Annual “housekeeping” activities of public companies at this time of year include, or should include, designating “officers” for purposes of filing reports under Section 16 of the Securities Exchange Act of 1934, as amended, and “executive officers” for purposes of disclosures in the Form 10-K and the proxy statement filed with the Securities and Exchange Commission under the Exchange Act.  The board of directors of a public company designates the officers and executive officers.  Although the board’s determination typically does not involve a great deal of uncertainty or complexity, the board may have judgments to make.

The definitions of “officer” in SEC Rule 16a-1(f) under the Exchange Act and of “executive officer” in SEC Rule 3b-7 under the Exchange Act– which are substantially similar, though not identical – provide the standards for the board’s determination.  Although the definitions primarily refer to or use titles to describe the persons who are officers or executive officers, they may require that the board exercise some judgment as to:

  • Which vice presidents are, or are not, “in charge of a principal business unit, division, or function,” or
  • Which officer, not having the title of vice president or above, performs a “policy-making function” for the company.

Regarding the latter standard, the note to Rule 16a-1(f) provides that “policy-making function” does not “include policy-making functions that are not significant.”

Because the SEC has stated that the determination of officers or executive officers depends on the circumstances and that it will not give advice regarding that determination, the board may exercise its judgment based on the company’s particular business, operating approach, organization and affairs.

A federal court decision published since last year’s annual housekeeping activities of most public companies in SEC v. Prince, provides some guidance as to a (significant) “policy-making function” and indicates the importance of particular circumstances.

In this suit the SEC claimed (among other things) that Gary A. Prince was a de facto officer of a public company, Integral Systems, Inc., and that his status as such – as well as his legal history, which included a permanent injunction from the SEC – should have been disclosed in Integral’s appropriate SEC filings.

After an extensive review of the facts, the court decided that Mr. Prince was not a de facto officer of Integral, because he did not individually make or implement significant policy decisions for Integral.

The court acknowledged that Mr. Prince had a significant and influential role in Integral.  Among other things, Mr. Prince:

  • actively supervised Integral’s mergers-and-acquisitions program, including the integration of acquired businesses;
  • was active and influential in a group of employees that regularly made policy recommendations to Integral’s CEO;
  • supervised a few employees, and had power to hire and fire certain employees;
  • had an office near, and worked closely with, Integral’s CEO; and
  • was one of Integral’s most highly compensated employees.  

Nevertheless, the court concluded that Integral and its counsel had structured or limited Mr. Prince’s activities to avoid his being characterized as a de facto officer of Integral and that Mr. Prince did not have the authority to control Integral or to “make policy for Integral in any capacity.”  Policy decisions were instead made by the CEO or other designated officers of Integral.

OUR TAKE: Although the facts of SEC v. Prince are unique, the decision may help a board of directors and its counsel understand what constitutes a significant “policy-making function” to the extent necessary to determine who are “officers” or “executive officers.”