SEC Focus on Executive Perk Disclosure Continues

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Foley Hoag LLP - IPO, Then What?

[author: Nick Gill]

In June 2020, the Securities and Exchange Commission settled charges with insurance company Argo Group International Holdings, Ltd. for failing to disclose perks and benefits received by its former chief executive officer.  Per the SEC order, Argo failed to report over $5.3 million in perks that its CEO received between 2014 and 2018 in violation of federal securities law. These benefits included personal use of corporate aircraft, helicopter trips, housing costs, club memberships, tickets to entertainment events and the value of benefits provided to the CEO’s family members. As a result of the SEC action, Argo consented to the SEC’s cease and desist order, agreed to pay a $900,000 civil penalty and undertook to cooperate fully with the SEC in its continued investigation into this matter.

Publicly traded companies are required to disclose the compensation paid to certain executive officers in their annual proxy statements.  Compensation for this purpose includes services, products, and other incidental benefits provided by the company in the course of employment that are not provided to all employees, which are referred to as perquisites (or perks). Any item that provides a direct or indirect personal benefit to the executive must be disclosed as a perk unless that item is “integrally and directly related to the performance of the executive’s duties,” or is made available to all employees on a non-discriminatory basis.  A sound business reason is not sufficient to make a perk integral under this test.

In recent years, the SEC has pursued several actions against companies for failures to properly disclose executive compensation. In 2017, the CEO of a marketing agency paid $5.5 million to the SEC to settle a claim following his receipt of more than $11 million in undisclosed perks over the course of six years. Two years ago, Dow Chemical paid $1.75 million to settle an action stating that the company failed to disclose approximately $3 million of compensation paid to its CEO.  Last December, Carlos Ghosn, the former CEO of Nissan, fled from his home in Japan to Lebanon to escape prosecution arising from over $130 million in undisclosed compensation he received from 2009 to 2018, which resulted in a settlement that included a $15 million payment by Nissan.

Although the failures in these cases were extreme, companies should take note of the SEC’s continued focus on this topic and review the effectiveness of their internal controls for monitoring benefits provided to executives.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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