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SEC Reversal Irks a Committee Chief
Rep. Frank Shows Concern For Relaxed Disclosure Rule, Vows to Get Congress Involved
By Siobhan Hughes
Thursday, December 28, 2006


WASHINGTON -- The Securities and Exchange Commission's decision to reverse course and relax disclosure rules on executive pay isn't sitting well with the Democrat who will head the House Financial Services Committee in the new Congress.

Rep. Barney Frank (D., Mass.) said he is "very disappointed with both the substance and the procedure" involved in the rule changes, which the SEC announced late Friday, just before the long Christmas weekend.

The rules, which apply to publicly held companies, would reduce the amount of top executives' compensation that many companies would be required to disclose next year.  Companies would be allowed to spread the value of options and restricted-stock awards over a number of years, disclosing them as they vested, rather than in the year they were granted.  Businesses had lobbied for the change, arguing that the SEC's plan to tighten disclosure requirements for options would have overstated executive pay.

Mr. Frank's committee has oversight of the SEC, and he could hold hearings on the executive-pay rules.  He has already said he would push for legislation to allow shareholders to vote on executive compensation.

"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," Mr. Frank said.

The SEC said it acted to reconcile the value of stock-options awards as disclosed in corporate financial statements with 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 disclose the value of stock-options awards on the date of the award, sometimes years before the recipient was entitled to exercise them.

SEC Chairman Christopher Cox said in a statement yesterday that "the object is to report accurate numbers.  Artificially inflating executive pay, or reporting 'phantom' pay, is just as misleading as routinely underreporting it, which was the case before we adopted the new executive-compensation rules in July."

The U.S. Chamber of Commerce had complained that by including the value of options, stock or other awards that wouldn't vest -- or pay out -- for years, the earlier rules would have made executive pay packages look misleadingly large.

Executive pay increasingly is becoming a hot-button political issue as the pay gap widens between corporate chieftains and rank-and-file employees.  Prompted by 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 details of executive-pay packages will be released mostly in early 2007, when companies file annual proxy statements.

In its latest changes, the SEC took the unusual approach of making the new rules for stock options effective almost immediately.  That decision essentially renders moot the agency's plans to provide a 30-day public comment period on the matter.

"The problem of executive pay that is both greatly excessive and deliberately obscured is a grave one," Mr. 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."

Write to Siobhan Hughes at siobhan.hughes@dowjones.com

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