Stock Option Accounting Reform Act

Mr. Chairman, I yield 1 minute to the gentleman from Washington (Mr. Inslee).

(Mr. INSLEE asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, I wish to acknowledge at this time the leadership of the gentleman from Ohio (Chairman Oxley) on this most important and difficult matter. Over the course of the past months, the committee has engaged in numerous hearings and roundtables to discuss the advisability of FASB's recommendation and to craft the appropriate remedy given the committee's concerns. The chairman at all times has been insistent on a balanced analytical process to afford all stakeholders the ability to be heard.

I certainly would also wish to extend my appreciation to the leader on the Democratic side, the gentlewoman from California (Ms. Pelosi); and the gentlewoman from California (Ms. Eshoo), who have been at the forefront of leading the charge from their perspective on what they both believe to be an important economic tool for job creation.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 1 minute to the gentlewoman from California (Ms. Lofgren).

Mr. Chairman, I yield 1\1/2\ minutes to the gentleman from New York (Mr. Crowley).

(Mr. CROWLEY asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 2\1/2\ minutes to the gentleman from Arizona (Mr. Shadegg), a member of the committee and an interested party in this most important issue.

Mr. Chairman, I yield myself such time as I may consume.

I wish to speak to the issue of FASB's independence and their track record on matters of financial accounting standards. It was in the fall of 1998 when FASB issued a statement relative to concerns about earnings manipulations by registrants in a number of industries, specifically banks, in the treatment of what was called loan loss reserves.

The allegation was that executives were exacerbating the amount of reserves necessary in order to offset potential volatility in financial institutions' earnings. Suffice it to say, it is a technical issue, again beginning in fall of 1998. I reference testimony of Governor Lawrence Meyer, member of the Federal Reserve, speaking on behalf of the Federal Reserve and all finance regulators. Six years later a letter issued then by the FDIC indicated that institutions should continue to determine the appropriateness of all their loan loss reserves on the basis of existing guidance set forth in GAAP and in the agency's supervisory guidance. Translation: they should ignore what FASB started 6 years earlier as an ill-conceived modification of safety and soundness provisions.

The point of this historic analysis is to provide the Congress with the understanding that FASB does not always get it right. I join with many Members of Congress in that era in expressing concerns about the unintended consequences of the implementation of FASB's rule should it be implemented.

Let us talk about what FASB has done in the course of the consideration of the issue currently at hand. The board announced their positions before a single comment from the public was solicited. The board disinvited comments on key issues of the current matter. The board disregarded the overwhelming majority of comments solicited. The board created an option valuation group to discuss valuation.

After all was said and done, apparently FASB did not find the board's work to be of much use since it decided to revert to the same valuation models before appointing the board. FASB refuses to conduct road tests of actual valuation models, meaning it is not trying out to see what the real-world consequence is of its valuation methodology. It has refused to respond to industry presentations on the existing valuation methodologies. It has refused to respond to recommended alternatives and compromises.

What has the board done? I alert the Members who have not yet received it to an e-mail distributed by a representative of FASB's foundation, I assume an independent arm of an independent

agency prescribed with the responsibility of engaging in political correspondence. What is a sad note about this particular e-mail, if one goes to the two phone numbers listed at the bottom of the e-mail, which is probably in all Members' offices, and they call those numbers, they can then refer themselves to directory assistance and ask for FASB's telephone numbers.

The two numbers cited in this independent political correspondence are numbers listed as FASB's official phone numbers. If one were to apply their own standards of financial transparency to their own e- mail, it should say FASB is now lobbying the Congress and using our phone numbers for ones to respond and make significant inquiry into the matter. It would appear although they find political interference a sullied and tawdry business, they have now engaged in such practice in attempting to influence the Congress on the direction of appropriate conduct.

What is an option, and what does it mean to our economic direction? Assume for the moment we are trying to gather a half dozen young bright people into a garage at someone's home to construct a new innovative product and we bring these people in without sufficient cash to pay them salary; but we offer them the opportunity, should their intellectual prowess be sufficient in building value to a company, to one day cash in on the options we are giving them as a piece of their investment. Assume for the moment the value of the options are $20. Things go awry. Things go poorly. Six months hence the stock price may be worth $10. The employees will not cash in their right to those options because they are called, in the terms of the industry, underwater. They are not worth what they were when they were granted. The employee may leave and go elsewhere. Without the passage of this bill, what would FASB require them to do? To expense that option at the time of granting even though it were later not exercised. The result: an underreporting of financial value of corporate value. That seems to me to be just as big a problem as what those opponents allege is some grand misrepresentation of current financial condition.

Options are reported today in the footnotes. One who persists can find out the dilutive effect on other shareholders. Translation: one can find out the facts about accurate financial condition if they choose to seek it out in currently published information.

It is quite clear that many have accused the current administration and others of finding ourselves in a jobless economic recovery. Were that to be the case, which I certainly dispute, there is no dispute that the granting of options to a broad base of employees has been and remains a very strong component of job creation within our economy. Does it make sense for those who criticize a jobless economic recovery to take away one of the proven tools that does create jobs when they are so badly needed? I think not.

So where are we to go? The identified problem was that a handful of executives were manipulating the granting of options for their personal financial gain. I, frankly, do not think the bill before us is a perfect remedy. I think it is a flawed remedy because the valuation of the option cannot be accurately predicted. But in response to the critics, we have said those top five must expense their options. Let us make them accountable for the reported wrongdoings of the past, but please do not affect adversely the broad-based stock option plans for the vast numbers of employees who have gained from their hard work, shared in the dynamic capital enhancement of corporations, and, yes, made money.

I am one of those staunch advocates in the Congress who believe that money is the cure to poverty. And by allowing employees to invest and work and believe in the great American Dream that one day they can have a part of it, stock options represent a magnificent tool of economic opportunity.

