Codes of Ethics and State Fiduciary Duties: Where is the Line?

Abstract

The important function of disclosure under federal securities laws and regulations, and the role of management in running the affairs of the corporation consistent with state fiduciary principles have a history of discord. The recent mandates of the Sarbanes-Oxley Act (“SOX Act” or “SOX”), and the Security and Exchange Commission’s (“SEC”) implementing regulations continue to increase the disclosure obligations of public companies. This article examines the implementation of code of ethics requirements under SOX. It examines the SEC’s regulations, which implement SOX requirements on the disclosure of codes of ethics, and self-regulatory agency (“SRO” or “listing agency”) rules on codes of ethics for public companies. This article argues that code of ethics rules encroach into state law in defining the fiduciary obligations of officers and directors. Specifically, this article argues that the SEC’s approval of New York Stock Exchange (“NYSE”) and National Association of Securities Dealers (“NASD” or “Nasdaq”) rules allow the SEC to do indirectly what it could not do directly. This article, therefore, calls for an amendment to the SEC’s code of ethics implementing regulation to provide a safe-harbor for senior financial officers and principal executive officers.

Keywords: Nasdaq, NYSE, SEC, SOX, ethics, stock exchange, finances, self-regulatory, 406 regulation