Can a participant purchase stock in his directed account of a company

[Guest]

Company A is a thinly publicly traded company. Frank is the president and a board member. Company A has a 401(k) plan that permits participant segregated, directed accounts. Frank currently owns 14% of Company A's outstanding stock in his directed account. He individually and through family members and trusts owns 45% of the outstanding stock.

Two large shareholders want to sell their shares. Company A is not able to redeem them for cash reasons, so Frank wants to purchase the shares in his directed account. Following the transaction, his directed account would own 20% of Company A. Finally, Company A may redeem the shares from Frank's account in the future.

Based on my reading of 4975, Frank probably has engaged in a prohibited transaction already and the purchase of more shares will compound it, particularly in light of the the recent Flahertys Arden Bowl case. Certainly, Company A's redemption of shares from Frank's account would contitute a PT.

Am I missing something? I'm being told that the plan's corporate trustee has no problem with these transactions. Anybody can help? Thanks.

[IRC401]

1. See IRC 4975(d)(13).

2. Consider whether under 401(a)(4) the plan administrator needs to offer to all participants the right to purchase company stock.

3. The plan document does permit the purchase of employer stock, doesn't it?

4. Have you talked to a securities attorney about investing 401(k) money in employer stock?

[Guest Jeff V]

Thornton, let me know what resolution you come to on this (jeffvr@msn.com)

I believe it's ok for an officer to own 14% of company's shares indirectly in their 401(k) plan if the company stock fund is open to other participants as well, but that the corporation has to report to the SEC any transactions, whether direct or indirect, including purchasing, selling or exchanging amounts with other fund investments. So yes, I would think that the purchase would be a prohibited transaction, and may have SEC implications as well.

[Guest]

Jeff,

We reached the same conclusion you did. The stock is in a participant directed, segregated account, not one of the investment options. Anyone who chooses to segregate could purchase company stock. Are there still SEC implications?

[RCK]

I have to admit that I'm not familiar with "thinly publicly traded" companies. Isn't Frank subject to insider trading rules and disclosures?

RCK