I urge this Congress to adopt H.R. 3574 as balanced; fair; transparent; and, most importantly, important for our economy.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 2 minutes to the gentleman from California (Mr. Cox), a respected Member on matters of financial reporting.

Mr. Chairman, I yield 2 minutes to the gentleman from Ohio (Mr. Boehner), a staunch defender of free enterprise.

Mr. Chairman, I yield 2 minutes to the gentleman from Virginia (Mr. Goodlatte).

(Mr. GOODLATTE asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 1\1/2\ minutes to the gentleman from Minnesota (Mr. Kennedy), a member of the committee.

Mr. Chairman, I yield 1 minute to the gentleman from Texas (Mr. Hinojosa).

Mr. Chairman, I yield 2 minutes to the gentleman from New Jersey (Mr. Menendez), the chairman of the Democratic Caucus.

Mr. Chairman, I yield 1 minute to the gentleman from Oregon (Mr. Blumenauer).

Mr. Chairman, I yield to the gentleman from Michigan (Mr. Smith) for the purpose of making a unanimous consent request.

(Mr. SMITH of Michigan asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield reluctantly only 1 minute, because of time limitations, to the gentleman from Texas (Mr. Barton), the chairman of the Committee on Commerce.

Mr. Chairman, I yield 1 minute to the gentleman from Texas (Mr. Hensarling), a member of the

committee and an outspoken advocate for the bill.

Mr. Chairman, I yield myself the remaining time.

Mr. Chairman, under the current FASB proposal, one would either use the binomial or the Black-Scholes methodology to determine the valuation of a stock option. During the intervening period, staff has calculated the remaining debate time available to me to close through both Black-Scholes and binomial, and the result has come out anywhere from zero to an hour and a half. Recognizing we have a commonsense limit of 1 minute, I shall proceed diligently.

The current proposal under H.R. 3574 would lead us to a transparent disclosure regime. It would continue a very important job-creation tool to our free enterprise system. It would allow employees to share in the free-enterprise dream of participating in the growth and ultimate financial profitability in the corporation for which they work.

Make no mistake: this bill nails those executives who have been held up as the abusive forces within our system by requiring the top five to expense their options granted.

The solution is not perfect; frankly, I would not require expensing at all. But it is a response to the critics who said executives have abused their privilege. For commonsense job creation and reform, I urge this body to support H.R. 3574.

Mr. Chairman, I thank the gentleman for yielding me this time.

This, of course, is an important amendment, and we should not forget for a moment that the lawmaking business is a very difficult course to follow. If one introduces a measure in the House of Representatives, it may be subject to numerous hearings and, of course, examination by many people over the course of many months, in some cases, years. It then must go to the United States Senate, where it goes through a similar process.

Assuming the House and Senate may disagree, there is an extensive conference committee process. Ultimately, if passed by both Houses as a conference committee report, it goes on to the President of the United States, either for his signature or for his veto.

What is contemplated by the gentlewoman's amendment is to dramatically alter the course of public policy consideration. If one were to take, for example, the 1934 Securities Act, considered after many, many months of deliberation and debate, I would point out that we start in the United States Congress or in the United States Senate.

Both Houses meet, deliberate, hear witnesses, stakeholders, public comment, lobbyists abound, even FASB running around through the halls, and ultimately we pass a bill out that makes its way to the White House, and the White House may or may not sign or choose to veto such a proposal.

The effect of the gentlewoman's amendment from New York would be to say after that lengthy process which, by the way, in the case of the stock option expensing debate has raged now for some time, after considerable hearings within the House Committee on Financial Services, even the cursory examination in the Committee on Energy and Commerce, now this public debate on the House floor.

And might I remind you we are now officially in an open public comment period by FASB, which we all of course know is closed, but for the sake of public discourse, we have an open public comment period. I would suggest the Congress is getting ready to comment on the matter.

What some are proposing with the Maloney amendment in the last circling at the end of the chart is that it would be the ``oops'' provision. The SEC could say, ``Oops, the Congress got it wrong. The President got it wrong. We are simply going to disregard the actions of our public policymakers and decide we are going to do it differently.''

Nowhere in the text of the public policy is there an arbitrary and capricious grant of authority for any bureaucratic enterprise to set aside the public policy determinations of the United States Congress. This, in fact, would be a first.

Now, I understand the dispute over the underlying reform proposal; but this, I suggest to Members of the House, is not an appropriate remedy for the concerns expressed by Members opposed to this H.R. 3574.

Should you be opposed to it, I suggest you vote against this measure and simply vote against the bill on final passage. However, I, for one, think it an extremely well-crafted remedy to the identified problem and urge my colleagues to support it on final passage.

Mr. Chairman, I thank the chairman for yielding me time.

Since 1969, the current debate has been in some form or fashion engaged by FASB, 1969, 35 years. You would not think that that would be considered a new and innovative strategy to begin expensing or not expensing options.

In 1995, the current methodology was adopted as a compromise. Yes, you can expense, if you so choose, determined by your board, driven perhaps by your shareholders, but you may also disclose in the footnotes.

What are footnotes? They are notes in the annual report to shareholders. If you are a shareholder and you are worried about diluted effect, in other words, they are giving an option to someone, what does that do to my asset in the company, you can find that out with an examination of the annual report.

To suggest that this is a new tactic developed by some executive in a back room to cheat shareholders or Americans out of value gained in their corporate investment is simply not accurate. This has been a practice common in the business world for many, many years.

Now, at question is whether or not a handful of executives who are identified as abusing their privileges ought to be brought to some account. The answer with the passage of this bill is ``yes.'' If you are one of the top five executives who, by some accounts, hold the majority of options granted, you will now be required to expense those options at the time they are granted to the employee. It does not, however, require the large number of employees who benefit from investment, showing up early, staying late, investing their intellectual and personal capital into the business, who ultimately benefit from the overall growth and value of that corporation by seeing their shares increase in value.

