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White Discusses New Related Person Transactions Disclosure

In a recent address to the Society of Corporate Secretaries and Governance Professionals, Corporation Finance Director John White discussed the new disclosure of related-person transactions and its connection to disclosure controls and procedures. He outlined the principles-based approach which begins with the identification of the key objective of the disclosure. Disclosure of related-person transactions is a key, principles-based component of the recently adopted executive compensation disclosure rules, Mr. White explained.

The key objective of the related-person transaction disclosure is to provide investors with material information about a transaction in which the company is a participant and which has a direct or indirect material interest to a related person, according to Mr. White. The term "transaction" has a broad scope, he added, and should not be narrowly interpreted.

Mr. White reported that he has heard some people state that a charitable donation cannot trigger the related-person transaction disclosure because it is a gift. He disagreed. In order to determine whether disclosure is required, the issue must be analyzed for its key objective. Mr. White said he sees nothing in the language of the rule or in the principle that would eliminate the possibility that a charitable contribution may be a related-person transaction, given its broad definition. He provided a couple of examples in which a charitable donation may be seen as a related-person transaction.

Mr. White acknowledged that the principles-based approach to the new disclosure can be difficult and urged companies to ensure that they have the necessary resources in place. A company's disclosure controls and procedures must operate for all of the disclosures that are made in SEC filings, he said, and the related-person transaction disclosure poses a particular challenge. He urged companies to review and revise their disclosure controls and procedures as needed to ensure that they are capable of complying with the new rules.

Mr. White referred to an earlier speech in which he outlined the questions he would ask his clients if he were still in private practice. Those questions include who will collect, aggregate and maintain the information and ensure that it is correctly reflected in the new compensation disclosure and analysis. He would also ask whether the existing disclosure committees are prepared for the task and whether they include the right people.

Companies may wish to consider whether their compensation committee members or a subset of the committee should be included in the disclosure processes earlier than in the past. The CD&A requires a close working relationship among a cross-section of the company's team, in Mr. White's view. He added that CEOs and CFOs will have a special interest in the CD&A given that it is covered by their certifications.

This fall is the time to receive input and encourage communication among all of the team, Mr. White said, prior to the upcoming proxy. Well-designed disclosure controls and procedures will provide the information necessary to comply with the principles-based disclosure requirements, he said. He urged registrants not to forget the importance of the substance to the required disclosure.

A significant amount of compensation information will have to be collected, evaluated and disclosed. Mr. White said that related-person disclosure will require information that can only be obtained from the related persons themselves. One source for obtaining this information is through director and officer questionnaires, he said, so companies may need to update them to ensure they ask the right questions. He added that companies may wish to hold training sessions or provide materials to officers and directors to ensure that they understand the new disclosure requirements and how the principles-based standards function.