Trickle down: how Sarbanes-Oxley reaches pension plans of private companies.

• Author: Cohen, Robert
• Position: PENSION PLANS

Nearly three years have passed since the passage of the Sarbanes-Oxley Act, requiring public companies to make their operations more transparent to outsiders. As public companies have struggled to comply, private companies--in particular, those with qualified plans, also have found themselves within SOX's reach. Here are three ways SOX impacts private companies:

1) Some legal analysts say Sec. 402, which makes it illegal for companies to make personal loans to directors and officers, may prohibit pension plans from making loans to any plan participants.

2) Sec. 904 significantly stiffens penalties for ERISA violations. Individuals can face fines of up to $100,000 and prison terms of up to 10 years, while companies can be fined up to $500,000.

3) Sec. 306 requires that administrators of plans with individual accounts--for example, 401(k) plans--give participants 30 days' notice of any blackout periods during which they may not direct plan investments, take out loans or obtain distributions. The same section prohibits insider trading of company securities by directors and senior executives during blackout periods.

These provisions make it imperative that public and private companies with qualified plans understand their duties as plan fiduciaries and review the procedures by which they carry out those duties.

CPAs can help in this effort, with caution. Laws governing pension plans are complex, and plan sponsors will need expert advice from competent counsel to make sure they are in compliance.

Pension laws also generalize regarding the fiduciary duties of plan sponsors, offering few specific guidelines about how to carry out these duties, and CPAs should not dictate what clients do in overseeing their plans.

The trust between CPAs and their clients, however, gives CPAs an opportunity to help plan sponsors understand the goals of pension laws so that their clients can find ways to shape their business practices to meet those goals.

LOANS FROM QUALIFIED PLANS

Let's start with the uncertainty over loans from qualified plans.

Sec. 402 amends the Securities and Exchange Act of 1934 to make it illegal for public companies 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 [company]."

Pension experts note that this wording does not specifically outlaw loans from qualified plans, whether made to insiders or anyone else.

And three other factors give rise to further confusion:

* SOX doesn't define what it means by "credit" or "personal loan;"

* Although Sec. 402 allows several exceptions, none mention loans...