Responses to ACSPC Request for Public Input
Corporate Governance/Listing Requirements
Question 24. Is the loan prohibition contained in SOX creating a hardship for smaller companies? If so, explain the manner in which this hardship is being created. Do the benefits to companies and investors outweigh the hardships? Should the prohibition be clarified to exclude certain types of transactions where conflicts of interest or a likelihood of abuse may not be present?
The following answers have been received:
08/02/2005 13:57:44 No problems that I can see here.
08/02/2005 17:44:12 No. Loans should not be granted to officers and directors if it not the primary business of the company
08/03/2005 01:39:17 No. Avoiding conflicts of interest is a sound way to address governance issues. The use of loans and complex options and warrants has been abused by many companies and is not excusable. Ethical governance is not complex and is a worthy goal of the legislation. I do not see hardships that cannot be addressed by the companies themselves.
08/03/2005 08:55:04 Do not know
08/03/2005 08:58:39 Not for a bank because we already have rules dealing with loans. Remember we are regulated.
08/03/2005 10:40:26 No
08/03/2005 12:17:58 yes.
08/03/2005 15:01:40 No, Since we are a bank, and banks were exempted from the rule.
08/03/2005 15:22:49 This has not been an issue for our company
08/03/2005 18:01:35 Please look into item no 29
08/03/2005 18:30:29 x
08/03/2005 19:54:33 The loan prohibition is not enforced. market makers are "borrowing" shares that do not exist. A company I know of has estimated between one and six trillion (TRILLION) uncovered (counterfeit) shares churning in the market. The loan prohibition should be fully enforced, and the grandfathering of uncovered shares must be removed for the small and micro-cap companies to be able to compete fairly priced, rather than shorted into oblivion.
08/03/2005 19:55:50 IT ALL BOILS DOWN TO INTEGRITY!
08/04/2005 09:39:15 No
08/04/2005 10:40:16 As a bank, we are exempt but we already had regulatory limitations.
08/04/2005 13:38:24 No comment.
08/04/2005 14:20:27 I will have our CFO give his opinion here.
08/04/2005 18:05:44 Not sure
08/05/2005 10:54:31 No
08/05/2005 12:44:28 This could be a problem for companies that rely on infusions of funds from insiders before public funds can be raised. Some of these companies are too small to qualify for credit on their own merit.
08/05/2005 15:34:53 It is not a hardship for us because we are a bank.
08/05/2005 15:43:46 In the banking industry the rules concerning lending already outweight SOX rules so this is a moot question.
08/05/2005 16:45:38 Unsure.
08/05/2005 19:33:08 I think its great. Leave it in. Should allow for some stock transactions for executives and employees but no cash transactions.
08/06/2005 13:52:06 Needs clarification. As it is, any transaction with insiders at least cause more intense review than in past; some benefit, but some overkill.
08/08/2005 11:10:11 no
08/08/2005 14:06:10 Not sure of the issue here. No answer
08/08/2005 15:43:24 No comment
08/08/2005 21:39:10 The loan prohibition in SOX is beneficial and should be kept intact. Loans to executives creates a conflict and may be a catalyst for some executives to apply creative accounting techniques in order to satisfy these loans.
08/09/2005 09:30:31 N/A to banks.
08/09/2005 16:26:34 No.
08/09/2005 17:25:10 No.
08/10/2005 09:04:41 no comment
08/10/2005 13:44:39 Not familliar with this.
08/10/2005 16:00:18 Pavilion Bancorp's primary subsidiary is a bank.
08/10/2005 17:18:15 Not to my knowledge. A company should never be treated as a personal bank account or credit card for certain employees or owners. This is best provision of SOX in my opinion.
08/10/2005 22:09:27 I think the loan applications are good
08/11/2005 20:27:22 NO - I don't believe that smaller companies should be the executive's person bank. If a company is public, executives should not be allowed to borrow money. Such loans usually result in abuses.
08/12/2005 13:12:10 This was already tightly regulated in banking. I've been living under those kinds of rules for years!
08/12/2005 14:46:45 Not in our case
08/12/2005 16:35:01 I am not familiar with the "loan prohibition".
08/13/2005 12:39:43 Don't know
08/15/2005 13:08:27 The loan provisions are not a hardship.
