Options-Disclosure Rule OKd

The Securities and Exchange Commission voted unanimously Wednesday to make companies tell investors how many shares may be paid to executives and other employees under stock-option plans.

The required disclosures will let stockholders gauge how much a company’s earnings per share may be affected if employees buy stock available under option programs, thereby boosting total shares outstanding. Firms also will have to describe any option plans adopted without shareholder approval.

The measure was proposed almost a year ago to address complaints that companies were keeping investors in the dark about lucrative option plans.

Companies in recent years have issued millions of options in employee pay packages, and shareholders often have faced a tough time figuring how many shares would exist if workers exercised all those options.

“It didn’t go as far as we would have liked, but we consider it a step in the right direction,” Teresa Webb, deputy director of the Council of Institutional Investors, said of the SEC plan. The council represents more than 120 pension funds.

The SEC approved the rule with a change sought by many companies, letting them combine related options plans for reporting purposes rather than breaking out numbers for possibly dozens of individual programs.

The new options-disclosure rule will apply to annual reports and proxy statements filed after the first half of 2002, SEC staff officials said. SEC Chairman Harvey Pitt encouraged companies to make voluntary disclosures before then.

A 22-page draft of the rule rolled out by the SEC in January was among the last items proposed under then-Chairman Arthur Levitt, who stepped down Feb. 9.

Levitt also had pressed for rule changes at the Nasdaq Stock Market and the New York Stock Exchange to require shareholder approval of most option plans. Those changes haven’t happened. Nasdaq has sought comment on a proposal that hasn’t been adopted and the NYSE has said it’s willing to change if Nasdaq goes along.

Pitt criticized the delay. “I find this unfortunate,” he said. “We will have to make it clear to the NASD [National Assn. of Securities Dealers] that although it was a request, it was expected to be implemented. They should move with alacrity.”

An NASD spokesman said the group “[looks] forward to working with the SEC.”

The new SEC disclosure rule requires companies to describe the number of securities to be issued upon the exercise of outstanding options, warrants and rights; the “weighted average exercise price” of the three; and the number of securities remaining available for future issuance under a firm’s compensation plans.

Disclosure must be separate for plans approved by shareholders and those not approved, the SEC said. A copy of compensation plans adopted without approval of shareholders must be filed with the SEC.

Companies also must disclose important features of their option plans, the SEC said. They can do so through a cross-reference to similar disclosures in audited financial statements, the agency said.

Companies’ use of stock options exploded with the technology-stock boom of the late 1990s.

The National Center for Employee Ownership, a nonprofit research group, estimates that nearly 12 million employees receive stock options, up from 1 million in 1992.

The Investor Responsibility Research Center found that 99% of almost 1,200 companies studied granted stock options to some segment of their work forces.

Pitt said the rule change involves information that many investors find hard to understand and urged the SEC staff to put out guidelines explaining the disclosure rule in plain English.