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Union Calendar No. 367 

108TH CONGRESS 

2D SESSION H. R. 3574 

[Report No. 108–609, Part I] 

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 

JULY 15, 2004 

Reported with an amendment and referred to the Committee on Energy and 

Commerce for a period ending not later than July 16, 2004, for consideration of such provisions of the bill and amendment as fall within the jurisdiction of that committee pursuant to clause 1(f), rule X 

[Strike out all after the enacting clause and insert the part printed in italic] 

JULY 16, 2004 

Additional sponsors: Mr. BURR, Mr. HAYWORTH, Mr. JOHN, Mr. BRADY of 

Texas, Mr. SHADEGG, Ms. HOOLEY of Oregon, Mr. BLUMENAUER, Mr. 

INSLEE, Mr. MCGOVERN, Mr. HOUGHTON, Mr. DOOLITTLE, Mr. DOOLEY

of California, Mr. CROWLEY, Mr. CARTER, Mr. SOUDER, Mr. MCINTYRE, 

Mr. CAPUANO, Mr. FLAKE, Mr. SMITH of Texas, Mr. MOORE, Mr. DAVIS

of Tennessee, Mr. BOUCHER, Mrs. BIGGERT, Mr. SESSIONS, Mr. 

HINOJOSA, Mr. DAVIS of Alabama, Mr. GONZALEZ, Mr. TOM DAVIS of 

Virginia, Mr. HEFLEY, Mr. PUTNAM, Mr. THOMPSON of California, Mr. 

ROSS, Mr. GOODLATTE, Mr. PEARCE, Mr. ENGLISH, Ms. HARMAN, Mr. 

BACHUS, Mr. HERGER, Mr. GRIJALVA, Ms. HARRIS, Mr. BLUNT, Mr. 

MENENDEZ, Ms. PELOSI, Mr. ROYCE, Mr. CARSON of Oklahoma, Mr. 

MEEKS of New York, Mr. SCOTT of Georgia, Mr. OTTER, Mr. ISAKSON, 

Mr. REYNOLDS, Mr. WU, Mr. CRANE, Mr. ISRAEL, Mr. RYUN of Kansas, 

Mr. ISSA, Ms. GINNY BROWN-WAITE of Florida, Ms. MCCARTHY of Missouri, Mr. MEEHAN, Mr. FARR, Mr. KIND, Mr. CUNNINGHAM, Mr. 
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MATHESON, Ms. LORETTA SANCHEZ of California, Mr. GARY G. MILLER

of California, Mr. MORAN of Virginia, Mr. MCINNIS, Mr. FILNER, Mr. 

THORNBERRY, Mr. CARDOZA, Mr. SMITH of Washington, Mr. WALDEN

of Oregon, Mr. TANCREDO, Mr. MILLER of North Carolina, Mr. GEPHARDT, Mr. SANDLIN, Mr. VITTER, Mr. BONILLA, Mr. FOSSELLA, Mr. 

WELLER, Mr. FEENEY, Mr. TURNER of Texas, Mr. OSE, Ms. HART, Mr. 

BOEHNER, Mr. GARRETT of New Jersey, Mr. SENSENBRENNER, Mr. 

COOPER, Mrs. MUSGRAVE, Mr. BELL, Mr. BOEHLERT, Mr. DICKS, Mr. 

HENSARLING, Mr. CANNON, Mr. COX, Mrs. WILSON of New Mexico, Mr. 

MANZULLO, Ms. CARSON of Indiana, Mr. LANTOS, Mr. JONES of North 

Carolina, Mr. GREEN of Texas, Mr. CASE, Mr. SCHIFF, Mr. POMBO, Mr. 

ROGERS of Michigan, Mr. NUNES, Mr. NETHERCUTT, Mr. PRICE of 

North Carolina, Ms. MCCOLLUM, Mr. HALL, Mr. FRANKS of Arizona, 

Mr. CHANDLER, Mr. CRAMER, Mr. FOLEY, Mr. BILIRAKIS, Mr. WILSON

of South Carolina, Mr. EHLERS, Ms. DUNN, Ms. JACKSON-LEE of Texas, 

Ms. GRANGER, Mrs. BLACKBURN, Mr. SULLIVAN, Mr. SIMPSON, Mr. 

