[House Report 107-414]
[From the U.S. Government Publishing Office]
107th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 107-414
======================================================================
CORPORATE AND AUDITING ACCOUNTABILITY, RESPONSIBILITY, AND TRANSPARENCY
ACT OF 2002
_______
April 22, 2002.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Oxley, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY, ADDITIONAL, AND DISSENTING VIEWS
[To accompany H.R. 3763]
The Committee on Financial Services, to whom was referred the
bill (H.R. 3763) to protect investors by improving the accuracy
and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
CONTENTS
Page
Amendment........................................................ 2
Purpose and Summary.............................................. 16
Background and Need for Legislation.............................. 18
Hearings......................................................... 19
Committee Consideration.......................................... 20
Committee Votes.................................................. 20
Committee Oversight Findings..................................... 34
Performance Goals and Objectives................................. 34
New Budget Authority, Entitlement Authority, and Tax Expenditures 35
Committee Cost Estimate.......................................... 35
Congressional Budget Office Estimate............................. 35
Federal Mandates Statement....................................... 35
Advisory Committee Statement..................................... 35
Constitutional Authority Statement............................... 35
Applicability to Legislative Branch.............................. 35
Section-by-Section Analysis of the Legislation................... 36
Changes in Existing Law Made by the Bill, as Reported............ 48
Minority, Additional, and Dissenting Views....................... 49
Amendment
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Corporate and
Auditing Accountability, Responsibility, and Transparency Act of
2002''.
(b) Table of Contents.--
Sec. 1. Short title; table of contents.
Sec. 2. Auditor oversight.
Sec. 3. Improper influence on conduct of audits.
Sec. 4. Real-time disclosure of financial information.
Sec. 5. Insider trades during pension fund blackout periods prohibited.
Sec. 6. Improved transparency of corporate disclosures.
Sec. 7. Improvements in reporting on insider transactions and
relationships.
Sec. 8. Codes of conduct.
Sec. 9. Enhanced oversight of periodic disclosures by issuers.
Sec. 10. Retention of records.
Sec. 11. Commission authority to bar persons from serving as officers
or directors.
Sec. 12. Disgorging insiders profits from trades prior to correction of
erroneous financial statements.
Sec. 13. Securities and Exchange Commission authority to provide
relief.
Sec. 14. Study of rules relating to analyst conflicts of interest.
Sec. 15. Review of corporate governance practices.
Sec. 16. Study of enforcement actions.
Sec. 17. Study of credit rating agencies.
Sec. 18. Study of investment banks and other financial institutions.
Sec. 19. Study of model rules for attorneys of issuers.
Sec. 20. Enforcement authority.
Sec. 21. Exclusion for investment companies.
Sec. 22. Definitions.
SEC. 2. AUDITOR OVERSIGHT.
(a) Certified Financial Statement Requirements.--If a financial
statement is required by the securities laws or any rule or regulation
thereunder to be certified by an independent public or certified
accountant, an accountant shall not be considered to be qualified to
certify such financial statement, and the Securities and Exchange
Commission shall not accept a financial statement certified by an
accountant, unless such accountant--
(1) is subject to a system of review by a public regulatory
organization that complies with the requirements of this
section and the rules prescribed by the Commission under this
section; and
(2) has not been determined in the most recent review
completed under such system to be not qualified to certify such
a statement.
(b) Establishment of PRO.--The Commission shall by rule establish the
criteria by which a public regulatory organization may be recognized
for purposes of this section. Such criteria shall include the following
requirements:
(1)(A) The board of such organization shall be comprised of
five members, three of whom shall be public members who are not
members of the accounting profession and two of whom shall be
persons licensed to practice public accounting and who have
recent experience in auditing public companies.
(B) Each member of the board of such organization shall be a
person who meets such standards of financial literacy as are
determined by the Commission.
(C) For purposes of this paragraph, a person shall not be
considered a member of the accounting profession if such person
has not worked in such profession for any of the last two years
prior to the date of such person's appointment to the board.
(2) Such organization is so organized and has the capacity--
(A) to be able to carry out the purposes of this
section and to comply, and to enforce compliance by
accountants and persons associated with accountants,
with the provisions of this Act, professional ethics
and competency standards, and the rules of the
organization;
(B) to perform a review of the work product
(including the quality thereof) of an accountant or a
person associated with an accountant; and
(C) to perform a review of any potential conflicts of
interest between an accountant (or a person associated
with an accountant) and the issuer, the issuer's board
of directors and committees thereof, officers, and
affiliates of such issuer, that may result in an
impairment of auditor independence.
(3) Such organization shall have the authority to impose
sanctions, which, if there is a finding of knowing or
intentional misconduct, may include a determination that an
accountant is not qualified to certify a financial statement,
or any categories of financial statements, required by the
securities laws, or that a person associated with an accountant
is not qualified to participate in such certification, if,
after conducting a review and providing fair procedures and an
opportunity for a hearing, the organization finds that--
(A) such accountant or person associated with an
accountant has violated the standards of independence,
ethics, or competency in the profession;
(B) such accountant or person associated with an
accountant has been found by the Commission or a court
of competent jurisdiction to have violated the
securities laws or a rule or regulation thereunder
(provided in both cases that any applicable time period
for appeal has expired);
(C) an audit conducted by such accountant or any
person associated with an accountant has been
materially affected by an impairment of auditor
independence;
(D) such accountant or person associated with an
accountant has performed both auditing services and
consulting services in violation of the rules
prescribed by the Commission pursuant to subsection
(c); or
(E) such accountant or any person associated with an
accountant has impeded, obstructed, or otherwise not
cooperated in such review.
(4) Any such organization shall disclose publicly, and make
available for public comment, proposed procedures and methods
for conducting such reviews.
(5) Any such organization shall have in place procedures to
minimize and deter conflicts of interest involving the public
members of such organization, and have in place procedures to
resolve such conflicts.
(6) Any such organization shall have in place procedures for
notifying the boards of accountancy of the States of the
results of reviews and evidence under paragraphs (2) and (3).
(7) Any such organization shall have in place procedures for
notifying the Commission of any findings of such reviews,
including any findings regarding suspected violations of the
securities laws.
(8) Any such organization shall consult with boards of
accountancy of the States.
(9) Any such organization shall have in place a mechanism to
allow the organization to operate on a self-funded basis. Such
funding mechanism shall ensure that such organization is not
solely dependent upon members of the accounting profession for
such funding and operations.
(10) Any such organization shall have the authority to
request, in a manner established by the Commission, that the
Commission, by subpoena or otherwise, compel the testimony of
witnesses or the production of any books, papers,
correspondence, memoranda, or other records relevant to any
accountant review proceeding or necessary or appropriate for
the organization to carry out its purposes. The Commission
shall comply with any such request from such an organization if
the Commission determines that compliance with the request
would assist the organization in its accountant review
proceeding or in carrying out its purposes, unless the
Commission determines that compliance would not be in the
public interest. The issuance and enforcement of a subpoena
requested under this paragraph shall be deemed to be made
pursuant to, and shall be made in accordance with, the
provisions of subsections (b) and (c) of section 21 of the
Securities and Exchange Act of 1934 (15 U.S.C. 78u(b)-(c)). For
purposes of taking evidence, the Commission in its discretion
may designate the Board, or any member thereof, as officers
pursuant to section 21(b) of such Act.
(c) Prohibition on the Offer of Both Audit and Consulting Services.--
(1) Modification of regulations required.--The Commission
shall revise its regulations pertaining to auditor independence
to require that an accountant shall not be considered
independent with respect to an audit client if the accountant
provides to the client the following nonaudit services, as such
terms are defined in such regulations as in effect on the date
of enactment of this Act, and subject to such conditions and
exemptions as the Commission shall prescribe:
(A) financial information system design or
implementation; or
(B) internal audit services.
(2) Review of prohibited nonaudit services.--The Commission
is authorized to review the impact on the independence of
auditors of the scope of services provided by auditors to
issuers in order to determine whether the list of prohibited
nonaudit services under paragraph (1) shall be modified. In
conducting such review, the Commission shall consider the
impact of the provision of a service on an auditor's
independence where provision of the service creates a conflict
of interest with the audit client.
(3) Additions by rule.--After conducting the review required
by paragraph (2) and at any other time, the Commission may, by
rule consistent with the protection of investors and the public
interest, modify the list of prohibited nonaudit services under
paragraph (1).
(4) Report.--The Commission shall report to the Committee on
Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the Senate
on its conduct of any reviews as required by this section. The
report shall include a discussion of regulatory or legislative
steps that are recommended or that may be necessary to address
concerns identified in the study.
(5) Conforming revision.--The Commission shall revise its
regulations pertaining to accountant fee disclosure items, as
set forth in paragraphs (e)(1) through (e)(3) of item 9 from
Schedule 14A (17 CFR 240.14a-101), in light of paragraph (1) of
this subsection and after making a determination as to whether
such disclosures are necessary.
(6) Deadline for rulemaking.--The Commission shall--
(A) within 90 days after the date of enactment of
this Act, propose, and
(B) within 270 days after such date, prescribe,
the revisions to its regulations required by this subsection.
(d) PRO Accountant Review Proceedings.--
(1) Review proceeding findings.--Any findings made pursuant
to an accountant review conducted under this section that a
financial statement audited by such accountant and submitted to
the Commission may have been materially affected by an
impairment of auditor independence, or by a violation of
professional ethics and competency standards, shall be
submitted to the Commission. The Commission shall promptly
notify an issuer of any such finding that relates to the
financial statements of such issuer.
(2) Confidential treatment of proceedings pending sec
review.--
(A) No disclosure.--Except as otherwise provided in
this section, but notwithstanding any other provision
of law, neither the Commission, a recognized public
regulatory organization, nor any other person shall
disclose any information concerning any accountant
review proceeding and the findings therein.
(B) Specific withholding not authorized.--Nothing in
this subsection shall--
(i) authorize a recognized public regulatory
organization to withhold information from the
Commission;
(ii) authorize such board or the Commission
to withhold information concerning an
accountant review proceeding from an accountant
or person associated with an accountant that is
the subject of such proceeding;
(iii) authorize the Commission to withhold
information from Congress; or
(iv) prevent the Commission from complying
with a request for information from any other
Federal department or agency requesting
information for purposes within the scope of
its jurisdiction, or complying with an order of
a court of the United States in an action
brought by the United States or the Commission.
(C) Duration of withholding.--Neither the Commission
nor the recognized public regulatory organization shall
disclose the results of any such finding until the
completion of any review by the Commission under
subsections (e) and (f), or the conclusion of the 30-
day period for seeking review if no motion seeking
review is filed within such period.
(D) Treatment under foia.--For purposes of section
552 of title 5, United States Code, this subsection
shall be considered a statute described in subsection
(b)(3)(B) of such section 552.
(3) Nonpreclusive effect of pro findings.--A finding by a
recognized public regulatory organization that an individual
audit of an issuer met or failed to meet any applicable
standard with respect to the quality of such audit shall not be
construed in any action arising out of the securities laws as
indicative of compliance or noncompliance with the securities
laws or with any standard of liability arising thereunder.
(e) Review of Sanctions.--
(1) Notice.--If any recognized public regulatory
organization--
(A) makes a finding with respect to or imposes any
final disciplinary sanction on any accountant;
(B) prohibits or limits any person in respect to
access to services offered by such organization; or
(C) makes a finding with respect to or imposes any
final disciplinary sanction on any person associated
with an accountant or bars any person from becoming
associated with an accountant,
the recognized public regulatory organization shall promptly
submit notice thereof with the Commission. The notice shall be
in such form and contain such information as the Commission, by
rule, may prescribe as necessary or appropriate in furtherance
of the purposes of this section.
(2) Review by commission.--Any action with respect to which a
recognized public regulatory organization is required by
paragraph (1) of this subsection to submit notice shall be
subject to review by the Commission, on its own motion, or upon
application by any person aggrieved thereby filed within 30
days after the date such notice was filed with the Commission
and received by such aggrieved person, or within such longer
period as the Commission may determine. Application to the
Commission for review, or the institution of review by the
Commission on its own motion, shall not operate as a stay of
such action unless the Commission otherwise orders, summarily
or after notice and opportunity for hearing on the question of
a stay (which hearing may consist solely of the submission of
affidavits or presentation of oral arguments). The Commission
shall establish for appropriate cases an expedited procedure
for consideration and determination of the question of a stay.
(f) Conduct of Commission Review.--
(1) Basis for action.--In any proceeding to review a final
disciplinary sanction imposed by a recognized public regulatory
organization on an accountant or a person associated with such
accountant, after notice and opportunity for hearing (which
hearing may consist solely of consideration of the record
before the recognized public regulatory organization and
opportunity for the presentation of supporting reasons to
affirm, modify, or set aside the sanction)--
(A) if the Commission finds that such accountant or
person associated with an accountant has engaged in
such acts or practices, or has omitted such acts, as
the recognized public regulatory organization has found
him to have engaged in or omitted, that such acts or
practices, or omissions to act, are in violation of
such provisions of this section, or of professional
ethics and competency standards, and that such
provisions are, and were applied in a manner,
consistent with the purposes of this section, the
Commission, by order, shall so declare and, as
appropriate, affirm the sanction imposed by the
recognized public regulatory organization, modify the
sanction in accordance with paragraph (2) of this
subsection, or remand to the recognized public
regulatory organization for further proceedings; or
(B) if the Commission does not make any such finding,
it shall, by order, set aside the sanction imposed by
the recognized public regulatory organization and, if
appropriate, remand to the recognized public regulatory
organization for further proceedings.
(2) Reduction of sanctions.--If the Commission, having due
regard for the public interest and the protection of investors,
finds after a proceeding in accordance with paragraph (1) of
this subsection that a sanction imposed by a recognized public
regulatory organization upon an accountant or person associated
with an accountant imposes any burden on competition not
necessary or appropriate in furtherance of the purposes of this
Act or is excessive or oppressive, the Commission may cancel,
reduce, or require the remission of such sanction.
(g) Review and Approval of Rules.--
(1) Submission, publication, and comment.--Each recognized
public regulatory organization shall file with the Commission,
in accordance with such rules as the Commission may prescribe,
copies of any proposed rule or any proposed change in, addition
to, or deletion from the rules of such recognized public
regulatory organization (hereinafter in this subsection
collectively referred to as a ``proposed rule change'')
accompanied by a concise general statement of the basis and
purpose of such proposed rule change. The Commission shall,
upon the filing of any proposed rule change, publish notice
thereof together with the terms of substance of the proposed
rule change or a description of the subjects and issues
involved. The Commission shall give interested persons an
opportunity to submit written data, views, and arguments
concerning such proposed rule change. No proposed rule change
shall take effect unless approved by the Commission or
otherwise permitted in accordance with the provisions of this
subsection.
(2) Approval or proceedings.--Within 35 days of the date of
publication of notice of the filing of a proposed rule change
in accordance with paragraph (1) of this subsection, or within
such longer period as the Commission may designate up to 90
days of such date if it finds such longer period to be
appropriate and publishes its reasons for so finding or as to
which the recognized public regulatory organization consents,
the Commission shall--
(A) by order approve such proposed rule change; or
(B) institute proceedings to determine whether the
proposed rule change should be disapproved. Such
proceedings shall include notice of the grounds for
disapproval under consideration and opportunity for
hearing and be concluded within 180 days of the date of
publication of notice of the filing of the proposed
rule change. At the conclusion of such proceedings the
Commission, by order, shall approve or disapprove such
proposed rule change. The Commission may extend the
time for conclusion of such proceedings for up to 60
days if it finds good cause for such extension and
publishes its reasons for so finding or for such longer
period as to which the recognized public regulatory
organization consents.
(3) Basis for approval or disapproval.--The Commission shall
approve a proposed rule change of a recognized public
regulatory organization if it finds that such proposed rule
change is consistent with the requirements of this Act and the
rules and regulations thereunder applicable to such
organization. The Commission shall disapprove a proposed rule
change of a recognized public regulatory organization if it
does not make such finding. The Commission shall not approve
any proposed rule change prior to the 30th day after the date
of publication of notice of the filing thereof, unless the
Commission finds good cause for so doing and publishes its
reasons for so finding.
(4) Rules effective upon filing.--
(A) Notwithstanding the provisions of paragraph (2)
of this subsection, a proposed rule change may take
effect upon filing with the Commission if designated by
the recognized public regulatory organization as (i)
constituting a stated policy, practice, or
interpretation with respect to the meaning,
administration, or enforcement of an existing rule of
the recognized public regulatory organization, (ii)
establishing or changing a due, fee, or other charge
imposed by the recognized public regulatory
organization, or (iii) concerned solely with the
administration of the recognized public regulatory
organization or other matters which the Commission, by
rule, consistent with the public interest and the
purposes of this subsection, may specify as outside the
provisions of such paragraph (2).
(B) Notwithstanding any other provision of this
subsection, a proposed rule change may be put into
effect summarily if it appears to the Commission that
such action is necessary for the protection of
investors, or otherwise in accordance with the purposes
of this title. Any proposed rule change so put into
effect shall be filed promptly thereafter in accordance
with the provisions of paragraph (1) of this
subsection.
(C) Any proposed rule change of a recognized public
regulatory organization which has taken effect pursuant
to subparagraph (A) or (B) of this paragraph may be
enforced by such organization to the extent it is not
inconsistent with the provisions of this Act, the
securities laws, the rules and regulations thereunder,
and applicable Federal and State law. At any time
within 60 days of the date of filing of such a proposed
rule change in accordance with the provisions of
paragraph (1) of this subsection, the Commission
summarily may abrogate the change in the rules of the
recognized public regulatory organization made thereby
and require that the proposed rule change be refiled in
accordance with the provisions of paragraph (1) of this
subsection and reviewed in accordance with the
provisions of paragraph (2) of this subsection, if it
appears to the Commission that such action is necessary
or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of
the purposes of this Act. Commission action pursuant to
the preceding sentence shall not affect the validity or
force of the rule change during the period it was in
effect, shall not be subject to court review, and shall
not be deemed to be ``final agency action'' for
purposes of section 704 of title 5, United States Code.
(h) Commission Action To Change Rules.--The Commission, by rule, may
abrogate, add to, and delete from (hereinafter in this subsection
collectively referred to as ``amend'') the rules of a recognized public
regulatory organization as the Commission deems necessary or
appropriate to insure the fair administration of the recognized public
regulatory organization, to conform its rules to requirements of this
Act, the securities laws, and the rules and regulations thereunder
applicable to such organization, or otherwise in furtherance of the
purposes of this Act, in the following manner:
(1) The Commission shall notify the recognized public
regulatory organization and publish notice of the proposed
rulemaking in the Federal Register. The notice shall include
the text of the proposed amendment to the rules of the
recognized public regulatory organization and a statement of
the Commission's reasons, including any pertinent facts, for
commencing such proposed rulemaking.
