Question

Public companies cannot make personal loans to directors or officers under Sarbanes-Oxley. Why was that problematic? Can you make an argument that such a practice should not be barred?

Answer 1

One of the troubling aspects of the Act is its prohibition on "arranging" for loans through third parties. This prohibition effectively bans the receipt of certain benefits by directors and executive officers that previously had been commonly associated with high-level managerial employment, such as mortgage assistance programs, certain types of stock option exercises, and loans from the employer's 401(k) plan. companies that are regularly engaged in the consumer credit business may offer loans to officers and executive directors if certain criteria is met. Such loans must be of a type generally offered and made in the ordinary course of business, on the same terms offered to the public. In addition, the loan must be for home improvement (or manufactured homes); for consumer credit (although this category remains undefined in the Act); an open-ended credit extension (including charge cards); or, a margin loan by a registered broker or dealer (this exemption does not apply in certain circumstances). Finally, banks insured by the FDIC may make qualifying loans so long as the loans comply with the existing insider lending restrictions.

In broad sweep of the Act and the absence of interpretive guidance from the SEC, employers should immediately review the legality of their policies relating to the benefits provided to officers and executive directors.