24 April 2001
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Disclosure of Equity Compensation Plan Information; File No. S7-04-01
Dear Mr. Katz:
The Financial Accounting Policy Committee (FAPC) of the Association for Investment Management and Research (AIMR)1 is pleased to comment on the Commission's rule proposal on Disclosure of Equity Compensation Plan Information. The FAPC is a standing committee of AIMR charged with maintaining liaison with, and responding to initiatives of, bodies that set financial accounting standards and regulate financial reporting disclosures. The FAPC also maintains contact with professional, academic, and other organizations interested in financial reporting.
The FAPC is pleased by the direction taken in the disclosure proposal. We firmly believe that stock option awards or the granting of similar rights to employees or suppliers are forms of remuneration and, therefore, should be recorded at their fair value in the financial statements. Given the current poor-quality accounting standards for employee equity-based compensation, comprehensive disclosure is essential in analyzing and comparing data between companies.
Full disclosure of all stock and stock options compensation plans provides investors, both stockholders and creditors, with the necessary information to assess properly the present and future economic effect, including the dilution of stockholders' interests, that these plans have on the enterprise's financial position and, in turn, on their investment in that enterprise. We believe strongly that these shares and options are awarded in exchange for goods and/or services, which have a monetary value that can be reasonably estimated. Moreover, the fair value disclosure shows the true impact from these compensation plans and thus, improves transparency and consistency, resulting in the efficient allocation of capital within the financial markets.
Although we agree with the overall objective of the proposed disclosures, we recommend certain modifications be made to the proposed disclosures, which are noted in our comments to specific questions posed by the SEC.
Specific Comments to Questions Posed by the SEC
1. Would narrative disclosure be preferable to the proposed tabular format?
We prefer a tabular format for presentation of the primary information, with narrative disclosure of the input data required to generate the tabular format. For each plan, we recommend a tabular format that is more extensive than the one proposed:
Number of Units
Beginning of Year Outstanding Amount
Canceled or Expired Unexercised
Repriced or Replaced
Change in Intrinsic Value
Change in Estimates
End of Year Outstanding Amount
This table should be presented for each year presented in the financial statements. The narrative should describe the information required to calculate the values at the start and end of the year (presumably the reconciliation will enable readers to understand the provenance of end-of-period values), including the weighted average exercise price, the stock price, the implied volatility, the assumed interest rate, and the reasons for any changes in these assumptions.
2. Are there any additional categories of information (such as weighted average exercise price information) or different categories of information that should be included in the disclosure?
As noted in our response to (1) above, there are significant additional data that are essential in understanding the economic cost of equity-based compensation. Some data are currently required, and therefore, we are not advocating duplication. However, data should be disclosed in a clear and concise method preferably in one location, rather than being dispersed throughout the notes to the financial statements or other disclosure documents. A consolidated disclosure ensures that users of financial statement will not omit, inadvertently, material information and thus, will avoid making incorrect assessments about the full effect of the registrant's compensation plans. We believe that disclosures proposed in this Release should be provided in the same footnote as pro forma and all related disclosures required by SFAS No. 123.
3. Is it useful to disclose information about the number of securities awarded and the number of options, warrants or rights granted during the last completed fiscal year?
Yes. This data is useful in understanding the registrant's compensation schemes and the related activities during the reported periods. In addition, data about the cancellations is needed for complete analysis.
4. Would disclosure of prior awards and grants over a different time period be more appropriate, and, if so, what period? Is it necessary, as proposed, for registrants to provide totals for the information set forth in each column of the tabular disclosure?
As noted above, disclosure of awards and grants should be disclosed for each year presented in the financial statements. We recommend that totals be required to facilitate the user's understanding of the full impact of these compensation plans.
5. When disclosure is being made in a registrant's proxy statement because the registrant is seeking security holder action regarding a compensation plan, should the tabular disclosure also cover the plan upon which action is being taken?
Yes. All plans should be summarized in one place for the reasons noted in our response to question 2.
6. Is aggregated disclosure of individual arrangements appropriate? If not, what alternative approach would be preferable?
Aggregated disclosure of individual arrangements is not appropriate. Current proxy statements require disaggregated disclosure for senior managers, and this should be continued. The overall information about plan totals is valuable for determining company costs and dilution. Furthermore, disaggregated information has significant additional value in understanding management's motivations and incentives.
7. Should aggregated disclosure be permitted in the case of certain equity compensation plans (such as plans that are assumed by the acquiring company in a merger, consolidation or other acquisition transaction)?
No. See our response to question 6.
8. Should additional or different disclosure be required with respect to equity compensation plans that have been adopted without security holder approval (such as the information currently required under Item 10 of Schedule 14A)?
We believe that all equity compensation plans should be subjected to the same disclosure requirements. If different disclosures are permitted, we believe that such an allowance would most likely lead to manipulation, resulting in misleading information and therefore, should be avoided.
9. Should disclosure be required if the plan was adopted in a year prior to the most recently completed fiscal year?
Yes. We believe that all active equity compensation plans should be disclosed regardless of when the plan was first adopted by the registrant.
10. Is it sufficient to require the disclosure of such plan's "material features," or should we identify the specific terms and conditions of the plan that must be disclosed (such as exercise price, vesting and expiration date information, or the existence of reload, stock swap, loan or option repricing features)?
The specific terms and conditions of the plan should be identified and disclosed. We are particularly interested in how companies derive at the volatility used in calculating option values Such disclosures enable the users of financial statements to evaluate the reasonableness of management's pricing assumptions.
11. In lieu of, or in addition to, the disclosure required for an equity compensation plan that has been adopted without security holder approval, should a registrant be required to file any such plan as an exhibit to the registrant's annual report on Form 10-K for the fiscal year in which the plan was adopted?
Yes. We believe that any material event, such as a notice of the equity compensation plan and related information, should reported in Form 8-K. Moreover, this same information should also be disclosed, in detail, in the Form 10-K, Annual Report.
In addition, notice of awards should be filed on Form 8-K. Recent articles in the press have highlighted egregious abuses, such as delays in reporting the repricing of options, which follow significant drop in the stock price.
12. Should specific disclosure about equity compensation plans that involve the use of repurchased or "treasury" shares be required?
Again, all compensation plans should have the same disclosure requirements to prevent manipulation or misleading information about the registrant's equity compensation plans.
The FAPC appreciates the opportunity to express its views on the Commission's rule proposal regarding disclosure of equity compensation plan information. If you or your staff have any questions or seek amplification of our views, we would be pleased to provide the additional information you seek.
/s/ Ashwinpaul C. Sondhi
Ashwinpaul C. Sondhi, Ph.D.
Chair, Financial Accounting Policy Committee
/s/ Trevor W. Nysetvold
Trevor W. Nysetvold, CFA
FAPC, Subcommittee Chair - Stock-based Compensation
/s/ Georgene B. Palacky
Georgene B. Palacky, CPA
cc: AIMR Advocacy Distribution List
Patricia Doran Walters, Ph.D., CFA - Sr. Vice President, Professional Standards and Advocacy, AIMR
Attachment - List of FAPC Members
|1||The Association for Investment Management and Research is a global, nonprofit organization of more than 49,000 investment professionals from 100 countries worldwide. Through its headquarters in Charlottesville, Virginia, and more than 100 affiliated societies and chapters throughout the world, AIMR provides global leadership in investment education, professional standards, and advocacy programs.|