SEC Will Issue Options-Timing Rule; Tells PCAOB to Delay Stock Options Alert

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The Securities and Exchange Commission (SEC) has asked the Public Accounting Oversight Board (PCAOB) to delay issuing an alert to accounting firms related to backdating stock options, the Wall Street Journal reported late last week. The SEC wants to complete its work on its own proposed rule regarding executive compensation. SEC Chairman Christopher Cox has said that he expects their rule, which should be completed later in the summer, to address backdating issues.

An SEC spokesman said that it makes sense for the SEC and PCAOB “to go out with it at the same time” . . . to “avoid confusion in the marketplace,” the Journal says.

The Journal also reported that the SEC wants the PCAOB to limit its guidance to current and future options grants, rather than suggest that auditors review past practices.

A PCAOB spokesperson declined comment but said there is “normal give and take that goes on between the PCAOB and SEC.” The PCAOB wanted to issue the guidance so that smaller firms could look at options-grant practices, the Journal reports.

Two SEC commissioners, speaking at a conference of the International Corporate Governance Network, provided differing views of the options issue and the SEC's approach to rulemaking. Commissioner Paul Atkins said that the stock-option backdating scandal could have a negative effect on legitimate use of stock option grants for executive compensation, according to “Well-timed stock options” benefited shareholders, he said, because they may allow the company to spend less cash on salaries.

Options are a “cash-preserving approach to compensation,” Atkins said, and grants are made by a company's board in good faith. He warned that the SEC “should not through enforcement actions undercut the business judgment rule – we do so to the peril of stockholders.”

Recent SEC rulings have been struck down in court for lack of empirical evidence, according to commissioner Cynthia Glassman, who also spoke at the International Corporate Governance Network, reports. Glassman cited the hedge-fund adviser registration requirement struck down by the D.C. Circuit Court three weeks ago as an example of rulemaking by the SEC that was characterized by “lack of rigorous thinking and empirical support.” A nonanalytical study was used by the commission to justify its rule.

Glassman expressed disappointment that the commission “wasted so much time and effort” on rules overturned in courts and urged the SEC to establish rules based on empirical evidence, said. She also suggested that the SEC should turn its attention to auditor concentration in the accounting industry and the ways that different regulatory systems interact and affect investors.

Commissioner Glassman, an economist, will be retiring from the SEC as soon as a replacement is named.


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