As proxy season kicks off, companies should be mindful of their disclosure obligations regarding related-person transactions, especially those involving immediate family members of executive officers and directors.  On January 15, 2025, the Securities and Exchange Commission (“SEC”) announced the settlement of an enforcement action against a publicly traded software and payment processing company (the “Company”), for failing to disclose $4.7 million in payments over three years that were made to siblings and children of executive officers and directors as compensation for services as non-executive employees and commissions as independent sales agents.  The company also paid a civil money penalty.

What are related-person transactions and why are they important?  Under Regulation S-K, Item 404(a), companies must disclose transactions since the beginning of the last fiscal year in excess of $120,000 in which the company was a participant and any “related person had or will have a direct or indirect material interest.”  A related person includes any director, director nominee, or executive officer of the company as well as any immediate family member.  The definition of “immediate family member” is quite broad and is defined as any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and anyone sharing the household of the director, executive officer or nominee.  Similar rules apply regarding greater than 5% shareholders of the company.

The purpose of this disclosure is to inform investors of any potential conflicts of interest, favoritism, or undue influence that may arise from transactions between the company and its insiders or their relatives.  The disclosure must include the name of the related person, the basis of the relationship, the related person’s interest in the transaction and the approximate dollar amount of the transaction, and any other information that would be material to investors.

What did the Company do wrong? According to the SEC’s order, it filed Forms 10-K for 2020, 2021 and 2022 that incorporated by reference related-person transaction information from the immediately forthcoming proxy statements. However, each proxy statement failed to disclose that:

  • A sibling of an executive officer and director (as well as a child of a different director) received, in each of 2020, 2021 and 2022, approximately $1.1 million in compensation while serving as a non-executive employee of the company.
  • A sibling of another executive officer received $167,947 in compensation while serving as a non-executive employee of the company in 2022.
  • A sibling of an executive officer and director (as well as a stepchild of a different director) received payments from the company of residual commissions while acting as an independent sales agent not employed by the company, in the respective amounts of $281,609, $492,096 and $463,565 in 2020, 2021 and 2022.

The SEC alleged that, in each case, these immediate family members were related persons who had a direct or indirect material interest in the transactions, and that the transactions and related information should have been disclosed in the Forms 10-K and proxy statements. Therefore, the SEC charged that the company violated Section 13(a) and Section 14(a) of the Exchange Act and related rules.  The SEC took into account the company’s cooperation and remedial acts, such as disclosures and improvements to related-person policies and procedures.

What are the key takeaways?  This enforcement action serves as a reminder that companies should carefully review their related-person transactions and ensure that they comply with the disclosure requirements under Item 404(a) of Regulation S-K.  Companies should also have effective policies and procedures to identify, evaluate, and report on related-person transactions, and to provide adequate training and oversight to the personnel involved. Companies should also be aware that the SEC may scrutinize related-person transactions involving the employment of immediate family members, and that the amount involved in the transaction includes all compensation, not just the salary of the employee. Failure to properly disclose related-person transactions with family members may expose companies to SEC enforcement actions and penalties, as well as reputational damage and shareholder litigation.

Seminar: February 24, 2025
6:00 – 8:00 p.m.
Register here.

Join the leaders of prominent university corporate governance centers for a discussion on one of the hottest topics in the field: Delaware’s continued leadership in the corporate chartering business.

Panelists

  • Lawrence A. Cunningham, Director, John L. Weinberg Center for Corporate Governance, University of Delaware, Alfred Lerner College of Business and Economics, and Henry St. George Tucker III Research Professor of Law Emeritus, The George Washington University Law School.
  • Sean J. Griffith, Former Director, Fordham Corporate Law Center, and T. J. Maloney Chair in Business Law, Fordham University Law School.
  • Dorothy S. Lund, Co-Director, Ira M. Millstein Center for Global Markets and Corporate Ownership, and Columbia 1982 Alumna Professor of Law, Columbia University Law School.
  • Edward Rock, Co-Director, Institute for Corporate Governance & Finance, and Martin Lipton Professor of Law, New York University Law School.

Moderator

  • Anna T. Pinedo, Capital Markets Partner, Mayer Brown, Adjunct Professor, The George Washington University Law School, and Member of Advisory Board of The George Washington University Center for Law, Economics & Finance (C-LEAF).

The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 122 to rescind the interpretive guidance previously provided in SAB 121. SAB 121 was originally issued in order to address accounting for obligations related to safeguarding crypto assets held by entities on behalf of platform users. It required entities to recognize both a liability and a related asset, measured at the fair value of the users’ crypto assets, and to include disclosures about the type and amount of crypto assets held, including separate disclosures for significant assets and any vulnerabilities arising from concentration risks. 

