IIB 

108TH CONGRESS 

2D SESSION H. R. 3574

IN THE SENATE OF THE UNITED STATES 

JULY 21, 2004

Received 

SEPTEMBER 7, 2004

Read twice and referred to the Committee on Banking, Housing, and Urban 

Affairs 

AN ACT

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,
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1 SECTION 1. SHORT TITLE. 

2 This Act may be cited as the ‘‘Stock Option Account3 ing Reform Act’’. 

4 SEC. 2. MANDATORY EXPENSING OF STOCK OPTIONS HELD 

5 BY HIGHLY COMPENSATED OFFICERS. 

6 Section 13 of the Securities Exchange Act of 1934 

7 (15 U.S.C. 78m) is amended by adding at the end the 

8 following: 

9 ‘‘(m) MANDATORY EXPENSING OF STOCK OP10 TIONS.—

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

12 this subsection, the term ‘named executive officer’ 

13 means—

14 ‘‘(A) all individuals serving as the chief ex15 ecutive officer of an issuer, or acting in a simi16 lar capacity, during the most recent fiscal year, 

17 regardless of compensation level; and 

18 ‘‘(B) the 4 most highly compensated execu19 tive officers, other than an individual identified 

20 under subparagraph (A), that were serving as 

21 executive officers of an issuer at the end of the 

22 most recent fiscal year. 

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

24 every issuer of a security registered pursuant to sec25 tion 12 shall show as an expense in the annual re26 port of such issuer filed under subsection (a)(2), the 
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1 fair value of all options to purchase the stock of the 

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

3 executive officer of the issuer. 

4 ‘‘(3) FAIR VALUE.—

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

6 option to purchase the stock of the issuer that 

7 is subject to paragraph (2) shall—

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

9 be agreed upon by a willing buyer and sell10 er of such option, who are not under any 

11 compulsion to buy or sell such option; and 

12 ‘‘(ii) take into account all of the char13 acteristics and restrictions imposed upon 

14 the option. 

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

16 an option pricing model, such as the Black17 Scholes method or a binomial model, is used to 

18 determine the fair value of an option, the as19 sumed volatility of the underlying stock shall be 

20 zero. 

21 ‘‘(4) EXEMPTIONS.—

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

23 subsection shall not apply to an issuer, if—

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

25 less than $25,000,000; 
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1 ‘‘(ii) the issuer is organized under the 

2 laws of the United States, Canada, or Mex3 ico; 

4 ‘‘(iii) the issuer is not an investment 

5 company (as such term is defined under 

6 section 3 of the Investment Company Act 

7 of 1940 (15 U.S.C. 80a–3)); 

8 ‘‘(iv) the aggregate value of the out9 standing voting and non-voting common 

10 equity securities of the issuer held by non11 affiliated parties is less than $25,000,000; 

12 and 

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

14 meets the criteria in clauses (i) through 

15 (iv) and is a majority-owned subsidiary, 

16 the parent of the issuer meets the require17 ments of this paragraph. 

18 ‘‘(B) DELAYED EFFECTIVENESS.—The re19 quirements of this subsection shall not apply to 

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

21 beginning on the date of the completion of the 

22 initial public offering of the securities of the 

23 issuer, and shall only apply to an option to pur24 chase the stock of an issuer granted after such 

25 date.
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1 ‘‘(5) VOLUNTARY EXPENSING.—Notwith2 standing the requirements of this subsection, issuers 

3 may elect to expense the fair value of all officer and 

4 employee stock options in the annual report of such 

5 issuer under subsection (a)(2), in accordance with 

6 the expensing alternative of Statement of Financial 

7 Accounting Standards Number 123, and any such 

8 issuer making such election in the annual report for 

9 a fiscal year shall not be subject to paragraphs (2) 

10 through (4) of this subsection for such fiscal year.’’.

11 SEC. 3. PROHIBITION ON EXPENSING AND ECONOMIC IM12 PACT STUDY. 

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

14 Act of 1933 (15 U.S.C. 77s(b)) is amended by adding at 

15 the end the following: 

16 ‘‘(3) PROHIBITION ON EXPENSING STAND17 ARDS.—

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

19 not recognize as ‘generally accepted’ any ac20 counting principle relating to the expensing of 

21 stock options unless—

22 ‘‘(i) it complies with the requirements 

23 of subparagraph (B); and 

24 ‘‘(ii) the economic impact study re25 quired under section 3(b) of the Stock Op-
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1 tion Accounting Reform Act has been com2 pleted. 