(2) The Commission shall give interested persons an
opportunity for the oral presentation of data, views, and
arguments, in addition to an opportunity to make written
submissions. A transcript shall be kept of any oral
presentation.
(3) A rule adopted pursuant to this subsection shall
incorporate the text of the amendment to the rules of the
recognized public regulatory organization and a statement of
the Commission's basis for and purpose in so amending such
rules. This statement shall include an identification of any
facts on which the Commission considers its determination so to
amend the rules of the recognized public regulatory agency to
be based, including the reasons for the Commission's
conclusions as to any of such facts which were disputed in the
rulemaking.
(4)(A) Except as provided in paragraphs (1) through (3) of
this subsection, rulemaking under this subsection shall be in
accordance with the procedures specified in section 553 of
title 5, United States Code, for rulemaking not on the record.
(B) Nothing in this subsection shall be construed to impair
or limit the Commission's power to make, or to modify or alter
the procedures the Commission may follow in making, rules and
regulations pursuant to any other authority under the
securities laws.
(C) Any amendment to the rules of a recognized public
regulatory organization made by the Commission pursuant to this
subsection shall be considered for all purposes to be part of
the rules of such recognized public regulatory organization and
shall not be considered to be a rule of the Commission.
(i) Commission Oversight of the PRO.--
(1) Records and examinations.--A public regulatory
organization shall make and keep for prescribed periods such
records, furnish such copies thereof, and make and disseminate
such reports as the Commission, by rule, prescribes as
necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of this Act or the securities laws.
(2) Additional duties; special reviews.--A public regulatory
organization shall perform such other duties or functions as
the Commission, by rule or order, determines are necessary or
appropriate in the public interest or for the protection of
investors and to carry out the purposes of this Act and the
securities laws, including conducting a special review of a
particular public accounting firm's quality control system or a
special review of a particular aspect of some or all public
accounting firms' quality control systems.
(3) Annual report; proposed budget.--
(A) Submission of annual report and budget.--A public
regulatory organization shall submit an annual report
and its proposed budget to the Commission for review
and approval, by order, at such times and in such form
as the Commission shall prescribe.
(B) Contents of annual report.--Each annual report
required by subparagraph (A) shall include--
(i) a detailed description of the activities
of the public regulatory organization;
(ii) the audited financial statements of the
public regulatory organization;
(iii) a detailed explanation of the fees and
charges imposed by the public regulatory
organization under subsection (b)(9); and
(iv) such other matters as the public
regulatory organization or the Commission deems
appropriate.
(C) Transmittal of annual report to congress.--The
Commission shall transmit each approved annual report
received under subparagraph (A) to the Committee on
Financial Services of the United States House of
Representatives and the Committee on Banking, Housing,
and Urban Affairs of the United States Senate. At the
same time it transmits a public regulatory
organization's annual report under this subparagraph,
the Commission shall include a written statement of its
views of the functioning and operations of the public
regulatory organization.
(D) Public availability.--Following transmittal of
each approved annual report under subparagraph (C), the
Commission and the public regulatory organization shall
make the approved annual report publicly available.
(4) Disapproval of election of pro member.--The Commission is
authorized, by order, if in its opinion such action is
necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of this Act or the securities laws, to disapprove the
election of any member of a public regulatory organization if
the Commission determines, after notice and opportunity for
hearing, that the person elected is unfit to serve on the
public regulatory organization.
(j) Clarification of Application of PRO Authority.--The authority
granted to any such organization in this section shall only apply to
the actions of accountants related to the certification of financial
statements required by securities laws and not other actions or actions
for other clients of the accounting firm or any accountant that does
not certify financial statements for publicly traded companies.
(k) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
rules to implement this section.
(l) Effective Date; Transition Provisions.--
(1) Effective date.--Except as provided in paragraph (2),
subsection (a) of this section shall be effective with respect
to any certified financial statement for any fiscal year that
ends more than one year after the Commission recognizes a
public regulatory organization pursuant to this section.
(2) Delay in establishment of board.--If the Commission has
failed to recognize any public regulatory organization pursuant
to this section within one year after the date of enactment of
this Act, the Commission shall perform the duties of such
organization with respect to any certified financial statement
for any fiscal year that ends before one year after any such
board is recognized by the Commission.
SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.
(a) Rules To Prohibit.--It shall be unlawful in contravention of such
rules or regulations as the Commission shall prescribe as necessary and
appropriate in the public interest or for the protection of investors
for any officer, director, or affiliated person of an issuer of any
security registered under section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 78l) to take any action to fraudulently influence,
coerce, manipulate, or mislead any independent public or certified
accountant engaged in the performance of an audit of the financial
statements of such issuer for the purpose of rendering such financial
statements materially misleading. In any civil proceeding, the
Commission shall have exclusive authority to enforce this section and
any rule or regulation hereunder.
(b) No Preemption of Other Law.--The provisions of subsection (a)
shall be in addition to, and shall not supersede or preempt, any other
provision of law or any rule or regulation thereunder.
(c) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
the rules or regulations required by this section.
SEC. 4. REAL-TIME DISCLOSURE OF FINANCIAL INFORMATION.
(a) Real-Time Issuer Disclosures Required.--
(1) Obligations.--Every issuer of a security registered under
section 12 of the Securities Exchange Act of 1934 (15 U.S.C.
78l) shall file with the Commission and disclose to the public,
on a rapid and essentially contemporaneous basis, such
information concerning the financial condition or operations of
such issuer as the Commission determines by rule is necessary
in the public interest and for the protection of investors.
Such rule shall--
(A) specify the events or circumstances giving rise
to the obligation to disclose or update a disclosure;
(B) establish requirements regarding the rapidity and
timeliness of such disclosure;
(C) identify the means whereby the disclosure
required shall be made, which shall ensure the broad,
rapid, and accurate dissemination of the information to
the public via electronic or other communications
device;
(D) identify the content of the information to be
disclosed; and
(E) without limiting the Commission's general
exemptive authority, specify any exemptions or
exceptions from such requirements.
(2) Enforcement.--The Commission shall have exclusive
authority to enforce this section and any rule or regulation
hereunder in civil proceedings.
(b) Electronic Disclosure of Insider Transactions.--
(1) Disclosures of trading.--The Commission shall, by rule,
require--
(A) that a disclosure required by section 16 of the
Securities Exchange Act of 1934 (15 U.S.C. 78p) of the
sale of any securities of an issuer, or any security
futures product (as defined in section 3(a)(56) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(56)))
or any security-based swap agreement (as defined in
section 206B of the Gramm-Leach-Bliley Act) that is
based in whole or in part on the securities of such
issuer, by an officer or director of the issuer of
those securities, or by a beneficial owner of such
securities, shall be made available electronically to
the Commission and to the issuer by such officer,
director, or beneficial owner before the end of the
next business day after the day on which the
transaction occurs;
(B) that the information in such disclosure be made
available electronically to the public by the
Commission, to the extent permitted under applicable
law, upon receipt, but in no case later than the end of
the next business day after the day on which the
disclosure is received under subparagraph (A); and
(C) that, in any case in which the issuer maintains a
corporate website, such information shall be made
available by such issuer on that website, before the
end of the next business day after the day on which the
disclosure is received by the Commission under
subparagraph (A).
(2) Transactions included.--The rule prescribed under
paragraph (1) shall require the disclosure of the following
transactions:
(A) Direct or indirect sales or other transfers of
securities of the issuer (or any interest therein) to
the issuer or an affiliate of the issuer.
(B) Loans or other extensions of credit extended to
an officer, director, or other person affiliated with
the issuer on terms or conditions not otherwise
available to the public.
(3) Other formats; forms.--In the rule prescribed under
paragraph (1), the Commission shall provide that electronic
filing and disclosure shall be in lieu of any other format
required for such disclosures on the day before the date of
enactment of this subsection. The Commission shall revise such
forms and schedules required to be filed with the Commission
pursuant to paragraph (1) as necessary to facilitate such
electronic filing and disclosure.
SEC. 5. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS PROHIBITED.
(a) Prohibition.--It shall be unlawful for any person who is directly
or indirectly the beneficial owner of more than 10 percent of any class
of any equity security (other than an exempted security) which is
registered under section 12 of the Securities Exchange Act of 1934 (15
U.S.C. 78l) or who is a director or an officer of the issuer of such
security, directly or indirectly, to purchase (or otherwise acquire) or
sell (or otherwise transfer) any equity security of any issuer (other
than an exempted security), during any blackout period with respect to
such equity security.
(b) Remedy.--Any profit realized by such beneficial owner, director,
or officer from any purchase (or other acquisition) or sale (or other
transfer) in violation of this section shall inure to and be
recoverable by the issuer irrespective of any intention on the part of
such beneficial owner, director, or officer in entering into the
transaction. Suit to recover such profit may be instituted at law or in
equity in any court of competent jurisdiction by the issuer, or by the
owner of any security of the issuer in the name and in behalf of the
issuer if the issuer shall fail or refuse to bring such suit within 60
days after request or shall fail diligently to prosecute the same
thereafter; but no such suit shall be brought more than 2 years after
the date such profit was realized. This subsection shall not be
construed to cover any transaction where such beneficial owner was not
such both at the time of the purchase and sale, or the sale and
purchase, of the security or security-based swap (as defined in section
206B of the Gramm-Leach-Bliley Act) involved, or any transaction or
transactions which the Commission by rules and regulations may exempt
as not comprehended within the purposes of this subsection.
(c) Rulemaking Permitted.--The Commission may issue rules to clarify
the application of this subsection, to ensure adequate notice to all
persons affected by this subsection, and to prevent evasion thereof.
(d) Definition.--For purposes of this section, the term ``beneficial
owner'' has the meaning provided such term in rules or regulations
issued by the Securities and Exchange Commission under section 16 of
the Securities Exchange Act of 1934 (15 U.S.C. 78p).
SEC. 6. IMPROVED TRANSPARENCY OF CORPORATE DISCLOSURES.
(a) Modification of Regulations Required.--The Commission shall
revise its regulations under the securities laws pertaining to the
disclosures required in periodic financial reports and registration
statements to require such reports to include adequate and appropriate
disclosure of--
(1) the issuer's off-balance sheet transactions and
relationships with unconsolidated entities or other persons, to
the extent they are not disclosed in the financial statements
and are reasonably likely to materially affect the liquidity or
the availability of, or requirements for, capital resources, or
the financial condition or results of operations of the issuer;
and
(2) loans extended to officers, directors, or other persons
affiliated with the issuer on terms or conditions that are not
otherwise available to the public.
(b) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
the revisions to its regulations required by subsection (a).
(c) Analysis Required.--
(1) Transparency, completeness, and usefulness of financial
statements.--The Commission shall conduct an analysis of the
extent to which, consistent with the protection of investors
and the public interest, disclosure of additional or
reorganized information may be required to improve the
transparency, completeness, or usefulness of financial
statements and other corporate disclosures filed under the
securities laws.
(2) Alternatives to be considered.--In conducting the
analysis required by paragraph (1), the Commission shall
consider--
(A) requiring the identification of the key
accounting principles that are most important to the
issuer's reported financial condition and results of
operation, and that require management's most
difficult, subjective, or complex judgments;
(B) requiring an explanation, where material, of how
different available accounting principles applied, the
judgments made in their application, and the likelihood
of materially different reported results if different
assumptions or conditions were to prevail;
(C) in the case of any issuer engaged in the business
of trading non-exchange traded contracts, requiring an
explanation of such trading activities when such
activities require the issuer to account for contracts
at fair value, but for which a lack of market price
quotations necessitates the use of fair value
estimation techniques;
(D) establishing requirements relating to the
presentation of information in clear and understandable
format and language; and
(E) requiring such other disclosures, included in the
financial statements or in other disclosure by the
issuer, as would in the Commission's view improve the
transparency of such issuer's financial statements and
other required corporate disclosures.
(3) Rules required.--If the Commission, on the basis of the
analysis required by this subsection, determines that it is
necessary in the public interest or for the protection of
investors and would improve the transparency of issuer
financial statements, the Commission may prescribe rules
reflecting the results of such analysis and the considerations
required by paragraph (2). In prescribing such rules, the
Commission may seek to minimize the paperwork and cost burden
on the issuer consistent with achieving the public interest and
investor protection purposes of such rules.
SEC. 7. IMPROVEMENTS IN REPORTING ON INSIDER TRANSACTIONS AND
RELATIONSHIPS.
(a) Specific Objectives.--The Commission shall initiate a proceeding
to propose changes in its rules and regulations with respect to
financial reporting to improve the transparency and clarity of the
information available to investors and to require increased financial
disclosure with respect to the following:
(1) Insider relationships and transactions.--Relationships
and transactions--
(A) between the issuer, affiliates of the issuer, and
officers, directors, or employees of the issuer or such
affiliates; and
(B) between officers, directors, employees, or
affiliates of the issuer and entities that are not
otherwise affiliated with the issuer,
to the extent such arrangement or transaction creates a
conflict of interest for such persons. Such disclosure shall
provide a description of such elements of the transaction as
are necessary for an understanding of the business purpose and
economic substance of such transaction (including
contingencies). The disclosure shall provide sufficient
information to determine the effect on the issuer's financial
statements and describe compensation arrangements of interested
parties to such transactions.
(2) Relationships with philanthropic organizations.--
Relationships between the registrant or any executive officer
of the registrant and any not-for-profit organization on whose
board a director or immediate family member serves or of which
a director or immediate family member serves as an officer or
in a similar capacity. Relationships that shall be disclosed
include contributions to the organization in excess of $10,000
made by the registrant or any executive officer in the last
five years and any other activity undertaken by the registrant
or any executive officer that provides a material benefit to
the organization. Material benefit includes lobbying.
(3) Insider-controlled affiliates.--Relationships in which
the registrant or any executive officer exercises significant
control over an entity in which a director or immediate family
member owns an equity interest or to which a director or
immediate family member has extended credit. Significant
control should be defined with reference to the contractual and
governance arrangements between the registrant or executive
officer, as the case may be, and the entity.
(4) Joint ownership.--Joint ownership by a registrant or
executive officer and a director or immediate family member of
any real or personal property.
(5) Provision of services by related persons.--The provision
of any professional services, including legal, financial
advisory or medical services, by a director or immediate family
member to any executive officer of the registrant in the last
five years.
(b) Deadlines.--The Commission shall complete the rulemaking required
by this section within 180 days after the date of enactment of this
Act.
SEC. 8. CODES OF CONDUCT.
(a) Rules Required.--Within 180 days after the date of enactment of
this Act, the New York Stock Exchange, the American Stock Exchange and
the Nasdaq Stock Market (or any successor to such entities), shall file
with the Commission proposed rule changes that would prohibit the
listing of any security issued by an issuer that has not adopted a
senior financial officers code of ethics applicable to its principal
financial officer, its comptroller or principal accounting officer, or
persons performing similar functions that establishes such standards as
are reasonably necessary to promote honest and ethical conduct, the
avoidance of conflicts of interest, full, fair, accurate, timely and
understandable disclosure in the issuer's periodic reports and
compliance with applicable governmental rules and regulations. The
Commission shall approve such proposed rule changes pursuant to the
requirement of section 19(b)(2) of the Securities Act of 1934.
(b) Other Exchanges.--The Commission, by rule or regulation, may
require any other national securities exchange, to propose rule changes
necessary to comply with the provisions of subsection (a) of this
section if the Commission determines such action is necessary or
appropriate in the public interest and consistent with the protection
of investors.
(c) Further Standards.--In addition to the requirements of
subsections (a) and (b), the Commission may, by rule or regulation,
prescribe further standards of conduct for senior financial officers as
necessary or appropriate in the public interest and consistent with the
protection of investors.
(d) Changes in Codes of Conduct.--Within 180 days after the date of
enactment of this Act, the Commission shall revise its regulations
concerning matters requiring prompt disclosure on Form 8K to require
the immediate disclosure, by means of such Form and by the Internet or
other electronic means, by any issuer of any change in, or waiver of,
the code of ethics of such issuer.
SEC. 9. ENHANCED OVERSIGHT OF PERIODIC DISCLOSURES BY ISSUERS.
(a) Regular and Systematic Review.--The Securities and Exchange
Commission shall review disclosures made by issuers pursuant to the
Securities Exchange Act of 1934 (including reports filed on form 10-K)
on a basis that is more regular and systematic than that in practice on
the date of enactment on this Act. Such review shall include a review
of an issuer's financial statements.
(b) Risk Rating System.--For purposes of the reviews required by
subsection (a), the Commission shall establish a risk rating system
whereby issuers receive a risk rating by the Commission, which shall be
used to determine the frequency of such reviews. In designing such a
risk rating system the Commission shall consider, among other factors
the following:
(1) Emerging companies with disparities in price to earning
ratios.
(2) Issuers with the largest market capitalization.
(3) Issuers whose operations significantly impact any
material sector of the economy.
(4) Systemic factors such as the effect on niche markets or
important subsectors of the economy.
(5) Issuers that experience significant volatility in their
stock price as compared to other issuers.
(6) Any other factor the Commission may consider relevant.
(c) Minimum Review Period.--In no event shall an issuer be reviewed
less than once every three years by the Commission.
(d) Prohibition of Disclosure of Risk Rating.--Notwithstanding any
other provision of law, the Commission shall not disclose the risk
rating of any issuer described in subsection (b).
SEC. 10. RETENTION OF RECORDS.
(a) Duty To Retain Records.--Any independent public or certified
accountant who certifies a financial statement as required by the
securities laws or any rule or regulation thereunder shall prepare and
maintain for a period of no less than 7 years, final audit work papers
and other information related to any accountants report on such
financial statements in sufficient detail to support the opinion or
assertion reached in such accountants report. The Commission may
prescribe rules specifying the application and requirements of this
section.
(b) Accountant's Report.--For purposes of subsection (a), the term
``accountant's report'' means a document in which an accountant
identifies a financial statement and sets forth his opinion regarding
such financial statement or an assertion that an opinion cannot be
expressed.
SEC. 11. COMMISSION AUTHORITY TO BAR PERSONS FROM SERVING AS OFFICERS
OR DIRECTORS.