SAB 122 clarifies that entities with obligations to safeguard crypto assets for others must evaluate whether to recognize and how to measure a liability related to the risk of loss associated with such obligations.  This evaluation must be undertaken in accordance with ASC 450-20 (Loss Contingencies) under U.S. GAAP or IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets) under IFRS.

SAB 122 reminds entities that they are required to provide detailed disclosures to ensure investors have a clear understanding of their safeguarding obligations. These disclosures may include:

  1. details outside of the financial statements required under Regulation S-K, such as descriptions of the business, risk factors, or management’s discussion and analysis (MD&A) of financial condition and results of operations; and
  2. disclosures under ASC 450-20 and ASC 275 (Risks and Uncertainties), addressing risks and uncertainties related to safeguarding crypto assets.

SAB 122 must be applied using a full retrospective transition approach for annual periods beginning after December 15, 2024.

In a September 2024 speech addressing SAB 121 by SEC Chief Accountant Paul Munter, the Chief Accountant noted that this kind of “financial reporting provides relevant, timely information that investors need to assess the unique risks and uncertainties related to safeguarding crypto-assets for others.” Chief Accountant Munter is due to retire from public service at the end of this month. 

The US Supreme Court has stayed the injunction against the Corporate Transparency Act (CTA), but the requirement for companies to file beneficial ownership information remains suspended, creating ongoing uncertainty about compliance timelines. This Legal Update summarizes status and notes potential developments that could impact companies’ reporting obligations. Continue reading.

Thinking about a dual listing? In this MB Sounding Board, partner Anna Pinedo talks to Joe Magnas, Senior Director of Legal Affairs of Protalix BioTherapeutics, Inc. Protalix is an Israel-based pharmaceutical company. During the discussion, Joe talks about the benefits, challenges, requirements, and special considerations associated with maintaining a dual listing.

Watch the Sounding Board MicroTalk.

On December 26, 2024, a panel of the US Court of Appeals for the Fifth Circuit vacated an order issued by a different panel just days before that had stayed the nationwide preliminary injunction suspending enforcement of the Corporate Transparency Act (CTA) and its implementing regulations. The Fifth Circuit’s action has the effect of restoring the nationwide preliminary injunction that had been in effect since early December and once again putting on hold companies’ obligations to file beneficial ownership information with the US Financial Crimes Enforcement Network (FinCEN).

Read our Legal Update.

Webinar | January 15, 2024
Register here.

During this session, Mayer Brown panelists, Brian Hirshberg, Jason W. Parsont, Thomas Kollar, and Gilat Abraham Zaefen will discuss US SEC disclosure priorities and other recent developments for foreign private issuers (FPIs) that should be priorities as they draft their annual reports.  Topics will include:

  • Artificial Intelligence
  • Cybersecurity and climate change disclosure trends
  • The SEC staff’s comments on clawback and pay versus performance issues
  • Insider trading and beneficial ownership rules
  • Financial reporting issues, including non-GAAP disclosures, critical accounting estimates in MD&A and segment reporting
  • China-related matters, including the HFCAA and potential tariff risk factors
  • Considerations related to risk factor disclosures
  • Areas of likely SEC focus in the coming months
United States
8:00 a.m. – 9:00 a.m. EDT
7:00 a.m. – 8:00 a.m. CDT
6:00 a.m. – 7:00 p.m. MDT
5:00 a.m. – 6:00 a.m. PDT
Europe
1:00 p.m. – 2:00 p.m. GMT
2:00 p.m. – 3:00 p.m. CET
Asia
9:00 p.m. – 10:00 p.m. HKT
9:00 p.m. – 10:00 p.m. SGT
10:00 p.m. – 11:00 p.m. JST

On December 23, 2024, the US Court of Appeals for the Fifth Circuit granted an emergency motion by the federal government to stay the nationwide preliminary injunction that had suspended enforcement of the Corporate Transparency Act (CTA) and stayed its compliance deadlines, including the January 1, 2025, compliance deadline for reporting companies formed prior to January 1, 2024. 

This Legal Update explains the extended deadlines that the US Financial Crimes Enforcement Network (FinCEN) issued within hours of the ruling, notes how the plaintiffs have responded and the Fifth Circuit might further respond, and provides takeaways for companies that may be subject to the CTA’s reporting obligations. 

Read our Legal Update.

This past Saturday, the US Financial Crimes Enforcement Network (FinCEN) confirmed that reporting companies—i.e., companies that would be required to report their beneficial ownership information to FinCEN under the Corporate Transparency Act (CTA) and its implementing regulations—are not required to file beneficial ownership reports for as long as the current, nationwide injunction of the CTA remains in effect. Further, FinCEN noted that reporting companies will have no liability for failing to file required beneficial ownership reports during the pendency of the injunction. FinCEN will continue to accept beneficial ownership reports from reporting companies on a voluntary basis.

Continue reading this Legal Update.