08/15/2005 14:27:30 Not significantly so far in my experience. I assume that, over time, the SEC can monitor and refine the rule to avoid unintended and unnecessary consequences and this would probably be a good thing.
08/15/2005 15:10:05 No
08/15/2005 15:13:01 It can be a hardship. I think the rule is a good one though. The company should not be looked at as management's bank. There are alternatives.
08/15/2005 15:14:45 Banks and bank holding companies have always had very stringent lending supervision. It is a non-issue for us.
08/15/2005 16:33:43 no
08/15/2005 16:41:14 No
08/15/2005 18:59:52 No.
08/16/2005 09:51:21 No
08/16/2005 10:13:05 no
08/16/2005 10:21:17 No.
08/16/2005 10:26:28 no comment/not applicable
08/16/2005 10:42:02 Like all black and white rules, the implementation of this rule leads to some rediculous and unfair outcomes, such as when a company's management wants to participate, even to a small extent, in a public offering using their unexercised options.
08/16/2005 10:44:16 Yes, I think so. However, as a Bank we must comply with Reg O anyway, so this is not particulary burdensome.
08/16/2005 10:45:16 no- but we are a bank
08/16/2005 11:18:54 Not a problem.
08/16/2005 11:52:16 I believe the loan prohibition is an excellent rule and should be kept. Especially where board and management members are related. I do not believe that any public companies should make loans to or do business with management or directors.
08/16/2005 12:15:34 No, I don't think that companies should be in the business of giving loans to directors and officers and I was happy to see that rule put in place.
08/16/2005 12:40:54 No
08/16/2005 12:42:56 We are finding it much harder to recruit officers because we cannot offer mortgage assistance to help officers move into Silicon Valley from lower cost housing areas. Other than that, which has been a significant problem, the restriction isn't an issue.
08/16/2005 13:04:14 Not an issue.
08/16/2005 13:12:04 Not a problem for this company; loans invite comflict of interest and there are alternatives in most cases. However, there should be a way to facilitate the financial side of extraordinary recruitment and relocation expenses of personnel.
08/16/2005 13:19:29 Again, as a bank, this provision does not apply to my company.
08/16/2005 13:20:23 No its not causing a conflict. We need to weed out conflicts of interest
08/16/2005 13:25:32 There must be cases where it creates a hardship, particularly in recruitment, but we have not experienced it. I believe that rather than creating loans, companies are using signing bonues and other special bonuses to avoid the needs for loans. Probably a more honest approach.
08/16/2005 13:27:00 No.
08/16/2005 13:30:33 Yes, it makes recruiting into high cost real estate markets very difficult.
08/16/2005 14:08:05 The loan prohibition causes problems in relocations.
08/16/2005 14:23:10 The loan prohibition probably does cause some hardship for very small companies. It seems that these issues could be remediated with additional disclosure or shareholder approval.
08/16/2005 15:15:12 The loan prohibition is bothersome, but not a hardship that can't be overcome. I believe the benefits do out weigh the detriments. Changing the requirements to allow certain types of transactions might be beneficial depending upon which types of transactions are allowed.
08/16/2005 16:08:50 No.
08/16/2005 16:09:47 No.
08/16/2005 16:16:04 NA
08/16/2005 16:45:09 We see no problem with the loan provision for any size company.
08/16/2005 18:35:41 The prohibition has essentially eliminated split dollar life insurance. I don't know that this is a bad thing. Other than this, I don't believe there's a problem of significance.
08/16/2005 21:29:07 Uncertain.
08/17/2005 10:59:57 Not at this time, however it could limit some flexibility.
08/17/2005 12:28:22 no, no, no.
08/17/2005 12:36:00 We are a banking company; therefore, the ability to make loans as long as they are compliant with banking regulation O has alleviated any problem for us.
08/17/2005 18:49:20 It is a good prohibition and the hardship, if any, is justified to create the proper governance structure.
08/17/2005 18:49:27 Yes - we cannot issue stock options to overseas managers. Because of the Patriot Act US based brokers must "know their client", all now refuse to trade shares or options for EU based employees and will not do cashless exercises. Most of our employees do not have the cash to pay the option exercise price and wait for the shares to be sold via an EU based broker. We could solve this by temporarily lending employees the float but cannot do so because of SOX. I also think there is nothing inherently wrong in a company lending an officer money if it is the best interests of the company, as determined by an independent board, and if fully disclosed to its stockholders. Disclosure and independence are the answer, not a ban.