(a) Commission Authority To Prohibit Persons From Serving as Officers
or Directors.--Notwithstanding any other provision of the securities
laws, in any cease-and-desist proceeding under section 8A(a) of the
Securities Act of 1933 or section 21C(a) of the Securities and Exchange
Act of 1934, the Commission may issue an order to prohibit,
conditionally or unconditionally, permanently or for such period of
time as it shall determine, any person who has violated section
17(a)(1) of the Securities Act of 1933 or section 10(b) of the
Securities Exchange Act of 1934 (or any rule or regulation thereunder)
from acting as an officer or director of any issuer that has a class of
securities registered pursuant to section 12 of the Securities Exchange
Act of 1934 or that is required to file reports pursuant to section
15(d) of such Act if the person's conduct demonstrates substantial
unfitness to serve as an officer or director of any such issuer.
(b) Finding of Substantial Unfitness.--In making any determination
that a person's conduct demonstrates substantial unfitness to serve as
an officer or director of any such issuer, the Commission shall
consider--
(1) the severity of the persons conduct giving rise to the
violation, and the persons role or position when he engaged in
the violation;
(2) the person's degree of scienter;
(3) the person's economic gain as a result of the violation;
and
(4) the likelihood that the conduct giving rise to the
violation, or similar conduct as defined in subsection (a), may
recur if the person is not so prohibited.
(c) Automatic Stay Pending Appeal.--The enforcement of any Commission
order pursuant to subsection (a) shall be stayed--
(1) for a period of at least 60 days after the entry of any
such order or decision; and
(2) upon the filing of a timely application for judicial
review of such order or decision, pending the entry of a final
order resolving the application for judicial review.
SEC. 12. DISGORGING INSIDERS PROFITS FROM TRADES PRIOR TO CORRECTION OF
ERRONEOUS FINANCIAL STATEMENTS.
(a) Analysis Required.--The Commission shall conduct an analysis of
whether, and under what conditions, any officer or director of an
issuer should be required to disgorge profits gained, or losses
avoided, in the sale of the securities of such issuer during the six
month period immediately preceding the filing of a restated financial
statement on the part of such issuer.
(b) Disgorgement Rules Authorized.--If the Commission determines that
imposing the requirement described in subsection (a) is necessary or
appropriate in the public interest or for the protection investors, and
would not unduly impair the operations of issuers or the orderly
operation of the securities markets, the Commission shall prescribe a
rule requiring the disgorgement of all profits gained or losses avoided
in the sale of the securities of the issuer by any officer or director
thereof. Such rule shall--
(1) describe the conditions under which any officer or
director shall be required to disgorge profits, including what
constitutes a restatement for purposes of operation of the
rule;
(2) establish exceptions and exemptions from such rule as
necessary to carry out the purposes of this section;
(3) identify the scienter requirement that should be used in
order to determine to impose the requirement to disgorge; and
(4) specify that the enforcement of such rule shall lie
solely with the Commission, and that any profits so disgorged
shall inure to the issuer.
(c) No Preemption of Other Law.--Unless otherwise specified by the
Commission, in the case of any rule promulgated pursuant to subsection
(b), such rule shall be in addition to, and shall not supersede or
preempt, the Commission's authority to seek disgorgement under any
other provision of law.
SEC. 13. SECURITIES AND EXCHANGE COMMISSION AUTHORITY TO PROVIDE
RELIEF.
(a) Proceeds of Enron and Andersen Enforcement Actions.--If in any
administrative or judicial proceeding brought by the Securities and
Exchange Commission against--
(1) the Enron Corporation, any subsidiary or affiliate of
such Corporation, or any officer, director, or principal
shareholder of such Corporation, subsidiary, or affiliate for
any violation of the securities laws; or
(2) Arthur Andersen L.L.C., any subsidiary or affiliate of
Arthur Andersen L.L.C., or any general or limited partner of
Arthur Andersen L.L.C., or such subsidiary or affiliate, for
any violation of the securities laws with respect to any
services performed for or in relation to the Enron Corporation,
any subsidiary or affiliate of such Corporation, or any
officer, director, or principal shareholder of such
Corporation, subsidiary, or affiliate;
the Commission obtains an order providing for an accounting and
disgorgement of funds, such disgorgement fund (including any addition
to such fund required or permitted under this section) shall be
allocated in accordance with the requirements of this section.
(b) Priority for Former Enron Employees.--The Commission shall, by
order, establish an allocation system for the disgorgement fund. Such
system shall provide that, in allocating the disgorgement fund amount
the victims of the securities laws violations described in subsection
(a), the first priority shall be given to individuals who were employed
by the Enron Corporation, or a subsidiary or affiliate of such
Corporation, and who were participants in an individual account plan
established by such Corporation, subsidiary, or affiliate. Such
allocations among such individuals shall be in proportion to the extent
to which the nonforfeitable accrued benefit of each such individual
under the plan was invested in the securities of such Corporation,
subsidiary, or affiliate.
(c) Addition of Civil Penalties.--If, in any proceeding described in
subsection (a), the Commission assesses and collects any civil penalty,
the Commission shall, notwithstanding section 21(d)(3)(C)(i) or
21A(d)(1) of the Securities Exchange Act of 1934, or any other
provision of the securities laws, be payable to the disgorgement fund.
(d) Acceptance of Additional Donations.--The Commission is authorized
to accept, hold, administer, and utilize gifts, bequests and devises of
property, both real and personal, to the United States for the
disgorgement fund. Gifts, bequests, and devises of money and proceeds
from sales of other property received as gifts, bequests, or devises
shall be deposited in the disgorgement fund and shall be available for
allocation in accordance with subsection (b).
(e) Definitions.--As used in this section:
(1) Disgorgement fund.--The term ``disgorgement fund'' means
a disgorgement fund established in any administrative or
judicial proceeding described in subsection (a).
(2) Subsidiary or affiliate.--The term ``subsidiary or
affiliate'' when used in relation to a person means any entity
that controls, is controlled by, or is under common control
with such person.
(3) Officer, director, or principal shareholder.--The term
``officer, director, or principal shareholder'' when used in
relation to the Enron Corporation, or any subsidiary or
affiliate of such Corporation, means any person that is subject
to the requirements of section 16 of the Securities Exchange
Act of 1934 (15 U.S.C. 78p) in relation to the Enron
Corporation, or any subsidiary or affiliate of such
Corporation.
(4) Nonforfeitable; accrued benefit; individual account
plan.--The terms ``nonforfeitable'', ``accrued benefit'', and
``individual account plan'' have the meanings provided such
terms, respectively, in paragraphs (19), (23), and (34) of
section 3 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1002(19), (23), (34)).
SEC. 14. STUDY OF RULES RELATING TO ANALYST CONFLICTS OF INTEREST.
(a) Study and Review Required.--The Commission shall conduct a study
and review of any final rules by any self-regulatory organization
registered with the Commission related to matters involving equity
research analysts conflicts of interest. Such study and report shall
include a review of the effectiveness of such final rules in addressing
matters relating to the objectivity and integrity of equity research
analyst reports and recommendations.
(b) Report Required.--The Commission shall submit a report to the
Committee on Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the Senate on such
study and review no later than 180 days after any such final rules by
any self-regulatory organization registered with the Commission are
delivered to the Commission. Such report shall include recommendations
to the Congress, including any recommendations for additional self-
regulatory organization rulemaking regarding matters involving equity
research analysts. The Commission shall annually submit an update on
such review.
SEC. 15. REVIEW OF CORPORATE GOVERNANCE PRACTICES.
(a) Study of Corporate Practices.--The Commission shall conduct a
study and review of current corporate governance standards and
practices to determine whether such standards and practices are serving
the best interests of shareholders. Such study and review shall include
an analysis of--
(1) whether current standards and practices promote full
disclosure of relevant information to shareholders;
(2) whether corporate codes of ethics are adequate to protect
shareholders, and to what extent deviations from such codes are
tolerated;
(3) to what extent conflicts of interests are aggressively
reviewed, and whether adequate means for redressing such
conflicts exist;
(4) to what extent sufficient legal protections exist or
should be adopted to ensure that any manager who attempts to
manipulate or unduly influence an audit will be subject to
appropriate sanction and liability, including liability to
investors or shareholders pursuing a private cause of action
for such manipulation or undue influence;
(5) whether rules, standards, and practices relating to
determining whether independent directors are in fact
independent are adequate;
(6) whether rules, standards, and practices relating to the
independence of directors serving on audit committees are
uniformly applied and adequate to protect investor interests;
(7) whether the duties and responsibilities of audit
committees should be established by the Commission; and
(8) what further or additional practices or standards might
best protect investors and promote the interests of
shareholders.
(b) Participation of State Regulators.--In conducting the study
required under subsection (a), the Commission shall seek the views of
the securities and corporate regulators of the various States.
(c) Report Required.--The Commission shall submit a report on the
analysis required under subsection (a) as a part of the Commission's
next annual report submitted after the date of enactment of this Act.
SEC. 16. STUDY OF ENFORCEMENT ACTIONS.
(a) Study Required.--The Commission shall review and analyze all
enforcement actions by the Commission involving violations of reporting
requirements imposed under the securities laws, and restatements of
financial statements, over the last five years to identify areas of
reporting that are most susceptible to fraud, inappropriate
manipulation, or inappropriate earnings management, such as revenue
recognition and the accounting treatment of off-balance sheet special
purpose entities.
(b) Report Required.--The Commission shall report its findings to the
Committee on Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the Senate within
180 days of the date of enactment of this Act and shall use such
findings to revise its rules and regulations, as necessary. The report
shall include a discussion of regulatory or legislative steps that are
recommended or that may be necessary to address concerns identified in
the study.
SEC. 17. STUDY OF CREDIT RATING AGENCIES.
(a) Study Required.--The Commission shall conduct a study of the role
and function of credit rating agencies in the operation of the
securities market. Such study shall examine--
(1) the role of the credit rating agencies in the evaluation
of issuers of securities;
(2) the importance of that role to investors and the
functioning of the securities markets;
(3) any impediments to the accurate appraisal by credit
rating agencies of the financial resources and risks of issuers
of securities;
(4) any measures which may be required to improve the
dissemination of information concerning such resources and
risks when credit rating agencies announce credit ratings;
(5) any barriers to entry into the business of acting as a
credit rating agency, and any measures needed to remove such
barriers; and
(6) any conflicts of interest in the operation of credit
rating agencies and measures to prevent such conflicts or
ameliorate the consequences of such conflicts.
(b) Report Required.--The Commission shall submit a report on the
analysis required by subsection (a) to the President, the Committee on
Financial Services of the House of Representatives, and the Committee
on Banking, Housing, and Urban Affairs of the Senate within 180 days
after the date of enactment of this Act. The report shall include a
discussion of regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the study.
SEC. 18. STUDY OF INVESTMENT BANKS
(a) GAO Study.--The Comptroller General shall conduct a study on the
role played by investment banks and financial advisors in assisting
public companies in manipulating their earnings and obfuscating their
true financial condition. The study should address the role of the
investment banks--
(1) in the collapse of the Enron Corporation, including with
respect to the design and implementation of derivatives
transactions, transactions involving special purpose vehicles,
and other financing arrangements that may have had the effect
of altering the company's reported financial statements in ways
that obscured the true financial picture of the company;
(2) in the failure of Global Crossing, including with respect
to transactions involving swaps of fiber optic cable capacity,
in designing transactions that may have had the effect of
altering the company's reported financial statements in ways
that obscured the true financial picture of the company; and
(3) generally, in creating and marketing transactions
designed solely to enable companies to manipulate revenue
streams, obtain loans, or move liabilities off balance sheets
without altering the economic and business risks faced by the
companies or any other mechanism to obscure a company's
financial picture.
(b) Report.--The General Accounting Office shall report to the
Congress within 180 days after the date of enactment of this Act on the
results of the study required by this section. The report shall include
a discussion of regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the study.
SEC. 19. STUDY OF MODEL RULES FOR ATTORNEYS OF ISSUERS.
(a) In General.--The Comptroller General shall conduct a study of the
Model Rules of Professional Conduct promulgated by the American Bar
Association and rules of professional conduct applicable to attorneys
established by the Commission to determine--
(1) whether such rules provide sufficient guidance to
attorneys representing corporate clients who are issuers
required to file periodic disclosures under section 13 or 15 of
the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o), as to
the ethical responsibilities of such attorneys to--
(A) warn clients of possible fraudulent or illegal
activities of such clients and possible consequences of
such activities;
(B) disclose such fraudulent or illegal activities to
appropriate regulatory or law enforcement authorities;
and
(C) manage potential conflicts of interests with
clients; and
(2) whether such rules provide sufficient protection to
corporate shareholders, especially with regards to conflicts of
interest between attorneys and their corporate clients.
(b) Report Required.--The Comptroller General shall report to the
Committee on Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the Senate on the
results of the study required by this section. Such report shall
include any recommendations of the General Accounting Office with
regards to--
(1) possible changes to the Model Rules and the rules of
professional conduct applicable to attorneys established by the
Commission to provide increased protection to shareholders;
(2) whether restrictions should be imposed to require that an
attorney, having represented a corporation or having been
employed by a firm which represented a corporation, may not be
employed as general counsel to that corporation until a certain
period of time has expired; and
(3) regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the
study.
SEC. 20. ENFORCEMENT AUTHORITY.
For the purposes of enforcing and carrying out this Act, the
Commission shall have all of the authorities granted to the Commission
under the securities laws. Actions of the Commission under this Act,
including actions on rules or regulations, shall be subject to review
in the same manner as actions under the securities laws.
SEC. 21. EXCLUSION FOR INVESTMENT COMPANIES.
Sections 4, 6, 9, and 15 of this Act shall not apply to an investment
company registered under section 8 of the Investment Company Act of
1940 (15 U.S.C. 80a-8).
SEC. 22. DEFINITIONS.
As used in this Act:
(1) Blackout period.--The term ``blackout period'' with
respect to the equity securities of any issuer--
(A) means any period during which the ability of at
least fifty percent of the participants or
beneficiaries under all applicable individual account
plans maintained by the issuer to purchase (or
otherwise acquire) or sell (or otherwise transfer) an
interest in any equity of such issuer is suspended by
the issuer or a fiduciary of the plan; but
(B) does not include--
(i) a period in which the employees of an
issuer may not allocate their interests in the
individual account plan due to an express
investment restriction--
(I) incorporated into the individual
account plan; and
(II) timely disclosed to employees
before joining the individual account
plan or as a subsequent amendment to
the plan; or
(ii) any suspension described in subparagraph
(A) that is imposed solely in connection with
persons becoming participants or beneficiaries,
or ceasing to be participants or beneficiaries,
in an applicable individual account plan by
reason of a corporate merger, acquisition,
divestiture, or similar transaction.
(2) Boards of accountancy of the states.--The term ``boards
of accountancy of the States'' means any organization or
association chartered or approved under the law of any State
with responsibility for the registration, supervision, or
regulation of accountants.
(3) Commission.--The term ``Commission'' means the Securities
and Exchange Commission.
(4) Individual account plan.--The term ``individual account
plan'' has the meaning provided such term in section 3(34) of
the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002(34)).
(5) Issuer.--The term ``issuer'' shall have the meaning set
forth in section 2(a)(4) of the Securities Act of 1933 (15
U.S.C. 77b(a)(4)).
(6) Person associated with an accountant.--The term ``person
associated with an accountant'' means any partner, officer,
director, or manager of such accountant (or any person
occupying a similar status or performing similar functions),
any person directly or indirectly controlling, controlled by,
or under common control with such accountant, or any employee
of such accountant who performs a supervisory role in the
auditing process.
(7) Recognized public regulatory organization.--The term
``recognized public regulatory organization'' means a public
regulatory organization that the Commission has recognized as
meeting the criteria established by the Commission under
subsection (b) of section 2.
(8) Securities laws.--The term ``securities laws'' means the
Securities Act of 1933 (15 U.S.C. 77a et seq.), the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.), the Trust
Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the Investment
Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the Investment
Advisers Act of 1940 (15 U.S.C. 80b et seq.), and the
Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa et
seq.), notwithstanding any contrary provision of any such Act.
Purpose and Summary
H.R. 3763, the Corporate and Auditing Accountability,
Responsibility, and Transparency Act of 2002, will protect
investors by improving the accuracy and reliability of
corporate disclosures made pursuant to the securities laws. The
bill achieves this goal through increased supervision of
accountants that audit public companies, strengthened corporate
responsibility, increased transparency of corporate financial
statements, and protections for employee access to retirement
accounts.
With regard to increasing the supervision of accountants,
the purpose of the legislation is to allow for the creation of
a public regulatory organization or organizations, comprised of
persons skilled and knowledgeable in issues related to the
audit of public companies, to perform quality or other reviews
of the activities of certified public accountants who report on
financial statements that are required to be filed with the
Securities and Exchange Commission (SEC). The legislation
envisions that such an organization will enforce compliance by
accountants with professional ethics and competency standards
applicable to audits of such financial statements and establish
such rules as are deemed necessary to provide for their review
and enforcement, and provides for the oversight of such
organizations by the Commission.
The legislation also requires that the SEC promulgate rules
that would bar the provision by auditors of certain nonaudit
services to their audit clients. The Committee heard testimony
that two nonaudit services--financial systems design and
implementation and internal audit outsourcing--were perceived
to raise issues about auditor independence. Because of the
importance of public perceptions in this area, the Committee
believes these services should be prohibited. The SEC had
proposed to prohibit them during a rulemaking in 2000, but
ultimately decided to allow them, subject to certain
conditions.
Although financial systems and internal audit work are the
two nonaudit services that have raised significant investor
concerns, the SEC is also authorized to modify its rules if
auditing firms begin to offer other services that raise
similarly significant independence concerns. Indeed, it is
appropriate that these issues be considered carefully by an
entity with the Commission's resources and expertise, and that
whatever standards are established apply uniformly to public
companies throughout the markets. A non-federal approach would
lead to uncertainty in our capital markets, particularly if the
standards applicable to public companies and audit firms varied
by jurisdiction. The Committee believes that it is appropriate
to continue dealing with nonaudit services by having the
Commission proscribe specific services rather than casting
doubt on a broad range of nonaudit services. In this regard,
the Committee heard testimony that a broader ban on nonaudit
services could undermine rather than improve audit quality,
since certain such services can improve the auditor's
understanding of the audit client's business activities.
Likewise, a broader ban could reduce corporate efficiencies and
impair auditing firms' ability to attract and retain tax and
other nonaudit personnel who are essential to the audit
process.
