Over 8,000 stocks trade on American stock exchanges,[1] but billions of dollars in daily trades in these listed stocks and 12,000 more unlisted (non-exchange-traded) stocks occur outside of an exchange in Over-The-Counter (“OTC”) transactions.[2] A substantial portion of these trades involve stocks held within employer-sponsored retirement plans subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). Individuals who constitute “fiduciaries” under ERISA are bound by fiduciary duties set forth under ERISA, including heightened concern regarding the stock’s liquidity, proper valuation, and compliant transfer.[3] Yet, problems often arise in these areas, so much so that significant government guidance and private-plaintiff litigation is focused on investigating the major problems while offering substantial paths to voluntary compliance and self-correction to offload lesser—but still monetarily significant—disputes.
What You Need to Know:
- OTC stock compensation is increasingly at issue in retirement plans because of both a large retiring generation and the prevalence of equity awards at start-ups.
- Criminal enforcement of insider trading, market manipulation, and other securities fraud remains high.
- Both the DOJ and the DOL are encouraging voluntary self-disclosure and self-correction of non-compliance in common areas of fiduciary risk, such as transactions involving parties in interest, illiquid assets, and potentially improper valuations.
- Plaintiffs’ lawyers are increasingly targeting OTC issuers/employers and their retirement plans to contest potential liquidity, valuation, or transfer problems involving OTC stocks.
A large retirement-age generation is seeking to liquidate equity accumulated over decades with their employers while a new generation of start-ups and small-cap companies have expanded access to stock compensation for executives and employees who are expected to change employers more frequently. Thus, retirement plans and their fiduciaries are increasingly encountering scenarios where OTC stocks are at issue in distribution and rollover payments. Depending on the documents governing the retirement plan, employees and retirees may have the ability to direct investment into OTC stocks that trade thinly because of low transfer volume or limited buyer/seller interest, particularly when the employer issues the stocks.[4] The intersection of securities laws and ERISA laws are overlayed with general government-enforcement policies that should be considered in a nuanced manner when acting on behalf of retirement plans that include such stocks in their portfolios.
Above all else, securities laws banning insider trading and market manipulation prohibit retirement plans and their fiduciaries from acting in a criminal manner.[5] The U.S. Department of Justice (“DOJ”) prosecutes criminal violations of the securities-fraud laws. The U.S. Securities and Exchange Commission (“SEC”) enforces the civil fraud provisions of the securities laws. Thus, employer-sponsored retirement plans are expected to have controls in place to prevent misconduct, and plan fiduciaries may not engage in or facilitate fraudulent acts, such as:
- An employee dumping shares held in a retirement plan account because the employee has information that bad news about the employer/issuer will soon be made public
- A board-level Compensation Committee times awards of stock grants to high-performing employees ahead of the release of good news to give them the benefit of an anticipated rise in share price
- Amounts withheld from employees’ pay to be used for pre-tax retirement-account contributions to purchase and hold company stock are accumulated and strategically injected into the retirement plan only when company executives want to drive up the company’s share price right before the end of a reporting period (“marking the close”)
- Sale requests by plan participants are intentionally queued and delayed until after a fiduciary is able to sell off all personally-held shares before the sale pressure from the plan affects the market price
Criminal law, however, generally—and in this context particularly—requires evidence of criminal intent. Similar fact patterns can emerge by coincidence, honest mistake, or even negligence—and not be criminal. Indeed, fiduciaries could be seeking to avoid one harm (e.g., manipulating a market by selling large quantities of thinly traded shares all at once) that could inadvertently lead to a different harm (e.g., depriving plan participants of the chance to buy shares at low prices when selling pressure is high). Regulations and agency guidance, along with case law, illuminates a path in these situations, but non-compliance can occur—particularly in the thorny areas of ensuring liquidity without engaging in market manipulation, fairly valuing a stock without disclosing insider information, and transferring stocks among related parties (including the issuer itself).
