The Securities and Exchange Commission’s (SEC or Commission) Division of Enforcement continues to be laser focused on executive perks and the manner in which they are disclosed by public companies. The SEC is expected to bring additional enforcement actions, but there are steps companies can take to reduce the risk of running afoul of perk disclosure requirements.

Key Takeaways

• As with other fact-intensive inquiries that require the exercise of judgment, process is important. Companies should ensure that they implement and follow disclosure controls and procedures for the use of company assets and the payment of expenses to ensure that the appropriate information gets to the right decision-makers in a timely and consistent manner, and companies should maintain documentation of the process.
• As we move further away from the COVID-19 pandemic, companies may need to revisit any changes to their perk reporting made during the height of the pandemic. SEC guidance issued in 2020 signaled a shift in what may be considered a perk in light of the implementation of protective measures, such as mandatory stay-at-home orders. However, as the circumstances continue to evolve, companies may need to reassess.
• Companies should be proactive and cooperative in responding to potential or actual misconduct relating to perk disclosure. The extent of a company’s cooperation and remedial efforts to address violations are key considerations for the SEC in determining whether a reduced civil penalty, or in some cases no civil penalty, is warranted.
• Perk disclosure has been a consistent enforcement priority of the SEC for the past decade. Companies would be well advised to remain vigilant and not lose sight of the significance of perk reporting as they attempt to comply with various other new rules. While certain disclosure violations may have been difficult to detect in the past, the SEC now has risk-based data analytics tools at its disposal and has utilized such tools to discover executive compensation disclosure violations, including those related to perks.[1]

What Is a ‘Perk’?

Item 402 of Regulation S-K requires companies to disclose in their proxy materials perquisites or other personal benefits (commonly referred to as “perks”) provided to a named executive officer in a given year if the aggregate value of the perks received by the named executive officer is $10,000 or more. If the total value is $10,000 or more for any named executive officer, each perk, regardless of its amount, must be identified by type, and any perk with a value exceeding the greater of $25,000 or 10 percent of the total amount of perks for such officer must be quantified and disclosed in a footnote. Perks are to be valued based on the aggregate incremental cost to the company.

SEC Guidance

In 2006, the SEC outlined in Release 33-8732(A) a two-factor analysis for determining whether an item is considered a perk.[2] An item is not a perk if it is integrally and directly related to the performance of an executive’s duties. Otherwise, an item is a perk requiring disclosure 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 nondiscriminatory basis to all employees. An item will be considered to meet the general availability standard if it is available to those employees to whom it lawfully may be provided. Whether an item is integrally and directly related to the performance of an executive’s duties is a fact-intensive inquiry that requires a holistic approach to understanding the context in which the benefit has been conferred, and the SEC assesses this concept narrowly. The analysis “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.”[3] To illustrate this distinction, the SEC provided the example of a company providing an item of personal benefit for security purposes. The SEC maintained that a company policy requiring an executive to use company aircraft or other company means of travel for personal travel does not affect the conclusion that the item provided is a perk, as it is not integrally and directly related to job performance. The release included a nonexhaustive list of examples of items requiring disclosure as perks under Item 402,[4] such as club memberships not used exclusively for business entertainment purposes, personal financial or tax advice, personal travel using vehicles owned or leased by the company, personal travel otherwise financed by the company, housing and other living expenses (including relocation assistance), and discounts on the company’s products or services not generally available to employees on a nondiscriminatory basis.

In 2008, the SEC issued guidance clarifying that items for which an executive officer fully reimburses the company are not considered perks and are not required to be separately identified by type.[5] However, absent such reimbursement, if the aggregate amount of value exceeds the $10,000 threshold, the items must be separately identified by type even if the perk has no aggregate incremental cost to the company.[6]

The shift to remote work and related changes stemming from the COVID-19 pandemic prompted the SEC to issue further guidance in 2020, wherein the Commission reinforced its two-factor test but acknowledged that items “considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19.”[7] For example, a company’s provision of enhanced technology needed to make a named executive officer’s home their primary office due to mandatory stay-at-home orders would generally not be a perk due to the integral and direct relationship of such provision to the performance of the executive’s duties. On the other hand, items including new health-related or personal transportation benefits provided to address new risks related to COVID-19, if not integrally and directly related to the performance of the executive’s duties, may still be considered perks unless they are generally available to all employees, irrespective of the fact that such benefits would not have been provided were it not for the COVID-19 pandemic.

