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Backdating and spring loading

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Another example involves situations where the company may have retroactively granted stock options (referred to as "backdating") so that, instead of the option exercise price being fair market value on the date the grant actually occurred, the option exercise price reflects the lower fair market value on an earlier date.

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But spring-loading, which was also discussed during the hearing, received more mixed comments, underscoring general disagreement among regulators and in the marketplace over whether the practice is, in fact, illegal — or even unethical. All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.Backdating stock options, as any of more than 100 companies now under scrutiny can now attest, is a bad idea.But what about spring-loading, the forward-looking cousin of backdating?Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.

Other similar practices are being reviewed by government officials as well.

November 2006 As we have been reminded recently, it is important that companies with stock option and other equity based compensation plans implement and adhere to grant procedures.

This is a good time to review your option grant procedures and controls.

In some cases, the date of exercise, rather than the date of grant, was changed to an earlier date to convert ordinary income into capital gains.

In general, companies engaging in a classic backdating transaction chose a date when the stock price was at a low point and chose that favorable date as the grant date.

Below are our recommendations with respect to oversight of stock option grant and other equity compensation programs.