(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

D.C. Bar Panelists Discuss Repercussions of Options Backdating

The DC Bar hosted the second in its two-part program on the backdating of stock options which focused on corporate governance and disclosure under the SEC's executive compensation rules. Meredith Cross, a partner with Wilmer Cutler Pickering Hale & Dorr LLP, noted that the backdating of options would make it hard to correctly fill out the columns under the new rules. She also provided an important practice tip. A plan's definition of the market value on the date of grant may vary from the SEC rule's definition. Registrants must use the SEC's definition of market value on the date of grants, which can be difficult, especially for large companies, she said.

Mark Borges, a principal with Mercer Human Resource Consulting, said that 70 percent of companies in a recent survey said they were either changing their definition of market value on date of grant or thinking about doing so to conform with the SEC's rule. David Lynn, chief counsel in the SEC's Division of Corporation Finance, noted that companies may simply disclose why there is a difference in the values.

Companies must disclose their policies on timing option grants under the SEC's rules. Ms. Cross believes many of companies will change their plans, but they still have to talk about the plan that existed in the last fiscal year. Mr. Lynn added that, if it is relevant, companies must also talk about events that occurred before and after the fiscal year, such as "fixing" a plan.

Mr. Borges said that many companies are planning to report that they have no procedures, plans or practices to grant options in advance of good news, but then go on to report that they always grant options in advance of their earnings release. He warned against attempts to bury disclosure on equity award arrangements. Mr. Lynn emphasized the requirement to disclose the information in plain English, or said to expect staff comments. The staff plans to focus on plain English disclosures in its reviews, he said.

Mr. Lynn said the staff has received a number of questions about Form S-3 and Form S-8 eligibility after a company has reported on Form 8-K that it plans to restate its financial statements. The filing of an Item 4.02 on Form 8-K does not automatically mean that registrants have to stop making sales under those forms, according to Mr. Lynn, as long as fraud was not involved as the basis for the restatement.

Ms. Cross said that while the SEC has left it up to practitioners to determine whether they may continue to use the forms, it is rather unusual to be able to go forward. Once you shut those forms down, she added, companies have to deal with Regulation BTR to report any benefit plan suspensions.

Mr. Lynn said the staff has also received a number of questions about continuing to use Form S-3 or Form S-8 if a registrant is late in its filing of Forms 10-Q or 10-K. He said the form eligibility depends on whether the late filing is a Form 10-Q or a 10-K, whether the registrant has an outstanding registration statement and whether it has a valid Section 10(a) prospectus, among other things. If the Form 10-Q is late, a company is not deemed current and timely for Form S-3 or S-8 purposes. If a Form 10-K is late, a registrant cannot file a new Form S-3 or S-8 but could use previously filed, effective Forms S-3 or S-8 if it is comfortable that there is no fraud.

Mr. Borges said that companies should examine their past option practices to look for discrepancies in their pricing and granting approach. They should satisfy themselves that they do not have a historic problem. Many companies have been identified by academics, he said, and companies may want to make sure they are not the next to be discussed in an academic study. Mr. Lynn added that many academics rely on the filing of Forms 4 for their studies. Some have raised concerns about the level of compliance with Section 16 reporting, which is very important, he said. Mr. Borges noted that late filings on Form 4 may invite attention.

Ms. Cross said that, by this time, all companies should have figured out if they have an options backdating problem. Many companies took a cursory look, concluded they had no problem, and then the auditors looked more deeply, she added. Mr. Borges agreed that companies must do more than take a superficial examination of their option grant practices, including option exercise dating. Backdating can raise a whole host of tax issues, he said, whether or not it was intentional. It may affect the optionees as well as the company, since they may be subject to immediate taxation on the gains.

Mr. Borges said a few companies have conducted tender offers to solve the tax problem, but there is some concern as to whether the arrangements satisfy the prompt payment requirement under Rule 13e-4. The American Bar Association and others are attempting to obtain a no-action letter from the staff that offers blanket relief to companies that are conducting tender offers to correct discounted stock options subject to Internal Revenue Code Section 409A. Since the employees are the innocent victims of the option problem, Mr. Borges said most companies are paying the taxes. A number of law firms and accounting firms have also requested global relief from the Internal Revenue Service, according to Mr. Borges.

Ms. Cross said that some of the shareholder services firms are pushing companies to adopt fixed grant dates that can be moved if they coincide with material non-public information. That won't work, she said, because if the forms are not filed on the expected date, everyone will know that "something big" is going to happen.