Stock options backdating rules

So a grant in January might not have to be disclosed until more than a year later.

stock options backdating rules-11

I appreciate the opportunity to explain the Commission's initiatives to deal with abuses involving the backdating of options.

I am especially pleased to testify together with Chairman Mark Olson of the Public Company Accounting Oversight Board.

I will let Chairman Olson speak to the steps the PCAOB is taking to address these issues from the auditing regulator's perspective, but I'd like to assure the Committee, and the public, that the Commission is working in close cooperation with the PCAOB in this important area. But here is a typical example of what some companies did: They granted an "in-the-money" option-that is, an option with an exercise price lower than that day's market price.

They did this by misrepresenting the date of the option grant, to make it appear that the grant was made on an earlier date when the market value was lower.

Four years ago, in 2002, the Sarbanes-Oxley Act very presciently tightened up on the reporting of stock option grants.

Before Sarbanes-Oxley, officers and directors didn't have to disclose their receipt of stock option grants until after the end of the fiscal year in which the transaction took place.And of course there were other reasons, many of them good ones with solid economic rationales, that companies wanted to use options as a form of compensation.For example, a properly-structured option plan can be useful in more closely aligning the incentives of shareholders and managers.The purpose of the new executive compensation rules is to make the CEO's pay understandable to the shareholders who own the company.Of course, no new SEC rules would be necessary to make executive pay transparent, if executives were all paid in the form of salary.Rather obviously, this fact pattern results in a violation of the SEC's disclosure rules, a violation of accounting rules, and also a violation of the tax laws.

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