Fashion Retailer Failed to "Express" $1M in Perks But Skirts Civil Penalties

Like a fashion trend that never fails to come back in style (we look fabulous in baggy jeans, btw), we're revisiting SEC enforcement actions involving public company executive perquisites – or "perks" – a topic we have covered in the past and one that we explained would "be a hot-button enforcement issue for the foreseeable future." In this article, we stitch together the statutory framework for perks, unbutton the SEC's settled charges against fashion retailer Express for allegedly failing to disclose nearly $1 million in CEO perks and summarize the steps Express took to self-report and cooperate with the SEC, for which it was rewarded with no civil penalty – very demure, very mindful.

Perks, Off-the-Rack

The SEC has long required public companies to report executive compensation. Specifically, Item 402 of Regulation S-K requires issuers to disclose in proxy materials the total value of "executive compensation" for "named executive officers."¹ Much of what comprises executive compensation – salary, bonuses, stock awards – is uncontroversial. But Item 402 also calls for the disclosure of "[a]ll other compensation," a catchall bucket that requires companies to disclose, among other things:

1. the total value of all perks and other personal benefits provided to named executive officers who receive at least $10,000 worth of such items in a given year, separated out by type
2. each perk or personal benefit that exceeds the greater of $25,000 or 10 percent of the total amount of that officer's perks and personal benefits

The SEC has provided the following guidance on the scope of perks:

An item is not a perquisite or personal benefit 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.

Importantly, even where a company determines that an expense may be "ordinary" or "necessary" for tax or other purposes, that determination is "not responsive to the inquiry of whether the expense provides a perquisite or other personal benefit for disclosure purposes." Id.

These regulations are both flash and fierce, as the SEC has vigorously enforced alleged perks violations, as we discussed in 2022 and 2023.

This trend continues with the SEC's recent case against Express.

Express's Bespoke Settlement

In a settled administrative proceeding filed on Dec. 17, 2024, the SEC alleged that from 2019 through 2021, Express failed to disclose nearly $1 million worth of perks and personal benefits provided to its CEO, including expenses associated with the CEO's authorized use of chartered aircraft for personal purposes. Ultimately, according to the SEC, this caused Express to understate the "All Other Compensation" portion of its CEO's compensation by an average of 94 percent in proxy statements issued from 2020 to 2022 for fiscal years 2019, 2020 and 2021 (and incorporated by reference into its Form 10-Ks).

In the order, the SEC charged that Express "incorrectly viewed the CEO's business expenses to include expenses associated with the CEO's personal flights, including transportation, meals, and hotel," and paid the expenses but did not disclose them as perks. Further, according to the SEC, Express failed to disclose nearly $150,000 in relocation benefits and $277,000 for vesting of a restricted cash award.

Without admitting or denying the allegations, Express agreed to cease and desist from committing or causing any violations or future violations of various strict liability disclosure and internal controls regulations, including Sections 13(a) and 14(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20, 13a-1, 13a-15(a), 14a-3 and 13a-9 thereunder – all of which are standard fare in other perks cases filed by the SEC in recent times.

Notably, Exchange Act Section 13(a) and Rule 13a-1 require issuers to file annual reports with the SEC, which, according to the SEC, Express violated by reference in its Form 10-Ks. Rule 12b-20 also requires issuers to make accurate statements in their SEC filings, which, as per the order, Express violated by failing to disclose the perks. Additionally, Exchange Act Section 14(a) and Rule 14a-3 prohibit issuers from soliciting a proxy in contravention of the rules or without furnishing proxy statements that disclose executive compensation as required under Item 402. By failing to disclose the executive compensation described above, the SEC found that Express violated these provisions. Rule 13a-14(a) requires issuers to maintain disclosure controls and procedures. The SEC found that by failing to maintain policies, procedures or controls designed to ensure that all potential perks and personal benefits were identified and analyzed for complete and accurate disclosure in its proxy statements, Express violated Rule 13a-15(a).

Sanjay Wadhwa, the former Acting Director of the SEC's Division of Enforcement, stated:

"Public companies have a duty to comply with their disclosure obligations regarding executive compensation, including perks and personal benefits, so that investors can make educated investment decisions."

Crucially, the order noted that Express took certain steps to cooperate with the SEC, including:

• promptly securing outside counsel to conduct an internal investigation and, before completing the investigation, self-reporting to the SEC
• cooperating with the SEC's investigation by providing documents and facts developed through its own internal investigation
• implementing remedial measures designed to ensure compliance with Item 402 and making disclosures in its fiscal year (FY) 2022 proxy statement concerning expenses it had identified that constituted undisclosed perquisites and making additional disclosures thereafter
• also, importantly to these authors, the CEO agreed to voluntarily reimburse the company over $450,000 in travel expenses

These are a few of the cooperative actions that the SEC rewards most frequently. But if an issuer expects to avoid penalties altogether, self-reporting like Express did here is almost a must.

Key Takeaways

• Button Up Those Frequent Fliers. The primary culprit in many perk settlements is aircraft travel, which has been the single most common factor of perks actions over the past several years. See, e.g., here ("These authorized but undisclosed perquisites included personal use" of company aircraft and other expenses); here ("Items that [the company] incorrectly viewed as business expenses and paid for on behalf of its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses associated with personal use of corporate aircraft."); here (CEO caused company to incur $650,000 worth of charges by traveling on aircraft for reasons "not integrally and directly related" to executive duties); here ("[F]or the relevant period, [the company's] CEO took trips on the Aircraft and charters that were financed by [the company], but not integrally and directly related to the CEO's job duties"); here (CEO caused company to incur approximately $252,896 in charges relating to travel on his personal aircraft for trips "not directly related to the performance of executive duties"); and here ("[T]hese same definitive proxy statements failed to disclose at least $1.3 million worth of perquisites and personal benefits, predominantly related to corporate aircraft usage"). As a result, issuers should continue to pay close attention to executive traveler flight schedules and other travel expenses, as well as where, how and by whom that information is reported internally to ensure appropriate external disclosure.
• Cooperation Is Always in Style. Although Enforcement continued to wield a heavy stick against both companies and individuals on the penalty front under former SEC Chair Gary Gensler, the one area where companies saw tangible benefits for cooperation and remediation was with perks. As was the case with the other prior settlements, Express avoided a civil penalty as a result of, in large part, if not wholly, its self-reporting, cooperation, forward-thinking and timely remediation. Given the relative paucity of factual findings concerning the underlying violations, the order is notable for its heavy focus on the measures Express took to address the issue. Though some may reasonably question the wisdom of self-reporting and cooperation, there is no reason to think that Enforcement will stop or even slow its emphasis on rewarding cooperation under incoming Chair Paul Atkins (pending confirmation). It remains to be seen, however, what carrots and sticks the Enforcement Division will have available to incentivize such conduct if corporate penalties fall out of fashion as being so last year.

The SECond Opinions Blog will continue to monitor these issues, and we will provide updates. If you need additional information on this topic – or any topic related to securities enforcement or investigations – please contact the authors or other members of Holland & Knight's Securities Enforcement Defense Team.

Notes

¹ 17 C.F.R. § 229.402.