Undisclosed Executive Perks and SEC Enforcement: Investigation Focus Areas

Undisclosed Executive Perks and SEC Enforcement: Investigation Focus Areas

The Securities and Exchange Commission (SEC) has been ramping up its focus on investigating and enforcing disclosure requirements around executive perks and benefits, which are often undisclosed or inadequately disclosed by public companies. This increased scrutiny has resulted in several recent high-profile enforcement actions that provide insight into the SEC’s focus areas in this realm.

What are Executive Perks?

Executive perks, also known as executive perquisites or perks, refer to various non-cash benefits provided to senior executives and directors of a company. Common examples include:

• Personal use of company vehicles, aircraft, or property
• Housing allowances
• Club memberships
• Financial planning services
• Security services

While reasonable perks are not inherently problematic, the SEC requires public companies to properly disclose executive perks over $10,000 in their public filings so that shareholders can evaluate the full compensation picture. Lack of disclosure prevents shareholders from assessing whether these perks are reasonable and aligned with performance.

Why is the SEC Targeting Executive Perks?

The SEC has emphasized executive perks as an enforcement priority for several reasons:

• Perks can represent hidden and significant compensation costs – Failure to properly disclose perks enables companies to underreport the true cost of executive pay.
• Perks may reflect conflicts of interest – Undisclosed perks could indicate problematic related party transactions and conflicts of interest.
• Non-disclosure violates securities laws – Public companies are required by law to accurately disclose executive compensation, including perks.
• Inadequate compliance and controls – Lack of perk disclosure may point to wider issues with legal compliance and internal controls.

By cracking down on perk disclosure violations, the SEC aims to improve overall compensation transparency and governance practices.

Recent SEC Enforcement Actions

The SEC has initiated several enforcement actions in recent years that shed light on its areas of focus with regards to undisclosed executive perks:

Stanley Black & Decker (June 2022)

The SEC charged Stanley Black & Decker and a former executive for failing to disclose at least $1.3 million in perks over three years, including personal use of company cars and aircraft, entertainment expenses, and housing allowances. The company agreed to pay a $1.5 million penalty to settle the charges. The SEC specifically cited inadequate disclosure controls as a contributing factor. [1]

Gulfport Energy Corp (February 2021)

Gulfport Energy and its former CEO were charged with failing to disclose over $650,000 in perks for personal use of company aircraft and other benefits. The company agreed to pay a $550,000 penalty and the former CEO paid over $500,000 in fines and disgorgement. According to the SEC, Gulfport cooperated fully with the investigation. [4]

Callon Petroleum (November 2020)

The SEC fined Callon Petroleum $4 million for failing to disclose around $3.7 million in executive perks over three years. The undisclosed benefits included private aircraft use, housing allowances, and equity compensation. Callon admitted to inadequate disclosure procedures and internal controls.

BMC Software (September 2019)

BMC Software agreed to pay $2.5 million to settle charges of failing to disclose executive perks over four years totaling nearly $850,000. The company admitted it lacked sufficient internal accounting controls related to executive compensation.

Key Focus Areas for Investigation

Based on these and other cases, we can identify several areas the SEC focuses on when investigating potential non-disclosure of executive perks:

Personal Use of Company Aircraft and Vehicles

Many enforcement actions have involved undisclosed personal use of company planes and cars by executives. The SEC scrutinizes private aircraft use in particular, given the extremely high costs involved. Companies must track and disclose personal usage according to strict SEC guidelines.

Housing Allowances and Relocation Expenses

Various housing-related perks like allowances, home security, and relocation reimbursements often go undisclosed. The SEC considers these taxable compensation that must be reported if above the $10,000 threshold.

Club and Membership Fees

Club memberships for golf, dining, or social clubs provided to executives are considered perks by the SEC. Companies must track and disclose memberships paid for executives.

Other Perks

The SEC also watches for non-disclosure of other common perks like financial planning, entertainment expenses, personal assistants, and discounted company stock purchases.

Inadequate Internal Controls

In many cases, the root cause behind non-disclosure is inadequate internal controls and procedures related to tracking and reporting executive perks. The SEC often cites weak controls as a factor in disclosure violations.

Cooperation Pays Off

An important lesson from recent cases is that companies who self-report and cooperate with SEC investigations tend to receive lighter penalties. Gulfport Energy is one example of a company that paid a reduced fine after self-disclosing and cooperating fully. The SEC rewards actions like thorough internal investigations, prompt remediation, and admission of wrongdoing.

Steps for Compliance

For companies seeking to avoid disclosure enforcement actions, key steps include:

• Carefully tracking all executive perks and benefits with thorough documentation.
• Establishing strong controls and procedures for gathering and reporting executive compensation data.
• Training executives and board directors on perk valuation and disclosure requirements.
• Reviewing executive pay disclosure with auditors prior to filing financial reports.
• Conducting periodic internal audits to identify any disclosure gaps or weaknesses.
• Demonstrating cooperation if any issues are identified and promptly remediating them.

The Road Ahead

The SEC has clearly made executive compensation disclosure an enforcement priority in recent years, with undisclosed perks representing low-hanging fruit. This trend shows no signs of slowing down, as the SEC continues leveraging data analytics to identify non-compliance.

With sound internal controls and cooperation, companies can likely mitigate enforcement actions and penalties. But the cost of non-compliance is rising, making executive perk disclosure an area warranting attention for public companies and their directors, officers, and counsel.

References

[1] SEC Charges Stanley Black & Decker and Former Executive for Failures in Executive Perks Disclosure

[2] The SEC Strikes Again: Undisclosed Executive Perks & Related Person Transactions

[3] Executive compensation in the United States (Wikipedia)

[4] SEC Charges Gas Exploration and Production Company and Former CEO with Failing to Disclose Executive Perks

[5] SEC Perk Disclosure Enforcement Actions Continue

[6] SEC Continues Focus on Executive Perquisites in Recent Action, Rewards Company’s Cooperation

SEC Charges Oil and Gas Company and Former CEO with Failing to Disclose Executive Perks

BMC Software Settles Charges of Disclosure and Controls Failures Regarding Executive Perks