work was insulting and unnecessary. The person that needs an education is you; both about manners and securities laws issues.

Your comment to Lizana that she should have posted this on the 401(k) message board was just wrong. She posted it on the exactly the right message board. Posting it on the other board would get more responses, but from people like you that know nothing about securities laws matters.

If you do anything like this again on my Message Board, I will delete all of your posts. Furthermore, I am going to recommend to Dave Baker that you be banned from the Message Boards immediately for your offensive behavior. Your ignorant and arrogant posts are something we should not have to endure. As seen by this message thread, you add nothing but detract dramatically from the discussions.

Lizana:

You are prescient. I have very recently submitted updates to the portfolio that include a discussion of this issue.

The answer is that the exemption under the 33 Act does not apply to multiple employer plans. My position is that any time you have a multiple employer plan, you have this problem, regardless of the situation arose (such as those examples you mentioned).

My recollection is that there is the same trouble under the 40 Act, but I can't confirm that. (I don't do much 40 Act work and if you don't have an exemption under the 33 Act, you're dead in the water anyway, so it is pretty much moot.)

Your statement that securities lawyers speak a different dialect than ERISA attorneys is an understatement. The way that they analyze issues is fundamentally different. Whenever I give a speech on securities laws issues to ERISA practitioners, I spend the first five or ten minutes trying to explain to them how the securities laws are so fundamentally different than ERISA.

[GBurns]

Please go ahead and ask Dave, BUT, to be fair have him read the thread and see if he agrees with you that there is any problem with the posts which only asked questions about what was being posted, none of which were answered.

I would happilly abide by Dave's decision.

[Kirk Maldonado]

GBurns:

Just because your post is a "question" doesn't mean that it isn't offensive. There is a right way to ask a question, then there is the GBurns way. Here's what I'm talking about:

Where did you see that "The securities laws treat a participant's interest in a qualfied plan as a security" ??????

That was a hostile tone in that question. It also made you look exceedingly stupid because it is absolutely clear that there is a security there. But looking like a fool on the message boards doesn't seem to bother you.

Despite the fact that you are almost completely ignorant of the underlying law the applies in most of the threads in which you post messages, you post hostile and insulting messages. I'm tired of you bullying people, particularly since you don't know anything about the topic being discussed. You are nothing but an ignorant bully.

I will make sure that your bullying will stop, if I have to delete everything you post. You can rest assured that every time you post a hostile message, I will delete it.

[gc@chimentowebb.com]

I'm posting this non-securities law question here because it is the only forum that seems to address multiple employer plans.

If a contributing employer ("Contributor") withdraws participation in a multiple employer 401(k) plan, because of its merger into an unrelated company ("Survivor"), can distributions be paid to employees of Contributor? Assume the employees now work for Survivor and participate in its defined contribution plan.

Has there been a severance from employment due to the merger ? The ownership of Contributor has changed and Survivor is not a sponsor of the multiple employer plan. Maybe Reg. 1.401(k)-1(d)(2) applies.

Or is the theory that the multiple employer plan has "terminated" with respect to Contributor, so that 401(k)(10) lump sum distributions are permissible?

Or is it impossible to distribute to Contributor's employees without violating the 401(k)(2)(B) distribution restrictions ?

Thanks.

[Guest Rider]

Does section 3(a) (2) of the Securities Act of 1933 exempt interests in multiple employer defined contribution plans? The terms relate to a plan "established by an employer for the exclusive benefit of its employees". Does an employer that adopts a plan maintained by an unrelated employer, thereby making the plan a multiple employer plan, "establish" a plan for its employees? Or is it simply participating in a plan established by another employer for the other employer's employees? If an employer allows an unrelated employer to participate in its plan, is the plan established "for the exclusive benefit of its employees"?

Would this be a good subject for the next update of the BNA Tax Management Portfolio on Securities Law Aspects of Employee Benefits Plans?

How about the exemption from the definition of investment company under section 3©(11) of the Investment Company Act of 1940? Is a multiple employer plan an "employee plan"?

The securities laws speak a different dialect than the tax laws and ERISA.

Did this question ever get answered? I would presume so, because there are Multiple Employer Plans everywhere, but we have an attorney posing this exact question and I have yet to find an answer.

[QDROphile]

The question was answered and the answer is still the same. A mulitiple employer does not have an exemption from registration under section 3(a)(2) and probably not the under the Investment Company Act, either. Most multiple employer 401(k) plans that are not registered are violating the law, and few are registered.

[Guest Rider]

Thanks for the information.

Anyone want to guess how many particpant's, plans and dollars are under PEO, Association, and other multiple employer plans that would fall under the position you state? I can think of a couple arrangements with a combined total of well over a billion dollars that would be in this category. Bet they would be interested in this conversation!

[Guest joshmeltzer]

Personally, I think this is a very interesting thread. I did a webinar a few months ago but this question never came up. I took a look at SEC release 33-6188 and it worried me until I saw SEC release 33-6281 http://content.lawyerlinks.com/default.htm...ses/33-6281.htm .

It seems that the SEC issued a suplement to the original release to provide "further guidance". From my reading they consider the contributions made to be all employer contributions, there is no sale of securities to employees and hence, 401(k) plans are not subject to the 1933 act at all. I may be reading too much into this but it would seem to me that if a Multiple employer plan is qualified under the code, this would apply equally to the multiple employer plan.

It was interesting to note that this treatment is not the same for plans where the sponsor or trustee of a participant directed plan actively manages the funds provided by the participants. This was distinguished in the release from a plan where the sponsor under the trust "acts as a mere custodian of the participants account". The release says that in these cases "the staff generally has taken a no-action position".

This release seems to give some clarity except in the case where the plan is a multiple employer plan and the sponsor/trustee is actively managing the assets that the participants choose from - in these cases it may be prudent to request a no-action letter from the SEC.

[Guest bobolink]

I need to study SEC Release 33-6281, but if it clears multiple employer 401(k) plans from the 33 Act, where does it leave the 40 Act issue. It seems it's still there. What do you think?

Also, I can't find a clear answer to my quest to find out the consequences of not registering when not exempt under the 33 Act or the 40 Act. It seems the enforcement posture of the SEC in this area encourages "taking the risk", but what really is that risk? Kirk? Anyone?

[QDROphile]

bobolink:

A registration violation gives the investor (plan participant) rescission rights. I have always given up on figuring out the consequences of implementing a rescission, but one of them appears to be disqualification of the plan.

[Benefits to all]

Bobolink, did you ever find any resolution on the Investment Company Act issue? This article is the most complete narrative I have found on this issue and this author suggests that any MEP would be an investment company (http://www.klgates.com/files/Publication/2e8a6c86-83f1-429e-a82d-0153b48c5480/Presentation/PublicationAttachment/1750591d-55f3-47bc-9fdf-0a6b74ecffe2/BNA_Article_Multiple_Employer_Plans.pdf) at pages 9-10.

Practically, are MEPs still just operating under the risk of nonregistration?

[ERISA11]

Although this thread is no longer active, I thought I would post a note because one of the comments above suggested that 401(k) plans are not subject to the 1933 Act at all. This was seemingly what the SEC was saying in Release 33-6281. However, the SEC clarified its position in its no-action letter to Diasonics, Inc. dated Nov. 29, 1982, and indicated that salary reduction 401(k) plans are subject to the 1933 Act.