WASHINGTON - The SEC won't cut companies any slack on registering deferred compensation or supplemental retirement plans set up outside of tax-favored pension plans.
The hard-line position could force hundreds of private companies and foreign corporations doing business in the United States to choose between going public or pulling the plug on their deferred compensation plans.
Most will dump the supplemental plans, experts say.
Employee benefits lawyers say Martin Dunn, associate director of operations of the Securities and Exchange Commission's division of corporation finance, has said the SEC is not willing to exempt even the most basic deferred compensation plans from registration as securities offerings.
The lawyers said Mr. Dunn made his remarks at the American Bar Association's Joint Committee on Employee Benefits meeting last month in Washington. The ABA committee had asked the SEC to exempt plain-vanilla deferred compensation plans from registration.
In an interview, Brian J. Lane, director of the corporation finance division, said: "We are not prepared to say that interest-only plans are not securities.
"It is still a debt obligation of the company" and the company adds money to the executives' accounts based on a predetermined interest rate, he said.
Mr. Lane said his staff is weighing whether to explain its position in an advisory opinion later this year.
Attorneys representing companies that would be affected by the SEC's move said registering would be costly.
"It's a big deal. Going public is a very big deal," said Paul T. Shultz, a partner in the New York office of law firm of Sutherland, Asbill & Brennan. "Private companies . . . certainly aren't going to go public to offer deferred compensation plans and foreign issuers might not want to reveal a lot of information to the public (stock) markets," he noted.
Registration would force foreign companies to restate their financial data under U.S. generally accepted accounting principles.
Following the meeting at which Mr. Dunn spoke, the ABA's joint employee benefits committee wrote him a letter, asking that the registration requirement be effective at year end for public companies and year end 1998 for private companies. The letter said companies need the extra time in part to comply with federal pension law.
What's more, private companies, or subsidiaries of publicly held companies, might need to figure out if they can claim any exemptions from securities rules, or arrange for parent corporations to guarantee the affiliate's deferred compensation obligations under the corporate umbrella, the draft ABA letter points out.
The letter also asks the SEC to double the size of an exemption available to companies that make small securities offerings. Under current rules, the exemption applies to securities offerings of less than $5 million in any 12-month period.
But even $10 million might be too small for some companies.
Consequently, companies might end up scaling back their deferred compensation plan arrangements to only their top executives, who would not need the protection of securities rules because they are considered sophisticated investors, said A. Richard "Brick" Susko, partner at the New York law firm of Cleary, Gottleib, Steen & Hamilton.
"Generally, deferred compensation plans have not had abuses that need the protection of securities law, therefore we will have compliance and registration problems in an area where there are no problems," he noted.
In typical deferred compensation or supplemental retirement plan arrangements, companies give executives the option of forgoing part of their current salary or bonus and taking it when they retire.
The executives save on current income taxes, and the companies credit an amount based on a stipulated interest rate, to the money set aside.
In more complex arrangements, companies may credit money to the executives' principal amounts based on the movement of the company stock, a broad market index, or shadowing returns on investments offered in 401(k) retirement plans.
Susan Serota, a partner with the New York law firm of Winthrop, Stimson Putnam & Roberts, said:
"I think the SEC has a valid concern, whether employees understand the credit risk they are taking when they defer compensation.
"On the other hand, I think this requirement of (forcing) private companies to register will have the effect of cutting the amount of deferred compensation being offered."
Also, companies that tie the returns on deferred compensation to those of private investment pools or hedge funds might be in for another nasty surprise, Mr. Susko pointed out.
Because securities rules exempt such private investment pools from registration only if they have fewer than 100 investors, or if they have very high net worth "qualified purchasers" participating, companies might have to link investment returns to some other options, or severely scale back their plans to cover only the top executives who would qualify as sophisticated investors, Mr. Susko said.