The SEC staff issued interpretative guidance addressing Section 402 of the Sarbanes-Oxley Act of 2002 for the first time. Section 402 prohibits an issuer from, directly or indirectly, extending or arranging personal loans to its executive officers and directors.
A financial services firm sought guidance with respect to a proposed equity-based incentive compensation plan (the "Plan"). Under the Plan, participants would be awarded shares of stock as incentive compensation and thereafter transfer such shares to an independently-managed Delaware statutory trust. The trust would obtain term loans secured by the transferred shares under a credit facility provided by an independent banking institution. The loan proceeds would be used to make a distribution to each participant in an amount equal to the tax incurred by such participant by reason of the receipt of the incentive compensation award. At the maturity of each loan, a sufficient number of shares would be sold to repay the loan and the remaining shares would be returned to the participant. The SEC staff advised that the issuer's establishment of the Plan would not cause the issuer to be deemed to be extending credit or arranging for the extension of credit for purposes of Section 402.