Lessons Gleaned from SEC Enforcement Actions

The SEC’s scrutiny of perk disclosure is expected to continue. Prior SEC enforcement actions provide insight into the SEC’s focus and enforcement approach.

Several companies charged with violating perk disclosure requirements have avoided the imposition of civil penalties by cooperating with the SEC and implementing extensive remedial measures. In June 2023, the SEC charged Stanley Black & Decker Inc., alleging that it failed to disclose at least $1.3 million worth of perks and personal benefits paid to, or on behalf of, four of its executive officers and one of its directors from 2017 through 2020.[8] The perks predominantly related to the officers’ and director’s use of Black & Decker’s corporate aircraft. However, the SEC declined to impose a civil penalty against Black & Decker due to the company’s self-reporting of its disclosure failures, cooperation with the SEC’s investigation and implementation of appropriate remedial measures. Black & Decker’s prompt retention of outside counsel after learning of potential misconduct to perform an internal investigation under the direction and oversight of a special committee of independent directors; its provision to the SEC of facts developed through its internal investigation and production of relevant documents, information and data; and its implementation of remedial measures designed to ensure compliance with Item 402 of Regulation S-K and SEC guidance were cited by the Commission as the basis for its decision not to assess a civil penalty. The director of the SEC’s Division of Enforcement, Gurbir Grewal, observed that the action “not only reaffirms the Commission’s commitment to enforcing executive compensation disclosure rules, but also to incentivizing self-reporting and cooperation when entities and individuals discover violations of the federal securities laws.”[9] Similarly, ProPetro Holding Corp. avoided a civil penalty based on its cooperation with the SEC and remedial efforts taken. ProPetro was charged by the SEC in November 2021 for failure to properly disclose certain perks provided to its CEO related to business-related aircraft travel and personal credit card charges.[10] Remedial efforts undertaken by ProPetro included: hiring a new management team and additional finance department personnel with significant public company experience; creating a new board committee dedicated to disclosure oversight; developing new internal controls regarding internal auditing matters, credit card and expense reimbursement, and travel; and enhancing its annual directors’ and officers’ (D&O) questionnaire disclosure process.

In other instances, cooperation with the SEC and reinforcement of internal controls and policies have resulted in reduced civil penalties. In September 2020, the SEC charged Hilton Worldwide Holdings Inc. for its failure to disclose approximately $1.7 million of travel-related perks provided to executive officers from 2015 to 2018, including personal use of Hilton’s corporate aircraft and executive officers’ hotel stays.[11] After receiving an information request from the SEC, Hilton conducted an internal review of its disclosure controls and its procedures for identifying, tracking and calculating perks and provided revised disclosures in its proxy statement. The SEC noted that it considered remedial acts “promptly undertaken” by Hilton and its cooperation with SEC staff.[12] The SEC accepted Hilton’s settlement offer, which required the company to pay a $600,000 civil penalty. Also in September 2020, the SEC charged RCI Hospitality Holdings Inc. for failing to disclose $615,000 of perks provided to executive officers, including personal use of RCI’s aircraft and RCI-provided vehicles, reimbursement for personal air travel, charitable contributions to the school that two of an executive’s children attended, and housing and meal costs.[13] The SEC noted RCI’s cooperation with the Commission and the company’s remedial efforts, which included engaging outside counsel to conduct an internal investigation, engaging a third-party consultant to assist in the review and revision of its executive compensation process, and implementing new internal controls and compliance policies. RCI ultimately agreed to a cease and desist order and to pay a $400,000 civil penalty. In the absence of Hilton’s and RCI’s cooperation and remedial efforts, it is unlikely that the SEC would have accepted the sanctions agreed to in the companies’ settlement offers, and the civil penalties would have presumably been much higher.

