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Rep Frank Rebukes SEC Over Executive-Pay Changes December 27, 2006

Posted by notapundit in Congress, Politics, US News.

WASHINGTON (Dow Jones)–The U.S. Securities and Exchange Commission is coming under congressional criticism for a last-minute decision to reverse course last week and loosen executive-pay disclosure rules.

Rep. Barney Frank, D-Mass., the incoming chairman of the House Financial Services Committee, said in a statement Wednesday that he is “very disappointed with both the substance and the procedure used to reach the SEC’s Christmas Eve decision to loosen reporting requirements for the pay of the top executives of public corporations.”

The SEC late Friday announced new rules that would lower the amount of total compensation that companies will disclose paying to top executives next year. The rules would spread out the value of options and restricted stock awards over a number of years, rather than in the year in which the options were granted. Businesses had lobbied for the change, but the SEC originally hadn’t agreed.

“Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation that is now unconstrained by anything except the self restraint of top executives, a commodity that is apparently in insufficient supply,” said Frank.

An SEC spokesman wasn’t immediately able to comment.

Executive pay is becoming an increasingly hot-button political issue amid a widening gap in pay between rank-and-file employees and top executives. Amid investor concern, the SEC earlier this year approved rules that will provide more information about the pay and perquisites granted to top executives. The new pay details will be released mostly in early 2007, when companies file annual proxy statements.

SEC rules require companies to report the total compensation for the chief executive, chief financial officer, and the three other most highly paid employees, all in a single number representing total compensation. Originally, the total compensation would have reflected the value of stock options on the date of the grant. Now, the total compensation will reflect the value of only those stock options that have vested.

Companies will still have to disclose elsewhere in the proxy filing the number of stock options granted to top executives. Those figures simply won’t be fully reflected in total compensation.

“At least it’s disclosed somewhere,” said Ann Yerger, executive director of the Council of Institutional Investors. Still, she said, the changes the SEC announced last week will muddy what was supposed to be “a very clear snapshot of what the package was for the executive during the year.”

The SEC had justified its decision as an effort to align the value of stock-options awards disclosed in financial statements and the value of executive stock-option grants disclosed to investors.

Companies treat stock options as costs in their financial statements as the options become exercisable. The SEC rules had previously required companies to issue executive-compensation tables that included the value of stock options awards on the date of the award, before an executive could exercise the options. The result was a difference in the treatment of options in executive-pay tables and in financial statements.

“The new disclosure requirements will be easier for companies to prepare and for investors to understand,” SEC Chairman Christopher Cox said on Friday.

The U.S. Chamber of Commerce had complained that the earlier rules would create the appearance of giant pay packages even when options, stock, or other awards wouldn’t vest – or pay out – for a number of years.

On Friday, when it changed its rules, the SEC took the unusual approach of announcing that the new rules for stock options would take effect almost immediately. The result is to limit the opportunity for public comment, in effect rendering moot the SEC’s plans to have a 30-day comment period on an already approved rule.

“The problem of executive pay that is both greatly excessive and deliberately obscured is a grave one,” Frank said. “I had been encouraged when the SEC recognized this problem in its initial proposal, and while that continues to provide improvements in the relevant rules, this slippage is regrettable both substantively and for not having been open to more public discussion.”

By Siobhan Hughes, Dow Jones Newswires


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