(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.)

Senate Committee Holds Hearing on Executive Compensation

SEC Enforcement Director Linda Thomsen was among a panel of witnesses testifying at a recent Senate Finance Committee hearing on executive compensation, the backdating of stock options and the tax treatment of executive compensation. Ms. Thomsen advised that the staff has been sharing information with the Department of Justice and the Internal Revenue Service, whose representatives also testified. The backdating of stock option grants and option exercises have tax implications, she explained. The witnesses' written statements were made available by the Committee.

IRS Commissioner Mark Everson reported that the Sarbanes-Oxley Act and the post-Enron environment had improved corporate governance, including tax-related issues. The SEC and the IRS have improved their contacts, according to Mr. Everson. He cited the SEC's cooperation and willingness to share information about its investigations of options backdating. The SEC's expertise has assisted the IRS in identifying subjects for examinations more quickly than the IRS would be able to do on its own, he explained.

Mr. Everson said it is unlikely that the IRS would identify governance issues before they otherwise become known through the media, research analysts, the SEC or other organizations. He said it is unfortunate that the IRS is precluded by Internal Revenue Code Section 6103 from sharing information with the SEC or other government agencies. The lack of transparency and the inability to share information with other agencies is one of the challenges the IRS faces with respect to executive compensation, according to Mr. Everson.

Mr. Everson said the IRS is working with the SEC to determine whether there might be areas in which more information sharing would be helpful. The IRS and the SEC will work with the Committee on any proposals they develop, he said.

Paul McNulty, deputy attorney general at the Department of Justice, testified about the ongoing investigation of the backdating of stock options. This practice may raise significant accounting, disclosure and tax consequences, he said. He said the granting of backdated options on terms that are contrary to shareholder approved compensation plans is an embezzlement of corporate assets.

The Department of Justice moved quickly when the backdating practice became known, according to Mr. McNulty. A team was organized to determine whether a criminal investigation was warranted. Two criminal cases have since been filed alleging that the backdating of options constituted violations of the federal securities laws and other criminal statutes.

Mr. McNulty said the cases that are deemed appropriate for criminal resolution are being prosecuted on the theory that the defendant violated the federal securities statutes and other antifraud statutes by 1) falsifying corporate books and records to conceal the fact that the option grants were backdated, 2) causing the preparation of false and misleading financial statements and other documents, 3) lying to the board of directors, the auditors and the SEC, 4) misleading investors and the financial press and 5) filing false reports with the SEC. The Department of Justice has a range of statutory options, he said, and is not requesting any new legislation to deal with the problem.

Nell Minow, the editor of the Corporate Library, said reports of backdating and spring loading stock option grants was shocking because those practices fundamentally subvert the entire justification for options-based compensation. The Corporate Library has an extensive database on corporate governance at public companies, she reported, and it shows that the disparity between pay and performance is enormous and growing.

Ms. Minow called for the removal of impediments to a market response from shareholders. She said the disparity between executive pay and performance is so outrageous that it undermines the credibility of the U.S. system of capitalism. Ms. Minow supports a requirement that board candidates must receive a majority of votes cast to be elected and, as in the United Kingdom, the ability of shareholders to vote on CEO compensation.

Lucian Bebchuk of the Harvard Law School testified that the weakness of existing shareholder rights should be part of any examination of executive compensation. Neither disclosure nor tax penalties can address the problem, in Professor Bebchuk's view. Disclosure is insufficient if shareholders have no power to act, he explained. He called for the removal of all legal impediments to shareholders' ability to adopt by-laws or charter amendments. Shareholders also should have the right to vote on the compensation committee report, he said.