Group asks SEC to delay Zions' stock-option method

A group representing investors with more than $3 trillion in assets asked the U.S. Securities and Exchange Commission to delay approving new ways to value stock options until it has time to study the potential effects.

The Council of Institutional Investors, representing 140 pension funds, complained to SEC Chief Accountant Conrad Hewitt in a Feb. 5 letter that an auction-based system developed by Salt Lake-based Zions Bancorp. was approved last week without investor input.

The Zions approval "does not appear to have been subject to any public due process," wrote Jeff Mahoney, general counsel of the Washington-based group. "We would respectfully request that your office defer any further approvals of this approach" for at least a month.

Companies have been seeking ways to reduce the cost of employee stock options since accounting rules were changed last year to require they be counted as expenses. Zions, a holding company that operates banks in 10 Western states, won SEC approval to set option prices by auctioning tracking securities called Employee Stock Option Appreciation Rights.

Companies typically estimate stock-option prices using academic models, which they say tend to produce higher valuations. In a test auction last June, Zions established a value of $7.50 a share for its own options, compared with $15.02 a share derived under the widely used Black-Scholes model.

Mahoney expressed concern other companies would use the Zions model to cut their compensation expenses.

"Your approval of Zions' ESOARS is likely to have a significant impact on the reporting of compensation costs and reported earnings," he wrote to Hewitt.

The SEC "will consider the viewpoints of all" those who have an interest in new option valuation techniques, Hewitt said in an interview.