The legislation will also ensure that the SEC has
sufficient authority to bar individuals from serving as
officers or directors of public companies if they demonstrate
they are substantially unfit to serve and that company
officials disgorge any profits they receive from selling their
own shares of their company's stock prior to a restatement of
the company's financial statements. The bill also prohibits any
company official from fraudulently misleading an auditor and
requires the SEC to conduct studies of several areas related to
corporate responsibility in order to evaluate other areas of
corporate conduct and disclosure which may need reform.
The legislation requires the SEC to issue rules increasing
the accuracy and transparency of company disclosures and will
strengthenthe SEC's procedures for reviewing the financial
statements of issuers that play a significant role in the economy.
Further, the bill will require that the SEC explore the effectiveness
of SRO rules relating to analysts, and report on the role and function
of credit rating agencies.
Finally, the legislation will protect employee access to
their retirement accounts by preventing company insiders from
trading their own shares in a company when their employees
cannot do so because of a ``blackout'' in a company sponsored
employee retirement account.
The legislation is also designed to strengthen the SEC's
procedures for reviewing the financial statements of issuers
that play a significant role in the economy, explore the
effectiveness of SRO rules relating to analysts, and report on
the role and function of credit rating agencies.
Background and Need for Legislation
The Federal securities laws are designed to ensure that
public companies provide investors with full and accurate
disclosure of the true financial condition of the company.
Following the bankruptcies of Enron Corporation and Global
Crossing LLC, and restatements of earnings by several prominent
market participants, regulators, investors and others expressed
concern about the adequacy of the current disclosure regime for
public companies.
Additionally, they expressed concerns about the role of
auditors in approving corporate financial statements. Questions
regarding the independence of auditors of public companies led
to calls for greater supervision of the profession. The SEC
raised the need for the creation of a new oversight body to
review compliance of public auditors with the profession's
standards of ethics and competency; this suggestion received
widespread support.
The bankruptcy of Enron Corporation also raised issues
relating to the security of employee retirement accounts. When
allegations arose that some Enron insiders were able to sell
their company stock even as Enron employees were prohibited
from doing so because of an administrative lockdown in the
company's retirement plan, new calls arose for protecting the
access of employees to their accounts to the same degree as
insiders.
The securities laws, and in particular the Securities
Exchange Act of 1934, provide a host of protections for
investors with regard to their access to company information.
Reflecting the technology available to public companies and
investors at that time, the securities laws largely reflect the
paper-based system of reporting information that was prevalent
up until the advent of the electronic age. With the creation of
the internet and continuous televised coverage of the capital
markets, the regulatory regime for speeding the availability of
company information has been unable to keep pace with the
nearly instantaneous demand for investor access to that
information. On-line trading of securities broadly expanded
both the number of participants in the securities markets and
the volume of trading in those markets. This development also
heightened the need for more rapid disclosure of company news.
The increased public participation in the securities
markets and the broader coverage of those markets also raised
the profile of securities analysts that provide recommendations
regarding equity securities. Responding to the concerns of some
that analysts for companies that also underwrite and trade in
the securities markets, the Subcommittee on Capital Markets,
Insurance and Government Sponsored Enterprises held a series of
hearings on the role of analysts in reporting on equity
securities. Following these hearings, the securities industry
developed a statement of best practices guiding analysts and
their employers in avoiding conflicts of interest. This
statement was later followed by a proposed rule by the self
regulatory organizations (SROs) establishing guidelines for
analysts and their employers to ensure that analyst
recommendations are fair and unbiased. This proposal is
currently under review by the SEC.
The Committee's hearings on the Enron matter, the collapse
of Global Crossing LLC, and the operations of the Nation's
capital markets all indicated that reforms were necessary both
for the regulators and the regulated. Further, the President's
Plan to Improve Corporate Responsibility and Protect America's
Investors, announced on March 7, 2002, outlined a path by which
corporations and their investors can continue their partnership
in growing the Nation's economy, and do so on fair and equal
footing. This legislation responds to the problems of the
marketplace through a fair and balanced approach that ensures
that the Nation's capital markets continue to be the strongest
in the world.
Hearings
On March 13 and March 20, 2002, the Committee held
legislative hearings on H.R. 3763. The following witnesses
testified on March 13: former SEC Chairman Roderick Hills; Mr.
Marc Lackritz, President, Securities Industry Association; Mr.
Barry Melancon, President and CEO, American Institute of
Certified Public Accountants; Mr. James Glassman, American
Enterprise Institute; Mr. Ted White, California Public
Employees' Retirement System; Mr. Lynn Turner, former Chief
Accountant, Securities and Exchange Commission; and Ms.Barbara
Roper, Director of Investor Protection for the Consumer Federation of
America.
On March 20, the following witnesses testified: SEC
Chairman Harvey Pitt; Mr. Franklin Raines, appearing on behalf
of the Business Roundtable; Mr. Phillip Livingston, President
and CEO, Financial Executives International; Mr. H. Carl
McCall, Comptroller, State of New York; Mr. Joseph V. DelRaso,
Pepper Hamilton LLP; Mr. Jerry Jasinowski, President, National
Association of Manufacturers; and Mr. Peter Chapman, TIAA-CREF.
The Committee also received the written testimony of Deputy
Undersecretary of the Treasury Mr. Peter Fisher.
Pursuant to clause 2(j)(1) of rule XI of the Rules of the
House of Representatives and rule 3(d) of the rules of the
Committee on Financial Services, the Committee held another day
of hearings at the request of the minority on April 9, 2002.
The following witnesses testified: Mr. David Walker,
Comptroller General of the United States, General Accounting
Office; Mr. Richard Breeden, former Chairman, Securities and
Exchange Commission; Mr. Donald Langevoort, Professor of Law,
Georgetown University Law Center; and Mr. Damon Silvers,
Associate General Counsel, AFL-CIO.
Committee Consideration
The Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises was discharged from the
further consideration of H.R. 3763 on April 8, 2002.
The Committee on Financial Services met in open session on
April 11 and April 16, 2002 and ordered H.R. 3763 reported to
the House with a favorable recommendation by a record vote of
49 yeas and 12 nays, a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. A
motion by Mr. Oxley to report the bill to the House with a
favorable recommendation was agreed to by a record vote of 49
yeas and 12 nays (Record vote no. 37), a quorum being present.
The names of members voting for and against follow:
YEAS NAYS
Mr. Oxley Mr. LaFalce
Mr. Leach Mr. Frank
Mrs. Roukema Mr. Kanjorski
Mr. Bereuter Ms. Waters
Mr. Baker Mr. Sanders
Mr. Bachus Mrs. Maloney of New York
Mr. Castle Mr. Ackerman
Mr. King Ms. Lee
Mr. Royce Mr. Inslee
Mr. Ney Ms. Schakowsky
Mr. Barr of Georgia Mr. Capuano
Mrs. Kelly Mr. Clay
Mr. Gillmor
Mr. Cox
Mr. Weldon of Florida
Mr. Ryun of Kansas
Mr. LaTourette
Mr. Manzullo
Mr. Ose
Mrs. Biggert
Mr. Green of Wisconsin
Mr. Toomey
Mr. Shays
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Watt of North Carolina
Mr. Bentsen
Mr. Maloney of Connecticut
Ms. Hooley of Oregon
Ms. Carson of Indiana
Mr. Sherman
Mr. Sandlin
Mr. Moore
Mr. Gonzalez
Mr. Ford
Mr. Hinojosa
Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
Mr. Israel
Mr. Ross
Record votes were held on the adoption of the following
amendments. The names of members voting for and against follow:
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce (as modified by unanimous consent), no. 1a,
establishing the Public Accounting Regulatory Board, was not
agreed to by a record vote of 26 yeas and 33 nays (Record vote
no. 25).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Leach
Mr. Kanjorski Mr. Bereuter
Ms. Waters Mr. Baker
Mr. Sanders Mr. Castle
Mrs. Maloney of New York Mr. King
Mr. Gutierrez Mr. Royce
Mr. Watt of North Carolina Mr. Ney
Mr. Ackerman Mr. Barr of Georgia
Ms. Hooley of Oregon Mrs. Kelly
Ms. Carson of Indiana Mr. Weldon of Florida
Mr. Sherman Mr. Ryun of Kansas
Mr. Sandlin Mr. Riley
Mr. Meeks of New York Mr. LaTourette
Ms. Lee Mr. Manzullo
Mr. Mascara Mr. Ose
Mr. Inslee Mrs. Biggert
Ms. Schakowsky Mr. Green of Wisconsin
Mr. Moore Mr. Toomey
Mr. Gonzalez Mr. Shadegg
Mrs. Jones of Ohio Mr. Fossella
Mr. Capuano Mr. Gary G. Miller of
Mr. Hinojosa California
Mr. Clay Mr. Cantor
Mr. Israel Mr. Grucci
Mr. Ross Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Bentsen
Mr. Maloney of Connecticut
Mr. Lucas of Kentucky
Mr. Shows
An amendment to the amendment in the nature of a substitute
by Mrs. Biggert, no. 1b, disgorgement of bonuses and other
incentives, as amended, part 1 (page 1, line 1 through page 3,
line 13) was agreed to by a voice vote and part 2 (page 3, line
14 through page 5, line 2), was agreed to by a record vote 36
yeas and 25 nays (Record vote no. 28).
YEAS NAYS
Mr. Oxley Mr. LaFalce
Mr. Leach Mr. Frank
Mr. Bereuter Mr. Kanjorski
Mr. Baker Ms. Waters
Mr. Bachus Mr. Sanders
Mr. Castle Mrs. Maloney of New York
Mr. King Mr. Watt of North Carolina
Mr. Royce Mr. Ackerman
Mr. Lucas of Oklahoma Mr. Bentsen
Mr. Ney Mr. Maloney of Connecticut
Mr. Barr of Georgia Ms. Hooley of Oregon
Mrs. Kelly Ms. Carson of Indiana
Mr. Paul Mr. Sherman
Mr. Gillmor Mr. Meeks of New York
Mr. Cox Ms. Lee
Mr. Weldon of Florida Mr. Mascara
Mr. Ryun of Kansas Mr. Inslee
Mr. LaTourette Ms. Schakowsky
Mr. Manzullo Mr. Moore
Mr. Jones of North Carolina Mr. Gonzalez
Mr. Ose Mrs. Jones of Ohio
Mrs. Biggert Mr. Capuano
Mr. Green of Wisconsin Mr. Shows
Mr. Toomey Mr. Crowley
Mr. Shays Mr. Ross
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Lucas of Kentucky
An amendment by Mr. LaFalce to the amendment by Mrs.
Biggert, no. 1b(2), addressing the disgorgement of bonuses and
other incentives, was not agreed to by a record vote of 25 yeas
and 30 nays (Record vote no. 26).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Bereuter
Mr. Kanjorski Mr. Baker
Ms. Waters Mr. Bachus
Mrs. Maloney of New York Mr. Castle
Mr. Watt of North Carolina Mr. King
Mr. Bentsen Mr. Royce
Mr. Maloney of Connecticut Mr. Ney
Ms. Hooley of Oregon Mrs. Kelly
Ms. Carson of Indiana Mr. Paul
Mr. Sherman Mr. Weldon of Florida
Mr. Sandlin Mr. Ryun of Kansas
Mr. Meeks of New York Mr. Riley
Ms. Lee Mr. LaTourette
Mr. Mascara Mr. Manzullo
Mr. Inslee Mr. Ose
Mr. Moore Mrs. Biggert
Mr. Gonzalez Mr. Green of Wisconsin
Mrs. Jones of Ohio Mr. Toomey
Mr. Capuano Mr. Shadegg
Mr. Hinojosa Mr. Fossella
Mr. Shows Mr. Gary G. Miller of
Mr. Crowley California
Mr. Clay Mr. Cantor
Mr. Israel Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Lucas of Kentucky
An amendment by Mr. LaFalce to the amendment by Mrs.
Biggert, no. 1b(4), allowing for the removal of unfit corporate
officers or directors and prohibiting unfit persons from
serving as an officer or director, was not agreed to by a
record vote for 24 yeas and 25 nays (Record vote no. 27).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Leach
Mr. Kanjorski Mr. Bereuter
Ms. Waters Mr. Baker
Mr. Sanders Mr. Castle
Mrs. Maloney of New York Mr. King
Mr. Gutierrez Mr. Ney
Mr. Watt of North Carolina Mr. Barr of Georgia
Mr. Ackerman Mrs. Kelly
Mr. Bentsen Mr. Weldon of Florida
Mr. Maloney of Connecticut Mr. Ryun of Kansas
Ms. Hooley of Oregon Mr. LaTourette
Ms. Carson of Indiana Mr. Jones of North Carolina
Mr. Sherman Mrs. Biggert
Mr. Mascara Mr. Green of Wisconsin
Mr. Inslee Mr. Toomey
Ms. Schakowsky Mr. Shays
Mr. Gonzalez Mr. Fossella
Mr. Capuano Mr. Gary G. Miller of
Mr. Lucas of Kentucky California
Mr. Shows Mr. Cantor
Mr. Crowley Mr. Grucci
Mr. Israel Ms. Hart
Mr. Ross Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
An amendment to the amendment in the nature of a substitute
by Mr. Sherman, no. 1k, providing for auditor capital
requirements, was not agreed to by a record vote of 9 yeas and
49 nays (Record vote no. 29).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Sanders Mr. Leach
Mr. Gutierrez Mr. Bereuter
Mr. Sherman Mr. Baker
Mr. Sandlin Mr. Bachus
Mr. Meeks of New York Mr. Castle
Ms. Lee Mr. King
Ms. Schakowsky Mr. Royce
Mr. Clay Mr. Ney
Mr. Barr of Georgia
Mrs. Kelly
Mr. Paul
Mr. Gillmor
Mr. Weldon of Florida
Mr. Ryun of Kansas
Mr. LaTourette
Mr. Manzullo
Mrs. Biggert
Mr. Green of Wisconsin
Mr. Toomey
Mr. Shays
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of
California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Tiberi
Mr. Frank
Mr. Kanjorski
Ms. Waters
Mrs. Maloney of New York
Mr. Watt of North Carolina
Mr. Bentsen
Mr. Maloney of Connecticut
Ms. Hooley of Oregon
Ms. Carson of Indiana
Mr. Mascara
Mr. Inslee
Mr. Moore
Mrs. Jones of Ohio
Mr. Capuano
Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
Mr. Israel
Mr. Ross
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1l, requiring that the CEO or CFO must
certify financial statements, was not agreed to by a record
vote of 29 yeas and 30 nays (Record vote no. 30).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Leach
Mr. Kanjorski Mr. Bereuter
Ms. Waters Mr. Baker
Mr. Sanders Mr. Castle
Mrs. Maloney of New York Mr. King
Mr. Gutierrez Mr. Royce
Mr. Watt of North Carolina Mr. Ney
Mr. Bentsen Mr. Barr of Georgia
Mr. Maloney of Connecticut Mrs. Kelly
Ms. Hooley of Oregon Mr. Paul
Ms. Carson of Indiana Mr. Gillmor
Mr. Sherman Mr. Weldon of Florida
Mr. Sandlin Mr. Ryun of Kansas
Mr. Meeks of New York Mr. LaTourette
Ms. Lee Mr. Manzullo
Mr. Mascara Mrs. Biggert
Mr. Inslee Mr. Green of Wisconsin
Ms. Schakowsky Mr. Toomey
Mr. Moore Mr. Shays
Mr. Gonzalez Mr. Shadegg
Mrs. Jones of Ohio Mr. Fossella
Mr. Capuano Mr. Cantor
Mr. Hinojosa Mr. Grucci
Mr. Shows Ms. Hart
Mr. Crowley Mrs. Capito
Mr. Clay Mr. Ferguson
Mr. Israel Mr. Rogers of Michigan
Mr. Ross Mr. Tiberi
Mr. Lucas of Kentucky
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce (as modified by unanimous consent), no. 1m,
addressing analysts conflicts of interest, was not agreed to by
a record vote of 25 yeas and 37 nays (Record vote no. 31).
YEAS NAYS
Mr. Leach Mr. Oxley
Mr. Bachus Mr. Bereuter
Mr. Castle Mr. Baker
Mr. LaFalce Mr. King
Mr. Frank Mr. Royce
Mr. Kanjorski Mr. Ney
Ms. Waters Mr. Barr of Georgia
Mr. Sanders Mrs. Kelly
Mrs. Maloney of New York Mr. Paul
Mr. Gutierrez Mr. Gillmor
Mr. Watt of North Carolina Mr. Cox
Ms. Carson of Indiana Mr. Weldon of Florida
Mr. Sherman Mr. Ryun of Kansas
Mr. Sandlin Mr. LaTourette
Mr. Meeks of New York Mr. Manzullo
Ms. Lee Mr. Ose
Mr. Mascara Mrs. Biggert
Mr. Inslee Mr. Toomey
Ms. Schakowsky Mr. Shays
Mr. Gonzalez Mr. Shadegg
Mrs. Jones of Ohio Mr. Fossella
Mr. Capuano Mr. Gary G. Miller of
Mr. Hinojosa California
Mr. Clay Mr. Cantor
Mr. Israel Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Bentsen
Mr. Maloney of Connecticut
Ms. Hooley of Oregon
Mr. Moore
Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
Mr. Ross
An amendment to the amendment in the nature of a substitute
by Mr. Sherman, no. 1n, addressing attestation authority, was
not agreed to by a record vote of 16 yeas and 46 nays (Record
vote no. 32).
