Since Congress enacted the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”),[1] the staff of the U.S. Securities and Exchange Commission (the “Commission”) has received inquiries about how pooled employer plans should be treated under the Federal securities laws. Pooled employer plans, sometimes referred to as “PEPs,” are a type of defined contribution retirement plan created by Congress under the SECURE Act.
Pooled employer plans permit multiple, unrelated employers to join a single retirement plan and offer retirement benefits to their employees through the plan, subject to the requirements in the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986 (the “Code”).[2] Different types of employers may participate in a pooled employer plan, including employers with one or more employees that are “self-employed individuals” as defined in section 401(c)(1) of the Code.[3]
The staff of the Division of Investment Management (the “staff”) is thus providing its views regarding the applicability of (i) the “single trust exclusion” in section 3(c)(11) of the Investment Company Act of 1940 (the “Investment Company Act”) to pooled employer plans, and (ii) rule 180 under the Securities Act of 1933 (the “Securities Act”) to interests in collective investment trusts (“CITs”) maintained by a bank and issued to those pooled employer plans that cover self-employed individuals.
Applicability of the “Single Trust Exclusion” in Section 3(c)(11) to Pooled Employer Plans
In order to avoid regulation as an investment company under the Investment Company Act, employee benefit plans often rely on the exclusion from the definition of “investment company” in section 3(c)(11) of the Investment Company Act for “[a]ny employee’s…profit-sharing trust which meets the requirements for qualification under section 401 of [the Code]…” commonly referred to as the “single trust exclusion.”[4]
Section 3(a)(2) of the Securities Act includes a similarly-worded exemption under the Securities Act for interests in what are commonly referred to as “single trusts.”[5] Staff of the Divisions of Investment Management and Corporation Finance have historically interpreted the single trust provisions in both Acts as referring to the same type of trust,[6] specifically:
- a trust fund for employees of a single employer;
- a trust fund for employees of employers so closely related as to be regarded as a single employer (e.g., a parent and its subsidiaries); and
- a trust fund established and controlled by employers and/or a union representing the employees of such employers.[7]
Pooled employer plans do not fall into any of these categories because a pooled employer plan is typically structured as a trust fund for employees of multiple, unrelated employers.
As discussed above, however, Congress enacted the SECURE Act to, among other things, remove legal barriers preventing the broader use of multiple employer plans.[8] For this reason, Congress, among other actions, amended ERISA and the Code to treat pooled employer plans as single employer plans for purposes of those statutes.[9] Accordingly, the staff would not object if a pooled employer plan treats itself as a single employer plan for purposes of the Investment Company Act and relies on the single trust exclusion in section 3(c)(11) of the Investment Company Act to avoid registration as an investment company; provided that the pooled employer plan: (i) is subject to ERISA; and (ii) meets all of the requirements of the relevant section of the Code referenced in section 3(c)(11).[10]
Applicability of Rule 180 to Interests in CITs Issued to Certain Pooled Employer Plans
Many pooled employer plans offer CITs as investment options to employers participating in the plan and their employees. CITs typically do not register the offer and sale of their interests under section 5 of the Securities Act in reliance on the exemption in section 3(a)(2) of the Securities Act.[11] However, CITs that accept assets from plans covering “self-employed individuals” as defined in the Code cannot rely on the exemption in section 3(a)(2). Section 3(a)(2) of the Securities Act exempts from registration requirements of the Act interests issued in connection with certain qualified employee benefit plans. Section 3(a)(2), however, does not apply to interests in plans covering self-employed individuals, as defined in section 401(c)(1) of the Code, or to interests in CITs and separate accounts that fund such plans. As a result, CITs that accept such assets may seek to rely on rule 180 under the Securities Act to avoid registering their interests under the Act.
Rule 180 exempts from registration any interest or participation in a CIT issued to an employee benefit plan that covers self-employed individuals; provided that the plan and issuer meet the criteria set forth in the rule. Among other criteria,[12] rule 180(a)(2) requires that “[t]he plan covers only employees of a single employer or employees of interrelated partnerships.” Additionally, rule 180(a)(3), commonly referred to as the rule’s “sophistication requirement,” generally requires that the issuer have reasonable grounds to believe that the employer has (or obtains advice from a certain person or entity reflecting) “knowledge and experience in financial and business matters” so the interests of the employer and its employees are adequately represented.[13]
The staff has been made aware that sponsors of CITs have interpreted rule 180 as being unavailable to interests issued to pooled employer plans that cover self-employed individuals, because such plans cover multiple, unrelated employers (which is seemingly inconsistent with the requirement in rule 180(a)(2)) and CITs are uncertain as to how they can satisfy the rule’s sophistication requirement with respect to these plans.[14] As a result, pooled employer plans covering self-employed individuals generally do not have access to investments in CITs.[15] This interpretation also may cause pooled employer plans to exclude employers with self-employed individuals from joining the plan to retain the pooled employer plan’s ability to include CITs as plan investment options.[16]
As discussed above, Congress adopted the SECURE Act to expand the ability of small employers, including self-employed individuals, to participate in pooled employer plans and benefit from the economies of scale such plans provide.[17] Accordingly, in the staff’s view, it is reasonable to similarly treat pooled employer plans as single employer plans for purposes of rule 180(a)(2).
