Academic journal article Journal of Corporation Law

Left in the Dark: Sarbanes-Oxley and Corporate Abuse of 401(k) Plan Blackout Periods

Academic journal article Journal of Corporation Law

Left in the Dark: Sarbanes-Oxley and Corporate Abuse of 401(k) Plan Blackout Periods

Article excerpt


We know the story all too well by now. The media and politicians told of blue-collar workers who lost their life savings at the hands of fraudulent and scheming corporate executives.1 The demise of market giants like Enron surprised economists and the public alike, and Congress was quick to act in response to the public outcry that corporate abuse must be stopped and punished swiftly. The enactment of the Sarbanes-Oxley Act of 2002 (Act),2 also known as the Corporate Governance Act, seeks to build upon and strengthen existing securities regulation to guarantee that corporate abuse ala Enron does not slip through the cracks of the securities laws.3

Section 306 of the Sarbanes-Oxley Act addresses two key issues that seek to prevent executive manipulation of blackout periods.4 First, § 306 responds specifically to one of the more egregious abuses that came to light after the demise of Enron-corporate executives who manipulated the 401(k) system by trading during blackout periods, times when the plan prohibited workers from trading their 401(k) employer stock.5 section 306 now prohibits executive insider trades during blackout periods.6 second, § 306 mandates advance, written notification to investors of blackout periods to allow them to make informed decisions about modifying their 401(k) holdings prior to the beginning of the blackout period.7

This Note evaluates the changes brought into effect by § 306, namely, the prohibition of insider trades during 401(k) pension blackout periods and the required advance notice of blackout periods, and evaluates the effectiveness of this section in truly protecting the employee-investor. Part II provides a background discussion of the rise of the modern 401(k) plan, the objectives sought through employee investment in their employers, the details of Enron's abuse of its fall 2001 blackout period that coincided with public knowledge of its accounting fraud, and the congressional enactment of Sarbanes-Oxley. Part III discusses the reforms § 306 brings into effect as compared with earlier securities regulation relating to pensions and the administration of blackout periods. Part IV argues that although § 306 takes much-needed measures toward transparency in the administration of blackout periods, without additional reform measures, the section fails in many respects to bring meaningful protection to employee-investors. This Note concludes § 306 takes important first steps in shedding light on the administration of blackout periods, but the inherent gaps in the section itself leave many investors unprotected and without recourse.


A. The Rise of the Modern 401(k) Plan: The Pursuit of "Democracy" Through Employee Investment

Beginning in the late 1950s, a body of thought developed among academics that workers should actively participate in the capital markets through employer stock ownership, with individual freedom to manage these assets. The theory championed the causes of the low wage worker, arguing that "democracy suffer[s] when money [is] confined to the hands of the wealthy."8 Economists theorized worker ownership and management of stock could stabilize the American economy and prevent future economic depression.9 This theory gave birth to the employee stock ownership plan (ESOP), a combination stock bonus and profit sharing plan that allowed employees to accrue company stock in personal accounts.10

This concept of employee management of retirement funds marked a sharp departure from pension plan predecessors to the 401(k) plan. Previously, companies, as opposed to individuals, administered individual retirement plans largely through the defined benefit pension plan.11 Defined benefit pension plans "promise a fixed payout based on an employee's longevity with the firm and his/her final salary. . . ."12 Corporations, rather than the individual employee, bore the investment and management responsibility for retirement pools of employee contributions. …

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