Strategies to Mitigate Risk

• Maintain robust internal controls, policies and procedures and review them regularly. Inadequate internal controls and policies are consistently cited by the SEC as a contributing factor to perk disclosure violations. Controls and policies lacking in detail and scope may result in perk identification and analysis being left to the discretion of individual decision-makers, which invites the risk of violating disclosure requirements, among other unwanted consequences.[14] It is worth noting that an overwhelming majority of enforcement actions regarding executive perks have involved personal aircraft travel. Companies should maintain formal policies that establish clear parameters for the approval and use of company aircraft or company vehicles, as well as reimbursement for related expenses. Employees responsible for identifying or administering perks and those involved with disclosure and reporting should receive adequate training to reduce the risk of perk disclosure violations.
• Revisit D&O questionnaires and evaluate review protocols. Companies should maintain formal written policies for the completion of D&O questionnaires and establish adequate procedures for the review of questionnaire responses. This process should be viewed as a supplement to other disclosure controls and procedures. Simply requiring completion of D&O questionnaires and then relying solely on executive responses to populate perk and beneficial ownership disclosures is insufficient and may result in perk disclosure violations.
• Apply the correct standard in characterizing perks. The assessment of whether an item is a perk must be conducted through a narrow lens. Determinations must be made based solely on whether an item is integrally and directly related to the executive’s duties. The fact that an item is “business related” or serves some general business purpose is not enough to avoid disclosure requirements. Companies should actively monitor and analyze individual items to determine whether they meet the requisite standard and should not rely on the fact that a similar item was found to be directly and integrally related to job performance in the past.
• Promptly address any disclosure violation. If a potential disclosure issue is identified, expeditiously assess and address the issue. Legal counsel should be promptly consulted to determine whether the company should undertake an independent investigation and identify any other measures that should be taken.

Conclusion

The SEC’s Division of Enforcement is aggressively enforcing potential disclosure violations. Executive perks have been, and will continue to be, a focus of enforcement efforts. Particularly as remote and hybrid work conditions and expectations change, companies would be well advised to reassess their classification of perks as well as disclosure policies related to perks and personal benefits. If a disclosure violation is identified, companies have benefited from acting promptly and proactively.

[1] See Press Release, Securities and Exchange Commission, “SEC Charges Hospitality Company for Failing to Disclose Executive Perks” (Sept. 30, 2020).

[2] See Securities and Exchange Commission, Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006).

[3] Id.

[4] Id.

[5] See Compliance and Disclosure Interpretations to Regulation S-K, Question 119.07.

[6] Id.

[7] See Compliance and Disclosure Interpretations to Regulation S-K, Question 219.05.

[8] See In re Stanley Black & Decker Inc., Exchange Act Release No. 97761, AP File No. 3-21497 (June 20, 2023).

[9] See Press Release, Securities and Exchange Commission, “SEC Charges Stanley Black & Decker and Former Executive for Failures in Executive Perks Disclosure” (June 20, 2023).

[10] See In re ProPetro Holding Corp., Exchange Act Release No. 93645, AP File No. 3-20661 (Nov. 22, 2021); see also Gulfport Energy Corporation, Exchange Act Release No. 91196, AP File No. 3-20232 (Feb. 24, 2021) (SEC declined to impose a civil penalty in light of cooperation and remedial efforts, which included hiring a new general counsel and external disclosure counsel and developing a new enterprise risk management program, in addition to several other efforts undertaken by ProPetro).

[11] See Hilton Worldwide Holdings Inc., Exchange Act Release No. 90052, AP File No. 3-20109 (Sept. 30, 2020).

[12] Id.

[13] See RCI Hospitality Holdings Inc., Exchange Act Release No. 89935, AP File No. 3-20035 (Sept. 21, 2020).

[14] See id. (use of personal judgment in the absence of controls resulted in undisclosed compensation to executives).

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