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SEC Enforcement Spotlight on Inadequate Executive Perquisites Disclosures: Risk Mitigation Strategies for Public Companies

By: Lucosky Brookman
SEC Enforcement Spotlight on Inadequate Executive Perquisites Disclosures: Risk Mitigation Strategies for Public Companies

The Securities and Exchange Commission (SEC) closely scrutinizes the nature and extent of executive officer perquisites and personal benefits disclosed by public companies in annual proxy materials. Where the SEC’s Corporation Finance reviewers perceive potential deficiencies or gaps, formal enforcement referrals often follow based on inadequate quantification and reporting of taxable executive benefits. Avoiding such enforcement risks requires implementing internal controls that facilitate accurate disclosure and audit of the full array of executive perks. This article examines recent SEC enforcement actions, proxy requirements, common executive benefits attracting disclosure focus, and risk mitigation strategies in this area demanding priority compliance attention.

SEC’s Consistent Enforcement Focus on Executive Compensation Disclosures

The Securities and Exchange Commission maintains a consistent focus on executive compensation disclosures in its oversight and enforcement program targeting public companies. Ensuring complete, accurate and transparent reporting of all elements of executive pay, including perquisites and personal benefits beyond base salary, represents a priority area.

Within the Division of Enforcement, initiating investigations and bringing enforcement actions based on deficient proxy disclosures of executive perks offers a relatively easy manner to churn out a steady volume of financial reporting cases. While mistakes in perquisite reporting often lacks obvious signs of intentional deception, it nonetheless results in misstated taxable compensation that the Division charges as a proxy rules violation with consent sanctions imposing usually modest financial remedies.

From the SEC’s perspective, pursuing these violations incrementally heightens the scrutiny and accountability pressures on companies and compensation committees to exert greater diligence ensuring full transparency on executive pay elements. Any resulting chilling effect on lavish executive perks is a welcome byproduct for the SEC even if not the primary motivation.

Common Executive Perquisites Attracting Heightened Disclosure Scrutiny

The types of executive benefits most frequently attracting disclosure enforcement includes perquisites like:

  • - Personal use of company-owned or leased vehicles, private aircraft, and real property such as vacation residences
  • - Housing and living allowances including associated tax gross-ups
  • - Reimbursed or paid country club and other social club memberships
  • - Personal and home security services
  • - Payment or reimbursement of travel, meals, entertainment costs
  • - Discounts or free provisioning of company products and services for personal use
  • - Tax gross-ups provided to offset income taxes imposed on the value of benefits received

Mandated Public Reporting and Disclosure Requirements

Under current proxy disclosure rules, public companies must accurately quantify, value and disclose the full range of perquisites and other personal benefits provided to named executive officers (NEOs) whose pay packages are reported annually. Companies must affirmatively determine the aggregate incremental cost to the company paying for or providing the executive perquisites.

This necessitates closely tracking and auditing executive benefits usage, applying fair valuation methodologies, and properly reporting aggregated amounts exceeding $10,000 for any given officer in the Summary Compensation Table within the Definitive Proxy Statement. Inadequate procedures frequently yield deficient disclosures downplaying or omitting sizeable executive perks. This creates predicable enforcement risks.

Steps Public Companies Can Take to Mitigate Exposure on Executive Perk Disclosures

Given the SEC’s meticulous focus and enforcement risks surrounding executive perquisites, public companies can take a number of steps to mitigate exposure:

  • - Adopt internal processes and controls to identify, track and centrally monitor executive benefits usage for aggregation and auditing.
  • - Institute policies requiring executives to report and substantiate any personal usage of corporate-paid items or services for companions.
  • - Apply consistent, supportable methodologies for valuing benefits that comport with fair market value. Seek expert valuation assistance when needed to avoid underreporting.
  • - Maintain full documentation of perquisite cost determinations and proxy disclosure decisions to demonstrate diligence if later scrutinized.
  • - Scrutinize past disclosure practices and filings to assess previous quantification and reporting of executive perks for any needed remediation.
  • - Confirm Compensation Committee and independent auditor review and input on perquisite compensation disclosures contained within annual proxies.
  • - Periodically consult with experienced counsel on executive compensation disclosure matters to validate full compliance with evolving SEC expectations and guidance in this scrutiny area.

Proactively managing executive perquisites reporting reduces the risk of material misstatements in proxies that frequently trigger SEC enforcement referrals. Upon any indication of disclosure deficiencies reaching the SEC, companies should promptly engage experienced securities counsel for strategic guidance navigating the investigative process to mitigate exposure. Please contact the attorneys at Lucosky Brookman if we can help assess or strengthen your executive compensation disclosure policies, procedures and controls.