Mr. Jonathan G. Katz
U. S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

April 2, 2001

Re: File No. S7-04-01 (Release Nos. 33-7944, 34-43892)
Disclosure of Equity Compensation Plan Information

Dear Mr. Katz:

Arthur Andersen LLP is pleased to respond to the Securities and Exchange Commission's request for comments on Release Nos. 33-7944/34-43892, Disclosure of Equity Compensation Plan Information, (the "Proposal").


With the increased use of equity compensation instruments, we acknowledge the importance of adequate disclosure of a company's use of equity compensation plans. We are not in a position to evaluate the merits of the Proposal from the perspective of investors. However, we believe it is appropriate for us to comment on the ways in which the proposed disclosures appear to duplicate information currently provided in financial statements and elsewhere in SEC filings. Our view is that redundancies in reported information unnecessarily increase registrants' costs of providing information to investors while at the same time decrease investors' ability to identify and evaluate relevant information. For this reason, we support efforts such as the FASB-sponsored Business Reporting Research Project to eliminate existing redundancies and recommend ways in which future redundancies could be prevented.

The Proposal states that the proposed rules are in response to concerns regarding:

Disclosures of material information about equity compensation plans, including the dilutive effect of these plans, are already required in registrants' financial statements. Although there are some minor differences between the Proposal and existing disclosures, it does not appear to us that those differences are sufficient to warrant requiring the volume of information proposed. Further, it is our understanding that the issue of security holder approval of equity compensation plans is a matter of corporate governance that is being addressed currently in proposals by the New York Stock Exchange and Nasdaq. Accordingly, it would appear to us that the Commission's objectives are being met and that no incremental rulemaking is necessary at this time.

Our detail comments focus primarily on the issue of duplication. However, should the Commission decide to issue a final rule, we offer some specific observations about the Proposal's requirements.

Duplicative Disclosure Requirements

Proposed Items 201(d) of Regulations S-B and S-K would require that registrants disclose the following information in tabular format:

The Background section of the Proposal indicates that certain equity compensation disclosures are "sometimes available indirectly" through the financial statements. However, the Proposal notes that such disclosures are not "consistently available in any one location or format, may not include non-derivative securities awarded to employees and may not include stock options granted to non-employees." We believe that the accounting profession has appropriately addressed the issues of full disclosure of (a) equity compensation arrangements to employees and non-employees and (b) the potentially dilutive effects of such arrangements. Our view is based our analysis of the requirements of generally accepted accounting principles as well as our understanding of the basis for these disclosures, as explained by the Financial Accounting Standards Board (the "Board") in their deliberations on recent standards. It is our conclusion that the proposed disclosures are substantially equivalent to the information that is presented in registrants' financial statements. Further, to the extent that the disclosures are incremental, we question whether the value of the additional information is sufficient to merit its cost.

Related to the Commission's concern regarding full disclosure of equity compensation arrangements, Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, requires disclosure of information related to equity compensation arrangements provided to employees and non-employees. Specifically, Statement 123 requires disclosure of the following:

We acknowledge that the Proposal would require disclosure of information for each individual plan whereas Statement 123 does not mandate this level of disaggregation in all circumstances. Statement 123 approaches disaggregation on the basis of whether the additional information would be meaningful to investors. Specifically, paragraphs 47 and 48 indicate that separate or segmented disclosures are appropriate when such disclosures are important to an understanding of a registrant's use of stock-based compensation. In assessing the level of disclosure to require, the Board considered and obtained input regarding the appropriate extent of separate disclosures. In its Basis for Conclusions, the Board states (emphasis added):

"The Exposure Draft proposed requiring entities with both fixed and indexed or performance-based plans to provide separate disclosures for the different types of plans. Some respondents to the Exposure Draft requested additional guidance on the situations in which separate disclosures would be necessary and what information should be provided separately for fixed plans and other plans. The Board decided that separate disclosures should be provided to the extent that differences in the characteristics of the awards make those disclosures important to an understanding of the entity's use of stock-based compensation. This Statement gives examples of such circumstances rather than specifying detailed requirements. The Board recognizes that entities differ in the extent to which they use various forms of stock-based employee compensation. An entity should exercise its judgment in providing detailed information that is useful in its own situation." (paragraph 254 of Statement 123)

The Proposal mandates disaggregation for each plan but permits aggregation for "individual arrangements." It is not clear to us why aggregation for individual arrangements is sufficient for investors but aggregation as permitted by Statement 123 is not.

