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New SEC rules speed exercise of insiders' stock options.

The Securities and Exchange Commission recently changed the "insider" stock options rules, allowing insiders and corporate executives to accelerate the exercise of stock options. Richard M. Cummins, CPA, national director of personal financial services, and Janet Fuersich, national director of compensation consulting in the actuarial, benefits and consulting group, both at Coopers & Lybrand, New York, New York, explain the new rules.

Until now, the SEC's insider rules have limited some executives' and insiders' ability to realize gain from the sale of company stock for six months after exercising a stock option. Under the SEC new rules [240.16(b)-31], which went into effect May 1, 1991, and are still subject to various transitional rules, executives can sell shares immediately after exercise. However, they must first hold the option for six months.

The new rules also given insiders the opportunity to finance their options without cash, a technique that formerly was not available to them. Under a cashless exercise, an arrangement is made between the company and a broker to sell an amount of stock equal to the exercise price and to deliver shares to their employee net of that price.

Accountants should caution their clients (especially corporate executives) about these actions' tax implications. Before the May ruling, the SEC insider rules applied for six months after exercise of a nonqualified stock option, and the tax imposed on the income from that exercise was deferred until the restriction lapsed. Now the tax will be imposed at the time of exercise, whether or not the shares are sold. Thus, option holders no longer can defer taxation into the next year for nonqualified options exercized after June 30 of each year.

CPAs also should advise affected executives to analyze their individual tax situations before exercising their options. They should be aware that the new rules accelerate the potential alternative minimum tax consequences to the date the option was exercised rather than six months after exercise.

In addition, CPAs should recommend that clients or employers review their existing stock option and stock-related compensation programs and reevaluate the rule's effect on a variety of business, tax and investment strategies.
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Author:Fuersich, Janet
Publication:Journal of Accountancy
Date:Aug 1, 1991
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