Forty-five percent of the venture capital in this country goes to the Silicon Valley, 45 percent, and the bulk of that goes to these new technology start-up companies. If my colleagues wish to see them in the future, please vote for H.R. 3574. It is rational reform headed in the right direction.

Mr. Speaker, I thank the gentleman from Texas (Mr. Sessions), my friend, for his fine management of this rule and his commitment to the structure which will encourage innovation and creativity.

We are on the verge of yet another very important bipartisan victory for this institution and, most important, for the American people.

Mr. Speaker, I would like to begin my comments by extending my appreciation to a couple of Californians on the other side of the aisle who have played a very important role in getting us to the point where we are. First and foremost, the gentlewoman from California (Ms. Eshoo), my great friend with whom I have been privileged to work on this issue for literally years now as we have been trying to tackle and deal with this very important challenge. And also I would like to praise the gentlewoman from California (Ms. Pelosi), our minority leader, my fellow Californian who has joined as a cosponsor of this legislation and understands how important it is not only for our State of California and for the area that is represented by the gentlewoman from California (Ms. Eshoo) and the gentlewoman from California (Ms. Pelosi), but for the overall concept of encouraging innovation and creativity. And I do know that we have a wide range of other Members on the other side of the aisle who have followed the lead of the gentlewoman from California (Ms. Eshoo) and the gentlewoman from California (Ms. Pelosi) on this issue.

I also want to say, Mr. Speaker, that on our side of the aisle there have been a number of people who have been great champions in this. First of all, I want to express appreciation to the gentleman from Illinois (Speaker Hastert) and the gentleman from Texas (Mr. DeLay), majority leader, for working closely with me and ensuring that we would have an opportunity to bring this measure to the floor; also to the two committee chairmen who have been very involved in this.

The prime committee of jurisdiction is the Committee on Financial Services. I would like to congratulate the gentleman from Ohio (Mr. Oxley) and the gentleman from Louisiana (Mr. Baker) and other members of that committee, including the gentleman from California (Mr. Royce) and the gentleman from California (Mr. Ose) and the gentleman from Arizona (Mr. Shadegg), who have worked very hard on this issue. And also I would like to express appreciation to the gentleman from Texas (Mr. Barton), who has just recently become the chairman of the Committee on Energy and Commerce and is doing a great job and joins with us in support of this important legislation.

I should also say that there are a number of staff people who have been very involved as well, Mr. Speaker. I see a number of them on the floor, but I do want to specifically mention the staff director of the Committee on Rules, Mr. Pitts; and from the Speaker's office, Seth Webb; and from the majority leader's office, Brett Shogren, who worked very hard with us in making sure that we got to the point where we are today, because this has been a difficult and a real challenge for us, but it is the right thing for us to do.

Mr. Speaker, I want to state for the record that I am an ardent opponent of mandatory stock option expensing.

With all due respect to the wonderful people who are supporting the Financial Accounting Standards Board's expensing proposal, the notion that stock options are an expense is absolutely absurd. You do not have to be an accountant to clearly understand that stock options result in no cash outflows from a company, nor do they add to its financial liabilities. But I recognize that in the wake of the corporate accounting scandals, and I know many people are going to be talking about that as we begin debate on this issue, a whole new environment does now exist.

In this arena, those who have long opposed the use of employee stock options, and recognize, there are many people, Mr. Speaker, who have long been opponents of the utilization of employee stock options, they have been able to artificially link the public's legitimate hunger to rein in corporate abuse with their desire to kill the use of employee stock options.

Let me say that again. We all are outraged at the corporate abuse that we have seen over the past few years, but it is, to me, very troubling that a number of people who are opponents of the utilization of employee stock options are using that shared concern that we all have to try and limit the opportunity for stock options to exist. In effect, they are trying to use an accounting sleight of hand to eliminate stock options in the name of investor interests and open corporate reporting.

If stock option opponents succeed, innovation and ingenuity, the indisputable drivers of our 21st century economy, will be unquestionably undermined. Millions and millions of rank and file employees will lose their ability to hold stakes in their company's future successes. A troublesome precedent will have been set in the promulgation of accounting standards.

Expensing proponents have successfully used what is supposed to be a technical, a technical, determination of an accounting standard to obtain what is really a corporate governance policy decision. That is why I want to applaud, as I said earlier, the gentleman from Louisiana (Chairman Baker) for crafting a bill that achieves a critical balance.

H.R. 3574, the Stock Options Accounting Reform Act, while implementing stock option expensing for, as

has been pointed out by my colleague the gentleman from Texas (Mr. Sessions), for the company's top five executives, does so in a way that will preserve the continued viability of broad-based employee stock option plans. It is one of two critical reasons why I am a proud cosponsor of this Baker-Eshoo bill.

It is that latter objective, giving workers on the lower rungs of the corporate ladder the opportunity to own a piece of the company pie, that is so important to the health and growth of our ingenuity-driven economy.

Remember, it is the estimated 14 million workers, 90 percent of whom hold nonmanagement positions, who would be immediately affected by a mandatory expensing standard. These are the rank-and-file workers, the Americans who have invested their sweat equity in the hope, not the guarantee, but the hope that their investment will provide future retirement funds, college tuition or a housing downpayment.

I am reminded how my friend, the gentlewoman from California (Ms. Eshoo), and I joined in getting a wide range of employees, from Sun, Cisco, Intel and other companies, who have talked about the fact that their opportunity to own a home, to pay for their college education for their children, has come from the existence of these options.

Many argue that expensing will prevent CEOs from abusing stock options. That is simply untrue, Mr. Speaker. Illegal accounting tactics are just that, they are illegal. An accounting standard is not going to stop an individual who is intent on breaking the law. Instead, FASB's proposed accounting standard will eliminate what has been a valuable employee incentive tool. That will not help the top managers. Similar to what traditional companies, like Coca-Cola do now, we know that executives will continue to receive stock options even with mandatory expensing.