3 ‘‘(B) REQUIREMENTS.—A standard re4 ferred to in subparagraph (A) shall require 

5 that—

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

7 of an issuer that is subject to the require8 ments of section 13(m) of the Securities 

9 Exchange Act of 1934 is exercised—

10 ‘‘(I) any expense that had been 

11 reported under that section 13(m) 

12 with respect to such option shall be 

13 recomputed as of the date of exercise 

14 and shall be equal to the difference 

15 between the price of the underlying 

16 stock and the exercise price; and 

17 ‘‘(II) to the extent the recom18 puted amount differs from the 

19 amount previously reported under sec20 tion 13(m) with respect to such op21 tion, the difference shall be reported 

22 in the fiscal year in which the option 

23 is exercised as a reduction or increase, 

24 as the case may be, of the total ex25 pense required to be reported under 
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1 that section 13(m) during that fiscal 

2 year; 

3 ‘‘(ii) if an option to purchase the 

4 stock of an issuer that is subject to the re5 quirements of section 13(m) of the Securi6 ties Exchange Act of 1934 is forfeited or 

7 expires unexercised, any expense that had 

8 been reported under that section 13(m) 

9 with respect to such option shall be re10 ported in the fiscal year in which the op11 tion expires or is forfeited as a reduction 

12 of the total expense required to be reported 

13 under that section 13(m) during that fiscal 

14 year; and 

15 ‘‘(iii) to the extent that any reduction 

16 required under clause (i) or (ii) exceeds 

17 total option expenses for any fiscal year, 

18 such excess shall be reported as income 

19 with respect to options to purchase the 

20 stock of the issuer.

21 ‘‘(C) EXCEPTION FOR VOLUNTARY EX22 PENSING.—Nothing in this paragraph or in any 

23 other provision of the Stock Option Accounting 

24 Reform Act shall prevent the Commission from 

25 continuing to recognize the expensing alter-
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1 native of Statement of Financial Accounting 

2 Standards Number 123 as part of generally ac3 cepted accounting principles for issuers that 

4 elect to expense the fair value of all officer and 

5 employee stock options in the annual report of 

6 such issuer pursuant to section 13(m)(5) of the 

7 Securities Exchange Act of 1934.’’. 

8 (b) ECONOMIC IMPACT STUDY.—Not later than 1 

9 year after the date of enactment of this Act, the Secretary 

10 of Commerce and the Secretary of Labor shall conduct 

11 and complete a joint study on the economic impact of the 

12 mandatory expensing of all employee stock options, includ13 ing the impact upon—

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

15 expanding employee corporate ownership to workers 

16 at a wide range of income levels, with particular 

17 focus upon non-executive employees; 

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

19 and retention of skilled workers; 

20 (3) the role of such plans in stimulating re21 search and innovation; 

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

23 economic growth of the United States; and 
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1 (5) the role of such plans in strengthening the 

2 international competitiveness of businesses organized 

3 under the laws of the United States. 

4 SEC. 4. IMPROVED EMPLOYEE STOCK OPTION TRANS5 PARENCY AND REPORTING DISCLOSURES. 

6 (a) ENHANCED DISCLOSURES REQUIRED.—Not later 

7 than 180 days after the date of enactment of this Act, 

8 the Commission shall, by rule, require each issuer filing 

9 a periodic report under section 13(a) or 15(d) of the Secu10 rities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)) to 

11 include in such report more detailed information regarding 

12 stock option plans, stock purchase plans, and other ar13 rangements involving an employee acquisition of an equity 

14 interest in the company. Such information shall include—

15 (1) a discussion, written in ‘‘plain English’’, in 

16 accordance with the Plain English Handbook pub17 lished by the Office of Investor Education and As18 sistance of the Commission, of the dilutive effect of 

19 stock option plans, including tables or graphic illus20 trations of such dilutive effects; 

21 (2) expanded disclosure of the dilutive effect of 

22 employee stock options on the issuer’s earnings per 

23 share; 
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1 (3) prominent placement and increased com2 parability and uniformity of all stock option related 

3 information; 

4 (4) the number of outstanding stock options; 

5 (5) the weighted average exercise price of all 

6 outstanding stock options; and 

7 (6) the estimated number of stock options out8 standing that will vest in each year. 

9 (b) DEFINITIONS.—As used in this section: 

10 (1) COMMISSION.—The term ‘‘Commission’’ 

11 means the Securities and Exchange Commission. 

12 (2) ISSUER.—The term ‘‘issuer’’ has the mean13 ing provided in section 2(a)(7) of the Sarbanes14 Oxley Act of 2002 (15 U.S.C. 7201(a)(7)). 

15 (3) EQUITY INTEREST.—The term ‘‘equity in16 terest’’ includes common stock, preferred stock, 

17 stock appreciation rights, phantom stock, and any 

18 other security that replicates the investment charac19 teristics of such securities, and any right or option 

20 to acquire any such security. 

21 SEC. 5. PRESERVATION OF AUTHORITY. 

22 Nothing in this Act shall be construed to limit the 

23 authority over the setting of accounting principles by any 

24 accounting standard setting body whose principles are rec25 ognized by the Securities and Exchange Commission 
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1 under section 19(b)(1) of the Securities Act of 1933 (15 

2 U.S.C. 77s(b)(1)).

Passed the House of Representatives July 20, 2004. 

Attest: JEFF TRANDAHL, 

Clerk.