June 21, 2023
Self-Reporting Benefits Company in Latest Perks Enforcement Action
Yesterday, the SEC announced that it settled charges against a company and a former executive related to an alleged failure to disclose approximately $1.3 million worth of perquisites predominantly related to personal use of corporate aircraft by four of its executive officers and one of its directors over four years. During the years in question, the company’s proxy did not disclose any compensation related to personal use of a corporate plane.
The SEC’s order against the company states that the company’s process did not apply the “integrally-and-directly-related standard” to certain expenses, which resulted in the company understating the executives’ and director’s “All Other Compensation” by $325,000 per year, on average.
In the SEC’s order against the former executive, the SEC alleges that the executive failed to disclose approximately $280,000 in personal expenses charged to the company, including chauffer services, other travel, meals, apparel, and car repair services, in response to the company’s D&O questionnaire and after reviewing drafts of the proxy statement. As a result of the executive’s submission of these reimbursements and approval of payments to vendors, the company incorrectly recorded these as business expenses and not compensation.
Perks disclosure is technical, nuanced and, if the number of related enforcement actions is any indication, easy to get wrong. The SEC’s order has a good reminder that the “integrally-and-directly-related standard” is very limited:
According to the Adopting Release, even where the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” Indeed, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”
While the perks footfault here may not be unusual, one notable aspect of this settlement is that the SEC declined to impose a civil penalty on the company, citing its self-reporting, cooperation and implementation of remedial measures. The former executive agreed to pay $75,000 in civil penalties to settle the charges.
– Meredith Ervine