YEAS NAYS
Mr. Bereuter Mr. Oxley
Mr. LaFalce Mr. Leach
Mr. Frank Mr. Baker
Ms. Waters Mr. Bachus
Mr. Sanders Mr. Castle
Mr. Gutierrez Mr. King
Mr. Sherman Mr. Royce
Mr. Sandlin Mr. Lucas of Oklahoma
Mr. Meeks of New York Mr. Ney
Ms. Lee Mr. Barr of Georgia
Mr. Mascara Mrs. Kelly
Ms. Schakowsky Mr. Paul
Mr. Gonzalez Mr. Gillmor
Mrs. Jones of Ohio Mr. Weldon of Florida
Mr. Hinojosa Mr. Ryun of Kansas
Mr. Clay Mr. Riley
Mr. LaTourette
Mr. Manzullo
Mr. Ose
Mrs. Biggert
Mr. Shays
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Kanjorski
Mrs. Maloney of New York
Mr. Watt of North Carolina
Mr. Bentsen
Mr. Maloney of Connecticut
Ms. Hooley of Oregon
Ms. Carson of Indiana
Mr. Inslee
Mr. Moore
Mr. Capuano
Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
Mr. Israel
Mr. Ross
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1v, requiring audit committee approval of
nonaudit services, was not agreed to by a record vote of 19
yeas and 31 nays (Record vote no. 33).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Bereuter
Mr. Kanjorski Mr. Baker
Mr. Sanders Mr. Bachus
Mrs. Maloney of New York Mr. Castle
Mr. Watt of North Carolina Mr. King
Mr. Ackerman Mr. Royce
Mr. Bentsen Mr. Lucas of Oklahoma
Ms. Hooley of Oregon Mr. Ney
Ms. Carson of Indiana Mrs. Kelly
Mr. Sherman Mr. Gillmor
Mr. Inslee Mr. Weldon of Florida
Ms. Schakowsky Mr. Ryun of Kansas
Mr. Gonzalez Mr. LaTourette
Mr. Capuano Mr. Manzullo
Mr. Ford Mr. Jones of North Carolina
Mr. Hinojosa Mr. Ose
Mr. Crowley Mrs. Biggert
Mr. Israel Mr. Green of Wisconsin
Mr. Shays
Mr. Fossella
Mr. Cantor
Mr. Grucci
Ms. Hart
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Maloney of Connecticut
Mr. Moore
Mr. Lucas of Kentucky
Mr. Shows
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, 1cc, prohibiting independent directors from
serving as consultants, was not agreed to by a record vote of
20 yeas and 38 nays (Record vote no. 34).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Leach
Mr. Kanjorski Mrs. Roukema
Ms. Waters Mr. Bereuter
Mr. Sanders Mr. Baker
Mrs. Maloney of New York Mr. Bachus
Mr. Ackerman Mr. Castle
Mr. Maloney of Connecticut Mr. King
Ms. Hooley of Oregon Mr. Ney
Ms. Carson of Indiana Mr. Barr of Georgia
Mr. Sherman Mrs. Kelly
Mr. Inslee Mr. Gillmor
Ms. Schakowsky Mr. Cox
Mr. Moore Mr. Weldon of Florida
Mr. Gonzalez Mr. Ryun of Kansas
Mr. Capuano Mr. LaTourette
Mr. Hinojosa Mr. Manzullo
Mr. Clay Mr. Jones of North Carolina
Mr. Israel Mr. Ose
Mr. Ross Mrs. Biggert
Mr. Green of Wisconsin
Mr. Toomey
Mr. Shays
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of
California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Watt of North Carolina
Mr. Bentsen
Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1dd, providing for shareholder approval
executive stock option plans, was not agreed to by a record
vote of 22 yeas and 34 nays (Record vote no. 35).
YEAS NAYS
Mr. Leach Mr. Oxley
Mrs. Roukema Mr. Baker
Mr. Bereuter Mr. Bachus
Mr. Castle Mr. King
Mr. Gillmor Mr. Royce
Mr. LaFalce Mr. Ney
Mr. Kanjorski Mr. Barr of Georgia
Ms. Waters Mrs. Kelly
Mr. Sanders Mr. Cox
Mrs. Maloney of New York Mr. Weldon of Florida
Mr. Watt of North Carolina Mr. Ryun of Kansas
Mr. Ackerman Mr. LaTourette
Mr. Bentsen Mr. Manzullo
Ms. Hooley of Oregon Mr. Jones of North Carolina
Ms. Carson of Indiana Mr. Ose
Mr. Sherman Mrs. Biggert
Mr. Moore Mr. Green of Wisconsin
Mr. Gonzalez Mr. Toomey
Mr. Capuano Mr. Shays
Mr. Ford Mr. Shadegg
Mr. Hinojosa Mr. Fossella
Mr. Shows Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Maloney of Connecticut
Mr. Inslee
Mr. Lucas of Kentucky
Mr. Crowley
Mr. Israel
Mr. Ross
An amendment to the amendment in the nature of a substitute
by Mr. Ackerman, no. 1hh, auditor independence, was not agreed
to by a record vote of 18 yeas and 40 nays (record vote no.
36).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Frank Mr. Leach
Mr. Kanjorski Mrs. Roukema
Ms. Waters Mr. Bereuter
Mr. Sanders Mr. Baker
Mrs. Maloney of New York Mr. Bachus
Mr. Watt of North Carolina Mr. Castle
Mr. Ackerman Mr. King
Ms. Carson of Indiana Mr. Royce
Mr. Sherman Mr. Barr of Georgia
Ms. Lee Mrs. Kelly
Mr. Inslee Mr. Gillmor
Mr. Capuano Mr. Cox
Mr. Ford Mr. Weldon of Florida
Mr. Hinojosa Mr. Ryun of Kansas
Mr. Crowley Mr. LaTourette
Mr. Clay Mr. Manzullo
Mr. Israel Mr. Ose
Mrs. Biggert
Mr. Green of Wisconsin
Mr. Toomey
Mr. Shays
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Bentsen
Mr. Maloney of Connecticut
Ms. Hooley of Oregon
Mr. Moore
Mr. Gonzalez
Mr. Lucas of Kentucky
Mr. Shows
Mr. Ross
The following other amendments were also considered by the
Committee:
An amendment in the nature of a substitute by Mr. Oxley,
no. 1, making various technical and substantive changes to the
bill, was agreed to by a voice vote.
An amendment by Mr. Lucas of Kentucky to the amendment by
Mrs. Biggert, no. 1b(1), addressing the composition of the PRO,
was agreed to by a voice vote.
An amendment by Mr. Watt to the amendment by Mrs. Biggert,
no. 1b(3), striking the scienter requirement, was NOT AGREED TO
by a voice vote.
An amendment by Ms. Hooley of Indiana and Mr. Maloney of
Connecticut to the amendment by Mrs. Biggert, no. 1b(5),
requiring that any independent public or certified accountant
who certifies a financial statement to maintain the audit work
papers and other related information for a minimum of 7 years,
was agreed to by a voice vote.
An amendment by Mr. Watt to the amendment by Mrs. Biggert,
no. 1b(6), striking certain language from the amendment, was
not agreed to by a voice vote.
An amendment by Mr. Capuano to the amendment by Mrs.
Biggert, no. 1b(7), addressing the qualification time of public
members of the PRO, was not agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mrs. Maloney of New York, no. 1c, making changes in the code
of ethics, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Watt, no. 1d, striking a requirement to consult with
State regulators, an amendment to the amendment in the nature
of a substitute by Mr. Watt, no. 1e, addressing the filing of
disclosures in other formats, an amendment to the amendment in
the nature of a substitute by Mr. Bentsen, no. 1f, addressing
transactions involving real time disclosure, an amendment to
the amendment in the nature of a substitute by Mr. Bentsen, no.
1g, calling for improved transparency of loans to officers and
directors, an amendment to the amendment in the nature of a
substitute by Ms. Waters, no. 1h, providing that disgorgement
funds be distributed to pension fund victims, an amendment to
the amendment in the nature of a substitute by Mr. LaFalce, no.
1i, addressing enhanced oversight of periodic disclosures by
issuers, and an amendment to the amendment in the nature of a
substitute by Mr. LaFalce, no. 1j, addressing disclosure of
insider and director relationships, were agreed to en bloc by
unanimous consent.
An amendment to the amendment in the nature of a
substitute, by Mr. Gonzalez, (as amended by unanimous consent),
no. 1o, requiring a GAO study of certain standards of
professional conduct for attorneys and their protection of
investors, was agreed to by a voice vote.
An amendment by Mr. Watt to the amendment by Mr. Gonzales,
no. 1o(1), requiring the report to identify pertinent
regulatory or legislative steps, was AGREED TO by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1p, addressing real time disclosure of
financial information, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Watt, no. 1q, requiring recommendations for regulatory
and statutory changes to studies, and an amendment to the
amendment in the nature of a substitute by Mr. Watt, no. 1r,
addressing regulations for penalties for manipulation of
auditors, were offered en bloc and were agreed to by a voice
vote
An amendment to the amendment in the nature of a substitute
by Mr. Watt, (as modified by unanimous consent), no. 1s,
minimizing burdensome rules on issuers for disclosures required
under the bill, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mrs. Maloney, no. 1t, restoring oversight of energy
derivatives to the Commodity Futures Trading Commission, was
withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1u, addressing auditor independence, was
not agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Sherman, no. 1w, addressing the scope of non-audit
practice, was withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce (as modified by unanimous consent), no. 1x,
addressing auditor/issuer employment restrictions (cooling-off
period), was not agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1y, addressing the role of audit committee,
was not agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Bentsen and Mr. Watt (as modified by unanimous consent),
no. 1z, providing authority to bar additional nonaudit
services, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Kanjorski (as modified by unanimous consent), no. 1aa,
lengthening the statute of limitations for certain private
rights of action, was not agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1bb, addressing the removal of unfit
corporate officers, was not agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce (as modified by unanimous consent), no. 1ee,
requesting a GAO study of investment banks, was AGREED TO by a
voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1ff, requiring the mandatory rotation of
auditors every 8 years, was withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. Kanjorski, no. 1gg, restoring aiding and abetting
liability, was withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. Capuano and Mr. Lucas of Kentucky, no. 1ii, clarifying
PRO activity, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Inslee, no. 1jj, addressing energy pricing disclosure,
was withdrawn.
Substitute amendment to the amendment in the nature of a
substitute offered by Mr. LaFalce, no. 1kk, was not agreed to
by a voice vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee held a hearing and made
findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
H.R. 3763 authorizes the Commission to take steps designed
to increase the oversight of accountants that certify financial
statements required under the securities laws, increase
transparency of financial statements filed with the Commission,
and increase the accountability of officers and directors of
public companies. The legislation promotes these goals and
objectives by directing the Commission to undertake rule
makings and studies in areas related to the above goals.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee finds that this
legislation would result in no new budget authority,
entitlement authority, or tax expenditures or revenues.
Committee Cost Estimate
A cost estimate prepared by the Director of the
Congressional Budget Office pursuant to section 402 of the
Congressional Budget Act of 1974 was not available in time for
the filing of this report. The Committee estimates that budget
authority will be made available to the SEC at approximately
the levels authorized in the legislation.
Congressional Budget Office Estimate
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, a cost estimate provided by the
Congressional Budget Office pursuant to section 402 of the
Congressional Budget Act of 1974 was not made available to the
Committee in time for the filing of this report. The Chairman
of the Committee shall cause such estimate to be printed in the
Congressional Record upon its receipt by the Committee.
Federal Mandates Statement
An estimate of Federal mandates prepared by the Director of
the Congressional Budget Office pursuant to section 423 of the
Unfunded Mandates Reform Act was not made available to the
Committee in time for the filing of this report. The Chairman
of the Committee shall cause such estimate to be printed in the
Congressional Record upon its receipt by the Committee.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional Authority of Congress to enact this legislation
is provided by Article 1, section 8, clause 1 (relating to the
general welfare of the United States) and clause 3 (relating to
the power to regulate interstate commerce).
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
Section-by-Section Analysis of the Legislation
Section 1. Short Title
Designates this title as the ``Corporate and Auditing
Accountability, Responsibility and Transparency Act of 2002.''
Section 2. Auditor Oversight
Subsection 2(a). The Federal securities laws, and the rules
and regulations thereunder, require that certain financial
statements of public companies be audited by an independent
public or certified public accountant and filed with the
Securities and Exchange Commission. The legislation requires
the establishment of a public regulatory organization (PRO) to
perform certain review and disciplinary functions with respect
to accountants who audit those financial statements. Subsection
2(a) provides that the Commission may not accept any financial
statement unless the certifying accountant (1) is subject to a
system of review by a PRO established in accordance with the
section and (2) has not been determined in the most recent such
review to be not qualified to audit the statements.
Subsection 2(b). Subsection 2(b) requires the Commission to
adopt rules establishing criteria by which an organization may
become a ``recognized PRO.'' Subsection 2(b) specifies certain
criteria that must be included. The board of any PRO must
include members of the accounting profession and ``public
members'' who are not members of the accounting profession. The
board must be composed of five members, at least three of whom
are ``public members'' and two of whom are members of the
accounting profession with recent experience in auditing public
companies. The Board will often be faced with complex and
specialized issues related to financial reporting and the
application of professional and other competency standards in
real-world settings. Board members who are licensed, practicing
accountants and who understand the issues involved in audits of
public companies will bring a valuable perspective and needed
expertise to the Board's deliberations.
Paragraph 2(b)(1) further provides that each member of the
Board shall meet such standards of financial literacy as
determined by the Commission. This requirement is intended to
ensure that only individuals whose background demonstrates a
solid understanding of the purposes and methods of financial
reporting, and the auditing of financial statements, shall
serve on the Board.
The details of the Board's specific operations, such as the
frequency of Board meetings, staffing levels, and the full- or
part-time nature of service on the Board, are left to the
discretion of the Commission.
Subsection 2(b) also makes clear that a PRO must have the
capacity to enforce compliance by accountants, and persons
associated with accountants, with the provisions of the bill,
professional ethics and competency standards, and the PRO's own
rules. A PRO must have the authority to impose sanctions,
including the power to bar accountants temporarily or
permanently from reviewing financial statements of public
companies if the PRO finds that the accountant acted knowingly
or intentionally. A PRO must also be organized, and have the
capacity, to review accountants' work product and to review
potential conflicts of interest involving accountants. As
subsection 2(j) further clarifies, such reviews are not
intended to include work performed for non-public companies or
any nonaudit work.
A PRO must also have in place procedures to minimize,
deter, and resolve conflicts of interest involving its board
members. A PRO must also publicly disclose, and make available
for public comment, its proposed review procedures and methods.
A PRO must consult with State boards of accountancy and must
have in place procedures for notifying those boards and the
Commission of the results and findings of the PRO's reviews.
Paragraph 2(b)(9) provides that the PRO have a mechanism to
allow the organization to operate on a self-funded basis and to
ensure that the organization is not solely dependent upon
members of the accounting profession for funding. The phrase
``not solely dependent'' is intended to require that the PRO
have a mechanism to obtain funding from other users of audited
financial statements who will benefit from the PRO's oversight
of accountants and persons associated with accountants.
An organization that satisfies the criteria to be a
recognized PRO is granted the authority to impose sanctions
against the accountants it reviews. Sanctions may be imposed
only after the PRO has conducted a review and provided an
opportunity for a fair hearing and has made any of the
following findings: that the accountant or associated person
(1) violated professional standards of independence, ethics, or
competency; (2) has been found by the Commission or a court of
competent jurisdiction to have violated the Federal securities
laws or a rule or regulation thereunder; (3) conducted an audit
under circumstances in which independence standards were
violated, (including new independence standards which section 2
requires the Commission to adopt, as discussed below) or (4)
impeded, obstructed, or failed to cooperate with the PRO's
review. By referring to the profession's standards of
independence, ethics, or competency, subparagraph 2(b)(3)(A)
authorizes the PRO to sanction violations of the Code of
Professional Conduct, U.S. Auditing Standards, and the
profession's Statements on Quality Control Standards as they
exist today or may be modified in the future. The PRO will have
the authority to enforce these standards, but standard-setting
powers will remain with the SEC and/or the profession as is the
case today.
Subparagraph 2(b)(3)(C) empowers the PRO to impose
sanctions on an accountant when the PRO finds that the
accountant (or an associated person) has conducted an audit
that was materially affected by an impairment of auditor
independence. Subparagraph 2(b)(3)(C), which requires a
determination of material impact on the audit, should govern
most instances of alleged violations of independence, although
there may be certain serious violations that could result in
sanctions under subparagraph 2(b)(3)(A) even though a material
impact is lacking.
The PRO's sanctions may include a determination that an
accountant is not qualified to certify a financial statement,
or certain categories of financial statements, or that a
particular person associated with an accountant is not
qualified to participate in the certification of a financial
statement or certain categories of financial statements.
Paragraph 2(b)(3) is not intended to require the PRO to
conclude, in all cases of knowing or intentional misconduct,
that a particular person or audit firm is not qualified to
participate in the certification of financial statements.
Moreover, as subsection 2(j) states expressly, because the
PRO's jurisdiction runs to the qualification of accountants to
perform audit services for public companies, disqualification
by the PRO does not preclude an accountant or a person
associated with an accountant from performing audit services
for non-public companies or from performing any nonaudit
services.
The PRO is given the authority to request the SEC subpoena
or otherwise compel the testimony of witnesses or the
production of documents for purposes of conducting auditor
reviews. This subpoena power should be exercised in order to
ensure that relevant information is obtained from persons or
entities not otherwise within the PRO's sanctioning authority.
The taking of evidence referred to in the last sentence of this
subsection includes both the taking of testimony and the
production of documentary evidence.
Subsection 2(c). Paragraph 2(c)(1) requires the Commission
to revise its regulations to provide that, for financial
statements required to be certified by an independent public or
certified public accountant, an accountant will not be
considered independent of its audit client if it provides that
client with financial information system design or
implementation services or internal audit services. Paragraph
2(c)(2) authorizes the Commission to review the impact of
nonaudit services on auditor independence in the event services
that have not previously been the subject of Commission or
congressional scrutiny are offered by accounting firms, in
order to determine whether the list of prohibited nonaudit
services should be modified. Subsection 2(c) does not mandate
that the Commission prescribe new rules relating to nonaudit
services and is intended only to clarify that the Commission
must report the results of any such review to the Committee.
Paragraph 2(c)(5) requires that the Commission revise its
regulations regarding disclosures of audit and other services
if such disclosures are still deemed necessary in light of the
new prohibitions on financial systems design and implementation
and internal audit outsourcing, and to ensure that audit
services, services provided in connection with an audit, and
all other services are appropriately categorized. Under
Paragraph 2(c)(6), the Commission is required to propose and
make final such revisions within 90 and 270 days, respectively,
of the enactment of the bill.
Subsection 2(d). Subsection 2(d) sets out certain
procedures to govern the PRO review and hearing process.
Paragraph 2(d)(1) provides that any finding made pursuant to an
accountant review that a financial statement audited by an
accountant and submitted to the Commission may have been
materially affected by an impairment of auditor independence,
or by a violation of professional ethics and competency
standards, must be submitted to the Commission, and that the
Commission must promptly notify an issuer of any such finding
that relates to the issuer's financial statements. The Board
should act in all instances with regard for fairness and due
process. For this reason, the notifications required by this
subsection should be made only after the accountant or audit
firm is formally notified of the Board's finding and provided a
meaningful opportunity to contest it, pursuant to procedures to
be established by the Board.