08/17/2005 19:31:08 It makes it tougher for management to take advantage of stock option incentives and basically requires them to either immediately sell their equity to pay taxes and exercise prices or be independently wealthy.
08/17/2005 21:27:12 Yes. To recruit executives we often need to relocate them and provide them incentives to make living in this high cost area affordable. One tool that was used in the past was low interest loans for use in home financing ans secured by the value of the home. This tool is no longer available to us and we now find that we need to increase the relocation packages and sign on bonuses to compensate for the higher cost of housing. This type of loan should be permitted, provided that it has Board level approval.
08/17/2005 22:55:14 Yes, the loan prohibition is creating a problem for smaller companies. Loans to assist with stock option exercises, especially while the company is privately-held, or assist with relocation or home ownership, particularly in high-cost housing markets, has made it more diffcult to attract qualified executives.
08/18/2005 08:03:31 This is one of the few benefits of SOX and should be kept to prevent fraud.
08/18/2005 14:30:38 NO
08/19/2005 02:56:12 We've seen no hardships and it actually makes it easier for the company to say no related party loans.
08/19/2005 11:44:44 Doesn't apply to financial institutions.
08/19/2005 13:49:01 Loan prohibition should remain and any hardship ignored. Similar transactions that benefit a limited population and/or group should likewise be prohibited. The one exception to this statement relates to cashless exercises of stock options. I do not consider a cashless exercise to be a loan and therefore should not be prohibited.
08/19/2005 14:40:28 No.
08/19/2005 14:50:07 Not applicable as we are subject to Reg O.
08/19/2005 17:03:28 It's not a hardship.
08/21/2005 03:34:34 Some loans should be allowed, but it should be limited to a certain percentage of the annual sales or other limiting measure, so it is used only in some special ircumstances.
08/22/2005 14:21:23 I am not sure I know the answer but if the chance of conflict of interest or abuse were non-existant the perhaps some flexibility should be permitted.
08/22/2005 15:20:23 Not familiar with this.
08/22/2005 15:47:02 No opinion.
08/22/2005 15:47:34 No.
08/22/2005 17:54:28 The loan prohibition is appropriate and overdue.
08/22/2005 17:56:59 All conflicts of interest should be eliminated.. Boards should not be loaning to company executives.
08/22/2005 19:27:18 No. THis is a good idea. The old rules were to easy to create abuses.
08/22/2005 20:10:17 Not to our company.
08/23/2005 00:42:38 loans to officers should be treated like any other compensation decision. up to the company and it's board.
08/23/2005 15:56:30 No.
08/23/2005 16:49:34 No
08/23/2005 18:10:00 no.
08/23/2005 21:11:03 Yes.. the already illiquid nature of the small company market place makes it increasingly difficult for senior executives, often the largest shareholders to free personal capital. Disclosure in clear terms requiring a seperate loan agreement is likely more useful than complete prohibition.
08/24/2005 14:30:13 Not been an issue for us.
08/24/2005 16:19:27 Don't know,
08/24/2005 16:26:56 No.
08/24/2005 16:54:47 don't know
08/24/2005 20:16:09 Banks are exempt
08/25/2005 15:23:41 Historical abuses to the loan ability probably renders it to be prohibited.
08/25/2005 17:02:43 No.
08/26/2005 12:41:42 Basically, I have no problem with a prohibition on loans to officers. This can be a problem for small companies when a key employee is relocating from a low cost area to a higher cost area of the country. My concern is for the inadvertant items such as making a personal purchase on a Company credit card. My understanding is that this could be considered a loan - even if the amount is nominal.
08/26/2005 13:07:22 Banks are exempt so long as they follow Federal Reserve Regulation O.
08/26/2005 15:31:29 If there is no apparent conflict of interests, foresee no problem.
08/26/2005 16:22:08 Yes.
08/27/2005 11:21:03 No. The solution that is already in place is just to record such as compensation. Any bona fide repayments are accounted for as reductions of future compensation or capital contributions. This is not a problem because most such loans in the past were disguised compensation. This rule should not be changed further.
08/28/2005 23:37:43 No, other than the occasional relocation package.
