Excerpt from Current Issues and Rulemaking Projects Outline (November 14, 2000)
Section VIII.A.12. Current Disclosure, Legal and Processing Issues – Disclosure, Legal and Processing Issues –Non-Qualified Deferred Compensation Plans
A typical non-qualified deferred compensation plan permits an employee to defer compensation over a set dollar amount. The employer retains those monies. The employee will then either receive a fixed rate of return on the deferred monies or the employer may permit the employee to index the return on those monies off of a number of investment return alternatives.
In a number of no-action positions, the Division has indicated that it would not recommend enforcement action if transactions in non-qualified deferred compensation plans were not registered. The requests in those instances set forth two bases for the determination that registration under the Securities Act was not required. First, those requests set forth the argument that the offer and sale of interests in the deferred compensation plan did not involve the offer or sale of a security because the decision to participate in those plans was based primarily on tax management, not investment, purposes. Second, the requests contained the argument that the employees participating in the plan were top-level executives who did not need the protections provided by registration under the Securities Act. In providing the no-action position requested, the Division's responses state that, while not agreeing with the analysis in the request, it would not recommend enforcement action if transactions under the plans were not registered. The Division has not taken such a no-action position since 1991.
Due to a number of market and regulatory factors, non-qualified deferred compensation plans have greatly proliferated, both with respect to the number of employers offering such plans and the number of employees participating. At this time, the Division is not prepared to disregard the argument that the debt owing to plan participants is analogous to investment notes, which typically are viewed as debt securities. Further, the staff is not persuaded that there is a meaningful distinction between those plans that offer returns tied to different investment alternatives and those that offer only a fixed rate. The Division, therefore, will not grant requests for no-action with respect to any non-qualified deferred compensation plan, including those that have an interest only return. The Division has not stated affirmatively, however, that all interest only deferred compensation plans involve securities. Instead, the Division currently is leaving that question for counsel's analysis of the facts and circumstances. To the extent that interests in a non-qualified deferred compensation plan are securities, registration would be required unless the offerings under the plan would qualify for an exemption, e.g., Section 4(2).
Form S-8 would be available when an employer registers the offer and sale of interests in the deferred compensation plan under the Securities Act. The filing fee should be based on the amount of compensation being deferred, not on the ultimate investment return. As the "deferred compensation obligations" to be registered are obligations of the issuer/employer, not interests in the plan, the registration of the "deferred compensation obligations" would not result in a requirement that a deferred compensation plan file a Form 11-K with respect to those securities. Further, based on the unique terms of the "deferred compensation obligations" (both with respect to interest and maturity), compliance with the Trust Indenture Act of 1939 has not been required.