Perk Disclosures: Reminders for Executives and Directors

The SEC recently settled with the former Chairman and CEO of MDC Partners, Inc. for $5.5 million concluding a years-long investigation into his receipt of perks and the related disclosure in the company’s proxy statements. MDC settled with the SEC for $1.5 million in January 2017.

Miles Nadal stepped down from his positions on July 20, 2015 and agreed to repay to the company $10.582 million in cash bonus awards that contained claw-back provisions in connection with an internal investigation by a Special Committee of MDC’s board of directors. The investigation into the perks, personal expense reimbursements and other items of value received by Mr. Nadal or his management company from 2009-2014 ultimately revealed that Mr. Nadal received far more benefits than were disclosed in MDC’s proxy statements—ranging from sports car and yacht expenses to cosmetic surgery to charitable donations in his name—totaling nearly $11.285 million, which Mr. Nadal also repaid to MDC.  On May 11, 2017, without admitting or denying the SEC’s findings of securities law violations, Mr. Nadal consented to an SEC cease-and-desist order and he agreed to pay $1.85 million in disgorgement, $150,000 in interest and a $3.5 million penalty. Mr. Nadal also agreed to be barred from serving as an officer or director of a public company for five years.

MDC’s settlement with the SEC related to two sets of federal securities laws violations. In addition to the compensation disclosure failures and the absence of appropriate internal controls, the SEC found that MDC violated the disclosure requirements for non-GAAP measures contained in Regulation G and Item 10(e) of Regulation S-K (specifically, the prominence requirement and a failure to disclose a change in the calculation of a key non-GAAP measure that boosted growth).  MDC, without admitting or denying the SEC’s findings, consented to a cease-and-desist order and agreed to pay a $1.5 million civil penalty. In determining to forgo proceedings and accept a settlement offer, the SEC considered that MDC cooperated with the Staff and took a number of remedial steps, including forming an independent board committee to conduct an in-depth investigation, replacing its CEO and Chief Accounting Officer, recovering more than $21.7 million from the CEO, adding three new independent directors to the board and a new executive responsible for internal controls and compliance, and implementing new internal control and compliance policies and procedures related to expense reimbursement, accounts payable, and travel and entertainment.

What To Do Now

There are important lessons for companies and their directors and officers from this SEC enforcement even though they may be able to easily distinguish the nature of their perks from those discovered in this investigation:

  • Carefully Prepare Responses to D&O Questionnaires. Companies use D&O questionnaires to, among other things, ensure that they comply with applicable rules and regulations, including disclosure requirements. In that connection, they also rely on the certifications of the respondents that the responses are accurate and complete. Companies should remind their directors and officers of the importance of these questionnaires and that any failure to provide information that is requested in the questionnaires or provision of inaccurate information provided by a director or officer could have adverse consequences for the company and the individual.
  • The Determination of a “Perk” May Require Analysis of the Facts and Circumstances. While in this enforcement proceeding some of the items are easily identified as perks – e.g., the yacht and sports car payments and cosmetic surgery – the determination of whether or not an item is a perk is not always clear. Specifically, under a facts and circumstances, principles-based analysis, certain items like tuition reimbursement for certification programs or costs of travel to serve at the company’s request on a board of directors of another company, could be considered directly and integrally related to the performance of the executive’s duties. If so, no further analysis is required. However, if it is not, then a second step in the analysis is required to determine whether the item confers a direct or indirect personal benefit.
  • Remember that the CEO and CFO Certifications in Form 10-K Also Cover the Executive Compensation Disclosures in the Proxy Statement. Companies typically incorporate by reference into the Form 10-K various disclosures from their proxy statements, including executive and director compensation disclosures. As a result, the CEO and CFO certifications in the Form 10-K also apply to these proxy statement disclosures.
  • Maintain Internal Control Procedures and Compliance Relating to Compensation and Expenses. Companies should periodically review and refresh with directors, officers and employees their policies relating to reimbursement of travel and entertainment, private aircraft usage and other perks. Compliance with such policies must be routinely monitored by the appropriate accounting and/or compliance personnel at the company. Non-compliance with these policies by executives or directors should be referred to an appropriate committee of the board.
  • Recognize Auditor’s Responsibilities Relating to Executive Compensation Disclosure under AS 18. Executive compensation is not a matter for internal audit alone. Auditing Standard No. 18 requires auditors to perform specific procedures to obtain an understanding of the company’s financial relationships and transactions with its executive officers, including with respect to compensation.