Item 401 of Regulation S-K: Disclosure Requirements

Item 401 of Regulation S-K is a Securities and Exchange Commission (SEC) rule that mandates public companies furnish detailed background information on the individuals steering the organization. The purpose of this rule is to provide investors with the information necessary to assess the experience, qualifications, and integrity of a company’s leadership. By compelling these disclosures, the SEC aims to ensure that shareholders can make informed voting and investment decisions based on a clear understanding of who is managing the company.

The information required by Item 401 is included in annual reports on Form 10-K and proxy statements for shareholder meetings. This transparency allows the market to evaluate the capabilities and potential risks associated with the management team and board of directors. The rule is structured to bring consistency to how this biographical and background data is presented across different companies, helping to create a more level playing field for investor analysis.

Required Disclosures for Directors and Executive Officers

Item 401 of Regulation S-K requires specific, detailed disclosures about the individuals who serve as directors and executive officers. These requirements form the foundation of the background information available to the public. The objective is to paint a clear picture of each person’s professional history and their connections to the company, allowing investors to gauge the collective expertise and potential conflicts of interest within the leadership team.

Companies must disclose the name, age, and all positions held by each director, director nominee, and executive officer. This includes their term of office and the specific periods they have served in those roles. This basic identifying information provides a starting point for understanding the composition of the board and management.

A description of each individual’s business experience over the past five years is a significant component of the disclosure. This narrative must include their principal occupations and the name and primary business of the organizations where they were employed. This five-year look-back helps investors evaluate the relevance of a director’s or officer’s recent experience to the company’s current business and strategic direction.

The rule also mandates the disclosure of any directorships held at other public companies. This information is important for assessing an individual’s network and understanding potential time commitments or conflicts of interest that might arise from serving on multiple boards. Furthermore, any family relationships among directors and executive officers, extending to first cousins, must be reported to highlight potential nepotism or concentrated influence.

Disclosure of Legal Proceedings

Item 401 mandates that companies disclose certain legal events involving directors, nominees, and executive officers that have occurred within the last ten years. This requirement is based on the principle that such events could be material to an evaluation of the ability or integrity of the people leading the company.

One category involves bankruptcy or insolvency proceedings. Companies must report if a director or officer has filed for personal bankruptcy or if they were an executive officer of a company that filed for bankruptcy during their tenure or within two years prior.

Criminal proceedings are another area of disclosure. Any conviction in a criminal proceeding, or a pending criminal proceeding, must be reported. While minor offenses like traffic violations are excluded, financial crimes such as fraud, embezzlement, or tax evasion are considered highly relevant to an individual’s integrity and must be disclosed.

The rule also covers a range of orders, judgments, and decrees from courts and regulatory bodies. This includes findings of violations of federal or state securities or commodities laws. Additionally, any court or agency order that bars an individual from engaging in business activities, such as acting as a securities broker-dealer or an investment adviser, must be disclosed.

Audit Committee Financial Expert Disclosure

Public companies are required to disclose whether their board of directors has determined that at least one “audit committee financial expert” serves on the audit committee. The disclosure must be made in the company’s annual report, and if an expert is identified, their name must be provided.

The SEC provides a specific definition of what constitutes an audit committee financial expert. This individual must possess a comprehensive understanding of generally accepted accounting principles (GAAP) and financial statements. They must also have the ability to assess the application of these principles in connection with accounting for estimates, accruals, and reserves. This expertise is typically gained through experience as a public accountant, auditor, chief financial officer, or controller, or through similar roles.

A company that does not have an audit committee financial expert is not in violation of the rule, but it must affirmatively disclose this fact. In such cases, the company is required to provide an explanation for why it lacks such an expert on its audit committee. The rule also includes a “safe harbor” provision, stating that being designated as a financial expert does not increase an individual’s legal liability.

Disclosures for Promoters and Control Persons

Item 401 extends disclosure requirements to individuals identified as “promoters” and “control persons,” particularly for companies that are new to the public reporting system. This rule applies to companies that have not been subject to the reporting requirements of the Exchange Act for the 12 months prior to a filing and have had a promoter within the last five fiscal years. A promoter is a person who takes the initiative in founding and organizing the business of the company.

A control person is an individual who has the power to direct the management and policies of the company, whether through the ownership of voting securities, by contract, or otherwise. For these individuals, the company must disclose the same types of legal proceedings that are required for directors and executive officers. This means that any involvement in bankruptcy, criminal proceedings, or securities law violations within the specified timeframe must be reported.

The purpose of this requirement is to ensure that investors in newly public companies are aware of any potential integrity issues associated with the key individuals who were instrumental in the company’s formation or who exercise significant influence over its operations. This allows potential investors to make a more complete assessment of the risks associated with an investment in a company that does not have a long public reporting history.