Speaking more broadly, if high-growth industries lose their flexibility to use broad-based stock options, we will all lose. Stock options align the employee interests with the company interest, and that produces a motivated worker. Nowhere has that formula proven more effective than in the technology sector of our economy, particularly in California's Silicon Valley.

No matter what area of technology you look at, you will find that the common thread to a company's success has been employee stock options. Without that flexibility, we would lose a key motivator for would-be entrepreneurs and existing innovative companies to take risks and transform new ideas into industry. New industries create new jobs, higher wages and increased standards of living.

That brings me to my other primary reason for supporting this legislation, and that is the investor. Expensing proponents cite time and time again the urgency of giving investors accurate information about a company's use of stock options. I absolutely agree with that goal, Mr. Speaker. Investors need meaningful and transparent information. However, the real investor class issue here is a corporate reporting issue, not an accounting issue. Options do not cost a company money, but they do have an impact on share value.

We must stand on the side of investors and ensure that they have clear and accurate information about how stock options dilute the value of their shares. I want to commend the gentleman from Ohio (Chairman Oxley) for adding provisions to this measure that will do just that. His language will expand required disclosures to include plain English discussion of the dilutive effects of stock option plans, increased comparability information, the number of outstanding stock options and the estimated number of outstanding stock options that will vest in each year.

Many of us, Mr. Speaker, may have been following this issue closely over the past few years. Actually, I know a number of our colleagues, frankly, have not been following this issue in great detail over the last couple of years, so it is for that reason I think it is important to explain why stock option expensing will do everything but bring clarity and accuracy to corporate financial statements.

The inability to correctly value options that have not been exercised, may never be exercised and are not tradable in open markets means investors will necessarily get wrong information from expensing. Why? Because no one has been able to figure out how to value these options. That, in and of itself, should make anyone question FASB's fundamental premise that stock options are a corporate expense.

FASB set up an options valuation group earlier this year to come up with one single method, but the group was unable to do so. FASB now is preparing to recommend allowing companies to choose from two different valuation models in its pending proposal.

Mr. Speaker, Professor William Sahlman from Harvard, commenting on the Black-Scholes model said, ``If anything, expensing options may lead to an even more distorted picture of a company's economic position and cash flows than financial statements currently paint.''

One of the inventors of the other model, the binomial method, recently said, ``I was one of the inventors of the board-proposed model, and I say: Don't use it. It doesn't work.''

Mr. Speaker, I want to close my remarks by doing what I did when the gentlewoman from California (Ms. Eshoo) and I testified before the Committee on Financial Services subcommittee on this issue by taking us back nearly two millennia to around 100 A.D.

During that time, a brilliant mathematician, astronomer and geographer named Claudius Ptolemy, wrote a 13-volume treatise entitled The Mathematical Compilation. It is also known as the Almagest. It explained the movements of the sun, moon and five planets around the center of the Earth.

For nearly 15 centuries, his work was the leading scientific explanation of that ``truth.'' And based on the fact that the Earth was at the center of the universe, scientists of that time developed very complicated and precise answers to all types of questions, such as why the visible planets take certain paths around the sky.

Mr. Speaker, geniuses like Nicolaus Copernicus improved on the Ptolemaic work by proposing that the sun and Earth revolved around a point near the sun. And Tycho Brahe explained how the planets revolved around the sun, and the sun and planets revolved around the Earth. Even Galileo did not break completely from the intellectual view underpinning the 15 centuries of Ptolemy's astronomy.

What does Ptolemy have to do with stock options, expensing and the FASB? Mr. Speaker, the accountants at FASB, good people that they are, are determined to fit the entire universe around a world view that in the end is flawed as much as Ptolemy's universe was. Their view is that everything must be able to be scored and placed on a corporate balance sheet. Well, the Earth is not the center of the universe, and everything does not belong on a balance sheet.

That is not to say that given enough hard thinking, a smart person could not figure out a way to put everything on a balance sheet. Utterly brilliant people figured out a way to explain with amazing precision how and why the sun and planets revolved around the Earth. You can explain just about anything with mathematical precision, but that does not make it true.

FASB is not populated by Ptolemy, Copernicus, Brahe or Galileo, and you do not have to be a Johannes Kepler to know that FASB is just plain wrong when it comes to stock option expensing.

Mr. Speaker, the Stock Options Accounting Reform Act is one of the most important proeconomic growth, proemployee ownership bills that we will consider in this Congress. Unlike the FASB, and I do recognize their independence, we as elected officials have an obligation to American workers and investors to preserve an environment that allows entrepreneurs to grow our economy. A potential change in accounting treatment may be arcane to some, but it is in the real world that the negative impact of mandatory expensing will hurt the risk-takers who are creating jobs and wealth in this country.

Mr. Speaker, we have made a rule in order that will allow for consideration of all the amendments that have been submitted to us, but I want to urge my colleagues to vote in opposition to those amendments that could in any

way undermine the basis of this very important legislation.

So I urge my colleagues to support the rule and, of course, enthusiastically support this measure as it comes to passage, and enjoy a strong bipartisan victory at the end of the day.

Mr. Speaker, by direction of the Committee on Rules, I call up House Resolution 725 and ask for its immediate consideration.

Mr. Speaker, for the purpose of debate only, I yield the customary 30 minutes to the gentleman from Florida (Mr. Hastings), pending which I yield myself such time as I may consume. During consideration of this resolution, all time yielded is for the purpose of debate only.

Mr. Speaker, the resolution before us is a well-balanced, structured rule that makes in order a manager's amendment and three amendments offered by members of the minority, including a minority amendment in the nature of a substitute. It provides for 1 hour of general debate, equally divided and controlled by the chairman and ranking minority member of the Committee on Financial Services.

The rule waives all points of order against consideration of the bill and provides that the amendment in the nature of a substitute recommended by the Committee on Financial Services, now printed in the bill, shall be considered as an original bill for the purpose of amendment, and shall be considered as read.

