[Senate Hearing 107-948]
[From the U.S. Government Publishing Office]
ACCOUNTING REFORM AND INVESTOR PROTECTION
VOLUME III
S. Hrg. 107-948
ACCOUNTING REFORM AND
INVESTOR PROTECTION
=======================================================================
DOCUMENTS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
VOLUME III
ON
THE LEGISLATIVE HISTORY OF THE SARBANES-OXLEY ACT OF 2002:
ACCOUNTING REFORM AND INVESTOR PROTECTION ISSUES RAISED BY ENRON AND
OTHER PUBLIC COMPANIES
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EXCERPTS FROM THE CONGRESSIONAL RECORD
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JULY 8, 9, 10, 11, 12, 15, AND 25, 2002
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
87-708 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Dean V. Shahinian, Counsel
Stephen R. Kroll, Special Counsel
Lynsey Graham Rea, Counsel
Vincent Meehan, Counsel
Sarah A. Kline, Counsel
Judith Keenan, Senior Policy Advisor
Alexander M. Sternhell, Staff Director, Securities Subcommittee
Linda L. Lord, Republican Chief Counsel
Stacie Thomas Morales, Republican Economist
Michelle R. Jackson, Republican Counsel
Geoffrey P. Gray, Republican Senior Professional Staff Member
Mark F. Oesterle, Republican Counsel
Katherine McGuire, Republican Economist
Michael D. Thompson, Republican Legislative Assistant
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
Irene Whiston Carroll, Assistant Editor
Frank E. Wright, Assistant Editor
Kevin D. High, Assistant Editor
(ii)
C O N T E N T S
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VOLUME I
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TUESDAY, FEBRUARY 12, 2002
Page
Opening statement of Chairman Sarbanes........................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 3
Senator Miller............................................... 4
Senator Enzi................................................. 4
Senator Corzine.............................................. 6
Senator Hagel................................................ 7
Senator Stabenow............................................. 7
Senator Bayh................................................. 8
Senator Carper............................................... 8
Senator Johnson.............................................. 9
Prepared statement....................................... 55
Senator Schumer.............................................. 10
Senator Dodd................................................. 11
Senator Akaka................................................ 56
WITNESSES
Arthur Levitt, Chairman, U.S. Securities and Exchange Commission,
1993 to 2000................................................... 14
Prepared statement........................................... 56
Richard C. Breeden, Chairman, U.S. Securities and Exchange
Commission, 1989 to 1993....................................... 16
Prepared statement........................................... 58
Response to written questions of Senator Hagel............... 94
David S. Ruder, Chairman, U.S. Securities and Exchange
Commission, 1987 to 1989....................................... 20
Prepared statement........................................... 69
Response to written questions of Senator Hagel............... 94
Harold M. Williams, Chairman, U.S. Securities and Exchange
Commission, 1977 to 1981....................................... 23
Prepared statement........................................... 75
Response to written questions of Senator Hagel............... 95
Roderick M. Hills, Chairman, U.S. Securities and Exchange
Commission, 1975 to 1977....................................... 26
Prepared statement and exhibits.............................. 78
Response to written questions of Senator Hagel............... 95
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THURSDAY, FEBRUARY 14, 2002
Opening statement of Chairman Sarbanes........................... 97
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 98
Prepared statement....................................... 141
Senator Stabenow............................................. 99
Prepared statement....................................... 141
Senator Enzi................................................. 99
Senator Bayh................................................. 100
Senator Crapo................................................ 101
Senator Bunning.............................................. 101
Senator Shelby............................................... 113
Senator Carper............................................... 113
Senator Akaka................................................ 114
Prepared statement....................................... 142
Senator Miller............................................... 128
Senator Corzine.............................................. 129
Senator Johnson.............................................. 142
WITNESSES
Paul A. Volcker, Chairman, International Accounting Standards
Committee Foundation; Chairman, Arthur Andersen's Independent
Oversight Board; Former Chairman, Federal Reserve System....... 102
Prepared statement........................................... 143
Sir David Tweedie, Chairman, International Accounting Standards
Board; Former Chairman, United Kingdom's Accounting Standards
Board.......................................................... 107
Prepared statement........................................... 147
Additional Material Supplied for the Record
Letter from Paul A. Volcker, Chairman, International Accounting
Standards Committee Foundation; Chairman, Arthur Andersen's
Independent Oversight Board; Former Chairman, Federal Reserve
System to Chairman Paul S. Sarbanes, dated May 17, 2002........ 159
Editorial from The Wall Street Journal by Paul A. Volcker,
Chairman, International Accounting Standards Committee
Foundation, dated February 19, 2002............................ 164
Memo from Sir David Tweedie, Chairman, International Accounting
Standards Board; Former Chairman, United Kingdom's Accounting
Standards Board on Funding of the UK Accounting Standards Board 166
Article from Sir David Tweedie, Chairman, International
Accounting Standards Board; Former Chairman, United Kingdom's
Accounting Standards Board, dated January 2002................. 168
----------
TUESDAY, FEBRUARY 26, 2002
Opening statement of Chairman Sarbanes........................... 181
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 183
Senator Miller............................................... 184
Senator Enzi................................................. 184
Senator Stabenow............................................. 186
Senator Allard............................................... 187
Prepared statement....................................... 234
Senator Shelby............................................... 187
Prepared statement....................................... 234
Senator Corzine.............................................. 188
Prepared statement....................................... 234
Senator Schumer.............................................. 219
WITNESSES
Walter P. Schuetze, Chief Accountant, U.S. Securities and
Exchange Commission, 1992 to 1995.............................. 189
Prepared statement........................................... 235
Michael H. Sutton, Chief Accountant, U.S. Securities and Exchange
Commission, 1995 to 1998....................................... 193
Prepared statement........................................... 239
Lynn E. Turner, Chief Accountant, U.S. Securities and Exchange
Commission, 1998 to 2001....................................... 196
Prepared statement........................................... 243
Dennis R. Beresford, Former Chairman, Financial Accounting
Standards Board, 1987 to 1997.................................. 201
Prepared statement........................................... 258
Response to question raised by Senator Miller................ 270
Additional Material Supplied for the Record
Article by Walter P. Schuetze in Abacus, a Journal of Accounting,
Finance, and Business Studies, ``What Are Assets and
Liabilities?'' dated February 2001............................. 271
Article by Walter P. Schuetze, 2001 RJ Chambers Research Lecture,
dated November 27, 2001........................................ 288
Letter from Walter P. Schuetze to Senator Charles E. Schumer,
dated March 25, 2002........................................... 296
Letter with attachments from Lynn E. Turner, Director, College of
Business, Colorado State University, dated March 1, 2002....... 302
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WEDNESDAY, FEBRUARY 27, 2002
Opening statement of Chairman Sarbanes........................... 341
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 342
Senator Miller............................................... 343
Senator Corzine.............................................. 362
WITNESSES
John H. Biggs, Chairman, President, and CEO, Teachers Insurance
and Annuity Association-College Retirement Equities Fund (TIAA-
CREF).......................................................... 343
Prepared statement........................................... 373
Ira M. Millstein, Co-Chairman of the Blue Ribbon Committee on
Improving the Effectiveness of Corporate Audit Committees;
Senior Partner, Weil, Gotshal & Manges, LLP.................... 350
Prepared statement........................................... 378
Additional Material Supplied for the Record
Miscellaneous exhibits submitted by Ira M. Millstein, Co-Chairman
of the Blue Ribbon Committee on Improving the Effectiveness of
Corporate Audit Committees; Senior Partner, Weil, Gotshal &
Manges, LLP.................................................... 388
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VOLUME II
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TUESDAY, MARCH 5, 2002
Opening statement of Chairman Sarbanes........................... 505
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 506
Senator Dodd................................................. 507
Senator Miller............................................... 507
Senator Crapo................................................ 508
Senator Corzine.............................................. 508
Prepared statement....................................... 550
Senator Stabenow............................................. 515
Prepared statement....................................... 550
Senator Bennett.............................................. 515
WITNESSES
David M. Walker, Comptroller General of the United States, U.S.
General Accounting Office; accompanied by: Thomas McCool,
Managing Director, Financial Markets and Community Investment;
and Robert Gramling, Former Director, Corporate Financial
Audits......................................................... 508
Prepared statement........................................... 551
Robert R. Glauber, Chairman and Chief Executive Officer, National
Association of Securities Dealers, Inc......................... 527
Prepared statement........................................... 569
Joel Seligman, Dean and Ethan A.H. Shepley University Professor,
Washington University School of Law in St. Louis; Public
Member, American Institute of Certified Public Accountants
Professional Ethics Executive Committee........................ 530
Prepared statement........................................... 573
John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia
University School of Law....................................... 534
Prepared statement........................................... 582
Additional Material Supplied for the Record
GAO Report, SEC Operations, Increased Workload Creates
Challenges, dated March 2002................................... 594
GAO Report, Highlights of GAO's Corporate Governance,
Transparency and Accountability Forum, dated March 2002........ 638
Business Week article submitted by Senator Paul S. Sarbanes,
dated March 11, 2002........................................... 653
The Wall Street Journal article submitted by Senator Robert F.
Bennett, dated February 25, 2002............................... 654
Letter from GAO Comptroller General of the United States David M.
Walker to Senator Paul S. Sarbanes, dated May 3, 2002.......... 657
Letter from John C. Coffee, Jr., Bevis Longstreth, and Joel
Seligman to Senator Paul S. Sarbanes, dated July 1, 2002....... 670
Letter from SEC Chairman Harvey L. Pitt to Senator Phil Gramm,
dated July 3, 2002............................................. 674
Letter from SEC Attorney General Eliot Spitzer to Senator Paul
Sarbanes, dated June 5, 2002................................... 676
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WEDNESDAY, MARCH 6, 2002
Opening statement of Chairman Sarbanes........................... 679
Statement of Senator Gramm....................................... 680
WITNESSES
Shaun F. O'Malley, Chairman, 2000 Public Oversight Board Panel on
Audit Effectiveness (O'Malley Commission); Former Chairman,
Price Waterhouse; Past President, Financial Accounting
Foundation..................................................... 681
Prepared statement........................................... 716
Lee J. Seidler, Deputy Chairman of the 1978 AICPA Commission on
Auditors' Responsibilities; Managing Director Emeritus, Bear
Stearns........................................................ 685
Prepared statement........................................... 725
Arthur R. Wyatt, CPA, Former Chairman, American Institute of
Certified Public Accountants' Accounting Standards Executive
Committee; Former Chairman, International Accounting Standards
Committee; Former Partner, Arthur Andersen & Co.; Professor of
Accountancy Emeritus, University of Illinois................... 689
Prepared statement........................................... 739
Abraham J. Briloff, Emanuel Saxe Distinguished Professor
Emeritus, Bernard M. Baruch College, CUNY...................... 692
Prepared statement........................................... 745
Bevis Longstreth, Member of the O'Malley Commission; Former
Commissioner of the Securities & Exchange Commission, 1981-
1984; Retired Partner, Debevoise & Plimpton.................... 696
Prepared statement........................................... 793
Additional Material Supplied for the Record
Letter from Chairman Paul S. Sarbanes to President George W.
Bush, dated March 6, 2002...................................... 802
Letter from the National Association of State Boards of
Accountancy to Chairman Paul S. Sarbanes and Members of the
Banking Committee, dated March 22, 2002........................ 804
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THURSDAY, MARCH 14, 2002
Opening statement of Chairman Sarbanes........................... 809
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 811
Senator Gramm................................................ 811
Senator Corzine.............................................. 813
Senator Enzi................................................. 813
Senator Dodd................................................. 815
Senator Bayh................................................. 816
Senator Stabenow............................................. 817
Prepared statement....................................... 860
Senator Miller............................................... 817
Senator Carper............................................... 842
WITNESSES
James G. Castellano, CPA, Chairman, Board of Directors, American
Institute of Certified Public Accountants (AICPA); Managing
Partner, Rubin, Brown, Gornstein & Company, LLP................ 818
Prepared statement........................................... 860
Response to written question of Senator Miller............... 888
James E. Copeland, Jr., CPA, Chief Executive Officer, Deloitte &
Touche, LLP.................................................... 820
Prepared statement........................................... 862
William E. Balhoff, CPA, CFE, Chairman, Executive Committee,
AICPA Public Company Practice Section; Senior Audit Director,
Postlethwaite & Netterville, A.P.A.C........................... 823
Prepared statement........................................... 865
Olivia F. Kirtley, CPA, Former Chairman, Board of Directors,
AICPA (1998-1999); Retired Vice President and CFO, Vermont
American Corporation........................................... 825
Prepared statement........................................... 866
James S. Gerson, CPA, Chairman, Auditing Standards Board, AICPA;
Partner, PricewaterhouseCoopers, LLP........................... 827
Prepared statement........................................... 868
Robert E. Litan, Vice President and Director, Economic Studies
Program, The Brookings Institution............................. 848
Prepared statement........................................... 870
Response to written question of:
Senator Gramm............................................ 889
Senator Miller........................................... 890
Peter J. Wallison, Resident Fellow and Co-Director, Project on
Financial Market Deregulation, American Enterprise Institute... 853
Prepared statement........................................... 879
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TUESDAY, MARCH 19, 2002
Opening statement of Chairman Sarbanes........................... 893
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 894
Prepared statement....................................... 939
Senator Corzine.............................................. 894
Senator Dodd................................................. 917
Senator Carper............................................... 936
Senator Akaka................................................ 939
WITNESSES
Charles A. Bowsher, Chairman, Public Oversight Board; Former
Comptroller General of the United States; accompanied by: Alan
B. Levenson, Counsel to the Public Oversight Board............. 895
Prepared statement........................................... 939
Aulana L. Peters, Member, Public Oversight Board; Former
Commissioner, U.S. Securities and Exchange Commission; Retired
Partner, Gibson, Dunn & Crutcher............................... 902
Prepared statement........................................... 963
John C. Whitehead, Former Co-Chairman, Goldman Sachs & Co.;
Former Deputy Secretary of State............................... 918
Prepared statement........................................... 965
L. William Seidman, Former Chairman, Federal Deposit Insurance
Corporation; Former Chairman, Resolution Trust Corporation..... 921
Prepared statement........................................... 967
Michael Mayo, Managing Director, Prudential Securities, Inc...... 925
Prepared statement........................................... 969
Additional Material Supplied for the Record
The Road to Reform, a White Paper from the Public Oversight
Board, dated March 19, 2002.................................... 973
Letter from Harvey L. Pitt, Chairman, U.S. Securities and
Exchange Commission to Charles A. Bowsher, Chairman, Public
Oversight Board, dated January 22, 2002........................ 994
Fortune news article, The Price of Being Right, dated February 5,
2001........................................................... 996
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WEDNESDAY, MARCH 20, 2002
Opening statement of Chairman Sarbanes........................... 1003
Opening statements, comments, or prepared statements of:
Senator Akaka................................................ 1004
WITNESSES
Senator Howard M. Metzenbaum (Ret.), Chairman, Consumer
Federation of America.......................................... 1004
Prepared statement........................................... 1032
Sarah Teslik, Executive Director, Council of Institutional
Investors...................................................... 1009
Prepared statement........................................... 1040
Response to written questions of Senator Akaka............... 1056
Thomas A. Bowman, CFA, President and Chief Executive Officer,
Association for Investment Management and Research............. 1012
Prepared statement........................................... 1043
Damon A. Silvers, Associate General Counsel, American Federation
of Labor and Congress of Industrial Organizations.............. 1016
Prepared statement........................................... 1053
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THURSDAY, MARCH 21, 2002
Opening statement of Chairman Sarbanes........................... 1059
Opening statements, comments, or prepared statements of:
Senator Dodd................................................. 1060
Senator Bunning.............................................. 1060
Senator Corzine.............................................. 1061
Senator Enzi................................................. 1062
Senator Gramm................................................ 1064
Senator Bennett.............................................. 1084
Senator Schumer.............................................. 1087
Senator Carper............................................... 1089
Senator Johnson.............................................. 1102
WITNESS
Harvey L. Pitt, Chairman, U.S. Securities and Exchange Commission 1065
Prepared statement........................................... 1103
Additional Material Supplied for the Record
The Washington Post article, submitted by Harvey L. Pitt,
Chairman, U.S. Securities and Exchange Commission, dated
November 15, 2000.............................................. 1167
Letter from Stephen M. Cutler, Director, Division of Enforcement,
U.S. Securities and Exchange Commission, to Chairman Paul S.
Sarbanes and Congressman Michael G. Oxley, dated July 23, 2002. 1168
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VOLUME III
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MONDAY, JULY 8, 2002
Senate Floor Debate in Regard to the Accounting Reform and
Investor Protection Act of 2002 taken from the Congressional
Record......................................................... 1171
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TUESDAY, JULY 9, 2002
Senate Floor Debate in Regard to the Accounting Reform and
Investor Protection Act of 2002 taken from the Congressional
Record......................................................... 1225
Continuation of the Senate Floor Debate in Regard to the
Accounting Reform and Investor Protection Act of 2002 taken
from the Congressional Record.................................. 1247
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WEDNESDAY, JULY 10, 2002
Senate Floor Debate in Regard to the Accounting Reform and
Investor Protection Act of 2002 taken from the Congressional
Record......................................................... 1261
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THURDAY, JULY 11, 2002
Senate Floor Debate in Regard to the Accounting Reform and
Investor Protection Act of 2002 taken from the Congressional
Record......................................................... 1355
Continuation of the Senate Floor Debate in Regard to the
Accounting Reform and Investor Protection Act of 2002 taken
from the Congressional Record.................................. 1387
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FRIDAY, JULY 12, 2002
Senate Floor Debate in Regard to the Accounting Reform and
Investor Protection Act of 2002 taken from the Congressional
Record......................................................... 1423
Continuation of the Senate Floor Debate in Regard to the
Accounting Reform and Investor Protection Act of 2002 taken
from the Congressional Record.................................. 1429
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MONDAY, JULY 15, 2002
Senate Floor Debate in Regard to the Accounting Reform and
Investor Protection Act of 2002 taken from the Congressional
Record......................................................... 1463
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THURSDAY, JULY 25, 2002
Senate Floor Debate in Regard to the Sarbanes-Oxley Act of 2002
Conference Report taken from the Congressional Record.......... 1613
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VOLUME IV
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Transcript of President Bush's remarks at the Signing Ceremony
for the Sarbanes-Oxley Act of 2002 on July 30, 2002............ 1653
The Sarbanes-Oxley Act of 2002, Public Law 107-204 signed by
President Bush on July 30, 2002. Text is identical to
Conference Report on H.R. 3763 passed by the House of
Representatives on July 25, 2002, by a vote of 423 Yeas to 3
Nays and by the Senate by a vote of 99 Yeas to 0 Nays.......... 1657
H.R. 5118, Corporate Fraud Accountability Act of 2002, passed by
the House of Representatives on July 16, 2002, by a vote of 391
Yeas to 28 Nays................................................ 1723
S. 2673, Public Company Accounting Reform and Investor Protection
Act of 2002, passed by the Senate on July 15, 2002, by a vote
of 97 Yeas to 0 Nays. For procedural purposes, the bill is
renamed H.R. 3763.............................................. 1737
Senate Committee on Banking, Housing, and Urban Affairs report on
S. 2673, Public Company Accounting Reform and Investor
Protection Act of 2002, filed by Chairman Sarbanes on June 26,
2002........................................................... 1879
S. 2673, Public Company Accounting Reform and Investor Protection
Act of 2002, passed by the Senate Committee on Banking,
Housing, and Urban Affairs on June 18, 2002, by a vote of 17
Yeas to 4 Nays................................................. 1953
Senate Committee on the Judiciary Report on S. 2010, Corporate
and Criminal Fraud Accountability Act of 2002, filed by
Chairman Leahy on May 6, 2002.................................. 2071
S. 2010, Corporate and Criminal Fraud Accountability Act of 2002,
passed by the Senate Judiciary Committee on April 25, 2002, by
a vote of 19 Yeas to 0 Nays.................................... 2109
H.R. 3763, Corporate and Auditing Accountability, Responsibility,
and Transparency Act of 2002, passed by the House of
Representatives on April 24, 2002, by a vote of 334 Yeas to 90
Nays........................................................... 2135
House Committee on Financial Services Report on H.R. 3763,
Corporate and Auditing Accountability, Responsibility, and
Transparency Act of 2002, dated April 22, 2002................. 2193
H.R. 3763, Corporate and Auditing Accountability, Responsibility,
and Transparency Act of 2002, passed by the House Committee on
Financial Services on April 16, 2002, by a vote of 49 Yeas to
12 Nays........................................................ 2257
ACCOUNTING REFORM AND
INVESTOR PROTECTION
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VOLUME III
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VOLUME 148, MONDAY, JULY 8, 2002, NUMBER 90,
PAGES [S6327-S6347]
Public Company Accounting Reform and Investor Protection Act of 2002
The President pro tempore. Under the previous order, the
Senate will now proceed to the consideration of S. 2673, which
the clerk will report.
The assistant legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
The President pro tempore. The Senator from Maryland, Mr.
Sarbanes, the manager of the bill, is recognized.
Mr. Sarbanes. I thank the Chair.
Mr. President, today the Senate turns its attention to S.
2673, the Public Company Accounting Reform and Investor
Protection Act of 2002, which was reported from the Senate
Committee on Banking, Housing, and Urban Affairs on June 18 on
a strong 17-to-4 vote.
A unanimous consent agreement was entered into with respect
to this legislation prior to the Fourth of July recess, which
provided that at 2 p.m. today, Monday, July 8, the Senate would
proceed, for debate only, to the consideration of this
legislation.
I hope to take a fair amount of time to set out the process
through which the committee worked and to discuss the
provisions of this legislation.
As I understand it, upon convening tomorrow and going back
to this legislation, amendments will be in order. There are a
couple of technical amendments that I am hopeful we can approve
today by unanimous consent. I will be discussing that with the
distinguished ranking Republican member of the committee in the
course of the afternoon.
Mr. President, I rise in very strong support of this
legislation. This legislation is intended to address systemic
and structural weaknesses that I think have been revealed in
recent months and that show failures of audit effectiveness and
a breakdown in corporate financial and broker-dealer
responsibility. In fact, it is very clear that much of this has
been happening over the last few years.
Hopefully, we have experienced the brunt of it. Who can
guarantee that, however, when every day you come to read in the
morning paper yet another story, as witnessed this morning with
respect to one of the most respected pharmaceutical companies
in the country.
I believe this bill is urgently needed. I hope my
colleagues will agree with that and will support its swift
passage.
The House, earlier this year, passed legislation on this
subject, but I think it is fair to say that the legislation we
are bringing to the floor of the Senate is more comprehensive,
more thorough, and, I believe, more effective. But, of course,
once we complete our work here, we will have the challenge of
going to conference with our colleagues on the other side of
the Capitol to work out the differences between the two
versions of the legislation.
Let me discuss for a few minutes the backdrop against which
this bill was crafted. Our financial markets have long been
regarded as the fairest, the most transparent, and the most
efficient in the world. In fact, I think it is fair to say--and
many of us have said it time and time again--that the American
capital markets are one of the great economic assets of this
country and a very important source of our economic strength.
It is becoming increasingly clear that something has gone
wrong, seriously wrong, with respect to our capital markets. We
confront an increasing crisis of confidence that is eroding the
public's trust in those markets. I frankly believe that, if it
continues, this erosion of trust poses a real threat to our
economic health.
Let me begin with one of the most obvious symptoms of this
problem: the extraordinary increase in restatements of
corporate earnings. The Wall Street Journal, citing a study
last year by the research arm of Financial Executives
International, the organization of the chief financial officers
of corporations, reported that there were 157 financial
restatements by companies in 2000, 207 in 1999, and 100 in
1998. The 3-year total of 464 was higher than the previous 10
years combined, during which the average number of restatements
was 46 each year. This is a dramatic increase in the number of
restatements.
Last month's revelation by WorldCom is only one example of
a problem that is becoming increasingly disturbing. In a recent
article titled ``Tweaking Numbers To Meet Goals Comes Back To
Haunt Executives,'' the New York Times described a series of
recent corporate failures or near-failures that were
characterized by accounting improprieties: Adelphia
Communications, ``$3 billion in loans to its founding family''
had been concealed; Computer Associates was investigated ``on
suspicion of inflating sales and profits by booking revenue on
contracts many years before it was paid''--you raise your
revenues, there is no offsetting cost, you boost your profits.
Global Crossing is being investigated ``on suspicion of
inflating sales and profits by making sham transactions with
other telecom companies''; Enron, ``hiding losses and loans
with partnerships that were supposedly independent but were
actually guaranteed by the company''--Enron filed for
bankruptcy last December--Rite Aid had ``four former top
executives indicted . . . in what regulators called a
securities and accounting fraud that led to a $1.6 billion
restatement of earnings''; Tyco International is under
investigation ``on suspicion of hiding payments and loans to
its top executives . . . and its ``shares have plunged 75
percent this year as investigators question whether it inflated
its earnings and cashflow''; WorldCom, under investigation for
``hiding $4 billion in expenses by wrongly classifying short-
term costs as long-term investments.''
Commentators have made much of the fact that while Enron
had very complicated dealings, off-balance-sheet special
entities and a host of other things, WorldCom simply took
expenses that should have been treated as short-term costs and
set them up as capital investments to be amortized over a
period of time. Of course, that was a very substantial
reduction in WorldCom's costs. As a consequence, its profits
were boosted by $4 billion. The SEC asked them to come clean,
and now we think there is probably another billion of faulty
accounting with respect to their statement.
Can you imagine--the company went from showing a
substantial profit to actually having a loss. People are out in
the marketplace making decisions about whether to purchase this
stock. Pension plans are making decisions on behalf of their
members. And they are making the decision in the belief that
this company is making a good profit. Instead, it is losing
money.
I read one story where competitors of WorldCom were
apparently debating within their own corporate ranks: How do
they do it? How are these people producing this profit record?
We can't do it. We are competing against them. We think we are
doing everything we ought to be doing, and we just can't
produce the same kind of performance. How are they doing it?
What is the secret they have discovered?
The secret they had discovered was to hide their expenses
by wrongly classifying short-term costs as long-term
investments.
The Xerox Corporation, one of the pillars of our economic
system, paid a $10 million fine to the SEC in April, the
largest in an enforcement case. They reclassified $6.4 billion
in revenue and restated financial results for the last 5 years.
I could go on and on with other companies: Cendant,
MicroStrategy, Waste Management.
What has led to this increase in restatements? The practice
of ``backing into'' the forecast earnings has certainly
contributed. The New York Times described this practice as
follows:
Some companies do whatever they have to do to make sure
they do not miss a consensus earnings estimate. They start with
the profit that investors are expecting and manipulate their
sales and expenses to make sure the numbers come out right.
During the last decade's boom, as executive pay was
increasingly based on how the company's stock performed,
backing in became more widespread and more aggressive. Just how
much so is only now becoming clear.
The distinguished Columbia Law School Professor John
Coffee, noted, in summarizing the trend:
During the 1990s, the quality of financial reporting and
analysis appears to have declined. While an earnings
restatement is not necessarily proof of fraud, this increase
strongly implies that auditors have deferred excessively to
their clients.
Jack Ehnes, the chief executive of the California State
Teachers Retirement System, which oversees $100 billion in
investments, put it this way:
This looks like the year of the restatement. It's certainly
disturbing for investors who expect financial statements to be
accurate.
Clearly, what is transpiring is having a very severe impact
on hard-working American families. Corporate wrongdoing is
being felt not just at the boardroom table, but it is now being
felt at the kitchen table as well.
First of all, there have been tremendous job losses. The
Washington Post reported that WorldCom was laying off 17,000
employees. The companies that are going into bankruptcy are
shedding employees left and right. Enron laid off 7,000 people
after it filed for bankruptcy. Global Crossing laid off 9,300
employees in the last year. Employment at Xerox is down 13,000
from 2 years ago. So there is a direct impact on many working
families, simply through the layoffs, as the companies for
which they work encounter difficult financial times.
In other words, the company is crashing down, and the
workers, amongst others, are paying the price.
Second, the adverse impact on employees clearly extends to
the impact of these corporate failures on employee pension
funds, an impact that has led many workers to question the
security of their retirement. A quick look at the numbers
demonstrates how badly public pension funds have been hit.
It is reported that 21 States have combined losses of just
under $2 billion from their WorldCom investments. The
California public retirement system reported a loss of $565
million. And the numbers go on from there. I won't cite them
all, but all across the country there are tremendous losses
being incurred. It is said that the loss of value of both
WorldCom and Enron has cost public State pension funds $2.7
billion.
Of course, in addition to their impact on workers and
pension funds, these revelations have had a negative effect on
shareholders generally. Average investors are watching their
portfolios plummet and their retirement prospects decline.
Worldcom's market capitalization has gone from $180 billion at
its peak 3 years ago--this is just WorldCom--to $177 million
last week. Tyco lost $90 billion in market capitalization
between January 2001 and June 2002, and on and on.
The bond markets have also been affected. WorldCom, for
example, has $28 billion in outstanding bonds that are due
between now and 2025. Investors, including banks and insurance
companies, stand to lose much of this sum. So you are being hit
not only if you have a direct connection with WorldCom, but
also if you have an equity interest in a bank or insurance
company that owns WorldCom bonds. The current market value of
these bonds is 15 cents on the dollar.
The same week that WorldCom's auditing irregularities
became public, Morgan Stanley observed that the spread between
corporate bonds and comparable Treasury bonds had widened by 15
basis points. As the Wall Street Journal wrote on June 27:
That is a dramatic move that will boost the borrowing costs
for all kinds of companies.
Now, the problems that I have described did not develop
overnight. In many ways, they reflect failures on the part of
every actor in our system of disclosure and oversight. Auditors
who are supposed to be independent of the company whose books
they are reviewing are too often compromised by the fact that
they provide consulting services to their public company audit
clients. Securities analysts are not in a position, according
to observers, to warn investors or direct them to other
investments.
As the New York Times reported in an article earlier this
year entitled ``A Bubble No One Wanted to Pop'':
Eager to help their firms generate business selling
securities to investors and reap their own rewards and bonuses,
Wall Street analysts have made a habit of missing corporate
misdeeds altogether.
I will come back to these issues later. But for the moment
I simply want to note that the problems leading to such
dramatic lapses are widespread and seem to be built into the
system of accounting and financial reporting. That is what this
legislation seeks to address. Our committee did not engage in
an exercise in finger-pointing and placing blame but we held a
series of hearings--I will discuss them in a minute--directed
toward the future; in other words, we focused on the changes we
can make that will help to clear up this situation. It is
serious.
The Wall Street Journal, in a recent comment, said:
The scope and scale of the corporate transgressions of the
late 1990s now coming to light exceed anything the U.S. has
witnessed since the years preceding the Great Depression.
One can run through the figures and find some support for
that. Between its peak in 1929 and 1931, the Dow fell 79
percent. Over the same period since its peak in March 2000, the
Nasdaq has
fallen 73 percent. But rather than work through these figures,
let me simply close this part of my statement with a comment
from Benjamin Graham's classic textbook on ``security
analysis'':
Prior to the SEC legislation . . . it was by no means
unusual to encounter semi-fraudulent distortions of corporate
accounts . . . almost always for the purpose of making the
results look better than they were, and it was generally
associated with some scheme of stock-market manipulation in
which the management was participating.
He was writing about the year 1929. Regrettably, that
description fits some of today's events. Now, I am certainly
not suggesting that this is the practice of a majority of our
business people. In fact, most of them, I think, try very hard
to play by the rules, and to be honest and straightforward in
their dealings, and they recognize how important trust is.
But it is clear, from the number of departures we have
witnessed from that standard, that what is involved is more
than just a few bad apples. Those bad apples ought to be
punished, and punished very severely. I certainly agree with
the President when he makes that statement. But it seems to me
we have to move beyond that in order to address the incredible
loss of investor confidence that is now taking place.
I have been reading the newspaper articles carefully, and
sometimes the most apt comments come not from the experts but
from ordinary citizens. My colleague from Texas knows that very
well because we have a noted citizen of his State, Dicky Flatt,
who is constantly cited.
Karl Graf, a financial planner and accountant in Wayne, NJ,
is quoted in the Bergen Record as saying:
The integrity of the game is in question for now, and
that's a much bigger thing than if the stock market does poorly
for two years. You have to have faith in the numbers the
companies are reporting, and if you don't or can't, it makes it
seem more like gambling all the time. It makes me more cynical,
and I'm very discouraged. It's going to take a lot to make
people feel confident.
Bob Friend, an aerospace engineer from Redondo Beach, CA, a
stock investor for 20 years, was quoted in the L.A. Times as
saying:
There's a complete lack of trust in corporate leadership. I
think the lack of ethical behavior has destroyed investor
confidence.
Morris Hollander, a specialist in financial disclosure
accounting with a Miami firm, was quoted in the Miami Herald as
saying:
We always had the strongest financial markets in the world,
and that was because of credible accounting standards. When you
see that confidence eroding, it is not good. It is a real
serious credibility crisis.
A recent poll demonstrates that these views are not unique
or unusual. When asked this question: ``when it comes to
financial information the major stock brokerage firms and
corporations provide to you, do you or do you not have
confidence that the information is straightforward and an
honest analysis,'' only 29 percent of Americans said they had
confidence the information was straightforward and an honest
analysis. A majority, 57 percent, did not have confidence in
the basic information that undergirds our equities market.
The Washington Post, on June 26, reported:
According to economists and market analysts, these still-
unfolding corporate and accounting scandals have begun to weigh
heavily on the stock market, the dollar, and the U.S. economy.
And the effects are likely to linger at least through the end
of the year.
The same article quoted the chief economist for one of Wall
Street's major firms as saying:
The economy and markets right now are in the midst of a
full-blown corporate governance shock. . . . To presume somehow
that it's over or that the worst is behind us is naive.
Furthermore, it is not only American investors who are
losing confidence in our markets. A recent New York Times
article entitled ``U.S. Businesses Dim as Models for
Foreigners'' quoted Wolfram Gerdes, the chief investment
officer for global equities at Dresdner Investment Trust in
Frankfurt, as saying:
There is unanimous agreement that the United States is not
the best place to invest anymore.
According to the Federal Reserve Board, foreign direct
investment in corporate equities has fallen by 45 percent from
2001 to 2002. And according to a new OECD report, foreign
inflows from cross-border mergers and acquisitions, which in
2001 were greater than direct foreign investment into the
United States, have fallen sharply in 2002.
The Wall Street Journal said:
The loss of faith by American and overseas investors in
U.S. corporate books is churning global financial markets:
Share prices are plunging in America and the dollar is losing
value, setting off stock-market plunges in Asia, Europe and
Latin America. If the flow of foreign capital to the United
States is disrupted as a result, the world economy could be
jeopardized, because the U.S. relies on overseas money to
finance its huge current-account deficit, and Asia and Europe
rely on America to buy imports.
As I draw this preliminary overview of the context in which
we are working to a close, I want to speak for a moment about
the potential loss of world economic leadership for the United
States. The Wall Street Journal had an article entitled ``U.S.
Loses Sparkle as Icon of Marketplace.'' It says:
The wave of scandals in corporate America is roiling world
stock markets. But the controversy may have an even greater
impact in the marketplace of ideas, where the U.S. economic
model is coming under attack.
One area of particular importance and now debate is
adoption of accounting principles. The European Union--and I do
not think many people yet in this country have focused on this
matter--has indicated that the rules adopted by the
International Accounting Standards Board will become mandatory
for all companies throughout the European Union in 2005.
Traditionally, the U.S. has been preeminent in the
accounting field. We have by far the largest economy. We have a
reputation for high standards for transparency. So generally
the American argument on behalf of its standards carried great
influence. Now we have the European Union, comparable in
economic size to the United States, moving to adopt a uniform
set of accounting standards, to be promulgated by the
International Accounting Standards Board, for all of the
European Union countries. So there is a potential for real
challenge to American preeminence in this area, given what is
happening over here.
In fact, the New York Times reported on June 27:
There is a groundswell among executives in Europe against
the American system of corporate accounting--the so-called
generally accepted accounting principles--that was supposed to
be the gold standard in disclosure.
Before Enron, Global Crossing and WorldCom, America had
been winning the argument on accounting standards. But now, a
growing number of Europeans are convinced that the American
system is both too complex and too easy to manipulate.
Regrettably, in my view, unless we come to grips with this
current crisis in accounting and corporate governance, we run
the risk of seriously undermining our long-term world economic
leadership. Why do countries look to us? They look to our
capital markets. They say: your capital markets are the most
transparent; they have the greatest integrity; we can rely upon
them; we can make rational business decisions using the
information that is provided through your system. If that is no
longer the case, we can expect growing difficulties as we
continue to argue for our preeminence.
The Wall Street Journal gave this summary of the problem,
after which I will move onto the bill itself:
The institutions that were created to check such abuses
failed. The remnants of a professional ethos in accounting, law
and securities analysis gave way to the maximum revenue per
partner. The auditor's signature on a corporate report didn't
testify that the report was an accurate snapshot, said
[Treasury Secretary Paul] O'Neill. He says it too often meant
only that a company had ``cooked the books to generally
accepted standards.''
I want to be very clear about this. I believe the vast
majority of our business leaders and of those in the accounting
industry are decent, hard-working, and honorable men and women.
They are, in a sense, tarnished by the burden of these
scandals. But trust in markets and in the quality of investor
protection, once shaken, is not easily restored, and I believe
that this body must act decisively to reaffirm the standards of
honesty and industry that have made the American economy the
most powerful in the world. That is what this legislation does,
and that is why I urge its adoption by my colleagues.
Let me now turn to the hearings and to the bill. I know
others are waiting to speak, and I will try to summarize my
remarks. We have been working on this for a long time, so
obviously I could go on at some length.
First, we sought to do a very thorough and careful job in
developing this legislation. The committee held a total of 10
substantive hearings and heard from a broad range of experts,
as well as interested parties. I am not going to name all our
witnesses, but, for example, we heard from five past Chairmen
of the SEC; three former SEC chief accountants; former Federal
Reserve Board Chairman, Paul Volcker; former Comptroller
General and Chairman of the Public Oversight Board, Charles
Bowsher; the present Comptroller General, David Walker; a
number of distinguished academics who have been studying these
issues throughout their careers; leaders of commissions that
studied the accounting industry and corporate governance;
representatives of the accounting industry; representatives of
the public interest community; representatives of the corporate
community, and SEC Chairman Pitt.
It was a very thorough effort to gather the best thinking
on these issues and to give all interested parties a chance to
be heard. My colleagues on the committee, and the ranking
member, Senator Gramm, participated in this effort seriously
and with commitment. Senators Dodd and Corzine early on
introduced a bill dealing with oversight of accounting and
auditor independence. Many of that bill's provisions are
reflected in this legislation. Senator Enzi, of course, took a
particular interest. He is the only certified public accountant
in the Senate. Many other Members made important contributions
as we moved along the way.
I will now turn to each title. Title I of the bill creates
a strong independent board to oversee the auditors of public
companies. Title II strengthens auditor independence from
corporate management by limiting the scope of consulting
services that auditors can offer their public company audit
clients. This bill applies only to public companies that are
required to report to the SEC. It says plainly that State
regulatory authorities should make independent determinations
of the proper standards and should not presume that the bill's
standards apply to small- and medium-sized accounting firms
that do not audit public companies.
Titles III and IV of the bill enhance the responsibility of
public company directors and senior managers for the quality of
the financial reporting and disclosure made by their companies.
Title V seeks to limit and expose to public view possible
conflicts of interest affecting securities analysts. Title VI
increases the SEC's annual authorization from $481 million to
$776 million and extends the SEC's enforcement authority. Title
VII of the bill mandates studies of accounting firm
concentration and the role of credit rating agencies.
It is my intention to go through the bill title by title in
a summary fashion, but I will pause for a moment and ask my
colleague whether he has any time pressures.
Mr. Gramm. I don't have a time preference as such. My
suggestion is whenever the Senator gets tired of talking and
would like me to speak a while, I can speak, and then he can
come back to it. But I have no objection if you want to go
through your whole presentation. You certainly have that right.
If you think it will work better doing it that way, that is
fine. If you want to break at some point and have me speak,
that would be fine.
Mr. Sarbanes. Why don't I move ahead, and I will try to
compress it a bit.
Title I creates a public company accounting oversight
board. This board is subject to SEC review and will establish
auditing, quality control, ethics, and independence standards
for public company auditors and will inspect accounting firms
that conduct those audits. It will investigate potential
violations of applicable rules and impose sanctions if those
violations are established.
Heretofore we have relied on self-policing of the audit
process, private auditing and accounting standards setting,
and, for the most part, private disciplinary measures. But
questionable accounting practices and corporate failures have
raised serious questions, obviously, about this private
oversight system. Paul Volcker stated:
Over the years there have also been repeated efforts to
provide oversight by industry or industry/public member boards.
By and large, I think we have to conclude that those efforts at
self-regulation have been unsatisfactory.
That is obviously one of the reasons we are moving, in this
legislation, to an independent public company accounting
oversight board. We heard extensive testimony in favor of such
a board.
The board would have five full-time members. Two of the
members will have an accounting background. All will have to
have a demonstrated commitment to the interests of investors,
as well as an understanding of the financial disclosures
required by our securities law. The board members would be
appointed by the SEC after consultation with the Federal
Reserve and the Department of the Treasury and would serve
staggered 5-year terms. They could not engage in other business
while they were doing this work.
Of course, the board will have a staff. We would expect
staff salaries to be fully competitive with comparable private-
sector positions in order to ensure a high-quality staff.
The bill requires that accounting firms that audit public
companies must register with the board. Failure to register or
loss of registration would render a firm unable to continue its
public company audit practice. Upon registering, a company
would consent to comply with requests by the board for
documents or testimony made in the course of the board's
operations.
The board would possess plenary authority to establish or
adopt auditing, quality control, ethics, and independence
standards for the auditing of public companies. But this grant
of authority is not intended to exclude accountants or other
interested parties from participating in the standard-setting
process. So the board may adopt rules that are proposed by
professional groups of accountants or by one or more advisory
groups created by the board.
These provisions reflect an effort to respond to the
argument that you need the experts to either set the standards
or help to set the standards. The experts in the industry can
make these proposals, but the board will have the authority to
adopt or to modify such proposals or to act of its own
volition.
We provide for the inspection of registered accounting
firms by the board. Firms that audit more than 100 public
companies are to be inspected by staff of the board each year.
Firms that audit less than that are inspected every 3 years,
although the board has the power to adjust these inspection
schedules.
The board also has investigative and disciplinary
authority. Former SEC Chairman Arthur Levitt told the
committee:
We need a truly independent oversight body that has the
power not only to set the standards by which audits are
performed but also to conduct timely investigations that cannot
be deferred for any reason and to discipline accountants.
If the board finds that a registered firm, or one or more
of its associated persons, has violated the rules or standards,
it will have the full range of sanctions available.
The board also has the power to sanction a registered
accounting firm for failure reasonably to supervise a partner
or employee, but we allow an accounting firm to defend itself
from any supervisory liability by showing that its quality
control and related internal procedures were reasonable and
were operating fully in the situation at issue. I am mentioning
this item, even though it may not seem that important in the
context of a bill this complex, to point again to the effort
that was made in the committee to balance competing concerns.
In effect, we say the firms have this supervisory
responsibility. They should not duck this responsibility.
Otherwise, how are we going to assure the people working for
accounting firms are meeting high standards? On the other hand,
we realize it is extremely difficult in large organizations to
control right down to the last person. So we provided that if
accounting firms have quality control and related internal
procedures in place that are reasonable and that are operating
fully, the operation of those procedures can serve as a
defense.
The bill applies to foreign public accounting firms that
audit
financial statements of companies that come under the U.S.
securities laws. The board is subject to SEC oversight, which
is important. Finally, we formalize the role of the Financial
Accounting Standards Board in setting accounting standards
accounting standards are different than auditing standards,
which the new oversight board will set. The bill provides for
guaranteed funding of the new oversight board and the FASB by
public companies, something I think we all agree is extremely
important.
Some have asked, why do we need a statutory board? Why not
let the SEC do something of this sort by regulation? But others
have raised questions about the adequacy of the authority the
SEC has to accomplish all of this by regulation alone. Clearly,
a firmer base would be established, a stronger reference point,
if the board were established by statute, and the potential of
litigation that might arise with respect to some of these
disciplinary and fee-imposing powers if they were created
solely by the SEC by regulation would be avoided by a clear
statutory underpinning.
Furthermore, I believe, frankly, that we need to establish
this oversight board in statute in order to provide an extra
guarantee of its independence and its plenary authority to deal
with this important situation.
Let me turn to title II on auditor independence. This is a
very important issue. Each of the country's Federal securities
laws requires comprehensive financial statements. That is what
is now required under the securities laws for public companies.
They have to have comprehensive financial statements that must
be prepared--and I now quote from the statute--``by an
independent public or certified accountant.''
The statutory requirement of an independent audit has two
sides to it. It is a private franchise, and it is also a public
trust.
The franchise given to the Nation's public accountants is
clear. Their services must be secured before an issuer of
securities can go to market, have its securities listed on the
Nation's stock exchanges, or comply with the reporting
requirements of the securities law. In other words, the
accountants have been handed by mandate a major piece of
business because the statute says to these public companies
that they must have comprehensive financial statements prepared
by an independent public or certified accountant.
So in effect we have directed to them a significant amount
of business. But the franchise, in a way, is conditional. It
comes in return for the certified public accountant's
assumption of a public duty and obligation.
The Supreme Court stated this well in a decision almost 20
years ago:
In certifying the public reports that collectively depict a
corporation's financial status, the independent auditor assumes
a public responsibility. . . . [That auditor] owes ultimate
allegiance to the corporation's creditors and stockholders, as
well as to the investing public. This public watchdog function
demands that the accountant maintain total independence from
the client at all times and requires complete fidelity to the
public trust.
Richard Breeden, Former Chairman of the SEC from 1989 to
1993, under the previous President Bush, said in his testimony
before the committee:
While companies in the U.S. do not have to employ a law
firm, an underwriter, or other types of professionals, Federal
law requires a publicly-traded company to hire an independent
accounting firm to perform an annual audit. In addition to this
shared Federal monopoly, more than 100 million investors in the
U.S. depend on audited financial statements to make investment
decisions. That imbues accounting firms with a high level of
public trust, and also explains why there is a strong Federal
interest in how well the accounting system functions.
What has happened in recent years is that a rapid growth in
management consulting services offered by the major accounting
firms has created a conflict in the independence that an
auditor must bring to the audit function. According to the SEC,
in 1988, 55 percent of the average revenue of the big five
accounting firms came from accounting and auditing services; 22
percent came from management consulting services.
By 1999, 10 years later, these figures had fallen to 31
percent for accounting and auditing services, and 50 percent
for management consulting services.
In fact, a number of experts argue that the growth in the
non-audit consulting business done by the large accounting
firms for their audit clients has so compromised the
independence of audits that a complete prohibition on the
provision of consulting services by accounting firms to their
public audit clients is required--a complete prohibition.
According to James E. Burton, the CEO of the California Public
Employees' Retirement System, CalPERS, which manages pension
and health benefits for more than 1.3 million members and has
aggregate holdings of $150 billion:
The inherent conflicts created when an external auditor is
simultaneously receiving fees from a company for non-audit work
cannot be remedied by anything less than a bright line ban. An
accounting firm should be an auditor or a consultant, but not
both to the same client.
John Biggs, CEO of Teachers Insurance and Annuity
Association--College Retirement Equities Fund, TIAA-CREF, the
largest private pension system in the world, which manages
approximately $275 billion in pension assets for over 2 million
participants in the education and research communities, told
the Committee:
Because auditors owe their primary duty to the
shareholders, questions about the primacy of that duty are
raised if the audit firm provides other, potentially more
lucrative, consulting services to the company. The board and
the public auditor should both see to it that, in fact as well
as in appearance, the auditor reports to the independent board
audit committee and acts on behalf of shareholders. The key
reason why awarding consulting contracts and other non-audit
work to the audit firm is troubling is because it results in
conflicting loyalties. While the board's audit committee is
formally responsible for hiring and firing the outside auditor,
management controls virtually all the other types of non-audit
work the audit firm may do for the company. Those contracts
with management blur the reporting relationship it is difficult
to believe that auditors do not feel pressure for the overall
success of their firm with the client. Even their own
compensation packages may be tied to consulting and non-audit
services being provided by their firm to the company. . . .
By requiring public companies to use different accounting
firms for their audit and consulting services, and by
establishing an independent board with real authority to
oversee the accounting profession you will be taking important
steps toward reversing the crisis in confidence in financial
markets that exists today.
We looked at this carefully. We had testimony on the other
side. In the end, we took the approach that is outlined in the
bill. The bill contains a short list, nine items, of non-audit
services that an accounting firm doing the audit of a public
company cannot provide to that company. These include, for
example, bookkeeping or other services related to the
accounting records or financial statements of the audit client,
financial information systems design, appraisal or valuation
services, actuarial services, management functions or human
resources, broker or dealer or investment adviser services, and
legal services.
The thinking behind drawing this line around a limited list
of non-audit services, is that provision of those services to a
public company audit client creates a fundamental conflict of
interest for the accounting firm in carrying out its audit
responsibility. If the accounting firm is not the auditor for
the company, it can do any of these consulting services--it can
do any consulting service it wants. But if it is the auditor--
so there is a conflict of interest problem--then we take
certain services and say: those services you can't do. And the
reason is, first of all, in order to be independent, the
auditor should not audit its own work, as it would do if it did
financial information system design or appraisal evaluation
services or actuarial services. It should not function as part
of the management or as an employee of the audit company, as it
would if it were doing human resources services, and it should
not act as an advocate of the audit client, as it would do if
it were providing legal and expert services. Nor should it be
the promoter of the audit client's stock or other financial
interest, as it would be if it were the broker-dealer or the
investment adviser.
They are the public company's auditors. They have a very
defined responsibility as the auditors. The bill doesn't bar
accounting firms from offering consulting services. It simply
says that if a firm wants to audit the company, there are
certain services it cannot perform. And even in that case, the
bill provides the board authority to grant case-by-case
exceptions, so if a case could be made why an auditor's
performing a consulting service ought to be permitted, there is
some flexibility to permit it.
David Walker, the Comptroller General of the United States,
in a statement on June 18 said:
I believe that legislation that will provide a framework
and guidance for the SEC to use in setting independence
standards for public company audits is needed. History has
shown that the AICPA and the SEC have failed to update their
independence standards in a timely fashion and that past
updates have not adequately protected the public's interests.
In addition, the accounting profession has placed too much
emphasis on growing non-audit fees and not enough emphasis on
modernizing the auditing profession for the 21st century
environment. Congress is the proper body to promulgate a
framework [on this important issue].
There are a lot of other auditing services, other than the
nine I mentioned, that an auditor may want to provide and whose
provision we did not preclude. In other words, the statutory
system that we are establishing lists certain consulting
services that, if you are the auditor, you cannot perform for
the public company that is your audit client, unless you can
get one of these case-by-case exemptions from the board. And
those consulting services were the ones which, upon
examination, seemed clearly to raise the most difficult
conflict of interest questions that could result in undermining
the auditor's fulfillment of his auditing responsibility.
The public company auditor can provide other non-audit
services; that is, any but those on the proscribed list, if it
clears them with the audit committee of the public company's
board of directors. We seek to strengthen the audit committee
in very substantial ways, including, as I will mention later,
that they should be the ones to hire and fire the auditors--
that the auditors really work through the audit committee for
the board of directors and that the auditors do not work for
the management. I think it is very clear, to some extent, and
in some instances, it is management working with the auditors
that have done these clever schemes for which we are now paying
the price.
We had the issue of auditor rotation before us. Many
witnesses thought the audit firm itself should have to rotate
every 5 years, periodically. We did not go that far. We
recommend here that the lead partner and the review partner on
audits must rotate every 5 years--not the audit firm itself.
But we do provide that audit firm rotation should be further
studied and direct the General Accounting Office to undertake
such a study with respect to the mandatory rotation of the
audit firm.
I will move more quickly and skip over some sections, but I
can always, of course, come back to them if there are any
questions.
We were concerned about the movement of personnel from
audit firms to the public company audit clients. There we put a
1-year cooling off period with respect to the top positions in
the company, so that you can't hold out to the audit team the
immediate prospect of an important position in the company.
Again, we are trying to protect the independence of the audit.
The next two titles, III and IV, deal with corporate
responsibility and enhanced financial disclosure. As I said, we
provide for a strong public company audit committee that would
be directly responsible for the appointment, compensation, and
oversight of the work of the public company auditors, which
makes it clear that the primary duty of the auditors is to the
public company's board of
directors and the investing public, and not to the managers. We
provide that the audit committee members must be independent
from company management.
We require that the audit committee develop procedures for
addressing complaints concerning auditing issues and also that
they put in place procedures for employee whistleblowers to
submit their concerns regarding accounting.
Where does an employee go when he sees a problem and is
fearful of taking it up with management because his perception
is that management is involved with the problem? We
specifically provide that they should be protected in going to
the audit committee.
We have a provision prohibiting the coercion of auditors.
Some have asserted that officers and directors have sought to
coerce their auditors or to fraudulently influence them to
provide misleading information. Obviously, the auditors ought
to be protected from that as well.
We have a provision that the CEO and the CFO who make large
profits by selling company stock or receiving company bonuses
while management is misleading the public about the financial
health of the company would have to forfeit their profits and
bonuses realized after the publication of a misleading report.
We also address the question of remedies against officers
and directors who violate securities laws, something in which
the SEC is very interested.
We have a provision on insider trades during pension fund
blackout periods. We prohibit the insider trades. So you can't
have officers and directors free to sell their shares while the
majority of the employees of the company are required to hold
theirs--as, of course, has happened in some instances.
On enhanced financial disclosures, we require that public
companies must disclose all off-balance-sheet transactions and
conflicts. We require that pro forma disclosures be done in a
way that is not misleading and be reconciled with a
presentation based on generally accepted accounting principles.
More companies are doing these pro forma disclosures. They
really are not accurately reflecting the financial conditions
of the company.
We require very prompt disclosure of insider trades--
actually, to be reported by the second day following any
transactions.
We require the reporting of loans to insiders. There have
been some enormous loans made. At a minimum, those need to be
disclosed. Some argue they ought to be prohibited. We didn't go
that far. Some testified there are some good reasons on
occasion that a company ought to make a loan to one of its
officers. But, at a minimum, they ought to be disclosed.
This is a small item, but it may have a good benefit. We
require public companies to disclose to the investors whether
they have adopted a code of ethics for senior financial
officers and whether their audit committee has among it a
member who is a financial expert. We don't require them to have
a code of ethics, although we think they should. We just
require that they disclose whether they have one or not.
Title V deals with analyst conflicts of interest. We have
had this incredible situation that was brought to the public
attention by the efforts of the Attorney General of the State
of New York, Eliot Spitzer, in which research reports and stock
trades of companies that were potential banking clients of a
major broker-dealer were often distorted to assist the firm in
obtaining investment banking business. There was one document
that actually acknowledged the conflict and, as a result,
stated:
We are off base on how we rate stocks and how much we bend
over backwards to accommodate banking.
These analysts would recommend a buy rating on the stock
essentially to help out the investment banking firm which was
trying to get the company's investment banking business. So
they get the analysts to say good things about the company,
which will then lead the company to be far more favorably
inclined and take on that firm in order to do their investment
banking business.
In some instances, they were actually recommending buys and
then they were saying to one another what a turkey the company
was, but the poor investor was being taken at the time.
We set out a number of provisions in this regard. I will
not go through all of them.
We prevent investment banking staff from supervising
research analysts or clearing their reports.
We prohibit analysts from distributing research reports
about a company they are underwriting.
We have a provision to protect analysts from retaliation
for making unfavorable stock recommendations.
We heard moving testimony from someone who said: If you
make an unfavorable recommendation, who knows what is going to
happen to you?
We also provide--the bill here focuses on disclosure
instead of prohibition--that an analyst would have to disclose
if he owned the company stock. If you are doing an analysis and
if you are doing a report and a recommendation, you ought to
disclose whether you own the company stocks or bonds, whether
you have received compensation from the company, whether your
firm has a client rel-
ationship with the company, and whether you are receiving
compensation based on investment banking revenues from the
company. These are not prohibitions, they are just disclosures.
The thought behind this is, if you are an investor and an
analyst is making a recommendation and he puts up front in his
analysis that he owns the company stock, or that he is
receiving compensation from the company, or that his firm has a
client relationship with the company, or that he is receiving
compensation based on investment banking revenues received from
the company, someone is going to look at this and say: wait a
second. I have to take his recommendation in the context of his
involvement.
Finally, of major importance is the increase we have
provided for the budget of the SEC to, No. 1, provide pay
parity for SEC employees; No. 2, enhance information technology
and security enhancement; and, No. 3, fund more professionals
to help carry out the important investigative and disciplinary
efforts of the SEC.
We provide for two studies. One concerns the consolidation
of public accounting firms. Senator Akaka was very interested
in this. There has been a constant consolidation trend. We have
asked the Comptroller General to do the study. And the other is
by Senator Bunning directing the SEC to conduct a study of the
role of credit rating agencies in the operation of the
securities markets.
In closing, there has been broad support for this
legislation. Just a few days ago, the Business Roundtable came
out in favor of it. The Financial Executives International
early on in the process was supportive, as well as the Council
of Institutional Investors.
We have tried hard to listen to the concerns people raised.
The procedure here was that before the Memorial Day
recess--in fact, in early May, we put out a committee print. As
we approached markup shortly before the Memorial Day recess, a
number of amendments were proposed. It was urged that we put
the markup over. We agreed to do that. We took all the
amendments that had been put forward, and other suggestions
that were being received with respect to the committee print,
and went back and reworked it.
I have to say to you that, in all candor, many of those
suggestions were meritorious and in fact are now reflected in
the legislation that is before the Senate.
So we tried very hard to listen to people at every step of
the way. We then reworked the print. We came back with another
committee print. We went to markup on June 18. We made a
limited number of amendments in markup and brought the bill out
to the floor of the Senate by a 17-to-4 vote.
I simply close by saying how strongly I believe that
financial irresponsibility and deception of the sort that we
have seen in all of the instances that keep appearing on the
front pages of our newspapers are a real threat to our economic
recovery. We cannot afford to wait for the next corporate
deception, followed by the next round of layoffs, followed by
the next collapse of a company's pension fund.
We need to take action to restore public trust in our
financial markets, and that really begins with restoring public
confidence in the accuracy of financial information. That is
what this legislation seeks to accomplish. I urge my colleagues
to support this critical legislation.
Mr. President, I yield the floor.
The Presiding Officer (Mr. Bingaman). The Senator from
Texas is recognized.
Mr. Gramm. Mr. President, I begin by thanking Senator
Sarbanes for working with me as we have considered this bill. I
congratulate him on this day that we are considering the bill
in the Senate.
We had a series of hearings that I wish every Member of the
Senate could have attended. I am not surprised that at the end
of those hearings good people with the same facts, as Jefferson
said so long ago, were prone to disagree.
I find myself in a position where Senator Sarbanes and I
agree on many of the key issues of this bill; we differ on
others. It is not the first time in managing a bill that we
have been on opposite sides.
I reminded Senator Sarbanes this morning that it might very
well be this will be the last bill we will ever manage
together. Since I am leaving the Senate, and we have something
like 40 legislative days left, I do not know whether, after
this bill is dealt with, the Banking Committee will warrant any
of those 40 days.
But I would like to say for the record that no one can
object to the hearings we had, the approach the Chairman has
taken. Whether you agree with him or whether you do not, I
think his approach has been reasoned and reasonable.
It is clear this issue has attracted a great deal of
attention. It is clear that there is a mind in the Congress, if
not in the country--Congress is not always reflective of the
thinking of the country--but there is a sort of collective mind
that we need to do something, even if it is wrong.
I lament, as we have gotten into this debate, that the
media has decided that the tougher bill is the bill with more
mandates; that if you decided to set up a stronger committee, a
stronger board with broader powers so they might decide to go
beyond the legislative mandates, that that is a weaker proposal
than having
Congress actually write auditing standards or conflict of
interest standards.
I would submit to my colleagues--and I guess I would have
to say at this point, I do not know that we will follow this
adage--but I suggest this is a very important bill. I urge my
colleagues, as you look at this bill, to realize we are not
just talking about accounting. If this bill were just about
accounting, it could do some good, it could do some harm, but
it could not do too much of either.
But this bill is far more than just a bill about
accounting. This is a bill that has profound effects on the
American economy; therefore, I think it is very important that
we try to look at the problem and that we try to come up with a
solution that will be good not just for today, not just that
will bring forth a positive editorial in a newspaper tomorrow,
but I submit we want to try to find one that meets the front
porch of the nursing home test. That is the test where, when we
are all sitting around in rocking chairs in a nursing home, and
we look back at what has happened under this bill, that we will
be proud of what we did and how we did it.
I want to touch on several things. I want to go through and
make several points, some related to what the distinguished
chairman said, some just because I want to say them. I want to
talk about what I believe the problem is. And I want to make it
clear that I do not know how to fix it. I do not know that this
bill fixes it. I do not believe it does. I do not believe my
substitute I offered fixes it either. But I think somebody
needs to talk a little bit about it. Then I want to talk about
the bill that we have before us, and where I agree with it and
where I differ, and what those differences are.
I think the good news is--from the point of view of if
consensus is a good thing--there is a consensus, and has been
from the very beginning, that we need to pass a law. What this
President cannot do is provide an independent funding source
and a legal foundation for this independent board.
I personally believe the President's 10-point program was a
good program. What the Chairman of the SEC cannot do is provide
an independent funding source and provide a legislative
foundation for the board. The Chairman and I agree on that.
There have been people who have reached a conclusion that
if you differed from Senator Sarbanes, you did not really want
a bill. I believe those of us who have differed do want a bill.
And the one thing that we agree on, which I think is at the
heart of this whole debate, is a strong, independent board to
make determinations about conflict of interest and about
ethics.
Now, let me touch on the things that I wanted to touch on.
I personally thank Senator Sarbanes for the approach he
took in focusing on the problem and on the future. Everybody
knows this has now become a political issue. We know that
people are either trying to go back and pin this problem on
past Presidents or SEC Directors or they are trying to pin the
problem on the current President and the current SEC Chairman.
I think it is a testament to Senator Sarbanes' leadership that
he has had nothing to do with that.
The plain truth is we have had a succession of great SEC
Chairmen. Arthur Levitt and I disagreed on many things, but I
do not think anybody could argue that he was not an effective
SEC Chairman. It is true that he had the ability, under
existing law, to go back and change GAAP accounting to set up a
board, to do anything he wanted to do, and he did not do it.
But it is always so easy to see these things when you are
looking with that wonderful hindsight.
Anybody has to give Arthur Levitt credit that he was the
first to raise an issue about auditor independence. Whether you
agreed when he raised it or not that it was a problem, that it
was proven, it is clear that he saw a problem which may or may
not be the source of our problem today, but many people believe
it is. You have to give him credit. And I don't believe anybody
else in his position would have done a much better job than he
did.
Let me also say that I think Harvey Pitt has done an
outstanding job in the short period of time he has been at the
SEC. Much is made of the fact that he did legal work for
accounting firms. I continue to be struck by this approach that
somehow knowledge is corruption, that somehow the perfect
regulator is a guy who just came in off a turnip truck and who
knows absolutely nothing.
It reminds me of Senator McCain was once telling a story
about talking to a journalist who was covering the Vietnam War
and asking the journalist if he had ever read this seminal work
about the history of Vietnam. And the journalist said: No, he
had never read it because he wanted to approach the subject
with a totally unbiased mind.
There is a big difference, I submit, between an open mind
and an empty mind. We make a grave mistake when we discount
knowledge. Everybody today, when they are criticizing Harvey
Pitt, talks about the fact that he represented accounting firms
and security firms. I guess if he were being more aggressive
than is the public mood, people would remember that he was
probably the most rigorous chief counsel at the SEC in its
history and, in that process, brought cases against numerous
major companies. They would be saying that that experience had
tainted him for his current work.
The point is, the man has broad experience as chief counsel
to the SEC, where he prosecuted major firms, and he has vast
experience as probably the Nation's premier security lawyer
where he defended associations and businesses. And quite
frankly, when in doubt, I will go with knowledge. When in
doubt, I will take experience. I do not believe that experience
taints you.
Let me also say that there is this current mood that
anything having anything to do with accountants is somehow bad.
Having just praised Harvey Pitt, let me point out an area where
I disagree with him. When he set up his board to oversee
accounting ethics and to look at issues such as the
independence issue, on ethics issues, he does not allow people
with an accounting background to vote.
Now I would have to say that I strongly disagree with that
for two reasons: No. 1, since when is a person's background a
source of corruption? I will address that a little more in a
minute. Secondly, when you are looking at what is and what is
not ethical practice, I am not saying it is absolutely
essential, but it is helpful to have somebody who knows
something about what practice is.
I submit that in all of these approaches, from the SEC
approach to the approach of this bill, we are probably going
too far in putting people in positions where they are going to
have massive unchecked authority and they have no real
expertise in the subject area.
Anybody who thinks this board is just going to slap around
a few accountants does not understand this bill. This board is
going to have massive power, unchecked power, by design. I
would have to say the board that Senator Enzi and I set up in
our bill has massive unchecked power as well. I mean, that is
the nature of what we are trying to do here. I am not
criticizing Senator Sarbanes. I am just reminding people that
there are two edges of this sword. We are setting up a board
with massive power that is going to make decisions that affect
all accountants and everybody they work for, which directly or
indirectly is every breathing person in the country. They are
going to have massive unchecked powers.
We need to give some more thought to who is going to be on
this board and is it going to be something that is attractive
enough to make people want to serve.
In the proposal Senator Enzi and I put together, I thought
we could enhance its prestige by making it a little more
independent of the SEC. Under the committee bill, which is
before us, the SEC would appoint the members of the board. I
thought that given the broad nature of its power, which goes
far beyond just accounting and far beyond just securities, it
would be helpful to have the SEC appoint two members--Senator
Enzi and I suggested that one have an accounting background and
one not--have the Federal Reserve Board appoint two; have the
CFTC appoint two; and then have the President appoint the
chairman. I think that board would have a higher profile. With
a Presidential appointee as chairman, it would raise the
prestige of the board, and we would get better people to serve
on the board.
I urge my colleagues, think long and hard when you think
about this board exerting tremendous, unbridled, unchecked
power, about how many people you want on the board who know
something about the subject matter. Today, in an environment
where accountants are the evil people of the world, the enemies
of the people, having no accountants on this board or
relatively few and not letting them vote when ethics matters
are being dealt with, I assert that kind of approach means you
are not going to have first-rate people who are going to want
to serve.
Let me finally get it out of my system by saying: I don't
know a whole bunch of accountants. I taught at a public
university. About a third of my students in economics were
accounting majors. I would have to say that I have a pretty
high opinion of accountants. If I had to trust the safety and
sanctity of my children and my wife today, after all these
revelations about bad accounting, to a politician, a preacher,
a lawyer, or an accountant drawn at random in America today,
without any pause I would choose an
accountant.
I am not saying that there are not bad people in
accounting. I am not saying there has not been abuse. But I
think we have to separate people from professions.
One of my concerns is, we have already had a decline in the
number of people majoring in accounting. I am wondering, I
don't care what kind of law you write, I don't care what kind
of board you set up, if we don't attract smart young people
into accounting, people who understand it is not talent, it is
not personality, it is not cool, it is character that
ultimately counts, then none of these systems are going to work
very well.
Now, I don't buy the idea that legislating something
instead of setting up a reasoned system to make decisions is a
tougher approach; and if it is, I don't want it. But what we
have today is an approach that is largely taken in the media
that the more mandates you have, that the more things chiseled
inflexibly into law, that the more it is one-size-fits-all,
whether it has any rhyme, reason, or responsibility, that that
is tougher, and therefore it is
better, that in today's environment is obviously appealing.
I hope this doesn't happen, but it would not shock me if we
have a series of amendments offered tomorrow when we start
dealing with the bill, where people try to out-tough each
other--maybe one to kill all the accountants and start all over
and train new ones. Well, nobody would offer such an amendment,
but I think we could very easily get into this oneupsmanship
that we can end up regretting. I hope that will not happen. I
want to discourage that.
Let me give you an example of where Senator Sarbanes and I
differ in our opinions. Who is right, I don't know. I think
maybe being in this business for a while convinces you that
nobody has a lock on wisdom and nobody knows in each and every
case what is right and responsible, but I want you to
understand the difference of our approach. Let me just go right
to the heart of the matter.
The substitute that I offered in committee with Senator
Enzi has an independent board. I think it is better, but you
can argue that the two boards are pretty similar. Ours is a
little more independent of the SEC; though, in the end, to meet
the constitutional test, the SEC has to have authority over it.
We went a little further in terms of independence and
appointing members, and I have already talked about that. But
the whole heart of the difference--let's pick one issue--comes
down to auditor independence. If you ask me today, should the
same company that does an external audit for a firm be able to
do internal audits--and I argue today I don't have the
knowledge to say this--I would argue today that I really don't
know enough about accounting practice and how the process
works, not just at General Motors but at the smallest
corporation in America, to make that decision. The bill before
us sets out the law. It is written in the law that if you do an
external audit, you cannot do any one of these nine different
things. I don't know, it may well be that after a reasoned
analysis a competent board would decide they ought to do those
things. My guess is that if I had to decide today, and you
forced me to make a decision that was going to be binding on
the country, which is a little frightening to me, I might well
agree with most, and in some cases all, of these things. But I
don't believe we ought to be writing that into law. I don't
think anything is gained by writing it into law, and I think a
lot is lost by writing it into law.
Having read editorials, I know this makes the bill tougher,
but I don't think it makes it better. What I believe we should
do is set up the best and strongest board we can, make it
independent, give it independent funding, and put competent
people on it. The way Senator Enzi and I did it, and there is
nothing magic about it other than that we did it, we decided to
have the SEC, the Fed, and the CFTC appoint two members, one
with an accounting background and one without, and then have
the President appoint the chairman, and he could decide.
I personally think that having more accountants rather than
fewer is a plus, not a minus. I don't think they all ought to
have an accounting background. I don't necessarily say a
majority have to have an accounting background, but I believe
that day in and day out, 20 years from now when we have all
left the Senate and we are not paying attention to these
things, it would help to have people who know what they are
doing. I don't buy the idea that people who don't know what
they are doing are more moral, other things being the same,
than people who do know what they are doing. In any case, I
believe that rather than writing out these nine things by law
that you cannot do while you are doing an external audit, we
ought to set up the strongest board we can, and we ought to
give them external funding and plenty of power, and we ought to
say to them: you need to look at these nine things and do a
reasoned analysis. You need to talk to lots of people, such as
smart theorists who are accounting professors at our best
universities, and you probably ought to talk to the bookkeeper
in Muleshoe who is actually doing bookkeeping work, look at the
practical, the theoretical, and make a determination.
Should you be able to do an external audit and do any one
of these nine things? You make a decision and set it out in
regulation. Why is that better than writing it into law? It
seems to me it is better for two reasons: One, if you are
wrong, or if accounting practices change, or if your perception
of the problem changes, you can go back and change it by
regulation. The problem with writing it into law is that
Congress then has to come back and change the law. As we know
from Glass-Steagall, it took us 60 years to fix something that
had it been written in regulation by the 1940s, it would have
changed. But we didn't change it until 1999.
The second reason, which I think is equally important, if
not more important, is the way the bill is now written might
very well make sense for General Motors. That is, it might make
perfectly good sense to have a process whereby General Motors
might have three or four different CPA firms--maybe more--but
they are operating all over the country and all over the world.
That is perfectly feasible. But the last time I looked--and I
don't know, but some of these may have gone out of business
and, God willing, maybe some new companies have come into
business--the last time my trusty staff looked, there were
16,254 publicly held companies in America. I don't care how
smart you are, I don't care how good your intentions are, you
cannot write a mandate, if you get too far in the detail, that
fits General Motors and also fits the 16,254th largest company
in America. It just doesn't work.
One of the advantages of setting up an independent board,
giving them a mandate to look at these areas, but not chiseling
it into stone in legislation, is because they can then say,
well, here is the principle and if you are General Motors, here
is how it applies, but if you are XYZ Paint Company in Montana,
or Wyoming, or wherever, you might only have one accounting
firm operating in the town that you are domiciled in. I am not
saying you cannot hire accountants to come from the Capital
City, or wherever, to your town to do work for you, and maybe
you ought not to be operating in a little town in a small
State; but people choose that, and people who represent small
States seem to like these companies being there. I am just
saying that giving the board the ability to set a principle and
apply it in one way to General Motors and in another way to a
small company in a small town makes eminently good sense in
practice.
Now, I know it is not a mandate in the same sense as
writing it into law, but I think the result would end up being
better.
One of the amendments that I will offer--and I thank
Senator Sarbanes for trying--and one thing I have to say is
that nobody on our committee can say that Senator Sarbanes did
not listen. Nobody can say he failed to try to hear them out on
their concerns and that, in many cases, he didn't change the
bill to try to respond to their concerns.
One of the changes that I support is giving the board, with
the concurrence of the SEC, the ability to grant waivers to
these rules and, in fact, to the law. The problem with waivers
on an individual company basis is a practical problem, and that
is, if 16,254 companies are trying to get waivers under their
special conditions--they all come to Washington and hire
lawyers and lobbyists; they all petition the board and the
SEC--if that board has 16,254 petitions in 1 year, and it could
have many times that if people are petitioning for different
kinds of waivers, we are going to shut it down for any other
purpose except waivers.
What will happen, not because anybody wants it to happen
but because of the very nature of Government, the people who
will get the waivers will not in general be the most deserving
people. They will be the people who hired the best lawyers, who
had the best contacts, who knew how to go about it, and who had
the money to spend getting the waiver.
My guess is the smallest companies that need the waiver the
most will not get them. Surely at some point we are going to
fix the bill so that the accounting board, with the concurrence
of the SEC, can say: OK, look, in applying this, if you fall
into these categories, you have these circumstances, you have a
waiver to do things in this way. Clearly, something like that
has to make sense.
One of the things we have to come to recognize, and I think
we all recognize it, is that having a beautiful law in a law
book does not make good law. It has to be practical, and it has
to take into account the 1,001--in this case, the 16,254
different circumstances that can apply.
What is the problem? I guess there are as many theories
about the problem as there are people. I have my own theory
about the problem, and I will share it with my colleagues and
anybody else who is interested.
Why is all of this happening now? I believe it is happening
because of the problems in GAAP accounting. There are other
extenuating circumstances, and I want to touch on them, but
here is the problem in GAAP accounting. Senator Sarbanes used a
perfect example of it, and I will just take his example. He
talked about how WorldCom saw its market capitalization fall
from $100 billion to $100 million. How is that possible? I
remember when Enron went bankrupt. People said: Where are the
assets? When a company goes from $100 billion to $100 million,
what happened to the
assets?
Here is the problem. Increasingly, the asset is a
combination of know-how, credibility, and a belief by the
public that you are carrying out your business in an efficient
and ethical way. Increasingly, the modern corporation does not
have 12 steel mills. They do not own massive physical assets.
Many companies have tried, basically, to get out of the asset
business into the information business. The value of WorldCom
was a discounted present value of what the public believed its
revenue stream was relative to its cost. It never had $100
billion worth of physical assets, anything like it. That is
what the value of the ideal was as the public perceived it in a
period where our wise friend, Alan Greenspan, talked about
irrational exuberance. That is what they thought that company
was worth, but it never had assets that were anything near $100
billion. What it had was know-how, knowledge of a market, and
it had credibility.
Enron was like a bank in the 19th century before FDIC
insurance. Their reputation was the source of their value, and
when they made stupid business decisions that called that
reputation into question, they collapsed.
I have a great sympathy for accounting because I used to be
an economist, and in economics, we have something called
ceteris parabis. It means ``other things being the same.'' So
when we do not know what those other things are, we just utter
this Latin phrase and pretend they do not exist--literally
pretend they do not exist.
That is valuable in physics where you talked about force
equals mass times acceleration, or for every action there is
equal but op-
posite reaction. That is an assumption. That is a
simplification because it leaves out friction, and it leaves
out gravity. There is nothing wrong with it, but the problem
is, accounting cannot do those things.
I had a famous and great accounting professor named David
McCord Wright. Nobody remembers him anymore. I can visualize
him today easily defining WorldCom. He would have talked about
the discounted stream of earnings, and he would have talked
about the value of their equity or market capitalization and
would have plotted out a projection of revenues and a
projection of costs and integrating that area to add it up, and
that is where the $100 million was.
I doubt if WorldCom's physical assets ever totaled $50
million, probably not $20 million. You are an accountant and
you have the job with the directions that are available through
GAAP, generally accepted accounting principles. You have the
job of trying to model, for accounting purposes, what WorldCom
looks like. You do not have the ability to utter a Latin phrase
and wish away things you do not understand. Our problem today
is that our GAAP accounting has not kept pace with the world in
which we live.
In this world where knowledge is power, in this world where
know-how is wealth, it is very hard to model with GAAP
accounting. In the decade of the 1990s, when this new model was
used on a massive basis in the American economy, accountants
had to figure up how much all this stuff was worth.
GAAP accounting has not kept pace with our changing
economy. Our accounting is based on the old steel mill of the
1940s where you had how much you paid for the furnaces, and you
had them a certain period of time, and you have depreciated
them.
How do you depreciate an idea? How do you book having
brilliant young people who are committed to the future in your
company because they own your stock? How do you put that down
in value terms?
So when we are pointing the finger at these people who call
themselves accountants, when we are blaming them for every
problem in the world, accountants did not put WorldCom into
bankruptcy. Accountants did not put Enron into bankruptcy.
Enron put Enron into bankruptcy by making bad business
decisions. The accounting was a problem because it was slow to
show it, but it was there. WorldCom's problems were there. The
problem was not accounting. The problem was accounting did not
show the problem soon enough.
So if anyone is listening to this debate and thinks some
investment is going to be more valuable because we have better
accounting, in the long run that is true; in the short run, I
am not sure that is true. In fact, I argue these companies
would have gone broke anyway. Clearly, they would have gone
broke, and they would have gone broke quicker had the
accounting system been better. It should have been better. It
needs to be better.
The point I am trying to make is the following: When you
are trying to model a company using GAAP accounting, it is
hard. It is something nobody has ever done before.
We are learning how to do this, and we will--using concepts
like goodwill to try to be a proxy for things like intellectual
capital and know-how. That is the source of our problems.
I think the fact this came at the end of a financial bubble
in the 1990s exacerbated the problem. The problem, in my
opinion, is accounting was easier--maybe it was not easier
initially. We figured out how to do it on the old model. We
will figure out how to do it on the new model.
There is some smart accountant, probably at Texas A&M right
now, studying accounting, who will probably get an MBA, who
will figure out how to get all this goodwill off our books--
which is a silly concept in my opinion, but it is the only one
we have--and come up with models of intellectual capital that
will have meaning, just as that steel furnace in the 1940s and
the write-down of it that made sense, but that is not the world
in which we live. That has to be dealt with.
Something the Chairman's bill does, something that I very
much am in favor of, is it gives independent funding to FASB.
The two things that have to be done and only Congress can do
them effectively, in my opinion, are: No. 1, we have to have an
independent, self-funded accounting standards board, FASB, and
we have to have accountants setting accounting standards. No.
2, we need to set up this board to oversee ethics in
accounting.
I do not think it matters whether it has a majority of
accountants or not, but it needs to have a reasonable number of
people who have a background in accounting so they know what
they are doing and so they have an intellectual stake in it
being done right. It is a dangerous thing when there are people
with massive power who do not have any kind of intellectual
stake in the application of that power, and it concerns me.
So to conclude, let me say this: Senator Sarbanes and I,
when we were at this point on the financial services
modernization bill, were on opposite sides. I was for the bill.
I saw it as the epitome of all wisdom. He was opposed to the
bill and saw it in less glowing terms. By the time we got out
of conference, it was our bill. We were together on it and 90
Members of the Senate voted for it. It passed the Senate
initially on a very close vote, a very narrow margin.
I do not think that will be the case here. I think this
bill will pass by a very large margin. I also think it is
possible that by the time we have reconciled this bill with the
House, that we can have a bill that will be very broadly
supported. At that point, I hope I will be in a position of
supporting it.
There are many good things in the Sarbanes bill. There
certainly has not been a bill, since I have been in the Senate,
that was better intended than this bill. I do think it can be
improved. I think it legislates too much. I think it does one-
size-fits-all mandates. It takes them a little bit too far.
That, to some guy outside government, does not sound very
important, but it is very important when one starts talking
about application. If we do this thing right, and if we build a
consensus and it works well, that will be the final monument of
the bill.
I hope we can offer germane amendments. As of right now, I
think there will probably be two amendments I will offer. One
will have to do with this issue about granting waivers on a
blanket basis so that rather than making every individual
company that has specific kinds of problems come in and ask for
an individual waiver, that the SEC and the board, when they
agree, could simply issue a set of principles, and if you
qualify you would get the waiver. If you do not, you do not.
Pretty straightforward amendment.
The second amendment I believe I will offer will have to do
with appeals. Under British common law, we have always taken a
very strong position in affecting the right of a person to earn
a living. We have set very high standards when it comes to
taking somebody's livelihood. I believe there are people who
are practicing accounting, or veterinarians or economists or
any profession, there is somebody in it who ought not to be in
it. I think when this board, which is a private entity--and
again this is not a problem with the Sarbanes bill. This is a
problem of our substitute as well. It is a strange kind of
entity. We want it to be private, but we want it to have
governmental powers. We have tried to structure it in ways to
try to accommodate this.
The bottom line is, when this board is taking away
somebody's livelihood and that person believes they have been
wronged, they ought to have a right to go to the Federal
district courthouse. They ought to have a right to say: I do
not think that was right, and I want my day in court.
They ought to have to pay for it, and at that point I think
all the material involved has to be made public, but that is a
right I think people have to have. Those two amendments are
very narrowly drawn, and they go to the very heart of the bill.
I know some of our colleagues are thinking about offering a
whole bunch of other amendments. I submit that trying to work
out a compromise with the House is going to be difficult. I
think we will succeed at it, but I think if we get a whole
bunch of other issues involved, we are making the mountain
higher. I believe we are ready to legislate in this area, and I
think if we can limit what we are doing to this area that we
can pass this bill, we can go to conference, and we can come
back and have a bill signed into law before we leave. I think
if we get into a lot of other areas, I am not saying the world
comes to an end if you put an amendment on here--having us
write accounting standards with regard to stock options, for
example, that is a tax issue. I would probably want to make the
death tax permanent as a second-degree amendment, but I am not
saying the world comes to an end if we do that.
I am saying if we get off into those kind of issues, where
you have strong feelings on both sides of the aisle--and that
would not be any kind of partisan vote--I think it is harder
for our chairman and for the members of this committee to get
their job done. I hope we will have a limited number of
amendments. I hope they will be germane to the bill.
Finally, at some point we are going to take up Yucca
Mountain. I am not up high enough in the pecking order to have
gotten the word as to exactly when that is going to be. Other
things being the same, I would rather finish this bill first
and then go to Yucca Mountain than to stop in the middle of it.
But it is a highly privileged motion. Any Member can make it.
It is not debatable. I assume at some point sometime tomorrow
that motion will be made. As I figure the time limit under that
privileged motion, it would take about a day.
I don't see any reason this bill should not be finished
this week, and maybe much sooner if we can stay on the bill, if
we don't drift on into these other areas. When people who are
for the bill in its current form want to stay pretty close to
the bill and people who are against it in its current form want
to stay pretty close to the bill, we ought to stay pretty close
to the bill.
I thank my colleagues for their indulgence. I look forward
to working on this issue. I yield the floor.
The Presiding Officer (Mr. Dorgan). The Senator from
Wyoming.
Mr. Enzi. Mr. President, these are interesting times. I
hope colleagues have been listening. The two presentations that
preceded me were outstanding explanations of both the bill and
the financial problems facing the world today. I don't think
you can get a clearer explanation of the problems than those
given by Senators Gramm and Sarbanes. They are very detailed
and very much to the point and lay the groundwork for what we
are about to do.
Usually in this Chamber, we have a solution and we are
looking for a problem. Today, we have a problem and we are
looking for a solution. We have a problem before the Senate.
The way this process works, is that we try to place the
solution in the best possible form. Under our form of
government, the Senate will work on its bill; the House works
on another bill on the same topic. When those two bills have
been completed, there will be a conference committee and we
will work out the differences. Through every one of those
processes, there will be changes to the legislation. We get 100
different opinions from 100 different backgrounds on any piece
of legislation. That is what makes our form of government work.
At the other end of the building, there are 435 people from
different backgrounds. They all lend their opinion issues that
come before the House.
It is sometimes a slow process, but it is the best process
in the world. It will work on this problem for which we are
looking for a solution.
If the economy were different today, we would not have this
problem. When there are changes in the economy, we realize
accounting problems--or at least that is when the accounting
problems become apparent. That is where we are today.
I am the lone accountant in the Senate. There is a good
reason for that. Accountants are out there doing very detailed
work. When you listen to what is in this bill, you are going to
hear details that you do not hear with other legislation. It is
the nature of the occupation, of the profession of accounting.
In the last 6 months, there has been an increased interest in
the accounting profession. Kids in colleges have been asking
the Deans about this phenomenon called accounting that nobody
has talked about for a long time. It is a tremendous
opportunity for accountants to finally explain what they do.
Some of the kids are looking into accounting for the wrong
reasons. They want to be one of the green eyeshade people
bringing down huge corporations. That is not what it is about.
It is an opportunity to make sure everyone understands business
in America. Accountants are the people with the very basis who
both know it and can explain it. That is their job.
Somewhere along the line, it is possible for people to get
distracted from that main goal. We are trying to bring them
back to that main goal--providing a basis where everyone can
understand the value of the companies in which they are
investing.
Today we are addressing accounting legislation that has
been reported out of the Banking Committee. It has been through
initial scrutiny. It has been through the process that leads us
to the floor. I have talked about the floor process, but so far
this has only been through the hearings process. We had 13
hearings in the Banking Committee. They were on very diverse
topics and a very diverse bunch of people who understood each
of those topics testified. I commend Senator Sarbanes for the
way he conducted the process of the hearings, and then the
process of negotiations that led up to the committee vote. That
happened over the last several months. On this issue, I can
think of no other Chairman in either the House or Senate who
did a more thorough job in conducting hearings. The Banking
Committee stayed on the substance and did not allow enormous
outside pressures on this issue to interfere with trying to get
to the bottom of the real problem. The hearings were not
finger-pointing. The hearings were an attempt to get valuable
information to arrive at the best possible solution.
In addition, the witnesses at the hearings presented
objective views. Had it been my choice to call the witnesses, I
would have chosen nearly every person who testified. That shows
the care and concern that went into choosing the individuals
who provided this basic information. The witnesses offered
several different views, and they came from diverse
backgrounds.
I also thank the Chairman for the way he and his staff
conducted themselves through the endless negotiations we had
during that same timeframe.
Right now, it seems as if everyone is writing an accounting
bill--including myself. In fact, I got calls as soon as Enron
occurred from some of the House Members who said they would
really like to work on a bill with me. Of course, the first
question I had to ask them was, What did you find really
happened with Enron? Usually the answer was, we don't know yet.
Their response was, but we want to get ahead of the curve.
I am glad we had the patience to wait, to hold the
hearings, and then to negotiate through a number of different
bills to come up with the one before the Senate today. Those
negotiations by Senator Sarbanes and his staff were both honest
and fair. Although we were not able to agree on everything,
which is the basis of negotiation, I believe all negotiations
took place in good faith. I thank the Chairman for that. I do
think we have a bill that is a good basis for finishing the
process and going to conference.
Enron, Global Crossing, WorldCom, and the other numerous
restatements that are occurring have caused a ripple effect on
the trust of corporate executives and their auditors by the
public. These executives, the persons in whom shareholders put
their trust, have stained the entire corporate community. A few
bad apples have spoiled the bunch. As a result, the legislation
we will be debating this week will restructure the way
executives operate by increasing accountability and making it
easier to discipline fraudulent behavior while at the same time
increasing penalties for illegal activity.
This legislation will force the management of companies to
be accountable to their shareholders by requiring that they
certify the accuracy of their financial statements. In
addition, the legislation will require that members of
corporate audit committees are independent directors. We
provide the audit committee the ability to engage outside
consultants and advisers and provide them the resources they
need to determine whether the accounting techniques being used
are in the best interests of the shareholders.
In addition, all employees should be subject to the same
rules when selling company stock. In this regard, the bill
prevents officers and directors of a company from purchasing or
selling stock when other employees are restricted. And when
these officers or directors do sell stock in the companies in
which they work, they should report the transaction on the next
business day.
However, the cornerstone of this legislation will be to
change the way in which a company's auditors interact with
their clients, and also to force them to be more accountable.
While I believe that accountants have extremely high ethics and
standards, I do believe the current environment has highlighted
a number of problems inherent in the current oversight
structure of the accounting industry.
I do believe it is an awesome task to be the accountant
trying to explain this to everybody else. I do need to explain
a little bit why there are not more accountants in legislatures
or in the Senate or in the House. That is because if you pick
up experience in legislating, most of that is done during the
tax season and we need the accountants during the tax season.
And they need the business during the tax season. If they don't
earn at least 70 percent of their revenue during that time,
they are out of business, which precludes them from picking up
legislative experience. There is no requirement that you have
to have legislative experience before you come here. There is
no requirement that you have any kind of experience. But that
is why there are fewer accountants here than there are a number
of other professions--it is a matter of timing.
While I am hesitant to move forward with the number of
changes included in the bill, I do believe the legislation is
necessary given the current lack of faith in accountants.
Make no mistake about it, this legislation is
Federalization of the accounting industry. This bill places a
Federal Government bureaucracy at the helm of accounting
regulation. While the legislation doesn't prevent the State
accountancy boards from continuing to regulate accountants
registered in their States, it does establish an overlord
regulator to oversee the firms which audit publicly traded
companies. My hope is that this new oversight structure will
renew the faith the public has in auditors and the financial
statements which they help prepare.
In addition to my own proposal, over the past several
months I have seen a lot of different proposals. I have also
spoken to and met with many of my colleagues about this issue.
I have spoken with groups from different industries; I have
talked to scholars, consumer advocates, and regulators. All the
groups agree that steps need to be taken to enhance the
oversight of accountants.
I have examined several existing models of quasi-public
regulators such as the New York Stock Exchange and the National
Association of Securities Dealers. One point is clear: When
these organizations were established, there was a desire to
appoint the most informed individuals, those who actually deal
with the industry on a day-to-day basis, as majority members of
the boards that oversee the industry.
For instance, the National Association of Securities
Dealers, NASD, has a large board which must consist of anywhere
between 17 and 27 members. Nowhere in the NASD rules does it
state their board members may not serve if they have previously
been involved in the securities industry. As such, the majority
of the NASD board members have worked within the industry.
Why should the accounting industry be treated so
differently? Why would we create a board which oversees the
accounting industry and then require that a minority of its
members have ever practiced accounting? The NASD plays just as
important a role in the protection of investors as the
accounting oversight board will, so why shouldn't the persons
who sit on this board have the best possible knowledge of the
accounting industry?
I do want to thank Senator Sarbanes for the change he made
in the legislation. Originally it said there could be no more
than two accountants on this five-person board. He made the
change so that two will be accountants. It is a very
significant change so that accountants are represented on the
board. Previously it would have been possible to have no
accountants regulating the accounting profession.
Every piece of legislation has its handful of unintended
consequences, despite how well-meaning Congress can be. I fear
the way in which the accounting industry will change when a
group of non-accountants set the standards which accountants
must follow. Lawyers do not have non-lawyers setting ethical
and professional standards which they must follow, yet I would
argue that those standards are as important as accounting
standards and ethics.
I don't want my message to be misconstrued. I do believe
that a board should be established to oversee the accounting
industry. I also agree the board members should have all the
tools necessary to effectively oversee the industry. I agree
that the board members should be full-time and independent from
the accounting firms. I agree that they should be appointed by
government and not by industry. But I do not agree that the
members of the board should be excluded just because they may
have passed a CPA exam 25 years ago.
To the contrary, because I believe this board should be as
effective as possible, I believe the board members should know
how an audit engagement works and they should know the
pressures that are applied to an auditor from a client. I
believe with this knowledge the board may in fact apply
stricter standards than a board of non-accountants.
As I said, I believe accounting firms should be subject to
strict scrutiny. However, I do not believe this legislation
should pave the road for the trial bar to open frivolous
lawsuits against accounting firms. Arthur Andersen no longer
exists. Can we really afford to lose another one or two of the
final four firms? We used to call them the big five. Now we
call them the final four.
It was mentioned earlier that there are 16,254 SEC-filed
corporations. That is 16,254 to be reviewed, primarily by four
accounting firms. If the trial lawyers pick off one after
another after another of the firms because the Board provides
information and because they are handed that information, how
will we have those 16,254 audited at all?
I am hoping there are a lot of young people listening who
are going into accounting who may start firms and grow the firm
themselves so they can handle an audit of a Fortune 500
company. But it doesn't happen overnight. And we have to make
sure that there is auditing, and not just consulting, which
some people will point out is where most of the money is these
days.
It makes me nervous to know that essentially only four
accounting firms now have the resources and expertise to audit
the world's largest companies. We rely on these firms to verify
the books of diverse and complex companies because they are the
only firms that can provide this service. If we subject them to
the will of the trial bar, they will surely continue to be
driven from existence, one firm at a time.
Instead, we should punish the wrongdoers to the fullest
extent possible and rely on good managers of companies to do
their jobs effectively. In the end, we are going to end up
making the audit committee members full-time employees, and
then there will not be any independence--another problem about
which we have to worry.
Having said this, I do believe this legislation is needed
at this time. Congress must produce a remedy to help restore
investor confidence. We have seen that real penalties, or at
least a threat of strong penalties, need to be hung over the
heads of corporate executives to assure they maintain their
obligations and responsibilities. The moral and ethical
breakdown among some of those executives is disgraceful, and
investors must know these executives will be punished severely
when they make selfish judgments.
A major concern, as we have gone through this legislation,
trying to put the bill in its present form, has been the
relationship to small business. As I mentioned 16,254 companies
are the ones that are registered with the SEC. There are
thousands of companies out there that are not SEC registered
businesses. There are thousands of entities out there that hire
auditors to give confidence in the financial statements they
have that are not SEC filed.
One of our concerns has been that we not change business so
drastically that these small businesses will no longer be able
to afford auditors. So we built in protections for the small
businesses. Our intent with this bill is not to have the same
principles that apply to the Fortune 500 companies apply to the
mom-and-pop business. When they hire an auditor, they want that
auditor to give them every bit of information they possibly can
so the information they get improves their business and doesn't
hide anything from investors. Mom and pop are the investors.
We have taken a lot of care to be sure we are not cascading
the provisions down into small business. We will look at
additional ways, I am sure, to make sure that does not happen.
This is not a license to States to do the same thing that we
are doing on a Federal basis. There is recognition that on a
Federal basis there is a bigger problem than on a State-by-
State basis.
I also want to point out there is also a responsibility by
the individual investor. They have to learn to diversify and
not to keep all of their eggs in one basket. I hope we can turn
this situation into a chance to educate small investors as to
how best to manage and invest their money. Nothing will bring
back the billions of dollars employees of some of these
companies have lost. But hopefully the collapse in confidence
will ensure that individuals will never again lose their life
savings because of a lack of diversification or knowledge of
finance.
What will this legislation provide? It will provide a
strong oversight body to watch the accounting industry. It will
provide a set of corporate governance laws that will require
corporate executives to become accountable for their financial
statements. It will provide assurances that corporate boards
watch the management of the company with a more critical eye--
no longer will board memberships be cushy jobs with no
responsibility.
It will also provide assurances to the American people that
Congress will not allow these millionaire and billionaire
executives to steamroll their obligations to the shareholders.
It will also ensure that research analysts aren't being told
what to say by the investment bankers.
To a great extent, I believe the marketplace has made
remarkable changes to address a number of the issues which were
highlighted by these corporate failures. First and foremost,
corporate boards and audit committees will no longer turn their
head when management wants to engage in questionable ethical
engagements. Also, credit rating agencies will impose much more
scrutiny on the companies they rate to protect financial
institutions and other lenders. Lenders themselves will require
more information about the stability of the companies in which
they invest. Research analysts will ask more questions about
the company, and more importantly, they will demand more
answers from executives. But perhaps, most important of all, is
the fact that investors, both institutional and individual,
will be more critical.
Shareholders will wake up and learn about the power of
their votes on corporate actions. We've already seen great
strides from some institutional investors in that they plan to
use their votes in shareholder meeting to keep executives
honest and accountable. They also plan to use their votes to
impact executive compensation packages. These private sector
solutions will be more effective than any legislation which can
be passed out of Washington.
One of our country's greatest strengths rests in the
dominance of our capital markets. But the strength of our
markets is only as strong as the underlying confidence in the
listed companies. When these companies build facades instead of
standing on principle, it shatters the entire system. Congress
and the SEC must find a middle ground where we allow the
marketplace to continue to operate in the capital markets to
the greatest extent possible but also assures investors, both
domestic and internationally, that the U.S. capital markets
will continue to be worthy of their investments. We must
continue to convince investors, that at the core of the
American capital markets, there must be a high level of
integrity and ethics by all players.
I want to reiterate another message that has been prevalent
this afternoon.
As we get into this bill, there are virtually no limits on
what amendments can be put on--at least unless there is a
cloture motion.
I hope people will recognize the need to have something
done, the need to get it done quickly, and not try and make
this a vehicle for everything they ever thought needed to be
done with corporations.
The purpose of this bill is not to solve the international
problems of business for everything that we ever thought of.
I hope my colleagues will constrain their amendments, keep
them to the corporate governance and accounting area we are
working on, and help us to get this bill finished as quickly as
possible.
Again, I thank Chairman Sarbanes and Senator Gramm for
their tremendous efforts and insight which they provided in the
previous explanation of this, and for the hours of work they
have put into the solution that is before us today. I hope we
can keep it to a limited solution, take care of the problems
that are recognizable, and reach agreement so we can get this
to conference and get a bill to the President for his
signature.
Thank you, Mr. President. I yield the floor.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
it be in order to send an amendment to the desk and have it
immediately considered. This amendment makes two simple changes
to the bill. One is a technical change to conform to the budget
rules, and a conforming change involving the definition of
``issuers.'' We have discussed this. It has been cleared. I
would like to go ahead and take care of that business, if I
could.
The Presiding Officer. Is there objection?
Mr. Gramm. Mr. President, there isn't any objection. I
think this clarifies the bill. I think it is something that
both sides are for, even though we had a previous agreement not
to do any amendments today. It is simply so technical that I
don't think anybody would have any concerns.
The Presiding Officer. Without objection, it is so ordered.
AMENDMENT NO. 4173
The Presiding Officer. The clerk will report.
The assistant legislative clerk read as follows:
The Senator from Maryland [Mr. Sarbanes] proposes an
amendment numbered 4173.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To make technical and conforming amendments)
On page 65, line 11, strike ``All'' and insert ``Subject to
the availability in advance in an appropriations Act, and
notwithstanding subsection (h), all''.
On page 76, between lines 16 and 17, insert the following:
(d) Conforming Amendment.--Section 10A(f) of the Securities
Exchange Act of 1934 (15 U.S.C. 78k(f)) is amended--
(1) by striking ``Definition'' and inserting
``Definitions''; and
(2) by adding at the end the following: ``As used in this
section, the term `issuer' means an issuer (as defined in
section 3), the securities of which are registered under
section 12, or that is required to file reports pursuant to
section 15(d), or that will be required to file such reports at
the end of a fiscal year of the issuer in which a registration
statement filed by such issuer has become effective pursuant to
the Securities Act of 1933 (15 U.S.C. 77a et. seq.), unless its
securities are registered under section 12 of this title on or
before the end of such fiscal year.''.
The Presiding Officer. If there is no further debate,
without objection, the amendment is agreed to.
The amendment (No. 4173) was agreed to.
Mr. Sarbanes. Mr. President, I move to reconsider the vote,
and I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. Sarbanes. Mr. President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Reid. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. Mr. President, I first want to extend my
appreciation to the Senator from Maryland for this bill. It is
really well timed and well done.
I received a letter today from the Secretary of State of
the State of Nevada, a Republican.
By the way--the Senator from Connecticut is in the
Chamber--the Secretary of State worked very closely with the
Senator from Connecticut. As the Senator will recall, he is a
very fine man. I wish he were a member of the Democratic Party.
He is not. But he is an outstanding public servant.
He wrote me a letter, which said:
Dear Senator Reid: Investor confidence in the integrity of
U.S. securities markets has been badly shaken as a result of
Enron, Global Crossing, WorldCom, and other alleged wrongdoing.
The failure of several large corporations to police themselves
cries out for reform before the negative impact on our markets
damages our national economy.
The Senate is to begin consideration of S. 2673, The Public
Company Accounting Reform and Investor Protection Act of 2002,
on Monday, July 8. I fully support
S. 2673 and oppose any efforts to weaken its provisions.
If I could have the attention of the Senator from Maryland,
the manager of this bill, I have here a letter from the
Secretary of State of the State of Nevada, who says:
I fully support S. 2673 and oppose any efforts to weaken
its provisions.
I say to the Senator, one of the things the Secretary of
State of Nevada is worried about is someone attempting to
weaken the bill that you have brought forward to prevent State
securities agencies from looking at wrongdoings in the State of
Nevada.
As the Senator from Maryland knows, the Attorney General
from New York, who has been here, is very concerned about this.
It is my understanding this bill does nothing to weaken that;
is that true?
Mr. Sarbanes. If the Senator would yield.
Mr. Reid. I would be happy to yield.
Mr. Sarbanes. That is correct. At one point there was talk
of an amendment floating around but----
Mr. Reid. But the point is, it is not in the bill?
Mr. Sarbanes. No, it is not in the bill.
Mr. Reid. On behalf of the Secretary of State of Nevada,
who I indicated earlier worked closely with the Senator from
Connecticut in bringing forward a very good election reform
bill--he is very progressive, and a fine Secretary of State--
throughout this letter, he acknowledges how important this
legislation is. I wanted this to be spread on the Record before
my friend's attention was diverted.
Mr. Sarbanes. I appreciate the Senator's comments.
Mr. Reid. My friend, Secretary of state Heller, goes on to
say:
As Nevada's chief securities regulator, I believe there is
an immediate need to restore investor confidence in our
securities markets.
I stand with my fellow State securities regulators in
endorsing Title V, Analyst Conflicts of Interest, in its
current form and strongly oppose any amendment to this title
that would reduce our ability to investigate wrongdoing and
take appropriate enforcement actions against securities
analysts. However, an industry amendment has been circulated
that would prohibit state securities regulators from imposing
remedies upon firms that commit fraud if it involves securities
analysts and perhaps even broker-dealers that serve individual
investors. If Nevada's investigative and enforcement authority
in this area are weakened, so too will the confidence of Nevada
investors.
He certainly opposes this.
Mr. President, I ask unanimous consent that the letter from
our Secretary of State be printed in the Record.
There being no objection, the letter was ordered to be
printed in the Record, as follows:
Office of the Secretary of State,
July 8, 2002.
Hon. Harry Reid,
U.S. Senator, Hart Senate Office Building, Washington, DC
Dear Senator Reid: Investor confidence in the integrity of U.S.
securities markets has been badly shaken as a result of Enron, Global
Crossing, WorldCom, and other alleged wrongdoing. The failure of
several large corporations to police themselves cries out for reform
before the negative impact on our markets damages our national economy.
The Senate is to begin consideration of S. 2673, The Public Company
Accounting Reform and Investor Protection Act of 2002, on Monday, July
8. I fully support S. 2673 and oppose any efforts to weaken its
provisions. As Nevada's chief securities regulator, I believe there is
an immediate need to restore investor confidence in our securities
markets.
I stand with my fellow state securities regulators in endorsing
Title V, Analyst Conflicts of Interest, in its current form and
strongly oppose any amendment to this title that would reduce our
ability to investigate wrongdoing and take appropriate enforcement
actions against securities analysts. However, an industry amendment has
been circulated that will prohibit state securities regulators from
imposing remedies upon firms that commit fraud if it involves
securities analysts and perhaps even broker-dealers that serve
individual investors. If Nevada's investigative and enforcement
authority in this area are weakened, so too will the confidence of
Nevada investors.
An amendment may be offered on the Senate floor under the guise of
creating national uniform standards for securities analysts. Its real
intent, I fear, is to eliminate remedies that state securities
regulators may impose on firms should fraudulent activity be unearthed
in an investigation. This approach is clearly ill-advised in today's
climate of investor uncertainty.
As Nevada's Secretary of State, my office is charged with
administering the Nevada Uniform Securities Act. My office is in
current negotiations with Merrill Lynch regarding a possible settlement
of analyst conflicts discovered in a lengthy investigation by the New
York Attorney General's office. My staff is also participating in a
task force investigation of UBS Paine Webber/UBS Warburg. This
amendment would greatly hamper our ability to investigate analyst
conflicts and would have a detrimental effect on Nevada investors.
I urge you to support S. 2673 and to vote against any amendment to
weaken the enforcement powers of state securities regulators. The
result of an amendment such as this could be that virtually every one
of the thousands of actions brought by state securities regulators
every year would be preempted, as well as all civil suits and
arbitrations under state law. In light of the recent Enron and WorldCom
debacles, it simply does not make sense to limit or preempt the state's
ability to bring enforcement actions against analysts who lie to Nevada
investors. The public is looking for elected officials to help them
regain their confidence in corporate America.
As Nevada's Secretary of State, I have a duty to protect our
state's investors. Any measure that dilutes my authority as the state's
chief securities regulator is counter to the mission of my office and
to state securities regulators nationwide. Accordingly, I again urge
you to vote against any amendment to S. 2673 that would weaken the
enforcement powers of state securities regulators.
Please call me at (775) 684-5709 if you have any questions or need
additional information
Sincerely,
Dean Heller,
Secretary of State.
Mr. Reid. Mr. President, our Nation is experiencing a
crisis in confidence among the investing public. Americans hear
on the news and read in the papers every day more and more
cases of corporate executives bilking employees and investors,
and of auditors who looked the other way, of boards of
directors failing to provide the oversight expected of them,
and of well-connected investors buying and selling stock based
on insider information. Investors do not know who they can
trust.
We have been in a mad rush the last many years to make sure
that the quarter you are involved in has a good financial
statement. People go to whatever ends they can to make sure
that that quarterly statement looks good to keep the stock
price up. That is all that matters. It does not matter whether
the company is losing money. It does not matter if their
employees are being laid off. It does not matter, as long as
they do everything they can to do what can be done to make sure
that stock price stays the same or goes up.
I have spoken previously on efforts of Senators to secure
the future for American families. In fact, Senate Democrats are
using that as a theme: to secure the future for all American
families. Securing our future means not only making sure our
borders are safe but also securing educational opportunities
for all our children and access to affordable prescription
drugs and affordable health care.
We must also provide pension protection for American
families. In part, that means extending pension coverage. There
will be an opportunity, before this legislative year ends,
where we can have a good debate.
The vast majority of workers in Nevada have no pensions. As
a consequence, they face their retirement years with inadequate
resources. Senator Bingaman, chairman of a task force, has
raised awareness of the lack of pension coverage for American
workers and is working on legislation to address that problem.
My colleagues have also led the way with other legislative
initiatives to restore investor confidence and provide
safeguards to secure Americans' investments, pensions, and
retirement savings.
Chairman Sarbanes has introduced important legislation that
will create a strong, independent oversight board to oversee
the conduct of auditors of public companies, and he has done
this on a bipartisan basis. That bill was reported out of
committee, as I recall, by a vote of 17-to-4, with overwhelming
bipartisan support.
This legislation would establish guidelines and procedures
to assure that auditors of public companies do not engage in
activities that could undermine the integrity of the audit. It
ensures greater corporate responsibility by setting standards
for audit committees and for corporate executives, but it
would, we would hope, impose penalties when standards are
violated. It would establish additional criteria for financial
statements and require enhanced disclosures regarding conflicts
of interest.
This legislation also directs the Securities and Exchange
Commission to adopt rules to improve the independence or
research and disclose potential conflicts of interest. It also
would provide a significant boost in funding for the SEC, the
Securities and Exchange Commission, to help it carry out its
responsibilities in a fashion that would help restore
investors' confidence in the markets.
This legislation goes a tremendous distance in addressing
some of the major concerns I have heard from people in Nevada.
And I am pleased this bill has gained, as I have indicated,
bipartisan support.
Indeed, it seems that after staying silent for so long, and
after allowing a permissive atmosphere where businesses could
do no wrong, the President, our President, and Republicans in
Congress, quite frankly, are now reversing course. Some are
falling all over themselves to jump on the bandwagon and
support this legislation. They have done it after hearing from
an outraged public. And that is good.
Tomorrow I will be eager to hear what the President has to
say in New York. I hope that he does not say we are going to
have to enforce the law that we have, because the law we have
has not been enforced, especially by the people who surround
this President and his Administration.
For him to go to New York and say we need to enforce the
law more strongly will not do the trick. He needs to jump on
the bandwagon with this legislation. We need additional
legislation.
The President ran a campaign based on themes such as
responsibility and accountability, but recent news reports
suggest that both have been lacking in his explanations of his
past dealings in the business world.
Prior to holding public office, our President has parlayed
his connections as a member of a wealthy and powerful family to
arrange a number of, some would call, sweetheart deals. In
editorials they have been referred to that way for the past
several days. Despite a string of business failures, our
President always seemed to land on his feet and seemed to
profit.
Now there are disturbing indicators that he has played fast
and loose with some of the rules that he is now being asked,
through his Administration, to enforce. When asked about his
business dealings, the President has not accepted personal
responsibility, instead shifting blame to accountants and
lawyers or implying that he was just doing business as usual.
I would have to say there are questions not only about the
Harken business dealings but about the business and accounting
practices of Halliburton, where Vice President Cheney enriched
himself, walking away with tens of millions of dollars.
So the problems we have heard go far beyond Enron and the
President's friend, as he referred to him, ``Kenny boy,'' Kenny
Lay. They are not limited to the handful of companies getting
most of the media coverage in recent weeks. Instead, there are
fundamental and systematic problems that have to be corrected.
That is what this legislation is all about.
I applaud the chairman and the committee for reporting out
this bipartisan legislation.
I hope, I repeat, that the President will join in
supporting this legislation. We need to make sure that those
who serve as corporate executives and on boards accept the
responsibility of their roles when they sign their name on a
financial report. The American people need to be able to trust
corporate leaders.
Likewise, the President, and those in his administration
who came to office from the corporate world, need to show more
transparency in letting the American people know how they are
making policy decisions, who has access to them, who is
influencing them, who is meeting with them.
I joined in an amicus brief with the General Accounting
Office to have the Vice President disclose who he met with to
come up with energy policy that this Administration enumerated.
We need to know with whom he met, when he met with them, and
why he met with them. They refused to give us that information.
That is why I joined in that litigation.
This administration must set aside what I believe and agree
with some--again, it is replete in the editorials of the last
few days--is their arrogance and secrecy and instead be open
and forthcoming public servants.
This legislation is timely. The Banking Committee jumped
right on it. Most of us thought the Enron thing was something
that was a rare dealing in corporate America. We have come to
find out it is not a rare dealing in corporate America. It has
happened since then time and time again. We have only seen the
beginning of it, I am sure.
The Banking Committee is to be applauded for moving this
legislation forward on a bipartisan basis. By a vote of 17-to-
4, it was reported out of committee. I would hope we can get
this bill out of the Senate as quickly as possible. It is good
legislation. It is legislation that the American people need to
reestablish confidence in corporate America and those people
they rely on so that they feel better about having their
pensions supplemented with investments made in the stock
market.
The stock market is an indication, as far as I am
concerned, of how people feel about what is going on in
business. As we know from recent days, people have not felt
very good about it. We have had tremendous losses. I heard the
chairman of the committee, Senator Sarbanes, speak about the
Nasdaq losing some 74 percent of its value. That is a
significant loss to our country.
I know the Members of the Senate understand the importance
of this legislation. I hope that they understand why it is
important to move it as quickly as possible. We have a few
short weeks to complete lots of extremely important legislation
prior to the August recess. As I have said on four separate
occasions, this legislation is as important as anything we
could do, and it is very timely.
The Presiding Officer. The Senator from Connecticut.
Mr. Dodd. Mr. President, let me begin my remarks by
commending the distinguished chairman of the Banking Committee.
I have said on other occasions and in other places that for
students of the Congress who wish to find a good example of how
to prepare a committee and ultimately the Chamber for a moment
such as this, a good model to use would be the hearings
conducted by the chairman of the committee on this very
question.
There were 10 hearings--there may have been more, certainly
10 full hearings--to which were invited virtually everyone from
across the spectrum on this question. This was hardly a set of
hearings where we heard from one side. We literally invited the
best experts in the country; they came and shared with us their
views and thoughts on what sort of steps we should be taking to
reform the accounting profession, to reform the rules affecting
the accounting profession.
I begin by extending my compliments to the chairman and his
staff for the tremendous job done to lay the groundwork.
Oftentimes we will see, particularly in light of a crisis that
occurs, there is a rush to judgment. We will come very quickly
to the floor with a sort of a cut-and-paste job with the
legislation. I am not suggesting intentions are not good, but
that is oftentimes how we react.
This set of hearings did, very deliberately, with a great
deal of patience and thought, lay out the foundation for the
legislation now before the Senate.
Certainly, while there will be ideas offered to improve the
legislation, we think the committee has produced a very fine
product. The best evidence of that is the fact that 17 of us in
the committee found this proposal to be worthy of our support.
There were four dissenters. I think even among dissenters,
there was a sense that we were heading in the right direction.
Some may have fundamentally disagreed, but if there were one in
the four, I don't know which one it would have been. Most
thought we were doing the right thing, either that we went a
little too far or didn't go far enough possibly, but this is a
very balanced approach.
I urge our colleagues to be careful of two potential
actions in the coming days. One would be to dilute this product
in some way. We are not suggesting we have written perfection
here, but we think this is a well-balanced proposal.
Senator Sarbanes has worked closely with our colleague from
Wyoming, Senator Enzi, who is the only Member of this body who
is actually a former member of the accounting profession. He
brings a wealth of personal knowledge and awareness to the
issue. He worked very closely with him and other members of the
minority, as well as with those of us on the majority side, to
finally bring this product to the Chamber. It already has
involved some compromise.
At this hour, when investor confidence is going to be
absolutely critical and the steps that we take and the language
we use will in no small measure contribute to the restoration
of confidence, it can just as easily do the opposite, if we are
not careful. This is a critical moment in the economic history
of our country.
The steps taken by those who are in significant positions
to affect the outcome of the course we are on are going to be
critically important.
The second caution I express is that we don't try to also
overburden this bill to say that this is the only opportunity
for us to deal with every other issue affecting corporate
business life in America. I am not suggesting the ideas Members
will want to bring to the table are bad. But we can so load
down a good bill that we can sink this effort if we are not
careful. I urge my colleagues as well to be restrained in the
temptation to bring up every other idea and incorporate it as
part of an accounting reform proposal. Those are the two
cautionary notes I have.
Let me also add my voice to those who have expressed theirs
earlier today. Tomorrow I know the President of the United
States is going to give a very important speech on Wall Street
in New York, the financial capital of our country. I commend
him for doing so. I think it is extremely important that he
actually go to Wall Street to share his views.
My hope would be that this evening, as he makes the final
preparations for his remarks, he would come out four square and
endorse this proposal that we have brought out of our committee
by a vote of 17 to 4. I can't think of anything more the
President could do in the next 24 hours, aside from the
rhetoric he will offer, than to endorse this bill and to say
this was a good effort and to talk about the laborious hearings
we have held to learn exactly what was necessary to incorporate
in this legislation.
Lastly, I would hope we would get this bill done fairly
soon and not let this go on too long. We would love to be able
to not only finish our work here but to go to conference with
the House, which has another proposal. It is a weaker proposal,
in my view, but nonetheless we will have to work with them to
resolve our differences and to send a bill to the President for
his signature.
I would hope that before we leave for our August break less
than 3 weeks from today we would actually be able to give to
the President a bill for his signature and not let it drag on
over into September and October. It is important we act in a
timely fashion.
With those background thoughts, I would like to share some
general comments about the bill itself. The importance of this
issue cannot be overstated. Anyone who has read a paper or
turned on the news or flipped on their computer is aware of the
crisis in our financial markets and, in fact, beyond that, in
our Nation. No rule or regulation is enough to address this
fundamental problem.
The issue causing all of this turmoil is about the simple
word of ``trust.'' The question that the world is asking is not
whether our companies or corporations or the workers who toil
in them or the products and services are competitive, but
simply whether we are telling the truth. Are we telling the
truth?
The reason people of the world so often have come here and
invested their hard-earned resources is not because there is a
better deal to be made financially speaking. It is because
there is a sense that our structures are sound, transparent,
and they are fair. You may end up losing your investment; you
may make money on your investment. That is always a risk when
you make a financial investment. But the one thing you could
always say about the United States, as opposed to almost any
other place around the globe, is that when you come to America
and invest your money, there is a sense of fairness and trust
and soundness to our financial institutions and the structures
that we created to protect them.
That trust has been fractured by the events that have
occurred over the last 9 months, And it continues to be
fractured with daily reports. So it is vitally important that
we respond in an appropriate and thoughtful manner as the
Congress of the United States. We have done so, in my view,
with the proposal the chairman has brought to our attention.
The very integrity of our markets is being questioned, and the
Congress must respond cautiously, prudently, and also
expeditiously.
Enron's collapse in December was, of course, an enormous
shock to all of us. Seven or eight months later, we have seen
that Enron was not an isolated incident. There have been a
whole host of corporate accounting scandals and collapses--
names such as WorldCom, Global Crossing, Tyco, Adelphia, the
list goes on and on. I fear, as my colleagues do, that the
latest corporate accounting scandal with WorldCom will not be
the last. I hope it will be, but my fear is it will not be.
The Congress should address the critical issue of
accounting reforms as quickly as we can. America's financial
engine does not need a tuneup, it needs an overhaul. We must
disassemble it in some ways, examine every nut, bolt, and
working part, and reassemble it to reflect the days in which we
live.
The fact is, if we fail to act on serious reforms, America
will see a continuation of the dangerous and discredited
corporate accounting practices that have, in the past 7 months
alone, cost American shareholders and workers billions of
dollars in their savings and pensions. This has deeply shaken
investor confidence, and that serves as a cornerstone of our
economic system.
It is important to note that in the dozens of hearings
surrounding Enron's collapse, no committee has engaged in a
more nonpartisan examination, focused not just on what went
wrong with Enron but, far more important, what Congress can do
to prevent future Enrons from occurring in the days ahead.
On March 8 of this year, Senator Jon Corzine and I
introduced legislation, S. 2004, that addressed what we thought
were some of the tough issues on improving regulatory oversight
of the accounting profession and restoring investor confidence.
I worked closely with the chairman, as did Senator Corzine, to
incorporate some of the language and spirit of S. 2004 in the
legislation before us today.
I thank the chairman for including in the product before us
much of what we wrote in S. 2004. I thank his staff, and I also
thank my colleague from Wyoming.
Congress must act quickly. If nothing else, we must address
the most prominent cause of the recent corporate scandals, the
practices inherent and common to the accounting profession, and
particularly the ability to audit a company's books while
simultaneously providing other services to that same
corporation. We saw this with Enron and Andersen. Now we see it
with WorldCom and the pending investigations that have greatly
contributed to the public's loss of confidence in our financial
marketplace.
Since the beginning of the year, while our economy has been
rebounding from last year's economic downturn and most economic
indicators point to a bull market, the Nasdaq is down more than
20 percent, the Dow is down more than 3 percent, and trading
volume has declined. One reason may be investor skepticism that
companies are not as financially healthy as they have said they
were. More restatements on corporate earnings have been filed
in the past 7 months than in the last 10 years combined. Most
of these restatements dramatically downgrade the financial
health of the companies in question.
Not surprisingly, the public is quickly losing trust in
disclosed corporate financial information. Although the
investing public may be reacting to the bad behavior of a few,
the possibility of conflicts of interest between accounting
firms and the companies they audit creates a perception that
this aggressive accounting is commonplace, even when it may not
be. This perception, which takes on its own sense of reality,
has led to a very dangerous, least-common-denominator thinking
in which the estimated worth of all public companies may become
undervalued because some are proven to be seriously overvalued.
The fact is, a few key reforms included in this bill can go
a very long way toward shoring up the public's confidence in
the integrity of America's financial marketplace.
Most importantly, to enhance auditor independence, the
legislation restricts the ability of accounting firms to audit
a company's books while simultaneously providing other
services. It also addresses the revolving door through which
executives from one firm leave to work for the companies they
audit.
This reform legislation includes the creation of an
independent body to oversee the accounting profession, with
substantial authority to ensure auditor discipline and improve
audit quality. The Securities and Exchange Commission will also
be given the resources to hire more accounting ``cops'' to
handle increasingly complex oversight responsibilities and
improve the agency's investigative and disciplinary
capabilities. The Government must be able to assure the public
that audits meet the high standards of independence and
objectivity that have been the hallmark of America's accounting
profession.
