Some business executives have profited handsomely from the practice of earning “spring-loaded” stock options that take advantage of information not available to the public, but U.S. regulators on Monday announced plans to put a stop to it.
The Securities and Exchange Commission issued new guidance for companies on how to reflect the potential value of spring-loaded options when they disclose how much top executives actually earn.
Spring-loaded awards are a type of compensation in which a company grants stock options shortly before it announces market-moving information, such as an stronger-than-expected earnings release or disclosure of important transactions. The options have the potential to soar in value once the news is made public.
The practice came to the public’s attention in July 2020 when a sudden surge in the stock price of Eastman Kodak KODK transformed option given to its top executives into potentially millions of dollars in profits. The options were granted just a day before the company announced it had received a large federal loan.
The unusual timing of the option awards spurred Sen. Elizabeth Warren of Massachusetts to ask the SEC to investigate whether any laws were broken. Kodak has not been charged with any violations.
Under new SEC guidance, non-routine spring-loaded options “merit particular scrutiny” from the corporate officers responsible for making sure their companies comply with financial disclosure rules.
“It’s important that companies’ accounting and disclosures reflect the economics and terms of these compensation arrangements,” SEC Chairman Gary Gensler said in a press release. “This gets to the SEC’s remit to protect investors.”
In Kodak’s case, CEO Jim Continenza could have earned more than $95 million had he exercised and sold his options at the peak of Kodak’s rise, The Wall Street Journal reported last year.
More recently, an investor in Roku
ROKU,
sued the company in August after claiming company insiders issued cheap stock options to themselves in the lead-up to a 2019 earnings report that drove the company’s stock price up 35%, Bloomberg Law reported.
This post was originally published on Market Watch
