Human Capital & Careers

“Spring-Loading” Raises Doubts at SEC

Is the Securities and Exchange Commission backing-off of stock option spring-loading cases?
Stephen TaubOctober 4, 2006

The Securities and Exchange Commission’s deputy chief accountant, Scott Taub, said Tuesday that the government may have little basis for bringing accounting-based enforcement actions over “spring-loading” of stock options, reported Reuters. Spring-loading is a cousin to stock option backdating, and one of the options-related abuses currently under investigation by the SEC.

Taub told a Financial Accounting Standards Board user advisory council meeting that the accounting rules for spring-loaded options are clear and many companies may have accounted for them properly, according to the wire service. When asked whether he thought the SEC could bring any enforcement action against companies for improper accounting related to spring-loading, Taub reportedly said: “I doubt that you could get one on accounting, from what I’ve seen.”

Spring-loading is the practice of awarding options just prior to a positive news announcement, which would likely result in a rise in the company’s stock price and a subsequent boost in the value of the options. Most of the SEC’s probes involve backdating, whereby companies push back the grant dates of options from the actual date they issued the options to lower the exercise price.

At the FASB meeting, Damon Silvers, associate general counsel of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) criticized guidance for accounting for stock options, issued last month by Taub’s office, noted Reuters. Silvers reportedly asserted that the guidance on spring-loading would allow companies to hide important information. “I think you will be judged harshly for this,” he said, noted Reuters. Taub responded: “The accounting for those kind of options is clear. We felt our hands were tied.”

Taub also said that the SEC was not trying to endorse the practice, according to the wire service. “There are people in our building who have varying feelings about whether spring-loading is good or bad. Accounting-wise we felt stuck,” Taub added, according to Reuters. “This is accounting literature written in the [19]70s that clearly did not hold up well. We don’t get to enforce the accounting standards we wish existed, we have to enforce the accounting standards that do exist.”

Indeed, Taub isn’t the only SEC official that thinks chasing spring-loading cases may be difficult. During a hearing held last month by the Senate Committee on Banking, Housing, and Urban Affairs, SEC Chairman Christopher Cox characterized spring-loading as a practice that is “bound up with concepts of insider trading,” a comment that seemed to suggest spring-loading could be difficult to prove. Furthermore, in July, SEC Commissioner Paul Atkins argued that there was nothing wrong with spring-loading.

But executives representing investor interests feel differently. At the September Senate hearing, Lynn Turner, managing director of research at Glass Lewis, an investment research and proxy advisory firm, strongly denounced spring-loading. In the filings of companies accused of spring-loading, the disclosures of stock option grants “have been grossly misleading and false,” asserted Turner. And Russell Read, the chief investment officer at the $209-billion California Public Employees’ Retirement System, said that if the SEC’s executive compensation disclosure requirements don’t curb spring-loading, then the regulator should take additional steps to ensure that grants occur at specific times.