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

California CPA, June, 2005 by Robert Cohen, Anthony Apodaca, Pat Severo

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 to participants in qualified plans; and

* This section made its way into SOX late in the legislative process, so there is no committee testimony or conference report outlining what Congress had in mind.

The confusion puts plan sponsors in a pickle: Are plan loans to officers and directors outlawed by SOX? If so, can plans allow other participants to take out loans without running afoul of ERISA, which requires that qualified plans make loans available to all participants on a reasonably equivalent basis?

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The SEC, which has power to interpret the Securities and Exchange Act, has not provided plan sponsors with any guidance. And the Department of Labor has taken the position that public company qualified plans may deny loans to officers and directors, notwithstanding SOX and ERISA.

But the department took this position in a Field Assistance Bulletin, FAB No. 2003-1, issued April 15, 2003, for the guidance of department field representatives. In other words, it was a departmental memo not legally binding.

PROCEDURAL REVIEW

At some point the government will clear up this confusion. In the meantime, given the stiffened penalties facing those who run afoul of ERISA, the wise course for plan sponsors is to review the procedures by which they carry out their fiduciary duties, asking at every step whether the procedures are reasonable and likely to bring about the desired end.

Start with the generalities of pension law, which holds plan sponsors accountable for, among others, the following:

* Developing an investment policy statement that outlines the goals and objectives of the plan;

* Offering investment options in accordance with those goals and objectives;

* Identifying and training company officials who, in overseeing a qualified plan, take on fiduciary responsibility;

* Preventing prohibited transactions, including self-dealing and top-heavy contributions;

* Maintaining a surety bond equaling the lesser of $500,000 or 10 percent of plan assets to recover plan losses resulting from dishonest acts by fiduciaries; and

* Complying with the annual audit requirements for plans with 100 or more eligible participants.

Lacking in-house resources to meet these goals, most small and mid-market companies farm out their pensions to professional administrators or stock brokerages, banks or insurers. Few employers, however, understand that they remain accountable for everything having to do with their pensions.