The U.S. Department of Labor (“DOL”) houses an agency responsible for plan/fiduciary compliance issues—the Employee Benefits Security Administration (“EBSA”).[6] The EBSA administers a Voluntary Fiduciary Correction Program (“VFCP”) “that allows plan officials to identify and fully correct certain transactions such as prohibited purchases, sales, and exchanges; improper loans; delinquent participant contributions; and improper plan expenses.”[7] If a VFCP application is accepted, then the applicant will receive a no-action letter from EBSA, which allows for a correction of a fiduciary breach without imposition of civil monetary penalties.
On January 14, 2025,[8] the DOL released new final rules under the VFCP that aimed to streamline certain corrections, notably including a self-correction component for certain delinquent transmittals of participant contributions. However, some applicants or fiduciary breaches are not eligible for correction under the VFCP. Eligibility for the VFCP is generally limited to (1) non-criminal conduct (2) that is not already under direct governmental investigation.[9] In such cases, with proper documentation of a situation, an explanation of how it occurred, and proof of what was done to fix it, civil and administrative exposure can be avoided if the EBSA accepts the correction under the VFCP. The VFCP expressly applies to 19 different situations, including:
- Purchase of Assets by Plans from Parties in Interest
- Sale of Assets by Plans to Parties in Interest
- Purchase of Assets from Non-Parties in Interest at More Than Fair Market Value
- Sale of Assets to Non-Parties in Interest at Less Than Fair Market Value
- Holding of an Illiquid Asset Previously Purchased by a Plan
- Payment of Benefits Without Properly Valuing Plan Assets on Which Payment is Based
Thus, scenarios involving company share buybacks, fiduciaries liquidating personally allocated plan assets, illiquidity of thinly traded OTC shares, and contested valuations of OTC stocks are all potentially eligible for the VFCP.[10] Similarly, the VFCP contemplates resolution of imperfect efforts for a plan/fiduciary to be protected by the ERISA 404(c) safe harbor.[11]
Notably, even broader guidance in the EBSA’s Voluntary Compliance Guidelines (“VCG”) strongly advocates that “[m]any issues are suitable for” voluntary compliance, including benefit disputes, reporting issues, and disclosure issues encountered by plans and fiduciaries.[12] Typically, an issue involving fraud or criminal misconduct cannot be voluntarily resolved—but, if the DOJ and SEC are first brought into agreement to defer to the EBSA, it can be.[13] Similarly, cases requiring more than a year to correct and/or warranting a removal of a fiduciary are routinely ineligible, but exceptions can be made with the right approach and under the right case circumstances. Repeat violations, complex violations, and novel legal issues may be more challenging, but may nonetheless be considered for voluntary compliance without further government action in the right settings.
A path to voluntary compliance has numerous benefits. Naturally, benefits exist in avoiding penalties, a monitorship, or even costs associated with responding to government subpoenas and interview requests. Certainty in knowing the government’s position before the ERISA statute of repose runs is another benefit.[14] Likewise, knowing what the government finds acceptable for resolution is also helpful, particularly when the situation may repeat itself or call for an SEC Rule 10b5-1 plan to allow OTC securities to be sold over time in the future to allow a retirement plan to both meet its obligations to participants and to avoid securities-fraud claims. A first-mover advantage often exists for the entity that first calls the government’s attention to a situation, as the same facts can be narrated quite differently by a lawyer representing a plan/fiduciary versus a lawyer representing a plaintiff plan participant, employee, or retiree.
While many states have ethics rules completely or partially prohibiting the threat of criminal prosecution or reports to government regulators solely to obtain an advantage in civil litigation, plaintiffs’ lawyers can sometimes toe the line and push cases forward with such implications. Likewise, plaintiffs’ lawyers can also seek to morph individual participant claims into class actions involving all traders in a certain OTC stock or with a certain value, time, or method. Strong internal controls—and self-detection and self-correction in accordance with industry best practices and government expectations—can position potential defendants (including, for example, the employer/issuer, the plan, fiduciaries, and their insurers) for a stronger defense against such private-private claims and related tactics.