Neither the Commission, the PRO, nor any other person shall
disclose any information concerning an accountant review
proceeding or the findings therein except as is authorized by
the Act, and are exempt from disclosure under the Freedom of
Information Act. Paragraph 2(d)(2) provides for protection
against disclosure, whether voluntarily or through discovery,
compulsory process, or any other rule, statute, or law, of
information developed by or submitted to the PRO during its
review and investigatory activity and its review proceedings,
subject to the provisions of subparagraphs (2)(B) and (2)(C).
These confidentiality provisions govern with regard to other
provisions of this legislation, including any provisions
relating to any notifications required by this section. Neither
the Commission nor the PRO may disclose the results of any
finding until the completion of Commission review, or the
conclusion of the 30-day period for seeking review, if no
motion for review is filed within the period. This provision
does not authorize the Commission to withhold information from
Congress, or prevent the Commission from complying with a
request from another Federal agency, or a Federal court order
in an action brought by the United States, or the Commission.
If the PRO provides information to a Federal department or
agency other than the SEC, such information remains subject to
the protections against disclosure otherwise provided for by
this subsection. Paragraph (d)(3) provides that the findings of
the PRO are made inadmissible in any civil proceeding as
evidence of any alleged violation of the securities laws, and
are not to be accorded collateral estoppel effect as to
compliance or noncompliance with the law or any standard of
liability, in any judicial or administrative proceeding.
Subsection 2(e). Subsection 2(e) sets out certain
procedures for Commission review of PRO proceedings. The
Commission is authorized to review PRO findings and sanctions
and is authorized to affirm, modify, or set aside the
sanctions. The reference to the submission of affidavits and
the presentation of oral arguments in paragraph 2(e)(2) is not
meant to preclude the submission of legal briefs or memoranda
on the issues before the Commission.
Subsection 2(f). Commission review must include an
opportunity for a hearing, though the Commission may limit the
hearing solely to consideration of the record before the PRO
and the opportunity for the presentation of supporting reasons
to affirm, modify, or set aside the sanction. While the hearing
before the Commission must consist of the record before the PRO
and arguments for or against affirmation, modification, or
rejection of the PRO's findings and conclusions, this
limitation is not meant to preclude the Commission from
considering newly discovered evidence for which there is a
reasonable explanation as to why it was not available or
presented in the PRO's proceeding, nor is it meant to preclude
the Commission from taking into account evidence that the
Commission concludes that the PRO improperly failed to
consider.
Subsection 2(g). A recognized PRO is required to file with
the Commission any proposed rule or rule change. The Commission
shallpublish notice of the proposed rule and give interested
persons an opportunity to comment. The Commission must approve any such
proposed rule if the Commission finds that the proposal is consistent
with the requirements of this bill and the relevant rules and
regulations thereunder. Certain categories of rules may be given effect
immediately upon being filed with the Commission, though the Commission
has authority summarily to abrogate any such rule and require that it
be filed as a proposed rule for notice and comment.
Subsection 2(h). Subsection 2(h) authorizes the Commission
to abrogate, add to, or delete from the rules of a PRO on the
Commission's own initiative after publishing notice and giving
interested persons an opportunity to submit data, views, and
arguments on the proposal.
Subsection 2(i). Subsection 2(i) provides that a PRO shall
make and keep for prescribed periods such records and reports
as the Commission by rule requires. Paragraph 2(i)(2)
authorizes the Commission, by rule or order, to enable a PRO to
perform duties and functions that the Commission determines are
necessary and appropriate for the public interest or the
protection of investors, and to carry out the purposes of this
bill and the securities laws.
Consistent with other provisions throughout this section, a
PRO cannot be authorized under this subsection to enforce the
securities laws or to promulgate accounting, audit or other
professional standards. A PRO has power to make rules for its
internal processes and for its enforcement activities. The
Commission may not delegate any substantive rulemaking power
that it has to a PRO.
Subsection 2(j). Subsection 2(j) confirms that the
authority of any PRO reaches only the actions of accountants
related to the review or audit of public companies.
Subsection 2(k). Subsection 2(k) provides that the
Commission must propose rules to implement section 2 within 90
days and shall implement such rules within 270 days of
prescribing them.
Subsection 2(l). Subsection 2(l) establishes effective
dates and transition periods. Paragraph 2(l)(2) provides that
if the Commission has failed to recognize any PRO within one
year after the date of enactment of the Act, the Commission
must perform the duties of the PRO with respect to any
certified financial statement for any fiscal year that ends
before one year after any PRO is recognized by the Commission.
This subsection is not intended to expand the powers of the
Commission or the size of the federal bureaucracy but rather to
have the specified functions performed by a PRO. The Commission
should devote the resources necessary to ensure that a
qualified PRO is recognized within one year after the date of
enactment of the bill and should recognize any qualified PRO on
a timely basis. In the event that it is not possible to
recognize a PRO within one year, the Commission should ensure
that a PRO is approved as soon as possible after that one-year
deadline, and in the interim the Commission should not act to
assume or to exercise the functions of the PRO beyond the
degree necessary for investor protection.
Section 3. Improper Influence on Conduct of Audits
Section 3 makes it unlawful for any officer, director, or
affiliated person of an issuer to take any action, in
contravention of a rule adopted by the Commission, to
fraudulently influence, coerce, manipulate, or mislead any
independent public or certified accountant engaged in auditing
that issuer's financial statements, for the purpose of
rendering such financial statements materially misleading. The
Commission has exclusive civil authority to enforce section 3
and any rule or regulation thereunder. The authority conferred
by this section is in addition to, and does not preempt, any
other authority of the Commission with respect to this area,
such as the Commission's current authority under Exchange Act
Rule 13b2-2, which prohibits making materially false or
misleading statements to auditors, and the Commission's cease-
and-desist authority under Section 21C of the Exchange Act or
its injunctive powers under Section 21 of the Act with respect
to third parties who cause others to violate, or aid and abet
violations of, the securities laws and rules and regulations
thereunder.
Section 4. Real-Time Disclosure of Financial Information
Section 4 amends section 13 of the Securities Exchange Act
of 1934 (15 U.S.C. 78m), to require the Commission to adopt
rules requiring issuers of securities registered under section
12 of that Act to make public disclosure, on a rapid and
essentially contemporaneous basis, of information concerning
the issuer's financial condition and operations. The Commission
has exclusive civil authority to enforce this provision and any
rule or regulation thereunder.
Section 4 also provides that the Commission must adopt
rules providing that any disclosure required by the Federal
securities laws, or rules or regulations thereunder, concerning
any sale of securities by an officer, director, or other
affiliated person of the issuer of the securities must be made
electronically to the Commission before the end of the business
day following the day of the transaction, and must be made
available electronically by the Commission before the end of
the business day following the day received by the Commission.
Any issuer that maintains a corporate web site is also required
to publishthe disclosure, by any of its officers, directors, or
affiliated persons, on its web site by the end of the day following the
day the disclosure is received by the Commission. The Commission must
also revise its forms and schedules as necessary to facilitate
compliance with these requirements.
Section 5. Insider Trades During Pension Fund Blackout Periods
Prohibited
Section 5 makes it unlawful for any person who holds,
directly or indirectly, beneficial ownership of more than 10
percent of any class of equity securities (other than exempted
securities) registered pursuant to section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l), or is a director or
officer of the issuer of those securities, to purchase or sell,
directly or indirectly, any equity securities of the issuer
(other than exempted securities) during a blackout period. A
``blackout period'' is defined in section 22 of this bill.
Section 5 also provides for recovery, by the issuer, of any
profit resulting from a trade made in violation of this
provision. If the issuer fails to bring a suit within 60 days
of a request to do so, or fails to prosecute the suit
diligently, an owner of any security of the issuer may bring a
suit in the issuer's name. No suit may be brought after 2 years
from the date the profit was realized. Section 5 does not
govern transactions where the beneficial owner was not such at
both the time of the purchase and sale, or any transaction
exempted by the Commission as not within the purposes of
section 5. Section 5 permits the Commission to issue rules
clarifying the application of this provision, to ensure
adequate notice to all persons affected, and to prevent evasion
of this provision.
Section 6. Improved Transparency of Corporate Disclosures
Section 6 requires the Commission to revise its regulations
under the securities laws to expand the disclosure requirements
for the financial reports and registration statements of public
companies, so that they provide adequate and appropriate
disclosure of certain of an issuer's off-balance sheet
transactions and relationships. Section 6 requires these new
disclosures to the extent that the transactions or
relationships are not otherwise reported in the issuer's
financial statements at fair value, and are reasonably likely
to materially affect the issuer's liquidity or availability of,
or requirements for, capital resources, or the financial
condition or results of operations of the issuer. The Committee
intends that these disclosures would be made on a fair value
basis. Issuers must also disclose loans extended to officers,
directors or other persons affiliated with the issuer on terms
or conditions that are not otherwise available to the public.
Section 6 also requires the Commission to conduct an
analysis of the extent to which disclosure of additional or
reorganized information may be required to improve the
transparency, completeness or usefulness of financial
statements and other disclosures. In its analysis, the
Commission must consider requiring the identification of the
key accounting principles that are most important to the
issuer's reported financial condition or results of operation,
and that require the most difficult, complex or subjective
judgments by management. The Commission must also consider
requiring an explanation, where material, of how different
available accounting principles applied, along with the
judgments made in their application and the likelihood of
materially different reported results if different assumptions
were to prevail. In addition, the Commission must consider
requiring an explanation of trading activities where an issuer
engages in the business of trading non-exchange traded
contracts, accounted for at fair value, but where a lack of
market price quotations necessitates the use of fair value
estimation techniques. Finally, the Commission must consider
establishing requirements relating to the presentation of
information in plain language, and requiring any other
disclosures in financial statements or other disclosure
documents that would improve transparency.
Section 7. Improvements in Reporting on Insider Transactions and
Relationships
Section 7 requires the Commission to initiate a proceeding
to propose changes in its rules and regulations with respect to
financial reporting to require increased disclosure of
relationships between the issuer and affiliates of the issuer
and officers, directors or employees of the issuer; and
officers, directors or employees of the affiliate and unrelated
other entities to the extent such relationships create a
conflict of interest for those individuals. The proceeding must
examine relationships with philanthropic organizations, insider
controlled affiliates, joint ownership interests in real
property, and the provision of services by related persons. If
a rulemaking is initiated pursuant to this section, the
Commission is directed to do so within 180 days of the
enactment of the bill.
Section 8. Codes of Conduct
Section 8 directs the New York Stock Exchange, the American
Stock Exchange and the Nasdaq stock market to file with the
Commission proposed rules that would prohibit their listing any
securityfor a company that has not adopted a code of ethics for
the company's senior officials. The Commission is given the authority
to impose this requirement on any other national securities exchange.
Section 8 requires that the Commission revise its
regulations pertaining to disclosures on form 8K to require the
immediate disclosure of any change or waiver of such code of
ethics of an issuer.
Section 9. Enhanced Oversight of Periodic Disclosures by Issuers
Section 9 directs the Commission to review disclosures of
issuers required to file statements under the securities laws
on a more regular and systematic basis. The Commission is
directed to create a risk rating system to determine the
frequency of such reviews. The Commission is directed to ensure
that no issuer shall be reviewed less than once every three
years. The section provides that the Commission may not
disclose the risk rating of any issuer.
Section 10. Retention of Records
Subsection 10(a) requires CPAs who certify financial
statements under the securities laws to prepare and maintain
final audit work papers and other information that are
necessary to support an accountants report on such financial
statements for a period of no less than 7 years. The term
``work papers'' was used as a term of art, to be defined with
reference to the professional standards governing the subject.
Subsection 10(b) defines the term ``accountants report'' to
mean a document in which an accountant identifies a financial
statement and sets forth his opinion regarding that financial
statement or an assertion that an opinion cannot be expressed.
The purpose of this section is to ensure that necessary
auditing documents are retained in the event that a CPA's
conclusions are subsequently reviewed. At the same time, the
legislation is not intended to impose unnecessary or
excessively costly burdens on accountants, or to require that
every document, or every iteration of a document, be preserved.
The requirements of this section may be satisfied through the
use of electronic records.
Section 11. Commission Authority to Bar Persons from Serving as
Officers or Directors
Section 11 gives the Commission authority to issue an order
in connection with a cease-and-desist proceeding to bar a
person who has violated section 17(a)(1) of the Securities Act
of 1933 (Securities Act) or section 10(b) of the Securities
Exchange Act of 1934 (Exchange Act) from acting as an officer
or director of a company that is registered with or required to
file reports with the Commission (public company), if that
person's conduct demonstrates substantial unfitness to serve as
an officer or director of a public company. Under current law,
section 20(e) of the Securities Act and section 21(d)(2) of the
Exchange Act, the Commission can only obtain such a bar in a
Federal court proceeding.
The administrative bar authority granted in section 11 is
an extraordinary remedy, allowing the Commission effectively to
deprive a person of his or her livelihood. In other
circumstances where the Commission or other Federal agencies
have similar authority, the agency generally has plenary
regulatory authority over the industry in which the individual
is employed and the bar extends only to that industry. For
example, under section 15(b)(6) of the Exchange Act, the
Commission has the authority to bar an individual from being
associated with a broker or dealer, and section 203(f) of the
Investment Advisers Act of 1940 gives the Commission authority
to bar an individual from being associated with an investment
adviser. Brokers, dealers and investment advisers are all
subject to comprehensive regulatory schemes overseen by the
Commission. See also 12 U.S.C. 1818(e)(1) (2002) (permitting
debarment of banking officials); 15 U.S.C. 80a-35 (2002)
(permitting debarment of officers, directors or members of
investment company advisory boards). On the other hand, while
the securities laws require disclosure by public companies,
there has been no legislative mandate to the Commission to
create a comprehensive regulatory scheme applicable to public
companies or their employees and directors. Such a mandate
would be antithetical to the disclosure philosophy of our
securities laws, which has been the basis for the development
of our strong securities markets. Moreover, while an individual
barred from the securities industry may seek employment in many
other industries, an individual barred from serving as an
officer or director of a public company is prohibited from
employment in such capacity by over 17,000 companies.
The Committee has therefore included several protections in
section 11 to make clear that the standard for the Commission
to apply in issuing a bar order is high, and to ensure that the
Commission exercises this authority with care and only in
circumstances where it is justified by the magnitude of the
individual's offense and the need to protect investors from
potential recidivism by the individual.
The first protection is the requirement in paragraph (a)
that the Commission must find that a person's conduct
demonstrates ``substantial unfitness'' to serve as an officer
or director of a public company before he or she can be barred.
This is the same standard that is applicable to Federal court
proceedings in which the Commission seeksto bar an individual
from serving as an officer or director of a public company.
The Committee also believes it is appropriate to set forth
factors for the Commission to consider in making a
determination whether an individual's conduct demonstrates
substantial unfitness. These factors are derived from case law
interpreting this standard under section 20(e) of the
Securities Act and section 21(d)(2) of the Exchange Act. See,
e.g., SEC v. McCaskey, 2001 U.S. Dist. LEXIS 13571 (S.D.N.Y.
2001); SEC v. Farrell, 1996 U.S. Dist. LEXIS 22681 (W.D.N.Y.
1996); SEC v. Patel, 61 F.3d 137 (2d Cir. 1995); SEC v. Shah,
1993 U.S. Dist. LEXIS 10347 (S.D.N.Y. 1993); see also Jayne W.
Barnard, When is a Corporate Executive ``Substantially Unfit to
Serve,'' 70 N.C.L. Rev. 1489 (1992). They are: (1) the severity
of the person's conduct giving rise to the violation, and the
person's role or position when engaged in the violation; (2)
the person's degree of scienter; (3) the person's economic gain
as a result of the violation; and (4) the likelihood that the
conduct giving rise to the violation, or similar conduct as
defined in subsection (a), may recur if the person is not so
prohibited. Paragraph (b) omits one of the factors considered
by the courts, whether the person is a ``repeat offender.'' The
Committee believes that repeat offender status is an implicit
consideration in the fourth factor, the likelihood that similar
conduct will recur.
An additional protection is provided in paragraph (c),
which stays the enforcement of a Commission bar order during
the period in which application may be made for judicial review
of the bar order and, if a timely application for judicial
review is made, pending the entry of a final order resolving
the application. This will prevent an individual from losing
his or her position while exercising the right of appeal to a
Federal court. Without this stay provision, the Committee is
concerned that an administrative bar would have its intended
effect even if ultimately deemed by a court to have been
inappropriate, in that the individual would have been deprived
of his or her livelihood in the intervening period and might
have a difficult time attaining a comparable position to that
lost due to the improper bar.
Finally, the Committee notes that section 11 provides, as
does section 20(e) of the Securities Act and section 21(d)(2)
of the Exchange Act, that the Commission may issue an order to
bar an individual conditionally or unconditionally, and
permanently or for such period of time as it shall determine
(emphasis added). Accordingly, the Committee expects that the
Commission will, as the courts have done, issue orders tailored
to the individuals and facts before it. See SEC v. McCaskey,
2001 U.S. Dist. LEXIS 13571 (S.D.N.Y. 2001) (rejecting
permanent bar order in favor of six-year bar); SEC v. Farrell,
1996 U.S. Dist. LEXIS 22681 (W.D.N.Y 1996) (rejecting
comprehensive bar order in favor of industry specific bar).
Section 12. Disgorging Insiders Profits From Trades Prior to Correction
of Erroneous Financial Statements
Section 12 directs the Commission to conduct an analysis of
whether any officer or director of an issuer should be required
to disgorge profits gained or losses avoided from the sale of
the securities of such issuer during the six month period
preceding the filing of a restated financial statement. The
Commission is authorized to issue rules requiring disgorgement
under those circumstances. The Committee intends that, if the
Commission chooses to issue rules pursuant to this section, it
do so only after providing safeguards and exemptions to ensure
that such disgorgement is required only in cases where the
Commission can prove extreme misconduct on the part of that
officer or director. The Committee intends that the Commission
would, in establishing any such rules, ensure fair and
impartial procedures, with a right to appeal, for the
adjudication of any action to require disgorgement.
