New guidance from Securities and Exchange Commission regulators sets limits on ways to determine the cost of stock options, though the new SEC chairman said that the report was "tentative."Chief accountant Donald Nicolaisen, who will leave the SEC in October, wrote in a statement that he had doubts as to whether the creation of a financial instrument to mimic employee stock options would be an accurate tool. And chief economist Chester Spatt wrote in a memo from the SEC's Office of Economic Analysis that such an instrument would face the inherent difficulty of reconciling market price with the fair value of stock options.
Though not named in either document, technology company Cisco Systems Inc. suggested the financial instrument route earlier this summer. Saying that valuation methods proposed by regulators put too high a value on stock options, Cisco had offered a market-based alternative.
SEC Chairman Christopher Cox seemed to temper both Nicolaisen's and Spatt's statements in prepared remarks released the same day.
"The commission's approach has been, and remains, the encouragement of robust efforts in the private sector to design market instruments that have the potential to accurately measure the cost of employee stock option grants to the issuer," Cox said in a statement. "Because so little empirical data is available, the views expressed today are necessarily tentative and subject to ongoing assessment."
Adding that, over time, best practices will emerge for valuation, Cox said, "For now, however, it is not our intention to narrow the field and to limit experimentation, but rather to welcome it."
The options expensing rule, adopted by accounting standard-setters and supported by the SEC, will soon require companies to treat stock options as a routine business expense. During his confirmation hearings, Cox said that he would not override the new rule.
