Sarbanes–Oxley (SOX) & Related SEC/FINRA Obligations — Oracle Source

SOX (SEC/FINRA, US) - Overview

The Sarbanes–Oxley Act of 2002 (SOX) is a U.S. federal law enacted in response to major accounting scandals (Enron, WorldCom) to improve the accuracy and reliability of corporate disclosures in financial markets.[cite:110][cite:116] It establishes requirements for public company governance, internal control over financial reporting (ICFR), auditor independence, and executive responsibility for financial statements, backed by SEC rulemaking and enforcement.[cite:116][cite:105] For financial services firms, SOX operates alongside the Securities Exchange Act, SEC rules, PCAOB auditing standards, and FINRA supervisory rules to create an integrated regime for truthful reporting, books-and-records, and supervisory controls.[cite:107][cite:112]

SOX (SEC/FINRA, US) - What It Is

SOX is a federal statute (Pub. L. 107‑204, 116 Stat. 745) signed into law on July 30, 2002, and codified across Titles 15 and 18 of the U.S. Code.[cite:116][cite:110] Key operative sections for financial reporting and controls include Section 302 (corporate responsibility for financial reports, 15 U.S.C. §7241), Section 404 (management assessment of internal control over financial reporting), Section 906 (criminal certifications, 18 U.S.C. §1350), Section 301 (audit committees), Sections 201–209 (auditor independence), and Section 802 (destruction/alteration of records).[cite:116][cite:113] The SEC implements SOX through regulations under the Securities Act and Exchange Act, and the PCAOB (created under Title I of SOX) sets and enforces auditing standards for registered public accounting firms.[cite:116][cite:113] FINRA rules (e.g., Rules 3110 and 3120) operate in parallel to require broker‑dealers to maintain supervisory systems and internal controls reasonably designed to achieve compliance with federal securities laws, including SOX‑related obligations.[cite:115][cite:112]

SOX (SEC/FINRA, US) - Who It Applies To

SOX applies primarily to “issuers” — companies with securities registered under Section 12 of the Securities Exchange Act of 1934, those required to file reports under Section 15(d), and companies that file or have filed a registration statement under the Securities Act.[cite:110][cite:116] This includes U.S. public companies and foreign private issuers listed on U.S. exchanges, covering many banks, broker‑dealer holding companies, and large financial institutions.[cite:87][cite:92] SOX also applies to auditors of issuers (public accounting firms registered with the PCAOB) and, through certain sections, to officers, directors, and audit committee members of issuers (e.g., CEO/CFO certification obligations, audit committee responsibilities, audit committee financial expert disclosures).[cite:113][cite:101]

Broker‑dealers and investment advisers are subject to SOX indirectly via their status within issuer groups and directly through SEC and FINRA rules requiring robust books‑and‑records, supervisory systems, and certifications that are aligned with SOX's objectives (e.g., Exchange Act Rules 17a‑3/4, FINRA Rules 3110 and 3120).[cite:115][cite:112] Private companies are not directly subject to SOX, but many adopt SOX‑like controls voluntarily, and SOX provisions can apply if they later become public or issue registered securities.[cite:92][cite:98]

SOX (SEC/FINRA, US) - What It Requires - Corporate Governance & Audit Committees

SOX strengthens board‑level governance, particularly through audit committees.[cite:116][cite:113]

Audit Committee Structure and Duties (Section 301)

• Issuers’ audit committees must be directly responsible for the appointment, compensation, and oversight of the external auditor; auditors report directly to the audit committee.[cite:116][cite:113]
• Audit committees must establish procedures for receiving, retaining, and treating complaints about accounting, internal accounting controls, or auditing matters, including confidential whistleblower submissions by employees.[cite:116][cite:113]
• National securities exchanges (e.g., NYSE, Nasdaq) implement SOX Section 301 via listing standards requiring audit committee independence and specific responsibilities for oversight of financial reporting and auditors.[cite:110][cite:113]

Audit Committee Financial Experts (Section 407)

• Issuers must disclose whether their audit committee has at least one “financial expert” (as defined by the SEC) or explain why not.[cite:101]
• A financial expert must possess an understanding of GAAP, financial statements, internal controls, and audit committee functions based on past experience as an accountant, auditor, CFO, controller, or similar role.[cite:101]

SOX (SEC/FINRA, US) - What It Requires - Executive Certifications & Disclosure Controls (Section 302 / 906)

SOX Sections 302 and 906 create personal certification obligations for CEOs and CFOs and require robust disclosure controls and procedures.[cite:105][cite:110]

