Are There Securities Regulation Issues With Respect to Nonqualified Deferred Compensation Plans?

The answer is uncertain. At a meeting of the Securities and Exchange Commission (SEC), an SEC spokesperson stated that the SEC considered all nonqualified deferred compensation plans (with certain exceptions noted below) to be registerable and indicated that the SEC would be issuing a formal statement on its position. As of the date of this printing, that statement has not been issued. It is possible that the SEC may require the registration of nonqualified deferred compensation plans as securities, but only if the plan involves employee contributions and the employees are motivated by investment rather than tax deferral. If the employees making the contributions have investment motives (i.e., the plan involves investments in underlying securities whose return is credited to the employee), registration appears to be required. On the other hand, if employees are making contributions because of tax deferral motives (i.e., primarily to save income taxes), no registration with the SEC is necessary. In other words, an investment-motivated nonqualified deferred compensation plan will be considered to be a security, while a nonqualified deferred compensation plan motivated by tax deferral need not be registered, because the plan will not be considered to be a security. In making its decision, the SEC will look at all the facts and circumstances. In the authors’ opinion, most businesses which establish nonqualified deferred compensation plans for twenty or fewer key executives will probably qualify under one of the three safe harbor exemptions noted below, but plans covering a very large number of individuals or exceptionally large amounts of money may have to register. Certainly, no employer can ignore the issue and all should obtain competent legal advice on the registration issue.

The key registration exemptions that would apply to most small corporation plans are for intrastate exemptions (securities offered and sold only to persons resident within a single state), small offerings, and nonpublic offerings. Regulation D, Rules 505 and 506 are safe harbors which define the latter two exemptions, as follows:

  1. Offers and sales of securities with a total offering price of $5,000,000 or less, in which there are no more than thirty-five purchasers and which meet certain other rules will be protected from registration requirements.
  2. Offers and sales of securities which do not involve more than thirty-five purchasers are protected from registration requirements (regardless of the dollar amount of the offering) if every purchaser who is not considered an accredited investor is considered capable of evaluating the merits and risks of the prospective investment.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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