The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.
The practice of allowing a mutual fund shareholder to use previous purchases of the fund's shares so as to qualify for reduced commission charges on subsequent purchases.
Backdating is used when a fund offers declining proportional sales charges on larger purchases.
Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.
In our example, backdating the options is the same as giving John Doe a check for $35,000 -- without recording that $35,000 on the within two business days.
However, it can be permissible under certain circumstances.
For instance, one may backdate an insurance claim if there was an unavoidable delay between the date the insured event occurred and the day the claim was made.
Typically, the grant date of the stock options is the same as the date of the board meeting.
This is important to note, because the grant date is what determines the exercise price on the options.
grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.