Securities laws and NQDC
Author | Marla J. Aspinwall - Michael G. Goldstein |
Pages | 357-378 |
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CHAPTER XV
SECURITIES LAWS AND NQDC
Lawrence S. Venick
Loeb & Loeb LLP
I.
INTRODUCTION
This Chapter considers two issues: (i) when a NQDC plan must be registered with the
Securities Exchange Commission (“SEC”) and (ii) how NQDC benefits must be disclosed in
proxy statements and other reports filed with the SEC.1
II.
REGISTRATION OF NQDC PLANS WITH THE SEC
The Securities Act of 1933, as amended (the “1933 Act”),2 requires that any security be
registered with the SEC before any sale or offer to sell is made, unless an exemption from
registration applies.3
A.
Does an Interest in a NQDC Plan Constitute a Security? The term “security” is
defined by Section 2(1) of the 1933 Act to include, among other things, “any note, stock . . .
bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-
sharing agreement . . . [or] investment contract.”4 A NQDC plan is not specifically identified in
the list of instruments and agreements constituting securities, and, in fact, the U.S. Supreme
Court has noted that the 1933 Act definition of “security” makes no reference to pension plans at
all.5 As such, it is instructive to review court cases, SEC releases and other regulatory
pronouncements in analyzing whether a NQDC plan must be registered with the SEC.
1.
Teamsters v. Daniel. In 1979, the U.S. Supreme Court considered whether
an employee benefit plan constituted an “investment contract,” and therefore a “security,” in
Teamsters v. Daniel.6 In Daniel, a trucking company established a defined benefit pension plan
for its employees, including Daniel, pursuant to a collective bargaining agreement. All
employees were required to participate in the plan. The employer made all contributions to the
plan, and the employees were not permitted to make any contributions. Under the plan, an
employee was required to have 20 years of continuous service with the company in order to
1 See also Chapter XIV, “Financial Accounting and NQDC,” and Chapter VI, “ERISA and NQDC,” for
additional information regarding the disclosure of information regarding NQDC plans.
2 15 U.S.C. § 77a et seq.
3 15 U.S.C. § 77e.
4 15 U.S.C. § 77b(1).
5 Teamsters v. Daniel, 439 U.S. 551, 558 (1979) (“[i]n spite of the substantial use of employee pension plans
at the time they were enacted, neither § 2(1) of the Securities Act nor § 3(a)(10) of the Securities Exchange
Act, which defines the term ‘security’ in considerable detail and with numerous examples, refers to pension
plans of any type”).
6 439 U.S. 551 (1979).
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receive benefits.7 The company refused to pay benefits to Daniel because, although he had
worked over 20 years for the company, he had a four-month break in service due to a layoff.8
Daniel argued that the plan was required to be registered with the SEC, that the employer had
made misstatements regarding the plan, and that the employer had failed to provide material
information required by the 1933 Act.
Prior to Daniel, the U.S. Supreme Court enumerated four criteria in SEC v. Howey for
determining whether an instrument or agreement constitutes an “investment contract”: it
involves: (i) an investment of money; (ii) in a common enterprise; (iii) with the expectation of
profits; (iv) to be earned solely from the efforts of others (often referred to as the “Howey test”).9
In Daniel, the U.S. Supreme Court concluded that the pension plan arrangement was not
an “investment contract” under the four-part Howey test because two of the four parts were not
satisfied — (i) the “investment of money” test and (ii) the “expectation of profits” test.10
Investment of Money Test. The Supreme Court stated that this requirement was not met
because Daniel did not “give up a specific consideration in return for a separable financial
interest with the characteristics of a security.”11 In addition, the court found that “in such a
pension plan the purported investment is a relatively insignificant part of the total and indivisible
compensation package of an employee, who, from the standpoint of the economic realities, is
selling his labor to obtain a livelihood, not making an investment in the future.”12
Expectation of Profits Test. The Supreme Court stated that while the pension fund
depends to some extent on earnings from its assets, “the possibility of participating in a plan’s
asset earnings ‘is far too speculative and insubstantial to bring the entire transaction within the
7 Id. at 554.
8 Id. at 555, n. 4 (Daniel was laid off from December 1960 to April 1961; and from April 1961 to July 1961
no contributions were made by the employer to the plan because of embezzlement by the employer’s
bookkeeper).
9 SEC v. Howey, 328 U.S. 293 (1946). The Howey Company owned citrus groves in Lake Country, Florida.
A related corporation, Howey-in-the-Hills Service, Inc. (“Howey-in-the-Hills”), provided various services
in connection with cultivating and developing the citrus groves. Prospective customers were offered both a
land sale contract from Howey Company and a service contract from Howey-in-the-Hills. Although a
prospective customer could purchase the land only (and not enter into the service contract), the superiority
of the Howey-in-the-Hills services was stressed, and in fact, 85% of the acreage sold was covered by
Howey-in-the-Hills service contracts. When a prospective customer paid the purchase price, the land was
conveyed to the purchaser by warranty deed and under the service contract, Howey-in-the-Hills was
granted a leasehold interest and full and complete possession of the acreage for a 10-year period (the
customer did not have an option to cancel). The customers were predominantly business and professional
people who lacked the knowledge, skill and equipment to cultivate, harvest or sell the fruit, and who were
attracted by the expectation of profits. Howey did not file a registration statement with the SEC regarding
the sale of these arrangements. The Supreme Court concluded that the arrangements constituted an
“investment contract” and that the failure to register was a violation of the 1933 Act.
10 See supra note 6.
11 439 U.S. at 559.
12 58 L. Ed. 2d 808, 812 (syllabus of reporter of decision).
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