During the course of the last month, the Securities and Exchange Commission (“SEC”) brought two enforcement actions related to inadequate disclosure of perquisites.  In early July, the SEC issued an order finding that, from 2011 through 2015, an issuer failed to follow the SEC’s perquisite disclosure standard,[1] which resulted in a failure to disclose approximately $3 million in named executive officer perquisites.[2]   In addition to the imposition of a $1.75 million civil penalty, the SEC order mandated that the issuer retain an independent consultant (at its own expense) for a period of one year to conduct a review of its policies, procedures, controls and training related to the evaluation of whether payments and expense reimbursements should be disclosed as perquisites, and to adopt and implement all recommendations made by such consultant.

More recently, the SEC filed a complaint against John Schiller, the CEO of Energy XXI, Ltd. (“Energy”), alleging various violations of the securities laws for failure to disclose related party transactions, a loan with a board member and perquisites.[3]  The related party transactions at issue involved undisclosed personal loans that Schiller received from vendors in exchange for company contracts, and the perquisites included over $1 million in expenses that the SEC alleged were personal in nature, unreasonable and/or lacked the requisite documentation to establish a business purpose.  Schiller consented to a permanent injunction which prohibits him from acting as an officer or director of a public company for a period of five years and imposes a $180,000 civil penalty.[4]

Although the facts in the Energy case appear to be egregious, and two enforcement actions do not necessarily imply a trend, SEC enforcement proceedings in this area have historically been rare.  Given the recent uptick in SEC activity, companies should continue to think carefully about the benefits they provide to their executive officers and how those benefits are administered, characterized and disclosed.  In particular, companies should rigorously review their policies and procedures and executive employment arrangements as they relate to executive benefits and business expense reimbursements, as well as the controls and procedures in place to ensure proper oversight and administration of such policies, procedures and arrangements.  Companies should also be mindful of the fact that benefits or reimbursements might be characterized differently for tax purposes than for SEC disclosure purposes.  Additionally, companies should ensure those individuals responsible for public disclosure have a proper understanding of, and training on, the SEC disclosure rules relating to perquisite disclosure (and executive compensation disclosure more generally) and are given reasonable access to independent compensation consultants and legal advisors when considering such issues.

[1] Under the SEC’s standard, an item is not a perquisite if it is integrally and directly related to the performance of the executive’s duties, and is a perquisite 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 company’s convenience, unless it is generally available on a non-discriminatory basis to all employees.  The SEC’s order indicates that the issuer incorrectly applied a standard under which a business purpose related to the executive’s job was sufficient to determine that a benefit was not a perquisite requiring disclosure.

[2] The order is available at https://www.sec.gov/litigation/admin/2018/34-83581.pdf.

[3] The complaint is available at https://www.sec.gov/litigation/complaints/2018/comp-pr2018-133.pdf.

[4] See https://www.sec.gov/news/press-release/2018-133.