[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3574 Referred in Senate (RFS)]
2d Session
H. R. 3574
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
July 21, 2004
Received
September 7, 2004
Read twice and referred to the Committee on Banking, Housing, and Urban
Affairs
_______________________________________________________________________
AN ACT
To require the mandatory expensing of stock options granted to
executive officers, 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 ``Stock Option Accounting Reform
Act''.
SEC. 2. MANDATORY EXPENSING OF STOCK OPTIONS HELD BY HIGHLY COMPENSATED
OFFICERS.
Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m)
is amended by adding at the end the following:
``(m) Mandatory Expensing of Stock Options.--
``(1) Named executive officer.--As used in this subsection,
the term `named executive officer' means--
``(A) all individuals serving as the chief
executive officer of an issuer, or acting in a similar
capacity, during the most recent fiscal year,
regardless of compensation level; and
``(B) the 4 most highly compensated executive
officers, other than an individual identified under
subparagraph (A), that were serving as executive
officers of an issuer at the end of the most recent
fiscal year.
``(2) In general.--Subject to paragraph (4), every issuer
of a security registered pursuant to section 12 shall show as
an expense in the annual report of such issuer filed under
subsection (a)(2), the fair value of all options to purchase
the stock of the issuer granted after December 31, 2004, to a
named executive officer of the issuer.
``(3) Fair value.--
``(A) In general.--The fair value of an option to
purchase the stock of the issuer that is subject to
paragraph (2) shall--
``(i) be equal to the value that would be
agreed upon by a willing buyer and seller of
such option, who are not under any compulsion
to buy or sell such option; and
``(ii) take into account all of the
characteristics and restrictions imposed upon
the option.
``(B) Pricing model.--To the extent that an option
pricing model, such as the Black-Scholes method or a
binomial model, is used to determine the fair value of
an option, the assumed volatility of the underlying
stock shall be zero.
``(4) Exemptions.--
``(A) Small business issuers.--This subsection
shall not apply to an issuer, if--
``(i) the issuer has annual revenues of
less than $25,000,000;
``(ii) the issuer is organized under the
laws of the United States, Canada, or Mexico;
``(iii) the issuer is not an investment
company (as such term is defined under section
3 of the Investment Company Act of 1940 (15
U.S.C. 80a-3));
``(iv) the aggregate value of the
outstanding voting and non-voting common equity
securities of the issuer held by non-affiliated
parties is less than $25,000,000; and
``(v) in the case of an issuer that meets
the criteria in clauses (i) through (iv) and is
a majority-owned subsidiary, the parent of the
issuer meets the requirements of this
paragraph.
``(B) Delayed effectiveness.--The requirements of
this subsection shall not apply to an issuer before the
end of the 3-year period beginning on the date of the
completion of the initial public offering of the
securities of the issuer, and shall only apply to an
option to purchase the stock of an issuer granted after
such date.
``(5) Voluntary expensing.--Notwithstanding the
requirements of this subsection, issuers may elect to expense
the fair value of all officer and employee stock options in the
annual report of such issuer under subsection (a)(2), in
accordance with the expensing alternative of Statement of
Financial Accounting Standards Number 123, and any such issuer
making such election in the annual report for a fiscal year
shall not be subject to paragraphs (2) through (4) of this
subsection for such fiscal year.''.
SEC. 3. PROHIBITION ON EXPENSING AND ECONOMIC IMPACT STUDY.
(a) Prohibition.--Section 19(b) of the Securities Act of 1933 (15
U.S.C. 77s(b)) is amended by adding at the end the following:
``(3) Prohibition on expensing standards.--
``(A) In general.--The Commission shall not
recognize as `generally accepted' any accounting
principle relating to the expensing of stock options
unless--
``(i) it complies with the requirements of
subparagraph (B); and
``(ii) the economic impact study required
under section 3(b) of the Stock Option
Accounting Reform Act has been completed.
