On December 17, the U.S. Securities and Exchange Commission announced it settled charges against fashion retailer Express, Inc. for failing to disclose $979,269 worth of perquisites and personal benefits provided to its former CEO, including certain expenses associated with the CEO’s authorized use of chartered aircraft for personal purposes.

Express incorrectly categorized expenses associated with the CEO’s personal flights, including transportation, meals, and hotel, as business expenses. Express paid these expenses, but failed to disclose them as perquisites in the “All Other Compensation” column of its Summary Compensation Table, thereby understating this portion of its executive compensation by an average of 94% over these three years.

Without admitting or denying the findings, Express agreed to a cease-and-desist order. The SEC did not impose a civil penalty based on Express’ cooperation with the SEC’s investigation. 

What you need to know about SEC enforcement action against Express:

An item is a perquisite under SEC rules if it confers a direct or indirect personal benefit. While the Internal Revenue Service (IRS) uses the “business purpose” test for determining whether an item is a non-taxable “working condition fringe” rather than a taxable perquisite, the SEC applies a different standard to perquisites for disclosure purposes. Prior SEC guidance indicates that “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 “integrally and directly related to the performance of the executive’s duties.” In such guidance, the SEC explicitly states:

“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.”

When preparing proxy disclosure, companies should ensure that they are applying the “directly and integrally related” test and reviewing relevant SEC guidance on the topic.

This is not an isolated incident. Over the past few years, the SEC has continued to focus on executive perquisites, particularly executives’ personal use of corporate aircraft. Since 2020, the SEC has settled perquisite-related enforcement actions against Stanley Black & Decker Inc., The Greenbrier Companies, Inc., ProPetro Holding Co., National Beverage Corp., Gulfport Energy Corporation, RCI Hospitality Holdings, Inc., Hilton Worldwide Holdings Inc., and Argo Group International Holdings, Ltd. These enforcement actions typically arose from the following issues:

●  Inadequate internal disclosure and financial reporting controls

●  Executives’ failure to disclose accurate information in annual director and officer questionnaires

●  Insufficient company process to determine whether executive flights constituted perquisites, including training employees responsible for perquisite analysis

●  Insufficient or lack of a company policy regarding travel-related expense reimbursement, particularly the use of corporate aircrafts

In light of ongoing SEC scrutiny of travel expenses, companies should have written policies for travel-related expense reimbursement and a clear internal process for analyzing whether these reimbursements constitute perquisites. Any company employees involved in this perquisite analysis should have training on this topic, including assistants responsible for executive travel. Companies may want to consider conducting a quarterly audit of executive travel expenses to ensure they are accurately tracking and categorizing expenses throughout the year. 

The IRS is also scrutinizing corporate aircraft use. Earlier this year, the IRS announced a plan to audit executives' personal use of corporate aircraft to determine whether reported business tax deductions are appropriate. As part of the audit, the IRS is using advanced analytics that pull from publicly available information, such as SEC filings. 

SEC emphasizes cooperation. This enforcement action and other recent settled actions demonstrate that the SEC continues to emphasize “cooperation” with their investigations, particularly self-reporting. In light of this trend, if a company identifies a perquisites disclosure deficiency, it may want to consider preemptive action, such as self-reporting or correcting the proxy disclosure.