SEC Enforcement Action Highlights Need for Careful Analysis of Perquisites and Personal Benefits

On July 2, 2018, the SEC brought a settled cease-and-desist proceeding against The Dow Chemical Company for failing to disclose approximately $3 million in executive perquisites, including personal use of company aircraft, in its proxy statements over five years.  The SEC concluded that Dow failed to adequately train key employees to ensure that the proper standard for perquisite disclosures was being applied and that Dow had inadequate processes and procedures to ensure proper reporting of perquisites.

As a result of these omissions, Dow was fined $1.75 million. In a somewhat surprising move, Dow was also ordered to retain an independent consultant for one year to review its policies, procedures, controls and training relating to perquisite disclosures and implement recommended changes.

Under Item 402 of Regulation S-K, Dow was required to disclose the total value of certain perquisites and other personal benefits provided to named executive officers.  According to the SEC, Dow did not follow the SEC’s standard for disclosure of perquisites, as outlined in the relevant adopting release in 2006, which stated that:

  • “An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  • Otherwise an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

Instead, according to the SEC, Dow believed that an executive benefit was not a perquisite if it had a business purpose related to the executive’s job. The perquisites that Dow did not disclose included “travel to outside board meetings, sporting events, and personal activities; club memberships; limited use of personal assistant office time; and membership fees to sit on the board of a charitable organization.”

Notably, the SEC’s 2006 adopting release states that “the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one” that “draws a critical distinction between an item that a company provides because the executive needs it to do the job … and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.” The SEC’s order points out that the adopting release made clear that deductibility of an item as an ordinary or necessary business expense for tax purposes is not, by itself, a sufficient basis to conclude that the item is not a perquisite.

The enforcement action underscores the importance of conducting a careful analysis regarding whether payments or benefits constitute perquisites or other personal benefits.

Relatedly, the SEC recently brought charges against the former CEO of Energy XXI Ltd. for hiding more than $10 million in personal loans received during his service as CEO from company vendors and others. The SEC’s complaint also alleged that Schiller received undisclosed compensation and perks from the company, including lavish social events, first-class travel, a shopping spree, and donations to his preferred charities. While the SEC has yet to take any action against Energy XXI directly, it has noted that Energy XXI failed to report at least $1 million in excess compensation in its proxy statements over five years.

Companies should consider evaluating their existing policies, procedures, controls and training relating to identifying and disclosing required items, including perquisites, in proxy statements to ensure compliance with the relevant securities laws and SEC interpretive guidance.

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