The accounting profession is a great profession. There are
thousands of highly qualified, talented, ethical people in the
accounting profession. I feel for them at this hour. Because of
the malfeasance and fraud committed by some, the many who work
in this profession feel tainted by it. I regret that. The best
way I know to recover the confidence people have in this
profession is to provide some regulatory framework that would
allow for auditor independence and for professionalism to be
restored at a time when it has been so badly damaged.
Investors are depending upon us to act on this issue and
set aside partisan conflicts. As I said, we should not dilute
this legislation and make it far less important, less
meaningful, or overburden it by trying to add too much to the
bill. It is not an easy path to walk down. I urge my colleagues
to listen to those of us who worked on this bill, particularly
the chairman, as we try to balance the particular needs of our
members and the desire to come up with a good, competent,
bipartisan piece of legislation. This is not an easy path to
walk down, but it is critically important if we are going to
contribute to the restoration of investor confidence as part of
our responsibilities as members of this historic Chamber.
The purpose of the original securities laws of the 1930s
was to increase public trust in America's financial markets,
the reliability of disclosed corporate financial information.
The resulting openness and accuracy of corporate disclosures to
the investing public paved the very way for America's rise as
the unrivaled economic superpower that we had achieved. The
collapses of Enron, WorldCom, and other corporations, and the
accounting scandals have ended any question about whether these
laws need reexamination. They do. We know that reforms are
mostly needed to protect and strengthen the public trust in
America's financial markets, and the time to enact them is now.
I am confident and hopeful that we will do just that in the
ensuing days.
I yield the floor.
The Presiding Officer. The Senator from Maryland is
recognized.
Mr. Sarbanes. Mr. President, I thank the very able Senator
from Connecticut for his kind remarks about our work together
on the committee as we tried to move this legislation forward.
I particularly want to underscore the very substantial and
significant contribution that the Senator from Connecticut and
his colleague from New Jersey, Senator Corzine, made when they
came forward fairly early on in the process with S. 2004.
Much of that legislation is included in this legislation,
and it was a seminal contribution early on in our consideration
and it helped us to move ahead. I am grateful to him for that
and for his efforts and support throughout this process as we
have tried to move this legislation forward.
The Senator from Connecticut, of course, is a chairman of
one of our subcommittees and has been enormously effective
within the committee in his efforts on this legislation, and I
appreciate that. I am very hopeful that we are going to get a
good product at the end of the path--of course, we are not
there yet--which the President will sign and which will make a
substantial difference.
It is a tragedy, in a sense. The founder of the accounting
firm Arthur Andersen was a man of great rectitude and very high
principles. He had the slogan ``think straight and talk
straight'' to guide him.
His successor, Leonard Spacek, also was a man of very high
principle. For that company with those origins, in that
tradition, to in effect have happen what has happened to it is
a tragedy, there is no question about it.
We are anxious to reassure accountants all across the
country that we think this legislation will help bring the
profession back to the standards that marked it at an earlier
time and which standards more thoughtful and more responsible
members hope will mark it once again.
The point the Senator from Connecticut made in that regard
is an interesting and important one.
Mr. Dodd. I thank the chairman.
Mr. Sarbanes. Mr. President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Dorgan. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer (Mr. Dodd). Without objection, it is
so ordered. The Senator from North Dakota.
Mr. Dorgan. Mr. President, I begin by saying the Senator
from Maryland has done this Senate and this country a great
service, along with his colleagues, including the Presiding
Officer, by writing legislation that addresses a critically
important topic at a very important time in this country.
As much as I appreciate the work done on this bill, I would
still like to speak about a few ways in which we can strengthen
it. I listened with some attention in the last hour or so as I
presided in the Senate to the suggestion that we ought not
change it much. I do not disagree with that assessment, but we
ought to change it some, in my judgment. There are some areas
we can strengthen, and I hope we can strengthen this
legislation and send it on to the President and have the
expectation the President will sign it.
This Chamber has long been the site of debates about
excesses and abuses, especially in America's poverty programs.
We have heard over a couple of decades, and appropriately so,
anecdotal stories about the Cadillac welfare queen who spends
food stamp money to buy cigarettes. Congress has clamped down
on all of that and said: Shame on you, you cannot do that, that
is abusing the public trust. And it is. So we have taken
aggressive action as we have seen these abuses.
Today this discussion is not about the abuse of the poverty
program or the abuse at the bottom, this is about fraud in the
boardroom; it is about abuse at the top. It is important for
all of us to understand that accountability and responsibility
do not just apply to poor people in this country,
accountability and responsibility apply to everyone, and that
includes the people at the top of the corporate structure.
I wish to talk about fraud in the boardroom, about
deceiving investors, about cooking the books, about accounting
firms that cannot account, about law firms that turn a blind
eye. I wish to talk about the situations the country has seen
in recent weeks and months that we have not seen for many
decades in this country.
The victims, of course, are the people in this country who
have invested in stocks, who believed in the certification of
financial statements by some of the biggest accounting firms in
the country that these were good corporations, that they had
good income, that they were moving in the right direction,
taking steps so that the funds in corporations were accounted
for properly. And now we discover that was not necessarily the
case in all too many instances.
Of course, there are a lot of wonderful corporations in
this country, wonderful companies with terrific top executive
officers who do the right thing, always do the right thing.
Yes, they take some risks, but they do it in anticipation of
gain for the stockholders. We ought not tarnish with the same
brush all American corporations, but we ought to determine what
is happening within some of these corporations that has caused
the collapse and the devastation of a lifetime of savings for
many Americans.
Let me use Enron as an example. We spent a fair amount of
time with Enron hearings in the Commerce Committee. We had top
executives of that company who had been cashing out prior to
Enron going bankrupt. I have a chart that shows the way in
which the top management of Enron made fortunes on the sale of
Enron stock, from 1998 to the present, at the same time that
they were driving their company into the ground.
Contrast this with a call I received from a fellow in North
Dakota one day who said: I worked for Enron for a good number
of years. I had a retirement plan, and all my retirement plan
was in Enron stock. Mr. Lay and others repeatedly encouraged us
to do that. My retirement plan was in Enron stock. It was worth
$330,000. Now it is worth $1,700. He said: That is what
happened to my life savings--$330,000 to $1,700.
What happened to the folks at the top of the ladder in
Enron? Mr. Lay, the chairman of Enron, from 1998 to the
present, sold $101 million worth of stock. That is what he
received. Mr. Rice, $72.7 million; Mr. Skilling, $66.9 million;
Mr. Fastow, $30 million.
Mr. Fastow was able to have an equity role in the special
purpose entities, the off-the-books partnerships, and in one of
them he actually invested $25,000 of his own money. He invested
$25,000, and 2 months later paid himself $4.5 million. I do not
know anybody who gets returns like that anywhere in America,
except by cheating.
In the year 2001 in American corporations, the average pay
for top CEOs increased by 7 percent, despite falling profits
and stock values. Is there a relationship at the top between
people who run the companies and the performance of the
companies themselves? It does not look like it, does it?
In 1981, the average executive compensation of the top 10
highest paid CEOs was $3.5 million. In the year 2001, the
average was $155 million. So we can see what has happened in
this country at the top in the boardroom.
Let's look at the number of times that CEO pay exceeds
average worker pay: In 1980, they made 42 times the pay of the
average worker in the company. In 1990, they made 85 times the
pay of the average worker in the company. But in the year 2000,
it was 531 times. So forty-twofold to five hundred and thirty-
onefold. That is what has happened to executive compensation at
the top of the corporate ladder.
We have seen story after story about what is happening in
some of the boardrooms. There are a lot of wonderful companies,
and I do not think this ought to tarnish all American
corporations, but we ought to be very concerned about what is
happening inside some publicly traded corporations and why the
safeguards have not been able to provide early warning to
investors and others.
Adelphia: The drop in their stock value is 99 percent. The
question is whether it failed to properly disclose $3.1 billion
in loans and guarantees to the family of the founder.
Dynegy: Whether the Project Alpha transactions served
primarily to cut taxes and artificially increase cashflow, 67
percent of their value lost.
Enron lost 99.8 percent of its value. In fact, as I have
mentioned before, the Enron board of directors commissioned a
report called the Powers Report which looked at only three
partnerships, and they described what was happening inside this
company was ``appalling.'' The board of directors of the
company itself said what was happening inside the company was
appalling. They said that in one year they reported $1 billion
of income they did not have.
Global Crossing: Whether it sold its telecom capacity in a
way that artificially boosted 2001 cash revenue, 99.8 percent
loss in value.
Halliburton: Whether it improperly recorded revenue from
cost overruns on big construction jobs.
The list, of course, goes on.
Qwest: Whether it inflated revenue for 2000 and 2001
through capacity swaps and equipment sales.
On the weekend talk shows, I heard a panel discussion about
this, and one of the panelists who is kind of an academician
said the market is just adjusting. That is an antiseptic way,
by an economist I suppose, to ignore the fact that families are
losing their life savings.
Sure, the market is adjusting, but it means families are
losing everything they have. It means investors with 401(k)s
see that 401(k) shrink so their life savings are disappearing
right before their eyes.
The question with all of these issues is: What has changed?
Why, with big accounting firms taking a look at what is going
on--and today there is a hearing on WorldCom in the House of
Representatives--why, with big accounting firms looking over
their shoulder, has this sort of thing occurred?
With Arthur Andersen and Enron, they had a $25 million
relationship by which Arthur Andersen audited the Enron
Corporation, and Arthur Andersen was also paid $27 million by
the Enron Corporation for consulting services. That is one of
the things that is at the root of this bill: Is that not a
clear conflict of interest? Is there not enormous pressure on
the accounting firm then to become an enabler for that
corporation? The answer clearly is yes, and that is why this
legislation takes action to deal with some of those issues.
I was driving in the car over the weekend in North Dakota
and saw that the Xerox Corporation had a substantial
restatement of earnings. It indicated that the SEC had
previously taken a look at it and fined Xerox $10 million,
which seems to me like pretty much a slap on the wrist when you
consider the billions of dollars involved in the restatement.
Then we hear this big story this weekend about yet another
restatement. So what we have is a restatement, and then a
restatement of the restatement of earnings.
What is the cause of all of this, and what is enabling it?
With Enron, for example, it was an accounting firm that became
an enabler; it was a law firm that became an enabler; it was
CEOs who became greedy, officers of the corporation who did not
pay much attention, who also, incidentally, were making a great
deal of money selling stock, board members selling stock. It
all became a carnival of greed.
I indicated, after having spent a lot of time looking at
Enron, that there was a culture of corruption inside that
corporation. The CEO of Enron took great exception to that, but
it is clear every passing day, with more and more evidence of
what happened inside that company, that there was in fact a
culture of corruption.
How do we respond to that, and how do we deal with that? I
think that, first of all, the rules have to be changed some,
and that is what this legislation attempts to do. Second, even
if there are changes in the rules, there must be an effective
referee, a regulator. In this system of ours, we have to have
effective regulation. And frankly, that has been lacking.
Mr. Pitt, who is the head of the SEC, I know has taken
great exception to statements that have been made by my
colleagues and myself. But the fact is that a system like this
cannot work unless there is effective oversight and regulation,
and that has been lacking.
Consider some of the statements that Mr. Pitt has made.
This is Mr. Pitt speaking at the AICPA, which represents the
accounting industry:
For the past two decades, I have been privileged to
represent this fine organization and each of the big five
accounting firms that are among its members. Somewhere along
the way, accountants became afraid to talk to the SEC. Those
days are ended.
That was to the American Institute of Certified Public
Accountants.
Then Mr. Pitt, who is, again, the head of the SEC, said:
The agency I am privileged to lead has not, of late, always
been a kinder and gentler place for accountants; and the audit
profession, in turn, has not always had nice things to say
about it.
So Mr. Pitt was concerned about ensuring a ``kinder and
gentler'' SEC.
The New York Times did a story as a result of the initial
speeches Mr. Pitt gave when coming to the SEC. It noted that
Pitt ``spoke favorably of pro forma earnings reports in ways
that no doubt heartened accountants who have worked so hard to
find ways to make even the worst profit figures look pretty.''
It also noted that ``A major embarrassment for accountants
is having the SEC force a client to restate its numbers. Mr.
Pitt and his chief accountant, Robert Herdman, are sending
signals that fewer such demands will be made.''
We can change the law, but if we do not have a tough, no-
nonsense regulator, then it will not work.
We all watch basketball games, and we see referees. They
are the ones who enforce the rules in basketball. We see a game
from time to time where it is quite clear right at the start
the referees are not going to call them close, and then pretty
much it is ``Katy bar the door,'' and things get out of hand.
Then we see other games in which it is quite clear they are
going to call up close, and nothing gets out of hand. The same
is true with the attitude and mindset of Federal regulators. We
have regulatory agencies for a purpose. That purpose is to
enforce the rules. Fairly, yes, but also aggressively.
If someone who comes from that industry and says, I
represented all of you, and suggests it will be a kinder and
gentler place, I wonder whether that is the regulator we ought
to have.
No matter who is heading the SEC, I want that person to be
a fierce advocate on behalf of the rules that protect
investors. I want someone that can make this system work and
require everyone to own up to their responsibilities. So people
who never enter a corporate office or know nothing about a
corporation but who want to invest in American business, can
buy a share of stock, having never met an officer of the
company, having never visited the company, and can have
confidence that what the accounting firm has said about that
company, what the financial statements represent about that
company, are absolutely fair and accurate.
That is the only way in which the American people can
participate in the raising of capital for America's business.
If we do not do that and do that quickly, we undermine the
entire system by which we raise capital in this country. We
undermine the entire system. That is why this piece of
legislation is important and timely.
There are several amendments I would like to have
considered, some I hope will be accepted, and some, perhaps, we
will discuss at some length, and I may or may not prevail.
There are some amendments that can strengthen and improve this
legislation.
One of the provisions in the legislation calls for CEOs to
return profits and bonuses they wrongfully reaped in the 12
months following a published earnings report that require a
restatement. I would propose that this provision apply when a
company goes bankrupt, as well. This idea has been endorsed by
former SEC Chairman Richard Breeden, Goldman Sach CEO Henry
Paulson, and others.
There also ought to be some provision with respect to loans
to CEOs by corporate boards of directors. I don't know what
that limit ought to be, but I mentioned one corporation where
over $3 billion was loaned to one family of the founder. This
is a publicly traded corporation. I believe we ought to discuss
that.
I may offer a provision dealing with something called
inversion, a mechanism whereby some American corporations have
decided they want to renounce their American citizenship and
move their official headquarters to another country--Bermuda,
for example. I want to be certain that CEOs of such companies
cannot escape the requirement of this bill that they certify
the accuracy of their financial statements. I do not think
that, in addition to avoiding their fair share of U.S. taxes,
these companies ought to be held to a lesser standard of
reporting accuracy than U.S.-based firms. So I will offer an
amendment, if needed, and visit with the chairman and the
ranking member about that subject.
Another issue, one requiring disciplinary proceedings to be
open to the public was discussed in committee. Transparency and
having those hearings open to the public are important. I hope
we can consider an amendment on that.
The other issue that was discussed in the committee at
great length: What is the definition of the division of
responsibilities between auditing and consulting? That
definition, determined by the SEC or the Congress, is critical
to determining whether there is a conflict.
Having said all that, let me say to the Senator from
Maryland, we are in the Senate the first week after the Fourth
of July. I listened to the Senators from Texas and Wyoming and
Connecticut and others speak about this bill. This is a good
start. If this legislation passed without one word changed, it
would make a magnificent contribution to a problem we face, a
gripping problem in this country.
Having said that, I do not subscribe to those on the
committee who say not to change anything. That is not what the
chairman said. There are some suggestions that will come from
other parts of the Senate that can strengthen and improve this
legislation, a couple of which I suggested. When it goes to
conference with the House, we will have something we can be
proud of.
The most important thing is to show to the investors in
this country who have lost, in many cases, their life savings,
that we are taking action to respond to the conditions that
caused this to happen.
When we talk about the people at the top getting rich and
the people at the bottom losing their life savings, the
American people have every right to ask: By whose authority can
this happen in this kind of economy? It cannot happen if the
rules are fair. It cannot happen if the rules are enforced.
The American people have a right to expect the regulators,
the SEC, and the Congress to take action now to address these
issues.
I yield the floor.
The Presiding Officer (Mr. Wellstone). The Senator from
Missouri is recognized.
Mr. Bond. Mr. President, I initially came to the floor to
talk about this bill and another issue. The Water and Power
Subcommittee of the Energy and Natural Resources Committee is
holding a hearing on Wednesday, and I asked to testify about
the views of Missouri on the Missouri River issue. Initially,
the staff said I was not going to be able to testify, and I was
going to therefore have to share my testimony with the entire
body. However, I have now been advised by the chairman of the
committee I will have an opportunity to testify, so I will save
my comments for the committee hearing.
I thank the chairman for giving me that opportunity.
Mr. Dorgan. Will the Senator yield?
Mr. Bond. I am happy to yield.
Mr. Dorgan. Let me explain to the Senator what my hope was.
The Senator asked to testify, quite properly. The Missouri
River manual issue is a highly controversial issue. The Senator
has been involved with it for some long while. We are having a
hearings. The Corps of Engineers and many others are
testifying. My hope had been we could hold a hearing with all
of those groups, then have a separate meeting, hearing from all
Members of Congress who want to testify. It appears that that
will not be the case.
We will hear from Senators at the front end of that
hearing. I assume it will take some time. As the Senator from
Missouri knows, having indicated, yes, we would entertain his
testimony, there are a number of other Senators who have
already gotten in line saying, if that is the case, please hear
my statement, as well. Of course we will.
It was never a case where we would not hear testimony. The
question was whether we would have a separate hearing and hear
Members of the Senate. I understand the Senator's concern.
Senators Daschle, Johnson, Conrad, Carnahan, and many, many
other Senators have great concerns about this issue.
I will lose some sleep Tuesday night with great
anticipation hearing your testimony on Wednesday morning.
Mr. Bond. I thank my good friend from North Dakota and
assure him I hope to be brief and to the point. I am somewhat
disappointed I will not share all that testimony with my
colleagues, but there will be another opportunity.
I thank the chairman of the subcommittee for his kind
indulgence.
Today I rise to join in expressing my concern about recent
accounting practices in publicly held companies and their
auditors. As a former State auditor, I have an interest in that
profession being performed properly. Obviously, something is
seriously broken. We hear about Enron, Global Crossing,
WorldCom, and Arthur Andersen. The people of America are very
concerned. We have seen millions of families with their
investments diminished or even wiped out. That is not
acceptable. The vast majority of investments were not in the
volatile sectors, or not what we thought were the volatile
sectors of the stock market. They were invested in the so-
called blue chip companies. The families who made those
investments on their strong belief in the integrity of our
financial markets and accounting industry now find that because
of corporate shams, accounting gimmicks, and inadequate
auditing, they have lost significantly the investments they
planned for education or retirement--for their families.
As far as we know, overall the overwhelming majority of
publicly traded companies are in full compliance with corporate
accounting standards. But the fact that there has been a
significant deception by a handful of companies raises
suspicions of all companies. In addition, we don't know how
many others will come forward in coming weeks.
We must restore the public's confidence in the market.
Without this, the economic recovery which should be beginning
will remain elusive.
While much of the focus in the debate here and in the news
media is on the auditing problems of the big conglomerate
companies, unfortunately little attention has been paid in this
bill to how the impact will fall on small publicly traded
companies and small auditing firms. As the ranking member on
the Committee on Small Business and Entrepreneurship, I have
some concerns, after reviewing this bill, that we may be
pushing ahead without considering the serious effect and the
unintended consequences the bill could have on smaller firms--
both small auditing firms and small publicly traded companies.
The bill is clearly targeted towards abuses in extremely
large businesses, which we all think should be dealt with. I
personally hope it will result in prison sentences for people
who are proven to have committed criminal acts in their
accounting activities.
But the SEC is not even aware of how many small auditing
firms there are auditing small, publicly traded companies.
There are some 2,500 small companies, and we believe many of
them are audited by small- and medium-size auditing firms. For
small auditors, the bill will require many new elements
including registration, annual filing requirements, as well as
partnership rotation of lead auditors. In addition, the bill
would codify a list of banned services or nonauditing services
that an auditing company might conduct for a company that it
audits.
While some of these elements clearly are necessary to
restore confidence, and I think are going to be dealt with by
regulatory action and maybe even by the industry itself, no one
knows how these requirements will affect the small firms. It
has been argued that the bill allows for a case-by-case
exemption, but that exemption process itself could be extremely
costly and untimely for small firms and lead to inconsistent
results.
I fear that some of these small auditing firms will not
have the resources to implement these requirements and will
stop auditing services or just go out of business. The result
may be that small, publicly traded companies may not be able to
obtain auditing services at reasonable cost. As a result, the
bill might be setting up a hurdle for small companies to reach
the public markets, one that is too expensive and too great to
overcome.
Clearly, when we deal with the major problems we ought not
cause significant problems for the smaller, growing
entrepreneurial sector of our country.
As for publicly traded companies, the bill also places new
requirements for auditing committees and for corporate
responsibility. Again, many of these may be necessary. However,
we need to look at how these requirements will affect the
small, publicly traded companies.
The entrepreneurial spirit of our country is really the
envy of the world. People know that entrepreneurship works in
America. That is where we get the new ideas. That is where we
get the growth. That is where we get the new services and the
products. We should be careful as we adopt reforms not to put a
disproportionate burden on these companies, dampening the
entrepreneurial spirit or impeding access to the public
markets.
I fully support accounting reform and the taking of steps
necessary to restore investor confidence in the market. I think
we should pass a balanced bill that will not overburden small
firms and not create additional hurdles that will impede them
from growing. We don't want an incidental consequence of this
bill to be a monopoly of large accounting firms when it comes
to corporate audits.
I agree with the other speakers that the American public is
looking to us for answers. I intend to work to see that the
needs of the small businesses, publicly traded small companies,
and small auditing firms are protected. I am committed, and I
think we all are committed, to restoring the public's
confidence in the markets so families can feel safe once again
in investing in America and in America's future.
I look forward to working with my colleagues to secure a
balanced bill which will do that without bringing unnecessary
hardship on the entrepreneurial sector of our economy.
I thank my colleague from Wyoming for the courtesy in
allowing me to go ahead. I yield the floor.
Mr. Enzi. Mr. President, I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Specter. Mr. President, during the course of the Fourth
of July recess, I traveled through Pennsylvania holding some 16
town meetings, and I found many concerns among my constituents:
The issue of prescription drugs; the concern about what is
happening with respect to Iraq; the issue of terrorism, which
confronts the United States; the concern about what might
happen on July 4; concern about the suicide bombers from the
Palestinians terrorizing Israel.
But high on the list of public concern was what has
happened with Enron, WorldCom, and many other companies on the
stock exchange, where so many of my constituents in
Pennsylvania--like tens of millions of Americans, really, and
even more--have had their savings decimated in their retirement
accounts of a variety of sorts. The issue that was raised
consistently was: What happens next?
I think it is very good that the Senate is now considering
legislation to deal with the fraudulent conduct that has
plagued so many companies in corporate America. There is no
doubt that there is a clear-cut conflict of interest for an
accounting firm to be both an adviser and an auditor. An
adviser has a close relationship with a company--call it cozy,
or intimate, or friendly--but that is very different from the
function of an auditor, which ought to be at arm's length,
scrutinizing what the company has done. That kind of a conflict
should certainly be prohibited in the future. If the accounting
firms do not have enough understanding of the ethics, then laws
have to be enacted, with very tough penalties to follow. When
you find companies having so much debt off the books,
subsidiary corporations, that is a matter of fraud. Fraud is a
misrepresentation of a fact where someone relies to their
detriment, and that is a crime. When you have companies putting
expenses in, say, a capital account that shows billions of
dollars in additional income or assets of the corporation, that
too is fraud.
A good part of my career has been as an assistant DA and
then as district attorney. I believe this kind of white-collar
crime is certainly susceptible of deterrence, providing that
standards are established and penalties are provided for a
breach. It is my hope that from the Senate's current
consideration, some very tough legislation will follow.
(Mr. Dayton assumed the Chair.)
VOLUME 148, TUESDAY, JULY 9, 2002, NUMBER 91,
PAGES [S6436-S6444]
Public Company Accounting Reform and Investor Protection Act of 2002
The Presiding Officer. Under the previous order, the Senate
will resume consideration of S. 2673, which the clerk will
report.
The assistant legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
The Presiding Officer. The majority leader is recognized.
amendment no. 4174
(Purpose: To provide for criminal prosecution of persons who alter or
destroy evidence in Federal investigations or defraud investors of
publicly traded securities, and for other purposes)
Mr. Daschle. Madam President, I have an amendment at the
desk.
The Presiding Officer. The clerk will report.
The assistant legislative clerk read as follows:
The Senator from North Dakota [Mr. Daschle], for Mr. Leahy,
for himself, Mr. McCain, Mr. Daschle, Mr. Durbin, Mr. Harkin,
Mr. Cleland, Mr. Levin, Mr. Kennedy, Mr. Biden, Mr. Feingold,
Mr. Miller, Mr. Edwards, Mrs. Boxer, Mr. Corzine, and Mr.
Kerry, proposes an amendment numbered 4174.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
Mr. Daschle. Madam President, on behalf of Senator Leahy
and others, I offer this amendment which is identical to the
Corporate and Criminal Fraud Accountability Act, S. 2010,
passed unanimously by the Judiciary Committee some time ago.
I view the Leahy amendment as a necessary complement to the
Sarbanes bill. In fact, I think of them as two parts of a vital
whole--one element guarantees the truth and honesty of
corporate accounting. The other is a deterrent. It says that
corporate misrepresentation will be forcefully punished--with
jail time.
We need both. We need to improve oversight and independence
of the accounting profession and hold corporate wrongdoers
accountable for their actions.
We need to act comprehensively to fulfill our promise to
the American people that integrity, honesty, and accountability
will be restored to our markets.
Last week Senator Leahy and I wrote to the President
requesting his views on this bill and the Sarbanes accounting
reform bill.
Unfortunately, the President has not answered our letter
yet. But I hope to hear today--and I think we need to hear
today--that he supports and will sign both.
We welcome the President's apparent new enthusiasm for
reforming our corporate culture, and we look forward to working
with him.
The Administration needs to understand that the time for
half measures has long passed. The American people expect and
deserve comprehensive reform.
Combining the Leahy bill and the Sarbanes bill accomplishes
just that. The Sarbanes bill revamps the regulatory structure
that protects our markets. There will be better rules and a new
oversight body to send corporations and accountants a clear
message that they must tell the truth on their balance sheets.
The Leahy bill is every bit as vital. Let me summarize a
few of its provisions very quickly. The amendment has three
aims: punishing criminals; preserving evidence; and protecting
victims.
The Leahy amendment punishes criminals by creating a tough
new 10-year felony for securities fraud. It provides
prosecutors with a new tool that is flexible enough to keep up
with the most complex new fraud schemes and tough enough to
deter violations on the front end. It also provides a mechanism
to raise the fraud sentences that are already on the books.
The amendment also preserves evidence of fraud. It creates
two new criminal anti-shredding provisions in Federal law. As
we say in the Arthur Andersen case, even the most straight-
forward obstruction of justice cases can be difficult to prove
under current law.
Senator Leahy's bill closes the loopholes and makes
document destruction in fraud cases an unambiguous crime.
The amendment does not just protect ``paper evidence,'' it
also protects valuable testimony from people. For the first
time, the Leahy bill creates Federal protection for
whistleblowers. People like Sherron Watkins of Enron will be
protected from reprisal for the first time under Federal law.
This bill is going to help prosecutors gain important insider
testimony on fraud and put a permanent dent in the ``corporate
code of silence.''
Finally, the amendment will protect victims of fraud. By
extending the time period during which victims can bring cases
to recoup their losses, the Leahy bill removes the reward for
those fraud artists who are especially gifted at concealing
what they've done for lengthy periods of time.
Cases where victims have lost their entire life savings
should be decided on the merits, not based on procedural
hurdles that may now be used to throw legitimate victims out of
court.
The Leahy bill also prevents fraud artists from declaring
bankruptcy to shut out their victims. The amendment would
accomplish this by making security fraud debts nondischargeable
in bankruptcy.
Again, the Leahy provisions enjoyed broad bipartisan
support in the Judiciary Committee when passed unanimously in
April. They are needed now more than ever, as the number and
magnitude of corporate misstatements continues to pile up and
the lost jobs, lost pensions, and ruined lives continue to
mount.
We must act to punish criminals, no matter what color their
collar. I hope all Senators will support this amendment.
Madam President, the country will be listening intently to
what the President says this morning. A crucial test will be
whether he explicitly supports--and pledges to sign--the
Sarbanes bill with the Leahy legislation attached. We cannot
restore confidence in the integrity of our markets with
anything else.
Senator Leahy is on the floor.
Mr. Leahy. Will the majority leader yield?
Mr. Daschle. Yes.
The Presiding Officer. The Senator from Vermont is
recognized.
Mr. Leahy. Madam President, I very much appreciate what my
good friend, the distinguished majority leader, has said. I
also
compliment him for his leadership on corporate accountability.
Sometime ago, he asked the Chairs of the various committees
with possible jurisdiction in this area to get together and
craft comprehensive legislation. I recall that meeting very
well. I recall the majority leader--back at the time of Enron,
before WorldCom and these other business scandals came
forward--expressing his concern that not only is this a blight
on the business community, it is a blight on our system of
doing things. He also spoke about how terrible it was for those
people, not only workers who had their pensions tied up in the
fortunes of the companies they are working with and are relying
on for truthfulness--what they assumed is the truthfulness--of
the accounting statements of those companies, but also many
other people who invest, whether it is a farmer in South Dakota
or a merchant in a small town in Vermont who is putting savings
in and hoping this will be part of his retirement.
The majority leader made it very clear to all of us that we
were to set politics aside, we were to set any kind of special
interests aside, and we were to bring up the best legislation
possible for the people of America. That was what Senator
Daschle charged us to do, and that is what I am trying to do
with this amendment.
We have excellent accounting reform legislation, S. 2673,
crafted by Chairman Sarbanes and the Senate Banking Committee.
I commend Senator Sarbanes and the other members of the Banking
Committee--for their bipartisan leadership. Senator Sarbanes
had people on both sides of the aisle come out with this
legislation, and I am proud to cosponsor it.
My amendment is to add to Senator Sarbanes' legislation,
not to detract from it. As he knows, I offered to add a
criminal penalty and other provisions that are within the
jurisdiction of the Judiciary Committee.
My amendment is cosponsored by Senator McCain and the
majority leader, Senators Durbin, Harkin, Cleland, Levin,
Kennedy, Biden, Feingold, Miller, Edwards, Boxer, Corzine,
Kerry, Schumer and Brownback. Our amendment is identical to S.
2010, the Corporate and Criminal Fraud Accountability Act that
was reported unanimously by both Republicans and Democrats in
the Judiciary Committee on April 25.
Again, following the very clear direction the distinguished
majority leader gave us when he said we have to protect the
people of this country, we have to make sure corporate America
can do its best to help our economy, this would create tough
new penalties for securities fraud and would preserve evidence
of fraud to make sure there is accountability for crimes that
not only cheat investors but rob the markets themselves of the
public trust. The markets have stolen the public's trust.
According to press reports, President Bush has changed his
mind on corporate reform and may support new penalties for
corporate fraud, and I welcome the President's change of heart.
The Corporate and Criminal Fraud Accountability Act creates
tough, new, criminal penalties for corporate fraud, and Senator
Daschle and I have written to the President asking for his
support.
The time for watching and hand-wringing is over. We have to
take action to start the slow but critical process of restoring
confidence in the books of our publicly traded companies.
The collapse of Enron has become a symbol of a corporate
culture where greed has been inflated and accountability
devalued. Unfortunately, Enron is no longer alone. Joined by
Arthur Andersen, Global Crossing, Tyco, Xerox, and, most
recently, WorldCom, the misrepresentations about the financial
health of our Nation's largest companies have shaken confidence
in our financial markets.
If we do nothing to learn and apply the repeated lessons of
the last months, we are only going to compound the problem.
That was obviously the belief of the unanimous Judiciary
Committee vote when the Committee approved S. 2010. Innocent
consumers, investors, and employees depend on stock investments
for their children's college funds, for their retirement nest
eggs, and for their savings. Every week brings news of a new
financial scandal. Just look at the effect on the stock market.
It has been devastating. This has repercussions not just for
companies that depend on our capital markets to grow their
businesses and our economy, but certainly also for the average
American family. More than one in every two Americans invest in
our financial markets, and they are watching what we do here.
They deserve action.
Those who defraud investors should be held accountable for
their crimes. The Leahy-McCain amendment, the Corporate and
Criminal Fraud Accountability Act, is all about accountability
and transparency--two bedrocks of our market.
The Presiding Officer. The Chair states that the majority
leader has yielded for a question only while retaining the
floor. Is that the intent of the majority leader?
Mr. Daschle. Madam President, it was my intention to yield
for a question, but I thank the distinguished Chair of the
Judiciary Committee for his extraordinary leadership and the
effort he has made to bring this legislation to the floor.
This is the Leahy amendment and, as I noted, it passed
unanimously in large measure because I think he was able to
work with our colleagues on both sides of the aisle.
I am happy to yield the floor so he and others may seek
recognition.
Mr. Leahy. My question would be this to the majority
leader: Would he agree, in his experience, that nothing would
focus the attention more of those executives who have defrauded
their own companies and investors than the idea that they would
actually go to jail for it, and not walk off with hundreds of
millions of dollars?
Mr. Daschle. Madam President, it is for that reason that I
believe this package ought to be viewed in its entirety. The
Sarbanes bill lays out the framework. The Leahy bill lays out
the penalties for violating that framework. So I don't know
that you can have one without the other and not have a complete
package.
So I appreciate very much the work of the Judiciary
Committee, and the Chair of the Judiciary Committee especially,
for the work in allowing this package to come to the floor. I
thank him again for the contributions he made.
Several Senators addressed the Chair.
Mr. Leahy. Madam President, I seek recognition in my own
right.
The Presiding Officer. The Senator from Texas is
recognized.
AMENDMENT NO. 4175 TO AMENDMENT NO. 4174
Mr. Gramm. Madam President, I send an amendment to the
desk.
The Presiding Officer. The clerk will report.
Mr. Leahy. Madam President, parliamentary inquiry.
The Presiding Officer. The Senator from Vermont.
Mr. Leahy. What is the rule on recognition? Is it not the
Senator who seeks recognition first?
The Presiding Officer. The Chair understands that the
managers of the amendment are entitled to be recognized.
Mr. Leahy. On my amendment? May I be recognized on my own
amendment which is pending before the Chair? Is that correct?
The Presiding Officer. The managers of the legislation have
priority.
Mr. Leahy addressed the Chair.
The Presiding Officer. The Senator from Texas, the manager
of the underlying bill.
Mr. Leahy. Would the managers of the amendment include the
distinguished senior Senator from Kentucky? Is he one of the
managers?
The Presiding Officer. The managers of the legislation are
the Senator from Maryland and the Senator from Texas.
Mr. Leahy. The distinguished Presiding Officer has
recognized, however, the Senator from Kentucky.
The Presiding Officer. The Chair has recognized the Senator
from Texas. The clerk will report the amendment.
The assistant legislative clerk read as follows:
The Senator from Texas [Mr. Gramm], for Mr. McConnell,
proposes an amendment numbered 4175 to amendment No. 4174.
Mr. Gramm. Madam President, I ask unanimous consent that
the reading of the amendment be dispensed with.
The Presiding Officer. Is there objection?
Mr. Leahy. I object.
The Presiding Officer. Objection is heard. The clerk will
continue.
The assistant legislative clerk continued with the reading
of the amendment.
The Presiding Officer. The Senator from Vermont.
Mr. Leahy. Madam President, I want to make sure people
understand what the Leahy-McCain amendment is. I realize there
may be those who want to amend it to make life easier.
The Presiding Officer. Will the Senator from Vermont
suspend? The regular order is the reading of the amendment.
Mr. Leahy. I ask unanimous consent that the reading of the
amendment be dispensed with.
The Presiding Officer. Is there objection to calling off
the reading of the amendment? Without objection, it is so
ordered.
The amendment is as follows:
(Purpose: To provide for certification of financial reports by labor
organizations and to improve quality and transparency in financial
reporting and independent audits and accounting services for labor
organizations)
At the end of the amendment add the following:
SEC. 302. CORPORATE AND LABOR ORGANIZATION RESPONSIBILITY FOR FINANCIAL
REPORTS AND DISCLOSURE REQUIREMENTS.
(a) Financial Reports.--
(1) Certification of reports.--
(A) Certification of periodic reports.--Each periodic
report containing financial statements filed by an issuer with
the Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d))
shall be accompanied by a written statement by the chief
executive officer and chief financial officer (or the
equivalent thereof) of the issuer.
(B) Certification of financial reports by labor
organizations.--
(i) In general.--Each financial report filed by a labor
organization with the Secretary of Labor pursuant to section
201(b) of the Labor-Management Reporting and Disclosure Act of
1959 (29 U.S.C. 431(b)) shall be accompanied by a written
statement by the president and secretary-treasurer (or the
equivalent thereof) of the labor organization.
(ii) Definition.--In this subparagraph, the term ``labor
organization'' has the meaning given the term in section 3 of
the Labor-Management Reporting and Disclosure Act of 1959 (29
U.S.C. 402).
(2) Content.--The statement required by paragraph (1) shall
certify the appropriateness of the financial statements and
disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer or labor organization.
(3) Conforming amendment.--Section 201(b) of the Labor-
Management Reporting and Disclosure Act of 1959 is amended, in
the matter preceding paragraph (1), by inserting ``(and
accompanied by the statement described in section 302(a)(1)(B)
of the Public Company Accounting Reform and Investor Protection
Act of 2002)'' after ``officers''.
(b) Reporting Requirements.--
(1) Financial reporting for labor organizations equivalent
to required reporting of public companies.--Section 201 of the
Labor-Management Reporting and Disclosure Act of 1959 (29
U.S.C. 431) is amended by adding at the end the following:
``(d)(1) In the case of a labor organization with gross
annual receipts for the fiscal year in an amount equal to
$200,000 or more, the information required under this section
shall be reported using financial reporting procedures
comparable to procedures required for periodic and annual
reports of public companies pursuant to sections 12(g), 13, and
15 of the Securities and Exchange Act of 1934 (15 U.S.C.
78l(g), 78m, and 78o).
``(2)(A) Such information shall be reviewed by a certified
public accountant using generally accepted auditing standards
applicable to reporting companies under the Securities and
Exchange Act of 1934.
``(B) Such audit shall be conducted subject to requirements
comparable to the
requirements under section 10A of the Securities Exchange Act
of 1934 (15 U.S.C. 78j-1).
``(3) Such information shall be reported using generally
accepted accounting procedures comparable to the procedures
required for public companies under sections 12(g), 13, and 15
of the Securities and Exchange Act of 1934 (15 U.S.C. 78l(g),
78m, and 78o).
``(4) The authority provided under this subsection shall be
in addition to the authority provided under subsection (b) and
section 208, regarding reporting procedures and review of
information required under this section.''.
(2) Remedies and penalties for violations of reporting
requirements.--Section 210 of the Labor-Management Reporting
and Disclosure Act of 1959 (29 U.S.C. 440) is amended--
(A) by striking ``Whenever'' and inserting ``(a)
Whenever''; and
(B) by adding at the end the following:
``(b)(1) If the Secretary finds, on the record after notice
and opportunity for hearing, that any person has willfully
violated any provision of section 201(d), the Secretary may
impose a civil monetary penalty in an amount not to exceed the
amount for any comparable violation under section 21B(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-2).
``(2) In the case of a violation of an auditing requirement
under section 201(d)(2) by a public accountant, the Secretary
may impose a civil monetary penalty in the same manner as
penalties are imposed under section 10A(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1(d)).
``(3) For purposes of any action brought by the Secretary
under paragraph (1), any person who knowingly provides
substantial assistance to another person in violation of a
provision of section 201(d), or of any rule or regulation
issued under such section (including aiding, abetting,
counseling, commanding, or inducing such violation) shall be
deemed to be in violation of such provision to the same extent
as the person to whom such assistance is provided.
``(c)(1) Any person who makes or causes to be made any
statement in any report or document required to be filed under
section 201(d) which statement was at the time, and in the
light of the circumstances under which it was made, false or
misleading with respect to any material fact, shall be liable
to any person (not knowing that such statement was false or
misleading) who relied upon such statement. A person seeking to
enforce such liability may sue at law or in equity in any court
of competent jurisdiction.
``(2) In any such suit the court may, in its discretion,
require an undertaking for the payment of the costs of such
suit, and assess reasonable costs, including reasonable
attorneys' fees, against either party litigant.
``(3) The recovery and statute of limitation provisions of
subsections (b) and (c) of section 18 of the Securities
Exchange Act of 1934 (15 U.S.C. 78r) shall apply for purposes
of any action under this subsection.
``(d) In any action arising under subsection (c) or (d) or
in connection with any provision of section 201(d), the
provisions of section 27(c) of the Securities Act of 1933 (15
U.S.C. 77z-1(c)) regarding abusive litigation shall apply.''.
(3) Regulations.--Not later than 1 year after the date of
enactment of this Act, the Secretary of Labor, shall promulgate
such regulations as the Secretary determines necessary to carry
out the provisions and purposes of this subsection (including
the amendments made by this subsection) and to ensure the
provisions of this subsection are carried out in a manner
comparable to the manner any similar provisions are carried out
by the Securities and Exchange Commission.
The Presiding Officer. The Senator from Vermont.
Mr. Leahy. Madam President, so people understand what the
Leahy-McCain amendment is, it is the Corporate and Criminal
Accountability Act. It is about accountability, and it is about
transparency. I think everybody--investors, corporate managers,
or anybody else--will tell you that accountability and
transparency are the bedrock of our economy, of our markets.
If one is going to invest in a company, one wants to know
what the company does and what the books say. One wants to be
able to rely upon their reports.
Transparency will instill confidence, and accountability
helps enforce transparency and forthright financial decisions.
We do not just rely on the better angels of our nature; we rely
on the fact that somebody is going to be there to enforce it.
We cannot stop greed, but we can stop greed from
succeeding. This bipartisan amendment is going to send
wrongdoers to jail and save documents from the shredder, and
that sends a powerful and clear message to potential
wrongdoers: Don't do it.
The measure enjoys wide support. The amendment is supported
by law enforcement officials, regulators, and numerous
whistleblowers, and consumer protection advocates. I have
letters of support from these advocates, and I will, at the end
of my statement, ask consent to print them in the Record.
Let me summarize some of the provisions. This bipartisan
amendment has three prongs to restore accountability: punishing
and preventing fraud, preserving the evidence of fraud, and
protecting victims of fraud.
S. 2010, as unanimously reported, accomplishes these goals
in a number of ways. It is going to create a tough new Federal
felony for securities fraud for a 10-year maximum penalty. The
idea of 10 years in the slammer is going to focus the attention
of those who are more interested in taking their money and
hiding it in offshore bank accounts.
As one who was a prosecutor, I was surprised to learn that
unlike bank fraud, health care fraud, and even bankruptcy
fraud, there is no specific Federal crime of securities fraud
to protect victims of fraud related to publicly traded
companies.
Can you imagine, Madam President, while all this talk has
been going on, it turns out there is no specific crime of
securities fraud. This bill would create such a felony with a
tough 10-year jail sentence.
The amendment provides for a review of the existing
sentencing guidelines for fraud cases and for organizational
misconduct to make them tougher as well.
The new crimes and enhanced criminal penalties in this bill
were worked out among Senators Hatch, Schumer, and me, and
unanimously supported by the Judiciary Committee, and I thank
Senators Hatch and Schumer for their support.
The Leahy-McCain amendment also creates two new anti-
shredding penalties which set clear requirements for preserving
financial audit guides and close loopholes in current anti-
shredding laws.
These provisions close loopholes in current laws and set a
clear requirement that corporate audit documents must be saved
for 5 years. We, incidentally, picked that time period because
that is the statute of limitation for most Federal crimes.
These provisions are crucial in preventing recurrences of
what happened at Arthur Andersen.
These provisions will preserve evidence that helps law
enforcement officers and prosecutors focus immediately on the
evidence. It takes a few minutes to warm up the shredder, but
it can take years for prosecutors and victims to put together a
case without key documents.
The amendment protects corporate whistleblowers. Senator
Grassley and I worked out these bipartisan measures in the
Judiciary Committee. I thank the Senator from Iowa for his
assistance and his constant leadership over the years on
whistleblower rights.
When sophisticated corporations set up complex fraud
schemes, corporate insiders are often the only ones who can
disclose what happened and why.
Unfortunately, the Enron case also demonstrates the
vulnerability of corporate whistleblowers to retaliation under
current law. This is a memo from outside counsel to Enron
management. They were afraid there might be a whistleblower. It
said:
You also asked that I include in this communication a
summary of the possible risks associated with discharging (or
constructively discharging) employees who report allegations of
improper accounting practices.
Then he goes on to give them the good news:
Texas law does not currently protect corporate
whistleblowers. The supreme court has twice declined to create
a cause of action for whistleblowers who are dis-
charged. . . .
In other words, if they dare tell about corporate misdeeds,
fire them, it is not going to hurt.
After this high-level employee of Enron reported improper
accounting practices, the Enron executives were not thinking
about firing the accountants who were doing wrong; they wanted
to fire the whistleblower, their own employee. Why? Because
they were pocketing the money. They were getting that money out
to their bank accounts as fast as they could, and they did not
want anybody to say so.
The bipartisan whistleblower protections are supported by
the national Whistleblower Center, the Government
Accountability Project, and Taxpayers Against Fraud. They call
S. 2010 ``the single most effective measure possible to prevent
further recur-
rences. . . . ''
The measure lengthens the statute of limitation by
extending it from the earlier of 1 year from discovery or 3
years from the fraud to 2 years from discovery or 5 years from
the fraud.
Senators Feinstein and Cantwell worked hard to craft a fair
compromise on this provision in the Judiciary Committee.
Indeed, the last two SEC Chairmen from both parties, Arthur
Levitt and Richard Breeden, both agreed that the current short
statute of limitations is unfair to fraud victims.
Attorney General Christine Gregoire testified before the
Judiciary Committee in the Enron State pension fund litigation
that the current short statute has forced some States to forego
claims against Enron.
In Washington State alone, the short statute of limitations
could cost hard-working State employees--firefighters and
police officers--nearly $50 million in lost Enron investments.
Last week, Xerox announced it was restating its revenue
back 5 years by $6.4 billion. Madam President, as a law
student, I remember sitting in the gallery listening to the
distinguished Senator from Illinois, Mr. Dirksen, give his
well-known speech: ``A billion here and a billion there, and
soon you're talking about real money.''
Imagine a corporation claiming they made a mistake in their
revenue of $6.4 billion for the past 5 years. The disclosures
raise the specter of innocent investors who, through no fault
of their own, will be barred from recouping losses.
We make the debt from security law violations
nondischargeable in bankruptcy. We protect fraud victims by
amending the bankruptcy code to make judgments and settlements
based upon security law violations nondischargeable. Corporate
leaders should not be allowed to take the money, run, file
bankruptcy, and keep from ever paying any securities fraud
judgment. The State security regulators strongly support this
change. You cannot have one set of rules which say if you steal
$500 from a store, you can go to jail. But if you steal $50
million from the corporate boardroom, keep the money. That
makes no sense. Everywhere I went in the State of Vermont last
week, people were saying: If I committed an act, if I stole
something, if I cash a bad check for $100, I run the risk of
going to jail.
But what do you do if you get $50 million or $100 million?
You are home free.
Criminal conduct deserves criminal penalties. Corporate
CEOs who rob their company, who rob the pension funds of their
employees, who rob the trust of the American people, are
criminals. They ought to go to jail.
The steel bars, maybe that will give a conscience to some
of these people like Kenneth Lay and others who obviously do
not have one. This gives prosecutors, the investigators, and
victims the tools to hold corporate wrongdoers accountable.
The people who are involved in such massive criminal
activity ought to pay. The American people ought to know they
will have to pay. If they don't, there will be a whole lot more
fraud.
I ask unanimous consent to have a number of letters printed
in the Record.
There being no objection, the letters were ordered to be
printed in the Record, as follows:
Taxpayers Against Fraud,
Washington, DC.
Government Accountability Project,
Washington, DC, July 5, 2002.
Dear Senator: The Government Accountability Project (GAP) and the
Taxpayers Against Fraud (TAF) reaffirm our support for the Leahy
Corporate and Criminal Fraud Accountability amendment to S. 2673, the
Public Company Accounting Reform and Investor Protection Act of 2002.
Initially introduced as S. 2010, the Corporate and Criminal Fraud
Accountability Act, was unanimously reported by the Senate Judiciary
Committee on May 6, 2002. This amendment is a landmark proposal. It
promises to make whistleblower protection the rule rather than the
exception for those challenging betrayals of corporate fiduciary duty
enforced by the Securities and Exchange Commission. It would be the
single most effective measure to prevent recurrences of the Enron and
Worldcom debacles as well as similar threats to the Nation's financial
markets, shareholders and pension holders.
GAP is a nonprofit, nonpartisan public interest law firm dedicate
since 1976 to helping whistleblowers, those employees who exercise
freedom of speech to bear witness against betrayals of public trust
that they discover on the job. GAP has led the campaign for passage of
nearly all Federal whistleblower laws over the last two decades. TAF is
a nonprofit, nonpartisan public interest organization dedicated to
combating fraud against the Federal Government through promotion and
use of the Federal False Claims Act and its qui tam whistleblower
provisions. TAF supports effective anti-fraud legislation at the
Federal and state level.
The Leahy amendment to S. 2673 is outstanding good government
legislation. It closes the loopholes that have meant whistleblowers
proceed at their own risk when warning Congress, shareholders, and
their own management's Board Audit Committees of financial misconduct
threatening the health of their own company, investor confidence and
the Nation's economy. We hope we can count on your support to add this
state of the art whistleblower protection system in S. 2673. If you
have any questions regarding the Leahy amendment, please call Tom
Devine at GAP (202-408-0034 ext. 124), or Doug Hartnett (ext. 136).
Sincerely,
Jim Moorman,
Executive Director, TAF.
Tom Devine,
Legal Director, GAP.
----------
North American Securities Administrators Associations,
Inc.,
Washington, DC, July 5, 2002.
Hon. Patrick Leahy,
Washington, DC.
Dear Senator Leahy: NASAA supports S. 2673, The Public Company
Accounting Reform and Investor Protection Act of 2002, and opposes
efforts to weaken its provisions. State securities regulators believe
there is an immediate need to restore investor confidence in our
securities markets.
Passage of the Leahy amendment, which incorporates S. 2010, the
Corporate and Criminal Fraud and Accountability Act of 2002, into the
accounting reform bill would send a strong deterrent message to
potential securities violators by providing prosecutors with new and
better tools to punish those who defraud our Nation's investors. Our
focus is on Section 4, which would prevent the discharge of certain
debts in bankruptcy proceedings. At the present time, the bankruptcy
code enables defendants who are guilty of fraud and other securities
violations to thwart enforcement of the judgments and other awards that
are issued in these cases.
We support passage of the Leahy amendment because it strengthens
the ability of regulators and individual investors to prevent the
discharge of certain debts and hold defendants financially responsible
for violations of securities laws. This issue is of great interest to
State securities regulators, and we hope you'll support it on the
Senate floor.
In addition, State securities regulators enclose Title V of S.
2673--Analyst Conflicts of Interest--in its current form and strongly
oppose any amendment to this title that would reduce our ability to
investigate wrongdoing and take appropriate enforcement actions against
securities analysts. An amendment drafted by Morgan Stanley was
circulated that, we believe, would have prohibited State securities
regulators from imposing remedies upon firms that committed fraud, if
it involved securities analysts and perhaps even broker-dealers that
deal with individual investors. Clearly this approach is ill-advised,
especially in today's climate. What message would be sent to Main
Street investors if the States' investigative and enforcement authority
were weakened? (Additional information on this proposal was delivered
to your office last week.)
Please vote for passage of S. 2673, for the Leahy amendment, and
against any amendments to curtail State securities enforcement actions.
Sincerely,
Joseph P. Borg,
NASAA President, Alabama Securities Director.
Christine A. Bruenn,
NASAA President-elect, Maine Securities Administrator.
----------
American Federation of Labor and
Congress of Industrial Organization,
Washington, DC, April 17, 2002.
Hon. Patrick Leahy,
Senate Judiciary Committee, Washington, DC.
Legislative Alert!
Dear Senator Leahy: The sudden and spectacular collapse of Enron
has jeopardized the retirement security of millions of hardworking
Americans and exposed systemic failures of our securities laws. If we
are to prevent future Enrons and restore the credibility of America's
capital markets, aggressive reform is required. This week the Judiciary
Committee will markup S. 2010, the Corporate and Criminal Fraud
Accountability Act of 2002, which is an important part of this effort
and deserves your support.
The measures embodied in S. 2010 will help protect working families
and their retirement funds from future Enrons by strengthening the
penalties for securities and accounting fraud, and destruction of audit
papers. The bill provides strong civil and criminal penalties for
conduct such as document shredding by auditors and conspiracies to
defraud investors; and bars those who commit securities fraud from
using the bankruptcy system to avoid compensating the victims of such
fraud. It also lengthens the statute of limitations for civil lawsuits
by the victims of securities fraud, making it more difficult for those
who commit these crimes to escape having to compensate their victims.
S. 2010 is an important part of the comprehensive reforms Congress
needs to enact in response to the conflicts in the capital markets
exposed by the collapse of Enron. The AFL-CIO urges you to support S.
2010 at this week's Judiciary Committee markup.
Sincerely,
William Samuel
Director, Department of Legislation.
----------
Consumers Union,
Washington, DC.
Re Support for S. 2010, the Corporate and Criminal Fraud Accountability
Act of 2002
Consumer Federation of America,
Washington, DC, April 16, 2002.
Dear Senator: Consumers Union and the Consumer Federation of
America urge your support for S. 2010, the Corporate and Criminal Fraud
Accountability Act of 2002, sponsored by Senator Patrick Leahy, when it
comes before the Judiciary Committee for markup on Thursday. This
proposal adds important provisions to the civil and criminal laws,
which will both, deter and when necessary, punish securities fraud.
enhancing enforcement and sanctions for securities fraud
S. 2010 takes the following important steps to strengthen
enforcement and penalties for securities fraud:
It creates a new felony for the act of defrauding shareholders of
publicly traded companies.
It creates a new felony for destruction of evidence or creation of
evidence with intent to obstruct a Federal agency or criminal
investigation.
It provides whistleblower protection to employees of publicly
traded companies when they act lawfully to disclose information about
fraudulent activities within their company.
It enhances the ability of State attorneys general and the SEC to
use civil RICO to enforce existing law; currently only the U.S.
Attorney General has such authority currently under RICO.
adopting a realistic statute of limitations
S. 2010 also increases the ability of defrauded investors to
recover their losses by lengthening the statute of limitations. The
bill would set the statute of limitations to the earlier of 5 years
after the date of the fraud or 3 years after the fraud was discovered.
The current statute of limitations, the result of a 5-4 vote in a
1991 Supreme Court decision, sets up an unrealistically short timetable
for bringing private suits and needs to be corrected. Former President
Bush's SEC Chairman Richard Breeden, former President Clinton's SEC
Chairman Arthur Levitt, and State securities regulators have all
supported an extension of the statute of limitations.
Suits by defrauded investors have long been recognized by
securities regulators, including former SEC Chairman Levitt, as an
important deterrent against fraud. Moreover, securities fraud is often
well-concealed and not readily apparent to investors until, in some
cases, years after the fraud has been committed. As Chairman Levitt
testified in 1995 before the Senate Banking Committee, ``Extending the
statute of limitations is warranted because many securities frauds are
inherently complex, and the law should not reward the perpetrator of a
fraud who successfully conceals its existence for more than 3 years.''
Justices O'Connor and Kennedy, in their vigorous dissent in the
1991 Supreme Court case, also supported a longer statute of
limitations. Justice Kennedy wrote, ``The most extensive and corrupt
schemes may not be discovered within the time allowed for bringing an
express cause of action under the 1934 Act. Ponzi schemes, for example,
can maintain the illusion of a profit-making enterprise for years, and
sophisticated investors may not be able to discover the fraud until
long after its perpetration . . . By adoption of a 3 year period of
response, the Court makes a 10(b) action all but a dead letter for many
injured investors who by no conceivable standard of fairness or
practicality can be expected to file suit within 3 years after the
violation occurred. In so doing, the Court also turns its back on the
almost uniform rule rejecting short periods of response for fraud-based
actions.''
Indeed, some States' pension funds may have to forego claims
against Enron for securities fraud that occurred in the late 1990s
because of this short statute of limitations. Washington State's
Attorney General discussed this problem when she testified before your
Committee in February of this year. ``In fact, for Washington State,
our claim in the [Enron] case is for approximately $50 million, when in
fact our losses are in excess of $100 million. But because of the
statute of limitations, we're not able to make that claim.''
(underlining added).
The current statute of limitations rewards those who are able to
conceal their fraud for a relatively short time with immunity from
private liability. It also includes a limit of 1 year from the time of
discovery, which encourages a rush to the courthouse.
The criminal conduct surrounding the collapse of Enron, and the
fact that many claims for fraud will be time-barred by the current
short statute of limitations, have drawn attention to the need for
reform. S. 2010 includes important investor pro-
tection measures. We urge your support for this bill in the Judiciary
Committee April 18.
Sincerely,
Sally Greenberg,
Senior Counsel.
Travis Plunkett,
Legislative Director.
----------
U.S. Public Interest Research Group,
Washington, DC, April 17, 2002.
No More Enrons--Support S. 2010, the Corporate and Criminal Fraud
Accountability Act of 2002
Dear Member of the Senate Judiciary Committee: We are writing on
behalf of the members of State Public Interest Research Groups to urge
your strong support for S. 2010, the Corporate and Criminal Fraud
Accountability Act of 2002, sponsored by Senator Patrick Leahy, when it
comes before the Judiciary Committee for markup on Tuesday. This
proposal adds important provisions to the civil and criminal law to
both deter and, when necessary, punish securities fraud. Please oppose
weakening amendments.
S. 2010 takes the following important steps to strengthen
enforcement and penalties for securities fraud:
It creates a new felony for the act of defrauding shareholders of
publicly traded companies.
It creates a new felony for destruction of evidence or creation of
evidence with intent to obstruct a Federal agency or criminal
investigation.
It provides whistleblower protection to employees of publicly
traded companies when they act lawfully to disclose information about
fraudulent activities within their company.
It enhances the ability of State attorneys general and the SEC to
use civil RICO to enforce existing law; currently only the U.S.
Attorney General has such authority currently under RICO.
Importantly, S. 2010 also increases the ability of defrauded
investors to recover their losses by lengthening the statute of
limitations. The bill would reasonably and sensibly set the statute of
limitations to the earlier of 5 years after the date the fraud occurred
or 3 years after the fraud was discovered. A securities law violation
is often a complex, multi-year enterprise. Indeed, Enron's recent
accounting restatements went back 5 years. Under the fraudster-friendly
current law, some state pension fund claims against Enron may be time-
barred.
S. 2010 includes numerous important investor protection measures to
assist whistleblowers, fraud victims, and law enforcement agencies. We
urge your strong support for this bill to help restore investor
confidence in the Judiciary Committee April 18. Please oppose weakening
amendments. For more information about the full State PIRG platform to
protect employees, investors and taxpayers from future Enron/Andersen
debacles, please visit http://www.enronwatchdog.org. Please contact me
with questions at either 202-546-9707x314 or [email protected].
Sincerely,
Edmund Mierzwinski,
Consumer Program Director.
----------
National Whistleblower Center,
Washington, DC, April 17, 2002.
Hon. Maria Cantwell,
Senate Judiciary Committee, Washington, DC.
Dear Senator Cantwell: The National Whistleblower Center strongly
supports S. 2010, the Corporate and Criminal Fraud Accountability Act
of 2002. This law would protect employees who disclose Enron-related
fraud to the appropriate authorities.
One of the most notorious loopholes in current whistleblower
protection law exists under the securities laws, in which employees who
report fraud against stockholders have no protection under Federal law.
It is truly tragic that employees who are wrongfully discharged merely
for reporting violations of law, which may threaten the integrity of
pension funds or education-based savings accounts, have no Federal
protection.
This point was made abundantly clear by the recently released
internal memorandum from attorneys for Enron. According to Enron's own
counsel, employees who were blowing the whistle on Enron's misconduct
were not protected under Federal law, and could be subject to
termination. Unfortunately, the Enron attorney was correct.
It is imperative that the next time a company like Enron seeks
advice from counsel as to whether they can fire an employee, like
Sharon Watkins (who merely disclosed potential fraud on shareholders),
the answer must be a resounding ``no.'' That can only happen if the
Corporate and Criminal Fraud Accountability Act is enacted into law.
Respectfully submitted,
Kris J. Kolesnik,
Executive Director.
----------
National Association of Attorneys General,
Washington, DC, July 3, 2002.
Dear Senator: It has come to my attention that the substance of S.
2010, the Corporation and Criminal Fraud Accountability Act of 2002,
will be offered as an amendment to S. 2673, the Public Company
Accounting Reform and Investor Protection Act of 2002, as early as next
week.
I have attached a letter to Senator Leahy from seven Attorneys
General written last April in support of the substance of S. 2010, in
order to make these views known as you consider this legislation.
If you have any questions or concerns, please feel free to call
Blair Tinkle, NAAG's Legislative Director at 202-326-6258.
Sincerely,
Lynne Ross,
Executive Director.
----------
National Association of Attorneys General,
Washington, DC, April 17, 2002.
Hon. Patrick Leahy,
Chairman, Senate Judiciary Committee, U.S. Senate, Washington, DC.
Dear Chairman Leahy: We would like to take this opportunity to
express our support for your bill, S. 2010, the Corporate and Criminal
Fraud Accountability Act of 2002, which is pending before the Senate.
As you know, the proposal would allow state Attorney's General to
seek to enjoin racketeering activities under the Federal RICO statute.
Such added authority would enhance the ability of Attorneys General to
protect their citizens from unlawful activities by organizations both
within and outside the borders of our individual states.
In addition, to restore accountability, S. 2010 provides
prosecutors new and better tools to effectively prosecute and punish
criminals who defraud investors by:
Creating a new, 10-year felony specifically aimed at securities
fraud.
Enhancing fraud and obstruction of justice statutes where evidence
is destroyed and in fraud cases, where there are many victims or where
any victim is financially devastated.
Creating two new document destruction felonies establishing a new
felony shredding crime and requiring the preservation of audit
documents for 5 years.
Creating new protections for corporate whistleblowers.
Finally, the bill protects victims' rights by:
Protecting securities fraud victims from discharge of their debts
in bankruptcy.
Extending the statute of limitations in securities fraud cases.
We appreciate your efforts to enact this important legislation.
Please feel free to contact us if we can provide further assistance in
this effort.
Sincerely,
Carla J. Stovall, Attorney General of Kansas, President of NAAG;
Hardyress, Attorney General of Oregon, Chairman, Enron
Bankruptcy Working Group; Christine Gregsire, Attorney
General of Washington; William H. Sorrell, Attorney General
of Vermont; Ms. Edmonds, Attorney General of Oklahoma,
President-Elect of NAAG; Thurbert E. Baker, Attorney
General of Georgia; Betty D. Montgomery, Attorney General
of Ohio.
Mr. Leahy. I appreciate the distinguished majority leader
introducing this amendment and yielding to me.
I yield the floor.
The Presiding Officer. The Senator from Georgia.
Mr. Miller. I was going to send an amendment to the desk
but I understand there is one pending. I ask unanimous consent
I have up to 8 minutes to discuss this amendment now, which I
will send later.
Mr. McConnell. Reserving the right to object, and I
probably will not, I hoped for an opportunity to briefly
explain the second-degree amendment that is pending at the
desk. If the Senator thinks it might be helpful just to
determine the order of discussion, perhaps it is more
appropriate to discuss the amendment that is pending over one
that might have been pending.
Mr. Miller. The Senator from Kentucky is correct. I would
like to get in the queue somewhere along the line.
Mr. Reid. I ask the question of the Senator from Kentucky,
How long does the Senator from Kentucky wish to speak?
Mr. McConnell. I will be happy to wrap up in 5 or 6
minutes. I want to summarize what the amendment is about.
Mr. Sarbanes. Madam President, I ask unanimous consent the
Senator from Kentucky be recognized for 5 minutes to speak to
the second-degree amendment that has been offered, that is
pending, and that be followed by the Senator from Georgia to
speak for 8 minutes.
Mr. Murkowski. Madam President, I wonder if I may be
recognized after the sequence that has been discussed for about
1 minute.
Mr. Reid. I object.
The Presiding Officer. Is there an objection to the
original request of the Senator from Maryland?
Mr. Reid. I do not object to the original 13 minutes.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Kentucky will proceed.
Mr. McConnell. I thank my friend from Georgia. I will
briefly discuss the second-degree amendment. I expect to vote
for the underlying bill, but we ought to, in the name of
equity, apply the same principles in the underlying bill we are
seeking to apply to corporations to labor unions.
The amendment I sent to the desk requires union financial
statements to be audited by an independent accountant using
procedures that mirror those of public companies under Federal
securities laws. It imposes civil penalties for violations of
these new
auditing requirements that mirror those imposed on the Security
Exchange Act of 1934. Third, it requires that the Union
President and Secretary-Treasurer certify the accuracy of
financial reports, mirroring a similar requirement for CEOs and
CFOs in the Sarbanes bill.
We are debating how to better oversee and enforce the audit
requirements for large corporations that were first established
under the Securities Act of 1933. It may shock many to learn
that labor unions are not even required to have independent
audits of the financial statements they file with the
Department of Labor--or should I say that they are required to
file. Many unions apparently thumb their nose at the
requirement. A study by the Office of Labor Management
Standards found that 34 percent of all unions filed late
financial reports or no reports at all.
If we are serious about protecting the investing public
from the financial fraud of corporations and accountants, we
should be equally serious about protecting the day-to-day
American worker--the plumbers, the machinists, the
longshoremen, and the steelworkers--from the financial fraud of
union officials.
One prominent union official recently said that:
Over the coming months you will no doubt hear more about
the Enron scandal and the many thousands of people who have
lost their pensions because of corporate greed.
I agree with that. What we do not hear enough of are the
stories of union greed. It is only fair to share some of them
today. I have a rather long list I will discuss later in the
debate, but let me cover a few of them in my allotted time. We
have heard of Arthur Andersen, but has anyone heard of Thomas
Havey? That is the accounting firm where a partner confessed to
helping a bookkeeper conceal the embezzlement of hundreds of
thousands of dollars from a worker training fund of the
International Association of Ironworkers. And in an eerie
parallel to the Enron scandal, the Havey accountants revealed
startling information--10 years ago, the then General Counsel
for the Ironworkers Union said that if the accounting firm
refused to assist in the union scheme to conceal financial
mismanagement, the accounting firm should be fired. Sadly, the
accounting firm complied.
We have all heard of Global Crossing, but has anyone heard
of ULLICO? That is the multibillion-dollar insurance company
owned primarily by unions and their members' pension funds that
invested $7.6 million in Global Crossing. Apparently, ULLICO
directors received a sweetheart investment deal that allowed
them to make millions on the sale of stock. The union pension
funds, however, dried up with Global Crossing's demise.
There is much more. An accountant within the National
Association of Letter Carriers embezzled more than $3.2 million
from union funds over an 8 year period to buy 8 cars, 2 boats,
3 jet skis, a riding mower, and 105 collectable dolls. A former
official of the Laborers' Union District Council in Oregon,
Idaho, and Wyoming is in jail for accepting hundreds of
thousands of dollars in kickbacks for directing money into a
ponzi-like investment scheme that defrauded Oregon labor unions
of $355 million.
I have a number of additional examples that I wish to get
to later, but I do want to say in summary, again, what my
amendment is about, just so everyone will understand as we move
subsequently to a vote. It first requires union financial
statements to be audited by an independent accountant using
procedures that mirror those of public companies under the
Federal securities laws; second, it imposes civil penalties for
violations of these new auditing requirements that mirror those
imposed under the Securities Exchange Act of 1934; and, third
and finally, it requires that the Union President and
Secretary-Treasurer certify the accuracy of their financial
reports, which mirrors a similar requirement for CEOs and CFOs
in the Sarbanes bill.
I yield the floor.
Mr. Sarbanes. Will the Senator yield for a question?
Mr. McConnell. Yes.
Mr. Sarbanes. Of course, there is a special statutory
arrangement that governs labor organizations. I take it this
proposal--has this come to us from the Department of Labor?
Mr. McConnell. I say to the Senator from Maryland, it did
not come from the Department of Labor. It came from my office.
This is something we have been looking at over the last week or
10 days, thinking that, since the very worthwhile requirements
of corporations and accounting firms, under the bill of the
Senator from Maryland, make sense if we are looking to protect
investors, we should also protect union members from similar
kinds of casual exploitation.
Mr. Sarbanes. But under the Labor Management Reporting and
Disclosure Act, the Department has certain authorities it can
invoke in dealing with the kind of problems the Senator has
outlined. At least that is my understanding under the current
state of the law. Is that correct?
Mr. McConnell. I don't know what the position of the
Department of Labor is on the amendment I am offering. But it
is my belief that if the amendment were not necessary, we would
not be offering it here today. This is something I am sure we
are going to discuss further as we move along.
Mr. Sarbanes. I am sure the Senator would be able to find
out from the Secretary.
Mr. McConnell. I expect I could find out from the Secretary
of Labor, but I chose not to do that.
Mr. Gramm. I don't know whether you could or not.
Mr. McConnell. She has her job and I have mine.
AMENDMENT NO. 4176
The Presiding Officer. The Senator from Georgia is
recognized under the previous order.
Mr. Miller. Madam President, I ask unanimous consent the
pending amendment be temporarily set aside so I be allowed to
offer an amendment.
The Presiding Officer. Is there objection to the request?
Without objection, it is so ordered.
The clerk will report.
The bill clerk read as follows:
The Senator from Georgia [Mr. Miller] proposes an amendment
numbered 4176.
Mr. Miller. Madam President, I ask unanimous consent the
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To amend the Internal Revenue Code of 1986 to require the
signing of corporate tax returns by the chief executive officer of
the corporation)
At the end add the following new title:
TITLE VIII--CORPORATE TAX RETURNS
SEC. 801. SIGNING OF CORPORATE TAX RETURNS BY CHIEF EXECUTIVE OFFICER.
(a) In General.--Section 6062 of the Internal Revenue Code
of 1986 (relating to signing of corporation returns) is amended
by striking the first sentence and inserting the following new
sentence: ``The return of a corporation with respect to income
shall be signed by the chief executive officer of such
corporation.''.
(b) Executive Date.--The amendment made by this section
shall apply to returns filed after the date of the enactment of
this Act.
Mr. Gramm. Will the Senator yield?
There is a little bit of confusion. I want to be sure he is
setting aside the entire amendment, the Leahy and the McConnell
amendment, and he is offering a first-degree amendment? That is
what I understood when I talked to the Senator and to what I
had agreed.
The Presiding Officer. That is the Chair's understanding.
Mr. Sarbanes. No. What was the request? I thought the
unanimous consent request was to set aside the McConnell
amendment and offer the Miller amendment to the Leahy
amendment.
Mr. Gramm. It was the pending amendment.
Madam President, I wanted to be sure that we set aside both
Leahy and McConnell. This is a new issue, a first-degree
amendment. That was the basis that I understood it on and on
the basis of that I had no objection to it.
The Presiding Officer. The Chair understands the Senator
from Georgia was going to offer an amendment that would be
considered at a different time, an independent first-degree
amendment, to be spoken about now and considered at a later
time. Is that the understanding of the Senator from Vermont?
Mr. Leahy. Reserving the right to object, I want to make
sure I fully understand. What is the request?
The Presiding Officer. There is no request pending.
Mr. Leahy. I am sorry. I thought there was a request to lay
aside my amendment.
The Presiding Officer. That request has been granted.
Mr. Leahy. But then my--what is the parliamentary situation
with my amendment? Maybe that is the best way to ask it.
The Presiding Officer. The Senator from Georgia obtained
the consent to set aside the pending amendment in order to
offer a first-degree amendment.
Mr. Leahy. I understand.
Mr. Sarbanes. Would the call for the regular order at the
completion of the statement of the Senator from Georgia, or
disposition of his amendment, bring back before the body the
Leahy amendment?
The Presiding Officer. Yes, it would.
Mr. Leahy. The Senator from Georgia spoke to me earlier. I
do not want in any way to interfere with that. I do want to
accommodate him. I just wanted to make sure, also for my own
schedule, where we stood.
I thank the distinguished Presiding Officer and I thank the
distinguished Chairman of the Committee and of course I thank
the distinguished Senator from Georgia.
Mr. Miller. I thank the Senator from Vermont and the
Senator from Texas.
Madam President, there is a good old boy from down in
Georgia named Jerry Reed, who went to Nashville several years
ago and made it big as a tremendous guitar picker, singer, and
songwriter. He had a big hit a while back. Maybe some of you
remember it. It was called ``She Got the Gold Mine and I Got
the Shaft.''
I thought about that song of Jerry Reed's as I watched what
has happened lately on the corporate scene. The big shots of
Enron and WorldCom and others, they got the gold mine while the
poor employees and the innocent stockholders got the shaft.
If a picture is worth a thousand words, take a look at this
gold mine. It was built partly on the backs of those Georgia
schoolteachers who, each month, put their hard-earned money
into the Georgia teachers' retirement fund. The fund in Georgia
lost $78 million from Enron and another $6 million from
WorldCom. Think how many monthly contributions by how many
struggling teachers that represents. And think about those
other thousands of employees who have lost their life savings,
not even to mention the thousands of employees who have lost
their jobs--at least 450 jobs were wiped out in Georgia alone
so far.
Yes, a few big shots got the gold mine and a lot of little
folks got the shaft.
I am as probusiness as anyone in this body. I yield to no
officeholder when it comes to supporting business issues. As
Governor and Senator, I have worked to give tax cuts and tax
incentives and pay for the training of their employees--all to
provide a probusiness environment in which the entrepreneurial
spirit can thrive and prosper and create jobs. But, folks,
there comes a time when so much greed and so many lies become
so bad--even if it is only by a few--that something meaningful
has to be done. We must act quickly to protect the investor,
provide some security for the worker, and restore confidence in
the marketplace because, make no mistake about it, today we
have a crisis in the integrity of corporate America.
That is why I have worked with Senator Sarbanes in
perfecting his bill, and I strongly support it. I am pleased
that it is before us this week. I also commend President Bush
for making the strong recommendations he is going to be making
in New York.
But I think we need to do at least one other thing, so I
have a simple amendment. It is only two short paragraphs in
length, but it goes to the very essence of fairness. It simply
says that, when the taxman cometh, we all--workers and high-
dollar bosses alike--must face him just alike, without any go-
betweens or liability firewalls or corporate veils.
This is how it would work. There is a standard tax form
called 1040. I know there are more sophisticated ones for big
business, but the principle I am getting at is the same. This
is what it says:
Under penalties of perjury, I declare that I have examined
this return and accompanying schedules and statements, and to
the best of my knowledge and belief they are true, correct and
complete.
And then it is signed here by Joe Sixpack. Joe Sixpack of
America signs those kinds of forms. There were more than 14
million of those forms filed in April. If Joe Sixpack is
required to sign this oath for his family, why shouldn't
Josepheus Chardonnay be required to sign that same oath for his
corporation?
So my little amendment simply requires that henceforth the
chief executive officer of all publicly owned and publicly
traded corporations must sign the corporation's annual Federal
tax return.
Currently, there is an IRS rule that corporations can
designate any corporate officer to sign their tax return. That
will not get it. Let's be specific. Let's put it into law: The
CEO is the one who is to sign the tax return and must be
accountable for it.
Where I come from it is expected that those being paid ``to
mind the store'' should at least know whether the store is
losing or making money.
Harry Truman had a sign on his desk in the Oval Office that
said, ``The Buck Stops Here.'' For Truman, it meant that he was
accountable.
He took the blame. He suffered the consequences when things
went bad.
For some of today's CEOs, it is just the opposite. They
want no accountability. They shift the blame to others. They
hide behind that corporate veil. And, it seems, they rarely if
ever pay the consequences.
Their former workers cancel plans for their children to go
to college while they sip from champagne flutes in their
mansions in Boca and Aspen.
For these CEOs, Truman's famous sign has changed from ``The
Buck Stops Here'' to ``The Bucks Go Here.''
Our system of collecting taxes is based upon the premise
that individual taxpayers will take all steps necessary to
ensure that the financial information in the tax return is
accurate.
If Joe Sixpack fudges the numbers, he doesn't get a pass
from paying penalties or going to jail. I find it outrageous
that the same is not a part of the mind set for those in the
corporate culture.
If any CEO is not willing to sign the company tax return--
if they are not willing to take steps to satisfy themselves
that their corporation is accurately reporting financial
information--then those CEOs have no right to the prestige and
respect that goes with the position they hold.
What is good for the goose is good for the gander. So I
urge my colleagues to simply hold our CEOs to the same standard
that we now impose upon our average wage earners.
Treat them the same, ``Treat 'em'' the same. That is the
American way. That is what the voters out there want us to do
and that is what they expect us to do. ``Treat 'em'' the same.
And you can take that back home this summer and explain it.
Some of these other reforms, I fear, will be more difficult to
explain.
Treat 'em the same.
I yield the floor.
The Presiding Officer. The Senator from Alaska.
VOLUME 148, TUESDAY, JULY 9, 2002, NUMBER 91,
PAGES [S6491-S6496]
Public Company Accounting Reform and Investor Protection Act of 2002--
Continued
The Presiding Officer. The clerk will report the pending
business.
The assistant legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
Mr. Sarbanes. What is now pending before the Senate?
The Presiding Officer. The Miller amendment, No. 4176.
Mr. Sarbanes. I ask for the regular order.
Mr. Gramm. May we have order, Madam President.
The Presiding Officer. Members will take their
conversations off the floor of the Senate.
Mr. Sarbanes. There is a procedural question following the
Miller amendment. We have been discussing that. We may be able
to resolve it, but we need to do that overnight.
I call for the regular order which, as I understand it,
would take us back to the Leahy amendment, with the McConnell
amendment pending to Leahy?
The Presiding Officer. The Senator is correct.
Mr. Sarbanes. I call for the regular order.
amendment no. 4175
The Presiding Officer. The amendment is now pending. The
Senator from Massachusetts.
Mr. Leahy. Will the Senator yield for a question? We are
on, am I correct, the Leahy amendment which was pending to it
the McConnell amendment?
The Presiding Officer. That is correct.
Mr. Leahy. I thank the Senator from Massachusetts.
The Presiding Officer. The Senator from Massachusetts.
Mr. Kennedy. As I understand it, the matter before the
Senate now is the McConnell amendment; am I correct?
The Presiding Officer. That is correct.
Mr. Kennedy. Madam President, this amendment of the Senator
from Kentucky is what we call around here and everywhere a
poison pill amendment intended to prevent serious action on
corporate accountability. Just as a few Republicans sought to
stop campaign finance reform with similar amendments, now they
are trying to block action to make executives accountable. The
lack of corporate responsibility in the United States has
undermined the credibility of our markets and devastated the
retirement savings of millions of Americans.
This widespread abuse of corporate power has jeopardized
our Nation's economic recovery and hurt the legitimacy of our
fundamental institutions. We must not call for the
obstructionism of Senate Republicans. Instead, we must heed the
call of the American people and insist on bold action this week
to ensure that corporations are made accountable and that
workers and investors are protected against these abuses.
The Leahy amendment, which my Republican colleagues seek to
block, was unanimously approved by the Judiciary Committee in
April. It includes critical measures to strengthen the ability
of Federal prosecutors to detect, prevent, and prosecute
corporate fraud. It makes acts of document shredding and
corporate fraud punishable by 10 years in prison. It lengthens
the statute of limitations for victims of security fraud.
Finally, the bill directs the U.S. Sentencing Commission to
review criminal penalties for obstruction of justice and
corporate fraud.
Today, Americans are outraged by the endless corporate
scandals, and Congress must act to hold corporate crooks fully
accountable and to restore confidence in our markets.
Defeating the ``poison pill'' amendment offered by Senator
McConnell is the first step toward that goal. Senator
McConnell's amendment would put America's workers in double
jeopardy. The amendment puts new requirements on workers'
representatives, despite the fact that these officials
currently face disclosure and reporting requirements which
surpass those of public companies.
This amendment would subject small local unions with annual
receipts of only $200,000, which are already subject to labor
reporting requirements, to the same SEC reporting requirements
as large public companies which typically have resources in the
millions.
The reality is that union finances are already more heavily
regulated than those of most public companies. The Department
of Labor under current law can investigate and audit union
financial records at any time, including conducting random
audits. There is no comparable requirement for public companies
today.
There are many other examples of current labor laws
requiring much stricter disclosure by unions than the SEC
requires of publicly traded companies. Unions have to list
every employee who receives more than $10,000. But the SEC does
not require this of companies. Unions have to provide more
detailed information regarding their loans than do public
companies under SEC requirements. Unions have to provide more
detailed lists of their investment today than do public
companies under the SEC requirements.
The list goes on and on and on.
For over 40 years under labor laws, union officials have
been required to certify the annual financial reporting of
their unions under penalty of perjury.
The McConnell amendment certification requirement ignores
the safeguards that already exist under our labor laws. Union
officials are already subject to criminal penalties, which
include jail time for willfully failing to file reports, or
knowingly making false statements, or willfully concealing
documents. Union officials who violate these provisions are
subject to jail time as well as substantial fines.
It is misguided to apply SEC requirements and penalties
which were designed for publicly traded companies to not-for-
profit groups such as unions. Even the Department of Labor
recognizes this.
Don Todd, Deputy Assistant Secretary in charge of the
Department's Union Reporting Office, wrote last August
regarding SEC requirements that the Department of Labor does
not have the expertise to provide more than a very general
overview of this complex area of law. Why in the world would we
want to force the labor unions to comply with SEC filing
requirements when the relevant oversight agency doesn't
understand this area of the law?
The bottom line here is that the Republicans fear corporate
responsibility. They know the American people are outraged by
the endless series of corporate scandals that are hurting
workers, retirees, and our economic recovery. Rather than admit
the scope of corporate corruption and the urgency of criminal
penalties for corrupt executives proposed by Senator Leahy, the
Republicans are seeking to poison the well. If we allow this,
the American people will never forgive us for passing up this
unique opportunity to bring accountability to corporate
executives. Corporate criminals must be made to pay for their
misdeeds.
I urge my colleagues to vote against the McConnell
amendment.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, first of all, let me point out
something. Senator McConnell's amendment changes nothing in the
Leahy amendment. The adoption of Senator McConnell's amendment
does nothing to change the Leahy amendment. I understand that
Senator McConnell tomorrow is going to come over and speak at
great length on his amendment. But I don't want anyone to be
deceived as to what the amendment is about.
The amendment has nothing to do with the Leahy amendment in
terms of its adoption in any way delaying or changing the Leahy
amendment.
The Senator from Kentucky has proposed a simple proposition
that I believe is unassailable logically. That proposition is
we are going to put penalties on filing false reports by
corporations, and we are going to in the process send people to
prison for it. I support that provision. I think there are
probably 100 Members of the Senate who support that part of
Senator Leahy's amendment.
The Senator from Kentucky simply asks the question: Why
don't we require that labor unions, when they submit financial
statements once a year, have them audited by CPAs? Second, why
don't we have them sign those reports and be accountable for
their accuracy?
I am sure that people who do not want unions subjected to
transparency and to accountability are going to say: Well, this
is an effort to circumvent requirements on corporate America.
Nothing could be further from the truth. This amendment does
not strike the Leahy amendment. It simply adds a simple
provision to it that applies parallel standards to unions.
Senator Kennedy says this neglects existing law. The point
is that the existing law is not very strong. Many unions don't
even submit these reports. You could argue on the corporate
side that we already have a body of law; why are we writing new
laws? We are writing new laws because we need stronger and
better laws. We have a bipartisan consensus that we do it.
Also, Senator Kennedy says the veracity of these reports
should follow under another jurisdiction. We are talking about
accounting. We are talking about accuracy in reporting. We are
talking about transparency. We are talking about
accountability. Surely union members, in reading a report,
should have the same confidence that it is valid, that a
certified public accountant who is subject to high ethical
standards wrote the report, and that the president of the
unions certifies it, and that the president is going to be held
accountable if it doesn't meet the standards we are setting.
Let me just summarize, since we are going to debate this
amendment tomorrow, by saying:
No. 1, this amendment does not change the Leahy amendment.
If you are for the Leahy amendment, that is fine.
The question the Senator from Kentucky poses is, should
similar parallel requirements be imposed on unions that issue a
financial statement annually, and should they have to be
certified by a certified public accountant? And should the
president of the union have to sign the report as the president
of a corporation does? Should they be held liable if the report
is not accurate and if they knowingly file an inaccurate
report?
That is the question.
No. 2, it seems to me it is perfectly reasonable. You might
be for it, and you might be against it, but you can't say it
has anything to do with trying to undo the Leahy amendment.
It seems to me that if you are against it, you have to
explain why unions should not be required to meet high
standards in filing
reports.
I haven't spoken on the Leahy amendment. It is my
understanding we are going to be debating it tomorrow. I would
like to simply outline what is in the amendment that I am for
and what is in the amendment that I am against. I can do it
very briefly.
If people knowingly and willfully violate the law, I
support putting them in prison. The President has proposed
doubling the sentence. I am for that. I hope at some point the
administration will give us legislative language to implement
the changes the President proposed today. I am hopeful that on
a bipartisan basis we can adopt it on the floor of the Senate
as part of this bill.
If we do not have time to do it, I have every reason to
believe there will be bipartisan support to make those changes
and those additions, those strengthening amendments in
conference.
There is only one part of the Leahy amendment to which I
object. Unfortunately, it is a very important part of the
amendment that no one is focusing on when they are talking
about the Leahy amendment. In fact, I would move that we simply
accept the Leahy amendment except for this small but important
provision.
I remind my colleagues that in 1995, on a bipartisan basis,
we adopted the Private Securities Litigation Reform Act,
legislation that basically amended securities laws to deal with
the whole issue of predatory strike suits where one law firm
was filing 80 percent of the lawsuits against corporate America
and we had a reform of corporate liability. That bill was
adopted on a bipartisan vote. It is the only bill that we
overrode President Clinton's veto on in 8 years in office.
One of the reforms was to set statute of limitations
requirements that basically paralleled the securities acts from
the 1930s. What we said is, if you want to file a lawsuit, you
have to do it within a year of when you know there was a
violation or within 3 years of when the violation occurred.
The whole point of statute of limitations is, that beyond
some point it is very difficult to maintain records. You do not
know what happened. People's memories fade. People die. This
was part of this important reform.
The Leahy amendment effectively throws out the 1 year and
the 3 year statute of limitations and adopts a 5 year
limitation. Now, he claims it is a 2 year and 5 year, but the 2
year applies only if you can prove that the person who filed
the lawsuit knew that the violation occurred outside of the 2
years. I would assert that is virtually impossible to prove.
It is interesting, in statute of limitations, where you are
saying you have to act on a timely basis because people do not
have knowledge after periods of time expire, under this, you
have to have enough knowledge to prove that they knew, which I
think is a standard that could not possibly work. No one really
believes it could work.
So the reality is, we are striking the 1-year and the 3-
year statute of limitations in the securities litigation reform
bill, and we are substituting a 5-year statute of limitations
for it. That is a provision that I oppose. Every other part of
the Leahy amendment I support. I personally would be willing to
see it accepted by unanimous consent save that one provision in
the bill. I think it is an important provision.
But I want people to know, as we go into the debate, that
my support for the McConnell amendment has nothing to do with
the Leahy amendment; it simply has to do with having been
convinced that there is logic to the McConnell position.
If we are trying to get transparency in financial
reporting, if we are trying to hold people accountable, if we
want honest numbers, it seems to me the logical place would be
to start with Government, which we have not done. But the
second point, it seems to me, is to apply the same standard to
business and to labor. That is what McConnell has done.
Tomorrow we will have the debate on it, but I wanted to
outline what the amendment did and did not do and my position
on the Leahy amendment.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, I am prompted to enter this
debate by the comments of my colleague from Texas. You cannot
evaluate the parallelism of the McConnell amendment without
evaluating the requirements that are now imposed upon labor
unions under the Labor-Management Reporting and Disclosure Act
of 1959. The argument that this is logical is only if you drop
out of the picture or the context the fact that the unions are
now under extensive reporting requirements in the law,
requirements that significantly exceed, in many respects,
anything that is required of corporations.
Now, the Department of Labor has the authority to conduct
audits of labor unions.
Mr. Kennedy. Will the Senator yield on that point?
Mr. Sarbanes. Yes.
Mr. Kennedy. According to the statute, it can conduct those
audits randomly, as I understand. Does the Senator agree with
me that these audits can be done randomly? According to the
statute, it says right here, in section 601(a):
The Secretary shall have power when he believes it
necessary in order to determine whether any person has violated
. . . any provision of [the legislation] . . . to make an
investigation and in connection therewith. . . .
And they may enter such places to inspect such records and
accounts in question.
Does the current underlying legislation permit the SEC to
conduct random auditing of public entities?
Mr. Sarbanes. The auditing is done by the independent
public accountants.
Mr. Kennedy. The point I am making is, at the current time,
the Department of Labor can conduct an independent audit at any
particular time on any occasion, according to the Labor-
Management Reporting Act.
Beyond that, it has the provision:
Every labor organization shall file annually with the
Secretary a financial report signed by its president and
treasurer or corresponding principal officers containing the
following information. . . .
And it lists all of that information. It already exists.
Mr. Sarbanes. Will the Senator yield on that point?
Mr. Kennedy. Yes.
Mr. Sarbanes. The Senator from Kentucky says they are not
filing these reports. What are the Secretary of Labor and the
Department of Labor doing, because they have the power to make
them file their reports. In fact, they can impose penalties, as
I understand it, including not only fines but also imprisonment
for the failure of union officials to meet the requirements
under the statute.
My dear colleague from Texas says, well, look, this thing
is on all fours. This is what we are doing to the corporations.
And all the McConnell amendment does is it does it to the
unions. Now, who could be against that?
But let's look at what is already being done to the unions.
Let's look at the requirements under which they already have to
function. Let's look at the powers that the Department of Labor
and the Secretary of Labor have with respect to this matter.
Mr. Gramm. Will the Senator yield?
Mr. Sarbanes. Certainly.
Mr. Gramm. You can make the same argument the SEC has the
power to audit any company in America today. Any exchange they
are a member of has the power to audit them today. We are
saying we need better, stronger, more powerful laws. We need
better reporting. People need better information.
All the Senator from Kentucky is saying is, why don't we
apply the same thing to the reports that are filed by labor
unions.
Mr. Sarbanes. Will the Senator yield?
Mr. Gramm. Yes. You have the floor.
Mr. Sarbanes. Has the Senator examined, with any care, the
reporting requirements and the other matters that govern labor
union reporting under the Labor-Management Reporting and
Disclosure Act?
Mr. Gramm. Only to the degree that I can say that all the
arguments that are being made, saying we do not need to improve
reporting, are arguments that someone could make with regard to
corporate America. They are already subject to random audits by
the SEC. They are already subject to random audits by
exchanges. I am not making that argument because I do not
believe it.
Mr. Sarbanes. What about the requirement on unions that
they list the employees whose total of salaries and other
disbursements exceed $10,000, including position, gross salary,
allowances, and disbursements? What about that requirement that
is imposed on the unions to make that kind of disclosure? Where
is a comparable disclosure in that regard with respect to
corporations?
Mr. Gramm. Will the Senator yield?
Mr. Sarbanes. Certainly.
Mr. Gramm. I say, if the Senator wanted to offer an
amendment to impose that, he certainly could. And I will stop
asking him to yield, but let me make this point.
Mr. Sarbanes. To impose it on corporations, you support
that?
Mr. Gramm. If you offer that amendment, I would have to
read it. I probably wouldn't.
Mr. Sarbanes. All right.
Mr. Gramm. But the point I am making is, we are talking
about two things. One thing that you have to have is a CPA do
the audit, and, two, the president of the union and the
president of the company has to sign the report. They are
liable if they knowingly are misleading people. Those are the
only two things the McConnell amendment does.
I just can't see what is wrong with it and why it doesn't
make sense. Not that there is anything wrong with that part of
the Leahy amendment; I support that part of the Leahy
amendment. I just don't understand why this does violence to
organized labor. It seems to me it makes perfectly good sense.
Mr. Sarbanes. I simply say that a statutory structure has
been worked out for labor which is quite extensive and exceeds
in many respects anything that applies to corporations. You
can't make a judgment about whether you should do anything
additional to the unions until you examine carefully what is
already required from them under the existing statutory scheme.
That is not happening here.
Mr. Dodd. Will my colleague yield for a question?
Mr. Sarbanes. I yield.
Mr. Dodd. It occurs to me as well, in this bill, we are not
requiring for all businesses these requirements. These are for
businesses that have to file with the SEC.
Mr. Sarbanes. That is right, which is a limited universe.
Mr. Dodd. It is a limited universe. My point is, we are not
talking about every entity that conducts business for profit.
We excluded the overwhelming majority of businesses that are
private entities, that have no filing requirements with the
SEC. Our colleague from Wyoming felt very strongly about this
point, that we only deal with public companies, the 16,000
public companies.
Let me ask my colleague this question: Is a labor union a
for-profit business or are they a different kind of an entity?
I have always understood a labor union was not a business and
therefore to require of the labor union that which we require
of a for-profit company that is required to file with the SEC
seems to be mixing apples and oranges. There is no parallelism
here at all.
Mr. Sarbanes. The Senator is absolutely correct. The unions
ought to have reporting requirements and they ought to file.
Mr. Dodd. Correct.
Mr. Sarbanes. Those have been put into law. There are
extensive authorities in the Secretary of Labor and the
Department with respect to the unions--quite extensive
authorities, I might add.
We have established one statutory framework to control the
reporting requirements and disclosure on the part of unions,
which is a completely separate universe from what we are trying
to address in this legislation.
The Senator is absolutely right. It is in a sense apples
and oranges. You are dealing with two different universes, and
you have established two different statutory frameworks within
which to address that.
Mr. Dodd. If the Senator from Texas were interested in
creating a sense of uniformity, I could see him offering an
amendment--I wouldn't agree with it--which would require that
all businesses that are conducting their operations for profit
be subjected to an accounting standard that was equal. Again,
my friend from Wyoming would strenuously object to such an
amendment. I would as well because of the reasons that smaller
companies just could not possibly afford the costs associated
with that. But to suggest somehow that a nonprofit organization
ought to be subjected to the same rules as a for-profit public
company where shareholders and so forth are involved is
stretching logic.
I appreciate my colleague yielding.
Mr. Sarbanes. It is obvious that one of the distinctions we
sought to make in the underlying bill that is before us is that
when a company becomes public, you then have an investor
interest that has to be protected. Otherwise, manipulation
destroys investor confidence and affects the confidence in our
capital markets. That is the issue we are confronting now and
the impact it is having on the economy.
That was the universe we tried to deal with in this
legislation. We were very careful that the legislation does not
apply to most businesses in America and doesn't apply to most
accountants in America, since most of them don't audit public
companies.
Mr. Gramm. Will the Senator yield?
The Presiding Officer (Mr. Dayton). The Senator from Texas.
Mr. Gramm. I remind my colleagues that in some 40 States in
the Union, you can't work unless you are a member of a union.
If unions are not public organizations, when you have mandatory
requirements, I can't work in Maryland in an area that is
unionized without either joining the union or paying union
dues. To suggest that unions are somehow private when you have
mandatory membership I think won't hold water.
Mr. Sarbanes. If the Senator would yield, you don't have
mandatory membership. You may have a requirement that you pay a
union fee, but the union then has an obligation, if you are in
a union shop, to represent you in the collective bargaining
efforts
and with grievances, and so forth and so on. So the union has
to, in effect, provide you a service for the fact that you get
charged that fee.
Mr. Gramm. I am not saying you are not getting anything for
it. I am just saying that it is mandatory, and I don't see how
you cannot say that unions are public institutions.
Secondly, why do we require CPAs to do audits of companies?
We can't audit every company in America. We don't have enough
resources. So you try to get a system where the auditor has
some degree of responsibility for helping to enforce the
standards. I don't see why you wouldn't have CPAs required to
do the audits of unions.
I was handed this by Senator McConnell's staff. I am sorry
he had an appointment tonight, but the OLMS, which does the
compliance audits, did a high of 1,583 audits in 1984. Last
year, that was only 238. So I don't know why you wouldn't want
a union that has mandatory membership to have its reports done
by CPAs who we are holding to a high standard in this bill.
That is all I am saying.
Mr. Sarbanes. What is the explanation by the Department of
Labor for this rather stunning drop in the number of audits?
Was it from 1,500 to 200 in 1 year's time or 2 years' time?
Mr. Gramm. It is from 1984 to 2001.
I would say on that issue, if the Senator will yield, that
the President's 2003 budget asked for an additional $3.4
million for 40 full-time positions. It will be very interesting
to see if we provide the money for them to have it.
Mr. Sarbanes. That is the way to go at this problem;
otherwise, it seems to me that the Department of Labor needs to
do the job that it has been charged to do. I think that is what
those figures amply demonstrate.
I am gratified that the Administration's budget is seeking
more money in order to meet these responsibilities, but that is
where it ought to be done.
Mr. Gramm. My final point--and I appreciate the generosity
of the chairman--it seems to me the most fundamental
requirement is if you are going to make a public report and you
have mandatory membership so you are a public institution, you
ought to have a certified public accountant do that report and
sign that they have done it.
We have decided--I think it is one of the best things in
our bill; whatever bill is adopted will have it--to require the
heads of companies to sign these reports. I don't know why you
wouldn't want the head of the union to sign these reports.
Mr. Sarbanes. Would the Senator support a provision that
required all companies with annual receipts of $200,000 or more
to meet all of these auditing requirements?
Mr. Gramm. I would if the companies were companies that
people had to do business with. If we had anything equivalent
in the marketplace to a provision that said you have to buy
things from this company or you can't buy them, which in
essence we do in States that don't have right-to-work laws; we
say that you have to pay the union dues in order to work--you
don't have to join, but you have to pay the dues--I think when
you have that mandatory element, having to report publicly is
logical.
Mr. Sarbanes. They do have to report publicly. They are now
required to report publicly under the legislation that governs
reporting and disclosure. The Senator is speaking as though
there are no such requirements.
The fact of it is that there is an elaborately developed
framework. Now, the Department of Labor may not be carrying it
out fully, as the statute would require. They may be falling
short in that regard, but if that is the case, the way to
remedy the situation is to provide the resources to the
Department of Labor and call upon them to do their job.
Mr. Gramm. Mr. President, this is Mr. McConnell's
amendment, and I will let him debate it. But the whole purpose
of having CPAs, the whole purpose of having licensing and the
taking of oaths is we cannot audit every company by the
Government. I am pleased to say that nobody has proposed to
have the Government take over the auditing function. We have
proposed to strengthen the CPA process and impose higher
standards because that is really our fundamental line of
defense.
I just don't understand. It seems to me this would be a
logical amendment to take. It only says two things: When unions
file a report, it has to be done by a CPA. You have a mandatory
membership of unions in some 40 States, and they are public
institutions. Secondly, the president of the union, as the
president of the company, ought to have to verify the veracity
of the statement and be liable if he knowingly is certifying it
when he knows it is not valid. I mean you are not holding him
accountable if somebody has not told him the truth.
Senator McConnell is going to present case and verse of all
of the problems. I don't know the problems, but it seems to me
that when we are trying to improve reporting and improve
transparency and improve accountability, the simple proposal
that when unions file their annual report, as corporations do,
a CPA should prepare the report--I just cannot imagine not
requiring that.
Secondly, the president of the union ought to have to sign
the report and be accountable if he knowingly is saying
something that is not true.
Finally, the argument that there are other requirements--
well, there are more requirements on corporate America. We just
concluded there were not enough. So Senator McConnell is simply
saying while you are improving one, improve both. If I were a
member of a union, I would like having certified by a CPA a
report showing how my money was spent. I think it would give me
more confidence. I would think if the rank-and-file union
members in my State would vote on this, there would be an
overwhelming vote for it. I don't even know why we are debating
this. This is sort of a no-brainer, in my opinion. But my
opinion may not be the majority opinion.
I yield the floor.
The Presiding Officer. The Senator from Illinois is
recognized.
Mr. Durbin. Mr. President, I agree with the Senator from
Texas, this is a no-brainer amendment because I cannot quite
understand why we would be establishing a standard here for
labor unions. It reminds me of when I was raising my kids and
my wife and I had to give one of our children medicine that
they didn't want. My daughter would say: I would feel a lot
better if my brother had to take it, too. That is what we are
having here--businesses faced with corporate corruption.
Frankly, we have people on the Senate floor saying, as painful
as it is for us to make more disclosures, we would feel better
if you could also hurt the labor unions while you are at it. Is
that what this is about--to try to find a parity of pain
between business and labor? I didn't think so.
The point made by the Senator from Maryland is that labor
unions already face extraordinary reporting requirements in a
law that has been in place for 43 years--requirements not made
of many businesses. In the McConnell-Gramm amendment, it
suggests that if your labor union has receipts of $200,000 a
year, they are going to add a new burden to the labor unions--
even beyond this 43-year-old law.
I listened closely as the Senator from Maryland explained
the bill before us. He has worked closely with the Senator from
Wyoming to make sure it just applies to public corporations,
where there is public investment in stockholders and where
there is an item of public trust involved. That is
understandable.
So if I would stand before the Members here and say, if you
really believe in transparency and disclosure, you ought to
apply these requirements to every business in America, many
people would say that is an onerous and unnecessary burden; it
goes beyond the issue of public trust; now you are going after
every business, large and small. That is what the McConnell-
Gramm amendment does when it comes to labor unions. They say if
a labor union has receipts of $200,000, they have a brandnew
set of requirements. The Senator from Texas says these unions
are public institutions, they should not be treated as if they
are private. Well, they are not. They are subject to the 1959
Labor-Management Reporting and Disclosure Act.
The thing that also concerns me is that many requirements
of the labor unions under current law are far stricter than
what is required under the SEC for public corporations. I
cannot understand why we would want to increase the burden on
labor unions when the issue appears to be, at Enron, not a
union problem but a business problem. The issue at Enron had to
do with members of the board of directors being paid--according
to the Governmental Affairs recent report--$350,000 a year to
serve on the board and, frankly, missing it completely, or
didn't report it when things were being done that defrauded
stockholders, pensioners, and ultimately cost employees their
jobs.
That, I thought, was what this debate was about. Instead,
we are talking about right-to-work and labor unions. I am
sorry, but I don't think people across America believe the
problems of Enron and WorldCom and Global Crossing had anything
to do with labor unions. They didn't. They had to do with
corporate greed and corruption.
I commend Senators Sarbanes and Enzi for bringing to the
floor a bill that addresses this in a straightforward manner.
The McConnell-Gramm amendment wants to get us on another track
to discuss other things. I find this interesting. There is no
proposal that this new requirement be applied to any other
organization than labor unions. I don't hear anybody coming
before us and suggesting that the Boy Scouts of America should
be subject to SEC filing. That is a large organization. They
certainly have receipts beyond $200,000. I don't hear the
suggestion that associations and organizations like the Boy
Scouts of America, or the American Legion--I don't want to go
too far with this--or the Federalist Society should have more
transparency and disclosure and, therefore, should be subject
to SEC filings. Nobody brought that up. Is that part of the
problem in America, the lack of confidence in our economy? Not
at all.
The problem relates to corporations and businesses that
have gone too far and lied to the stockholders and the American
people. If we get off the track here and decide we are going to
go after other battles to be fought, whether labor unions or
other organizations, we have missed the point. I think this
amendment misses the point.
Let me also say that the McConnell amendment holds labor
unions to standards to which not even businesses are being
held. In 1995, I happened to be a Member of the House when the
so-called Newt Gingrich ``Contract on America'' came through.
One of the things we did there, I am afraid, turned out to be a
precursor to what we are going through today in what was known
then as securities litigation reform. We basically said we
think some of these plaintiff lawyers, class action lawyers,
have gone too far and therefore we are going to protect many
corporations from liability when it comes to securities
transactions. I was 1 of 99 in the House of Representatives who
voted against that bill and wanted to sustain President
Clinton's veto. We did not prevail. We lost in the House and in
the Senate.
It really, sadly, set the stage for where we are today.
Another watchdog was gone. Corporations such as Enron and
WorldCom didn't have to worry about somebody bringing an action
against them for securities misdeeds.
One of the things that was included in the 1995 law was to
take away liability for aiding and abetting, in terms of rights
of action, causes of action involving corporate fraud. We
exempted a whole category of people who, up until that time,
had been liable for aiding and abetting fraud. We said in the
name of securities litigation reform, we would exempt this
category of individuals.
Senator McConnell comes up with this amendment and says: We
want to reinstate that aiding and abetting liability, not for
businesses, but we want to put it on labor unions. What is
wrong with this picture? We are not imposing it on corporations
despite all the scandals we have read about; instead, we are
going to impose this new obligation on labor unions.
I am afraid, frankly, that is not a matter of public
policy, it is a matter of retribution. I also think we should
take a look at how many labor unions could be liable for this
audit that is required. There are 70 national and international
unions, but the McConnell-Gramm amendment would apply to 5,000
different unions, large and small, across America. It goes way
too far.
The amendment certification requirements are also
redundant. For more than 40 years, union officers have been
required to sign annual financial reports, under penalty of
perjury, attesting that the report's information accurately
describes the union's financial condition and operations. That
is a pretty reasonable standard for labor unions under current
law.
We are trying to impose similar standards on corporations
so when they file their accounting audit statements, someone
puts their name on it and accepts responsibility for the truth
and accuracy of the statement.
Frankly, I think Senator McConnell and Senator Gramm have
this totally upside down. The problems we face--the corporate
corruption, the lack of confidence in the economy, which even
the President spoke about today--have nothing to do with labor
unions. They really have to do with corporations that have an
obligation to the public.
I believe the vast majority of businesses and corporations
in America are run by honest people, working hard to make a
profit to provide goods, services, and jobs to make America a
better place. I do believe that. But there are some who have
violated the public trust. The underlying bill addresses that.
To bring in an argument now about imposing new obligations on
labor unions not only misses the point completely as to why we
are here this evening but misses the point about why we are
facing this crisis in America.
I stand in opposition to the McConnell-Gramm amendment, and
I hope all of my colleagues will join me in remembering why
this debate got started.
Mr. President, I yield the floor.
The Presiding Officer. The Senator from New Jersey.
Mr. Corzine. Mr. President, I, too, wish to verbalize my
opposition to this amendment that tries to draw in a completely
extraneous item which has not been debated in the context of
this bill in the 10 Committee hearings we had with regard to
putting together the Corporate Corruption and Investor
Protection Act.
It has not been involved in any of the President's
discussions about corporate abuse or fraud that we have heard
discussed. It is not in any way related to the group of
organizations with which we are attempting to deal, which are
large, publicly traded corporations, and really ignores the
fact that there is already a body of law that deals with union
organizations and union officers with regard to their
responsibility to their memberships and for their reporting
requirements.
For a whole host of reasons, I do not understand how this
even relates to the issue that is the fundamental part of the
underlying bill, and there certainly is not any evidence in the
marketplace of ideas and activities across America that would
justify pulling labor unions by their actions into the fish net
about which we are talking. This is about corporate corruption.
It is about investor protection. It is about making sure
corporate fraud is properly dealt with in the legal system, one
that puts everyone on notice that they have serious
responsibilities to certify that what is reported is real, and
if it is not real, then people are held accountable.
We are off on the wrong track, and if we end up having too
many of these diversionary tactics away from the underlying
principles of what we are trying to accomplish, which is to
have measured, reasonable, and thoughtful progress with regard
to corporate responsibility, corporate accountability,
accounting reform, and investor protection, public protection,
then I think we are going to miss the opportunity to secure our
economy, to secure the steps that are necessary for most people
to restart this engine of investment that drives our economy.
This is completely off point.
I hope my colleagues in the Senate will recognize it for
what it is and move on, turn this down, and get on with the
underlying amendment that Senator Leahy has so appropriately
brought to bear in this case.
I yield the floor.
Mr. Sarbanes. Mr. President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
VOLUME 148, WEDNESDAY, JULY 10, 2002, NUMBER 92,
PAGES [S6524-S6560]
Public Company Accounting Reform and Investor Protection Act of 2002
The Presiding Officer. Under the previous order, the Senate
will resume consideration of S. 2673, which the clerk will
report by title.
The assistant legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
Pending:
Daschle (for Leahy) amendment No. 4174, to provide for
criminal prosecution of persons who alter or destroy evidence
in certain Federal investigations or defraud investors of
publicly traded securities.
Gramm (for McConnell) amendment No. 4175 (to amendment No.
4174), to provide for certification of financial reports by
labor organizations to improve quality and transparency in
financial reporting and independent audits and accounting
services for labor organizations.
Miller amendment 4176, to amend the Internal Revenue Code
of 1986 to require the signing of corporate tax returns by the
chief executive officer of the corporation.
The Presiding Officer. The Senator from Minnesota.
Mr. Wellstone. Mr. President, I ask unanimous consent to be
added as a cosponsor of the Leahy amendment.
The Presiding Officer. Without objection, it is so ordered.
Mr. Wellstone. Mr. President, I wanted to come out here on
the floor and thank Senator Sarbanes for his leadership in
putting together a piece of legislation that deals with
structural reform of corporate governance and auditing
independence.
I also think what the Chairman didn't do is very important.
Senator Sarbanes didn't just call for a roundup of the usual
suspects but for the prosecution of the worst offenders who
deliberately have enriched themselves at the expense of the
employees, investors, and creditors, and then try to claim that
it is the end of the matter. This bill does hold bad actors
accountable for their fraud and deception. And it is probably
going to be stronger by the time it leaves the Senate Chamber.
The legislation goes much further, and it should because
the problem goes much deeper. We are faced with much more than
just the wrongdoing of individual executives. We are faced with
a crisis in confidence in America's capital markets and in
American business.
These corporate insider scandals are threatening the
economic security of families all across Minnesota, North
Dakota, New Jersey, Maryland, and all across the country. It is
heartbreaking. You have people who have taken their savings and
put them into stock. This is what was going to be their
resources to help send their
kids to college or to meet other family needs. The value of
that has eroded.
Other people have 401(k) plans and are counting on that for
retirement security. The value of that has eroded.
But I think the other big issue is really important, which
is above and beyond hundreds of billions of dollars wiped out.
That is what has happened already. You do not have investor
confidence. Without investor confidence, we will not have the
economic recovery that we need. Jobs aren't being created.
Frankly, this affects all of us.
It is this last problem on which I want to focus. I see my
colleague from New Jersey who knows much more about finance
than I do.
There is a business cycle. Some years are good and some
years are bad. Sometimes companies do well and sometimes
companies don't do well. Sometimes people invest more and
sometimes they invest less. That is the risk they take.
If the only problem was that executives at Enron were
corrupt and their business failed--all of which is true--or
WorldCom officers were fudging the books and the company really
wasn't all that profitable--which is true--and that a lot of
businesses, such as Global Crossing--what they were doing, to
be blunt, was just fake--which is true--even with all of that,
I don't think we would be out here on the floor with this
legislation.
In other words, if the story was only that a bunch of
companies did badly, lost money, went bankrupt, and a whole lot
of other people were hurt, frankly, I still don't think we
would feel this sense of urgency. But that is not the end of
the story.
The reason we need this legislation goes way beyond Enron
and WorldCom. It is not just because of Global Crossing. It is
not just because of MicroStrategy. We need this legislation,
and it ought not be cluttered with extraneous amendments, or
with delay, because the American investing public has lost its
confidence in this corporate system.
I want to emphasize this point because I think some
colleagues--some, not all of my colleagues--on the other side
of the aisle don't seem to get it. I hate to say it, but I
don't think the President or the Administration gets what this
is really about.
Again, the President yesterday basically focused on a
handful of corporate executives who deliberately misled
investors. He talked about a few bad apples. It goes much
deeper than that.
Listen to the words of some other Members of the
Administration, such as Donald Evans, Secretary of Commerce,
who 2 days ago said:
The system has not failed us, but a few have failed the
system.
The President said the same thing yesterday.
Treasury Secretary O'Neil said last year that Enron's
collapse was ``capitalism working.'' Now, if these individuals
didn't have substantial responsibility for the economy, then
their comments would be comical. I guess if we asked these guys
about Watergate, they would say it was just a burglary. But we
are dealing with more structural and deeper issues.
The crisis is a crisis in faith. Investors who thought that
if a corporation was doing badly and making poor decisions it
would show up on their financial reports now have found out
that is not the case. By the way, we should not be shocked by
this. In fact, this should be old news to us.
Almost 2 years ago, the then-Chairman of the SEC, Arthur
Levitt, approached many of us--I remember the discussion with
him in my office--and he said: ``Paul, we are on the brink of a
crisis in accounting.''
What Levitt was saying is, I want to put into effect a rule
which is basically going to say that the Andersens of this
world cannot be pulling in all these luxurious contracts and
money for their internal auditing and all the rest, because
once they get all the money, they are going to be reluctant to
bite the hand that feeds them. Secondly, they will be put in a
position of auditing their own auditing. That is a conflict of
interest, and the consequences of it could be tragic for a lot
of innocent people.
Arthur Levitt was right. Of the decisions I have made in
the Senate, one of the best decisions I ever made was 2 years
ago in writing a strong letter of support for the then-Chair of
the SEC for what he was trying to do. The auditors haven't done
a good job because they have been too close to the firms that
they were supposed to be auditing. That is what Arthur Levitt
was talking about. He fought for greater auditor independence.
His solution looked a lot like what is in this bill.
I am glad I supported his reform. That was a pretty lonely
position back then for Chairman Levitt. I am glad the Sarbanes
bill is going to get a lot more support. I believe it is going
to pass overwhelmingly.
The Sarbanes bill does a number of different things. No. 1,
at the core of this crisis is the need to have auditor
independence. That is part of what the Sarbanes bill is all
about. One hundred years ago, we had politicians and business
leaders who were willing to take on entrenched corporate
interests that were stifling competition--sound familiar--that
were bilking customers and bilking consumers and that basically
were enslaving their workers. We are dealing with similar kinds
of issues now.
We are now in a new century. This is going to be a real
interesting case study--I was a political science teacher--as
to whether or not the Senate and the Congress and this
Administration will, in fact, be there for strong reform.
The other part of this legislation which is also important
is to hold the corporate insiders accountable for their abusive
actions. That is why I am so supportive of the Leahy amendment.
If you ask people in any coffee shop in Minnesota, should
there be criminal penalties for altering the documents, such as
a 10-year felony, they will say, absolutely. If you ask people
in Minnesota, should there be whistleblower protection for
employees of public companies who actually blow the whistle on
these kinds of abuses of power and corruption, people in
Minnesota say, absolutely. If you ask, should there be criminal
penalties for securities fraud, create a new 10-year felony for
defrauding shareholders of a publicly traded company, people in
Minnesota will answer, absolutely.
The President spoke yesterday, and the problem is, he did
not call for enough resources. He has a lot of tough rhetoric,
but then when you look at what is behind the rhetoric you don't
see the resources the SEC needs for the oversight. You don't
see an oversight board that is set up, as the Sarbanes bill
does, with authority and independence. Most importantly, from
the President we don't get any proposals that insist on auditor
independence.
If we have learned one thing, it is that Chairman Levitt
was right. Two years ago, Arthur Levitt tried to warn all of
us. All of these big companies, accounting companies and all
these other people who are tied into this finance, some of the
biggest investors, frankly, in politics in the country--I know
of no other way to say it--all lobbied hard. Arthur Levitt was
clobbered by a whole bunch of people, but he was right. Now we
have a chance to do the right thing.
If you were to go back over the last decade, we have passed
too much legislation that has taken away some of the individual
investor rights, that has made it harder for us to have
Government oversight, that refused to look at these blatant
conflict of interest situations. As a result of that, we have
these corporate insider scandals.
I will say one more time, it is heartbreaking, hundreds of
billions of dollars have been lost. It is heartbreaking to see
what this has done to people's savings who invested in stock.
It is heartbreaking to see what it has done to 401(k) plans,
heartbreaking to see the ways in which families are terrified
in Minnesota and around the country. Most fundamental of all
is, we don't have investor confidence any longer.
I say to my colleague from Maryland, the best thing he did,
above and beyond this bill, is he didn't just say, let's go
after a few bad apples. He didn't just say that. That would be
the end of it. He has dealt with the underlying structural
issues so we can prevent this from happening again.
I am extremely proud to support this bill. I can think of
some zinger amendments. When I think of these guys who got the
golden parachutes, I am amazed. Look at WorldCom.
Mr. Sarbanes. Will the Senator yield for a moment?
Mr. Wellstone. I will just finish one quick point.
With WorldCom, you are looking at a situation where at the
very time--the same old story--they are getting employees to do
away with defined benefit packages and then they put their
employees in 401(k)s, cheerleading the 401(k)s, while they are
doing that, they are dumping their stock. They got out with
golden parachutes, all this money. It is outrageous what has
happened at the individual abuse level.
It is much deeper than the wrongdoing of these individual
corporate chieftains and governance. It gets to the structural
issues. That is what is so important about this bill.
Mr. Sarbanes. If the Senator will yield, I thank him for
that observation because he is absolutely on point. The bad
apples ought to be punished. There is no question about it.
They ought to be punished severely. But it is very clear, as
this issue has unfolded, that we need to make structural
changes. We need to change the system so that the so-called
gatekeepers are doing the job they are supposed to be doing.
That has not been happening. That is why we need to remove
these conflicts of interest on the part of auditors who are
also consultants for the same company, collecting huge fees.
And they are supposed to come in as outside auditors and be
very tough on the company, which at the same time is giving
them large fees for consultancy.
The Senator is absolutely on point. We have to put in place
a framework, a system which tightens up and begins to screen
out these things.
Furthermore, if you go after the bad apples, fine; but the
damage has already been done, as the Senator just observed, for
instance, WorldCom and the collapse of the whole pension
program and pension provisions.
Punishing a bad apple may have something of a deterrent
effect, but there is nothing like putting a system into place
that gives a heightened assurance that you are going to be
accountable. That is what investors are looking for.
Mr. Wellstone. One more minute. What I said earlier, the
problem with rounding up the usual suspects is quite often you
then say that is the end of the matter. That is why the
President's proposals yesterday come in for strong constructive
criticism.
The story in the Post today in the business section is
another outrageous example of what happened. WorldCom swallows
MCI and tells the MCI employees they don't have a defined
benefit any longer and puts them on the 401(k), cheerleads them
on to put the investment into the company, cooks the books, and
doesn't give them any accurate information on what happened to
them. Now what happens to all these MCI employees? They don't
have any of the savings any longer.
So do you know what. We have to hold these people
accountable, absolutely, but at the same time don't let
anybody--people in Minnesota--get away with saying it is a few
bad apples and that is all we are going to deal with. No. We
are going to deal with the conflict of interest and we are
going to have structural reforms. We are going to have
oversight. We are going to protect consumers, the little
people, and give the business community more confidence so they
do the investing in the economy. That is what is at stake with
this legislation.
I yield the floor.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
following Senator McCain, who will speak later, Senator Corzine
be recognized to speak for up to 15 minutes.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
amendment no. 4175
The Presiding Officer (Mr. Reed). Under the previous order,
the Senator from Kentucky is recognized for up to 30 minutes.
Mr. McConnell. Mr. President, I wish to take the
opportunity now to describe in detail the amendment currently
pending before us, that which I was unable to do yesterday.
There are two fundamental points to the amendment. What it
seeks to do is require independent audits of union funds which,
of course, are raised from union members in the vast majority
of our States. You don't have a choice; you must belong to a
union, and those dues are taken. So we have mandatory auditing
of those funds to ensure they are being accurately accounted
for, civil penalties for violating those auditing requirements,
and, third--this is all the amendment is about, these three
points--the president and the secretary of the union must
certify as to the accuracy of the audit.
We are talking about guaranteeing the integrity of the
funds raised from union members. The reason we require
corporations to file financial statements is so corporate
shareholders know how their money is being spent. As a second
layer of protection for shareholders, we also require those
financial statements to be independently audited. Why? So
investors know that information filed is actually correct, so
they know it is not just the creative writing of a crooked
bookkeeper or a corrupt executive.
We take this independent audit requirement, or this second
layer, very seriously--so seriously, in fact, that we are
creating a third layer in the Sarbanes bill, an entirely new
audit oversight board to better police these required audits
for the benefit of corporate shareholders.
This third layer is a good idea, especially given today's
stories of corporate fraud, deception, and outright theft that
we all cite as the real motivation behind the underlying bill.
