SEC's Cox defends compensation disclosure change
Wednesday, December 27, 2006; 7:26 PM
WASHINGTON (Reuters) - The top U.S. securities regulator defended his agency's relaxing the rules governing disclosure of stock options on Wednesday.
U.S. Securities and Exchange Commission Chairman Christopher Cox said in a statement that the rule adopted in July departed from accounting standards and would have been seriously misleading to investors. "The object is to report accurate numbers," he said.
Some investor advocates, including a senior lawmaker, criticized the changes announced last Friday as a Christmas gift to companies at the expense of investors.
As adopted July 26, the SEC rule would have required companies to include the value of unvested stock options - options that cannot be exercised until subsequent years - in new executive pay disclosures beginning in 2007.
But the SEC, in a unanimous vote by all 5 commissioners, changed the disclosure rule to match accounting rules which only require the cost of vested options -- those an executive can currently exercise -- to be counted as an expense.
The incoming chairman of the U.S. House of Representatives Finance Services Committee said in a statement on Wednesday he was disappointed with the SEC's "backtracking" and said it reinforced his determination that Congress needed to deal with excessive executive pay.
"I am very disappointed with both the substance and the procedure used to reach the SEC's Christmas Eve decision to loosen reporting requirements for the pay of the top executives of public corporations," said Massachusetts Democratic Rep. Barney Frank, who will chair the committee come January.
"It was a holiday present to corporate America," The New York Times quoted Ann Yerger, executive director of the Council of Institutional Investors, as saying. "It will certainly make the numbers look smaller in 2007 than they would otherwise have looked."
How companies disclose stock option awards will now conform more closely to U.S. Financial Accounting Standards Board (FASB) rule "FAS 123R," the SEC said.
That rule requires recognition of the costs of equity awards over the period in which an employee works for the award, the SEC said.
In defense of the SEC's change, Cox offered an example of two executives who both receive $5 million option packages that vest in four years.
If one executive leaves the company five years later, Cox said, she receives the full $5 million, while the other, who leaves in three years, would receive no compensation from the options. Under the old rule, the reported compensation would have been identical.
"The rule as adopted in July could have created confusion because it would have treated executives with vastly different compensation as if they were paid identical amounts," Cox said.
The SEC said it would be soliciting comment on the amendments for 30 days after publication of the rules in the Federal Register.
Frank said it was ironic the SEC would relax rules regarding stock options at precisely the time that widespread abuses of the practice were coming to light.
The SEC, the U.S. Department of Justice and the U.S. Internal Revenue Service are investigating possible manipulation of stock options grants. More than 160 companies have been investigated or are conducting internal inquiries.
"The problem of executive pay that is both greatly excessive and deliberately obscured is a grave one," Frank said.