Locke Lord QuickStudy: SEC Sanctions Inadequate Perk Disclosure and Sends Message

Locke Lord LLP
July 11, 2018
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On June 2, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced that The Dow Chemical Company (“Dow Chemical”) agreed to settle charges related to its inadequate disclosure of executive perquisites in SEC filings by paying a $1.75 million civil penalty, hiring an independent consultant to evaluate and recommend changes to the company’s policies and procedures relating to perquisites disclosure, and implementing the recommended changes. While enforcement proceedings of this type are unusual, the SEC’s strong response demonstrates the importance of adequate perquisites disclosure and may signal increased enforcement activity in this area.


Item 402(c)(ix)(A) of Regulation S-K under the Securities Exchange Act of 1934 (the “Exchange Act”) specifically requires disclosure of corporate perks and other personal benefits that may be categorized as executive compensation. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other personal benefits provided to named executive officers who receive at least $10,000 worth of such items in a given year. Item 402 of Regulation S-K also requires identification of all perquisites and personal benefits by type and quantification of any perquisite or personal benefit that exceeds the greater of $25,000 or 10% of total perquisites.

As set forth in the SEC’s 2006 adopting release (the “Adopting Release”)1, overhauling executive compensation disclosure, in determining whether an item is a perk or other personal benefit, the following two factors are to be considered:

  1. An item is not a perk or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  2. Otherwise, an item is a perk 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.

The SEC found that Dow Chemical applied a standard whereby a business purpose related to the executive’s job was sufficient to determine that a benefit would not be a perquisite that required disclosure. Although the SEC considered the business-purpose standard, it ultimately decided not to adopt that standard to determine whether a benefit provided to an executive should be disclosed as a perquisite.

According to the Adopting Release, “the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “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.” Accordingly, even where a 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.” Indeed, “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.”

As a result of applying an improper standard for perquisite disclosure from 2011 through 2015 for its named executive officers, the SEC determined that Dow Chemical understated its disclosed perquisites in its 2013-2016 proxy statements. Specifically, the SEC found that Dow Chemical did not ensure that approximately $3 million in executive perquisites were adequately evaluated and disclosed as “other compensation” in the Compensation Discussion & Analysis (“CD&A”) section of the annual proxy statements. These undisclosed perquisites include travel to outside board meetings, sporting events (these purportedly included such items as trips to the 2010 Super Bowl, the 2010 World Cup in South Africa and the 2010 Masters’ Golf Tournament), and personal activities, including personal use of the Dow Chemical aircraft; club memberships; limited use of personal assistant office time; and membership fees to sit on the board of a charitable organization. 

In addition, the SEC concluded that Dow Chemical did not adequately train employees in key roles, including those tasked with drafting the CD&A section of the proxy statement and compiling the executive compensation tables, to ensure that the proper standard was applied for perquisites disclosure. The SEC further determined that Dow Chemical also had inadequate processes and procedures to ensure proper reporting of perquisites.  As a result, in its settlement, the SEC required Dow Chemical to retain an independent consultant for a one year period to review the company’s policies, procedures, controls and training related to the characterization and disclosure of expense reimbursements and other payments as perks.


Although, enforcement proceedings of this type are rare because of how difficult it can be for SEC staff to detect lapses in perquisites disclosures, in the Dow Chemical case the alleged lapses were flagged by a former employee as part of a whistleblower claim. The facts surrounding the enforcement proceeding and SEC decision are specific to Dow Chemical, but the strong SEC response should send a clear message to other companies to pay attention to their perquisites disclosures and could signal increased SEC activity in the area. Considering the stakes, it is important that companies provide adequate training to the personnel preparing disclosure statements in order to ensure that correct guidelines and standards are being followed. 



1 Executive Compensation and Related Person Disclosure, Release Nos. 33-8732A; 34-54302A; IC-27444A; File No. S7-03-06 (August 29, 2006), available here.