Item 404: Related Person Transaction Disclosure Triggers and Exemptions

Regulation S-K Item 404 sets out the related person transaction disclosure requirements that public companies must follow when a director, executive officer, significant shareholder, or one of their family members has a financial stake in a deal with the company. Codified at 17 CFR § 229.404, the rule requires a narrative disclosure whenever the transaction exceeds $120,000 and the insider has a direct or indirect material interest in it. The purpose is to let investors see conflicts of interest that might shape how a company spends its money or chooses its counterparties.¹

Who Counts as a Related Person

The rule defines the term broadly. It covers anyone who served as a director or executive officer at any point during the last fiscal year, any person nominated to become a director, and any shareholder known to beneficially own more than five percent of a class of the company’s voting securities. Someone who held one of these roles for even part of the year qualifies for the entire period.¹

Immediate family gets swept in alongside the core group. A director’s spouse, parents, stepparents, children, stepchildren, siblings, and all in-laws are covered, as is anyone sharing the household of a director, officer, or major shareholder, other than a tenant or employee.¹ Family coverage exists so an insider cannot route a favorable deal through a relative and claim ignorance.

The Two Triggers for Disclosure

A transaction gets disclosed only when it clears both a dollar threshold and a materiality standard. Both have to be present.

The dollar hurdle is $120,000. If the company was or will be a participant in a transaction where the total amount involved exceeds that figure since the beginning of its last fiscal year, the deal enters the analysis. Proposed transactions count, and the $120,000 can be reached by aggregating a series of related transactions, arrangements, or relationships rather than requiring a single large payment.²

The second trigger is materiality. Even once the dollar threshold is met, the related person must have a direct or indirect material interest in the transaction. Materiality turns on whether a reasonable investor would consider the information significant when deciding whether to buy, hold, or sell the stock.¹ A direct interest is straightforward: the related person receives payment or property from the company. Indirect interests usually involve the insider owning a stake in a separate entity that transacts with the company.

What the Disclosure Must Contain

When a transaction clears both triggers, the filing has to cover a specific set of data points. The company must state the related person’s name, explain the basis for their classification (director, officer, five-percent shareholder, or family member of any of them), and describe the nature of their interest in the transaction.¹

Two dollar figures are required: the approximate total amount involved in the transaction and the approximate dollar amount of the related person’s interest in it.¹ If a director owns half of a vendor that sold $300,000 of goods to the company, the filing lists $300,000 as the transaction total and $150,000 as the director’s interest. The two figures let an investor gauge how meaningful the transaction is relative to both the company and the insider.

Debt transactions carry additional line items. The disclosure must report the largest aggregate principal balance outstanding during the period, the amount of principal outstanding as of the latest practicable date, the principal and interest paid during the period, and the interest rate.¹ Any portion of the debt that was forgiven has to be stated explicitly.

Transactions That Are Exempt

Not every deal above the dollar threshold has to be disclosed. The regulation identifies categories where the risk of conflict is low enough to be left out of the filing.

No Material Indirect Interest

A related person is not treated as having a material indirect interest when their tie to the counterparty is limited. That covers situations where the person’s only connection to the counterparty is serving on its board, or where the related persons together own less than ten percent of the counterparty’s equity. Limited partners holding under ten percent of a partnership that transacts with the company are similarly excluded, provided they hold no general partner role or other position.²

Compensation Reported Elsewhere

Executive officer compensation does not require separate Item 404 disclosure if it is already reported under Item 402 of Regulation S-K. For officers who are not named executive officers, the exemption still applies if the compensation would have been reported under Item 402 had they qualified, and a compensation committee or independent directors approved it. Director compensation reported under Item 402(k) is also excluded.²

Routine Business Categories

Transactions priced through competitive bidding or government-regulated rates, such as utility services or common carrier charges.
Transactions where the related person’s only interest comes from holding the same class of stock as everyone else, and all holders of that class received the same pro rata benefit.
Services as a bank depositary, transfer agent, registrar, or trustee under a trust indenture.
Trade payables, routine travel and expense reimbursements, and similar ordinary-course indebtedness.

