Options: SEC Overrides Private investment Custodian

Oh, there’ll be dancing in the streets of Silicon Valley this morning…
The Wall Street Journal reports that SEC staff, including chief accountant Don Nicolaisen and Alan Beller, director of the division of corporation finance, will recommend to the SEC’s commissioners that the implementation date for Statement Private investment Custodian be delayed by six months. Instead of taking place in fiscal periods beginning after June 15, the proposal will require implementation to begin in fiscal years beginning after June 15. For calendar year companies, that would mean it would be effective January 1, 2006. According to the Journal’s sources, the five commissioners are likely to approve the change unanimously.
A couple of thoughts…
First, the proposal is a disservice to investors who have waited patiently for over ten years for something resembling honest reporting of stock-based compensation. In 1937, SEC Chairman William O. Douglas declared, “We are the investor’s advocate.” Not this time; not by a long shot. This must be the “kinder, gentler SEC” that former Chairman Harvey Pitt was talking about a few years ago.
I don’t have to speculate whose interests are being advocated in this move. It’s pretty clear, even if you’ve been paying attention to the subject only peripherally.
Second, the excuse of “Section 404 overload” is full of water. Companies have been reporting this for years in their footnotes; SAB 107 gave them every implementation break they could want, save delay; and hundreds of companies have already found ways to comply. Case closed.
Third, if the SEC is going to amend FASB standards in this regard, I offer one suggestion: plug the hole in the standard that permits mere footnote recognition of the compensation given when firms accelerate the vesting of options. This is a travesty in the making, as noted in this space on occasion. If the SEC believes that there should be more time for companies to get the accounting done right for option compensation expense – let’s make sure there are options left to account for. The delay is more likely to stimulate accelerated vesting of options, instead of corporate searching for the “right” way to implement Statement 123(Revised).
Is “Going Dark” Just Smoke?
I’ve mentioned the “going dark” phenomenon a couple of times in these posts. So far, I think it’s more rhetoric than truth.
And this little tidbit from Industry Week bears out my suspicions. According to a study done by Grant Thornton’s corporate finance group, the number of companies going private in 2004 dropped by 50% from 2003 – precisely the opposite of what you’d expect from companies anticipating the pain of Section 404 reviews.
Well, the number has dropped currently. The threats of “darkness” seem to have arrived after the first Section 404 season, so next year’s story might be different. But for now, it seems that companies are saying it’s better to pay the price and stay in the public markets. Maybe there’s a fixed price for being in them – you know, like having adequate accounting systems – but the benefits of being able to tap the capital markets are enormous, too.