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 Min-
nesota, Mr. HONDA, Mrs. TAUSCHER, Ms. LOFGREN, and Mr. CANTOR) 
introduced the following bill; which was referred to the Committee on Fi-
nancial Services 
A BILL 
To require the mandatory expensing of stock options granted 
to executive officers, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Stock Option Account-
ing Reform Act’’.
SEC. 2. MANDATORY EXPENSING OF STOCK OPTIONS HELD 
BY HIGHLY COMPENSATED OFFICERS. 
Section 13 of the Securities Exchange Act of 1934 
(15 U.S.C. 78m) is amended by adding at the end the 
following: 
‘‘(m) MANDATORY
EXPENSING
OF
STOCK
OP-
TIONS.—
‘‘(1) NAMED EXECUTIVE OFFICER.—As used in 
this subsection, the term ‘named executive officer’ 
means—
‘‘(A) all individuals serving as the chief ex-
ecutive officer of an issuer, or acting in a simi-
lar capacity, during the most recent fiscal year, 
regardless of compensation level; and 
‘‘(B) the 4 most highly compensated execu-
tive officers, other than an individual identified 
under subparagraph (A), that were serving as 
executive officers of an issuer at the end of the 
most recent fiscal year. 
‘‘(2) IN GENERAL.—Subject to paragraph (4), 
every issuer of a security registered pursuant to sec-
tion 12 shall show as an expense in the annual re-
port of such issuer filed under subsection (a)(2), the 
fair value of all options to purchase the stock of the 
issuer granted after December 31, 2004, to a named 
executive officer of the issuer.
‘‘(3) FAIR VALUE.—
‘‘(A) IN GENERAL.—The fair value of an 
option to purchase the stock of the issuer that 
is subject to paragraph (2) shall be—
‘‘(i) equal to the value that would be 
agreed upon by a willing buyer and seller 
of such option, who are not under any 
compulsion to buy or sell such option; and 
‘‘(ii) shall take into account all of the 
characteristics and restrictions imposed 
upon the option. 
‘‘(B) PRICING MODEL.—To the extent that 
an option pricing model, such as the Black-
Scholes method or a binomial model, is used to 
determine the fair value of an option, the as-
sumed volatility of the underlying stock shall be 
zero. 
‘‘(4) EXEMPTIONS.—
‘‘(A) SMALL
BUSINESS
ISSUERS.—This 
subsection shall not apply to an issuer, if—
‘‘(i) the issuer has annual revenues of 
less than $25,000,000; 
‘‘(ii) the issuer is organized under the 
laws of the United States or Canada;
‘‘(iii) the issuer is not an investment 
company (as such term is defined under 
section 3 of the Investment Company Act 
of 1940 (15 U.S.C. 80a–3)); 
‘‘(iv) the aggregate value of the out-
standing voting and non-voting common 
equity securities of the issuer held by non-
affiliated parties is less than $25,000,000; 
and 
‘‘(v) in the case of an issuer that 
meets the criteria in clauses (i) through 
(iv) and is a majority owned subsidiary, 
the parent of the issuer meets the require-
ments of this paragraph. 
‘‘(B) DELAYED EFFECTIVENESS.—The re-
quirements of this subsection shall not apply to 
an issuer before the end of the 3-year period 
beginning on the date of the completion of the 
initial public offering of the securities of the 
issuer, and shall only apply to an option to pur-
chase the stock of an issuer granted after such 
date.’’.