Chapter 8 - § 8.8 • EMPLOYEE BENEFIT PLAN TRANSACTIONS

• Jurisdiction: Colorado

§ 8.8 • EMPLOYEE BENEFIT PLAN TRANSACTIONS

§ 8.8.1—Do They Involve The Offer Or Sale Of A Security?

Many employee benefit plans that use stock as an incentive to employees are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). These include Employee Stock Ownership Plans (ESOPs) and similar plans that create a trust relationship for the benefit of the participating employees.

Participation by an employee in a non-voluntary, non-contributory plan is not subject to regulation under the federal securities laws.³⁷ In such a plan, the employees are not voluntarily giving up something of value. It cannot be successfully argued that "but for the plan," the employee's compensation would be greater because the employee's compensation is in the discretion of the officers or directors of the corporation.

On the other hand, participation by employees in voluntary, contributory plans is subject to regulation under the federal securities laws.³⁸

In Uselton v. Commercial Lovelace Motor Freight, Inc., the court found that the employees were electing to give up something of value in exchange for a security — the voluntary deductions made from their paychecks to purchase shares in the company through the ESOP. The court also determined that the existence of the ERISA regulatory scheme did not exempt employee benefit plans from regulation under the securities laws because the ERISA regulation did not "compel the disclosure of 'relevant, accurate information upon which to base an investment decision.'"³⁹ Furthermore, ERISA "fails to provide a meaningful remedy to plan participants who allege that plan administrators or promoters acted fraudulently. "⁴⁰

In so deciding, the Tenth Circuit applied the test fashioned by the Supreme Court in Marine Bank v. Weaver⁴¹ and International Brotherhood of Teamsters v. Daniel,⁴² further refined by the Tenth Circuit in Holloway v. Peat, Marwick, Mitchell & Co.⁴³ The test under Holloway for determining whether an alternative regulatory scheme bars application of the federal securities laws is "whether such alternative federal regulation accomplishes the same purposes as the securities laws, thereby making the securities laws' protection for investors duplicative and unnecessary."⁴⁴

In Marine Bank, federal regulation of banking was found to be sufficient with respect to certificates of deposit. In Daniel, ERISA regulation was found to be sufficient in the case of non-contributory, non-voluntary pension...