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SEC Sanctions The Dow Chemical Company for Undisclosed Perquisites
Practical Law Legal Update w-015-7119 (Approx. 5 pages)
SEC Sanctions The Dow Chemical Company for Undisclosed Perquisites
by Practical Law Employee Benefits & Executive Compensation
| Published on 10 Jul 2018 • USA (National/Federal) |
The SEC issued a cease-and-desist order against The Dow Chemical Company for failing to disclose approximately $3 million in executive perquisites in the company's proxy statements. The SEC imposed the sanctions agreed to in Dow's settlement offer, which include extensive undertakings to ensure future compliance and a $1,750,000 civil monetary penalty.
On July 2, 2018, the Securities and Exchange Commission (SEC) instituted cease-and-desist proceedings against The Dow Chemical Company (Dow) pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act) for its failure to properly disclose approximately $3 million in executive perquisites in its 2013 to 2016 proxy statements. Dow submitted an Offer of Settlement which the SEC accepted.
Item 402 of Regulation S-K
Item 402 of Regulation S-K requires companies to disclose detailed compensation information for their named executive officers (NEOs) in their proxy statements. In addition to items such as base salary and bonus, companies are required to disclose the value of an NEO's perquisites and other personal benefits to the extent that the value for a given year equals or exceeds $10,000. For more on executive compensation disclosure requirements, see Practice Note, Preparation of Compensation Discussion and Analysis.
Standard for Perquisites
Item 402 sets out the following standard for determining whether or not an item is a perquisite requiring disclosure:
- An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive's duties.
- 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 convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.
In its Adopting Release, the SEC emphasized that the concept of a benefit that is "integrally and directly related to job performance" is narrow and includes only those items that the company provides because the executive needs them to do his or her job. An item that is provided for some other reason, even if it involves a company benefit, is a perquisite that must be disclosed.
The Adopting Release clarifies that "business purpose or convenience" does not affect the characterization of an item as a perquisite where not integrally and directly related to the executive's performance of his or her job.
Dow's Business Purpose Standard
Contrary to Item 402 and the SEC's guidance in the Adopting Release, Dow applied a standard whereby any benefit that had a business purpose related to the executive's job was not deemed a perquisite that required disclosure. Applying the improper standard for perquisite disclosure resulted in Dow failing to disclose benefits such as:
- Travel to board meetings.
- Sporting events.
- Club memberships.
Dow therefore understated the perquisites of its Chief Executive Officer in its 2013 to 2016 proxy statements by approximately $3 million.
Dow's Inadequate Processes and Disclosure
Dow's processes related to perquisite disclosure also fell short, as it failed to:
- Adequately train employees who were responsible for drafting the compensation sections of the proxy statement to ensure that they applied the proper standard for perquisite disclosure.
- Institute adequate processes and procedures to ensure proper reporting of perquisites.
Dow's Settlement Offer
In anticipation of the SEC's cease-and-desist proceedings, Dow submitted an Offer of Settlement and the SEC agreed to impose the following sanctions:
- Dow must cease and desist from committing or causing any future violations of Sections 13(a) and 14(a) of the Exchange Act.
- Dow must comply with the following undertakings:
- Retain an independent consultant (Consultant) at its own expense for a one year period to review Dow's policies, procedures, controls, and training relating to the evaluation of whether payments and other reimbursements should be disclosed as perquisites.
- Within 180 days of being retained, the Consultant shall provide a written report to Dow and SEC staff containing recommendations of policies, procedures, controls, and training reasonably designed to ensure proper evaluation of perquisites and compliance with Item 402 of Regulation S-K.
- Dow must adopt and implement all recommendations within 180 days of receiving the report (subject to Dow's ability to object within 30 days to any recommendation that it finds unduly burdensome and to propose an alternative).
- The Consultant will not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Dow or any related parties during the period of engagement and for two years following the engagement's completion.
- Dow will certify in writing its compliance with these undertakings.
- Dow will pay a civil money penalty of $1,750,000 to the SEC.
Practical Implications
This SEC enforcement action highlights the need for companies to implement proper procedures and apply the appropriate standard for determining whether or not items are perquisites for purposes of Item 402 of Regulation S-K. Understating perquisites in the company's proxy statement could be costly, resulting in both significant monetary penalties and a requirement to hire an outside consultant to conduct a review of the company's procedures related to perquisite disclosure.