The SEC has announced settled charges against Express, Inc., a multi-brand American fashion retailer formerly listed on the NYSE, for failing to disclose over a three-year period almost $1 million in perks provided to its now former CEO. What were those perks? About a half of that amount was attributable to the perk that seems to trip up so many companies (and flashing favorite target of SEC Enforcement): use of company-owned or -leased aircraft and other travel expenses for personal purposes. The SEC also charged that the company “did not have adequate controls, policies, or procedures in place to effectively identify and analyze potential compensation for disclosure.” However, the SEC did not impose civil penalties on the company, which filed for bankruptcy, in light of its cooperation. According to Sanjay Wadhwa, the Acting Director of Enforcement, “[p]ublic companies have a duty to comply with their disclosure obligations regarding executive compensation, including perks and personal benefits, so that investors can make educated investment decisions….Here, although Express fell short in carrying out its obligation, the Commission declined to impose a civil penalty based, in part, on the company’s self-report, cooperation with the staff’s investigation, and remedial efforts.”
As you know, under Reg S-K Item 402, which is generally required in proxy statements, companies must disclose executive perks and other personal benefits unless the aggregate amount is less than $10,000. Item 402 also requires identification of all perks and personal benefits by type, including quantification of any perk or personal benefit that exceeds the greater of $25,000 or 10% of total perquisites. The tricky part, of course, is determining whether or not an item is actually a perk. In Release No. 33-8732A (Aug. 29, 2006), the SEC explained:
“Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:
- An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
- Otherwise, an item is a perquisite or personal benefit 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 non- discriminatory basis to all employees.”
According to the release, the “concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one. The analysis draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.” In addition, even if the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” That is, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.” For example, a “company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.” Items identified in the release as perks include
“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, personal use of other property owned or leased by the company, housing and other living expenses (including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence), security provided at a personal residence or during personal travel, commuting expenses (whether or not for the company’s convenience or benefit), and discounts on the company’s products or services not generally available to employees on a non-discriminatory basis….For example, a company’s provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis. As we have noted, business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”
In this Order against Express, the SEC charged that the system that Express employed “for identifying, tracking, and calculating perquisites” applied an improper standard: the system would not categorize an item as a perk or personal benefit that required disclosure if there were a business purpose for the item. But, as explained above, that’s not how the SEC determines perks. As a result, the SEC alleged, in proxy statements for fiscal 2019, 2020 and 2021, under the caption “All Other Compensation,” the company failed to disclose almost $1 million in perks to the CEO. According to the SEC, “Express incorrectly viewed the CEO’s business expenses to include expenses associated with the CEO’s personal flights, including transportation, meals, and hotel. Express paid these expenses but did not disclose these expenses as perquisites.” In addition, the company failed to disclose almost $150,000 in relocation benefits. (The company also failed to disclose about $277,000 for vesting of a one-time restricted cash award.) As a result of its flawed system and disclosure failures, the company understated “All Other Compensation” by an average of 94% over the three fiscal years. The proxy statements were incorporated into the company’s Forms 10-K.
According to the Order, after learning of its “potential misconduct, Express acted promptly to ensure that outside counsel conducted an internal investigation,” self-reported to the SEC staff, cooperated with the SEC’s investigation by providing to the staff, among other things, facts developed in its internal investigation, and implemented remedial measures. In addition, in its fiscal 2022 proxy statement, Express included revised perk disclosures for the CEO for fiscal 2020 and 2021. The company also “disclosed that the CEO voluntarily reimbursed the company approximately $454,000 for private air travel and expenses that were determined to be perquisites or personal expenses.”
The SEC charged that the company violated Section 14(a) of the Exchange Act and related Rules 14a-3 and 14a-9 (proxy statements), Section 13(a) of the Exchange Act and related Rule 13a-1 (Forms 10-K) and Rule 12b-20. And, by “failing to maintain policies, procedures, or controls designed to ensure that all potential perquisites and personal benefits are identified and analyzed for complete and accurate disclosure in its proxy statements,” the company was charged with violation of Rule 13a-15(a) (disclosure controls and procedures).
In light of the company’s cooperation, the SEC imposed only a cease-and-desist order and did not impose a civil penalty.