My colleagues have cited the well-publicized financial failures
and the endless corporate scandals and the need to hold
corporate crooks accountable. I could not agree more. But we
also have union corruption, union greed, union scandals.
My amendment will give American workers the assurances that
their labor unions' books have been independently audited--the
same second layer of protection we have given to corporate
shareholders since 1933.
Unions already have to file financial statements. They do
so with the Department of Labor on a form called the LM-2. Why?
For the same reason corporations do: So American workers, the
card-carrying, dues-paying union workers can see where their
money goes. But we don't currently require independent audits
of union financial statements. Unlike the corporate
shareholder, the rank-and-file American worker has no earthly
idea if the financial information they rely on is correct--no
idea at all. So why shouldn't the American steelworker or
longshoreman be entitled to the same assurances as the
corporate shareholder who has recklessly overinvested in a
bundle of Internet stocks? Isn't the workers' money just as
hard earned and deserving of protection--maybe even more so?
I cannot imagine that anyone in this body would argue that
American workers do not suffer from the same type of greed and
corruption that plagues our corporate and accounting culture,
nor can I imagine that as a result of these scandals anybody in
this body believes that American workers do not deserve the
very same assurances that their unions' financial statements
are correct.
But just in case, let me read for my colleagues a few
recent accounts of union corruption. I am going to read quite a
few, and I will do so for a specific reason--so nobody can
stand up and say that greed and corruption only affects
corporate shareholders, so no one can say the only stories here
are Enron and WorldCom, and so no one can stand up and say we
are wasting time by trying to protect the American workers from
being cheated out of their money.
We have all heard of Arthur Andersen, but has anybody heard
of Thomas Havey? That is the accounting firm where a partner
confessed last month to helping a bookkeeper conceal her
embezzlement of hundreds of thousands of dollars from a worker
training fund of the International Association of Iron Workers.
Yesterday, a colleague of mine said that the problem at
Global Crossing had nothing to do with labor unions. Maybe he
hasn't heard of ULLICO. That is the multibillion-dollar
insurance company owned primarily by unions and their members'
pension funds that invested $7.6 million in Global Crossing.
Apparently, ULLICO directors received a sweetheart stock
investment deal that allowed them to make millions on the sale
of the stock. All the while, union pension funds, however,
suffered the fate of Global Crossing.
There is plenty more, beginning with a couple of stories I
briefly mentioned yesterday. An accountant with the National
Association of Letter Carriers embezzled more than $3.2 million
from union funds over an 8-year period to buy 8 cars, 2 boats,
3 jet skis, a riding mower, and 105 collectible dolls.
A former official of the Laborers' Union District Council
in Oregon, Idaho, and Wyoming is in jail for accepting hundreds
of thousands of dollars in kickbacks for directing money into a
Ponzi-like investment scheme that defrauded Oregon labor unions
of $355 million.
A former business manager and financial secretary of the
International Association of Heat and Frost Insulators and
Asbestos Workers Local 87 was indicted by the U.S. attorney for
the Western District of Texas for embezzling tens of thousands
of dollars in union funds.
Mr. President, a comptroller of the American Federation of
State, County and Municipal Employees, Council 71 of New
Jersey, was sentenced to 13 months in prison and fined for
embezzling tens of thousands of dollars from the union.
A trustee of Glass, Molders, Pottery, Plastics & Allied
Workers International Union Local 63B, headquartered in
Minneapolis, was charged with forgery and embezzlement in
connection with the theft of thousands of dollars from the
union.
Fourteen officers and members of Local 91 of the Laborers
International Union in Niagara Falls were arrested on charges
of labor racketeering, extortion, assault, vandalism, and
bombing a dissenting union member's home and stabbing a worker.
A former business manager of IBEW Local 16 in Evansville,
IN, was indicted for diverting union dues checks to his
personal bank account.
A Federal grand jury recently indicted an ex-business
manager of the United Association of Plumbers and Pipefitters
Local 15 in Minneapolis in connection with the theft of tens of
thousands of dollars from the union.
A former officer of United Food and Commercial Workers
Local 1288, in Fresno, CA, was sentenced to 18 months in prison
for embezzling almost $300,000 from the union's credit union.
An ex-business manager and financial secretary of the
United Union of Roofers, Waterproofers and Allied Workers Local
86, in Columbus, OH, was sentenced to 21 months in prison for
embezzling $130,000 from the union to pay his gambling debts.
An ex-president of the American Postal Workers Union Local
1616, in Roanoke Rapids, NC, was indicted for embezzling
thousands in union funds and making false entries in union
records.
Laborers International Union of North America Local 2, in
Chicago, which recently came out of Federal trusteeship imposed
because of its close ties to organized crime, failed an
oversight audit and is again having significant accounting and
bookkeeping problems.
An ex-secretary-treasurer of the American Postal Workers
Union Local 761 in Las Vegas and ex-treasurer of the Postal
Workers Nevada State Association pled guilty to embezzling
$200,000 in union funds.
Two former officers of Steelworkers Local 9339 in Virginia
and a former administrator of the local union's disaster relief
fund were indicted for conspiracy to embezzle union funds and
make false recordkeeping entries.
A grand jury is investigating claims that a local United
Auto Workers Union ended an 87-day strike against General
Motors only after union officials received phony overtime
payments and jobs for their relatives. Union members have also
filed civil suits to recover over half a billion dollars--half
a billion dollars--from alleged self-dealers.
My good friend, the senior Senator from Texas, always says
you cannot argue about facts. Facts are a powerful thing. These
are the cold hard facts of union corruption. Just like Enron,
just like WorldCom, just like Global Crossing, these are the
cold hard facts, and there are plenty more of these facts.
I have a stack of papers filled with what is called a union
corruption update. If you look at this stack, this is just for
the year 2002. This stack is just for the year 2002--this whole
stack--and 2002 is only half over. It is compiled by the
National Legal Policy Center. The Department of Labor's Office
of Labor Management Standards reports 12 new indictments and 11
convictions of union fraud per month over the last 4 years.
Let's go over that one more time. DOL's Office of Labor
Management Standards reports 12 new indictments and 11
convictions of union fraud per month over the last 4 years.
This is a serious problem, and the Senate should not let
whatever allegiance some Members may have to the leaders of
organized labor affect their concern about the workers
themselves, and that is what this amendment is about: Providing
the same protection for union members that we insist on
providing for investors in corporations.
We have a choice before us. Who should bear the cost of
union corruption against the rank-and-file, dues-paying
American workers? The unions, the perpetrators of much of this
fraud, by bearing an incremental cost of an audit that will
help prevent future workers from being cheated out of their
money? Or the workers, whose money will continue to be
embezzled, concealed? And if we do not provide them with
minimal assurances of an independent audit, it will go on and
on.
To me, this choice is identical--absolutely identical--to
the choice in the Sarbanes bill. Who should bear the cost of
the corporate and accounting corruption against shareholders,
the corporations and accountants, obviously, through improved
oversight, enforcement, and corporate responsibility or the
investing public whose stock holdings will continue to be
embezzled, concealed, if we do not provide them a new
accounting oversight board?
Choosing the unions over the workers in this case is no
different than siding with the accountants and corporate
executives who quietly oppose the Sarbanes bill.
Mr. President, about the complaints I have heard of the
burdens and costs associated with this bill. It would not
surprise me if the leaders of organized labor have been on the
phone calling particularly our Democratic colleagues over the
last 24 hours concerned about the burdens and costs associated
with this bill.
First of all, I find it absolutely astounding, given the
pervasiveness of union corruption, that some of our colleagues
are worried about the incremental cost of stopping that
corruption, the cost of giving union workers the same quality
assurance answers that we are prepared to give corporate
shareholders in the underlying bill.
I do not hear any complaints about the cost of a new
accounting oversight board or the cost of corporate
responsibility or enhanced disclosure requirements in the
Sarbanes bill. Why not? Because the accountants and executives
are the ones responsible for the fraud and deception of
investors. But for some reason, when it comes to unions, some
of our colleagues speak less about the cost to the workers
being ripped off and more about the burdens this amendment will
place on unions whose officials are responsible for the greed
and corruption documented in the binder I just held up a few
minutes ago which represented only half of the year 2002.
We hear that unions are saddled with too many requirements
on their financial statements. I am not concerned with the
quantity of disclosure requirements. I am only concerned about
the quality of that disclosure, specifically whether the
information is accurate and certified as such for the benefit
of the dues-paying American union workers.
We hear that we do not need audits. Some have said we do
not need audits because the Department of Labor can conduct
enforcement audits, if necessary. Well, let's play with that
logic a little. If that is the case, we do not need public
corporations to be audited either. Let's get the SEC to conduct
enforcement audits. Could you imagine the uproar if someone
suggested that? And no one has.
Think about the message this would send to American workers
that it is not worth requiring your union to assure you that
your money is going where they say it is; just take a number
and hope the Department conducts an audit of your union.
At any rate, the Department, as most Federal agencies,
needs more money to conduct the few enforcement audits that
they conduct. The Deputy Secretary of the Department of Labor
testified recently that the number of departmental audits has
fallen from 1,583 in 1984 to a mere 238 last year, and the
President has requested an additional $3.4 million and 40 new
staff positions to combat union fraud.
We hear that audits will be too expensive. Here is an easy
tip for union officials to save money: Stop stealing it. That
is a good way to save money. My amendment only requires audits
to any union that already bears the cost of filing financial
disclosure statements. In other words, this would apply only to
unions that already have to file financial disclosure
statements. That is unions with
receipts topping $200,000 annually. It goes to my original
point. If you have to file an annual report, it ought to be
verified as accurate.
We hear that smaller unions will be hit hardest by having
to conduct an audit. Well, there is no national one-rate plan
for audits of which I am aware. As any professional service,
the rates are proportional to the size and scope of the client.
Obviously, a union with $500,000 is not going to pay in audit
fees what a $60 million corporation pays for an audit.
Let me close this part of my remarks with a simple
suggestion for my colleagues who have been tricked into
worrying about the cost this amendment would impose on unions.
Just imagine this: The cost to American workers of not
requiring audits. Let us think about the cost to American
workers of not requiring audits: More embezzlement, more
crooked bookkeeping, more abuse and concealment of workers'
hard-earned money.
We do not need more embezzlement, more crooked bookkeeping,
and more concealment of workers' hard-earned money. We have a
choice. We can extend to American workers the same financial
protection afforded corporate shareholders, or we can extend to
unions the ability to continue to pilfer and profit off the
workers' money. That is the choice.
How much time do I have remaining?
The Presiding Officer. The Senator from Kentucky has 8
minutes 30 seconds remaining.
Mr. McConnell. I know the Senator from Arizona has been
waiting patiently. I would like to reserve my 8 minutes because
I am not clear how long this debate is going to go on. We do
not have a time agreement yet for a vote. Is that correct? I
guess I am asking my friend from Maryland what his plans are
for the disposition of the McConnell amendment.
Mr. Sarbanes. If the Senator will yield, we have people
lined up to speak once the Senator has concluded, Senator
McCain and then Senator Corzine. After that, I anticipate then
dealing with the McConnell amendment.
Mr. McConnell. So is it the plan of the Senator from
Maryland to have a vote sometime in the next hour or so?
Mr. Sarbanes. I would anticipate a vote in relation to the
McConnell amendment--well, we have 30 minutes.
Mr. McConnell. Could we do this, then? I ask unanimous
consent that I have 2 minutes prior to the vote to sum up what
I think this amendment is about.
Mr. Sarbanes. I certainly think that could be done. I
intend to speak to it for a few minutes.
The Presiding Officer. Without objection, it is so ordered.
Mr. McConnell. Therefore, I yield the floor.
amendment no. 4174
The Presiding Officer. Under the previous order, the
Senator from Arizona is recognized for up to 15 minutes.
The Senator from Arizona.
Mr. McCain. Mr. President, for the benefit of the managers,
I do not intend to consume all 15 minutes.
I rise in strong support of the underlying Leahy amendment,
and I hope we can dispose of that amendment within a reasonable
length of time and move on to other changes that need to be
made to this very important legislation.
Our publicly owned companies are an essential component to
the economic health of our country. As we have seen over the
past few months, the continued lapses of our corporate leaders,
whether they are ethical, criminal or just plain ignorant, have
a significant, sometimes crippling, effect on the welfare of
our Nation. We must make some fundamental changes in the
current system of corporate oversight to protect Americans from
avarice, greed, ignorance and criminal behavior. Now is the
time for Congress to restore investor confidence and take the
necessary action to protect the interests of the public
shareholders and place those interests above the personal
interests of those entrusted with managing and advising those
companies. The deterioration of the checks and balances that
safeguard the public against corporate abuses must be reversed.
We have to address the shortcomings in Federal law and send
the message that prosecutors now have the tools to incarcerate
persons who defraud investors or alter or destroy evidence in
certain Federal investigations. This amendment is a step in the
right direction. It creates two new criminal states that would
clarify current criminal laws relating to the destruction or
fabrication of evidence and the preservation of financial and
audit records. The Enron debacle clearly indicated that there
were gaping holes in the current framework. There will be a 10
year criminal penalty for the destruction or creation of
evidence with the intent to obstruct a Federal investigation.
There will be a new 5 year criminal penalty for the willful
failure to preserve, for a minimum of five years, audit papers
of companies that issue securities.
The amendment also provides for the review and enhancement
of criminal penalties in cases involving obstruction of justice
and serious fraud cases. All of these actions are necessary to
deter future criminal action. Until somebody responsible goes
to jail for a significant amount of time, I am not sure that
these people are going to get the message. Defrauding the
shareholder has to carry a meaningful penalty. Corporate
decision-makers can make millions, tens of millions, even
hundreds of millions of dollars by cheating investors. A
relatively small fine or short prison term is not a deterrent;
it's a slap on the wrist. The threat of real time in jail is a
deterrent that will make people pay attention.
This amendment also creates a new securities fraud offense.
The provision makes it easier, in a limited class of cases, to
prove securities fraud. Currently prosecutors are forced to
resort to a patchwork of technical offenses and regulations
that criminalize particular violations of securities law, or to
treat the cases as generic mail or wire fraud that results in a
five-year maximum penalty. This new provision would criminalize
any scheme or artifice to defraud persons in connection with
securities of publicly traded companies or to obtain their
money or property. This new ten-year felony is comparable to
existing bank and health care fraud statutes. To those who
would say that it's hard to define a scheme or artifice to
defraud, I would say that full and honest disclosure of
material dealings and accounting treatments is the best way for
the officers who run America's corporations to protect
themselves and those who invest in their companies. There are
plenty of felony laws on the books that provide long prison
terms for crimes that cause less damage than the losses to
shareholders in Enron or WorldCom.
It is important to emphasize that when criminal charges are
pursued, it is not necessarily the firm that should be charged
but the individuals at the helm of the corporate ship who
should be prosecuted. If they are the ones making the decisions
out of self-interest, they are the ones that should be held
accountable. I also believe that we must protect the
``corporate whistleblower'' from being punished for having the
moral courage to break the corporate code of silence. This
amendment does that.
This amendment also extends the current statute of
limitations for matters concerning securities fraud, deceit or
manipulation. The current statute of limitations for securities
fraud cases is short given the complexity of many of these
matters, and defrauded investors may be wrongly stopped short
in their attempts to recoup their losses under current law. The
existing statute of limitations for most securities fraud cases
is one year after the fraud was discovered but no more than
three years from the date of the fraud regardless of when it
was discovered. Because this statute of limitations is so
short, the worst offenders may avoid accountability and be
rewarded if they can successfully cover up their misconduct for
merely three years. The more complex the case, the easier it
will be for these wrongdoers to get away with fraud. According
to at least one state Attorney General, the current short
statute of limitations has forced some states to forgo claims
against Enron based on alleged securities fraud in 1997 and
1998.
This situation essentially encourages offenders to attempt
to cover up their misdeeds however they can, including by using
questionable accounting procedures and financial shell games.
Furthermore, in some cases, the facts of a case simply do not
come to light until years after the fraud. If a person does not
and cannot know they have been defrauded, it is unfair to bar
them from the courthouse. We need to recognize the
sophistication and complexity of modern-day schemes designed to
defraud investors. The Leahy amendment does this.
Finally, this provision amends the Federal bankruptcy code
to prevent the corporate wrongdoer, the CEO or CFO, from
sheltering their assets under the umbrella of bankruptcy and
protecting them from judgments and settlements arising from
Federal and state securities law violations. Too many of these
highly paid corporate officers are using bankruptcy laws to
protect their assets while maintaining their high-rise
penthouses and ski chalets. It is time to force accountability
and punish the person, not the institution, who is not willing
to abide by the moral and legal codes that accompany leadership
and public trust.
I hope we will have an early and overwhelming vote in favor
of the Leahy amendment.
I yield the floor.
Mr. Sarbanes. Mr. President, so Members may have a sense of
what the program is in the short term, I will propound a
unanimous consent request and I hope it will be accepted and
then we can move forward.
I ask unanimous consent that following Senator Corzine,
there be 15 minutes allotted to Senator Gramm, 5 minutes
allotted to Senator McConnell, 10 minutes to myself as the
manager of the bill--or up to these amounts of time; hopefully,
they won't all be used--and at the conclusion thereof, there be
a vote on or in relation to the McConnell amendment.
The Presiding Officer. Without objection, it is so ordered.
Under the previous order, the Senator from New Jersey is
recognized for up to 10 minutes.
Mr. Corzine. Mr. President, today I rise to speak on both
the amendment proposed by Senator Leahy and also to the
underlying bill which I feel quite strongly about.
I am quite pleased to support Senator Leahy's amendment. It
creates tough new securities fraud penalties and punishes
corporate wrongdoers we have just heard the Senator from
Arizona speak to. It is a meaningful and appropriate response
to the kind of corruption we have seen and makes sure that
punishment meets the nature of the act. It also protects
corporate whistleblowers, prohibits corporate executives who
violate securities laws from hiding behind the bankruptcy code.
In summary, this is more than mere lip service with regard
to enforcement and punishment of corporate fraud. It is real
reform. It is real response as a methodology to deter criminal
conduct. It will go a long way toward providing incentives that
are necessary to protect investors and pensioners and others
who operate in the marketplace, in contrast to strong rhetoric
from some with regard to what we need to do about punishment
but not putting reality into place to deal with the issues. I
am proud to cosponsor the Leahy amendment, and I urge all
colleagues to do so as well.
Mr. President, we need to speak clearly and directly in the
Senate about restoring and sustaining the trust in America's
capital markets, trust in America's economic security going
forward. For several days leading up to yesterday morning's
Presidential speech on Wall Street, there was a buzz of
anticipation that we would see a real embracing of change. Some
went so far as to suggest the President's speech might lead to
a Roosevelt moment, an embrace, a change in policy, a change in
direction, maybe counterintuitive to the history of the man
because it was in the Nation's best interests.
In retrospect, it is safe to say, while the President's
speech was good with respect to rhetoric, it was hardly
Rooseveltian or a Ruthian moment in the home of the New York
Yankees. Unfortunately, it was far from a home run, in my view,
and did emphasize rhetoric as a substitute for reform. Its lack
of specifics or detail I found unfortunate.
It is not to say that the President's speech did not
include some important themes, or, by the way, embrace an
initiative that is quite important; that is, the corporate
fraud task force in the Justice Department which will be a
strong step in carrying out pursuit of wrongdoers.
However, stating the commitment of his Administration
pursuing these folks, while an important message, needs to be
more substantive. We need specific undertakings to protect
investors and shareholders. It was what the President did not
say in terms of offering specifics, particularly specifics with
regard to structural changes that will solve the problems, deal
with the problems, provide checks and balances to the problems
that we have seen from the Enrons, WorldComs, Global Crossings,
et cetera. That is why the speech fell short of what many
expected.
The best way, in my view, the President could have
accomplished that simple important message would have been to
acknowledge the comprehensive structural reform that needs to
be put in place and is expressed most clearly, most
effectively, by the legislation we are considering on this
floor right now, the Public Company Accounting Reform and
Investor Protection Act.
The Sarbanes bill, the bill we are talking about on this
floor, comprehensively reforms our accounting profession. It is
detailed, it is specific, and it is quite a strong element with
regard to accounting professionals' responsibilities. It
enhances corporate accountability, improves transparency of
corporate financial statements, truly strengthens the ability
of the SEC to operate as an enforcement agency, and as a
regulatory agency to a significant degree. In combination, all
those factors together will go a long way to restore investor
confidence in American capital markets and, more importantly,
restore faith in our economic system.
I think this is the direction it should take. But before I
discuss the merits of the legislation in specific, I take a
moment to pay tribute to the leadership of the distinguished
Chairman of the Banking Committee, Senator Sarbanes. In
shepherding this bipartisan legislation to the floor of the
Senate, he has really done an outstanding job of bringing
together a lot of disparate views on a very difficult and
complex problem, synthesized into a terrific response to a real
problem.
I see Senator Enzi in the Chamber. I also congratulate him
for his help in making sure we have a bipartisan effort in this
process. His contributions have been enormous. There are a
number of people on staff who I think have done a terrific job
to make sure this happens.
But Paul Sarbanes, Chairman of the Banking Committee, has
done an incredible job, a thorough job, making sure we have
measured, balanced, deliberate steps to be taken to meet a
crisis of confidence. I think the American people will be
grateful that we have responded in a proper way. It has been a
privilege for me to work with all my colleagues in the Banking
Committee, but particularly the Chairman. Particularly as a
freshman, I learned so much of how this legislative process
works.
I must say, after 30 years in business, working my way up,
the 10 days of hearings we had with respect to this particular
subject, with exhaustive testimony, thoughtful testimony
provided from a large range of perspectives, was one of the
best graduate seminars I have ever had in business. I hope
actually somebody will take the time to try to publish these,
and they will be used as an example both of how the legislative
process should work but also how the structure and nature of
public policy debates with regard to business policy will
occur. It is extraordinary. I think it forms an enormously
positive foundation for the kind of thoughtful legislation the
Chairman has brought to bear.
With that as backdrop, we all know that there are serious
problems in our system. The list of companies involved is way
too long and way too important--many of them supposed models of
the new economy. But I want to move a little bit away from just
some of the simple concepts we talk about, the most headlined,
the name concepts or companies, to focus on the fact that we
are going to have almost 300 restatements of earnings this
year, this year in our economy--300 restatements. There have
been almost 1,100 restatements since 1997 of company earnings
reports. This is a problem.
It is not just the individual headline companies, it is the
fact that this is going on every day in our marketplace. It is
no wonder that investors--institutional, retail, foreign,
pensioners--do not have a sense of where we should be or how
they should make their commitments to markets. That is because
they cannot trust the numbers. There have been broken
retirement dreams, lost jobs, and companies shut down. This
really needs to change.
Roughly 10 percent of major companies--of the 12,000
actively traded companies, almost 10 percent of them have had
statements of change in the last 4 years. That is just bad.
That is why investors worldwide have developed some skepticism
about our markets. Some might even say that is why our dollar
has depreciated as sharply as it has in the last 2 or 3 months.
Confidence is shaken--it is real.
American financial markets have been a tremendous engine
for economic growth. We have had a highly efficient capital
market, and that has fueled our economy. We need to act.
While the depth and breadth of efficiency of our markets is
still substantial, if we continue to have this kind of erosion
of confidence, we are going to be missing one of the important
drivers of America's great success in leadership in the world.
While I will not go through every detail of this bill, if we do
not come up with a strong oversight of our accounting industry,
make sure the information that people make their decisions and
take their decisions to the marketplace with is sound and
secure, then we will not have those strong capital markets and
strong economy. I think we can all agree upon that, in the
nature of a bipartisan initiative, to make sure we are moving
in the right direction.
I hope we can focus on the reality that some of the
conflicts of interest that exist in our practices in the
accounting world have been part of the cause and the focus.
Some of the conflicts of interest in the investment banking
business, the world I came from, with regard to our analysts,
have undermined our security with regard to how people analyze
and understand where companies fit.
Other issues that need to be dealt with are the ``revolving
doors''--executives from accounting firms going to companies
they worked for--and the lack of independence of audit
committees. All of these factors underlie a growing public
distrust in the corporate financial information. It really
needs to be acted upon.
While these things are real, I think we need structural
response. We cannot just identify a few bad apples. This is
more than that. Remember: 1,100 corporate restatements in the
last 4 years. There is a structural problem, a systemic problem
that is undermining the health security of our economy. I hope
people will realize that in the context of the kind of debates
we are going to have with regard to this bill--but maybe even
more important, when we get into a conference and try to put it
together with the House response, and get it to the President.
Unfortunately, I think the other elements of proposals on
the table just do not meet the kind of standards that the
Sarbanes proposal, the Banking Committee proposal, brings to
bear. I hope we will be able to deal with that going forward.
I would be happy to talk about the specifics as we go
forward. I know others need to get into this aspect. Other than
we need to have a real reform of the accounting industry, we
need a strong oversight board. We need to really deal with the
corporate accountability issues, which I think the Leahy
amendment goes a long way to strengthen in this bill. There are
many elements inside it.
We need to give the SEC the kinds of resources so it can
actually do the job it is expected to do. The President talked
about giving them $100 million additional resources. Even the
House has talked about $300 million increments. We do not
provide for pay parity. There are just so many weaknesses in
some of the proposals that are watered down relative to what we
have on the table before the Senate.
I can only say I hope we can keep this bipartisan effort
together because I think what we need is a final product that
will deal with the reality of the undermining of confidence we
have across the board, in a whole host of ways with regard to
our financial markets, with regard to our accounting statements
and with regard to the economy itself. This is too important to
make a political issue. This is one to make sure we move
forward in a way that we secure America's economic future.
The continued vitality of America's markets is at stake. We
need to make this a priority. We need to move quickly. We need
to understand it is systemic, it is not just anecdotal, it is
not just a few bad apples. I think the bill we have on this
floor will go a long way. Some of the amendments that are
brought forward can strengthen it.
We need real reform. We need it now. We do not need
rhetoric. We need to be able to restore the confidence the
American people want to see, move away from the era of Enron
and WorldCom, and get to an era where we have markets that are
balanced and fair, where they have the checks and balances in
them to give people the confidence that when they make an
investment, that investment is what they thought it was when
they entered into it.
I thank the Chairman for an extraordinary effort in
bringing together an exceptional bill. I am proud to be part of
this effort. I look forward to continued debate and hopefully
bringing it to the President's desk as soon as possible.
The Presiding Officer. The Senator's time has expired.
Mr. Sarbanes. Mr. President, I ask unanimous consent to
speak for 30 seconds.
The Presiding Officer. Without objection, it is so ordered.
Mr. Sarbanes. Mr. President, I thank the able Senator for
his very kind comments.
I underscore, as I said last night on the floor when
Senator Dodd was here, my deep appreciation for the very
positive and constructive contribution which Senator Dodd and
Senator Corzine have made to this legislation. Early on, they
introduced S. 2004, the Dodd-Corzine bill that formed the basis
of a great deal of what is now before the Senate. I really
appreciate the tremendous effort on the part of the two
Senators.
I think it is very important that I make it very clear how
much I appreciate the Senator's continuing, very strong
contributions in the committee and now as we consider this
legislation.
The Presiding Officer. Who yields time?
Mr. Sarbanes. Mr. President, I think under the agreement
there are 15 minutes allotted to Senator Gramm, 5 minutes to
Senator McConnell, and I have reserved 10 minutes before we go
to a vote on or in relation to the McConnell amendment.
Mr. Leahy. Mr. President, I ask unanimous consent to
proceed for 30 seconds without taking the time reserved for my
colleagues.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
The Senator from Vermont is recognized.
Mr. Leahy. Mr. President, I thank the distinguished Senator
from Arizona, Mr. McCain, for his kind words earlier this
morning. He is the supporter of the Leahy-McCain-Daschle, et
al, amendment pending before the body. I will speak further at
an appropriate time when I am not imposing on the time reserved
by our colleagues. I wanted to thank Senator McCain for his
support of the amendment and for his kind remarks.
I yield the floor.
The Presiding Officer. Who yields time?
The Senator from Kentucky.
Mr. McConnell. Mr. President, I believe the Senator from
Texas is on the way. He is not here yet, so I will go ahead
with my closing remarks.
Let me describe again what the McConnell amendment does. It
is really quite simple. I think the first thing to remember is
that it doesn't change in any way the Leahy proposal. It
doesn't change in any way the Sarbanes proposal. It does not
alter either of those. This is an addition to the underlying
Sarbanes bill, and to the Leahy amendment, which I assume is
going to be adopted sometime today. This doesn't in any way
detract from the efforts underway to get greater accountability
in corporate America.
The McConnell amendment is about adding to that union
accountability so that rank-and-file union members can be
assured--just as shareholders will now be assured in the
underlying bill--that independent audits are being done. They
can be assured that there will be civil penalties for violating
these new auditing standards. They will be further assured by
the fact that the president and the secretary-treasurers of the
unions will have to certify as to the accuracy of the financial
reports for unions just as we are requiring that for corporate
CEOs and CFOs for publicly traded corporations.
We are simply completing the circle of protection for
Americans, whether they be investors in corporations or union
members whose dues are being paid every payday and who have a
right to expect that those funds are going to be treated
carefully and correctly.
It has been suggested--I expect it will be suggested
again--that this is going to be expensive for the unions. My
amendment has been carefully crafted to ensure that it does not
impose any egregious new costs, especially on labor. And it
only applies to unions with annual receipts over $200,000.
Why did I pick that number for unions that already file
financial information with the Department of Labor? They are
already having to file. This amendment simply requires that
labor organizations with over $200,000 in annual receipts incur
the incremental costs of running their financial statement and
pass an independent audit, and abide by generally accepted
accounting principles. This is a cost borne by any public
company with as little as $1 million in total assets.
The additional costs here only apply to the larger unions
that already have to file with the Department of Labor in any
event.
I want to say again that this is the union corruption
update. This massive stack is just for the first half of 2002.
There are numerous examples of the problems about which I have
been talking. This stack here represents just the first half of
2002.
Some will suggest that the examples I have given show how
well DOL is catching and prosecuting union fraud.
Unfortunately, that is not the case. The Department of Labor
auditing of unions accounts for just 9 percent of all
embezzlement cases. The other 91 percent of embezzlement comes
from other sources. Without a required audit, union officials
do not have to contend with the threat of an annual independent
audit hanging over their heads.
The stories speak for themselves. Union corruption is
rampant. It is absolutely rampant on the local, national, and
pension fund levels all across our country. In the last 2
years, there has been a union embezzlement or closely related
case in 40 out of our 50 States. This is a huge problem.
With regard to the financial information already required
to be filed, it is not verified by an independent auditor. The
current union filings are not verified by an independent
auditor. The independent audits required in the McConnell
amendment will help verify that the information is indeed
accurate. Unions in many instances have not been complying with
the filing requirement.
The Presiding Officer. The Senator has used 5 minutes.
Mr. McConnell. I ask unanimous consent for a couple of more
minutes of Senator Gramm's time.
The Presiding Officer. Without objection, it is so ordered.
Mr. McConnell. Unions have not been complying with the
filing requirements. Up to 40 percent of unions required to
file LM-2 reports filed late or not at all. The Department of
Labor, under current law, can't even fine these organizations
for noncompliance. My amendment would at least give them the
ability to fine these organizations for noncompliance.
Let me summarize what this is about. We have decided in the
Sarbanes bill and in the Leahy amendment that we want
accountability in corporate America. We want to hold the CEOs
and the CFOs responsible. We want the auditing done accurately.
If it is not done accurately, somebody needs to be held
responsible.
Why are we doing that? We are doing that because we want to
reassure the shareholders that somebody is not cooking the
books, that we don't have more WorldComs and Enrons and Global
Crossings and the like.
The McConnell amendment seeks to provide those very same
protections to rank-and-file citizens who may or may not be big
enough to invest in the market. But they are investing their
dues every week in the majority of our States where they do not
have a choice to not pay their dues. And they have every right
to expect independent audits of their funds to make sure they
are not being stolen and not being misused. They have every
right to expect the presidents of those unions and the
secretary-treasurers of those unions to certify as to the
accuracy of those audits.
That is what this amendment is about. It is about providing
the same fairness to the union member as we provide to the
shareholder. Simple justice. I urge that the McConnell
amendment be adopted.
I yield the floor.
The Presiding Officer (Mr. Johnson). Who yields time?
The Senator from Texas.
Mr. Gramm. Mr. President, how much time do I have?
The Presiding Officer. Thirteen minutes.
Mr. Gramm. Mr. President, first, I thank Senator McConnell.
I do not think anybody who listened to Senator McConnell is
going to believe the assertion that somehow this amendment has
nothing to do with the logic of this bill. You can take a view
that business is for real and that standards should apply
there, but organized labor is a different kind of institution
and they should not apply there; but if you are making that
argument, you have to argue it on the basis of politics. You
cannot argue it on the basis of logic. You cannot argue it on
the basis of justice or fairness.
What Senator McConnell has done, it seems to me--and I
think it is a service to the process that he has done it--is
that his amendment in no way changes Senator Leahy's amendment.
So whether you are for or against the Leahy amendment is not a
relevant factor in whether you are for or against Senator
McConnell's amendment because he does not change the Leahy
amendment. He simply says, at that moment in history where we
are trying to enhance the quality of financial reporting in
corporate America, to protect the investor and to strengthen
the economy, that we should make the same changes with regard
to financial reporting by labor unions.
There have been several arguments made against this
amendment, but I do not believe any of them hold water, at
least in terms of my ability to understand the amendment and
the arguments.
The first argument that has been made is: There are already
requirements that apply to unions, that they have this vast
array of reporting requirements.
The same thing is true with corporate America. If you
accept that argument that there already is a body of law, and
if that means that it should not be improved or strengthened,
then what are we doing here?
There are differences over this bill, differences about how
the board should be structured, differences about what the
board should decide and what Congress should decide, but there
is no difference over the issue that we need higher standards
in accounting. There is no difference over the issue that
people who knowingly violate the law ought to be held
accountable.
So to say that unions are subject to requirements is not an
argument that we should not have better requirements, because
if it were an argument, that would be an argument against the
bill; and not one Member of the Senate has bought that argument
or made it or believes it.
The fact that there are requirements today does not mean,
in a time when we are enhancing transparency and efficiency and
honesty in reporting, that we should not improve it for both
corporate America and for organized labor.
The second argument that is made is: Companies are public
and unions are private. Not only is that argument invalid, but
unions are more public than private investments, more public
than public companies. Nobody made anybody invest in WorldCom.
Nobody made them do that. But in some 40 States of the Union
you have to pay union dues in order to work.
I do not think that is right. I think that is fundamentally
wrong. I thank God every day that in Texas we have right-to-
work laws that say I do not have to join a union to earn a
livelihood. But in some 40 States you do.
I think the case is even stronger than the Senator from
Kentucky made because nobody made anybody buy WorldCom, but in
some 40 States you have to pay union dues. Surely, there is a
public interest, in a mandatory institution, in seeing that it
keeps straight books.
So this argument that we are talking about, public
companies and private unions, what is private about a union
that I have to join in order to have a job? Nothing is private
about that union. It is as public as something can be public.
It seems to me--and Senator McConnell made the point--
nobody made people invest in WorldCom, but people are forced
every day to pay union dues. Every day they are forced to pay
them. So they are as public as public companies are, I would
argue more public, and we have a stronger interest in
protecting that money which was involuntarily taken, it seems
to me, or just as strong an interest in protecting that money
that was involuntarily taken versus money that was voluntarily
invested.
The strongest argument of this amendment--and something
that is absolutely breathtaking to me--is that the annual
report that is required of unions does not have to be certified
and prepared by a CPA.
We are going to great lengths in every bill that has been
proposed to set up an independent body to proctor high
standards in accounting for CPAs. Shouldn't a union that is
handling my money that they took from me involuntarily have its
books audited by a CPA?
Why is that important? In fact, why do we care about
accounting ethics? We care about them because there is no way
the Government has enough resources to spot audit every company
in America. So we have to rely on the integrity of the CPA. And
it is the problem we have with that today that brings us to the
floor of the Senate.
While we are enhancing that integrity through this
oversight board, shouldn't we require organized labor that is
taking people's money involuntarily to have their annual report
certified and prepared by a certified public accountant? How
can anybody--how can anybody--argue against requiring a CPA to
do these audits?
You could say the Labor Department ought to go out and
audit every one of these unions. Clearly, they do not have the
resources to do it. The President has asked for more money to
do it. I would guess this Congress will not provide that money.
I will be watching the appropriations to see if they do. But
even if they provide it, it is not enough money to audit every
union in America.
What we have to do to bring honesty to union financial
reports, as we bring honesty to corporate reports, is to
require a CPA to do the audit. I can see no logic whatsoever to
opposing requiring a CPA to certify.
Finally, we have gone to great lengths--and I think
appropriately--to require the guy who is drawing the big check,
the head man or head woman, to sign this annual financial
statement to put their credibility on the line and give them
nobody to hide behind. Should we not require the president of
the union sign this audited report? And shouldn't the annual
report be done by a certified public accountant?
Now, it is astounding to me--and, boy, it shows you the
different level of enforcement of the law. If anybody does not
believe that politics play a part in law enforcement in
America, look at the fact that was given to us by the Senator
from Kentucky, that 34 percent of unions are out of compliance
in terms of filing these reports. Some of them just don't file
the report.
It seems to me if 34 percent of the companies in America
didn't file reports, we would be outraged, and rightly so. In
fact, you couldn't trade your stock on the New York Stock
Exchange or the American Stock Exchange or the Nasdaq because
of the enforcement that exists in private entities.
The McConnell requirement that the reports be filed is
straightforward and reasonable.
I reserve the remainder of my time by simply saying, what
harm can come from requiring unions to have CPAs do these
reports? I see good can come. I can see no possible harm that
could come.
Secondly, why not have the union president certify the
veracity of that report just as the corporate president does?
Some people say this is punitive. Some people say this is
political. If this were being used to try to kill the Leahy
amendment, you might be able to make that argument. But this
amendment in no way takes away any part of the Leahy amendment.
It simply adds to it that the high standards we set for
corporate America should apply likewise to unions.
I reserve the remainder of my time.
The Presiding Officer. Who yields time? The Senator from
Maryland.
Mr. Sarbanes. Could I ask what the time situation is?
The Presiding Officer. The Senator from Maryland has 10
minutes.
Mr. Sarbanes. And how much time is left to the Senator from
Texas?
The Presiding Officer. The Senator from Texas has a minute
and a half.
Mr. Sarbanes. Mr. President, it is important, in
considering this amendment, to realize there exists now, under
the labor management reporting and disclosure procedure,
extensive and intensive provisions for reporting by labor
organizations, officers, and employees of labor organizations.
If all of these provisions are not being carried out fully,
the responsibility rests with the Secretary of Labor. The
Secretary of Labor ought to be doing her job. If the Congress
is not providing sufficient resources for that, that is an
issue for the Congress. We ought to address that issue.
This supposed parallelism that is being argued completely
misses the mark in the sense that there is already an existing
statutory scheme covering reporting and disclosure by labor
organizations.
I want to go through some of those provisions so Members
appreciate how extensive they are and the amount of review and
oversight that now exists.
I am now reading from the statute:
Every labor organization shall file annually with the
secretary a financial report signed by its president and
treasurer--
So much for this argument about they ought to sign, put
their signature on the report--
or corresponding principal officers containing the following
information in such detail as may be necessary accurately to
disclose its financial condition and operations for its
preceding fiscal year.
Listen to what they have to set out: Assets and liabilities
at the beginning and end of the fiscal year; receipts of any
kind and the sources thereof; salaries, allowances, and other
direct or indirect disbursements, including reimbursed expenses
to each officer and also to each employee who, during the
fiscal year, received more than $10,000 in the aggregate from
such labor organization and any other labor organization.
Ten thousand dollars? Ken Lay of Enron got $177 million.
Twenty executives of Enron got over $3 million in salary. Here
we are talking about a $10,000 figure which they have to
report.
I am reading from the statute that governs labor
organizations on their reporting and disclosure: Direct and
indirect loans made to any officer, employee, or member which
aggregated more than $250 during the fiscal year, together with
a statement of the purpose, security, if any, and arrangement
for repayment. A $250 loan, $250. Bernard Ebbers of WorldCom
got a $366 million loan. This is just to underscore in a sense
the tightness of this framework governing the labor
organizations--a $250 loan. WorldCom executive Ebbers, $366
million? The Adelphia situation with the Rigas family, $3
billion in loans.
Let's look at the power of the Secretary of Labor to
enforce these requirements: Any person who willfully violates
this subchapter shall be fined not more than $10,000 or
imprisoned for not more than 1 year. Any person who makes a
false statement or representation of a material fact or who
knowingly fails to disclose a material fact in any document,
report required under the provisions of this subchapter shall
be fined not more than $10,000 or imprisoned for not more than
1 year. Any person who makes a false entry or willfully
conceals, withholds or destroys books, records, reports shall
be fined not more than $10,000 or imprisoned for not more than
1 year.
``Personal responsibility of individuals required to sign
report,'' I earlier said the president and the treasurer of the
labor organization had to sign the reports. Listen to this:
Each individual required to sign reports under sections 431
and 433 of this title shall be personally responsible for the
filing of such reports and for any statement contained therein
which he knows to be false.
Of course, we have just noted from the previous provisions,
that is a fine and possible imprisonment for up to 1 year. So
we have a statutory scheme in place to control the labor
organizations. If it is not fully adequate, it needs to be
addressed in that context. But clearly, it goes well beyond
many of the provisions that apply to corporate officers. It has
been carefully worked out over the years. The Labor-Management
Reporting and Disclosure Act dates from 1959 originally, with
subsequent modifications and adjustments, as we have proceeded.
There is a system in place to govern labor organizations.
It has been asserted: Well, the Labor Department has not been
able to do everything it needs to do. That burden is on the
Labor Department. In a sense, what has been raised represents a
challenge to the Secretary of Labor.
If, in fact, the Congress hasn't given her adequate
resources, that point needs to be made to the Congress and we
need to address that.
But we have established a well-thought-out, comprehensive
scheme with respect to the reporting and disclosure of the
labor organizations, and if they are falling short of the
statutory requirements, that needs to be addressed in the
context of the statute.
The Labor Department has enormous authority over the labor
organizations. Make no mistake about it, the powers and the
authorities that reside in the Secretary of Labor and the
Department are quite extensive to deal with the labor
organizations. I mentioned only some of them, including these
imprisonment for 1-year provisions.
So I am in opposition to the amendment. I think any
shortcomings that one might perceive need to be addressed in
the context of the reporting and disclosure provisions
applicable to labor organizations; and I must say to you--and
the Senator from Kentucky has outlined some of the problems--
the Department needs to come to grips with them and come to the
Congress, if it deems that necessary, to seek an appropriate
congressional response in order to deal with them.
I very much hope my colleagues, when the time comes, will
not be supportive of this amendment. When all time is used, I
am prepared to make a motion with respect to the amendment.
Mr. Specter. Mr. President, I am voting against the
McConnell amendment because existing law already accomplishes
what he seeks to do. There exists now under the Labor
Management Reporting and Disclosure Act of 1959 extensive and
intensive provisions for reporting by the President and
Treasurer of labor organizations.
Furthermore, the audit requirements of this amendment,
which apply to union filers with receipts of $200,000 or more,
impose under regulation of small entities. Public corporations
subject to the SEC typically have many more assets with initial
public offerings are customarily in the range of $40 million.
The annual costs of compliance might exceed the annual receipts
of many filers who would be subjected to these requirements. To
require audits of all unions regardless of size or complexity
of financial reports would cause an unreasonable burden on many
smaller locals who already must file LM-2 reports. Unions with
annual receipts of $200,000 or more covered by the McConnell
amendment come in an extremely wide range of types, sizes, and
of performing services. Of the more than 5,000 labor
organizations that currently meet this criterion and file LM-2
reports, only about 70 are national or international unions.
The rest are locals--largely voluntary organizations, many with
no or few full-time employees. The current Department of Labor
reporting requirements take this ``no one-size-fits-all''
approach into account and build in some flexibility that the
McConnell amendment does not allow. For example, many smaller
locals do not need to retain outside CPAs because their
financial statements are very simple and consistent from year
to year.
The amendment's certification requirements are also
redundant. For more than 40 years, union officers have been
required to sign annual financial reports under penalty of
perjury, attesting that the report's information accurately
describes the union's financial condition and operations.
The Presiding Officer. The Senator from Texas is
recognized.
Mr. Gramm. Mr. President, let me paraphrase our colleague
from Maryland. The SEC already has power. Let them do their
job. We are not saying that. We are saying they need more power
and they need help doing their job because the job is not
getting done.
The same is true for unions. The Senator from Maryland said
there is already a regulatory scheme. There is already a
regulatory scheme for corporate America, but we are saying it
is not good enough, not tough enough, it is not working, and we
need to improve it.
The same is true for unions. The president of a corporation
already has to sign an annual report. We are trying to expand
that in this bill. Why not require the president--not other
officers, but the president--to sign the report? I submit that
illegality, whether it is $100 million or $10,000, is still
theft. The President has asked us to bar loans.
The issue here is, should we have the same integrity
standards for unions? I believe the answer is yes.
I yield the remainder of my time.
The Presiding Officer. The Senator from Texas has 17
seconds and the Senator from Maryland has 50 seconds.
Mr. McConnell. Mr. President, it is true that unions file a
lot of papers. The problem is that accuracy is not required.
This requires certified records--certified by a CPA--and it
requires the presidents and secretaries of their treasuries to
certify that the records are accurate.
Union corruption is a serious problem. This will help
correct it. I urge colleagues to support the amendment.
Mr. Sarbanes. Mr. President, I only observe that if they
file a false statement of representation, they can be fined and
sent to jail for up to 1 year. That is a pretty heavy remedy if
you stop and think about it.
Mr. President, I yield back the remainder of my time.
Mr. Gramm. Mr. President, is any time remaining?
The Presiding Officer. No time remains.
Mr. Sarbanes. Mr. President, I move to table the McConnell
amendment, and I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There is a sufficient second.
The question is on agreeing to the motion. The clerk will
call the roll.
The assistant legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from North
Carolina (Mr. Helms) and the Senator from Ohio (Mr. Voinovich),
are necessarily absent.
I further announce that if present and voting the Senator
from North Carolina (Mr. Helms) would vote ``nay.''
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The result was announced--yeas 55, nays 43, as follows:
[Rollcall Vote No. 168 Leg.]
Yeas--55: Akaka, Baucus, Bayh, Biden, Bingaman, Boxer, Breaux,
Byrd, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton, Conrad,
Corzine, Daschle, Dayton, Dodd, Dorgan, Durbin, Edwards, Feingold,
Feinstein, Graham, Harkin, Hollings, Inouye, Jeffords, Johnson,
Kennedy, Kerry, Kohl, Landrieu, Leahy, Levin, Lieberman, Lincoln,
Mikulski, Miller, Murkowski, Murray, Nelson (FL), Nelson (NE), Reed,
Reid, Rockefeller, Sarbanes, Schumer, Smith (OR), Specter, Stabenow,
Torricelli, Wellstone, Wyden,
Nays--43: Allard, Allen, Bennett, Bond, Brownback, Bunning, Burns,
Campbell, Cochran, Collins, Craig, Crapo, DeWine, Domenici, Ensign,
Enzi, Fitzgerald, Frist, Gramm, Grassley, Gregg, Hagel, Hatch,
Hutchinson, Hutchison, Inhofe, Kyl, Lott, Lugar, McCain, McConnell,
Nickles, Roberts, Santorum, Sessions, Shelby, Smith (NH), Snowe,
Stevens, Thomas, Thompson, Thurmond, Warner
Not Voting--2: Helms, Voinovich
The motion was agreed to.
Mr. Sarbanes. I move to reconsider the vote.
Mr. Gramm. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
DIVISION OF AMENDMENT 4174
Mr. Gramm. Mr. President, I ask for a division of the
amendment with sections 801, 802, and 803 in division 1,
section 804 in division 2, and the remainder of the amendment
in division 3.
The Presiding Officer (Mrs. Carnahan). The amendment is
divisible and is so divided.
Mr. Gramm. I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Sarbanes. Madam President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Sarbanes. Madam President, I would like to put forward
a couple of inquiries. Could the Senator outline what his
division of the amendment does?
Mr. Gramm. The amendment was divisible, and my division
divided it into three amendments. The amendment having to do
with statute of limitations in filing a lawsuit is now division
2. So division 1 would be the pending business, as I understand
it. Then division 2, and then division 3, seriatim, unless
there was some other agreement that took us to another order or
other amendments.
Mr. Sarbanes. What does division 3 provide for?
Mr. Gramm. I sent the division to the desk. Basically,
division 1 was everything up to section 804. Then division 2 is
804. And then division 3 is 805 through the end of the bill.
Mr. Sarbanes. Did the Senator consider dividing it only for
section 804?
Mr. Gramm. The way it was done, the easiest division was to
do it in three parts.
Mr. Sarbanes. It is that division you want a separate vote
on, I take it?
Mr. Gramm. It is that division on which I want an
opportunity for the Senate to work its will, as well as the
others.
Mr. Leahy. Madam President, if the Senator will yield,
there is another way, of course, for the Senate to work its
will. The reason I mention it, this is a critical part of the
legislation. It is nice to say, and we should say, my cosponsor
of the Sarbanes bill, which I think is superb--we should say we
should have better accounting methods, we should say we should
have more accountability, but we have a lot of these executives
who have proven by their past behavior they are not going to do
squat unless they think they are going to go to jail for what
they do.
The Leahy-McCain, et al, amendment makes it very clear that
these people are going to face jail terms if they loot the
pension funds, if they defraud their investors, if they defraud
the people of their own company. And I might suggest if the
Senator from Texas agrees, there ought to be real penalties;
let's vote on Leahy-McCain. Let's vote on it, not divide it up.
If he believes there is something he may want to do better--
such as shield some of these people with a shorter statute of
limitations or with a more restrictive statute of limitations--
he has every right to do whatever he wants to shield these
people. But bring it up as a separate amendment and let the
Senate vote up or down on that.
When I look at places such as Washington State alone where
the pension funds of firefighters and police lost $50 million
because of the fraud of the leaders of Enron, I don't feel too
sympathetic. We already have a very short statute of
limitations in here anyway. We ought to at least have that so
people might be able to recover some of the money they have
lost, if it is at all possible, instead of just a few
executives going up and building their $50 million mansions and
hiding it there.
There ought to be some way for the people who lost their
pensions, lost their life savings, to get it back. We ought to
have criminal penalties for those who did this in the first
place so they end up in the slammer.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, a wonderful speech, and it
might be appropriate for another occasion, but what has
happened is that a comprehensive bill has been offered as an
amendment to the pending bill. All I asked for, which every
Senator has the right to ask for, was a division of the
question so that the Senate could work its will on individual
parts.
I know of no living person, at least anyone who is in the
Senate or the executive branch of Government--I don't know
about the judicial branch of Government--who is not for the
provision related to putting people in jail for knowing and
willful behavior where they violate the law.
This bill which has been offered, however, has many
different sections. The part I am concerned about has to do
with statute of limitations and the security reform legislation
we adopted in 1995.
I remind my colleagues that in 1995 we had these massive
strike lawsuits. One firm filed 80 percent of them. Almost all
were settled out of court. It created an abuse that generated a
bipartisan consensus that something should be done about it.
We passed a law, and then, incredibly, with Democratic
support, we overrode President Clinton's veto of the bill. The
only veto override of the Clinton Administration was on this
issue.
One of the reforms had to do with shortening the statute of
limitations. I remind my colleagues, this has nothing to do
with the SEC or the Justice Department. We are not shortening
their statute of limitations. In 1995, when we passed this bill
with a strong bipartisan vote, we said: If I want to sue
Senator Sarbanes, I have to file the suit within a year of
discovering that I believe I have been wronged, or I have to
file it within 3 years of when I was wronged. That was the
decision we made then.
Now, hidden away in this bill, which has been offered as an
amendment, is a provision that effectively extends that to 5
years.
All my division of the amendment did was to say this ought
to be dealt with separately so that those who are for mandatory
prison sentences for knowing and willful behavior that violates
the law can be for that without being for repealing our Private
Securities Litigation Reform Act. The reason behind the rules
of the Senate that give Members the ability to divide bills
goes to exactly the heart of this point; that is, if someone
could take a bill--if someone could take----
Mr. Sarbanes. Will the Senator yield on that point?
Mr. Gramm. Let me just finish my point and I will be happy
to yield, as I try to always do.
Someone could take the securities bill of 1933 and they
could put in it all kinds of things that the vast majority of
Members of the Senate are for, and then they could put one
little provision in one line in that virtually nobody is for,
and they could send it as an amendment to the desk and then we
would have no recourse except to vote against all the things
that we are for in order to vote against the one little thing
that we are against.
It seems to me there is nothing worse in public life than
to have someone attack you for voting against a great big old
bill and say: Well, you were against. It says here motherhood
and the flag and Christmas and Easter--you were against that
because you voted against a bill that busted the budget and
bankrupt the public.
So in writing the rules of the Senate, we wrote the rules
in such a way that when someone offered such a bill as an
amendment that had different parts, any Member could ask for a
division so it could be dealt with separately. All I have done
is exercise that right.
We now have three amendments pending before the Senate--I
guess four, counting the Miller amendment--but that is all I
have done. Two of these amendments I am supportive of, one of
them I am not supportive of, but that is where we are.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, let me say, first of all,
the Senator is obviously within his rights to divide the
amendment. The Senator could have offered an amendment striking
section 804, which is the section to which he objects. As I
understand it, he approves of the remainder of the bill. By
dividing it, he gains a one-vote advantage because if he moved
to strike and we had a tie vote, he would lose. By dividing the
bill, if there is a tie vote on section 804 the proponents of
that provision lose. So by the division the Senator from Texas
has gained a one-vote step up. I recognize that. That is
permitted under the rules. I am not complaining about it.
I think it is inaccurate to use an example of the whole
bill and say I either have to vote for all of the amendment or
none of it because certainly he hasn't been in that position.
He could have offered an amendment to strike the section--
am I right; 804 is the section on which the Senator is focused?
I make the following suggestion in order to try to move
matters forward, if I could have the attention of my colleague.
Why don't we proceed and adopt the two divisions other than
804 right now and get those taken care of. Then we can address
804, which is the division to which the Senator objects. We can
have an appropriate debate with respect to that division.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, we do have someone who wishes
to speak. I am not sure whether it is on one of these sections
or not. I am not ready to do that right now. We may reach a
point where I will be ready to do that, but I am not ready to
do that at this point.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, given that the Senator has
indicated he is supportive of the Leahy amendment--I think he
said that on more than one occasion--except for section 804,
what is it that would have to transpire?
Mr. Leahy. Madam President, if I might step in for just a
moment, if the Senator from Maryland will not mind?
The Presiding Officer. The Senator from Vermont.
Mr. Leahy. I keep hearing this discussion by the senior
Senator from Texas that my bill somehow changed the Securities
Litigation Reform Act. It does not. It does not do that at all.
It changes no provision in it at all.
The PSLRA did not establish the current statute of
limitations. It did not deal with that issue at all. The Leahy
bill does not impact on these provisions. It was a 5-to-4
Supreme Court case that overturned years of established law to
set the current limitation periods in Lampf v. Gilbertson.
In fact, interestingly enough, former Secretary General
Kenneth Starr and I take the same position on these statutes of
limitations. In the dissent in that case, two of the
dissenters, Justices Kennedy and O'Connor, said the one in
three statute of limitation makes the possibility of injured
investors recovering basically a dead letter.
Here are some numbers. Florida lost $335 million because of
Enron; the University of California, $144 million--all the way
down to Vermont; we lost millions of dollars. These are people
who would like, in these kinds of cases, at least to have a
statute of limitations such that we can go after them.
We are not suggesting changing in any way--I want everybody
to be clear on this--we are not suggesting changing the basic
standards of the law on a statute of limitation. We are talking
about extending the time. We are talking about extending the
time so it will not be, as the Supreme Court said, with a short
statute of limitations, a dead letter. We are saying we want
enough of a statute of limitation--still very short but a long
enough one so people can recover. We are perfectly willing to
have exactly the same words as the law says now, with the
exception the statute is slightly longer.
I cannot speak for an activist Supreme Court that seems to
be meddling in most of our laws, but their case law, their
stare decisis impacts on every single Federal court in this
country--district level, court of appeals level. So there, with
the exact same law, the stare decisis is Lampf v. Gilbertson.
That would be controlling except it would be a longer statute
of limitations.
The Senator from Texas, or anybody else, if they think that
statute of limitations is too long, fine, vote against it. But
I am here to try to protect people and give them an
opportunity--when there has been such enormous fraud and all
the pension funds have been lost, and all the people who have
lost their life savings--give them at least some chance to
recover something, especially as the executives of these
companies walk off with tens of millions of dollars. We go two-
five instead of one-three.
It makes sense to me. That was negotiated and voted on in
the Judiciary Committee, and the final bill was passed
unanimously.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, I want to resume my
discussion with the Senator from Texas. I am not going to
engage in a substantive debate with respect to section 804 of
the Leahy amendment, which is division 1 of the divisions the
Senator has made.
I want to go back to the prospects of getting division 1
and division 3 accepted, to which the Senator has repeatedly
indicated he has no objection. In fact, as I understand it, he
is supportive of it.
I renew my inquiry as to whether we could move ahead and
accomplish that, since in our previous discussions the Senator
has indicated concurrence with the notion that we need to move
this legislation along. I don't understand what the objection
would be to doing that. The Senator has divided the amendments.
He has improved his holding position by doing so with respect
to section 804. He has accomplished that objective under the
rules. But as I understood it, he does not object to all of the
matters in division 1 and division 3. I think it would help
move the work along if we could adopt those two divisions, and
then we could address divi-
sion 2.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, first of all, let me say as the
ranking member of the committee that I have yet to have an
opportunity to offer an amendment. I only have two amendments I
want to offer. No one is more eager to get this bill to
conference where we might come up with something for which
there would be virtually unanimous support. But I assume at
some point during the deliberations we will have votes on
division 1 and division 3. But I would like to have an
opportunity to offer amendments myself.
All I want to do is follow the rules of the Senate.
Let me say that I am concerned, as I listen to colleagues
on both sides of the aisle, that we are going to have a literal
blizzard of amendments not directly related to this bill. I
continue to believe that at some point, in order to finish the
bill, we are going to have to file cloture.
I intend, as I said at the beginning of the debate, to
support that cloture motion. I think someone would have a hard
time portraying me as someone who is slowing down the process
when I am ready to vote to bring debate on this bill to an end
and force amendments to be germane to the bill itself.
My proposal is that we simply go on with the business of
the Senate. I am ready to offer an amendment. I am ready to
deal with the amendment of the Senator from Georgia. That
amendment is amendable. All of these amendments are amendable.
I suggest we simply proceed, let Members be recognized, and
have those Members move forward.
In light of that, I send an amendment to the desk in the
form of a second-degree amendment to division 1. It is a very
short amendment. I think the best thing to do is to have it
read.
Madam President, I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Reid. Madam President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. Madam President, I have spoken to the manager of
the bill. He has indicated he has no problem with someone
speaking on the bill as long as there is no effort to do
anything in a parliamentary fashion because there are
negotiations pending at the present time. We understand that. I
ask unanimous consent that the Senator from Illinois be
recognized to speak for purposes of debate only.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. Following his remarks, the quorum call will be
reinstituted.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Illinois.
Mr. Durbin. I thank my colleague from Nevada as well as the
Senator from Wyoming for allowing me to speak to the bill.
I am happy to be an original cosponsor of this amendment
with Senators Leahy and Daschle. The Public Company Accounting
Reform and Investor Protection Act is a long title, but what it
basically seeks to do is to address what most Americans view as
one of the most dangerous developments in our Nation's economy
in the last several years, if not longer.
When you ask the average American what they think of all
this corporate corruption, all of the disclosures about
corporations that have literally lied to the public, to their
shareholders, to their employees, and to pensioners, people
across America say it does not give them much hope for recovery
for our economy. It does not give them much confidence in terms
of investing in the stock market. And it makes them feel very
sad and worried about their own pension and retirement.
We were proud to announce several years ago that almost
half of Americans owned stock. We had developed to that point
where the average person thought owning stock was a normal
thing to do.
I grew up in a family with a mother and father who never
once purchased a share of stock until my mother in her later
years decided ``to gamble,'' as she called it. But it was
unthinkable in their working years to buy stock. They were
working people. They worked for a railroad. Workers didn't buy
stock.
That has changed. More and more people across America buy
mutual funds and stocks, 401(k)s, retirement plans. And why
wouldn't they? Look at what happened over the last 10 years. If
you were smart enough to buy yourself a dart board and put the
Wall Street Journal up on it and throw the dart, just about any
stock you hit was going to give you more money.
People came to realize that. They bought their mutual funds
and stocks and sat back and relaxed and said: This is easy. I
will be able to retire a lot sooner than I ever dreamed, and we
have more financial security in our family than ever before.
Boy, have things changed in the last 2 or 3 years. We have
seen a recession, the economy slow down, and then we watch as
day after painful day reports come of the Dow Jones and the
Nasdaq, all the rest of them, hitting new lows every single
day.
It has to do with the state of the economy, the recession,
but it has to do as much with consumer confidence, the belief
that you just can't trust the corporate big boys.
There are too many instances where they decided to cash in
with big stock options and walk away with millions--sometimes
hundreds of millions--of dollars and leave a floundering
corporation. They call it ``restatement.'' When I went to grade
school, if I tried to tell the nuns I wanted to restate
something I had said, I never got by with it. I got slapped on
the back of the hand with a ruler. They knew it was an
admission that you lied, misrepresented something. Now that is
commonplace when you deal with corporations across America.
Every week, there is some new disclosure.
Senator Leahy, Senator Daschle, and I sat down to say we
have to get to the heart of this issue and try to resolve it,
in terms of making certain there are penalties in place for
those who are deceitful, misleading, lying to the American
people about the status of corporations. From Wall Street to
Main Street, confidence has been shaken. It started off with
Enron, the poster child of runaway corporate greed. Isn't it
curious that today, as we debate corporate corruption, and
isn't it an oddity that there is an actress in Hollywood who is
facing possible jail time for shoplifting and she is facing
more time in jail than any officer of the Enron Corporation?
What is wrong with this picture? Somebody who shoplifts might
go to jail, but not the first person has been indicted at
Enron, the seventh largest corporation in America, which goes
bankrupt.
We had a series of hearings, and everybody on Capitol Hill
was wringing their hands and calling in the cameras, saying we
have to do something about it. Yet the Department of Justice
has yet to indict the first person at Enron.
So what we are saying with this amendment is that we want
to establish standards and practices so that those who violate
the law, who are guilty of corporate corruption, will pay a
price for it, not just a fine that may be ignored or paid off
by the corporation but more.
In our criminal code, we establish mandatory minimum
sentences for people who are caught with a thimbleful of
cocaine. We will put them in jail, and we won't give the judge
any flexibility. They go to jail for x number of years, no ifs,
ands, or buts. But if a person is engaged in ripping off
stockholders of a major corporation, lying about their books,
causing tens of thousands of people to lose their jobs,
jeopardizing the retirement plans of millions of Americans,
then, frankly, we say to them that yours is going to be a much
easier punishment.
What is wrong with this picture? Where are the scales of
justice? We should have known, when you have executives and
board members who stand to gain millions of dollars from acting
on insider information in the corporations they serve, that
many would be tempted to do exactly that--especially when they
knew there weren't any cops on the beat to keep an eye on
them--no auditors, accountants, or government agencies.
In the Gingrich revolution that occurred a few years ago,
we passed something called the ``Contract on America.'' One of
its provisions said, we are going to take away the power of
individuals to sue corporations when there has been securities
fraud. The argument was made that there were too many litigious
people and greedy lawyers who were meddling in the corporate
business and that we had to really close the door to that
opportunity. Well, that law was enacted. I voted against it
because it took away one more safeguard, one more protection
for the public.
Isn't it coincidental that now we stand here and talk about
the disintegration of corporate confidence? There were fewer
people watching then, and some of these corporate leaders were
reaching into the cookie jar and pulling out with both hands.
It happened over and over again. We should have known that when
you condition the salary of executives on potential gains from
how the company's stock prices will rise--known as options--
that would be a temptation to raise the stock prices
artificially, especially when those on the inside knew that, as
the prices would fall, they would already have their money.
We should have known that when you have auditors and
accountants shifting numbers to come up with the right set of
bottom-line figures they need to produce for Wall Street, they
would be tempted to do that even when the audited numbers
didn't add up. We should have known that when you have the
smartest lawyers and bankers in the country scheming all night
to come up with borderline legal ways to avoid paying taxes
through a maze of fictitious straw companies, they would be
tempted to do just that, especially when they knew Congress
wrote the laws with plenty of loopholes for which their
lobbyists paid.
We stand in the Senate and reflect upon the sad state of
business in America, and we have to wonder who is really at
fault.
Let me add that the vast majority of business leaders in
America are honest, hard-working people who have taken a risk
in our free enterprise system to produce goods and services of
value to our country and to the world, to create jobs and
wealth. They deserve our admiration and respect. But, clearly,
day after day, week after week, month after month, we read on
the front pages of our major newspapers about the exceptions to
what I just said.
Is it the executives who are responsible as the bad actors,
or their accountants, their auditors, their bankers? The answer
is all of the above. Every one of these must face up to their
responsibilities.
In due course, I hope we will enact stricter rules for
these corporate players. But we have to accept our
responsibility; Government and Congress has a responsibility.
I salute Senator Sarbanes of Maryland for what he has done
with Senator Enzi in bringing this bill to the floor. There is
an effort to divide up this bill in the hopes of changing a
statute of limitations.
Why is a statute of limitations of importance in this
debate? It really defines the reach of the law. If you tell me
there is a statute of limitations that limits the liability of
these corporate bad actors, I can tell you some people are
going to get off the hook. The Leahy amendment to Senator
Sarbanes' bill broadens the statute of limitations so that more
wrongdoers will be held accountable; those who have lied,
cheated, and stolen will be held accountable.
The opponents of this approach are now suggesting we need
to shorten the statute of limitations, limit the inquiry and
investigation of the Government, and limit the liability of the
bad actors. This is an answer to the prayers of many corporate
big wigs who have ripped off their stockholders, employees, and
pensioners across America.
This suggestion that we would lessen and shorten the
statute of limitations is what they want to hear. Some will now
be able to retire to their mansions, and they will be able to
live in the lap of luxury with the hundreds of millions of
dollars they have taken from these corporations and never be
called to answer for their violations of the law. That is what
happens when you shorten a statute of limitations. It is an
answer to the prayer of the corporate big wigs' defense
attorneys. Why in the world would we be doing that?
Why do we want to insulate from liability the very people
who are guilty of wrongdoing? Why would we not support Senator
Leahy's amendment to say that those who have violated the
public trust, those who have lied, misled, and been deceitful
should be held accountable both on a criminal and civil
standard?
So I certainly hope that at the end of this debate the
Senate, on a bipartisan basis, will stand by Senator Sarbanes
and his bill. I also hope that when it is all said and done,
the underlying amendment I have offered with Senator Leahy and
Senator Daschle will be accepted.
Let me tell you what the amendment does, in brief. It
punishes corporate criminals and creates a 10-year securities
fraud felony for any ``scheme or artifice'' to defraud
shareholders, and directs the U.S. Sentencing Commission to
raise penalties in obstruction of justice cases.
Two, it preserves evidence of fraud, establishes a new
felony for destroying evidence when records are under subpoena.
It requires key financial audit documents to be retained for 5
years, and it creates a new 5-year felony for intentional
destruction of documents.
Do you know what happened? As soon as Enron got in trouble,
they called some of their buddies at Arthur Andersen, and the
next thing you know, the documents are being shredded, evidence
is disappearing. This underlying amendment, the Leahy-Daschle-
Durbin amendment, addresses that specifically.
The third thing is that it protects victims. It creates
protections for corporate whistleblowers. We need them. If
insiders don't come forward, many times you don't know what is
happening in large corporations. It lengthens the statute of
limitations to 5 years from the date of fraud and 2 years from
the date of discovery for victims to bring claims against the
corporations. It prevents securities laws violators from using
bankruptcy to shield debts based on fraud judgments.
What they are trying to do--I see Senator Leahy in the
Chamber; he is the major sponsor of this amendment--is to gut
the provision that extends the statute of limitations and say
that these people will not have to be held accountable for
their wrongdoing.
I urge my colleagues in the Senate to resist this effort.
We have to hold these corporate wrongdoers accountable. We
should not be party to any kind of effort to reduce their
liability; otherwise, what message are we sending? Mandatory
minimum sentences for a thimbleful of cocaine, but allowing
those guilty of corporate wrongdoing to get off the hook. What
is wrong with this picture of justice?
I urge my colleagues to resist the change in the statute of
limitations, and I yield the floor.
Mr. Gramm addressed the Chair.
The Presiding Officer. The Senator from Texas.
Mr. Sarbanes. Madam President, I suggest the absence of a
quorum.
Mr. Gramm. Madam President, was I recognized?
The Presiding Officer. The Senator from Texas was
recognized.
Mr. Gramm. Madam President, let me answer what has just
been said and straighten out the facts. In 1995, we had a major
problem in America in that we had strike lawsuits being filed
against high-tech industries where one firm filed 80 percent of
the cases and settled almost all the cases out of court.
We had a bipartisan consensus that this represented abuse.
So under the leadership of Senator Dodd, Senator Domenici, and
others, we passed a bill which President Clinton vetoed. We
then overrode the veto. An important part of that reform was to
say--and let me make it clear, this does not have anything to
do with committing a crime where you can be put in jail. It has
nothing to do with the SEC's jurisdiction. It has nothing to do
with the Justice Department's jurisdiction. It simply has to do
with my right to file a lawsuit against you and anybody else's
right to file a lawsuit against anybody else.
We had a lot of reforms in that bill. You had to actually
have a client. The lawyer who was the lead lawyer in 80 percent
of these cases said he loved these type lawsuits because he did
not have to fool with a client. In essence, he was suing on
behalf of himself. Virtually a huge percent of the money went
to the lawyer filing the suit, not to the people who supposedly
had been harmed.
Part of the reform was to set a statute of limitation that
if you believe I have done something wrong, and you want to sue
me for it, you have 1 year from the time you find it out, or 3
years from when it happens to file a lawsuit.
When the Senator was talking about letting people off the
hook, surely everybody understands that our system has no ex
post facto laws. So if the provision raising that statute of
limitation to 5 years became law, it would have no effect on
anybody who has committed one of these violations about which
we are talking.
AMENDMENT NO. 4184 TO DIVISION 1 OF AMENDMENT NO. 4174
Mr. Gramm. Mr. President, having straightened that out,
that is not even the subject about which we are talking. We now
have three amendments pending, and I send a second-degree
amendment to the first amendment and ask for its immediate
consideration.
This is a very short amendment and I ask it be read because
the language of it is so clear that a lot of times we have an
amendment, and what we say does not have much to do with the
amendment. I want people to read the language.
The Presiding Officer (Mr. Carper). The clerk will report.
The legislative clerk read as follows:
The Senator from Texas [Mr. Gramm], for himself and Mr.
Santorum, proposes an amendment numbered 4184 to division 1 of
amendment No. 4174:
(Purpose: To provide the Board with appropriate flexibility in applying
non-audit services restrictions to small businesses)
At the end of the division, insert the following new section:
``SEC. . EXEMPTION AUTHORITY.
``(1) Case-by-Case Waivers.--Notwithstanding section 201(b)
of this Act. The Board may, on a case by case basis, exempt any
person, issuer, public accounting firm, or transaction from the
prohibition on the provision of services under section 10A(g)
of the Securities Exchange Act of 1934 (as added by this
section), to the extent that such exemption is necessary or
appropriate in the public interest and is consistent with the
protection of investors, and subject to review by the
Commission in the same manner as for rules of the Board under
section 107.
``(2) Small Business Exemption.--The Board may, by rule
exempt any person, issuer or public accounting firm (or classes
of such persons, issuers or public accounting firms) from the
prohibition on the provision of services under section 10A(g)
of the Securities Exchange Act of 1934 (as added by this
section), based upon the small business nature of such person,
issuer or public accounting firm, taking into consideration
applicable factors such as total asset size, availability and
cost of retaining multiple service providers, number of public
company audits performed, and such other factors and conditions
as the Board deems appropriate consistent with the purposes of
this Act.''.
The Presiding Officer. The Senator from Nevada.
Mr. Reid. Mr. President, I ask unanimous consent that I be
allowed to yield to the Senator from Georgia.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Georgia.
AMENDMENT NO. 4176 WITHDRAWN
Mr. Miller. Mr. President, I ask unanimous consent that the
Miller amendment be withdrawn.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The senior assistant bill clerk proceeded to call the roll.
Mr. Daschle. Mr. President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
DIVISION 1 OF AMENDMENT NO. 4174 WITHDRAWN
Mr. Daschle. Mr. President, I withdraw Division 1 of the
amendment.
The Presiding Officer. The division is withdrawn.
DIVISION 2 OF AMENDMENT NO. 4174 WITHDRAWN
Mr. Daschle. I withdraw Division 2 of the amendment.
The Presiding Officer. The division is withdrawn.
DIVISION 3 OF AMENDMENT NO. 4174 WITHDRAWN
Mr. Daschle. I withdraw Division 3 of the amendment.
The Presiding Officer. The division is withdrawn.
AMENDMENT NO. 4185
(Purpose: To provide for criminal prosecution of persons who alter or
destroy evidence in certain Federal investigations or defraud
investors of publicly traded securities, and for other purposes.)
Mr. Daschle. Mr. President, I send an amendment to the
desk.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from South Dakota [Mr. Daschle], for Mr. Leahy,
for himself, Mr. McCain, Mr. Daschle, Mr. Durbin, Mr. Harkin,
Mr. Cleland, Mr. Levin, Mr. Kennedy, Mr. Biden, Mr. Feingold,
Mr. Miller, Mr. Edwards, Mrs. Boxer, Mr. Corzine, and Mr.
Kerry, proposes an amendment numbered 4185.
Mr. Daschle. Mr. President, I ask unanimous consent that
the reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
Mr. Daschle. I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Daschle. Mr. President, I ask unanimous consent the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Daschle. Mr. President, first, let me say that we have
had a very productive period over the last several minutes, and
I think we now are in a position to move to a vote on the Leahy
amendment.
Mr. President, I ask unanimous consent that a vote occur on
the Leahy amendment at 3:15 this afternoon, and that there be
no amendments offered prior to the vote.
The Presiding Officer. Is there objection?
The Chair hears none, and it is so ordered.
Mr. Daschle. I thank the Chair.
Mr. Leahy. Mr. President, I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There appears to be.
The yeas and nays were ordered.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Mr. President, first, let me say, I am pleased
we have reached an agreement on the Leahy amendment. This is
one of these little technical things that does not mean much to
many people, and it is one where, in fact, there is a dispute,
but we have reached an agreement that will allow the Leahy
amendment to go forward with certainty on our part that the 2-
year statute of limitation is a real statute of limitation,
that we simply change the number and that in the process, by
the way we do it, we do not do anything that would challenge
the current court ruling.
Mr. Reid. Will my friend yield for a unanimous consent
request?
Mr. Gramm. I am happy to yield.
Mr. Reid. Mr. President, I ask unanimous consent that the
time from now until 3:15 be divided equally between the two
managers of the bill.
The Presiding Officer. Is there objection?
The Chair hears none, and it is so ordered.
Mr. Gramm. Mr. President, I thank the majority leader for
helping us work this out. I think this will give us the ability
now to move forward. As part of this agreement, we will have
cloture filed on the bill. While that cloture is ripening, we
will continue to consider amendments.
I think this agreement guarantees we will have an
opportunity, if not to finish the bill this week, the
opportunity to assure that it would be finished early next
week.
Let me also say, for the record, I would not object to a
unanimous consent request to have the cloture vote today or
tomorrow. From my point of view, we do not need to wait until
Friday to have the cloture vote. I would be willing to ask
unanimous consent that it be moved up, if that were
appropriate. I think that is up to the majority leader,
obviously. But from my point of view, we are ready to move and
head to conference with this bill.
This one small part of the Leahy amendment I do not think
is prudent policy, but there is greater certainty about what it
means in terms of the statute of limitations. So I am more
satisfied at least in terms of certainty.
I thank Senator Leahy for working this out. There is no
doubt about the fact that he had the votes if we could have
brought it all to a vote, but I think what we are doing, by
working out this simple compromise, is guaranteeing that we are
going to pass this bill in short order.
I am hopeful in conference we will be able to bring in the
changes the President has proposed. I understand the Republican
leader will offer them as an amendment. I will support them. I
hope they are adopted unanimously.
But in any case, I think this agreement paves the way to
guarantee we will pass this bill, hopefully, this week if not
early next week.
Let me say to my colleagues on the Republican side of the
aisle, I intend to vote for cloture. I think this is an
important piece of legislation. I would do important parts of
it differently than Senator Sarbanes, but he is Chairman and I
am ranking member; and we have been in the different positions.
There is a difference between the two, but we cannot get a bill
which I want unless we go to conference.
The House bill is very different. I think we have an
opportunity to work out a compromise, just as we did on
financial services modernization. Senator Sarbanes opposed it
when we dealt with it on the floor of the Senate, but by the
time we came back from conference, we got 90 votes. My guess
is, we will do as well or better on this bill after going to
conference.
So I think we have taken a major step toward moving on. I
think it is important. I think the American people want this
bill passed. If we were willing to move up the cloture vote,
which I am willing to do, we could pass it this week. If not,
we will pass it next week.
The Presiding Officer. Who yields time?
Mr. Leahy. Mr. President, would the distinguished senior
Senator from Maryland yield me, say, 5 minutes?
Mr. Sarbanes. Would the Senator mind if I made a very short
statement?
Mr. Leahy. I would be delighted if the distinguished
Chairman did.
Mr. Sarbanes. Mr. President, I rise to commend the
distinguished Senator from Vermont for the excellent work that
he and the Committee on the Judiciary did with respect to the
amendment that is now pending at the desk.
This amendment will create tough new penalties to punish
corporate fraud. It has very important provisions to protect
corporate whistleblowers. Previously, they have been acting
under wire and mail fraud provisions. And those are not
adequate to deal with securities fraud. The committee
recognized that and dealt directly with that question.
The President is talking about doubling the penalties for
wire and mail fraud, as I understand it, but did not have a
proposal to actually have a securities fraud offense. And that
is very important because it would have been very difficult
under those other statutes because they are not directly
focused on securities fraud.
I think the committee has stepped into what was clearly a
vacuum and has filled it in an exceedingly effective and
craftsmanlike way.
There are also important provisions in this amendment to
prohibit individuals from destroying documents or falsifying
records with the intent to obstruct or influence a Federal
investigation or a matter in bankruptcy. That is also very
important. We have some provisions of that sort but, once
again, they are not fully developed or fully focused. The
committee, again, has applied itself in order to do that and
obviously made a very substantial contribution in that regard.
I also want to touch, very briefly, on the provisions for
whistleblower protection for employees of public companies. The
legislation, as reported out of the Banking Committee, requires
audit committees to have in place procedures to receive and
address complaints regarding accounting and internal control or
auditing issues and to establish procedures for employees'
anonymous submissions of concerns regarding accounting or
auditing matters. That was a provision championed by Senator
Stabenow. We were very pleased to adopt it.
But Senator Leahy and his colleagues on the Judiciary
Committee have moved ahead to provide additional protections
and remedies for corporate whistleblowers that I think will
help to ensure that employees will not be punished for taking
steps to prevent corporate malfeasance.
There are a number of other very important provisions in
this legislation of which I am very strongly supportive, but I,
in deference to the limitation on time, will withhold with
respect to those.
But, again, I thank the able Chairman of the Judiciary
Committee and his colleagues for this very important
contribution to the legislation we are trying to develop.
Let me simply say it is a pleasure, once again, as we did
back in the fall when we did money laundering, to be able to
work closely with the committee in furthering the public
interest.
I yield the remainder of my time to the Senator from
Vermont.
The Presiding Officer. Thirteen minutes remain for the
majority. The Senator from Vermont.
Mr. Leahy. I thank the distinguished Senator from Maryland.
I appreciate his comments also about last fall after the
tragedies of September 11. He and I and our committees worked
closely on the terrorism legislation. Realizing it was more
than simply having a penalty against terrorism, we had to have
the tools against terrorism, and the distinguished senior
Senator from Maryland was very helpful in putting together the
money-laundering legislation so we could come out with a
counterterrorism package on which the Senate could vote for 99-
1.
That is what we are trying to do today. I am a proud
cosponsor of Senator Sarbanes' legislation before the body.
After years of experience in this body, I know how helpful it
is if you have bills where the jurisdiction of various aspects
may be in different committees. And considering having turf
battles, when you work together, as we have in the Banking and
Judiciary Committees, and others worked, you usually end up
with a better package for the Senate.
The final product becomes better and more complete because
of our joint work. Having served here for a quarter of a
century with the Senator from Maryland, I know such things can
be done.
With the members of his committee, he has had to craft a
very complex, worthwhile bill on the issue of how do you
account, how do you keep records, of all the various things to
come under the SEC, to come under the jurisdiction of his
committee.
What I am concerned about, from the Judiciary Committee,
is, if you get these people, you get them; that if you have
somebody who has gone and spent all their efforts to defraud
their own company and the pension holders in their company and
the investors in their company, that they not walk off scot-
free with their mansions in protected States and their offshore
money.
When you look at what has happened, when you look at the
out-and-out fraud of some of these executives as they have
ruined their own company, actually damaged their own country as
well, at the same time lining their pockets as if anybody could
even have pockets as huge as the amounts of money they have put
in, and they walk away scot-free and they say: This is such a
tragedy. I hate to see my company collapse like that and tens
of thousands of people out of work and all those pensioners
gone and all those States defrauded. And I am just going to
have to comfort myself for the rest of my life with my $100 or
$200 or $300 million I have absconded with.
Their comfort might be a little bit less if they find that
those same pension holders and stockholders have the ability to
go after the money they are walking away with, and their
comfort might be a little bit less if instead of a very large
mansion they are in a 12-by-12 cell behind steel doors. Instead
of a complacent board of directors, they may have to be dealing
with their fellow inmates who may not take very kindly to them.
Why do we have to have that kind of a tough law, and why do
we have to have the statute of limitations? Just take a look at
this chart. This is what Enron did. Does this look like a
company that wants to be transparent in their dealings? Does
this look like a company that wants to be on the up and up?
These are their off-the-book transactions, hidden debt, fake
profits, inflated stock.
What were some of the companies they were hiding this
behind? Here is one named Ponderosa. If you look at that, you
do not know it belongs to Enron. Or Jedi Capital or Big Doe--
that is not D-O-U-G-H--or Sundance or Little River or Yosemite
or OB-1 Holdings or Peregrine or Kenobe. I guess Kenobe is a
different company than OB-1. And we have Braveheart and Mojave
and Chewco and Condor. It seems the only time they had free
between trying to hide the money was going to movies, when you
look at some of the secret partnerships they created here, Jedi
II, OB-1, Kenobe.
My point is, do you think if anybody stumbled across one of
these companies they would think for even 1 minute that it
belonged to Enron? Of course not. If you were the person who
was to protect the pension rights of the employees, do you
think if you found Ospry or Zenith or Egret or Cactus or Big
River or Raptor you would think the money that was being tucked
away and hidden in there could actually belong to the employees
of Enron?
But Kenneth Lay comes up here, sidles up to the table where
he is going to be called to testify and says: I wish you could
know the whole story, but not from me. I am taking the fifth.
Well, he has that constitutional right. But he doesn't have
a constitutional right to steal and defraud, and other people
like him don't have the constitutional right to steal and
defraud and hide the money.
This isn't a question of whether they walk away with only
$100 million instead of $200 million. It is a question of a
middle-age couple reaching retirement time and having virtually
all their retirement save Social Security tied up in a pension
fund such as this and seeing it wiped out that day. They are
not facing a question of whether they will have $200 million or
$100 million. They are going to face the question of whether
they can even keep their home, whether they will have the money
to visit their grandchildren, or have the money to take care of
their medical needs in their old age. That is what we are
talking about. Or the people who work so hard, show up for work
every single day, help make the fortune for the Ken Lays of the
world, but they suddenly find they can't make the mortgage
payment, they can't make the car payment, they can't pay for
their children's braces. They can't do any of these other
things because the big guys have walked off with all the money.
That is why I wrote the legislation I did. I wrote
legislation that is going to punish criminals. I wrote
legislation that will preserve the evidence of fraud and
protect victims.
As one who has prosecuted people, I know nothing focuses
their attention more than knowing they will not go to jail.
Suddenly that overlooked ethics course when they were getting
their MBA, or that overlooked ethics course in the accounting
school or law school, they are going to start looking at it
again. If they think, because they can walk away from this,
they will go to jail, they are going to go to jail. It is not
going to be a complacent board of directors they will deal
with. It will be a criminal in the cell next door. That is what
they have to worry about.
These people deserve to go to jail. They have ruined the
lives of thousands of people, good people, hard-working people,
honest
people. They have destroyed much of the confidence in Wall
Street. They have destroyed the confidence in people who should
be investing.
I am proud to be an American and proud to be in a country
such as ours where you can invest, where people can grow
companies, where they can make money if they do the right
thing. But I am not proud of these kinds of people who destroy
that sort of American dream.
The President says he is outraged. I suspect he is. But I
am also outraged. I would hope the President's outrage will go
to the point of supporting this kind of legislation, this kind
of legislation which doesn't just say it is wrong for you to do
that, but if you do it, you are going to go to jail. Those iron
bars are going to close.
We have worked hard on this legislation. That is why I
compliment the distinguished senior Senator from Maryland. He
and the members of his committee worked very hard. The people
of my staff, including Ed Pagano, Steve Dettelbach, Jessica
Berry, and Bruce Cohen worked so hard. They brought in people
from across the political spectrum, Republicans and Democrats
alike, to join us. I think all of those who joined it joined in
one basic thing. They set aside their philosophical or partisan
differences. They set aside their feelings of party and said
they were overwhelmed with feelings of outrage.
Even in my own little State of Vermont, pension funds were
damaged because of the excesses of Enron. And then we see
WorldCom and Tyco and Xerox, and we say we had better look back
5 years.
That is not the American way. That is the way of some of
the most arrogant, self-centered, spoiled criminals. That is
what they are; they are criminals. They cooked the books in
California during an energy crisis, so millions of people in
California paid more for their electricity. Their arrogance was
such that they did not care because all of those offshore
corporations were hiding the money. Lord knows how much money
is still there. You are not going to find out from these
executives because they will take the fifth. They have the
constitutional right to do that, and I will defend that right,
as I will the rights of everybody else. But let us not shed
tears for them. Just as Democrats and Republicans will join in
voting for this, I call on the President and the Attorney
General to step forward and say they support it. And I call on
our Justice Department to go forward and find some of these
people not just to say maybe we will find a corporation guilty
of a crime; let's send some of these people to jail for what
they have done. Let's send them to jail, and let's do
everything we can to let the people defrauded by them recover
some of their ill-gotten gains.
I see the Senator from Michigan has taken over the chair.
Madam President, I reserve the remainder of my time.
The Presiding Officer. The Senator's time has expired.
Mr. Leahy. I note that the Senator from Michigan is a
cosponsor of this amendment.
The Presiding Officer. The Senator from Texas is
recognized.
Mr. Gramm. Madam President, I think all time has expired on
the majority side. I think I have about 13 minutes. I have said
all I intended to say. I think we have cleared the way for this
bill to be passed. I want to reiterate that when cloture is
filed in a few minutes, I will be supportive of having that
cloture vote earlier than Friday, which would be the normal
time it would ripen. Maybe others would not be supportive of
having the vote, and they are perfectly within their rights. I
think the agreement we worked out has guaranteed we are going
to pass this bill either this week or very early next week.
The net result is that we can go to conference with the
House, and we will have an opportunity, I believe, to come back
with a strong bipartisan bill. I have to say that I think we
have sort of reached the point where a lot of debate on this
issue is more about the next election than it is about
corporate integrity. I wonder if the debate has not reached the
point where we are hurting equity values by making people fear
not only the disease, but the absurd prescription of the doctor
that might come from the Government.
I think the sooner we can finish this bill and go to
conference and come out with a final product so that people
know with certainty what the new rules are and how we are going
to go about them, everybody will benefit. I think the only
thing that will be lost by invoking cloture is that we will
have fewer speeches, we will have fewer opportunities to
denounce evil, however we define it, and we will be less likely
to get on the 6 o'clock news; but we will also be less likely
to spook the markets and more likely to get our job done; we
will be more likely to produce a good bill we can all be proud
of, not just when we read the editorial in the Washington Post,
but when we submit it all to the front-porch-of-the-nursing-
home test, as to how we feel about it someday when we are
sitting on the front porch of the nursing home.
Mr. Harkin. Mr. President, our economic system is based on
transparency. Investors need accurate financial information
about a company so that they can make informed investment
decisions. They need information they can trust. Getting honest
information requires accountability and honesty from three
entities: corporate executives, stock brokers, and public
auditors. Clearly, we are seeing breakdowns, if not outright
criminality, at all three levels. And it requires additional
accountability at all three levels in order to restore investor
confidence.
First, we must expect that corporations present an honest
portrait of the companies economic health and well-being.
Corporate executives who cooks the books are no different than
used car salesmen who roll back the car odometers, both are
engaged in a fraud. They must be held accountable for their
actions and severely punished.
Second, we must expect brokers provide their investors with
honest, accurate, and unbiased advice. I stress unbiased.
Unfortunately, many brokerage firms have a conflict of interest
because they bring in businesses and increase their own profits
by pushing bad stocks. One recent report indicated that 94
percent of Wall Street firms continued to recommend stocks for
companies that went bankrupt this year up to the very day that
companies filed for Chapter 11.
Third, we have to expect that public accounting firms are
acting as watchdogs over corporate financial statements. Yet
many of the auditing firms, not just Arthur Andersen, have had
major failures.
Accounting firms gave a clean bill of health to over 93
percent of publicly traded companies that were subsequently
involved in
accounting problems within the year. And 42 percent of publicly
traded companies that filed for bankruptcy were given a clean
bill of health. Clearly, we need fundamental reform at all
three levels to restore investor confidence and punish criminal
behavior. Some say may say that Enron, Worldcom and the others
are a few bad apples. That ignores the much wider, systemic
problems that now plague corporate America.
Advocating half measures or saying that we do not need to
strengthen the law is like saying that bank robbery should not
be severely punished and banks should not have vaults because
most people do not rob banks. Well, some people do rob banks.
And some corporate executives rip off investors. But they are
both criminals and both should be punished accordingly.
I commend Chairman Sarbanes for his accounting reform bill,
S. 2673, which is an excellent start at providing for stronger
rules regarding accounting procedures. I am also pleased to be
an original cosponsor of Senator Leahy's ``Corporate and
Criminal Fraud Accountability Act,'' that is now being offered
as an amendment. Will some key executives go to jail if this
amendment passes? If they are guilty of fraud or destroying
evidence of wrong doing, I certainly hope so.
First, the amendment creates a new crime for security fraud
and helps prosecutors punish corporate criminality. This
amendment is a lot like the ``Go to Jail'' card in the board
game ``Monopoly.'' It says to corporate criminals ``go to jail,
do not pass go and do not collect $200.'' The amendment also
increases penalties for obstruction of justice. The people who
would shred documents to cover up criminal behavior are not
better than the ``wheel man'' in a robbery. They may not have
pulled the robbery, but the crook cannot getaway without them.
This amendment would make sure the shredders are held
accountable as well.
Incidentally, the amendment also lengthens the statute of
limitations on these crimes and protects corporate
whistleblowers. Corporate criminals should not be allowed to
run out the clock and avoid prosecution. And workers who
discover corporate fraud should be protected just as we protect
government whistleblowers. I believe this amendment will go a
long way toward preventing corporate crime and prosecuting
those who would rip off their stock holders and employees.
Restoring confidence and punishing criminal behavior is in
everyone's best interest--honest corporate executives, their
employees, investors, and the public at large. I urge adoption
of the amendment and look forward to seeing it become law.
I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Sarbanes. Madam President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer (Ms. Stabenow). Without objection, it
is so ordered.
Under the previous order, the question is on agreeing to
amendment No. 4185. The yeas and nays have been ordered. The
clerk will call the roll.
The legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from North
Carolina (Mr. Helms), the Senator from Ohio (Mr. Voinovich),
and the Senator from Idaho (Mr. Crapo), are necessarily absent.
I further announce that if present and voting the Senator
from North Carolina (Mr. Helms) would vote ``yea.''
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The result was announced--yeas 97, nays 0, as follows:
[Rollcall Vote No. 169 Leg.]
Yeas--97: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Craig, Daschle, Dayton, DeWine,
Dodd, Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold,
Feinstein, Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel,
Harkin, Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye,
Jeffords, Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin,
Lieberman, Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller,
Murkowski, Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid,
Roberts, Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby,
Smith (NH), Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas,
Thompson, Thurmond, Torricelli, Warner, Wellstone, Wyden
Not Voting--3: Crapo, Helms, Voinovich
The amendment (No. 4185) was agreed to.
Mr. Daschle. Madam President, I move to reconsider the
vote.
Mr. Sarbanes. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
AMENDMENT NO. 4186
Mr. Daschle. Madam President, I send an amendment to the
desk.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from South Dakota [Mr. Daschle], for Mr. Biden
and Mr. Hatch, proposes an amendment numbered 4186.
Mr. Daschle. Madam President, I ask unanimous consent that
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To increase criminal penalties relating to conspiracy, mail
fraud, wire fraud, and certain ERISA violations, and for other
purposes)
At the end, add the following:
TITLE VIII--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
SEC. 801 SHORT TITLE.
This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.
SEC. 802. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE OR TO
DEFRAUD THE UNITED STATES.
Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through ``If,
however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined or imprisoned, or both, as set forth in
the specific substantive offense which was the object of the
conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined under this title, or imprisoned not more
than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.
SEC. 803. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
SEC. 804. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.
Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(2) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.
SEC. 805. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-
COLLAR OFFENSES.
(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the need
to modify the sentencing guidelines and policy statements to
deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and specifically,
are adequate in view of the statutory increases in penalties
contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;
(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
SEC. 806. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. Failure of corporate officers to certify financial reports
``(a) Certification of Periodic Financial Reports.--Each periodic
report containing financial statements filed by an issuer with the
Securities Exchange Commission pursuant to section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall
be accompanied by a written statement by the Chairman of the board,
chief executive officer, and chief financial officer (or equivalent
thereof) of the issuer.
``(b) Content.--The statement required under subsection (a) shall
certify the appropriateness of the financial statements and disclosures
contained in the periodic report or financial report, and that those
financial statements and disclosures fairly present, in all material
respects, the operations and financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other provision of
law--
``(1) any person who recklessly violates any provision of this
section shall upon conviction be fined not more than $500,000, or
imprisoned not more than 5 years, or both; or
``(2) any person who willfully violates any provision of this
section shall upon conviction be fined not more than $1,000,000, or
imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section analysis for
chapter 63 of title 18, United States Code, is amended by adding at the
end the following:
``1348. Failure of corporate officers to certify financial reports.''.
Mr. Daschle. Madam President, I know there are a number of
Senators who wish to be recognized to offer amendments. I think
Senator Lott would like very much to offer an amendment as
well. What I would like to do is to propound a unanimous
consent request involving a number of Senators who have
amendments to be offered so they will know the sequence. I know
Senator Edwards has been waiting a long time to offer an
amendment, as well as Senator Levin, Senator Schumer, Senator
Gramm, and Senator McCain. Perhaps in the next couple of
minutes we can put together a unanimous consent request which
will sequence these amendments so Senators will know they are
protected and have the opportunity to then have their
amendments called up. I ask that all of our colleagues work
with us over the course of the next few minutes.
I yield the floor to accommodate Senator Lott's interest in
offering his amendment. We will lay aside the Biden amendment
temporarily as that amendment is considered as well.
The Presiding Officer. The Republican leader.
Mr. Lott. Madam President, first, I thank Senators
Sarbanes, Gramm, and Leahy for the work they have put into
moving through the amendment on which we just voted. That
allows us to move on to other germane or important amendments
that will be offered.
AMENDMENT NO. 4188
Madam President, I understand the Biden amendment will be
set aside. So I send to the desk my amendment.
The Presiding Officer. Without objection, the pending
amendment is set aside, and the clerk will report.
The legislative clerk read as follows:
The Senator from Mississippi [Mr. Lott] proposes an
amendment numbered 4188.
Mr. Lott. Madam President, I ask unanimous consent that
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To deter fraud and abuse by corporate executives)
At the appropriate place, insert the following:
SEC. . HIGHER MAXIMUM PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 is amended by striking
``five'' and inserting ``ten''.
(b) Wire Fraud.--Section 1343 is amended by striking
``five'' and inserting ``ten''.
SEC. . TAMPERING WITH A RECORD OR OTHERWISE IMPEDING AN OFFICIAL
PROCEEDING.
Section 1512 of title 18, United States Code is amended--
(a) by re-designating subsections (c), (d), (e), (f), (g),
(h), and (i) as subsections (d), (e), (f), (g), (h), (i) and
(j);
(b) by inserting after subsection (b) the following new
subsection:
``(c) Whoever corruptly--
``(1) alters, destroys, mutilates or conceals a record,
document or other object, or attempts to do so, with the intent
to impair the object's integrity or availability for use in an
official proceeding; or
``(2) otherwise obstructs, influences, or impedes any
official proceeding, or attempts to do so;
``shall be fined under this title or imprisoned not more
than ten years, or both.''
SEC. . TEMPORARY FREEZE AUTHORITY FOR THE SECURITIES AND EXCHANGE
COMMISSION.
(a) In General.--The Securities Exchange Act of 1934 is
amended by inserting after section 21C(c)(2) (15 U.S.C. 78u-
3(c)(2)) the following:
``(3) Temporary freeze.--
``(A) Whenever during the course of a lawful investigation
involving possible violations of the Federal securities laws by
an issuer of publicly traded securities or any of its
directors, officers, partners, controlling persons, agents or
employees, it shall appear to the Commission that it is likely
that the issuer will make extraordinary payments (whether
compensation or otherwise) to any of the foregoing persons, the
Commission may petition a Federal district court for a
temporary order requiring the issuer to escrow, subject to
court supervision, those payments in an interest-bearing
account for 45 days. Such an order shall be entered, if the
court finds that the issuer is likely to make such
extraordinary payments, only after notice and opportunity for a
hearing, unless the court determines that notice and hearing
prior to entry of the order would be impracticable or contrary
to the public interest. A temporary order shall become
effective immediately and shall be served upon the parties
subject to it and, unless set aside, limited or suspended by
court of competent jurisdiction, shall remain effective and
enforceable for 45 days. The period of the order may be
extended by the court upon good cause shown for not longer than
45 days, provided that the combined period of the order not
exceed 90 days.
``(B) If the individual affected by such order is charged
with violations of the Federal securities laws by the
expiration of the 45 days (or the expiration of any extended
period), the escrow would continue, subject to court approval,
until the conclusion of any legal proceedings. The issuer and
the affected director, officer, partner, controlling person,
agent or employee would have the right to petition the court
for review of the order. If the individual affected by such
order is not charged, the escrow will terminate at the
expiration of the 45 days (or the expiration of any extended
period), and the payments (with accrued interest) returned to
the issuer.
(b) Technical Amendment.--Section 21C(c)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2)) is
amended by striking ``This'' and inserting ``Paragraph (1) of
this''.
SEC. . AMENDMENT TO THE FEDERAL SENTENCING GUIDELINES.
(a) Request for Immediate Consideration by the United
States Sentencing Commission.--Pursuant to its authority under
section 994(p) of title 28, United States Code, and in
accordance with this section, the United States Sentencing
Commission is requested to--
(1) promptly review the sentencing guidelines applicable to
securities and accounting fraud and related offenses;
(2) expeditiously consider promulgation of new sentencing
guidelines or amendments to existing sentencing guidelines to
provide an enhancement for officers or directors of publicly
traded corporations who commit fraud and related offenses; and
(3) submit to Congress an explanation of actions taken by
the Commission pursuant to paragraph (2) and any additional
policy recommendations the Commission may have for combating
offenses described in paragraph (1).
(b) Other.--In carrying out this section, the Sentencing
Commission is requested to:
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of securities, pension,
and accounting fraud and the need for aggressive and
appropriate law enforcement action to prevent such offenses;
(2) assure reasonable consistency with other relevant
directives and with other guidelines;
(3) account for any aggravating or mitigating circumstances
that might justify exceptions, including circumstances for
which the sentencing guidelines currently provide sentencing
enhancements;
(4) make any necessary conforming changes to the sentencing
guidelines; and
(5) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
(c) Emergency Authority and Deadline for Commission
Action.--The Commission is requested to promulgate the
guidelines or amendments provided for under this section as
soon as practicable, and in any event not later than the 120
days after the date of the enactment of this Act, in accordance
with the procedures set forth in section 21(a) of the
Sentencing Reform Act of 1987, as though the authority under
that Act had not yet expired.
SEC. . AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS FROM SERVING AS
OFFICERS OR DIRECTORS.
(a) In section 21C of the Exchange Act of 1934, add at the
end a new subsection as follows:
``( ) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 10(b) of this title or the
rules or regulations thereunder from acting as an officer or
director of any issuer that has a class of securities
registered pursuant to section 12 of this title or that is
required to file reports pursuant to section 15(d) of this
title if the person's conduct demonstrates unfitness to serve
as an officer or director of any such issuer.''
(b) In section 8A of the Securities Act add at the end a
new subsection as follows:
``( ) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 17(a)(1) of this title 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 that Act if the person's
conduct demonstrates unfitness to serve as an officer or
director of any such issuer.''
AMENDMENT NO. 4189 TO AMENDMENT NO. 4188
Mr. Gramm. Madam President, I send a second-degree
amendment to the desk.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from Texas [Mr. Gramm] proposes an amendment
numbered 4189 to amendment No. 4188.
Mr. Gramm. Madam President, I ask unanimous consent that
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To deter fraud and abuse by corporate executives)
Strike all after the first word, and insert the following:
HIGHER MAXIMUM PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 is amended by striking ``five'' and
inserting ``ten''.
(b) Wire Fraud.--Section 1343 is amended by striking ``five'' and
inserting ``ten''.
SEC. . TAMPERING WITH A RECORD OR OTHERWISE IMPEDING AN OFFICIAL
PROCEEDING.
Section 1512 of title 18, United States Code is amended--
(a) by re-designating subsections (c), (d), (e), (f), (g),
(h), and (i) as subsections (d), (e), (f), (g), (h), (i) and
(j);
(b) by inserting after subsection (b) the following new
subsection:
``(c) Whoever corruptly--
``(1) alters, destroys, mutilates or conceals a record,
document or other object, or attempts to do so, with the intent
to impair the object's integrity or availability for use in an
official proceeding; or
``(2) otherwise obstructs, influences, or impedes any
official proceeding, or attempts to do so;
``shall be fined under this title or imprisoned not more than
ten years, or both.''
SEC. . TEMPORARY FREEZE AUTHORITY FOR THE SECURITIES AND EXCHANGE
COMMISSION.
(a) In General.--The Securities Exchange Act of 1934 is
amended by inserting after section 21C(c)(2) (15 U.S.C. 78u-
3(c)(2)) the following:
``(3) Temporary freeze.--
``(A) Whenever during the course of a lawful investigation
involving possible violations of the Federal securities laws by
an issuer of publicly traded securities or any of its
directors, officers, partners, controlling persons, agents or
employees, it shall appear to the Commission that it is likely
that the issuer will make extraordinary payments (whether
compensation or otherwise) to any of the foregoing persons, the
Commission may petition a Federal district court for a
temporary order requiring the issuer to escrow, subject to
court supervision, those payments in an interest-bearing
account for 45 days. Such an order shall be entered, if the
court finds that the issuer is likely to make such
extraordinary payments, only after notice and opportunity for a
hearing, unless the court determines that notice and hearing
prior to entry of the order would be impracticable or contrary
to the public interest. A temporary order shall become
effective immediately and shall be served upon the parties
subject to it and, unless set aside, limited or suspended by
court of competent jurisdiction, shall remain effective and
enforceable for 45 days. The period of the order may be
extended by the court upon good cause shown for not longer than
45 days, provided that the combined period of the order not
exceed 90 days.
``(B) If the individual affected by such order is charged
with violations of the Federal securities laws by the
expiration of the 45 days (or the expiration of any extended
period), the escrow would continue, subject to court approval,
until the conclusion of any legal proceedings. The issuer and
the affected director, officer, partner, controlling person,
agent or employee would have the right to petition the court
for review of the order. If the individual affected by such
order is not charged, the escrow will terminate at the
expiration of the 46 days (or the expiration of any extended
period), and the payments (with accrued interest) returned to
the issuer.
(b) Technical Amendment.--Section 21C(c)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2)) is
amended by striking ``This'' and inserting ``Paragraph (1) of
this''.
SEC. . AMENDMENT TO THE FEDERAL SENTENCING GUIDELINES.
(a) Request for Immediate Consideration by the United
States Sentencing Commission.--Pursuant to its authority under
section 994(p) of title 28, United States Code, and in
accordance with this section, the United States Sentencing
Commission is requested to--
(1) promptly review the sentencing guidelines applicable to
securities and accounting fraud and related offenses;
(2) expeditiously consider promulgation of new sentencing
guidelines or amendments to existing sentencing guidelines to
provide an enhancement for officers or directors of publicly
traded corporations who commit fraud and related offenses; and
(3) submit to Congress an explanation of actions taken by
the Commission pursuant to paragraph (2) and any additional
policy recommendations the Commission may have for combating
offenses described in paragraph (1).
(b) Other.--In carrying out this section, the Sentencing
Commission is requested to:
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of securities, pension,
and accounting fraud and the need for aggressive and
appropriate law enforcement action to prevent such offenses;
(2) assure reasonable consistency with other relevant
directives and with other guidelines;
(3) account for any aggravating or mitigating circumstances
that might justify exceptions, including circumstances for
which the sentencing guidelines currently provide sentencing
enhancements;
(4) make any necessary conforming changes to the sentencing
guidelines; and
(5) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
(c) Emergency Authority and Deadline for Commission
Action.--The Commission is requested to promulgate the
guidelines or amendments provided for under this section as
soon as practicable, and in any event not later than the 120
days after the date of the enactment of this Act, in accordance
with the procedures set forth in section 21(a) of the
Sentencing Reform Act of 1987, as though the authority under
that Act had not yet expired.
SEC. . AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS FROM SERVING AS
OFFICERS OR DIRECTORS.
(a) In section 21C of the Exchange Act of 1934, add at the
end a new subsection as follows:
``( ) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 10(b) of this title or the
rules or regulations thereunder from acting as an officer or
director of any issuer that has a class of securities
registered pursuant to section 12 of this title or that is
required to file reports pursuant to section 15(d) of this
title if the person's conduct demonstrates unfitness to serve
as an officer or director of any such issuer.''
(b) In section 8A of the Securities Act add at the end a
new subsection as follows:
``( ) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 17(a)(1) of this title 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 that Act if the person's
conduct demonstrates unfitness to serve as an officer or
director of any such issuer.''
Mr. Daschle. Madam President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Daschle. Madam President, I ask unanimous consent the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
AMENDMENT NO. 4186, AS MODIFIED
Mr. Daschle. Madam President, I think we are working
through the number of procedural issues with which we have to
deal. I want to make sure we are in a position to be able to
complete that work. So I call for the regular order.
The Presiding Officer. Amendment No. 4186 is pending.
Mr. Daschle. I modify the original amendment that I offered
with the changes that are at the desk.
The Presiding Officer. The amendment is so modified.
The amendment, as modified, is as follows:
On page 117 in line 12 strike ``Act'' and insert the
following: Act.
TITLE VIII--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
SEC. 801 SHORT TITLE.
This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.
SEC. 802. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE OR TO
DEFRAUD THE UNITED STATES.
Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through ``If,
however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined or imprisoned, or both, as set forth in
the specific substantive offense which was the object of the
conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined under this title, or imprisoned not more
than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.
SEC. 803. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
SEC. 804. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.
Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(2) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.
SEC. 805. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-
COLLAR OFFENSES.
(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the need
to modify the sentencing guidelines and policy statements to
deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and specifically,
are adequate in view of the statutory increases in penalties
contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;
(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
SEC. 806. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. Failure of corporate officers to certify financial reports
``(a) Certification of Periodic Financial Reports.--Each
periodic report containing financial statements filed by an
issuer with the Securities Exchange Commission pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written
statement by the Chairman of the board, chief executive
officer, and chief financial officer (or equivalent thereof) of
the issuer.
``(b) Content.--The statement required under subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other
provision of law--
``(1) any person who recklessly violates any provision of
this section shall upon conviction be fined not more than
$500,000, or imprisoned not more than 5 years, or both; or
``(2) any person who willfully violates any provision of
this section shall upon conviction be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section
analysis for chapter 63 of title 18, United States Code, is
amended by adding at the end the following:
``1348. Failure of corporate officers to certify financial reports.''.
Mr. Daschle. Madam President, I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There appears to be a sufficient second.
The yeas and nays were ordered.
AMENDMENT NO. 4190 TO AMENDMENT NO. 4186, AS MODIFIED
Mr. DASCHLE. Madam President, I send up an amendment in the
second degree.
What we have done now is to assure that both the Biden
amendment and the Lott amendment will have an opportunity to be
considered and debated. I am hoping we might even be able to
continue to work to see if we can have one vote rather than
two.
The Presiding Officer. The clerk will report the amendment.
The legislative clerk read as follows:
The Senator from South Dakota [Mr. Daschle], for Mr. Biden,
proposes an amendment numbered 4190 to amendment No. 4186, as
modified.
The amendment is as follows:
(Purpose: To increase criminal penalties relating to conspiracy, mail
fraud, wire fraud, and certain ERISA violations, and for other
purposes)
Strike all after the first word and insert the following:
VIII--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
SEC. 801 SHORT TITLE.
This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.
SEC. 802. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE OR TO
DEFRAUD THE UNITED STATES.
Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through ``If,
however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined or imprisoned, or both, as set forth in
the specific substantive offense which was the object of the
conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined under this title, or imprisoned not more
than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.
SEC. 803. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
SEC. 804. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.
Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(2) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.
SEC. 805. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-
COLLAR OFFENSES.
(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the need
to modify the sentencing guidelines and policy statements to
deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and specifically,
are adequate in view of the statutory increases in penalties
contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;
(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
SEC. 806. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. Failure of corporate officers to certify financial reports
``(a) Certification of Periodic Financial Reports.--Each
periodic report containing financial statements filed by an
issuer with the Securities Exchange Commission pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written
statement by the Chairman of the board, chief executive
officer, and chief financial officer (or equivalent thereof) of
the issuer.
``(b) Content.--The statement required under subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other
provision of law--
``(1) any person who recklessly violates any provision of
this section shall upon conviction be fined not more than
$500,000, or imprisoned not more than 5 years, or both; or
``(2) any person who willfully violates any provision of
this section shall upon conviction be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section
analysis for chapter 63 of title 18, United States Code, is
amended by adding at the end the following:
``1348. Failure of corporate officers to certify financial reports.''.
This section shall take effect one day after date of this
bill's enactment.
Mr. Daschle. Madam President, I yield the floor. It is my
understanding Senator Biden and Senator Lott would both like to
address their amendments. I yield for that purpose now.
The Presiding Officer. The Republican leader.
AMENDMENT NO. 4188
Mr. Lott. Madam President, if I could describe my amendment
briefly. I understand Senator Biden is prepared to do the same
thing.
First, I should note, in at least one area they overlap in
what they propose. In some other areas, there are some
differences. But I don't see there are major problems.
Senator Biden's amendment, as I understand it, just from
looking at it quickly, would increase penalties in some areas
that are not included in my amendment. What this amendment
would do, though, is increase penalties for corporate fraud.
Section 1 would increase maximum sentences for fraud. Mail
fraud and wire fraud statutes are often used in criminal cases
involving corporate wrongdoing. So obviously this is an area
that is of concern and needs to be addressed. This section
proposes doubling the maximum prison term for these crimes from
5 years to 10 years by amending 18 U.S.C. sections 1341 and
1343.
The second section would enact stronger laws against
document shredding. Current law prohibits obstruction of
justice by a defendant acting alone, but only if a proceeding
is pending and a subpoena has been issued for the evidence that
has been destroyed or altered. Timing is very important.
Most people understand that shredding documents is a very
bad thing to do. Obviously, you cannot do it if there is
something pending or if there is a subpoena. But as was the
case recently, they knew that an investigation was underway and
a subpoena was likely, and the shredding of documents went
forward.
So this section would allow the Government to charge
obstruction against individuals who acted alone, even if the
tampering took place prior to the issuance of a grand jury
subpoena. I think this is something we need to make clear so we
do not have a repeat of what we saw with the Enron matter
earlier this year.
Section 3 freezes payments of potential wrongdoers. This
section would allow the SEC, during an investigation, to seek
an order in Federal court imposing a 45-day freeze on
extraordinary payments to corporate executives.
Again, this year we have seen just that sort of thing
happening. While an investigation is underway, basically
rewards were given to these corporate executives. While it
would require a court order, there would be this 45-day freeze.
The targeted payments would be placed in escrow, ensuring
that corporate assets are not improperly taken from an
executive's personal benefit.
If an executive is charged with violations of Federal
securities laws prior to the expiration of the court order, the
escrow would continue until the conclusion of legal
proceedings, again, with court approval.
Section 4 involves sentencing guideline enhancements for
crimes committed by corporate officers and directors. This
section would implement President Bush's call on the Sentencing
Commission to quickly adopt the new ``aggravating factor'' to
provide stronger penalties for fraud when the crime is
committed by a corporate officer or director. This
``aggravating factor'' is a term of art used in the law. It
would provide, under this section, stronger penalties for such
fraud.
Section 5 would bar corporate officers and directors who
engage in serious misconduct. Under current law, only a Federal
court can issue an order prohibiting a person from acting as an
officer or director of a public company.
The SEC cannot order this remedy in its own administrative
cease-and-desist proceedings, even in a case of securities
fraud where the person's conduct would otherwise meet the
standards for imposing such a bar. This section would grant the
SEC the authority to issue such orders if a person had
committed securities law violation and his or her conduct
demonstrated unfitness to serve as an officer or a director.
These points are all points that were made by the
President, asking that legislation be provided to provide for
these additional increases and strengthening of the law. We
have found clearly that in recent events there has been
improper conduct. There have been questionable accounting
procedures, and there has probably been some illegal conduct.
So you can put all the laws in the world on the books, but if
people act in bad faith, violate the law, you can never
legislate morality.
We have also seen that there are some cases where the law
had some loopholes or where it was not timely or where it was
not strong enough. One example, of course, is where there has
been shredding. Another example is the very bad image of
corporate executives taking increased payments, extraordinary
payments, while they are being investigated. You can't have
that sort of thing.
I think these are basic things that should be added to this
bill. It would strengthen the bill. I have checked with a
number of Senators on both sides of the aisle. There is general
support for this legislation.
I thank Senator Biden for allowing me to make this brief
statement about the amendment. Again, I emphasize that there
are some similarities between this amendment and his amendment,
but he does add additional penalties beyond what is in this
proposal. But I did want to put into the bill what the
President specifically recommended.
The Presiding Officer (Mr. Dayton). The Senator from
Delaware.
Mr. Biden. Mr. President, this amendment is from Senator
Hatch and me. He had as much input in this as I had. Let me
respond in the spirit in which I was asked to do this and
explain what the Biden-Hatch amendment does and then yield to
my colleague to make any additional statements.
Based on what Senator Lott has just pointed out, he has
indicated that there are four basic sections to his amendment.
On the first one, doubling the penalties for title 18, sections
1341 and 1343, that is exactly the same provision that is in
the Biden-Hatch bill.
Secondly, making it a crime for document shredding: If I am
not mistaken, that is in the Leahy amendment we just passed and
that I cosponsored, as well as many others.
The third part of the amendment discussed by the Republican
leader is something with which I happen to agree. It is not in
either the Leahy bill just passed or in the Biden-Hatch
amendment. That is the 45-day freeze on corporate executives'
extraordinary income based upon the SEC being able to hold that
in escrow and freeze it for 45 days while they look at it. I,
for one, would be willing--I will yield to my colleague from
Utah at the appropriate time--to accept that or join that in
our amendment.
Fourth, the Sentencing Commission provisions that were
referred to by my friend from Mississippi are in the Biden-
Hatch bill. There is only one piece of the legislation of the
Senator from Mississippi, as I understand it, based on the
summary, that is not either already passed or included in
Biden-Hatch.
But there are three areas that are not included which we
think are very important. One is in section 2 of our
legislation, which relates to conspiracy. Under title 18,
section 371, the maximum penalty for general conspiracy to
commit a crime is 5 years in prison regardless of whether the
penalty for the predicate offense--that is, the thing they are
conspiring to do--is considerably more than 5 years. So what
Senator Hatch and I do is we allow the penalty for conspiracy
to be consistent with what the penalty would be for the
underlying crime; that is, the predicate crime. That is not
included in the amendment of the Senator from Mississippi.
Also, a very important provision of Biden-Hatch is that
right now, under ERISA, the Employment Retirement Security Act
of 1974--we were both here to vote for that--under current law,
a violation for essentially squandering someone's pension to
the tune of tens of millions, maybe billions, of dollars is a
misdemeanor with a maximum penalty of 1 year. If you were to
steal an automobile from my driveway, which is about 2 miles
from the Pennsylvania line, drive it across the Pennsylvania
line, under Federal law, it is a 10-year sentence. There is
obviously a bizarre disparity.
What we do is we increase the penalty for criminal
violation of ERISA to 1 to 10 years, based upon the value of
what is stolen in ERISA. If the loss in ERISA is a $20,000
pension versus several billion dollars' worth, the Sentencing
Commission can make that judgment, as they do now, to have the
penalty be from 1 but up to 10 years. That is not in Senator
Lott's amendment.
Lastly, section 6 of Biden-Hatch. Currently, the Securities
and Exchange Commission requires regulated companies to file
periodic financial reports with the SEC. This section of Biden-
Hatch creates a new section in title 18 of the United States
Code to require certification, signed by the top officials of
that corporation, that the financial reports being filed
accurately reflect the financial condition of the company.
Criminal penalties are created for failure to comply with this
section. Reckless failure to certify--you have to be able to
prove it; it is a high standard--requires a penalty of up to 5
years, while a willful failure to certify on the part of these
executives includes a maximum penalty of up to 10 years.
The point is, A, everything but one provision of Senator
Lott's amendment either has been passed or is in Biden-Hatch. I
will yield to my colleague, but I am willing to accept the one
provision that is not included. That is the provision relating
to freezing payments for up to 45 days under the authority of
the SEC of compensation packages that are excessive so there is
time to look at it. I am willing to accept that.
It does not include three sections: Conspiracy, the ERISA
increased penalties, and the requirement of certification that
the financial reports accurately reflect the financial
condition of the company, with penalties to prevail if in fact
they either recklessly or willfully do not sign such a document
or they recklessly or willfully signed it and it does not
reflect what in fact they say it reflects.
That is a response to the majority leader's request of what
the difference is. That is the difference.
I now yield, with the permission of my colleagues, to the
Senator from Utah, and I might add, this is not original stuff
of Joe Biden; this was Hatch and Biden, Biden and Hatch. He
takes equal responsibility for this. If we are wrong, we are
equally wrong.
I yield the floor.
The Presiding Officer. The Senator from Utah.
Mr. Hatch. Mr. President, I am proud to stand here with my
colleague from Delaware, who is one of the truly remarkable
Senators who knows as much about criminal law as anybody in
this body or in the Congress itself.
I also rise today and applaud President Bush and Senator
Lott, as well as Senator Biden, for offering what really,
combined, will be a comprehensive legislative proposal that
calls for harsh, swift punishment of corporate executives who
exploited the trust of their shareholders and employees while
enriching themselves.
Senator Biden and I have worked together for years now on
many important pieces of legislation. This is not new for us. I
always feel good when I can work with my colleagues on the
other side. It is always a pleasure to work with him. I commend
him for the care and attention he has given to the subject of
white-collar penalties, as well as for his leadership in this
area. Just in the past 4 weeks, Senator Biden scheduled two
hearings to review the adequacy of current penalties for white-
collar criminal offenses. I am thankful that he did so for I
think this is a critically important area for us to focus on,
especially in today's unprecedented climate of market turmoil
and corporate responsibility--or should I say irresponsibility.
All of us well know that the past few months have been
painful ones for our Nation's financial markets. At least some
of the blame can be laid at the doors of some multibillion-
dollar corporations, their highly paid executives, and the
accounting firms that were supposed to assure the public's
trust. We learn--each week it seems--of more and more
accounting and corporate fraud and irregularities that have
caused billions of dollars of losses to innocent investors. I
am personally outraged by these scandals.
The amendment I cosponsor today is a product of much
thoughtful attention and scrutiny. No Member feels more
strongly than I do about the importance of our criminal laws.
