(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
As has been widely publicized, on June 26, 2013, the U.S. Supreme Court in United States v. Windsor (PDF) struck down Section 3 of the federal Defense of Marriage Act (DOMA) under the Fifth Amendment and thus required federal recognition of same-sex marriage recognized under state law. After the decision, the reactions, the punditry and the parades, a moment of reflection causes one to realize that Windsor will impact a number of critical definitions and concepts that are important, if not critical, in public company regulation and other aspects of federal securities law.
For those who haven’t yet read the actual opinion, Section 3 of DOMA provided that, for purposes of federal law, the term “spouse” could only apply to different-sex couples legally married under state law (including common law). As Justice Kennedy’s opinion states, that Section of DOMA “enacts a directive applicable to over 1,000 federal statutes and the whole realm of federal regulations.” As a result of Windsor, terms like “spouse” and other terms having a bearing on marriage will now be read to include same-sex spouses legally married under state law.
Many commentators have focused on the impact of DOMA on federal taxation. But consider the number of SEC regulations affecting public companies and other fundamental SEC rules that will be affected by the immediate change in the definition of “spouse”:
- Section 16 Beneficial Ownership — The presumption of indirect pecuniary interest of a shareholder under Rule 16a-1 under the Securities Exchange Act of 1934 (and therefore, the “beneficial interest” of such shareholder for purposes of reporting under Section 16 of that Act) includes holdings of a spouse.
- Rule 144 — Under SEC Rule 144(a)(2)(i), the term “person” (i.e., the shareholder seeking to sell under Rule 144) includes a spouse and any relative of that spouse.
- Related Party Disclosures —Spouses of public company directors, executive officers, director-nominees and greater-than-ten-percent beneficial owners are considered “related persons,” and transactions with such persons are subject to disclosure under Item 404(a) of Regulation S-K.
- Form S-8 Registration — Form S-8 (PDF) may be used to register the exercise of an option and resale of the underlying stock by an employee’s “family member” who has acquired the options from the employee through a gift or a domestic relations order. The term “family member” includes a spouse or former spouse.
- Accredited Investors — Under Rule 501(a) of Regulation D, both means by which most individual natural persons (other than corporate officers or directors of the entity offering securities) are eligible to participate in a private placement offering — by virtue of their net worth either alone or together with their spouse, or by virtue of their income either alone or together with their spouse — will change with the definition of “spouse.”
- Qualified Purchasers and Qualified Clients — Like the “accredited investor” definition, these defined terms, important under the Investment Company Act of 1940 and the Investment Advisers Act of 1940, respectively, should now be read to include the net worth and income of same-sex spouses. In addition, the “spouse” definition under the Investment Adviser Act regulations also impacts the definition of “client” used in that Act.
In addition to federal securities law, Windsor will also impact definitions and concepts important in the administration of most stock incentives, human resources and employee benefits. For example:
- Stock Incentives — Both stock incentive plans and non-plan incentives often, if not typically, permit the transfer to and exercise of incentives by a legal representative or transferee pursuant to a will or the laws of descent and distribution (which will now presumably include transfers to same-sex spouses who are legal heirs). Some plans also permit distributions to “family members” (typically with a cross reference to the definition of that term contained in the General Instructions to Form S-8). That term should now be understood to include same-sex spouses.
- Qualified Retirement Plan — The administration of survivor benefits and the assignment of portions of qualified retirement plans pursuant to “qualified domestic relations orders” issued by courts during a marital dissolution will now presumably need to account for same-sex couples.
- Health Plans — Health coverage for the same-sex spouse of an employee will no longer be subject to income or payroll taxes, and employers will have no reporting and withholding obligations for such coverage.
These changes will affect the practice of private and in-house securities and benefits lawyers as well as other related professionals. Presently, only 11 states and the District of Columbia permit same-sex marriage. Nevertheless, it is likely that more states will follow suit. How quickly remains to be seen.
It is unclear to what extent regulators like the SEC, the IRS and the Department of Labor will undertake to make definitional changes in their regulations or provide official guidance. Regardless of what steps those regulators take to connect all the dots for professionals, the main point and effect of the Windsor ruling seems plain enough—the question of who can be legally married is now reserved to the states by our federal system and constitution. As shown by the array of regulations and provisions above, the impact of the ruling will be wide-ranging and may not be fully understood in the near future.