- The Washington Times - Tuesday, July 25, 2006


Regulators are moving to require companies to disclose more details of executives’ pay and perks. They are also writing new rules on disclosure of the dating of stock options as controversy widens over suspect timing.

The Securities and Exchange Commission is expected to vote at a public meeting today to adopt the biggest changes in rules governing disclosure of executive compensation since 1992.

Public companies for the first time will be required to furnish tables in annual filings showing the total yearly compensation for their chief executive officers, chief financial officers and the next three highest-paid executives.

The plan, designed to enhance corporate transparency and address an issue that has angered company shareholders and the public, comes as the controversy builds over timing of options grants. In expanding probes, at least 60 public companies have disclosed that their options practices are being investigated by the SEC or the Justice Department or both, and the SEC itself says it has at least 80 companies under scrutiny.

At issue in many of the investigations is a practice known as backdating, in which stock options are retroactively issued to coincide with low points in a company’s share price — a move that can fatten profits for recipients of the options when they eventually sell their shares after the market price rises.

Backdating of options can be legal if the practice is properly disclosed to shareholders and approved by the company’s board, analysts say.

Improperly disclosed backdating “is a serious potential problem under the federal securities laws,” SEC Chairman Christopher Cox said yesterday in testimony before the Senate Banking, Housing and Urban Affairs Committee. “I believe that illegal backdating goes to the heart of investor confidence.”

The SEC rules on disclosure of executive compensation include new requirements for companies regarding disclosure of options backdating.

The plan requires companies to provide detailed information on how they determine when option grants are made to executives and, if they do so, how and why they backdate options.

The required tables showing option awards to executives will include the date that options were granted. If the exercise price is less than the stock’s market price on the date of the grant, a separate column will have to be added showing the market price on that date.

The government’s first criminal complaint in a stock options probe came last week, when the former chief executive officer of Brocade Communications Systems Inc. was charged with fraud. Gregory L. Reyes and another former executive of the maker of data storage devices, Stephanie Jensen, also face civil charges lodged by the SEC. Their attorneys have said that their clients are innocent.

A central charge in the government’s case involves backdating of options awards. The authorities also charge that Mr. Reyes and Miss Jensen regularly backdated minutes of meetings of the company’s board so that it appeared that the compensation committee granted options on dates that Brocade’s share price was relatively low. In fact, the authorities charge, no such meetings occurred on those dates.

In the SEC plan to be adopted today, the true costs to companies’ bottom line of their executives’ pay packages — including stock options — will have to be revealed.

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