Section 13. Securities and Exchange Commission Authority To Provide
Relief
Section 13 provides that, if the Commission obtains funds
pursuant to a disgorgement proceeding from Enron Corporation,
Arthur Andersen LLC, or any affiliate, subsidiary, officer,
director or principal shareholder thereof, the Commission will
establish an allocation system for those funds that will give
priority to former employees of Enron Corporation who were
participants in its employee retirement plan. The section
directs that any monies in payment of a civil penalty against
Enron or Arthur Andersen must be paid into the disgorgement
fund. The section also authorizes the Commission to accept
donations for the disgorgement fund.
Section 14. Study of Rules Relating to Analyst Conflicts of Interest
Section 14 requires the Commission to conduct a study and
review of any final rules by any self-regulatory organization
registered with the Commission, related to matters involving
equity research analyst conflicts of interest. The study must
include a review of the effectiveness of the final rules in
addressing matters of objectivity and integrity of equity
research analyst reports and recommendations. Section 14 also
requires the Commission to submit a report on its study and
review to Congress within 180 days of the delivery of the final
rules to the Commission, with annual updates thereafter.
Thereport to Congress must include recommendations, including any
recommendations for additional self-regulatory organization rulemakings
regarding equity research analysts.
Section 15. Review of Corporate Governance Practices
Section 15 requires the Commission to conduct a study and
review of corporate governance standards and practices, to
determine whether they serve the best interests of
shareholders. In conducting the study, the Commission must seek
the views of State securities and corporate regulators, and
must report on its analysis in its next annual report to
Congress.
The study must include an analysis of whether current
standards and practices promote full disclosure to shareholders
of relevant information; whether corporate codes of ethics are
adequate for shareholder protection; the extent to which
conflicts of interest are aggressively reviewed; the extent to
which sufficient legal protection exists to ensure that any
manager who attempts to manipulate or unduly influence an audit
is subject to appropriate sanctions and liability; whether the
rules, standards and practices relating to determining whether
independent directors are in fact independent are adequate;
whether rules relating to the independence of directors serving
on audit committees are adequate to protect investors and are
uniformly applied; whether the duties and responsibilities of
audit committees should be established by the Commission; and
what further or additional practices or standards might best
protect investors and promote the interests of shareholders.
Section 16. Study of Enforcement Actions
Section 16 requires the Commission to review and analyze
all of its enforcement actions involving violations of
securities law reporting requirements and all restatements of
financial statements over the past five years. The purpose of
the review is to identify the areas of reporting most
susceptible to fraud, inappropriate manipulation or
inappropriate earnings management, such as revenue recognition
and the accounting treatment of off-balance sheet special
purpose entities. The Commission must report its findings to
Congress within 180 days of enactment, and use its findings to
revise rules and regulations as necessary.
Section 17. Study of Credit Rating Agencies
Section 17 requires the Commission to conduct a study of
the role and function of credit rating agencies in the
operation of the securities markets, and report on the analysis
to the President and Congress within 180 days of enactment. In
conducting the study, the Commission must examine the role of
credit rating agencies in the evaluation of securities issuers,
and the importance of that role to investors and the
functioning of the securities markets; any impediments to the
accurate appraisal by credit rating agencies of the financial
resources and risks of issuers; any measures which may be
required to improve the dissemination of information concerning
such resources and risks when credit rating agencies announce
credit ratings; any barriers to entry into the business of
acting as a credit rating agency and measures needed to remove
such barriers; and any conflicts of interests in the operation
of credit rating agencies and measures to prevent those
conflicts or ameliorate their consequences.
Section 18. Study of Investment Banks
Section 18 directs the General Accounting Office (GAO) to
conduct a study on the role of investment banks and financial
advisors in assisting public companies in manipulating their
earnings and obfuscating their true financial condition. The
section directs the GAO to address the role of investment banks
in the bankruptcy of Enron Corporation, the failure of Global
Crossing, and in the creation and marketing of transactions
designed to obfuscate a company's financial picture. The GAO is
directed to report to Congress within 180 days of enactment of
the bill.
Section 19. Study of Model Rules for Attorneys of Issuers
Section 19 directs the Comptroller General to conduct a
study of the Model Rules of Professional Conduct promulgated by
the American Bar Association and rules of professional conduct
applicable to attorneys established by the Commission to
determine whether such rules provide adequate guidance to
attorneys with respect to their ethical obligations. The
Comptroller General is ordered to report to the House Financial
Services Committee and the Senate Banking Committee.
Section 20. Enforcement Authority
Section 20 grants the Commission all of the authorities
granted to it under the securities laws in order to enforce the
bill. Commission actions under the legislation, including
actions on rules and regulations, are subject to review in the
same manner as actions under the securities laws.
Section 21. Exclusion for Investment Companies
Section 21 clarifies that certain provisions of the bill
are not meant to apply to investment companies registered with
the Commission under the Investment Company Act of 1940.
Because those companies are already subject to a thorough
regulatory regime, the application of these provisions would be
inappropriate.
Section 22. Definitions
Section 22 defines terms used in the bill.
Changes in Existing Law Made by the Bill, as Reported
The bill does not amend existing law.
MINORITY VIEWS
The collapse of the Enron Corporation provided irrefutable
evidence of serious, systemic problems in our financial
reporting system and our capital markets. Far from being an
isolated instance, Enron was only the most spectacular example
of what has become a common phenomenon--earnings manipulation
and deceptive accounting by our largest companies. Before
Enron, company after company--Waste Management, Sunbeam,
Cendant, W.R. Grace, and many others--were found to have
manipulated their accounting to present a picture to investors
that did not match reality. As evidenced by the record number
of investigations opened by the SEC thus far this year, the
problem has only become more acute.
The safeguards that should protect investors from such
practices have failed at every level in company after company,
overwhelmed by the temptation for companies to cheat,
overstate, or obscure their financial disclosure to improve
short-term results and meet analyst or investor expectations.
The stock prices of many companies have been whipsawed by any
suggestion of possible accounting problems, indicating a clear
decline in confidence in our financial reporting system. While
this system has long been viewed as the best in the world, its
reputation has suffered from a string of record financial
restatements and prosecutions of some of our largest companies.
Virtually all of the witnesses heard by the Committee spoke
of the need for auditors to be willing to stand up to
management and for audit committees to take real responsibility
for audits and auditors. To do this, we must significantly
alter the relationship of the auditor to its client, strengthen
the functioning of audit committees, and provide meaningful
ongoing oversight of the auditing profession. We should use
this opportunity to restore the vitality of critical investor
safeguards by ensuring that auditors and audit committees can
once again act as the first line of defense in protecting
investors. The market alone cannot provide an effective or
lasting solution to these problems.
To restore confidence in the integrity of our markets, this
Congress should enact tough and credible legislation to address
the serious and growing problem of earnings management and
accounting fraud. There are a number of important areas in
which the bill reported out of the Financial Services Committee
should be improved:
Oversight of the accounting industry. In spite of the
critical role that auditors play in the financial reporting
system for publicly traded companies under our securities laws,
oversight of the industry has been left entirely to the
industry itself, with little input from either the SEC or the
public. While a broad consensus has formed on the need for a
new public oversight body for the accounting profession, there
are major differences on the attributes such a regulator must
have to be credible and effective. The bill reported out of
committee leaves these matters to SEC rulemaking, effectively
allowing these issues to remain open to debate even after
Congress has acted.
Given the importance of these decisions to the
effectiveness of the new regulator, Congress should not
delegate this task. Without a clear mandate from Congress, the
structure and role of the new regulator will be the subject of
continued debate and will be more limited than needed to
effectively oversee the auditing industry. Delegating decisions
on its duties and powers to the SEC provide an opportunity for
the authority of the new regulator to be weakened.
The new regulator should have authority to set audit
quality and independence standards, rather than just enforcing
the standards set by industry bodies. While the regulator could
chose to rely on existing industry standards if it determines
they are adequate to ensure high-quality audits, the regulator
should be able to use the results of the experience gained from
reviewing auditors and audits to determine where new or more
explicit standards are needed in problematic areas. Congress
should strengthen the bill reported by Committee to provide
this authority.
The new regulator also should have clear disciplinary and
investigative powers. Unlike the tangled jumble of existing
industry organizations, the new regulator must be given the
tools to provide meaningful quality control and to conduct
timely investigations and disciplinary actions. It must have
the ability to draw on its experiences to strengthen the
industry standards as necessary to provide the high level of
quality and independence that we expect of auditors of public
companies. Clarifying the authority of the regulator will
enable it to better coordinate with the SEC, rather than
waiting years until after SEC actions are completed. The
provisions of the bill reported out by the committee should be
significantly improved in this regard.
Auditor independence. While an auditor's first duty should
be to the public, auditors currently are beholden to their
audit clients for fees for non-audit services that may far
exceed the audit fees they receive. Data now available under
the Security and Exchange Commission's disclosure rule on non-
audit fees makes clear that, for the auditors of many large
public companies, audit fees are a minute percentage of the
fees they receive. The non-audit services that auditors provide
to the public companies they audit must be limited and must be
made subject to real oversight by the audit committees.
The bill reported out of committee includes no real limits
on the non-audit services that auditors provide to their audit
clients. While H.R. 3763 includes a provision that purports to
prohibit auditors from providing audit clients with two non-
audit services, financial information design and implementation
and internal audit outsourcing. The language of the provision
references the existing SEC rules in a way that includes only
the limited restrictions that the SEC currently places on these
services. By codifying existing regulatory carve-outs, the
provision effectively makes no change in existing law, not even
going as far as the accounting industry has announced it is
willing to go voluntarily.
The bill reported out of committee should have included
real limits on the non-audit services that auditors provide to
their audit clients where those services create conflicts for
auditors, such as services that result in the auditor auditing
its own work. Additionally, while some non-audit services do
not create conflicts for auditors or are difficult to separate
from audit work, the provision of such services by an auditor
to its audit client should be carefully examined to ensure that
the full scope of services provided are in the best interests
of shareholders, rather than auditors or management.
Congress should strengthen the bill reported by the
committee to include provisions to ensure that the full scope
of the relationship between an auditor and its audit client are
subject to the control of the audit committee in order to
enable the audit committee to effectively oversee the auditor.
A requirement for audit committee approval of non-audit
services would promote the independence of the audit by
ensuring that it is responsible to the audit committee and
shareholders, rather than to management. Such a provision would
enable an audit committee to determine what makes sense for the
individual company and its auditor in light of the full range
of services and activities of its auditor.
The role of the audit committee. The bill reported out of
committee calls for a study of corporate governance, but does
not in any meaningful way address to whom the outsider auditors
report. In our view, the bill should have included a provision
that would have required an issuer's auditor to be appointed by
and report to the audit committee of the board of directors. In
addition, it is vital that the audit committee has an ongoing
dialogue with the outside auditor as a critical check on the
veracity of the financial statements and internal controls of
the company.
The record before this Committee demonstrates that the
audit committee has the responsibility to shareholders to make
sure that their auditors are doing their job, raise the tough
questions, and ensure that the financial picture of the company
is accurate and portrays the true nature of the financial
condition of the company. It is clear from the Enron case, as
the special committee of the board of directors of Enron
concluded, that at every level corporate oversight failed,
including and perhaps most acutely at the audit committee
level. It is important to vest the audit committee with the
clear authority to closely oversee the work of the auditors and
take seriously their oversight responsibilities.
Mr. Harvey Pitt, Chairman of the Securities and Exchange
Commission, said in a recent speech, ``while shareholder
approval of outside auditors is now a well established aspect
of corporate governance, I believe we should also explore
whether the audit committee should be vested with the initial
decision about which firm is recommended to the shareholders. I
also believe that audit committees should have the authority to
fire outside auditors (or prevent management from firing
them).''
Independent directors serving as consultants. The bill
reported out of the Committee does not include provisions to
ensure that independent directors are truly independent. The
bill should have included a provision that would prevent the
practice of paying independent directors as ``consultants''
while they serve on the board. Lynn Turner, former Chief
Accountant of the SEC, among others, have argued that paying
directors as consultants is back door compensation that
fundamentally undermines their independence. The critical
question is whether ``independent'' directors who are receiving
significant consulting compensation would challenge the same
management that is paying them to serve as consultants. Such a
provision is a simple step in ensuring that directors act in
the best interests of shareholders.
Analysts conflicts. The role of many securities analysts in
continuing to push Enron's stock even as the company was
collapsing is well recognized. In spite of the evidence before
us, the committee failed to address the core issues that
undermine securities analysts' independence. That is,
compensation arrangements of analysts at investment banks
provide incentives to win and retain business, rather than
provide investors with high-quality unbiased research.
To ensure securities analyst independence Congress should
have adopted a provision that would require:
That the self regulatory organizations adopt
rules to ban equity research analysts from holding
equity interests in the companies that they cover;
That analyst compensation not be based on
investment banking revenue, but permit compensation to
be based on the overall success of the firm;
That the investment banking department have
no input into the compensation, hiring, firing and
promotion of securities analysts.
That SROs establish criteria for evaluating
analyst research quality and require that analyst
compensation be principally based on the quality of an
analyst's research.
Disgorgement of bonuses and other incentives. In an attempt
to restore accountability among corporate officers, the
President unveiled a 10 point plan. One of the meritorious
items in that plan was a call to require disgorgement of
incentive-based compensation from officers and directors in
cases of false or misleading statements made by such officers
that required an accounting restatement. Instead of attempting
to implement this straightforward and common sense proposal,
the Committee simply tasked the SEC to study the question of
disgorgement. Additionally, the report language attempts to
raise the bar to use of this remedy by stating that it should
be used only where the Commission can prove ``extreme
misconduct''. Establishing such a high standard will make it
very difficult, if not impossible, for the Commission to obtain
disgorgement of millions of dollars that executives have earned
from stock sales at the same time they were committing
securities fraud.
We, however, believe that Congress should act quickly to
provide the SEC with the power to require disgorgement of
compensation in an administrative proceeding. Congress should
have adopted a provision that requires the SEC to prescribe
regulations to require disgorgement in certain proceedings to
seek disgorgement of salaries, commissions, fees, bonuses and
other incentive-based compensation obtained by an officer or
director of an issuer who made or caused to be made the filing
of financial statements that were at the time false or
misleading.
In addition, the bill should have included a provision that
provides in any action or proceeding brought or instituted by
the Commission under the securities laws against any person who
made or caused to be made the filing of financial statements
that were at the time false or misleading or for causing, or
aiding and abetting any other violation of the securities laws
may be required to disgorge salaries, commissions, fees,
bonuses and other incentive-based compensation.
CEO and CFO certification of financial statements. Another
important policy initiative advanced by the President was a
recommendation that the principal executive officer or officers
and the principal financial officer or officers (CEO and CFO),
or persons performing similar functions, certify to the
accuracy of the financial statements included in each annual or
quarterly report filed or submitted to the SEC. It reasonable
to expect that corporate officers stand behind the company's
public disclosure and be subject to sanction should they
violate that certification. Regrettably, the bill reported out
of the Committee did not include this worthwhile policy
initiative. Congress should implement this initiative by
including provisions to require the CEO and the CFO to certify
that:
1. Such officer has reviewed the report.
2. To the officer's knowledge, the report does not contain
any untrue statement of material fact or omit to state a
material fact to make the statements made, not misleading.
3. Based on the officer's knowledge, the financial
statements, and other financial information fairly present the
financial condition and results of the company as of, and for,
the periods presented in the report.
4. Such officers have created and maintained internal
procedures to ensure that material information relating to the
company is made known to them by others within the company.
5. The company has evaluated its internal controls
including the fact that the singing officers have disclosed to
the auditors and the audit committee that: (a) all significant
deficiencies in such controls and (b) any fraud, whether or not
material, that involves management or other employees who have
a significant role in the company's internal controls. In
addition, the signing officers have indicated in the report to
shareholders whether or not there were significant changes in
internal controls subsequent to the date of the evaluation of
internal controls and whether any corrective actions have been
taken.
If such provisions are adopted, the SEC would have
available to it civil money penalties and injunctive power to
enforce these provisions as provided in the Securities Exchange
Act of 1934. Morever, a willful violation of these
certifications would carry criminal sanctions under Section 32
of the Securities Exchange Act of 1934.
Officer and director bars. An amendment sponsored by the
majority that was ultimately adopted has made it more difficult
rather than less for the SEC in an administrative proceeding to
seek an officer and director bar against individuals who are
guilty of misconduct. The bill purports to authorize the SEC to
bar officers and directors from serving as an officer or
director in proceedings brought by the Commission under Section
21(c) of the Securities and Exchange Act of 1934. Such a bar
would be permitted if the ``person's conduct demonstrates
substantial unfitness to serve as an officer or director of any
issuer.'' In determining unfitness the Commission shall
consider several factorsincluding ``the likelihood that the
conduct giving rise to the violation, or similar conduct * * * may
recur if the person is not so prohibited.''
Congress provided the SEC with explicit authority to seek
officer and director bars in 1990. Current statutory authority
provides the Commission the power to seek an officer and
director bar against any individual who violates Section 10(b)
of the Securities Exchange Act or Section 17(a)(1) of the
Securities Act, and whose ``conduct demonstrates substantial
unfitness to serve as an officer or director'' of a public
company. Unfortunately, the Commission's ability to obtain
officer and director bars, however, has been limited by
judicial interpretations of the phrase ``substantial
unfitness'' that have created a very high standard for
obtaining a bar. Several courts apply a six-part test which
require, among other factors, a showing that the misconduct is
likely to recur. This is precisely the same test that the bill
reported out by this Committee codified. The Director of
Enforcement of the SEC has said in a recent speech, ``the
result has been, unbelievably, that in some cases courts have
refused to impose permanent officer and director bars on
individuals who have engaged in egregious--even criminal--
misconduct.'' The argument that this bill facilitates officer
and director bars for those guilty of serious misconduct is an
illusion. It codifies exactly the barriers that the SEC says
are the problem.
The bill should have included legislative modifications to
existing law that facilitate officer and director removal in
either a court proceeding or in an administrative action. For
example, the Committee should have adopted a sensible and real
approach to the problem by deleting the word ``substantial''
before unfitness in Section 21(d)(2) of the Exchange Act. The
effect would have been to lessen the unreasonable barriers
imposed by some courts on the SEC to obtain such bars. In
addition, the Committee should have been empowered as a remedy
in its own administrative proceeding to seek an officer and
director bar without going to district court to seek such a
bar, without imposing unreasonable factors that serve only to
frustrate their efforts.
These provisions, had they been adopted, would have given
effect to the President's plan to make it easier for the SEC to
bar officers and directors who have been determined to have
committed serious misconduct. The majority amendment approved
by the Committee on a party-line vote has only succeeded in
making much more difficult, while claiming that they have
enacted real reform.
