SEC Charges E-Commerce Firm for Failing to Evaluate and Disclose Board Member's Lack of Independence

The SEC recently announced settled charges against formerly publicly-traded Leaf Group Ltd. for failing to adequately evaluate and disclose in its annual proxy statement the lack of independence of a director and a board committee as well as an “interlocking” board-of-directors relationship between that director and Leaf’s Chief Executive Officer. SEC reporting rules require public companies to disclose interlocking relationships that impede independence, including when an executive officer serves as a member of the compensation committee of another entity, one of whose executive officers serves as a director of the issuer. For mutual funds, the 1940 Act provides the framework that determines director independence. According to the SEC’s order, Leaf Group made material misstatements in 2020 concerning the independence of a director and the existence of an interlocking relationship between that director and Leaf’s CEO. The SEC’s order found that Leaf Group materially misstated that the director was independent even though he served as chief financial officer of another company, for which Leaf’s CEO served as a director and whose compensation committee Leaf’s CEO chaired. The order further found that this “compensation committee interlock” disqualified the Leaf director as independent under the listing standards of the New York Stock Exchange, on which Leaf's stock traded, and also required specific disclosure in Leaf’s proxy statement. According to the order, the company further materially misstated the independence of a special committee that it had established to explore strategic alternatives, including a possible sale of the company, and also failed to maintain, during the 2019-20 period, disclosure controls concerning director independence and interlocks. Pursuant to the order, Leaf has agreed to cease and desist from violating the SEC's disclosure-controls, proxy-disclosure, and reporting rules and to pay a penalty of $325,000.