[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 2877 Introduced in Senate (IS)]







107th CONGRESS
  2d Session
                                S. 2877

To amend the Internal Revenue Code of 1986 to ensure that stock options 
 of public companies are granted to rank and file employees as well as 
            officers and directors, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             August 1, 2002

  Mr. Lieberman (for himself and Mrs. Boxer) introduced the following 
  bill; which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to ensure that stock options 
 of public companies are granted to rank and file employees as well as 
            officers and directors, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Rank and File Stock Option Act of 
2002''.

SEC. 2. DENIAL OF DEDUCTION FOR STOCK OPTION PLANS DISCRIMINATING IN 
              FAVOR OF HIGHLY COMPENSATED EMPLOYEES.

    (a) In General.--Section 162 of the Internal Revenue Code of 1986 
(relating to deduction for trade and business expenses) is amended by 
redesignating subsection (p) as subsection (q) and by inserting after 
subsection (o) the following new subsection:
    ``(p) Deductibility of Stock Options Not Widely Available to All 
Employees.--
            ``(1) In general.--If--
                    ``(A) an applicable taxpayer grants stock options 
                during any taxable year, and
                    ``(B) the taxpayer fails to meet the overall 
                concentration test of paragraph (2) or the individual 
                concentration tests of paragraph (3) for such taxable 
                year with respect to the granting of such options,
        then the deduction allowable to such taxpayer for any taxable 
        year in which any such option is exercised shall be limited as 
        provided in this subsection.
            ``(2) Overall concentration test.--If the total number of 
        shares which may be acquired pursuant to options granted to 
        applicable highly compensated employees by an applicable 
        taxpayer during a taxable year exceeds 50 percent of the 
        aggregate share amount, then the deduction allowable under this 
        chapter with respect to the exercise of any option granted by 
        the applicable taxpayer during such taxable year to any 
        employee shall be reduced by the product of--
                    ``(A) the amount of such deduction computed without 
                regard to this subsection, and
                    ``(B) a percentage equal to the number of 
                percentage points (including any fraction thereof) by 
                which such total number exceeds 50 percent.
            ``(3) Individual concentration tests.--
                    ``(A) Options granted to single employee.--If the 
                total number of shares which may be acquired pursuant 
                to options granted to any applicable highly compensated 
                employee by an applicable taxpayer during a taxable 
                year exceeds 5 percent of the aggregate share amount, 
                then no deduction shall be allowable under this chapter 
                with respect to the exercise of any options granted by 
                the applicable taxpayer to such employee during such 
                taxable year.
                    ``(B) Options granted to top employees.--
                            ``(i) In general.--If the total number of 
                        shares which may be acquired pursuant to 
                        options granted to employees who are members of 
                        the top group by an applicable taxpayer during 
                        a taxable year exceeds 15 percent of the 
                        aggregate share amount, then no deduction shall 
                        be allowable under this chapter with respect to 
                        the exercise of any options granted by the 
                        applicable taxpayer to such employees during 
                        such taxable year.
                            ``(ii) Top group.--For purposes of this 
                        subparagraph, an employee shall be treated as a 
                        member of the top group if the employee is a 
                        covered employee (within the meaning of section 
                        162(m)(3)).
                    ``(C) Exception.--Subparagraphs (A) and (B) shall 
                not apply to any taxable year if the applicable 
                taxpayer granted an equal number of identical options 
                to each employee without regard to whether the employee 
                was highly compensated or not.
            ``(4) Rules relating to tests.--For purposes of this 
        subsection--
                    ``(A) Aggregate share amount.--
                            ``(i) In general.--The aggregate share 
                        amount for any taxable year is the total number 
                        of shares which may be acquired pursuant to 
                        options granted to all employees by an 
                        applicable taxpayer during the taxable year.
                            ``(ii) Certain options disregarded.--Except 
                        as provided in regulations, if the terms of any 
                        option granted to an employee other than a 
                        highly compensated employee during any taxable 
                        year are not substantially the same as, or more 
                        favorable than, the terms of any option granted 
                        to any highly compensated employee, then such 
                        option shall not be taken into account in 
                        determining the aggregate share amount.
                    ``(B) Options granted on different classes of 
                stock.--Except as provided in regulations, this 
                subsection shall be applied separately with respect to 
                each class of stock for which options are granted.
            ``(5) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Applicable taxpayer.--The term `applicable 
                taxpayer' means any taxpayer which is an issuer (as 
                defined in section 3 of the Securities Exchange Act of 
                1934; 15 U.S.C. 78c)--
                            ``(i) the securities of which are 
                        registered under section 12 of that Act (15 
                        U.S.C. 78l), or
                            ``(ii) which--
                                    ``(I) is required to file reports 
                                pursuant to section 15(d) of that Act 
                                (15 U.S.C. 78o(d)), or
                                    ``(II) will be required to file 
                                such reports at the end of a fiscal 
                                year of the issuer in which a 
                                registration statement filed by such 
                                issuer has become effective pursuant to 
                                the Securities Act of 1933 (15 U.S.C. 
                                77a et seq.), unless its securities are 
                                registered under section 12 of the 
                                Securities Exchange Act of 1934 (15 
                                U.S.C. 78c) on or before the end of 
                                such fiscal year.
                    ``(B) Applicable highly compensated employee.--The 
                term `applicable highly compensated employee' means--
                            ``(i) any highly compensated employee who 
                        is described in subparagraph (B) of section 
                        414(q)(1), and
                            ``(ii) any director of the applicable 
                        taxpayer.
                    ``(C) Incentive stock options not taken into 
                account.--An incentive stock option (as defined in 
                section 422(b)) shall not be taken into account for 
                purposes of applying this section.
                    ``(D) Aggregation.--All corporations which are 
                members of an affiliated group of corporations filing a 
                consolidated return shall be treated as 1 taxpayer.
            ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection, including regulations to prevent the avoidance 
        of this subsection through the use of phantom stock, restricted 
        stock, or similar instruments.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 3. SHAREHOLDER APPROVAL.

