This recent SEC Cease & Desist Order with Dow Chemical serves as an instructive refresher on Reg. S-K Item 402's executive perk identification standard and related disclosure requirements, and the associated domino effect of inaccurate disclosure. Among other things, the Order includes a helpful discussion of the SEC's previously-considered - but not adopted - "business purpose" disclosure standard as compared to the adopted narrow "integrally and directly related" standard, which disregards the business purpose of an expense on a stand-alone basis for purposes of perk characterization.
This relevant excerpt from the Order recaps the basics:
- According to the Adopting Release, "an item is not a perquisite or personal benefit," and does not need to be reported, "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." The Adopting Release also states that "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."
- According to the Adopting Release, even where 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." 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."