It makes in order only those amendments printed in the Committee on Rules report accompanying the resolution, and provides that the amendments printed in the report may be considered only in the order printed in the report, and may only be offered by a Member designated in the report. They shall be considered as read, debatable for the time specified in the report, equally divided and controlled by the proponent and an opponent, not be subject to amendment, and not be subject to a demand for a division of the question in the House or in the Committee of the Whole.

Finally, the rules waive all points of order against the amendments printed in the report, and provides one motion to recommit with or without instructions.

Mr. Speaker, I rise today in strong support of the rule for H.R. 3574 as well as the underlying legislation. This bill offered by my good friend from Louisiana (Mr. Baker) is carefully constructed legislation that will help the United States to retain its global dominance in the biotechnology and high-technology sectors while creating new jobs, fostering innovation and enhancing productivity. It will also empower rank-and-file employees to share in the

benefits of their hard work by allowing them to earn an equity stake in the companies where they work every day to create new products and technologies keeping America one step ahead of the rest of the world in technological advances and competitiveness.

H.R. 3574 achieves this worthy goal by bringing some common sense and discipline back to the debate over stock options expensing. First, it requires the immediate expensing of the stock options granted to the CEO and the next four most highly compensated executives of a company, consistent with information that must be filed with the SEC.

Second, it requires that options granted to the five top senior executives be valued in such a way that mitigates some of the most severe problems with FASB's expected valuation models which are based on valuation models for a type of option that differs fundamentally from stock options by virtue of being freely traded on open exchanges.

Third, it exempts certain small businesses from what we call the top five rule expensing requirement and delays option expensing for small business issuers until 3 years after an initial public offering has taken place, allowing a small business' stock to settle down from the initial volatility of the initial public offering.

Fourth, it prohibits the SEC from recognizing any stock option expensing accounting standard until the standard recognizes the true expense of the stock option on a company's financial statement when the option is exercised, expires or is forfeited, and a comprehensive economic impact study has been completed by the Secretary of Commerce and the Secretary of Labor.

Finally, this legislation improves corporate governance and transparency by requiring the SEC to issue a rule mandating that public companies include more detailed information on stock option and stock purchase plans in their public periodic reports, such as plain-English descriptions that describe the effect that stock options will have on earnings per share and the number of outstanding stock options.

Throughout the 108th Congress, the Republican majority in this House has championed and advanced a legislative program full of efforts to improve economic growth, corporate governance, and transparency on behalf of investors across the United States. Unfortunately, the Financial Accounting Standards Board's recent recommendation to mandate the expensing of stock option runs contrary to this pro-investor agenda. It represents a step in the wrong direction by providing investors with less accurate information about public-traded companies which will lead investors to a distorted picture of a company's financial performance. Even worse, the mandatory expensing proposal threatens to destroy broad-based plans and the productivity, innovation, and economic growth they currently generate.

I do not believe that Congress should replace FASB or become suddenly interested in micromanaging accounting standards; however, the proposal to expense all stock options does not simply have an academic outcome. It would have a negative real-world policy impact by destroying the American partnership culture of distributing stock options to our entire workforce. I believe that allowing such a proposal to go forward will choke off job growth, innovation, and entrepreneurship that broad- based ownership generates; and Congress does have a very real and immediate response to prevent this from happening.

The research behind the economic benefits of stock options support this view. As two Rutgers researchers recently concluded `` . . . using broad-based options to create a partnership model of the corporation will, over the long run, help to make most companies more competitive and create more wealth for shareholders.''

Research also shows that companies with stock-based option plans receive a one-time, but permanent, boost to their productivity of about 4 percent compared to what productivity would have been without entrepreneurship and employee ownership. More importantly, total shareholder returns go up by an average of about 2 percent. This kind of growth is vital to improving our economy and creating jobs; and I believe this kind of incentive should be nurtured, not eliminated.

Data on stock ownership also shows that the 100 largest high-tech firms that focus on the Internet, average employees hold approximately 19 percent of their company's stock, 17 percent accumulated through stock options. Top executives hold only 14 percent, demonstrating that stock options have empowered rank-and-file employees and low-level managers to acquire a stake in their work by accumulating more ownership in their companies than their bosses. Ninety-eight of these 100 companies provide options to them or to most of their employees. In Intel's case, for example, 98 percent of the options granted between 1998 and 2002 went to employees other than the top five executives.

More than 200 companies from more than 29 States have filed public comments opposing mandatory expensing. The NASDAQ, which lists 3,600 companies, opposes expensing, and opposition to FASB's proposal comes not only from the high-tech and biotech sectors but also from other areas of our economy, such as from the National Association of Manufacturers, the U.S. Chamber, America's Community Bankers, the Business Roundtable, and the Association of Financial Professionals.

I would like to thank the gentleman from Louisiana (Mr. Baker), the Committee on Financial Services chairman; the gentleman from Ohio (Mr. Oxley); and the gentleman from California (Mr. Dreier), the young chairman of the Committee on Rules, for all of their hard work, their vision, and leadership on this issue on behalf of American workers and investors. I believe this legislation improves the financial information available to investing for the public while ensuring that rank-and-file employees and middle management can still participate in the great American tradition of a broad-based employee ownership of their company.

The choice presented by this legislation is very stark and clear: Should Congress allow inside-the-beltway accounting technicians to implement standards with severe negative economic consequences, or should we develop policies that encourage economic growth, job creation, and international competitiveness? I say yes. I believe the choice is clear and that Congress should take this opportunity to stand up for American workers and business. I encourage all of my colleagues to support this rule and the underlying legislation.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself such time as I may consume.

What this legislation does do is run the risk of encouraging entrepreneurs and companies and people to work harder, produce better products for this country, to do the right thing for the investor, but mostly it runs the risk of making sure that the person who would get that stock option is able to then take advantage of that and better their life and to better the life of America by making sure that people have money in their pockets to where they can make their own decisions.

Mr. Speaker, I yield such time as he may consume to the gentleman from California (Mr. Dreier), chairman of the Committee on Rules.

