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SOX Prohibition on Loans to Officers and Directors

By Laura P. Washburn
May 24, 2013

Since the adoption of the Sarbanes-Oxley Act (SOX) in 2002, public companies and their advisers have been seeking guidance on Section 402 of the Act (codified as Section 13(k) of the Securities Exchange Act of 1934, as amended), which imposed a prohibition on public companies extending loans to their directors and executive officers.'

Under Section 402, public companies were no longer permitted “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,” either directly or indirectly through a subsidiary or otherwise. The concerns addressed by this blanket prohibition were the use and abuse of public company funds to provide personal financing to insiders. However, many corporate practices among public companies and insiders that have the character of a “loan” or an “arrangement of credit” do not present the concerns that Section 402 was designed to address. For example, cashless exercises of stock options or the advancement of travel or relocation expenses could be deemed to fall within the term “personal loan.”

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