The regulator said the practice of awarding stock shortly before announcing market-moving news deserves “special scrutiny” from the authorities.
Companies have relied on this practice for years, often to expedite profits to executives, believing that the announcement drives up the stock price. Investors have long considered it deceptive, and the SEC monitors related activity for potential securities infringement. Spring-loaded options are priced on the day the companies grant them.
“It is important that companies’ accounting and disclosure reflect the economics and terms of these compensation arrangements,” SEC Chairman Gary Gensler said in a statement. “The same goes for the remit of the SEC to protect investors.”
Guidance follows programs associated with Eastman Kodaki Co.
Last year’s stock. Stock of Rochester, NY-based Kodak rose to its highest level in six years in July 2020 after a federal agency announced that the company received a $765 million loan to help make drugs to protect against the coronavirus. was prepared to do.
A day before the official announcement of the loan, Kodak handed over options to executives. Those options, some of which were vested on the day they were granted, increased in value with the stock. Executive Chairman Jim Continenza stood to receive more than $95 million from the stock increase if he had exercised the options at the then prices. He did not exercise his options at that time. The company has not been charged with securities infringement. Eastman Kodak did not immediately respond to a request for comment.
The SEC said its employees have seen several instances of companies loading non-regular stock awards, a practice that merits “special scrutiny” from executives of public companies handling issues of compensation and financial-reporting governance. holds. Under the guidance, the SEC said companies should consider whether it is appropriate to adjust for the current share price or expected volatility for the share price when estimating the cost of a share-based payment transaction.
The regulator has provided examples of scenarios in which soon-to-be public companies and businesses accounting for certain financial instruments may measure the cost of these rewards. For example, public companies cannot retrospectively apply their method of estimating costs for rewards awarded while being private. That’s because it would require companies to estimate a prior period, which could differ widely from estimates made earlier, the SEC said.
The SEC differs from accounting guidance rules because it is the interpretations and practices that the corporate-finance department and the chief accountant’s office follow in overseeing disclosure requirements.
In recent years some top executives have manipulated stock prices to increase their options compensation, including through spring loading and other rewards practices, from 2007 to 2012, according to academic research by three finance professors published last year. 1,500 publicly traded companies were tracked.
Spring loading continues to be widespread because companies still have an incentive to release bad news before an option grant and good news after, according to the study with Robert Dines, professor of law and business at Stanford University and Grant McQueen of Brigham Young. said one of the researchers. University and Rob Schonlau of Colorado State University.
Referring to Spring Loading, he said, “the stock price around their grant is artificially low for a relatively long period of time.”
SEC guidance around spring loading doesn’t go far enough, said Paul BW Miller, emeritus professor of accounting at the University of Colorado at Colorado Springs. He noted that like other US accounting standards on share-based compensation, it does not state the true value transferred to employees of companies.
“Any answer that fails to present the full value of the options as compensation expense is inappropriate,” Mr Miller said.
——Kristin Broughton contributed to this article.
[email protected] . on Mark Maurer