For these reasons, the staff would not object if a CIT issues interests to a pooled employer plan that covers self-employed persons without registering the offer and sale of the CIT’s interests under section 5 of the Securities Act in reliance on rule 180; provided that the plan: (i) is subject to ERISA; and (ii) the issuance meets all of the requirements in rule 180(a)(1) and (a)(3). The staff understands that ERISA requires the pooled plan provider to provide most of the administrative and fiduciary responsibilities with respect to that plan, effectively assuming the role of the employer.[18] As such, the staff takes the view that a CIT may apply the rule’s sophistication requirement with respect to the plan’s pooled plan provider, rather than any employer, to confirm that the provider is able to adequately represent the interests of plan participants.[19]
We note that CIT interests eligible to rely on rule 180 remain subject to the Securities Act’s anti-fraud provisions.[20] In addition, our position in this statement applies equally to any other investment option issued to a pooled employer plan that would otherwise qualify for the rule 180 exemption, including any interest or participation in a single trust fund or any security arising out of a contract issued by an insurance contract. Further, this statement focuses on the availability of rule 180 to interests in CITs issued to certain pooled employer plans, not on the interests in pooled employer plans issued to participants. For those interests, a pooled employer plan—like any other employee benefit plan—may rely on available exemptions from the Securities Act’s registration requirements, including rule 180(b), provided the plan satisfies the conditions of the applicable exemption.
This staff statement represents the views of the staff of the Division of Investment Management.[21] It is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This staff statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. Future changes in rules, regulations, and/or the staff’s no‑action and interpretive positions may supersede some or all of the information in a particular staff statement.
If you have any questions about this statement, please contact the Division of Investment Management’s Chief Counsel’s Office at IMOCC@sec.gov.
[1] The SECURE Act was enacted as Division O of the Further Consolidated Appropriations Act 2020 (Pub. L. 116-94) (Dec. 20, 2019).
[2] See section 3(43)(A) of ERISA (defining a pooled employer plan generally as “an individual account plan established or maintained for the purpose of providing benefits to the employees of two or more employers”); section 413(e) of the Code (outlining qualification requirements applicable to pooled employee plans).
[3] For purposes of this staff statement, “self-employed individuals” has the same meaning as the definition in section 401(c)(1) of the Code, which generally includes employees who receive net earnings from self-employment, such as sole proprietors or partners who work for their own businesses. See section 401(c)(1) of the Code.
[4] An employee benefit plan that meets the definition of “investment company” under section 3(a)(1) in the Investment Company Act must register as an investment company unless an exclusion, such as the single trust exclusion in section 3(c)(11), or an exemption applies.
[5] See section 3(a)(2) of the Securities Act (exempting from registration “any interest or participation in a single trust fund… issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of [the Code]”).
[6] See Employee Benefit Plans, Release No. 33-6188 (Feb. 1, 1980) (“Release 33-6188”) (setting forth the views of the staff of the Division of Corporation Finance concerning the application of the registration provisions of the Securities Act to interests in employee benefit plans and noting that section 3(c)(11) of the Investment Company Act was the model upon which the single trust exemption in section 3(a)(2) of the Securities Act was based); see also Communications Workers of America Savings and Retirement Trust, SEC Staff No-Action Letter (Jan. 27, 1980) (stating the staff’s views that, given the similar statutory language, the single trust exclusion in section 3(c)(11) of the Investment Company Act refers to the same type of trust as that described in the single trust exemption in section 3(a)(2) of the Securities Act).
[7] See Release 33-6188 (stating the staff’s view that each of these would be considered a single trust for purposes of section 3(a)(2)). Staff stated similar views on the single trust exclusion in section 3(c)(11) in a series of no-action letters. See e.g., The E.W. Scripps Company, SEC Staff No-Action Letter (Jan. 5, 1983) (discussing the staff’s position that a trust covering employees of various related employers could rely on the single trust exclusion in section 3(c)(11), but a trust covering employees of various unrelated employers could not).
