SOX sec. 402 (Enhanced Conflict of Interest Provisions). 2383



  • A company traded on the otcbb (UDRY) that I work for has made two loans totaling USD766,280 to the Director of Real Estate and Business Development at 6.0% interest maturing on Dec. 3 2008. Is this permitted or not? There is some debate in our company as to wether this is an acceptable practice or not under SOX. :?



  • Here is the wording from the SOX act. YOu will need to determine whether of not this individual is an executive officer or a director as defined below -
    Section 402 of the Act makes it unlawful for any public company, directly or indirectly, to extend credit, maintain credit or arrange for the extension of credit in the form of a personal loan to or for the benefit of any director or executive officer. This prohibition on loans is broadly worded and may cover a variety of circumstances that are ordinarily not thought of as ‘loans.’ While the SEC has the ability to clarify Section 402 through regulations, the SEC has not indicated when, or if, any such regulations will be promulgated. In the meantime, severe penalties are applicable to violations of Section 402.
    This Alert discusses Section 402 of the Act and the situations to which it may be applied. It also contains recommendations for compliance with the Act and highlights areas of uncertainty where companies may wish to await guidance from the SEC.
    Who is Covered by the Act
    Section 402 of the Act generally prohibits company loans to or for the benefit of any director or executive officer of a public company. ‘Director’ refers to members of a public company’s board of directors or
    its equivalent. ‘Executive officer’ means a public company’s president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function for the company or any other person who performs a similar policy-making function. Because the Act extends to loans ‘for the benefit of’ a director or executive officer of a public company, the prohibition probably extends to family members of a director or executive officer, and any other person if the loan to such person could be viewed as benefiting the director or executive officer. Executive officers and directors of private companies can be subject to the Act as well, since the Act applies upon the filing (not the effective date) of a company’s first registration statement with the SEC. Directors and executive officers of private companies that have not yet filed a registration statement are not subject to the prohibition under Section 402, but may find it advisable to modify their loan practices now to avoid possible future violations.



  • Are otcbb companies covered by SOX? I thought this exchange didn’t have any particular listing requirements, etc



  • Are otcbb companies covered by SOX? I thought this exchange didn’t have any particular listing requirements, etc
    I don’t know the answer to that question, but this company does file with the SEC as a small business. I assume that since they file with the SEC, they are subject to SOX rules.



  • Kymike,
    Denis,
    Most issuers who are listed on the National Association of Securities Dealers Over-The-Counter Bulletin Board (NASD OTCBB). The listing rules of the OTCBB require that the security is registered with the SEC or that periodic reporting is provided to the SEC. There are some exceptions for industries, which are registered with other U.S. regulators (banks if I remember correctly) and provide regular reporting to them.
    The NASD OTCBB does not have the status of a ‘national securities exchange’ as defined in the Securities Exchange Act of 1934 and it does not have a formal registration as a national securities exchange from the SEC. As a consequence, any issuer listed on NASD OTCBB will usually fall under section 12(g) of the Securities Exchange Act which deals with over-the-counter trading of equity securities of issuers with total assets of at least 10 mn. USD and at least 300 holders of those equity securities.



  • So, looks like not a SOX issue.
    Loans by a company to it’s own directors are not normally good practice, however, in this case the arrangement looks to be, more or less, ‘arms-length’. Loans on favourable terms can be a problem (sometimes illegal) in many jurisdictions.
    You might also run into additional issues if the directors were failing to make the appropriate repayments, etc.



  • It IS a SOX issue and section 402 applies.
    Section 402 that bans loans to directors and officers inserts this provision into section 13 of the Securities Exchange Act and applies it to ‘issuers’ as
    defined in section 2 of the Sarbanes-Oxley Act. An issuer is defined as an issuer that has securities registered under section 12 of the Securities Exchange Act or a reporting obligation under section 15(d) of the Securities Act or that has filed a registration statement.
    Basically this covers

    1. issuers with securities traded on a national securities exchange in the U.S. (i.e. registration of the security under section 12(b) of the Securities Exchange Act)
    2. issuers with equity securities traded over-the-counter in the U.S. (that includes the NASD’s Over-The-Counter Bulletin Board and the pink sheets) (i.e. registration of the security under section 12(g) of the Securities Exchange Act)
    3. issuers that have publicly offered their securities in the U.S. (and have a registration under the Securities Act, which triggers a reporting obliation under section 15(d) of the Securities Exchange Act).
      As I pointed out in my earlier post, the eligibility rules of the NASD OTC-BB require a registration of the securities with the SEC (with very few exceptions).
      In order to determine whether a particular provision of the Sarbanes-Oxley Act applies to a particular company, you need to check the particular section of the Sarbanes-Oxley Act and any rules of the SEC that implement that section. Most sections of the SOA apply to all public companies (i.e. issuer that use the public capital market of the U.S. in one of the three ways described above that trigger a registration of the security with the SEC). Very few sections of the SOA only apply to issuers that are listed on a national securities exchange (e.g. NYSE, NASDAQ, AMEX, etc.). One example is the section that deals with the minimum independence and task standards for audit committees of LISTED issuers. The rule of the SEC implementing that provision explicitly states that this provision does not apply to the OTC-BB.
      ‘Executive officer’ means a public company’s president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function for the company or any other person who performs a similar policy-making function.
      I guess if Real Estate and Business Development are one of the principal business units of the company and if this director is directly reporting to the CEO, then he will be considered as an executive officer. If he is lower in the food chain, the SEC may still consider him to have a policy-making function unless his boss sets all the policies and the guy basically justs executes based on fixed guidelines.

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