Originally published February 17, 2009

Keywords: SEC, Notice ad Access Delivery Method, Proxy Materials, ERISA, mailing, shareholders, E-Proxy delivery, plan account,

The Securities and Exchange Commission's Notice and Access rules (also known as the "E-Proxy" rules), which became effective on January 1, 2009, give all public companies the option to forego the traditional method of mailing proxy materials to shareholders and instead to use the "notice and access model," whereby such materials are primarily made available via the Internet. For further information on E-Proxy delivery options and the conditions to their use, see our August 24, 2007, Securities Update, "E-Proxy: Understanding the New Delivery Options for the 2008 Proxy Season."

Even though the E-Proxy rules permit distribution of proxy materials via the Internet, sponsors of defined contribution retirement plans (such as 401(k) plans) should be mindful of the disclosure obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA), if the materials are being distributed in connection with a plan that is intended to be a "404(c) plan."

Section 404(c) of ERISA generally provides that, with certain limited exceptions, fiduciaries of account balance plans (such as 401(k) plans) are relieved from liability for losses (or by reason of any breach) resulting from a participant's exercise of control over the assets in his or her plan account. In order to obtain the protections of section 404(c), participants must be permitted to exercise (and must exercise) independent control over the assets in their plan accounts. A plan will be treated as providing participants with an opportunity to exercise control over their account assets only if, among other things, the participant is provided with, or has the opportunity to obtain, sufficient information to make informed decisions with regard to the plan's available investment alternatives and ownership rights connected with such investments (such as voting rights).

Applicable Department of Labor (DOL) regulations set forth extensive rules that must be satisfied in order for 404(c) protections to be afforded. In connection with plans that permit participants to invest in an employer stock fund, voting, tender and similar rights with respect to the employer securities must be passed through to participants and beneficiaries. Additionally, information that is provided to shareholders of the employer securities also must be provided to participants and beneficiaries who have plan accounts that hold employer securities.

Under ERISA, information must be provided to participants and beneficiaries in accordance with applicable DOL regulations. Those regulations permit electronic delivery of materials only to:

  • Participants who can access those documents at work, and for whom access to the relevant electronic information system is an integral part of their job duties; and
  • Participants and beneficiaries who have consented to receipt of documents through electronic media and have not withdrawn such consent.
  • Consent to electronic receipt requires that the participant or beneficiary be furnished with a statement that includes:
  • The types of documents to which the consent would apply;
  • Notice that consent can be withdrawn at any time without charge;
  • The procedures for withdrawing consent and for updating the address for receipt of electronically furnished information;
  • Notice of the right to request and obtain a paper version of the documents; and
  • Any hardware and software requirements for accessing and retaining the documents.

In light of the foregoing requirements, a plan sponsor's assessment of whether to rely upon the E-Proxy rules as the exclusive method of delivery of proxy materials should include a review of the sponsor's employee benefit plans and its desire for 404(c) protections. To ensure compliance with all applicable regulations, a public company may need to bifurcate the methods that it uses to deliver its proxy materials; for example, by using the mail, or other acceptable delivery methods, in connection with section 404(c) plan participants, and by using E-Proxy to deliver to all other shareholders.

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