Clarification on SEC’s Guidance for Company Stock Purchases Through a 401(k) Plan Brokerage

Last month, I wrote about some helpful guidance published by the SEC on the question of whether a company that does not offer a company stock fund investment option under its 401(k) Plan, but makes available a self-directed “brokerage window feature” that allows participants to direct the investment of their 401(k) Plan accounts among an almost limitless number of investment alternatives, including, potentially, company stock, must file a Form S-8. What I want to clarify is that the guidance the SEC published in new C&DI, Question 139.33, was consistent with the SEC staff's previously announced (and long-held) position on employee stock purchase plans (that is, broad purchase programs that are operated by a third party, rather than the company itself).

I am afraid that some readers were concerned that the SEC was creating a trap for companies, when the SEC was, in fact, providing a very helpful expansion of its prior position on open marker employee stock purchase plans. My bad for using a scary headline designed to capture readers’ attention, instead of the one I offered at the very end of that Blog, which was “P.S. I realize that this is not a surprise to many of you, but the title seemed more likely to draw readers’ attention than this title: ‘Ho Hum, the SEC Confirms Something...Whatever.’”

Nearly all public companies allow employees to make pre-tax salary deferral contributions to a 401(k) Plan. Many public companies make available a company stock fund into which Plan participants may direct all or a portion of their contributions. These companies must file a Form S-8 to register the offering and sale of stock to employee/participants under the 401(k) Plan. Until the SEC’s recent guidance, it was not clear whether those companies had to file a Form S-8 for shares of company stock purchased through the brokerage window. New C&DI 139.33 is good news for all of us, except for those few that were seeking to do indirectly what they couldn't do directly without registration.

As I pointed out last month, the company should not draw employees’ attention to the possibility of investing in employer securities through the brokerage window. A potential problem arises when a company eliminates the company stock fund investment option from its 401(k) Plan [usually in response to the avalanche of “Stock Drop Litigation”], but then prominently broadcasts to their employees, “Don’t worry, you can always buy company stock through the brokerage window!