Mr. Speaker, I would like to notify my colleague, the gentleman from Florida (Mr. Hastings), that at this time the majority does not have additional speakers. I believe I have approximately 5 minutes remaining, and I would encourage him to utilize that time that is necessary for him to close, and then I will do so myself.

Mr. Speaker, I yield myself such time as I may consume.

I thank you for your indulgence in hearing this debate today and for your wisdom and hard work to be with us through this process.

Mr. Speaker, what we have heard today is, Members of Congress from all across this great country, California, Oregon, Florida, Texas and other places, who have talked about the need and the desire for us to pass this legislation that we have before us.

I am proud that our speaker, the gentleman from Illinois (Mr. Hastert) and our majority leader, the gentleman from Texas (Mr. DeLay) are fully in support of this bipartisan legislation, legislation that has been brought to the floor through the leadership of the gentleman from Ohio (Mr. Oxley) and the gentleman from Louisiana (Mr. Baker) and the gentleman from Texas (Mr. Barton), who is the chairman of the Committee on Energy and Commerce, and certainly the words from the gentleman from California (Mr. Dreier), the chairman of the Committee on Rules, in talking about how this excites America and workers to achieve not only dedication and hard work, but also encourages biotech firms.

I think this is exciting. I think this is the right thing. I think this is what Congress should be doing in the leadership of the gentleman from Texas (Mr. DeLay) and the gentleman from Illinois (Mr. Hastert) to make sure this kind of legislation consumes our time, is important to America and our future.

In 2002, nearly 15 million Americans held stock options, about 13 percent of private sector workers nationwide. About 85 percent of the existing stock options are held by nonmanagement workers. This is a whole lot to do about allowing people who get up and go to work every day, Mr. Speaker, who care about not only this country and about their families, but this offers them to protect that nest egg that grows.

I am proud of what the Republican Party is doing by bringing this legislation to the floor. I am equally as proud that it is bipartisan, because it is doing the right thing for people, and I stand in support of this, encourage my colleagues to support the underlying legislation in the rule.

Mr. Speaker, I yield back the balance of my time, and I move the previous question on the resolution.

The previous question was ordered.

Mr. Chairman, I thank the gentleman from Pennsylvania (Mr. Kanjorski) for yielding me this time.

I am very proud to be the lead Democratic sponsor of this bill. My partner, the gentleman from Louisiana (Mr. Baker), the gentleman from California (Mr. Dreier) before him, and colleagues from both sides of the aisle, this is a true bipartisan effort: over 100 cosponsors, including leadership from the Democratic side, our distinguished leader, the gentlewoman from California (Ms. Pelosi), as well as from the Republican side. This is not a partisan issue, nor should it be.

What this debate is about is not simply the grays and the green eye shade issues of accounting. What stands front and center in this issue is the American economy and how we continue to spur it. There are three major ingredients that other countries around the world have come to understand because they have studied it, and it has been part of our success: venture capital, the protection of intellectual property, and stock options. Why stock options? Because it is a magnet that attracts workers to a company; and with that magnet it is stated, yes, we are willing to take a risk and make this company grow. And when we do, we will all share in the rewards. That is intrinsically American.

Now, have there been people who have abused stock options at the top? Sadly, that was the case. And the Congress stepped in because the SEC needed us to step in. The SEC did not do what it was supposed to do, and the Sarbanes-Oxley legislation was passed. So in terms of the debate, leave the SEC alone, leave the FASB alone, we should not interfere, we should not step in, that case is absolutely blown by having adopted Sarbanes-Oxley.

The FASB has put out an accounting standard. They understand that they have nothing to do with the economy, and they are proud of saying that. The Congress does have a responsibility for anything that impinges on our economy. There are institutional investors in this country that are not interested in individual stakes and shareholders. That is all right; it is the view that they hold.

So this debate today, and make no mistake about it, listen carefully, this is about protecting a tool that has paid off for rank-and-file workers across the country. This is not only about high technology and biotechnology. In fact, most of the stock option holders' rank-and-file are outside of those two industries, and they represent 14.6 million workers in our country.

Now why expense the people at the top? Because they come to their compensation package differently. Rank-and-file workers do not negotiate with a board of directors; the top five in the company do. This is balanced. This is important. This is essential. Do not wreck one of the most valuable tools that we have in our country today to expand our economy, to expand new businesses and to have a stake in the future of America. I urge my colleagues to support H.R. 3574.

Mr. Chairman, I'm proud to be the lead Democratic sponsor of the Stock Option Accounting Reform Act, and thank Chairman Baker for his leadership, moving it through the Financial Services Committee with such strong support. The legislation is urgently needed to avert the implementation of new accounting rules that would have a disastrous impact on American companies, and more importantly, American workers.

The Financial Accounting Standards Board (FASB) has long threatened to require stock options to be deducted from a company's earnings, and this bill would prevent FASB from implementing this requirement for many critical reasons. Mandatory expensing of stock options would have a terrible impact on companies that rely on options to recruit and retain the most talented employees. Without stock options, many of these companies--including some of the most successful high-tech and biotech firms--would not even exist today.

Stock options have become associated with corporate scandals and excessive executive compensation, leading to a call for expensing as the ultimate prescription for these problems. But stock options were not the cause of the recent corporate accounting scandals, and eliminating stock options would do nothing to instill corporate responsibility or accountability. The crimes committed at Enron, Tyco, and other companies would not have been prevented if expensing was the accounting rule of the day.

The Sarbanes-Oxley legislation, which I was proud to support, was passed to prevent future corporate swindles. If companies are forced to expense stock options, most will drop broad-based option plans because of the prospect of taking a huge and misleading charge against their bottom line in accounting statements.

Make no mistake about it. Stock option plans or some other form of lucrative compensation for senior executives will undoubtedly continue to be offered. Consider this: Only a small portion of employee-held options--about 15 percent--are held by corporate management. 14.6 million American workers--13 percent of private-sector workers nationwide--held stock options in 2002.

