Frank Introduces Stock Option Legislation

April 23, 2004 (PLANSPONSOR.com) - The top five executives of a public company would reimburse the firm for profits on options if the company's stock price declined in the year after the options were exercised, under a new proposal being weighed in the U.S. House of Representatives.

>Under the proposal introduced by Representative Barney Frank (D – Massachusetts), the U.S. Securities and Exchange Commission (SEC) would be directed to reclaim the stock option profits for the company from the executives should the price decline.   Frank says this is in an effort to discourage short-term decision-making by executives when exercising their stock options for personal gain, according to Washington-based legal publisher BNA.

“After spending considerable time studying the public policy questions involved in stock options, I believe the problem they present is the perverse incentive they give top executives in some cases to spike the stock price and cash in and walk away,” Frank said. “Therefore, I believe the appropriate government solution does not involve stock options in general, but only the perverse incentive they create.”

Frank also said his bill is an alternative to another stock option expensing proposal floating around the house:   H.R. 3574.   That bill, sponsored by Richard Baker (R – Louisiana), would block the recent proposal by the Financial Accounting Standards Board (FASB) requiring the expensing of stock based compensation to all employees.   Rather, the Baker bill would require stock option expensing for just a company’s top five executives.

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