[8] See SECURE Act of 2019, Report of the Committee on Ways and Means, H. Rept. 116–65, part 1, May 16, 2019, available at https://www.congress.gov/committee-report/116th-congress/house-report/65/1 (“2019 Report”) (noting that the SECURE Act modifies certain requirements “to make it easier for small businesses to offer such plans to their employees by allowing otherwise completely unrelated employers to join in the same plan”); see also Scott Retirement Security Report, U.S. Senate Special Committee on Aging (Oct. 2021), available at https://www.aging.senate.gov/imo/media/doc/Scott_Retirement_Security_Report_10.28.21.pdf (noting that the SECURE Act established pooled employer plans “[t]o help bridge the access gap in employer-provided retirement plans…[by]allowing unrelated small businesses to join together and provide retirement savings options without some of the costs, administrative burdens, and liability attached to sponsoring a plan on their own.”).
[9] See SECURE Act (e.g., amending section 3(2) of ERISA to treat a pooled employer plan as “a single employee pension benefit plan or single pension plan…” and amending section 413 of the Code to permit a pooled employer plan to keep its tax-qualified status under certain circumstances).
[10] See section 3(c)(11) of the Investment Company Act (limiting the single trust exclusion to “[a]ny employee’s…profit-sharing trust which meets the requirements for qualification under section 401 of [the Code] …”).
[11] CITs typically do not register as investment companies under the Investment Company Act by relying on the exclusion in section 3(c)(11) of the Act for collective trust funds maintained by a bank consisting solely of assets of certain types of employee benefit plans. See section 3(c)(11) of the Investment Company Act.
[12] For example, rule 180(a)(1) generally requires that: (i) the plan covers self-employed individuals; and (ii) is either (a) a pension or profit-sharing plan that qualifies under section 401 of the Code, or (b) an annuity plan that meets the requirements for deduction of the employer’s contribution under section 404(a)(2) of the Code.
[13] Rule 180(a)(3) generally requires that the issuer “have reasonable grounds to believe and, after making reasonable inquiry, shall believe immediately prior to any issuance” that the employer is able to adequately represent its interests and those of its employees because either: (i) the employer is a law firm, accounting firm, investment banking firm, pension consulting firm or investment advisory firm engaged in providing services that involve knowledge and experience in financial and business matters; or (ii) the employer obtains advice from an unaffiliated person/entity that has knowledge and expertise in financial and business matters.
[14] More specifically, CITs are unsure whether they may assess the sophistication of the pooled employer plan’s pooled plan provider, or whether they must assess the sophistication of each employer participating in the plan, because the sophistication requirement refers to “the employer.”
[15] See e.g., letter from American Bankers Association (Sept. 24, 2019), available at https://www.sec.gov/comments/s7-08-19/s70819-6184363-192414.pdf (noting that “most CITs would continue to admit only [rule 180 qualified plans] in order to maintain the exemption from registering interests in the CIT under the [Securities Act]”).
[16] See e.g., letter from Wilmington Trust (Jan. 6, 2020) available at https://www.sec.gov/comments/s7-08-19/s70819-6611993-202936.pdf (noting that the restrictions of the rule “operate in a manner that does not protect persons who are self-employed, but interfere with and impede their eligibility to participate in [PEP] arrangements that invest in CITs”).
[18] See section 3(44) of ERISA (defining pooled plan provider to mean a person that is designated by the terms of the plan as a named fiduciary under ERISA, as the plan administrator, and as the person responsible for the performance of all administrative duties that are reasonably necessary to ensure the pooled employer plan meets Code and ERISA requirements); Registration Requirements for Pooled Plan Providers, 85 FR 72934 (Nov. 16, 2020).
[19] For the avoidance of doubt, the sophistication requirement may be applied to a pooled plan provider under either rule 180(a)(3)(i) or (a)(3)(ii). See generally Exemption from Registration of Interests and Participations Issued in Connection with Certain H.R.10 Plans, Release No. 33-636317 (Nov. 24, 1981) (“The Commission believes that the conditions incorporated in proposed rule 180 minimize the potential for abuse. By requiring (1) the plan cover only employees of a single employer or of interrelated partnerships and (2) the employers be sophisticated in financial matters or obtain expert advice, it is likely that the employers adopting [Keogh] plans will be able to protect their own interests as well as those of their employees. It is not unreasonable to rely on the sophisticated employer or the qualified expert to obtain all necessary information from sponsors of potential funding media prior to making any decision or recommendation affecting the disposition of the assets of the [Keogh] plan…[Rule 180] exempts only those issued to plans of employers which can be expected to provide adequate representation of the interests of plan participants.”).
[20] See section 17(a) of the Securities Act.
[21] This staff statement represents the views of the staff of the Division of Investment Management regarding the application of section 3(c)(11) of the Investment Company Act and rule 180 under the Securities Act. It does not address any other provisions of the Federal securities laws. For the views of the staff of the Division of Corporation Finance regarding the eligibility of pooled employer plans to claim the section 3(a)(2) exemption see Corporation Finance Interpretation 118.01 available at https://www.sec.gov/rules-regulations/staff-guidance/corporation-finance-interpretations-cfis.