• New Law Impacts Retirement Plans and Executive Compensation
  • May 1, 2003 | Author: Helana A. Darrow
  • Law Firm: Dinsmore & Shohl LLP - Cincinnati Office
  • On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). Although the Act mostly addresses accounting and corporate governance reform, it also contains several new rules that apply to retirement plans and executive compensation. The Act includes black-out period provisions which impact participant-directed 401(k) and other defined contribution plans, new restrictions on corporate loans to executives and increases in criminal penalties for violations of ERISA.

    Insider Trading Restrictions During Black-Out Periods Directors and executive officers of a public company are now prohibited from selling or transferring company stock (if it was acquired through their service with the company) during a "black-out period." A black-out period is defined as a period of more than three consecutive business days in which at least 50 percent of the participants in the company's participant-directed defined contribution plans cannot sell or otherwise transfer their company stock held under the plans. The company is required to notify the directors, executive officers, and the Securities and Exchange Commission of the black-out period. The shareholders or the company can recover any profits received by the directors or executive officers that violate this insider trading restriction.

    For this purpose, a black-out period does not include: (i) a regularly scheduled period in which sales and purchases are restricted, if the period is incorporated into the plan and timely disclosed to employees; or (ii) suspensions imposed due to a corporate merger, acquisition or divestiture or a similar transaction involving the plan or plan sponsor. The trading restrictions are effective January 27, 2003.

    Advance Notice of Black-Out Periods

    The Act amends ERISA to require plan administrators of participant-directed defined contribution plans to provide participants with a 30 day advance written notice of a black-out period, regardless of whether the plan invests in employer securities. For purposes of the notice and disclosure requirements under ERISA, a black-out period is a period of more than three consecutive business days during which the participants or beneficiaries in an individual account plan are limited or restricted from their normal right to direct or diversify assets in their accounts or obtain plan loans or distributions. A black-out period does not include: (i) a regularly scheduled limitation or restriction previously disclosed to participants through a Summary of Material Modifications or in other materials describing specific investment alternatives under the plan; or (ii) the suspension, limitation or restriction which applied one or more individuals due to a qualified domestic relations order.

    Content of Notice

    The notice must include:

    • The reasons for the black-out period
    • Identification of the investments and other rights that are affected
    • The expected beginning date and length of the black-out period
    • A statement that the individuals should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets credited to their accounts. The notice must be in writing and can be sent by electronic means, provided the notice is reasonably accessible to the recipient.

    A plan administrator who fails to provide a required black-out notice may be fined by the Department of Labor in an amount up to $100.00 per day per affected participant or beneficiary. If the black-out period involves employer securities, the plan administrator must also provide notice to the issuer of the employer securities. The Secretary of Labor is required to issue initial guidance in a model notice no later than January 1, 2003, and interim final rules by October 13, 2002.

    Enhanced Criminal Penalties Under ERISA

    The Act amends Section 501 of ERISA to increase the maximum criminal penalties for violations of ERISA. For individuals, the maximum fine is increased from $5,000 to $100,000. The maximum prison term is increased from one year to ten years. The maximum fine for a business entity is increased from $100,000 to $500,000. Since the Act did not provide a specific effective date, it appears that the changes to the criminal penalties are effective upon the enactment of the Act.

    Restrictions on Executive Loans

    Section 402 of the Act amends the Securities Exchange Act of 1934 to prohibit a public company, or its subsidiary, from extending or maintaining, either directly or indirectly, any personal loan or other extension of credit to any executive officer or director. A loan maintained by the issuer on the date of enactment of the Act will not be subject to these restrictions, provided that there is no material modification or renewal of the loan on or after the date of enactment. The ban does not apply to the following types of credit, if they are made available under terms no more favorable than those offered to the general public in the company's ordinary course of business:

    • Home improvement and manufactured home loans
    • Consumer credit
    • Any extension of credit under an open-end credit plan; or
    • A charge card