In a settled enforcement action, the Securities and Exchange Commission (“SEC”) charged Shift4 Payments, Inc. (“Shift4”), a payment processing company based in Pennsylvania, with failing to disclose payments made to immediate family members of executive officers and directors as compensation.
Item 404(a) of Reg S-K requires companies describe transactions since the beginning of the last fiscal year if: (1) the transaction is in excess of $120,000; (2) the company was a participant; and (3) any “related person had or will have a direct or indirect material interest.” The definition of a “related person” is quite broad, as it includes any director (or nominee), executive officers, and immediate family members of directors (or nominees) and executive officers. Under Item 404(a), immediate family members include “any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer or nominee for director, and any person (other than a tenant or employee) sharing the household of such director, executive officer or nominee for director.”
If the transaction meets the requirements outlined in Item 404(a), the company must disclose:
- the related person’s name;
- the nature of the relationship;
- the related person’s interest in the transaction;
- the approximate dollar amount of the transaction; and
- any other information that would be material to investors.
The same disclosure requirements also apply to transactions between companies and any 5% shareholder.
As an example, X is a director of Company A. Company A employs X’s son at a yearly salary of $150,00. Because X’s son is a related person and has a material interest in his yearly compensation, this transaction must be disclosed under Item 404(a).
In its Order against Shift4, the SEC alleged Shift4 violated Sections 13(a) and 14(a) after failing to disclose two transactions which met the requirements for disclosure under Item 404(a). Specifically, Shift4 employed a sibling of an executive officer and director, who received $1.1 million in compensation between 2020 and 2022. Additionally, another sibling of an executive officer and director received over $1 million as “residual commissions while acting as an independent sales agent” between 2020 and 2022. Shift4 did not disclose either of these transactions in its Form 10-K or proxy statements. As such, it violated Item 404(a).
Because Shift4 cooperated with the SEC during its investigation and took several remedial acts, including improving its company policies and procedures, Shift4 and the SEC settled. The company agreed to pay a civil money penalty of $750,000.
Shift4 did not admit or deny the SEC’s allegations.
