FASB - SEC Open Letter 6/15/07 - "Four Remedies to Hedge Fund Type Fees Earned on Executive Options Pursuant to Corporate Stock Repurchase Programs"
Summary
Accounting regulations will likely change to deal with 10b-18 / 10b5-1 conflicts, insider trading, option compensation and governance issues that have become apparent as "open market" corporate stock repurchases have become increasingly popular.
Some recommendations make sense (Stephen Penman at Columbia University proposes that option expense be recognized upon exercise or expiration). Others do not (Senator Carl Levin, D., Mich. proposes curtailing the deductibility of stock option expense).
Executives should plan for change in the accounting and regulation of stock buybacks. MG Holdings/SIP advocates good rules over bad. Bad rules lead to bad decisions, bad regulation, bad enforcement, and bad litigation. Good rules are a smooth ride to self regulation.
In particular, we advocate four changes to facilitate ongoing corporate stock repurchase program growth while eliminating accounting and governance conflicts. Companies should report:
"Absolute accretion" return to investors on completed stock repurchases.
Option expense at time of exercise or expiration.
Monthly VWAP in addition to actual, monthly buyback cost.
Income on buybacks (buybacks now reported only on balance sheet).
In a subsequent report, we also suggested that reporting of commissions and expenses on stock buybacks be disclosed.
Good regulations make good sense.