    (a) Rules Required.--Not later than 1 year after the date of 
enactment of this Act, the Securities and Exchange Commission shall 
finalize rules pursuant to the Securities Exchange Act of 1934 to 
ensure that--
            (1) shareholder approval is required for stock option plans 
        and grants, stock purchase plans, and other arrangements by 
        public companies by which any person may acquire an equity 
        interest in the company in exchange for consideration that is 
        less than the fair market value of the equity interest at the 
        time of the exchange; and
            (2) prior to submission of such plans to shareholders for 
        approval, such shareholders are given detailed information 
        about the stock option plans and grants, including--
                    (A) the economic rationale and interest of 
                shareholders in the plan or grant;
                    (B) a detailed description of the anticipated 
                distribution of the plan or grant among directors, 
                officers, and employees and the rationale of such 
                distribution;
                    (C) the total number of options reserved or 
                intended for grants to each director and officer, and 
                to different classes of employees;
                    (D) the maximum potential future earnings per share 
                dilution of investors' shareholdings, assuming the 
                exercise of all in-the-money options with no adjustment 
                for the use of the Treasury stock method, as stock 
                price varies;
                    (E) the terms under which stock option grants may 
                be canceled or reissued; and
                    (F) the number, weighted average exercise prices, 
                and vesting schedule of all options previously approved 
                or outstanding.
    (b) Reliability and Accuracy.--The Commission shall ensure that all 
disclosures required by this section shall increase the reliability and 
accuracy of information provided to shareholders and investors. 
    (c) Exemption Authority.--Shareholder approval rules issued in 
accordance with this section--
            (1) may exempt stock option grants to individual employees 
        under terms and conditions specified by the Commission, except 
        that such exemptions shall be available only in cases in which 
        the grant--
                    (A) is made to an individual who is not a director 
                or officer of the company at the time the grant is 
                approved;
                    (B) is necessary, based on business judgment;
                    (C) represents a de minimus potential dilution of 
                future earnings per share of investors' shareholdings; 
                and
                    (D) is made on terms disclosed to shareholders in 
                the next filing with the Commission; and
            (2) may exempt stock option plans and grants of any 
        registrant that qualifies as a small business issuer under 
        applicable securities laws and regulations, or to such 
        additional small issuers as the Commission determines would be 
        unduly burdened by such requirements as compared to the benefit 
        to shareholders, except that such exemption may be phased in, 
        both as to applicability and to its effective date, so that the 
        Commission may determine the size of issuer to which such 
        exemptions will apply and the extent to which the rule should 
        apply to plans that exclude officers and directors.

SEC. 4. HOLDING PERIOD FOR EXECUTIVES.

    Not later than 1 year after the date of enactment of this Act, the 
Securities and Exchange Commission shall conduct an analysis of, and 
make regulatory and legislative recommendations on, the need for new 
stock holding period requirements for senior executives, including--
            (1) recommendations to set minimum holding periods after 
        the exercise of options to purchase stock and to set a maximum 
        percentage of stock purchased through options that may be sold; 
        and
            (2) an analysis of sales to company, sales on public 
        markets, and derivative sales.
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