[Congressional Record Volume 148, Number 99 (Friday, July 19, 2002)]
[Senate]
[Pages S7104-S7106]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ENZI (for himself, Mr. Lieberman, Mr. Allen, Mrs. Boxer, 
        Mr. Burns, Mr. Frist, and Mr. Ensign):
  S. 2760. A bill to direct the Securities and Exchange Commission to 
conduct a study and make recommendations regarding the accounting 
treatment of stock options for purposes of the Federal securities laws; 
to the Committee on Banking, Housing, and Urban Affairs.

  Mr. ENZI. Mr. President, I rise today to introduce the Enzi-
Lieberman-Allen-Boxer amendment on stock options. Our bipartisan 
amendment helps solve many of the perceived problems with the issuance 
of stock options by giving the SEC a broad mandate to look into and 
analyze numerous issues concerning stock options, including disclosure, 
corporate governance, and the benefits and detriments of expensing 
stock options.
  After its analysis, the SEC will be required to furnish 
recommendations, if any, for changes in corporate America's uses of 
stock options, and we envision that being done through FASB. We are not 
trying to tell FASB, the Federal Accounting Standards Board, how to do 
their work; we are trying to provide them with more information so they 
can make a consideration of that issue again.
  I and the other original cosponsors of this bill have sent a letter 
to Chairman Harvey Pitt and the other Commissioners on the SEC asking 
them to initiate on their own the action items outlined in our bill and 
to make recommendations on these issues in the next 60 days. I hope 
they take such initiative.
  Mr. President, I ask unaimous consent the letter be printed in the 
Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:


                                                  U.S. Senate,

                                    Washington, DC, July 19, 2002.
     Hon. Harvey L. Pitt, Chairman,
     Hon. Isaac C. Hunt, Jr., Commissioner,
     Hon. Cynthia A. Glassman, Commissioner,
     Mr. Robert K. Herdman, Chief Accountant,
     Securities and Exchange Commission, Washington, DC.
       Dear Chairman Pitt, Commissioners Hunt and Glassman, and 
     Mr. Herdman: We are writing to request that the Securities 
     and Exchange Commission (SEC) analyze and propose 
     recommendations, if needed, on issues regarding stock 
     options. We have introduced legislation mandating such action 
     by the Commission, but ask that you proceed before this 
     legislation is enacted.
       The legislation is the Stock Option Fairness and 
     Accountability Act. This legislation focuses on key issues 
     regarding stock options, which include stock option pricing 
     models; disclosure to investors and shareholders; shareholder 
     approval of stock option plans; and restrictions on senior 
     management sale of stock. The bill also mandates a review of 
     the benefits and detriments of any new options expensing 
     rules on the productivity and performance of companies and 
     start-up enterprises, the recruitment retention of skilled 
     workers, and employees at various income levels, with 
     particular focus

[[Page S7105]]

     on the effect on rank-and-file employees and the income of 
     women.
       It is our view the debate on stock options has focused 
     narrowly on the accounting of stock options, and failed to 
     focus on other critical stock option policy issues. We seek 
     to broaden the debate to ensure that Congress, the 
     Commission, and other relevant agencies take action to 
     eliminate any problems which might exist with stock options, 
     while ensuring their benefits are retained.
       We believe options should be preserved and protected 
     because, when they are properly structured, they are 
     incentives for productivity and growth. In most instances, 
     they reflect America's best business values--the willingness 
     to take business risks, the vision to develop new 
     entrepreneurial companies and technologies, a way to broaden 
     ownership and participation among employees, and a strong 
     performance incentive for both management and employees. We 
     should focus on strengthening stock option incentives and 
     enabling them to yield even greater economic growth dividends 
     for our economy.
       In general, we believe the Senate should not be legislating 
     detailed accounting or regulatory standards regarding stock 
     options or other accounting issues. These are issues best 
     left to the SEC and its expert staff. The Financial 
     Accounting Standards Board (FASB) has independent authority 
     to set accounting standards, and should continue to do so. 
     That is why our legislation and this letter request that the 
     Commission address all of these issues and make 
     recommendations.
       Regarding shareholder approval of stock option plans, a 
     Special Committee of New York Stock Exchange recommended 
     shareholder approval of all stock option plans, while the 
     NASDAQ has recommended shareholder approval of any plan that 
     includes officers and directors. We want the SEC to examine 
     whether these measures are adequate, and whether any 
     additional accountability to shareholders is needed.
       Current disclosure requirements for stock options exist 
     which focus on the potential cost of stock options when they 
     are exercised, the potential dilution of earnings per share, 
     and other issues. We believe the SEC should look at whether 
     these disclosure rules should be strengthened in order to 
     provide investors and shareholders more accurate and complete 
     information.
       We understand that restricting the sale of stock acquired 
     through stock option plans is a complex and controversial 
     issue. We ask you to review whether a need exists for 
     imposition of a holding period for senior executives and 
     whether the benefits of such a rule would outweigh the costs. 
     Should you recommend such a rule, we suggest you also review 
     whether any exemptions are necessary, given individuals may 
     have a legitimate need to sell stock to raise cash to pay 
     taxes on their options or for personal emergencies. We urge 
     you to also consider whether a holding period might impose a 
     special burden on small companies and start-up enterprises, 
     where stock options form a greater proportion of employee 
     compensation.
       We appreciate the assistance of the Commission addressing 
     these vital issues and promptly making recommendations. We 
     believe we have presented you with a comprehensive agenda of 
     stock option policy issues, which will ensure positive action 
     is taken to restore investor and shareholder confidence, calm 
     and markets, and prevent perceived problems associated with 
     stock options. We look forward to receiving a response with 
     your recommendations and plan for action within 60 days.
           Sincerely,
         Senator Mike Enzi, Senator Joseph Lieberman, Senator 
           Barbara Boxer, Senator Conrad Burns, Senator John 
           Ensign, Senator George Allen, Senator Bill Frist.

