The Sarbanes-Oxley Act is a regulation passed in 2002 aimed at protecting investors, shareholders, and employees from companies misrepresenting their financial records or otherwise engaging in deceitful practices. The regulation followed several high-profile corporate scandals in the early 2000s.
Read on to better understand the provisions in the Sarbanes-Oxley Act (SOX) and how the protections that it provides to investors.
What Is the Sarbanes-Oxley Act?
To safeguard investors from corporate fraud, Congress passed The Sarbanes-Oxley Act (SOA) of 2002 . The act aimed to improve corporate financial records, making them more adequate, reliable, and precise. When the law passed, then-President George W. Bush said it was “the most-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”
Names for Congressional sponsors Sen. Paul Sarbanes and Rep. Michael Oxley, the Sarbanes-Oxley Act came in response to a rash of corporate scandals in the early 2000s, including those involving Enron Corporation, WorldCom, Global Crossing, Tyco International, and Adelphia Communications.
In addition to tightening up corporate responsibility and financial reporting regulations, the Sarbanes-Oxley Act formed the Public Company Accounting Oversight Board (PCAOB), which oversees auditing standards and ensures that companies comply with the new law.
What Prompted the Passage of the Sarbanes-Oxley Act?
In the 2000s, companies such as Enron Corporation, WorldCom, and Global Crossing among several firms caught up in accounting and financial reporting scandals. As investor confidence fell in the wake of the scandal, Congress passed the Sarbanes-Oxley regulations to prevent further fraudulent financial reporting, minimize future scandals, and protect investors.
What’s Included in the Sarbanes-Oxley (SOX) Act?
Although the SOX Act is extensive, there are a few crucial components, including:
This section requires senior corporate officers, such as the CEO and CFO, of public companies to file reports with the Security and Exchange Commission (SEC). All companies publicly traded in the U.S. must create a system for their financial reports.
This system should include a traceable, verifiable pathway for the reports’ source data. None of this source data can be tampered with in any way. Additionally, the method and technology which retrieves that data must be reported on as well. If it’s changed, the company has to document the particulars of that change.
This section directs the company to disclose the internal protocols in place for financial reporting to the public. The company must discuss shortcomings and efficacy in these evaluations.
Sections 802 and 906
Both sections impose penalties for mishandling documents. That means companies need to have a financial reporting system with preserved, traceable data and clear documentation on how it’s handled.
Section 802 pertains to altering or destroying documents with the intent to affect a legal investigation, which can lead to a prison sentence of up to 20 years. It also enforces proper auditing maintenance requirements. Section 906 forbids certifying misleading or fraudulent reports, which can incur fines up to $5 million and upwards of 20 years imprisonment.
The Sarbanes-Oxley Act: Penalties
A non-compliant company and its executives could face severe penalties for violating the Sarbanes-Oxley Act. As mentioned in Sections 802 and 906, there are legal ramifications, including fines and prison sentences. For example, 802 imposes a penalty on any individual who knowingly does not preserve financial and audit records. This failure can result in up to 10 years in prison; however, other violations can lead to millions of dollars in fines and up to 20 years imprisonment.
Before the Sarbanes-Oxley Act was in place, there were other laws governing the securities industry, most of which had been put in place during or after the financial crisis that led to the Great Depression.
The Securities Act (1933)
This law required more transparency around securities sold on public exchanges, and banned insider trading.
The Glass-Steagall Act (1933)
Also known as The Banking Act, this legislation forced banks to split up their investment banking and commercial banking operations. It also established the Federal Deposit Insurance Corp.
The Securities Exchange Act (1934)
This act created the SEC, which regulates the securities industry and holds disciplinary powers over publicly traded companies that violate the law, along with associated individuals.
The Trust Indenture Act (1934)
This act created formal agreement standards that bond issuers must uphold in every sale to the public.
The Investment Company Act Act (1934)
This act requires that companies that invest and trade securities must regularly disclose their financial condition and investment policies to investors.
The Investment Advisers Act (1940)
This act requires that investment advisers must register with the SEC and adhere with its regulations.
The Securities Acts Amendments (1975)
These amendments prohibited brokers from self-dealing, aimed to minimize conflicts of interest, and required additional disclosures by institutional investors.
Regulators have many tools they can use to discourage financial institutions and advisers from unethical activities, and to penalize those who fail to comply with the rules. That said, it’s important for all investors to do their due diligence and research any company with which they want to invest or adviser with whom they want to work.
If you’re ready to start researching and building your own portfolio, you can get started with the SoFi Invest® brokerage platform makes personalized investing easy to navigate, including access to complimentary financial advisory services.
Photo credit: iStock/vadimguzhva
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.