The SEC staff for the first time issued interpretive guidance regarding Section 402 of the Sarbanes-Oxley Act of 2002 (SOX). To date, in the absence of authoritative guidance, issuers have largely steered clear of activities arguably within the ambit of SOX 402′s prohibition on personal loans to officers and directors. The staff’s new letter provides a measure of clarity regarding SOX 402′s scope.
SOX 402, codified as Section 13(k) of the Securities Exchange Act of 1934, makes it unlawful for an issuer “directly or indirectly … 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 any of its directors or executive officers. Violations of SOX 402 can subject issuers to civil and criminal penalties under Sections 21B and 32(a) of the Exchange Act.