KENNEDY of Rhode Island, and Mr. HOEKSTRA

JULY 16, 2004 

The Committee on Energy and Commerce discharged; committed to the Committee of the Whole House on the State of the Union and ordered to be 

printed 

[For text of introduced bill, see copy of bill as introduced on November 21, 2003] 

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 Accounting 

5 Reform Act’’. 

6 SEC. 2. MANDATORY EXPENSING OF STOCK OPTIONS HELD 

7 BY HIGHLY COMPENSATED OFFICERS. 

8 Section 13 of the Securities Exchange Act of 1934 (15 

9 U.S.C. 78m) is amended by adding at the end the following: 
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1 ‘‘(m) MANDATORY EXPENSING OF STOCK OPTIONS.— 

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

3 this subsection, the term ‘named executive officer’ 

4 means— 

5 ‘‘(A) all individuals serving as the chief ex6 ecutive officer of an issuer, or acting in a simi7 lar capacity, during the most recent fiscal year, 

8 regardless of compensation level; and 

9 ‘‘(B) the 4 most highly compensated execu10 tive officers, other than an individual identified 

11 under subparagraph (A), that were serving as 

12 executive officers of an issuer at the end of the 

13 most recent fiscal year. 

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

15 every issuer of a security registered pursuant to sec16 tion 12 shall show as an expense in the annual report 

17 of such issuer filed under subsection (a)(2), the fair 

18 value of all options to purchase the stock of the issuer 

19 granted after December 31, 2004, to a named execu20 tive officer of the issuer. 

21 ‘‘(3) FAIR VALUE.— 

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

23 option to purchase the stock of the issuer that is 

24 subject to paragraph (2) shall— 
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1 ‘‘(i) be equal to the value that would be 

2 agreed upon by a willing buyer and seller 

3 of such option, who are not under any com4 pulsion to buy or sell such option; and 

5 ‘‘(ii) take into account all of the char6 acteristics and restrictions imposed upon 

7 the option. 

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

9 an option pricing model, such as the Black10 Scholes method or a binomial model, is used to 

11 determine the fair value of an option, the as12 sumed volatility of the underlying stock shall be 

13 zero. 

14 ‘‘(4) EXEMPTIONS.— 

15 ‘‘(A) SMALL BUSINESS ISSUERS.—This sub16 section shall not apply to an issuer, if— 

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

18 less than $25,000,000; 

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

20 laws of the United States, Canada, or Mex21 ico; 

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

23 company (as such term is defined under sec24 tion 3 of the Investment Company Act of 

25 1940 (15 U.S.C. 80a–3)); 
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1 ‘‘(iv) the aggregate value of the out2 standing voting and non-voting common eq3 uity securities of the issuer held by non-af4 filiated parties is less than $25,000,000; 

5 and 

6 ‘‘(v) in the case of an issuer that meets 

7 the criteria in clauses (i) through (iv) and 

8 is a majority-owned subsidiary, the parent 

9 of the issuer meets the requirements of this 

10 paragraph. 

11 ‘‘(B) DELAYED EFFECTIVENESS.—The re12 quirements of this subsection shall not apply to 

13 an issuer before the end of the 3-year period be14 ginning on the date of the completion of the ini15 tial public offering of the securities of the issuer, 

16 and shall only apply to an option to purchase 

17 the stock of an issuer granted after such date.’’. 

18 SEC. 3. PROHIBITION ON EXPENSING AND ECONOMIC IM19 PACT STUDY. 

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

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

22 end the following: 

23 ‘‘(3) PROHIBITION ON EXPENSING STANDARDS.— 

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

25 not recognize as ‘generally accepted’ any ac-
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1 counting principle relating to the expensing of 

2 stock options unless— 

3 ‘‘(i) it complies with the requirements 

4 of subparagraph (B); and 

5 ‘‘(ii) the economic impact study re6 quired under section 3(b) of the Stock Op7 tion Accounting Reform Act has been com8 pleted. 

