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Focus On Backdating Of Stock Option Grants Intensifies

Focus On Backdating Of Stock Option Grants Intensifies

by Rick Turoczy on August 11, 2006

The focus has thus far been on stock option grants pre-dating August 29, 2002, when the SEC first required under the Sarbanes-Oxley Act that stock option grants be disclosed within two days of the grant. This rule has been thought to have made it much more difficult to manipulate the timing of stock option grants, but work by a pair of academics from the University of Michigan published earlier this year found that nearly one-quarter of stock option grants are reported late and that Sarbanes-Oxley may not have completely stopped manipulation of the timing of stock option grants.5

On July 26, 2006 the SEC voted to adopt changes to the rules regarding disclosure of executive and director compensation. These new rules will change the landscape for company disclosures about their stock option programs. The SEC has not yet released the actual text of the new rules, but it has indicated that companies will be required to disclose details about their stock options grants in a table and will likewise have to include a narrative description with regard to the timing of grants of stock options.

The focus continues to be on stock option grants that pre-date August 29, 2002. However, public companies should also consider their later stock option grants, particularly if problems were uncovered with earlier grants or there have been instances of late reporting of stock options grants. Going forward, companies will need to address the new disclosure requirements mandated by the SEC.

Focus On Backdating Of Stock Option Grants Intensifies

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