February 12, 2004
In this issue:
- FASB Votes to Proceed with Stock Option Expensing
- SEC Requires More Disclosure and Requests Comments on 12b-1 Fees
FASB Votes to Proceed with Stock Option Expensing
On February 11, the Financial Accounting Standards Board (FASB) formally directed its staff to draft a proposal calling for the expensing of stock options. The proposed rule is expected to be issued in March with an effective date of January 1, 2005.
The draft proposal is expected to include language urging companies to use a binomial model instead of the Black-Scholes model in assigning fair value to the stock option if information on stock option exercise histories is available. A slim majority of the board stopped short of voting to formally require use of the binomial method.
Legislation has been introduced in both the House (H.R. 3574) and the Senate (S. 1890) which would require expensing of stock options for the chief executive officer and next four most highly compensated employees. This legislation essentially prohibits FASB from requiring expensing for stock options awarded to other employees until a study of the potential effects is completed. For more information, contact Jan Jacobson, Council director, retirement policy, at 202-289-6700.
SEC Requires More Disclosure and Requests Comments on 12b-1 Fees
On February 11, the Securities and Exchange Commission (SEC) voted to increase mutual fund disclosure requirements and to request comments on rule 12b-1, including whether the rule should be repealed.
The SEC proposed an amendment to rule 12b-1 under the Investment Company Act of 1940 that would prohibit mutual funds from directing commissions from their portfolio brokerage transactions to broker-dealers to compensate them for distributing fund shares. Under rule 12b-1, fees can be assessed against the assets of mutual funds to cover advertising and distribution costs. These fees are commonly used to pay for the services of many retirement plan administrators and recordkeepers (among other purposes). The SEC also asked for comments on the need for additional changes to rule 12b-1, including the possible elimination of the rule. Comments will be due approximately 60 days after the proposed rule is published in the Federal Register. As we reported in the February 10 Benefits Byte, the Mutual Fund Reform Act (S. 2059) similarly prohibits 12b-1 fees and revenue sharing arrangements (which are commonly used to pay fees to recordkeepers and third party administrators (TPAs).
The SEC's new disclosure requirements, which will be effective for reports and reporting periods ending on or after 120 days following publication of the rule in the Federal Register, will require mutual funds to disclose fund expenses in dollars and cents terms in shareholder reports. Funds will also be required to file information on portfolio holdings on a quarterly basis and these reports will be publicly available. For more information, contact Jan Jacobson, Council director, retirement policy, at 202-289-6700.
The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.