Section 302 – Corporate Responsibility for Financial Reports

• CEOs and CFOs must certify each quarterly and annual report filed with the SEC, stating they have reviewed the report and that, to their knowledge, it does not contain untrue statements of material fact or omit material facts.[cite:105][cite:110]
• Officers must certify that financial statements fairly present, in all material respects, the issuer’s financial condition and results of operations.[cite:105][cite:103]
• Officers are responsible for establishing and maintaining disclosure controls and procedures and ICFR, evaluating their effectiveness within 90 days prior to filing, and presenting their conclusions in the report.[cite:105][cite:113]
• Officers must disclose to the audit committee and external auditors all significant deficiencies and material weaknesses in internal controls and any fraud (whether or not material) involving management or employees with a significant role in ICFR.[cite:105][cite:113]

Section 906 – Criminal Certifications (18 U.S.C. §1350)

• CEOs and CFOs must certify that periodic reports containing financial statements fully comply with SEC reporting requirements and fairly present the issuer’s financial condition.[cite:116][cite:110]
• Knowingly or willfully providing false certifications triggers criminal penalties, including fines and imprisonment (up to 20 years for willful violations).[cite:108][cite:116]

SOX (SEC/FINRA, US) - What It Requires - Internal Control Over Financial Reporting (Section 404)

Section 404 is the core ICFR requirement and has significant implications for control design, documentation, testing, and auditing.[cite:105][cite:113]

Management Assessment of ICFR

• Management must establish and maintain adequate internal control over financial reporting (ICFR) and annually assess and report on the effectiveness of ICFR in Form 10‑K.[cite:104][cite:113]
• The internal control report must state management’s responsibility for establishing and maintaining ICFR and contain management’s assessment as of the end of the fiscal year.[cite:104][cite:113]
• Management must document processes, risks, and controls that ensure reliable financial reporting and prevention/detection of material misstatements.[cite:113][cite:88]

External Auditor Attestation

• For accelerated and large accelerated filers, the company’s registered public accounting firm must attest to and report on management’s assessment of ICFR.[cite:104][cite:88]
• PCAOB Auditing Standard No. 2201 (formerly AS 5) guides ICFR audits, requiring a top‑down, risk‑based approach focused on entity‑level controls, significant accounts, and relevant assertions.[cite:88][cite:98]

Scope, Testing, and Remediation

• ICFR encompasses controls over transaction processing, account reconciliations, financial close, IT general controls (ITGCs), and application controls relevant to financial reporting.[cite:95][cite:96]
• Identified material weaknesses must be disclosed; failure to remediate can lead to adverse opinions on ICFR and increased audit scrutiny and cost.[cite:88][cite:91]

SOX (SEC/FINRA, US) - What It Requires - Auditor Independence & Audit Practice

SOX imposes strict independence and oversight rules on auditors of issuers.[cite:116][cite:113]

Prohibited Non‑Audit Services (Sections 201–202)

• External auditors may not provide certain non‑audit services to audit clients (e.g., bookkeeping, financial information systems design/implementation, appraisal/valuation services, internal audit outsourcing, management functions, legal services unrelated to the audit).[cite:116][cite:113]
• Other permissible non‑audit services must be pre‑approved by the issuer’s audit committee.[cite:116][cite:113]

Audit Partner Rotation and Reporting (Sections 203–204)

• The lead audit partner and reviewing partner must rotate off the issuer’s audit engagement after five consecutive years, with a subsequent cooling‑off period.[cite:113][cite:116]
• Auditors must report to the audit committee on critical accounting policies, alternative treatments of financial information discussed with management, and other material written communications.[cite:113]

PCAOB Registration, Inspection, and Standards (Title I)

• Public accounting firms that audit issuers must register with the PCAOB, which conducts regular inspections and can impose sanctions for deficiencies.[cite:116]
• PCAOB issues auditing and related professional practice standards, including for ICFR audits, fraud consideration, and audit quality.[cite:88][cite:98]

SOX (SEC/FINRA, US) - What It Requires - Books, Records, and Retention

SOX enhances recordkeeping requirements and penalties for improper alteration or destruction of records.[cite:116][cite:110]

Section 802 – Criminal Penalties for Altering Documents

• It is a crime to knowingly alter, destroy, mutilate, conceal, or falsify records, documents, or tangible objects with intent to impede or influence investigations; violations can result in fines and imprisonment of up to 20 years.[cite:116][cite:110]
• Auditors must retain audit workpapers and related documents for not less than seven years (SEC and PCAOB rules implement this requirement).[cite:116]