It's ironic that many are calling for the expensing of stock options in order to reign in executive compensation, when expensing stock options would do little to accomplish this. Rather rank and file employees would be the ones to lose, because they don't get to negotiate with a Board of Directors for their compensation package.

H.R. 3574 also answers many of the critics of stock options who maintain (wrongly) that this compensation is an ``executive perk'' and a tool to avoid reporting executive salaries. The Stock Option Accounting Reform Act requires companies to expense options granted to the CEO and the next four highest paid officers. Small businesses are exempted from this requirement and cannot be required to expense options for the 3 years following an initial public offering.

The bill would also enact new disclosure rules for companies who offer stock options, requiring them to disclose additional information regarding share value dilution and other stock option-related information.

Some have also argued that FASB's independence must be protected and accounting standards--like other technical rules--should not be set by Congress. While in general this is the case, there are many occasions when expert bodies fail to fully protect the public interest and it's incumbent on Congress to step in. For example, the Securities and Exchange Commission--an independent, expert agency--failed to adequately protect investors and the public from the corporate scandals of recent years: Congress stepped in to enact the reforms of Sarbanes- Oxley.

Recently, a ``determination on drug safety'' was made by the Food and Drug Administration which found that the morning-after birth control pill was not safe enough to approve for over-the-counter sale, despite ample evidence to the contrary. I would hope that if the FDA does not change its position on the morning-after pill, we will act to overturn this decision as well.

Even the Chairman of FASB recently acknowledged that the Board has proceeded too quickly and the implementation of the new expensing rules may need to be delayed. H.R. 3574 would simply ensure that the rules are not implemented for at least a year, pending economic impact studies by the Commerce and Labor Departments.

Given the radical change the new rules would establish and the potentially devastating impact on employee ownership programs, Congress has the responsibility to make sure that these rules are appropriate and implemented responsibly. I urge my colleagues to support this legislation and protect broad-based employee ownership programs.

Mr. Chairman, I thank the gentleman from Ohio (Mr. Oxley) for yielding me time.

Mr. Chairman, I oppose this amendment, and let me state very clearly why. Number one, this amendment allows the SEC to override what the Congress wants. I think that stands our process on its head. And I am not suggesting that our process is always perfect and tidy. I thought that when I came here that when the Congress legislates and the executive signs on to that and a bill becomes law that it is up to the executive branch of government to carry that out.

We have gotten nowhere with this accounting board. They do not want to sit down and hear the other side of this, which is economic. And so that is why I urge my colleagues to reject the amendment.

It essentially guts the bill. If you are opposed to stock options for rank-and-file employees, be opposed to that; but to do this the other way around, I think really begs the question.

Mr. Chairman, I thank the gentleman from Ohio for the time, and Mr. Chairman, I would like to point out a few things here about the substitute.

First of all, obviously I respect the gentleman from Pennsylvania, but I do not support the substitute, and let me tell my colleagues why.

There was a chart that was here on the floor a little earlier of companies that expense. I wish we had a chart on the floor that demonstrated that those companies that do do not offer stock options to their rank-and-file employees.

This debate is not about the venture capitalists. They are going to make their investments. They are going to pick and choose. But this is a magnet that attracts individuals to form new companies to allow them to grow and bring them up to profitability. We want to destroy this? Well, it is going to be in the hands of the Congress to do that. That is what this debate is about.

Those that have problems with executive compensation have problems with it. Talk to the board of directors that form those packages, but rank-and-file employees do not get to negotiate their compensation or those packages. That is why their stock options are so important.

This substitute does not address FASB's failure to develop accurate expensing formulas. They are unwilling to even road-test the standards that they are talking about.

Now, I think that that is really unfair. That is why, as a Member of Congress, I stepped in. I think we should, and I think it is appropriate because we do have a responsibility to answer to the American people about economics and economic impacts on our people.

That is why I urge my colleagues to reject and to vote against the Kanjorski substitute. It was rejected in the committee and it should be on the floor.

Mr. Chairman, I yield myself 6 minutes.

Mr. Chairman, we are unfortunately meeting today to consider the Stock Option Accounting Reform Act. This bill would begin the process of repealing the reforms we enacted in the historic Sarbanes-Oxley Act just 2 years ago. As I repeatedly noted during the Committee on Financial Services' consideration of these matters, deciding what should be accounted for and how it should be accounted for is the job of the Financial Accounting Standards Board, not the Congress.

Nevertheless, I recognize the strong feelings and deep concerns expressed by the parties on the other side of this contentious issue. The accounting treatment of stock options has caused significant controversy for more than a decade and FASB's decision to revisit this matter has rekindled a fiery debate.

Although I have great sympathy for those individuals in the high-tech community who have raised considerable reservations about the expensing of stock options and the effects on business operations and compensation plans, H.R. 3574 would interfere with FASB's independence. It could also undermine the credibility of financial reports.

We need to work in Washington, particularly in the wake of recent accounting scandals, to improve the transparency of financial reporting statements in order to help average investors make better decisions. A decade ago, the Congress strong-armed FASB into abandoning an effort to adopt a rule requiring stock option expensing. We now know that this retreat helped contribute to a recent financial storm on Wall Street. In fact, a recent study by economists at Texas A&M found that companies where CEOs had options equal to 52 times their annual salary were 70 percent more likely to have a restatement than similar-sized companies in similar industries where CEO had little option wealth.

In considering this bill today, we may, therefore, ultimately allow history to repeat itself. We would for the first time also be making the Congress an appeals board for the development of accounting standards. Support in the business community for mandatory expensing has increased significantly in the wake of the recent tidal wave of accounting scandals. A Merrill Lynch study found more than 90 percent of institutional investors want stock options expensed. This view is shared by the American Institute of Certified Public Accountants, the Investment Company Institute, and the Council for Institutional Investors. Our largest accounting firms have also called for the expensing of stock options.

