Issuer Fined for Undisclosed Payments to Executives’ Family Members
Commentary by Stephanie Metherall
A footwear company settled with the SEC for failing to make required disclosures of related person transactions in its annual reports and proxy statements.
According to the Order, the company, on two separate occasions over the course of two fiscal years, filed a Form 10-K indicating that the required related person transaction information would be incorporated by reference in the company’s forthcoming proxy statement. The SEC found that the company failed to disclose in the proxy statement that a person sharing the same household as a director and executive officer of the company received $210,000 in compensation as an independent contractor. Further, the SEC found in a proxy statement for the following fiscal year, that the company failed to disclose that a sibling-in-law of an executive officer and director received $155,419 in compensation and a sibling of a different executive officer and director received $486,790 in compensation.
In addition, the SEC found that the two proxy statements failed to disclose that one or more executive officers and directors owed in excess of $120,000 to the company, with respect to personal expenses that had been paid for by the company, but not yet reimbursed by the related person.
The SEC found that the company violated Exchange Act Section 13(a) and Rule 13a-1 ("Reports by issuer of security; contents") thereunder and Exchange Act 14(a) ("Proxies") and Rule 14a-3 ("Information to be furnished to security holders") thereunder.
To settle the charges, the company agreed to (i) cease and desist from committing or causing any violations and any future violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1 and 14a-3 thereunder and (ii) pay a civil money penalty in the amount of $1.25 million.
Commentary
This is an instance of a violation where it seems inappropriate to impose a monetary penalty on the issuer (and indirectly on its shareholders), in which it did not benefit from the failure of disclosure. There is no suggestion in the SEC Order that the related party services were not actually rendered at value to the company. Therefore, this appears to be a pure disclosure case. The settlement underscores that it is important for companies to have some methodical system - perhaps a questionnaire - when ascertaining related party transactions.