SEC and FINRA Books‑and‑Records

• Broker‑dealers must comply with Exchange Act Rules 17a‑3 and 17a‑4, which require creation and retention of detailed business, customer, and trading records, including electronic communications.[cite:117][cite:112]
• FINRA Rules 3110 and 4511 reinforce recordkeeping and supervisory requirements, including ensuring retained communications are supervised and retrievable.[cite:115][cite:112]

SOX (SEC/FINRA, US) - What It Requires - Supervisory & Compliance Systems (SEC / FINRA)

While SOX does not directly legislate broker‑dealer supervision, SEC and FINRA rules operationalize SOX‑aligned expectations for supervision, testing, and certifications.[cite:112][cite:115]

FINRA Rule 3110 – Supervision

• Members must establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules.[cite:115][cite:109]
• Requirements include written supervisory procedures (WSPs), designation of supervisors, review of transactions and communications, branch inspections, and documentation of supervisory activities.[cite:115][cite:109]

FINRA Rule 3120 – Supervisory Control System

• Firms must establish, maintain, and test a system of supervisory controls that test and verify that their supervisory procedures are reasonably designed to achieve compliance, with at least annual reporting to senior management.[cite:112]
• For larger firms, an additional CEO certification (Rule 3130) requires the CEO to certify annually that the firm's processes are reasonably designed to achieve compliance with applicable federal securities laws and FINRA rules, echoing SOX‑style executive accountability.[cite:112][cite:109]

SOX (SEC/FINRA, US) - Governance Implications

SOX and related SEC/FINRA rules have deep governance implications for financial services firms, including model‑driven and AI‑enabled environments.

Board, Executive, and Audit Committee Governance

• SOX Sections 302, 404, and 906 require CEOs/CFOs to personally certify reporting accuracy and ICFR effectiveness, which elevates accountability for governance across finance, risk, and IT.[cite:105][cite:113]
• Audit committees must oversee external auditors, ICFR, and whistleblower channels, and must include or disclose an audit committee financial expert, embedding specialized oversight into board structures.[cite:113][cite:101]

Ontic BOM Mapping (Conceptual)

• model — SOX‑relevant models (e.g., risk scoring, P&L attribution, AML/market surveillance models) must be controlled within ICFR where outputs affect financial statements; validation, performance monitoring, and change control are required components of ICFR and supervisory controls.[cite:96][cite:88]
• oracle — Authoritative sources for positions, pricing, reference data, and transaction data are part of books‑and‑records and ICFR; SOX implicates data lineage, reconciliations, and integrity checks over these oracles.[cite:95][cite:96]
• ontology — Standardized data taxonomies (products, accounts, legal entities, risk types) support consistent classifications and aggregations in financial reporting and regulatory reporting; inconsistent ontologies can drive control failures and reporting misstatements.[cite:88][cite:98]
• system_prompt — For AI/LLM‑based tooling used in reporting, disclosures, or supervisory workflows, governance must ensure prompts and configuration do not cause omissions or misstatements, tying them into SOX 302/404 disclosure and control frameworks conceptually.[cite:96][cite:77]
• gate — Access gates on critical reporting systems, ICFR‑relevant applications, and production models must enforce role‑based access, approvals, and change management consistent with ITGC requirements.[cite:95][cite:107]
• security — Cybersecurity controls directly affect integrity and availability of financial data; failures can create misstatement risk and implicate SOX 404 and SEC disclosure obligations.[cite:96][cite:114]
• signed_client — Identification and attestation mechanisms for internal and external users (e.g., traders, finance staff, auditors) support non‑repudiation and traceability of key actions affecting financial reporting and supervisory oversight.[cite:107][cite:109]

E/A/D Axis Integration

SOX (SEC/FINRA, US) - Enforcement Penalties

SOX violations are enforced by the SEC, PCAOB, DOJ, and self‑regulatory organizations (SROs) like FINRA.[cite:110][cite:114]

Criminal Penalties (Selected SOX Provisions)

• Section 906 (18 U.S.C. §1350): Knowingly certifying a non‑compliant report can result in fines up to $1,000,000 and imprisonment up to 10 years; willful violations can result in fines up to $5,000,000 and imprisonment up to 20 years.[cite:108][cite:116]
• Section 802 (18 U.S.C. §1519): Knowing destruction or falsification of records with intent to impede investigations can lead to fines and imprisonment up to 20 years.[cite:116][cite:110]