08/29/2005 07:07:37 Don't see a problem.
08/29/2005 10:21:15 We have noted no hardship relative to this provision.
08/29/2005 10:21:25 We have noted no hardship relative to this provision.
08/29/2005 11:21:29 No.
08/29/2005 14:18:47 I have no impression to share on this question.
08/29/2005 14:53:30 Answer to first question: No.
08/29/2005 15:31:21 I am not aware of the requirements of the SOX loan prohibition.
08/29/2005 16:20:53 No, because as a federally regulated financial institution we have to comply with the provisions of Regulation 'O' as it pertains to loans to insiders.
08/29/2005 17:09:27 Not for regulated banks, who were already subject to insider lending restrictions.
08/29/2005 17:12:26 No.
08/29/2005 17:36:32 Unable to comment
08/29/2005 19:02:32 We are afraid of abuse. It is prohibited by our bylaws.
08/29/2005 19:05:24 The absolute prohibition is creating hardships as ordinary business transactions can be construed as prohibited loans. The prohibition should be narrowed to exclude amounts of limited magnitude and duration.
08/29/2005 21:00:01 No.
08/30/2005 15:04:16 No, this provision of SOX is appropriate for all public companies NO company is the bank of an executive and no loan should be allowed, under any circumstances.
08/30/2005 15:07:00 I don't see the loan prohibition as creating a hardship.
08/30/2005 17:08:46 Do not know whether loan prohibition creates a hardship for smaller companies. It has not done so for us.
08/30/2005 18:26:14 N/A
08/30/2005 18:48:02 The loan prohibition is just common sense. There is a temporary problem in interpretation of what constitutes a "loan". Questions about insurance policies, travel expenses, etc. can surely be clarified and resolved in a sensible manner.
08/30/2005 18:51:48 We believe that the loan prohibition is valuable and should be kept.
08/30/2005 21:07:56 No.
08/30/2005 21:39:41 No.
08/30/2005 23:57:28 No hardshop for smaller companies for loan prohibition. It could avoid conflicts of interest.
08/31/2005 08:31:59 No, its not creating a hardship.
08/31/2005 10:19:14 No comment.
08/31/2005 10:21:37 Not a hardship with us. The prohibition is a good control to prevent conflict of interest and abuse.
08/31/2005 14:00:12 The loan prohibition is appropriate.
08/31/2005 14:00:16 Loan prohibition should not be an issue - for large or small companies. Hardships, if any, exist because of poor decisions previously. Companies should not be relied upon to resolve this. I am in favor of loan prohibition.
08/31/2005 14:25:37 In some cases yes, but in the banking business we have always had restrictions on insider loans.
08/31/2005 15:19:27 No.
08/31/2005 16:13:45 Lending is part of our normal course of business. Exceptions should be permitted where conflicts of interest are not likely.
08/31/2005 16:16:33 24. Our company believes that the loan prohibition should stay in place.
08/31/2005 17:16:33 No.
08/31/2005 18:22:30 We have not seen such a hardship in our clients.
08/31/2005 18:23:08 No response have not observed this issue.
08/31/2005 19:16:05 24. Loans to officers beyond some monetary point are excessive, but they are also necessary in many circumstances. What you want to do is make sure loans are truly loans and reported as such. If a loan is not repaid or not intended to be repaid it should be reported as income in the year it was granted and the individual should be responsible for taxes, penalties and interest to the IRS if the loan is reported as income at a later date.
08/31/2005 20:55:07 I do not believe so. It is much cleaner and less likely to be abused.
09/01/2005 00:55:31 We have not experienced any hardshipd due to this provision
09/01/2005 14:30:54 Although not difficult for our company, the new regulations forced us to change the way we provided life insurance benefits to our Chairman, forcing us out of a policy due to split dollar accounting and loans to fund the policy. These types of Loans should be thoroughly disclosed, but permitted. In other instances loans should be allowed where proper collateral or other repayment mechanisms are provided and there are no apparent conflicts of interest.
09/01/2005 17:12:34 It takes a tool to attract valuable talent away. Particularly in California with housing prices the ability to offer a loan can help. However, in general I feel the loan prohibition is a good thing.
09/04/2005 07:42:16 Yes. It blocks management discretion in this issue. If proper disclosure of such loan is preserved such loans should not harm investors.