(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.)

Conference Board Recommends Expensing of Options, Pre-Trade Insider Reporting

The Conference Board's Blue-Ribbon Commission on Public Trust and Private Enterprise has proposed a wide-ranging series of reforms that would greatly strengthen board compensation committees, give shareholders power over equity-based compensation, and alert the market to impending insider transactions. In addition, the panel urged that fixed price stock options be expensed on corporate financial statements. The twelve-person commission includes among its members former SEC Chairman Arthur Levitt, former Federal Reserve Board Chairman Paul Volcker, John Biggs, chairman of the Teachers Insurance and Annuity Association College Retirement Equities Fund, or TIAA-CREF, and former Comptroller General Charles Bowsher.

Among other things, the panel calls for a strong independent compensation committee with the power to retain compensation experts. The panel encourages fully independent, accountable and vigorous compensation committees to take primary responsibility for all aspects of executive compensation, including employment, retention, and severance agreements. The compensation committee should retain outside consultants who report solely to the committee. In addition, the conference panel believes that the compensation committee should be unconstrained by industry averages and statistics or by the company's past compensation practices and levels, which, in certain companies, have been excessive. A pivotal role of the compensation committee, reaffirmed by the panel, is to retain management in a reasonable and cost-effective manner.

The board also said that stock options should be expensed on a uniform and broadly accepted basis so as to eliminate the accounting treatment that makes stock options so desirable to companies at the expense of more performance-oriented forms of compensation. The panel noted that the overwhelming number of stock options granted have been fixed price options which generally have an exercise price that is the same as the stock's fair market value on the date of grant and, therefore, result in no expense on the company's books. Other forms of equity compensation, such as restricted stock grants or performance stock options, are required to be expensed. The panel believes that expensing fixed price options will level the playing field. In addition, senior management and directors should be required to own a meaningful amount of company stock on a long-term basis and be subject to substantial minimum holding periods for equity received as compensation.

The panel also cautioned companies to avoid the use of special purpose entities to compensate or enrich senior executives. The compensation committee should approve any compensation arrangement for a senior executive officer involving any subsidiary, special purpose entity or other affiliate. Because of the significant potential for conflicts of interest, emphasized the blue-ribbon panel, these arrangements should be permitted only in very special circumstances and only when of benefit to investors. They should also be disclosed in filings with the SEC.

As a general principle, the panel believes that shareholders should have control over potential equity dilution resulting from compensation practices. Specifically, equity-based compensation should be made through plans approved by shareholders. Similarly, the panel recommended that existing equity compensation arrangements should not be materially modified, including the repricing of options, without shareholder approval.

Finally, the panel said that executive officers should be required to give advance public notice of their intention to sell their stock. This proposal expands on Sarbanes-Oxley Act provisions which move the reporting of insider transactions up to two-business days following the transaction, from as many as 40 days after the date of the trade. In making its proposal, the panel reasoned that requiring senior executives to provide advance notice of their intention to sell stock will let the market help correct problems of unjust enrichment and also help address any public impression in the future that managements who cash in very large amounts of stock, particularly of failing companies or companies whose stock price falls substantially thereafter, may have known or suspected that the company's results and stock price would be lower than was generally recognized.