We return once more to the issue of public company executive perquisites or "perks" – a topic we anticipated last year would "be a hot-button enforcement issue for the foreseeable future." We were not wrong. In light of the SEC's most recent perks enforcement action, in this post we revisit the statutory framework for perks and dive into last month's settled charges against tool company Stanley Black & Decker Inc. (SBD) for allegedly failing to disclose perks it provided to certain executives. Additionally, we offer several key takeaways, including consideration of certain boilerplate language in the SBD order in the face of ongoing constitutional challenges to the SEC's in-house proceedings.

Perks, Generally

The SEC has long required public companies to report executive compensation. Specifically, Item 402 of Regulation S-K requires issuers to disclose in proxy materials the total value of "executive compensation" for "named executive officers."¹ Much of what comprises executive compensation – salary, bonuses, stock awards – is uncontroversial. But Item 402 also calls for the disclosure of "[a]ll other compensation," a catchall bucket that requires companies to disclose, among other things:

1. the total value of all perks and other personal benefits provided to named executive officers who receive at least $10,000 worth of such items in a given year, separated out by type
2. each perk or personal benefit that exceeds the greater of $25,000 or 10 percent of the total amount of that officer's perks and personal benefits.

The SEC has provided the following guidance on the scope of perks:

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.

Importantly, even where the company determines that an expense may be "ordinary" or "necessary" for tax or other purposes, that determination is "not responsive to the inquiry of whether the expense provides a perquisite or other personal benefit for disclosure purposes." Id.

These regulations have both bark and bite, as the SEC has enforced perk actions vigorously. Consider as but a few examples the previously discussed 2018 proceedings here, the 2020 actions involving against Hilton Worldwide Holdings Inc. and the trifecta of 2021 proceedings against Gulfport Energy Corp., National Beverage Corp. and ProPetro Holding Corp.

The trend continues. Just last month, in the second matter in recent months, the SEC announced settled charges against SBD and a former senior executive.

The Settlements

In a June 20, 2023, order, the SEC found that, from 2017 through 2020, SBD failed to disclose at least $1.3 million in perks and personal benefits paid to, or on behalf of, four executive officers and one director. In contrast to some of the prior orders for perks-related misconduct, the SBD order was short on details. The order provides only five paragraphs of specific factual findings, including only one additional key fact beyond the inaccurate disclosure (SBD's system failure for identifying, tracking and calculating perks).

Without admitting or denying the findings, SBD agreed to cease and desist from committing or causing any violations or future violations of Sections 13(a) and 14(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20, 13a-1 and 14a-3 thereunder. Exchange Act Section 13(a) and Rule 13a-1 require issuers to file annual reports with the SEC, which, according to the SEC, SBD violated by incorporating deficient proxy statements by reference in its Form 10-Ks. Rule 12b-20 also requires issuers to make accurate statements in their SEC filings, which, as per the order, SBD violated by failing to disclose the perks. Additionally, Exchange Act Section 14(a) and Rule 14a-3 prohibit issuers from soliciting a proxy in contravention of the rules or without furnishing proxy statements that disclose executive compensation as required under Item 402. By failing to disclose the executive compensation described above, the SEC found that SBD violated these provisions.

In a related order, the SEC found that one of the former SBD executives received, but failed to disclose, more than $647,000 worth of perks and benefits, including $280,000 in personal expenses consisting of "chauffer services, other travel items, meals, apparel, and car repair services." The remainder of the undisclosed compensation included approved use of the corporate aircraft, gifts, products and personal services provided by SBD employees. The executive failed to disclose the perks in his annual director and officer (D&O) questionnaires, thus causing the company to incorrectly record the benefits as "business expenses and not compensation." As a result, the company did not disclose the perks in its proxy statements. The executive subsequently left the company and repaid the perks, but the SEC nevertheless imposed a civil monetary penalty of $75,000.

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, stated:

"Today's action not only reaffirms the Commission's commitment to enforcing executive compensation disclosure rules, but also incentivizing self-reporting and cooperation when entities and individuals discover violations of the federal securities laws."