9 ‘‘(B) REQUIREMENTS.—A standard referred 

10 to in subparagraph (A) shall require that— 

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

12 of an issuer that is subject to the require13 ments of section 13(m) of the Securities Ex14 change Act of 1934 is exercised— 

15 ‘‘(I) any expense that had been re16 ported under that section 13(m) with 

17 respect to such option shall be recom18 puted as of the date of exercise and 

19 shall be equal to the difference between 

20 the price of the underlying stock and 

21 the exercise price; and 

22 ‘‘(II) to the extent the recomputed 

23 amount differs from the amount pre24 viously reported under section 13(m) 

25 with respect to such option, the dif-
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1 ference shall be reported in the fiscal 

2 year in which the option is exercised 

3 as a reduction or increase, as the case 

4 may be, of the total expense required to 

5 be reported under that section 13(m) 

6 during that fiscal year; 

7 ‘‘(ii) if an option to purchase the stock 

8 of an issuer that is subject to the require9 ments of section 13(m) of the Securities Ex10 change Act of 1934 is forfeited or expires 

11 unexercised, any expense that had been re12 ported under that section 13(m) with re13 spect to such option shall be reported in the 

14 fiscal year in which the option expires or is 

15 forfeited as a reduction of the total expense 

16 required to be reported under that section 

17 13(m) during that fiscal year; and 

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

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

20 total option expenses for any fiscal year, 

21 such excess shall be reported as income with 

22 respect to options to purchase the stock of 

23 the issuer.’’. 

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

25 after the date of enactment of this Act, the Secretary of 
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1 Commerce and the Secretary of Labor shall conduct and 

2 complete a joint study on the economic impact of the man3 datory expensing of all employee stock options, including 

4 the impact upon— 

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

6 expanding employee corporate ownership to workers 

7 at a wide range of income levels, with particular 

8 focus upon non-executive employees; 

9 (2) the role of such plans in the recruitment and 

10 retention of skilled workers; 

11 (3) the role of such plans in stimulating research 

12 and innovation; 

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

14 economic growth of the United States; and 

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

16 international competitiveness of businesses organized 

17 under the laws of the United States. 

18 SEC. 4. IMPROVED EMPLOYEE STOCK OPTION TRANS19 PARENCY AND REPORTING DISCLOSURES. 

20 (a) ENHANCED DISCLOSURES REQUIRED.—Not later 

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

22 Commission shall, by rule, require each issuer filing a peri23 odic report under section 13(a) or 15(d) of the Securities 

24 Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)) to include 

25 in such report more detailed information regarding stock 
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1 option plans, stock purchase plans, and other arrangements 

2 involving an employee acquisition of an equity interest in 

3 the company. Such information shall include— 

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

5 accordance with the Plain English Handbook pub6 lished by the Office of Investor Education and Assist7 ance of the Commission, of the dilutive effect of stock 

8 option plans, including tables or graphic illustrations 

9 of such dilutive effects; 

10 (2) expanded disclosure of the dilutive effect of 

11 employee stock options on the issuer’s earnings per 

12 share; 

13 (3) prominent placement and increased com14 parability and uniformity of all stock option related 

15 information; 

16 (4) the number of outstanding stock options; 

17 (5) the weighted average exercise price of all out18 standing stock options; and 

19 (6) the estimated number of stock options out20 standing that will vest in each year. 

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

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

23 means the Securities and Exchange Commission. 
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1 (2) ISSUER.—The term ‘‘issuer’’ has the meaning 

2 provided in section 2(a)(7) of the Sarbanes-Oxley Act 

3 of 2002 (15 U.S.C. 7201(a)(7)). 

4 (3) EQUITY INTEREST.—The term ‘‘equity inter5 est’’ includes common stock, preferred stock, stock ap6 preciation rights, phantom stock, and any other secu7 rity that replicates the investment characteristics of 

8 such securities, and any right or option to acquire 

9 any such security. 

10 SEC. 5. PRESERVATION OF AUTHORITY. 

11 Nothing in this Act shall be construed to limit the au12 thority over the setting of accounting principles by any ac13 counting standard setting body whose principles are recog14 nized by the Securities and Exchange Commission under 

15 section 19(b)(1) of the Securities Act of 1933 (15 U.S.C. 

16 77s(b)(1)). 

Union Calendar No. 367 

108TH CONGRESS 

2D SESSION H. R. 3574 

[Report No. 108–609, Part I] 

A BILL 

To require the mandatory expensing of stock oppurposes. tions granted to executive officers, and for other 

JULY 16, 2004 

The Committee on Energy and Commerce discharged; 

the State of the Union and ordered to be printed committed to the Committee of the Whole House on 

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