For regulated lenders such as banks and broker-dealers, the company can limit its disclosure to a statement that the loans were made on terms comparable to those available to unrelated borrowers and did not carry unusual collectibility risk, so long as the loans are not past due or classified as troubled debt.²

Where the Disclosure Gets Filed

Item 404 information appears in a handful of filings. Form 10-K requires it under Part III, Item 13 (“Certain Relationships and Related Transactions, and Director Independence”).³ Many companies incorporate the disclosure by reference from their definitive proxy statement on Schedule 14A, which calls for Item 404 information when presenting director nominees.⁴ Registration statements trigger it too: a Form S-1 for an IPO or a Form 10 registering securities under the Exchange Act must include the disclosure.²

Review and Approval Policies

Item 404(b) requires every registrant to describe the policies and procedures it uses to review, approve, or ratify related person transactions. The description must identify the types of transactions covered, the standards applied when evaluating a deal, the people or board groups responsible for the review, and whether the policy is written. If a disclosable transaction slipped through without following the company’s own policy, the company has to say so.²

At most public companies, the audit committee or a group of independent directors performs this review, and stock exchange rules push in the same direction. The NYSE requires listed companies’ audit committees (or another independent board body) to conduct “reasonable prior review and oversight” of all related party transactions and to block any that conflict with the interests of the company and its shareholders.⁵ Nasdaq Rule 5630 imposes a parallel obligation, directing listed companies to conduct “appropriate review and oversight” through the audit committee or another independent board body.⁶ Both exchanges define “related party transaction” by cross-reference to Item 404, so the SEC threshold and the exchange oversight requirement move together.

Modified Rules for Smaller Reporting Companies

Smaller reporting companies follow a different version of Item 404. The SEC defines a smaller reporting company as one with a public float below $250 million, or one with annual revenues below $100 million and either no public float or a public float below $700 million.⁷

For those filers, the Item 404(d) threshold is the lesser of $120,000 or one percent of the average of the company’s total assets at year-end for the last two completed fiscal years. A small company with $8 million in average total assets hits the one-percent trigger at $80,000. Smaller reporting companies also cover a longer lookback: the last fiscal year and the fiscal year before it, rather than only the last fiscal year.²

What Happens When a Company Gets It Wrong

Failure to disclose a related person transaction violates Section 13(a) of the Securities Exchange Act and the filing rules underneath it. The SEC has real enforcement tools, and it uses them.

In a 2023 action, the SEC found that Lyft failed to disclose a related person transaction in its 2019 Form 10-K. The transaction involved a large shareholder’s pre-IPO sale of roughly 7.7 million shares to a special purpose vehicle affiliated with a Lyft director, who received millions of dollars in compensation for his role in the deal. Lyft did not report the transaction in the “Certain Relationships and Related Transactions” section of its annual report, as Item 13 of Form 10-K requires.⁸ The SEC issued a cease-and-desist order and imposed a $10 million civil penalty. Beyond agency enforcement, shareholders can bring derivative suits alleging that undisclosed self-dealing harmed the company, targeting the directors or officers who participated in or approved the transaction.

1
eCFR. 17 CFR 229.404 – Transactions With Related Persons, Promoters and Certain Control Persons
2
eCFR. 17 CFR 229.404 – Transactions With Related Persons, Promoters and Certain Control Persons
3
U.S. Securities and Exchange Commission. Form 10-K
4
eCFR. 17 CFR 240.14a-101 – Schedule 14A Information Required in Proxy Statement
5
New York Stock Exchange. NYSE 2025 Annual Guidance Letter
6
Nasdaq. Nasdaq Rule 5630 – Review of Related Party Transactions
7
U.S. Securities and Exchange Commission. Smaller Reporting Company Definition
8
U.S. Securities and Exchange Commission. Administrative Proceeding File No. 3-21672 – In the Matter of Lyft, Inc.