``(B) Requirements.--A standard referred to in
subparagraph (A) shall require that--
``(i) if an option to purchase the stock of
an issuer that is subject to the requirements
of section 13(m) of the Securities Exchange Act
of 1934 is exercised--
``(I) any expense that had been
reported under that section 13(m) with
respect to such option shall be
recomputed as of the date of exercise
and shall be equal to the difference
between the price of the underlying
stock and the exercise price; and
``(II) to the extent the recomputed
amount differs from the amount
previously reported under section 13(m)
with respect to such option, the
difference shall be reported in the
fiscal year in which the option is
exercised as a reduction or increase,
as the case may be, of the total
expense required to be reported under
that section 13(m) during that fiscal
year;
``(ii) if an option to purchase the stock
of an issuer that is subject to the
requirements of section 13(m) of the Securities
Exchange Act of 1934 is forfeited or expires
unexercised, any expense that had been reported
under that section 13(m) with respect to such
option shall be reported in the fiscal year in
which the option expires or is forfeited as a
reduction of the total expense required to be
reported under that section 13(m) during that
fiscal year; and
``(iii) to the extent that any reduction
required under clause (i) or (ii) exceeds total
option expenses for any fiscal year, such
excess shall be reported as income with respect
to options to purchase the stock of the issuer.
``(C) Exception for voluntary expensing.--Nothing
in this paragraph or in any other provision of the
Stock Option Accounting Reform Act shall prevent the
Commission from continuing to recognize the expensing
alternative of Statement of Financial Accounting
Standards Number 123 as part of generally accepted
accounting principles for issuers that elect to expense
the fair value of all officer and employee stock
options in the annual report of such issuer pursuant to
section 13(m)(5) of the Securities Exchange Act of
1934.''.
(b) Economic Impact Study.--Not later than 1 year after the date of
enactment of this Act, the Secretary of Commerce and the Secretary of
Labor shall conduct and complete a joint study on the economic impact
of the mandatory expensing of all employee stock options, including the
impact upon--
(1) the use of broad-based stock option plans in expanding
employee corporate ownership to workers at a wide range of
income levels, with particular focus upon non-executive
employees;
(2) the role of such plans in the recruitment and retention
of skilled workers;
(3) the role of such plans in stimulating research and
innovation;
(4) the effect of such plans in stimulating the economic
growth of the United States; and
(5) the role of such plans in strengthening the
international competitiveness of businesses organized under the
laws of the United States.
SEC. 4. IMPROVED EMPLOYEE STOCK OPTION TRANSPARENCY AND REPORTING
DISCLOSURES.
(a) Enhanced Disclosures Required.--Not later than 180 days after
the date of enactment of this Act, the Commission shall, by rule,
require each issuer filing a periodic report under section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)) to
include in such report more detailed information regarding stock option
plans, stock purchase plans, and other arrangements involving an
employee acquisition of an equity interest in the company. Such
information shall include--
(1) a discussion, written in ``plain English'', in
accordance with the Plain English Handbook published by the
Office of Investor Education and Assistance of the Commission,
of the dilutive effect of stock option plans, including tables
or graphic illustrations of such dilutive effects;
(2) expanded disclosure of the dilutive effect of employee
stock options on the issuer's earnings per share;
(3) prominent placement and increased comparability and
uniformity of all stock option related information;
(4) the number of outstanding stock options;
(5) the weighted average exercise price of all outstanding
stock options; and
(6) the estimated number of stock options outstanding that
will vest in each year.
(b) Definitions.--As used in this section:
(1) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(2) Issuer.--The term ``issuer'' has the meaning provided
in section 2(a)(7) of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
7201(a)(7)).
(3) Equity interest.--The term ``equity interest'' includes
common stock, preferred stock, stock appreciation rights,
phantom stock, and any other security that replicates the
investment characteristics of such securities, and any right or
option to acquire any such security.
SEC. 5. PRESERVATION OF AUTHORITY.
Nothing in this Act shall be construed to limit the authority over
the setting of accounting principles by any accounting standard setting
body whose principles are recognized by the Securities and Exchange
Commission under section 19(b)(1) of the Securities Act of 1933 (15
U.S.C. 77s(b)(1)).
Passed the House of Representatives July 20, 2004.
Attest:
JEFF TRANDAHL,
Clerk.