I 

108TH CONGRESS 

1ST SESSION H. R. 3574

To require the mandatory expensing of stock options granted to executive 

officers, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

NOVEMBER 21, 2003

Mr. BAKER (for himself, Ms. ESHOO, Mr. DREIER, Mr. KENNEDY of Minnesota, Mr. HONDA, Mrs. TAUSCHER, Ms. LOFGREN, and Mr. CANTOR) 

introduced the following bill; which was referred to the Committee on Financial Services 

A BILL

To require the mandatory expensing of stock options granted 

to executive officers, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Stock Option Account5 ing Reform Act’’. 
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1 SEC. 2. MANDATORY EXPENSING OF STOCK OPTIONS HELD 

2 BY HIGHLY COMPENSATED OFFICERS. 

3 Section 13 of the Securities Exchange Act of 1934 

4 (15 U.S.C. 78m) is amended by adding at the end the 

5 following: 

6 ‘‘(m) MANDATORY EXPENSING OF STOCK OP7 TIONS.—

8 ‘‘(1) NAMED EXECUTIVE OFFICER.—As used in 

9 this subsection, the term ‘named executive officer’ 

10 means—

11 ‘‘(A) all individuals serving as the chief ex12 ecutive officer of an issuer, or acting in a simi13 lar capacity, during the most recent fiscal year, 

14 regardless of compensation level; and 

15 ‘‘(B) the 4 most highly compensated execu16 tive officers, other than an individual identified 

17 under subparagraph (A), that were serving as 

18 executive officers of an issuer at the end of the 

19 most recent fiscal year. 

20 ‘‘(2) IN GENERAL.—Subject to paragraph (4), 

21 every issuer of a security registered pursuant to sec22 tion 12 shall show as an expense in the annual re23 port of such issuer filed under subsection (a)(2), the 

24 fair value of all options to purchase the stock of the 

25 issuer granted after December 31, 2004, to a named 

26 executive officer of the issuer. 
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1 ‘‘(3) FAIR VALUE.—

2 ‘‘(A) IN GENERAL.—The fair value of an 

3 option to purchase the stock of the issuer that 

4 is subject to paragraph (2) shall be—

5 ‘‘(i) equal to the value that would be 

6 agreed upon by a willing buyer and seller 

7 of such option, who are not under any 

8 compulsion to buy or sell such option; and 

9 ‘‘(ii) shall take into account all of the 

10 characteristics and restrictions imposed 

11 upon the option. 

12 ‘‘(B) PRICING MODEL.—To the extent that 

13 an option pricing model, such as the Black14 Scholes method or a binomial model, is used to 

15 determine the fair value of an option, the as16 sumed volatility of the underlying stock shall be 

17 zero. 

18 ‘‘(4) EXEMPTIONS.—

19 ‘‘(A) SMALL BUSINESS ISSUERS.—This 

20 subsection shall not apply to an issuer, if—

21 ‘‘(i) the issuer has annual revenues of 

22 less than $25,000,000; 

23 ‘‘(ii) the issuer is organized under the 

24 laws of the United States or Canada; 
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1 ‘‘(iii) the issuer is not an investment 

2 company (as such term is defined under 

3 section 3 of the Investment Company Act 

4 of 1940 (15 U.S.C. 80a–3)); 

5 ‘‘(iv) the aggregate value of the out6 standing voting and non-voting common 

7 equity securities of the issuer held by non8 affiliated parties is less than $25,000,000; 

9 and 

10 ‘‘(v) in the case of an issuer that 

11 meets the criteria in clauses (i) through 

12 (iv) and is a majority owned subsidiary, 

13 the parent of the issuer meets the require14 ments of this paragraph. 

15 ‘‘(B) DELAYED EFFECTIVENESS.—The re16 quirements of this subsection shall not apply to 

17 an issuer before the end of the 3-year period 

18 beginning on the date of the completion of the 

19 initial public offering of the securities of the 

20 issuer, and shall only apply to an option to pur21 chase the stock of an issuer granted after such 

22 date.’’. 
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1 SEC. 3. PROHIBITION ON EXPENSING AND ECONOMIC IM2 PACT STUDY. 

3 (a) PROHIBITION.—Section 19(b) of the Securities 

4 Act of 1933 is amended by adding at the end the fol5 lowing: 

6 ‘‘(3) PROHIBITION ON EXPENSING STAND7 ARDS.—

8 ‘‘(A) IN GENERAL.—The Commission shall 

9 not recognize as ‘‘generally accepted’’ any ac10 counting principle established by a standard 

11 setting body relating to the expensing of stock 

12 options unless—

13 ‘‘(i) it complies with the requirements 

14 of subparagraph (B); and 

15 ‘‘(ii) the economic impact study re16 quired under section 3(b) of the Stock Op17 tion Accounting Reform Act of 2003 has 

18 been completed. 

19 ‘‘(B) REQUIREMENTS.—A standard re20 ferred to in subparagraph (A) shall require 

21 that—

22 ‘‘(i) if an option to purchase the stock 

23 of an issuer that is subject to the require24 ments of section 13(m) of the Securities 

25 Exchange Act of 1934 is exercised, for26 feited, or expires unexercised, any expense 
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1 that had been reported under that section 

2 13(m) with respect to such option shall be 

3 reported in the fiscal year in which the op4 tion expires or is forfeited as a reduction 

5 of the total expense required to be reported 

6 under that section 13(m) during that fiscal 

7 year; and 

8 ‘‘(ii) to the extent that any reduction 

9 required under clause (i) exceeds total op10 tion expenses for any fiscal year, such ex11 cess shall be reported as income with re12 spect to options to purchase the stock of 

13 the issuer.’’. 

14 (b) ECONOMIC IMPACT STUDY.—The Secretary of 

15 Commerce and the Secretary of Labor shall conduct and 

16 complete a joint study on the economic impact of the man17 datory expensing of all employee stock options, including 

18 the impact upon—

19 (1) the use of broad-based stock option plans in 

20 expanding employee corporate ownership to workers 

21 at a wide range of income levels, with particular 

22 focus upon non-executive employees; 

23 (2) the role of such plans in the recruitment 

24 and retention of skilled workers; 
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1 (3) the role of such plans in stimulating re2 search and innovation; 

3 (4) the effect of such plans in stimulating the 

4 economic growth of the United States; and 

5 (5) the role of such plans in strengthening the 

6 international competitiveness of businesses organized 

7 under the laws of the United States.

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