Companies should take an intense look at their compensation practices using stock options in light of a recent ruling by the Securities and Exchange Commission, an insurance brokerage is cautioning.
Nick Conca, managing principal of New York-based Integro insurance brokerage, said in an interview, "Companies must now be diligent in undertaking a thorough review of their corporate policies."
He noted that internal investigative procedures "must now take priority. Oversight committees should now be formed and independent experts called in to assess corporate policy in light of existing D&O [directors and officers liability] policy coverage."
On Wednesday the Securities and Exchange Commission laid out requirements for companies on how to disclose their stock option grants.
While the new rules won't necessarily bar the practice of back-dating options to ensure their dollar value to those granted them, it will require companies to disclose the manner in which they are granted more fully than before, Mr. Conca noted.
D&O writers are now going to be more aggressive in their underwriting of executive liability risk. "As such, companies looking to renew or expand their D&O liability coverage will need to be particularly sensitive to the terms and conditions given the SEC requirements," Mr. Conca said.
An estimated 80 companies have been targetted in various federal and state investigations regarding the practice of back-dating options to improve their cash in value. Companies face the possibility of not only governmental fines and sanctions but also private shareholder litigation.
D&O writers will in all likelihood be on the hook for defense costs, but disagreement exists as to whether they will be exposed for "disgorgement of ill-gotten gains" costs.
Chubb Chief Administrative Officer John Degnan said in a recent conference that the entire back-dating issue has been overblown.
Mr. Conca said he does not see the back-dating issue as leading to a noticeable impact on D&O pricing or terms and conditions.
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