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

Senate Bills on Options Could Receive Consideration

Senate bills requiring shareholder approval of stock option plans and making options more broad-based may be considered when Congress returns from recess in September. The Rank and File Stock Option Act, S.2877, introduced by Sen. Joseph Lieberman, would significantly alter the way that options are allocated, sold and approved, through three key reforms involving distribution, shareholder approval, and disposition by senior executives. In introducing his reform measure, Sen. Lieberman, who is chairman of the Governmental Affairs Committee, reaffirmed his opposition to requiring companies to expense stock options at the time of grant, saying that because there is no known way to reliably estimate the value of a stock option years before it is exercised, any attempt to do so would inject greater uncertainty, not less, into earnings statements. Separately, Sen. Ron Wyden , introduced the Prevention of Stock Option Abuse Act, S.2822, aimed at tightening controls on corporate stock options provided to the officers and directors of public companies. Sen. Wyden, who sits on the Commerce Committee, said his goal in proposing the bill is to eliminate opportunities to manipulate stock options for personal short-term gain at the expense of the long-term interests of companies and shareholders.

The Lieberman bill would direct the SEC to finalize rules within one year requiring majority shareholder approval of every stock option plan or stock purchase plan, a reform designed to give shareholders a greater say in the design of option plans and ensure greater accountability. The bill would also require the SEC to conduct an analysis and make regulatory and legislative recommendations on the need for new stock holding period requirements for senior executives in order to reduce incentives for earnings manipulations. Similarly, senior executives would not be able to sell their shares while still employed by the company. Finally, the bill limits the ordinary and necessary business expense deduction attributed to the spread on the exercise of stock options to the extent stock option grants for the taxpayer are not broad-based.

The measure would deem stock option grants to be broad-based when, immediately after the grant of the options, employees who are not highly compensated hold share options that permit the acquisition of at least 50 percent of all shares that may be acquired pursuant to all stock options outstanding, whether or not exercisable, as of such time. The bill does not require that stock option grants be made to literally every employee, but as a practical matter such grants to every employee may be necessary to meet the test.

The Wyden measure would direct the SEC to implement new requirements for all public companies, including shareholder approval of stock option compensation plans and a vesting period of at least five years for any grant of stock options to officers or directors. In addition, the new SEC rules would provide multi-tiered holding periods for stock acquired by an officer or director. Twenty-five percent of acquired stock shares could not be sold until at least six months after they were acquired, 50 percent could not be sold until at least three years after they were acquired and 25 percent could not be sold until 6 months after the officer or director leaves the company.

The bill also mandates better reporting of a company's stock option practices. Every public company would be required to include, in each quarterly SEC filing, a special section on employee stock options. Currently, stock option information is provided only annually, and in the footnotes of corporate financial statements. The new section would include information necessary to make sure investors can fully understand the potential impact of the company's practices on employee incentives and shareholder value.