We have blogged many times over the years about the evolving law affecting companies that offer a company stock fund investment option under their 401(k) Plan. Companies that offer a company stock fund know that they need to register shares on a Form S-8 filed with the SEC. But what about companies that do not offer a company stock fund investment option under their 401(k) Plan? They are out of the woods, right? Wrong again buzzard breath.

Last Thursday, the SEC published a new C&DI, Question 139.33, confirming its position (in the face of pushback from, among others, the ABA) that a company that does not offer a company stock fund investment option under its 401(k) Plan still may be required to file a Form S-8 if it makes available a brokerage window feature through which participants could invest their own contributions in company stock. (Broc blogged on this last week, right after the SEC published it.)

According to the SEC, whether a company must file an S-8 for company stock that may be acquired through a brokerage window “depends on the extent of the employer company’s involvement.” To avoid the need to file an S-8, the company may do no more than:

  • Describe the self-directed “brokerage window” as part of the investment alternatives under the 401(k) plan
  • Make payroll deductions
  • Pay administrative expenses not in any way tied to particular investments selected by employees

The company must not take any action to draw employees’ attention to the possibility of investing in employer securities through the brokerage window. In the SEC’s eyes, part of the problem was that companies eliminated the company stock fund option from their 401(k) Plans following the avalanche of “Stock Drop Litigation.” However, some of those companies (and others that never offered a company stock fund) prominently broadcast to their employees, “Do not worry, you can always buy company stock through the brokerage window!

So what should companies do? Companies essentially have the following three choices:

  1. Prohibit investments in company stock through the brokerage window.
  2. Review their plan communications to eliminate any references to company stock in their self-directed brokerage and 401(k) Plan communications (and, possibly, reissue those communications).
  3. Register shares on Form S-8 (which is neither difficult nor costly).