They must be fair, and they must be just. If our criminal laws
are to bear credibility and provide deterrence, they must
adequately reflect the severity of the offenses. But right now
they do not do so in the context of so-called white collar
crimes. They are, to put it bluntly, out of whack.
A person who steals, defrauds, or otherwise deprives
unsuspecting Americans of their life savings--no less than any
other criminal--should be held accountable under our system of
justice for the full weight of the harm he or she has caused.
Innocent lives have been devastated by the crook who cooks the
books of a publicly traded company, the charlatan who sells
phony bonds, and the confidence man who runs a Ponzi scheme out
there. These sorts of white-collar criminals should find no
soft spots in our laws or in their ultimate sentences, but all
too often they have done so.
It is time for us to get tough with these offenders. We
need to make crystal clear that we will not tolerate this sort
of outrageous criminal conduct, conduct that not only
devastates the savings of citizens, but also has lasting
effects on the entire world's confidence in our American
financial markets. This amendment will take away the soft
landings these criminals have expected and obtained for far too
long.
The amendment Senator Biden and I propose--with the
acceptance of the additional language of the President and
Senator Lott--makes several notable improvements to current
law. As Senator Biden said, and I will reiterate, first, our
amendment increases the maximum penalties for those who commit
mail fraud, wire fraud, and ERISA offenses, as well as those
who conspire to violate Federal criminal laws. These changes
are long overdue. The maximum penalty under current law for
most of these offenses is 5 years, which is the same as the
maximum penalty that could be handed down for mutilating a coin
produced by the U.S. Mint. The current maximum penalty for
ERISA fraud violations is just 1 year. In other words, a fraud
committed in connection with employment retirement plans, no
matter how severe or wide, is punishable now only as a
misdemeanor. Under current law, one could get 5 years for
scratching George Washington's face off a quarter but only 1
year for defrauding an entire company's pension plan. It goes
without saying that we need to fix this problem.
Think about it. Pension plans go down the drain because of
dishonest business people, which is sometimes hundreds of
millions of dollars. Think of all the people who lose as a
result of that.
Second, our amendment would make corporate officials
criminally responsible for their public filings with the SEC.
Make no mistake, these filings are critically important to
investors who rely upon them to make decisions affecting how
they should invest billions and billions of dollars. They need
to be accurate. Our amendment makes it possible to hold
somebody criminally accountable if they are not accurate.
Third, our amendment directs the U.S. Sentencing Commission
to review the adequacy of current guidelines for white-collar
offenders. We heard just a few weeks ago from the Department of
Justice that these types of criminals often get off with a slap
on the wrist and that judges too often do contortions to avoid
handing down terms of imprisonment. This simply is not good and
will not do. It undermines the deterrent effect of our criminal
laws, makes a mockery of our system of fair and evenhanded
justice, and ultimately sends the wrong message to all
Americans. Our amendment will ensure that the Sentencing
Commission will take steps designed to ensure that our system
of justice no longer coddles criminals simply because they
``just'' steal.
It is time for the Senate to act on this important matter
of fraud and responsibility. I think these amendments are a big
step in the right direction. I compliment the President,
Senator Lott, and, of course, my dear friend and colleague from
Delaware, Senator Biden, for the work they have all done on
these two amendments. I agree with Senator Biden that we are
willing to accept that part of the preference package.
With that, I yield the floor.
The Presiding Officer. The Senator from North Carolina is
recognized.
Mr. Edwards. Mr. President, I ask unanimous consent that
the pending amendment be laid aside.
The Presiding Officer. Is there objection?
Mr. Sarbanes. I object for the moment. I suggest the
absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Biden. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
AMENDMENT NO. 4190, AS MODIFIED
Mr. Biden. Mr. President, I ask unanimous consent to modify
the Hatch-Biden amendment by changing on page 6 of our
amendment, under the title ``Failure of corporate officers to
certify financial reports,'' line 19--it presently reads:
(1) any person who recklessly violates any provision of
this section. . . .
I ask unanimous consent to amend it to say on line 19,
subsection 1:
Any person who recklessly--
And add the words ``and knowingly''--
recklessly and knowingly.
Page 6, line 19, fourth word in, add as a fifth word
``and'' and the sixth word ``knowingly.''
The Presiding Officer. Without objection, it is so ordered.
The amendment is so modified.
The amendment, as modified, reads as follows:
Strike all after the first word and insert the following:
VIII--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
SEC. 801 SHORT TITLE.
This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.
SEC. 802. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE OR TO
DEFRAUD THE UNITED STATES.
Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through ``If,
however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined or imprisoned, or both, as set forth in
the specific substantive offense which was the object of the
conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined under this title, or imprisoned not more
than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.
SEC. 803. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
SEC. 804. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.
Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(2) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.
SEC. 805. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-
COLLAR OFFENSES.
(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the need
to modify the sentencing guidelines and policy statements to
deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and specifically,
are adequate in view of the statutory increases in penalties
contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;
(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
SEC. 806. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. Failure of corporate officers to certify financial reports
``(a) Certification of Periodic Financial Reports.--Each
periodic report containing financial statements filed by an
issuer with the Securities Exchange Commission pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written
statement by the Chairman of the board, chief executive
officer, and chief financial officer (or equivalent thereof) of
the issuer.
``(b) Content.--The statement required under subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other
provision of law--
``(1) any person who recklessly and knowingly violates any
provision of this section shall upon conviction be fined not
more than $500,000, or imprisoned not more than 5 years, or
both; or
``(2) any person who willfully violates any provision of
this section shall upon conviction be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section
analysis for chapter 63 of title 18, United States Code, is
amended by adding at the end the following:
``1348. Failure of corporate officers to certify financial reports.''.
This section shall take effect one day after date of this
bill's enactment.
Mr. Biden. I thank the Chair and suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Reid. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Maryland.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
the pending second-degree amendments be withdrawn; that no
second-degree amendments be in order to either of the two
pending first-degree amendments; that the Daschle for Biden
amendment No. 4186 be further modified with the changes that
are at the desk; that the time until 4:45 p.m. today be for
debate in relation to the pending first-degree amendments; that
the time be equally divided between the two managers or their
designees; that at 4:45 p.m., without further intervening
action or debate, the Senate proceed to vote in relation to the
Daschle for Biden amendment No. 4186, as further modified; that
upon disposition of that amendment, the Senate vote in relation
to the Lott amendment No. 4188; provided further that upon
disposition of these amendments, Senator Edwards be recognized
to call up amendment No. 4187.
The Presiding Officer. Is there objection?
The Senator from Nevada.
Mr. Reid. Reserving the right to object, I ask the manager
of this bill, the Chairman of the committee, to insert after
the words ``Senator Edwards be recognized to call up amendment
No. 4187,'' that following the disposition of that amendment,
Senator Gramm be recognized.
Mr. Gramm. Following.
Mr. Reid. That is right. We were sequencing this, that
following Senator Edwards, Senator Gramm be recognized;
following that, Senator Levin be recognized; and following
that, Senator Gramm be recognized.
The Presiding Officer. Does the Senator from Maryland so
modify his request? Is there objection?
Without objection, it is so ordered.
The amendments (Nos. 4189, and 4190, as modified) were
withdrawn.
The amendment (No. 4186), as further modified, reads as
follows:
On page 117 in line 12 strike ``Act'' and insert the
following: Act.
TITLE VIII--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
SEC. 801 SHORT TITLE.
This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.
SEC. 802. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE OR TO
DEFRAUD THE UNITED STATES.
Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through ``If,
however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined or imprisoned, or both, as set forth in
the specific substantive offense which was the object of the
conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined under this title, or imprisoned not more
than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.
SEC. 803. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
SEC. 804. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.
Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(2) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.
SEC. 805. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-
COLLAR OFFENSES.
(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the need
to modify the sentencing guidelines and policy statements to
deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and specifically,
are adequate in view of the statutory increases in penalties
contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;
(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
SEC. 806. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. Failure of corporate officers to certify financial reports
``(a) Certification of Periodic Financial Reports.--Each
periodic report containing financial statements filed by an
issuer with the Securities Exchange Commission pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written
statement by the Chairman of the board, chief executive
officer, and chief financial officer (or equivalent thereof) of
the issuer.
``(b) Content.--The statement required under subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other
provision of law--
``(1) any person who recklessly and knowingly violates any
provision of this section shall upon conviction be fined not
more than $500,000, or imprisoned not more than 5 years, or
both; or
``(2) any person who willfully violates any provision of
this section shall upon conviction be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section
analysis for chapter 63 of title 18, United States Code, is
amended by adding at the end the following:
``1348. Failure of corporate officers to certify financial reports.''.
Mr. Biden. Mr. President, I rise today--along with my good
friend, Senator Hatch--to offer our bill, the White-Collar
Penalty Enhancement Act of 2002 as a second-degree amendment to
amendment No. 4174, Senator Leahy's amendment to S. 2637.
Let me begin by applauding Senator Sarbanes for his
leadership in sponsoring S. 2637, and guiding it through his
Banking Committee with a 17-4 vote. It is my hope and
expectation that it will win the same overwhelming support on
the floor of the Senate. I also commend Senators Leahy and
Daschle for offering the Corporate and Criminal Fraud
Accountability Act, of which I am a cosponsor.
Let me briefly recount the events which bring me to the
floor today to offer this amendment to increase penalties on
white collar criminals. In recent months, dramatic events have
shaken our country out of complacency. A decade of peace and
prosperity came to an end, first with a shattering reminder of
our vulnerability to external threats, and then with a series
of spectacular corporate collapses that revealed cracks in the
very foundation of our economic system.
Our response to terrorism was to come together as a Nation,
reminded of all we have in common, all we have to be proud of.
The shock of those high-flying corporations falling
spectacularly to earth presents us with different problems. We
have to examine our own system--the capitalist system that has
brought us so much material success, the envy of the rest of
the world.
As the stock market continues to lose value, as the dollar
has dropped to a 2-year low, we know that investors, here at
home and abroad, have lost some of their faith in the American
economy.
That loss of faith has a material impact of the wealth of
this country, as our currency and our securities lose value.
Some observers worry aloud that a full-blown loss of faith in
our economy could drain even more value from our markets.
The task before us is nothing less than restoring
confidence in our market economy. There are many facets to this
problem.
One is reforming the auditing process. On the Senate floor
right now is the Sarbanes bill that is essential to any effort
to restore investor's faith in our markets. Audit firms are
supposed to be independent voices, providing disinterested
information that investors need to assess risk and to allocate
funds to those companies that will have the best chance of
raising our standard of living.
We need more transparency, more accountability in the
conduct of accounting firms, and more confidence that they have
access to, and are willing to tell us, the truth about the
businesses they audit. Senator Sarbanes has done us all a
service by bringing this bipartisan bill to the floor.
Yesterday, I was hoping to hear the President support this
bipartisan approach to reform, reform that is supported by the
business community in the form of the Business Roundtable, when
he spoke yesterday. I still hope he will soon add his voice in
support of this landmark reform.
Just as important is the amendment to the Sarbanes bill
that I am cosponsoring with Senator Leahy. It will put real
teeth in securities fraud enforcement, providing substantial
criminal penalties for those who defraud investors of
publically traded securities or who destroy evidence to
obstruct justice.
Yesterday, the President announced his support for tougher
criminal penalties for fraud offenses. I applaud the
President's call for increase penalties for wire and mail
fraud, and my amendment contains identical provisions. But I am
concerned that the President's proposals do not go far enough.
For example, in the wake of the publicly reported problems
at Enron, WorldCom, and other companies, we need to restore
people's faith in their pension plans. They need to know that
the companies they work for will treat them fairly, handle
their funds wisely, and that the investments made by pension
funds are sound. Yet, I believe that the criminal penalties for
violations under the Employment Retirement Investment Security
Act of 1974, ERISA, limited to 1 year in jail, are woefully
inadequate to protect defrauded pensioners.
As Chairman of the Judiciary Subcommittee on Crime and
Drugs, I held a hearing several weeks ago--and am holding a
second hearing this afternoon--on the adequacy of criminal
penalties to deter this type of corporate wrongdoing. Corporate
executives who defraud investors by whatever means should go to
jail--period--and we need to give investigators and prosecutors
the tools they need to send them there.
One thing most of our hearing witnesses agreed on was that
there is a ``penalty gap'' between white collar crimes and
other crimes. For example, if a kid steals your car and drives
it over the 14th Street Bridge into Northern Virginia, he could
get up to 10 years in jail under the Federal interstate auto
theft law. Yet, if a corporate CEO steals your pension and
commits a criminal violation under ERISA, he is only subject to
1 year in jail.
At my hearing, we heard from Charlie Prestwood, a 63-year-
old Enron retiree, who lives in Conroe, TX. Charlie worked
proudly for some 33 years for that company, saved and invested
in his pension, and retired with about $1.3 million in his
plan. Within a few tragic months, that was nearly wiped out--
only $8,000 remained. Charlie is not a lawyer, but he had the
good sense to know that its just not fair that a car thief who
steals a jalopy can get 10 years in prison and a Gucci-clad
corporate crook can steal a person's life savings and might
only end up with 1 year in prison.
Accordingly, the amendment that Senator Hatch and I offer
today is carefully crafted to hold corporate officer
responsible and to reduce the ``penalty gap'' between a number
of white collar crimes and other serious crimes. It does 3
basic things.
First, it goes beyond President Bush's proposal by raising
penalties for those white collar crimes that are most often
violated but which have insufficient penalties to deter
corporate crooks. For example, it raises the maximum penalties
from 1 to 10 years for ERISA criminal violations. It double
penalties for wire and mail fraud from 5 to 10 years, and it
treats white collar who conspire with others like drug king
pins, by mandating that they receive the same maximum penalty
for the offense underlying the charged conspiracy, rather than
their sentence being capped at a 5-year penalty as exists under
current law.
When these penalty enhancements are taken in combination
with the new 10-year felony for securities fraud contained in
the amendment I have co-sponsored with Senator Leahy, the
Government will have the full range of prosecutorial arrows in
its quiver to fight pension crooks and corporate wrong doers.
Respectfully, the President's penalty proposal is only one
small piece of the white collar crime-fighting puzzle.
Second, our amendment tells corporate big wigs that they
are no longer off the hook for their companies misdeeds. My
amendment requires top corporate officials to certify to the
Securities and Exchange Commission that the periodic financial
reports filed by their companies with the Commission accurately
reflect the financial health of these corporations. Reckless
failure by a corporate official to do so will result in up to 5
years in prison, while willful failure to do so will trigger a
jail term of up to 10 years.
Third, our amendment directs the U.S. Sentencing Commission
to review and amend the Federal sentencing guidelines to
lengthen sentences for white collar criminals to reflect these
new, more serious penalties. It also directs the Commission to
impose sentencing enhancement where corporate officials defraud
victims. I applaud President Bush for announcing a similar
proposal.
Make no mistake--this amendment will not stamp out white
collar crime. We live in a fallen world where bad people do bad
things--whether its stealing cars or stealing pensions. But,
its time to ``level the playing field'' between white collar
and blue collar criminals.
I believe the amendment that Senator Hatch and I are
offering will move us substantially in the direction of
deterring corporate wrongdoers by holding them responsible for
the criminal acts. It will also begin the restoration of
confidence in our financial markets. We must do both. The time
to act is now. I urge my colleagues to support this amendment.
I yield the floor.
AMENDMENT NO. 4188
Mr. Hatch. Mr. President, I want to applaud President Bush
and Senator Lott for offering a comprehensive legislative
proposal that calls for harsh, swift punishment of corporate
executives who exploit the trust of their shareholders and
employees, while enriching themselves.
This bill, which tracks the President's recent proposal,
increases the criminal penalties that apply to fraud statutes
that are frequently used to prosecute corporate wrongdoers. It
also strengthens an existing obstruction of justice statute,
and calls for an aggravated sentencing enhancement for frauds
perpetrated by corporate officers and directors. Finally, it
increases the Security and Exchange Commission's administrative
enforcement tools by strengthening the SEC's ability to freeze
improper payments to corporate executives while the company is
under investigation, and by enabling the SEC to bar corporate
officers and directors from continued service where they engage
in serious misconduct.
I support these provisions because I strongly believe that
it is critical that we hold corporate executives accountable
for acts of wrongdoing. We can do so by supplying the SEC and
Federal prosecutors with the civil and criminal tools they need
to investigate and prosecute acts of corporate misconduct.
Let me briefly elaborate on some of the specific provisions
contained in this bill.
First, as I mentioned, the bill doubles the maximum prison
term for mail and wire fraud offenses, from 5 years to 10
years. This is identical to a provision Senator Biden and I
have included in our amendment. This is a necessary sentencing
enhancement, and one that is long overdue. Because prosecutors
frequently use the mail and wire statutes to charge acts of
corporate misconduct, it is important that we ensure that the
penalties that apply to such offenses are sufficiently severe
to deter and punish corporate wrongdoers.
Second, like the suggested enhancement contained in the
bill Senator Biden and I have proposed, this amendment directs
the U.S. Sentencing Commission to review the sentencing
guidelines that apply to acts of corporate misconduct and to
enhance the prison time that would apply to criminal frauds
committed by corporate officers and directors. As I have
stated, I strongly support such an enhancement because
corporate leaders who hold high offices and breach their duties
of trust should face stiff penalties.
Third, the amendment strengthens an existing Federal
offense that is often used to prosecute document shredding and
other forms of obstruction of justice. Section 1520 of Title 18
of the United States code currently prohibits individuals from
persuading others to engage in obstructive conduct. However, it
does not prohibit an act of destruction committed by a
defendant acting alone. While other existing obstruction of
justice statutes cover acts of destruction that are committed
by and individual acting alone, such statutes have been
interpreted as applying only where a proceeding is pending, and
a subpoena has been issued for the evidence that is destroyed.
This amendment closes this loophole by broadening the scope
of the Section 1512. Like the new document destruction
provision contained in S. 2010, this amendment would permit the
government to prosecute an individual who acts alone in
destroying evidence, even where the evidence is destroyed prior
to the issuance of a grand jury subpoena.
Prosecutors in the Andersen case succeeded in convicting
the corporation. However, in order to do so, they had to prove
that a person in the corporation corruptly persuaded another to
destroy or alter documents, and acted with the intent to
obstruct an investigation. Certainly, one who acts with the
intent to obstruct an investigation should be criminally liable
even if he or she acts alone in destroying or altering
documents. This amendment will ensure that individuals acting
alone would be liable for such criminal acts.
This amendment also includes new statutory provisions that
will strengthen the SEC's ability to freeze improper payments
to corporate executives while a company is under investigation.
These provisions would prevent corporate executives from
enriching themselves while a company is subject to an SEC
investigation, but before the SEC has gathered sufficient
evidence to file formal charges.
In particular, these provisions would enable to SEC to
freeze improper payments by obtaining a Federal court order.
The order, which could last for 45 days and be extended upon a
showing of good cause, would freeze extraordinary payments to
corporate executives and require that such payments be
escrowed. And where an executive is charged with a securities
law violation prior to the expiration of the court order, the
escrow would continue, with court approval, until the
conclusion of legal proceedings.
Finally, the amendment grants the SEC the authority to bar
individuals who have engaged in serious misconduct from serving
as officers and directors of any public company. Under current
law, only a court may order an officer and director bar. In an
SEC enforcement action, a court may issue an order that bars a
person from acting as an officer or director of a public
company where the person has committed a securities fraud
violation, and his or her conduct demonstrates ``substantial
unfitness'' to serve as an officer or director. However, under
current law, the SEC cannot order this remedy in an
administrative cease-and-desist proceedings, even where the
person's conduct would otherwise meet the standards for the
bar.
This amendment would enable the SEC to issue such a bar
where the officer or director has committed a securities law
violation and his or her conduct demonstrates ``unfitness'' to
serve as an officer or director. This will give the SEC the
ability to punish an officer or director who has committed an
unlawful act, where it has not yet instituted an enforcement
action.
I strongly believe that if Congress and the President act
together to increase corporate transparency and to enact tough
civil and criminal provision, we will succeed in restoring
confidence in our market economy. The Federal government plays
an important role in upholding and enforcing standards of
corporate conduct. I look forward to working with my colleagues
and with the President to enact needed legislation to
strengthen corporate accountability.
Mr. Gramm. Mr. President, let me try to explain where we
are. We are about to have two votes. One vote is on a
bipartisan amendment that was put together prior to our receipt
of the language of the President's proposal. That was done by
Senator Biden and Senator Hatch. That amendment will be voted
on first.
I believe that amendment deals with the same subject area
as the President's proposal. The overlap is not perfect, but
when you take Senator Leahy's amendment that we have already
adopted, when you take this amendment, the things that are
covered in the President's proposal are covered.
We also have the legislative language proposed by the White
House to follow on the proposals the President made yesterday
in New York.
When we adopt these two amendments, we will have added a
substantial amount to the underlying bill. We will have added,
in essence, two different variants of the President's proposal
of yesterday. I assume we will get a unanimous vote for both of
these amendments. I commend to my colleagues to vote for both
of them.
At that point, we will proceed in the outline we have. It
is my understanding we will try to put together an additional
list, depending on the amount of time we have. Once these two
votes are taken, the subject matter of the President's proposal
of yesterday will be part of this bill. I commend to my
colleagues to vote for both amendments.
Mr. Sarbanes. Mr. President, in just a few minutes, at
4:45, we will move to the first of two votes. The first vote
will be on the Daschle amendment, and the second vote on the
Lott amendment. I urge my colleagues to support both
amendments.
At the conclusion of those votes, we will go to Senator
Edwards, who has been waiting patiently, to call up an
amendment. Then we have sequenced behind Senator Edwards, for
purposes of calling up amendments, Senator Gramm, and Senator
Levin has an amendment involving the powers of the SEC, and
then back to Senator Gramm. That is the procedure we have
managed to put into place so far while continuing to work to
try to compile a list of amendments and to do some sequencing.
We urge our colleagues to inform us--I am not urging to add
amendments, but just informing colleagues of the process so
they can be on the alert.
Very shortly we will begin the first of two rollcall votes.
Both of these are amendments which strengthen the penalties.
Many are related to the Leahy amendment which we adopted
earlier today, and in a sense deal primarily with the subject
matter that was in the Leahy amendment.
I urge my colleagues to be supportive of both amendments.
Mr. Gramm. I yield back any time I may have.
Mr. Sarbanes. I yield back the time.
The Presiding Officer (Mr. Miller). The question is on
agreeing to amendment No. 4186 as further modified. The yeas
and nays have been ordered. The clerk will call the roll.
The assistant legislative clerk called the roll.
Mr. Reid, I announce that the Senator from New Jersey (Mr.
Corzine) is necessarily absent. I further announce that, if
present and voting, the Senator from New Jersey (Mr. Corzine)
would vote ``aye.''
Mr. Nickles, I announce that the Senator from North
Carolina (Mr. Helms), the Senator from Ohio (Mr. Voinovich),
and the Senator from Idaho (Mr. Crapo) are necessarily absent.
I further announce that, if present and voting, the Senator
from North Carolina (Mr. Helms), would vote ``aye.''
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The result was announced--yeas 96, nays 0, as follows:
[Rollcall Vote No. 170 Leg.]
Yeas--96: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Craig, Daschle, Dayton, DeWine, Dodd,
Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold, Feinstein,
Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel, Harkin,
Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye, Jeffords,
Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin, Lieberman,
Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller, Murkowski,
Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid, Roberts,
Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby, Smith (NH),
Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas, Thompson,
Thurmond, Torricelli, Warner, Wellstone, Wyden
Not Voting--4: Corzine, Crapo, Helms, Voinovich
The amendment (No. 4186), as further modified, was agreed
to.
Mr. Sarbanes. Mr. President, I move to reconsider the vote.
Mr. Leahy. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
VOTE ON AMENDMENT NO. 4188
The Presiding Officer. Under the previous order, the
question is on agreeing to Lott amendment No. 4188.
Mr. Hatch. I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There appears to be.
The clerk will call the roll.
The legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from North
Carolina (Mr. Helms), the Senator from Ohio (Mr. Voinovich),
and the Senator from Idaho (Mr. Crapo) are necessarily absent.
I further announce that if present and voting the Senator
from North Carolina (Mr. Helms) would vote ``yea.''
The result was announced--yeas 97, nays 0, as follows:
[Rollcall Vote No. 171 Leg.]
Yeas--97: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Craig, Daschle, Dayton, DeWine,
Dodd, Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold,
Feinstein, Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel,
Harkin, Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye,
Jeffords, Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin,
Lieberman, Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller,
Murkowski, Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid,
Roberts, Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby,
Smith (NH), Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas,
Thompson, Thurmond, Torricelli, Warner, Wellstone, Wyden
Not Voting--3: Crapo, Helms, Voinovich
The amendment (No. 4188) was agreed to.
Mr. Reid. Mr. President, I move to reconsider the vote.
Mr. Sarbanes. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. Reid. Mr. President, I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Reid. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
Mr. Sarbanes. Mr. President, I ask for the regular order.
The Presiding Officer. Under the previous order, the
Senator from North Carolina is recognized.
AMENDMENT NO. 4187
Mr. Edwards. Mr. President, I wish to say a few words about
an amendment I intend to offer along with Senators Enzi and
Corzine. This amendment addresses an important player in the
problem we have had with corporate misconduct in this country.
It is a player with which I have a lot of personal experience.
That player is a lawyer.
As most people know, I practiced law for 20 years and spent
a lot of time representing kids and families against very
powerful interests. I think I have a reasonably good
understanding of what responsibilities we as lawyers have to
the people we represent. While those are the kinds of folks
that I mostly represented, other lawyers have different kinds
of clients. Some lawyers represent corporations rather than
individuals. The lawyers who represent corporations have the
same kind of responsibility, but it is to a different entity
and a different group of people. They have a responsibility,
though, to represent that corporation, their client, zealously,
the same way I had the responsibility to represent kids and
families.
One of the problems we have seen occurring with this sort
of crisis in corporate misconduct is that some lawyers have
forgotten their responsibility. We have heard a great deal
about managers and accountants, which Senator Enzi is familiar
with, and scandals such as Enron and WorldCom. Managers and
accountants are the focus of Senator Sarbanes' bill, and they
are critical to us doing what needs to be done to correct this
problem and restore the public confidence.
The truth is that executives and accountants do not work
alone. Anybody who works in corporate America knows that
wherever you see corporate executives and accountants working,
lawyers are virtually always there looking over their shoulder.
If executives and/or accountants are breaking the law, you can
be sure that part of the problem is that the lawyers who are
there and involved are not doing their jobs.
For the sake of investors and regular employees, ordinary
shareholders, we have to make sure that not only the executives
and the accountants do what they are responsible for doing, but
also that the lawyers do what they are responsible for doing as
members of the bar and as citizens of the country.
Let me be a little more specific about what this amendment
does and what the responsibility of a lawyer is and should be.
If you are a lawyer for a corporation, your client is the
corporation and you work for the corporation and you work for
the shareholders, the investors in that corporation; that is to
whom you owe your responsibility and loyalty. And you have a
responsibility to zealously advocate for the shareholders and
investors in that corporation.
What we have seen some lawyers do, unfortunately, is
different. We have seen corporate lawyers sometimes forget who
their client is. What happens is their day-to-day conduct is
with the CEO or the chief financial officer because those are
the individuals responsible for hiring them. So as a result,
that is with whom they have a relationship. When they go to
lunch with their client, the corporation, they are usually
going to lunch with the CEO or the chief financial officer.
When they get phone calls, they are usually returning calls to
the CEO or the chief financial officer. The problem is that the
CEO and the chief financial officer are not the client. Their
responsibility and the client they have to advocate for--and
which they have an ethical responsibility to advocate for--is,
in fact, the corporation, not the CEO or the chief financial
officer.
One of the most critical responsibilities that those
lawyers have is, when they see something occurring or about to
occur that violates the law, breaks the law, they must act as
an advocate for the shareholders, for the company itself, for
the investors. They are there and they can see what is
happening. They know the law and their responsibility is to do
something about it if they see the law being broken or about to
be broken.
This amendment is about making sure those lawyers, in
addition to the accountants and executives in the company,
don't violate the law and, in fact, more importantly, ensure
that the law is being followed. For some time, the SEC actually
tried to do that in the late 1970s and early 1980s. They
brought legal actions to enforce this basic responsibility of
lawyers--the responsibility to take steps to make sure
corporate managers didn't break the law and harm shareholders
in the process. If you find out that the managers are breaking
the law, you must tell them to stop. If they won't stop, you go
to the board of directors, which represents the shareholders,
and tell them what is going on. If they won't act responsibly
and in compliance with the law, then you go to the board and
say something has to be done; there is a violation of the law
occurring. It is basically going up the ladder, up the chain of
command.
For years, the SEC recognized the principle that lawyers
had a legal responsibility to go up the ladder if they saw
wrongdoing occurring. But then they stopped. One of the reasons
they stopped is because there were a lot of protests coming
from the organized bar. With Enron and WorldCom, and all the
other corporate misconduct we have seen, it is again clear that
corporate lawyers should not be left to regulate themselves no
more than accountants should be left to regulate themselves.
There has been a lot of debate, rhetoric, and discussion--
rightfully so--about the necessity about not ``letting the fox
guard the chicken coop.'' The same is true with lawyers. This
has become clear through various acts of misconduct. The
lawyers have involvement and responsibility, and they also
cannot be left to regulate themselves.
In January, a bipartisan group of the top securities
lawyers and legal ethics experts in the country wrote a letter
to Harvey Pitt telling him it was time for the SEC to enforce
the up-the-ladder principle, as in the past. Mr. Pitt's top
lawyer said: We are not going to do anything. If Congress wants
something done, Congress should act. Then I wrote a letter to
Mr. Pitt in essence saying: We are ready to act here. Will you
help us in crafting legislation and working out this problem?
That was 3 weeks ago. As of now, I have not yet received a
response.
The time has come for Congress to act. This amendment acts
in a very simple way. It basically instructs the SEC to start
doing exactly what they were doing 20 years ago, to start
enforcing this up-the-ladder principle.
This is what the amendment says specifically: First, the
SEC shall establish rules to protect investors from
unprofessional conduct by lawyers, conduct that violates the
legal standards of the profession.
Second, the SEC shall make one rule in particular, and it
is a simple rule with two parts. No. 1, a lawyer with evidence
of a material violation of the law has to report that evidence
either to the chief legal counsel or the chief executive
officer of the company. No. 2, if the person to whom that
lawyer reports doesn't respond appropriately by remedying the
violation, by doing something that makes sure it is cured, that
lawyer has an obligation to go to the audit committee or to the
board. It is that simple. You report the violation. If the
violation isn't addressed properly, then you go to the board.
Three important details about this amendment address some
of the concerns that I have heard voiced. First, the way we
have drafted the bill, the duty to report applies only to
evidence of a material violation of the law. That means no
reporting is required for piddling violations or violations
that don't amount to anything. The obligation to report is
triggered only by violations that are material--violations that
a reasonable investor would want to know about. So we have been
very careful there.
Second, when the evidence is reported within the company,
we have not specified how a CEO or a general counsel should act
to rectify the violation. That is because the truth is that the
appropriate response to cure the problem will vary
dramatically, depending on the circumstances. If the CEO can do
a short investigation, for example, and figure out that no
violation occurred, then the obligation stops there. But if
there is a serious violation of the law, the appropriate
response is clear: The CEO has to act promptly to remedy the
violation. If he doesn't, the lawyer has to go to the board. It
is that simple.
One final point. Nothing in this bill gives anybody a right
to file a private lawsuit against anybody. The only people who
can enforce this amendment are the people at the SEC.
They will enforce this amendment not on behalf of any
private party, but in the name of the American people. This is
about forcing the SEC to do its job and protect the American
people.
Mr. President, I call up amendment No. 4187 and ask for its
immediate consideration.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from North Carolina [Mr. Edwards], for himself,
Mr. Enzi, and Mr. Corzine, proposes an amendment numbered 4187.
Mr. Edwards. Mr. President, I ask unanimous consent that
the reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To address rules of professional responsibility for
attorneys)
On page 108, line 15, insert before the end quotation marks the
following:
``(c) Rules of Professional Responsibility for Attorneys.--Not
later than 180 days after the date of enactment of this section, the
Commission shall establish rules, in the public interest and for the
protection of investors, setting forth minimum standards of
professional conduct for attorneys appearing and practicing before the
Commission in any way in the representation of public companies,
including a rule requiring an attorney to report evidence of a material
violation of law by the company or any agent thereof to the chief legal
counsel or the chief executive officer of the company (or the
equivalent thereof) and, if the counsel or officer does not
appropriately respond to the evidence (adopting, as necessary,
appropriate remedial measures or sanctions with respect to the
violation), requiring the attorney to report the evidence to the audit
committee of the board of directors or to another committee of the
board of directors comprised solely of directors not employed directly
or indirectly by the company, or to the board of directors.
Mr. Edwards. I yield the floor.
Mr. Gramm addressed the Chair.
Mr. Sarbanes. Will the Senator yield for a question?
The Presiding Officer. The Senator from Texas.
AMENDMENT NO. 4200 TO AMENDMENT NO. 4187
(Purpose: To modify attorney practices relating to clients, and for
other purposes)
Mr. Gramm. Mr. President, on behalf of Senator McConnell, I
send a second-degree amendment to the desk.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from Texas [Mr. Gramm], for Mr. McConnell,
proposes an amendment numbered 4200 to amendment No. 4187.
Mr. Gramm. Mr. President, I ask unanimous consent that the
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
Mr. Gramm. Mr. President, I am not going to talk about the
amendment. Senator McConnell was concerned--he has an
appointment tonight and he wanted to be recognized, so I
offered the amendment for him. I wish to say a few words before
I yield, giving him an opportunity to speak on behalf of the
second-degree amendment.
I wish to print in the Record the lead editorial from
today's Wall Street Journal. I would like to read the first
paragraph. I want to make it clear, I am not talking about this
amendment, I am just talking about the climate we are in. This
is the lead editorial in today's Wall Street Journal:
As if investors weren't frightened enough, the politicians
are now offering to help. That was worth more than 180 points
off the Dow yesterday, but then stock prices aren't the point.
Everything you're hearing now from Washington is aimed at
winning the November elections, not calming financial markets.
This is an excellent editorial. One can agree with it or
not agree with it. The point I want to make is the following:
There is a wonderful line in a very famous economics book,
``The Wealth of Nations,'' where Adam Smith is talking about
government and talking about problems. A line in ``The Wealth
of Nations'' goes something like: The economy is powerful and
it overcomes not only the illness but the absurd prescription
of the doctor that comes from the Government.
I believe we have now put together the makings of a good
bill. We still have differences of opinion. We still have
differences not on whether we should set up a board, not on how
strong it should be. We agree on those issues. We have
differences about how independent the SEC should be. We have
differences as to whether that board ought to set audit
standards and independent standards or whether we ought to do
it by law.
As we go through the process in the next 2 days, if the
some 30 amendments that people on my side of the aisle are
proposing to offer is any index, and as someone once said--and
I am sorry I cannot remember his name--I have only seen the
heart of a good man, not necessarily the heart of an evil man.
I have just seen these amendments.
I am concerned that people who are looking at investing are
going to say: My God, it is one thing that my stock has been
battered because there were people who did things that were
wrong, there were people who did things that were illegal, but
now I am going to be battered by one-upmanship efforts to show
that Congress is really tough, that Congress is tougher than
the President, the President is tougher than the Congress, that
Republicans are tougher than Democrats, or Democrats are
tougher than Republicans.
I would just like to say, not that anybody is going to be
calmed by what I say, but I would like to say, in the end, I
think we will end up with a fairly responsible bill, and I hope
people who are thinking about investing money will take into
account that this, too, will pass; that this summer will pass;
that after all the charges are made and the one-upmanship has
occurred, in the end, normally this process has worked pretty
well for over 200 years, and my guess is it will work well
again and we will end up in a give-and-take in conference, with
the White House involved, measuring each amendment in terms of
what we think will work and what we think probably hurts more
than it helps--the absurd prescription of the doctor about
which Adam Smith talked.
If we do go too far in one area or we do not go far enough
in another, there is going to be another Congress next year and
the year after and for every year from now until the end of the
world, I hope.
Just reading this article set me thinking about it. There
are probably people trying to decide this afternoon what they
are going to do tomorrow on Wall Street. We have this bill
passed in the House where, if you are domiciled outside the
United States and move your domicile, you cannot get Government
contracts. This is the era of where, if you want to slap an
accountant around, it is not going to do a lot of harm. It is
not fair, it is not right, I am not for it, and I am not going
to do it, but if you want to slap business around, this is a
wonderful time to do it.
The problem is the market is going to open in the morning
and people are going to either buy or sell or they are going to
do both.
I ask unanimous consent to print this lead editorial from
the Wall Street Journal in the Record.
There being no objection, the editorial was ordered to be
printed in the Record, as follows:
[From the Wall Street Journal]
Review & Outlook: The November Markets
``Congress must now act to restore public confidence.''--
Senator Carl Levin (D., Mich.)
As if investors weren't frightened enough, the politicians
are now offering to help. That was worth 180 more points off
the Dow yesterday, but then stock prices aren't the point.
Everything you're hearing now from Washington is aimed at
winning the November elections, not calming financial markets.
That includes President Bush's much-touted Wall Street
speech yesterday on ``corporate responsibility.'' His stern
words for CEO wrongdoers were perfectly apt, and some of his
proposals might even help. But coming so long after the Enron
scandal first broke, and amid election season, the speech was
widely and accurately described as an exercise in defensive
politics.
Democrats immediately panned it as inadequate, but they'd
have said that if Mr. Bush had proposed public hangings. Their
goal is to associate Republicans with corporate ``greed,'' to
knock Mr. Bush's approval rating from its war-time pedestal and
develop a campaign issue.
You can judge their sincerity by the sop to trial lawyers
that has suddenly appeared in the ``reform'' queue. For months
Maryland Democrat Paul Sarbanes has worked to form a bipartisan
coalition for accounting reform. But now Senate Democrats are
also demanding that Mr. Bush sign onto expanding the time
available for plaintiff plutocrat Bill Lerach to file
shareholder suits. In other words, what they're really after is
a Bush veto, which they will then run against.
It's not as if Mr. Bush is letting business off the moral
hook. He's creating a new Justice Department task force on
corporate fraud, which as these things go will find someone to
indict. He's also painted a bull's-eye on CEOs, who will now be
personally and criminally liable (and face stiff penalties) for
their companies' financial results.
We only hope Justice keeps in mind the requirement of mens
rea, or criminal intent, when it's CEO hunting. This legal
principle got trampled in the rush to convict Arthur Andersen.
If otherwise honest CEOs can be indicted merely for putting
their names to a statement that turns out to be false, good
luck finding competent executives.
The brighter CEOs have also been busy cleaning up their own
act. They understand something that politicians won't admit,
which is that only business is truly capable of restoring
confidence in business. The New York Stock Exchange and Goldman
Sachs chief Hank Paulson have proposed more CEO supervision by
independent directors, among other reforms.
Just as significant, major pension funds and large
investors have begun to scrutinize stock options and other
forms of executive compensation. This sort of due diligence too
often went missing in the ``decade of greed,'' as liberals now
like to call the 1990s. (Or are we confusing our decades?)
Mr. Bush put it well yesterday: ``I challenge every CEO in
America to describe in the company's annual report, prominently
and in plain English, details of his or her compensation
package, including salary and bonus and benefits. And the CEO,
in that report, should also explain why his or her compensation
package is in the best interests of the company he serves.''
The point isn't that there is a moral taint to high pay but
that it has to be justified in shareholders value.
The one place we've thought regulatory change might help is
audit reform. Clearly the culture of the accounting trade went
awry in the 1990s, and not only at Arthur Andersen. We favored
Paul Volcker's plan, which would have restored some internal
accounting-firm discipline and reduced conflicts of interest.
But the accounting lobby resisted and now finds itself fending
off much more intrusive regulation in Congress. Serves them
right.
As a political matter, Republicans are also paying for
protecting the accountants. Bush SEC Chairman Harvey Pitt, who
once worked for the Big Five, is now being urged to resign by
the likes of Al Gore, Tom Daschle and John McCain. As these
columns noted long before these politicians wet their finger to
the wind, Mr. Pitt's temptation now will be to appease these
critics by cracking down too hard on too many, in a way that
further roils financial markets. A regulator with more
credibility usually has to regulate less.
The investing public, fortunately, seems to understand
this. While rightly angry about WorldCom and Enron, the public
hasn't panicked even after three years of stock-market losses.
Americans know that even scarier than a bear market in stocks
is a bull market for politicians.
Mr. Gramm. Mr. President, I ask my colleagues to read the
editorial and pray over it. As I say, there are some things in
it one may like, some one may not like; one may not like any of
it, or one may like all of it.
In the next couple of days, we are going to have a lot of
proposals that are going to be frightening to investors. I
wanted to take this opportunity tonight to tell them that--I
know my dear colleague who is sitting in the chair as a
Presiding Officer remembers the old hymn, ``This is My Father's
World.'' Remember that hymn? It talks about all these things
that are happening, all these bad things that happen, but in
the end it is going to be right. I think the Lord is going to
count on us to right it. I hope it is in good hands.
In any case, I wanted to say that as we hear all these
ideas brought up, if you are thinking about investing money
tomorrow or next week or next year, do not be frightened. I
think this issue is going to move back toward a middle course,
and if we go too far--and I hope we will not, and I am
dedicated to not doing more harm than good--then we will fix
it, and if in some areas we do not go far enough, we can come
back and fix it, too.
As I said, I offered the second-degree amendment for
Senator McConnell who has an appointment and wanted to get his
amendment in. I yield the floor.
The Presiding Officer. The Senator from Kentucky is
recognized.
Mr. McConnell. Mr. President, I say to my friend from
Texas, I have enjoyed his wisdom over the last 18 years. I am
going to save my remarks about how I feel about his departure
until later in the year. We have just heard another example of
the extraordinary wisdom of the senior Senator from Texas from
which I have benefited for 18 years. I wish to tell him again
how much his service has meant not only to his State but to our
Nation.
I say to my friends from Wyoming and North Carolina, they
will be relieved to know I do not intend to make my speech on
the second-degree amendment. This is an amendment about which I
am sure the junior Senator from South Carolina is going to be
particularly enthusiastic. I say that with tongue in cheek. I
will briefly describe what it is.
This is an amendment to provide a client's bill of rights
for clients with Federal claims or who are in Federal court.
Fundamentally, what this client's bill of rights would provide
is an opportunity for an orderly and systematic notice from
their lawyers of the fee arrangements to which they are
subjecting themselves; in addition to that, a bereavement rule
which would prevent the solicitation of business within 45 days
of the occurrence of the event. That is a brief summary of what
my amendment is about. There will be ample time for everyone to
take a look at the amendment over the evening. It does not in
any way detract from the underlying Edwards-Enzi amendment,
which I support and commend the authors for offering. I think
it is right on the mark. I would like to see these principles
expanded to a larger class of clients so they, too, can receive
adequate protection.
I yield the floor.
The Presiding Officer. The Senator from Nevada.
Mr. Reid. Mr. President, I ask unanimous consent that
following the previous sequence already in place, the
amendments listed in this agreement be the next six amendments
in the sequence, in the order listed: Carnahan amendment
regarding electronic filing; McCain amendment regarding
accounting treatment/stock options; Dorgan amendment regarding
bankruptcy/disgorgement; Enzi amendment regarding materiality;
Schumer amendment regarding restitution; and Murkowski
amendment regarding the Ninth Circuit.
The Presiding Officer. Without objection, it is so ordered.
Several Senators addressed the Chair.
Mr. Reid. Mr. President, I would say to the Chair that I
ask the Senator to yield to me for a unanimous consent request
so the Senator from Illinois would have the floor.
The Presiding Officer. The Senator from Illinois.
Mr. Durbin. Mr. President, I want to make a comment about
the second-degree amendment that is pending. I want to commend
my colleague, the Senator from Kentucky.
Last night, at the close of the session, there was an
amendment offered by the Senator from Kentucky and the Senator
from Texas. Now remember, this bill is about corporate
misconduct. This is about corporate corruption. Last night,
they decided we ought to expand the jurisdiction and scope of
this debate to include reforming labor unions.
I have followed Enron, WorldCom, and others very closely
and do not recall ever hearing anybody say the root cause of
the problem of these corporations was labor unions. Thank
goodness the Senate rejected that notion.
The Senator from Kentucky comes back tonight and says, no,
it is not just labor unions, it is the fees paid to lawyers;
that is the problem. When you are dealing with corporate
corruption, it is the fees paid to lawyers, contingency fee
contracts, and class actions.
I was stopped cold when I heard this amendment being
described to try to understand what this has to do with making
certain that criminal misconduct by corporate officers will
result in time in jail. I do not get the connection. Perhaps
the Senator from Kentucky can help me understand this. How does
the issue of attorney's fees relate to corporate misconduct and
corporate corruption?
I am sorry he cannot join us in this debate to respond, but
I say to my colleagues I am beginning to get the distinct
impression that the other side of the aisle is trying to change
the subject on us. I do not think they want to talk about
wrongdoing in corporate boardrooms and what we can do to
restore confidence.
Yesterday, the President used the bully pulpit and turned
the bears loose on Wall Street. Today, we had another dip in
the stock market. We had better get honest. We had better get
real. We had better make some real changes in the law to bring
honesty in transactions with major businesses if we want to
restore America's confidence in business dealings and bring
people back to the stock market and get this economy back on
track and give people a chance to save for their retirement.
That is what this is all about.
Somehow or another the other side of the aisle wants us to
veer off now and talk about attorney's fees. I do not get the
connection, and I urge my colleagues to take a close look at
this long amendment and try to join me in divining what they
are trying to achieve other than to perhaps change the subject.
I yield the floor.
The Presiding Officer. The Senator from Wyoming is
recognized.
Mr. Enzi. Mr. President, I do rise in support of the
Edwards-Enzi-Corzine amendment. I am disappointed there has
been a second-degree amendment to this, on which amendment we
are working. It does not deal with the same topic. It does not
deal with the same bill. It is going off in a different
direction. If we keep having second-degree amendments
throughout that go off in other directions, we are not going to
get this bill finished and through the process. So it would be
my hope it would be withdrawn.
I will concentrate my efforts on the amendment I have
worked on with Senator Edwards, Senator Corzine, and others.
This amendment is designed to assure that attorneys are
responsible for fully informing their corporate client of
evidence of material violations of Federal securities law. That
is what we are talking about through the whole accounting
reform.
Over the past few months, Congress and the public have
concentrated on the role of accountants and auditors involved
in Enron, WorldCom, Global Crossing, and others. We have held
hearings and drafted legislation intended to restore a high
level of ethical behavior to corporate America and the
accounting industry. This breach in ethical behavior led to the
problems these companies are now experiencing. I have to say
through all of those hearings, as an accountant, I felt the
profession was very picked on, and the profession deserved to
be picked on--not everybody in the profession. Again, it is
that one-half of 1 percent or one-tenth of 1 percent who are
fouling up everything for everybody. It happens in a lot of
different professions.
As we beat up on accountants a little bit, one of the
thoughts that occurred to me was that probably in almost every
transaction there was a lawyer who drew up the documents
involved in that procedure. I know as to the companies we
looked at, that was the case. It seemed only right there ought
to be some kind of an ethical standard put in place for the
attorneys as well. All of the people who are involved should be
looking at a new way of doing business.
As an accountant, I have been deeply disturbed by the
action taken by some in my profession, and as a result I have
taken a more personal interest than others might in drafting
legislation which will ensure that accountants act
professionally and responsibly, and which will protect the
interests of corporate shareholders.
Following hearings on this matter, it has become clear that
the role of attorneys who counseled these corporations and
their accountants must be scrutinized as well. Just like
accountants, these lawyers are expected to represent the
corporation in the best interests of the shareholders. In doing
so, these attorneys are hired to aid the corporation and its
accountants in adhering to Federal securities law.
When their counsel and advice is sought, attorneys should
have an explicit, not just an implied, duty to advise the
primary officer and then, if necessary, the auditing committee
or the board of directors of any serious legal violation of the
law by a corporate agent. Currently, there is no explicit
mandate requiring this standard of conduct. It is clearly in
the best interest of their client to disclose this kind of
information to the board, rather than just upper management.
Maybe it could be called the ``smell test.'' If something
smells wrong, somebody who can do something to fix it ought to
be told.
It is important to understand the corporate attorney's
client is the whole corporation and its shareholders, and not
just the CEOs or some of the executives, accountants, or
auditors. As a result, their ultimate duty of representation is
not to the people to whom they normally report but to the
shareholders through the board of directors.
This amendment would require the Securities and Exchange
Commission to enact rules within 180 days to set forth minimum
standards of professional conduct and responsibility for
attorneys appearing and practicing before the Commission; not
all attorneys, just attorneys appearing and practicing before
the Commission; that is, those who are dealing with documents
that deal with companies listed by the Securities and Exchange
Commission.
This amendment instructs the Commission to establish rules
that require an attorney, with evidence of material legal
violation by the corporation or its agent, to notify the chief
legal counsel or the chief executive officer of such evidence
and the appropriate response to correct it. If these officers
do not promptly take action in response, the Commission is
instructed to establish a rule that the attorney then has a
duty to take further appropriate action, including notifying
the audit committee of the board of directors or the board of
directors themselves, of such evidence and the actions of the
attorney and others regarding this evidence. It is all within
the corporation.
This amendment is simple. It requires the attorney to
contact specific persons who are part of the management
hierarchy and explain the problem. If that fails to correct the
problem, the attorney must contact the audit committee or the
board of directors.
I am usually in the camp that believes States should
regulate professionals within their jurisdiction. However, in
this case, the State bars as a whole have failed. They have
provided no specific ethical rule of conduct to remedy this
kind of situation. Even if they do have a general rule that
applies, it often goes unenforced. Most States also do not have
the ability to investigate attorney violations involved with
the complex circumstances of audit procedures within giant
corporations.
Similarly, the American Bar Association's Model Rules of
Professional Responsibility do not have mandatory rules for
professional conduct for corporate practitioners which require
them to take specific action. The ABA merely has a general rule
that an attorney must represent the best interests of an
organization and suggests a number of ways an attorney could
respond, including reporting illegal conduct to a responsible
constituent of the organization, such as the board of
directors. But this does not mandate action.
In response to Enron and the current environment concerning
corporate integrity, on March 27 of this year the ABA did form
a task force on corporate responsibility. But how many task
forces have been formed and accomplished nothing? Task forces
are often used to delay implementation of necessary changes.
When task forces are used, we all know it takes years to set up
the rules. When they are established, States may not actively
enforce them or even have the means to enforce them.
In any event, it is my understanding that the ABA's task
force's preliminary recommendations are for the attorney to
report law violations through a chain or ladder of the
corporation. That is what, in fact, this amendment does, first
through the legal counsel or CEO and then to the audit
committee or the board of directors.
While I almost always advocate a State solution, in this
instance I must advocate a Federal solution. In the past,
Congress has authorized a Federal commission to regulate the
conduct of attorneys through promulgation of rules on attorneys
practicing before them. For example, 31 U.S.C. section 330
provides the Treasury Department authority to regulate the
practice of attorneys appearing before the Internal Revenue
Service. Accordingly, the IRS has promulgated rules on the
conduct of attorneys.
Under 31 CFR, part 10.21 of the IRS regulations, each
attorney who knows the client has not complied with the revenue
laws or who has made an error or omission on any return or
document required by the IRS shall advise the client promptly
of the fact of such noncompliance, error, or omission. The
amendment I am supporting will give the SEC authority to
promulgate a rule similar to the IRS rule.
In the past, the SEC has tried to impose ethical conduct on
attorneys. SEC rule 2(e), previously 102(e), authorizes the
Commission to disbar or suspend from practice before it a
lawyer or other professional who violates the securities law,
assists in someone else's violation, or otherwise engages in
unprofessional conduct.
Through this process, the SEC previously instituted
proceedings under rule 102(3) to enforce the ethical standards
for the practice of Federal securities law. But it has stopped
bringing these types of actions. This amendment will get the
SEC back on track and make attorneys stand up and pay attention
if they have evidence a corporate agent has committed a
material legal violation.
In the wake of Enron, over forty professors with expertise
in Federal securities and ethics law, have written to SEC
Chairman Harvey Pitt asking for some form of regulation over
the practice and conduct of attorneys involved in Federal
securities law.
In their letter, they state that if senior managers will
not rectify a violation, lawyers who are responsible for the
corporation's securities compliance work, should be required to
report to the board of directors.
As they point out, such a disclosure obligation is still
less onerous than that imposed on accountants under section 10A
of the 1934 Securities Exchange Act, which requires an auditor
to report, both to the client's directors and simultaneously to
the SEC, and illegal act if management fails to take remedial
action.
The amendment I am supporting would not require the
attorneys to report violations to the SEC, only to corporate
legal counsel or the CEO, and ultimately, to the board of
directors.
Some argue that the amendment will cause a breach of
client/attorney privilege, which is ludicrous. The attorney
owes a duty to its client which is the corporation and the
shareholders. By reporting a legal violation to management and
then the board of directors, no breach of the privilege occurs,
because it is all internal--within the corporation and not to
an outside party, such as the SEC.
This amendment also does not empower the SEC to cause
attorneys to breach their attorney/client privilege. Instead,
as is the case now, attorneys and clients can assert this
privilege in court.
In addition, this amendment creates a duty of professional
conduct and does not create a right of action by third parties.
The Fourth Circuit has made such a ruling concerning the code
of conduct applied by the IRS Rules.
The SEC has already found that attorneys who fail to take
steps to prevent their clients from violating Federal
securities law are guilty of aiding and abetting. This
amendment will put attorneys on the right course. By reporting
violations to the board of directors, they can avoid being
found guilty of aiding and abetting their client.
Just as I am concerned about the conduct of accountants
because that is my profession, I would think member attorneys
would be as concerned about the conduct of the legal
profession. To ignore the role attorneys played in Enron,
WorldCom and Global Crossing is a disservice to their
profession.
I hope you will join me in ensuring that attorneys are
required to conduct themselves ethically and in the best
interests of their client when they see evidence of a material
legal violation. They should be expressly required to report
that type of activity to upper managers, and ultimately, to the
board of directors who represent the shareholders.
After Enron, it is clear we need some hard and fast rules,
and not just an arcane honor code rarely adhered to, so the
necessary measure of client duty is placed into the hearts and
minds of the legal profession. Again, I am disappointed there
is a second-degree amendment. This is an important amendment
and something that I thought would be cleared by both sides. We
will deal with the rest of the process.
I yield the floor.
The Presiding Officer (Mr. Akaka). The Senator from Wyoming
yields the floor.
The Senator from New Jersey.
Mr. Corzine. Mr. President, first, I am proud to have
worked with Senator Edwards and Senator Enzi on this amendment
on lawyer responsibility in corporate practice. It is an
exceptional piece of additional effort in dealing with
corporate fraud, corporate crime, and corporate abuse. I am
very happy to have participated with him, and I particularly
compliment Senator Edwards on bringing this important issue to
the attention of the Senate and for making sure that we propose
this strong amendment, to ensure corporate lawyers' ethical
responsibilities.
I, too, with the Senator from Wyoming, am disappointed. We
are mixing apples and oranges when we are talking about
lawyer's fees. This is dealing with corporate actions of
lawyers. I don't understand why we are trying to move to a
completely different subject when what we are trying to deal
with is corporate responsibility. Lawyers play a role in that
as much as accountants and management.
Again, I thank Senator Enzi for his cooperation and
leadership, not only on this effort but with regard to the core
bill, which is going to make a big difference in the
marketplace. People talk about weakness in the market and are
fearful of what we do in Congress, but they are really fearful
of what we will not do or what we might do in addressing some
of the quite obvious needed reforms.
We have talked a lot in the wake of Enron and WorldCom
about the responsibility of accountants and corporate managers.
Rightly so, as we have seen far too much bending of the rules,
breaking of the rules in pursuit of profit, pursuit of personal
gain. In their wake, shareholders, employees, and frankly the
whole economy, has suffered from the selfishness that we have
seen demonstrated by the actions of many--the criminal actions,
in some instances.
It is not insignificant that even before this week, before
there was so much focus on this issue, this year there had been
roughly $2 trillion worth of damage, value lost in the stock
market, which is reflective of the discomfort that investors
across the globe, as well as here at home, feel about where we
stand.
As a former corporate leader, I tell you I am disgusted
with many of the actions I have seen taken by some corporate
managers when they betrayed shareholders' trust, employees'
trust, and the public confidence in general. I think they have
basically betrayed our whole Nation's economy. That is why I
have been pleased to work on this critical legislation that
Senator Sarbanes has proposed regarding the accounting
industry's corporate responsibility.
But I do not think that is enough. I think, as Senator
Edwards said when he brought this to our attention, executives
and accountants do not work alone. In fact, in our corporate
world today--and I can verify this by my own experiences--
executives and accountants work day to day with lawyers. They
give them advice on almost each and every transaction. That
means when executives and accountants have been engaged in
wrongdoing, there have been some other folks at the scene of
the crime--and generally they are lawyers.
This is not a new issue. The SEC had an unambiguous view
about this more than 10, 15 years ago. More than 10 years ago
Judge Stanley Sporkin, while commenting on the criminal actions
of Charles Keating, noted that Keating had:
. . . surrounded himself with literally scores of
accountants and lawyers to make sure all the transactions were
legal.
In a now famous refrain, Sporkin lamented:
Where were these professionals . . . when these clearly
improper transactions were being consummated? . . . Where,
also, were the outside accountants and attorneys when these
transactions were being effectuated?''
That sounds a little familiar in the current circumstance.
The bottom line is this. Lawyers can and should play an
important role in preventing and addressing corporate fraud.
Our amendment seeks to ensure that. It seeks to go back to the
old way: When lawyers know of illegal actions by a corporate
agent, they should be required to report the violation to the
corporation.
Let me be clear. The same as I feel about most accountants
and most business leaders, the vast majority of lawyers
discharge their duties with integrity and in an ethical manner.
This is not an effort to blame corporate lawyers. But we cannot
overlook the role corporate lawyers, the lowest common
denominator, can play in addressing abuses and ensuring that
our markets have integrity. We need to clarify that corporate
lawyers have a duty to the shareholders, not just to the
management that hired them.
That is why Senator Edwards, Senator Enzi, and I have
crafted an amendment that will clarify that lawyers who know of
wrongdoing by a corporation must report that wrongdoing to the
client so it can be corrected. The client is more than just the
person who hired them. The lawyer's client is the corporation's
shareholders, not the manager. As we have seen far too often
this year, when management is engaged in fraud it harms the
shareholders. That is why we need to ensure that lawyers who
know of illegal acts report those acts to the board of
directors which represent those shareholders. Our amendment
would require the SEC to establish rules in the public interest
and for the protection of investors, setting forth minimum
standards of professional conduct for attorneys appearing and
practicing before the Commission. Those rules would include--
shall include a requirement that lawyers who have evidence of a
violation of law would be required to go up the ladder of
corporate management and report the violation.
It is a simple principle--very much common sense. If a
manager doesn't respond appropriately, including remedying any
violation, the lawyer would then be required to report the
violation to the board of directors which represents the
shareholders.
We should recognize that in some instances where there may
be evidence of a violation, it may become apparent after a more
complete investigation that there is not an actual violation.
But when lawyers are aware of a potential violation, they do
have a duty to investigate. And if they determine there is a
material violation of law--not some small violation, some
insignificant rule--that violation should be remedied by the
corporation. If it is not remedied, it is the duty of the
lawyer, under our language, to report it to the board.
I am pleased that Senator Edwards and Senator Enzi and I
have been able to craft an amendment that will firmly establish
the ethical duty of corporate lawyers to report wrongdoing to
their client, including, if necessary, to the board of
directors that represents a company's shareholders.
Addressing the role of corporate lawyers is just as
important a step as it is with accountants and with corporate
officers. If we want to truly address this breakdown in
corporate responsibility, it is a critical piece of the puzzle
that cannot be overlooked. I urge my colleagues to support this
sensible amendment.
Once again I say I am disappointed with the McConnell
amendment. I suggest we move to table that, in light of its
irrelevance with respect to the underlying matter.
I will withdraw that motion, and I suggest the absence of a
quorum.
Mr. Reid. Will the Senator withhold?
Mr. Sarbanes. Does the Senator yield the floor?
The Presiding Officer. Does the Senator withhold suggesting
the absence of a quorum?
Mr. Corzine. Yes. I yield the floor.
The Presiding Officer. The Senator from Georgia.
AMENDMENT NO. 4206
Mr. Miller. Mr. President, I ask unanimous consent the
pending amendments be laid aside so I may offer an amendment,
and that there be a time limitation of 2 minutes on my
amendment, with no amendments in order to my amendment. This
amendment has been agreed to by both managers.
Mr. Reid. Reserving the right to object, and following the
disposition of this that we will return to the Edwards
amendment?
The Presiding Officer. That is the understanding of the
Chair. Is there objection? Without objection, it is so ordered.
Mr. Miller. I send my amendment to the desk.
The Presiding Officer. The clerk will report the amendment.
The assistant legislative clerk read as follows:
The Senator from Georgia (Mr. Miller) proposes an amendment
numbered 4206.
Mr. Miller. I ask unanimous consent the reading of the
amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To express the sense of the Senate that the chief executive
officer of a corporation should sign the corporation's income tax
returns)
At the end add the following new title:
TITLE VIII--CORPORATE TAX RETURNS
SEC. 801. SENSE OF THE SENATE REGARDING THE SIGNING OF CORPORATE TAX
RETURNS BY CHIEF EXECUTIVE OFFICERS.
It is the sense of the Senate that the Federal income tax
return of a corporation should be signed by the chief executive
officer of such corporation.
Mr. Miller. Mr. President, this amendment is only three
lines long. Let me read them to the Senate:
It is the sense of the Senate that the Federal income tax
return of a corporation shall be signed by the chief executive
officer of such corporation.
Believe it or not, that is not in the law right now, and it
should be. The average wage earner on his 1040 form has to sign
it. We require it of him. That is what we should require of the
CEO of a corporation, just treat them the same.
I yield the floor.
The Presiding Officer. The Senator from Maryland, Senator
Sarbanes.
Mr. Sarbanes. I urge the adoption of the amendment.
The Presiding Officer. Is there further debate?
Mr. Gramm. Mr. President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
Mr. Gramm. Mr. President, I withdraw the request. I don't
have any problem. It was a confusion of which amendment.
The Presiding Officer. Without objection, the amendment is
agreed to.
The amendment (No. 4206) was agreed to.
Mr. Levin. Mr. President, I move to reconsider the vote.
Mr. Reid. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. Reid. I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Daschle. Mr. President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Daschle. Mr. President, I announce that there will be
no more rollcall votes tonight. I hope Senators will come to
the floor and continue to participate in the debate. But for
the interest of Senators and schedules, we will have no
additional rollcall votes tonight.
I yield the floor, and I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Sarbanes. Mr. President, while we are all waiting for
further business, I will take just a moment to speak to the
amendment that has been offered by the very able Senator from
North Carolina. In fact, I would like to put a couple of
inquiries to the Senator, if I might.
It is my understanding that this amendment, which places
responsibility upon the lawyer for the corporation to report up
the ladder, only involves going up within the corporate
structure. He doesn't go outside of the corporate structure. So
the lawyer would first go to the chief legal officer, or the
chief executive officer, and if he didn't get an appropriate
response, he would go to the board of directors. Is that
correct?
Mr. Edwards. Mr. President, my response to the question is
the only obligation that this amendment creates is the
obligation to report to the client, which begins with the chief
legal officer, and, if that is unsuccessful, then to the board
of the corporation. There is no obligation to report anything
outside the client--the corporation.
Mr. Sarbanes. I think that is an important point. I simply
asked the question in order to stress the fact that that is the
way this amendment works. This has been a very carefully worked
out amendment. I engaged in an exchange with the distinguished
Senator from North Carolina, and the Senator from Wyoming, Mr.
Enzi, the cosponsors of this amendment. I know how careful they
have been in trying to craft the amendment and in bringing it
here. I think they have done an absolutely first-rate job in
sort of focusing the amendment, considering questions that were
raised from one source or another, and adjusting it in order to
meet them.
I think the amendment they have now put before us is an
extremely well reasoned amendment, and it ought to command the
support of the Members of this body.
I very deeply regret that Senator McConnell has added an
amendment to the amendment. His amendment really doesn't
address this amendment. It doesn't really address the subject
matter of this legislation. It is a total diversion. Of course,
I presume it will complicate our ability to try to move ahead
as we consider amendments. It obviously complicates the
consideration of the Edwards-Enzi amendment which is now
pending.
Furthermore, I understand that under this amendment it can
only be enforced by the SEC through an administrative
proceeding. Is that correct?
Mr. Edwards. The answer is yes. The only way to enforce
this legal requirement is through an administrative process.
Mr. Sarbanes. That was an effort, of course, to deal with
the idea that somehow it might bring causes of action from
outside, or somewhere else. So it is limited to the SEC. The
SEC, as I understand it, had something like this in place in
the past. Is that correct?
Mr. Edwards. The answer is yes. Years ago, the SEC had and
enforced such a regulation, which they have not been doing for
some time.
Mr. Sarbanes. I further understand that a number of
professors of securities regulations and professional ethics
are, in fact, supportive of this proposal. I think at an
earlier time they wrote to the SEC urging the SEC itself to put
some provision such as this into place. Is that correct?
Mr. Edwards. The Senator is correct. There is a large group
of distinguished securities lawyers and legal ethics lawyers
who have written the SEC suggesting exactly what the Senator
said--that it become part of the regulations and part of the
law.
Mr. Sarbanes. This amendment really, in effect, parallels
or follows those recommendations--at least in substantial
respect--as I understand it.
Mr. Edwards. That is correct.
Mr. Sarbanes. Again, that letter which I have had the
chance to review, and also the signatories to it--some 40 or so
distinguished professors of securities regulations or
professors of professional ethics at the law schools--is also a
very carefully reasoned proposal. The one they submitted to the
SEC is the one the Senator from North Carolina has tracked in
his amendment.
I thank both Senator Edwards and Senator Enzi for their
very careful work. And I very much hope at the appropriate time
we will be able to adopt this amendment and include it in this
legislation. I think it makes an important contribution.
Mr. President, I yield the floor. I suggest the absence of
a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Levin. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Levin. Mr. President, I ask unanimous consent at this
time that I be called upon to offer an amendment; that the
amendment be debated tonight--it is the amendment on SEC
enforcement--and that when the debate is completed tonight and
when we recess until the morning, that when the morning
arrives, we would then return immediately to the Edwards
underlying amendment and the McConnell second-degree amendment
thereto.
The reason I make this unanimous consent proposal tonight
is that there are a lot of relevant amendments which are
waiting in line, which are important amendments, which have a
lot of support, I believe, on a bipartisan basis in this body
that ought to be considered prior to cloture or else; because
they may not be technically germane, they would be precluded if
cloture is invoked.
I have a number of amendments on the list. I think we
should move this train forward tonight, utilize the time this
evening to move this process forward so as many of these
amendments as possible can be considered before cloture. I make
that unanimous consent proposal at this time.
The Presiding Officer. Is there objection?
The Senator from Texas.
Mr. Gramm. Mr. President, reserving the right to object,
let me say that we have a lot of people who want to offer
amendments. I have on my side some 30 amendments. We had better
follow the regular order. Let me say that I would intend, once
we have disposed of this unanimous consent request, to ask that
all further amendments be germane to the bill and that at noon
tomorrow we proceed to third reading. But I object to the
unanimous consent request.
The Presiding Officer. Objection is heard.
The Senator from Nevada.
Mr. Reid. Mr. President, I ask unanimous consent that at
10:30 tomorrow morning, Thursday, July 11, the Senate resume
consideration of S. 2673 and that the time until 12 noon be
divided as follows: The first 45 minutes under the control of
Senator Byrd; the remaining 45 minutes under the control of
Senator McConnell or his designee; that at 12 noon Senator Enzi
be recognized to make a motion to table the McConnell second-
degree amendment No. 4200, with no intervening amendment in
order prior to disposition of the McConnell amendment.
That is not part of this agreement. For the information of
Senators, we would have an hour, beginning at 9:30, for morning
business for both sides, equally divided.
Mr. Levin. Mr. President, reserving the right to object.
Mr. Gramm. Mr. President, I think this is a perfectly
reasonable unanimous consent request, and I do not object.
Mr. Levin. Reserving the right to object, Mr. President, I
have two questions relative to this unanimous consent request.
The first question is, Does this then mean we would move to the
disposition of the Edwards amendment?
Mr. Reid. Mr. President, that is my hope. One of the
reasons we want to dispose of the second-degree amendment--
Senator Enzi, who has worked with you and others on the
underlying amendment, is going to move to table. We hope we can
move to the Edwards amendment.
The Senator from Texas, Mr. Gramm, has told us he wants to
study this tonight and he will give us word on it tomorrow. I
think it has been debated quite sufficiently. It appears to me
the Edwards amendment is reasonable. I think in the dialog he
answered all the questions of the Senator from Texas. I have no
problem if the Senator wants to spend the night looking it over
more.
Mr. Levin. My second question under the reservation is
this: This does not then change the order that has been
previously listed for amendments under the earlier UC request;
is that correct?
Mr. Reid. That is correct. We have a number of amendments
queued up. Senator Edwards has been here all day, for example.
The Senator from Michigan has been here a long time today. We
hope we can move through some of these tomorrow.
As the Senator knows, there is anticipation tonight that a
cloture motion will be filed on this bill. The majority leader
has told everyone that we have only 3 weeks remaining in this
little session before the August recess. We would like to do
prescription drugs. We are going to move, we hope, to the
MILCON appropriations bill in the next day or so. We have
homeland security we have to do. There is so much to do and a
limited amount of time in which to do it.
Mr. Levin. Further reserving the right to object, Mr.
President, I will simply add the following because there are
relatively few hours between now and a vote on cloture,
assuming that cloture motion is filed. I think we should fully
utilize that time to consider relevant amendments. What my
great fear is--which is being reinforced tonight--is that the
time is going to be filled not by relevant amendments but in
other ways which would preclude the consideration of relevant
amendments in the event cloture is adopted. That is a major
concern I have. I don't know if other people waiting in line
with amendments that are relevant amendments have the same
concern, but I hope and believe they do.
I hope it will be possible for relevant amendments to be
considered, if not tonight, then tomorrow, and that the time be
fully utilized; otherwise, it would simply preclude important
relevant amendments that are waiting in line.
Mr. Reid. Mr. President, the Senator also speaks for
others. We have had, over the last several months, problems
getting legislation up the way we used to do it here. It is
difficult when we have obstacles that are brought up. It does
not allow us to proceed in the normal fashion. I hope the
Senator will allow the agreement to go forward.
The Presiding Officer (Ms. Cantwell). The Senator from
Texas.
Mr. Gramm. Madam President, I am told one of my colleagues
is coming down to object to this unanimous consent request. I
have to suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Reid. Madam President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. I renew my unanimous consent request.
The Presiding Officer. Is there objection?
Mr. Gramm. Madam President, the reservations of the Senator
from Michigan have no impact on this unanimous consent request?
That is a parliamentary inquiry. The reservations expressed by
the Senator fromMichigan have no impact on the unanimous
consent request as it is written?
The Presiding Officer. That is correct.
Mr. Gramm. I have no objection.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Nevada.
Mr. Reid. Madam President, I appreciate very much the work
of the managers of this bill. This is very important
legislation. I was advised by the Chairman of the committee
just a few minutes ago the stock market dropped again today
almost 300 points. We need to do something to reestablish
credibility and to reestablish the confidence of the American
people in corporate America. This legislation goes a long way
toward that end. I hope there will be cooperation tomorrow so
that some of these relevant amendments can be offered.
I hope everyone understands the importance of this
legislation. I am confident they do. I appreciate the ability
to work this out so we can at least move forward tomorrow to
the extent we do in this unanimous consent agreement.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, let me just outline, if I may,
where I see we are in the process. Tonight, a cloture motion is
going to be filed. Tomorrow we are going to have a series of
amendments. As everybody knows, when cloture is invoked, the
relevant test is germaneness, not relevance, not significance,
not the feeling of a Member that their amendment is important
or more important than any other Member. The test is
germaneness.
Anybody who has ever been involved in a situation where we
move toward cloture understands that once we are on that track,
unless amendments are relatively acceptable on a broad basis to
all parties involved, knowing that the amendment is sheared off
at the hour of cloture, that amendment in all probability--let
me state it more precisely--that amendment is not going to be
adopted.
We can do this in one of two ways, and either way works
perfectly with me. We can either try for the nongermane
amendments--if your amendment is germane, you are solid, you
can offer it now, you can offer it later, and you are going to
get a vote on it. But if your amendment is not germane, I
suggest we try to get our staffs together and see if something
can be worked out where if part of the amendment or all of the
amendment or the amendment and something else is
noncontroversial, it could be adopted.
At the end of the day, we will all be happier if we do
that. If we spend all of tomorrow butting heads knowing what
the final outcome is going to be, the net result is we are just
going to have unhappiness and no good will come out of it.
I say to anyone who has a nongermane amendment, in the end,
to have that amendment adopted it is going to have to be
generally supported because, obviously, any Member is going to
be able to prevent it from being voted on. It is going to get
sheared off at cloture.
I have a list of amendments, most of which have absolutely
nothing to do with this bill. I have amendments on bankruptcy.
I have amendments on the Ninth Circuit Court of Appeals. I have
amendments on pensions. I have amendments on tax policy. I have
numerous amendments on stock options.
I submit to all these people who want to offer amendments
that what we ought to do if we are going to try to get
something done is to have them have their staff sit down with
staff on both sides of the aisle and say: Is there anything in
here that might be generally agreed to, and if that is the
case, we could move in that direction.
Finally, let me say we have in place a unanimous consent
agreement about how we are going to proceed tomorrow morning,
and I ask the Democratic floor leader, if I can, given that we
have a unanimous consent agreement in place for the morning,
can we simply have the floor open for the purpose of debate
only tonight so that those of us who are going to be here all
day tomorrow, as we were all day today, can go home?
Mr. Reid. I say to my friend, there are some things we have
to do, such as filing cloture, and if that situation of debate
only is in effect, we could not do that.
Mr. Gramm. With what now?
Mr. Reid. If there is debate only, we could not file the
cloture motion.
Mr. Gramm. If you can just tell us, if we can have an
agreement--the Senator can amend it. All I am saying is, if
people want to stay and debate any pending amendment or talk
about whatever they want to talk about, that is fine. It seems
to me if we are through with all of our business except debate,
we could let people who have debated enough go home.
Mr. Reid. The leader has stated there will be no more
rollcall votes tonight. I hope if one wants to talk about the
bill, they will do that, but I do not think we need a UC to
accomplish that.
Mr. Gramm. If the Senator will yield, what about a
unanimous consent request, except to file a cloture motion,
that there will be debate only tonight? That way we do not have
a problem of potentially someone asking unanimous consent for
something.
Mr. Reid. My personal feeling is I have no problem with
that. I have to check with staff to make sure I am not missing
anything, but I want to make sure the Senator from North
Carolina is protected.
Mr. Edwards. Will the Senator from Texas yield, if he has
the floor?
Mr. Gramm. If I do I yield to him.
The Presiding Officer. The Senator from North Carolina.
AMENDMENT NO. 4187, AS MODIFIED
Mr. Edwards. Madam President, I have a modification to my
amendment at the desk.
The Presiding Officer. The amendment is so modified.
The amendment, as modified, is as follows:
On page 108, line 15, insert before the end quotation marks
the following:
``(c) Rules of Professional Responsibility for Attorneys.--
Not later than 180 days after the date of enactment of this
section, the Commission shall establish rules, in the public
interest and for the protection of investors, setting forth
minimum standards of professional conduct for attorneys
appearing and practicing before the Commission in any way in
the representation of public companies, including a rule
requiring an attorney to report evidence of a material
violation of securities law or breach of fiduciary duty or
similar violation by the company or any agent thereof to the
chief legal counsel or the chief executive officer of the
company (or the equivalent thereof) and, if the counsel or
officer does not appropriately respond to the evidence
(adopting, as necessary, appropriate remedial measures or
sanctions with respect to the violation), requiring the
attorney to report the evidence to the audit committee of the
board of directors or to another committee of the board of
directors comprised solely of directors not employed directly
or indirectly by the company, or to the board of directors.
Mr. Edwards. I yield the floor.
The Presiding Officer. The Senator from Nevada.
Cloture Motion
Mr. Reid. Madam President, I send a cloture motion to the
desk.
The Presiding Officer. The cloture motion having been
presented under rule XXII, the Chair directs the clerk to read
the motion.
The assistant legislative clerk read as follows:
Cloture Motion
We, the undersigned Senators, in accordance with the provisions of
rule XXII of the Standing Rules of the Senate, do hereby move to bring
to a close the debate on Calendar No. 442, S. 2673, the Public Company
Accounting Reform and Investor Protection Act of 2002:
Jon Corzine, Deborah Stabenow, Paul Wellstone, Ron Wyden, Daniel
Akaka, Barbara Boxer, Charles Schumer, Byron Dorgan, Harry
Reid, Paul Sarbanes, Daniel Inouye, John Edwards, Barbara
Mikulski, Thomas Carper, Jack Reed, Tim Johnson.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, before the Senator from
Texas departs, I wish to add an observation to the comments he
made before about how to proceed.
There are a number of amendments. The definition of
germaneness, once cloture has been invoked, is very narrow.
There are amendments that Members have which in the normal
terminology would be regarded as germane and are certainly
relevant. It seems to me an effort should be made to address
those amendments as well as ones that are perceived to be
germane in the very narrow sense.
There is another category of amendments that I am not very
sympathetic to, and those are ones that have really nothing to
do with this bill. The second-degree amendment offered by the
Senator from Kentucky that is now pending, in my judgment, is
an example of that. We probably ought to move very quickly to
table those kinds of amendments when they come up so we have an
opportunity for colleagues who have amendments that are really
relevant to this legislation to bring them up and to have them
considered.
Mr. Gramm. Will the Senator yield?
Mr. Sarbanes. Yes.
Mr. Gramm. I think we have a fairly broad consensus that is
the direction in which we should go. The fact that we are
getting ready to have cloture should not prevent us from
adopting amendments where there is support and where there is a
collective judgment that the amendment is relevant. The plain
truth is that anyone knowing that cloture was coming could have
held up the President's amendment which added criminal
sanctions. Any Member of the Senate could have prevented that
from being voted on knowing that it was nongermane, but nobody
did that because there was a general base of support for it.
All I was saying was that every Member of the Senate knows
the germaneness rule and everybody knows that, come whenever we
invoke cloture, any amendment that is nongermane is going to
fall. Then what is going to happen is, unless there is some
consensus for the amendment, it is simply going to be delayed
until it is cut off.
If what the Senator is saying is that if an amendment is
relevant, if it would improve the bill, if it is not highly
controversial, we ought to take it, I agree with that. Looking
down my amendment list, there are not a lot of such amendments,
but the ones that are there, if people want to bring them up, I
am not going to oppose an amendment simply because it is not
germane.
Mr. Sarbanes. I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Reid. Madam President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. Madam President, I ask unanimous consent that the
previously agreed to Daschle for Biden amendment, No. 4186, as
modified, be inserted in the appropriate place in the bill.
The Presiding Officer. Without objection, it is so ordered.
VOLUME 148, THURSDAY, JULY 11, 2002, NUMBER 93,
PAGES [S6603-S6616]
Public Company Accounting Reform and Investor Protection Act of 2002
The Presiding Officer. Under the previous order, the Senate
will resume consideration of S. 2673, which the clerk will
report.
The assistant legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
Pending:
Edwards modified amendment No. 4187, to address rules of
professional responsibility for attorneys.
Gramm (for McConnell) amendment No. 4200 (to amendment No.
4187), to modify attorney practices relating to clients.
The Presiding Officer. The Senator from Nevada is
recognized.
Mr. Reid. Mr. President, this has been cleared by both
managers of the bill. We have had a number of inquiries about
the need for more time to talk on various issues. As the Chair
knows, from 12:30 until 2 o'clock, we have our policy luncheon,
and normally we don't have votes.
I ask unanimous consent that the previously scheduled
order, which provided that Senator Enzi be recognized at 12
noon today to make a motion to table the McConnell amendment
No. 4200, be modified to provide that the recognition of
Senator Enzi occur at 12:45 today, with the additional 45
minutes, from 12 to 12:45, equally divided and controlled
between Senators Sarbanes and Gramm, or their designees, and
that all other provisions of the previous order remain in
effect.
Mr. Dorgan. Mr. President, reserving the right to object, I
would like to engage in a brief discussion with my colleague
from Nevada under my reservation of an objection, if I might. I
shall not object to the specific request of the Senator, but I
have just visited with the Chairman of the Committee and you
know there exists a list of amendments that Members of the
Senate wish to offer to this legislation.
As I have watched this process over the last couple of
days, it appears to me that we have set up a gatekeeper of
sorts for determining who will offer amendments and whether
there will be votes on the amendments, and it appears to me we
are not making very much progress. I would like to get some
sense of whether we have a clear process beginning this
afternoon, so that this afternoon and this evening we might be
able to move through 6, 8, 10 amendments and get time
agreements so Members of the Senate have the opportunity under
the rules to offer and have considered amendments that they
consider important in this legislation.
Mr. Reid. Mr. President, I say to my friend, the chairman
of the committee has worked for hours and hours trying to get
movement so people could offer relevant amendments. We have
been not very successful, to be very candid with the Senator
from North Dakota. I have stood by the Senator from Maryland
and coerced, urged, and we haven't gotten to the debating point
yet. We have done everything we can.
There are a number of Senators, not the least of whom is
the Senator from North Dakota, who have amendments. There is
the Senator from Michigan, the Senator from New York, and
others who have spent a lot of time wanting to offer
amendments. We are doing everything we can. We hope the Enzi
motion to table will break some of this loose.
I say to my friend from North Dakota that we understand how
he feels. The only thing I will say is there is no gatekeeper.
On one bill the two managers said they would oppose any
amendment that was not relevant, but that is not the case now.
The Senator from Maryland has expressed to me that there are
some relevant amendments which should be offered. He has done
everything he can to----
Mr. Byrd. Mr. President, who controls time?
The Presiding Officer. Under the previous order, the
Senator from West Virginia controls the next 45 minutes. There
is a unanimous consent request pending.
Mr. Byrd. Mr. President----
Mr. Dorgan. Mr. President, reserving the right to object.
Mr. Reid. If I can ask my friend to let me finish. I ask
unanimous consent that the time in the colloquy between the
Senator from North Dakota and the Senator from Nevada not take
away from the time of the Senator from West Virginia.
The Presiding Officer. Without objection, it is so ordered.
Mr. Dorgan. Mr. President, continuing on my reservation--
and it is not my intention to delay the Senator from West
Virginia--I want to try to understand what is happening.
First, my comments should not in any way suggest that the
chairman of the committee hasn't done an extraordinary job. I
have great respect for him. But it has been difficult to get
amendments up and get votes on them in the last day or two.
There are a good number of very important amendments.
Under the reservation, I say that we know what has happened
to the stock market in the last few days. We know this is a
critically important issue--this legislation and the amendments
to it. We ought not to treat this lightly. This piece of
legislation ought to be on the floor and open for amendment,
having a robust discussion on the very important issues dealing
with corporate responsibility.
Instead, what is happening is we have a couple people on
the floor who seem to want to stall this process and prevent
amendments from being considered in order. I hope--and I will
come back after lunch today--to offer at least two amendments.
I want to debate them and get them voted on. At least as a
Senator I have a right to do that.
It is very important to me that I be able to add these
amendments. If the Senate doesn't like them, fine, we will
vote. But it is important to me to have that opportunity. I
shall not object to the unanimous consent request with respect
to the tabling motion.
I wanted to say to the Senator from Nevada and the Senator
from Maryland, who have done everything humanly possible to try
to make this process work, that there are others in the Chamber
who are trying to drag this process out and prevent others from
offering amendments. I am going to assert my rights, to the
extent I can, to say that before this bill is completed we need
to have
the best ideas everyone in the Senate has to offer about how to
do this job.
The economy in this country is in significant trouble. We
know it. The confidence the American people have in this
economy and corporate governance has been shattered in many
ways. It rests upon the shoulders of this institution to pass
this legislation and do everything we can to make it the best
piece of legislation possible to restore that confidence and
give some lift to this economy. I wanted to make that point.
I appreciate the indulgence and the patience of the Senator
from Nevada. If the Senator from Maryland will give me a chance
to say this once again: In no way am I saying the Chairman
hasn't done everything humanly possible to move this along. He
wants to move quickly. I shall not object.
Mr. Graham. Mr. President, reserving the right to object.
The Presiding Officer. The Senator from Florida.
Mr. Graham. Mr. President, I express my great admiration
for what Senator Sarbanes has done in presenting to America
such a meaningful piece of legislation to deal with one of the
great scandals that has occurred in the history of our free
enterprise system, and taking a step toward restoring the
confidence of the public in the investment community.
But as Senator Dorgan, I have an idea which, in fact, in
one instance, is parallel to Senator Dorgan's; that is, I
believe we need to be very clear that we are applying the same
standards to corporations that have their corporate
headquarters inside the United States as we do to corporations
that take advantage of our capital markets and have chosen to
locate or relocate their headquarters outside of the United
States.
Mr. Reid. Mr. President, I am reclaiming my time.
Mr. Graham. Reserving the right to object, there are enough
incentives to do that already in the Tax Code and otherwise. We
should not be creating additional incentives for companies to
run from their responsibilities within the United States. My
specific----
Mr. Reid. Mr. President, I want the floor back.
Mr. Graham. I am raising this today----
Mr. Reid. Mr. President, I have the floor.
The Presiding Officer. The Senator from Nevada has the
floor.
Mr. Graham. Mr. President, I am reserving my right to
object.
Mr. Reid. Mr. President, I have the floor.
Mr. Graham. I will conclude my comments in short order.
The Presiding Officer. The Senator can either object or
not. Reserving the right to object occurs at the indulgence of
those who have the floor.
Mr. Reid. Mr. President, we have built in time for people
to speak. It is not fair to Senator Byrd and others who have
been waiting to speak. I have no problem with Senator Graham
coming. I agree with his position. There is time to be allowed
under this unanimous consent agreement. Otherwise, the time
will be all gone, and there are two Senators who have an hour
and a half, by virtue of a unanimous consent agreement entered
into last night.
It is not fair to use the extra half hour with these
speeches that are taking away from Senator Byrd and Senator
McConnell.
The Presiding Officer. Is there objection?
Mr. Graham. Reserving the right to object, just for the
purpose of concluding my remarks.
Mr. Byrd. Mr. President, I object.
The Presiding Officer. Objection is heard.
Mr. Byrd. Mr. President, I will be happy to yield to the
Senator when I get the floor. We cannot make long speeches on
reservations to object. We either object or we don't. I object
and then I will be happy to yield to the Senator. I want to be
fair. Am I recognized?
The Presiding Officer. The Senator from West Virginia is
recognized.
Mr. Byrd. How much time does the Senator wish?
Mr. Graham. Just 1 minute.
Mr. Byrd. Mr. President, I yield to the distinguished
Senator from Florida for 1 minute, reserving my right to the
floor.
Mr. Graham. I appreciate the courtesy of the Senator. I
want to bring to your attention an article from the Washington
Post today. I ask unanimous consent that this article be
printed in the Record.
There being no objection, the article was ordered to be
printed in the Record, as follows:
SEC Chairman Pitt a Potential Liability to Administration
(By Dana Milbank)
While President Bush was delivering his long-awaited speech
on corporate governance Tuesday, Securities and Exchange
Commission Chairman Harvey L. Pitt was exactly where many Bush
aides wanted him to be: on a week-long beach vacation.
``We were not surprised that the Chairman was not included
in Administration plans for public appearances,'' SEC
spokeswoman Christi Harlan said. ``The commission is an
independent agency.''
White House officials, though calling it a coincidence,
acknowledged they had no desire for Pitt's presence.
The arms-length treatment of Pitt underscores a dilemma for
Bush and his radioactive SEC chairman. Many Democrats and even
a few Republicans have called for Pitt's resignation because of
his alleged conflicts of interest and ties to the accounting
industry. There is no sign that Bush is even thinking of
dropping Pitt. But whether Pitt stays or goes, he is a
potential liability.
Dismissing Pitt would violate the Bush code of loyalty and
would be viewed as validating Bush's critics, from Senate
Majority Leader Thomas A. Daschle (D-S.D.) to Bush's Republican
nemesis, Sen. John McCain (Ariz). ``Dropping Harvey Pitt right
now would be an acknowledgment of wrongdoing where there's been
no wrongdoing,'' said GOP lobbyist Ed Gillespie, a former Bush
campaign aide.
Forcing Pitt out would also open the White House to charges
of interfering in the SEC's investigation of Halliburton Co.'s
activities when Vice President Cheney was its chief executive.
Underscoring that danger, Halliburton shareholders yesterday
filed a fraud lawsuit in Dallas against the company and Cheney.
White House Press Secretary Ari Fleischer said the suit is
``without merit.'' That prompted Larry Klayman, whose group,
Judicial Watch, represents the shareholders, to accuse the
White House of seeking to influence the SEC's investigation.
Yet Pitt's presence as the Government's top securities
watchdog carries dangers for Bush, too. Even some Pitt
defenders say his close ties to the accounting industry limit
his credibility as a reformer. In his first speech as SEC
Chairman last year, Pitt told an audience of auditors that the
SEC would be ``a kinder and gentler place for accountants.''
``Pitt has been in hot water since day one and WorldCom
turned it into a full boil,'' said GOP operative Scott Reed.
Because Bush will not drop Pitt, Reed said, ``McCain and the
Democrats have turned him into a political pinata, and that
will continue ad infinitium.''
Democrat Chris Lehane, who defended Bill Clinton and Al
Gore during that Administration's scandals, said Bush is making
the wiser political choice in keeping Pitt, even though Pitt
could undermine faith in Bush's reforms. ``Pitt could do
everything right and nobody's going to give him credit for
it,'' he said.
Pitt's foes point to his past legal work for executives of
now-sullied corporations, including MCI, Merril Lynch & Co.,
Arthur Andersen LLP and other accounting firms. He has also
been criticized for meeting in April with a former client, KPMG
Consulting Inc., while KPMG's audits of Xerox Corp. were being
investigated by the SEC. Critics also say that as a lawyer,
Pitt favored restricting Federal oversight of auditing firms.
Over the years, Pitt has represented figures such as Ivan
Boesky and Michael Saylor in SEC actions.
Bush, in his Monday news conference, generously defended
Pitt. ``I support Harvey Pitt--Harvey Pitt has been fast to
act,'' Bush said. Later, Bush added: ``I'm going to give him a
chance to continue to perform.''
Privately, Bush has expressed amazement at the conflict-of-
interest charges. ``It's only in this town that people want
someone who doesn't know what they're talking about to lead an
agency,'' he told Congressional Republicans visiting the White
House yesterday.
Pitt has an unlikely defender in Lanny J. Davis, one of
President Clinton's scandal handlers. ``The attack being made
by Democrats could be made on most anyone for having conflicts
from prior positions,'' he said. But Davis said the
Administration has been making matters worse. ``The more you
bottle up Harvey Pitt, the more you allow Democrats to make him
an issue,'' Davis said.
Observers on both sides expect Pitt to make a public effort
to build his credibility by demonstrating that he can be hard
on his old friends. Indeed, some in the Administration joke
that Pitt will come to resemble a model Democratic SEC
Chairman, one heavy on regulations.
The White House has distributed evidence of Pitt's activity
on the job: requiring chief executive and chief financial
officers of the 947 largest companies to personally recertify
the accuracy of their disclosures; seeking to bar 54 officers
and directors; and issuing a long list of new reporting rules
and regulations.
Pitt was not Bush's first choice for the SEC job, and
officials say he continues to be far from Bush's inner circle.
The reforms Bush announced Tuesday were developed largely by
Treasury Secretary Paul H. O'Neill and White House Deputy Staff
Chief Joshua Bolten, with help from Bush economic advisers
Lawrence B. Lindsey and R. Glenn Hubbard.
But Bush is stubborn about demonstrating loyalty to his
aides, which enables him to claim reciprocal loyalty. Officials
say he continues to defend Army Secretary Thomas E. White,
embattled because of his Enron Corp. ties and personal travel,
because White has been faithful to Bush.
But when underlings act disloyal, Bush can quickly cut them
loose. Linda Chavez was dropped as Bush's nominee to be Labor
Secretary when it appeared she had misled those vetting her
background. Michael Parker, the Civilian Chief of the Army
Corps of Engineers, was ousted for complaining about
administration budget cutting.
Pitt so far has demonstrated fealty to Bush, and Bush aides
remain loyal to him. ``The best thing to do is vigorously
enforce the law, and that's what he's doing,'' Lindsey said.
Mr. Graham. In this article, the President of the United
States has given as one of his reasons to continue his support
for the Chairman of the Securities and Exchange Commission,
Chairman Harvey L. Pitt, the fact that Mr. Pitt has required
chief executives and chief financial officers of the 947
largest companies to personally recertify the accuracy of their
disclosures.
What was left out were all the American companies which
have their corporate headquarters outside the United States of
America. Apparently, the Chairman of the SEC believes he can
discriminate and apply a principle only against those
corporations which are sited in the United States and exclude
corporations outside the United States.
That is an irrational and unfair distinction and one that
we should correct as promptly as possible in this legislation.
I thank the Senator from West Virginia.
The Presiding Officer. The Senator's time has expired.
Mr. Reid. Mr. President, will the Senator yield for a
unanimous consent request?
Mr. Byrd. Gladly.
Mr. Reid. Madam President, I renew my unanimous consent
request.
The Presiding Officer (Ms. Landrieu). Without objection, it
is so ordered.
The Senator from West Virginia.
Mr. Byrd. Madam President, since the revelation last month
of yet another corporate accounting scandal--this time
involving the second largest telecommunications provider,
WorldCom--the Bush Administration seems to have lost its
patience with corporate America. In fact, from the rhetoric we
have heard from the Administration in recent weeks, I expected
to hear the President tell corporate America this week that his
top advisors had been in the White House basement planning, not
just a corporate fraud task force, but a new Department of
Corporate Security.
The President said last month at the G8 summit in Canada,
``The revelations that WorldCom has misaccounted [$3.8] billion
is outrageous.''
In his June 29 weekly radio address, the President warned
corporate America that ``no violation of the public's trust
will be tolerated. The Federal Government will be vigilant in
prosecuting wrongdoers to ensure that investors and workers
maintain the highest confidence in American business.''
The President apparently is so miffed with these corporate
``wrongdoers'' that he has elevated them in his rhetoric to a
bad-guy level that is almost, but not quite as bad, as al-
Qaeda's ``evildoers.'' Almost the same level; perhaps not
quite.
WorldCom president and CEO John Sidgmore, in a June 28
letter to President Bush, joined the President in expressing
his outrage. ``I want you to know that we, the current
management team, are equally surprised and outraged . . . about
past accounting irregularities at WorldCom,'' he said.
So the Bush Administration and the CEO of WorldCom now both
agree that American corporations teaming up with unscrupulous
(or incompetent) accountants to mislead shareholders about how
much money the company is making is an ``outrageous'' practice.
Madam President, how comforting it is. As Jackie Gleason
used to say: ``How sweet it is.'' How sweet it is. How
comforting it is to know that we have finally reached a
consensus on that issue.
Despite the excuses and the explanations, I find little
credibility in the argument that certain corporate executives
lacked sufficient knowledge to ask the right questions about
their companies' accounting practices.
If CEOs are worth their generous pay, one would think they
could take the time to make sure that the company's chief
financial officer is not padding earnings by omitting costs
from the balance sheet.
In fact, one finds disconcerting the acute lack of shame--
the acute lack of shame--S-H-A-M-E--on the part of some of
these corporate executives. Former Enron CEO Jeffrey Skilling
told the House Energy and Commerce Oversight Subcommittee that
Enron had tight control on financial risk, but that he could
not be expected to oversee everything and ``close out the cash
drawers . . . every night.''
Can you imagine that kind of statement? I think it was
Wordsworth who said: No matter how high you are in your
department, you are responsible for what the lowliest clerk is
doing.
Let me repeat that. Wordsworth said: No matter how high you
may be in your department, you are responsible for what the
lowliest clerk is doing. That was William Wordsworth. Let's
take that statement and put it beside the statement of former
Enron CEO Jeffrey Skilling when he told the House Energy and
Commerce Oversight Subcommittee that Enron had tight controls
on financial risk but that he could not be expected to oversee
everything and ``close out the cash drawers . . . every
night.'' Oh, that poor man. What a heavy burden he carried.
That poor man. We can all shed crocodile tears for someone who
is put into that very difficult position and then consider the
kinds of salaries these people draw down.
Shakespeare said: ``The quality of mercy is not strain'd,
it droppeth as the gentle rain . . . upon the place beneath.''
I will tell you, it does strain gentle mercy when we read about
these scandals that have swept over this country and how these
people plead the fifth amendment when they are called up before
Senate committees and House committees--plead the fifth
amendment. That is a stunningly irresponsible attitude for a
chief executive.
It is something that you might hear from the teenage
manager of a fast food restaurant who cannot account for a
handful of change missing from the cash drawer at the end of
the night. You might hear that from the teenage manager of a
fast food restaurant who cannot account for a handful of change
missing from the cash drawer at the end of the night. But we
are not talking about a handful of change. We are talking about
the American public. Those eyes that are peering--they are
peering at this Senate floor at this very minute through the
lenses of those cameras. They are the taxpayers out there. I
see them looking through those cameras. I see them in West
Virginia. I see them in Texas. I see them in Wyoming. I see
them in New York looking through those cameras.
We are talking about them, the American public having lost
by some estimates tens of billions--not millions--tens of
billions of dollars of invested savings in companies that
issued false--the Ten Commandments, I keep them on my walls;
some of these CEOs should keep them on their walls--financial
reports and tens of thousands of workers who have lost their
jobs, and many have lost their meager earnings that they, too,
invested, that is what we are talking about.
So here is an individual who tells a House committee he
cannot be expected to oversee everything and close out the cash
drawers every night--such a stunning, irresponsible, arrogant
attitude on the part of a chief executive. I say again it is
something that you might expect to hear--you might--from the
teenage manager of a fast food restaurant who could not account
for a handful of change missing from the cash drawer at the end
of the night.
We are not talking, let me say again, about a handful of
change. We are talking about the American public, those people
out there, Republicans and Democrats and Independents, in the
Alleghenies, along the eastern coast, on the storm-beaten coast
of Maine, the fishermen on the mighty deep, the people in the
Plains and the Rockies and beyond. These are the people, north
and south, the public. We are talking about the American public
having lost, by some estimates, tens of billions of dollars of
invested savings in companies that issued false--and they knew
they were issuing false--financial reports. Tens of thousands
of workers who have to wash the grime from their hands and
their faces, workers in the fields, in the mines, in the
shipyards, those are the people we are talking about, the
public, tens of thousands of workers who have lost their jobs.
Even after these corporations' fraudulent accounting,
somebody ought to go to jail, and the doors should be locked
and the keys thrown away. Throw away the keys. It really would
not be too severe a punishment for some of these four-flushers.
Even after these corporations' fraudulent accounting
methods are exposed, the accounting games seem to continue.
After telling the Securities and Exchange Commission that it
hid nearly $4 billion in expenses last year, WorldCom submitted
revised financial reports to the SEC which the SEC Chairman,
Harvey Pitt, immediately called wholly inadequate and
incomplete. Apparently, WorldCom's revised financial statements
included additional accounting errors dating back to 1999 and
2000. That, Chairman Pitt said, could add at least $1 billion
to the company's financial revision.
No wonder the trust of those people is broken. No wonder
the public's trust in corporate America has eroded. What kind
of trust can the public have in companies that hide information
in an effort to pull the wool over the eyes of American
investors?
After WorldCom's announcement, the Bush Administration
sharpened its rhetoric and is now working to assure the
American public that it recognizes the importance of
transparency and disclosure. The Chairman of the White House
Council of Economic Advisers, Glenn Hubbard, said in an
interview last month that the President wants to reassure
investors about the economy while also delivering a shot across
the bow to leaders of corporations that abuses of the public
trust will not be tolerated.
In the midst of Congressional hearings last March, after
the collapse of Enron, the President lectured corporate America
about how to regain the public's trust. He said corporations
must disclose relevant facts to the investing public and they
must focus on the interests of shareholders, who are the real
owners of any publicly held enterprise, to properly inform
shareholders and the investing public that we must adopt better
standards of disclosure.
That is nice rhetoric, but this Administration hardly sets
the model for openness and transparency. In fact, this is an
administration that prides itself on operating in secrecy and
governing by surprise. Remember the secret government that was
being set up? In fact, this is an administration, let me say
again, that prides itself in operating in secrecy and governing
by surprise.
I find it difficult to watch this Administration lecture
corporate America about virtues of disclosing information to
the public while at the same time it is restricting the
public's access to information about its own executive actions.
Last October, Attorney General John Ashcroft issued a memo
encouraging Federal agencies to withhold unclassified records
under the Freedom of Information Act, the law that gives the
American public the legal right to certain Government
information. The Attorney General even told the Federal
agencies that the Justice Department would defend agency
decisions to deny FOIA, Freedom of Information Act, requests.
Last November, the President issued an Executive Order to
limit access to Presidential papers that, under the
Presidential Records Act of 1978, would normally be made
available to the American public. The Executive order allows a
former or a sitting President to block the release of records
requested under the law by invoking ``constitutionally based
privileges.'' The words ``constitutionally based privileges''
are in quotation marks.
The American people would have to go to court to challenge
the privilege claim. The order could even permit a former or
incumbent President to impede requests for old records simply
by withholding approval for their release, effectively negating
the need for the Chief Executive to even make the claim of
executive privilege.
We have had our own little taste of this side of the coin
from the executive branch as we on the Appropriations
Committee, Senator Stevens and I, tried to have the
Administration let Tom Ridge come up before the committee and
testify.
Then we see this creation of this mammoth reorganization of
Government that sprang like Minerva, fully clothed and armed,
from the forehead of Jupiter.
When this Administration's chief executive talks about
adopting better standards of disclosure, I hope that these
executive actions are not what he has in mind. These are just
examples of the Administration directly restricting the
public's access to government information. The Administration
has also moved to limit access by Members of Congress, who are
elected by the people and responsible for the oversight of
executive actions in the public's behalf.
Last December, the President gave notice that he was
unilaterally withdrawing the United States from the
Antibalistic Missile Treaty, allowing the Administration to
begin development of a new antibalistic missile defense system.
Soon after, the Pentagon began to exempt missile defense
projects from traditional reporting requirements and
Congressional oversight, an overt attempt to keep the Congress
and the American people in the dark about the progress of that
system. As the Administration requests additional defense
funds, the Pentagon is taking further steps to shield cost
estimates and time tables from the Congress, making it harder
to keep the Administration accountable for technical and
budgetary assessments.
The Dark Ages were supposed to have ended in about 1000
A.D. They lasted 1,000 years, the Dark Ages. Reminiscent of the
Dark Ages, an administration that believes in keeping a
Congress in the dark, the American people in the dark, and we
are hearing a lot of sword rattling about it. An attack on
Iraq--the Administration should level with the Congress. It is
an equal branch. It is not a subordinate branch to the
Government. It never has been, and I hope never will be. Let's
hear more about this plan to invade Iraq. Watch out for August
when Congress is out of town, or before the election. Who
knows?
This reorganization of Government sprang like Aphrodite
from the ocean foam, and she was carried on a leaf to the
island of Crete. She later appeared in full dress before the
gods on Mount Olympus. They were stunned with her beauty.
This is what we see. These ideas sprang from where? This
idea to reorganize the Government--and I am concerned it will
also reorganize the checks and balances of the Constitution
unless we are watchful--sprang from the bowels of the White
House, the creation of four individuals who are named in the
public press. Not exactly the equal, perhaps, of that committee
that wrote the Declaration of Independence--Thomas Jefferson,
Benjamin Franklin, Roger Sherman, John Adams, and Livingston,
those five. Not exactly.
But look at all the commotion that ideas has created. Look
out, the Congress is being stampeded into putting its
imprimatur on that idea. Well, some parts of the idea may be
OK, but we should not be in too big a hurry.
And that is to say nothing of the fact that these executive
actions toward secrecy have occurred during a period in which
the President has refused to allow Tom Ridge, in his capacity
as the Director of Homeland Security, to testify before the
Congress, and in which the Comptroller of the General
Accounting Office was forced to sue the Vice President of the
United States to obtain information about the White House
energy task force and its connections to Enron.
These are not the actions of an administration that
believes in the virtues of disclosing information to the
public. This is an administration that not only embraces the
idea of operating in secrecy, but flaunts its abilities to hide
information from the Congress and the American public.
Upon announcing its proposal for a new Department of
Homeland Security, the Administration bragged to the media
about how the plan had been pieced together by just four men
and a few trusted aides in the basement of the White House. As
the work became more detailed and the working groups expanded,
the code of silence was gravely explained to each new arrival.
At the end of each meeting, all papers were collected: nothing
left that room, we've been told. The work was completed before
any member of the Congress was briefed on the plan. White House
Chief of Staff Andrew Card even arrogantly proclaimed, ``We
consulted with agencies and with Congress, but they might not
have known we were consulting.''
Now, get that. I can hardly believe my eyes, except my eyes
have seen this prior to my having stated it on the floor. White
House chief of staff Andrew Card even proclaimed--I used the
adverb ``arrogantly,'' I will put it back in--White House chief
of staff Andrew Card arrogantly proclaimed, ``We consulted with
agencies and with Congress but they might not have known we
were consulting.''
What a reflection on Congress. What is he saying about
Congress? That is hardly a model of transparency that I want
corporate America to follow.
We don't want to hear corporate CEOs saying we shared
information with the American public, but they might not have
known we were sharing it with them. The Administration's
euphoria for secrecy seems motivated in large part by its
desire to implement a political agenda. That is what it is. A
political agenda, regardless of whether it has the support of
the American people.
Mr. Reid. Will the Senator yield?
Mr. Byrd. I would be glad to yield.
Mr. Reid. Mr. President, I have been listening to the
Senator from West Virginia give his speech, and I am of the
opinion maybe the reason all that secrecy takes place is they
are running the White House like people run corporations.
Rather than having a public institution as the Administration
and White House should be, maybe they are running the White
House like a corporation.
I say to my friend that the White House, this
Administration is covered with corporate America. Maybe they
think the White House is to be run like a corporation.
Mr. Byrd. The distinguished Senator from Nevada introduces
an interesting idea. Maybe they do. Maybe anything goes. All is
fair in love and in war they say. Now we can add, big business.
Big business.
That is not a fair thing to say about many big businesses
really because many of the people in big business are honest
and try to do the right thing. They are open, they are
transparent. It is too bad a few bad apples reflect on the
whole barrel. I used to sell produce. I was a produce boy,
married, with children coming on, and I found that a few bad
peaches would quickly ruin the whole bushel. The same thing
with apples and other fruits and so on.
When the Administration's polls suggest opposition to
certain policies from the American public, it limits access to
information about that policy. I fear that the American public,
and their elected representatives in Congress, at times are
viewed by this Administration as some sort of obstacle or
hurdle that is to be avoided. There is a contempt, there is an
arrogancy in this Administration, there is a contempt for
Congress. They hold Congress in contempt.
This kind of executive mentality can only emanate from the
arrogance of an Administration that believes the White House is
the fountain of wisdom in Washington. Wisdom is the principal
thing. Such a mentality is dangerous, it is absolutely
dangerous. I was here in the Nixon Administration. I remember
what happened to that Administration. Such a mentality is
dangerous. We need only look to the corporate accounting
scandals which this Administration has so harshly criticized in
recent weeks to see why.
Most economic pundits seem convinced that the hyperactive
stock market of the late 1990s was the catalyst for a slow,
steady deterioration in professional and ethical standards in
corporate America. The pressure on CEOs and companies to
produce earnings, quarter after quarter, resulted in a kind of
competitive behavior that encouraged companies to push the
accounting envelope. Rising profits and stock prices provided
cover for underlying ethical lapses. The longer the boom
lasted, the more brazen these corporations became in cutting
corners and taking a little more off the top.
By the end of the boom, many companies appear to have been
engaged in the kind of fudging, gamesmanship and ethical
corner-cutting that, while legal in some cases, was certainly
less than ethical. Unfortunately, it was only after the stock
market began its inevitable decline and great piles of money
were lost that people began to ask the critical, penetrating
questions that should have been asked earlier to prevent this
kind of behavior in the first place. Those harder questions are
now leading to accounting revisions, executive resignations,
lawsuits, and criminal investigations.
So far, the reflexive instinct of the business community
and the Bush Administration largely has been to blame a ``few
bad apples,'' but that assertion is hardly consistent with the
fact that the SEC opened 64 financial-reporting cases between
January and March of this year, and that almost a thousand
companies, not just a handful, have been asked to recertify to
the SEC their financial statements through the last fiscal
year.
It is somewhat ironic that the actions of chief executives
were protected by soaring stock prices, since the
Administration finds itself in a similar position. Just like
soaring stock, as long as the President's approval ratings
remain high, presumably propped up by the American public's
understandable desire to support the war on terrorism, the more
latitude the Administration will be granted in restricting
information about its executive actions under the guise of
national security. This kind of culture can be extremely
dangerous. It was allowed to flourish in corporate America
during the late 1990s, and now threatens the public trust.
The Administration would do well to take some of its own
medicine and make itself more transparent to the American
public. For all of its expressed concerns about the public's
loss of confidence in corporate America, this Administration
seems to have given little, if any, consideration to the loss
of the public's trust in government. That is the most basic of
commodities in republican government. I do not refer to it, as
many politicians who ought to know better glibly refer to this,
our system, as a democracy. They ought to go back and read
Madison's 10th and 14th essays in the Federalist Papers. They
will finally learn the difference--or be reminded of the
difference. They probably have forgotten the difference between
a democracy and a republic.
The public's trust in government--when the public loses its
trust, when the public's trust is eroded, all is lost: The
public trust. And sooner or later, high poll numbers will
tumble, as they always do. We have seen them do it before.
Don't read the polls, I say to my colleagues, so
assiduously, read the Constitution--which I hold in my hand.
Read the Constitution. I say to the Administration, I say to
the executive branch, read the Constitution. Don't be so
enamored with the polls. They are fleeting. Read the
Constitution.
This Administration's Chief Executive came into office
touting himself as the first President to earn a master's
degree in business Administration. That is certainly more than
I have. He announced that he would run the White House like a
modern-day corporation. Ha-ha-ha; watch out.
To be fair, the President probably didn't realize at the
time that he would be faced with the exposure of a corporate
culture--not all his. The President probably didn't realize at
the time that he would be faced with the exposure of a
corporate culture which encouraged shoddy auditing, negligent
or criminal management, and impudent and secretive corporate
CEOs.
In hiding its own actions from the public view, this
Administration is fostering the same kind of arrogant, arrogant
culture in which these corporate accounting scandals were
allowed to flourish. This Administration would do well to take
preventive measures to keep the nasty, nasty little seeds of
arrogance and secrecy that have affected corporate America from
taking root in the executive branch and threatening the
public's trust.
I close with a Biblical parable: Pride goeth before
destruction, and the haughty spirit before a fall.
I ask unanimous consent to have printed in the Record an
article from today's Washington Post titled ``Bush Took Oil
Firm's Loans as Director''; and an article from today's
Washington Times titled ``Cheney named in fraud suit.''
There being no objection, the material was ordered to be
printed in the Record, as follows:
[From the Washington Post, July 11, 2002]
Bush Took Oil Firm's Loans as Director
(By Mike Allen)
As a Texas businessman, President Bush took two low-
interest loans from an oil company where he was a member of the
board of directors, engaging in a practice he condemned this
week in his plan to stem corporate abuse and accounting fraud.
Bush accepted loans totaling $180,375 from Harken Energy
Corp. in 1986 and 1988, according to Securities and Exchange
Commission filings. Bush was a director of Harken from 1986 to
1993, after he sold his failed oil and gas exploration concern
to the company. He used the loans to buy Harken stock.
Corporate loans to officers came under scrutiny after
WorldCom Inc., the long-distance carrier that last month
reported huge accounting irregularities, revealed it had lent
nearly $400 million to Bernard J. Ebbers to buy the company's
stock when he was chief executive. He resigned in April as the
stock price tumbled.
Bush attacked corporate loans during his speech on Wall
Street on Tuesday, when he offered proposals to tighten the
accountability of corporate executives while stopping short of
the tougher measures headed toward passage in the Senate. ``I
challenge compensation committees to put an end to all company
loans to corporate officers,'' he said.
A senior Administration official, briefing reporters on
Bush's plan, said Tuesday that Bush wants public companies to
ban loans to their officers, including directors. ``Corporate
officers should not be able to treat a public company like
their own personal bank,'' the official said.
The contrast between Bush's record as a business executive
and his rhetoric in the face of corporate scandals underscores
the challenge his Administration faces in trying to credibly
foster what he calls ``a new era of integrity in corporate
America.''
Bush was investigated by the SEC in 1991 for possible
illegal insider trading, although the SEC did not take action
against him, and he has admitted making several late
disclosures to the agency, which regulates public companies.
Harken's loans to Bush--at 5 percent interest, below the
prime rate--were reported several times in filings to the SEC
in the years before the debt was retired in 1993 and were noted
in news accounts at the time. The loans were for the purchase
of Harken stock, which was then held as collateral.
Rajesh K. Aggarwal, a Dartmouth College professor who
specializes in executive compensation and incentives, said such
loans ``are not unique, but are by no means widespread.''
White House communications director Dan Bartlett said
Harken offered the loans to directors to buy shares in the
company as part of an incentive for board members ``to have a
long-term commitment with the company.'' Bartlett said the
loans to Bush were ``totally appropriate--there was no
wrongdoing there.''
``This is a common practice in small, medium and large
companies,'' Bartlett said. ``These recent abuses of certain
types of loans led the president to believe that the government
should draw a bright line concerning loans going forward. This
is one of the main things that undermined the confidence of
investors and shareholders.''
Bartlett said the loans were for $96,000 in 1986, for
80,000 shares, and $84,375 in 1988, for 25,000 shares. He said
that in 1993, Harken changed its compensation policies and
discontinued the loan program. He said Harken converted to a
program giving directors stock options, allowing them to buy
stock later at a fixed price.
Bartlett, asserting that Bush did not profit on the loans,
said Bush traded the 105,000 shares being held as collateral
for the loans, retiring his debt. Bush then received 42,503
options under the new compensation plan, Bartlett said, The
options were never exercised and expired after Bush left the
board, Bartlett said.
With adminsitration officials privately expressing concern
about the impact of so much fresh attention to old questions
about Bush's career, the White House yesterday distributed
talking points headlined ``If you get asked about Harken'' to
Bush loyalists who might be contacted by reporters. Bartlett
said the fact sheets were sent to members of Congress after
they asked for them.
White House press secretary Ari Fleischer said aides to
Bush have ``talked to the private accountants and private
counsels who are involved in the president's private
transactions'' while preparing answers to reporters' question
during the growing debate over corporate responsibility.
Vice President Cheney also is receiving unwanted attention
to his corporate past. The SEC is investigating an accounting
practice begun by Halliburton Co., the Dallas-based energy
services company, when Cheney was chief executive before
joining Bush's campaign ticket.
Also yesterday, the White House refused to release records
of Bush's service on Harken's board. Bush had pointed to those
records during a news conference on Monday when asked about his
role in the sale of a subsidiary. The transaction later was
used by Harken to mask losses.
``You need to look back on the director's minutes,'' Bush
said.
Bartlett said the Administration does not have the minutes
and does not plan to ask Harken for them. ``He personally would
not have access to them,'' Bartlett said. ``These are company
documents. I can't release something I don't have.''
Harken has declined to release board records ever since
questions about Bush's record on the board were raised during
his first campaign for Texas governor, in 1994.
Bartlett also said the White House would not accept a
challenge by Senate Majority Leader Thomas A. Daschle (D-S.D.)
on Sunday to ask the SEC to make public the records of its
investigation into whether Bush had engaged in illegal insider
trading of Harken stock.
Daschle said on CBS's ``Face the Nation'' that Bush would
do well to ask the SEC to release the file. ``We've had
different explanations as to what actually occurred,'' Daschle
said. ``I think that would clarify the matter a good deal.''
Bartlett said Bush will not do that. ``Those are documents
in the possession of an independent regulatory agency,''
Bartlett said. ``I'm not in a position to call on them to do
that. We've made available every relevant document we have in
our possession.''
Administration officials said they would take the same
position about an SEC investigation that resulted in Harken's
restating its earnings to show a $12.6 million loss for a
quarter instead of an earlier reported loss of $3.3 million.
Bush was a member of the board's audit committee.
----------
[From the Washington Times, July 11, 2002]
Cheney Named in Fraud Suit
(By Patrice Hill)
Vice President Richard B. Cheney was named yesterday with
the energy company he headed in a lawsuit by investors that
cited bookkeeping practices under investigation by the
Securities and Exchange Commission.
The lawsuit arranged by Judicial Watch, a government
watchdog group, charges that Halliburton Inc. overstated its
revenue by $534 million between 1998 and the end of last year
by illegally booking revenue from oil construction projects
that were in dispute and had not been collected from its
clients. The suit says the accounting fraud resulted in
overvaluation of Halliburton's stock, deciving investors.
Mr. Cheney was Halliburton's chief executive from 1995
until August 2000, after he joined the Bush presidential
campaign. The White House and Halliburton yesterday said the
suit was without merit but both acknowledged that the SEC
investigation is continuing.
``We are working dilgently with the SEC to resolve its
questions regarding the company's accounting practices,'' said
Doug Foshee, Halliburton's chief financial officer. The claims
in this lawsuit are untrue, unsupported and unfounded.''
SEC Chairman Harvey L. Pitt has vowed to pursue the
investigation. ``We don't give anyone a pass,'' he told ABC's
``This Week'' on June 30. ``If anybody violates the law, we go
after them.''
President Bush on Tuesday called for stronger SEC
enforcement and longer prison terms for corporate executives
found guilty of the kind of accounting fraud charged in the
lawsuit. The suit was filed in the U.S. District Court in
Dallas, where Halliburton is based.
A unified Senate approved harsh new penalties yesterday for
corporate fraud and document shredding, adding enforcement
teeth to Mr. Bush's plan to curb accounting scandals. In a
series of unanimous votes, senators added the penalties to an
accounting oversight bill moving toward passage.
Also named as a defendant in the lawsuit is the Arthur
Andersen firm, Halliburton's former auditor, which was fired in
April after the accounting firm was charged with obstructing an
SEC investigation of Enron Corp. Andersen was convicted of the
obstruction charge last month and is no longer permitted to
audit public companies.
The suit says Andersen was a champion of ``aggressive''
accounting tactics and masterminded the bookkeeping maneuvers
that defrauded Halliburton investors.
As evidence of Mr. Cheney's knowledge and approval of these
maneuvers, the suit refers to his appearance in a promotional
video for Andersen in which he said he got ``good advice'' from
the firm, advice that went ``over and above just the normal by-
the-books auditing arrangements.''
The lawsuit cites a critical accounting change made by
Halliburton and Andersen in late 1998. Halliburton was facing
losses because of a recession in the oil industry and cost
overruns on construction contracts in which the company had
negotiated fixed, or lump-sum, payment plans.
Before the accounting change, which was never formally
disclosed to investors, Halliburton had booked the cost
overruns as losses on such projects as long as they were in
dispute and customers had not agreed to pay them.
But starting in 1998, the company booked payment for the
cost overruns as revenue if it believed the disputes would be
resolved and the customers would pay the bills.
As a result of this change, Halliburton showed a profit for
several quarters in 1998 and 1999 when it otherwise would have
posted losses, the suit charges. In some years, the disputed
revenue appears to account for as much as half of the company's
reported profits.
``Halliburton overstated profits that many American
citizens relied upon,'' said Larry Klayman, chairman of
Judicial Watch. ``That's fraudulent security practices, and it
resulted in those Americans suffering huge losses.''
The suit says Halliburton and Andersen violated securities
laws when they did not disclose and justify the accounting
change in a letter to investors. Halliburton's financial
statements starting in 1998 do note, however, that it was
booking uncollected revenue from cost overruns.
Mr. Reid. Madam President, if the Senator will yield for a
parliamentary inquiry.
Mr. Byrd. Yes. I yield.
Mr. Reid. The Senator was allocated 45 minutes. Of course,
we have other time. We have an extra 15 minutes. It is my
understanding there are 4 or 5 minutes left. Is that right?
The Presiding Officer. There are 3\1/2\ minutes remaining.
Mr. Reid. If the Senator so desires, we could also allocate
15 minutes to the Senator from West Virginia if he has more to
say.
Mr. Byrd. Madam President, I thank the distinguished
majority whip for his courtesies and generosity, and for his
characteristic ways of helping his colleagues. I think I will
let my remarks remain today as they are. I thank him.
I yield the floor.
Mr. Reid. Madam President, while there are a couple of
minutes remaining of the Senator's time, I am sure the chairman
of the committee joins with me in expressing our pleasure at
being able to listen to such a profound statement which the
Senator made. I think it again is what this is all about. By
``this,'' I am talking about the legislation.
