Executive Loans 720



  • I have read in the past where the act of issuing loans to certain executives is not a recommended practice for public companies. Specifically to the CFO and CEO (or other acting lead executive). The reasons were because they have the ability to influence the loan structure and terms. Unfortunately I can’t find where I read this.
    Has anyone heard of this? If so, where can I find more information? What are your internal guidelines relative to employee loans?
    Thanks for any and all help.
    Ron :?:



  • Ron,
    Section 402 of the SOx Act refers:
    SEC. 402. ENHANCED CONFLICT OF INTEREST PROVISIONS.
    (a) PROHIBITION ON PERSONAL LOANS TO EXECUTIVES.Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as amended by this Act, is amended by adding at the end the following:
    (k) PROHIBITION ON PERSONAL LOANS TO EXECUTIVES.
    (1) IN GENERAL.It shall be unlawful for any issuer (as defined in section 2 of the Sarbanes-Oxley Act of 2002), directly or indirectly, including through any subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of that issuer. An extension of credit maintained by the issuer on the date of enactment of this subsection shall not be subject to the provisions of this subsection, provided that there is no material modification to any term of any such extension of credit or any renewal of any such extension of credit on or after that date of enactment.
    (2) LIMITATION.Paragraph (1) does not preclude any home improvement and manufactured home loans (as that term is defined in section 5 of the Home Owners’ Loan Act (12 U.S.C. 1464)), consumer credit (as defined in section 103 of the Truth in Lending Act (15 U.S.C. 1602)), or any extension of credit under an open end credit plan (as defined in section 103 of the Truth in Lending Act (15 U.S.C. 1602)), or a charge card (as defined in section 127©(4)(e) of the Truth in Lending Act (15 U.S.C. 1637©(4)(e)), or any extension of credit by a broker or dealer registered under section 15 of this title to an employee of that broker or dealer to buy, trade, or carry securities, that is permitted under rules or regulations of the Board of Governors of the Federal Reserve System pursuant to section 7 of this title (other than an extension of credit that would be used to purchase the stock of that issuer), that is
    (A) made or provided in the ordinary course of the consumer credit business of such issuer;
    (B) of a type that is generally made available by such issuer to the public; and
    © made by such issuer on market terms, or terms that are no more favorable than those offered by the issuer to the general public for such extensions of credit.
    (3) RULE OF CONSTRUCTION FOR CERTAIN LOANS.Paragraph (1) does not apply to any loan made or maintained by an insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)), if the loan is subject to the insider lending restrictions of section 22(h) of the Federal Reserve Act (12 U.S.C. 375b).’’.



  • Thanks.
    New to the forum and already I’m greeted with helpful, intelligent folks.
    Thanks… 😄 :.:
    Ron



  • Does anyone know what are the penalties for breaching section 402?



  • Just the same as Ron, I am also new to this forum. Thanks for all your wonderful post. It is very informational.
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  • Does anyone know what are the penalties for breaching section 402?
    Nothing is specified in the Sarbanes-Oxley Act for this. Hpwever, Section 402 makes it an offence under Section 13 of the Securities Exchange Act of 1934.
    Someone please correct me if I’m wrong but I don’t think there is specified a maximum penalty for executive loans - just the penalty for breaching Section 13 which includes a wide range of Securities offences. This regime is quite harsh i.e. imprisonment up to 10 years and individual fines of up to USD5 million.



  • Section 402 of the Sarbanes-Oxley Act of 2002 added a new subsection (k) to section 13 of the Securities Exchange Act of 1934 that bans loans to directors and executive officers of public companies. The only exception is loans by public companies that provide loans to customers in their ordinary course of business (e.g. banks and broker dealers) if the terms of the loans are not more favorable for directors and officers.
    Section 32 of the Securities Exchange Act of 1934 specifies criminal sanctions of not more than USD 5 milllion and/or imprionment of not more than 20 years for natural persons and USD 25 million for legal persons that willfully violate any provisions of the Securities Exchange Act or any rules or regulations thereunder.
    In addition, there is a range of administrative sanctions including civil monetary penalties and officers and director bars for violations of the Securities Exchange Act of 1934.


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