Both the government and private plaintiffs have a particular interest in ensuring proper valuation of OTC stocks without getting dragged into a protracted “battle of the experts” in litigation where dense and costly accounting and valuation professionals can prolong litigation and render any victory a hollow one after expenses are considered. An EIAP may invest in employer securities as long as it does so for “adequate consideration.” 29 U.S.C. § 1108(b)(17)(A). For OTC securities with a “generally recognized market,” adequate consideration is “a price not less favorable to the plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of the party in interest, taking into account factors such as the size of the transaction and marketability of the security[.]” 29 U.S.C. § 1108(b)(i)(II). For OTC securities so thinly traded such that the market is not considered generally recognized, a good-faith valuation obtained in accordance with applicable regulations should control. 29 U.S.C. § 1108(b)(ii). Yet, this area is one where fierce disagreement may give way to voluntary and cooperative resolutions.
Conferring with lawyers experienced in these nuances and capable of working across multiple sets of regulations can benefit plans and fiduciaries in establishing plan documents and controls to avoid these issues altogether as well as to navigate government enforcement and private-plaintiff litigation (individual or class action) where non-compliance is alleged or may have occurred.
[1] https://www.nyse.com/network/article/nyse-tapes-b-and-c
[2] https://www.finra.org/investors/insights/over-the-counter-equities-trading
[3] See generally 29 U.S.C. §§ 1104(a)(1) & 1106.
[4] A retirement plan is considered an Eligible Individual Account Plan (“EIAP”) if it is a profit-sharing, stock bonus, thrift, or savings plan that can hold employer securities. 29 U.S.C. § 1107(d)(3). For purposes of ERISA, an employer security is “a security issued by an employer of employees covered by the plan, or by an affiliate of such employer.” 29 U.S.C. § 1107(d)(1). Notably, an “affiliate” under securities laws has a different definition than “affiliate” used colloquially or in the corporate realm. For instance, an “affiliate” under a corporate understanding may only include entities owned by the same parent while a parent or subsidiary itself is included within the definition of “affiliate” under securities laws, which expands to include an entity that directly or indirectly “controls or is controlled by, or is under common control with” the other entity. 17 C.F.R. § 230.405.
[5] Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 427-30 (2014). See also 18 U.S.C. § 1348.
[6] Secretary of Labor's Order 1-2011, 77 FR 1088 (January 9, 2012).
[7] https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement/oe-manual/voluntary-fiduciary-corection-program
[8] Effective March 17, 2025.
[9] The newly issued guidance indicates that “Under Investigation” will not include situations in which the DOL has merely contacted the applicant, plan, or self-corrector as a result of a participant complaint, unless the participant complaint concerns the violation that is being corrected under the contemplated application and the plan has not yet received the corrective VFCP payment as of the date of the DOL contact. Further, the new rules allow for permission to correct delinquent participant contributions and loan repayments if there is evidence of criminal activity in certain limited circumstances.
[10] With limited exceptions, ERISA prohibits fiduciaries from causing a retirement plan to engage in certain transactions with parties in interest, an issue that can arise when employer stock is transferred in or out of an employer-sponsored plan. 29 U.S.C. § 1109. “Parties in interest” include fiduciaries of the plan (and their relatives) and the employer whose employees are covered by the plan. 29 U.S.C. § 1002(14). Prohibited transactions between the plan and a party in interest include the sale of property, lending of money, and “transfer to, or use by or for the benefit of a party in interest, of any assets of the plan. . . .” 29 U.S.C. § 1106.
[11] Fiduciaries are shielded from potential liability caused by a participant’s investment choice. 29 C.F.R. § 2550.404c-1. Yet, numerous conditions must be met. 29 C.F.R. § 2550.404-c-1(d)(2)(ii)(E)(4)(i-ix).
[12] https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement/oe-manual/voluntary-compliance-guidelines
[13] The DOJ has its own pilot program for voluntary self-disclosure by individuals of certain criminal violations involving corporations. See https://www.justice.gov/criminal/criminal-division-pilot-program-voluntary-self-disclosures-individuals. Lower-level insider-trading or market-manipulation cases that would involve similar OTC stocks discussed could be potentially resolved through it.
[14] ERISA has a six-year statute of repose that runs from when the breach of fiduciary duty was discovered, unless the plaintiff had actual knowledge of the breach, in which case the period in which to bring suit is shortened to three years. See Intel. Corp. Inv. Pol’y Comm. v. Sulyma, 589 U.S. 178, 180-81 (2020) (outlining the ERISA time limitations on suit).