I talked with a friend of mine. We played football together
as young men. He runs a company in Las Vegas. He said: Harry, I
took all of my money out of the stock market. I will never
invest in the stock market until something is done. He said: I
am afraid. I said: We all feel that way.
I think the Senator really condensed what is going on in
corporate America. It needs to be changed, and hopefully this
legislation will help that.
Mr. Byrd. Madam President, let me express my gratitude to
the distinguished Senator for his comments.
And with respect to the manager of this legislation, let me
state without any equivocation that this is one of the finest
minds I have seen in the Senate. I have been here 44 years. I
have seen the equivalent of the entire Senate come and go, and
I have never seen a sharper intellect. I have seen some Sharp
ones--John Pastore, Herman Talmadge, and there are others. I
have never seen any sharper than that of Paul Sarbanes, in my
judgment. I don't know a great deal about the intelligence
quotients. I don't know what the high range is. I assume it
could be 150, or 155, or 160--whatever it is. Paul Sarbanes is
the brightest.
Also, he has a way about him of not flaunting his intellect
in front of others. Most of us--not because of that kind of
intellect--have been inclined to speak more often--maybe too
much, and perhaps I do already, but not because of that kind of
intellect. But I salute the manager and commend that kind of
intellect. He applies it. I watch him in the committees, and I
watch him on the floor as he manages a bill. He is never a man
to act in haste, or to be too rhetoric in haste. I admire his
patience. He is plotting; he is studying; he is working; and he
is extremely effective.
When I was majority leader, there were certain Senators I
would call into my office from time to time. I would try to
pick their brains as to what we should do on this or that.
Scoop Jackson was one. Paul Sarbanes is always there.
Mr. Reid. Madam President, will the Senator yield for a
comment?
Mr. Byrd. Yes.
Mr. Reid. What the Senator is saying is that the Rhodes
Scholar Committee a number of years ago made a good choice in
selecting Paul Sarbanes to be a Rhodes scholar. Is that what
the Senator is saying?
Mr. Byrd. I am saying exactly that. I am happy the
distinguished Senator put it that way.
This bill before the Senate is the product of that kind of
mind, that kind of attention, and that kind of dedication.
I hope we can pass this bill with an overwhelming vote,
and, also in conference so that when put on the President's
desk he can sign it. I am eager to support it in any way I can.
Before I yield the floor, let me say that when we talk
about intellect and sharp intellects, this man from Texas, Phil
Gramm, is another. He is sharp. I have talked to my staff many
times about that kind of intellect. He can talk about anything.
He doesn't need a script. I have prided myself on working with
him on several challenges, and I have found him to be fair and
straightforward.
I admire people--like these two--having that kind of sharp
intellect.
I was told by an old Baptist pastor, former chief chaplain
in the Army during the war--I don't remember which war it was.
But he always said: The mark of brilliance is to surround
yourself with brilliant people.
I am really proud to look around this Chamber and see
people such as Paul Sarbanes and Phil Gramm. Sometimes I say
that North Dakota has the highest overall quotient, perhaps of
all, with its two Senators--Senators Conrad and Dorgan. I don't
know whether they are Rhodes scholars or not. I am not a Rhodes
scholar. I was not fortunate enough. I just barely made it by
working at night for 10 years just to get a law degree. But
these people make me proud to serve in this body.
Let me yield to the Senator from Maryland.
Mr. Sarbanes. Madam President, I thank the distinguished
Senator for his extraordinarily generous remarks. I am very
appreciative of them.
I want to echo what the very able Senator from Nevada said
about the Senator's eloquent address just a few minutes ago,
which is reflective of the pattern that he has established--
which is to go on the floor of the Senate and go to the very
fundamentals of what our system is all about. His constant
reference to the Constitution draws us back to those
fundamentals. The Senator has always put before the Senate this
broader and deeper vision of why we are here, what we ought to
be doing, and calling us back to our basic principles as a
Nation--right back to the Founding Fathers--as the Senator
pointed out in his talk today. Important aspects of that are
being challenged today in a very serious way.
I echo what my colleague said and express my appreciation
to the Senator from West Virginia.
Mr. Byrd. Madam President, I thank the distinguished
Senator. I am going to yield the floor.
Before I yield it, I apologize to the distinguished Senator
from Kentucky, Mr. McConnell. He is a Republican and I am a
Democrat.
I have been known to go down into Kentucky at his
invitation and speak, and I value his friendship. I apologize
to him for imposing on his time.
Mr. Gramm. Before the Senator yields, if he would yield
very briefly to me, I thank him for his very sweet comments. I
am very happy to be named along with Paul Sarbanes. And someday
when I am talking to my grandchildren about the fact that their
grandpa actually was a pretty important guy in his day--though
his mind, I am sure, at that point will have seemed to have
largely slipped away--I will say: I got to serve with the great
Robert C. Byrd.
Mr. Byrd. I thank the Senator.
amendment no. 4200
The Presiding Officer. The Senator from Kentucky will now
be recognized for up to 45 minutes.
Mr. McConnell. Thank you, Madam President.
I rise to speak on behalf of the McConnell amendment which
will be voted on sometime in the not too distant future. It is
my understanding that my own colleague, Senator Enzi, may make
a motion to table at the end of the debate. So let me, at the
outset, say I support the Edwards-Enzi amendment.
The second-degree amendment that is pending at the desk,
which I will shortly discuss, does not, in any way, change or
diminish the Edwards-Enzi amendment. I think it is a good idea.
However, I think it simply does not go far enough.
I also supported the Leahy amendment yesterday after my
amendment to combat union fraud was defeated. I will continue
to support responsible corporate accountability measures in
this bill.
My only point is, corporations do not have a monopoly on
misconduct, deception, and fraud. As long as we are addressing
professional misconduct, deception, and fraud, we ought to
recognize this is a problem in our entire professional culture,
not just in corporate culture. Let me repeat that. This is a
problem in our entire professional culture, not just in
corporate culture.
I understand the mood at the moment is to beat up on
corporations. And they deserve it. That is what the underlying
bill is about. On the other hand, to ignore other areas of
abuse, it seems to me, is to miss an opportunity to address the
problem in a broader way.
The Senator from North Carolina raises real problems with
the ethics and conduct of corporate lawyers. I commend him for
that. And I commend the Senator from Wyoming for that. But I
have long sought to curb similar and well-documented abuses in
the general practice of law, specifically in the case of
personal injury law.
Let me say at this point that the McConnell amendment
applies only to Federal claims and Federal courts. We are
talking here about Federal claims and Federal courts. My point
in offering this amendment is not to obstruct but to extend and
enhance our debate on professional conduct.
We ought to set standards for corporate attorneys. I favor
that. And we ought to set standards for personal injury lawyers
as well. Corporations and corporate attorneys do not have a
monopoly on misconduct. We are doing a real disservice to the
American public if, during this important debate on
professional misconduct, we turn a blind eye to abuses in our
society that have been piling up way before--long before--
Enron, WorldCom, and Global Crossing.
All too often we hear stories about lawyers who take
advantage of their clients by not informing them of the legal
fees and costs those clients will incur. This sad practice
results in consumers of legal services receiving next to
nothing in personal injury and other claims.
Let me recount the story of Diana Saxon. Ms. Saxon was a
victim of, among other things, attempted forcible rape. The
defendant was convicted, and Ms. Saxon brought a personal
injury action against that defendant. The attorney she hired
said the fee he was going to charge was 40 percent, plus costs.
Ms. Saxon received an award of $25,000. Of that, per her
agreement, $8,300 went to her lawyer in attorney's fees. But an
additional $20,716 went to her lawyer for expenses. However,
none of those costs was made known to Ms. Saxon during the
course of the litigation. She was only informed of them after
her case was concluded.
Now, it gets even better--or, for Ms. Saxon's unfortunate
situation, it gets worse. After her lawyer charged her his
costs, she ended up owing her attorney $4,000--$4,000. That is
right. For poor Ms. Saxon, she was actually left over $4,000 in
the hole, in debt.
Now, to be fair, Ms. Saxon's lawyer was actually
magnanimous in that he waived a few costs and a small portion
of his fee so that she was actually able to walk away with the
princely sum of $833--$833.
In his letter to her, where he agreed to offer her these
few hundred dollars from her award of $25,000, he wrote:
I'm agreeable to pay the sum of $833. This is the only
money you will receive from your $25,000 settlement.
So, in sum, even though Ms. Saxon's lawyer told her that
the lawyer would get 40 percent of her award, plus costs, in
reality, after including these costs, he got 96 percent--96
percent--of her award. That is right, 96 cents on every dollar
that Ms. Saxon received.
We need to make sure that consumers of legal services are
not duped by this type of inaccurate and incomplete
information.
Let me quote Ms. Saxon. She has put the problem better than
I could. Here is what she had to say:
This is not how our civil justice system is supposed to
work. What happened to me should never happen to anyone again.
You have a chance today to make a difference by passing a law
to protect people from the kind of thing my attorney did to me.
Had I known in advance or at some point along the way how
little of my lawsuit was going to benefit anyone but my lawyer,
I might have thought different about enduring 2 years of
emotional trauma during the litigation.
Summing up what she had to say: Had she had any idea how
little of the money she might get, she might not have wanted to
endure the trauma of this litigation for 2 long years.
Now, Ms. Saxon, in a sense, was lucky in that at least her
lawyer told her she would be liable for costs, although he
obviously did not tell her the magnitude of the costs she was
looking at and, thereby, completely misled her.
But as these excerpts from the Yellow Pages here in the
District of Columbia area phonebook indicate, some lawyers are
not even that candid.
So let's take a look at the first chart out of the DC
phonebook. On this first chart, we have an ad with the big
banner entitled ``AUTOMOBILE ACCIDENTS.'' There is a line
almost as big--the fourth line down--proclaiming: ``No
Recovery, No Legal Fees''--``No Recovery, No Legal Fees.'' It
does not say anything about the cost the plaintiff is going to
have to bear and, therefore, does not paint an accurate
picture.
Let's take a look at the second chart, again out of the DC
phonebook. It has a big banner down the right side entitled
``PERSONAL INJURY.'' At the top is says: ``Personal Injury
Lawyers Who Put You First.'' ``The Firm Boasts an All-Star
Roster of Top Personal Injury [Lawyers].'' And it makes the
point: ``No fee if no recovery.'' But, again, like the last ad,
it does not mention at all anywhere in the ad--nowhere in all
of this ad--that the client will be liable for costs.
Let's take a look at chart No. 3. This ad is marginally--
marginally--better. At the top of the ad there is a headline,
in bold, saying: ``Legal Problems Require a Lawyer.''
Obviously, legal problems require a lawyer. About midway down
is a line item saying: ``Call me. I can help.'' ``Call me. I
can help.'' And right below this line, another line says: ``No
Legal Fee If No Recovery.'' In a little bit smaller print you
will notice, ``No Legal Fee If No Recovery.'' But this lawyer,
at least, to his credit, has an asterisk by this line. If you
look very carefully, you see an asterisk; and way down here at
the bottom of the ad, in minuscule print--which might require
you getting your glasses adjusted or to get a magnifying
glass--it says: ``Cost May Be Additional.''
This lawyer at least gets credit in his ad for mentioning
that there might be some cost, although you better have your
glasses adjusted in order to find it.
Chart No. 4 is a familiar pitch, that there be ``no legal
fees unless recovery.'' This lawyer, to his credit, at least
has it in print large enough to where you might actually see
that line. But there is, of course, an asterisk; down here at
the bottom, again, in tiny, minuscule print, ``Clients may be
responsible for reasonable fees.''
This lawyer, at least, gets some credit--be the print ever
so small--for pointing out that there could be a cost involved,
and maybe a careful client would see that in the ad.
Chart No. 5, really my favorite one, it has a big banner at
the top, ``accidents,'' all the way across the top. You
wouldn't have any trouble missing that. Underneath, ``No legal
fee if no recovery.'' Very enticing observation to an injured
client, potential client, and there is an asterisk after it.
Going to the bottom of the page, below the Visa and
MasterCard logos, it says, ``excluding costs.'' That is about
the smallest print on the ad. But a careful potential client
might be able to find that there could conceivably be a cost
attached to this.
Frankly, I am not sure if this phrase means that costs are
excluded and, therefore, you don't have to pay for these
either, or if it means that costs are excluded from the
exclusion, which means you do have to pay for them. A consumer
of legal services should not be enticed by the prospect of free
legal services, including what appears to be an exclusion of
cost from the charges for which he is responsible.
As I will shortly describe, the amendment I am offering
would help prevent people from being duped by incomplete and
misleading representations such as these. Let me repeat that
the scope of my amendment is not every court in America but
only applies to Federal claims and Federal courts.
Shifting gears for a moment, we also hear stories of
ambulance chasers who take advantage of grieving families when
they are most vulnerable. For example, at the scene of a 1993
collision between two commuter trains in Gary, IN, witnesses
reported seeing lawyers' business cards being passed around at
the scene of the accident. And the injured were being
videotaped as they were removed on stretchers.
After an August 1987 crash of a commercial airline flight
in Detroit, a man posing as a Roman Catholic priest, Father
John Irish, appeared at the scene to console families of the
victims. He hugged crying mothers and talked with grieving
fathers of God's rewards in the hereafter. Then he would hand
them the business card of a Florida attorney, urging them to
call the lawyer, and then the father would disappear.
We should make sure that misleading ads and shameless
ambulance chasing do not occur. I propose a clients' bill of
rights for consumers of legal services. We have talked a lot in
recent years about a Patients' Bill of Rights to make sure
patients are treated properly by health maintenance
organizations. We need a clients' bill of rights to make sure
consumers of legal services are treated fairly.
This clients' bill of rights would do two things. The first
thing it would do is require consumers of legal services to
receive basic information at the beginning, during the course,
and at the end of the case so that all along the way the
client, the consumer of legal services, has a clear
understanding of what the financial relationship is between the
lawyer and the client.
As the old saying goes: Knowledge is power. My amendment
empowers consumers by giving them the knowledge they need to
make informed decisions about their legal representation. As I
pointed out earlier in one of my examples, there was a lady who
had no earthly idea, because of not receiving proper
information about the extent of the cost that could be involved
in her case, that after getting a $25,000 settlement she would
essentially get nothing. The lawyer then benevolently gave her
$833.
So clients need information all along the way to make
informed decisions about legal representation.
At the initial meeting before they are retained, under the
McConnell amendment, attorneys would have to provide would-be
clients with the following things--and this is not
unreasonable; it's elementary justice--No. 1, the estimated
number of hours that will be spent on the case; No. 2, the
hourly fee or the contingent fee that will be charged; No. 3,
very importantly, the probability of a successful outcome;
next, the estimated recovery reasonably expected; next, the
estimated cost or expenses the plaintiffs will bear; and
whether a client will be subject to fee arrangements with other
lawyers.
This is elementary consumer protection. Let me say to my
friends in the Senate who are close to and allied with the
plaintiffs' lawyers in America: We are not talking about
capping anybody's fees. This is not about capping fees. The fee
arrangement could still be whatever astronomical amount the
lawyer believes he can charge. But we are talking about
providing basic information to the client so the client can
understand what the fee arrangement is going to be. There are
no fee caps in this amendment.
Monthly statements: My amendment would also require lawyers
to provide their clients with monthly statements so that
consumers of legal services will be informed on a regular basis
of the basic progress of their case. Specifically, the lawyers
would have to tell clients how much time they are expending on
their case, what they are spending their time doing, and what
expenses they are incurring in the case. Again, this is basic
information clients should receive so they know how their case
is progressing and how in essence their money is being spent.
Then an accounting at the end of the case: Clients should
receive basic information at the end of the case so they know
exactly what they paid for during their representation. To this
end, my amendment provides that within 30 days after the end of
the case, attorneys shall provide clients with the number of
hours expended; the amount of expenses to be charged; the total
hourly fee or the total contingency fee in a contingency fee
case; the effective hourly fee charged, which would be
determined by dividing the total contingency fee by the total
number of hours expended.
Again, this is elementary, reasonable information, no fee
caps, just providing reasonable information to the client at
the end of the case so they can understand just what the legal
services have provided.
Madam President, in the age of disclosure, I cannot believe
that my colleagues would not support some basic disclosures
that the first part of my amendment would provide. It does not
limit--I say again--attorney's fees in any regard. There are no
fee caps of any sort in this amendment. Frankly, I would like
to see that. We have had fee caps under the Federal Tort Claims
Act for years, and I am told there is no dearth of lawyers
prepared to bring tort claims against the United States. But
there are not any fee caps in this legislation. That is
something a large number of Members of the Senate do not
support. The first part of my amendment simply enables
consumers of legal services to make informed choices.
The second thing my amendment does is establish a
bereavement rule. A bereavement rule means the provision for a
period of mourning, or a period of bereavement, during which
lawyers would have to be respectful of injured victims or their
families. As I mentioned, this provision is important because
there are disturbing stories of ambulance-chasing lawyers who
prey upon victims and their families when these people are the
most vulnerable.
To address this problem, my amendment simply provides that
there will be no unsolicited communication by lawyers to
victims, or to their families, regarding an action for personal
injury, or wrongful death, for 45 days from the date of death
or personal injury--just 45 days to give the victims, or their
families, an opportunity to begin to get their feet back under
them before they start considering which lawyer, if any, they
want to retain to pursue the legal action to which they may be
entitled.
Let me repeat. This amendment applies only to unsolicited
communications. If the victims or their families are feeling
like it 2 days after the event, they are certainly free to call
whomever they choose. This only applies to unsolicited
communications to victims or their families. Injured parties
and their families are free to contact whomever they want
whenever they want.
Madam President, there is precedent for this respectful,
considerate principle in existing Federal law. In 1996, we
passed legislation that prohibited lawyers from engaging in
unsolicited communications for 30 days following an airline
disaster. Let me say it again. There is precedent for a
bereavement rule already in Federal law. In 1996, we passed
legislation that prohibited lawyers from engaging in
unsolicited communications for 30 days following an airline
disaster. Just 2 years ago, in 2000, we extended this
prohibition to 45 days from the date of an airline crash. That
prohibition is codified at 49 U.S.C. section 1136(g)(2).
The point I am making here is that there is precedent in
Federal law already for a bereavement rule, and this simply
expands upon that preference and provides this protection for
additional victims during a period of mourning.
Madam President, someone who has been killed or injured in
a train crash or a shipping accident is just as dead, or just
as injured, as someone who is killed or injured in an airline
crash. These victims and their families deserve the same type
of respect and consideration. All these types of victims and
their families are in a vulnerable state where it is easy for
them to be pressured or taken advantage of.
The second part of my amendment would afford victims of
other tragedies the same protection that we afford victims of
airline disasters. The language in my amendment that we used to
do so is virtually identical to current Federal law. It would
guarantee these people a reasonable period of time to grieve,
collect their thoughts, and to think clearly about what action
they want to take and who they want to take such action on
their behalf.
As I said, there is current precedent for it in Federal
law, and I hope my colleagues will support it, along with the
disclosure provisions in my amendment.
Madam President, what is the time situation?
The Presiding Officer. The Senator has 20 minutes
remaining.
Mr. McConnell. Madam President, let me sum up what the
McConnell amendment is. There are essentially two parts to it.
First, it would require that lawyers provide to their clients
all along the way, from initially being retained until the
conclusion of the case, adequate consumer protection
information so the clients will have a sense at every stage of
the case how the case is moving along, what the likelihood of
success is and, very importantly, what kind of costs the client
may be incurring in the course of the litigation.
Secondly, we provide for a bereavement rule of 45 days to
give the victims and their families an opportunity to get back
on their feet during an atmosphere in which unsolicited efforts
to retain these victims are put off. If, however, the family at
any point during that 45-day period decides it is ready to move
on and wants to look at its legal options, there is nothing in
the amendment that would prevent the victim or victim's
families from retaining a lawyer at any time. All this does is
protect them from unwanted solicitations for a brief period of
45 days following the occurrence of the event.
As I pointed out, there is already precedent in Federal law
for such a bereavement period of 45 days. That applies in the
wake of airline disasters.
Finally, let me repeat this because I know this is
something that is offensive to many Members of the Senate,
particularly on the other side of the aisle. As much as I would
like to see fee caps established, this amendment has no fee
caps in it. Even though, under the Federal Tort Claims Act,
since the late 1940s, we have had a fee cap of 25 percent in
tort actions against the Federal Government, no such fee cap is
in this amendment.
So I think this is a modest proposal to provide consumer
protection to victims of accidents as they contemplate their
futures and determine, first, which lawyer to hire, and after
hiring the lawyer, have adequate information along the way to
make sure they understand what the fee arrangement is.
I yield the floor and retain the remainder of my time and
now urge--and I will also do so later--the Senate to adopt this
amendment.
The Presiding Officer (Mrs. Clinton). Who yields time?
Mr. Sarbanes. Madam President, can I inquire as to what the
allocation of time is? Let me make a parliamentary inquiry. I
understand the vote on a motion to table that will be offered
by Senator Enzi is scheduled to take place at 12:45.
The Presiding Officer. That is correct.
Mr. Sarbanes. Can the Chair inform us as to the allocation
of time from now until quarter to 1?
The Presiding Officer. The unanimous consent agreement
provided that the time between the conclusion of Senator
McConnell's remarks and the 12:45 p.m. vote will be evenly
divided between Senators Gramm and Sarbanes, and Senator
McConnell has a remaining amount of time of 16 minutes.
Mr. Sarbanes. Sixteen minutes?
The Presiding Officer. That is correct.
Mr. McConnell. Madam President, is it the Senator's thought
we move up the vote?
Mr. Sarbanes. Staff has made an announcement, and people
have planned accordingly. I understand that is the situation on
both sides of the aisle for that matter. It was announced
earlier on. People, therefore, made plans accordingly.
The Presiding Officer. If Senator McConnell used all of his
remaining time, each side would have approximately 10 minutes.
Mr. McConnell. I say to my friend from Maryland, I will be
happy to hear from the other side on the amendment. I am
reluctant to yield back my time until I know the extent of the
debate in which we are going to engage. In any event, the vote,
Madam President, occurs at quarter to 1?
The Presiding Officer. That is correct.
Mr. McConnell. I retain the remainder of my time until such
time we decide otherwise. I have not heard from the other side.
Mr. Sarbanes. As I understand the agreement, I do not think
others can use time until the Senator from Kentucky uses his
time.
The Presiding Officer. That is the Chair's understanding.
Mr. McConnell. I suggest we divide the remainder of the
time between now and the vote. Will that be acceptable?
The Presiding Officer. Is there objection?
Mr. Sarbanes. I ask unanimous consent that the remaining
time between now and quarter of 1 be divided equally to the
manager of the bill, to Senator Enzi, and to Senator McConnell.
That will give us about 10 minutes each, I think.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Maryland.
Mr. Sarbanes. Madam President, I will speak briefly to the
McConnell amendment which has been added as a second-degree
amendment to the Edwards-Enzi amendment. Before I address that
amendment itself, let me again indicate my very strong support
for the underlying first-degree amendment, the Edwards-Enzi
amendment, which was very carefully worked out and I believe
represents a constructive suggestion. I am hopeful we can get
to that amendment and have a vote on it sometime in the near
future.
Obviously, the way things are now structured, we have to
dispose of the McConnell second-degree amendment in order to
get to the Edwards-Enzi amendment, but I think the Edwards-Enzi
amendment warrants both the attention and the support of this
body. I hope at some point we will be able to do that.
I am not going to address the substance of the McConnell
amendment, or perhaps I will discuss it only in passing. I
simply wish to observe that it is not relevant to this bill. It
is talking about a client's bill of rights which may or may not
be a worthy subject to examine.
How we regulate the lawyers is a complicated problem,
obviously. It has mostly been done at the State level. The
Senator from Kentucky has some sweeping proposals on a national
basis, and they may warrant examination, but I certainly do not
think they warrant coming into this debate on a very different
issue. I do not know that there has been any study of it. I do
not think this represents the recommendation or the report of
any committee that is putting this forward, having undertaken
an appropriate series of hearings in order to examine the
subject. I have not had the benefit of testimony from the
proponents and opponents. In fact, if the Senator from Kentucky
will yield for a question, has a committee of the Senate
recommended anything like this?
Mr. McConnell. I say to my friend from Maryland, no
committee of the Senate recommended the energy bill on which we
spent 6 weeks in the Senate, and the majority leader has
bypassed committees consistently throughout the last year. So I
do not know that the Senate was constrained in any way----
Mr. Sarbanes. It may be a response to say to me it was done
somewhere else. I have a very specific question: Has a
committee of the Senate recommended this proposal?
Mr. McConnell. I would like to provide my own answer. If
the Senator is asking for an answer from the Senator from
Kentucky, I would like to be able to express myself, if that is
OK with the Senator from Maryland.
Mr. Sarbanes. The Senator from Kentucky is very skilled. I
watched him on these television programs. I know he is very
good when the question is put to him to give the answer he
wants to give, even though it is not directed to the question.
Obviously, I will have to go through that same experience on
the floor of the Senate now.
Mr. McConnell. I thank my friend from Maryland for his
compliment and respond, as with many other bills over the last
year that we dealt with on the floor of the Senate, it has not
been reported by a committee. But many worthwhile ideas have
been adopted and made a part of law that have been recommended
by both Democratic and Republican Senators that, in the years
my friend and I have been here, were not officially reported
out of a committee.
Mr. Sarbanes. Have any hearings been held on these
proposals--the bereavement period and the fees proposal? Have
hearings been held on those issues?
Mr. McConnell. I am unaware of any hearings to that effect,
but I ask my friend from Maryland why he thinks something as
elementary as this, something as obviously as fair as this, and
in the case of the bereavement rule, which we adopted in
Federal law for families and victims of airline crashes, would
not be an appropriate thing to do with or without hearings?
Mr. Sarbanes. It seems to me there are complicated issues
that are raised by Senator McConnell's proposal, and they
certainly should have been preceded by hearings in which the
pros and cons could have been carefully examined.
Madam President, I reiterate my point, this amendment is
not relevant to the issue before us. It does not come to us on
the basis of any hearings that back up or buttress the
proposal. It has not worked through any committee. It certainly
has not been recommended by any committee, and there have not
even been any hearings, as I understand it, by any committee.
At the appropriate time, I will be very strongly supportive
of the motion to table that will be offered by the able Senator
from Wyoming. This is, of course, the second McConnell second-
degree amendment we have had to deal with on this legislation.
I hope the Senator from Kentucky does not view this as a
kind of fair hunting game to bring forth at each step along the
way, whenever there is an opening for a second-degree
amendment, whatever sort of pet project he has been harboring
in his office for whatever period of time.
I reserve the remainder of my time.
The Presiding Officer. The Senator from Kentucky.
Mr. McConnell. I yield myself some of my time to respond to
my friend from Maryland.
As I listened carefully to my friend from Maryland, he is
straining to think of a good argument against this worthwhile
amendment. It has been my experience over the years in the
Senate that when we start saying there has been no committee
action, there have been no hearings, we are having a hard time
thinking of a good argument against the proposal on the merits.
So let me repeat again what the merits are. It seems to me
we do not need committee hearings or committee action to
convince us that a 45-day bereavement rule for victims and
their families, which we have already adopted in Federal law
for victims and families of plane crashes--we do not need
committee action to tell us this is a fundamentally appropriate
thing to do.
Do we need hearings and committee action to tell us that in
Federal claims and in Federal cases it is appropriate and only
right that lawyers provide information to their clients at the
beginning, during, and at the end of their handling of the case
as to the possible costs involved? That is what is before us,
not the issue of whether or not we should have hearings on this
or whether or not the committee should act. My goodness, we
spent 6 weeks on an energy bill that the committee did not pass
out of the Energy Committee. We do that frequently. The Senate
is not known to be constrained by tight rules of germaneness,
nor by official committee action.
So I urge my colleagues to look at the amendment itself,
not these rather extraneous arguments seeking to divert our
attention away from what the amendment itself provides, which
is protections for consumers of legal services.
I reserve the remainder of my time.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, on the energy analysis, I
simply point out that the Energy Committee held extended
hearings over a long period of time on the energy issue. Then,
they did not actually evolve a bill, but they had a very full
set of hearings and a lot of recommendations available to be
included in an energy package.
On the other, I say to my colleague, I forbore from
discussing the substance because I did not want to prejudice
the Senator on some future occasion by having to go
substantively into the weaknesses and deficiencies of the
proposal that is before us. Since the time is limited and that
would take quite a while to do, I intend to continue to do that
out of a sense of consideration to my colleague because
presumably, if this amendment is tabled, he will be back
visiting with us on another day, perhaps on an appropriate
vehicle. I do not know. One would have to wait and see whether
that would be realized.
Out of some deference of respect for my friend from
Kentucky, I simply thought I would not undertake to go into
this point by point on the substance because it is really not
appropriate. We ought to recognize that and go ahead and table
the amendment, and maybe when it finally comes up in an
appropriate context, we can then address its substantive
weaknesses or strengths. Perhaps at that time it would have
evolved into a different animal.
I reserve the remainder of my time.
The Presiding Officer. Who yields time?
The Senator from Wyoming.
Mr. Enzi. Madam President, I yield myself such time as I
may consume. At 12:45, I will be making a motion to table the
McConnell second-degree amendment to amendment No. 4200. We are
working on a bill that I have spent hundreds of hours on, part
of them in hearings, much of the time in drafting my own
legislation, then working with Senator Gramm to come up with an
even better bill, and then working with Senator Sarbanes to
come up with the bill we have before us.
There is a crisis in the stock market. Two days ago, it
dropped by 185 points. Yesterday, it dropped by 285 points.
Some suggest that is because Congress is working on this issue
and it is scaring the heck out of the people of the United
States. I hope that is not the case. I hope it is a sign that
they do want to have a solution, and they want to have a
solution quickly. We do have the solution that, combined with
the House bill, can serve the purpose of restoring the
confidence of American investors.
The McConnell amendment is a clients' bill of rights to
reform the way attorneys treat their clients. It is not about
securities and exchange. It is all about attorneys. Senator
Edwards and I modified our amendment so it applies only to
action before the Securities and Exchange Commission. That was
so that if this debate draws out with multiple second-degree
amendments well beyond the time we have the cloture vote, our
amendment will still be germane.
A standard that the Senator from Texas, Mr. Gramm, has put
on amendments is that they be germane. He did an extensive
speech last night about the need to do germane amendments and
get this finished.
This amendment is good and well intended. It requires
attorneys to do a number of things in representing those who
put their trust in attorneys' hands, and this includes
requiring attorneys to provide written disclosure to their
clients on the number of hours that will be spent on their
case, the attorney's hourly or contingent fee, the probability
of successful outcome, estimated recovery of costs, and
bereavement.
Under normal circumstances, I probably would be very
excited about this bill. The reason I am opposing it is simply
because it does not have anyplace in the accounting reform bill
that we are debating today. I realize it does not change
anything in my amendment. It is not a substitute amendment, but
it is an addition that will cause problems further down the
road. It will delay actually getting accounting reform into
place. The accounting reform bill is being used as a vehicle to
provide a free ride for a nongermane, unrelated amendment. I
will probably use that same line again on a number of other
amendments that come up later--it is nongermane.
The McConnell amendment needs to hitchhike on a different
road with a different vehicle at a different time.
Over several months, I and my esteemed colleagues on both
sides of this aisle have worked hard on the accounting reform
bill. We have worked hard to keep out surplus, nonrelevant
issues so we can get through the process of getting accounting
legislation through in a timely fashion and in a bipartisan
manner. We have been very successful at keeping out exact
amendments even that deal with how to do accounting and have
set up a process where people who are knowledgeable on that can
figure out the right way to do it and the right way to do it
faster than before.
I strongly believe this bill cannot afford to be held up
any longer just for Members on both sides of the aisle to score
political points on hot button issues. A lot of us have pet
projects and issues we would have liked to add on, but we
resisted and we encouraged our colleagues on the Banking
Committee to do the same thing.
We are now in the amendment process, but amendments should
be germane to the contents of the underlying bill and
amendment. That is not a requirement until after cloture, but
we need to get the bill done. There is no reason we even need
to go to cloture if we would get the germane amendments done
and get this into a conference committee so we can get the work
done.
The McConnell second-degree amendment, while well intended,
is not germane. It does not deal solely with securities laws or
those attorneys appearing and practicing before the SEC. It
does not deal solely with attorneys working for publicly traded
companies but to any attorney and any client practicing any
form of Federal law. It does not deal with an attorney's
professional responsibilities of reporting Federal securities
law violations to its corporate client. It is much broader than
the underlying amendment which does deal strictly with Federal
securities laws, attorneys appearing and practicing before the
SEC, and internal reporting by an attorney within a publicly
traded company.
In addition, the McConnell amendment is going to require
study and debate, meaning more time spent diverting passage of
the much needed accounting reform bill. We are running out of
time before the next recess and have several important bills
yet to consider, including Homeland Security Department
legislation.
While the McConnell amendment is well intended, the timing
is simply wrong. I respect my colleague from Kentucky and his
constant support and earnest effort to make attorneys play it
straight with their clients. But I must respectfully oppose
this amendment at this time. I hope we will be able to debate
and vote on it on another day. When the time is appropriate
under the agreement, I will make a motion to table the
amendment.
I yield the floor, and I reserve the remainder of my time.
The Presiding Officer. The Senator from Kentucky.
Mr. McConnell. Madam President, let me say first with
regard to whether this is appropriate to be added to this bill,
the ranking member of the Banking Committee, the manager of the
bill on this side, supports my amendment. Obviously, it is not
his view that this is in any way inappropriate for this
legislation.
I also say to my good friend from Wyoming, this will not
slow down the bill. This amendment will be voted on at 12:45.
There is a time agreement on it. We certainly are not in any
way trying to slow down the passage of the underlying bill
which I fully expect to support.
The issue is whether we are only interested in corporate
defense counsel misbehavior. Why are we only interested in
corporate defense counsel misbehavior? My amendment applies to
the other side, the plaintiff 's side. It would apply to cases,
for example, brought under the Federal Employers Liability Act,
which governs injury and wrongful death actions against
railroads in interstate commerce by railroad workers and their
families. It would apply to cases brought under the Longshore
and Harbor Workers Compensation Act, which establishes no-fault
compensation for employees injured on navigable rivers. And it
would apply to plaintiffs bringing action under the Price
Anderson Act amendments of 1998, which creates a Federal cause
of action for nuclear accidents. It would also apply to the
Federal Tort Claims Act, which creates Federal causes of action
for tort claims against the U.S. Government. It would apply to
lawyers representing clients bringing cases under the Public
Health Service Act, which are suits against certain Federally
supported health centers and their employees brought under the
Federal Tort Claims Act. And finally, it would apply to lawyers
representing clients bringing actions under part of Federal
law, very important in my State, the Black Lung Benefits Act of
1972, which establishes a compensation scheme for coal miners
allegedly suffering from blank lung disease and survivors of
miners who died from or were totally disabled by the disease.
Let me sum it up again: it is not my intent to slow the
bill down. This amendment will be voted on at 12:45, so it
clearly is not slowing anything down. It seems to me entirely
consistent with the underlying amendment dealing with corporate
defense counsel misbehavior to also address the question of a
plaintiff 's lawyer's misbehavior.
Beyond that, we are talking simply about providing
consumers of legal services with basic information, at the
beginning, during, and at the end of a lawsuit, and a modest
45-day bereavement rule giving the victims and their families a
chance to get back on their feet before they are contacted by
lawyers seeking to represent them in court. It would not in any
way prevent families from contacting a lawyer during that time
but would protect them from unwarranted solicitation of legal
services for a mere 45 days.
This is a very modest proposal. I would love to go a lot
further. I like the fee caps in the Federal Tort Claims Act.
That is not what we have offered. That is not what I offered.
There is no impact on fees, no caps on damages. This is
strictly consumer protection in the area of legal services. It
is a very modest proposal which I hope the Senate will adopt
when we vote on it at 12:45.
I reserve the remainder of my time.
The Presiding Officer. The Senator from Wyoming.
Mr. Enzi. Madam President, I will give a little explanation
for the point raised that this particular bill--because a time
has been set for the vote--will not hold things up. There are
about 60 amendments out there; there are probably 10 that
actually deal with what is in the bill. There has to be some
point where we have to ask, can we not concentrate on what is
in the bill instead of bringing up the other things? I am sorry
that yours is the bill on which we are starting that.
Mr. McConnell. Will the Senator yield?
Mr. Enzi. Sure.
Mr. McConnell. It was my understanding that cloture was
filed last night. Would my friend from Wyoming not agree, that
cloture vote brings the bill to a conclusion? I am not in any
way trying to delay the passage of the bill. I support the
underlying bill. I believe my amendment is appropriate to be
considered.
Mr. Sarbanes. Will the Senator yield?
Mr. Enzi. Yes.
Mr. Sarbanes. Actually, I will use my own time, and the
Senator may reserve his time.
We must table this amendment. Otherwise, it becomes an
invitation for others to come in and offer second-degree
amendments that are not relevant to the bill. This amendment is
not relevant to the bill--nowhere close. If we start this
process now, opening up the bill to these nonrelevant
amendments, what will happen to the relevant amendments, some
of which are germane under cloture and others of which might
miss the tight test of germaneness but are relevant material,
which are pending, which other colleagues have offered, if they
want to get to those amendments?
We could have done the Edwards amendment yesterday and
moved on to something else, but we came in with a second-degree
amendment, not relevant--not only not relevant to the Edwards
amendment, not relevant to the bill.
Frankly, we are well beyond the point where we at least
ought to set aside amendments that have no relevance to the
underlying legislation.
Mr. McConnell. Will the Senator yield?
Mr. Sarbanes. Certainly, I yield.
Mr. McConnell. I ask my friend from Maryland, if he
believes my amendment may have some merit, whether he would
support taking it up as a freestanding measure with a time
agreement.
Mr. Sarbanes. No, I would not support that.
Mr. McConnell. I thank the Senator.
Mr. Sarbanes. Why would I support a request like that?
Surely the Senator from Kentucky is just making a joke on the
floor of the Senate by making that inquiry. That must be
apparent to all. I appreciate the Senator's sense of humor in
that regard. I also appreciate his indication, just a moment or
two ago, he intends to support the underlying bill. Of course,
we are gratified to hear that.
I yield the floor and reserve whatever time I may have
left.
What is the time situation?
The Presiding Officer. The Senator has 33 seconds, Senator
McConnell has 4 minutes 38 seconds, and the Senator from
Wyoming has 3 minutes.
Who yields time?
The Presiding Officer. The Senator from Kentucky.
Mr. McConnell. It was my understanding that Senator
Santorum was on the way. But if he has not arrived yet, I
suppose the best thing to do would be to enter a quorum call
knowing full well my time is running.
I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. Reid. Madam President, I ask unanimous consent the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. Madam President, I will alert Members we are
going to have a vote later. The two members of the
Appropriations Committee have finally gotten a meeting with the
House appropriators on the supplemental appropriations bill. I
think it would be in everyone's best interest that they are
allowed to go forward with that most important meeting.
We received a request from the chairman of the
Appropriations Committee, Senator Byrd. Therefore, I ask
unanimous consent that the order that is now in effect be
modified and that Senator Enzi would be recognized at 2 p.m. to
move to table the amendment, and that 8 minutes prior to that
would be devoted to debate between the two managers of the
bill, Senator Sarbanes and Senator Gramm, and that Senator Enzi
would be recognized for 2 minutes, and Senator McConnell for 2
minutes--a total of 8 minutes. All other provisions of the
unanimous consent agreement now in effect would remain the way
they are.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
Mr. Reid. Madam President, the vote will occur at 2 o'clock
today. In the meantime, I ask there be a period from now until
then for morning business, with the time equally divided
between Senator Daschle or his designee or Senator Lott or his
designee.
The Presiding Officer. Without objection, it is so ordered.
Mr. Reid. I suggest the absence of a quorum, and I ask the
time be charged equally between Senator Daschle and Senator
Lott.
The Presiding Officer. Without objection, it is so ordered.
The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mrs. Clinton. Mr. President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer (Mr. Miller). Without objection, it
is so ordered.
VOLUME 148, THURSDAY, JULY 11, 2002, NUMBER 93,
PAGES [S6620-S6633]
Public Company Accounting Reform and Investor Protection Act of 2002--
Continued
amendment no. 4200
The Presiding Officer (Mr. Carper). The question is on
agreeing to the motion to table amendment No. 4200. The yeas
and nays have been ordered. The clerk will call the roll.
The legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from North
Carolina (Mr. Helms), the Senator from Ohio (Mr. Voinovich),
and the Senator from Idaho (Mr. Crapo) are necessarily absent.
I further announce that if present and voting the Senator
from North Carolina (Mr. Helms) would vote ``no.''
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The result was announced--yeas 62, nays 35, as follows:
(Rollcall Vote No. 172 Leg.)
Yeas--62: Akaka, Allen, Baucus, Bayh, Biden, Bingaman, Boxer,
Breaux, Byrd, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Collins, Conrad, Corzine, Daschle, Dayton, Dodd, Dorgan, Durbin,
Edwards, Enzi, Feingold, Feinstein, Graham, Hagel, Harkin, Hollings,
Inouye, Jeffords, Johnson, Kennedy, Kerry, Kohl, Landrieu, Leahy,
Levin, Lieberman, Lincoln, McCain, Mikulski, Miller, Murray, Nelson
(FL), Nelson (NE), Reed, Reid, Rockefeller, Sarbanes, Schumer, Shelby,
Snowe, Specter, Stabenow, Thompson, Torricelli, Warner, Wellstone,
Wyden
Nays--35: Allard, Bennett, Bond, Brownback, Bunning, Burns,
Campbell, Cochran, Craig, DeWine, Domenici, Ensign, Fitzgerald, Frist,
Gramm, Grassley, Gregg, Hatch, Hutchinson, Hutchison, Inhofe, Kyl,
Lott, Lugar, McConnell, Murkowski, Nickles, Roberts, Santorum,
Sessions, Smith (NH), Smith (OR), Stevens, Thomas, Thurmond
Not Voting--3: Crapo, Helms, Voinovich
The motion was agreed to.
Mr. Sarbanes. I move to reconsider the vote.
Mr. Daschle. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The Presiding Officer. The majority leader.
AMENDMENT NO. 4269 TO AMENDMENT NO. 4187
(Purpose: To address procedures for banning certain individuals from
serving as officers or directors of publicly traded companies,
civil money penalties, obtaining financial records, broadened
enforcement authority, and forfeiture of bonuses and profits)
Mr. Daschle. Mr. President, I have an amendment I send to
the desk on behalf of Senator Levin.
The Presiding Officer. The clerk will report.
The assistant legislative clerk read as follows:
The Senator from South Dakota [Mr. Daschle], for Mr. Levin,
for himself, Mr. Nelson of Florida, Mr. Harkin, Mr. Corzine,
and Mr. Biden, proposes an amendment numbered 4269.
Mr. Daschle. Mr. President, I ask unanimous consent reading
of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
Mr. Daschle. I yield the floor.
The Presiding Officer. The Senator from Michigan.
Mr. Levin. Mr. President, this amendment is offered--and I
thank the majority leader--on behalf of myself, Senator Bill
Nelson, Senator Harkin, Senator Corzine, and Senator Biden.
Our amendment would grant the SEC administrative authority
to impose civil fines on persons who violate securities laws,
regulations, and rules. Now the SEC has to go to court, which
is difficult and burdensome.
We, just the other day, decided we wanted to give the SEC
the power to remove directors and officers from public
companies who violate rules and regulations and laws without
having to go to court.
Of course, those decisions administratively by the SEC are
subject to an appeal. That is always true and always must be
true. The same approach is essential relative to the imposition
of civil fines. If the SEC is going to have power, without a
lot of cumbersome, costly, and expensive procedures, to really
take on those directors and those auditors who violate the law,
who violate rules and regulations, the SEC must have the same
authority which other regulatory bodies have to impose civil
fines.
A few examples: The Commodity Futures Trading Commission
has authority to impose civil fines up to three times the
monetary gain from a violation plus restitution of customer
damages. The Department of Transportation can impose civil
fines. The Consumer Product Safety Commission can impose civil
fines. The Occupational Safety and Health Administration, OSHA,
can impose civil fines. The Federal Communications Commission
can impose civil fines.
As a matter of fact, the Securities and Exchange Commission
can impose civil fines on some of the people it regulates--
brokers. But unless we act today, there will be a great gap in
the enforcement power of the SEC, a continuing gap. That gap
is, it does not have the power, without legislation, to impose
an administrative civil fine on auditors and members of boards
of directors who violate rules and regulations in the law of
the land.
Our amendment would give the SEC that authority to impose
administratively civil fines on those people who violate our
securities laws and regulations and rules. That includes
officers, directors, and auditors of publicly traded companies.
I emphasize, these fines would be, and must be, subject to
judicial review, as are the other SEC administrative
determinations which they have authority to answer at this
point. That is the first objective of the amendment.
Secondly, our amendment would significantly increase the
civil fines the SEC can impose on law violators. I particularly
thank Senator Nelson of Florida for highlighting the problem
and supporting the inclusion of these provisions in the
amendment.
The civil fines that currently can be imposed on broker-
dealers administratively have maximum amounts that start at
$6,500 per violation. That is the maximum amount under the so-
called tier 1 civil fine. If a broker-dealer now violates the
securities laws under so-called tier 1 where there is a
violation found, not yet proven to be fraudulent but a
violation nonetheless, $6,500 is the maximum fine under current
law. Tier 2 for individuals is a $60,000 fine. That is where
you find fraud, deceit, manipulation, and deliberate or
reckless disregard--$60,000 for an individual for that
violation.
It is laughable. The current structure of fines which can
be imposed on those people who administratively can be subject
to a civil action or civil fine by the SEC is so low, these
fines are a joke. We are talking about people who frequently
are walking away, lining their pockets, violating rules and
regulations for millions of dollars, sometimes tens of millions
of dollars. To have a system where the maximum fine under tier
1 is $6,500 for an individual and under tier 2 is $60,000 is
just simply inadequate.
Here is what the SEC staff said in June of this year: The
current maximum penalty amounts may not have the desired
deterrent effect on an individual or a corporate violator. For
example, an individual who commits a negligent act is subject
to a maximum penalty of $6,500 per violation.
This is the conclusion of the SEC staff: The amount is so
trivial that it cannot possibly have a deterrent effect on the
violator.
I would say that is an understatement: $6,500, given the
current amount of money flowing through these violations of
rules and regulations, is pitifully trivial. In fact, it is no
deterrent at all. It might as well not be there. If we are
going to have a deterrent system, we have to have fines which
have some bite, which are real, which have an impact on people.
We would, under our amendment, increase the maximum fines
from a range of $6,500 to $600,000, which is the current range
for tiers 1 through 3, to a range which goes from $100,000 to
$5 million in fines per violation.
We are seeing these corporate restatements and misconduct
involving $2 billion, $4 billion, and even $12 billion. These
new fine amounts are critical if they are to have the desired
deterrent and punitive effects on wrongdoers in the corporate
world.
Our bill also has language which is similar to the language
in the Leahy and Lott amendments that were adopted relative to
the removal from office. We do this for the sake of
completeness, so that we can lay out the entire structure being
proposed in our bill for administratively imposed civil fines.
That part of the amendment is the same as the removal from
office provisions adopted by the Senate yesterday in the Leahy
and Lott amendments.
Finally, our amendment would grant the SEC new
administrative authority, when the SEC has opened an official
investigation, to subpoena financial records from a financial
institution without having to notify the subject that such a
records request has been made. This authority would allow the
SEC to evaluate financial transactions, to trace funds, to
analyze relationships, without having to alert the subject of
the investigation to the SEC's action.
Under current law, the SEC either has to give the subject
advance notice of the subpoena or to obtain a court order that
can delay notification for no longer than 90 days. That is a
huge impediment to enforcement by the SEC. We ought to change
that.
The staff of the SEC wrote the following relative to this
amendment:
This amendment would enhance the Commission's ability to
trace money and relationships quickly and effectively. The
Commission typically requests bank records when it has reason
to suspect possible relationships between persons or entities
and that passage of money between those persons or entities may
be relevant to violations of the securities laws. Identifying
those relationships and quickly identifying assets obtained or
transferred in connection with possible unlawful activity is
critical to the Commission's ability to obtain orders freezing
assets and other appropriate relief.
In many situations, the Commission could proceed much more
effectively if it could obtain relevant bank records without
providing notice to the persons whose account records are
sought.
Under current law, however--
The SEC staff wrote--
the right to the Financial Privacy Act generally requires
the commission to provide those persons with notice and a
substantial period--10 to 14 days--in which to file a contest
to the commission's authority to obtain the records.
Let me continue with the SEC staff analysis of this
language that is in our bill:
Because Congress recognized that the notice requirement
can, in some cases, compromise important and legitimate
commission investigative objectives, Congress provided in
section 21(h) of the Exchange Act that the commission may seek
court authorization to obtain relevant bank records without
notifying the customer for at least 90 days. Unfortunately----
The SEC staff wrote--
those important investigative objectives are also
compromised by the inherent delay in obtaining the necessary
court order.
The proposed amendment to section 21(h)----
Our language in this amendment--
addresses both the notice and delay problem by allowing the
commission the discretion only in those cases in which it has
already authorized a formal investigation to proceed without
notice to the customer. The proposed amendment also reiterates
and strengthens the commission's authority to require that
financial institutions not compromise investigations by
notifying any persons or entities that their bank records have
been subpoenaed.
Mr. Nelson of Florida. Will the Senator yield for a
question?
Mr. Levin. I will be happy to yield for a question, but I
do have an additional thought.
Mr. Nelson of Florida. I am proud to be here today with my
colleague from Michigan to offer these reforms aimed at
preventing and punishing perpetrators of corporate fraud. The
questions I wanted to ask the very distinguished Senator from
Michigan, who has the foresight of why we need this at this
particular time, are these: Would it not intrigue the Senator
from Michigan and other Senators here that all of this is
happening in an environment when 17,000 workers at WorldCom
have received pink slips and have realized losses of over a
billion dollars in their retirement plans; and at the same time
they were receiving pink slips, the corporate executives were
attending a retreat in Hawaii? That would not surprise the
Senator, would it?
Mr. Levin. It would not surprise me at all.
Mr. Nelson of Florida. I doubt that it would surprise the
Senator that one of those executives, by the way, was putting
the finishing touches on a $15 million mansion, derived from
that money from WorldCom. Would it surprise the Senator that
late last year Global Crossing laid off 1,200 people, giving
them no severance package, while the CEO of that company walked
away with hundreds of millions of dollars?
Mr. Levin. I am afraid very little would surprise me about
some of these violations and deceptions these days.
Mr. Nelson of Florida. I know it would not surprise the
Senator, but I will ask him this anyway. After what went on
with Enron last summer, while Enron executives were selling
their shares for hundreds of millions of dollars and protecting
their portfolios, their retirees and employees lost more than a
billion dollars in retirement savings. Does that surprise the
Senator?
Mr. Levin. Tragically, it is not a surprise.
Mr. Nelson of Florida. It is unconscionable. One of those
we had testify in our Commerce Committee was Janice Farmer, an
Enron retiree who lost her entire life savings that she had
built up in a retirement plan from Enron. In her case, it was
$700,000. She has nothing now.
And then, I suppose it also would not surprise the
distinguished Senator that, while we are talking about these
excesses of corporate irresponsibility and corporate greed, the
Florida pension fund for the Florida retirement system had a
loss of $335 million--more losses than any other State--from
Enron stock purchases, and that the money managers of that
Florida pension fund, which covers all of the public sector
retirees in Florida--the money managers kept buying Enron
stock, based on the assertions from the company's management
that everything was OK, that doesn't surprise us either, does
it?
Mr. Levin. No surprise. I am afraid that the public, having
lost so much of its pension money, is disgusted but no longer
surprised.
Mr. Nelson of Florida. The management said everything was
OK, but it was not OK. While the stock was dropping like a
rock, but not before the company's management had unloaded
their shares, the money managers were buying that stock as it
dropped like a rock, and it caused to a dozen or so pension
funds, retirement systems, public pension funds in this country
over a billion dollars in losses. My State had the most losses
of $335 million.
So we have seen in the last year and a half corporate
abuses of monumental proportions, and it is time for us to stop
it. I am grateful to the Senator from Michigan for his
leadership in bringing forth the amendment that he has
described, which is basically going to give some additional
teeth to the Securities and Exchange Commission to cause
disclosure and to cause some hurt when these corporate
managers, motivated and operated by greed, cross the line.
I thank the Senator for his leadership.
Mr. Levin. I very much thank the Senator from Florida for
his comments and his questions, and also for the active role he
has taken in shaping this language. He has identified the
feeble nature of the fine structure that we have in the current
law. We have some ruthless people out there who have lined
their own pockets in violation not only of law and regulation,
but of any code of morality and fiduciary duty. We have some
ruthless people.
We also have some toothless laws. The SEC, when it has to
go to court to impose a civil fine, is put through hoops that
other regulatory agencies are not put through. They can impose
civil fines administratively--always subject to an appeal by
the respondent or the defendant. But they have the capability
to seek civil fines administratively--these other agencies. I
have given examples of some of them. But when it comes to the
SEC--outside of the brokers, where the SEC has that power--they
have to go through the cumbersome proceedings of going to
court.
Now, we have cured some of this already in the bill. When
it comes to the removal from office, yesterday we took action
to give the SEC the ability to act administratively and to
order the removal of directors or executives from office. What
we didn't do yet, and what this amendment does, is add a
critical component to regulatory effectiveness, which is the
ability to impose civil fines administratively.
This is what the Administration said in supporting the
grant to the SEC of the power to remove directors from office,
which we have now already done. It says that if we didn't do
that--and now I am quoting the Statement of Administration
Policy:
It would continue to require the SEC to expand significant
time and resources in order to attempt to gain similar relief
in the Federal courts.
That is what we are talking about now with civil fines.
If we do not adopt this amendment, if we do not give the
SEC these enforcement tools that other agencies have relative
to directors and auditors, we will be requiring the SEC to be
wasting time and wasting resources that they otherwise should
be using to chase these corrupt and immoral people.
Mr. Nelson of Florida. Will the Senator yield for another
question?
Mr. Levin. I will be happy to yield.
Mr. Nelson of Florida. The distinguished Senator from
Michigan has laid out how this amendment will give stronger
enforcement measures to the Securities and Exchange Commission.
We have a saying in the South: It is beyond me. It is beyond me
why there are other people in this Chamber, when confronted
with such corporate and auditor misconduct, would not want to
strengthen the law to prevent and punish such corporate abuse.
Does the senior Senator from Michigan have any idea why
people would oppose us trying to strengthen existing law and,
indeed, strengthen the underlying bill?
Mr. Levin. I am hopeful there will be broad support for
this amendment, just for the reason the Senator from Florida
gives. There should be. This is not novel. This capability of
imposing civil fines administratively belongs to other
regulatory agencies. The protection is always an appeal to the
court, but without this tool, the SEC has a weaker capability.
They are not in a position then to do what other enforcement
agencies can do in the face of some of the worst deception this
country has ever seen--the deception which is now unfolding in
too much of corporate America.
This is of the worst attack on our system we have seen. It
is unfolding in front of our eyes, and the SEC should be given
the powers to deter it or punish it--all the power.
We want the court to be able to review administrative
actions. I think most Members of this body do not want any
administrative agency to be able to act without court review if
they are excessive or if they are wrong. I think most of us
believe in that. I believe in that. But I also believe an
administrative agency has to have enforcement tools.
We have given the SEC some additional tools in the last few
days. Senator Leahy and Senator Lott, for instance, in the
criminal law area, toughened the criminal penalties, and the
SEC now has the capability to impose fines against the
stockbroker, although they are pitifully small.
Our amendment would include directors, corporate
executives, and auditors in the purview of the SEC power to act
administratively and would toughen the fines so they would be
far more realistic and could have some deterrent effect. The
current fine structure against a limited class of people is
useless; it is toothless.
This is a huge gap in the bill before us. This is a
terrific bill, by the way, and I do not want anything I say to
suggest otherwise. The Banking Committee has given the Senate,
and hopefully the country--if we can get some support for it
from the Administration and if it can get through conference--
the Banking Committee has come up with a very strong law. We
have strengthened it so far on the floor.
This amendment will strengthen it further by filling a gap
that exists in the toolbox. It is the missing tool in the
toolbox of enforcement capabilities that the SEC should have.
Mr. Nelson of Florida. The Senator's timing is just
uncanny. We need look back no further than to yesterday when
the stock market dropped almost 300 points, all the way down
close to 8,800, the stock market being a reflection of the
confidence of the American people in their investments in
public corporations. Lo and behold, that confidence is sinking,
and the American people need some greater sense of confidence
that, indeed, they will not be hoodwinked, that they will not
be fooled by greedy corporate executives or greedy auditors who
blur the lines on what their auditing duties ought to be and
instead get in bed with those who would mismanage the finances
of a corporation. The people of America who invest their hard-
earned dollars ought to have the confidence that when they see
the financial reports, those financial reports are accurate.
That confidence is not there, and we saw it yesterday in the
reaction of the people in their purchases and sales in the
stock market.
I thank the Senator from Michigan for his timeliness in
trying to put some teeth in the authority of the Securities and
Exchange Commission to give greater confidence to the Joe and
Jane Citizen of America who invest their money because they
want to invest in the future of their country and they need to
do it and know they are getting accurate figures. I thank the
Senator.
Mr. Levin. I thank the Senator from Florida.
Mr. President, I wish to expand for one moment on the
question of the notice provision in our amendment.
As I indicated before, where there are allegations that
officers, directors of companies are misusing the accounting
rules and abusing their powers, the SEC has to be able to look
at financial records without giving the account holder an
opportunity to move funds or to change accounts or to further
muddy the investigative waters. Other agencies have that power,
and this agency must have that power.
We have carefully circumscribed that power in a number of
ways. We have not just simply said you can subpoena any
documents you want. We have criteria for doing that or else
they have to give notice.
One of the criteria is that it has to be an official
investigation that has been ordered by the Commission. That is
an important safeguard. This is not just the beginning of an
investigation. This is not during a discovery process. This is
where the Securities and Exchange Commission has initiated an
official investigation, which is a very formal act on the part
of the Securities and Exchange Commission.
At that point, they should be able to subpoena documents
under certain circumstances. These are the circumstances that
we set forth in the amendment:
If the Commission so directs in its subpoena, no financial
institution or officer, director, partner, employee,
shareholder, representative or agent can directly or indirectly
disclose that records have been requested or provided in
accordance with subparagraph (A).
In other words, you cannot disclose to the subject of the
investigation that you, as a financial institution, have been
subpoenaed for those records if the Commission finds reason to
believe that such disclosure may--and then we set forth the
rules, and the rules are intended to make sure that the
Commission can act after it has announced or determined there
should be an official investigation but does not want to risk
that the subject of the investigation is going to remove
documents or remove money or hide assets.
So we set forth the protections, and they are: If the
Commission finds reason to believe that disclosing the fact of
the official investigation to the subject of that investigation
by a financial institution would, one, result in the transfer
of assets or records outside of the territorial limits of the
United States. So if the Commission says, hey, we have reason
to believe if that person is notified in advance of those
records being obtained by us or if there is a delay in our
obtaining records that person may transfer assets or records
outside of the United States, there could be nondisclosure.
The second criteria which, if it exists, would permit this
to happen is if the disclosure would result in improper
conversion of investor assets.
The third cause for the requirement that there be
nondisclosure is that if such disclosure would impede the
ability of the Commission to identify, trace, or freeze funds
involved in any securities transaction. That speaks for itself.
The fourth way in which nondisclosure would be permitted is
that if it endangers the life or physical safety of an
individual. If the Commission has reason to believe the life or
physical safety of an individual would be compromised by
disclosure, surely we ought to not require disclosure.
Fifth, if it results in flight from prosecution, if they
have reason to believe that could happen, or if the Commission
has reason to believe that the disclosure may result in
destruction of or tampering with evidence, or if such
disclosure may result in intimidation of potential witnesses or
otherwise seriously jeopardize an investigation or unduly delay
a trial.
Those are carefully set forth reasons for why disclosure
should not be required. These are similar to what other
agencies have in terms of powers, and it seems to me with this
careful delineation of this subpoena power that we should
surely give the Securities and Exchange Commission that power.
Again, staff has given the reasons for the importance of
that amendment, and I hope that reasoning of the SEC staff
would be persuasive on this body. We have to give the SEC some
administrative authority to impose civil fines. It would
provide a tool that is now missing from the toolbox. It would
add this tool, this weapon, to their arsenal. Without this
weapon in their arsenal, they still have one hand tied behind
their back. Without this amendment, they do not have the same
administrative authority that other agencies have.
Given the environment we are in, that we must use all
legitimate means to put an end to the abuses and the deceptions
of too many of our corporate leaders, corporate executives,
corporate directors, and auditors, we must surely bring our
laws up to date in terms of the powers we give to the SEC, and
in terms of the civil fines we authorize them to impose, always
subject to an appeal to the courts.
I yield the floor.
The Presiding Officer (Mr. Corzine). The Senator from
Texas.
Mr. Gramm. Mr. President, some of my colleagues change
positions on issues like privacy so quickly that it gives me
whiplash, and I will get to that point. I do not know how many
people have seen the movie ``Minority Report.'' If you have
not, I want to tell you the story. I never thought I would see
a real-life example of what happens in this movie, but I have
found one right here on the floor of the Senate.
In the movie ``Minority Report,'' you have a cop who has
almost supernatural powers, and his job is to arrest people
before they commit a crime. It starts with three people, two
guys who naturally do not have very much ESP, and then you have
this lady, who naturally is quite attractive, who has these
massive powers of ESP. They visualize crimes that are going to
happen, their brain waves activate a computer, and then it
prints out what they are seeing. They see crimes happening that
have not yet occurred.
The action in the movie begins with a guy finding his wife
in bed with another man. The husband is obviously a nice guy--
probably an accountant--and he is leaving his house. His wife
seems so eager for him to leave, he figures out something is
going on. He is sort of an old, balding fellow and as he is
leaving, he misses his bus. While he is waiting for the next
bus, a young guy comes in and walks in his front door. Needless
to say, the husband is upset about it. (Who wouldn't be upset
about it? No one would want that to happen to them or anybody
they knew.) So the husband goes in and he is sort of in shock.
He finds himself in the bedroom, sitting by the bed. He goes
crazy, and picks up a pair of scissors.
At this point, the computer system (hooked up to the people
with ESP) alerts this superwarrior for law enforcement that
there is about to be a murder. He jumps in this sort of minijet
that flies fast and stops on a dime. The officer zooms in--have
you seen this movie, Senator McCain?--and just as the guy is
getting ready to stab his wife, the officer grabs the knife,
puts the handcuffs on the husband, takes him off and they put
him in prison for murder.
Mr. McCain. Will the Senator yield? That is a better
description than the movie was.
Mr. Gramm. Now, I thought, the whole thing is sort of a
moral question: Were these people really going to commit these
crimes? They put them in prison for life. They put them in
these metal cylinders and wired them up to control their brain
waves. It is not very pleasant. So the question is, do you have
a right to do this to people who have not yet committed a crime
simply because some person with extrasensory perception said it
was going to happen?
That is what the movie is about. It is a big hit movie. It
made over $100 million the first week. It sounds silly when I
tell it, but they got $100 million and I am giving this speech.
In any case, I thought, what an absurd plot. Who in the
world could ever believe--this is the U.S. of A, by the way.
This movie is off in the future.
Why would we ever have a law under which people can be
punished for what they might do? Is that absurd? Can anybody
believe that would happen? If you think not, you are wrong.
Let me read from this amendment. This is in general. It is
talking about authority of the Commission to assess monetary
penalties. This is from the amendment that is pending.
In general, in any cease and desist proceedings under
subsection A, the commission may impose a civil monetary
penalty if it finds on the record, after notice and opportunity
of hearing, that a person is violating, has violated, or is
about to violate or has been or will be the cause of violation.
Senator Levin is going to fine people because we are
concluding that they are about to do something before they have
done it. Or that they ``will be'' the cause of a violation.
I submit, first of all, this is not from the SEC. The SEC
has not asked for this provision. This is from staff at the
SEC--maybe ``a'' staff person, for all I know.
The point is, do we really want to say we are going to
penalize people because they are about to violate the law or we
believe they are going to? How can you tell? How are you going
to tell that they will be the cause of a violation? I submit
that is a standard I am unaware has ever existed. If so, I
didn't know about it or I would have tried to change it.
Let me mention a second problem. The second problem has to
do with financial records. Correct me, my colleague on the
Banking Committee, if somehow I have fallen into a time warp
and am in a different world than last year. Was it not last
year we were going to shut down the Internet, we were going to
put people in prison for putting out your mailing address or
for mailing you a letter where someone could read your address
off of it and go murder you? Were we not just in this time warp
where privacy was the be-all and end-all of society?
I get whiplash, we change positions so often.
Let me state what the current law is and then read what
Senator Levin is proposing. The current law is the following:
The SEC and other Federal agencies have the power to get your
financial records, and they can do it through administrative
subpoena or judicial subpoena.
Now, normally there is one little inconvenience. Normally,
they have to tell you they have taken your financial records.
Not an unreasonable thing, it would seem to me, if this is
still America. But we are talking about business people here,
and there is a different standard. Two consenting adults can
engage in any activity other than commerce, with full
constitutional protection, but if they engage in job creation
or wealth creation, they stand naked before the world in terms
of any rights whatever.
Under current law, the Government can come in and take your
financial records, but they have to tell you they have done
it--``except.'' And there are three reasons they can do it
without telling you. I think we all would say they make
reasonably good sense. They can not tell you if they have
reason to believe that there is going to be a flight from
prosecution; or if they believe there is going to be
destruction of or tampering with evidence; or if telling you
would otherwise seriously jeopardize an investigation of
official proceedings, or unduly delay a trial of an ongoing
official process.
That is the current law. What is unreasonable about that?
If the Government believes someone is doing something wrong,
they can come in and take their records. Unless they believe
there is going to be a flight from prosecution or there will be
tampering with evidence or it will jeopardize the
investigation, they have to tell you they took the records.
That is not unreasonable. But if they believe any of these
things to be the case, they can go in and take your records and
not tell you.
Now, what does the amendment of the Senator from Michigan
do? It says notwithstanding--that is always dangerous--
notwithstanding sections 1105 or 1107 of the Right To Financial
Privacy Act of 1978--that law has been around here a long time.
But notwithstanding it, which means throw it out, the
Commission may obtain access to and copies of or information
contained in financial records of any person held by a
financial institution, including financial records of a
customer, without notice to that person.
If you think someone is going to flee prosecution or
destroy evidence or that will jeopardize an ongoing
investigation, maybe we would accept the limits of our
individual liberty. But under the Levin amendment, you don't
have to find any of those things. The government doesn't have
to find that any of those circumstances is the case to be able
to go in and take financial records.
Since this bill is a bill that amends our securities laws
and our financial laws, this bill falls under this
jurisdiction. So what this literally means is that a government
agency, without ever going to the courthouse, could come and
take all of your financial records--your banking records, your
investment records, any financial records you have or have ever
had--and without finding that there is any risk that you are
going to flee from justice or destroy evidence or jeopardize an
investigation, they can take them and not tell you about it.
There is a limit, it seems to me, to the logic in this
case. If the Senator had an amendment that simply raised these
fines for people who are criminals, that would be an amendment
I could support. It shows how far we have flown from reality
when we are talking about penalizing people because they are
``about'' to violate the law; or that ``will be'' the cause of
a violation.
It is very hard to know when someone is going to violate
the law. I have not yet gotten any kickback, I am not a
stockholder even, I don't think I have received a contribution
from the PAC of the people who made the movie I've described--
though if they had any decency, they would have contributed to
my campaign over the years. But if you watch this movie, you
are going to see what the problem with the Levin amendment is.
The problem with the Levin amendment, as it turns out, is
these psychics are not always right, and they don't always
agree. Sometimes there is a ``Minority Report.'' The
superwarrior cop discovers this. It turns out they try to frame
him for a murder. A good movie. I recommend seeing it.
In any case, I am opposed to this amendment. It is a thick
amendment. There are a lot of things in it. There are some
things in it that I support. But I do not support penalizing
people for what you think they are going to do. I do not
support taking people's financial records without telling them
about it. It sounds to me as if somebody at the SEC has got the
idea that maybe they are living in a different era in a
different country and they are saying: Look, if we didn't have
to fool with civil liberties, if we could get rid of the Bill
of Rights, we could be a more effective law enforcement agency.
If we could arrest people we think are going to violate the
law, we could be more efficient. We don't live in that country.
I yield the floor.
The Presiding Officer. The Senator from Michigan.
Mr. Levin. Mr. President, first let me assure my good
friend from Texas that I have seen ``Minority Report.''
Mr. Gramm. You have?
Mr. Levin. I have.
Mr. Gramm. Then you got the idea from it.
Mr. Levin. As a matter of fact, I got the idea for the
protections we write in here from ``Minority Report'' just
because, as a tribute to the protections and civil liberties
that are defended and protected in ``Minority Report,'' I had
to be absolutely certain we would put these protections in our
bill, to make sure that only if there were reason to believe a
transfer of assets was going to go outside of the United
States, or there would be conversion of assets, or it would
endanger the life or physical safety of an individual, or
result in flight from prosecution--those very criteria,
carefully delineated, that are a tribute to the civil liberties
and protections and privacy rights in this country to which my
good friend from Texas just referred.
I can assure my good friend from Texas, the lesson of
``Minority Report'' is carefully reflected in this amendment. I
saw that because I knew the Senator from Texas was going to
raise that movie. With that kind of foresight, I decided,
knowing just how he does this so beautifully on the floor of
the Senate, I had better see ``Minority Report.'' That is why I
want to assure the Senator from Texas that these very
protections which he is so careful to delineate are in fact set
forth in this amendment. We have these criteria laid out in
this amendment.
Mr. Reid. I don't want to take away from the seriousness of
the debate, but I haven't seen ``Minority Report.'' I have seen
``Big Fat Greek Wedding,'' and I would recommend that.
[Laughter.]
Mr. Levin. It sounds as if I have not been doing too much
else, but I have also seen that--since we are giving
testimonials to movies here.
The language to which the Senator from Texas objects, about
penalizing people for what they are going to do--that is
language which the good Senator from Texas, as chairman and
ranking member of the Banking Committee, has overseen for
years. That is the same language that currently exists in the
SEC law. We are not adding anything new here. This is the SEC
law, section 77(h)(1): Cease and desist proceeding, authority
of the Commission.
If the Commission finds after notice and opportunity for a
hearing that any person is violating, has violated or is about
to violate any provision----
That is existing law. The Senator from Texas has overseen
that for all these years. He has done a brilliant job as
chairman and ranking member of the Banking Committee, and we
are just simply following the language that exists already in
the SEC law and applying it to folks who are not now covered.
Mr. Gramm. Will the Senator yield?
Mr. Levin. For a question, I will be happy to.
Mr. Gramm. What the Senator saying is they can issue cease
and desist orders under these circumstances, but they can't
fine somebody. You are not only ceasing and desisting them--I
have no problem. In the movie--and that is where you got this
idea from. I thought it was.
In the movie, I don't object to them grabbing the guy who
is about to stab his poor wife. It is putting him in prison,
not for attempted murder--he did that--but for killing her when
she is not dead.
Mr. Levin. The Senator from Texas raises an issue which, I
am afraid, is also addressed in current law. It is not just
cease and desist orders, it is the implementation of civil
fines. We are following the same language. But what we are
saying is, if the SEC has power to impose a fine on a broker,
based on the standards which exist in this law, there is no
reason the SEC should not have the same power to impose a fine
on an auditor or on a director who violates the regulations and
laws of this land. This is the same language. We haven't added
anything new.
What is new here is that for the first time there will be
the potential, the power in the SEC, subject to an appeal to
the court--which is another protection of our civil liberties--
subject to an appeal to the court, to impose a civil fine,
administratively, on people who are now let off the hook. There
is no reason for this gap in the law.
If, in fact, there is a problem that the Senator has
raised, with language, that language is in the existing law for
SEC. It is in the existing law for FDIC, the Federal Deposit
Insurance Corporation:
If, in the opinion of the appropriate Federal banking
agency, any insured depository institution, depository
institution which has insured deposits, or any institution
affiliated party is engaged or has engaged, or the agency has
reasonable cause to believe that the depository institution or
any institution affiliated party is about to engage--
The words which the Senator from Texas mocks are in
existing law, in the FDIC law, in the SEC law.
There may be reasons the Senator wants to maintain this gap
in enforcement, but that cannot be used as the reason. That
cannot be used.
The Presiding Officer. The Senator from Arizona.
MOTION TO RECOMMIT WITH AMENDMENT NO. 4270
(Purpose: To require publicly traded companies to record and treat
stock options as expenses when granted for purposes of their income
statements)
Mr. McCain. Mr. President, I move to recommit the bill to
the Committee on Banking, Housing, and Urban Affairs with
instructions to report the bill back forthwith, with the
following amendment that I send to the desk.
The Presiding Officer. The clerk will report the motion.
The legislative clerk read as follows:
The Senator from Arizona (Mr. McCain) moves to recommit the
bill (S. 2673) to the Committee on Banking, Housing and Urban
Affairs, with instructions to report back forthwith with the
following amendment, numbered 4270:
At the appropriate place, insert the following:
SEC. . STOCK OPTIONS MUST BE BOOKED AS EXPENSE WHEN GRANTED.
Any corporation that grants a stock option to an officer or
employee to purchase a publicly traded security in the United
States shall record the granting of the option as an expense in
that corporation's income statement for the year in which the
option is granted.
The Presiding Officer. The Senator from Nevada.
Mr. Reid. Mr. President, I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Reid. Mr. President, I ask unanimous consent the order
for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
AMENDMENT NO. 4271
Mr. Reid. Mr. President, I send an amendment to the desk.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from Nevada [Mr. Reid], for Mr. Edwards, for
himself, Mr. Enzi, and Mr. Corzine, proposes an amendment
numbered 4271 to the instructions of the motion to recommit S.
2673 to the Committee on Banking.
Mr. Reid. Mr. President, I ask unanimous consent reading of
the amendment be dispensed with.
Mr. McCain. I object. I would like to hear what the
amendment says.
The Presiding Officer. Objection is heard. The clerk will
continue to read the amendment.
Mr. Reid. I say to my friend, I will be happy to have it
read, but it is the exact same amendment that was pending
beforehand.
Mr. McCain. Thank you.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To address rules of professional responsibility for
attorneys)
At the end of the instructions add the following:
``(c) Rules of Professional Responsibility for Attorneys.--Not
later than 180 days after the date of enactment of this section, the
Commission shall establish rules, in the public interest and for the
protection of investors, setting forth minimum standards of
professional conduct for attorneys appearing and practicing before the
Commission in any way in the representation of public companies,
including a rule requiring an attorney to report evidence of a material
violation of securities law or breach of fiduciary duty or similar
violation by the company or any agent thereof to the chief legal
counsel or the chief executive officer of the company (or the
equivalent thereof) and, if the counsel or officer does not
appropriately respond to the evidence (adopting as necessary,
appropriate remedial measures or sanctions with respect to the
violation), requiring the attorney to report the evidence to the audit
committee of the board of directors, or to another committee of the
board of directors comprised solely of directors not employed directly
or indirectly by the company, or to the board of directors.
Mr. Reid. Mr. President, I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There appears to be.
The yeas and nays were ordered.
AMENDMENT NO. 4272 TO AMENDMENT NO. 4271
(Purpose: To address procedures for banning certain individuals from
serving as officers or directors of publicly traded companies,
civil money penalties, obtaining financial records, broadened
enforcement authority, and forfeiture of bonuses and profits)
Mr. Reid. Mr. President, I send a second amendment to the
desk.
The Presiding Officer. The clerk will report.
The legislative clerk read as follows:
The Senator from Nevada [Mr. Reid], for Mr. Levin, for
himself, Mr. Nelson of Florida, Mr. Harkin, Mr. Corzine, and
Mr. Biden, proposes an amendment numbered 4272 to amendment No.
4271.
Mr. Reid. Mr. President, I ask unanimous consent reading of
the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
Mr. Reid. Mr. President, I appreciate the cooperation of
the Senator from Arizona. There are other ways we could have
gotten to the point we are now. This just made it a lot easier.
I appreciate that very much.
I say this, before I yield the floor, to my friend from
Arizona. We are now in the exact same posture we were in prior
to the Senator from Arizona offering his amendment--his
instructions, I should say.
The Presiding Officer. The Senator from Arizona.
Mr. McCain. Mr. President, before the Senator from Nevada
leaves the floor, I wonder if he would respond to a question.
Do we intend to vote on these pending amendments and the motion
to recommit?
Mr. Reid. I say to my friend, we have been trying very
hard. I have received instructions--it is probably the wrong
word, but Senator Edwards has been here for 2 days, and he left
here for a while this afternoon waiting to vote on his
amendment. Senator Levin has been here for several days--2
days. We would like very badly to vote on the Levin second-
degree amendment and the Edwards first-degree amendment.
I have spoken to the manager of the bill for the minority.
It appears very unlikely that we are going to be able to do
that. I think that is a disappointment. I think some of these
relevant--I shouldn't say some--I think all of these relevant
amendments we can get up to prior to the cloture vote, we
should try to dispose of.
But I understand the rules of the Senate. I am disappointed
to say, my friend from Texas also understands them, so even
though I would like votes, it does not appear we are going to
be able to have votes.
Mr. McCain. Mr. President, I thank my friend from Nevada
for his candor. I think it is pretty obvious. Everybody ought
to understand what is happening as we go through these arcane
procedures.
The whole purpose of this--the whole purpose of what we
just went through--is to not have a vote on anything that has
to do with stock options. Let's be very clear what that is all
about.
Whatever side you are on on the issue, the fix is in, as we
say all too often in the sport of boxing. The fix is in and we
will now have cloture invoked and there will not be a vote on
stock options.
While my friend from Nevada is still here, I can tell him,
I understand the rules of the Senate. I have been through other
difficult issues on which I have been blocked from getting
votes. I tell my friend from Nevada, and all of my colleagues,
we will have a vote on stock options. We will have--sooner or
later--a vote on stock options. And I only regret that we
cannot do it now, get it over with, and get everybody on
record.
I also would make one additional comment. I hope I do not
harm the feelings of any of my colleagues. This is an important
issue. This is a very important issue, no matter where you
stand on the issue of stock options and how they should be
accounted. It is a very important issue.
Why is it that this body would not take up the issue and
have an up-or-down vote on how stock options are treated? I
would ask the manager of the bill, why would we not at least
allow a vote up or down?
I will read editorials. In fact, it may be sometime before
I give up the floor because I have a lot to say about this
issue. I will read from Mr. Greenspan's speech, a fairly widely
respected individual, who says--well, I will read his speech in
just a minute. He is in favor of treating stock options as an
expense.
So is Mr. Stiglitz and Mr. Buffett, and so many others, who
are aware of this issue and its impact and the way it has been
terribly abused by the same people we are trying to go after,
the same people we are after.
Mr. Sarbanes. Will the Senator yield for a response to his
question?
Mr. McCain. According to a recent analysis from 1996 to
2000, Enron issued nearly $600 million in stock options,
collecting tax deductions, which allowed the corporation to
severely reduce their payment in taxes. According to reports
that I think I have here, over $1 billion in stock options were
issued to the senior executives of WorldCom.
This is an important issue. I respect the views of my
colleagues who disagree with my position and that of Mr.
Greenspan, Mr. Stiglitz, and Mr. Buffett in various op-eds and
editorials in newspapers throughout America. But why would we
not vote on it? That is the question.
Why would the distinguished Senator and friend from Nevada
feel it incumbent upon himself to not allow a vote on stock
options? I guess that question can be answered by observers.
But here is the deal. I want to tell my friend from Nevada
again, there will be a vote on how stock options are treated. I
will repeat the amendment. I will repeat the amendment and will
repeat it again several times before I finish discussing this
issue. The issue, no matter how you feel, should be addressed.
But through the invocation of cloture, everybody knows that the
amendment and the motion to recommit will fall.
I want to repeat. The amendment is fairly clear-cut, fairly
simple. We deal with a lot of arcane issues in the discussion
of this regulatory reform. But I repeat:
Any corporation that grants a stock option to an officer or
employee to purchase a publicly traded security in the United
States shall record the granting of the option as an expense in
that corporation's income statement for the year in which the
option is granted.
It is very simple. It does not say anything about the tax
treatment of it. It does not say anything about a number of
other rather controversial aspects. It just says it will
``record the granting of the option as an expense in that
corporation's income statement. . . . ''
Mr. President, it is curious to me--actually, it is not
curious to me--why a vote on this amendment is blocked. It is
because every lobbyist in this town for the high-tech community
has said: Don't do it. Don't do it. The one thing that the
folks in Silicon Valley are scared of more than anything else
is that they would lose their precious stock options--all of
it, of course, in the interest of the employee, only the
employees, the secretaries, the workers, those people who are
down there toiling in the bowels of the corporation, trying to
get some incentive to stay there and have their retirement.
Meanwhile, Mr. Ellison, the CEO of Oracle, last year,
cashes in $706 million worth of stock options, $706 million
worth of stock options in 1 year. Are we going to vote on it?
Yes, we will vote on it. Maybe not now, but unless there is
cloture on every single bill that comes before this body, there
will be a vote on stock options. I want to assure my friend
from Nevada of that.
I will just remind him, there were many who wanted to block
a vote on campaign finance reform for a long period of time.
Well, we got our vote on campaign finance reform, and we will
get a vote on stock options.
We have to end the double standard for stock options.
Currently corporations can hide these multimillion-dollar
compensation plans from their stockholders or other investors
because these plans are not counted as an expense when
calculating company earnings.
I want to make it perfectly clear to all, I am not in favor
of doing away with stock options. Stock options have a valuable
place in American corporate life. What we are addressing here
is how they are treated so investors can know exactly what the
profit and loss of a corporation is.
I repeat: I am not in favor of eliminating stock options.
What I am trying to do is exactly in accordance with Mr.
Greenspan's comments from which I will quote. Federal Reserve
Chairman Alan Greenspan, New York University, March 26, 2002:
Some changes, however, appear overdue. In principle, stock-
option grants, properly constructed, can be highly effective in
aligning corporate officers' incentives with those of
shareholders. Regrettably, the current accounting for options
has created some perverse effects on the quality of corporate
disclosures that, arguably, is further complicating the
evaluation of earnings and hence diminishing the effectiveness
of published income statements in supporting good corporate
governance. The failure to include the value of most stock-
option grants as employee compensation and, hence, to subtract
them from pretax profits has increased reported earnings and
presumably stock prices. This would be the case even if offsets
for expired, unexercised options were made. The Financial
Accounting Standards Board proposed to require expensing in the
early to middle 1990s but abandoned the proposal in the face of
significant political pressure.
The Federal Reserve staff estimates that the substitution
of unexpensed option grants for cash compensation added about
2\1/2\ percentage points to reported annual growth in earnings
of our larger corporations between 1995 and 2000. Many argue
that this distortion to reported earnings growth contributed to
a misallocation of capital investment, especially in high tech
firms.
Especially in high-tech firms? Where is most of the
opposition coming from to the proper accounting of stock
options? From the high-tech firms. I repeat:
Many argue that this distortion to reported earnings growth
contributed to a misallocation of capital investment,
especially in high tech firms. If market participants indeed
have been misled, that, in itself, should be surprising, for
there is little mystery about the effect of stock-option grants
on earnings reported to shareholders. Accounting rules require
enough data on option grants be reported in footnotes to
corporate financial statements to enable analysts to calculate
reasonable estimates of their effect on earnings.
Some have argued that Black-Scholes option pricing, the
prevailing means of estimating option expense, is approximate.
But so is a good deal of other earnings estimates, as I
indicated earlier. Moreover, every other corporation does
report an implicit estimate of option expense on its income
statement. That number for most, of course, is zero. Are option
grants truly without any value?
I repeat Mr. Greenspan's question: Are option grants truly
without any value?
Critics of option expensing have also argued that expensing
will make raising capital more difficult. But expensing is only
a bookkeeping transaction. Nothing real is changed in the
actual operations or cash-flow of the corporation. If investors
are dissuaded by lower reported earnings as a result of
expensing, it means only that they were less informed than they
should have been. Capital employed on the basis of
misinformation is likely to be capital misused.
Critics of expensing also argue that the availability of
options enables corporations to attract more-productive
employees. That may well be true. But option expensing in no
way precludes the issuance of options. To be sure, lower
reported earnings as a result of expensing could temper stock
price increases and thereby exacerbate the effects of share
dilution. That, presumably, would inhibit option issuance. But
again, that inhibition would be appropriate, because it would
reflect the correction of misinformation.
I am not sure this debate is between me and the high-tech
community. I think the debate is somewhat different. When you
look at the preponderance of opinion, not only that stock
options need to be expensed but the incredible effect that it
has had on the whole distortion of the market, then it is an
important issue.
I ask again: How can we really address the entire issue we
are facing without addressing the issue of stock options? That
is like playing a baseball game without third base.
Mr. Joseph Stiglitz, noble laureate professor of economics
at Columbia University on Tuesday, March 12, 2002:
Some contend that it is difficult to obtain an accurate
measure of the value of the options. But this much is clear:
zero, the implicit value assigned under current arrangements,
is clearly wrong. And leaving it to footnotes, to be sorted out
by investors, is not an adequate response, as the Enron case
has brought home so clearly. At the Council of Economic
Advisers, we devised a formula that represented a far more
accurate lower bound estimate of the value of the options than
zero. Moreover, many firms use formulae for their own purposes,
in valuing stock options (charging them against particular
divisions of the firm). However, Treasury, in its opposition to
the FASB concerns, was singularly uninterested in these
alternatives. I leave it to others to hypothesize why that
might have been the case.
If we are to have a stock market in which investors are to
have confidence, if we are to have a stock market which avoids
the kind of massive misallocation of resources that result when
information provided does not accurately report the true
condition of firms, we must have accounting and regulatory
frameworks that address these issues. As derivatives and other
techniques of financial engineering become more common, these
problems too will become more pervasive. While headlines and
journalistic accounts describe some of the inequities--those
who have seen their pensions disappear as corporate executives
have stashed away millions for themselves--what is also at
stake is the long run well being of our economy. The problems
of Enron and Global Crossing are part and parcel of the current
downturn.
I was under the impression this legislation was all about
trust and transparency--regaining the trust of the American
people and investors in the stock market and, frankly, the
economic system that drives America and has been so successful,
and transparent. Perhaps under this legislation, by beefing up
many of the penalties and regulations and many other things--
many of which I have recommended and strongly supported and
will have in further amendments, but how in the world do we say
that we have given transparency when, in the view of most
experts, this is one of the greatest hindrances to transparency
in the system as it exists today?
I would now like to read the opinion of Mr. Warren Buffett,
in the Washington Post, April 9, 2002, Stock Options and Common
Sense:
In 1994 seven slim accounting experts, all intelligent and
experienced, unanimously decided that stock options granted to
a company's employees were a corporate expense.
Six fat CPAs, with similar credentials, unanimously
declared these grants were no such thing.
Can it really be that girth, rather than intellect,
determines one's accounting principles? Yes indeed, in this
case. Obesity--of a monetary sort--almost certainly explained
the split vote.
The seven proponents of expense recognition were the
members of the Financial Accounting Standards Board, who earned
$313,000 annually. Their six adversaries were the managing
partners of the (then) Big Six accounting firms, who were
raking in multiples of the pay received by their public-
interest brethren.
In this duel the Big Six were prodded by corporate CEOs,
who fought ferociously to bury the huge and growing cost of
options, in order to keep their reported earnings artificially
high. And in the pre-Enron world of client-influenced
accounting, their auditors were only too happy to lend their
support.
The members of Congress decided to adjudicate the fight--
who, after all, could be better equipped to evaluate accounting
standards?--and then watched as corporate CEOs and their
auditors stormed the Capitol. These forces simply blew away the
opposition. By an 88-9 vote, U.S. senators made a number of
their largest campaign contributors ecstatic by declaring
option grants to be expense-free. Darwin could have foreseen
this result: It was survival of the fattest.
The argument, it should be emphasized, was not about the
use of options. Companies could then, as now, compensate
employees in any manner they wished. They could use cash, cars,
trips to Hawaii or options as rewards--whatever they felt would
be most effective in motivating employees.
But those other forms of compensation had to be recorded as
an expense, whereas options--which were, and still are, awarded
in wildly disproportionate amounts to the top dogs--simply
weren't counted.
The CEOs wanting to keep it that way put forth several
arguments. One was that options are hard to value. This is
nonsense: I've bought and sold options for 40 years and know
their pricing to be highly sophisticated. It's far more
problematic to calculate the useful life of machinery, a
difficulty that makes the annual depreciation charge merely a
guess. No one, however, argues that this imprecision does away
with a company's need to record depreciation expense. Likewise,
pension expense in corporate America is calculated under widely
varying assumptions, and CPAs regularly allow whatever
assumption management picks.
Believe me, CEOs know what their option grants are worth.
That's why they fight for them.
It's also argued that options should not lead to a
corporate expense being recorded because they do not involve a
cash outlay by the company. But neither do grants of restricted
stock cause cash to be disbursed--and yet the value of such
grants is routinely expensed.
Furthermore, there is a hidden, but very real, cash cost to
a company when it issues options. If my company, Berkshire,
were to give me a 10-year option on 1,000 shares of A stock at
today's market price, it would be compensating me with an asset
that has a cash value of at least $20 million--an amount the
company could receive today if it sold a similar option in the
marketplace. Giving an employee something that alternatively
could be sold for hard cash has the same consequences for a
company as giving him cash. Incidentally, the day an employee
receives an option, he can engage in various market maneuvers
that will deliver him immediate cash, even if the market price
of his company's stock is below the option's exercise price.
Finally, those against expensing of options advance what I
would call the ``useful fairy-tale'' argument. They say that
because the country needs young, innovative companies, many of
which are large issuers of options, it would harm the national
interest to call option compensation as expense and thereby
penalize the ``earnings'' of these budding enterprises.
Why, then, require cash compensation to be recorded as an
expense given that it, too, penalizes earnings of young,
promising companies? Indeed, why not have these companies issue
options in place of cash for utility and rent payments--and
then pretend that these expenses, as well, don't exist?
Berkshire will be happy to received options in lieu of cash for
many of the goods and services that we sell corporate America.
At Berkshire we frequently buy companies that awarded
options to their employees--and then we do away with the option
program. When such a company is negotiating a sale to us, its
management rightly expects us to proffer a new performance-
based cash program to substitute for the option compensation
being lost. These managers--and we--have no trouble calculating
the cost to the company of the vanishing program. And in making
the substitution, of course, we take on a substantial expense,
even though the company that was acquired had never recorded a
cost for its option program.
Companies tell their shareholders that options do more to
attract, retain and motivate employees than does cash. I
believe that's often true. These companies should keep issuing
options. But they also should account for this expense just
like any other.
A number of senators, led by Carl Levin and John McCain,
are now revising the subject of properly accounting for
options. They believe that American businesses, large or small,
can stand honest reporting, and that after Enron-Andersen, no
less will do.
I think it is normally unwise for Congress to meddle with
accounting standards. In this case, though, Congress fathered
an improper standard--and I cheer its return to the crime
scene.
This time Congress should listen to the slim accountants.
The logic behind their thinking is simple.
One, if options aren't a form of compensation, what are
they?
Two, if compensation isn't an expense, what is it?
Three, and if expenses shouldn't go into the calculation of
earnings, where in the world should they go?
Mr. President, I have to admit to you that I stood fifth
from the bottom of my class at the Naval Academy. I don't
pretend to understand a lot of the nuances and hidden workings
of the stock market or many of the issues we are facing today
because there were some very imaginative CEOs and corporate
officers who have deprived investors of their money and
hundreds of thousands of people of their jobs. But even I can
understand Mr. Buffett's questions:
If options aren't a form of compensation, what are they?
If compensation isn't an expense, what is it?
And if expenses should not go into the calculation of
earnings, where in the world should they go?
Mr. President, that is why this amendment is simple:
Any corporation that grants a stock option to an officer or
employee to purchase a publicly traded security in the United
States shall record the granting of the option as an expense in
that corporation's income statement for the year in which the
option is granted.
That is not a complicated issue, and there will be
discussion from time to time about what the tax implications
are and all those things. I would be glad to have smarter
people than I figure it out.
I want to read a letter to the editor of the New York Times
by Steven Barr, senior contributing editor of CFO Magazine,
April 5, 2002. Reference: ``Leave Options Alone'' by John Doerr
and Frederick W. Smith:
What if, in the mid-1990s, accounting-rule makers had not
caved in to lobbyists and instead had forced companies to
recognize options as a compensation expense on financial
statements?
There would still have been a technology boom, a bear
market, and a period of recession. Such cycles are immutable.
But there may have been less of the accounting gamesmanship
that is now the object of government investigation and investor
ire.
Options should count as an expense to the corporation, and
the ability to exercise them should be based on stock
performance that exceeds an index of peers.
Mr. President, one of the more egregious activities we have
seen with some of these really unsavory people has been that
while their company stock was declining, they exercised their
stock options and sold them, making hundreds of millions of
dollars.
As I said earlier, in the case of Enron--I heard WorldCom
was $1.8 billion, or Enron, I am not sure which--at the same
time in the case of Enron, the employees, in testimony before
the Commerce Committee, said they were urged to hang on to the
stock, hang on to the Enron stock. Meanwhile, the executives
were selling the stock. I do not know of anything quite as
egregious as that.
As I mentioned, according to a recent analysis from 1996 to
2000, Enron issued nearly $600 million in stock options,
collecting tax deductions which allowed the corporation to
severely reduce their payment in taxes.
I repeat, no other type of compensation gets treated as an
expense for tax purposes without also being treated as an
expense on the company books. This double standard is exactly
the kind of inequitable corporate benefit that makes the
American people irate and must be eliminated.
If companies do not want to fully disclose on their books
how much they are compensating their employees, then they
should not be able to claim a tax benefit for it.
The Washington Post, Thursday, April 18, 2000:
Alan Greenspan, perhaps the Nation's most revered
economist, thinks employee stock options should be counted,
like salaries, as a company expense. Warren Buffett, perhaps
the Nation's foremost investor, has long argued the same line.
The Financial Accounting Standards Board, the expert group that
writes accounting rules, reached the same conclusion eight
years ago. The London-based International Accounting Standards
Board recently recommended the same approach. In short, a
rather unshort list of experts endorses the common-sense idea
that, whether you get paid in cash or company cars or options,
the expense should be recorded. Yet today's Senate Finance
Committee hearing on the issue is likely to be filled with
dissenting voices. There could hardly be a better gauge of
money's power in politics.
The Washington Post said:
There could hardly be a better gauge of money's power in
politics.
Why does this matter? Because the current rules--which
allow companies to grant executives and other employees
millions of dollars in stock options without recording a dime
of expenses--make a mockery of corporate accounts. Companies
that grant stock options lavishly can be reporting large
profits when the truth is they are taking a large loss. In
2000, for example, Yahoo reported a profit of $71 million, but
the real number after adjusting for the cost of employee stock
options was a loss of $1.3 billion. Cisco reported $4.6 billion
in profit; the real number was a $2.7 billion loss.
Mr. President, those numbers are staggering. Let me repeat:
Yahoo reported a profit of $71 million, but the real number
after adjusting for the cost of employee stock options was a
loss of $1.3 billion. Cisco reported $4.6 billion in profits;
the real number was a $2.7 billion loss. By reporting make-
believe profits, companies may have conned investors into
bidding up their stock prices. This is one cause of the
Internet bubble, whose bursting helped precipitate last year's
economic slowdown.
It is not surprising, therefore, that the expert consensus
favors treating options as a corporate expense, which would
mean that reported earnings might actually reflect reality. But
the dissenters are intimidated by neither experts nor logic.
They claim that the value of options is uncertain, so they have
no idea what number to put into the accounts. But the price of
an option can actually be calculated quite precisely, and
managers have no difficulty doing the math for purposes of tax
reporting. The dissenters also claim options are crucial to the
health of young companies. But nobody wants to ban this form of
compensation; the goal is merely to have it counted as an
expense. Finally, dissenters say that options need not be so
counted because granting them involves no cash outlay. But
giving employees something that has cash value amounts to
giving them cash.
The dissenters include weighty figures in both parties.
Sen. Joe Lieberman (D-Connecticut) is the chief opponent of
options sanity in the Senate, and last week President Bush
himself declared that Mr. Greenspan is wrong on this issue.
What might be behind this? Many of the corporate executives who
give generously to politicians are themselves the beneficiaries
of options--often to the tune of millions of dollars. High-tech
companies, an important source of campaign cash, are fighting
options reform with all they've got. But if these lobbyists are
allowed to win the argument, they will undermine a key
principle of the financial system. Accounting rules are meant
to ensure investors get good information. Without good
information, they cannot know which companies will best use
capital, and the whole economy suffers in the long run.
Mr. President, again, transparency and trust. Transparency
and trust. Without transparency, we are not going to have
trust.
A Washington Post, April 21, 2002, editorial; byline David
S. Broder. Mr. Broder writes:
Thanks to the Enron scandal, the public is getting to know
about a scheme that corporate executives have used for years,
but that most of us were not smart enough to understand.
I include myself in that group that Mr. Broder describes.
You can call it the have-your-cake-and-eat-it-too ploy.
It involves stock options, the rights to buy company stock
some time in the future at the (presumably bargain) price at
which it is selling currently. Stock options awarded to senior
management by their (usually hand-picked) boards of directors
mushroomed from $50 billion in 1997 to $162 billion just three
years later. As Business Week pointed out in its April 15
issue, boards have been ``lavishing options on executives'' so
profligately ``that they now account for a staggering 15
percent of all shares outstanding.''
This is obviously a good deal for the executives. One of
them, Oracle Corporation's Lawrence Ellison, exercised options
worth $706 million in one week. A nice mouthful of cake, by any
standard.
But here's how his company--and all others like it--can
have its cake, too. The value of the stock options granted
Ellison is a cost to Oracle for tax purposes, but it doesn't
come off the bottom line when Oracle is reporting its earnings
for the year.
This would seem to defy common sense--and it does. Almost a
decade ago, as the options craze was getting under way, the
Federal Accounting Standards Board--the watchdog group--said
that when options are granted, they should be treated as an
expense in company reports as well as in tax returns. The
corporate CEOs and the accounting firms they hire went nuts,
and the next thing you knew, the Senate in 1994 was passing a
resolution . . . telling the watchdog: forget it.
Mr. Gramm. Mr. President, will the Senator yield? I do not
want to break in, but a key point I would like to make--and I
thought the Senator might want a breather----
Mr. McCain. I would appreciate it if the Senator would
phrase it in the form of a question, as he is very adept at
doing. I will be glad to yield for his question.
Mr. Gramm. I thought it was very important to make this
point. What happened almost a decade ago when we saw this
blossoming of stock options? The answer is, in 1993, we passed
a law that said that if you paid a corporate executive more
than $1 million a year in a plain old paycheck, you could not
deduct it as an expense in running the business.
At that time, the largest companies in America--and I am
trying to make a point that is in no way contradicting anything
the Senator says, though I do not agree with a word of it, but
what we said was you could not pay a corporate executive,
through their paycheck, more than a million a year, even though
the 50 largest companies in America were paying their corporate
executives $3 million a year, on average.
When we passed that law, what happened? What happened is
that corporate America, being clever--you do not make $3
million a year if you are not pretty smart--figured out ways
around the law. Some of the ways around the law were getting
loans from the company at low interest rates and getting stock
options, which are now criticized as giving corporate
leadership a very short-term horizon.
The only point I want to make is that everybody has
forgotten that in 1993 Congress, in a demagogic amendment aimed
at ``rich people,'' started this whole process.
It struck me when you were saying this group of accountants
got together in 1994, what they were doing was responding to a
bad law, and the bad law helped trigger this. One of the
things--and God knows it is not going to happen in the
environment we are in now--but one of the things Congress ought
to do is to repeal that law so General Electric could pay its
CEO with a paycheck, like everybody else, instead of trying to
find all these ways around the law. I just wanted to get in
that advertisement.
Mr. McCain. I would like to respond to the Senator's
question by saying that I think the Senator makes a very valid
point. I think this is probably none of Congress's business as
to what salaries should be bestowed on a corporate executive,
with truly independent boards of directors and with a voice of
the stockholders.
Let me say to the Senator before he leaves, I am not
talking about doing away with stock options. I am talking about
how they are treated. They may have gotten around that, but it
is how they are treated. As we get into the debate further, I
would be glad to hear him respond to Mr. Buffett's three
questions.
Mr. Gramm. I would be happy to respond to Mr. Buffett.
Mr. McCain. I ask unanimous consent for Senator Gramm to
respond without me losing my right to the floor.
The Presiding Officer. Without objection, it is so ordered.
Mr. Gramm. I would be happy to respond to him. First, I
would have been happy to have voted on the Senator's amendment.
Mr. McCain. I thank the Senator.
Mr. Gramm. Second, this is something I am happy to debate.
The only point I wanted to make is that while we are all
damning corporate America, our law, which said if you paid
somebody more than $1 million a year it could not count as a
business expense, really helped trigger all of this. One of the
things we ought to be doing in the name of reform is to repeal
that law.
When I tried today in Finance--the Senator said this would
not be brought up in Finance, but today in the Finance
Committee I thought we ought to have one Good Government
amendment, and it failed, like logic and truth, for the lack of
a second. That is my only point.
Mr. McCain. I thank the Senator. I especially thank him for
agreeing because the Senator from Texas--we have had our
agreements, mostly agreements and occasional disagreements--has
never, in all the years we have known each other, which goes
back to our days in the other body, wanted to deprive anybody
of a vote on an issue, no matter where he stood on that issue.
I regret deeply that it is clear, as I said earlier, the
fix is in; there is not going to be a vote on this issue before
cloture is invoked, but I want to again assure my colleagues
there will be a vote. There will be a vote on this issue, just
like when I was blocked for a long time on the line-item veto,
I was blocked for a long time on campaign finance reform, I
have been blocked on a lot of other issues but we always got a
vote because that is my right as a Senator to get a vote.
It is not my right as a Senator to determine the outcome,
but it is my right as a Senator to get a vote on an issue,
particularly when, in the view of any observer, stock options
are a key issue in this entire debate.
Again, I respect the views of the Senator from Texas who
disagrees with my position. I think it is a respectful
disagreement that we have. I look forward to debating him. I do
so at some disadvantage because he is a trained economist and
former professor of economics.
I can also see why he would want to do away with that
million-dollar cap because I am sure the Senator from Texas
will make more than a million dollars when he leaves this body,
and justifiably so given his talent, expertise, and experience.
I wish him well. I wish him every success in doing so.
At least the Senator from Texas is in agreement that we
should have a vote on this issue.
The question is going to be raised by me and others, time
after time: Why did we not have a vote on this issue? If we are
truly committed to reforming the system, restoring trust and
transparency to the system, why do we not have a vote on it?
That is a very legitimate question. There will be a vote.
I will return to Mr. Broder's editorial. He talks about
that:
The Federal Accounting Standards Board said that when
options are granted, they should be treated as an expense.
And the Senate passed a resolution telling the watchdogs,
forget it.
And that has had a truly wondrous effect. On average, the
Federal Reserve Board estimates, the ruling has boosted the
reported earnings growth of corporations by 3 percentage points
from a realistic 6 percent to an inflated 9 percent. Enron, it
is estimated, used that same ruling in 2000 to inflate its
earnings by more than 10 percent. Overstated earnings, of
course, boost stock prices, thus benefiting the executives who
have been given stock options.
By the way, I might add, not only stock options but it
increases compensation because the stock value is inflated.
But that is not the end of it. Because these stock options
are deductible for tax purposes, and their cost can be carried
forward for years, they also enable companies that hand out a
lot of options to stiff-arm the IRS. In Enron's case, they
allowed the company to cut its tax bill by $625 million between
1996 and 2000.
Especially on my side of the aisle, there is this
continuous drumbeat: Let us make the tax cuts permanent; let us
do away with the death taxes; let us make the tax cuts
permanent; let us help the American taxpayer. Should we not try
to make a corporation pay its legitimate taxes? In Enron's
case, because of the use of stock options, they allowed the
company to cut its tax bill by $625 million over a period of 4
years. Amazing.
Thanks to Enron, another push is under way to stop the
double-dealing. But it faces tough sledding. The Coalition to
Preserve and Protect Stock Options, which includes 32
influential trade associations, is flooding Congress with
`talking points' claiming that `stock options are a vital tool
in the battle for economic growth and job creation . . . (and)
to attract, retain and motivate talent.'
The coalition is trying to kill a bill that would not end
stock options but simply specify that companies could not use
them to reduce their taxes unless they also report them as an
expense in their financial statements.
The bill has bipartisan sponsorship: Democratic Senators
Carl Levin of Michigan, Mark Dayton of Minnesota and Dick
Durbin of Illinois; Republican Senators John McCain of Arizona
and Peter Fitzgerald of Illinois. Fitzgerald is particularly
interesting. He is from a wealthy banking family and is a
staunch conservative, but Enron has made him almost a raging
populist.
It has had no such effect on President Bush. Concerned as
always for the deserving rich, he told the Wall Street Journal
he opposes this kind of legislation. . . . But Federal Reserve
Board Chairman Alan Greenspan testified recently in support of
expensing stock options. The only issue, he said, is whether
under current rules, ``is income being properly recorded? And I
would submit to you that the answer is no.''
That is what Alan Greenspan says: Is income being properly
reported? And I would submit to you that the answer is no.
And superinvestor Warren Buffett, who hands out bonuses but
not stock options to his employees--
By the way, I have not heard of any bad morale or failure
to attract employees out at Berkshire Hathaway out in Omaha, a
lovely place to live--for years has been asking three
questions: ``If options aren't a form of compensation, what are
they? If compensation isn't an expense, what is it? And if
expenses shouldn't go into the calculation of earnings, where
in the world should they go?"
That is what Mr. Broder has to say.
Paul Krugman, on May 17, 2002:
On Tuesday Standard & Poor's, the private bond rating
agency, announced that it would do something unprecedented: It
will try to impose accounting standards substantially stricter
than those required by the Federal government. Instead of
taking corporate reports at face value, S&P will correct the
numbers to eliminate what it considers the inappropriate
treatment of ``one-time'' expenses, pension fund earnings and,
above all, stock options--a major part of executive
compensation that, according to Federal standards, somehow
isn't a business expense. S&P's estimate of ``core earnings''
for the 500 largest companies slashes reported profits by an
astonishing 25 percent.
Why does S&P--along with Warren Buffett, Alan Greenspan and
just about every serious financial economist--think that
current accounting standards require a drastic overhaul? And if
such an overhaul is needed, why doesn't the government do it?
Why does S&P think that it must do the job itself?
To see the absurdity of the current rules, consider stock
options. An executive is given the right to purchase shares of
the company's stock, at a fixed price, some time in the future.
If the stock rises, he buys at bargain prices. If the stock
falls, he doesn't exercise the option. At worst, he loses
nothing; at best, he makes a lot of money. Nice work if you can
get it.
Yet according to Federal accounting standards, such deals
don't cost employers anything, as long as the guaranteed price
isn't below the market price on the day the option is granted.
Of course, this ignores the ``heads I win, tails you lose''
aspect; executives get a share of investors' gains if things go
well, but don't share the losses if things go badly. In fact,
companies literally apply a double standard: they deduct the
cost of options from taxable income, even while denying that
they cost anything in their profit statements.
So how could it possibly make sense not to count options as
a cost? Defenders of the current system argue that stock
options align the interests of executives with those of
investors. Even if that were true, however, it wouldn't justify
ignoring the cost--no more than it would make sense to deny
that wages, which provide incentives to workers, are a business
expense. Furthermore, it's now clear that stock options, far
from reliably inducing executives to serve shareholders, often
create perverse incentives. At worst, they handsomely reward
managers who run their companies as pump-and-dump schemes,
executives at Enron and many other companies got rich thanks to
stock prices that soared before they collapsed.
I hope the opponents of this provision, including my friend
from Texas, will put it into the real-world context. It is nice
to talk about economic theory. I know of no one better at that
than the Senator from Texas. What happened at Enron? What
happened at Enron when it cashed in $600 million worth of stock
options and the stock tanks and there are 10,000 or so
employees out of work? And there was a period of time where the
employees were not allowed, because they were undergoing some
managerial change of their portfolio, to cash in their stock
options. But the executives were not prohibited from doing so.
They kept on doing it. They kept on doing it.
So I hope we can have this debate not in the world of
theories of economics. I am not a CPA, nor am I a professor of
economics, nor am I as smart as most of the Members of this
body, but I know what happened to these people. I know of the
thousands left penniless. I know of the thousands whose
retirement savings were wiped out.
Meanwhile, the very people this whole stock option deal was
supposed to be protecting were not protected, and yet somehow
the executives all made out like bandits.
Perhaps my colleagues, as they oppose this legislation, can
talk about the real-world examples--not the theoretical world
of economics, which I will immediately grant them a distinct
advantage on. I would like for them to have the opportunity to
meet some of these employees, as I have, who were told by the
executives of the corporation the stock was in great shape,
while they were dumping the stock. I would like for them to
talk to the employees or the retirees who invested enormous
amounts of their money and their life savings, in some cases in
a stock, and were told by their employers and executives that
everything was great, things could not be better, estimates of
double the stock value over the next few years.
That is the framework of this debate, not the framework of
whether certain economic theories are valid or not.
Options are only part of an accounting system in deep
trouble. As David Blitzer, S&P's chief investment strategist,
recently wrote, ``Financial markets are as much a social
contract as is democratic government.'' Yet there is a growing
sense that this contract is being broken, undermining the trust
that is so essential to the operation of financial markets.
Clearly, major reforms are needed. And bear in mind that this
isn't a left-right issue; it's about protecting investors--
middle-class and wealthy alike from exploitation by self-
dealing insiders. So who could possibly be opposed? You'd be
surprise.
Harvey Pitt, the accounting industry lawyer who heads the
Securities and Exchange Commission, has clearly been dragging
his feet on reform.
Bear in mind, this is not a left-right issue. It is about
protecting investors, middle class and wealthy alike, from
exploitation by self-dealing insiders. So who could possibly be
opposed? You would be surprised. Harvey Pitt, the accounting
industry lawyer who heads the Securities and Exchange
Commission, has clearly been dragging his feet on reform. Mr.
Blitzer of S&P points out that in previous periods of corporate
scandal, legislatures and prosecutors took the lead with public
concerns over the market.
It is a sad commentary on our leadership that this time he
believes he must do the job himself--referring to Standard and
Poors--and announced that it would impose accounting standards
substantially stricter than those required by the Federal
Government.
Boston Globe, June 10, 2002:
Stock options have become the currency of choice to reward
high ranking executives in part because under current rules the
company need not count them as an expense with much of their
compensation. Depending on the difference between the option
price of the stock and the market price, it is no wonder that
some executives have used trickery to show quarterly growth and
inflate the worth of their companies. Excessive reliance on
stock options is a license for some executives to drive their
companies along treacherous roads.
I have a number of other views, but I think I have made my
point. The point is this: Why should we, in the name of
restoring confidence, trust, and transparency to the American
people on an issue of this import, not have a vote? That is the
first question.
The second question that needs to be answered is Mr.
Buffett's question, not mine; not mine because I don't claim to
have a corner on expertise and knowledge on this issue. But I
believe that Mr. Buffett does. I believe that Mr. Greenspan
does. I believe that literally every outside observer and
economist does. If options aren't a form of compensation, what
are they? If compensation isn't an expense, what is it? And if
expenses shouldn't go into the calculation of earnings, where
in the world should they go?
I know what I will hear in response. In fact, most of those
have already been responded to so I don't intend to engage in
extended debate about it. We all know where the majority stock
options have gone--to the executives, not to the workers. Mr.
Buffett, and many others, have been able to attract good and
talented employees and retain them without having to resort to
stock options.
But the real question is not whether stock options are good
or bad because the intent of the amendment is not to do away
with stock options. The intent of the amendment is simply to
give an accurate depiction of what stock options are. And that
is clearly compensation. Depreciation is listed as an expense.
In the view of many, that is much harder to calculate than a
stock option.
Another argument I anticipate will be, how do you treat it
taxwise? Frankly, I would be glad to treat it taxwise as to how
the smartest people at the SEC would say it should be treated.
I would leave that up to the two experts. But to not treat it
as an expense, as Mr. Buffett says, of course is just
Orwellian. It is Orwellian.
Mr. Levin. Will the Senator yield for a question?
Mr. McCain. I am sorry my colleague will not allow a vote.
I will be glad to respond to my colleague from Michigan.
Mr. Levin. I appreciate the Senator's yielding for a
question. I wonder if the Senator would agree that the
following individuals and organizations support the change in
accounting for stock options, which the Senator has outlined:
Alan Greenspan, Paul Volcker, Arthur Levitt, Warren Buffett, as
the Senator mentioned, TIAA-CREF, Paul O'Neill, Standard &
Poor's, Council for Institutional Investors, Consumer
Federation, Consumers Union, AFL /CIO--among others? Would the
Senator agree that those organizations support a change in the
accounting for stock options?
Mr. McCain. I would say to my friend, yes. I think there is
another important organization, the Federal Accounting
Standards Board--I believe it is--the international.
Mr. Levin. There are some additional organizations.
Mr. McCain. Yes.
Mr. Levin. I wanted to give the Financial Accounting
Standards Board.
Mr. McCain. Yes.
Mr. Levin. Does the Senator remember, as I do very vividly
because I appeared before the Federal Financial Standards Board
in the middle 1990s to support their independence, when they
decided that you had to expense options, that it was
compensation, that it had value like all other forms of
compensation?
Does the Senator remember what the Financial Accounting
Standards Board decided when they left it optional, as to
whether or not to either expense options or to show them as a
footnote--just to disclose them without actually expensing
them? Because if the Senator does not, I would like to read
what the Financial Accounting Standards Board said about the
pressure they were put under, the horrendous, horrific pressure
they were put under, and how they could have, indeed, been put
out of existence if they went forward with what they believed
was right, which is what Warren Buffett says.
If the Senator does not remember those words, I wonder if
he might yield to me to read them, without losing his right to
the floor.
Mr. McCain. Yes.
Mr. Levin. This is what the Financial Accounting Standards
Board said. They had proposed that stock options be expensed.
That was their proposal. This is the board of accountants.
The debate on accounting for stock-based compensation,
unfortunately, became so divisive that it threatened the
Board's future working relationship with some of its
constituents. Eventually the nature of the debate threatened
the future of accounting standards setting in the private
sector. The Board continues to believe that financial
statements would be more relevant and representationally
faithful if the estimated fair value of employee stock options
was included in determining an entity's net income, just as all
other forms of compensation are included. To do so would be
consistent with accounting for the cost of all other goods and
services received as consideration for equity instruments.
However, in December 1994, the Board decided that the extent of
improvement in financial reporting that was envisioned when
this project was added to its technical agenda and when the
Exposure Draft was issued was not attainable because the
deliberate, logical consideration of issues that usually leads
to improvement in financial reporting was no longer present.
That is the climate that was created for this Board in
1994. And when the accountants, the Board, the Financial
Accounting Standards Board of this country, said they have
value, these options, they are compensation, they should be
accounted for in the financial statement, they were hit upon so
hard that even when they said we are throwing in the towel
because it could destroy us, even when they said we will allow
it to be shown as a footnote, not required to be taken as an
expense--even then, they said this is not the right way to
proceed.
We are now creating--I should ask a question, I think,
given the request I made.
Does the Senator not agree that ideally what we should be
allowing here is an independent Financial Accounting Standards
Board to determine the rules?
Mr. McCain. I could not agree more with the Senator from
Michigan. I think he knows how strongly I believe that options
should be expensed because they are compensation and they have
value and there is no other form of compensation that is not
expensed. It is a stealthy form of compensation and has driven
the excesses of the 1990s. These options have driven the
deceptions that make these financial statements for
corporations look better than those corporations' situations
really are because they have created so much value in those
options that then executives--mainly executives--were able to
cash in on these options and make tens of millions of dollars
based on financial accounting which was deceptive.
Would the Senator agree with that and agree that ideally
these standards should be set by an independent financial
accounting standards board?
Mr. McCain. I say to my friend from Michigan, first of all,
it was the Senator from Michigan who first initiated discussion
with me on this issue several years ago. We were treated as
virtual pariahs for having the audacity to challenge what was
then, as we now know, a high-tech bubble in the way stock
options were being disbursed.
By the way, let's do away with the myth that these stock
options are for the average worker. The fact is the
overwhelming majority of the stock options have gone to the
chief executives. That is just a matter of record and fact.
But I think the Senator is correct. I think the Senator has
also an additional, I think important, corollary to this
amendment, that we could have certain direction from FASB, as
it is known. But I think it is also a clear-cut, black-and-
white issue as to how stock options should be treated.
I would be glad to agree with the Senator from Michigan
that some of these aspects of it can be better handled by the
experts.
Finally, the Senator from Nevada and the Senator from
Maryland are in the Chamber. I hope they will reconsider and
allow a vote postcloture at some time on this important
amendment. I do not see how you can possibly go to the American
people and say: Look, we have discussed and debated all these
issues, but we wouldn't allow a vote on the issue of stock
options.
There is no observer who does not believe that the issue of
stock options is one of significant importance in this entire
scenario of returning trust and transparency so we can regain
the confidence of the American investor.
Again, I assure my friends, we will have a vote on this
issue at some time, whether it be now on this bill or whether
it be the next bill or the bill after that. So I hope my
colleague from Nevada and my colleague from Maryland will allow
an up-or-down vote on this amendment.
Mr. Levin. Will the Senator yield for one last question?
Mr. McCain. I am glad to.
Mr. Levin. Assuming cloture is invoked, there is still,
does my friend agree, the possibility at least of voting on
germane amendments relating to this subject? So the amendment
which is germane postcloture does not state what the Senator
from Arizona and I believe, which is that unless we deal with
this, we are missing a huge problem, we are not addressing a
huge problem that has driven the situation that we now face in
terms of deceptive financial statements. But, in any event,
will the Senator from Arizona agree that at least postcloture,
if an amendment is germane which says it is determined that
FASB or an independent accounting board reviewed this matter,
that at least there could be a vote at that time on something
which carries out the spirit of what the Senator from Arizona
and I have been fighting for, which is that an independent
accounting board be allowed to proceed without threatening its
very existence to determine what is the proper accounting for
stock options?
Mr. McCain. I apologize to my colleagues for taking as much
time as I have on this subject. As I said, I believe it is one
of transcending importance in the minds of average American
citizens. Yes. I would support the Senator's amendment
postcloture. But I would also have to add that it doesn't
address the issue completely. Here is why.
The Senator from Michigan just talked about how these
boards have been intimidated and bullied into backing off of a
position they had before. I can't have the confidence that any
board that is subject to the kind of intimidation and bullying
that has happened in the past would properly carry out what is
a pretty simple operation.
I understand the Senator's point. I will support his
amendment postcloture. I think it is an important one. But
there has to be a clear signal sent. That clear signal is this:
As Mr. Buffett says, if it isn't compensation, what is it? If
options are not a form of compensation, what are they? If
compensation is not an expense, what is it? If expenses
shouldn't go into the calculation of earnings, where in the
world should they go? This answers Mr. Buffett's question. We
know where it should go--as an expense.
Again, I am not trying to do away with stock options but
how it is treated so the American people can restore their
confidence.
Mr. Levin. Will the Senator yield for a couple of questions
which his comments have raised?
Mr. Sarbanes. Will the Senator yield? The Senator directed
a question.
The Presiding Officer. The Senator from Arizona has the
floor.
Mr. McCain. I would be glad to yield to the Senator from
Maryland for a comment without yielding my right to the floor.
Mr. Sarbanes. I wanted to respond at this point because the
Senator just directed a question. We are not trying to prevent
a vote on your amendment. We have been trying repeatedly to get
votes on these amendments. Senator Edwards has had an amendment
pending in here for now more than a day. We can't get a vote on
it. Senator Levin has had an amendment pending. We have a list
of people who want to offer amendments. We have been trying to
work through these amendments. Now the Senator has come with
his amendment. There are a lot of amendments around here on
which people are trying to get votes. I think they are entitled
to those votes.
I know you have a problem. But I take some umbrage as sort
of having it placed on my shoulders. In fact, I think that is
totally inaccurate, and I just want to make sure I put that on
the record.
Mr. McCain. Thank you.
I ask unanimous consent that the McCain amendment be
allowed postcloture.
Mr. Reid. Objection.
Mr. McCain. So you see.
Mr. Sarbanes. No. That doesn't approve anything. The
Senator wants his amendment----
Mr. McCain. I have the floor.
Mr. Sarbanes. And denies everybody else.
The Presiding Officer. The Senator from Arizona has the
floor.
Mr. McCain. I thank the Chair.
I think I have made my point.
Mr. Sarbanes. No. You haven't made your point.
The Presiding Officer. The Senator from Arizona has the
floor.
Mr. McCain. I would like to respond to the question of the
Senator from Michigan, if he would like.
