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The family ties that bind

More companies are revealing that executives or directors have family members on the company payroll. While welcoming the new disclosures, observers criticized the companies for waiting to tell investors about the relationships.
/ Source: The Associated Press

Following the Securities and Exchange Commission’s recent settlement with Walt Disney Co., more companies are revealing for the first time that executives or directors have family members on the company payroll.

Among the companies recently making first-time disclosures about family ties are Bear Stearns Cos., First Busey Corp. and Qualcomm Inc.

While welcoming the new disclosures, observers criticized the companies for waiting until now to inform investors about the long-standing relationships.

Corporate-governance and securities-law experts said the companies’ past silence apparently violated an SEC rule that requires companies to say if executives or directors have immediate family members who receive more than $60,000 in a year from the companies.

“I think companies were violating the rule the entire time they weren’t (disclosing the relationships), and I think some of them were stretching very hard to find an interpretation” of SEC rules that allowed them to avoid making disclosures, said Beth Young, a senior research associate at the Corporate Library, a governance research group.

SEC Regulation S-K
The family-ties disclosure rule is part of the SEC’s Regulation S-K, which was originally enacted in 1982 and outlines the information that companies need to make public. The rule “generally requires that employment of a relative earning more than $60,000 has to be reported,” said SEC spokesman John Nester.

The series of new disclosures is at least partially a byproduct of the SEC’s high-profile charges against Disney for failing to disclose family ties between its directors and employees of the Burbank, Calif., entertainment company.

Without admitting or denying that it broke the rules, Disney in December 2004 settled the SEC charges by agreeing to avoid future violations. Until the Disney case, some companies didn’t disclose the relationships on the grounds that they didn’t think an executive or director’s family member’s being employed represented a financial “transaction” that was covered under Regulation S-K, said Brian Lane, a former director of the SEC’s corporate finance division.

The Disney settlement “caused companies’ awareness to be raised on the issue, and many went back to discuss whether family members (of executives or directors) were working for the company,” said Lane, now a partner at Gibson Dunn & Crutcher LLP.

2 companies get Disney message
At least two companies — Qualcomm and First Busey — say the Disney case prompted them to beef up their disclosures.

Qualcomm recently revealed for the first time that the son of its audit committee chairman is a senior finance officer who earned $169,540 last year, in addition to stock options. In the same proxy, the San Diego-based wireless communications company also disclosed for the first time that the brother of Executive Vice President Steven R. Altman is a director of business development for Qualcomm, and was paid $154,873, plus stock options, in 2004.

Qualcomm said in a statement that it hadn’t previously thought it needed to disclose such relationships “if the family member was an adult not living with the director or executive and no other special circumstances relating to employment would render the relationship ’material’ under relevant SEC rules.” But the SEC’s charges against Disney “called this understanding into question” and led Qualcomm to disclose the relationships, the company said.

Father, brother, son
First Busey, an Urbana, Ill.-based bank and insurance holding company, said in its proxy statement last month that the son and brother of Edwin A. Scharlau II, the chairman of First Busey’s investment group, both work for the company and earned more than $60,000 last year. The three Scharlaus have been First Busey employees for at least several years.

Barbara Harrington, First Busey’s chief financial officer, said the new disclosure “is really just in response to” the SEC’s Disney investigation.

Among the other first-time disclosers, Bear Stearns said this week that Paul A. Novelly, an independent director since 2002, has a son who until recently worked as an account executive at the Wall Street firm. After more than 14 years with Bear Stearns, the son, who earned $281,902 last year, resigned two weeks before the company filed its proxy statement.

The company didn’t say if the resignation was related to the impending proxy disclosure. A Bear Stearns spokesman declined to comment on the matter.