Key Takeaways

• The primary culprit was a usual suspect: aircraft travel, which is the single biggest trigger of perks actions over the past several years. See, e.g., here ("These authorized but undisclosed perquisites included personal use" of company aircraft and other expenses); Hilton Worldwide Holdings ("Items that Hilton incorrectly viewed as business expenses and paid for on behalf of its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses associated with personal use of corporate aircraft."); Gulfport Energy (CEO caused company to incur $650,000 worth of charges by traveling on aircraft for reasons "not integrally and directly related" to executive duties); National Beverage ("[F]or the relevant period, NBC's CEO took trips on the Aircraft and charters that were financed by NBC, but not integrally and directly related to the CEO's job duties."); ProPetro (CEO caused company to incur approximately $252,896 in charges relating to travel on his personal aircraft for trips "not directly related to the performance of executive duties").
• Another repeat offender item: D&O questionnaires. As was the case in both Gulfport and ProPetro, an executive's failure to disclose sizeable perks on a D&O questionnaire can be a foothold for the SEC to file an enforcement action directly against the executive. As detailed above, the focus for executives when completing these forms is whether the expense in question confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason and without regard to tax classifications. Executives must be mindful that the information provided on these forms can have significant personal consequences.
• The civil penalty dichotomy here is significant – no penalties against the company, but a significant penalty against the executive.² Although SEC enforcement has continued to wield a heavy stick against both companies and individuals on the penalty front during the administration of SEC Chair Gary Gensler, the one area where companies have seen tangible benefits for cooperation and remediation is on the perks front. As was the case with both Gulfport and ProPetro, SBD avoided a civil penalty here. And given the relative paucity of factual findings concerning the underlying violations, the order is notable for its heavy focus on SBD's self-reporting, cooperation and remedial measures it took to address the perks issue.

For starters, after learning of the undisclosed perks, the company took immediate action by appointing a special committee made up of independent directors, which hired outside counsel to conduct an internal investigation. And before the investigation was complete, the company self-reported the perks and other issues and cooperated with the SEC's investigation by providing compilations of relevant information.³ Moreover, the company engaged in remedial measures designed to ensure compliance with Item 402 and also disclosed the perks in its 2022 Form 10-K. We encourage companies to react to discoveries of these types of issues with deliberate speed, such as the board appointing an independent special committee to oversee the investigation, hiring outside counsel to conduct the investigation and undertaking remedial efforts promptly, including possibly self-reporting.

A Word on Boilerplate

The SBD order, as with most orders that forgo a civil monetary penalty, contains standard language authorizing the SEC to reopen the action and impose a penalty should it discover that the entity knowingly provided false or misleading information to the SEC. The boilerplate reads as follows:

Respondent acknowledges that the Commission is not imposing a civil penalty based in part upon its cooperation in a Commission investigation. If at any time following the entry of the Order, the Division of Enforcement ("Division") obtains information indicating that Respondent knowingly provided materially false or misleading information or materials to the Commission, or in a related proceeding, the Division may, at its sole discretion and with prior notice to the Respondent, petition the Commission to reopen this matter and seek an order directing that the Respondent pay a civil money penalty. Respondent may contest by way of defense in any resulting administrative proceeding whether it knowingly provided materially false or misleading information but may not: (1) contest the findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.

This stock language is interesting in light of the myriad constitutional challenges to the SEC's administrative proceedings. As we detailed last year, enforcement practices by the SEC have come under constitutional scrutiny through a series of filings and recent opinions. And as we predicted, the U.S. Supreme Court recently granted certiorari to a U.S. Court of Appeals for the Fifth Circuit opinion finding the SEC's in-house proceedings unconstitutional on multiple fronts. In light of the boilerplate language noting that the SEC's Division of Enforcement may "petition the Commission" in the event of such findings, would such a challenge similarly fall prey to a constitutional challenge? Although any such petition appears to avoid certain alleged constitutional defects by involving a petition directly to the Commission, as opposed to occurring before an administrative law judge, would other constitutional challenges concerning nondelegation or Seventh Amendment concerns similarly apply here? This is an area that bears watching going forward.

The SECond Opinions Blog will continue to monitor these issues, and we will provide updates.

Notes

¹ 17 C.F.R. § 229.402.

² The SEC did not explain why it did not charge any of the other executives who received undisclosed perks.

³ Note that the Division of Enforcement does not consider complying with a document subpoena to be cooperation.