On May 4, the Staff of the Securities and Exchange Commission (“SEC”) Division of Investment Management issued a “Staff Statement Regarding Pooled Employer Plans” (the “Statement”) permitting a pooled employer plan (“PEP”) to be treated as a “single employer” plan for purposes of certain registration exemptions under federal securities law. Most notably, the Statement removes a barrier to PEP investments in collective investment trusts (“CITs”) where self-employed individuals participate in the PEP. The Statement helps both PEPs and CITs by articulating a clear rule and imposing only modest compliance burdens.
Brief Background on PEPs and Federal Securities Registration Requirements
Congress created PEPs under the SECURE Act of 2019, intending to expand access to retirement plans by allowing multiple unrelated employers to join a single 401(k) type plan administered by a “pooled plan provider” (“PPP”). PEPs can reduce the burdens of plan administration on smaller employers while providing access to a wide range of relatively low-cost investment options, including CITs. However, questions have arisen about the treatment of PEPs under:
- The Securities Act of 1933 (the “Securities Act”), which requires that securities offered or sold to the public must be registered with the SEC, unless an exemption applies; and
- The Investment Company Act of 1940 (the “Investment Company Act”), which requires each issuer of securities that is primarily engaged in investing securities to register as an “investment company,” unless an exemption applies.
Because participants in single employer 401(k) type plans voluntarily contribute their own earnings to the plan in the hope of realizing investment gains, participants’ interests in plans could be “securities” that must be registered and the plan itself could be viewed as an “issuer” of securities. However, most plans can avoid these registration requirements by relying on exclusions in the Securities Act and the Investment Company Act that apply to a qualified retirement plan trust if the plan covers employees of: (1) a single employer; (2) a group of closely related employers; or (3) jointly controlled union and employers.
PEPs Can Rely on the Single Employer Exclusion
The Statement notes that while none of these exclusions precisely describe PEPs, Congress intended PEPs to be treated like single employer plans under ERISA and the Internal Revenue Code. As a result, the Statement concludes that a PEP should also be able to rely on the “single employer” exclusion from registration under the Securities Act and the Investment Company Act provided that the PEP is: (1) subject to ERISA; and (2) qualified under section 401(a) of the Code.
CITs Can Treat a PEP as a Single Employer
The Statement then addresses PEP investments in CITs. CITs generally rely on exclusions from registration under both the Securities Act and the Investment Company Act that are similar to the exclusions available to qualified plans. However, the Securities Act exclusion for CIT interests is not available if the CIT permits investment by “self-employed individuals” (typically, as part of a Keogh Plan) unless the requirements of a regulation known as “Rule 180” are satisfied. The SEC has explained that Rule 180 is available only if: (1) the plan covers employees of a “single employer” (or a series of interrelated partnerships); and (2) each single employer is financiall sophisticated or obtains expert advice.
To date, uncertainty about whether Rule 180 is available for PEP investments in CITs has resulted in limited access to CIT investments for PEP participants. The Statement should relieve these constraints because it allows a CIT to issue interests to a PEP covering one or more self-employed persons if the PEP is subject to ERISA and the offering otherwise meets the requirements of Rule 180. CITs can also comply with the “sophistication” requirement of Rule 180 by confirming that the PPP “is able to adequately represent the interests of plan participants.” In this way, the Statement allows CITs to look to the PPP to ensure the CIT is an appropriate investment for all PEP participants (including self-employed individuals).
Observations
While the Statement provides needed clarity to the securities registration issues it addresses, it is often the case that regulatory certainty in one area can introduce or exacerbate uncertainty in another. For example, most PPPs will be comfortable if the PEP is treated as a “single employer” plan for purposes of avoiding securities registration requirements, but will not want to be viewed as the “employer” of PEP participants under ERISA.
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