SEC Rejects Cisco's Proposal on Options Valuation

The Securities and Exchange Commission has rejected a proposal from Cisco Systems to value its options based on a market in employee options the company would create. Under the proposal, Cisco would create a new derivative security whose terms would be the same as its employee options. Derivative securities are investments whose values is derived from their relationship to an underlying security, in this case Cisco common shares. Like employee options, the securities would have a fixed term, would have an exercise price equal to the price of common stock when the derivative security is bought, and could not be exercised until a defined period of time has elapsed. Moreover, investors could not hedge their investments against the options, effectively limiting their potential loss or gain. These options would thus be considerably more restrictive than conventional traded options and therefore would sell for a greater discount to common shares. Cisco would issue a limited number of these options and would make them available only to certain institutional investors.

The SEC was dubious that the proposal really created a valid market, but Chair Christopher Cox said the SEC would encourage other proposals to create market conditions that more closely mimicked the cost of options to employees.