## Facts

- W. R. Grace & Co. (WRG) was a public company that filed periodic reports and proxy materials covering 1992–1994.
- J. Peter Grace, Jr., WRG’s long-time CEO, retired effective December 31, 1992.
- WRG agreed to provide Grace, Jr. substantial retirement benefits and continuing perquisites, including use of company property.
- In preparing disclosure for WRG’s 1992 Form 10-K and 1993 proxy statement, Grace, Jr. provided inaccurate responses to internal disclosure questionnaires concerning benefits received.
- In early 1993, WRG considered a proposed sale of Grace Hotel Services Corporation (GHSC), a subsidiary, to a group headed by Grace, Jr.’s son, J. Peter Grace III.
- WRG’s 1993 Form 10-K and 1994 proxy statement did not disclose the proposed GHSC related-party transaction.
- Non-management directors played a primary role in negotiating and approving the retirement arrangements; material details were not adequately communicated to personnel responsible for public filings.
- The SEC issued a cease-and-desist order against WRG for disclosure violations and separately issued a Section 21(a) report addressing the conduct of certain former officers and directors; WRG and three individuals consented to issuance of the report without admitting or denying its statements.

## Issues

1. Whether WRG’s periodic reports and proxy statements violated federal securities disclosure requirements by failing to fully disclose (a) substantial CEO retirement benefits and (b) a proposed related-party transaction involving the CEO’s immediate family.
2. Whether certain former officers and directors caused or contributed to WRG’s disclosure violations by failing to take reasonable steps to ensure complete and accurate disclosure of material compensation and related-party information.

## Decision

- The SEC found WRG violated Exchange Act disclosure requirements applicable to periodic reports and proxy solicitations by:
  - Not fully disclosing substantial retirement benefits and perquisites promised to Grace, Jr. in the 1992 Form 10-K and 1993 proxy statement.
  - Omitting disclosure of the proposed GHSC sale to a group headed by Grace, Jr.’s son in the 1993 Form 10-K and 1994 proxy statement.
- The SEC issued an administrative cease-and-desist order directing WRG to cease and desist from future violations of the relevant disclosure provisions.
- In a public Section 21(a) report, the SEC determined that the issuer’s violations resulted from the conduct of certain former officers and directors, who contributed by failing to take steps they should have taken to ensure full and proper disclosure.
- The SEC did not bring separate charged proceedings against the individuals discussed in the report, using the report to address individual responsibilities and expected conduct.

## Legal Principles

- Public companies must fully and accurately disclose material executive compensation arrangements, including substantial retirement benefits and continuing perquisites, in periodic reports and proxy statements when required by applicable disclosure rules.
- Proposed transactions involving an issuer and an immediate family member of a senior executive or director are related-party matters requiring specific disclosure in periodic reports and proxy materials when the disclosure rules apply.
- Disclosure compliance is not limited to drafting personnel; officers and directors involved in, or possessing material information about, compensation and related-party matters have an affirmative responsibility to ensure that such information is communicated for inclusion in required filings.
- Reliance on internal disclosure questionnaires does not excuse incomplete public disclosure where responses are inaccurate or where those responsible for governance and approvals fail to verify and transmit material information.
- The SEC may use a Section 21(a) report to publicly describe conduct that contributed to issuer disclosure violations and to state expected standards for officers and directors, even without imposing individual sanctions.

## Conclusion

The SEC concluded that WRG’s filings omitted required disclosure about significant CEO retirement benefits and a proposed sale to the CEO’s son’s group, and it faulted certain former officers and directors for failing to ensure that material information was verified, communicated, and properly disclosed, while ordering the company to cease and desist from future disclosure violations.


In re W. R. Grace & Co., Exchange Act Release No. 39,157 (Sept. 30, 1997)