I 108th CONGRESS 2d Session H. R. 4208 IN THE HOUSE OF REPRESENTATIVES April 22, 2004 Mr. Frank of Massachusetts introduced the following bill; which was referred to the Committee on Financial Services A BILL To discourage the abuse of stock options by executives of public companies by preventing unjust enrichment through the recapture of profits when shareholders suffer losses.

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Short title

This Act may be cited as the &short-title1;.

2.

Purposes

The purposes of this Act are— (1) to reduce the perverse incentive created by executive stock options for executives to take actions to inflate the value of their shares prior to exercising options; and (2)to prevent the resulting losses to shareholders by limiting the ability of executive officers and directors to profit from the exercise of stock options when shareholders have suffered substantial losses.

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Return of stock option profits

Section 304 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7243) is amended (1)by redesignating subsection (b) as subsection (c); (2)by inserting after subsection (a) the following new subsection: (b)

Stock option exercise prior to stock price declines

The Commission shall prescribe rules requiring that, if, at the end of a period ending one year after one or more of the five most highly compensated executive officers or the directors of an issuer have exercised options on securities of an issuer granted to the executive officer or director as compensation, the stock of the issuer has declined by a material amount, as determined by the Commission by rule, then such executive officer or director shall be required to reimburse the issuer for all gains realized on the sale of securities obtained as a result of the option exercise that are in excess of any gains that would have been realized had the securities been sold at the stock price at the end of such one-year period. Such rules shall be effective one year after the date of enactment of the Executive Compensation and Corporate Governance Act of 2004. ; and (3)in subsection (c) (as redesignated by paragraph (1) of this section), by striking subsection (a) and inserting subsections (a) and (b).

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Deadline for rulemaking

The Securities and Exchange Commission shall prescribe the rules and regulations required by the amendments made by this Act within 270 days after the date of enactment of this Act.