October 2, 2007

Spotlight on Insider Trading at Hedge Funds

In yesterday’s blog, three out of the top ten recent Enforcement cases that I listed involved allegations of insider trading—clearly a top priority at the SEC. In late August, the SEC sent a 27-page letter to registered hedge fund advisers, seeking information about employees and clients who might be in a position to obtain material non-public information. As noted in this Washington Post article, Mark Schonfeld of the SEC’s New York regional office indicated “[t]his is an effort to look out for potential insider trading at hedge funds and to ensure that hedge-fund advisers are living up to their obligation to detect and prevent insider trading.”

According to published reports, the letter asks for lists of all employees and clients of the fund, as well as any relatives serving as officers or directors of public companies. The letter also requests information about contacts at brokerage firms with which the fund has done business. In addition, the SEC is seeking information about controls in place to prevent insider trading.

With this level of scrutiny, now more than ever companies need to focus on their insider trading policies and the activities of their officers and directors (including the use of Rule 10b5-1 plans). Even though we are only a week away, it is still not too late to sign up for our three critical conferences. In addition to Linda Chatman Thomsen’s keynote address at our Hot Topics conference, you can also hear the latest on Rule 10b5-1 plans and everything you need to know—in a nutshell—to prevent inadvertent, costly insider trading, Section 16 and Rule 144 violations. Register now for:

– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)

Register for the “Member Appreciation Package” online—or use this Order Form.

If you have any questions, contact our HQ at or 925.685.5111.

Stock Option Legislation Introduced

Last Friday, Senator Carl Levin (D-Mich.) introduced a bill entitled the “Ending Corporate Tax Favors for Stock Options Act” (S. 2116). The bill was referred to the Senate Finance Committee.

Levin’s bill would:

– match the corporate tax deduction for stock option compensation to the book expense reflected in a company’s financial statements;

– permit companies to deduct stock option compensation in the same year that it is recorded on their books, rather than when the options are exercised;

– provide that research tax credits use the same stock option deduction when computing the “wages” eligible for those particular tax credits;

– establish a transition provision that would apply the new tax deduction to stock option exercises occurring after enactment, permit the old tax deduction rule to apply to options vested prior to adoption of FAS 123R, and allow a catch-up deduction in the first year after enactment for options that vested after adoption of FAS 123R but before the date of enactment; and

– make stock option compensation part of the same $1 million cap on the tax deductions that can now be claimed by public companies for other forms of executive compensation under Section 162(m).

In Senator Levin’s statement introducing the bill, he noted the significant disparity in pay between the CEO of a large corporation and the average worker. As for the influence of the tax code on executive compensation decisions, Levin noted: “When a company’s compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it’s a pretty tempting proposition for the company to pay its executives with stock options instead of cash or stock. It’s a classic case of U.S. tax policy creating an unintended incentive for corporations to act.” This legislation stems from the Senate’s Permanent Subcommittee on Investigations hearing entitled “Executive Stock Options: Should the IRS and Stockholders be Given Different Information” from back in June. The bill would not affect the stock option compensation tax rules applicable to individuals.

Test Your M&A Knowledge: Are You a Pro or Troll?

We have posted one of our popular quizzes – “Pro” or “Troll”? Test Your Knowledge – on It will score your answers as you go—and let you know how you compare against your peers.

Simply read each statement and decide whether you agree with it (by clicking “Ah Yes”) or disagree (by clicking “That’s Ridiculous”). Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.

– Dave Lynn