Mr. Sarbanes. Will the Senator yield?
Mr. McCain. I would be glad to yield, if the Senator from
Michigan would be glad to yield.
Mr. Sarbanes. It is a very clever trick, but you haven't
made your point. There are other Members here with amendments
that are very important to them which they are trying to have
considered. We have been trying to process those amendments in
an orderly way. The Senator arrives on the scene and apparently
thinks, well, there should be a special set of rules for the
Senator to do his amendment. So he just now tried to jump ahead
of other people, and a reasonable objection was made. And I
think it ought to have been made. The Senator from Arizona
comes in, and, all of a sudden, there is going to be a special
set of rules to deal with his amendment. The Senator doesn't
even recognize what is in the bill, which does try to address
to some extent this problem with independent funding and FASB
that this legislation provides for--which everyone agrees is
long overdue and is an important contribution.
But we have these people lined up here who want to do
amendments. We have the Edwards amendment, we have the Levin
amendment, and we have a whole list of people with amendments.
We have been trying to process those amendments, and we have
not been able to do it.
As one who is down here trying to work overtime to get
these amendments processed, I want to very strongly register
that point.
Mr. Reid addressed the Chair.
The Presiding Officer. The Senator from Arizona has the
floor.
Mr. McCain. I still have the floor. I thank the Senator
from Maryland. I appreciate his hard work managing the
legislation. I have managed bills in my time. I know that
sometimes it gets very frustrating and difficult.
I have some suggestions. One is that the Senator oppose
cloture so that we can address all of these issues and prevail
on his colleagues to do so so that we can have relevant
amendments considered.
I also think--it is not just in this Senator's view but in
the view of almost everyone, in the view of Alan Greenspan, in
the view of Warren Buffett, in the view of the Washington Post
and the New York Times, and everybody--that this is a serious
and vital issue.
So my suggestion is that we not have a cloture vote, and
that we go ahead and take up the amendments in an orderly
fashion. The Senator from Nevada, obviously, will not allow my
amendment to be considered postcloture.
The Senator from Michigan has a question. Would the Senator
from Nevada, the distinguished whip, like to wait until the
Senator from Michigan is finished, or would you like to go
ahead?
Mr. Levin. My question was actually touched upon by the
Senator from Arizona relative to the independence of the
Financial Accounting Standards Board, and as to whether or not
the Senator was aware--at least now in this bill--that we have
the source of financing for that board which hopefully will not
only allow it to reach its own conclusion, as it did once
before, that options have value and should be expensed but also
that it carry through with it without threatening their own
survival.
I think that is an important part of this. But at least
that gives us hope this time that when the Financial Accounting
Standards Board reviews this matter--if it does--it will reach
a conclusion not only that it believes it, but it can then
implement it through an accounting standard.
That was my question about that funding source in this
bill.
Mr. McCain. I would like to respond. I understand that. I
did know it is part of the bill. I also know what has happened
in the past. The fact is that we have not made the changes
which are necessary because of enormous pressures that have
been brought to bear.
The Senate should be on record on this issue. This is not a
minor issue. This is not a small item. The Senate should be on
record on this issue, and it apparently will not be at this
time.
I thank my colleagues, though I do think that it is an
important step forward. But I also believe this is something
that we could address in a straightforward fashion.
Mr. Levin. Mr. President, will my colleague yield for 60
seconds so I can make a statement on this subject prior to a
unanimous consent, or an address on a different part of my
amendment?
Mr. McCain. Mr. President, I yield the floor.
The Presiding Officer. The Senator from Michigan.
Mr. Levin. Mr. President, I thank Senator McCain for his
steadfast support of the issue which is critically important.
Unless we address the way stock options are dealt with in
this country--the fact that it is now a free ride, and stealth
compensation which has caused, in large measure, the problems
because accepted accounting practices, as we have seen, are
significantly driven by the option accounting which allows
options to be left off the financial statements as an expense,
and, therefore, cashed in when those books of the company show
great value, which is not reality, but nonetheless drives up
stock prices--I want to say that I agree with the Senator from
Arizona. Unless we address this issue, we are leaving a huge
gap in our reform efforts.
The Presiding Officer. The Senator from Nevada.
Mr. Reid. Mr. President, the Senator from Maryland has
tried now for several days to figure out a way to have
amendments. We have tried to negotiate. We have had those which
have been arbitrated. We have had some cajoling. We have had a
little bit of begging. We have gotten nowhere. But the rules of
the Senate are the rules of the Senate. Therefore, it would be
contrary to my beliefs to have a special set of rules for the
Senator from Arizona, as well intentioned as his amendment may
be.
I have had phone calls. I have had personal visits from at
least 15 Democratic Senators saying they have amendments that
they believe in very strongly. They and their staffs have
worked on some of these amendments for months. They are not
going to be able to offer those amendments.
Mr. Gramm. There are 58 Democratic amendments.
Mr. Reid. So it would be totally unfair to have a
nongermane amendment that would be available for us
postcloture. That is why I object. If I had to do it again, I
would do the same thing.
But let me say this. People can complain--and I have no
problem with their doing so--that we have not been able to go
through the relevant amendments, but this legislation that has
been brought to us by the Banking Committee and has now been
improved upon by the Judiciary Committee's amendment of Senator
Leahy is a very fine piece of legislation.
Let's not lose track of that. This is a very fine vehicle.
Maybe we could do a better job--put some rearview mirrors on
both sides of it, maybe improve the upholstery a little bit,
but the legislation we have that will be voted on and approved
by the Senate is very good.
The Public Company Accounting Reform and Investor
Protection Agent would establish the Public Company Accounting
Oversight Board to set standards for auditing public companies.
It would inspect accounting firms. It would conduct
investigations into possible violations of its rules and impose
a full range of sanctions. It would restrict the nonaudit
services a public accounting firm may provide to its clients
that are public in nature. It would require a public accounting
firm to rotate its lead partner and review partner on audits
after 5 consecutive years of auditing a public company.
It would require chief executive officers and chief
financial officers to certify the accuracy of financial
statements and disclosures. It would require CEOs and CFOs to
relinquish bonuses and other incentive-based compensation and
profit on stock sales in the event of accounting restatements
resulting from fraudulent noncompliance with Securities and
Exchange Commission financial reporting requirements.
It would prohibit directors and executive officers from
trading company stock during blackout periods. It would require
scheduled disclosures of adjustment statements. It would
establish bright-line boundaries to prohibit stock analyst
conflicts of interest.
It would authorize about $300 million more than the
President's budget for the SEC next year to enhance its
investigation and enforcement capabilities.
I will not go through all the details of the amendment that
has been approved by the Senate, offered by Senator Leahy,
making certain things criminal in nature and increasing the
penalties.
This is a fine piece of legislation. But I do say this. The
Senator from Maryland is in the Chamber. I am confident the
Senator from Maryland would agree to a unanimous consent
request that on relevant amendments, determined by the
Parliamentarian, we have a half hour on each one, and as soon
as the half hour is up, vote on them.
I ask the Senator from Maryland, you would agree to that,
wouldn't you?
Mr. Sarbanes. It would be one way of trying to deal with
these amendments and dispose of them. A request of that sort
ought to be carefully considered, certainly.
We have this problem. Members have amendments pending. We
have been trying to move the amendments forward. We have not
been able to do that. I know how frustrated they are. I share
their frustration.
(Mrs. Carnahan assumed the chair.)
Mr. Reid. But in spite of all this, I want the Record to be
spread with the fact that we have a good piece of legislation.
I would like, as I said before, to have some of the fancier
upholstery----
Mr. Sarbanes. If the Senator will yield, it is interesting,
in the debate we just had, until the Senator from Michigan
underscored the fact, it was not pointed out that we provide
independent funding in this legislation for the Financial
Accounting Standards Board, which has the responsibility of
setting these accounting standards.
Their problem in the past has been that they are
voluntarily funded from the industry. They have to go to them
and beg for money in order to carry out their activities. And
if the industry thinks they are going to do a ruling that is
contrary to what they want, then they are not as willing to
support their activity.
We eliminate that in this bill because we have a mandatory
fee that must be paid by all issuers, and the Board will be
funded out of that money. So that, in itself, is a very
important and significant step in establishing the independence
of the Accounting Standards Board.
Mr. Reid. Madam President, I have spoken with the Presiding
Officer and staff on several occasions. Yours is our next
amendment in order. You have been waiting 2 days to have that
amendment offered, a very important amendment. And you are just
one of several. You are fortunate in that you are the next one,
if we can ever get to the next one.
I would ask my friend----
Mr. Gramm. I have the next Republican amendment.
Mr. Reid. We know we have to be burdened with a Republican
amendment once in a while.
I say to my friend, would the Senator consider my proposal
to have relevant amendments debated--and the relevancy would be
determined by the Chair--for a half hour on each one of those
and, at the end of the half hour, have a vote up-or-down on
that amendment?
Mr. Gramm. The Senator is already in a big fight with
Senator McCain. I do not know why he wants to try to pick one
with other people.
Where we are is, we are going to cloture. And there are
rules in the Senate. And postcloture, for an amendment, the
ticket to get into the arena is it has to be germane, which
means it must be directly related to a provision in the bill.
It cannot amend the bill in more than one place. There is a
certain set of rules.
If the Senator would indulge me a second, we have 36
Republicans who want to offer an amendment. My amendment is
next on the list. I am the ranking member of this committee,
and it appears I am not going to get an opportunity to offer an
amendment. Now, I could cry and pout about it, but it would not
change anything and would not change the world either. There
are 58 Democrat amendments.
The point is, we all agree on one thing: Whether you like
this bill or you do not like it, it is an important bill and we
need to get on with it. We need to pass it. We need to go to
conference. We need to work out an agreement with the House and
with the White House. If we sat here and tried to do 36
Republican amendments and 58 Democrat amendments--and some of
them having to do with things such as the Ninth Circuit Court
of Appeals and bankruptcy law--we would literally spend 3 or 4
months. So there is no other alternative than following the
rules of the Senate. And that is exactly what I want to do.
Mr. Reid. Reclaiming the floor, I have always enjoyed the
Texas drawl of my friend, the senior Senator from Texas. But
even through the drawl, I understood that to be a no.
Mr. Gramm. Yes. Yes, it was a no.
Mr. Reid. My friend, the other Senator from Arizona, is on
the floor. We are waiting for the Republican leader. I assume
that will be soon.
I ask my friend from Wyoming, when the Republican leader
does appear, if he would be kind enough to allow us to attempt
to enter into an agreement.
I ask the Senator, if you see him come to the floor, would
you be so kind as to yield the floor for just a short time? It
would be appreciated.
Mr. Enzi. I would be happy to interrupt my remarks at that
time. I would hope my remarks would appear as uninterrupted.
Mr. Reid. I would agree.
VOLUME 148, FRIDAY, JULY 12, 2002, NUMBER 94,
PAGES [S6683-S6685]
Public Company Accounting Reform and Investor Protection Act of 2002
The Acting President pro tempore. Under the previous order,
the Senate will now resume consideration of S. 2673, which the
clerk will report.
The legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
Pending:
Edwards modified amendment No. 4187, to address rules of
professional responsibility for attorneys.
Daschle (for Levin) amendment No. 4269 (to amendment No.
4187), to address procedures for banning certain individuals
from serving as officers or directors of publicly traded
companies, civil money penalties, obtaining financial records,
broadened enforcement authority, and forfeiture of bonuses and
profits.
McCain motion to recommit the bill to the Committee on
Banking, Housing, and Urban Affairs with instructions to report
back forthwith with amendment No. 4270, to require publicly
traded companies to record and treat stock options as expenses
when granted for purposes of their income statements.
Reid (for Edwards) amendment No. 4271 (to the instructions
of the motion to recommit the bill to the Committee on Banking,
Housing, and Urban Affairs), to address rules of professional
responsibility for attorneys.
Reid (for Levin) amendment No. 4272 (to amendment No.
4271), to address procedures for banning certain individuals
from serving as officers or directors of publicly traded
companies, civil money penalties, obtaining financial records,
broadened enforcement authority, and forfeiture of bonuses and
profits.
The Acting President pro tempore. Under the previous order,
the time until 9:30 a.m. shall be equally divided between the
two managers for debate only. Who yields time?
The Senator from Maryland.
Mr. Sarbanes. Madam President, I understand there will be
about 5 minutes allotted each manager now. Is that correct?
The Acting President pro tempore. The Senator is correct.
Mr. Sarbanes. Madam President, very shortly we will be
voting on a cloture petition with respect to this legislation,
S. 2673. I urge my colleagues to vote for the cloture motion.
I know there are a lot of amendments pending, but we have
now been on this legislation a full week. Even with the voting
of cloture today, this matter will carry over into next week.
There have been a range of amendments, some that are pending
that are germane under cloture to the bill. In other words,
they have been drawn in a way and the subject matter is focused
and limited enough that they remain germane even after cloture.
There are a number of amendments that are relevant to the
bill but not germane. Once cloture is invoked, they will fall.
I know that is a matter of some concern to those who are
proposing those amendments, but I do not know how we can handle
this differently and move along towards a resolution.
In addition to those relevant amendments--and I have
sympathy there because while they may not meet the very narrow
definition of germaneness, they do touch the subject matter of
the legislation--there are also amendments that are not even
relevant to the bill that are sort of--I was going to say
floating around, but it would be more accurate to say they are
sort of present. They touch matters that have nothing to do
with this legislation.
I am frank to say to my colleagues, I do not see how we can
progress and move towards a final vote and resolution on this
issue without invoking cloture this morning. We tried not to
precipitate that early on, although I know people were then
blocked from getting votes, and I regret that. I was concerned,
as anyone, to get the votes and give people a chance to have
their amendments considered. Nevertheless, we are now where we
are, and I urge my colleagues to vote for cloture.
We have to move forward on this legislation. This is
important legislation. I think the committee and my colleagues
have fashioned legislation which will make a very important
contribution toward addressing the serious economic challenge
now confronting the country and this loss of confidence in the
workings of our economic system. The fact that people cannot
have any trust in or reliance on the basic financial
information upon which they make important economic decisions
is having a major impact on the workings of the economy and
carries with it the very real potential of having an even more
significant impact.
This is serious business, and the potential for an economic
downturn, triggered in part by the difficulties we are trying
to address in this legislation, I think is not insignificant.
So I think it is important that we move forward and pass this
legislation. This is but one step along the way, and there are
many steps left yet to be done.
I am hopeful at some point the administration will come to
see the necessity of putting into place a statutory framework
to provide for an independent oversight board with respect to
the accounting industry, to address the conflict that exists on
the part of auditors when they are the auditor of a company and
at the same time are providing certain consulting services to
the company which carry with them an inherent conflict of
interest with their responsibilities as an auditor.
There are extensive provisions in this bill with respect to
corporate responsibility and accountability with respect to
corporate disclosure and, of course, with respect to the
conflict of interest we have seen manifest with respect to
stock analysts who are often in the position of giving buy
recommendations on the stock of a company with which the
analyst's company is also having investment banking deals
which, of course, raises the question: Is the recommendation on
the stock being done in order to gain the investment banking
business? So we try to provide some, as they call them, Chinese
walls between those two sides of the company in order to reduce
the degree of that conflict.
Furthermore, this has a very significant authorization of
additional monies for the SEC in order to be able to meet its
responsibilities, which I think is very important. The
President asked the other day in his address for another $100
million. That is not sufficient. We have to do better than that
so the SEC can do its job.
So we can move forward, I urge my colleagues to support the
cloture motion which will be before us for a vote at 9:30.
I presume I have used my time, and I yield the floor so my
colleague, the ranking Republican Member, may use his time.
The Acting President pro tempore. The Senator from Texas.
Mr. Gramm. Madam President, we need to pass a bill. We are
going to conference with a House bill that is substantially
different from this bill. I believe that between the two bills,
we can find a virtually unanimous vote. I think we can write a
bill that will satisfy the President and both Houses of
Congress. I do not think we are making the bill better. The
amendments that are being offered now are largely nongermane.
We have gotten into sort of a one-upmanship position, and I
think we are harming the markets by convincing people that the
cure may very well be worse than the disease.
It is very important that we get on with our business and
that we pass this bill. I intend to vote for it today. I do not
think it is the bill we need in the end, but it gets us to
conference where we can get the bill we need in the end. I urge
my Republican colleagues to vote for it, not because in the end
they are for this version but because they want to do
something. We need to bring this debate to a close. We do have
some germane amendments. We will be dealing with those, but the
time has come to get on about our business. Getting on about
our business means bringing this debate to a close.
So I urge my colleagues to vote to end the debate. Let us
go to conference. Let us write this bill. Let us let it be
known with certainty what our policy is going to be. If we do
that, it will help restore confidence in the country. So I urge
my colleagues to vote for cloture and, as we get to the end of
the process, for the bill.
I yield back the remainder of my time.
The Acting President pro tempore. The Senator from
Michigan.
Mr. Levin. I do not know if the manager has any time.
Mr. Sarbanes. Do I have any time remaining?
The Acting President pro tempore. The manager has no time.
Mr. Levin. Madam President, I ask unanimous consent that I
be allowed to proceed until 9:30 when cloture is invoked.
The Acting President pro tempore. Without objection, it is
so ordered.
Mr. Levin. Madam President, a number of amendments have
been pending where we have been unable to get a vote. These are
highly relevant amendments, including mine which would have
given the SEC administrative powers to impose civil fines.
The Republican manager said the amendments were not
particularly relevant. Well, we had a highly relevant amendment
that goes directly to the issue of abuses by corporate officers
and corporate directors. The current fine structure of the SEC
does not reach officers and does not reach directors, except by
going to court. They have no administrative authority in the
SEC to impose civil fines, the way they do with brokers and the
way a lot of other agencies that regulate business have
authority to do. The SEC does not have the power to impose
administrative fines on directors and on officers of
corporations. They should have that power administratively.
We were blocked in getting a vote, and the amendment which
is pending is going to fall if cloture is invoked. That is the
use of the rules. But let it be clear what the rules were used
to do, which was to prevent a strengthening amendment for this
bill.
It is a good bill. I compliment the sponsors of this bill.
I compliment Senator Sarbanes and his cosponsors that this bill
can be strengthened; it should be strengthened. One of the
strengthening amendments was blocked from getting to a vote
yesterday and will fall if cloture is invoked.
We also have a question. What about postcloture? There are
48 germane or arguably germane amendments. The question is
whether or not the rules are going to be used again to block
votes on germane amendments. I will object to that happening. I
will do everything I can to make sure germane amendments,
including some that I have filed, are considered postcloture.
I thank the manager for yielding. I yield the floor.
cloture motion
The Acting President pro tempore. Under the previous order,
the clerk will report the motion to invoke cloture.
The legislative clerk read as follows:
cloture motion
We, the undersigned Senators, in accordance with the provisions of
rule XXII of the Standing Rules of the Senate, do hereby move to bring
to a close the debate on Calendar No. 442, S. 2673, the Public Company
Accounting Reform and Investor Protection Act of 2002:
Jon Corzine, Deborah Stabenow, Paul Wellstone, Ron Wyden, Daniel
Akaka, Barbara Boxer, Charles Schumer, Byron Dorgan, Harry
Reid, Paul Sarbanes, Daniel Inouye, John Edwards, Barbara
Mikulski, Thomas Carper, Jack Reed, Tim Johnson.
The Acting President pro tempore. By unanimous consent, the
mandatory quorum has been waived.
The question is, Is it the sense of the Senate that debate
on S. 2673, the Public Company Accounting Reform and Investor
Protection Act of 2002, shall be brought to a close? The yeas
and nays are required under the rule. The clerk will call the
roll.
The legislative clerk called the roll.
Mr. Reid. I announce that the Senator from Hawaii (Mr.
Inouye), the Senator from Massachusetts (Mr. Kerry), and the
Senator from Louisiana (Ms. Landrieu) are necessarily absent.
Mr. Nickles. I announce that the Senator from North
Carolina (Mr. Helms), the Senator from Ohio (Mr. Volinovich),
the Senator from Idaho (Mr. Crapo), and the Senator from
Virginia (Mr. Warner) are necessarily absent.
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The yeas and nays resulted--yeas 91, nays 2, as follows:
[Rollcall Vote No. 173 Leg.]
Yeas--91: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Craig, Daschle, Dayton, DeWine,
Dodd, Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold,
Feinstein, Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel,
Harkin, Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Jeffords,
Johnson, Kennedy, Kohl, Kyl, Leahy, Lieberman, Lincoln, Lott, Lugar,
McConnell, Mikulski, Miller, Murkowski, Murray, Nelson (FL), Nelson
(NE), Nickles, Reed, Reid, Roberts, Rockefeller, Santorum, Sarbanes,
Schumer, Sessions, Shelby, Smith (NH), Smith (OR), Snowe, Specter,
Stabenow, Stevens, Thomas, Thompson, Thurmond, Torricelli, Wellstone,
Wyden
Nays--2: Levin, McCain
Not Voting--7: Crapo, Helms, Inouye, Kerry, Landrieu, Voinovich,
Warner
The Presiding Officer (Mr. Carper). On this vote, the yeas
are 91, the nays are 2. Three-fifths of the Senators duly
chosen and sworn having voted in the affirmative, the motion is
agreed to.
The pending motion to recommit is out of order.
Mr. Sarbanes. Mr. President, I move to reconsider the vote.
Mr. Daschle. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. Daschle. Mr. President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Byrd. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
The Senate is not in order. The Senate will be in order.
The Senate is not in order.
The Senator from West Virginia.
Mr. Byrd. Mr. President, we can have order in the Senate
with Senators in their seats. At least they do not need to be
cluttering up the well. I want to say a few words.
The Presiding Officer. The Senate will be in order. The
Senator will suspend.
Mr. Gramm addressed the Chair.
The Presiding Officer. The Senator from West Virginia has
the floor.
Mr. Byrd. I have the floor.
The Presiding Officer. The Senator from West Virginia.
VOLUME 148, FRIDAY, JULY 12, 2002, NUMBER 94,
PAGES [S6687-S8700]
Public Company Accounting and Investor Protection Act of 2002--
Continued
Mr. Reid. Mr. President, will the Chair inform us what the
matter before the Senate now is?
The Presiding Officer. The Daschle second-degree amendment
to the Edwards first-degree amendment.
Mr. Reid. That is Daschle for Levin; is that not right?
The Presiding Officer. That is correct.
The Senator from Nevada.
Mr. Ensign. Mr. President, I raise a point of order that
the pending second-degree amendment is not germane to the bill
postcloture.
The Presiding Officer. The point of order is well taken.
The amendment falls.
The deputy majority leader.
amendment no. 4286, as modified, to amendment no. 4187
Mr. Reid. I call up amendment No. 4286, and I ask unanimous
consent that Carnahan amendment No. 4286 be modified with the
change at the desk.
The Presiding Officer. Without objection, it is so ordered.
The clerk will report.
The legislative clerk read as follows:
The Senator from Nevada [Mr. Reid], for Mrs. Carnahan, for
herself, Mr. Dodd, Mr. Durbin, Mr. Levin, Mr. Harkin, and Mr.
Corzine, proposes an amendment numbered 4286, as modified, to
amendment No. 4187.
Mr. Reid. Mr. President, I ask unanimous consent that the
reading of the amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To require timely and public disclosure of transactions
involving management and principal stockholders)
At the end of the amendment, insert the following:
(b) Electronic Filing.--Notwithstanding the provisions of section
403 of this Act, section 16(a)(2) of the Securities and Exchange Act of
1934, as added by section 403, is amended to read as follows:
``(2) if there has been a change in such ownership, or if such
person shall have purchased or sold a security-based swap agreement (as
defined in section 206B of the Gramm-Leach-Bliley Act) involving such
equity security, shall file electronically with the Commission (and if
such security is registered on a national securities exchange, shall
also file with the exchange), a statement before the end of the second
business day following the day on which the subject transaction has
been executed, or at such other times as the Commission shall
establish, by rule, in any case in which the Commission determines that
such 2 day period is not feasible, and the Commission shall provide
that statement on a publicly accessible Internet site not later than
the end of the business day following that filing, and the issuer (if
the issuer maintains a corporate website) shall provide that statement
on that corporate website not later than the end of the business day
following that filing (the requirements of this paragraph with respect
to electronic filing and providing the statement on a corporate website
shall take effect 1 year after the date of enactment of this
paragraph), indicating ownership by that person at the date of filing,
any such changes in such ownership, and such purchases and sales of the
security-based swap agreements as have occurred since the most recent
such filing under this paragraph.''.
The Presiding Officer. The Senator from Missouri.
Mrs. Carnahan. Mr. President, I am offering this amendment
on behalf of myself and Senators Dodd, Dubbin, Levin, Harkin,
and Corzine.
The Senate is engaged in an important debate about how to
improve our Nation's financial system. Today I am offering an
amendment that is intended to provide more timely information
to average investors. America has the most vibrant and dynamic
economy in the world. Our robust and resilient capital markets
are the foundation of our economy. But the success of those
markets depends on the free flow of accurate, reliable
information.
Recent disclosures about the inaccuracy of some companies'
financial reports have shaken that confidence. I am pleased the
Senate has acted quickly to take up this important reform
legislation. I believe that this bill makes tremendous progress
in improving the quality of information available to the
markets. In the interest of further improvement, I am offering
an amendment to modernize the method of disclosure required
when insiders trade in their own companies' stock.
One warning sign that a company may be in trouble is when
its executives are selling large amounts of company stock, as
occurred at Enron. I have learned, however, that information
about insider selling is not easily accessible.
Under our current system a company's officers are required
to file a disclosure form with the Securities and Exchange
Commission, SEC, any time they sell securities of their
company. Tens of thousands of these forms are filed annually.
These are not complicated forms. I have a copy here. It is a
simple 2-page form.
The Office of Management and Budget estimates that the form
should not take more than 30 minutes to fill out. With capital
markets as sophisticated as they are in the U.S., information
must be available quickly to be useful. However, insiders
currently have up to six weeks to file their disclosure forms.
And the overwhelming majority of these forms--95 percent--are
filed on paper, rather than electronically.
The Banking Committee has already addressed the issue of
timely disclosure. This legislation would require disclosure of
sales within 2 days, a vast improvement over the current
deadlines. However, this legislation is silent on the issue of
modernizing this arcane paper filing system.
Right now, there is no way for an investor in Missouri to
quickly learn that a company executive is selling off company
stock. The only ways to get the information are to go to a
reading room at the SEC in Washington, or to write a letter to
the SEC. These written requests may take weeks to process. This
is unacceptable in the electronic age.
My amendment requires that information about insider sales
of publicly traded companies be filed electronically. The SEC
would then be required to make the forms available to the
public over the Internet. Any company that maintains a
corporate Web site would be required to post these disclosure
forms on the Web site. The SEC, itself, has acknowledged the
value of having these forms filed electronically.
I have here a letter from SEC Chairman, Harvey Pitt. He
wrote to me that ``expedited disclosure of trading by company
insiders is imperative.'' In fact, he applauded the legislation
I introduced earlier this year that requires electronic
disclosure.
I ask unanimous consent that a copy of this letter be
printed in the Record.
There being no objection, the letter was ordered to be
printed in the Record, as follows:
U.S. Securities and Exchange Commission,
Washington, DC, March 1, 2002.
Hon. Jean Carnahan,
U.S. Senate, Hart Office Building,
Washington, DC.
Dear Senator Carnahan: Thank you for your February 14th letter
regarding S. 1897, the Fully Informed Investor Act which you recently
introduced. I share your concerns about the issues regarding reporting
of insiders' securities transactions that your bill addresses. As we
announced on February 13th, the Commission will shortly propose rules
that would provide accelerated reporting by companies of insider
transactions in public company securities. This is an integral part of
our effort to supplement the periodic disclosure system with ``current
disclosure'' in order to put information investors want and need into
their hands more promptly.
I also share the view reflected in your bill that expedited
electronic disclosure of trading by company insiders is imperative, and
I applaud your initiative. As you know, the Securities Exchange Act of
1934, rather than rules adopted by the Commission, sets the deadlines
for officers, directors and beneficial owners of ten percent of a class
of equity securities of a public company to report their trading in
those securities. A legislative solution, therefore, will be necessary
to address fully the issue of investors' timely access to information
about insiders' securities transactions.
While formal Commission comment on legislation is normally reserved
for testimony or a response to a request from a committee or
subcommittee given jurisdiction over the bill, we would welcome the
opportunity to provide you with technical assistance on your bill if
you would find that helpful. I have asked Casey Carter, the Director of
our Office of Legislative Affairs, to contact your staff to see if you
would like our assistance. Please feel free to call me or to have your
staff call Ms. Carter at (202) 942-0019 if you have any questions.
Yours truly,
Harvey L. Pitt.
Mrs. Carnahan. This is not a new idea. In fact, more than 2
years ago, in April 2000, the SEC published a rulemaking for
its electronic data system. In that rulemaking, the SEC
indicated that it ``anticipated'' making insiders file
disclosure forms electronically. I applaud the SEC for
recognizing the need to modernize, but I am frustrated by the
delay. It has been over 2 years since the SEC made this
proposal.
An agency that is responsible for monitoring markets where
trillions of dollars are electronically exchanged ought to be
able to develop a fairly simple electronic database to make
this information available.
The Senate now has the opportunity to require the SEC to
move quickly. I am very pleased that the bill I introduced
earlier this year on this subject was included in the House
accounting reform bill. The House has required that insiders
file electronically, within one day of their transactions. The
House has also required that corporations disclose insider
sales on their corporate Web sites.
I encourage my colleagues to support my amendment. We
should not make investors wait any longer for these basic
reforms.
I yield the floor.
The Presiding Officer. The Senator from North Dakota.
Mr. Dorgan. Mr. President, I have an amendment at the desk.
Mr. Dodd. Mr. President, I ask to be heard on the Carnahan
amendment very briefly. Does the Senator mind?
Mr. Dorgan. How briefly?
Mr. Dodd. Two minutes or so.
Mr. Dorgan. I am happy to yield to the Senator from
Connecticut, provided that I am recognized following his
presentation.
Mr. Dodd. I appreciate that.
The Presiding Officer. The Senator from Connecticut.
Mr. Dodd. Mr. President, I commend my colleague from
Missouri for this very fine amendment. I think it is going to
make a strong difference by improving electronic reporting. It
doesn't get the kind of attention it should.
This is a positive and constructive suggestion. I am a
cosponsor of the amendment and commend the distinguished
Senator from Missouri for offering the amendment. It makes the
bill stronger. It is something all our colleagues will be
willing to support. I commend the Senator for her work.
AMENDMENT NO. 4215, AS MODIFIED
Mr. Dorgan. Mr. President, I have an amendment numbered
4215 at the desk. I have submitted a modification of that
amendment which I believe has been reviewed by both sides. I
ask for its immediate consideration and I ask unanimous consent
that the amendment be modified.
The Presiding Officer. Is there objection to laying aside
the pending amendment of the Senator from Missouri?
Mr. Sarbanes. Will the Senator yield?
Mr. Dorgan. I am happy to yield.
Mr. Sarbanes. Is this the amendment that deals with the
offshore companies?
Mr. Dorgan. Yes.
Mr. Sarbanes. I have no objection to setting aside the
pending amendments in order to consider this amendment. I
understand upon the conclusion of the consideration of this
amendment we will revert to the Edwards-Carnahan amendment
Mr. Schumer. Reserving the right to object, I believe I
have two amendments that have been cleared by both sides. I
would like to offer them immediately after the Senator from
North Dakota.
Mr. Sarbanes. We are hoping to get to the Senator from New
York. I make a unanimous consent request that following the
disposition of the amendment of the Senator from North Dakota,
we turn to the amendments referred to by the Senator from New
York.
Mr. Ensign. Provided that no second-degree amendments are
in order to any of the three amendments.
Mr. Sarbanes. Furthermore, upon conclusion of the
consideration of the Schumer amendments, we return to the
regular order, which I take it would be the Edwards-Carnahan
amendment.
Mr. Reid. Reserving the right to object, Senator Schumer
has a number of amendments on the list. I think we better get
numbers of those amendments before there is an agreement they
be next in order.
Mr. Sarbanes. Let us withdraw the unanimous consent request
and make it only that Senator Schumer be recognized after the
disposition of the Dorgan amendment and we can address those
questions.
The Presiding Officer. Is there objection?
Mr. Ensign. Reserving the right to object, just to make
sure we have this clarified, the unanimous consent request is
just to the Dorgan amendment pending, and we would not object
as long as the second-degree amendment is not in order to his
amendment.
The Presiding Officer. Without objection, it is so ordered.
The Senator from North Dakota.
Mr. Dorgan. Mr. President, first of all I will offer an
amendment that I believe will be accepted. I understand the
process is that those who have amendments that will be accepted
will be allowed to offer them and those whose amendments are
not approved by both sides will not be allowed to offer them.
In my judgment, this is not the kind of procedure we ought to
use when considering this legislation. But I understand the
Senator from Texas indicated he will object to setting aside or
laying aside an amendment for the purpose of offering another
first-degree amendment unless he agrees with the amendment. I
will talk a little bit more about that in a couple of minutes.
I had asked unanimous consent my amendment be modified. Was
the consent agreed?
The Presiding Officer. It was agreed to.
Mr. Dorgan. Is amendment No. 4215 called up at this point?
The Presiding Officer. The pending amendment is set aside
and the clerk will report.
The legislative clerk read as follows:
The Senator from North Dakota [Mr. Dorgan], for himself and
Mr. Graham of Florida, proposes an amendment numbered 4215, as
modified.
Mr. Dorgan. I ask unanimous consent reading of the
amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To clarify that the requirement that certain officers certify
financial reports applies to domestic and foreign issuers)
On page 82, after line 24, insert the following:
(c) Foreign Reincorporations Have No Effect.--Nothing in this
section 302 shall be interpreted or applied in any way to allow any
issuer to lessen the legal force of the statement required under this
section 302, by an issuer having reincorporated or having engaged in
any other transaction that resulted in the transfer of the corporate
domicile or offices of the issuer from inside the United States to
outside of the United States.
Mr. Dorgan. Let me describe what this amendment is briefly.
There was a Wall Street Journal article on July 8 this week
titled: ``Offshore-based Firm's Officials Won't Have to Swear
to Results.''
The Securities and Exchange Commission's new order
requiring chief executives and chief financial officers of the
Nation's biggest companies to swear to the accuracy of their
financial results was intended to restore investors' battered
confidence. But two of the companies that have promised the
biggest concerns don't have to comply.
Why? Because Tyco International Ltd. and Global Crossing
Ltd. are based in Bermuda, even though they conduct many of
their operations and have main office in the United States and
are listed on the U.S. stock exchanges.
Securities and Exchange Commission spokesmen said large
foreign-domiciled companies over which the SEC has
jurisdiction, such as and Global Crossing and Tyco, were
excluded from the list because the agency wanted to issue the
order ``very quickly.'' Therefore it focused only on U.S.
companies.
So the Securities and Exchange Commission says that the
chief executives and chief financial officers of some of the
biggest companies must swear to the accuracy of their financial
results. But in recent times, we have had U.S. corporations
decide that they want to renounce their American citizenship
and they want to become citizens, for example, of Bermuda. That
is called a corporate inversion. They have essentially
renounced their American citizenship, saying we are now
corporate citizens of another country.
Guess what? Under the SEC order, they are rewarded for
leaving the United States, in that their chief executives no
longer have to certify financial results. The SEC says: We had
to get this done quickly, and we don't expect to change it at
this point.
Why does a company renounce its U.S. citizenship? They do
it because they don't want to pay U.S. taxes. Very simple. If
they can become a citizen of another country and renounce their
U.S. citizenship, they can save substantial money on their U.S.
tax bill.
At a time when we are at war with terrorists, is that a
patriotic thing to do? No, I don't think so. I hope the Senate,
and I certainly encourage my colleagues to do this, will shut
that door tight and stop these corporate inversions. Stop these
corporations from creating a sham of renouncing their U.S.
citizenship in order to avoid paying U.S. taxes.
It might be interesting to ask companies such as Tyco: If
you get yourself in trouble someplace around the world, who are
you going to call? The Bermuda navy? The Bermuda army? The
Bermuda marines? You want the full protection of the U.S.
Government and the U.S. military and all the benefits that
being a U.S. citizen brings along. But then you want to
renounce your citizenship and move to Bermuda, in a technical
sense, while keeping your offices in the United States and
saving big money on taxes. And then, under the SEC order, you
don't even have to have your chief executive officers certify
the financial results of the corporation.
That is a shame. The SEC should know better. What could
they have been thinking? I have accused them of sleeping, but
this is not sleeping; this is making really dumb decisions.
I have discussed my concern with the staff of the Banking
Committee. They believe that their bill implicitly addresses
the reincorporation problem. But Senator Graham of Florida and
I said we are not satisfied with ``implicitly'' being covered.
We want the issue addressed explicitly.
Let me also say, the technical people smile when I talk
about this, but, frankly, it took a day and a half for us to
evaluate whether it was implicitly covered in the bill. So
because of that, I think it is important to have an explicit
provision in this bill that says those companies involved in
inversions that renounce their citizenship, they, too, will be
required to certify their results. Their chief executive
officers and their CFOs will be required to certify their
results.
In a moment I will conclude and ask that this amendment be
attached to the bill. As I do that, I ask for the attention of
the Senator from Maryland and the manager on the other side to
say that I have another amendment that I will offer. I
understand, based on your process, you don't want it offered
now. Let me describe it briefly.
The other amendment deals with the issue of what is called
disgorgement of profits.
The top executives of these corporations make bonuses,
commissions, and a substantial amount of compensation--some of
them hundreds of millions of dollars. Then they issue a
restatement of earnings and everything collapses. But they keep
their profits and they keep their commissions and they keep
their bonuses.
This legislation says you can't do that. When you restate,
and just prior to restatement you have made all these bonuses,
you have to disgorge this money. It is a $2 word, but I think
everybody understands what it means.
The thing that is missing in this bill is that disgorgement
should be required in cases of bankruptcy as well. So I have an
amendment that will say: Yes, disgorgement in this bill with
respect to periods prior to restatement, but also disgorgement
for the 12 months prior to the filing of bankruptcy by a
corporation as well.
A fair number of people have had a lot to say about this.
Former SEC Chairman, Richard Breeden, who was the Chairman of
the SEC under President H.W. Bush from 1989 to 1993, said:
We should consider disgorgement to the company of any net
proceeds of stock sales or option exercises within a 6-month or
a 1-year period prior to a bankruptcy filing.
So he feels that way.
Goldman Sachs CEO Henry Paulson has also spoken in favor of
this idea.
This bill will be incomplete if it does not include
disgorgement in the period prior to bankruptcy. Those making a
fortune, getting bonuses and commissions of tens of millions,
yes hundreds of millions, as their companies are headed to
bankruptcy--that is unfair. We need to do something about this.
I will not ask consent at the moment because I want to get
my first amendment approved, but I will, following some
discussions, either this morning or else on Monday, ask consent
to set aside the second-degree amendment so we can consider, in
first-degree, this issue. My hope is we would have a 100-to-0
vote on this matter because, failing that, this bill will be
incomplete.
This bill is a great bill. I have credited Senator Sarbanes
and others at length. This is a wonderful piece of legislation
that I fully support. It can be and will be improved by my
amendments and by the amendments of Senator Schumer and others.
Let's complete this amendment process.
Let me just say one last thing, if I might.
I know it has taken the patience of Job to try to manage
this bill on the floor of the Senate. I understand all the
difficulties that Senator Sarbanes and Senator Reid and many
others have had these recent days because I have been here
every day when this bill has been on the floor. My
aggressiveness in trying to get these amendments considered has
nothing at all to do with the wonderful stewardship of the
chairman. I am very proud of the result he brings to the floor,
and I believe both of my amendments will improve it. I hope I
can work with him from now until Monday afternoon to have the
bankruptcy amendment included in this legislation.
Mr. Sarbanes. Will the Senator yield for just a moment?
Mr. Dorgan. I will be happy to yield.
Mr. Sarbanes. Madam President, I simply want to say I think
the subject matter with which the Senator's other amendment,
that he just referred to, deals is a very important subject,
and I think his observations are very much on point. Working
with the other side, we are trying to work through the
amendment. We are in the process of trying to do that. Of
course, we will be continuing to talk with the Senator, and I
hope we can resolve it. It would be very helpful. I appreciate
his kind words.
Mr. Dorgan. I thank the Senator from Maryland. I ask my
amendment be considered at this point and be voted upon.
The Presiding Officer. Is there further debate on the
amendment? If not, the question is on agreeing to amendment No.
4215, as modified.
The amendment, (No. 4215), as modified, was agreed to.
Mr. Sarbanes. I move to lay the motion to reconsider on the
table.
The motion to lay on the table was agreed to.
The Presiding Officer (Mrs. Clinton). The Senator from New
York.
AMENDMENT NO. 4295
Mr. Schumer. I ask unanimous consent the Carnahan amendment
be laid aside, and I send an amendment to the desk which we
have talked about.
Mr. Sarbanes. Will the Senator describe the amendment?
Mr. Schumer. Yes. This amendment is the amendment that
enhances the conflict of interest provisions by prohibiting
personal loans by issuers to chief officers of the issuer. It
has been agreed to by both sides.
Mr. Sarbanes. I ask unanimous consent no second-degree
amendment to the Schumer amendment, when it is sent to the
desk, be in order.
The Presiding Officer. Without objection, it is so ordered.
Is there objection to laying aside the pending amendment
for purposes of ending up a new amendment? Without objection,
it is so ordered. The clerk will report.
The assistant legislative clerk read as follows:
The Senator from New York (Mr. Schumer) proposes an
amendment No. 4295.
Mr. Schumer. I ask unanimous consent the reading of the
amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To enhance conflict of interest provisions by prohibiting
personal loans by issuers to chief officers of the issue)
On page 91, strike line 19 and all that follows through
page 93, line 22 and insert the following:
SEC. 402. ENHANCED CONFLICT OF INTEREST PROVISIONS.
(a) Prohibition on Personal Loans to Executives.--Section
13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as
amended by this Act, is amended by adding at the end the
following:
``(k) Prohibition on Personal Loans to Executives.--
``(1) In General.--It shall be unlawful for any issuer,
directly or indirectly, to extend or maintain credit, or
arrange for the extension of credit, in the form of personal
loan to or for any director or executive officer (or equivalent
thereof) of that issuer.
``(2) Limitation.--Paragraph (1) does not preclude any home
improvement and manufactured home loans (as that term is
defined in Section 5 of the Home Owners Loan Act, consumer
credit (as defined in section 103 of the truth in lending act),
or any extension of credit under an open end credit plan (as
defined in section 103 of the Truth in Lending Act (15 U.S.C.
1602)), that is----
``(A) made in the ordinary course of the consumer credit
business of such issuer;
``(B) of a type that is generally made available by such
issuer to the public; and
``(C) made by such issue on market terms, or terms that are
no more favorable than those offered by the issuer to the
general public for such loans.''.
Mr. Schumer. Madam President, I also ask unanimous consent
that Senator Feinstein be added as a cosponsor of this
amendment.
The Presiding Officer. Without objection, it is so ordered.
Mr. Schumer. Madam President, I am going to be very brief
because I know we do not have too much time and we have other
business. I thank both the majority and minority managers,
Senator Sarbanes and Senator Gramm, for their work on this
amendment. I have also spoken to the people in the White House
who were supportive of this amendment. It is a very simple
amendment. It basically says that with certain narrow
exceptions, CEOs and CFOs of companies will not be able to get
loans from those companies.
In his speech before Wall Street yesterday, President Bush
forcefully stated: ``. . . I challenge compensation committees
to put an end to all company loans to corporate officers.''
I couldn't agree more. It seems like we didn't learn our
lessons during the S&L crisis in the 1980's? These same kinds
of transactions were used then to ``cook the books'' and our
Nation's economy and financial institutions paid the price for
it. Once again, history repeats itself.
My amendment is very simple: it makes it unlawful for any
publicly traded company to make loans to its executive
officers. Let me give a few examples as to why we should do
this.
Executives of major corporations, including Enron,
WorldCom, and Adelphia, collectively received more than $5
billion in company funds in the form of personal loans. For
example, Bernard Ebbers, CEO of WorldCom, borrowed a mind-
boggling $408 million from the corporation over several years,
while receiving a compensation package valued at over $10
million annually, all the while the company was facing massive
losses. In the case of Adelphia, the Rigas Family received
loans and other financial benefits totaling a staggering $3.1
billion, while that company has also reported huge financial
losses.
The question is: Why can't these super rich corporate
executives go to the corner bank, the Suntrust's or Bank of
America's, like everyone else to take loans?
In the case of WorldCom, Ebbers had funded his personal
stock market activities by borrowing on margin. When the value
of those investments plunged, Ebbers had to pay up. How did he
do it? He borrowed money from his board of directors to pay for
the stock he had bought that was now being called in.
This is just wrong, and it must be stopped.
I urge the amendment be agreed to.
The Presiding Officer. Is there further debate on the
amendment? If not, the question is on agreeing to the
amendment.
The amendment (No. 4295) was agreed to.
Mr. Sarbanes. I move to reconsider the vote.
Mr. Craig. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
AMENDMENT NO. 4296
Mr. Schumer. I have a second amendment that has also been
agreed to, so I ask, again, the Carnahan amendment be laid
aside, and I send the amendment to the desk and ask for its
consideration. I ask unanimous consent Senator Shelby be added
as a cosponsor on this amendment on the SPEs.
Mr. Sarbanes. I ask unanimous consent no second-degree
amendment be in order to the Schumer amendment being sent to
the desk.
The Presiding Officer. Without objection, it is so ordered.
Is there objection to laying aside the pending amendments for
the purpose of introducing a new amendment? Without objection,
it is so ordered. The clerk will report.
The assistant legislative clerk read as follows:
The Senator from New York (Mr. Schumer), for himself and
Mr. Shelby, proposes an amendment numbered 4296.
Mr. Schumer. I ask unanimous consent the reading of the
amendment be dispensed with.
The Presiding Officer. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To require a study of the accounting treatment of special
purpose entities)
On page 91, between lines 18 and 19, insert the following:
(c) Study and Report on Special Purpose Entities.----
(1) Study required.--The Commission shall, not later than 1 year
after the effective date of adoption of off-balance sheet disclosure
rules required by section 13(j) of the Securities Exchange Act of 1934,
as added by this section, complete a study of filings by issuers and
their disclosures to determine----
(A) the extent of off-balance sheet transactions, including assets,
liabilities, leases, losses, and the use of special purpose entities;
and
(B) whether generally accepted accounting rules result in financial
statements of issuers reflecting the economics of such off-balance
sheet transactions to investors in a transparent fashion.
(2) Report and recommendations.--Not later than 6 months after the
date of completion of the study required by paragraph (1), the
Commission shall submit a report to the President, the Committee on
Banking, Housing, and Urban Affairs of the Senate, and the Committee on
Financial Services of the House of Representatives, setting forth--
(A) the amount or an estimate of the amount of off-balance sheet
transactions, including assets, liabilities, leases, and losses of, and
the use of special purpose entities by, issuers filing periodic reports
pursuant to section 13 or 15 of the Securities Exchange Act of 1934;
(B) the extent to which special purpose entities are used to
facilitate off-balance sheet transactions;
(C) whether generally accepted accounting principles or the rules
of the Commission result in financial statements of issuers reflecting
the economics of such transactions to investors in a transparent
fashion;
(D) whether generally accepted accounting principles specifically
result in the consolidation of special purpose entities sponsored by an
issuer in cases in which the issuer has the majority of the risks and
rewards of the special purpose entity; and
(E) any recommendations of the Commission for improving the
transparency and quality of reporting off-balance sheet transactions in
the financial statements and disclosures required to be filed by an
issuer with the Commission.
Mr. Schumer. Madam President, I will again be brief. This
amendment relates to a second problem that we have seen in the
latest crisis that we have faced in our financial markets, and
that is the special purpose entities. Sometimes special purpose
entities have a valid purpose. Many companies use them for
valid purposes.
We have seen, particularly most egregiously in the case of
Enron, these have been entities that have been used to take
losses off the books, and then shareholders, and everybody
else, don't know much about them.
Enron, for instance, conducted business through thousands
of these with names such as LJM, Cayman LP, and Raptor. They
become pretty famous and the Enron's former CFO, Andrew Fastow,
contributed hard assets and related debt to Raptor SPE and then
Raptor would turn around and borrow large sums of money from a
bank to purchase assets or conduct other business.
This is the key. The debts of this SPE, Raptor, never
showed up on Enron's financial statements.
People make money on it. Fastow made $30 million in
management fees. These things go way overboard. The way we had
proposed originally legislating on this was too complicated,
but there are some good ones. There are some with legitimate
purposes and many with bad purposes.
Congress can't set these accounting standards, nor should
we. Rather, that is the SEC and FASB's job.
We have asked in this amendment that the SEC do a
comprehensive study of the SPEs to show where the damage is,
point the way to reform, and make recommendations. This
amendment does not put Congress in the business of setting
accounting standards.
It does, however, say to thousands of Enron and other
employees who have lost pensions that we are stepping up to the
plate now to stop these kinds of egregious practices.
I add that there are probably many of these SPEs for bad
purposes floating around in other companies, and this study
cannot come too soon.
We have received agreement. I thank Senators Sarbanes and
Gramm.
I ask unanimous consent that the amendment be agreed to.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
The amendment (No. 4296) was agreed to.
Mr. Sarbanes. Mr. President, I move to reconsider the vote.
Mr. Santorum. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The Presiding Officer. The Senator from New York.
Mr. Schumer. Madam President, I thank Senator Sarbanes and
his staff as well as Senator Gramm and his staff for their work
on accepting these two important amendments that I think
improves the bill, which is a very fine bill that I am proud to
support.
I yield the floor.
The Presiding Officer. The Senator from Idaho.
Mr. Craig. Madam President, let me spend a few minutes
talking about the underlying legislation, S. 2673.
There has been a great deal of debate over the last good
number of days on this issue. I am pleased that we were able to
get cloture. It is time we move on to this issue.
The American public, a good many stockholders, a good many
pension plans, a good many retirement plans are discussing what
are we going to do about the meltdown that last occurred in
corporate America at the executive level with some key
corporations. It is really, in most instances, a crisis of
confidence.
There are a lot of well-run corporations across America
that are publicly held. They have historically observed the
prudent rules. Their boards have acted responsibly. But there
are bad players. There are big, bad players that have had a
dramatic impact on the markets. There is no question that we
have to deal with this straight away.
When I look at the whole of this issue, it isn't just in
the markets where there is a crisis of confidence that
Americans share: When you look at 9/11, then Enron, then
WorldCom, and, of course, all the scandals that have occurred,
and out in the West with the Ninth Circuit suggesting that the
Pledge of Allegiance isn't constitutional, put all of that
together, and America has to be scratching its head at this
moment, asking: Where does all of this take us? Where is that
rock of stability that we have come to rely on for so long?
I suggest that when we are debating this issue, while this
is an issue that has to be dealt with, and we are now moving
appropriately, it is one of a combination of factors that is
critically important for our country to deal with.
One issue we have to deal with is the war on terrorism. The
DOD appropriations ought to be the first bill we deal with on
the defense side to begin to shore up again this sense of
confidence in the American structure. Certainly, protecting our
soldiers in the post-9/11 fighting that has gone on in
Afghanistan is appropriate, and now, as we search out terrorism
around the world, that is critical.
The next step I would suggest is the confirming of judges.
It is important that we deal with judges. For the judicial
system of this country to remain strong, vacancies need to be
filled. People should receive their day in court in a timely
fashion. That has been one of the hallmarks and the strengths
of this country throughout its history, and it ought to be
today.
Clearly, I hope we appoint judges who will not act as the
ones in the Ninth Circuit who suggested that the Pledge of
Allegiance is unconstitutional. I think President Bush has gone
a long way in nominating good judges to the Senate.
Yet, the politics here in the Senate today is obvious:
Withhold as long as you can. Withhold as long as you can.
The President spoke the other day on Wall Street relating
to corporate accounting. The U.S. Senate is speaking today, as
they should.
I ask unanimous consent that a commentary by Lawrence
Kudlow be printed in the Record.
There being no objection, the material was ordered to be
printed in the Record, as follows:
[From the Washington Times, July 11, 2002]
A Class Above the Corruption and Critics
(By Lawrence Kudlow)
In front of a New York audience on Tuesday, President Bush unveiled
a revised plan to counter corporate wrongdoing and accounting fraud,
saying, ``There can be no capitalism without conscience, no wealth
without character.'' Adam Smith, the father of free-market economics,
couldn't have said it better.
Smith always argued that smooth-functioning markets require ethical
behavior at their center. From Day One of his presidency, Mr. Bush has
applied this rule even more broadly, emphasizing the need for ethical
clarity and moral certitude in all areas of American life. He has
successfully applied the rule of ethics to the war on terror, and now
he is transferring the very same principle to root out corporate
corruption.
From the election campaign to today, poll after poll shows that the
public believes Mr. Bush is a leader with strong character and
unshakable moral principles. Following the blowups of WorldCom, Enron
and Tyco--and many other rotten apples--Mr. Bush's honest outrage has
been heartfelt, and not political.
It has also shone above the political carping of Tom Daschle, Al
Gore, Richard Gephardt and other national Democrats who would locate
the source of the contagious virus of accounting fraud and corporate
corruption within the Bush administration. Theirs is a political,
reckless, and silly approach to a serious situation. The bad-business
bug gained strength and spread well before George W. Bush became
president. And today it is a grave problem that requires sober
solutions.
Serious Democrats, such as Senate Banking Committee head Paul
Sarbanes and Senate Investigations Subcommittee Chairman Carl Levin,
have taken a completely different tack from the business-as-usual
partisan politics of the Daschle gang.
Mr. Sarbanes has crafted a significant proposal to set up an
independent accounting-standards board--one that will end conflict of
interests between the auditing and consulting functions, properly score
stock options, create new pressure for independent boards of directors,
and legislate tough legal sanctions on executives, bankers, auditors,
accountants and others who violate the new standards.
The accounting system desperately needs a fix; it is even more
incoherent than the dreaded tax code. A new accounting-standards board
should come under the aegis of the Securities and Exchange Commission.
Along with proposals from the New York Stock Exchange to create truly
independent boards of directors, this action will promote honest
accounting and shareholder-based corporate governance.
Meanwhile, Mr. Levin has just as seriously proposed giving the SEC,
the Federal government's principal accounting overseer, the right to
levy tough fines on corporate evildoers without having to go to court
first.
Suburban liberals like Sens. Sarbanes and Levin, its seems, have
suddenly become conservative lawmakers who will ``move corporate
accounting out of the shadows,'' as Mr. Bush rightly put it, and
protect the basic workings of our wealth-creating capitalist system.
President Bush, in tune with these focused Democrats, has proposed
a doubling of the maximum prison term for mail- and wire-fraud statutes
from five to 10 years. This severe jail-time penalty will greatly
concentrate the executive mind. And so will Mr. Bush's proposal that
fraudulently earned bonuses and compensation must be returned; and so
will his request that corporate officers and directors who engage in
serious misconduct be barred from again sitting in corporate-leadership
positions. More, if the Bush corporate doctrine moves through Congress,
top executives will now have to certify their financial statements with
their own signatures. False reporting could lead to jail.
It seems that our more serious men in Washington want to bolster
the rue of law by strengthening the incentive to choose right from
wrong.
Incentives matter. If you tax something more you get less of it. If
you tax something less you get more of it. A 10-year jail term for
rotten corporate apples--or their accountants--is a huge legal tax on
wrongful actions.
Of course, standing behind higher ethical standards in business is
the great American investor class. Covering more than 50 percent of
American households and more than 80 million people, this group is
positively changing financial practices and the political culture.
These shareholders have lost enormous wealth, in part from dishonest
accounting and egocentric corporate misdeeds. And they're furious.
Financial markets have been democratized in the past 15 years with
the rise of this investor class. They have already voted to depress the
stock market as a signal of their indignation, and they're now prepared
to vote this November against the silly politicians who fail to realize
the enormity of the current problem. Consider this: Slightly more than
60 percent of the investor class voted in the last election. This may
be the most powerful lobby in America.
In no uncertain terms, this new political movement is forcing
Washington to renew the rule of law, strengthen accounting and
financial standards across the board, and restore a proper incentive
system that will return Adam Smith's ethical epicenter to the greatest
wealth-creating machine in all of history. The days of egocentric and
corrupt Soviet-style corporation have come to an end. In the stock
market, moral amnesia is dead.
Mr. Craig. Madam President, I see Chairman Sarbanes on the
floor. It is not often that Lawrence Kudlow praises the
chairman, but he did the other day in an op-ed and commentary
that he often writes. He talked about the Sarbanes bill and
said:
Serious Democrats, such as the Senate Banking Committee
head Paul Sarbanes and Senate Investigations Subcommittee
Chairman Carl Levin, have taken a completely different tact
from the business as usual----
I will not repeat the remainder of it. But that ought to be
a part of the Record because I think it reflects the spectrum
of the thinking on the floor of the U.S. Senate at this moment.
Whether you are conservative, moderate, or liberal, we know
that we have to regain the confidence of the American investing
public and the world investing public, and for that matter, the
market systems of our country and in corporate America.
As long and as loud as many of us speak about the good
corporations out there and how well run they are, the moment
another Enron occurs or someone else speaks out about
misdealings, that confidence is once again dashed.
This legislation moves to create a bright line between,
good and bad accounting by separating auditing and consulting
services for accountants in public corporations. It requires
disclosure of off-balance sheet transactions and other
obligations that might affect the corporate financial
condition, and it establishes independent auditing boards to
oversee corporate accounting.
All of those are very critical in creating bright lines of
clarity, understanding, confidence, and stronger enforcement of
criminal behavior.
Someone in my State said the other day: You don't have to
strengthen the accounting procedure, Craig. Put the bums in
jail. Those are criminal acts. When you knowingly are
distorting the financial strength of a company which affects
its stock, destroys retirement funds, employee's stock options,
and all of that, it is, in fact, a criminal act.
Our President has said it. Others have spoken on the floor.
But there is a line we have to draw. It is not one of
grandstanding for political purposes but doing the right thing,
to set in place good public policy that directs the free market
system in the appropriate fashion. Do we want to make it so
restrictive that decisionmaking in the board room means always
looking over their shoulder to see that they have done it
exactly right against a Federal law when the marketplace is a
dynamic place and laws are static?
We know there have to be some static lines attached. There
is no doubt about it. Those have to be clear. At the same time,
we cannot be so restrictive that we blight the market and send
investments outside the United States to the rest of the world.
The Wall Street Journal wrote yesterday that everything you
are hearing now from Washington is aimed at winning the
November elections and not at calming financial markets. I hope
this bill is all about calming financial markets. And I believe
the majority of this bill does have that goal. Some of rhetoric
may not reflect it. But I truly believe the chairman and the
ranking member are working in the direction of building a
substantive bill that will go to conference, that works out our
differences between the House and that goes to the President's
desk.
I hope the Wall Street Journal is wrong. I hope we refrain
from making corporate accountability simply another political
exercise. It ought not be. It has not been. It should never be.
In Idaho they say: ``You can't hang the same man twice.''
``You can't hang the same person twice.''
So let's make the laws clear, easily defined, not
arbitrary, not like our tax laws today where even the best
consultants cannot give good advice.
What we are working with, I hope, is clean and clear and
appropriate. There are more than 16,000 corporations under the
jurisdiction of the SEC. Of those, no more than a handful have
been accused of criminal wrongdoing. In the end--when all the
dust settles, the market stabilizes, and investors begin again
to regain confidence, and the Congress has acted--no more than
a handful of corporations will have been the bad actors.
So I hope and I trust we can finalize what we are doing
here today, and Monday possibly. It is important. The bottom
line is very simple: Congress needs to act, and act now, and
reaffirm the confidence the American people have in our public
institutions.
I just came from a Republican bicameral meeting between the
House and the Senate Republican leaders. They said: Get us the
bill immediately. Assign conferees. Let's go to work. Let's get
this out before the August recess.
Let's send a message to the American and the world investor
that we have acted timely, that we have acted responsibly. The
President has laid down his marker. The House has laid down
their marker. It is now time for us to do the same. And in
doing so, and in moving with expeditious action--not haste, not
in an irresponsible way--I think we can turn to the American
people and say: We have put in place the right safeguards, the
right protections, the right firewalls. Study the papers, study
the financials, and begin, once again, to reinvest in the
American marketplace because it will be the right place to put
your money.
Madam President, I yield floor.
The Presiding Officer. The Senator from Pennsylvania.
Mr. Santorum. Madam President, I want to pick up on what
the Senator from Idaho just said, which is, we were just
meeting on the House side among the leadership. One of the
messages that was very clear was, when this bill passes, the
House is very eager to appoint conferees and to move forward to
get a bill out as quickly and as responsibly as possible, to
send all the right messages to the investing public and to Wall
Street that Congress has seen the problem and that we are
ready, willing, and able to act, and act in an expeditious way.
I think it is important for us to act. I agree with that
sentiment. The House, obviously, acted months ago in dealing
with this problem. We have taken a little bit longer, which we
have a tendency to do in the Senate--take a little longer to
get things done. But we are now moving forward, and we should
not delay in getting to conference. We should not delay in
appointing conferees in the Senate. And we should have a
process by which we engage in these meetings earnestly and come
up with a product, if possible, by the August recess.
It is little difficult. The House is going to be out a week
before the Senate. So it is a pretty big task ahead of us, but
we should go about it in earnest, and we should do our best to
move this forward and send the signals that the Congress has
moved as expeditiously as possible to meet the concerns of the
investing public about the markets and the reliability of the
numbers that corporations are sending out to the investing
public.
I have to say, as one of the four members of the committee
who voted against this bill in the committee, I have some
concerns about the underlying bill that came out of committee.
I have some concerns about particularly the impact on some of
the small companies that will be governed by this legislation.
A lot has been made that this is a piece of legislation
that just deals with publicly traded companies, and so we are
talking about the big companies. As any of you who have watched
the market for any length of time know, there are a lot of
small companies that go into the equity markets and are
publicly traded, particularly a lot of technology companies.
A lot of the economic growth engines of our economy are
small publicly traded companies. One of the concerns I have is
this bill may be appropriate for large multinational
corporations--such as General Motors or IBM; you can go down
the list; Xerox, whatever--but it may not be particularly an
appropriate vehicle of regulation for small-cap stocks.
As you know, there are small-capital stocks, mutual funds,
small-cap funds. To apply the same rigorous accounting
standards and rules and regulations that very well may be
appropriate for these large companies to these smaller
companies could have a very significant negative effect on
economic growth in our country.
To put these kinds of rules and regulations in place for
these small companies is going to be very expensive, very
onerous, and make it very difficult for them to conduct
business. And remember, folks, who is responsible for economic
growth in America, job creation in America. Let me underscore
this. We have job claims up again just last week. The economic
engine for job creation is smaller businesses. A lot of them
are these small publicly traded companies.
It is a very grave concern to me that, yes, we look at
these companies we are talking about here. These are big
companies that have done a lot of things that, obviously, they
should not have done, and with big accounting firms. We are not
hearing about scandal in these smaller publicly traded
companies that use small accounting firms in most cases. To
apply these rules to these smaller companies is really
problematic and has a negative effect on our economy.
The last thing I want to see us do--yes, we want to
strengthen confidence in the capital markets. Yes, we want to
deal with the problems of fraud, and we want to hold people who
commit fraud more accountable, and toughen punishments, which
is what we have done on the floor. Those are very important
things to do. But we should not do that at the expense of jobs
and economic growth in our economy.
I understand there is a provision in the bill that allows
smaller--any company, I guess, to seek a waiver as to some of
the provisions of this act. I know a lot of small businesses,
and most of them do not have a lot of money to hire lobbyists
and lawyers and other people to come here to Washington, DC, or
to New York and plead their case that they should somehow be
preempted from the provisions of this act.
You are talking about 16,000 publicly traded companies,
most of which--well over 75 percent--are relatively small in
size. Imagine the burden of the regulators having to deal with
petition after petition after petition.
Senator Gramm has an amendment, which I presume he will
offer on Monday. I am hopeful that the Senate will seriously
consider giving the regulatory body some flexibility in
providing blanket waivers to classes of companies, or based on
some sort of rational scheme of determination of size and scope
of a company, that we give a little flexibility to the
regulators not to sort of throw all the babies in this one big
basket, and understand that there are real significant
consequences to jobs and future growth of this economy if we
did that.
So I know that is an issue on which we are going to have a
discussion next week. But, to me, it is a very significant
issue, one where you can be for tougher regulation, you can be
for increased accountability, you can be for tougher
penalties--all those things, setting up this governing board,
having standards in place--you can be for all these things in
the bill, but you have to understand that General Motors and
ABC Tech Company in Scranton, PA, are fundamentally different
entities and should not be treated the same way.
It really is important for us to have some sort of
provision for the regulatory body to exempt some of these
smaller entities, where some of these regulations do not really
apply or misapply, from this scheme of regulation that is in
this bill.
So with that, it looks as if we have another Member who
might be interested in offering an amendment or giving a
speech.
I am happy to yield.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Madam President, later I want to address a
couple of points made by the Senator from Pennsylvania, but the
Senator from Delaware is in the Chamber and wishes to speak. So
I yield the floor.
The Presiding Officer. The Senator from Delaware.
Mr. Carper. Madam President, I know the Senator from
Maryland is getting tired of receiving all these bouquets, but
he deserves them. Senator Enzi is not on the floor, but he
deserves one or two as well, along with others of our
colleagues, not just on the Banking Committee but other Members
as recently as this morning who offered amendments to this
legislation which improve it materially, especially the
amendment offered by the Senator from Missouri, Mrs. Carnahan.
It is all well and good that we say to those who are senior
officials within companies, if you have a stock transaction,
you have to report it. Give them the paperwork, they report it,
and it goes somewhere where few people ever have a chance to
see it or be aware of it. It is quite another thing to list
that transaction, do it electronically so anyone who has access
to the Internet can find out about it. Senator Carnahan's
amendment includes this electronic disclosure, and that is a
very good improvement to the legislation.
I like what the Senator from North Dakota, Mr. Dorgan, has
offered today, with respect to the process where we have
companies normally registered and incorporated here in a State
in America who somehow slip off to Bermuda and incorporate. We
actually provide an incentive; if we don't adopt the Dorgan
amendment, we provide an incentive for that kind of behavior.
Not only does that have an adverse effect on States such as New
York or Delaware or Maryland or Pennsylvania, it also has an
adverse effect on shareholders because the heads of companies
that are registered or incorporated in a place such as Bermuda
would otherwise not have to sign off and vouch for the
financial statements they are providing.
Even as recently as this morning, a good bill has gotten
better.
I appreciate the amendment offered earlier by Senator Lott
on behalf of the President and the addition of a number of
provisions in the bill that the administration supports, and,
frankly, I think we all should.
I came across an interesting column this week. I didn't
know if I would read it, but given that the Senator from New
York is presiding, I have to at least read the first paragraph.
This is a column by a fellow who writes in the LA Times and is
syndicated across the country, Ronald Brownstein. I will read a
paragraph and perhaps ask unanimous consent that the entire
column be printed in the Record.
There being no objection, the material was ordered to be
printed in the Record, as follows:
Bush Needs to Drop the Velvet Glove Approach
(By Ronald Brownstein)
It's easy to imagine the frenzy that would be engulfing Washington
if it was President Clinton now revising his explanation of a
controversial 12-year-old stock deal.
Bush Limbaugh would be roaring in outrage. Robert H. Bork would be
decrying the loss of moral authority in the Oval Office. Sen. Arlen
Specter, R-Pa., would be demanding a special prosecutor. Congressional
committees would be subpoenaing the president's old business partners.
President Bush probably will be spared all that, even after
suddenly altering his explanation for why he was eight months late in
reporting to the Securities and Exchange Commission his 1990 sale of
stock in Harken Energy Corp., a company on whose board he sat, shortly
before it announced large losses. (For years he blamed it on the SEC;
now he's fingering Harken's lawyers.)
After the fanatical ethics wars of the Clinton years, few in
Washington have much stomach for a full-scale confrontation--though the
Washington Post raised eyebrows by revealing Bush's former personal
attorney was the SEC general counsel at the time commission cleared him
of wrongdoing in the stock sale. The attorney, James Doty, says he
reused himself.
The demands of the war against terrorism also will discourage a
political firefight over the sale. But even so, the disclosures were
still creating awkward moments for Bush as he prepared to call for
greater corporate responsibility.
Actually, the focus on Bush's behavior 12 years ago may frame the
wrong debate. It's likely that the dominant argument in Washington will
be over whether it's credible for Bush to demand better corporate
behavior while facing these personal questions. The more relevant issue
is whether it's credible for Bush to threaten a crackdown now after his
administration spent its first 18 months promising business kinder and
gentler enforcement of the range of Federal laws against corporate
misconduct--from the environment to the stock markets to the workplace.
In other words, can Bush plausibly shake the iron fist after
stroking the Fortune 500 for so long with a velvet glove?
BUSINESS AS USUAL
For all the nouvelle elements of Bush's thinking on social issues
such as education or home ownership, he's always been a conventional
conservative on government oversight of business. As governor of Texas,
presidential candidate and president, Bush has focused more on
intrusive government than irresponsible corporations.
His consistent message has been that, in pursuing its goals and
enforcing its laws, government should be more cooperative and less
coercive. During the 2000 campaign, he crystallized his view on
government's relationship with business when he insisted: ``I do not
believe you can sue you way or regulate your way to clean air and clean
water.''
Bush has put flesh on that philosophy by staffing many Federal
agencies with alumni of the industries they now regulate. The Interior
Department is crowded with former lobbyists for the coal and oil
industries. A former timber lobbyist is watching the national forests
Harvey L. Pitt, the SEC chairman, came from the accounting industry;
Bush already has appointed another accounting industry alum to the
five-member commission and nominated yet a third. (That means Bush is
seeking to construct an SEC, for the first time, with a majority of
commissioners tied to accounting.)
To monitor safety in the workplace, Bush found an executive from
the chemical industry. To monitor safety in the mines, he appointed an
executive from the mining industry. The list goes on.
In chorus, Bush's appointees have sung the same tune. At her
confirmation hearing last year, Environmental Protection Agency
Administrator Christie Whitman promised more negotiation and less
litigation against recalcitrant companies. ``Instilling fear does not
solve problems,'' she insisted.
Over at the Occupational Safety and Health Administration, director
John Henshaw as late as last month told a business audience:
``Hopefully we can put the days of OSHA as an adversary behind us.''
And before Enron and WorldCom and Martha Stewart forced the SEC
chair to try to morph into Harvey Pitt-bull, he was sending the same
message, telling the accounting industry last fall that he viewed them
as the agency's ``partner'' and pledging ``a new era of respect and
cooperation'' after the confrontations of the Clinton years.
Partnership with industry has its place. But enforcing Federal law
to police the market place isn't it. No cop anywhere would agree with
Whitman; they instead would argue that the best way to discourage drug
dealing or street crime is to instill fear--of relentless enforcement.
The same is true in the boardroom. Polluters or stock swindlers are
more likely to stop because they fear being caught than because
Washington asks them nicely.
Mr. Carper. Here is the first paragraph:
It's easy to imagine the frenzy that would be engulfing
Washington if it was President Clinton now revising his
explanation of a controversial 12-year-old stock deal. Rush
Limbaugh would be reacting in outrage. Robert Bork would be
decrying the loss of moral authority in the Oval Office. [One
of our Senators] would be demanding a special prosecutor.
Congressional committees would be subpoenaing the president's
old business partners.
This is a whole lot more important than trying to find
political advantage in a particularly difficult debate and a
difficult time in this economic recovery. This is about the
economy.
As a Nation, we are trying to come out of a recession.
There is a fair amount of financial data which suggests we are
heading in the right direction. The number of people being laid
off is slowing. Manufacturing activity is increasing. Even
economic activity among some of the most hard-hit sectors of
the economy, technology sectors, is showing signs of life. I am
encouraged by that.
If you look at the stock exchange for much of the last
several weeks and months, it does not really reflect the
returning, emerging vibrancy in the rest of the economy. That
is not a good thing.
One of the reasons why it is so important for us to pass
this legislation is to send a clear signal to investors not
just around the country, but around the world that the United
States is a good place in which to invest. Our trade deficit
last year was about $300 billion. This year it is going to be
even more than $300 billion.
We are starting to see the value of American currency, the
dollar, which was robust and strong for the last several years,
deteriorate. The worst thing that could happen for us, at a
time when we need to attract foreign investments, would be to
send a message that the United States is not a good or safe
place in which to invest. When we are looking to much of the
rest of the world to help finance a trade deficit of over $300
billion, it is important that we send a strong message
throughout the world that the U.S. remains the best place in
which to invest.
There are a number of provisions. I will not go through
this bill provision by provision. I want to talk about some of
the groups that have the greatest interest, the most at stake,
what our obligation is to them, and how this legislation seeks
to make sure that we not only recognize that obligation but
that we act on it.
Shareholders of companies, publicly traded companies,
should have confidence. They should have confidence not only in
the CEOs and top officials, but they should have confidence in
the board of directors whose job it is to represent the
interest of the shareholders and to know that that board is
indeed independent. Shareholders should have confidence in the
audit committees of the board. Investors should know that the
audit committees of the board are comprised of independent-
minded board members, knowledgeable board members who will act,
not as a lap dog, but as a watchdog every day as they serve on
the audit committee.
Shareholders should have confidence that there are rigorous
auditing standards that exist in this country and not that
there are rigorous auditing standards that are on a piece of
paper somewhere, but there is a strong, independent,
knowledgeable entity that is going to make sure that those
auditing standards are enforced.
How about the auditors of publicly traded companies? We
should take away from them the temptation to look the other way
or give the benefit of the doubt to a company that they are
auditing because of the temptation from some other part of the
auditing company which deals with consulting services; in many
cases, these are lucrative services. We want to make sure the
folks doing the audits of publicly traded companies are
interested in doing a good job because that is their
responsibility. Auditors should not be interested in cutting
corners, looking the other way because doing so might enable
their accounting company to attract and to retain lucrative
consulting services.
This bill goes a long way--some would say too far--toward
curtailing that activity. To me, it strikes the right balance.
Most of us know of someone who used to work for one of the
big eight, then big five, now the big four accounting firms who
actually went to work for one of the companies that they
audited. I do. I suspect all of us could think of someone who
has made that transition in their lives. There is nothing wrong
with that. However, the revolving door can be more troublesome
when the person moves from the auditing company one day, the
company responsible for doing the audit, and the next day, the
next week, the next month ends up as a senior official of the
company that last week, last month they were auditing.
This measure doesn't completely stop that revolving door,
but it slows it down.
Another area that this bill tries to address is the
question: How often is it appropriate to have a fresh set of
eyes in charge of those independent auditors doing that
independent audit of a publicly traded company? Under current
standards every 7 years we say that the lead partner of an
audit should be changed. This measure takes it down to 5 years.
Not everyone agrees with that. Some would like to have a change
in auditing companies, requiring auditing companies to rotate
every 5 or 7 years. I don't think that is a good idea. I do
believe the approach we take in this measure, moving from 7 to
5 years the period of time after which the lead auditor, the
lead partner has to be changed, is sound.
How about investors? I talked about shareholders, about the
auditors themselves. How about investors? The investors in this
country and other countries need to be comforted by the
knowledge that when they hear an analyst on television or read
of an analyst's recommendation of a particular stock or stocks,
when an analyst says buy, they mean buy. When an analyst says
sell, they mean sell. When an analyst says hold, they mean
hold.
Investors have the right to know that the analysts whose
advice they are following or attempting to follow are not being
pressured to color their recommendations of a buy, sell, or
hold by what is happening on the investment banking side of the
business, and to know that the analyst's compensation is going
to be derived more from how well the analyst does his job,
providing good analysis and investment advice, and not about
how much new business that analyst can help bring to the
investment banking side of their company.
How about the CEOs and senior management? When they break
the law, they should be fully prosecuted under the law, and if
what they have done is an offense for which they can be
imprisoned, they ought to be. Our job in the Congress is to
pass laws and to say what the crime or penalty should be when
people violate those laws.
It is the job of the Justice Department to fully
prosecute--with the help of the SEC and the other watchdog
agencies--people who violate the laws. Senator Leahy, on behalf
of a number of Senators, earlier this week--yesterday, I
believe--offered legislation that provides a new law that says
not only can we prosecute some of the corporate wrongdoers--I
am tempted to call them criminals, but I won't--who violate the
trust, and to not only say you have to go after them under the
mail and fraud provisions of the criminal code, but to broaden
that--which is sometimes difficult to do--and make the
prosecutions more easily done and with very tough penalties
under another part of the code.
CEOs should not be allowed to profit from financial
misinformation or from manipulation of their books. I commend
the President and those who have worked on this legislation to
say, to the extent that this does happen--a CEO or senior
official benefits financially from tampering or cooking the
books--they would be compelled to give that money back.
I mentioned earlier the legislation offered by Senator
Carnahan of Missouri which would actually make sure there is a
disclosure of sale when a CEO or senior official sells their
stock; that the transaction would not only have to be reported
to the SEC, but disclosed electronically.
Another provision in the bill that I think is especially
good and timely, given what has gone on at WorldCom, where
apparently a senior official of that company received a $360
million loan from the company--a loan which I don't believe the
shareholders ever knew about--at least when they found out
about it, it was too late for a lot of them. That kind of
information should be fully disclosed promptly and through a
medium that allows those who have some need to know--investors
and shareholders--to have that information in a timely way.
Finally, a word about the employees who work for some of
these companies that have gone through, or are going through, a
meltdown. They need, I think, recourse when they are urged, on
the one hand, by senior officials to buy company stock for
their 401(k) investment plans at the very time when senior
officials are bailing out of the company stock. There should be
some kind of recourse for employees when that happens. In the
belief of what is good for the goose is good for the gander,
employees should never again face the situation that Enron
employees faced where, during a lockdown period of time,
employees could not sell their stock while senior officials
were able to bail out and sell their stock. What is good for
the goose is good for the gander. To the extent that employees
in a lockdown period are not able to sell their company stock
in their 401(k) plan, the senior officials of the company
should not be able to enter into transactions involving their
stock either.
There is one thing I don't believe we address in this bill;
the others I mentioned, we do. One area we do not address--and
I suspect it comes later--and a member of the staff will tell
me if I am mistaken. One of the problems we have with 401(k)s
for the employees, the investors, is that they don't get very
good advice. The companies don't want to be held liable if they
provide bad advice when all is said and done. And when we move
on to other issues, I hope we will have agreed on a way to
better ensure that the employees who are not getting very good
advice do get that good advice.
I worry about the concentration of assets and investments.
I know some people believe there should be a cap and that they
should not be able to invest any more than half or a quarter in
company stock for your 401(k). If I am an employee and I am
buying company stock, maybe I should have to sign a form that
is an acknowledgment that I am about to do something very
stupid--something similar to what the employees did at Enron,
where they put all their eggs in one basket--and acknowledge
that is not a bright thing to do, and acknowledge that I am
doing that unwise thing myself. Maybe that is needed here. In
addition to that kind of disclosure, I think we do need to
address the need for better advice for employees.
I will go back to where I started; that is to say, a lot is
riding on this legislation--a whole lot more than we would have
guessed 6 months ago. Six months ago, as we saw Enron melt down
and the disclosures come forward, we thought it was one company
that was poorly run, maybe fraudulently run. A lot of people
were hurt who worked at that company. A lot of people who
worked for the auditor, the accounting firm, Arthur Andersen,
have lost their jobs and were, frankly, fully innocent, but
they have been harmed. Six months ago, there was a full sense
of outrage at Enron and the people who led it to its fall.
We know now that what happened at Enron may not be
precisely the same as other companies, but it is symptomatic of
the behavior in other companies, where the people who run those
companies do not meet their obligations to the shareholders, to
the employees, and where greed has corrupted too many people.
While it is difficult for us to pass a law outlawing greed, we
can try to outlaw fraud. But it is tough to do that; I
acknowledge that.
With the developments within a whole host of other
companies--disclosures of financial mismanagement and
misstatements, misrepresentation of performance of other
companies in recent months--the importance of what we are doing
this week and next has grown. We need to get this economy
moving in the right direction. I believe that, underneath, a
lot of the fundamentals are pretty sound. If you look at
growth, and productivity, and the manufacturing activity to
which I alluded earlier, there is some good news. The troubling
news is what is going on in the stock market, as investors are
skittish, and that is understandable.
We can begin to restore, in a very meaningful and tangible
way, the confidence of those investors in America and in
American companies, and we ought to do that.
The last word I will say is this. I commend Chairman
Sarbanes. He is not presently on the floor. I also commend the
committee staff and personal staffs for the kinds of hearings
that have been held this year which have led us to this day.
Chairman Sarbanes is not the sort of person who is interested
in rushing out and being on television every night. He is not
interested so much in seeing his name or picture in the
newspaper. He is interested in getting at the truth. I think
the hearings that were held over many months have led us to
finding the truth and, maybe just as important, to finding the
right course for us to take as a Nation, to be able to right
some of the wrongs that have been done and to reduce the
likelihood that further wrongs will occur in the future.
I know some have been impatient for us to get to this day
and to take up this legislation, pass it, and to send it to the
President. I think it has been worth the wait. I acknowledge
that not everything that needs to be done ought to be done by
the Congress. The stock exchanges have made a number of
excellent changes, and they are to be commended. Many companies
and many corporate boards, that have sort of been tarred with
the same brush, and senior officials and CEOs who are doing a
good job in acting and behaving in a most important way, have
been tarred and feathered with the same brush.
A lot of companies have said, themselves, they have taken a
look in the mirror--boards of directors, audit committees, and
others--and said: We can do better. And they have adopted
reforms. Shareholders--market forces--have come to bear on
companies, their boards of directors, as they should, and that
is helpful as well.
In the end, there are some things the Congress can do and
ought to do, maybe not all of them, but a lot of them are
included in this legislation before us. I am proud to have
participated as a member of the Banking Committee in its
development and proud to be a witness to the work that is going
on in this Chamber to make a good bill even better. I yield the
floor.
The Presiding Officer. Who yields time? The Senator from
Michigan.
Mr. Levin. Madam President, in a moment I am going to ask
unanimous consent that the pending amendment be set aside and
that I be allowed to call up amendment No. 4283. This amendment
relates to stock options. The amendment is one line. It says
that the standard-setting body for accounting principles that
is set up in this bill shall review the accounting treatment of
employee stock options--just review it--and shall within a year
of enactment of this act adopt an appropriate generally
accepted accounting principle for the treatment of employee
stock options. They shall review it within a year and adopt an
appropriate standard.
There has been a huge amount of debate about stock options.
Recently the Republican Senate staff of the Joint Economic
Committee issued a report about ``Understanding the Stock
Option Debate.'' In that report, it concluded that, ``Basic
principles of financial accounting imply that stock option
awards should be treated as a cost in corporate financial
statements, and this cost should be recognized at the time of
grant.''
We have a Republican Senate staff report which, after
reviewing all of the pros and cons, concludes that stock option
awards should be treated as costs in financial statements. It
is a very strong document. It is an analysis that I recommend
to people to read.
Our amendment, however, does not do that. Our amendment,
which is an amendment I am offering on behalf of myself,
Senator McCain, and Senator Corzine, simply says that the board
we are funding in this bill should review the accounting
treatment of employee stock options and adopt an appropriate
standard.
How anybody can be opposed to the proper accounting board
doing a review and coming up with an appropriate standard is
something beyond my understanding. I can understand the
arguments, the pros and the cons. I have been through them for
10 years. I have argued that we ought to treat stock options
like any other form of compensation, and I believe we should.
But I do not set accounting standards. That is not my job. That
is the job of this newly independent board to set accounting
standards, and we should urge them to take a look at this. This
is where this matter should be referred and at a minimum, Madam
President, I ought to be allowed to get a vote on this
amendment.
This is a germane amendment. We are in a postcloture
situation, and I do not know of a time--there may be; I have
not been around here as long as some--but I do not know of a
time when a germane amendment postcloture has not been
permitted to go to a vote.
Apparently, that is what is going to happen, from what I
hear. I hope it is not true, and I do not want to be unfair to
my good friend from Pennsylvania. He may not object. But I
think it is a misuse of our rules now I am going to get to a
process issue--to not permit a germane amendment postcloture to
be voted on. And this amendment is germane.
On the stock option issue, we have everyone from Alan
Greenspan to economists. Let me read the list of some of the
people who support a change in stock option accounting: Alan
Greenspan; Paul Volcker; Arthur Levitt; Warren Buffett; TIAA-
CREF, one of the largest pension funds in the United States for
teachers; several economists; Paul O'Neill; Standard & Poors;
Council for Institutional Investors; Citizens for Tax Justice;
Consumer Federation of America; Consumers Union; AFL-CIO; on
and on. They believe that stock options are a form of
compensation, they have value, and they should be part of the
expenses on the books of a corporation just as they are taken
as a tax deduction at this point.
One of the driving factors in the corporate abuses that we
have seen are the huge gobs of stock options which have been
handed out to executives. Then executives push accounting
principles beyond any comprehension to raise the value of the
stock and then exercise their options and sell the stock. We
have seen this situation repeated in corporation after
corporation, and I believe we ought to try to put an end to it,
but that is not what this amendment does. This amendment simply
says: We are creating a newly independent board. This
independent board should decide on what the appropriate
standard is. That is why we are providing independent funding
for it.
I want to read a part of a Washington Post editorial of
April 18, 2002:
Alan Greenspan, perhaps the Nation's most revered
economist, thinks employee stock options should be counted,
like salaries, as a company expense. Warren Buffett, perhaps
the Nation's foremost investor, has long argued the same line.
Skipping down:
The London-based International Accounting Standards Board
recently recommended the same approach. In short, a rather
unshort list of experts endorses the common-sense idea that,
whether you get paid in cash or company cars or options, the
expense should be recorded. . . .
Why does this matter? Because the current rules--which
allow companies to grant executives and other employees
millions of dollars in stock options without recording a dime
of expenses--make a mockery of corporate accounts. Companies
that grant stock options lavishly can be reporting large
profits when the truth is that they are taking a large loss. In
2000, for example, Yahoo reported a profit of $71 million, but
the real number after adjusting for the cost of employee stock
options was a loss of $1.3 billion. Cisco reported $4.6 billion
in profits; the real number was a $2.7 billion loss. By
reporting make-believe profits, companies may have conned
investors into bidding up their stock prices. This is one cause
of the Internet bubble.
Then this editorial goes on:
But nobody wants to ban this form of compensation; the goal
is merely to have it counted as an expense.
Madam President, that is what most of the accounting
profession, economists, and business people, other than those
executives who are taking such huge amounts of stock options,
want to do. This is what the Accounting Standards Board wanted
to do in 1993, but then were beaten down so badly that they had
to come up with an alternative instead called disclosure.
Even when the accounting board decided to do that--which
was not an independent accounting board because it did not have
an independent source of financing, unlike this accounting
board will have after we enact this bill--and now to read their
report of 1994. The board issued an exposure draft called,
``Accounting for Stock-Based Compensation,'' and they decided
that stock option values should be expensed. Then they said the
draft was extraordinarily controversial, and the board not only
expects but actively encourages debate on issues. Then they
pointed out in the FASB document that the controversy escalated
throughout the exposure process.
Then in paragraph 60 of their findings, the FASB board said
the following, that ``the debate on accounting for stock-based
compensation unfortunately became so divisive that it
threatened the board's future working relationship with some of
its constituents. The nature of the debate threatened the
future of accounting standards-setting in the private sector.''
This is an extraordinary document and everybody should read
it so people understand the kind of pressure that not only that
board was under--hopefully, the newly independently funded
board will not be under--but the kind of pressure which exists
in this Congress. We have, in essence, a new board, because it
has an independent source of funding. We ought to let that
board reach an independent conclusion on one of the most
controversial, contentious issues we have before us.
This is a tremendous bill we are voting on. But it can be
strengthened. It is not a perfect bill, and from the point of
view of pure fairness and deliberation, this Senate should be
allowed to vote on a germane amendment postcloture.
I will read one additional paragraph from the FASB document
report to set out the extent of the pressure which exists in
this area and why it is so important there be a review of this
whole matter by an independent board.
In December 1994, the board said it decided that ``the
extent of improvement in financial reporting that was
envisioned when this project was added to its technical agenda
was not attainable.''
Why was it not attainable, the FASB said? Because the
``deliberate, logical consideration of issues that usually
leads to improvement in financial reporting was no longer
present.'' These are incredible words. This is from the board
that is supposed to set accounting standards in this country.
They wrote in their report that when their proposal to expense
stock operations was issued, it was not attainable because the
``deliberate, logical consideration of issues that usually
leads to the improvement in financial reporting was no longer
present.''
Why was it no longer present? Because the debate had become
so divisive, in their words, that it threatened the board's
future working relationship with some of its constituents.
The nature of the debate, they wrote, threatened the future
of accounting standards-setting in the private sector.
Finally, the board, beaten down, threatened with
extinction, said this: ``The board chose a disclosure-based
solution for stock-based employee compensation to bring closure
to a divisive debate on this issue, not because it believes the
solution is the best way to improve financial accounting and
reporting.''
That was in 1994. We have seen what has happened in terms
of stock option abuses because this board, if it had proceeded
in the way it thought best, would have gone out of existence.
This bill creates a newly independent board, a board that
has an independent source of revenue. This bill, it seems to
me, is not complete, is not strong, unless we now say to this
country that the newly independent board should review this
accounting standard and reach an appropriate conclusion.
This amendment, which is cosponsored by Senators McCain and
Corzine, does not say what that conclusion is. It does not,
unlike the McCain amendment which was not allowed a vote
yesterday, conclude that stock options should be expensed. It
does say we have an independently funded board which should
review this matter and reach the appropriate conclusion.
Mr. Reid. Will the Senator yield for a question?
Mr. Levin. I would be happy to.
Mr. Reid. I am just curious. I am not sure I should get
involved at this stage because the Senator knows the subject so
well, but this board that is set up in this proposed law, they
would not have authority to do that on their own?
Mr. Levin. They would.
Mr. Reid. Why do we need your amendment?
Mr. Levin. Because this Congress has been on record as
saying what the accounting standard should be. In the early
1990s we took a position. This neutralizes that position. This
says, the accounting board is the right place. The Senate is on
record by a vote of 88 to 9 as saying there should not be the
expensing of stock options. What this amendment says is that
the board should decide. It should review this matter. It takes
a neutral position, thereby clearing the record as to what the
position of this Senate is.
As of now, all we have on record is that stock options
should not be expensed. What this amendment would say is, you
should review this and reach an appropriate standard.
Mr. Reid. My question to the Senator was, If we did not
have the Senator's amendment, would the board not have that
authority anyway?
Mr. Levin. They could do it, but all that there would be on
the record would be our last statement saying they should not
expense. That same kind of pressure we put on them would still
be on the record, and I think that should not be the last
statement this Senate should make on this subject.
The last statement we ought to make on this subject is that
the accounting board is the appropriate place to make that
decision, not the Senate.
Mr. Reid. I still ask my friend for the third time, if we
have no Levin amendment, it would seem to me this newly created
board would still have authority to do what the Senator is
talking about.
Mr. Levin. Under the cloud we created in 1994. I would
refer my friend to the debate in this body back on May 3, 1994,
where the Senate reached a conclusion that it is the sense of
the Senate, that was approved by, again, a vote of 88 to 9 or
something like that, that the Financial Accounting Standards
Board should not change the current generally accepted
accounting treatment of stock options.
Mr. Sarbanes. Will the Senator yield?
Mr. Levin. I am happy to yield.
Mr. Sarbanes. I asked the Senator to yield because I do
want to underscore that the legislation that is before us takes
a major step in trying to guarantee the independence of the
Financial Accounting Standards Board in terms of how it
provides for its funding, and that is a dramatic improvement of
the situation because heretofore the standard board had to seek
voluntary funding. So the standards board ended up going to the
people for whom it was establishing the standards in order to
get money to fund its operations. Well, when it came to the
crunch--and this issue was one such crunch as far as the
Financial Accounting Standards Board was concerned--the people
from whom they were voluntarily getting the money said we are
not going to give you any money. You are not going to be able
to carry out your activities.
So we moved in this legislation because one of the things
we require is that the issuers pay a mandatory fee. If you are
an issuer, you are registered with the SEC and you have to pay
a fee. That goes into a fund and that fund pays for the budget
of the Public Accounting Oversight Board and the budget of the
Financial Accounting Standards Board, so they are assured a
revenue source.
I urge people to stop and think about that because it is a
very important step to ensuring the independence of both
boards. But here we are talking about the Financial Accounting
Standards Board, and the dramatic change from its previous
situation.
So it really will have, at least on the budget side, the
independence to go ahead and make these decisions as they
choose to call them. The issue that becomes involved in all of
this otherwise is the question, Should the Congress of the
United States be itself actually establishing accounting
standards? Of course, as the Senator indicated, when an opinion
was voiced on that a few years ago, it went in one direction.
And now people want the Congress to come along and express an
opinion in another direction. I have some sympathy. Obviously,
we have seen things happen. Most people might have sympathy.
But we come back to the basic question, whether the
Congress should be doing this. We set up this accounting
standards board so it could make independent judgments.
Unfortunately, there is no question about the fact that
previously the standards board was subjected to tremendous
pressure which affected its ability to make an independent
judgment. It got tremendous pressure from industry groups,
pressure from Congress reflecting the pressure of industry
groups, and of course this exposure on its budget.
We have tried in the legislation to address this very basic
question of making sure this board has its independence. That
does not reach to the specific issue the Senate is now
addressing, but I wanted that on the record. It is important
that be understood.
Mr. Reid. Mr. President I ask unanimous consent I be
allowed to speak using my own time for up to 2 minutes.
The Presiding Officer. Without objection, it is so ordered.
Mr. Levin. I will conclude, but I need to reclaim the floor
because apparently all time otherwise is counted against my
allotted time postcloture.
Mr. President, I ask unanimous consent the pending
amendment be set aside and that I be allowed to call up the
amendment I filed at the desk relative to this subject which I
understand has been ruled germane.
The Presiding Officer. The Senator from Pennsylvania.
Mr. Santorum. Reserving the right to object, I want to make
a couple of points.
No. 1, the Senator from Michigan suggested that all
amendments that are germane postcloture should be allowed to be
offered. I wish that were the case. I wish we had the
opportunity to do that in all situations, but that has not been
the case in this Senate, or has not been necessarily the
history of the Senate. There have been many instances where
germane amendments have not been allowed to be offered
postcloture.
No. 2, I make a point and reiterate the point that the
chairman of the committee has made. The Senator from Michigan
has made the point that FASB has been compromised because it
wanted to do things and it felt constrained by the constituency
which funds it. We have set up an independent funding source
for FASB now, and I think that would allow a lot more
independence to be able to deal with these accounting issues,
such as the way we treat stock options, in a way that allows an
independent judgment.
Finally, while we do have a sense of the Senate that is 8
years old on this issue, the Congress has never directed FASB
to study an issue of accounting. This is precedent setting.
There is nothing in this bill that directs FASB to do anything.
It is an independent board. It sets up the accounting
standards. I think there is no question that it will in all
likelihood review this issue.
For the Congress to begun to weigh in--even 8 years ago, we
did not direct FASB to do this; we simply expressed our
opinion. To direct FASB to do something would be a very bad
precedent to set.
I object.
The Presiding Officer. The objection is heard.
The Senator from Michigan.
Mr. Levin. Mr. President, I see no reason that a vote
should not be permitted on this amendment. That is what this
objection leads to. I urge we come back on Monday, or whenever
we do come back, and I will make this motion again because this
is a critical issue, that is not addressed in this bill, which
is a big part of the lack of credibility we have right now in
our markets. It needs to be addressed in some way. This is a
neutral way to do it.
The arguments given by our friend from Pennsylvania are
reasons to vote no on an amendment. They are not reasons to
prevent an amendment from being called up and being offered.
I will say again, I don't know where an amendment that is
ready to be offered is not permitted to be offered because
postcloture one side of the aisle has decided it is going to
leave a first-and second-degree amendment standing out there
without a vote in order to prevent other germane amendments
from being voted on. I don't think that has ever happened.
Obviously, we have reached the end of the 30 hours at times and
there are still germane amendments that are pending. But this
is not that situation.
There is no further debate on the Carnahan amendment that I
know of. Why not vote on the Carnahan amendment? There is no
further debate--or if there is, let the debate take place so
that other people can offer their germane amendments. That is
being precluded here. I believe it is a misuse of postcloture
rules to do that.
That being the situation, I will be offering a unanimous
consent at this time that my amendment be made in order at 2
p.m. on Monday.
The Presiding Officer. Is there objection?
Mr. Santorum. I object.
Mr. Levin. I thank the Chair, and I will make a unanimous
consent request again on Monday that we be allowed to offer
germane amendments in the time that remains on Monday and that
we not be precluded by a blocking action which, it seems to me,
is a distortion and a misuse of the postcloture rules which are
intended to allow 30 hours to consider germane amendments. If
that 30 hours is being used up and either being sworn off or
not used, it seems to me that then precludes consideration of
highly relevant--indeed, germane--amendments which are
important to strengthening this bill.
I thank the sponsors of this bill. It is a strong bill.
There is no reason we should not be able to vote on a way to
make it stronger.
I yield the floor.
Mr. Graham. Mr. President, I appreciate the chance to speak
about the Public Company Accounting Reform and Investor
Protection Act. I would like to strengthen section 302 of this
legislation which is entitled, ``Corporate Responsibility For
Financial Reports.''
I have discussed several ideas with Senator Sarbanes and
greatly appreciate his leadership on this legislation. He has
been tireless in his efforts to strengthen corporate
accountability and protect the American investing public.
My first area of concern involves companies that have
chosen to move their headquarters overseas. This legislation
requires that CEOs and CFOs sign a statement saying that the
financial documents they have filed are fair and accurate. This
is consistent with an order just issued by the Securities and
Exchange Commission, SEC, that requires CEOs and CFOs to attest
to the accuracy of their company's most recent financial
statement.
But there is a glaring omission to this recent SEC order.
Only companies that are U.S.-based would be required to send in
these signed documents. If a company once based in the U.S. has
fled our shores and gone overseas for tax reasons, they now
just received a reward for leaving our Nation. Those CEOs and
CFOs would not have to sign financial documents and attest to
their accuracy.
The SEC has also overlooked the accuracy of future
financial documents by non-U.S.-based companies. Under a
proposed rule, that is in the ``open comment period,'' foreign
based companies are again enjoying a lesser standard of
accountability. This is wrong, and unfair to American
companies.
In the proposed rule, the SEC does invite comments on how
to cover overseas-based companies. However, this could be a
case of ``too little too late.'' If companies are being
publically traded in the United States, regardless of where
their headquarters are located, they ought to be required to
meet the same level of accountability that we are establishing
for everyone else in this legislation.
Let's not give U.S.-based companies one more reason to
leave our Nation and incorporate someplace else. We need to
hold all companies in our markets to the same high standard--
there should be no reward of a lower standard if your company
leaves the U.S. for a new overseas headquarters.
My staff placed a call to the SEC to uncover the reason why
foreign based companies were excluded from their recent order.
To the credit of the SEC, they wanted to act quickly. They
thought that the quickest way to promulgate this order was to
cover only U.S. based companies. However, in doing this
quickly, they ended up sending the wrong message. U.S. based
CEOs and CFOs are ``on the hook'' in signed statements.
Foreign-based CEOs and CFOs, simply put, are not.
Senator Dorgan and I want to change this. We want it to be
clear in the statute that no matter where your company is
based, you must comply with this obligation. Senator Dorgan has
filed an amendment to correct this, amendment No. 4125.
I appreciate the consideration that the floor managers,
Senator Sarbanes and Senator Gramm, have given our amendment
and I encourage all my colleagues to support us in this effort.
I look forward to seeing it in the final legislation.
Mr. Johnson. Mr. President, I rise today to urge my
colleagues to take swift and decisive action to stem the tide
of corporate greed that is eroding the integrity of America's
capital markets. I am a strong believer in the free enterprise
system, and I am proud of America's leadership in creating
tremendous economic opportunity for all investors, big or
small, domestic or foreign. However, it is time that Congress
curb the appalling corporate excesses and misinformation that
have hurt investors, employees and taxpayers. Passage of the
Public Company Accounting Reform and Investor Protection Act is
a critical step in addressing these concerns.
It is tempting to blame the problems corporate America is
facing on just a few bad actors. For the most part, America's
business men and women are industrious, innovative, and honest
people who work hard to build our economy and provide jobs for
our communities. However, we simply cannot ignore the shocking
number and size of failed or failing companies, the marked
increase in earnings restatements, and the profound toll this
has taken on hard-working Americans. In fact, state pension
funds have plummeted more than $1 billion from the WorldCom
restatement and billions more from other companies involved in
the scandals.
In light of these inexcusable revelations, it is hard to
believe that these problems are just isolated instances. Almost
daily discoveries of accounting irregularities at some of
America's largest and most highly respected companies, such as
Enron, WorldCom, Tyco, and Xerox, to name just a few, clearly
demonstrate the need for systemic accounting and corporate
governance reform. Just recently, in fact, the Wall Street
Journal reported that the drug company Merck may have
understated revenue by over $12 billion.
We must address systemic problems that are undermining the
efficiency and transparency of our free market system, and
which are eroding the faith of everyday Americans in the
fundamental fairness of American business practices. We must
clean up the current corporate culture that rewards misleading
financial reporting and lax or corrupt corporate governance. We
need strong legislation that will end the conflicts of interest
and lack of disclosure that have misled investors and shaken
their faith in America's financial markets. And we need to
ensure that the SEC has the tools and money it needs to become
a strong and formidable enforcer of securities laws. A kinder
and gentler SEC serves only those corporate executives who have
something to hide.
The Public Company Accounting Reform and Investor
Protection Act addresses these problems in a way that limits
regulatory burden but provides affirmative measures to restore
the integrity of our free market system. I support the bill's
creation of a strong Public Company Accounting Oversight Board
and restrictions on non-audit services accounting firms can
provide to public company audit clients. Further, the bill
imposes tough new corporate responsibility standards and
implements controls over stock analyst conflicts of interest.
Also, the bill requires public companies to quickly and
accurately disclose financial information, so that high-level
executives don't have a head start over small investors in
bailing out when a company is in trouble. Finally, the bill
ensures that the SEC has the resources to accomplish its
mission of regulating the securities markets.
On this last point, I was disappointed that President
Bush's budget did not include money that the Banking Committee
authorized last year that would have strengthened the SEC. The
SEC has long been hobbled by its inability to compete for top-
notch employees because of a pay scale that was out of line
with other financial regulators. Late last year, Congress
passed, and the President signed, H.R. 1088, which provided pay
parity for SEC employees. Unfortunately, the President's budget
did not allocate additional funds, making it difficult if not
impossible for the SEC to carry out its enforcement mission. I
am pleased that President Bush is now calling for additional
funding for the SEC, which should be better able to police
public companies with adequate resources.
Without the threat of real consequences, however, dishonest
corporate executives have little to fear from being caught with
their hands in the cookie jar. For this reason, Congress must
implement a plan to hold irresponsible corporate executives
responsible for their actions. We must not allow these
criminals to hide behind the corporate veil, while stealing
millions of dollars from hard-working Americans. In that vein,
I support provisions contained in the Corporate and Criminal
Fraud Accountability Act, sponsored by Senator Leahy. The bill
would provide stronger criminal penalties for corporate
managers who defraud investors of publicly traded securities,
criminal prosecution of persons who alter or destroy documents
related to investigations, and protection for corporate
whistleblowers against retaliation by their employers, among
other provisions designed to protect investors from corporate
greed.
Finally, I believe that we should take a strong stance
against another form of corporate greed: corporations that
profit from American consumers, yet intentionally dodge U.S.
taxes by moving their headquarters abroad. It is outrageous
that these so-called ``American'' companies take advantage of
the benefits of operating in this country and yet shirk even
the most basic responsibilities of corporate citizenship.
That's why I strongly support the Tax Shelter Transparency Act,
sponsored by Senator Baucus, which would close the loopholes
that allow corporate executives to use evasive accounting
tactics to enrich themselves on the backs of American
taxpayers.
Before I close, I would like to thank Chairman Sarbanes for
his leadership on this important issue. I also want to thank
the Chairman as well as the Banking Committee staff for
conducting a series of ten inclusive and comprehensive hearings
on the issues addressed in his bill. The content of those
hearings provided a conceptual foundation for our subsequent
discussions of Senator Sarbanes' bill and a previous bill
proposed by Senators Dodd and Corzine. In addition, our work
has been enhanced by the fine contributions of Senator Enzi,
who is the Senate's only Certified Public Accountant. The
deliberative process used to develop this legislation has led
to an appropriate, thoughtful, bipartisan bill that makes great
strides in addressing the problems in our financial markets and
restoring investor confidence.
Ms. Landrieu. Mr. President, I would like to voice my
strong support for S. 2673, the Public Company Accounting
Reform and Investor Protection Act. This legislation will bring
accountability to our corporate boardrooms and end the
accounting abuses that threaten to undermine the free
enterprise system.
The hallmark of our economic system is free, fair, and open
competition. The system rewards innovation, efficiently, and
hard work. It allows individuals to take an idea, a dream, or
an invention; build a business around it; and turn it into a
livelihood. Some of our greatest corporations today started
with just one idea.
The recent revelations from Wall Street have thrown much of
this in doubt. For the Enrons, and WorldComs of the world,
success was based on hiding losses, misstating earnings,
destroying documents, and getting cozy with their so-called
``independent'' auditors and the stock analysis who are
supposed to give the stock buying public objective information.
Instead of winning through open competition, these companies
and others won through accounting sleight-of-hand.
The price of this deception has been too high. While much
has been made in the media about how far the Dow, the NASDAQ,
and the S & P 500 have fallen on Wall Street, the real pain is
being felt on Main Street--in retirement plans, pensions, and
the investment portfolios of hard working people in our
country. The pain is being felt by the very wealthy and people
with modest means. Fortunately no Louisiana-based corporation
has been caught up in this mess and hopefully that will remain
the case, but many Louisiana investors were not so lucky.
Many have said that all of these problems have been caused
by a few bad apples. But when we hear about corporations hiding
losses, creating off-book partnerships, insider trading, and
inside loans to corporate officers, it means that something may
be wrong with the whole tree: the tree is rotten because of
loopholes in regulations and limited oversight.
My State of Louisiana is home to a large number of small
businesses--94,000 of the employer businesses in my state
employ fewer than 500 people--and they employ about 54 percent
of the state's workforce. This does not include the estimated
135,000 self-employed people in my state. I find myself
wondering what small business owners think of all of the news
reports about these big, sophisticated corporations and their
crooked accounting?
Small business owners work hard to keep clean books. They
do not have a team of creative accountants that turn losses
into gains. The small business does not create sham, off-book
partnerships to hide losses. I have never heard of a small
business being forced to restate its earnings. Small business
grow by playing by the rules. Many small business owners dream
of taking the honest approach to turning their ideas and dreams
into big businesses. How disheartening must it be for them to
see that in the world of big corporate business the way to get
ahead is by cheating.
The bill before us today will help restore faith in the
free market. It creates a strong oversight board that will set
auditing standards for public companies backed up with the
power to investigate abuses. It gets rid of the inherent
conflict of interest faced by accounting firms that provide
management consulting services to their auditing clients. Here
on the floor we have added tough criminal penalties to this
bill and given greater protections to whistles blowers. The
whistle blower protections are an especially needed reform. We
want the honest people in business to know that there is still
a place for them.
We must take this opportunity to restore confidence in the
free market. I urge my colleagues to vote in favor of this
legislation and I want to commend the chairman of the
Committee, Mr. Sarbanes, for bringing this legislation to the
floor.
VOTE EXPLANATION
Mr. Kerry. Mr. President, due to a longstanding
commitment I was necessarily absent for the vote on cloture
on the Public Company Accounting Reform and Investor
Protection Act of 2002 (S. 2673). Although my vote would
not have affected the outcome, had I been present, I would
have voted for cloture on the bill.
VOLUME 148, MONDAY JULY 15, 2002, NUMBER 95,
PAGES [S6734-S6793]
Public Company Accounting Reform and Investor Protection Act of 2002
The Presiding Officer. Under the previous order, the Senate
will now resume consideration of S. 2673, which the clerk will
report.
The assistant legislative clerk read as follows:
A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to increase
corporate responsibility and the usefulness of corporate
financial disclosure, to protect the objectivity and
independence of securities analysts, to improve Securities and
Exchange Commission resources and oversight, and for other
purposes.
Pending:
Edwards modified amendment No. 4187, to address rules of
professional responsibility for attorneys.
Reid (for Carnahan) modified amendment No. 4286 (to
amendment No. 4187), to require timely and public disclosure of
transactions involving management and principal stockholders.
The Presiding Officer. Under the previous order, the
Senator from Michigan, Mr. Levin, is recognized.
Mr. Levin. Mr. President, I wonder if I might inquire as to
how much time I have on my allotted time under postcloture
rules.
The Presiding Officer. The Senator has 36 minutes
remaining.
Mr. Levin. I thank the Chair.
I will at a later time ask unanimous consent that the
pending second-degree amendment be laid aside so I can offer a
germane second-degree amendment relative to stock options.
My amendment, which is at the desk, would direct the
independent accounting standards board to review the accounting
rule on stock options and adopt an appropriate rule within 1
year.
It should not be necessary to seek unanimous consent. The
whole purpose of our postcloture rules is to allow those of us
who have germane amendments such as this one to offer that
amendment, to have it voted on. It is a frustration of the
clear intent of our rules to not allow germane amendments to be
voted on after cloture is invoked.
We have a strict rule. It is called cloture. It ends
debate. When cloture was invoked, I had pending an amendment
which would have given the Securities and Exchange Commission
greater powers to impose civil fines administratively. It is an
important addition to SEC powers. They now have that power over
brokers, but they don't have it over corporate directors. They
don't have it over corporate managers. They ought to have the
power to impose civil fines administratively--subject, of
course, to appeal to the courts--relative to corporate
directors and corporate officers.
That amendment, as relevant as it is to this bill, was
frustrated when cloture was invoked and when all the time up to
that vote was utilized so that my SEC amendment was not allowed
to come up for a vote.
Now we are in postcloture. Now we are under postcloture
rules. The question is whether or not the intent of those rules
is going to be carried out, which is to allow those of us who
have germane amendments to have a vote on those amendments.
The amendment on which I would like to have a vote cannot
be voted on because there is a pending first-degree amendment
and a pending second-degree amendment. So the second-degree
amendment would have to be laid aside in order to allow a vote.
As long as the opponents of this stock option accounting
amendment don't allow the first- and second-degree amendments
that are pending to come to a vote, we are foreclosed from
offering germane amendments.
That is not the intent of our postcloture rule. I believe
it is an abuse of the intent of our postcloture rule. I hope it
will not happen here. I am hoping against hope that there will
not be an objection to my unanimous consent request so that
this most critical issue can be addressed by the Senate.
If we don't address this issue, it seems to me we are
leaving a significant gap in the reforms we are struggling so
hard to adopt to try to restore honesty to accounting rules.
In 1994, the Financial Accounting Standards Board issued a
tentative rule which said that stock options should be expensed
like all other forms of compensation. That is what they decided
was the right thing to do.
Well, Congress intervened. The executives intervened
strongly, beat back FASB with huge pressure, all set out in the
FASB account of its rule. By the way, one of the most
extraordinary documents I have ever read, as a matter of fact,
in 24 years in the Senate, is that Financial Accounting
Standards Board history of their effort to bring honesty to
accounting for stock options, in their judgment, and how that
effort was beaten back by pressure from executives and from
Congress so that their very existence was at stake if they
proceeded in a way which they thought was right. All set forth
in the record. It is quite an amazing document.
So what FASB did was, they said: We can't survive if we do
what we think is right. So what we will do instead is we will
urge people to expense options. We will urge corporations to
expense their options, but we will not mandate it.
FASB said: If you don't expense options, at least disclose
the cost of the options as a footnote in your financial
statements.
That was the way they decided to survive. This body voted,
put some of the pressure on FASB, basically told them to leave
stock option accounting alone. So we intervened on an
accounting issue with a vote of something like 90 to 10 or
thereabouts.
The executives weighed in. I was at one of the meetings in
Connecticut when the executives weighed in heavily on this
issue. So I saw the pressure that was brought to bear on what
should be an independent accounting standards board.
Now we are doing something different in this bill. We are
saying to the board that we are going to give you an
independent source of funding. We are not going to make you
dependent directly for your funding from the very people you
are seeking to regulate through your accounting standards. So
we are making some progress now by giving them an independent
source of funding.
What my amendment would do is take what is the most
significant post-Enron issue that is left open, which is
accounting for these huge amounts of stock options that go
mainly to executives, and direct this board that now has an
independent source of funding to review--``review'' is the key
word--this matter and make an appropriate decision within 1
year.
Mr. McCain. Will the Senator yield for a question?
Mr. Levin. I wonder if I can yield on the time of the
Senator from Arizona, because time is so limited here that I am
going to have very little. I think the Senator has a half hour
and, assuming that the Senator can be recognized, I believe
that I only have about 10 or 15 minutes of time remaining. I
wonder if the Senator from Texas would permit that I be allowed
to yield to the Senator from Arizona, if the Senator from
Arizona is willing to ask a question to be taken out of his own
time.
Mr. Gramm. Reserving the right to object, the Senator
started out with a unanimous consent request and then launched
into a speech.
The Presiding Officer. There is no request pending.
Mr. Gramm. Maybe if the Senator would do his unanimous
consent request and then yield, that would be fine.
Mr. Levin. I would rather do my unanimous consent request
at the end of the time, rather than at the beginning of the
time. I make a parliamentary inquiry. If I make a unanimous
consent--
Mr. Gramm. I don't object to the Senator yielding. I wanted
to be sure we had the time we were supposed to have.
Mr. Levin. I ask unanimous consent that the Senator from
Arizona, if he is willing, be able to ask a question on his
time. I yield to the Senator from Arizona for that question and
then I retain the floor.
The Presiding Officer. Without objection, it is so ordered.
Mr. McCain. Mr. President, I will be very brief, due to the
shortness of time. I wonder if the Senator from Michigan
remembers my comments last Thursday when I referred to an old
boxing term, ``the fix is in.'' There was no vote allowed on my
amendment, which is a clearcut, absolutely unequivocal
statement about the use of stock options for accounting. Does
the Senator really believe that, since my amendment was blocked
by that side, his amendment is not going to be blocked by this
side?
The fix is in, I say to the Senator from Michigan. I hope
he knows that. This is a terrible mistake, a terrible mistake,
because we are not addressing what every observer knows is a
vital and critical aspect of reforming this system, which
continues to so badly erode the confidence of the American
people, the investors, which is over half of the American
people.
I wonder if the Senator from Michigan remembers what I said
last week, that the fact is the fix is in. I didn't get a vote
on my amendment and the Senator from Michigan won't get one on
his. Very frankly, since that side blocked my vote, I can
understand them blocking this vote. I think it is wrong on both
sides.
The American people deserve to know how we stand on the
issue of stock options. Does the Senator understand that?
Mr. Reid. Will my friend yield for a question on my time?
Mr. Levin. I am happy to.
Mr. Reid. The Senator will recall the Senator from Arizona
talking about the fix being in, and the Record will clearly
reflect that the Senator from Arizona asked that his amendment
be in order postcloture, and, as the Senator from Michigan will
recall, I objected to that because at that time we had 56 other
amendments that were pending. They also wanted them to be in
order.
Mr. McCain. If the Senator will yield, that is not correct.
Mine was a motion to recommit.
Mr. Reid. I am talking about the objection about which I
was involved, and does the Senator from Michigan recall that
objection to the unanimous consent request by the Senator from
Arizona?
Mr. Levin. I believe I do recall the objection to the
request, and I would rather let the Record speak for itself as
to the other matters because I think the issue before us is a
somewhat different issue than we faced on the McCain-Levin
amendment last week. Now we have a Levin-McCain-Corzine
amendment, which is somewhat different. I supported Senator
McCain's amendment, and, indeed, I have been very active in
trying to get this accounting rule adopted in the way the
independent accounting board wants to have it adopted. That is
the key emphasis.
Mr. Sarbanes. Will the Senator yield on my time for a
question?
Mr. Levin. I am happy to yield.
Mr. Sarbanes. As I understand the Senator's amendment--the
one he will be seeking to offer.
Mr. Levin. I will be seeking unanimous consent to have the
second-degree amendment laid aside so that I can do so.
Mr. Sarbanes. As I understand it, this amendment is not the
Congress trying to legislate what the accounting standard
should be; is that correct?
Mr. Levin. The Senator is correct.
Mr. Sarbanes. I think that is important because I, frankly,
do not think that the Congress should get into the business of
trying to legislate accounting standards. I don't think we have
the expertise or the competence to do it. And it turns
established accounting standards into a straight-out political
exercise, and I don't think that is wise.
As I understand the Senator's amendment, it would simply
reference the issue of the treatment of stock options to the
financial accounting standards board, for them to make their
own independent judgment as to how this matter should be
treated, is that correct?
Mr. Levin. The Senator is correct.
Mr. Sarbanes. And I understand that the terms of reference
are such that it does not presuppose a particular substantive
conclusion; it is, in effect, left open, or even level, however
you want to describe it--a level playing field for FASB, the
expert body that has been established to make these judgments
to make its own independent judgment as to how these matters
should be addressed, is that correct?
Mr. Levin. The amendment directs FASB to review the issue
and adopt an appropriate standard. Those are the words in the
amendment. I must tell my good friend from Maryland, however,
that there is a history here that cannot be ignored.
The history is that FASB tried to adopt a standard in 1994.
They said what the right standard was. They were beaten back
and brow-beaten and pressured, so they had to give up what they
believed is right. That is in their own history. Then they
recommended to corporations to expense options, because that is
the right thing to do. But they offered an option to
corporations to simply disclose the value of options in their
financial statement in a footnote. They left that option open.
So I have two hopes here. One is that there will not be an
objection to a vote on this amendment. For the life of me, I
cannot see how anybody can object to a vote on an amendment,
which simply tells the independent accounting standards board
to reach an appropriate decision.
Now, we did intervene 8 years ago, and I believed it was
wrong for us to intervene. Nine of us voted no; 90 voted yes.
We told them: Do not change the rule; do not expense options.
In my judgment, it was wrong procedurally and it was wrong
in terms of the substance. But it is my hope that, No. 1, we
will be allowed to have a vote, and, No. 2, it would be my
expectation, however, if it is left to the independence of
FASB, that FASB would continue to do what they said was the
right thing, which is to expense options.
It is left to their independent judgment to reach an
appropriate conclusion under the language of my amendment.
Mr. Sarbanes. So it would be FASB's call?
Mr. Levin. It would be FASB's call.
Mr. Sarbanes. Mr. President, I simply want to say I am
supportive of this amendment. I think this is the right way to
go about it.
Let me repeat, I do not think the Congress itself should be
in the business of legislating accounting standards, but this
amendment does not do that. It references the issue to the very
body that has been established to accomplish that, which has
the expertise and the competence. The amendment also helps to
underscore the independence of FASB and a Congressional
perception that they should call it as they see it. I hope at
the appropriate time the Senator will be able to obtain
permission to bring his amendment before the body.
I thank the Senator for yielding.
The Presiding Officer. The majority leader is recognized.
Mr. Daschle. I am sorry. I think the Senator from Michigan
has the floor.
The Presiding Officer. The Senator from Michigan has the
floor.
Mr. Levin. I ask unanimous consent that I yield to the
majority leader for whatever time he wishes to take and that
time not be taken from the few minutes I have remaining, and
that the floor be returned to me at that time.
The Presiding Officer. Without objection, it is so ordered.
Mr. Daschle. Mr. President, I will use my leader time so as
not to take any time still allotted to the Senator from
Michigan.
I hope we can get the unanimous consent request that the
Senator from Michigan is propounding. I will also say that this
is not a question of if he can get consent and ultimately bring
the amendment to the floor. One way or the other we will have a
vote on the Levin amendment. It may not be on this bill this
afternoon if we fail, but our colleagues need to know we will
have a vote on this amendment. This will occur. If I have to
offer it myself, we will have a vote on this amendment. So we
can do it this afternoon, we can do it tomorrow, or we can do
it next week. We are going to have a vote on this amendment.
Senators need to take that into account before they object.
Let me say as strongly as I can, this amendment belongs on
this bill. This is exactly what I think we ought to be doing,
and I think on a bipartisan basis there is strong support for
what Senator Levin is proposing.
I want to speak briefly this afternoon, in my leader time,
on the amendment itself. I think it is important, as my
colleagues have been noting, that the Levin amendment contains
precisely the right solution to the difficult problems of
determining the proper accounting treatment for stock options.
It reserves that judgment for the appropriate body, the
Financial Accounting Standards Board. They are the ones given
the authority, they are the ones with the credibility, they are
the ones with the standing to make the right decisions about
this very important and complex matter.
I argue this is the heart of our ability to deal with the
accounting reforms that are in the Sarbanes and Leahy bills.