Shareholder approval of stock option plans. SEC Chairman
Pitt has expressed his concern that stock options no longer
serve to align the interests of management with those of
shareholders and described specific measures that he felt were
needed to make option plans work as intended. He stated that
all stock option plans that allow a director or officer to
acquire stock should be approved by shareholders, that
decisions on granting options to senior management should be
entrusted to a committee of independent directors, and that
corporate boards should consider whether officers demonstrate
sustained, long-term growth before options can be exercised.
The growing evidence that many executives have reaped
significant rewards from stock option plans even as their
companies' earnings and stock prices have plummented calls for
measures to realign shareholder and executive interests. The
bill reported out of committee failed to include such
provisions. Institutional investors, pension plans, and others
have urged that shareholders be permitted to vote on stock
option plans that are used to provide executive compensation.
The manner in which stock options and other compensation is
provided to executives is an important factor in aligning the
interests of shareholders and executives, and should be subject
to shareholder approval.
Private litigants' rights. The Committee bill fails to
address very serious problems that confront pension funds and
other investors who seek compensation for securities fraud. In
the 1991 Lampf case, in a 5-to-4 decision, the Supreme Court
significantly shortened the period of time in which investors
may bring securities fraud action. The decision requires the
victims of fraud to bring suit by the earlier of 1 year from
the discovery of the fraud or 3 years from the fraudulent act.
Securities fraud is very difficult to detect because the
guilty parties often hide or destroy incriminating evidence.
The shorter period provide by Lampf does not allow individual
investors adequate time to discover and pursue violations of
securities laws. Moreover as the dissenting Justices in Lampf
argued, the case's strict statute of limitations runs counter
to the almost uniform rule in the United States rejecting short
statutes of limitations for fraud-based causes of action.
The unreasonably brief statue of limitations has already
had an adverse impact in the Enron debacle. In February of this
year, in testimony before the Senate Judiciary Committee,
Christine O. Gregorie, the Attorney General for the State of
Washington, testified that Washington State Pension fund
suffered over $100 million in losses because of the misleading
financial statements issued by Enron and audited by Andersen,
but, was only able to make a claim for approximately $50
million because of the restricted statute of limitations that
applies to securities fraud cases.
Both Democratic and Republican past-SEC Chairman have
stressed the integral role of private lawsuits in maintaining
investor confidence. However, since the Supreme Court's 1994
decision in the Central Bank of Denver case, the victims of
fraud have not been able to bring claims against the
accountants, lawyers, investment banks and others who aid and
abet issuers in misleading the public about the real state of
company balance sheets.
Our market regulatory system depends on the independent
professionals who verify and analyze the disclosures of
publicly held companies. The reduced threat of legal liability
for these ``gatekeepers'' that has existed since 1994 has
helped to create an environment of laxity, where gatekeepers do
not do all that they reasonably can to protect the investing
public.
Although the Private Securities Litigation Reform Act
partially overturned the Central Bank of Denver decision by
restoring some of the SEC's authority to pursue aiders and
abettors of securities fraud, that legislation failed to give
the victims of fraud the right to sue those who aid issuers in
misleading and defrauding the public. Moreover, the 1995
legislation made it harder for the SEC to prove the complicity
of aiders and abettors. The 1995 law requires the SEC to prove
that a defendant had actual knowledge of the fraud. The 1995
law does not permit the SEC to prosecute aiders and abettors
who acted recklessly with regard to their client's fraud, which
was the standard prior to the 1994 Supreme Court case.
In 1995, both Federal and State securities regulators,
academics and others (including a principal sponsor of the 1995
legislation), urged Congress to overturn the Lampf and the
Central Bank of Denver decisions. We should now heed these
recommendations and provide investors a fairer system of
redress in the courts.
First, Congress should now enact a statute of limitations
that provides that a private securities fraud case may be
brought not later than the earlier of five years after the date
on which the alleged violation occurred or three years after
the date in which the alleged violation was discovered. Such a
provision would provide a reasonable period of time in which to
uncover and investigate fraud and, then, bring meritorious
claims.
Second, Congress should reverse the trend toward laxity by
restoring a private right of action against those gatekeepers
who are guilty of aiding securities fraud and by restoring the
pre-1994 liability standards for the professionals who are
supposed to protect the public.
John J. LaFalce.
Paul E. Kanjorski.
Bernard Sanders.
Luis V. Gutierrez.
Janice D. Schakowsky.
ADDITIONAL VIEWS OF MR. LaFALCE
Auditor Rotation. The bill reported out by the Committee
does not contain a provision relating to auditor rotation.
Moreover, the bill does not provide for rotation of the audit
partner as suggested by Chairman Pitt in his testimony before
the Committee. Enron's failure heightened concerns about the
sufficiency of the current rules and independence standards for
auditors, particularly concerning the scope of non-audit
services that auditors perform for their audit clients. Enron's
auditor, for instance, received a very significant portion of
its fees from Enron for services that were not related to its
audit responsibilities. It also raised the real concern that
auditors' were more interested in the client than their duty to
the public.
The bill should have included a provision to mandate
rotation. Auditor rotation would provide a number of important
benefits including:
1. A new audit firm would bring to bear a skepticism
and fresh perspective that a long-term auditor may
lack;
2. Second, auditors tend to rely excessively on prior
years' working papers, including prior tests of
client's internal control structure, particularly if
fees are concerned;
3. Long-time auditors may come to believe that they
understand the totality of the client's issues, and may
look for those issues in the next audit rather than
staying open to the other possibilities; and
4. An auditor may place less emphasis on retaining a
client relationship even at the cost of a compromised
audit if it knows the engagement will end after several
years.
Auditor/Issuer Employment Restrictions. The bill reported
out by the Committee does not provide for any restrictions on
hiring of audit firm partners and other employees of an audit
client. It therefore fails to address a critical issue that
compromises the independence of an audit. As we saw
dramatically in Enron and Global Crossing, members of the audit
team often move to work for their audit clients. The bill
should have included provisions that limit the practice of
hiring members of an audit team who will then become the client
of their former audit team colleagues. This dynamic creates a
revolving door system that compromises the ability for auditors
to challenge management regarding their accounting practices
and public disclosure.
John J. LaFalce.
ADDITIONAL VIEWS OF MR. SHERMAN
Mr. Chairman, I voted for H.R. 3763 with the hope that, on
the House floor, we will improve this legislation. I do not
know if I will support this legislation on the floor, if we are
unable to improve it. As approved by the Committee, the bill is
a modest but inadequate step forward.
Brad Sherman.
ADDITIONAL VIEWS OF MESSRS. BENTSEN AND WATT
The Bentsen/Watt amendment adopted by the Committee to H.R.
3763, the Corporate and Auditing Accountability, Responsibility
and Transparency Act of 2002, is designed to enhance the
Securities and Exchange Commission's (the ``SEC'') authority
with respect to scope of services provided by auditors deemed
to be independent under the bill. Specifically, the Bentsen/
Watt amendment authorizes the SEC to review services provided
by auditors of public companies to audit clients to determine
whether the provision of such services would impact the
auditor's independence. Additionally, the amendment provides
authority for the SEC to adopt rules to modify the list of
prohibited services in order to cure any such conflict.
Finally, the amendment directs the SEC to report to Congress
periodically on such reviews and rules.
We offered this amendment because we believed that the
underlying bill insufficiently addressed the need for ongoing
oversight by the SEC of potential conflicts between auditors
and their clients to the detriment of investors. Failure to
adequately ensure auditor independence potentially puts
investors at risk and undermines confidence in markets.
Additionally, we believed efforts to expand the list of
prohibited services by statute, while well intentioned, to be
inflexible and would be better handled by regulators. While
some have argued, not incorrectly, that the SEC has existing
authority to address conflicts of auditors of public issuers,
we also believe the Congress should be on record endorsing and
encouraging such authority when necessary to protect investors
and ensure confidence in the markets.
Ken Bentsen.
Melvin L. Watt.
DISSENTING VIEWS OF MR. PAUL
Seldom in history have supporters of increased state power
failed to take advantage of a real or perceived crisis to
increase government interference in our economic and/or
personal lives. Therefore we should not be surprised that the
events surrounding the Enron bankruptcy are being used to
justify the expansion of federal regulatory power contained in
H.R. 3763, the Corporate and Auditing Accountability,
Responsibility, and Transparency Act of 2002 (CARTA).
So ingrained is the idea that new federal regulations will
prevent future Enrons, that the debate on H.R. 3763 has largely
been between CARTA's supporters and those who believe this bill
does not provide enough federal regulation and control. I would
like to suggest that before Congress imposes new regulations on
the accounting profession, perhaps we should consider whether
the problems the regulations are designed to address were at
least in part caused by prior government interventions into the
market. Perhaps Congress could even consider the almost
heretical idea that reducing federal control of the markets is
in the public's best interest. Congress should also consider
whether the new regulations will have costs which might
outweigh any (marginal) gains. Finally, Congress should
contemplate whether we actually have any constitutional
authorization to impose these new regulations, instead of
simply stretching the Commerce Clause to justify the program de
jour.
CARTA establishes a new bureaucracy with enhanced oversight
authority of accounting firms, as well as the authority to
impose new mandates on these firms. CARTA also imposes new
regulations regarding investing in stocks and enhances the
power of the Securities and Exchange Commission (SEC). However,
companies are already required by federal law to comply with
numerous mandates, including obtaining audited financial
statements from certified accountants. These mandates have
enriched accounting firms and may have given them market power
beyond what they could obtain in a free market. These laws also
give corrupt firms an opportunity to attempt to use political
power to gain special treatment for federal lawmakers and
regulators at the expense of their competitors and even, as
alleged in the Enron case, their employees and investors.
When Congress establishes a regulatory state it creates an
opportunity for corruption. Unless CARTA eliminates original
sin, it will not eliminate fraud. In fact, by creating a new
bureaucracy and further politicizing the accounting profession,
CARTA may create new opportunities for the unscrupulous to
manipulate the system to their advantage.
Even if CARTA transformed all (or at least all accountants)
into angels, it could still harm individual investors. First,
new regulations inevitably raise the overhead costs of
investing. This will affect the entire economy as it lessens
the capital available to businesses, thus leading to lower
rates of economic growth and job creation. Meanwhile,
individual investors will have less money for their retirement,
their children's education, or to make a down payment on a new
home.
Government regulations also harm investors by inducing a
sense of complacency. Investors are much less likely to invest
prudently and ask tough questions of the companies they are
investing in when they believe government regulations are
protecting their investments. However, as mentioned above,
government regulations are unable to prevent all fraudulent
activity, much less prevent all instances of imprudent actions.
In fact, as also pointed out above, complex regulations create
opportunities for illicit actions by both the regulator and the
regulated. Publicly held corporations already comply with
massive amounts of SEC regulations, including the filing of
quarterly reports that disclose minute details of assets and
liabilities. If these disclosure rules failed to protect Enron
investors, will more red tape really solve anything?
In truth, investing carries risk, and it is not the role of
the federal government to bail out every investor who loses
money. In a true free market, investors are responsible for
their own decisions, good or bad. This responsibility leads
them to vigorously analyze companies before they invest, using
independent financial analysts. In our heavily regulated
environment, however, investors and analysts equate SEC
compliance with reputability. The more we look to the
government to protect us from investment mistakes, the less
competition there is for truly independent evaluations of
investment risk.
Increased federal interference in the market could also
harm consumers by crippling innovative market mechanism to hold
corporate managers accountable to their shareholders. As former
Treasury official Bruce Bartlett pointed out in a recent
Washington Times column, during the 1980s, so-called corporate
raiders helped keep corporate management accountable to
shareholders through devices such as the ``junk'' bond, which
made corporate takeovers easier. Thanks to the corporate
raiders, managers knew they had to be responsive to shareholder
needs or they would become a potential target for a takeover.
Unfortunately, the backlash against corporate raiders, led
by demographic politicians and power-hungry bureaucrats eager
to expand the financial police state, put an end to hostile
takeovers. BruceBartlett, in the Washington Times column sited
above, described the effects of this action on shareholders, ``Without
the threat of a takeover, managers have been able to go back to
ignoring shareholders, treating them like a nuisance, and giving
themselves bloated salaries and perks, with little oversight from
corporate boards. Now insulated from shareholders once again, managers
could engage in unsound practices with little fear of punishment for
failure.'' Ironically, the federal power grab which killed the
corporate raider may have set the stage for the Enron debacle, which is
now being used as an excuse for yet another federal power grab!
The free market, if left alone by Congress, is perfectly
capable of disciplining businesses who engage in unsound
practices. After all, before the government intervened, Arthur
Anderson and Enron had already begun to pay a stiff penalty, a
penalty delivered by individual investors acting through the
market. This shows that not only can the market deliver
punishment, but it can also deliver this punishment swifter and
more efficiently than the government. We cannot know what
efficient means of disciplining companies would emerge from a
market process but we can know they would be better at meeting
the needs of investors than a top-down regulatory approach.
Of course, while the supporters of increased regulation
claim Enron as a failure of ``ravenous capitalism,'' the truth
is Enron was a phenomenon of the mixed economy, rather than the
operations of the free market. Enron provides a perfect example
of the dangers of corporate subsidies. The company was (and is)
one of the biggest beneficiaries of Export-Import (Ex-Im) Bank
and Overseas Private Investment Corporation (OPIC) subsidies.
These programs make risky loans to foreign governments and
businesses for projects involving American companies. While
they purport to help developing nations, Ex-Im and OPIC are in
truth nothing more than naked subsidies for certain
politically-favored American corporations, particularly
corporations like Enron that lobby hard and give huge amounts
of cash to both political parties. Rather than finding ways to
exploit the Enron mess to expand federal power, perhaps
Congress should stop aiding corporations like Enron pick the
taxpayer's pockets through Ex-Im and OPIC.
If nothing else, Enron's success at obtaining state favors
is another reason to think twice abut expanding political
control over the economy. After all, allegations have been
raised that Enron used the same clout by which it received
corporate welfare to obtain other ``favors'' from regulators
and politicians, such as exemptions from regulations that
applied to their competitors. This is not an uncommon
phenomenon when one has a regulatory state, the result of which
is that winners and losers are picked according to who has the
most political clout.
Congress should also examine the role the Federal Reserve
played in the Enron situation. Few in Congress seem to
understand how the Federal Reserve system artificially inflates
stock prices and causes financial bubbles. Yet, what other
explanation can there be when a company goes from a market
value of more than $75 billion to virtually nothing in just a
few months? The obvious truth is that Enron was never really
worth anything near $75 billion, but the media focuses only on
the possibility of deceptive practices by management, ignoring
the primary cause of stock overvaluations: Fed expansion of
money and credit.
The Fed consistently increased the money supply (by
printing dollars) throughout the 1990s, while simultaneously
lowering interest rates. When dollars are plentiful, and
interest rates are artificially low, the cost of borrowing
becomes cheap. This is why so many Americans are more deeply in
debt than ever before. This easy credit environment made it
possible for Enron to secure hundreds of millions in
uncollateralized loans, loans that now cannot be repaid. The
cost of borrowing money, like the cost of everything else,
should be established by the free market--not by government
edict. Unfortunately, however, the trend toward overvaluation
will continue until the Fed stops creating money out of thin
air and stops keeping interest rates artificially low.
Finally, I would remind my colleagues that Congress has no
constitutional authority to regulate the financial markets or
the accounting profession. Instead, responsibility for
enforcing laws against fraud are under the jurisdiction of the
state and local governments. This decentralized approach
actually reduces the opportunity for the type of corruption
referred to above--after all, it is easier to corrupt one
federal official than 50 state officials!
In conclusion, H.R. 3763 expands federal power over the
accounting profession and the financial markets. By creating
new opportunities for unscrupulous actors to maneuver through
the regulatory labyrinth, increasing the costs of investing,
and preempting the market's ability to come up with creative
ways to hold corporate officials accountable, this legislation
harms the interests of individual workers and investors.
Furthermore, this legislation exceeds the constitutional limits
on federal power, interfering in matters the 10th amendment
reserves to state and local law enforcement. I therefore urge
my colleagues to reject this bill. Instead, Congress should
focus on ending corporate welfare programs which provide
taxpayer dollars to large politically-connected companies, and
ending the misguided regulatory and monetary policies that
helped create the Enron debacle.
Ron Paul.
DISSENTING VIEWS OF MR. CAPUANO
The Enron and Global Crossing bankruptcies and the increase
in corporate earnings restatements have shaken the public's
confidence in our financial system. Congress has a
responsibility to help restore this confidence by enacting
legislation that strengthens oversight of our accounting
system, improves corporate governance, and modernizes financial
reporting standards. While this legislation makes a number of
significant reforms, I oppose H.R. 3763 because I have serious
concerns with two provisions in the legislation reported by the
Financial Services Committee.
The first provision addresses the composition of the Public
Regulatory Organization (PRO) created by the legislation. Under
an amendment that was adopted, the board will consist of five
members, with at least two of these being persons licensed to
practice public accounting and with significant experience
auditing public companies. The three other board members must
be members of the public.
Unfortunately, the definition of the public members of the
board in the amendment is troubling. It specifically allows
members of the accounting profession to serve as public members
of the board as long as they have not practiced in at least two
years. In addition, the legislation fails to adequately define
``members of the accounting profession.'' This would
potentially allow the entire board to be comprised of
practicing and non-practicing members of the accounting
profession.
While I strongly believe that members of the accounting
profession should serve on the PRO, and that all members should
meet a standard of financial literacy, I also believe that at
least one public member of the board should come from the
accounting profession. Individuals working in other
professions, including those managing pension funds, trading in
the financial markets, those involved with corporate governance
issues, or governmental experts on budgeting and finance could
bring important knowledge, experience and perspective to the
board. In addition, appointing members from outside the
accounting profession will give the PRO greater credibility as
a protector of investor interests.
The second provision directs the Securities and Exchange
Commission (SEC) to analyze whether officers and directors of
issuers should be required to disgorge profits gained or losses
avoided by the sale of securities related to the filing of a
restatement of earnings on the part of the issuer. However, the
bill only directs the SEC to investigate requiring disgorgement
for transactions undertaken in the six months prior to the
restatement. Since many SEC investigations uncover earnings
manipulation over a span of several years, requiring
disgorgements of inappropriate gains over a limited time period
will not give an accurate picture of the profits gained by the
manipulation of financial statements by insiders. This
arbitrary six-month limit should be lifted.
Without significant changes to these provisions to address
these concerns, I cannot support this legislation.
Michael E. Capuano.