Regarding the Commission's concern related to the potential dilutive effect of equity compensation arrangements, the Board specifically considered whether the adequacy of the disclosures required by Statement 123 would be sufficient for an understanding of the potentially dilutive effect of options and warrants issued as compensation. In its Basis for Conclusions the Board indicated that they addressed this issue, concluding that "the disclosures required by this Statement are generally consistent with disclosure long required for other potentially dilutive securities" (paragraph 257 of Statement 123).

In addition to the matters addressed by Statement 123, Statement of Financial Accounting Standards No. 128, Earnings Per Share, addresses the effect of dilution of stock options, warrants and similar instruments on registrants' earnings. Specifically, paragraphs 38 and 40 of Statement 128 require the presentation of (a) diluted earnings per share data, (b) a reconciliation that includes the individual income and share amount affects of all securities that affect earnings per share, and (c) information about securities that could potentially dilute basic EPS in the future that were excluded because they currently are antidilutive. These disclosures relate to circumstances existing at the balance sheet date. However, Statement 128 also requires disclosure of transactions such as the issuance of warrants and options or the exercise of potential common shares that occur after the date of the financial statements but prior to the issuance of the financial statements.

In its Basis for Conclusions related to Statement 128, the Board discusses the computation and presentation of dilution at length. For example:

"The Board decided to require a reconciliation of the numerators and denominators of the basic and diluted EPS computations in this Statement because the reconciliation is simple and straightforward and will help users better understand the dilutive effect of certain securities included in EPS computations...The Board agreed that disclosing the nature and impact of each dilutive potential common share (or series of shares) included in the diluted EPS computation, as well as separately identifying those antidilutive potential common shares that could dilute earnings per share in the future, allows users to exercise their own judgment as to the `likely' EPS number. " (paragraph 137)

In addition to the disclosures required by Statements 123 and 128, Item 402 of Regulation S-K currently requires disclosure of equity-based compensation information for the registrant's most highly compensated officers; compensation of directors; and option repricings for any executive officer during the last 10 fiscal years. In addition, the compensation committee report discusses the registrant's compensation policy for all executive officers.

We acknowledge that the existing disclosures discussed above are not presented in a standard format or in a single location. However, we are not persuaded that a standardized format or location for disclosures of all equity-based compensation arrangements by all registrants will provide a meaningful presentation, nor are we persuaded that concerns about the format and location of information are sufficient to merit duplicative disclosures.

We have been encouraged by the willingness of the Commission and the accounting profession to address concerns about duplicative disclosures, as indicated by the March 2001 report from the Business Reporting Research Project working group on GAAP-SEC Disclosure Requirements. One of the working group's recommendations is that the Commission's staff request FASB assistance when a proposed rule would create redundancy with existing GAAP disclosures. Prior to issuing a final rule on disclosures of equity-based compensation arrangements, we encourage the Commission staff to work with the FASB staff to understand the extent to which the Commission's disclosure objectives are met currently by the accounting literature and whether the Commission's incremental disclosure requirements could be narrowed.

Other Observations

Should the Commission decide to proceed with the proposed disclosures, we have the following specific comments regarding the Proposal:


We appreciate the opportunity to comment on the rules the Commission has proposed. If you would like to discuss our comments, please do not hesitate to contact us. Please contact Amy Ripepi at 312-507-7258 or via electronic mail at

Very truly yours,

Arthur Andersen LLP