It has become all too clear that accounting standards are
complex and can be easily manipulated by aggressive and
sometimes unscrupulous corporate executives. Unfortunately,
FASB's weak, dependent condition has contributed to those
manipulations. In fact, it is arguable that the undermining of
FASB's independence was the necessary precondition to the
crisis in confidence afflicting our capital markets today.
One of the many virtues of the Sarbanes bill is that it
corrects that situation. It provides for a new, improved FASB,
giving it for the first time full financial independence from
the accounting industry. That certainly is the first and most
vital improvement we need with respect to establishing clarity
and regularity of accounting standards.
Another needed improvement is for those of us in Congress
to allow FASB to do its job. In 1994--and my colleagues have
referenced this--when this issue was last taken up by the
Senate, I am proud to say I was one of nine Senators who voted
against the Senate intruding itself on FASB's decisionmaking
process. That is the only reason I opposed my colleague's
amendment last week. As well intended as it is, in my view it
did the same thing on the other side that they were trying to
do 9 years ago. It asserts Congress's authority to undermine
the independence of that board. I opposed it 9 years ago, and I
oppose it today, but for obviously different
results.
At the same time, the Senate was coming at the options
issue from the direction of prohibiting expenses back in 1994,
and as I said today the momentum is the opposite, but the right
course is the same. Let the experts on the accounting standards
board do their job and make the appropriate decision. Eight
years ago, the technical accounting questions were essentially
the same as they are today, although obviously 8 years have
given us an entirely different perspective than the one we had
back then. Nonetheless, the questions are still real.
Accountants still debate the relative merits of the opposing
sides. We still have expert opinion going both ways. On the one
hand, the argument is made that if options are not expensed,
bottom lines look far more attractive than they actually should
be, and the investors can be deceived by the distorted
financial pictures that result.
On the other hand, we hear that it is inherently impossible
to value options with no concrete reality behind what the
options will actually be worth when they are exercised. There
is also a real debate about the incentive effects of options.
Supporters argue that they better align an employee's
interests with the company's. Opponents contend they result in
a ``pump and dump'' mentality, with senior executives seeking
to inflate their stock prices at any cost so they can quickly
and cynically enrich themselves.
In contrast to those complex questions, the Levin amendment
is simplicity itself. It is one sentence. It says that FASB
shall:
Review the accounting treatment of employee stock options
and shall, within one year of enactment, adopt an appropriate
generally-accepted accounting principle for the treatment of
employee stock options--
End of issue.
The business of setting accounting standards is lodged, by
the Levin amendment, in the board that the Sarbanes bill
expressly seeks to strengthen and improve. I fully support the
Levin amendment and the philosophy behind it. Congress should
not be engaged in setting technical accounting rules. We should
be seeking to do the reverse: Establish an independent FASB
that can help restore confidence in the accuracy of financial
information.
I observe in this context that because of that principle,
as I said a moment ago, while well intended, I believe the
McCain amendment went too far and did exactly what we were
trying to do in 1994 but on the flip side. Restoring
independence to the accounting standards is one of the
overriding objectives of the Sarbanes bill, and that is one of
my main reasons for supporting it as strongly as I do. That was
my primary reason for voting in 1994 against a previous attempt
to direct FASB in its decision about expensing, and it is the
primary reason for supporting the Levin amendment today.
So I will end on this particular issue where I began. There
will be a vote on the Levin amendment. It will be today,
tomorrow, next week, or at some point in the future, but
Senators should not be misled. If there is an objection today,
it by no means ends the debate. We might as well have it. We
might as well get it. We might as well include it in the
Sarbanes bill because it will be included in one fashion or
another, ultimately, before the work has been done in the
Senate on this very important, complex, and comprehensive
challenge we face.
The Presiding Officer. The Senator from Michigan is
recognized.
Mr. Levin. How much time do I have remaining?
The Presiding Officer. The Senator has 25 minutes
remaining.
Mr. Levin. Mr. President, I quote from a few observers what
the stakes are in this vote and what the stakes have been in
terms of the way in which stock options have not been expensed,
have been stealth compensation, have fueled the incredible
increase in terms of executive pay, and have been a driving
force behind the deceptive accounting practices which have
bedeviled this Nation and undermined public confidence in the
credibility of our financial statements.
Robert Samuelson, an economist, said the following:
The point is that the growth of stock options has created
huge conflicts of interest that executives will be hard-pressed
to avoid. Indeed, many executives will coax as many options as
possible from their compensation committees, typically composed
of ``outside'' directors. But because ``directors are
[manipulated] by manage-
ment, sympathetic to them, or simply ineffectual,'' the amounts
may well be ex-
cessive. . . .
Stock options are not evil, but unless we curb the present
madness, we are courting continual trouble.
This is what a retired vice president at J.P. Morgan and
Company said: There can be no real reform without honest
accounting for stock options. A decade ago, the Financial
Accounting Standards Board recommended options be counted as a
cost against earnings like all other forms of compensation, but
corporate lobbyists resisted and Congress did their bidding.
Alan Greenspan and Warren Buffett, among others, are calling
for the same change now, but it remains to be seen whether the
accounting profession can act without congressional
interference. Treating options like other forms of pay would
make executive compensation transparent, diminish the
temptation to cook the books, and make managers less inclined
towards excessive risk taking.
Warren Buffett, who was quoted by Senator McCain last week,
said the following: If options aren't a form of compensation,
what are they? If compensation isn't an expense, what is it? If
expenses shouldn't go into the calculation of earnings, where
in the world should they go?
A New York Times editorial of March 31 of this year stated:
We have no quarrel with the business lobby's claim that
stock options have helped fuel America's entrepreneurship,
particularly in Silicon Valley. But in the interest of truthful
accounting and greater financial integrity, options should be
treated as what they are, a worthy form of compensation that
companies must report as an expense.
Robert Felton, director of McKinsey & Company's Seattle
office, said:
Because they have so much at stake with these huge grants,
options are likely to have encouraged some managers to cheat
and cook the books.
Allan Sloan of Newsweek:
. . . options are a free lunch for companies. . . .
I'm all in favor of employees becoming millionaires via
options--I'm an employee, after all--but I'm also in favor of
companies providing profit-and-loss statements that show the
real profit and loss. Ignoring options' costs and low-balling
CEO packages are simply outrageous. When campaigns start
expensing options and disclosing true CEO and director
compensation numbers, I'll believe that they've seen the light.
According to the Economist, last year, stock options
accounted for 58 percent of the pay of chief executives of
large American companies. So over half the compensation of our
CEOs of major companies now comes from stock options. To leave
that expense off the financial statements' bottom line is to
distort what is going on at companies. It is part of the reason
we have not had accurately reflective financial statements at
our corporations. It is part of the reason for the soup we are
in right now.
Where financial statements have been giving a false picture
of what a company's financial situation is, it has provided
stealth compensation in huge amounts to executives, it has
watered down the value of stock to the owners of a corporation.
That is why now we have such tremendous support from the
organizations which represent stockholders.
That is why, for instance, TIAA-CREF, the largest pension
fund in the United States for teachers is supportive of
changing the accounting for stock options. It is why the
Council for Institutional Investors, which is the leading
shareholders organization for pension funds, now favors
expensing stock options in order to give an accurate reflection
of what a company's financial statement is. It is why the AFL-
CIO supports the amendments offered last week and the amendment
which hopefully will be offered today if we are allowed to have
a vote on this.
Alan Greenspan says this is the top post-Enron reform.
Expensing stock options is the top post-Enron reform. That is
the Chairman of the Federal Reserve. Paul Volcker, former
Federal Reserve Chairman, supports a change in stock option
accounting. Arthur Levitt, former SEC Chairman, supports the
change; Warren Buffett, as we mentioned; and a host of
economists. Standard & Poor's believes you have to expense
stock options if you are going to show an accurate earnings
calculation; Citizens for Tax Justice; Consumer Federation of
America; Consumers Union, and on and on.
The Washington Post of April 18 says the following:
. . . expert consensus favors treating options as a
corporate expense, which would mean that reported earnings
might actually reflect reality. . . . But nobody wants to ban
this form of compensation; the goal is merely to have it
counted as an expense.
That is the end of that particular quote. I would like the
entire quote printed in the Record, and I ask unanimous consent
that all the editorials and comments that I referred to be
printed in the Record in full.
There being no objection, the material was ordered to be
printed in the Record, as follows:
[From the Washington Post, Jan. 30, 2002]
Stock Option Madness
(By Robert J. Samuelson)
As the Enron scandal broadens, we may miss the forest for
the trees. The multiplying investigations have created a
massive whodunit. Who destroyed documents? Who misled
investors? Who twisted or broke accounting rules? The answers
may explain what happened at Enron but not necessarily why. We
need to search for
deeper causes, beginning with stock options. Here's a good idea
gone bad--stock options foster a corrosive climate that tempts
many executives, and not just those at Enron, to play fast and
loose when reporting profits.
As everyone knows, stock options exploded in the late 1980s
and the '90s. The theory was simple. If you made top executives
and managers into owners, they would act in shareholders'
interests. Executives' pay packages became increasingly skewed
toward options. In 2000, the typical chief executive officer of
one of the country's 350 major companies earned about $5.2
million, with almost half of that reflecting stock options,
according to William M. Mercer Inc., a consulting firm. About
half of those companies also had stock-option programs for at
least half their employees.
Up to a point, the theory worked. Twenty years ago,
America's corporate managers were widely criticized. Japanese
and German companies seemed on a roll. By contrast, their
American rivals seemed stodgy, complacent and bureaucratic.
Stock options were one tool in a managerial upheaval that
refocused attention away from corporate empire-building and
toward improved profit-ability and efficiency.
All this contributed to the 1990's economic revival. By
holding down costs, companies restrained inflation. By
aggressively promoting new products and technologies, companies
boosted production and employment. But slowly stock options
became corrupted by carelessness, overuse and greed. As more
executives developed big personal stakes in options, the task
of keeping the stock price rising became separate from
improving the business and its profitability. This is what
seems to have happened at Enron.
The company adored stock options. About 60 percent of
employees received an annual award of options, equal to 5
percent of their base salary. Executives and top managers got
more. At year-end 2000, all Enron managers and workers had
options that could be exercised for nearly 47 million shares.
Under a typical plan, a recipient gets an option to buy a given
number of shares at the market price on the day the option is
issued. This is called ``the strike price.'' But the option
usually cannot be exercised for a few years. If the stock's
price rises in that time, the option can yield a tidy profit.
The lucky recipient buys at the strike price and sells at the
market price. On the 47 million Enron options, the average
``strike'' price was about $30, and at the end of 2000, the
market price was $83. The potential profit was nearly $2.5
billion.
Given the huge rewards, it would have been astonishing if
Enron's managers had not become obsessed with the company's
stock price and--to the extent possible--tried to influence it.
And while Enron's stock soared, why would anyone complain about
accounting shenanigans? Whatever the resulting abuses, the
pressures are not unique to Enron. It takes a naive view of
human nature to think that many executives won't strive to
maximize their personal wealth.
This is an invitation to abuse. To influence stock prices,
executives can issue optimistic profit projections. They can
delay some spending, such as research and development (this
temporarily helps profits). They can engage in stock buybacks
(these raise per-share earnings, because fewer shares are
outstanding). And, of course, they can exploit accounting
rules. Even temporary blips in stock prices can create
opportunities to unload profitable options.
The point is that the growth of stock options has created
huge conflicts of interest that executives will be hard-pressed
to avoid. Indeed, many executives will coax as many options as
possible from their compensation committees, typically composed
of ``outside'' directors. But because ``directors are
[manipulated] by management, sympathetic to them, or simply
ineffectual,'' the amounts may well be excessive, argue Harvard
law professors Lucian Arye Bebchuk and Jesse Fried and attorney
David Walker in a recent study.
Stock options are not evil, but unless we curb the present
madness, we are courting continual trouble. Here are three ways
to check the overuse of options.
(1) Change the accounting--count options as a cost.
Amazingly, when companies issue stock options, they do not have
to make a deduction to profits. This encourages companies to
create new options. By one common accounting technique, Enron's
options would have required deductions of almost $2.4 billion
from 1998 through 2000. That would have virtually eliminated
the company's profits.
(2) Index stock options to the market. If a company's
shares rise in tandem with the overall stock market, the gains
don't reflect any management contribution--and yet, most
options still increase in value. Executives get a windfall.
Options should reward only for gains above the market.
(3) Don't reprice options if the stock falls. Some
corporate boards of directors issue new options at lower prices
if the company's stock falls. What's the point? Options are
supposed to prod executive to improve the company's profits and
stock price. Why protect them if they fail?
Within limits, stock options represent a useful reward for
management. But we lost those limits, and options became a kind
of free money sprinkled about by uncritical corporate
directors. The unintended result was a morally lax, get-rich-
quick mentality. Unless companies restore limits--prodded, if
need be, by new government regulations--one large lesson of the
Enron scandal will have been lost.
----------
[From the Washington Post, April 18, 2002]
Money Talks
Alan Greenspan, perhaps the Nation's most revered
economist, thinks employee stock options should be counted,
like salaries, as a company expense. Warren Buffet, perhaps the
Nation's foremost investor, has long argued the same line. The
Financial Accounting Standards Board, the expert group that
writes accounting rules, reached the same conclusion eight
years ago. The London-based International Accounting Standards
Board recently recommended the same approach. In short, a
rather unshort list of experts endorses the common-sense idea
that, whether you get paid in cash or company cars or options,
the expense should be recorded. Yet today's Senate Finance
Committee hearing on the issue is likely to be filled with
dissenting voices. There could hardly be a better gauge of
money's power in politics.
Why does this matter? Because the current rules--which
allow companies to grant executives and other employees
millions of dollars in stock options without recording a dime
of expenses--make a mockery of corporate accounts. Companies
that grant stock options lavishly can be reporting large
profits when the truth is that they are taking a large loss. In
2000, for example, Yahoo reported a profit of $71 million, but
the real number after adjusting for the cost of employee stock
options was a loss of $1.3 billion. Cisco reported $4.6 billion
in profits; the real number was a $2.7 billion loss. By
reporting make-believe profits, companies may have conned
investors into bidding up their stock prices. This is one cause
of the Internet bubble, whose bursting helped precipitate last
year's economic slowdown.
It is not surprising, therefore, that the expert consensus
favors treating options as a corporate expense, which would
mean that reported earnings might actually reflect reality. But
the dissenters are intimidated by neither experts nor logic.
They claim that the value of options is uncertain, so they have
no idea what number to put into the accounts. But the price of
an option can actually be calculated quite precisely, and
managers have no difficulty doing the math for the purposes of
tax reporting. The dissenters also claim that options are
crucial to the health of young companies. But nobody wants to
ban this form of compensation; the goal is merely to have it
counted as an expense. Finally, dissenters say that options
need not be so counted because granting them involves no cash
outlay. But giving employees something that has cash value
amounts to giving them cash.
The dissenters include weighty figures in both parties.
Sen. Joe Lieberman (D-Conn.) is the chief opponent of options
sanity in the Senate, and last week President Bush himself
declared that Mr. Greenspan is wrong on this issue. What might
be behind this? Many of the corporate executives who give
generously to politicians are themselves the beneficiaries of
options--often to the tune of millions of dollars. High-tech
companies, an important source of campaign cash, are fighting
options reform with all they've got. But if these lobbyists are
allowed to win the argument, they will undermine a key
principle of the financial system. Accounting rules are meant
to ensure that investors get good information. Without good
information, they cannot know which companies will best use
capital, and the whole economy suffers in the long run.
[From the New York Times, March 31, 2002]
Stock Option Excesses
In his Congressional testimony last month, Jeffrey
Skilling, Enron's former chief executive, offered a primer on
the misuses of stock options. Options, he said, are the most
egregious way for companies to pump up their profits
artificially. They also netted him a tidy $62.5 million in 2000
and helped Enron pay no income taxes in four of the last five
years.
Stock options, in theory, aren't a bad idea. By giving
employees the chance to buy a company's stock in the future at
today's price, corporations can provide an extra incentive for
hard work and can augment compensation. The New York Times
Company awards option to its top executives. But like other
rational business practices that got out of hand during the
boom years of the late 1990's, options have been abused by some
companies and are in need of reform.
A good place to start would be for Congress to end the
conflict between how the tax laws and the accounting rules
treat employees options. Alan Greenspan, the Federal Reserve
chairman, has identified that as one of the most pressing post-
Enron reforms affecting corporate governance.
That conflict creates a loophole that has allowed companies
to treat stock options as essentially free money during the
recent dot-come bubble. A company does not have to report
grants of stock options as an expense on its profit-and-loss
statements, as it does with other forms of compensation, but it
can deduct the options as an expense from its tax liability
when employees exercise them.
As a result, corporate executives can award themselves
oodles of stock options without fear of denting their profit
reports. Once the options are exercised, the company can treat
the appreciation in the shares' value--the employees' profit--
as an expense for tax purposes. At Enron, stock option
deductions alone turned what would have been a Federal income
tax bill of $112 million in 2000 into a $278 million refund.
Mr. Greenspan said last week that Federal Reserve Board
research found that the average earnings growth rate of the S&P
500 companies between 1995 and 2000 would have been reduced by
nearly a quarter if the companies had reported their stock
options as expenses on financial statements.
A decade ago, the accounting industry proposed a sensible
rule to make companies report options as expenses, but it was
beaten back by fierce corporate lobbying. Now Senators John
McCain and Carl Levin have proposed a bill that would end the
double standard, disallowing the tax deduction for any company
that fails to report options as an expense.
They are backed in that effort by investors like Warren
Buffet and big institutions like pension plans, which are
rightly incensed by abusive executive compensation schemes.
They are tired of unseemly practices like the repricing of
options to ensure that executives still get windfalls if the
stock price falls. Making interest-free loans for executives to
acquire stock (often forgiven if the bet does not pay off) is
another dubious compensation practice.
We have no quarrel with the business lobby's claim that
stock options have helped fuel America's entrepreneurship,
particularly in Silicon Valley. But in the interest of truthful
accounting and greater financial integrity options should be
treated as what they are: a worthy form of compensation that
companies must report as an expense.
Congress must end the dot-com-era notion that options equal
free money. That would be a first step toward reassuring
investors that top executives cannot treat publicly traded
companies as Ponzi schemes created for their own enrichment.
----------
[From Newsweek, May 20, 2002]
Show Me the Money (All of it)
(By Allan Sloan)
Watching corporate America these days is like watching
drunks at a revival meeting. They're vowing to sin no more, to
tell shareholders the straight truth instead of playing
accounting games, to embrace ``transparency'' so outsiders can
see what's going on. But talk is cheap. When it comes to action
on two key reforms--accounting for stock options, and showing
the value of chief executives' compensation packages--
corporations are as opaque as ever.
The accounting first. As things stand now, options are a
free lunch for companies--employees place a high value on them,
but companies can issue as many as they want without hurting
corporate profits. That's because companies don't have to count
options value as an expense. With reform in the air because of
Enron, old-math types like Warren Buffett and Alan Greenspan
are pushing to change accounting rules to force companies to
count the value of stock options as an expense in their profit-
and-loss statements. Accounting rule makers proposed this a
decade ago, but backed down under political pressure generated
by corporations, especially in options-happy Silicon Valley.
Then there's a second, little-known aspect of the options-
accounting debate. If companies have to count the value of
options as an expense, they would come under huge pressure to
report their value as compensation to the CEO, and to members
of the board. Under current rules, a company has to show
shareholders a table that includes how much it gave the CEO in
salary, bonus, long-term compensation and other benefits. But
the table has to show only the number of options granted to the
CEO, not their economic value. To find that, you have to hunt
on other pages--and you may not find it at all if the company
opts to report a different way. ``The original idea was to have
the value of options in the table, not the number of options,''
says Graef Crystal, a compensation expert who worked on the
disclosure rules. But, he says, the SEC backed down after
companies objected.
It's easy to see why companies would have been upset at
having to count options as compensation. In most pay filings I
see these days, the economic value of CEO and directors'
options exceeds their cash payments. So counting options would
more than double the typical package.
To see how this works, let's look at Dell Computer and
Knight Ridder, two companies I just happen to have looked at
recently. Dell's most recent statement shows that Michael Dell,
its billionaire owner and founder, earned $2.6 million in
salary and bonus. Not starvation wages, but not much for a big-
time CEO. On a different page, you see that he got options the
company valued at $26 million. That's major moolah. Dell
directors were paid a $40,000 annual retainer fee, but also got
options on $850,000 worth of Stock. The option's economic
value: around $300,000. Note that I'm not accusing Dell of
hiding anything--it's following the rules.
Dell shows why options have economic value when they're
granted, even if the stock subsequently falls. The directors
got their options when Dell stock was about $52, double today's
price. By getting options on $850,000 of stock rather than
buying 16,298 shares, directors avoided losing money--and
didn't have to tie up $850,000. Meanwhile, they had the same
upside as regular investors who risked $850,000. The company
says its compensation packages are skewed toward options, so
that employees and directors don't make out unless regular
stockholders do.
Now to Knight Ridder, which has been on a cost-cutting kick
for years. Last year chairman Tony Ridder got $935,720 in
salary and no bonus. He also got options on 150,000 shares.
Knight Ridder values the options at about $1.6 million, but by
most rules of thumb, they were worth twice that much. Knight
Ridder directors got a $40,000 annual fee--and 4,000 options.
The options were worth about $42,500 by Knight Ridder's math,
about $85,000 by conventional math. Knight Ridder says its
figures are lower because it assumes its options are exercised
much quicker than other analysts assume.
I'm all in favor of employees becoming millionaires via
options--I'm an employee, after all--but I'm also in favor of
companies providing profit-and-loss statements that show the
real profit and loss. Ignoring options' costs and low-balling
CEO pay packages are simply outrageous. When companies start
expensing options and disclosing true CEO and director
compensation numbers, I'll believe they've seen the light.
Until then, I'll assume that they're still on the bottle.
----------
[From the Wall Street Journal, May 3, 2002]
Accounting for Options
(By Joseph E. Stiglitz)
Deja vu. The post-Enron imbroglio over stock options is a reminder
that history--if forgotten--does indeed repeat itself. Eight years ago,
while serving on President Clinton's Council of Economic Advisers, I
was involved in a heated debate over information disclosure. The
Financial Accounting Standards Board had proposed a new standard that
would require firms to account for the value of executive options in
their balance sheets and income statements.
When FASB made its proposal for what would have clearly been an
improvement in accounting practices, Silicon Valley and Wall Street
were united in their opposition. The arguments put forward then are the
same as those put forward today, and they are as specious and self-
serving now as they were eight years ago.
outrageous
The most outrageous argument--but the one that had the greatest
impact--was that disclosing the information would adversely affect
share prices. That is, if people only knew how much their equity claims
on the firm could be diluted by options, they would pay less for their
shares! True, and that is precisely why the disclosure is so important.
Markets can only allocate resources efficiently when prices accurately
reflect underlying values, and that requires as good information as
possible. If markets overestimate the value of a particular set of
ventures, resources will mistakenly flow in that direction. This is
partly what caused the dot-com and telecom bubbles. Irrational
exuberance played its part, but so too did bad accounting--i.e.,
distorted information.
To be sure, information will never be perfect and asymmetries of
information are pervasive. But one of the key insights of the modern
theory of information is that participants do not always have an
incentive to disclose fully and accurately all the relevant
information, and so it is important to have standards.
This is where the second specious argument enters: Critics of
FASB's proposal claimed that it is impossible to value options
accurately, and accordingly, it would be misleading to include the
options within the standard accounting frameworks. To better understand
the falsity of this argument, let's take a closer look at how stock
options really work.
The basic economics of stock options are simple. Issuing stock
options does not create resources out of thin air. Executives like
stock options because they have value. But the value however measured,
comes at the expense of other shareholders. The right of managers to
buy shares is the right to dilute the ownership claims of existing
shareholders. When markets work well--when information is good--the
market will value today the issuance of a right to dilute, even when
that dilution may never occur, and if it does occur, would happen
sometime in the future.
The existing owners of the firm will participate less in the upside
potential of the market them they would have in the absence of the
options. In principle, they can calculate the circumstances when the
executives are likely to exercise their options, and therefore can
calculate the diminution in their potential gains from owning shares in
the company. That is why when this information is disclosed in ways
that can easily be understood by investors, it will lead to a fall in
the company's share price.
Making such calculations, however, is not easy or costless. In
principle, each shareholder could go through each of the items in the
firm's accounts to construct his own ``estimates'' but that would be a
foolish waste of resources, and the transaction costs would put a major
damper on capital markets and the market economy. That is why we have
accounting standards. Such information is like a public good: Better
standards--more transparency--lead to better resource allocation and
better functioning markets; and if participants have more confidence in
markets, they will be more willing to entrust their money to markets.
Which brings us back to the argument that it is ``impossible'' to
value options. Companies do, of course, have ways of calculating the
value of options and do it themselves all the time for their own
internal planning purposes.
AS for the question of whether an estimate based on a publicly-
disclosed formula would be misleading, because it is only an estimate,
that is true of many line items that are central to our accounting
frameworks, such as depreciation, `Calculations about the value of
options would be just as, or even more, accurate than standard
depreciation estimates are of the market value of the declines in asset
values that come with use and obsolescence--something which is a line
item on every accounting framework in corporate America and most of the
world. Of this much we can be sure: zero, the implied valuation used by
companies now when describing the cost of options in their balance
sheets and income statements, is a vast underestimate.
Those who argue against including options within the standard
accounting frameworks try to have it both ways: They believe that
market participants are smart enough to read through dozens of
footnotes to figure out the implications of options for the value of
their shares, but so dumb that they would be misled by the more
accurate numbers that would be provided under the reform proposals, and
unable to redo the calculations themselves.
transparency
There is one more reason for the U.S. to be resolute in improving
our accounting standards by including better accounting for options.
During the East Asia crisis the U.S. preached the virtues of
transparency but then refused to do anything about regulating the murky
world of offshore banking. America also preached the virtues of our
accounting standards only to find that the world was laughing at Enron
and Arthur Andersen. Tightening our rules on accounting of options
would signal that the U.S. is serious about openness, serious about
improving its accounting standards--despite the special interests
opposed to changes--and willing to learn from its mistakes.
Many of the same forces that allied themselves in the 1990s against
changes in accounting for options are now trying to suppress this
attempt to make our market economy work better. In the earlier episode,
the National Economic Council, the U.S. Treasury, and the Department of
Commerce intervened in what was supposed to be an independent
accounting board, and put pressure on FASB to rescind its proposed
regulations. They won, and the country lost. Today, there is a risk
once again of political intervention. At least this time, the voices of
responsible economic leadership, such as Alan Greenspan, are speaking
out. I only hope that this time they will succeed.
----------
Mr. Levin. Mr. President, the Republican staff of the Joint
Economic Committee put out a report called, ``Understanding the
Stock Option Debate.''
They have gone through a lengthy analysis dated July 9,
2002, in which they conclude the following:
Existing accounting principles provide an unambiguous
answer. Stock option awards should indeed be treated as a cost
in financial statements.
It is quite clear to me that two things are true. No. 1,
that how we treat stock options is an essential part of the
post-Enron reform effort. That is No. 1. No. 2, it seems clear
to me that there is at least a likelihood that a majority of
this body, if allowed to vote on this amendment, will vote to
refer this matter to an independent accounting standards board
which has its own source of revenue, free from the kind of
pressure which it was under in 1994 and 1995, to reach an
appropriate conclusion.
Do I believe that conclusion will be the same as they
reached in 1994? I do. It is very clear to me they would reach
such a conclusion and should reach such a conclusion. But as
our colleagues have pointed out, that is up to the board under
this amendment. We would not be adopting a standard.
In all honesty, I expect they would continue on the same
course they were on 8 years ago when they were violently thrown
off course by people who had control over the purse strings of
the organization. I would expect that would happen. But under
this amendment, it is their call, not ours.
I support the McCain amendment because I believe, as I
believed then, that the accounting standards board wanted to
expense options and that we, in executive pressure, interfered
with that decision on their part. That is why I believe Senator
McCain's amendment is also appropriate. But we cannot even get
a vote on that amendment. Last week, we were not able to bring
that amendment to a vote.
But this amendment is different. This amendment says to the
independent board: review this issue. Make an appropriate
decision within a year.
For the life of me I not only do not see how folks--
regardless of the side of this particular issue that they are
on--could vote against such an amendment when it does not tell
them what to do but just asks them to review it and decide
within a year as to what the appropriate accounting method is.
I do not understand why, in the middle of a debate on the
reforms which are essential to restore public confidence after
the Enron fiasco, this Senate should not be allowed to vote on
this issue on this bill.
When the majority leader announced that one way or another
we will get to a vote on this amendment, I was glad to hear
that. I didn't know he was going to say that, but I certainly
was glad he said that. But it seems to me that adds a reason we
ought to vote for this amendment on this bill.
This is the right place. Surely it is the right time. There
has perhaps never been a more critical moment in our economic
history in the last few decades than we are facing right now,
to help us restore public confidence. It will be an additional
contribution to that restoration of public confidence if we
take this action. If we say yes, 8 years ago we did intervene,
but now we don't want to tell the accounting standards board
that they should not expense options. That was 8 years ago.
What we are telling them now is: Do the right thing.
We know what they tried to do 8 years ago. It is laid out
in the record by them. They wanted to do what they believed was
the right thing. If they had done so, they would have been put
out of business.
Now we have an opportunity, it seems to me, to do the right
thing ourselves, which is to tell the board that has the
responsibility to adopt accounting standards, to adopt what
they believe is the appropriate standard. That is the right
thing to do.
Mr. Reid. Will the Senator yield for a question on my time?
Mr. Levin. I will be happy to.
Mr. Reid. Is the Senator aware that the stock market, the
Dow as of now is down 338 points as of today?
Mr. Levin. I was not aware of that. But it surely adds an
additional urgency, if we need additional urgency, for why we
should do everything in our power to restore public confidence
in the financial systems in this country.
I left off one of my cosponsors before. Senator Biden is a
cosponsor of the amendment, which is at the desk.
I will ask unanimous consent we be able to vote on that at
a later moment.
I wonder if I could ask the Chair how much time I have
remaining.
The Presiding Officer. The Senator has 12 minutes
remaining.
Mr. Levin. I understand Senator McCain would like to speak
at this time. I see the Republican manager on the floor, so I
do not know if this fits his particular timetable or not.
I ask unanimous consent I be allowed to yield to Senator
McCain on his----
Mr. Reid. I object.
The Presiding Officer. Objection is heard.
Mr. Levin. Mr. President, at this time I ask unanimous
consent to lay aside the pending second-degree amendment, No.
4286, and call up for consideration my amendment 4283, on stock
options, which is a second-degree amendment to the Edwards
amendment No. 4187.
The Presiding Officer. Is there objection?
Mr. Gramm. Mr. President, reserving the right to object,
let me say there is something on which I agree with the
majority leader. That is, at some point we are going to make a
judgment on this issue. But we are currently in a situation
where we have 97 first-degree amendments that have been filed.
We have 24 second-degree amendments. We have 3 different
approaches to this issue.
Senator McCain wants to make a decision and set a policy.
Senator Levin, as I read it, wants a fair trial and then a
hanging.
And Senator Enzi and others would simply like to have a
fair trial.
What is the right outcome? I think that is subject to
debate. That is why I think we ought to have the debate. The
idea that when we have three different approaches, we are going
to decide that one of them is going to be debated on, voted on,
but not all three of them is something we should not expect to
happen.
I do not support Senator McCain's amendment, but he has
every right, it seems to me, to have it considered. And I am
certainly willing to vote on it. There may be people who do not
want to vote on this issue, but I am not one of them. So I
certainly do object. I object.
The Presiding Officer. Objection is heard.
Several Senators addressed the Chair.
The Presiding Officer. The Senator from Michigan has the
floor.
Mr. Levin. Mr. President, the only way we are going to get
to debate and votes is if we allow the pending amendments which
are the first- and second-degree amendments to be voted on so
we can move to other amendments without having one gatekeeper
denying opportunity for all the others on this floor to offer
amendments and have them voted on. That is not the intention of
cloture and postcloture.
I do not believe this process has been used in this way
before, where, postcloture, germane amendments are supposed to
be taken up and voted on, where first- and second-degree
amendments have not been disposed of so they can be used, not
with the consent of their sponsors, but they are used by others
to block consideration of the amendments.
The Senator from Texas says he would like to have a debate
and vote. There is one way to do it. Let's dispose of the
second-degree amendment, take up the Carnahan amendment and
vote on it, take up the Edwards amendment and vote on it.
Mr. Gramm. Will the Senator yield?
Mr. Levin. I will be happy to yield on the Senator's time.
The Presiding Officer. Is there objection?
Mr. Dorgan. Reserving the right to object, Mr. President,
the Senator from Michigan is claiming his 1 hour. I understand
he has been yielding back and forth. I assume we could, under
these circumstances, have one Senator run the entire 30 hours,
as long as they keep yielding to other Senators.
There are others of us, of course, who want to be heard and
who want to offer amendments.
Mr. Gramm. I think that is fair. I withdraw my request.
Mr. Levin. I yield the floor.
The Presiding Officer. The Senator from Texas is
recognized.
Mr. Gramm. Mr. President, I think if we want to deal with
this issue today, probably the way to deal with it is to have a
unanimous consent agreement and have a vote on all three
amendments--have a vote on Senator McCain's amendment, have a
vote on the Levin amendment, have a vote on Senator Enzi's
amendment so that we would have the full range of choices. But
to suggest that nothing is standing in the way except a few
obstacles to everybody having their will is to neglect the fact
that 97 amendments have been filed as first-degree amendments
and 24 second-degree amendments.
So, therefore, by definition, I assume if I suggest and ask
unanimous consent that each and every amendment be voted on,
someone would object since our leadership has plans for this
week and next week. I think it might be possible if we want to
deal with this issue today to have a unanimous consent
agreement where Senator McCain would get a vote on his
amendment, where the Senator from Michigan would get a vote on
his amendment, and where Senator Enzi would get a vote on his
amendment. Then we would have a range of choices.
I would be amenable to such an agreement if the Senator
wanted to shop that around on his side of the aisle. We could
do a hotline and see if it would fly. But in the absence of
some agreement where the other two gradations on this spectrum
of opinion would have their day to debate this amendment and
have it voted on, I don't think we are going to be able to do
that. It might very well be that we need a separate bill to
deal with this issue. If a Senator were to offer this amendment
in earnest, I would want an opportunity to amend it. I think
having FASB look at this issue--which they are certainly going
to do after this bill is agreed to because this is going to be
a self-funded agency, and they are going to have greater
independence--I think having them look at it is something that
we ought to do. But I think we shouldn't pretend to ourselves
that the Levin amendment is a neutral amendment.
Asking them to look at it when it mandates by law after
having looked at it that within 12 months they adopt in
appropriate generally accepted accounting principles for the
treatment of employee stock options--there is nothing neutral
about that; in other words, study it and within a year adopt a
rule.
As I understand it, Senator Enzi and others would have the
SEC do a study and make a recommendation based on their study.
If this amendment were going to be dealt with in isolation,
I would want an opportunity to at least leave it to FASB as to
what they determine rather than mandating that they ought to
issue a new accounting principle. It may be that they would
determine not to do that.
Let me reiterate that I don't have any concern about voting
on this issue. Maybe I should reserve my time. I want to speak
on this at some point. We have several Members here who are
going to speak. I have to be here for the whole time.
I reserve the remainder of my time.
The Presiding Officer. The Senator from Nevada is
recognized.
Mr. Reid. I don't think this is necessary. But so there is
no question about it, I ask unanimous consent that the time
Senator Daschle used be counted against the 30 hours.
The Presiding Officer. Is there objection?
Mr. Gramm. Reserving the right to object, I did not hear.
Mr. Reid. I wanted Senator Daschle's time to be counted
against the 30 hours.
Mr. Gramm. Yes.
The Presiding Officer. Without objection, it is so ordered.
The Senator from North Dakota.
Mr. Dorgan. Mr. President, we are in a postcloture period
of some 30 hours. I understand we will complete that at 6
o'clock or so this afternoon.
What is happening here is really an outrage, from my
standpoint. We are in postcloture. I have a germane amendment.
I have been here every single day since this bill came to the
floor of the Senate prepared and ready to offer my amendment.
Now, post-cloture, I have a germane amendment. And the only
way, apparently, that I can offer my amendment is if the
Senator from Texas is willing to allow me to offer it. That is
not the way the Senate should work.
I want to briefly describe my amendment.
My amendment requires the disgorgement of profits, bonuses,
incentives and so on that the CEOs of corporations receive 12
months prior to bankruptcy.
That is not in the bill at the present time. It ought to be
in the bill.
The bill contains a disgorgement provision requiring the
return of incentives and bonus payments received prior to a
restatement of earnings. I support that being in the bill, but
there is nothing about the requirement to divest all those
bonuses and incentive payments 12 months prior to bankruptcy.
That ought to be in this bill.
Let me describe some of the problems that we are dealing
with. We have been holding some hearings over in the Commerce
Committee on the subject of Enron. Here is what some Enron
officers got before Enron went bankrupt:
Kenneth Lay, $101 million; Ken Rice, $72.7 million; Jeffrey
Skilling, $66.9 million; Stan Horton, $45 million; Andy Fastow,
$30.4 million.
They did pretty well at the top. Of course, they have
already filed bankruptcy with their corporation.
Should some of this be given back?
I have a constituent in North Dakota who wrote to me and
said: I worked for Enron for a good many years. I built up a
retirement fund of $330,000. It is now worth $1,700. That was
my family's retirement fund. What am I to do? I have lost it
all.
But not everybody lost it all with respect to Enron. Those
close to the top made a fortune, and the folks at the bottom
lost their shirts. Most of the investors and employees lost
everything.
The question I ask with my amendment is, Should we include
a provision in this bill that requires the give-back of this
unwarranted compensation in the form of bonuses, incentives,
and various things 12 months prior to bankruptcy? The answer
is, of course, we should require it. We ought not to be
debating this. This amendment ought to be accepted.
Let me describe some of the other folks who believe this
ought to be done.
Mr. Richard Breeden, former SEC Chairman from 1989-1993
says:
We have long required officers and directors to disgorge
``short-swing'' profits for purchases and sales within a six-
month period . . . we should consider disgorgement to the
company of any net proceeds of stock sales or option exercises
within six-months or a year prior to bankruptcy filing.
That is Mr. Breeden, former SEC Chairman.
Henry Paulson, CEO, Goldman Sachs, who worked in the Nixon
Administration, said:
The business community has been given a black eye by the
activities of and behavior of some CEOs and other notable
insiders who sold large numbers of shares just before dramatic
declines in their companies' share prices . . . in the case of
CEOs and other inside directors, we should raise the bar and
mandate a one year ``claw-back'' in the case of bankruptcy,
regardless of the reason.
He is right. This bill doesn't require it. There is no
``claw-back'' in this bill. There ought to be 1 year prior to
bankruptcy.
I don't mean to diminish the importance of other issues
that we have just discussed. The other issues are very
important. On the issue of how stock options are treated, in
1994, I was one of nine Senators who voted against the proposal
back then that would handcuff FASB. I come to that issue with
fairly clean hands.
Let me say that while that issue is important, I have been
here every single day this bill has been on the floor to offer
this simple amendment on disgorgement in the face of
bankruptcies. If there are people in corporations at the top of
those companies who make $100 million or $70 million or $50
million, and then the company files for bankruptcy, do you not
believe that some of that ought to be required to be given
back? The folks at the bottom lost everything they had. They
lost their life savings. They lost everything, and the folks at
the top got rich. Shouldn't there be a requirement in this bill
to disgorge those profits? Does anybody think that is
unreasonable?
The Senator from Texas left the Chamber as I was beginning
to speak. I was hoping I might get his attention. But as I
understand where we are, we have a first- and a second-degree
amendment. The first-degree amendment is the Edwards amendment.
It is followed by a second-degree amendment, which is the
Carnahan amendment.
In order for anyone to offer an amendment postcloture
today, we must ask consent to set aside these amendments so we
can offer our amendment. My understanding is, if someone here
does not agree with that, then he can prevent that from
happening. My understanding is that that is precisely what
would happen.
So the result is, for the next 5 hours, we will have
gatekeepers who require us to say: Captain, may I? May I offer
an amendment? And they will say: No, you may not. We will not
allow the setting aside of the pending amendments.
So we will limp along to the end of the 30 hours not being
able to offer germane amendments to this bill. It is
outrageous, simply an outrageous process that puts us here. I
think there will be a good number of Members of the Senate who,
in the future, will consider this and find ways to avoid our
being put in this position again.
But what I would like to do is have a debate about this
amendment at some point. And perhaps there are people in the
Senate who want to stand up and say: Do you know what I think?
I think if somebody takes home $50 or $80 million 6 months
before bankruptcy, in the form of incentive payments and
bonuses, they ought to be able to keep it, even if they drove
this company right straight into the ground.
Is there one person who will stand up in the Senate today
to support that? Does one person want to support that position?
Well, we will see.
In the year before the Enron Corporation filed for
bankruptcy, Kenneth Lay, the chairman of that company, and 140
other company officials received $310 million in salaries,
bonuses, long-term incentives, loan advances, and other
payments.
Does anybody here want to stand up and say: ``That makes a
lot of sense.''? Anybody? Does anybody agree they should keep
all that money? Do we hear nothing because they don't have the
floor, or is it that nobody here believes the top officials of
Enron should keep $310 million prior to filing for bankruptcy,
where their employees lost they jobs, lost their life savings
in their 401(k)s, their investors lost their money?
How about NTL, Incorporated? It is a Manhattan TV cable
operator that filed for bankruptcy in May, just several months
after it gave its chief executive officer $18.9 million. It
made him one of the 30 highest paid CEOs in New York, putting
him ahead of IBM's Louis Gerstner. That company had $14 billion
in losses. And the CEO, Mr. Knapp, had a salary of $277,000, a
bonus of $561,000, and stock options worth $18 million.
So does anybody here think he ought to keep all that money,
just let the investors and the employees lose, but the people
at the top keep it--just walk away on some gilded, golden
carpet?
There are plenty of other examples, of course.
In recent months, we have heard all of these discussions
about what has happened at the top in the boardroom by
companies that wanted to find the line, and then go right to
it, and then go across it, if they could. And there are
accounting firms that were the enablers, who said: Yes, go
ahead and do that. And the law firms were on the side,
collecting big fees, saying: Yes, go ahead and do that--and the
CEOs without moral conscience. The result is, they got rich and
the little folks got broke.
My amendment is very simple. My amendment says that 1 year
prior to bankruptcy, if you are getting the big bucks, big
bonuses, big incentives, big stock options, and you want to
take off with $50 or $100 million, and leave everybody else
flat on their back, you cannot do it; you have to give it back.
Very simple.
No one can misunderstand the amendment. This amendment is
not strange or foreign to anyone. This bill will fall short of
the mark, this bill will be incomplete, if we just proceed now
to the final vote this afternoon and we are told: You cannot
offer this amendment. We will not consider this amendment. And
we do not want to require the give-back of millions of dollars
by CEOs who receive that money prior to bankruptcy.
If that is the message this Senate sends from this bill
this afternoon, this Senate has a lot of explaining to do.
We came to this debate with great promise. I have been to
the floor a couple of times complimenting the Banking
Committee, complimenting all on the Banking Committee who
worked to put this bill together. But I said there were areas
where it needed to be improved. This is one of them. This is
the lightest load you will ever be asked to carry, in my
judgment, to support an amendment of this type: The
disgorgement of ill-earned profits by CEOs who led their
corporations to bankruptcy but waltzed off with millions of
dollars in their pockets and left everyone else--the
bondholders, the stockholders, the employees--holding the bag.
This is not heavy lifting, to do this amendment. It is
absurd if the Senate says: No, we will have nothing to do with
that. Our position is, let's call this corporate
responsibility. Let's change the accounting standards. But, by
the way, let's let those people who essentially looted the
corporation from the top--drove it into bankruptcy, and then
left town--let's give them a big wave and say: So long, God
bless you, and I hope your future is a good one with all those
millions of dollars. If we do that, this Senate has a lot of
explaining to do.
A good many corporate leaders, respected business officials
in this country, have said this must be in a bill, this should
be in a bill, there is no excuse for it not being in a bill.
So I have amendment No. 4214 at the desk. Let me ask
unanimous consent that we set aside the Carnahan amendment,
which is a second-degree amendment to the Edwards amendment,
for the purpose of allowing consideration of amendment No.
4214. Let me make the first unanimous consent request first.
I ask unanimous consent that we set aside the Carnahan
second-degree amendment for the purpose of considering my
amendment.
The Presiding Officer (Mr. Wyden). Is there objection?
Mr. Enzi. On behalf of the ranking member of the Banking
Committee, I object.
The Presiding Officer. Objection is heard.
Mr. Dorgan. Mr. President, let me say, again, I think the
process is an outrage--an outrage. We are in a situation today
where we have 4 or 5 hours left postcloture, and we are told
that no one in the Senate has a right to offer an amendment
because someone has set himself up as a gatekeeper saying: I
will object to setting aside the Carnahan second-degree
amendment.
What kind of a way is that to legislate? Is someone afraid
he will lose on this amendment, that he will lose the vote? Is
that the purpose of the objection, that he is afraid we will
have a vote, Senators will vote for my amendment, and therefore
he will lose, so the words ``I object'' become a proxy for
avoiding a loss on an important amendment?
How many votes do you think would exist in the Senate for
saying: We want to enable CEOs, who ran the corporation into
the ground and took $20 million out and then filed bankruptcy,
to keep the money; we want them to keep the bonus, to keep the
stock option, to keep the commission payment, to keep the
money? How many votes do you think exist for that? Ten, maybe
12? Probably zero.
I think the Senator from Virginia is correct. Probably no
one would stand up and support that proposition. So the
question is why are we not allowing amendments to be voted on
this afternoon? I would be happy to yield to someone to answer
that. Is there someone who can answer that? Perhaps we could
find out on whose behalf the Senator from Wyoming objected.
How much time do I have remaining?
The Presiding Officer. The Senator from North Dakota has 29
minutes remaining.
Mr. Dorgan. Parliamentary inquiry: Are we entitled, as a
Senator, to 1 hour postcloture, those of us who are recognized?
The Presiding Officer. The Senator from North Dakota is
correct.
Mr. Dorgan. Several of my colleagues wish to speak. I want
them to be able to speak. I hope they will offer amendments.
I will guarantee them this: I will not be objecting to an
amendment if they want to offer them. They have a right to
offer an amendment today. They have a right to get a vote on
the amendment. I will not object to that.
The parliamentary inquiry is, I have just made a unanimous
consent request that has been objected to. Am I prevented from
making an identical request following the presentation by the
two Senators on the floor?
The Presiding Officer. The Senator is not prevented from
making unanimous consent requests.
Mr. Dorgan. That will give me some time then to snoop
around the cloakrooms and the corners and the nooks and
crannies in the Capitol to find out who won't come to the floor
and answer the question I have asked.
Why will we not get a vote on the simple proposition that
those corporate leaders who run their corporation into
bankruptcy and who take $10, $20, $30, or $50 million out of it
just prior to bankruptcy--why will we not allow a vote on an
amendment that would require them to disgorge themselves of
that profit? Why should that ill-gotten gain not be used to
help the employees, help the investors, help others recover,
who lost everything? Why should one group in this circumstance
walk off into the sunset with a pocketful of gold, leaving
everyone in their wake, employees, investors, and others who
lost everything they had?
Perhaps in the next hour or so, I will find someone in the
Chamber or in the anterooms who will say: I am the one who
decided you should not get a vote because I believe that those
CEOs ought to be able to get away with that money; that is the
American way.
My guess is the Senator from Virginia was right when he
shook his head. I think this amendment passes 100 to nothing or
very close to that, and I hope he and others will help me get
it to a vote before 6 o'clock.
Obviously I am a little irritated about the process. It
stinks. That is not a genteel way to say that. But postcloture,
if we have germane amendments, we should be able to be here to
offer those amendments. That is not now the case.
I will be here the next couple of hours trying to see if we
can find a way to cause enough trouble in as short a time as
possible to allow these amendments to be offered.
I yield the floor.
The Presiding Officer. The Senator from Virginia.
Mr. Allen. Mr. President, I would like to use a portion of
my 1 hour of time to say I agree with the purpose and the
intent of the Dorgan amendment. I understand Senator Grassley
of Iowa has a similar amendment that would disgorge or claw
back into some ill-gotten gains of executives for the benefit
of creditors and victims of their malfeasance or illegal acts.
I wish to speak not on process. Although, process seems to
drive a lot of what happens in this body.
I would like to talk to my colleagues and the American
people about the merits of certain ideas or the demerits of
certain ideas that have been raised. There have been several
measures dealing with the issue of stock options.
Senator McCain's measure was a direct hit. I don't like it,
but it was an accountable approach in getting rid of or killing
stock options. We had Senator Levin's amendment, with Senator
McCain, which was more of an indirect or ricochet killing of
stock options by granting that study to FASB, when everyone
knows what FASB's position is.
There is another option regarding stock options which I
would like to discuss as the approach that ought to be taken.
The majority leader, Senator Daschle, mentioned that we may
have a vote on it today. We may have a vote on it tomorrow, but
some day we will have a vote. There ought to be a full and fair
discussion of the approach we ought to take as well as what the
potential adverse impacts could be if either the study by FASB
or the direct killing of stock options, as far as requiring the
expensing of them, were to occur.
The more wise and prudent approach is one that was chiefly
sponsored by my good friend Senator Enzi of Wyoming, along with
Senators Lieberman, Boxer, myself, and others who joined with
us, Senators Murray, Cantwell, Bennett, Wyden, Lott, Burns,
Frist, Craig and Ensign. Our amendment is a more comprehensive,
reasonable alternative that has the Securities and Exchange
Commission review and make regulatory or legislative
recommendations to Congress.
Clearly, in today's climate, with the stock market dropping
again today, with the scandals from Global Crossing, Enron, the
crisis at WorldCom, it is axiomatic that there is a pressing
need for accounting reform to address the corporate abuses and
accounting firm malfeasance. The bill, as it is presented, is a
very good bill. I think it addresses the two key areas that
need to be addressed.
It is focused, number one, on transparency. That means that
people can readily and easily discern the true financial
condition of a company in which they may want to invest.
Secondly, you need deterrence, stiffer criminal and civil
sanctions for illegal actions by corporate officers. There may
be a few things added to make it better, but this bill
essentially addresses those two focused goals. Indeed, enhanced
transparency and improved corporate governance may restore some
investor confidence and foster proper disclosure for investment
decisions. More stringent penalties will provide a deterrence
and substantial disincentive for the corporate wrongdoing that
has led to this understandable firestorm of skepticism as a
fallout from the scandalous, fraudulent misrepresentations by
executives in many companies.
In our effort to reform, we must not enact measures that
stifle innovation and endanger the American entrepreneurial
spirit. Congress should not harm future opportunities for
employees to own a part of their company for whom they work.
Unfortunately, the Levin-McCain amendment does just that by
unjustifiably upsetting the current tax treatment of stock
options. It is unnecessary and unwise to change these
particular accounting policies.
It is virtually impossible to accurately determine the
worth or value of a stock option.
Now, how are you going to predict the future performance of
a company? How are you going to predict the future share value
of a company, especially with the vicissitudes of the stock
market these days? For example, somebody is granted a stock
option by a company--a new company--and the stock is trading,
after an IPO, at $5 a share. The option to this employee is to
be able to purchase 1,000 shares of that company at $10 a
share.
Now, nobody is going to exercise a stock option until the
share value reaches the strike price, or $10, and it may never
get to $10. It may take 5 years before that share value gets
above $10 a share, where somebody would exercise the option. So
it is very difficult to determine what is the actual value of
that stock option when it is granted.
The amendment Mr. Levin has proposed will affect current
law. Currently employers are not required to expense stock
option grants on their financial statements. But they are
permitted to deduct the employees' gains at exercise--that is,
down the road--as a compensation expense.
Now, this makes good sense. After all, a stock option grant
does not require a cash outlay like other expenses such as
wages.
Moreover, there is no transparency problem with failing to
expense stock option grants because they are disclosed on the
company's financial statement. If somebody says there ought to
be better disclosure, or it should be in bolder print, or it
should be highlighted more and the disclosure needs to be more
clear, that is fine. But I don't think it is necessary, in the
midst of better disclosure and transparency, to kill this
otherwise largely salutary idea and beneficial idea of stock
options. Nonetheless, the amendments by Senators McCain and
Levin mandate that any company taking a deduction must report
the stock option as an expense on their income statement,
profit and loss statement, and the deduction may not exceed the
reported expense.
Mr. Levin. Will the Senator yield for a question?
Mr. Allen. I yield.
Mr. Levin. Is the Senator aware that the Levin-McCain
amendment he is referring to is not the amendment being offered
at this time? There is another amendment, and they are totally
different matters involving the taxation issue. This is not a
taxation amendment at all. Hopefully, it will come before the
Senate today.
Mr. Allen. Mr. President, I say to the Senator from
Michigan, I understand his amendment offered today was one to
have FASB study the issue. Senator McCain's amendment was one
to require the expensing of stock options. I realize they are
two different matters.
Mr. Levin. And that neither one addresses tax issues. That
is a totally separate bill, not in either the McCain-Levin or
the Levin-McCain accounting standard.
Mr. Allen. I say to the Senator that in the event you, in
effect, require the expenses of stock options, that does affect
the tax treatment and the desirability of stock options.
Mr. Levin. Thank you.
Mr. Allen. I thank the Senator from Michigan.
Now, the problematic aspect of these ideas is that, if you
take away the current method of accounting and taxation of
stock options, a company can only take a deduction up to the
amount they expense at the time of the grant. Since the expense
would be taken at the time of the grant, the tax deduction
would be taken at the time of the exercise. If the value was
too low at the time of the grant, then you are not going to get
the full extent of your deduction. So the point is that if we
are not careful here, with all these approaches of changing the
tax treatment, changing the expensing rules, or having it be
done by FASB, the result is a convoluted tax increase on
companies.
Now, what will happen if these tax increases or this
inability to actually determine the value of the stock option
occurs, which may or may not be exercised at some unknown
future date, all of this consternation, inaccuracy,
unpredictability--the potential of actually a tax increase, in
effect--many companies will find this tax and accounting scheme
is so onerous they will discontinue offering options to all but
maybe a few senior executives who can bargain for them.
I think the idea of doing away with stock options, or
making them less desirable, is a substantial detrimental impact
on not only companies but many, particularly those companies in
the high-tech sector and small startups. New businesses have
powered our economy in the last decade and, hopefully, they
will do so in the future. Small companies motivate employees
with stock options. That is the way they keep employees.
Especially the startups who will get folks to serve on the
board and pay them for that service in stock options.
I think it is a good idea for people to care about a
company doing well in the future; not only looking for a
paycheck, but also caring about how well a company will do.
Indeed, in the last 10 years, the number of workers who
received stock options has grown dramatically--from about 1
million in 1992 to 10 million today. First, as I said, the
benefits of stock options has enabled companies to recruit and
keep quality workers. Absent stock options, many smaller
companies lack the capital. They don't have the money to
attract top-notch talent. Investors will be less likely to
invest in companies that retain stock option plans because the
company's earnings will be artificially deflated by this
phantom expense.
Finally, and perhaps most important, stock options enhance
productivity by providing employees with a greater stake in
their company's performance.
Mr. President, these options are particularly important to
rank and file employees who receive relatively modest salaries
and wages. There is one company that has a pretty good presence
in Virginia--Electronic Arts--which recently told me that stock
options enabled many of its employees to purchase their first
homes, to send their children to college, or to provide for
their aging parents. Thus, the desirability of stock options as
incentives is readily apparent, and we should not adopt any
measure that would effectively eliminate their use as a form of
employee compensation.
That is not to say that I oppose all stock option reform.
In fact, I fully support President Bush's proposal that
requires shareholder approval for stock option plans. I think
the idea of equitable treatment in the exercise of options by
employees or executives is well founded. But I am joining with
Senators Lieberman, Boxer, Enzi, and others in offering the
amendment that directs the Securities and Exchange Commission
to conduct a comprehensive study and to make recommendations
regarding the accounting treatment of stock options, which is
the way to go.
We may introduce this proposal as a free-standing bill.
Maybe we will not vote on it today but here is the approach
that we ought to take. The SEC will conduct an analysis and
make regulatory and legislative recommendations on the
treatment of stock options in which the Commission shall
analyze the following: No. 1, the accounting treatment for
employees' stock options, including the accuracy of available
stock option pricing models; No. 2, the adequacy of current
disclosure requirements to investors and shareholders on stock
options; No. 3, the adequacy of corporate governance
requirements, including shareholder approval of stock option
plans; No. 4, any need for new stock holding period
requirements for senior executives; No. 5, the benefit and
detriment of any new option
expenses rules on, A, the productivity and performance of
large, medium, and small companies and startup enterprises and,
B, the recruitment and retention of skilled workers.
The Commission shall submit its regulatory and legislative
recommendations to Congress and supporting analyses of those
matters as far as any changes indicated in the treatment of
stock options within 180 days.
In my view, this is the reasonable alternative we ought to
be taking. I urge my colleagues to support this approach rather
than adopting, whether it is today or in the future, Senator
McCain's measure that he introduced last week or Senator
Levin's study today. I think either of those would be harmful
and damaging to both American industry and to working men and
women.
The Senator from Michigan mentioned evidence, or
observations, of others as to the impact of his recommendations
and his amendment. I think it is very good for us to look at
what people who will be affected say about the measures that
are passed in the Senate. I think it is important that we be
accountable to those who are affected and we should listen to
them.
I have some other observations, as far as the issue of
stock options is concerned. This first I will share is the
views of the Information Technology Industry Council. They
expressed their support for the potential alternative amendment
cosponsored by Senators Lieberman, Enzi, Boxer, and Allen that
would direct the Securities and Exchange Commission to examine
the accounting treatment of stock options and make
recommendations.
The Information Technology Industry Council stated that, in
particular, those entrepreneurial high-tech companies that are
willing to take the risk in the pursuit of technological
innovation have offered stock options as an incentive to
attract and retain employees.
Unfortunately, the expensing of options would end the
practice of providing most employees with stock options. The
result would be a reversal of the trends toward employee
ownership and a significant reduction in financial
opportunities for thousands of workers.
Let me share another observation, and this comes from the
Telecommunications Industry Association, and I read, in part:
This sense of personal ownership referring to stock options
helps develop the innovative entrepreneurial spirit that has
characterized the high tech industry over the last decade.
Should the rules for options suddenly change and be treated as
a cash expense, the number of employees that receive the
benefit would be drastically reduced, most likely leaving only
members of the top management as recipients.
They conclude with this comment:
Adoption of this type of measure is a knee jerk reaction to
situations such as occurred with Enron, which is not what we
need. It is not in the best long-term interest of our country.
Another observation from a large group of trade
associations: American Electronic Association, Bankers
Association, Alabama Information Technology Association, the
Arizona Software and Internet Association, Biotechnology
Industry Organization, Business Software Alliance, Information
Technology Association of America, National Association of
Manufacturers, the Retail Federation, Semiconductor Equipment
and Materials International, as well as the Semiconductor
Industry Association, Software and Information Industry
Association, Software Finance and Tax Executives Council, the
Tax Council, the Technology Network, and the U.S. Chamber of
Commerce wrote me and said that the stock options tax bill--not
the Levin amendment but, rather, the tax treatment changes--
that legislation would, if enacted, discourage broad-based rank
and file access to stock options. It would lead to investor
confusion, less accurate financial statements, and raise taxes
on companies issuing stock options.
Now we have heard also some scholarly points of view. It is
nice to hear what some of these esteemed individuals may say
from time to time on the issue of stock options. Others in the
body have quoted from Warren Buffett, a person for whom we all
have a great deal of respect. But in another scholarly work
from two gentlemen, economics professors at Princeton
University and New York University, Dr. Malkiel, professor of
economics at Princeton, and Dr. Baumol, professor of economics
at New York University, say this:
Warren Buffett and other critics suggest that the income
statement should reflect an expense to the firm measured by the
cash equivalent value of options. There are two problems with
these views. First, if we were to consider the expense of
options to be equivalent to that of cash wages, there is no way
to measure that cost, the value of options at the time they are
issued, with any reasonable precision. The Nobel Prize winning
Black-Scholes model does an excellent job of predicting the
prices at which short-term options trade in the market, but the
Black-Scholes formula does not provide reliable estimates for
longer term options such as those lasting 6 months to one year,
and market prices often differ substantially from predicted
values. Because employee stock options have durations of 5 to
10 years, are complicated by not investing immediately, are
contingent on continuing employment and subject to various
restrictions, it is virtually impossible to put a precise
estimate on the options value. Moreover, employees' options
cannot be sold, violating one of the key Black-Scholes
assumptions.
They conclude by saying that by targeting all stock options
rather than stock option abuses, politicians are risking
destruction of equity compensation instruments that have been
engines of innovation and entrepreneurship.
Finally, an observation today from the Software Finance and
Tax Executives Council. They call themselves by the acronym
SoFTEC.
SoFTEC believes that Senator Levin's amendment essentially
dictates a pre-determined result without requiring the FASB to
analyze other relevant issues surrounding stock options. Rather
than mandate FASB to achieve a predetermined result, SoFTEC
believes that the SEC currently has the ability and authority
to properly study all of the issues surrounding stock options
and make recommendations based upon not only the technical
accounting issue but the public policy implications as well.
So I will conclude my time by requesting of my colleagues,
whether we vote on it today, this afternoon, this evening, or
in the future, that we act responsibly. It is fine to be
worrying about the details of procedure and accounting minutia,
but it is important also to understand the impact of this on
our free enterprise system. While we are doing a lot of good as
far as greater scrutiny, greater transparency, and greater
punishment for wrongdoers are concerned, let us make sure we do
no harm because the way that this stock market is going to
change is with more investment, more risk taking, more jobs
being created, and that entrepreneurial spirit that rewards
people who take risks, who are creative, who are innovative.
That is what is going to improve our economy, our
competitiveness as a country, as well as the stock market
eventually.
The point is we do not need to come up with new, convoluted
ways to increase taxes on companies that we want to invest in
and improve our country, and I hope we will support the free
enterprise system and, in doing so, look at reasonable,
logical, wise, and fully comprehended decision-making as we
move forward in these very uncharted waters of making major
changes in stock options.
The bill as it stands now is an outstanding bill. There can
be improvements made to it, such as the amendments of Senator
Grassley and Senator Dorgan, but let us not have the perfect be
the enemy of the very good, and let us make sure we do no harm.
By fouling up stock options for many men and women working in
this country, it would certainly do a great deal of harm.
I yield the floor.
Several Senators addressed the Chair.
The Presiding Officer. I think the Senator from Delaware
was first to seek recognition.
Mr. Biden. Mr. President, I say to my friend from Iowa if
he has a time constraint, I will yield to him. Just so he
knows, I was in the Chamber before he came. I took a phone call
and came back. But if the Senator has a time constraint, I have
10 to 12 minutes, but I will be happy to yield.
Mr. Grassley. If I only have to listen to a 10- or 12-
minute speech, I will be glad to wait.
Mr. Biden. I hope the Senator listens very closely. He may
learn something. I know I learn when I listen, and I do not
always listen enough.
Mr. President, let me begin where the Senator from Virginia
ended, and that is that I think the bill fashioned by Senator
Sarbanes and this committee does exactly what the Senator from
Virginia was suggesting. That would be balanced; we do not do
more harm than good.
If you look at other times--and I have been a Senator for a
while--we faced crises such as this, we have had occasion to
overreact. We have found sometimes that the cure is worse than
the disease. I note we probably did that in my early days here
with Senate campaign financing and other issues.
There is a real balance that the Senator from Maryland has
struck. I compliment the Senator. I cannot think of any Senator
better positioned to be chief spokesman for the Senate and
Congress on this issue, not only for the American people but
all our allies and the investors worldwide.
The dollar now has weakened drastically. In my capacity as
chairman of the Foreign Affairs Committee, I have had occasion
to meet with leading government officials from European
countries and from Asia, asking me, as if I were some kind of
broker: Can we continue to invest in your market? Is it real?
What is going on? How much more is coming?
We are fortunate to have the steady and always cautious
voice of the Senator from Maryland, whose background
academically as well as politically suits him well, and in this
moment, as probably no one else in this place is better
prepared, to take on this issue. I compliment the Senator and
his quiet, reasoned voice, and his profound understanding of
the problem we face as well as his determination to move ahead
and try to restore confidence. It is a welcome circumstance at
the moment. I compliment the Senator.
I realize from listening to him and knowing him as well as
I do, as a point of personal privilege, some will discount my
remarks because they know the Senator and I are close personal
friends and I admire him as much as anyone I have served in all
my years in the Senate. I understand there are other things
that he may or may not have wanted to put in the bill to
strengthen our position and the Nation's position and the
economy, but he wants to make sure there is consensus and
overwhelming support of whatever we do. This is not a
circumstance of questioning motives and wondering whether it is
more for show than for serious reconstruction of the
circumstances.
I say at the outset, I have one disagreement with the
President of the United States. Although there probably, pray
God, are only a ``few really bad apples''--I think that was his
phrase--in the corporate world, I do think we have a systemic
problem. The marvel is that there are so many men and women in
corporate America who have high moral standards and have
overcome a fairly overwhelming temptation that exists in the
way business is being done, the way in which we have loosened
some of the not regulations, loosened some of the oversight on
corporate America. It is a testament to the fact that there are
so many honorable people running America's major corporations
and multinational corporations.
The fact is, we have a systemic problem which leads me to
my friend from Michigan, Senator Levin. Senator Levin, Senator
McCain, Senator Corzine, Senator Edwards, myself, and several
others, in varying degrees, think what this debate is all about
is fundamental fairness and efficiency of our economy. A lot of
what we read about these days is focused on corporate scandals,
individual villains, their schemes, their greed. There is
plenty of that and maybe more than I can remember any time in
my Senate career.
I believe we need to focus on the behavior of corporate
executives who have betrayed their positions of power,
recklessly endangering the careers of tens of thousands of
employees and the savings of millions of Americans. That is why
it was so important the Senate unanimously adopted my amendment
last week and the amendment which was contained in that of the
Senator from Vermont for stronger penalties for corporate
crime.
In the hearings I have held in my criminal law subcommittee
in the Judiciary Committee, I made clear from the outset--and I
try never to overpromise what criminal law can do, even though
we are only now finally beginning to rectify and make our
criminal justice system reflect our values more clearly--that
is not a solution. It is a part of a solution. The Senator from
Iowa and I conducted hearings in that subcommittee. We have
asked for stronger penalties. We have passed them. One small
example: If you were to violate the Federal law relating to
pension security, ERISA, it is a misdemeanor that could cost
someone their entire pension or 1,000 people their pensions,
totaling hundreds of millions of dollars. It is a misdemeanor.
All you get is up to 1 year in jail. Yet if you steal my
automobile--I live 2 miles from the Pennsylvania State line, in
Delaware--and you drive across the State line into
Pennsylvania, you get 10 years under Federal law. Something is
awry.
Criminal penalties are not the answer. They are just
rectifying this incredible inequity within our system.
Hopefully we are beginning to reestablish some sense of faith
in the system where average people think big guys get away with
it and little guys go to jail.
Punishing and deterring corporate crime, although it is a
major part of our response to excesses committed by some of the
most privileged and powerful corporate executives, is not
enough. We face another fundamental problem. It is the loss of
trust in our system, most apparent, perhaps, in the recent drop
in the stock market. More than 200 off the DOW in the days
following the President's speech, and when I came to the floor
the DOW was down 300 points. I don't know where it is right
now. I hope and pray to God it has moved up.
The fact is, there is a profound lack of confidence at the
moment in our economy. There used to be a chairman of the board
of the Dupont Company, a big, old farm boy from Ohio. He had
great big hands. I remember, he was a wonderful guy, a first-
rate chemist, first-rate scientist, as well as corporate
executive. I was meeting with him one day and said: We have a
problem; we are in the hole. And he turned and looked at me and
said: My father always said, Joe, when you get in the hole,
stop digging.
Maybe the President should stop making speeches for a
couple of days. He has spoken twice and the market went down
500 points while he was speaking. It is not because of a lack
of anything in the President, but people are looking for real
change. They assume that if there is any rhetoric, it must not
be likely to be followed by something real.
The Senator from Maryland has done something real. What the
Senator from Utah and his committee has done is real. This is
real. This underlying bill is real; it is positive; it is
substantial. The bottom line is, no pun intended, there is a
profound lack of confidence at the moment and that our economy
can be shaken right now to the very foundations of our market
democracy. For a market democracy to work, we have to have
faith in our economy that will continue to create opportunities
for job advancement and that our Government will continue to
promote, as our Constitution requires, the general welfare.
In recent months, to be reminded how much we have in
common, how much of our unique blessings we have come to take
for granted prior to September 11, we were reminded that in the
end we are all in this thing together. Among those blessings we
had come to take for granted was the most dynamic economy in
the world, that had just come off the longest, strongest
expansion in history. In the new economic arena, we are now
reminded how much we depend on trust in each other to make our
markets work.
That sounds silly. No one was using the word trust before
when we talked of the market economy. We talked innovation, the
new economy, productivity, et cetera, but when you cut it all
aside, it is all based upon trust, which is based upon
transparency. If you cannot get out there and make your
judgment to invest or not invest in a corporation with a clear
sense that you have been told everything that is reasonable to
tell you about the state of affairs of that company, then you
might as well play the lottery.
You might as well come on over to Delaware and play the
slot machines at Delaware Park. You have about the same shot,
unless you are on the inside.
The task we are debating today is how to restore the
strength of our economy, which is to restore the trust. At the
core of that task is revival of confidence that consumers and
investors, including foreign investors, need to get back into
the market.
This is going to turn around, Mr. President. You and I both
know it. I am absolutely sure it is going to turn around. The
question is, how many bodies will be littered along the way;
how many pensions will be lost; how many jobs will be lost; how
long is it going to take? It will turn around.
I am sure the greatest strength of our system continues to
be its resiliency: Our ability to see change as opportunity. I
am sure of that because we have met this kind of adversity
before. Every time we have come out stronger.
I remember when the Senator from Maryland and I were on the
Banking Committee in those dark days of the savings and loan
crisis. We made it through. We made some very difficult
decisions that, I might add, Japan and other countries have not
made, and it resulted in an even stronger economy. So I am
confident we can come out of this stronger.
After the glare from all the glitter during the boom phase
and as our vision becomes a lot clearer, we know that our
economy is, in fact, fundamentally stronger than it was,
notwithstanding what is going on now. Productivity gains were
real. Information technology and corporate reorganization
created real growth. It was not imaginary. It was not like
these profit margins that people were suggesting they had on
the balance sheets that were a lie. There actually was growth.
The economy, the marketplace has created real growth. In
what economists like to call the real economy where jobs are
created, where goods are produced, the real economy is faster
and more efficient today than it was a decade ago. Even old
industries in our manufacturing sector have gained from
advances in new materials, as well as improvement in
information sharing and organization.
We also know that a lot of what looked like growth,
particularly in the financial sector, was only paper profits
and a lot of it was written in disappearing ink. Profits and
paper valuations were all too often inflated by wishful
thinking, by self-dealing analysts, by accounting gimmicks, and
by outright fraud.
The amendment I am proud to support offered by Senators
Levin and Corzine and others addresses one of the most glaring
problems behind those inflated profit statements that fueled
the stock boom that is now unwinding.
Stock options are, as advocates tell us, a useful device.
They can reward employees when companies are so young that they
have little else to offer. Of course, we all want to encourage
startup companies in every responsible way we can. Also, stock
options in theory, and sometimes in practice, keep employees'
and corporate officers' incentives tied to the growth of their
companies, but unlike virtually every other kind of
compensation the firm can give its employees, stock options do
not have to be listed on annual reports as an expense, and that
means the more stock options you give, the less compensation
you have to report, the lower your reported expenses, the
higher your reported bottom line.
That part is simple, and that is a big reason stock options
became so attractive not only for the good things they can do,
but also for the convenient way they inflated earnings
statements and I would even say, if I want to go overboard and
defend corporate America, even defending those corporate
executives who when they take the train up to Wall Street and
have some 30-year-old or 35-year-old guy sitting around a table
saying: OK, what are you going to do next quarter? And giant
companies that are strong and mature would say: We are going to
do as well as last quarter. That is not good enough. We are
going to downgrade your stock and your company.
I remember one CEO of a major Fortune 10 company telling
me, I have to do one of three things: I have to say, so be it,
and keep on the long-term course or go out there and find some
new product on the shelf, which I wish I had, that could
increase productivity and profit, or go home and do something.
The ``do something'' usually meant go home and cut the number
of employees you have, cut expenses.
Guess what. I do not think these are bad, evil, and venal
people. They went home, and there is an easy way to do it.
Let's make sure compensation is not reflected as an expense. So
instead of paying the top executives an additional $15 million
in compensation, give them stock options. Guess what. The
bottom line looked $15 million better than it did before.
That is not rocket science, and it may have been produced
by Wall Street's desire for immediate gratification, immediate
response. Whatever the reason, it turned out to be as much of a
liability in the literal sense, as much as a damaging impact as
the good things it could do by tying the employees' fate as
well as the CEO's fate to their company.
I see my friend from Utah standing. Does he want to ask me
a question?
Mr. Bennett. Mr. President, will the Senator yield for a
question?
Mr. Biden. I will be happy to yield.
Mr. Bennett. Mr. President, the Senator is going into
territory I will deal with in my statement, but to keep it all
in context as he is talking, I must raise this question. The
Senator is one of the historians of the Senate. He has been
around a good long time and probably will be around for longer
than I will.
Does the Senator from Delaware remember that in 1993 when
we increased taxes in the Clinton tax increase, we also put a
limit of $1 million on the total amount of deductions a company
could take for salary for its employees?
In other words, that CEO could not be paid over $1 million
for his or her services and have the company deduct that as a
legitimate expense for tax purposes.
Mr. Biden. To be honest with the Senator, I do not remember
that.
Mr. Bennett. Will the Senator agree that might have been
part of the reason why companies, in an effort to attract and
hold the best executive talent, would have moved away from
traditional compensation, that the Senator and I both
understood when we were growing up and applying for jobs, and
into the more esoteric area of stock options because stock
options were, in fact, not deductible; whereas, good old-
fashioned pay for services rendered was given a tax
disadvantage as a result of the Clinton tax bill?
Mr. Biden. In response to the Senator, I have to check more
closely. I have great respect for my friend from Utah. Based on
what he says, it seems to me it would have had a negative
impact rather than a positive impact. That is one of the things
we talk about at the front end.
Whatever we do here should have a positive impact. There is
something else stock options do, too. Because stock options are
predominantly awarded to top executives, they are a great way
to give yourself a sweetheart deal, with a powerful incentive
for executives to look for ways to inflate stock prices so
their stock options, at least for a while, are worth millions,
even hundreds of millions of dollars.
Here is what Business Week said about stock options back in
March:
Options grants that promised to turn caretaker corporate
managers into multimillionaires in just a few years encourage
some to ignore the basics in favor of pumping up stock prices.
And pump they did. Here is how much stock options distorted
the bottom line for some of the biggest and best companies in
America. One study by a London-based consulting firm, Smither
and Company, looked at the use of stock options by 145 of the
largest U.S. companies.
They found that those firms overstated profit by 30 percent
in 1995, 36 percent in 1996, 56 percent in 1997, and 50 percent
in 1998.
Other analysts, including the Federal Reserve, have found
the same thing.
These are huge distortions in the picture the public was
given about these companies and a huge distortion in
information investors were using to allocate capital. That kind
of distortion was clearly a big factor, maybe in addition to
what my friend from Utah says, in driving up those stock prices
that are now falling back to Earth.
This is no simple problem. The 200 biggest firms now
allocate more than 16 percent of their stock in options. Let me
repeat that.
The 200 biggest firms now allocate more than 16 percent of
their stock in options, mostly for their very top executives.
The potential for distortion and the temptation to distort
is great.
Remember these stock options are predominantly given to top
executives.
One study in 1998 found that 220 of the top managers at
Fortune 500 firms received an average of 279 times the number
of stock options awarded to each of the firms' other employees.
Two hundred and seventy-nine times what ordinary employees
got.
Despite the increased use of stock options this is clearly
a device top management has largely preserved for itself, and
the kind of incentives they created are now all too clear.
This amendment takes what I believe is the most restrained
and most careful approach to the problem of stock options.
It does not legislate accounting standards, and it does not
dictate outcomes.
It tells the Financial Accounting Standards Board that it
is given new resources and new independence by the underlying
Sarbanes amendment. It provides for FASB to come up with
appropriate techniques to account for stock options, it does
not dictate a one-size-fits-all at this moment, and it gives
them a year to do it.
This is not about Government intervention this is about
getting us out of the way of what every expert from Alan
Greenspan to Warren Buffett and FASB itself says should be
done.
It does nothing to interfere with the issuing of stock
options.
It is about giving shareholders and investors the
information they need to reassert their control over America's
corporations. That will help to promote companies' long-term
value, and reduce the temptation to pump up short-term stock
prices.
This amendment can help promote a stronger form of
stockholder democracy, to cure a system that a greedy few have
turned to their own personal advantage. That kind of democracy
needs openness and clarity--honest information to make informed
decisions.
This amendment is real reform, and I urge my colleagues to
support it.
I thank my friend from Utah for his intervention, and I
thank my friend from Iowa for listening.
I yield the floor.
The Presiding Officer. The Senator from Iowa.
Mr. Grassley. I yield to the Senator from Virginia, just to
make a unanimous consent request.
The Presiding Officer (Mr. Nelson of Nebraska). The Senator
from Virginia.
Mr. Allen. Mr. President, I yield the remainder of my hour
to Senator Gramm, the Senator from Texas, who is the Republican
manager of this bill.
The Presiding Officer. The Senator has that right. Time is
yielded. The Senator from Iowa.
Mr. Grassley. Before I forget, Mr. President, I make the
request that the unused portion of my hour that I will not be
using here, I would like to also have given to the Senator from
Texas.
The Presiding Officer. The Senator has that right.
Mr. Grassley. Mr. President, I have five amendments I
filed: (i) An amendment providing for a team of oversight
auditors, (ii) an amendment providing for prebankruptcy bonuses
paid to top executives be pulled back into the bankrupt
corporation's estate, (iii) an amendment providing the
Securities Exchange Commission with disgorgement remedies, (iv)
an amendment providing that auditors who sell tax shelter
products cannot opine on the financial effects of the tax
shelter deal; and, (v) last, an amendment providing
whistleblower protection to the accountants and others who want
to disclose financial statement misconduct.
I am pleased, in regard to the last amendment I just
announced about whistleblowers, Senators Leahy and Hatch
accepted that proposal as part of their amendment which has
been adopted.
I am not going to speak about the other four. I am just
going to speak about one of those. It is the first amendment I
put on my list, an amendment providing for a team of oversight
auditors.
As I said, I congratulate my colleagues, Senators Sarbanes
and Enzi on their hard work in moving S. 2673 out of Committee
and bringing the bill to the floor for further debate. The
reform bill is a great step in the right direction for tackling
some of the difficult accounting problems our Nation currently
faces. Nevertheless, I believe the reform bill isn't quite
tough enough on several issues and should be strengthened
further, consequently, the amendment.
In my view, the recent rash of accounting scandals did not
result from incompetency or lack of rigorous training of
accounting professionals. Neither has the problem lied
principally with misguided auditing standards known as GAAS or
ill-considered accounting rules known as GAAP.
The Worldcom debacle, among others, further demonstrated
that the problem does not rest entirely with a company's
external auditors--whose best efforts may not detect financial
misrepresentations if fraud is repeatedly covered up by
corporate insiders or contrived to defeat established internal
controls. Instead, each of the most recent corporate accounting
scandals appear to have arisen from egregiously bad behavior of
corporate insiders and internal accountants--with varying
degrees of complicity by those companies' external auditors.
Thus, as a matter of principle, I agree with the ``bad
apples'' theory being offered by many. However, I believe
addressing those bad apples requires additional oversight--and
not just of a company's external accountants but of the
internal accounting function itself.
To that end, I further respond to the President's call for
increased oversight and would like to offer an amendment that
would strengthen the provisions Sarbanes-Enzi bill by expanding
the powers of the oversight board to require the performance of
``spot audits.'' The underlying bill which focuses on
monitoring external auditors woud be amended to provide
additional board oversight of internal corporate accounting.
Specfically, my amendment would charge the Board with
responisibility for conducting oversight audits or ``spot
audits'' of public companies. The board would serve in a role
analogous to the Internal Revenue Service or the Federal Bank
Examiner. The IRS, for example, achieves voluntary public
compliance through review of a very limited number of Federal
tax returns each year. The IRS does not verify each and every
tax return. Similarly, the Federal Bank Examiner sporadically
and randomly audits various banks throughout the country. Such
``spot auditing'' has been an extremely effective oversight
tool for the banking industry and one which has resulted in
higher levels of regulatory compliance. In similar fashion, I
believe that accountants and corporate America will prepare
more carefully their financial statements if exposed to the
risk of compliance review by the board's oversight auditors.
Even in self-regulated form, the accounting industry has
long recognized the need for a second level of review. To that
end, 24 years ago the ACIPA established the peer review process
by which one accounting firm would review audit work of another
accounting firm. For example, Deloitte & Touche was for many
years the assigned peer reviewer of Arthur Andersen. Industry-
wide self-checking on top of industry self-regulation seems
ill-conceived and has been widely critized for its
effectiveness by lawmakers and the SEC.
Over the past 25 years, a Big Five accounting firm has
never issued a qualified report against another Big Five
accounting firm at the end of any peer review despite the
subsequent discovery of numerous irregularities including
numerous conflicts of interest from stock ownership in audit
clients. This recognized need for a second level of review is
longstanding although the mechanism originally established by
the accounting industry seems to have proven largely
inadequate.
Some may ask why the Board should be granted powers which
may be exercised currently by the SEC. The answer is simply
resources. Providing an effective mechanism for spot checking
the books of various issuers requires a dedicated audit staff
to carry out those purposes. Having resources dedicated to a
regulatory review process would allow the oversight board to
take a proactive approach in reviewing for accounting
irregularities and take the SEC out of a purely reactive
posture with respect to corporate accounting fraud. The SEC has
done a great job of investigating corporate scandals once
detected. Unfortunately, by the time many of the recent
scandals were discovered, things had progressed too far. We
were unable to salvage the companies and the life savings of
thousands of employees and shareholders. I believe the
oversight auditor would provide a deterrent to committing fraud
when coupled with tougher criminal sanctions. I further believe
that earlier detection could prevent the absolute destruction
of companies in which fraud remains uncovered for too long a
period of time.
I note that the concept of an oversight auditor within the
public oversight board was rejected in the accounting reform
proposal offered by the SEC and Harvey Pitt on June 20. The
draft emphasized that the SEC's vision of a newly created
public oversight board reassured corporate America that the
newly-created oversight board would require the cooperation of
audited corporations ``only to the extent necessary to further
. . . reviews or proceedings regarding the [audit
corporation's] accountant.'' The draft further promised that
the new oversight board would not conduct ``roving
investigations'' of audited corporations nor would the board
sanction those corporations. It occurs to me that by shifting
exclusive focus and responsibility to accounting firms, we
ignore the underlying behavior of corporate wrongdoers who have
principal responsibility for fair and accurate financial
reporting to corporate shareholders.
Under my proposal, the newly created oversight board would
be charged with reviewing the financial statements of issuers
and focusing its resources on highest-risk audit areas and
questionable accounting practices of which it is aware from the
SEC Division of Enforcement or other sources such as
whistleblowers under provisions I heartily supported.
Upon discovery, the board would refer findings of possible
accounting or auditing irregularity to the Division of
Enforcement with respect to issuers or other appropriate
Federal and State enforcement officials such as the President's
newly-created Fraud Task Force within the Department of
Justice. This referral mechanism would ensure that those
agencies continue to have primary authority and responsibility
for conducting comprehensive corporate investigations of
possible wrongdoing. The oversight board, of course, would have
authority to conduct investigations of possible wrongdoing with
respect to the involvement of accounting firms within its
jurisdiction.
That is a basic summary of what this amendment would
accomplish. I urge my colleagues to support establishment of an
oversight auditor as a means of improving the compliance of
corporate issuers and their external accounting firms and
detecting irregularities at a much earlier point in the system
when a shareholder value remains salvageable.
It seems to me that my amendment comes down to just a
simple case of common sense. As I think proven so many times
before, auditors need to be audited in the same way the IRS
does it for tax returns and in the same way bank examiners do
it in the case of bank audits. If auditors know their work will
itself be audited, they will think twice about looking the
other way on shady deals, as we have seen.
My amendment would put some very specific teeth in the
Sarbanes-Enzi bill.
At this point, I was hoping the Senator from Texas was
going to be here because I have done so much for him on a lot
of Finance Committee bills. I'm referring to tax bills,
including the recent CARE bill and the recent energy bill. I
have helped him with so many amendments that he wanted. I was
sure he would be willing to help me get unanimous consent to
get my amendment up, particularly in light of the fact that
last week I was assured when it wasn't on the list that it
would be on the list. Then I came back and found that it meant
being last on the list.
Now we are getting down to the end. I would like to have
what I consider kind of a commitment, although it probably is
not an ironclad commitment, that I be on the list, and,
obviously, I would be able to get a vote on my amendment.
At this point, I ask unanimous consent that the pending
amendment be laid aside for the purpose of taking up my
amendment just described, which is amendment No. 4232.
The Presiding Officer. Is there objection?
Mr. Enzi. In light of the discussions, I have to object.
Mr. Grassley. Was the President going to put my unanimous
consent before the Senate?
The Presiding Officer. I did.
Mr. Grassley. I did not hear the President do that.
The Presiding Officer. The Senator from Wyoming objects.
Mr. Grassley. Mr. President, before I yield the floor, I
would like to have just a short discussion of something that
bothers me. In the Senate we have a right to be, and a
responsibility to be, intellectually honest about these issues
with which we are faced here.
I have heard so much during this debate--not so much during
the debate, because that wouldn't be fair, but more probably in
news conferences held by Senators on the other side of the
aisle--about the Democrats wishing to use Enron and WorldCom
events very much as, I think, political issues. I think maybe
the Democrats are hoping for a ``November storm'' in which our
economy is weak and no progress is made on accounting reforms.
As this bill goes through the Senate, through conference,
and comes back, I hope we will realize that there is enough
blame to go around. But, most importantly, I think it is wrong.
For instance, the distinguished majority leader on ``Face the
Nation'' recently attributed the current crisis to the alleged
``permissive'' attitude in the Bush administration towards
business. I didn't see any ``permissiveness'' in the
President's speech last week. I don't think very many people
did.
But I think we also need to remember, while a lot of this
mischief was going on by corporations, that during the decades
of the 1990s and now in the 21st century there were 2 years in
which Democrats controlled Congress. In those two years, we had
a Republican President. That was the first Bush Presidency.
There was a period of time when the Democrats controlled both
Houses of Congress and the White House. That was 1993-1994.
Then there were 6 years that Republicans controlled the
Congress--1994-2000, and the Democrats controlled the
Presidency. Then there were 135 days last year that Congress
was controlled by Republicans, and the President of the United
States, but only 135 days out of a 12-year period of time, if
you want to use the 1990s plus now. And what has happened has
happened on the watch of both Republicans and Democrats.
I think that to say a President has been President 18
months and this crisis before us is because of a ``permissive''
attitude in the Bush administration towards business just
doesn't hold water.
I have a chart behind me. I hope I am very clear in making
this more accurate than what I just said. The yellow is the 2
years of the Bush administration going back to 1994, and the
other color covers the Clinton administration. But let's forget
about the Bush administration and the Clinton administration.
Let's just realize what the facts are.
In the case of Enron, it became public in the year 2001,
but the restated earnings and the mischief went on all the way
back to at least the beginning of 1997 because 1997, 1998,
1999, 2000, and the first two quarters of 2001 were restated
earnings.
Adelphia: Half of 1998, all of 1999, all of 2000--before
they were public in 2001--but restated earnings for all those.
Go down to Xerox. It was found by the end of the year 2000
everything that was done wrong in Xerox. The restated earnings
of 1997, 1998, 1999, and 2000 came before there was ever a
President George Bush.
There were restated earnings for Rite Aid for 1998, 1999,
and 2000. You can go down the list. What the chart says, better
than I can say, is that it is not a permissive attitude by this
President that has put us in this position. It is because of
the lack of transparency that was implied in what the
accounting profession and audit committees and boards of
directors, who ought to be watching management, were doing, and
the Securities Exchange Commission under the spirit of the 1933
law of what they should have been doing. I suppose there are a
lot of others as well.
But now politics should be put to the side. We should not
be making these statements. We ought to be correcting the
situation so that people have confidence and so that the crooks
who are running our corporations and doing these things that
are evidenced here. When I say ``crooks running our
corporations,'' I mean the ones who would do this sort of thing
to their stockholders and to the country and to the economy--so
that they cannot get away with that in the future.
That is what this bill is all about. I complimented Senator
Sarbanes and Senator Enzi about this bill. I think it would
have been improved with my amendment. But, quite obviously,
that is not the way the game is being played. So I am sorry
that my amendment could not be put to a vote.
The Presiding Officer. The Senator from Utah.
Mr. Bennett. Mr. President, I have spent most of the
afternoon in the Chamber listening to this debate, which I have
found to be illuminating, occasionally informative. I want to
do what I can to perhaps add to the information, if not to some
of the light.
I made reference, in my colloquy with the Senator from
Delaware, to the decision that was made by the Congress back in
1993 to put a limit on the amount of compensation that
executives could receive in terms of traditional dollar salary.
And the limit was $1 million.
I remember some of the rhetoric that flew around this floor
at that time, filled this Chamber--how terrible it was that
people were being paid these outlandish salaries and that
somehow it would benefit the people at the bottom of our
economic ladder if there was a limit placed on those salaries.
And so recognizing that they could not outlaw the salaries,
Congress could do the next best thing--or, if I might say, the
next worst thing--and say: All right, they can pay themselves
these big salaries, but, by George, we will not allow a tax
deduction for anything over $1 million.
Then, recognizing that would probably produce all kinds of
difficulty, Congress said: Except in a number of areas. And one
of the areas of exceptions was that nonsalary compensation
could exceed $1 million and be expensed if it were approved by
the shareholders.
In my view, this was a strong incentive to move towards
stock options. After all, if you are running a public company
and your services are worth $5 million or $10 million on the
open market, you are not going to stay with a company that will
only pay you $1 million in cash if a competing company will
come along and offer you the $5 million or $10 million you
think you are worth in the form of other compensation.
So as we get lyrical around here about how terrible stock
options are, and how stock options lead to all kinds of excess,
we should remember that Congress, in its excess of enthusiasm
for a form of wage and price controls, helped contribute to
this situation.
We do not like to have institutional memory. We do not like
to be held accountable for our actions 4 or 5 years after those
actions are taken. But, in this case, I think it is appropriate
for us to remember the past while we are getting so exercised
about what it is we plan to do in the future.
If I might, Mr. President, be a little autobiographical for
a moment, I would like to trace my own experience with stock
options. I have reflected on this, and I think it has perhaps
some value in this debate.
I was working for the JC Penney Company in the mid-1960s. I
was interested, when I went to work for the Penney Company, to
find out that company had a tremendously innovative and
singular form of compensation; that is, no one in the company
was paid more than $25,000 a year--no one. The president, the
chairman of the board, none of the vice presidents--no one was
paid more than $25,000 a year.
There was a pool of profits that was created, and in
addition to your $25,000 salary, you were given points in the
pool. It was assumed that the pool was divided up in such a way
that any one point in the pool was worth $1. So when I went to
work for the Penney Company in 1964, my salary was, as I
recall, $10,000 a year. I was not important enough to get to
the exalted $25,000 a year stage. But I was given 2,500 points
in the pool, which meant that if the company met its earnings
objectives, I would get another $2,500; in other words, my real
salary would be $12,500.
So I did everything I could to make sure that every point
in the pool was, in fact, worth $1. I did what I could to turn
off the lights. I did what I could to save expenses. I did what
I could to drive sales so that the company would meet its goal.
My memory is that in one of those years each point was
worth 93 cents; that is, the company fell 7 percent short of
its projection. And every one of us in the company who was
having that kind of a salary circumstance felt that 7 percent
hit. In the example I have just given, instead of getting
another $2,500 at the end of the year, I would have that $2,500
shaved by 7 percent. I would get my $10,000 salary, plus 93
percent of the additional $2,500.
There were stories in the Penney Company that were
legendary about managers who would get transferred from one
Penney store to another. At the time, as I recall, the limit
was not $25,000, it was $10,000. So $10,000 per year was the
maximum anyone in the company was paid. A store manager who was
transferred from a relatively small store to a relatively large
one in a large city was sure he was going to get a big raise.
He got his first check, and it was for $10,000 a year. And he
said: But my expenses are higher. I am running a store that is
two or three times bigger. It doesn't matter; you get $10,000 a
year. At the end of the year, when they added up the profits of
that store, he got a bonus based on the profits of the store he
was managing, and the bonus was about $100,000. Well, he had an
obvious incentive to see to it that store was profitable.
What does any of this have to do with stock options? That
system that was followed by the Penney Company that helped
drive its growth all those years--where compensation was tied
to performance, not only your personal performance as in the
case of the store manager I described but in the company's
performance, as in my own case--that program was scrapped. We
went to a more traditional kind of compensation. As part of the
traditional kind of compensation, we had stock options.
I got a little comfortable with the old system because I
remember 1 year where each point in the pool was worth $1.23.
The company did much better than it had anticipated, and I got
a 23 percent upward kick in my compensation.
I questioned: Why are we getting away from this because it
seems to me this works?
The answer was: Wall Street requires it.
Well, that wasn't enough of an answer for me. I said: What
do you mean Wall Street requires it?
They said: The analysts at Wall Street have said to us,
until you give stock options, we are not going to believe that
you are serious about the future of your company because stock
options are not tied to immediate profits. Stock options are
tied to future profits. And until you put some of your
compensation to your executives and key employees in the form
of stock options, we will not believe that you believe the
future of your company is as bright as you say it is. We want
them to have a stake in the future.
So as it was explained to me, in the scrapping of this
unique compensation plan that I think the JC Penney Company was
the only company in the country, if not the world, that
followed it, in the scrapping of that plan, you had to adopt
some form of stock options. So they did adopt stock options.
I didn't stay around long enough to take advantage of them.
I entered the Nixon administration in 1969 and gave up my
vesting in a number of circumstances at the Penney Company.
Frankly, I was a little nervous about that because I thought I
had a bright future financially if I had stayed at the Penney
Company. And again, as I say, at the end of the year, when they
sent me the money that had been accumulating in my behalf
during the part of the year I worked there, each point was
worth $1.23. That said to me, once again, how much more money I
would have had if I had stayed with Penney instead of coming
with the Government. That is a separate issue. I will not go
down that road any further. I am glad I made the decision I
made. I probably would not be a Senator if I had not.
The point is, the compensation of employees should be tied
to the future and benefit and prosperity of the company, and
stock options were created with that in mind. What we have seen
them become, since 1993, when they were not available as part
of an intelligent compensation mix, but they were made more
valuable by tax treatment by the Congress making an accounting
decision, what we have seen is that stock options have
accumulated the bad name we have been hearing about here on the
floor. I am not sure I agree with everything that has been said
about how terrible stock options are, but I do recognize they
have led to some excesses.
In the New York Times, on July 12, there was an editorial
signed by Walter Cadette, senior scholar at the Levy Institute
of Bard College and retired vice president of J.P. Morgan. With
a background at J.P. Morgan, in my view, he has a little bit
more credibility than some of the people who write editorials
for the New York Times. But he made the same point that has
been going around the floor here in some of the rhetoric when
he says:
Options . . . hold out the promise of wealth beyond
imaging. All it takes is a set of books good enough to send a
stock price soaring, if only for a while. If real earnings are
not there, they can be manufactured--for long enough, in any
case, for executives to cash out. This, in essence, is what
happened at Enron, WorldCom, Xerox--indeed, at quite a long
list of companies.
That is not congruent with the explanation about stock
options I received back in the 1960s, when I had my first
opportunity to participate in stock options in a Fortune 500
company. That is something that is new, that has come along.
So we are back to the fundamental question of this bill,
which is, How do we account for the performance of a company in
a way that will allow investors to make an intelligent judgment
about the value of the company?
That is the fundamental issue here. It is fundamental
enough that I think I ought to repeat it: How do we account for
the performance of the company in an accurate enough manner to
allow investors to make an intelligent decision about the
future of that company?
Some will say to us: That is a very easy question to
answer. Congressman Gephardt has been quoted in the press as
suggesting that accounting is a science. It is a simple matter
of black and white, of adding 1 and 1 and getting 2.
That is not the case, however much we would like to believe
that is the case. Yes, when you are talking about some aspects
of accounting for a company's performance, it is a simple
matter of adding up the numbers and reporting them. But in a
company as complex as today's modern industrial corporation,
there are a whole series of judgment calls that must be made.
It is not just a matter of adding up all of the sales. It is
not just a matter of adding up all of the costs.
Back to my example of the JC Penney Company, this is a
matter of a judgment call being made. What is the judgment of
the value of this company if it does not trust its executives
enough with stock options?
Analysts on Wall Street who are trained and experienced
came to one judgment call: that the Penney Company was not
worth as much without stock options as it would be with them--
nothing whatever to do with the bottom line, nothing whatever
to do with how many socks we sold or how many shoes we sold or
how many shirts we sold. It was a judgment call on the value of
the company based on accounting decisions.
Are we going to account for compensation strictly on the
basis of the Penney Company's system or are we going to make a
judgment call based on stock options?
Well, the Penney Company did what it believed it had to do
under those circumstances and, of course, went forward in its
history.
The point here is that there are judgment calls to be made
every day in every circumstance with respect to accounting, and
they will determine how the public, the investing public, will
respond to the company that makes them.
That raises the question of what should those calls be and
who should determine what those calls should be.
There is a term we use. It is called GAAP. It stands for
generally accepted accounting principles. The very phrase
itself defines what it is we are talking about. If we want to
make an accounting decision as to what something is worth, we
should make the decision within the parameters of GAAP; that
is, we should make the decision on the basis that is generally
accepted.
Let me give an example of what happens when you go outside
the basis of what is generally accepted accounting principles.
I was involved with an investor and he put out appropriate
balance sheets, accounting information, profit and loss
statements, and so on. He got a very angry call from one of the
subinvestors. This was the kind of man who would sell shares in
his overall project primarily to doctors and dentists.
He said to me once:
I will not sell shares to lawyers.
I said:
Why not? Isn't a lawyer's money just as good as a doctor's
or a dentist's money?
He said:
No, because lawyers are trained to find problems and I
don't want sub-investors who spend all of their time looking
for problems.
Well, he got a phone call from a physician who said to him:
I have looked at your financial information and you are
lying to me.
He said:
What do you mean I am lying to you?
He said:
It is right here in your documents. You said this
particular venture made X hundreds of thousands of dollars last
year. Now you have given me your financial statements and I
have found out you didn't make a penny.
The man said:
What are you talking about?
He said:
I have it right here. Here is a list of your assets and a
list of your liabilities and they match each other to the exact
cent. You didn't make any money.
Well, generally accepted accounting principles say that a
balance sheet always has to balance, that the number on one
side and the number on the other side must equal each other to
the penny. This man did not understand generally accepted
accounting procedures, he wanted to keep books a different kind
of way, and he was misled. The solution, of course, was to
educate him on what those generally accepted accounting
procedures ought to be. Once he generally accepted what those
procedures were, he could read the profit and loss statement,
the balance sheet, and he could discover that the man, in fact,
was not lying to him and that, in fact, the venture had made
several hundreds of thousands of dollars that year.
Now, let's come to Wall Street, let's come to Enron, let's
come to all of the things that we are talking about here. One
of the things we have heard in many of the hearings that I have
attended on this subject is that if you were a sophisticated
analyst of financial statements, you could, in fact, find all
of the information that you needed in the footnotes of the
various financial statements that were published. You did not
need the kinds of disclosure that this bill is calling for.
Well, I examined that, listened to that testimony, listened
to the people who made that point, and came to the conclusion
that they are right. If you are sophisticated enough to be able
to go through every single footnote, examine every single side
comment, and plow through all of the boilerplate that makes up
a standard financial release, you could create an accurate
picture of that corporation--except in those cases where there
was outright fraud. In my opinion, Enron was a case of outright
fraud, not a case of hiding things in footnotes; it was a case
of lying.
Quite frankly, there is nothing we can do in this Chamber,
or anywhere else in a legislative forum, to stop people who
determine that they are going to lie, who are determined they
are going to commit fraud. That will happen no matter what kind
of a bill we pass. We can raise the penalty and thereby
discourage it a little more--and there are proposals to do
that--but we cannot stop it. If someone is determined he is
going to break the law, and he thinks he can lie and get away
with it, he will still do it regardless of the bills that we
pass here.
But what we can do, what we should do, and what this bill
is crafted to do is to make it easier for the ordinary investor
to understand what a company is worth, make it so that the
generally accepted accounting principles conform with generally
understood activities with respect to the business world.
The question is, how can we establish accounting rules that
will make it possible for the ordinary investor to understand
what is going on and not restrict understanding to those who
can read the footnotes, who can decipher all of the
boilerplate. I don't think we will ever get there in a perfect
world. Life being what it is, with the lawyers coming in and
requiring careful terms of art to be spelled out, we will never
get to the point where someone who does not have any kind of
legal understanding of the terms of art can read this as easily
as he or she could read Harry Potter. However, we can move in
that direction, and I feel this bill does so move.
The one thing that we should be most careful of, however,
is to avoid having Congress set the accounting rules. Why? If
Congress sets the accounting rules, it will--to use a phrase we
use here derisively sometimes--take an act of Congress to turn
that around. And having set the rules, Congress is very
reluctant to come back in an act of Congress and change them.
But if the rules are set by the regulatory bodies over which
Congress exerts some oversight responsibility, they can be
changed much more easily as more information comes along and as
people begin to discover that what they did previously maybe
doesn't make as much sense.
I offer as exhibit A Congress's action to outlaw the
deductibility of cash compensation above a million dollars--
something that, in retrospect, now looks like it was a pretty
stupid thing for us to have done. But we have done it, and the
chances of trying to get a bill through that would undo it are
very slim. If we stay out of the business--we in Congress--of
making these kinds of accounting decisions, we will be better
off, the economy will be better off, more people will keep
their jobs, et cetera.
Let me close on that particular subject with that
particular idea in mind, and that is that Congress from time to
time wants to step into the marketplace, repeal the law of
supply and demand, and assert our judgment over the judgment of
the marketplace. I have said many times, and will say many
times hence, if I could add to what we have carved in marble
around here, I would say: ``You cannot repeal the law of supply
and demand.'' But we keep trying to do it with wage and price
controls. We keep trying to repeal the law of supply and
demand.
We tried to do it in 1993 when we said we will do something
about the excessive compensation of executives. We won't say
that the marketplace and the law of supply and demand will
determine what people get paid; we will legislate it. We will
legislate it with tax policy. We will do some social
engineering through tax policy. We keep trying to do that all
the time, and it almost always produces a perverse effect.
Let me address this question of overwhelmingly big salaries
and compensation--as if there was something really evil about
that, really corrupting about that. Maybe there is, in terms of
the impact that that sort of compensation has in the lives of
an individual, but it is the marketplace at work.
Let me give an example with which I think everybody might
be familiar. I am not talking about Jack Welch, the CEO of GE.
I am not talking about Ken Lay at Enron. Let's talk about
somebody with whom most people can identify. Let's talk about
Wayne Gretzky.
Wayne Gretzky has been called, accurately in my view, the
greatest hockey player who ever lived. Along with that, Wayne
Gretzky is the highest paid hockey player who ever lived. At
the time the decision was made by the hockey team that brought
Wayne Gretzky into the United States and paid him an incredible
sum of money, there was a great hue and cry: How can one
individual be worth this much money? For what? Knocking a solid
piece of whatever hockey pucks are made out of around on the
ice, for that he is worth $20 million, $30 million, $50
million--whatever it was--a year?
The owner of the team came out of some obscurity long
enough to say: Yes, he is worth that much money, and let me
explain to you why. Then he outlined what the ticket sales for
his team were the year before he hired Wayne Gretzky and what
the ticket sales for his team were the year he announced the
hiring of Wayne Gretzky. The number was several times the total
amount that Wayne Gretzky was being paid.
The owner said: On a percentage basis, he is a bargain. He
is a steal at the price I got him.
These numbers are representative rather than absolute, but
they stick in my memory that they were paying Gretzky something
like $40 million or $50 million and the increase in ticket
sales was going to be something like $120 million to $150
million.
The owner said: If I had to, I would pay him twice as much
because I am getting the benefit.
People say: But that is measurable. Michael Jordan did the
same thing for the Washington Wizards. We can figure that out
with accounting. But what these chief executive officers are
being paid is obscene.
If you are a shareholder of General Electric, Mr.
President, and you looked at what Jack Welch, the CEO of
General Electric, did with that company during the time he had
it in his stewardship, would you look back on that total period
and say we paid Jack Welch too much money? Or would you look
back on the amount of the value of General Electric that was
generated under his stewardship and say he was a bargain; he
was a steal; we could have paid him twice what we paid him and
still come out well ahead?
You say: But look at all of the executives who flew their
companies right into the sea. Look at the executives who
destroyed their firms. Yet they got this same amount of money.
If I may go back again to the sports world, have we not
seen sports teams pay very large salaries, responding to the
law of supply and demand, for coaches who had losing seasons?
For quarterbacks who ended up being on the waiver list? Those
of us in the Washington, DC, area have had a lot of experience
with quarterbacks. Does that mean we are going to stop trying
to get the right quarterback for the Washington Redskins by
saying we will pay them average salaries in the National
Football League so that there will not be any more of these
obscene salaries and failures?
Several things will happen if the Washington Redskins take
that point of view. No. 1, they will start to lose even more
than they have lost in the past. And, No. 2, the fans will stop
coming and the savings that you will make in buying a
quarterback that you can get for $400,000 or $500,000 a year,
compared to the one that you are gambling $10 million or $20
million on will all disappear as the ticket sales fall off, the
television revenue disappears, and people do not want to come
anymore.
Yes, there have been corporate executives who have been
vastly overpaid. There have been CEOs who have been hired on
the basis of their reputation, just as football coaches who
have been hired on the basis of their reputation, who, to lure
them into the company, have been given great packages and then
failed to deliver. But there are also the Jack Welches of this
world who have turned out to be bargains no matter how much
they were paid.
Who should make the decision as to how much they should be
paid? The answer is, The marketplace should do it. The law of
supply and demand should do it. Someone who has demonstrated
that he or she has the capacity to build, maintain, and expand
a corporation with tremendous value for the shareholders is
someone who can demand very high salaries because he or she is
in very short supply.
We can complain all we want to about the social inequity of
a CEO who is earning $20 million, $30 million, $40 million a
year and someone who is working in that company for minimum
wage, but it is the same principle as saying: Look at the
difference between Wayne Gretzky down on the ice earning $20
million, $30 million, $40 million a year and someone selling
hot dogs in the stands. If Wayne Gretzky were not on the ice,
there would not be anybody in the stands to buy the hot dogs.
Wayne Gretzky and his skills are in much shorter supply than
someone who can stand in the stands and sell hot dogs.
We should not in our frenzy in this whole debate get so
carried away with our desire to deal with those who have
damaged the system by their failure to live up to their
responsibilities that we, once again, make any statements that
would cause us to try to repeal the law of supply and demand.
I see my colleagues are seeking recognition. I have carried
on long enough. I leave with this one last thought: If we are
going to deal with these issues, we should deal with them in
the way this bill deals with them and not in the proposal that
Congress itself should set accounting standards or should set
wages or caps or compensation.
Past history tells us Congress can act in a hurry but
repent at great leisure.
Mr. Gramm. We have a unanimous consent request and a
request for the yeas and nays that I want to make while we have
at least a handful of Members here. I ask for the yeas and nays
on the Edwards amendment.
The Presiding Officer. It is not in order to request the
yeas and nays.
Mr. Gramm. I ask unanimous consent that it be in order to
request the yeas and nays on both pending amendments.
The Presiding Officer. Is there objection?
Without objection, it is in order to seek the yeas and nays
at this point.
Mr. Gramm. I ask for the yeas and nays on the pending
Edwards amendment.
The Presiding Officer. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mr. Gramm. I now ask for the yeas and nays on the Carnahan
amendment.
The Presiding Officer. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mr. Gramm. The Democrat floor leader had a unanimous
consent request he wants to propound.
Mr. Reid. Mr. President, we are in the process of working
that out now. I think we will be able to do that later.
Several Senators addressed the Chair.
The Presiding Officer. The Senator from Nevada.
Mr. Ensign. Mr. President, I ask unanimous consent that I
be allowed to speak for up to 10 minutes as in morning
business, with the time consumed counting against the
postcloture debate.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Nevada.
Mr. Reid. Mr. President, it is also my understanding that
the Senator from Nevada is going to yield an hour to the
manager of the bill; is that right?
Mr. Ensign. If you require the 50 minutes that will be left
against.
Mr. Reid. Or whatever time is left.
Mr. Ensign. Yes.
Mr. Reid. Mr. President, I understand he has a right to do
that; is that true?
The Presiding Officer. The Senator has a right to yield
time. The manager of the bill may receive up to 44 additional
minutes. The Senator from Nevada.
Mr. Ensign. Mr. President, at the end of my remarks, I will
yield whatever time the Senator from Texas can receive.
Mr. President, I want to talk about something a little
different than what we have been talking about today, although
I have very strong feelings about the bill and think that both
the managers of the bill, along with Senator Enzi from Wyoming,
have done a terrific job in addressing some very serious
problems out there. I still believe there are a few problems
with the bill we need to clean up in conference.
I do think the overall legislation has some positive
reforms that must be implemented to try to restore some
confidence back in the investing public.
PRESCRIPTION DRUGS
Mr. Ensign. Mr. President, what I want to talk about is
something we are going to be dealing with later this week--as
early as tomorrow from what I understand--and that is the whole
idea of prescription drugs within Medicare. Earlier today,
Senators Hagel, Gramm, Lugar, Inhofe, and I all introduced a
new prescription drug bill. It is the compilation of work
mainly that Senator Hagel and I have been doing for the last
couple of years. We think it is a proposal that deserves the
attention of our colleagues, and I encourage them to study this
proposal.
I want to start by reading an e-mail I received from a
senior citizen back in Nevada. This e-mail came in at 11:21
p.m. Pacific standard time, so obviously this person was up
late at night thinking about the whole issue of prescription
drugs. Let me read it:
I urge you to ponder very honestly the proposed
prescription coverage with Medicare. Many social problems arise
due to the fact that many persons who need medication to
maintain some sort of life existence are not able to purchase
the needed medications. Must we continue to choose housing or
our medications? Please step back and consider if an elderly or
disabled person in your own family were in this precarious
situation. Would you not step up to the moral plate and fight
to find funding for Medicare covered prescriptions?
I think this person summed up very well what a lot of
seniors are feeling: They are having to choose sometimes
between the type of food they eat and prescription drugs;
sometimes between whether they can turn their air-conditioner
on in the summertime or their heat on in the wintertime and
prescription drugs; sometimes between rent and prescription
drugs.
There are several proposals, and I commend the people who
have been working on their proposals, but, frankly, the reason
we decided to introduce this bill is that some of the other
bills, especially when one looks into the outyears, are so
costly that they literally could bankrupt the Medicare system
in and of itself.
Our bill does a few things. First, it is available to every
beneficiary, and it is also available faster than any of the
other prescription drug proposals. Our bill can be implemented
as early as January 1, 2004, whereas the earliest the other
proposals can be implemented is 1 full year later.
Our bill is also the most affordable bill, especially to
the taxpayer. We are waiting for the final score from CBO, but
we think it is going to come in somewhere around $150 billion
over the next 10 years. The next cheapest proposal, that we are
aware of, is around $370 billion, and when one looks at the
full cost of a 10 year program, other programs can be up to a
trillion dollars.
A trillion dollars is not something this country can
afford, especially under current economic conditions, and
especially when we think about young people who would like to
see Medicare as a benefit to them someday.
So we must enact a reform that not only America can afford
but also senior citizens can afford, and we think we have come
up with that balance. Basically, the way the program would work
is, every senior on a voluntary basis would be able to get a
prescription drug discount card. For a $25 annual fee, they
would sign up and get this prescription drug discount card.
They would then go buy their prescription drugs, and all
seniors would save because of volume discount buying. We would
use the private sector to do this. They would save, on average,
25 to 40 percent on their drugs. That is a huge savings right
upfront that every senior could achieve.
On top of that savings, seniors up to 200 percent of
poverty would next spend, on average, about $100 a month out-
of-pocket; then after that, other than a very small copay, the
Federal Government would cover the rest of their prescription
drug costs.
This is what seniors are looking for. In my campaign in the
year 2000, I took this plan all over the State of Nevada and
talked to low-income, moderate-income, and higher income
seniors groups about it. I told them that people who are in the
lower income bracket are going to get most of the benefit, and
for people in the higher income bracket, it is going to cost
them more money, as it should.
In some of the other programs, no matter whether one is a
lower income or higher income senior, they basically are
treated the same. I personally do not think Ross Perot or
somebody in his income category should be treated the same as
somebody who makes $15,000 a year. There should be some
difference. Under our bill, there is a great difference in the
way those two categories of people would be treated.
The reason our bill is less costly to the taxpayer is one
simple fact: All the other bills give a percentage of first
dollar coverage. Whether it is 50 percent or whatever the
coverage, after a very small deductible, they all start
covering right away. Our bill says the senior is going to pay
about the first $100 a month out of pocket, and then after
that, our coverage kicks in.
About 50 percent of the seniors do not have $1,200 worth of
prescription drug costs per year, so about half the seniors,
other than the discounts they will get because of the
prescription drug discount card, actually will not use it. But,
frankly, most seniors can afford about $100 a month for
prescription drugs. It is for that diabetic patient or that
heart patient or that cancer patient who has maybe about $500,
or $300, or $400, or whatever it is, a month that they are
paying in current prescription drug costs. These are the people
that really cannot afford their prescription drugs, and our
bill helps that person much more than most of the other plans.
The reason our bill saves so much money is that we keep the
patient accountable for the drugs they are getting. They do not
have somebody else paying for it and as they get the benefit.
That is one of the biggest problems we have with our current
health care system: There is no accountability with patients.
They are receiving the benefit regardless of the cost, and so
they do not think about shopping because somebody else is
paying the bill.
We do not have market forces working in the health care
field today, and if we enact a prescription drug benefit
without utilizing market forces, someday we are really going to
regret it because we will have severely out of control costs.
The bill we have introduced, we believe, is more fiscally
responsible and targets most of the benefit for those who truly
need it the most. We can enact it a lot more quickly than some
of the other programs, and it is permanent. It is because of
those factors that we believe this bill is the bill that our
colleagues should take a look at supporting.
We would be happy to meet with anybody to talk to them
about the bill and possibly about cosponsoring the bill. Do not
be turned off because one political party may be offering one
bill and the other party offering another bill. We are offering
an alternative to either of those bills, and we think this
bill, with its fiscal responsibility to the taxpayer, is the
bill that people should support.
In closing, I look forward to engaging in a meaningful
debate on prescription drugs after we deal with this accounting
reform issue--and this issue is so important, and I see my
friend from Wyoming who has done so much work on the bill, and
I applaud him and the others who have worked on this bill. But
later in the week as we are debating this prescription drug
benefit proposal, we need to take a serious look and not play
politics because seniors cannot afford for us to play politics
with the prescription drug issue. We need to work together in a
bipartisan, rather, in a nonpartisan fashion, so seniors can
get the help they so deserve.
I ask unanimous consent that under the provisions of rule
XXII, I may yield whatever time I can yield back to Senator
Gramm. I understand it is 44 minutes, and I yield that amount
of time to Senator Gramm.
The Presiding Officer (Ms. Cantwell). The Senator has that
right.
The Senator from Georgia.
Mr. Kennedy. Will the Senator yield?
Mr. Cleland. I am happy to yield.
Mr. Kennedy. We have had two speakers from the other side.
I ask unanimous consent to follow the Senator from Georgia.
The Presiding Officer. Without objection, it is so ordered.
The Senator from Wyoming.
Mr. Enzi. Reserving the right to object, and I will not
object, some of us have been on the floor all this time waiting
to speak, as well. We hope for a chance to speak before we
reach the end of the day.
I will not object.
The Presiding Officer. The Senator from Georgia.
Mr. Cleland. Madam President, I ask recognition to discuss
my amendment No. 4236. This amendment addresses the
accountability of corporate officers and directors. I strongly
support the legislation before us which addresses the critical
need to create an environment of accountability within
corporate America. We need to send a strong message to
corporate executives that the days of living large while lying,
cheating, and stealing from the American people are over.
Control of a company certainly has its advantages, but it also
carries important obligations and duties. My amendment would
address a situation like Enron where officers cashed in on
bonuses, severance packages and millions of dollars in stock
sales as they saw the light of the train coming through the
tunnel. Unfortunately for thousands of Enron employees and
investors, they had no similar warning and were not able to
bail themselves out before many lost not just their jobs, but
their life savings as well. My amendment would make sure that
officers and directors who know what is happening, who know
that financial reports are being manipulated, can't cash in on
this knowledge while leaving employees and investors holding
the bag. It is the duty of officers and directors to know what
is happening in the corporation and to blow the whistle when
they know there is wrongdoing.
In the case of Enron, 10 executives or directors joined CEO
Ken Lay and Chief Financial Officer Andrew Fastow in siphoning
off company proceeds and reaping millions of dollars when they
sold their Enron shares high. Together these 12 individuals
made stock profits totaling more than $30 million before the
company took a public nose dive at the end of last year. These
corporate high rollers were reaping huge profits at the same
time thousands of hard working Americans were losing more than
a billion dollars in retirement savings, including $127 million
in lost retirement savings in my home State alone by teachers
and State employees.
Corporate greed, should not be rewarded. The underlying
bill requires that when a corporation has to file a restated
financial report because of misconduct in the original report,
the CEO and CFO have to give back any profits they have made
from bonuses and stock sales for a year after the original
report. My amendment would expand on the bill by calling into
account all officers and directors who know about the
misconduct in filing the financial report and through that
knowledge abuse the company's trust and the trust of their
employees. It would also mandate that officers and directors
who have knowledge of wrongdoing in their financial reports
would not only have to give up bonuses and profits but also
their severance packages. Why should someone like Jeff Skilling
get a parachute as he bails out of a disaster he helped to
create?
This amendment, my amendment, deserves support. It is
endorsed by Arthur Levitt, one of this Nation's most
distinguished financial authorities. It is high time we call
corporate executives on the carpet and hold them accountable.
It is time we create an atmosphere that encourages responsible
behavior and restores the confidence of the American people in
the economy of this country.
The Presiding Officer. Under the previous order, the
Senator from Massachusetts is to be recognized.
Mr. Kennedy. I am happy to yield.
Mr. Reid. I will take a couple of minutes.
Mr. Kennedy. I guess I just yielded the floor.
I yield to the Senator and ask recognition afterwards.
Mr. Reid. We have had some very long speeches by those on
the other side and I thought it appropriate we respond.
The ranking member of the Finance Committee had all these
charts indicating that all the problems were not the problems
of this administration. The fact is, we realize there is a lot
of blame to go around. With do not try to whitewash this issue.
The fact is, the President of the United States appointed
the SEC Commissioner, who stated in the hearings he wanted a
friendlier, a more gentle Securities and Exchange Commission.
That statement speaks for itself.
We also have to understand that actions speak louder than
words. What I mean is, we have a Federal Government today, this
administration, that is basically run like corporate America.
That has to change. That is what this legislation is all about.
When there is a situation where the President of the United
States is being written up in editorials all over the country
and news articles throughout the country over his dealings with
stock, borrowing money that basically he did not have, to pay
back the principle until you sell your stock--no one else gets
deals like that. The commentators are looking at that, as they
should. Of course, the dealings that the Vice President had
with Halliburton, we would like to know more about that. But
the Vice President is treating that like he treated his energy
task force: in complete secrecy, contrary to how we should be
running this Government.
I believe we have a situation that cries out for passing
this legislation as quickly as possible. This administration
must step forward and recognize they are part of the problem,
until they start talking about supporting this legislation, as
I understand the President did today. I think that is
wonderful. I understand he is going to help us get this through
conference. I think that is important. I would like to see it
before the August recess. It is important this legislation move
forward.
Actions speak louder than words. This administration has to
do more than talk about what needs to be done. They have to
work with us in solving the problems of corporate America
today.
The Presiding Officer. The Senator from Massachusetts.
Mr. Kennedy. Madam President, there are many important
provisions in the legislation before the Senate to increase
corporate accountability. I had hoped to offer an amendment to
make workers' retirement plans whole again when the corporate
executives cheat.
After the collapse of Enron--the largest bankruptcy in U.S.
history--the President and many Republicans in Congress
suggested that it was an isolated example of corporate
wrongdoing. Since that time, the Nation has witnessed a
continuing series of corporate scandals which have demonstrated
otherwise.
