Cool terms: "spring-loading" or "bullet-dodging"

The guns came out at dawn. The legal phrase was cocked and ready to blow.  At the start of September the U.S. marshalls declared they would clamp down on the cowboys that manipulate markets with news affecting the price of share options.  Corporate Blawg UK notes that two weeks later the same whirlwind was to hit our chalky shores.
            This week the FSA have warned in its Market Watch September newsletter (published on the 25th) that companies should not attempt to manipulate the market with spring-loading or bullet dodging, or they could face unlimited fines and public sanction.
            Corporate Blawg whistled towards these cool terms and explains that when options over shares are granted, a company may manipulate the market with good or bad news to make those options worth more or less. 
            Spring-loading is when a company brings forward an option allocation date so the holder can benefit from anticipated rises in the share price.
            Bullet-dodging is the opposite, when the company delays the grant of an option so the owner can benefit from an expected fall in share price.
            The facts of each case will determine whether spring loading and bullet dodging amounts to market abuse under the Financial Services and Markets Act 2000 (FSMA). Market abuse may be caused by an employee acquiring, or person granting, options on the basis of inside information.  Section.118(3) FSMA (improper disclosure) may apply where a director discloses information to the person responsible for granting options, in order to affect the timing of the grant of the option, and that information relates to a forthcoming announcement. Section 118(4) (misuse of information) might also be applicable for where information is used to decide the timing of grants.  Any decision by a company to give clearance for dealings during the run up to the release of inside information would be a breach of the Model Code. There are a number of other provisions under which the FSA could stir trouble for dodgy directors or corrupt CEOs.
            Although the widespread use of share options as executive remuneration is relatively new, this method of manipulation of the market has been recognised since at least 1997.  In this year, the US Journal of Finance published an article by Dr David Yermack on "Good Timing:  CEO stock option awards and company news announcements." 
           The irritiation of the financial regulators with this "good timing" reached a crescendo on 11 September 2006 with a speech by John W. White, Director, Division of Corporation Finance of the U.S. Securities and Exchange Commission ("SEC").  John highlighted the issue, and obfuscated it with interesting jargon including a name for the process in which companies should disclose their option strategies: nicknamed "CD&A" or Compensation Discussion & Analysis.  Inspiring.
            CD&A boils down to companies having a scheduled plan or strategy that is clear and transparent. Companies should disclose these plans and strategies to their audit firms, and fully address the issues of timing for options and for disclosing information.  Whether such strategies will hit the mark, and are adminstratively feasible is yet to be tested.  Corporate Blawg looks forward to reviewing option grant strategies in corporate due diligence in the future.
            The fact that this is not the first media-hitting declaration to come out of the FSA two weeks after a similar excitement in the U.S., suggests that the Anglo-speaking financial regulators are a bit like film distributors, and launch their new products in the US market before the rest of the world.  Accordingly, Corporate Blawg U.K. has decided to keep a closer eye on movements in the U.S. financial regulatory markets, in order to forecast the news-worthy motions of the FSA and be a fortnight ahead of the game.  Whether this will help Corporate Blawg's solicitous career or his salacious blog is anyone's guess.

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