  Mr. ENZI. How did we get here, to this point of perhaps possibly 
legislating on stock options? The debate on stock options became heated 
over the last few months, following the accounting debacles of Enron, 
WorldCom, and Global Crossing. I think we can all agree that the use of 
stock options did not cause the demise of these companies, but 
nevertheless their use by these and other companies has become 
increasingly scrutinized during the current accounting debate and 
evidence of top exeuctive abuse.
  What initially raised everyone's attention to stock options was 
Enron. As we all know, Enron's executives and employees were issued 
numerous stock options. It is now clear that months before Enron filed 
for bankruptcy, executives who were aware of the true condition of the 
company, exercised millions of dollars of their options. Now, Enron 
employees--kept in the dark on company finances--are left with 
worthless Enron stock and retirement savings. While these Enron 
executives absconded with money from the sell of stock options, we all 
know the financial collapse of Enron had little to do with its 
accounting procedures on stock options. Enron went bankrupt. 
Nevertheless, concerns about stock option use by corporations have 
become magnified.
  We all know that when properly used, stock options can be a marvelous 
opportunity for all employees. In addition, small businesses and 
startup companies use stock options as an incentive and sometimes the 
only means to attract qualified employees.
  There have been many suggestions on what will stop future Enrons, and 
included in that debate has been a discussion on improving the 
accounting practices and other issues concerning stock options. Some 
members have come up with some creative and not so creative ideas on 
how to improve their use.
  Some have not considered how their ideas will affect rank-and-file 
employees, while others have kept that as their primary consideration. 
Some members have proposed setting a new expensing standard or 
directing the Federal Accounting Standards Board to take some specific 
action in setting new expensing rules. But, these amendments have pre-
ordained what the solution to stock options will be.
  Members promoting these amendments are furnishing their own 
conclusions. They mandate either codification of new expensing rules, 
or direct the Federal Accounting Standards Board, known as FASB, to 
require stock option expensing at the time of grant or exercise. This 
is a conclusion some of us do not believe should be made by non-experts 
in Congress, without careful analysis.
  Our bipartisan amendment is different. It doesn't preordain what the 
solution to stock options will be. Instead, it directs the SEC to 
analyze the treatment of stock options in several categories, not just 
stock option expensing, and lend its superior expertise in furnishing a 
report and making useful recommendations.
  This is a smart amendment because 99 non-accountant Senators, and one 
accountant Senator, all without expertise in securities accounting and 
law, have no business making a definitive decision on what the answer 
to stock option problems should be. Instead, the SEC should analyze the 
problem and make recommendations on what is needed.

