Loan backed share plans have many advantages. The cost of the loan is tax deductible to the company. There is no FBT on the loan. And the executive is encouraged to build and hold a stake in the company. Unfortunately, for Australian companies that operate in the US, this is not allowed. It is such a serious concern that Australia’s Treasury has made a submission to have the US law changed.
Treasury’s concerns relate to broader questions of principle in relation to section 402 of the Sarbanes-Oxley Act that prohibits personal loans to executives. The act becomes effective for Australian companies with US operations that have a fiscal year ending after July 15. Among the first Australian companies that report after this date and will be affected by it are the ANZ Banking group, National Australia Bank and Westpac.
Australian banks have raised two main concerns. Section 402 introduces a prohibition into the US Securities and Exchange Act that generally prohibits personal loans being made to directors or executive officers that would not generally be available on a commercial basis. Australian banks will be particularly disadvantaged by this restriction because the provision of concessional financial arrangements to executive officers has until recently been a common banking industry practice and an integral component of remuneration. This practice has not given rise to any regulatory concerns in Australia.
The second concern relates to the fact that the Sarbanes-Oxley Act treats non-US financial institutions in a different and less favorable way than US financial institutions with respect to this issue. It is understood that under the Sarbanes-Oxley Act, US insured depository institutions are exempt from the prohibition if they are subject to separate insider lending restrictions under the US Federal Reserve Act. This exemption is not available to non-US financial institutions.
Another feature of the Sarbanes Oxley Act is that companies must have in place formal bonus and incentive payment forfeiture rules where accounts are re-stated. We have raised this before (see here), suggesting that companies need to have these in place. Unfortunately, of the incentive plan rules we have reviewed to date for companies with a US capital raising presence, precious few comply.© Guerdon Associates 2022 Back to all articles