In addition, nearly 600 companies have already voluntarily adopted or are in the process of adopting fair-value expensing of stock options. Respected corporations like Home Depot, General Motors, General Electric, Wal-Mart, Microsoft, and Amazon have all decided to treat stock options as expenses.

In a recent letter to FASB, Citigroup emphasized its ``strong support for private sector standard setting'' and ``its opposition to congressional intervention on the accounting for stock options.''

Furthermore, in recent proxy votes at IBM, Peoplesoft, Hewlett- Packard, and Texas Instruments, the shareholders of these leading high- tech companies have voted in favor of stock options expensing. Moreover, in May the shareholders of Intel approved a proposal asking the company to expense stock options. This proposal passed with 54 percent of the 5.7 billion votes cast. To date, however, Intel's management has disregarded the decision of its stockholders.

Numerous consumer groups, including the Consumer Federation of America, Consumers Union, and Consumer Action, are also supporting the expensing of stock options. They have determined that the legislation we are considering would deprive investors of comprehensive and transparent financial transactions. Many in the labor movement share these concerns. These entities include the AFL-CIO, the Teamsters, and AFSCME, among others. Each of these groups has called on us to reject

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 4 minutes to the gentlewoman from California (Ms. Eshoo), a chief sponsor of the bill.

Mr. Chairman, I yield 3 minutes to the gentleman from Ohio (Mr. Gillmor).

Mr. Chairman, I yield 2\1/2\ minutes to the gentlewoman from Illinois (Ms. Schakowsky).

(Ms. SCHAKOWSKY asked and was given permission to revise and extend her remarks.)

Mr. Chairman, I yield 3 minutes to the gentleman from Massachusetts (Mr. Frank), the ranking member of the Committee on Financial Services.

Mr. Chairman, I yield 3\1/2\ minutes to the gentleman from Florida (Mr. Stearns).

(Mr. STEARNS asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 2 minutes to the gentlewoman from New York (Mrs. Maloney).

Mr. Chairman, I yield 2 minutes to the gentleman from Georgia (Mr. Marshall).

Mr. Chairman, I yield 2 minutes to the gentleman from California (Mr. Sherman).

(Mr. SHERMAN asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 2 minutes to the gentleman from Illinois (Mr. Emanuel).

Mr. Chairman, we have no objection to the manager's amendment and support it.

Mr. Chairman, I offer an amendment.

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, the Kanjorski-Castle-Dingell-Maloney-Emanuel substitute is simple in its structure and intent. In short, it would replace the current text of H.R. 3574 with language designed to preserve the independence of the Financial Accounting Standards Board in establishing accounting standards.

Specifically, the substitute incorporates a series of findings concerning SEC authority over standards setting and the importance of credible accounting standards to the economy and investors. It also puts forward a sense of Congress that preserving the integrity of the accounting standards setting process is crucial to the financial reporting systems and markets.

Finally, it provides direction to the SEC to oversee the process of setting standards for equity-based compensation to ensure that all comments, including those of the high-tech industry, are appropriately reviewed and that any modifications necessary to ensure the highest quality accounting standards are adopted.

Mr. Chairman, deciding what should be accounted for and how it should be accounted for is the job of the Financial Accounting Standards Board, not the Congress. As a Washington Post recently editorialized, ``The accounting standards, like interest rates and determinations of drug safety, should not be set by Congress.'' They should be set by the experts at the Financial Accounting Standards Board.

Moreover, we should not start proceeding down a slippery slope of establishing accounting standards via political process. As the Financial Accounting Foundation has noted, ``Once Congress starts setting accounting standards through its political process, the integrity of the United States accounting standards-setting and the credibility of the U.S. financial reporting will be dangerously compromised.''

In short, we should ensure that the Congress does not become an appellate court for accounting standards. I hope my colleagues, therefore, would support our bipartisan substitute.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 3 minutes to the gentleman from Delaware (Mr. Castle), a co-sponsor of the substitute amendment.

Mr. Chairman, I yield 2 minutes to the gentleman from Massachusetts (Mr. Frank), the ranking member of the Committee on Financial Services.

MR. FRANK of Massachusetts. Mr. Chairman, I am delighted to take up where the previous speaker left off.

No, I do not want to see an end to venture capital in the Silicon Valley, and my argument is that this is greatly overblown. Here is the argument; we have just heard it.

We have this very valuable resource in America, these high-tech start-ups. They are, on the whole, quite productive; they generate wealth, venture capitalists give them money, and we are being told that the venture capitalists in America are so stupid that a change in accounting, which represents no change in reality, will drive them away from this business.

Now, I agree with those who say that the options are a good thing. I do not

think investors are misled. If you are going to invest in a company, read the footnotes, and if you did not read the footnotes when you invested, do not complain to me. I have got constituents with real problems.

On the other hand, the argument that if you change the accounting and the reality is not changed, remember this has not been the issue. Nothing about what FASB is proposing would stop the issuance of options. It simply changes the way they are accounted for literally.

The argument is that the most sophisticated investors in America will see a change in the accounting and they will say, Oh, my God, I had better stop investing in these companies; I did not know that they were doing this. Well, of course they know. Both sides know. No one is getting any new information out of this.

The question is, if the accounting takes them from a gain on paper to a loss on paper with no change in reality, will that dry up capital?

Now, I understand where if you are one company out of many and you did this and others did not, maybe you would be at a disadvantage, but are venture capitalists so dumb that they do not know what apparently everybody here does? I think they at least tie us in intelligence and understanding of economic processes. Are they going to say, Oh, now that the accounting is changed, now that this is expensed, even though the realities are the same, I will withdraw my investment? I am wholly skeptical of that argument.

Mr. Chairman, I yield 1\1/2\ minutes to the gentleman from Ohio (Mr. Kucinich).

Mr. Chairman, I yield 1\1/2\ minutes to the gentleman from California (Mr. Sherman).

Mr. Chairman, I demand a recorded vote.