  Let me get to the specifics of our amendment. First, it requires an 
analysis of the accounting treatment of employee stock options, 
including the accuracy of available stock option pricing models. What 
are these models?
  Currently, companies estimate the value of granted stock options 
using something called the Black-Scholes model. This is because they do 
not know what the future value of their stock will be when the options 
are actually exercised and sold. So they make an educated guess with 
the Black-Scholes model.
  However, many believe the current practice of using the Black-Scholes 
method to value stock options, as currently used on footnotes, is 
fatally flawed. This method will be just as flawed if it must be used 
for expensing stock options at the time of grant. This amendment 
directs the SEC to look at the accuracy of this and other pricing 
models.
  Second, our amendment directs the SEC to analyze the adequacy of 
current disclosure requirements to investors and shareholders on stock 
options. The SEC needs to determine whether better disclosure 
provisions would solve the current, perceived problem with stock option 
reporting. The SEC can study what further disclosure and transparency 
provisions, if any, would be useful.
  We do not know what the SEC's recommendations might be. They might 
include a recommendation for user-friendly disclosure in clear, plain 
English with graphs and charts, which are comparable with other company 
disclosures. They might recommend increased quarterly reporting on 
certain information.
  Even high profile financial celebrities have differing view on 
expensing and disclosure. Like me, Secretary O'Neill has advocated 
fuller disclosure as a means to cure the present perceived problems 
with the information provided to investors and shareholders in 
footnotes on company financial statements, rather than expensing. 
Others, like Warren Buffet, have said fuller disclosure and 
transparency will not cure these problems, and Congress should do 
something about expensing. Alan Greenspan believes expensing of stock 
options at the time of grant is needed, but that Congress should not be 
the one deciding this or setting accounting standards.

[[Page S7106]]

  Given these differing views by financial heavy weights like Secretary 
O'Neill, Greenspan and Buffett, it makes sense to let the SEC analyze 
this issue and make the determination of what, if any, disclosure 
improvements are necessary, taking into account the effect on all 
affected parties--companies, shareholders, investors, and rank-and-file 
employees.
  Next, our amendment would direct the SEC to analyze the adequacy of 
corporate governance requirements on stock options, including the 
usefulness of having shareholders approve stock option plans.
  Previously, I advocated shareholder approval of stock option issuance 
to top corporate executives to prevent them from abusing stock options. 
Now, I and others of us are leaving it to the SEC to determine whether 
this will prevent stock option abuse.
  Our bipartisan amendment also requires an analysis of the need, if 
any, for stock holding period requirements for senior executives. Some 
Senators have advocated a holding period during which top executives 
cannot sell their stock options. One suggestion was that a 90-day 
cooling off period occur before a top executive can sell his stock. 
Another suggestion was that these executives could not sell their stock 
until they left the company and a two-year period expired.

  These suggestions pose a dramatic solution which needs more study by 
the SEC. These are not provisions to be taken lightly, nor drafted 
hurriedly by Senators. This type of amendment could possibly help 
prevent abuses, or have the opposite effect of chilling the future use 
of stock options entirely. Because I do not know what the effect of 
this will be and whether it will prevent executive fraud and abuse, I 
am at least willing to let the SEC study it to see if there is any 
merit to it.
  And finally, our amendment directs the SEC to look at the benefit and 
detriment of any new options expensing rules. So, instead of Senators, 
who have little knowledge of securities accounting, making an 
accounting decision on stock option expensing, we are leaving it in the 
hands of the SEC to see how expensing will affect all segments related 
to stock options.
  Our bipartisan amendment directs the SEC to look at the benefit and 
detriment of stock option expensing on companies and start-up 
enterprises. Specifically, it requires the SEC to look at what stock 
options expensing would do to the productivity and performance of all 
sizes of companies, and start-up enterprises.
  I am particularly concerned about the effect of expensing stock 
options on small companies and start-up enterprises. Many small 
businesses and start-up companies cannot afford to offer the salaries 
larger companies give, so they offer stock options as an incentive to 
attract highly-skilled employees. In addition, our amendment would 
require the SEC to look at the benefits and detriments of stock option 
expensing on the recruitment and retention of skilled workers.
  Currently, employees who risk working for start-up companies have the 
ability to make much more money than through traditional methods of 
payment by salaries or wages. Those who stay with the company tend to 
have a vested interest in the company through the issuance of stock 
options. Stock options may be the very reason that some employees start 
with a company and stay with it. We are asking the SEC to look at the 
issue of what effect stock option expensing will have on future 
recruitment and retention of employees.
  Finally, and most importantly, our amendment asks the SEC to look at 
the benefits and detriments of stock options on employees at all income 
levels, with particular emphasis on rank-and-file employees.
  These are some of the questions the SEC needs to look at and make a 
recommendation on.
  Whatever we do, we need to make sure the cure is not worse than the 
disease. We should not rush to pass something just for the sake of 
legislating on stock options. Let us step back and see what 
recommendations the SEC makes. Then, with cooler heads, perhaps we can 
prevail in getting rules and regulations on stock options which are 
truly needed, and not merely an overreaction to the current atmosphere 
of Enron.
  I would hate to see any hastly decision chill the ability of 
companies to issue stock options to millions of rank-and-file 
employees. Or chill new start-up companies' use of stock options to 
attract employees. At the same time, we have to stop future abuses by 
corporate executives who thumb their noses while plundering companies 
resources.
  For these reasons, I ask you to vote in favor of the Enzi-Lieberman-
Allen-Boxer Amendment.
                                 ______