Private Companies are Subject to Some of the Requirements in Sarbanes-Oxley

Volume 4, Issue 1
March 1, 2005

The Sarbanes-Oxley Act of 2002, widely known for its extensive accounting and corporate governance reforms imposed on publicly traded companies, also contains several important provisions that are generally applicable to both publicly traded and private companies. Those provisions impacting private companies include:

A. Criminal Liability for Retaliation Against Whistleblowers

Sarbanes-Oxley makes it a crime punishable by a fine and up to ten years in prison to knowingly retaliate against any person, including interfering with his or her lawful employment or livelihood, for providing to law enforcement truthful information relating to the commission or possible commission of any federal offense.

B. Criminal Liability for Document Destruction

Sarbanes-Oxley makes it a crime punishable by a fine and up to twenty years in prison to knowingly alter, destroy, conceal or falsify any record, document, or tangible object with intent to impede, obstruct or influence the investigation or administration of any matter within the jurisdiction of any department or agency of the United States or any bankruptcy case under Title 11 of the United States Code.

Adequate document retention policies are not only required by Sarbanes-Oxley, but a number of other laws expressly require that documents be retained for specified periods of time, including but not limited to, certain labor and employment laws and the Internal Revenue Code.

C. Civil and Possible Criminal Liability for Violation of ERISA Blackout Notice Requirements

Sarbanes-Oxley amends ERISA to require that benefit plan administrators notify participants and beneficiaries of ERISA plans (i.e., 401(k) plans and pension plans) that may be affected by any blackout period at least thirty days in advance of the blackout period. A black-out period is, in general, any period exceeding three consecutive days during which the participant's right to direct or diversify the assets in their account or to obtain loans or distributions from their account is suspended, limited or restricted. The required notice must be written in easily understandable language and include the reasons for the blackout, the investments and other rights affected, the expected dates of the blackout period, and a statement that the participant should evaluate the appropriateness of current investment decisions in light of the inability to direct investments during the blackout period.

Violations of ERISA blackout notice requirements are treated as a violation of the Securities Exchange Act of 1984 and are subject to all of that Act's sanctions, including possible SEC enforcement action and related civil injunctive actions, penalties, cease and desist proceedings and possible criminal liability. In addition, an issuer, or a security holder on behalf of an issuer, may bring a private action to recover any profits realized by a director or executive officer from a prohibited transaction during a blackout period, regardless of the director's or executive officer's motive or intention.

In addition to the provisions discussed above, Sarbanes-Oxley also includes generally applicable provisions enhancing penalties for securities violations, obstruction of justice, conspiracy to commit fraud, mail and wire fraud and ERISA fraud.

The complete text of the Sarbanes-Oxley Act of 2002 is available online at

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.