Civil and Administrative Penalties

• The SEC can impose civil monetary penalties, disgorgement, officer/director bars, and reimbursement of bonuses and profits under Section 304 (clawbacks) for executives following accounting restatements due to misconduct.[cite:110][cite:114]
• PCAOB can impose sanctions on audit firms and associated persons, including revocation of registration, monetary penalties, and censure for audit failures, independence violations, or documentation failures.[cite:116][cite:88]

Enforcement Examples (Recent)

• In FY 2024, the SEC obtained $8.2 billion in financial remedies (disgorgement plus civil penalties) across enforcement actions, including significant cases involving disclosure fraud, internal control failures, and misleading financial reporting.[cite:114]
• A 2024 enforcement action related to internal controls and recordkeeping failures resulted in a $2.5 million civil penalty against a broker‑dealer for violating Exchange Act Section 15(g) supervisory obligations, demonstrating the linkage between SOX‑aligned controls and supervisory requirements.[cite:111]
• Multi‑million‑dollar penalties and personal liability have been imposed in cases where executives submitted or certified false financial statements, underscoring the risk of criminal and civil exposure for SOX violations.[cite:108][cite:114]

SOX (SEC/FINRA, US) - Intersection With Other Frameworks

SOX sits within a broader ecosystem of financial regulation, internal control standards, and governance frameworks.

SEC, Exchange Act, and PCAOB

• SOX supplements existing securities laws (e.g., Securities Act of 1933, Exchange Act of 1934) and is implemented through SEC rules on disclosures, reporting, and internal controls.[cite:110][cite:116]
• PCAOB auditing standards operationalize SOX for auditors, aligning ICFR audits with COSO frameworks and internal control principles.[cite:88][cite:98]

COSO Internal Control Framework

• COSO’s Internal Control–Integrated Framework is the de facto standard for designing and assessing ICFR under SOX 404, covering control environment, risk assessment, control activities, information & communication, and monitoring.[cite:88][cite:113]

FINRA and Other SRO Rules

• FINRA Rules 3110, 3120, and 3130 provide supervisory and control requirements that operationalize SOX‑like expectations for broker‑dealers, especially around supervision, testing, CEO certifications, and recordkeeping.[cite:115][cite:112]
• Exchange listing standards (e.g., NYSE, Nasdaq) implement SOX audit committee, independence, and governance requirements, making compliance a condition for continued listing.[cite:110][cite:113]

Other Regulatory Interfaces

• Dodd‑Frank and SEC rules on whistleblower protections and clawbacks (e.g., Rule 10D‑1) extend SOX’s accountability and whistleblower protections.[cite:114][cite:111]
• For global firms, SOX interacts with non‑U.S. corporate governance codes and financial reporting regimes (e.g., IFRS, EU audit reforms), often requiring dual‑compliant control environments.[cite:87][cite:100]

SOX (SEC/FINRA, US) - Recent Updates

While the core SOX statutory text has remained stable, implementation and enforcement priorities have evolved materially in the last two years.

SEC Enforcement Trends (2024–2025)

• In FY 2024, SEC enforcement achieved record or near‑record levels in financial remedies, with a strong focus on financial reporting, internal controls, and recordkeeping violations.[cite:114]
• 2024–2025 saw multiple enforcement actions involving misleading or incomplete disclosures, failures in ICFR, and deficiencies in supervisory systems and electronic communications recordkeeping (e.g., $63.1 million combined penalties against 12 firms for recordkeeping failures).[cite:117][cite:114]

PCAOB and Audit Focus

• PCAOB inspections have increasingly emphasized ICFR audits quality, testing sufficiency, and auditor independence, heightening the practical bar for SOX 404 compliance.[cite:88][cite:98]

FINRA Supervisory and Communications Priorities

• FINRA’s recent guidance and exam priorities emphasize supervision of electronic communications (including messaging apps), social media, and off‑channel communications, tying directly into supervisory systems required under Rules 3110 and 3120.[cite:115][cite:117]

AI, Cybersecurity, and Controls

• SEC and PCAOB speeches and risk alerts highlight risks from cybersecurity incidents and the use of AI in financial reporting and trading, signaling expectations that SOX ICFR and supervisory controls extend to AI‑enabled processes and related ITGCs.[cite:96][cite:114]

These developments collectively raise the expectations for governance, documentation, monitoring, and enforcement for financial services firms subject to SOX, SEC, and FINRA oversight.