The lack of corporate responsibility in the United States
has undermined the credibility of our markets and devastated
the retirement savings of millions of Americans. This
widespread abuse of corporate power has also jeopardized our
Nation's economic recovery and hurt the legitimacy of our
fundamental institutions. We must take bold action this week to
ensure that corporations are made accountable and that workers
and investors are protected against these abuses.
In the past month, we have seen a jury criminally convict
the Arthur Andersen accounting firm for engaging in the
obstruction of justice to cover up the Enron debacle. We have
seen WorldCom admit that it wrongly reported its true financial
condition by nearly $4 billion. Just last week, the Wall Street
Journal reported that Merck recorded $12.4 billion in revenue
from a subsidiary that it never actually collected.
In response to these scandals the President gave a speech
last week, which the White House likened to the words of former
President Teddy Roosevelt. Unlike our Nation's great trust-
buster, the President failed to lay out a comprehensive plan to
restore America's confidence in our economic system.
Hard-working Americans and their families have suffered
immensely as a result of these scandals and the failure of the
Administration to take decisive action. Workers have lost their
jobs, their health benefits, and their retirement savings.
Today, over 47 million workers rely on 401(k) plans and the
stock market for retirement security. We can't wait for the
next report of corporate fraud, the next round of layoffs, and
retirement losses before we take serious action.
This wave of corporate scandals is undermining the
confidence of investors in the U.S. economy. Mutual fund
investors have lost about $700 billion in just the last 15
months. In May of this year, new investments in stock funds
declined by nearly two-thirds from the previous month. As
foreign investors lose confidence in the transparency of U.S.
corporations, these investors are pulling out of the U.S.
market and the value of the dollar is now falling against
foreign currency. With an unemployment rate of 5.9 percent,
America's workers can ill afford to have their economic
prospects dimmed by corporate corruption.
Its time--in fact its long past time--to pass tough new
laws to prevent future abuses of corporate power. We must
reform our accounting system, enact criminal penalties for
corporate wrongdoers, and pass new protections for workers.
Senator Sarbanes' accounting bill is critical to reforming
our public accounting system and ensuring transparency and
accountability for corporations in the United States. The
legislation creates an independent oversight board; it
restricts the non-audit services than an accounting firm can
provide to the public companies that it audits; it holds
corporate executives responsible for the accuracy of corporate
financial statements; it requires corporate insiders to report
stock sales and corporate loans to the SEC; and it provides
additional resources to the SEC to improve its investigation
and enforcement capabilities. We all owe a debt of gratitude to
our colleague, Senator Paul Sarbanes, for shepherding this
legislation through the Banking Committee and bringing it
before the Senate.
In addition to these accounting reforms, we must hold
corporate executives accountable when they mislead workers and
undermine their retirement security. At Enron, executives
cashed out more than a billion dollars of stock while Enron
workers lost nearly a billion dollars from their 401(k)
retirement plans. Thousands of Enron workers lost virtually all
of their retirement savings. Enron executives got rich off
stock options even as they drove the company into the ground
and systematically misled workers about the true financial
state of the company. Ken Lay now has a pension of nearly half
a million dollars a year for life. Many Enron workers have
nothing at all.
These are all statements that were made by Mr. Lay. Ken
Lay's lies encouraged workers to buy Enron stock at $49. He
``never felt better about the prospects of the company.'' He
predicted to employees a ``significantly higher stock price,''
saying it was ``an incredible bargain'' as it was going down.
Mr. Lay has a pension of nearly half a million dollars a year.
At WorldCom, the workers lost more than half of their
retirement savings as the stock dropped from $60 to just 6
cents. Workers across the country also lost big as a result
corporate wrongdoing at WorldCom. The brave firefighters and
police officers of New York City lost $100 million from their
pension fund. Over 20,000 workers have been laid off in the
last few weeks because of the actions of WorldCom executives.
Yet, those same executives made out like bandits. Former
WorldCom CEO Bernie Ebbers is guaranteed a million and a half
dollars for the rest of his life while WorldCom workers face a
bleak financial future.
Sadly, Enron and WorldCom are not just isolated tales of
corporate greed that hurt America's workers. At Kmart, 22,000
workers were laid off. At Lucent, 16,000 workers were laid off.
At Xerox, over 13,000 workers were laid off. At Tyco, almost
10,000 workers were laid off. At Global Crossing, over 9,000
workers were laid off.
These corporate debacles reveal a much deeper crisis of
corporate values. In America, people who work hard all their
lives deserve retirement security in their golden years. It is
wrong--dead wrong--to expect Americans to face poverty in
retirement after decades of working and saving.
For far too long, corporate executives have been obsessed
with their own compensation instead of the long-term health of
the companies they lead. Executives, like those at Enron and
Wordcom, should not put their own short-term gain ahead of the
long-term interests of workers and shareholders. They must not
be rewarded for doing so. At Enron, workers were systematically
misled by Enron executives about the financial situation of the
company. For years, Enron, like many other companies, pushed
its workers to buy company stock with their own 401(k)
contributions.
Until the bitter end, Enron executives continued to promote
Enron stock to workers in a series of e-mails. On August 14,
Enron CEO Kenneth Lay told workers that he ``never felt better
about the prospects for the company.'' On August 27, Lay
predicted to workers a ``significantly higher stock price.''
And on September 26, Lay called Enron stock ``an incredible
bargain.'' Even as they promised the moon, Lay and other
executives were cashing out their stock for a billion dollars.
If Enron and WorldCom scandals teach us anything, it's that
we must stop rewarding corporate misbehavior.
Our amendment--it is cosponsored by Senator Gregg of New
Hampshire--makes it clear that executives who give workers
misleading information about the company stock in their 401(k)
plans face serious penalties. The amendment is the civil law
parallel to the Leahy criminal provisions, which punish
executives for defrauding investors. The amendment is also the
ERISA civil law parallel to the Biden amendment, which
increases the ERISA criminal penalties. When executives lie and
mislead workers about company stock, they must face real
penalties.
Under current pension law, Enron executives, like Ken Lay,
and Arthur Anderson, cannot be held responsible for workers'
losses in their 401(k) plan. The amendment makes a corporate
``insider''--an officer or director or the independent public
accountant--responsible under pension law if the insider
misleads workers about the company's stock.
America's workers need this amendment to hold Ken Lay and
other executives engaged in wrongdoing accountable. The
amendment empowers workers to seek restitution when executives
knowingly abuse workers' pensions. If workers lose their
retirement savings due to deliberate corporate mismanagement,
then they should have the right under our laws to hold those
top executives accountable in a court of law, and recover what
they lost. This right could make the difference for a family
between an impoverished retirement and a comfortable retirement
that they earned.
The economic health of our Nation depends on reigning in
the abuses of corporate power which we have witnessed in recent
months. Restoring the credibility of accounting standards, as
the Sarbanes bill would do, is critical to restoring confidence
in our markets. At the same time, we must also restore basic
fairness to our system.
When corporations like Enron fail because of executive
wrongdoing, corporate executives get golden parachutes but
workers are left with a tin cup when it comes to their
retirement. Corporate criminals must be made to pay for their
misdeeds.
We see from this chart what has happened: Ken Lay, $457,000
a year for life, retirement savings were decimated, 4,200
layoffs; former WorldCom CEO, Bernard Ebbers, $1.5 million a
year, retirement savings decimated, 20,000 layoffs; Richard
McGinn, $12.5 million lump sum pay for Lucent, retirement
savings decimated, layoffs for 16,000; Charles Conway, $9
million lump sum pension, retirement savings decimated 22,000
layoffs.
This has to stop. Today we have a critical opportunity to
protect workers and investors against future abuses of
corporate power. We must not let these hard-working Americans
down.
Madam President, I ask unanimous consent to temporarily lay
aside the pending amendment in order that I may offer the
Kennedy-Gregg amendment, which I send to the desk at this time.
The Presiding Officer. Is there objection?
Mr. Gramm. I object.
The Presiding Officer. Objection is heard. The Senator from
Massachusetts retains the floor.
Mr. Kennedy. Madam President, I have heard objection. We
tried to get this amendment up during the period of the last
week and were closed out. It is a simple amendment. It is an
amendment that can do more to protect workers' interests than
many other proposals. I think we ought to have some
accountability for those who willingly mislead, willingly and
knowingly mislead workers, and then benefit from insider
information.
It would just give them a cause of action, a specific case,
no punitive damages. It would be a factual situation which
would have to be decided in the courts of law. But it does seem
to me to offer a real meaningful opportunity to protect workers
and the savings of workers from the kind of gross abuse we have
seen currently here in the Senate.
Mr. Dorgan. Madam President, will the Senator yield for a
brief question?
Mr. Kennedy. I am glad to yield for a question.
Mr. Dorgan. Madam President, the Senator from Massachusetts
has just propounded a unanimous consent request on an amendment
that makes good sense to me, and it certainly should be added
to this bill. I assume it is a germane amendment. We are
postcloture. At the very least, he should have gotten a vote on
the amendment. But I wonder if the Senator from Massachusetts
knows that this has gone on all afternoon. I offered an
amendment a couple of hours ago that was simple and germane. It
should have had a vote. It said that if the CEOs and directors
of a corporation waltz out the door with millions of dollars of
bonuses, stock options, and incentive pay, and then the company
goes bankrupt, they have to give it back. I couldn't get that
amendment up for a vote because of the same objection.
I wonder if the Senator from Massachusetts might conclude
from this that the things here in the final hour which are
germane have a right to be considered and heard on behalf of
the workers and the shareholders and the folks who didn't get
rich but the folks who lost everything. I wonder if there is
not a pattern here that the Senator from Massachusetts sees and
that others see to shut down those amendments and protect the
folks at the top while the folks at the bottom lost everything.
Mr. Kennedy. Madam President, this amendment is relevant.
But under the strict rules of the Senate, it would not be
considered germane, although I think a commonsense evaluation
or review of the amendment's purpose and what the underlying
bill is about would certainly appear to I think most people to
be an important strengthening provision if we are interested in
corporate responsibility and protection for workers. It is
certainly relevant, but under the technical rules it is not
germane.
But I think anyone who knows what this bill is really all
about understands what is happening in these circumstances.
This would certainly be a very strengthening provision in the
underlying provisions. We were unable to get the opportunity to
have the consideration because we were foreclosed from that
opportunity at the end of last week and we are getting
objections this week.
I think that is unfortunate. As I understand it, the most
current support for this is overwhelmingly among Republicans
and Democrats alike across this country. They understand. It
doesn't take a lot of debate or discussion to understand what
accountability is all about. Under the existing laws, they can
only have accountability, not for those who are at the CEO
level, who are really the ones making these judgments and
decisions upon which workers are
relying, but they would only be able to sue lesser figures in
the corporate ladder. Therefore, this is not an effective
remedy for workers.
We are trying to provide an effective remedy for workers
who are being shortchanged. It makes eminently good sense. It
is eminently fair. It is eminently responsible. It is eminently
relevant. But there has been objection to it.
I want to give assurance to the Senator that we look
forward to offering this amendment at another time at the first
opportunity.
Mr. Reid. Madam President, I ask unanimous consent that
Senator Byrd be recognized today at 5 until 15 after the hour
to speak.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
Mr. Reid. Madam President, I suggest the absence of a
quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Reid. Madam President, I ask unanimous consent the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
INSIDER TRADING
Mr. Gramm. S. 2673 includes provisions prohibiting insider
trading of company stock during so-called blackouts--or periods
during which pension plan participants are unable to exercise
control over the assets in their accounts. In order to
implement the insider trading prohibition, it was necessary to
provide a definition of a blackout period. The Banking
Committee also provided a 30-day notice requirement prior to a
blackout, so workers and executives alike would know when the
insider trading prohibition would be effective.
Mr. Grassley. Mr. President, there appears to be broad
consensus that pension plan administrators should be required
to provide 30 days' notice to affected plan participants before
limiting their ability to exercise the rights provided through
their pension plans. These advance blackout notices will become
integral requirements for how pension plans will operate in the
future. Because of this, notice requirements were included both
in the pension bill reported by the Health, Education, Labor,
and Pensions, HELP, Committee on March 21, and in the bill
reported by the Finance Committee unanimously on July 11.
Mr. Gregg. I agree with the Senator from Iowa. Although the
general concepts are agreed upon, however, there are
differences between these provisions in all three bills that
affect the operations of pension plans, and will clearly need
to be worked out before the bill is sent to the President's
desk. Harmonizing these requirements will require a careful
balance between the rights of pension participants and the
financial burdens on plan administrators.
Mr. Kennedy. I certainly agree with the remarks of my
colleagues. My bill provides pension plan participants with
written notice 30 days before a plan blackout begins, and
prohibits blackouts from continuing for an unreasonable time.
This important disclosure to pension plan participants is
within the jurisdiction of the HELP Committee.
Mr. Baucus. I also agree with the remarks of my colleagues.
As chairman of the Finance Committee, which also has
jurisdiction over pension plans, I join the chairman of the
HELP Committee and the ranking members of both the Finance and
HELP Committees in urging the chairman and ranking member of
the Banking Committee to work with us as you go to conference
on S. 2673, to ensure that the blackout provisions are drafted
in such a way as to ensure the proper operation of the pension
system.
Mr. Sarbanes. I look forward to consulting with both the
Finance Committee and the Health, Education, Labor, and
Pensions Committee as we go to conference to make sure the
provisions are appropriately drafted.
CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS
Mr. Graham. Section 302 of S. 2673 involves Corporate
Responsibility for Financial Reports. I am concerned that in
subsection (b), where the CEO and CFO sign documents to verify
the accuracy of financial reports, the bill's language says
they shall ``certify'' the accuracy of the financial documents.
In my view, this language should read ``certify under oath'' in
order to be consistent with current Securities and Exchange
Commission, SEC, regulations. You can clearly see that the SEC
currently requires that these statements to be under oath.
Let's not create a lower standard in this bill than currently
exists in regulation.
Mr. Sarbanes. I appreciate the Senator's interest, and I
hope his concerns can be addressed in conference.
Mr. Graham. I thank the Senator for his assistance on this
issue and his leadership on this legislation.
I ask unanimous consent that Exhibit A of the order be
printed in the Record.
There being no objection, the material was ordered to be
printed in the Record, as follows:
[From SEC website www.sec.gov, June 27, 2002, OMB Number: 3235-0569;
Expires: January 31, 2003]
Exhibit A--Statement Under Oath of Principal Executive Officer and
Principal Financial Officer Regarding Facts and Circumstances
Relating to Exchange Act Filings
I, [Name of principal executive officer or principal financial
officer], state and attest that:
(1) To the best of my knowledge, based upon a review of the covered
reports of [company name], and, except as corrected or supplemented in
a subsequent covered report: no covered report contained an untrue
statement of a material fact as of the end of the period covered by
such report (or in the case of a report on Form 8-K or definitive proxy
materials, as of the date on which it was filed); and no covered report
omitted to state a material fact necessary to make the statements in
the covered report, in light of the circumstances under which they were
made, not misleading as of the end of the period covered by such report
(or in the case of a report on Form 8-K or definitive proxy materials,
as of the date on which it was filed).
(2) I [have/have not] reviewed the contents of this statement with
[the Company's audit committee] [in the absence of an audit committee,
the independent members of the Company's board of directors].
(3) In this statement under oath, each of the following, if filed
on or before the date of this statement, is a ``covered report'':
[identify most recent Annual Report on Form 10-K filed with the
Commission] of [company name];
all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of [company name] filed with the Commission
subsequent to the filing of the Form 10-K identified above; and
any amendments to any of the foregoing.
GUIDANCE TO STATE REGULATORY AUTHORITIES
Mr. Ensign. Mr. President, the purpose of this amendment is
to ensure that State regulators do not automatically apply the
provisions of this bill to accounting firms, particularly small
accounting firms and firms that service small businesses
without first looking at the possible harmful unintended
consequences to those small businesses. The standards applied
by the board under this act could create undue burdens and cost
if applied to nonpublic accounting companies and other
accounting firms that provide services to small business
clients.
Mr. Gramm. I agree with my friend, the Senator from Nevada,
and want to add that what we need to avoid is a possible
cascading effect, starting with the Federal Government, that
could eventually hurt the small accounting businesses in this
country.
Mr. Ensign. Many of these small businesses rely on their
CPA or auditor to provide objective, trusted advice and counsel
on a broad range of tax and business related issues. Without
this amendment, we will end up harming thousands of American
accounting firms and their small business clients.
Mr. Gramm. Mr. President, I think the Senator from Nevada
is right about the harmful affects this legislation could have
on small businesses, not only the small accounting firms in
this country, but also the small business clients of those
companies. This amendment says to the State regulators to look
very carefully at the effects this legislation could have for
smaller and medium-sized firms, and also on small businesses
that may rely on larger firms for their audit work.
Mr. Ensign. I thank the Senator from Texas for his
comments.
Mr. Kohl. Mr. President, as a businessman, I have been
deeply concerned about the reports of fraudulent and even
criminal behavior at prominent American corporations. When I
worked in business on a daily basis, this is not the kind of
behavior I saw or expected from my peers. It is imperative that
we respond to the corporate malfeasance which has been roiling
our markets. The impact of these acts, all for the sake of
boosting short-term profits, has been broad, costing many their
jobs and others their savings.
The free market is the underpinning of our economic system,
the key to the growth and development of our Nation in the last
two centuries. The many creative and dynamic businesses which
make up our democratic capitalism make important contributions
in the form of good paying jobs and the taxes which pay for
critical services, such as our National defense. Above all,
these businesses are good citizens in their communities. As a
result, businessmen are important and highly valued people in
our society. The vast majority of businessmen act in good faith
and with integrity. It is the bad apples who give the rest a
bad name.
Our system has been abused. Unfortunately, those who have
raped the system have reaped financial gain, while the rest
have lost jobs, savings and pensions. They and their boards
violated the public trust.
Those who are lucky enough to be in positions of leadership
have an enormous responsibility to enhance and not damage our
economy. Unfortunately, the current system of regulation has
not been sufficient to prevent bad actors from abusing their
positions. That is why we are taking action today. We must
build more accountability into our economy because the bad
actors--even if they are not in great numbers--have impacted
our whole economy. The stock market is no longer the playground
of the rich: We are now in an era when as many as 50 percent of
the American people have some of their assets in the stock
market, meaning enormous repercussions if companies are
misrepresenting their financial positions.
I agree with the President that ethical behavior and
corporate responsibility are essential if we are to restore the
confidence of the American people in our free markets. However,
the colossal corporate wrongdoing we have seen uncovered--in
2001 alone, 270 public companies had to restate the numbers in
their financial statements--requires that we step up to the
plate and address some of the structural problems which have
allowed these frauds to occur.
That is why I support S. 2673, the Public Accounting and
Corporate Reform Investor Protection Act of 2002.
There are those who have said this legislation is too
strong. I disagree. This legislation will not have a negative
impact on people doing their jobs as they should. We have an
obligation to protect investors, employees, citizens. We are
saying to CEOs, their fellow executives, and their boards: We
expect you to do your jobs correctly, with integrity, and if
you don't, you will be held accountable.
It is not enough to challenge corporate America to do
better. We must make clear that there is a cost to engaging in
accounting and securities fraud. That is why I supported the
Leahy amendment, a version of the Corporate and Criminal Fraud
Accountability Act. This amendment strengthens existing
criminal penalties for corporate crime, creates a securities
fraud felony punishable by up to 10 years in prison, and
creates a new crime for schemes to defraud shareholders. The
amendment also would establish a new felony antishredding
provision and would protect corporate whistleblowers.
The strength of the Sarbanes bill is not in the penalties
alone. The bill addresses conflicts of interest which have
permitted these crimes to occur and is a balanced approach
which will help prevent corporate fraud from occurring in the
first place.
The bill sets up a strong, independent, and full-time
oversight board with broad authorities to regulate auditors of
public companies, set auditing standards, and investigate
violations of accounting practices. The Public Accounting
Oversight Board proposed in the bill is a better alternative to
the part-time board currently being pushed by the SEC. That
board would leave standard setting to the accounting profession
and would most likely perpetuate the status quo. It is the lack
of clear standards coming from the current system of self-
regulation which has been the root of many of the frauds being
revealed today.
The Sarbanes bill also restricts the nonaudit services a
public accounting firm may provide to its clients that are
public companies. These consulting services are clear conflicts
of interest for independent auditors. We cannot rely on
auditors to serve as the watchdogs of publicly traded companies
if they are deeply invested in these same companies. If we
cannot rely on the auditors, than how are we to rely on the
markets?
Finally, the Sarbanes bill addresses the problem of stock
analyst conflicts of interest. The Merrill Lynch case recently
settled in New York is an egregious example of stock analysts
pushing stocks that they actually thought had little value.
Most often the motive for pushing stocks of questionable value
is to boost their own investment banking departments which are
underwriting these stocks. The bill before us today addresses
this problem and requires the SEC to adopt rules designed to
protect the independence and integrity of securities analysts.
I have no illusions that one bill will be the panacea for
all that currently ails corporate America. For example, I
believe there is more we should do, beyond the corporate
disclosures in this bill, to address problems with corporate
boards. We have a responsibility, however, to restore
confidence in our markets and in the solid businesses which
make up these markets so that our economy can thrive. Only
decisive action can prevent this fraud on the American people
from happening again.
Mrs. Murray. Mr. President, over the past year as Americans
have worked hard to restart our economy, we have been hit by
report after report of irregularities, misconduct, and blatant
conflicts of interest by corporate executives, auditors, and
brokerage firms.
The current corporate and auditing scandals are hurting
American families. Thousands of jobs and retirement accounts
have disappeared. Millions of current investors have watched
their gains evaporate. Our economic recovery looks more
distant. And most importantly for our long-term prosperity,
investors are no longer confident that the financial
information provided by public companies and their auditors is
accurate.
Congress cannot restore the jobs and retirement savings
caused by this wave of corporate and auditing scandals. It can
act to strengthen oversight of the accounting industry, to
demand greater responsibility from corporate executives, and to
address conflicts of interest in brokerage firms.
Today I am voting for reform. We need to send a strong
message to working and retired Americans, to investors, and to
the executives and auditors of publicly held companies that
this Senate will act to restore accountability and faith in our
free market system. The Senate's bipartisan accounting reform
bill will do just that.
First, the bill limits its scope to publicly held
companies. The bill does not attempt to Federalize accounting
oversight. Instead, it strengthens the Federal Government's
historic role of regulating publicly traded companies and their
auditors. The State boards of accountancy will continue their
important role of regulating accountants who audit private
companies.
Second, the legislation establishes a strong, independent
Public Company Accounting Oversight Board. The board is
empowered to set auditing, quality control, and ethics
standards, to inspect registered accounting firms, to conduct
investigations, and to take disciplinary actions. As a check on
the board's power, its decisions are subject to oversight and
review by the Securities and Exchange Commission, SEC.
Third, this bill seeks to ensure that auditors are
fulfilling their public duties by ending potential conflicts of
interest. Large accounting firms typically provide both audit
and nonaudit services to their public company clients. The
legislation would prohibit auditors from performing specific
nonauditing services, unless those services are approved on a
case-by-case basis by the Public Company Accounting Oversight
Board. All legal nonaudit services would need to be approved by
a public company's audit committee.
Fourth, the Senate legislation demands that corporate
leaders take greater responsibility. The bill requires that
chief executive officers, CEOs, and chief financial officers,
CFOs, certify financial reports, outlaws fraud and deception by
managers in the auditing process, prevents CEOs and CFOs from
benefitting from misstatements made in their financial reports,
and prohibits corporate decisionmakers from selling company
stock at a time when their employees are prohibited from doing
so.
Fifth, the Senate bill would limit the growing pressure and
conflicts of interest that affect the independence of stock
analysts. Just as investors need to know that a company's
financial reports are accurate, so should investors expect
objective opinions from stock analysts.
Finally, the bill would authorize additional funding for
the SEC and would establish independent sources of funding for
the new oversight board and FASB. As a member of the Senate
Appropriations Committee, I will support full funding for the
SEC.
We need to work to prevent future scandals. We also need
stronger criminal laws and penalties to address fraud and abuse
by corporate executives and auditors. During last week's debate
I voted for three amendments, including an amendment by Senator
Leahy, that would close gaps in current law.
I know some of my constituents in the accounting and
business communities are concerned by a few of the steps in the
Senate bill. As I talk to certified public accountants in my
State, they have emphasized that it is critical to encourage
greater competition in the public accounting field. I agree
investors would be better served by more competition. The bill
requires the Comptroller General, in consultation with various
agencies and organizations, to identify the factors that have
led to the consolidation of public accounting firms since 1989,
the impact of consolidation, and ways to address it. While a
study does not guarantee action, I look forward to reviewing
its findings.
It is time to restore confidence in corporate financial
statements. It is time to hold people accountable who violate
the public trust. I urge my colleagues to join me in supporting
this legislation.
Mrs. Boxer. Individual investors, saving for their
retirement or their children's education, count on business
leaders to play by the rules. They also count on financial
industry professionals including accountants and research
analysis to produce reliable, professional, and honest work.
But recent business scandals at Enron, Tyco, Merrill Lynch,
WorldCom and others are proving that without strong government
oversight and regulation, greed will lead executives,
accountants, and investment analysts to abuse the trust that
American workers and investors have placed in them.
We have to restore that trust. This bill is a good first
step. It has the necessary teeth to clamp down on corporate
irresponsibility. First, it creates a full-time independent
board to set ethical auditing standards. Second, it prevents
companies from providing most consulting services for the very
same companies that they audit. Third, if enforced, it would
send corporate executives who mislead shareholders to jail.
Fourth, it forces Wall Street investment research analysts to
disclose any conflicts of interest that they or their financial
institution might have in the investment recommendations that
they make. And finally, it protects whistleblowers who reveal
unethical acts by the companies for which they work.
I support this bill and would have supported even stronger
legislation. I remain concerned that the public members on the
board created in this bill are not chosen according to specific
independence standards. I am also concerned that disclosure
requirements do not include the holdings of family members of
influential research analysts on Wall Street. And most
importantly I had hoped we could do more to get funds to
workers who lose their jobs as a result of executive
misconduct. Those concerns aside, this bill is a good first
step in restoring confidence in the system.
Unfortunately, the House recently passed a bill that is
weak and will not get the job done. It fails to establish a
full-time board to design and enforce auditing standards, does
not mandate jail time for securities fraud, and fails to
protect whistleblowers. On the conflicts of interests that
investment analysts are forced to disclose in the Senate bill,
the House bill calls only for a study of the issue.
I urge the President to go beyond rhetoric and endorse the
Senate accounting reform bill so that we can get a strong bill
out of conference. I also urge the President to join us in
fighting for meaningful pension reform to ensure that
American's retirement savings are protected.
Mr. Smith of Oregon. Mr. President, I rise today to take a
few moments to praise the Banking Committee for bringing the
Public Company Accounting Reform and Investor Protection Act of
2002 to the floor and all the hard work they have done in the
past week. In the weeks before this bill came to the floor I
thought that what we needed was some type of Investors' Bill of
Rights.
I had worked with colleagues on both sides of the aisle to
come up with bipartisan goals to prevent corporate abuse and
protect investors. I feel that much of the bill on the floor
fulfills these goals. I feel that there are a few things that
investors should see happen when we pass this bill. I believe
that much of this bill will help, and in other areas we may
have to work further.
I believe that investors must have access to information
about a company. We should ensure that every investor has
access to clear and understandable information needed to judge
a firm's financial performance, condition and risks. The SEC
will have the power to make sure companies provide investors a
true and fair picture of themselves. A company should disclose
information in its control that a reasonable investor would
find necessary to assess the company's value, without
compromising competitive assets.
I believe that investors should be able to trust the
auditors. Investors rely on strong, fair and transparent
auditory procedures and the concept of the Oversight Board in
the Sarbanes bill is a sound one.
I believe investors should be able to trust corporate CEOs.
Unlike shareholders or even directors, corporate officers work
full-time to promote and protect the well-being of the firm. A
CEO bears responsibility for informing the firm's shareholders
of its financial health. I support the concept of withholding
CEO bonuses and other incentive-based forms of compensation in
cases of illegal and unethical accounting. Further, I do
believe that CEOs must vouch for the veracity of public
disclosures including financial statements.
I believe that investors should be able to trust stock
analysts. Investors should be able to trust that
recommendations made by analysts are not biased by promises of
profit dependent on ratings. It is only common sense that there
should be rules of conduct for stock analysts and that there
must be disclosure requirements that might illuminate conflicts
of interest.
Finally, I believe that we should be able to rely on the
Securities and Exchange Commission to protect investors and
maintain the integrity of the securities market. Current
funding is inadequate and should be increased to allow for
greater oversight, ensuring investors' trust in good
government.
During the debate on this bill my attention has been called
to the plight of public pension systems, such as Oregon's
Public Employment Retirement System, known by the acronym PERS.
PERS you see was invested in both Enron and WorldCom stock and
has been hit hard by the debacles that occurred in each
company. The PERS system lost about $46 million after Enron
self-destructed and another $63 million following the WorldCom
scandal.
These losses occurred because false profits were inflated
and corporate books were doctored. Under the PERS system, an 8
percent rate of return is guaranteed for the 290,000 Oregon
active and retired members of PERS. Oregon taxpayers have to
make up the difference following an ENRON debacle or WorldCom
scandal, and my State's budget is not prepared for this kind of
loss.
While this bill goes far in creating accountability, I am
interested in finding out if there is more we can do and am
asking the General Accounting Office, in consultation with the
Securities and Exchange Commission and the Department of Labor,
to report to Congress on the extent to which Federal securities
laws have led to declines in the value of stock in publicly
traded companies and in public and private pension plans.
I believe this study is necessary because many public and
private pension plans continue to rely on the continued stock
growth in publicly traded companies, much like the PERS system.
I hope this study will provide the needed information so public
and private pension plans can reevaluate future investments in
publicly traded companies.
We cannot stand by and watch our hard working Americans
ruin their pension systems while corrupt corporate executives
take advantage of investors. I am proud of the work the Senate
has done in the last week in creating accountability and
responsibility in corporate America and look forward to working
on this issue in a way that will help the investors and
pensioners in the PERS system in Oregon.
Mr. Akaka. Mr. President, I rise today to express my
support for the Public Company Accounting Reform and Investor
Protection Act of 2002. I thank Chairman Sarbanes for his
leadership and the Banking Committee's staff for their efforts
which have resulted in a measure which is fair, realistic, and
protects investors. The steady disclosure of accounting
scandals and corporate misdeeds underscores the need for
legislation to protect investors and to restore public trust in
the accounting industry and financial markets. Chairman
Sarbanes has been the leading voice for reform. Our Banking
Committee held ten hearings on accounting and investor
protection issues in February and March. These hearings
produced extremely valuable information from which S. 2673 was
developed.
Public confidence has been shaken by the incidences of
fraud and misrepresentations revealed in the financial
statements of companies. Enron, Xerox, and WorldCom are just a
few examples of corporations which have misled investors with
their financial statements. Since 1997, there have been almost
1,000 restatements of earnings by companies. Investors have
suffered substantial financial losses and are unsure of the
validity of the audits of public companies. There is a
lingering fear that there will be additional revelations of
corporate fraud or misrepresentation. This has already harmed
investor confidence and could continue to have an adverse
impact on the financial markets.
I support this bill because it takes the appropriate steps
to help restore public trust in the accounting industry and
financial markets. S. 2673 would create an independent Public
Accounting Oversight Board to provide effective oversight over
those in the accounting industry responsible for auditing
public companies. Previous attempts at regulation have been
complex and ineffective. As the numerous auditing failures
demonstrate, there is a need for an independent Board with
authority to adopt and enforce auditing, quality control,
ethics, and independence standards for auditors.
The legislation also requires additional corporate
governance procedures to make Chief Executive Officers and
Chief Financial Officers more directly responsible for the
quality of financial reporting made to investors. After the
numerous misstatements and corporate abuses that have occurred,
this is a necessary step to ensure that corporate executives
are held accountable for the financial statements of their
companies. A particularly important provision in the bill would
require that CEOs and CFOs forfeit bonuses, incentive-based
compensation, and profits from stock sales if accounting
restatements result from material noncompliance with SEC
financial reporting requirements.
Rules to limit and disclose conflicts of interests for
stock analysts are included in the legislation. There is a
concern that firms pressure their analysts to provide favorable
reports on current or potential investment banking clients.
This provision would provide protection to those individual
investors who often depend on analysts for making investment
decisions without being aware of the potential conflicts of
interest that the analysts may have with companies whose stock
they evaluate.
The Public Company Accounting Reform and Investor
Protection Act also authorizes additional appropriations for
the Securities and Exchange Commission in order to provide the
resources necessary to protect investors. According to the
General Accounting Office, approximately 250 positions were
vacant last year because the Commission was unable to attract
qualified candidates. Additional funding is needed to attract
and retain qualified employees. S. 2673 would authorize
appropriations of $776 million for the Commission, which is
much greater than President Bush's original budget request of
$467 million. I am pleased that the President is moving closer
to supporting the dollar amount included in the bill.
I also want to thank Chairman Sarbanes for including an
amendment in the bill which I have worked closely with the
Committee staff in developing. The amendment would require the
General Accounting Office, GAO, to conduct a study of the
factors that have led to consolidation in the accounting
industry and the impact that this has had on the securities
markets. Since 1989, the Big 8 accounting firms have narrowed
down to the Big 5 and may soon become the Final 4. This study
is necessary to evaluate the impact that consolidation has had
on quality of audit services, audit costs, auditor
independence, or other problems for businesses. In addition,
the study is necessary to determine what can be done to
increase competition among accounting firms and whether Federal
or State regulations impede competition.
I am pleased that the Senate has worked in a strong
bipartisan fashion to strengthen this bill. Extremely valuable
amendments have been added to the original committee bill. In
particular, the Leahy and Biden amendments strengthen penalties
for corporate fraud. These two amendments will help provide
much needed additional protection for investors and retirement
plan participants.
I encourage my colleagues to support the Public Accounting
Reform and Investor Protection Act of 2002 to restore public
trust in the accounting industry and the financial markets.
Mrs. Feinstein. Mr. President, I rise to offer my support
and cosponsor an amendment to S. 2673 offered by the senior
Senator from New York, which would prohibit all loans by a
corporation to its directors or executive officers.
Among the abuses committed by senior executives and
directors at companies such as WorldCom, Enron, and Global
Crossing is the practice of issuing large, favorable loans to
those executives and directors.
Those loans can create conflicts of interest that limit
that the ability of outside directors, in particular, to voice
their criticism of the institution.
Many years ago, I served on the board of directors of a
bank, and noted that at the time, several of the directors had
hundreds of thousands of dollars worth of outstanding loans at
that bank.
At the time, this occurred to me to be wrong, and I could
not understand why these directors did not take out loans at
another bank, thereby avoiding any conflicts of interest.
The only conclusion I could draw was that the loans to
these directors were either easier to procure or made on more
favorable terms than loans from another bank would be.
I see no justification for providing loans to corporate
directors or executive officers. The goal of the reforms that
we are currently debating should be to create an environment in
which outside directors and major corporate officers act in as
pure and honest a manner as possible.
They should not enter into any appearance of conflict, such
as the conflict that occurs when the corporation that they
serve extends them a personal loan.
When an individual investor chooses to buy a stock, he or
she does so with the full knowledge that it might turn out to
be a bad investment. The stock may appreciate in value, but it
might also go sour.
Anyone who makes that investment knows that the only way to
be sure not to lose any money is to keep the money in cash or
buy a T-bill.
But that is not the way it worked for the CEOs and
directors of some of the largest public companies in this
country.
For example, Bernard Ebbers, the former CEO of WorldCom,
took out $430 million in loans from his company between
September 2000 and the end of 2001.
When the SEC began investigating WorldCom earlier this
year, $343 million in loans were still outstanding, most of
which may never be recovered by WorldCom's investors.
Those loans to Ebbers are far from unique in corporate
America today. One of the most egregious examples of this type
of abuse recent months is the disclosure of $3.1 billion in
loans extended to family members and affiliated business
interests of the Rigas family by Adelphia Communications, a
publicly traded company controlled by the Rigas family.
These loans were never disclosed to shareholders, and were
apparently used to shore up a wide variety of business deals
involving Rigas family members, including a golf course and an
infusion of cash into the Buffalo Sabres hockey team.
On July 9, President Bush went to Wall Street and called
for, among other things, ``an end to all company loans to
corporate officers.''
I believe that the President was right, and have
cosponsored this amendment with that goal in mind.
Investors have a right to know exactly how much of their
dividends are going to pay for excessive pay packages. They
also have a right to expect that the board of directors is
truly independent and that no directors are tied too closely to
the corporation they serve because of loans they have received
from it.
Ms. Snowe. Mr. President, I rise today to speak in support
of the legislation we are considering, S. 2673, the Public
Company Accounting Reform and Investor Protection Act of 2002.
Last fall, we watched as a company once in the top 10 of
the Fortune 500 imploded from the weight of its own complex
efforts to mask debt and hide losses. We watched as the company
stock-laden retirement plans of Enron's loyal employees
dwindled by $1 billion. Meanwhile, company executives cashed
out their own shares while these employees were barred from
doing so. And finally, in Congressional hearings, we watched
and listened as former Enron executives either chose to remain
silent, or pointed fingers of blame at everyone's actions
except their own.
Tragically, the bankruptcy of Enron was no anomaly in the
business sector. Rather, it was only the beginning. It
ultimately proved to be a watershed event, as several other
companies have reevaluated their own business and accounting
methods, and found significant indiscretions. Global Crossing,
a telecommunications company, is being investigated by the SEC
and FBI in regard to questionable accounting practices used to
artificially inflate revenue. Adelphia Communications, a cable
company, is now in bankruptcy proceedings due to investigations
by the SEC and two Federal grand juries for off-balance sheet
loans to the company's founders.
More recently, Xerox announced that it would restate 5
years of results which could affect the true nature of what had
been reported as $6 billion in revenues. And on June 25,
WorldCom announced that it had misrepresented $3.8 billion in
expenses over five quarters, therefore allowing the company to
report financial gain, when in reality, the company was
experiencing a net loss.
While the downward spiral of each of these companies was
unique, common threads are woven through each of their
failures. First, the insistence by executives that, above all
else, stock price remain high was an integral part of the
creation of the financial woes of each company; in essence,
this short-term focus compromised the long-term viability of
these entities.
What has also been disturbing as these revelations have
come to light is the role played by the so-called independent
auditors of the companies under investigation. While the
accountants are not the sole perpetrators of the financial
deception that has occurred, the apparent lack of scrutiny of
the financial statements of the aforementioned companies has
created an inherent mistrust in the accuracy and integrity of
the true nature of corporate earnings.
Furthermore, the practice of allowing auditing companies to
perform non-audit services can have the ultimate effect of
allowing such companies to audit the work of their own
personnel. This practice defeats the purpose of having an
unbiased entity objectively reviewing the merits and accuracy
of financial statements.
The legislation we are considering in the Senate includes
crucial provisions that will play a pivotal role in restoring
confidence in our market system, and enhancing the public and
private sector controls that are in place to monitor the
relevant entities. The legislation creates a Public Accounting
Oversight Board, which will be an entity solely focused on
companies that audit and account for publicly traded firms.
This oversight authority will include the ability to
investigate and punish any wrongdoing by companies under SEC
jurisdiction as well as their auditors. The bill also disallows
simultaneous auditing and consulting, while providing for the
Board to approve certain exceptions to non-specified non-audit
services under this rule.
The pending legislation also makes important strides in
ensuring that any gain made by company executives be subject to
retrieval if the company has to prepare an accounting
restatement due to certain noncompliance with SEC regulations.
As Treasury Secretary Paul O'Neill so aptly states in response
to the actions of Enron executives, ``I really do believe that
the CEO is in effect the steward for all the people who work in
their organization. And that with that responsibility goes a
commitment that the people come first and that the practices
are open and above board and without reproach.'' These
executives should not be able to leave their beleaguered
companies, pockets stuffed with profits from cashed out stock
options, while investors and employees suffer the consequences
of questionable company practices.
With the unanimous passage of the Leahy amendment, the
Senate recognized the need to strengthen penalties for the
punishment of those involved in corporate crime. For example,
the amendment created a new felony for persons involved in the
destruction of evidences--to address in the future such
indiscretions as the document shredding perpetrated by Arthur
Andersen's Enron Audit team. In addition, the Leahy amendment
grants important whistleblower protections to company
employees--like Enron's Sherron Watkins--who bravely report
wrongdoing occurring within their own corporation.
The bottom line is that integrity and trust are at the core
of a successfully functioning market system. These recent
business scandals have severely damaged this foundation. And as
with any foundation in disrepair, leaving unaddressed the
damage caused by lost faith in the system will lead to
continued instability, or worse.
Therefore, we in Congress have an obligation to do what we
can to maintain and build investor confidence and faith in our
free market system. I believe that the legislation we are
considering today is a crucial first step toward that end, as
well as ensuring the full rebound of our floundering economy.
Mrs. Feinstein. Mr. President, I rise in support of S.
2673, the Public Company Accounting Reform and Investor
Protection Act of 2002.
Nearly every day, it seems, the front pages of our
newspapers are awash in stories about the latest corporate
accounting scandal. Just 3 weeks ago we learned that WorldCom
hid $3.8 billion in expenses in the last five quarters alone.
And WorldCom is merely the latest member of an increasingly
large group of public corporations that have knowingly deceived
shareholders, directors, and, in some cases, their own
auditors. WorldCom, Enron, Tyco, Global Crossing, Xerox--the
list goes on and on.
Much attention has been focused on the huge sums that CEOs
and other senior executives have extracted from these companies
in the form of incentive pay, but even those large sums pale in
comparison to the total shareholder value that has been
destroyed as a result of these disclosures. At its peak,
WorldCom's market capitalization exceeded $190 billion, making
it, for a time, the most valuable telecommunications services
company in the world. Now, WorldCom shares are effectively
worthless.
Despite a slowdown in the telecom industry, some of the
value of those shares might have been preserved had its
executives relied on sound management, instead of deceptive
accounting, to make their numbers.
Who will suffer most from the immense value decline
associated with WorldCom and other companies that have deceived
their investors? Not the senior executives, most of whom have
stashed away enough of their pay to let them spend the rest of
their days in comfort. The people who will really suffer are
the thousands of employees whose retirement savings were
proudly invested in company stock; or the millions of public
employees whose pension funds held shares in these companies.
Those are the people who will bear the brunt of this value
decline.
CalPERS, the pension fund set up to invest the retirement
savings of 1.3 million public employees in my home State, has
estimated that it suffered a $580 million loss on WorldCom
stocks and bonds. That means that the average California public
employee lost over $440, not including any investments in
WorldCom they may have held independently.
To give you some perspective on that amount, the amount of
money lost by California public employees due to the WorldCom
fraud alone is likely to exceed the entire sum of the tax
rebate checks they received as part of the President's tax cut
last year.
In fact, every American who invests in our stock markets
will suffer as a result of these scandals, because every
scandal further tarnishes the reputation of American corporate
honesty for investors around the world. In recent months, those
investors have pulled billions of dollars in investments out of
our country, further reducing the value of stocks and weakening
the dollar.
The only way that we can turn this culture around is by
fostering a corporate environment that rewards honest
management by senior executives and severely punishes
fraudulent activities. That is exactly what would be achieved
by the bill proposed by Senator Sarbanes.
The Sarbanes bill tackles many of the major problem areas
associated with recent corporate scandals. Most importantly,
the bill would make it much more difficult for public companies
to bypass or trample over auditors in attempt to produce
inaccurate or deceptive financial statements.
For the first time, the Sarbanes bill creates a truly
independent accounting oversight board, staffed with objective,
unbiased overseers, who can enforce rules and prosecute
violators without having to vet their decisions elsewhere.
Unlike the Public Oversight Board, which depended on fees from
the very auditors it was meant to regulate, this new board will
be funded by mandatory fees paid by all public companies. These
are fees that cannot be withheld at the whim of those who have
the greatest interest in undermining the work of the board.
The Sarbanes bill does not stop at the creation of this new
board, however. Rather, the bill strengthens areas of the law
that have proven inadequate to prevent the fraudulent corporate
behavior that has become so prevalent today.
The Sarbanes bill prevents auditors from controling the
entire financial reporting system at an individual company by
both designing the internal audit system, and then purporting
to offer an unbiased external audit. The bill will also stiffen
the resolve and oversight of board of director audit committees
by requiring, among other provisions, that all committee
members be independent and that they be given free reign to
question auditors without executive officers present.
But rather than rely solely on increased oversight, the
bill moves to reduce conflicts of interest at their source, by
requiring the CEO and CFO of a company that has had to restate
its financial accounts to disgorge any bonuses or other
incentive pay they received in the year prior to the
misstatement.
Moreover, under an amendment sponsored by Senator Schumer
and myself, company loans to executive officers are now
prohibited, sharply limiting the types of ``hidden''
compensation that can be offered to executives without being
fully disclosed to shareholders. Our amendment passed by a
voice vote and will go a long way toward preventing the types
of loan-related abuses prevalent at WorldCom, Global Crossing,
and other companies now under investigation by the SEC for
loan-related abuses.
When Senator Sarbanes drafted this bill, he focused on the
single reform that matters most: increased transparency.
Unfortunately, we may witness more corporate failures like
those of Enron or WorldCom. These are failures that are brought
on by over-investment, the accumulation of excessive debt, or
an ill-conceived belief in markets or services that never live
up to expectations.
What we cannot abide by, and what the Sarbanes bill goes a
long way toward preventing, is the ability of senior executives
to hide those bad decisions in misleading financial statements.
By ensuring true auditor oversight, creating meaningful
penalties for senior executives who defraud investors, and
putting in place new disclosure requirements, this bill will
dramatically increase the quality and timeliness of the
information available to individual investors.
The United States is blessed with the best-regulated
markets in the world, and for that we have been rewarded with
tremendous foreign investment and a leadership position in
world financial markets.
A vote in favor of this legislation is a vote to strengthen
our position and avoid a wholesale loss of investor confidence
that would be perilously difficult to restore.
Mr. Hatch. Mr. President, I wish today to express my
support for S. 2673, the Public Company Accounting Reform and
Investor Protection Act of 2002. I am pleased that the Senate
is acting decisively to impose harsh, swift punishment on those
corporate executives who exploit the trust of their
shareholders and employees while enriching themselves. The
recent corporate scandals demonstrate just how important it is
to hold corporate executives accountable. I believe it is
equally important for prosecutors to be provided with the tools
necessary to aid in the investigation of these forms of fraud.
During this debate, our colleagues on both sides have
consistently called for increased penalties for corporate fraud
offenses. This week, as the Dow Jones index plummeted nearly
300 points--representing the biggest single day point drop
since the week following the attacks of September 11 we voted
unanimously to adopt a series of amendments that will
strengthen criminal fraud penalties and create new criminal
fraud offenses. I cosponsored an amendment with Senator Biden
to enhance white collar penalties. And I supported an amendment
offered by Senator Lott, which incorporated the President's
proposal by enhancing white collar penalties, supplementing
existing criminal laws, and increasing the Security and
Exchange Commission's administrative powers to enforce this
Nation's securities laws. I also supported Senator Leahy's
amendment, a measure I worked to improve in committee. This
amendment includes new criminal and civil provisions that I
believe will also assist in deterring and punishing future
corporate wrongdoing.
Further, I am glad to see the Senate finally considering
legislation that will overhaul government regulation of the
accounting industry. I agree with my distinguished colleague
from Maryland that there is an inherent conflict of interest
between internal and external auditing. The same people should
not be installing the internal control system, performing the
internal audits, and then reporting on the financial
statements. The external auditor sometimes has to be tough as
nails, and willing to disagree with its client's top
executives. It is hard to be the bad cop when you are also the
personal trainer.
However, Congress cannot always second-guess the desires of
investors. In some cases, stockholders, bondholders, and other
stakeholders will be worse off if Congress imposes too strict a
barrier between consulting and auditing. This is especially
true for small businesses that may not be able to afford to
hire both a consulting firm and a separate accounting firm.
And, as the President has noted, in our fast-changing economy,
Congressionally-imposed barriers between different business
practices can end up becoming Congressionally-imposed barriers
to productivity growth.
I think the bill before us represents an effort to strike a
good balance between these two competing goals of auditor
independence and business innovation. It prevents internal and
external audit work from being done by the same firm, and it
establishes clear lines of responsibility and accountability.
At the same time, the corporation's independent audit committee
will be permitted to authorize certain consulting services if
they are convinced it is in the shareholders' best interest.
This audit committee, consisting of members of the client's
board of directors, will be required by law to be completely
independent of the corporation itself. This will mean that if
the CEO and other top corporate officials believe it is in
their company's best interests to have their accounting firm
help with, for example, tax consulting and preparation, the
corporate officials will have to argue the merits of their case
before the independent audit committee. That kind of
independence makes good sense, and it makes good law.
The Federal Government needs to help investors whether
banks, pension funds, or individual investors in their quest
for accurate information about the financial condition of
America's businesses. Doing so is crucial for our economic
long-term health. While Enron's and WorldCom's financial
shenanigans contain many differences, the similarities are far
more important. These were both firms that borrowed too much
money during the expansion years of the late 1990s. And when it
started getting tough to make the debt payments, both firms
tried to hide their financial difficulties through creative
bookkeeping, cooked up at company headquarters. They succeeded
for a time, but the combination of investor vigilance, media
investigations, and government scrutiny are eventually bringing
the facts to light.
If there had been real financial transparency, both current
stockholders and potential investors could pierce the veil of
bookkeeping to immediately see these companies' true financial
situation. This may not have prevented the painful layoffs and
tragic loss of retirement assets by thousands of employees.
However, with more accurate and timely information, investors,
directors, analysts, financial institutions, and others could
have intervened earlier and helped to restructure these firms
before all-out catastrophe threatened. When it comes to
business information, knowing sooner is always better than
knowing later.
And even more importantly, if corporate officials had faced
the threat of serious jail time and the certain knowledge that
their financial and accounting capers would be exposed to the
world, they would have been much less likely to have
overborrowed and underdisclosed in the first place. Mr.
President, the bill on which we will vote today, on which
Senator Sarbanes and many of our colleagues have worked so
hard, contains solid provisions that I believe will put real
fear of serious consequences into the minds of corporate
wrongdoers.
Does this bill represent a perfect solution to the
corporate accountability issues presently facing our country?
Of course not. I would have written a different bill in several
respects. However, I believe that the bill is a good attempt to
balance competing interests and different political
philosophies. As the bill goes to conference with a House-
passed bill that has some significant differences, I expect the
balance to improve even further.
Strengthening corporate accountability is crucial to our
Nation's long-term welfare. If Congress and the President can
act together to help increase corporate transparency and
restore investor confidence, then businesses will be better
able to raise investment capital. Greater access to capital
will enable U.S. businesses to fund the groundbreaking research
and to purchase the high-tech equipment that is the foundation
of America's long-term prosperity. And Americans from all walks
of life will reap the rewards.
Mr. McCain. Mr. President, I rise today as a proud
cosponsor of amendment No. 4283 that is being offered by
Senator Levin. The amendment says that the standard-setting
body for accounting principles that is set up in this bill
shall review the accounting treatment of employee stock options
and shall within a year of enactment of this act adopt an
appropriately generally accepted accounting principle for the
treatment of employee stock options.
Unfortunately, this body is not going to get the
opportunity to vote on this reform or the reform I proposed
last week requiring the expensing of stock options. We want to
help restore investors' confidence for the long run, but we are
being denied an opportunity to do this. A simple vote on this
amendment is all we ask. And yet, we are being denied, and that
is truly regrettable. I see no reason that a vote should not be
permitted on this amendment, but let's face it--the fix is in.
I want to talk more about the expensing of stock options.
Americans have heard from the President and practically
every Member of the Senate about the vital need to restore
trust and transparency in business practices so we can begin to
repair investors' faith in the honesty of our companies and in
our markets. We need more transparency on a company's books so
that any person wanting to invest their hard-earned money has a
true financial picture of the company they are planning to
invest in.
This issue of expensing stock options is not going to go
away. Look at what has just happened. Coca-Cola, a Fortune 100
company, just announced that it will begin in the fourth
quarter to treat all employee stock options as an expense. And
I believe more companies will follow Coca-Cola's lead. It is
only a matter of time.
Before I yield the floor, I would like to read a quote from
a July 22, 2002 Weekly Standard article, ``Big Businesses Bad
Behavior,'' in which economist Irwin Stelzer, Director of
Regulatory Studies at the Hudson Institute, eloquently explains
why governmental action is needed to restore faith in our
financial institutions. The ``opposition of important segments
of the business and accounting communities to reform,'' he
writes, ``means that government must take on the burden of
revising the institutional framework within which business
operates--setting the rules of the game that will allow markets
to do their job of allocating human and financial capital to
its highest and best uses. As Milton Friedman, no fan of big
government, has written, society needs rules and an umpire `to
enforce compliance with rules on the part of those few who
would otherwise not play the game.' '' I couldn't agree more.
I ask unanimous consent that the following articles be
printed in the Record.
There being no objection, the material was ordered to be
printed in the Record, as follows:
[From the Weekly Standard, July 22, 2002]
Big Business's Bad Behavior
(By Irwin M. Stelzer)
No sensible person can quarrel with what the president told the
Wall Street biggies he addressed last week. Crooks should be forced to
disgorge their ill-gotten gains, and should go to a jail for extended
periods. Enforcement agencies should be given adequate resources.
Corporate executives should be held responsible for the accuracy of
what they tell shareholders, disclose their compensation in annual
reports ``prominently and in plain English,'' and explain what their
``compensation package is in the best interest of the company'' Board
members should be independent and ``ask tough questions.'' Shareholders
should speak up. Most important, chief executive officers should crate
a ``moral tone'' that ensure the company's top managers behave in
accordance with the highest ethical standards.
The quarrel comes not with what the president said, but with what
he didn't say. In the game of matching his laundry list of reforms
against the inevitably longer list generated by the Daschle-Leahy-
Sarbanes-Gephardt crowd the president inevitably loses, as last week's
unanimous vote of Senate Republicans for the Democrat's bill proves.
Longer sounds better if you're just compiling a laundry list of items
aimed at punishing politically unpopular corporate bad guys. Only if
there is a conceptual framework within which specific reforms can be
created and defended is there any hope that a sensible corporate
governance system will emerge from the congressional legislation
factory.
Start with the fact that it is important to distinguish the role of
government from that of the private-sector institutions that monitor
corporate America. The latter can be relied upon to act when the
integrity of the system is threatened, not because these private sector
players are a bunch of goodie-two-shoes, but for the more reliable
reason that honest markets and accurate profit reporting are in their
interest. Just as gamblers won't put their bets down when they know a
wheel to be rigged, so investors won't put their money into shares if
prices can be manipulated by inflated profit reporting or special
treatment of insiders.
Hence we have a stream of quite sensible reforms proposed by the
Business Roundtable and the New York Stock Exchange, some going beyond
those being pushed by the president. And we have companies scrambling
to adopt governance rules and accounting practices that will reassure
investors that the game is not rigged against them. No CEO wants to see
his company's stock battered by investors who fear that share values
will evaporate as profits are restated to eliminate the imaginative
counting of revenues (claim them now, before the customers pays or even
considers paying) and of costs (capitalize rather than expense every
outlay, regardless of the life of the item purchased). Plummeting share
prices are dangerous to the careers of chief executives.
But, as the president recognized when he called for higher ethical
standards, self-interest cannot be relied upon to produce honest
business dealings unless that self-interest includes what Adam Smith
called a ``desire to be both respected and respectable,'' and such
esteem is seen to flow not from ``wealth and greatness'' but from
``wisdom and virtue.'' Which may be what Bush had in mind when he said
that we need ``men and women of character, who know the difference
between ambition and destructive greed'' to lead our major
corporations. And it may be what he had in mind when, immediately after
delivering talk, he returned to Washington to award the Presidential
Medal of freedom--America's highest civilian honor--not to the Nations'
richest (Intel founder Gordon Moore may have been the one exception),
but instead to folks who have enriched our national life with their
sharp iconoclasm (Irving Kristol), gentle humor (Bill Cosby), and quiet
devotion of family and good causes (Nancy Reagan).
Still, neither self-interest reform nor a new emphasis on business
ethics can be relied upon to save capitalism from the capitalists.
Immediately after the president's speech the White House was bombarded
with calls from CEOs protesting his demand that they disclose their
compensation packages in easily accessible terms. I well recall the
reaction when, several years ago, I made a similar suggestion at a
think-tank-sponsored meeting of top business and government officials.
One captain of industry replied that he would not tell his shareholders
how much he earns lest he encourage kidnappers (as if they would only
become aware of his affluence if he revealed it in his company's annual
report).
Nor did anything the president said persuade the accountants to
call off their lobbyists, who continue to oppose reforms that would
make their devotion to the accuracy of their audit statements
unambivalent. Or convince CEOs of Silicon Valley and other high-tech
companies to bow to Alan Greenspan's call for them to report their
share options as the expenses they most certainly are. Again, I recall
a discussion that followed a similar proposal I made several years ago.
One CEO said that he couldn't place a value on these options for
purposes of reporting to shareholders, even though he could value those
same options for the purpose of deducting their cost from his profits
for tax purposes. Another claimed that if he treated options as an
expense, he would wipe out his entire reported earnings, an argument, I
suppose, for refusing to account for almost any expense that
constitutes a threat to reported profits--what might be called the
WorldCom excuse. (For the economy as a whole, experts estimate that
expensing of options would reduce aggregate corporate profits by about
8 percent.) Note that the issue is not whether companies, especially
start-ups, should be allowed to use options to attract talented staff,
but whether they should have to treat this compensation as an expense
when reporting profits. As Greenspan points out, refusing to deduct the
cost of options diverts capital and other resources from truly
profitable to only apparently profitable firms.
This opposition of important segments of the business and
accounting communities to reform means that government must take on the
burden of revising the institutional framework within which business
operates--setting the rules of the game that will allow markets to do
their job of allocating human and financial capital to its highest and
best uses. As Milton Friedman, no fan of big government, has written,
society needs rules and an umpire ``to enforce compliance with rules on
the part of those few who would otherwise not play the game.''
To keep rules to a Friedmanesque minimum, we need a conceptual
framework for reform rather than competing laundry lists. The first
step is to understand the limits of criminal sanctions. Yes, it makes
sense for the Senate to insist, as it did unanimously last week, that
the crimes perpetrated by some corporate managers and accountants be
defined as precisely as possible. Yes, criminal sanctions can be used
to make life miserable for those caught with their fingers in the till
and to deter from evildoing those for whom Adam Smith's ``desire to be
respectable and to be respected'' is insufficient inducement to decent
behavior. But, as law professors David Skeel and William Stuntz
recently pointed out in the New York Times, ``Criminal laws lead people
to focus on what is legal instead of what is right. . . . In today's
world, executives are more likely to ask what they can get away with
legally than what's fair and honest.'' The Senate was pleased with
itself for toughening the laws under which executives will operate, but
criminalizing bad behavior is no guarantee of future good behavior--
behavior that is not merely indictment-avoiding, but is efficiency- and
wealth-enhancing.
Instead, policymakers should turn to that trusty guideline, ``Get
the incentives right.'' The problems we are facing stem from the fact
that we have provided the four guardians of shareholder interests--
auditors, analysts, directors, and corporate managers--with the wrong
incentives.
Auditors know that success or failure in their profession depends
not so much on the accuracy and realism of their audits, as on their
ability to conduct themselves so as not to imperil the flow of
consulting fees to their firms. Enron paid Arthur Andersen as much or
more in consulting than in auditing fees; Andersen's $12 million in
consulting fees from WorldCom dwarfed its $4 million audit fee. It
would have taken a brave auditor indeed to fly in the face of these
clear incentives and tell Enron's management that placing some item
off-balance-sheet might be technically legal, but would obscure the
company's true financial condition, or to insist on access to documents
that might have revealed WorldCom's recording of current expenses as
capital investments. Rather than rely on such strength of character,
some 70 percent of the directors surveyed by McKinsey & Co. now say
they will in the future oppose the granting of such contracts, a policy
that Arthur Levitt, Bill Clinton's SEC chairman, was unable to push
through over the massed opposition of the accountants' lobbyists. All
of which makes Bush's silence on this subject rather odd, and the
Senate Democrats' insistence on a broader prohibition on consulting
than is contained in the House Republicans' bill more likely to get the
auditors' incentives lined up with shareholder interests.
Once those incentives are in place, other provisions of the House
and Senate bills become unnecessary. Both bills call for still more
regulation of auditors, and create still another regulatory body to set
and oversee accounting standards. One need not be an apologist for the
accounting profession to suggest that such a move would merely continue
the failed practice of attempting to control auditors by closely
supervising them. There is no reason to believe that such supervision
will be any more successful in the future than it has been in the past,
especially since in the end auditors are required only to say that they
followed often complex and arcane rules that necessarily involve the
exercise of judgment.
Instead of such ongoing regulation, including half measures that
merely restrict auditors from engaging in some specified form of
consulting activity, let's get the incentives right by complete,
mandated separation of the audit and consulting businesses, as John
McCain proposes. Lead the CPAs not into temptation, and reliance on
porous Chinese walls becomes unnecessary. Auditors will compete for
business on the basis of their ability to provide a product that gives
investors confidence in the transparency and accuracy of the company
accounts, with the uplifting effect that will have on the prices of
their clients' shares. (Audit firms are unlikely to compete on price,
since the risks associated with the audit business have risen. There
are only four major firms, and rotation of auditors on something like
the five-year basis favored by Senate Democrats, although necessary to
prevent over-identification between client and auditor, is a classic
cartel market-sharing arrangement--all legal, in this case.)
Analysts are another group who now face perverse incentives.
Investors may have been naive to believe that these students of income
statements, balance sheets, and other economic data would provide
honest advice about a company's financial condition and prospects. But
they had a right to such a belief, since the commissions they pay their
brokers are supposed to be in return for such advice. Along comes New
York State Attorney General Eliot Spitzer and revelations that some of
these supposed agents of the shareholders' interests are recommending
stocks they know to be ``shitty'' in order to win investment banking
business for their partners and increased compensation for themselves.
All of this in the presence of Chinese walls erected to separate
bankers from analysts. It took no Joshua-plus-trumpet to bring these
walls down; the prospect of hefty banking fees was quite enough. Jack
Grubman, the Salomon Smith Barney (a division of Citigroup) analyst
famous for his enthusiastic recommendations of WorldCom stock, last
week told the House Financial Services Committee, ``No one can sit here
on Wall Street and deny to anybody on this committee that banking is
not a consideration in the compensation of analysts of a full-service
firm.'' Forget the double negative: Grubman was conceding that part of
his salary, which reached $20 million per year, came from the $140
million in underwriting fees that his firm received from WorldCom over
the past five years.
Again, get the incentives right. One way, now preferred on Wall
Street, is to write contracts that make analysts' compensation
independent of the fees flowing into the investment banking divisions
of the large firms. But just how analysts can prosper if the banking
division isn't earning enough to pay the rent is unclear. Besides,
unless analysts suddenly become willing to issue ``sell''
recommendations just when their investment banking partners are
pitching a company for business, this proposed reform is unlikely to be
effective, especially after the current heat is off and congressional
attention turns to other matters. True or not, bankers believe that
CEOs, being human (yes, most are), are likely to take into account what
a firm's analysts are saying about their stock when selecting an
investment banker. It would be an unusual CEO, indeed, who would
cheerfully receive an investment banker after reading in the morning
papers that the banker's analyst-partner had just downgraded his
company's stock from a ``buy'' to a ``sell.'' Many investment bankers--
not all, but many--will find ways to persuade their partner-analysts to
be team players. Banking fees are large enough to give them an enormous
incentive to do just that.
So, let's get the incentives right and mandate a separation of the
investment banking and stock-picking businesses, another McCain
proposal. Analysts would then have an unambiguous incentive to make the
best ``buy'' and ``sell'' recommendations they possibly can, so as to
build reputations that will attract investors to them. And investors
will get something in return for their commission dollars--honest
advice from men and women expert in the analysis of corporate financial
data, competing with one another to attract clients by creating a track
record of picking winners.
Which brings us to Directors. Again, we have a case of skewed
incentives. Directors are hired by managers to protect shareholders
from, er, those same managers. To make sure the directors remain
friendly, executives often shower them with perks and consulting fees,
the continuation of which depend on the goodwill of the CEOs they are
supposed to be supervising. It is the rare director who chooses to
feast on the hand that feeds him, not merely because he is venal, but
because the courtesies lavished upon him genuinely persuade him that
the CEO is a decent chap, deserving of every million he is paid.
To get the incentives right, directors must be selected by
vigorously participating shareholders, most especially institutional
shareholders, from a slate of demonstrably independent people who,
although well compensated, have reputations worth protecting.
Nominations for that slate should come from sources other than the
company management, to avoid a you-sit-on-my-compensation-committee-
and-I'll-sit-on-yours, selection process. The directors should not
accept anything within the gift of the CEO; their directors' fees
should be compensation enough, and high enough to provide an incentive
to accumulate a record that will persuade shareholders to reelect them
at reasonably regular periodic intervals--perhaps throwing in term
limits to make sure that directors and management don't develop too
cozy a relationship.
Finally, we come to the CEO's and top managers. How to create
incentives to induce managers to act in the interests of the
shareholders who own the business has bedeviled students of corporate
governance ever since 1932, when Adolph A. Berle Jr. and Gardiner C.
Means published their classic ``The Modern Corporation and Private
Property,'' detailing the potential for managerial abuse created by the
separation of ownership from control of large corporations. Managers
placing self-interest above the interests of owners were immune to
retaliation by far-flung and essentially powerless shareholders. That
situation was partially corrected when Mike Milken and his debt-
financed corporate raiders snatched control of many companies from the
worst abusers of shareholders' interests, grounded fleets of corporate
jets, sold off hunting lodges, and generally sweated the fat out of
expenses--a wonderful example of markets working to correct abuses that
seemed beyond the reach of regulators.
But nowadays there aren't many people who want to be like Mike, so
it is incumbent on policymakers to get managers' incentives right.
President Bush's proposal for publication of compensation arrangements
in an accessible format would be a step in the right direction, its
effectiveness attested to by the howls of outrage it produced from some
CEOs. Truly independent boards, created along the lines described
above, would be another advance, since compensation committees not
beholden to corporate managements are more likely to relate pay to
performance than the supine committees that now exist on some boards.
Add in the requirement that options be treated as profit-reducing
expenses--another McCain proposal that so horrified senators that it
has for now been derailed--and you will have a new parsimony that will
keep salaries to levels commensurate with effort and performance. Under
such a regime, executives would have a clear incentive to spend their
time creating efficiencies and new markets, rather than figuring out
how to cash in options, and how to persuade their boards to revalue
options if poor company performance has driven the stock price below
the price at which the options may be exercised, rewarding executives
whether or not they have delivered long-term value for shareholders.
This may sound like an awful lot of regulation. But it is of a
special, self-liquidating sort. If we adopt policies that get the
incentives of all the players right, government can then get out of the
way so that the various actors can do their thing--audit, advise on
investments, monitor management performance in the interests of owners,
and manage the company in a world in which managers' interests coincide
with those of shareholders. The right kind of regulation can be a model
of minimal--and effective--government.
Irwin M. Stelzer is a contributing editor to The Weekly Standard,
director of regulatory studies at the Hudson Institute, and a columnist
for the Sunday Times (London).
----------
[From the Wall Street Journal, July 15, 2002]
Leading the News: Coke to Expense Employee Options
move may spur others to follow and could shape current talks in senate
(By Betsy McKay)
Atlanta--Coca-Cola Co. said it will begin in the fourth quarter to
treat all employee stock options as an expense, a move that could
accelerate debate in corporate boardrooms over whether to adopt that
accounting practice.
The beverage company's decision also could shape the outcome of
discussions today in the Senate over whether to instruct a new
accounting-oversight board to study the fate of stock options--in
particular, whether they should be expensed as other forms of
compensation.
Republicans tried Friday to block the measure, offered as an
amendment to an accounting-overhaul bill. But Democrats say they will
try again before final passage of the underlying accounting bill,
expected late today.
``We are in a new environment,'' Gary Fayard, Coke's chief
financial officer, said in an interview. ``There had been a loophole in
the accounting, and we thought it was the right time to step up to the
plate.
``There's no doubt that stock options are compensation,'' he added.
``If they weren't, none of us would want them.''
Coke said its decision, announced yesterday morning, will reduce
earnings only slightly--by about a penny a share--for 2002. That
reflects the fact that Coke doesn't grant options as extensively as do
some other companies. And while Coke isn't the first public concern to
make the accounting change--Boeing Co. and Winn-Dixie Stores Inc. in
recent years began calculating stock options as an expense--its high
profile could prompt other businesses to consider calls from investors,
regulators and politicians for greater financial candor.
Last week, AMB Property Corp., a San Francisco-based owner of
industrial real estate, also said it would record stock options as an
expense.
Proponents of expensing say options are compensation and should be
treated as such, especially since generous option awards dilute the
value of shares outstanding. Opponents say options are difficult to
value and argue that expensing would confuse investors, not enlighten
them. Changing accounting rules would reduce earnings at some
companies.
In 1993, the Financial Accounting Standards Board tried to mandate
the expensing of options but retreated in the face of stiff opposition
from business leaders and Congress. The issue flared up again after
Enron Corp's demise late last year and has taken on new life with
recent disclosures of earnings misstatements at WorldCom Inc.
Coke's Chairman and Chief Executive Douglas Daft raised the idea of
recording stock options as an expense about two months ago, Mr. Fayard
said, as news of financial scandals continued to unfold. About 10 days
ago, with lawmakers calling for tougher accounting standards, Mr. Daft
fielded the idea in phone calls to Warren Buffet and some other Coke
directors. Mr. Buffett, Coke's largest shareholder, for years has been
an outspoken proponent of expensing options.
Mr. Daft pressed ahead with his proposal to make the accounting
change last week after President Bush called in a speech for better
corporate governance. Mr. Bush didn't embrace the idea of forcing
companies to expense options, but numerous economists and financial
experts, including Federal Reserve Board Chairman Alan Greenspan, have
endorsed the move, and growing investor unease sent stocks plummeting
last week.
Mr. Daft convened a meeting at 7 a.m. Thursday in Sun Valley,
Idaho, where he and several other directors were attending a
conference. The discussion, over breakfast in the condominium of
director Herbert Allen, was short. It wasn't hard to win the directors'
support; Mr. Buffett, in particular, applauded the move.
``Our management's determination to change to the preferred method
of accounting for employee stock options ensures that our earnings will
more clearly reflect economic reality when all compensation costs are
recorded in the financial statements,'' Mr. Daft said in a statement. A
spokeswoman said he wasn't available for further comment.
``I'm delighted,'' Mr. Buffett said in a telephone interview.
``This tells shareholders what really happens in terms of costs.'' The
new plan, he said, also eliminates bias in structuring compensation
packages, encouraging Coke to design packages that fit its and
employees' needs without regard for accounting.
While Mr. Buffett said he never pushed Coke to treat stock options
as an expense, he said he did encourage the company last week to take a
further step and use independent investment banks to determine the fair
value of stock options that Coke grants. The move is intended to ease
concerns over whether options that are expensed are being properly
valued. Coke will ask two investment banks, Goldman Sachs & Co. and
Citibank, to price options, and will expense the option value based on
the average of those firms' quotes.
Coke said stock options will be expensed over the period in which
they vest, based on the value the day they are granted. Coke's 2002
options plan authorizes as many as 120 million shares, or 4.8 percent
of the company's share outstanding. The company usually issues 25
million to 30 million shares a year, however.
For 2001, Coke's top five officers received options on 3.7 million
shares, including options on one million shares for Mr. Daft. About
8,200 of Coke's 38,000 employees received options during 2001.
Mr. Buffett predicted Mr. Daft's move could make him ``unpopular''
among other CEOs, but he also said that while business leaders had
managed to quash efforts in 1993 to force expensing of stock options,
the current environment could force them now to accept it.
``I'm sure a few others will do it,'' he said. ``It may be that
good practices drive out the bad.''
Sen. John McCain (R., Ariz.) issued a statement applauding Coke's
decision and expressing hope that ``other companies will follow suit.''
Judy Fischer, managing director of Executive Compensation Advisory
Services, in Alexandria, Va., said she believes other corporations will
follow Coke. ``If a corporation can do it without a lot of problems to
their bottom line, I think a lot will follow suit,'' she said.
However, it wasn't clear how other companies will react,
particularly high-tech businesses that rely heavily on stock options. A
spokesman for Santa Clara, Calif., semiconductor maker Intel Corp.,
where all employees are eligible for stock options, said he couldn't
comment on Coke's move. One lobbyist was skeptical. ``I doubt just
because one company made this decision that other companies will follow
suit,'' said Ralph Hellmann, top lobbyist for the Information
Technology Industry Council, a high-tech trade association in
Washington. ``Each individual company is going to make its own
determination.'' Looking beyond 2002, Coke's Mr. Fayard said earnings
per share will be reduced by about three cents in 2003, with the
reduction gradually increasing to about nine cents a share by 2006, he
said. But the change won't affect the company's cash flow, he said.
Mr. Domenici. Mr. President, I rise first in support of our
free market economy. The revelations over the last few months
of corporate officials having betrayed the trust of their
employees and their investors is simply unacceptable. These
corporate officials must be prosecuted to the full extent of
the law and if additional penalties are required, then we
should enact them.
But let us not forget, that despite these terrible,
unconscionable acts perpetrated by some CEOs on their workers
and investors, the principles of our free market economy remain
the envy of the world. These principles have allowed our
economy to be the most productive, most innovative, most
creative system, that has created income and employment only
dreamed of in other parts of the world.
One of these principles is property rights. But it seems
that some corporate managers have forgotten that the companies
they run are not their personal property to operate however
they see fit or for their own benefit. The exuberance of the
1990s that Chairman Greenspan warned us about and the
extraordinary income and wealth generated during that period,
allowed for unethical persons in our business sector to exploit
this time of growth for their own selfish purposes and to bend
the rules for their own benefit.
So as we pursue new rules to punish those who have betrayed
a trust--and we must--let us not allow the pendulum to swing so
far that it jeopardizes the innovation and vitality of our
economic system for the future. Rather than working against the
principles that make our economic system so great, our actions
should affirm these principles.
I am angry, shocked and extremely concerned about the
revelations that have emerged in the past 6 months concerning
the accounting practices of a number of public companies. To
operate efficiently our free market system requires a high
level of honesty and trustworthiness among its participants,
especially among its key decisionmakers.
In the long run our economy--our standard of living--
reflects not only our inventiveness and hard work but our moral
character. Corporate executives have to be worthy of the key
role they play. With all their wealth and high position comes
responsibility. Sadly, some executives were not worthy of this
responsibility.
Restoring the public's trust is of paramount importance.
America's system of corporate governance and its trust in our
financial reporting mechanisms have been shaken and restoring
this trust is of critical importance. It will take more than
words to restore that confidence and trust. It will take
something that I, Senator Dodd and others have been lecturing
on for many years, and this is something not easily legislated.
It will take a renewed awareness of the ethics of
responsibility. It will take a reaffirmation that ``Character
Counts.''
Reaffirming that ``Character Counts'' means not only
encouraging our young people to live by the six pillars--
trustworthiness, respect, responsibility, fairness, caring, and
citizenship--but expecting that our corporate leaders adhere to
these traits and conduct themselves accordingly.
Cooking the books has hurt thousands and thousands of hard-
working Americans. American companies must adhere to the
highest standards of public accounting ethics. Despite these
abuses, as I have said our economy remains strong and the vast
majority of CEOs are honest and abide by the rules.
Unfortunately, a few bad characters have tainted the reputation
of our enterprise system.
The President and the Congress are addressing reform. I
will support these reform efforts that are aimed at regaining
trust and confidence in our Nation's financial markets and
ensure that American workers are protected from unscrupulous
corporations. No violation of the public's trust can be
tolerated.
But I also believe more can be done, and this bill before
us moves us in that direction. I support:
Full and accurate disclosure: I endorse the SEC's proposals
to require CEOs to certify that their financial statements
completely and accurately reflect the true condition of the
company.
Trust and accountability: Corporate leaders must be held
accountable for any abuse of public trust. I believe that
executives should be required to return moneys they received as
a result of fraudulent accounting practices, as embodied in the
Senate bill.
Independence: Boards of directors must exercise independent
judgment and a substantial majority of board members must be
independent of management.
Auditing reform: Strong oversight of the accounting
profession is essential if we are to ensure independence of
auditors and credibility of the auditing process.
Pension protection: I fully support steps that will protect
the retirement savings of American workers. Workers should have
freedom to diversify and monitor their own retirement funds,
giving confidence that their investments will not fall prey to
unethical executives.
I urge the SEC to move forward with the implementation of
its proposed reforms. And, I strongly believe that the NYSE and
the NASDAQ must proceed to improve their listing standards. I
support the reform that works to strengthen our free enterprise
system. It is our obligation as a Congress and as a country to
ensure that the unethical few that are causing hardship for so
many hard-working Americans, be swiftly brought to justice and
face jail time. We will restore faith in our economic system
for it is the greatest in the world. I support passage of the
Senate bill.
Mr. Cochran. Mr. President, while I support the passage of
this bill, I think we ought to recognize the role the
Administration is already playing to deal with these serious
problems of corporate responsibility.
I was pleased that President Bush announced last week his
suggestions for corporate accounting reform. The President
forcefully argued that higher ethical standards are an
imperative to restore confidence in corporate America. Those
standards should, in his words, ``be enforced by strict laws
and upheld by responsible business leaders'' and that
``corporations should not be disconnected from the values of
our country.''
I also support the President's executive order to create
the Corporate Fraud Task Force. Combined with new criminal
penalties for corporate fraud, this taskforce can help bring
stability to our Nation's economy. The President has also asked
the Securities and Exchange Commission to adopt new rules to
make sure that auditors are truly independent from the
businesses which they audit.
We also need to be sure the SEC has the resources it needs
to carry out its other important responsibilities.
I am hopeful that the Appropriations Committee will be able
to provide the necessary amount of funding for the SEC to hire
the enforcement officers it needs and to acquire state-of-the-
art technology that is necessary for the performance of its
duties.
With the passage of this bill by the Senate, we will be
able, in conference, to work with the other body to produce a
good bill that deals effectively with the problems in this area
of very legitimate concern to our country.
Mr. Leahy. Mr. President, I want to compliment the majority
leader for turning to the Sarbanes bill and the issue of
corporate responsibility. I also want to thank Chairman
Sarbanes for his leadership on the impressive bill that he has
produced in the Banking Committee.
So many times all that the public hears about Congress is
about turf and partisanship. This comprehensive reform effort
disproves those claims. Thanks to the leadership of the
Majority Leader and Senator Sarbanes, the bill that we are
about to vote on is a tough, comprehensive reform package that
enjoys broad bipartisan support in the Senate. It brought
together the best ideas from many Senators, from many
Committees, and from both parties.
From my standpoint, as Chairman of the Judiciary Committee,
this has been an opportunity to benefit once again from the
wonderful partnership that we have forged between the Banking
Committee and the Judiciary Committee. After September 11, our
two Committees worked together to write the anti-terrorism
provisions of the USA Patriot Act that dealt with money
laundering. Here, with the 97-0 vote to adopt of the provisions
of the Corporate and Criminal Fraud and Accountability Act, as
a Leahy-McCain amendment to this bill, Senator Sarbanes and I
have again united the forces and expertise of our Committees.
This time we have done so to craft comprehensive laws to deal
with financial wrongdoing, and again done so with bipartisan
support in both Committees. I think that the final product is
better and more complete because of our joint work. Thank you
Chairman Sarbanes.
But the joint effort did not stop with Senator Sarbanes and
myself. Senators Biden, Hatch and the Minority Leader offered
provisions that were also adopted by the Senate, adding aspects
of the President's recent proposal. That is an impressive show
of bipartisanship because those proposals were only made after
the Senate had already begun debate on this bill. Despite the
White House's refusal to help us shape our more comprehensive
proposal, we did not hesitate to include the President's
suggestions in our final product.
The bill was further perfected by Senator Edwards'
thoughtful amendment dealing with the conduct of corporate
attorneys. Once again, we were able to draw on the expertise of
a particular Senator to enlist the help of lawyers in stopping
corporate fraud, not designing it. In short, we started with a
fine bill from Senator Sarbanes, and have strengthened even
further, never losing our strong bipartisan support.
We need to remind ourselves of the underlying reasons for
the bipartisan support behind these measures. Enron brought it
to light, but it goes deeper. It's about a basic fairness and
equity that transcends party lines. It's about rewarding people
who play by the rules and punishing people who don't. It's
about the basic American ideal of treating all people equally
under the law.
We cannot have a system where a pickpocket who steals $50
faces more jail time than a CEO who steals $50 million. The
integrity of our financial system depends on accountability.
The mounting scandals and declining stock market have damaged
the integrity of our public markets and we must restore it.
I was proud that the Judiciary Committee, joined by the
Majority Leader and a bipartisan group of Senators including
Senator McCain and others was able to make such an important
contribution to this effort by contributing the provisions of
S. 2010, the ``Corporate and Criminal Fraud Accountability
Act,'' as it was unanimously reported out of the Judiciary
Committee in April, as an amendment to the Sarbanes bill. Both
in Committee in April and again last week on the floor, not a
single Senator from either party has voted against the
provisions of the Corporate and Criminal Fraud Accountability
Act.
We worked hard to reach across party lines on this measure,
and I hope that the House of Representatives acknowledges that
fact. I was glad to see in last Friday's newspapers that
Speaker Hastert also endorsed the joint Sarbanes-Leahy measure
after its adoption. I hope that the President can follow the
leadership of Speaker Hastert and support the Senate measure as
this bill moves forward.
Recent events have served as a stark reminder that we need
to reexamine our laws to make sure that they reflect our
important and shared values of honesty and accountability.
Enron has become a symbol for the torrent of corporate fraud
scandals that have hit the front pages and battered our
financial markets. Tyco, Xerox, WorldCom, Adelphia, Global
Crossings, the list goes on.
The things that happened at Enron did not happen by
mistake. They were not the result of one or two ``bad apples.''
Senior management at Enron, assisted by an army of accountants
and lawyers spun an intricate web of deceit. They engaged in a
systematic fraud that allowed them to secretly take hundreds of
millions of dollars out of the company. This kind of fraud is
not the work of a lone fraud artist. Rather, it is symptomatic
of a corporate culture where greed has been inflated and
honesty devalued.
Unfortunately, as I have said and as the experts warned at
our February 6 hearing, Enron does not appear to have been
alone. Each week we read of corporation after corporation that
has engaged in misconduct, and these are not small or marginal
corporations. These are major mainstays of corporate America.
The web of deceit woven by such publicly traded companies
ensnares and victimizes the entire investing public who depend
on the transparency and integrity of our markets for everything
from their retirement nest eggs to their children's college
funds. That is why this comprehensive reform is urgently needed
to restore accountability in our markets.
The Leahy-McCain amendment to the Sarbanes bill, approved
97-0 by the Senate, provided important provisions to ensure
just such accountability.
The Corporate and Criminal Fraud Accountability Act which I
authored provides tough new criminal penalties to restore
accountability and transparency in our markets. It accomplishes
this in three ways:
punishing criminals who commit fraud, preserving evidence
to prove fraud, and protecting victims of fraud.
Here are some of its major provisions as adopted by the
unanimous Judiciary Committee in April and the unanimous Senate
last week: It establishes a new crime of securities fraud, with
a tough ten year jail sentence. It breaks the ``corporate code
of silence'' by providing, for the first time, Federal
protection for corporate whistleblowers who report fraud to the
authorities or testify at trial. It closes loopholes and
toughens penalties for shredding documents as we learned had
occurred at Arthur Andersen. It requires audit documents to be
preserved for 5 years and provides tough criminal penalties for
their destruction. It protects victims the right to recoup
their losses by preventing fraud artists from hiding in
bankruptcy or concealing their crime and using an unfair
statute of limitations to hide.
With these bipartisan provisions and others incorporated,
this bill we have produced is truly a comprehensive measure. It
tightens regulation of corporate misconduct, but it now also
provides an important deterrent to fraud artists. This bill is
going to send wrongdoers to jail and save documents from the
shredder, which sends a powerful and clear message to potential
corporate wrongdoers ``don't do it.'' As a former prosecutor, I
have discovered that nothing focuses attention to morality like
the prospect of a long prison sentence.
In the Senate, as we have been debating and shaping
specific and comprehensive reform proposals, we had been trying
for months unsuccessfully to get the President's support. The
Administration had stayed on the sidelines during this
important debate.
For whatever reason, perhaps the mounting scandals or the
declining market, the President decided last week to speak out
against corporate fraud. He spoke again today on our economy. I
welcome his participation and hope that he will follow up his
speeches by supporting real reform. It is amazing to me that
with such broad bipartisan support and now on the verge of
Senate passage, that the Administration has still not given a
clear statement supporting the bill on which we are now about
to vote.
Although I now understand that a White House official
reportedly said that they agreed with the ``goals'' of this
reform bill, I was disappointed that the President has not yet
voiced his support for this bipartisan measure about to pass
the Senate. Supporting the ``goals'' is a good first step but
it is nonetheless a baby step. I read in the paper last week
that the President does not want to ``tip his hand.'' This is
not a game of poker, however. This is the time for Presidential
leadership with the integrity of our markets at stake. When
there are specific proposals passing the U.S. Senate by an
overwhelming majority of Senators from both parties and the
Speaker of the House is supporting the measures as well one
wonders what it will take for the President to express his
opinion.
For those of us in the Senate, like myself, Senator
Sarbanes, Senator McCain, Majority Leader Daschle, and others
who have worked hard to come up with specific and bipartisan
reform proposals, the ``goals'' have been clear for a long
time. It is now time for comprehensive action.
While the President's proposal was short on details, some
of it did sound familiar to those of us on the Judiciary
Committee. Three of the President's proposals are found in S.
2010, the Corporate and Criminal Fraud Accountability Act,
which we adopted 97-0 in the Senate: One, The President
advocates for strengthening the laws punishing document
shredding and obstruction of justice. That is in our bill. Two,
The President wants the Sentencing Commission to raise
penalties for corporate misconduct. That is in our bill. Three,
The President wants the Sentencing Commission to raise the
penalties for the existing fraud laws. That is in our bill as
well.
I am glad the President adopted three proposals from my
bill, even if he will only say that he supports the `` goals.''
As I said, we were also quick to write up his ideas into
concrete proposals and include them in our bill. Unfortunately,
the President's proposal failed to include many of the
important provisions in the bipartisan Leahy amendment. It
fails to create a new crime to punish securities fraud to
directly punish corporate wrongdoers. It fails to provide
whistleblowers with protection that will break the corporate
code of silence. Remember, you can put whatever criminal laws
you want on the books but unless there are witnesses who are
not scared to help prosecutors prove what happened no one will
be held accountable. It fails to protect victims of fraud by
allowing them to recover their losses from a fraud artist who
declares bankruptcy. It fails to establish a realistic statute
of limitations to allow victims to recoup their losses when a
fraud artist can manage to conceal his crimes for long enough,
a change that has received strong bipartisan support dating
back to the SEC under former President Bush.
As I said, I was glad to hear the President finally join
this reform debate. Now is not the time, though, for half
measures. We need comprehensive action. We were glad to include
the President's proposals in the Senate bill, but we
unanimously agreed to more comprehensive reform, including the
Leahy bill.
Now I hope that the President will support such
comprehensive reform as is found in this bill. I hope that his
rhetoric is backed by action and that his generalities are
backed with specifics.
Speaker Hastert has now publicly supported the Sarbanes
bill and the Leahy amendment. I hope that the President will
support the bill's provisions as it moves forward to conference
and will appeal to other Republican House members not to water
it down. That will be the true test of his resolve to restore
accountability to our markets.
It is time for action, comprehensive action that will
restore confidence and accountability in our public markets.
The Sarbanes bill, including the unanimously approved Leahy-
McCain amendment incorporating the Corporate and Criminal Fraud
Accountability Act, provides just such action.
Let's pass this comprehensive bill and send the President a
strong measure to sign into law. Congress must act to restore
integrity in our capital markets to strengthen our economy.
Mr. Reid. Madam President, I ask unanimous consent that at
5:45 p.m. today all time postcloture expire, and that all the
time available, not counting the time available for Senator
Byrd, be equally divided and controlled between the two
managers or their designees; that without further intervening
action, the Senate proceed to vote on or in relation to the
Carnahan amendment No. 4286, to be immediately followed by a
vote in relation to the Edwards amendment No. 4187, as amended,
if amended; that upon disposition of these amendments, the bill
be read a third time, and the Senate vote on passage of the
bill; that upon passage, the Banking Committee be discharged
from further consideration of H.R. 3763, the House companion,
and that the Senate then proceed to its consideration; that all
after the enacting clause be stricken and the text of S. 2673,
as passed, be inserted in lieu thereof; that the bill be read a
third time, passed, and the motion to reconsider be laid upon
the table; that upon passage of H.R. 3763, the Senate insist on
its amendment, request a conference with the House on the
disagreeing votes of the two Houses, and that the Chair be
authorized to appoint conferees on the part of the Senate; that
all succeeding votes in this vote sequence, after the first
vote, be limited to 10 minutes; that there be up to 2 minutes
of explanation prior to each vote, with no further intervening
action or debate, with the 2 minutes equally divided in the
usual form.
The Presiding Officer. Is there objection?
Mr. Gramm. Madam President, reserving the right to object,
I would like to propound a parliamentary inquiry. Under this
agreement, when 5:45 comes, we would begin to vote on the two
amendments, and then vote on final passage, and no other
amendment would be in order under the agreement; is that
correct?
The Presiding Officer. The Senator is correct.
Mr. Gramm. Madam President, I do not object. I think under
this agreement we will have time to go back and forth. I would
say that if it saves anyone time, we do not need a vote on the
two pending amendments. We could do them by voice vote and
proceed to final passage.
Mr. Reid. We will be happy to discuss that after the UC is
entered.
The Presiding Officer. Is there objection to the request?
Without objection, it is so ordered.
Mr. Reid. Madam President, I ask unanimous consent that
upon disposition of H.R. 3763, passage of S. 2673 be vitiated
and the bill be returned to the calendar.
The Presiding Officer. Is there objection?
Without objection, it is so ordered.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, I want to begin by very briefly
responding to Senator Kennedy. I was somewhat taken aback at
his suggestion that we set aside the two amendments and allow a
nongermane amendment to be offered when, in fact, on a
bipartisan basis, earlier this week, we decided not to deal
with pension reform.
So I want to make it clear to my colleagues that I am
perfectly happy to deal with pension reform. I think a
bipartisan consensus is evolving on pension reform. But we made
a decision, on a bipartisan basis, earlier this week, not to
put pension reform on this bill. Its day will come. I want to
make that clear.
Madam President, let me try to respond to several points
that were made earlier today. I will try to be brief so that my
other colleagues will have an opportunity to speak on my side
of the aisle.
I want, first, to talk about stock options. Then I want to
talk about the bill before us and where we go from here. And I
will try to be brief on all of them.
First, let me make it clear that stock options are pretty
important to the American economy. More than 6 million
nonexecutive workers in America receive stock options every
year. So when we finally get around to having a policy set on
stock options--which I hope will be done by FASB, the
accounting board, based on logic and reason--we need to take
into account that 6 million people who are not executives of
companies get stock options every year.
We want to be sure that we are not endangering their
ability to own a piece of America with the reforms designed to
deal with a few people who violated the law in some cases, who
did not act honorably in some cases.
We want to be sure we do not deprive or preclude 6 million
workers who are not executives--or people who did not violate
the law, did not act dishonorably--from the ability to get
stock options.
Let me also say, in areas such as biotechology and the
computer programming industries, that 55 percent of rank and
file employees get stock options.
So I just want to urge, as we are going about our business
here, with all this talk about people who have made millions,
that we do not forget that millions of Americans benefit from
this, and we need to be careful about what we are doing.
Let me say, secondly--and Senator Bennett made the point
today; I made it last week--if you listen to what is being said
in this debate, a big point is made of the fact that in 1994 we
saw an explosion in the use of stock options and low-interest
loans and other nonconventional forms of executive
compensation.
What happened to trigger that is in 1993, as a gratuitous
provision in the 1993 tax bill, we changed the law so that if
you are compensating an executive in corporate America and you
pay that executive more than $1 million a year, you cannot
count that compensation as a business expense. Of the top 30
companies in America, the level of compensation at that point
was already substantially above the million-dollar mark. So
because of what Congress did in 1994, having passed a law that
said you could not pay people with a paycheck above a certain
level and have it count as a business expense, we should not
have been surprised that accountants and financial planners and
people who were smart enough to make over $1 million a year
found other ways to receive compensation.
So I want to make it clear that the point I am making is,
if you are looking for somebody to point the finger of blame at
here--and many people are trying to do that--I think Congress
is a good institution to point at because Congress eliminated
the ability of companies to pay their executives the old-
fashioned way.
A lot has been made about who is at fault in all this. I
would just simply make the following points. If somebody said
to me: I know you don't know what caused all these current
problems, but tell me; I am going to force you to tell me what
you think the cause was. I would say: The inadequacy of GAAP
accounting, which, in its current incarnation, works very well
for old-style companies with assets that are written off.
GAAP accounting fits the steel industry perfectly. It fits
the automobile industry pretty well. But the problem in the
1990s--when productive power became knowledge, when companies
with relatively little in the way of assets gained huge market
caps because of people's assessment of their know-how and the
technology embodied by the company--was that GAAP accounting
did not keep pace with the reality of the world that we live in
today and that we lived in the 1990s.
It is very complicated to try to figure out what the values
of these companies actually are by any conventional method
where you are adding up their acquisition cost of assets and
depreciating those assets.
This created a giant void in GAAP accounting in the 1990s,
and people pushed the envelope within that void. In some cases,
it appears they violated the law; in other cases, they have
certainly violated standards of ethics.
Nothing we are doing in this bill is going to solve the
problem in GAAP accounting. I am confident that over time we
will find new ways of developing generally accepted accounting
principles that don't rely on concepts such as goodwill, which
don't make a lot of sense economically. But I do believe the
bill before us is a step in the right direction.
There are differences of opinion. Before we go to final
passage, I want to make clear what those differences are.
Senator Sarbanes and I both believe that we should have an
independent accounting board. We both believe that that board
should set and enforce ethics standards. We both believe that
part of setting ethics standards is looking at auditor
independence.
Senator Sarbanes believes that we should write in law in
some great detail what is entailed in auditor independence. I
believe the problem with that is that while the law might fit
General Motors, there are 16,254 publicly traded companies in
America, and I am concerned that there is no law that Congress
can write that will fit all 16,254 companies.
My second problem is, if you make a mistake in writing the
law, then you have to go back and pass another law to correct
it. If we had set out Glass-Steagall, separating banking and
securities, by regulation, my guess is that by the mid 1950s,
we would have concluded that that was a mistake, and we would
have fixed it. But since it was written into law, it couldn't
be fixed by regulation. Regulators tried to make marginal
changes. We ended up with a very unstable system, and we were
only able to fix it by law in 1999.
A second problem with writing the details of these
different standards such as auditor independence into law is if
you make a mistake, it is hard to fix it; whereas if you set up
a board and, based on their expertise, they set out a
regulation, if they make a mistake, they can fix it.
My final point on setting these standards by law is, one
size fits all never works. What we need is the flexibility for
this board to set a standard and then determine, based on the
circumstance of the individual company, what makes sense.
I intend to vote for the bill on final passage. There are
probably 10 things in the bill I am opposed to. But we are
going to conference with a House bill that is very different. I
am confident that in conference we can write a bill that will
be supported by both Houses of Congress and signed by the
President. I think we can strengthen the bill where it needs to
be strengthened. I think we can provide flexibility where it is
needed to bring in reason and responsibility.
Our objective has to be to fix what is broken in American
capital markets and do it while minimizing the cost we impose
on businesses, investors, and workers that did not violate the
law and did not act in a nonethical manner.
The sooner we can get to conference, the sooner we can
write this bill and see the bill signed into law. We have
reached the point where we have a bill before us that addresses
the major issues that we decided to address.
I know people have been unhappy about the inability to
offer amendments today. The plain truth is, we have 97 first-
degree amendments that have been filed and 24 second-degree
amendments, and there was never any possibility that those
amendments could be offered. We tried to come up with
amendments that were agreed to and in the process, ended up
excluding some people.
Let me conclude my remarks, at least for the time being, by
congratulating Senator Sarbanes on his leadership on this bill.
Overall, he has done a good job. I do not agree with him on
each and every part of it, but he has always been open. We have
had many good discussions. I am confident that in the end we
will write a bill that will be broadly supported and that will
be in the interest of the country.
The Presiding Officer. Under the previous order, the hour
of 4:55 having arrived, the Senator from West Virginia is
recognized.
SUPPLEMENTAL BILL
Mr. Byrd. Madam President, there is a game being played
with the critical issue of homeland security. It is a political
game which could have disastrous consequences.
The White House is talking big about homeland security,
exhibiting strong presidential interest in homeland security,
trotting out proposals for a whole new Department of Homeland
Security, and publicizing alerts.
It is strange, then, strange indeed that despite its public
pronouncements on homeland security, the White House refuses to
back the rhetoric up with resources.
Twice--once last year, and currently--large bipartisan
majorities in both Houses of Congress have withstood veto
threats from this administration and insisted on significant
funding increases for homeland security.
President Bush's own appointees have all but begged the
President's OMB Director for additional funds to fight the war
on terrorism here at home. Many of these requests are urgent
and quite compelling, yet the OMB has continually rejected a
surprising number of these pleas. It is as if this
administration has delivered an internal unfunded mandate to
its own cabinet secretaries and Federal workers. Fight the war
on terrorism on every front here in the homeland. Fight
vigorously. Spare nothing, but make sure you do it on a
shoestring. Protect our people here at home, but protect them
on the cheap.
The Department of Energy proposed a total of $380 million
to fund projects to enhance the security of radioactive
materials here at home and overseas, including: better security
measures to safeguard the transport of nuclear weapons within
the United States; improvements in the ways in which we secure
and store plutonium; cleaning up, transporting, and protecting
low-level radioactive materials that could be used in a ``dirty
bomb.''
For these and similar activities $380 million was asked for
by the Secretary of Energy. But do you know what? That request
fell on deaf ears at the Office of Management and Budget.
Despite all of the worrying and nail biting about what would
happen if some lunatic obtained radioactive material and
detonated a ``dirty bomb'' on the mall in Washington or in some
other large city, the OMB provided less than $27 million or
about 7 percent of the Energy Department's request. Let me say
that again: The OMB provided less than $27 million or about 7
percent of the Energy Department's request. This urgent
supplemental bill contains $361 million for the Department to
dedicate to securing these dangerous and vulnerable materials.
That is $334 million above the amount requested by the
President.
Another striking omission from the Bush supplemental
request for homeland security involved efforts to deport those
individuals who entered the country on visas that have now
expired. Currently there are an estimated 8 million
undocumented immigrants in the United States and only 2,000
interior immigration enforcement officers nationwide. This is a
very dangerous situation. We know that terrorists live and plot
their crimes among us. The Immigration and Naturalization
Service requested $52 million for analysts to help find, arrest
and deport high-risk individuals who have disregarded the
departure dates on their visas.
OMB said no, nada, nix. It denied the entire request. The
supplemental bill, now stuck in conference because of the
administration's latest demands, contains $25 million that the
Appropriations Committee believes the INS can usefully spend
this year to address the need to locate some of these
individuals. We also include $88 million for construction and
equipping of border facilities, and for improved border
inspections.
Last fall, OMB denied $1.5 billion in funding which the FBI
requested in the wake of the attack on the twin towers in New
York. Part of the FBI's funding request was for acceleration of
a new computer system that will be at the heart of all
communications within the bureau. Also included in the request
were funds to enhance the internal security of the FBI's
systems and procedures; for ``cyber cops'' and for hazardous
materials personnel. The Congress provided $212 million above
the President's request to permit completion of the new
computer system much earlier than would be allowed under the
Bush plan. In addition, we have included--the Appropriations
Committee--$175 million for cyber security and counter
terrorism in the supplemental that the White House is now
delaying--delayed at the last minute last Thursday evening.
I could go on, but suffice it to say that this
administration talks a good game about homeland security but it
is unwilling to put its money where its mouth is.
Over this past weekend, during his radio address, the
President said that, ``Strengthening our economy and protecting
the homeland and fighting the war on terror are critical issues
that demand prompt attention.'' I agree. I only wish that the
same message would be made clear to the Office of Management
and Budget.
We have worked diligently in the Congress to get these
critical homeland security monies out to Federal and local
personnel charged with protecting our people. Yet, we have been
met by objection after objection by this administration.
In March, the President insisted he needed more money for
national defense in an urgent supplemental. We gave him every
dollar he requested. In addition, the House and Senate provided
more money for critical homeland defense needs.
Instead of letting the House and Senate work out our
differences and get the funding out, the White House started
issuing veto threats before the Senate bill was even off of the
floor. And last Thursday evening, just as all differences
appeared to be worked out, the White House bomb throwers blew
up the agreement with new demands.
It makes one wonder how much the White House really needs
that defense money and it certainly causes one to wonder how
serious this administration really is about homeland security.
Senator Stevens and I have beseeched the White House over
and over again to have the Homeland Security Director come
before our Committee to tell us about the needs for Homeland
Security. Our requests were denied. We held days of hearings
with administration officials, local firefighters, policemen,
mayors and governors. We did our best and funded the needs as
testimony we heard indicated.
We wrote a good bill, and we were ready to convene the
conference Friday. But our efforts were blown up by the OMB
Director, suddenly and completely and with no warning until the
very last minute, Thursday evening.
So needs go wanting in our military and in our homeland
defense effort. There is no excuse for such irresponsibility.
Such tactics are not in the best interests of our people.
Hollow rhetoric on homeland security will never replace solid
funding for these needs.
Political gamesmanship over issues so critical to our
Nation and our people is irresponsible, arrogant and totally
out of line.
I deplore the arrogance with which the good faith efforts
of both Houses of Congress have been treated by this White
House. Apparently the security and safety of this Nation and
its people have taken a back seat to gamesmanship by a White
House that has no respect for the people's representatives or
for the people's urgent needs.
Under OMB Director Mitch Daniels' stewardship, the Federal
budget has gone from a surplus of $127 billion in FY 2001 to an
estimated deficit for the current fiscal year of $165 billion.
This is a swing of $292 billion in just one year.
The President is now threatening to veto the urgent
national defense and homeland defense supplemental
appropriations bill based on Mr. Daniels recommendation. Why?
Because Mr. Daniels asserts that the bill spends too much
money. Yet the conference report's spending levels that have
been agreed to on a bipartisan and bicameral basis would
increase the deficit by only about $600 million compared to the
President's request.
Mr. Daniels believes that the critical port security,
border security, firefighting, law enforcement, nuclear
security and other homeland defense programs funded in the
supplemental can wait because the bill would increase the
deficit by about $600 million, when his failed fiscal policy
has resulted in a $292 billion swing in the deficit.
The OMB Director seems to have forgotten, or perhaps never
learned, that the appropriations process is about more than
just numbers. Maybe at OMB, they can be bean counters, but here
in Congress we are responsible for understanding what the
numbers mean for the American people.
Mr. Daniels is cynically focused only on the bottom line.
In an effort to make the supplemental bill look smaller, he has
proposed rescinding the balance of funds under the airline loan
guarantee program. He asserts that this would produce $1.1
billion of savings. Yet these funds under the law can not be
spent. There are no real savings here. The Congressional Budget
Office would not score savings for this proposal. This is the
kind of phony accounting that is getting our Nation's
corporations in trouble.
This phony accounting is proof that Mr. Daniels does not
care about homeland defense or about our national defense, or
about fiscal discipline. This phony accounting proves that the
President's veto threat is only about proving that he can force
the Congress to hit some arbitrary bottom line. And the
unmitigated gall of a high White House official coming to the
Congress with an accounting gimmick at a time when that same
White House is decrying phony accounting practices and scandals
in the business community is beyond belief.
We should not delay this conference one more day. There are
some in Congress who suggest that we should throw our hands up
on this bill and wait until the next fiscal year to address
these priorities. Such statements ignore the critical needs
facing the Nation for defense and homeland security. Our
fighting men and women need this money to prosecute the war on
terrorism. Dr. Dov Zakheim--the Defense Department
comptroller--said in a briefing on Friday that the Defense
Department is hitting a wall and that our people in uniform
cannot be paid if the Supplemental Bill is not enacted by the
August break. He said in that briefing that there is good will
on Capitol Hill, and he is right. We are trying to do the right
thing for our people here at home and our fighting men and
women in the field. It is deplorable that good will, hard work,
and good intentions can be trashed by OMB Director with
reckless abandon. I do not think this President or this Nation
are well-served by tactics and gamesmanship when the stakes are
so high.
Mr. President, I ask unanimous consent that a memorandum be
printed in the Record which sets forth the highlights of the
$7.2 billion for homeland defense in conference funding levels.
There being no objection, the material was ordered to be
printed in the Record, as follows:
Highlights of $7.2 Billion for Homeland Defense in
Conference Funding Levels
The tentative conference funding levels are $1.9 billion above the
President's request. A summary of the $1.9 billion increase with
examples of changes to the President's homeland defense proposal
follows:
$701 million for first responder programs, $343 million above the
President's request, including:
$150 million for firefighters, with the funds going directly to the
local firefighters. The President did not request supplemental funds
despite the fact that over $3.0 billion in applications from 18,000
fire departments were received for the $360 million currently
available.
$100 million for State and local governments for improving
interoperability of communications equipment for fire, police and
emergency medical technicians, none of which was requested. The funding
flows through existing FEMA and Justice program, rather than the new,
centralized program at FEMA, proposed by the President for FY 2003. In
addition, we are directing the National Institute of Standards and
Technology to take the lead in developing uniform standards for
interoperable State and local law enforcement, firefighting and
emergency medical communications equipment.
$151 million for the Justice Department, $151 million above the
President's request to give to State and local governments for improved
training and equipment for law enforcement personnel (rather than
through FEMA). Funds would also be used to improve the processing of
security clearances for State and local first responders so that State
and local governments can have information on potential security risks
and to promote mutual aid agreements to coordinate the response of
State and local governments to a terrorist attack.
$193 million, $134 million below the request for FEMA grants to
State and local governments to update their emergency operations plans
and to improve State emergency operations centers. $25 million is
approved for a new, unauthorized program requested by the President,
$25 million below the request. The proposal establishes a Citizen Corps
within FEMA to promote volunteer service for emergency preparedness.
$54 million, $22 million above the President's request for FEMA's
search and rescue teams. Currently, there are 28 FEMA search and rescue
teams around the country that can be deployed to major disasters to
assist local first responders in search and rescue operations. Funding
will be used to upgrade equipment and training for responding to events
involving a biological, chemical or radiation attack.
$37.1 million of unrequested funding for the National Institute of
Standards and Technology for developing uniform guidelines for
chemical, biological and radiation detection equipment ($17.1 million)
and for developing best practice guidance for homeland security
technologies ($20 million).
$15.9 million for the Federal Law Enforcement Training Center to
expand training capacity for law enforcement personnel of the new
Transportation Security Administration.
$739 million for port security programs, $465 million above the
President's request, including:
$125 million for port security grants through the Transportation
Security Administration. Last Fall, Congress approved $93 million of
unrequested funds for port security grants. DOT received $692 million
of applications for the $93 million we provided. Despite this, the
President did not request additional funds.
$528 million for the Coast Guard for port and maritime security,
$273 million above the President's request. Increased funds would be
used to: expedite vulnerability assessments at our Nation's ports,
rather than follow the Administration's current plan to do the
assessments over the next five years; add two new maritime safety and
security teams; purchase a total of six homeland security response
boats; and expand aviation assets as well as the shore facilities to
support them.
$39 million for Customs to target and inspect suspect shipping
containers at overseas ports before they reach U.S. ports. The
Administration requested no funds for this activity.
$19.3 million, as requested for 34 additional personnel for
improved background checks for truck drivers, for improved fraud
detection for truck licensing and for improved fraud detection for
driver's licenses.
$28 million of unrequested funding for the Safe Commerce program to
develop better procedures for securing the contents of the 6 million
containers that enter U.S. ports each year.
$251 million for bioterrorism funding, $251 million above the
President's request, including:
$251 million for the Centers for Disease Control for improved and
secure facilities, including toxicology and infectious disease labs, an
emergency operations center and for information technology security.
$235 million, $209 million above the President's request to improve
security at our nuclear weapons facilities (Energy requested the funds,
but the White House did not request them). Funding would be used to
improve security of the nuclear weapons stockpile, the national nuclear
labs and our nuclear weapons plants. Funds are included to establish a
911 system for local first responders to call when confronted with
nuclear hazzards, enhanced funding for the National Center for
Combating Terrorism, expansion of radiological search teams, and
establishment of a National Capital Area Response Team at Andrews Air
Force Base. Funds would also be used to consolidate nuclear materials
sites so fewer locations need to be protected. Several requested items
that are approved include funds to improve security on the electrical
grid and funds to improve our capability to detect radiation.
$147 million, $128 million above the President's request for cyber
security to help deal with the threat to Federal and private
information systems. $82.6 million is provided to Justice to improve
the investigation and prosecution of cyber crime, research to improve
the detection of cyber crime, ``data warehousing'' and ``data mining''
to help expose cyber crime and for information sharing. $20 million is
provided to Commerce to develop unified Federal guidelines and
procedures for system security certification and to develop guidelines
and benchmarks for secure information systems. Funding is also provided
to improve wireless intrusion detection systems. $25 million is
provided to the Energy Department to improve cyber security at our
nuclear weapons plants and labs. $19.3 million, as requested, is
included for NSF for scholarships to develop cyber security skills.
$120 million for border security, $78 million more than requested
by the President, including $32 million for Immigration and
Naturalization Service Construction to improve facilities on our
Nation's borders, $25 million for better equipment for the additional
personnel that are being hired with the funds Congress provided at Fall
and $5.7 million for the Justice Department to deploy to 30 more ports
the IDENT/IAFIS system for rapid response criminal background checks by
the INS of suspect aliens prior to their admission into the country.
$57 million for INS for identifying and removing immigration felons
from the country and for information technology enhancements.
$140 million of unrequested funding for the Department of
Agriculture to enhance our Nation's food safety capabilities and to
protect against devastating plant and animal disease; to increase
support for the Food Safety and Inspection Service, especially to
ensure the safety of imported products; for improved security at USDA
labs in order to secure bio-hazardous materials; funding for the
Extension Service to provide emergency training for first response in
rural areas; for FDA to improve the ability to inspect imported
products such as medical devices that contain or are susceptible to
being contaminated with radiation; and for vulnerability assessments
and security improvements to protect rural water systems.
471 million of unrequested funding for airport security, including
$150 million to insure that all small and medium hub airports have all
of the funds necessary to implement the FAA's new airport security
guidelines and that large airports have some additional funding to meet
those requirements; $225 million is provided above the President's
request for explosives detection equipment; $42 million is provided to
improve the security of the FAA air traffic control system; $17 million
is provided to improve airport terminal security for our Nation's
airports; and $7.5 million is provided to FAA to repair long range
radar systems that the Department of Defense believe must be continued
for several years because these assets are the only FAA radar capable
of continually tracking aircraft with disabled transponders. In
addition, $15 million is provided for improved air to ground
communications for the air marshals, $4 million for radiation detection
equipment for air cargo and $10 million is included for improved
technology for air cargo safety and other cargo modes.
$100 million for unrequested nuclear non-proliferation programs.
The best opportunity to stop a potential ``dirty'' bomb is to minimize
the opportunity for terrorists to get their hands on nuclear material.
Funds are included to protect fissile material abroad, purchase
radiation detectors and to establish international standards for
securing fissile material.
$108 million of unrequested funding for the Corps of Engineers to
improve security at Corps water projects.
$92 million, $82 million above the President's request for the FBI
for counter terrorism and information technology enhancements. In
total, FBI receives $175 million when cyber security funding is
included.
$50 million of unrequested funds for EPA to provide funds to local
governments to conduct vulnerability assessments on our drinking water
systems.
Examples of the remaining $273 million, most of which was
unrequested include: $12 million for security at the Smithsonian; $17.7
million for the National Park Service for installation of bollards at
the Jefferson Memorial and an in-ground retaining wall at the
Washington Monument (requested by the President in FY 2003); $26
million for the U.S. Geological Survey for high resolution mapping and
imagery of the Nation's major cities for use in developing
vulnerability assessments of infrastructure and for expanded data
storage capacity; $28.5 million to expand Secret Service capacity to
combat electronic crimes; $23.6 million for the Legislative branch for
Capitol Police and for the Library of Congress to cover part of the
lost copyright fees from the slowed mail and for costs associated with
cleaning up the Hart building after the anthrax attack; $19 million to
improve response capacity to chemical attacks and for research on the
impact of the release of toxic substances at the World Trade Center;
$15 million for improved bus safety; $7.2 million for NOAA to develop
back-up capacity for the supercomputers that support our weather
forecasting system; $17 million for security and renovations of the
Federal courts, $3 million above the request; and $44 million for the
District of Columbia and the Washington Metro to improve security;
consistent with the congressionally-mandated District emergency
operations plan and FEMA's emergency plan for the National Capital
Region, and to construct decontamination and quarantine facilities at
Children's Hospital and the Washington Hospital Center.
The conference funding levels include $4.1 billion for the new
Transportation Security Administration, $331 million below the request
($439 million of which is for unrequested items highlighted under port
security and airport security).
The conference funding levels also include the $87 million
President's Budget request for the Postal Service to improve protection
of postal customers and postal employees from a bioterrorist attack,
the $52 million President's Budget request for improved security of
Federal buildings and $3.8 million for the Office of Homeland Security,
$1.2 million below the President's request.
Mr. Byrd. Mr. President, I yield the floor.
The Presiding Officer (Mr. Carper). The Senator from
Maryland is recognized.
Mr. Sarbanes. Mr. President, I yield 10 minutes to the
distinguished Senator from Connecticut.
The Presiding Officer. The Senator from Connecticut is
recognized.
Mr. Dodd. Mr. President, I thank the chairman of the
committee. Let me begin by stating that which I have said on
several occasions: We are all deeply indebted to the Senator
from Maryland for the tremendous work he has done as the
chairman of the Banking Committee in fashioning this
legislation. He has worked with many of us to put this bill
together. My guess is that, within an hour or so, we will
overwhelmingly pass this bill before us. The chairman will be
largely responsible for the result.
I also commend my colleague from Wyoming, Senator Enzi, and
others who have worked very hard and have made it a bipartisan
bill. Without his leadership, I don't think that would have
happened. We may have had a partisan vote coming out of
committee. That would not have bode well for the handling of
this matter on the floor. So I commend him and others for
reaching an accommodation that made this a strong, good bill.
Mr. President, I want to take a few minutes toward the
close of this debate to urge our colleagues to be supportive of
this bill, and I hope Members of the other body will support
what we have done in the Senate.
The House passed legislation a number of weeks ago, prior
to a lot of the events that have unfolded over the last 2 or 3
weeks. The argument today for a stronger Senate bill hardly
needs to be made in light of events that occurred over the past
number of days. Just today, the Dow is down some 40 points;
Nasdaq is even. But over the last week, we have seen a
continued decline in investor confidence and, of course, how
that is reflected in the stock markets.
Investors, both domestic and foreign, are losing confidence
in our financial markets. Investor trust is contagious. I also
point out the corollary to that: Investor mistrust is also
contagious. What we are watching is an erosion of trust that
has begun and is almost impossible to stop once it gets
rolling. Obviously, a lot of factors will contribute to
stemming this tide of continued erosion of investor trust and
confidence.
One of the things we can do is what we are doing today.
Other people will have to add their voices to the debate. In my
view, the President still has to be stronger than he has been.
The House will have to rise to the occasion as we have endorsed
in large measure what we have accomplished here, but our step,
the first step, is the one we are taking this afternoon.
Therefore, I think this is critically important.
This is not just another bill we are passing. This is far
more important. In fact, the impact of how people react may be
more important than the actual wording and language of the
bill. It is critically important we have as strong a vote as
possible.
If we fail to enact serious reforms--and this bill is
serious reform--then I believe we endorse dangerous and
discredited accounting practices that we have seen in the last
7 months alone cost shareholders and workers billions of
dollars in their savings and pensions.
The Nasdaq has fallen over 37 percent, and the Dow has
fallen 17 percent since the beginning of the year. Both Nasdaq
and the Dow have dropped over 10 percent each in the past week
alone. So Congress must act today, Mr. President, and act with
a very strong voice to stem the rising tide of investor
apprehension.
Passage of this bill will not and cannot of itself restore
investor confidence. More must be done to win back consumer
faith, but this bill is a critical piece of the overall effort
and, therefore, it is essentially important we adopt it.
The part of the rationale of the original securities law in
the 1930s was to increase public trust in America's financial
markets and reliability of disclosed corporate financial
information. Those laws over the past 70-plus years were a part
of the modern economic foundation of our Nation, and they were
designed to promote market efficiency and inspire investor
confidence.
The resulting market confidence in the statements of
financial health of publicly traded companies has paved the way
for America's rise as an economic superpower.
I could make a strong case that the vote we are going to
take today is for one of the most important bills impacting the
Nation's financial markets since the 1930s. I say that because
this legislation will fundamentally change the way publicly
traded companies will do business and how the accounting
profession performs its statutorily required audit function.
Much has been said about what this legislation does not
accomplish. Briefly, I wish to focus my remarks on what it does
do and repeat, we are not solving every problem with this bill.
There are a lot of other issues that need to be addressed, but
we have to begin the process, it seems to me, by getting the
accounting part of this equation right, and we will not know
ultimately whether we have done all we could, but I think this
is a major step in that direction.
The bill, we now know, creates a new independent regulator
for the accounting profession. The new body will act as a
strong, independent, full-time board with significant authority
to regulate auditors of public companies. The independent board
will have clear authority for setting auditor standards and
important investigative standards. It strengthens audit
reporting standards for the accounting profession and contains
significant prohibitions for accountants performing nonaudit
services for audit clients, and it addresses the growing
conflicts of interest that have been too pervasive throughout
the accounting profession.
It provides for the first time an independent funding
source for the Financial Standards Accounting Board, which I
think is also extremely important and one of the major reforms
in this bill.
There are additional dollars to provide the SEC with more
firepower, if you will, to have more cops on the street so we
might avoid some of the problems that have occurred in the
past.
It also improves corporate governance requirements and
improves corporate disclosures. The bill grants additional
authority and responsibility to the audit committees of
publicly traded companies.
Those are very important steps. The provisions contained in
the legislation were carefully considered. We had 10 hearings,
and by a vote of 17 to 4, the committee--the Presiding Officer
being one--passed out this very fine legislation.
Additionally, during floor consideration of this bill,
Senator Leahy of Vermont added new criminal penalties for
securities fraud. I commend him and strongly endorse the
provision that won the overwhelming support of the Members. I
hope it will add to our efforts of restoring investor
confidence.
One of the last issues I would like to address, because it
has been talked about so much, is the stock options issue,
which involved a lot of debate and discussion of the last
number of days. I commend our colleague from Michigan, Senator
Levin, who has made an extraordinary effort to find a
resolution to this issue we all can support. Obviously, this
question inspires more questions than answers in many ways, but
I commend him for his thoughtfulness and energy that he has
brought to this debate.
The issue of whether or not stock options should be
expensed is not an issue that is going to go away. It has to be
addressed. I must admit, I am swayed by those who have a great
deal of expertise in this area: Alan Greenspan, Warren Buffett,
Paul Volcker, all of whom support the expensing of stock
options.
I also recognize the danger when Congress begins the
process of legislating accounting standards.
My friend from Texas and I have been involved in the past
when there have been efforts by people who wanted to have us
vote on some of these matters. I recall 3 or 4 years ago the
debate was over pooling and purchasing accounting standards. I
was very sympathetic to the arguments made by those advocating
pooling. Certainly, if I were a member of FASB, I think I would
have voted to allow that accounting standard to go forward, but
the idea that the Senate might vote by 51 to 49 to pick one
accounting standard over another is just ludicrous on its face.
We do not want to set a precedent, in my view, of the Congress
of the United States deciding what accounting practices ought
to be. That is why we set up these boards to do the job.
The approach taken by having the Accounting Standards
Board, the SEC, and others look at these matters and get back
to us with their recommendations is the appropriate and proper
way to go. Despite the temptation of others to want to
legislate these matters explicitly on the floor, I remind my
colleagues who have done that in the past, we inevitably regret
doing it when we set precedents such as those and are only
duplicated by other ideas that temporarily may be very popular,
may be politically attractive, but may be terrible economics as
well.
I applaud the effort to approach the stock option issue in
the manner in which it has been addressed. I mentioned Senator
Enzi. I mentioned my colleague from Texas as well. He and I
worked many years on a lot of matters affecting the financial
services sector of our economy. He does not have that many days
left with us, and I am going to miss him. I told him that
privately, and I tell him publicly that he is a valued Member
of this institution. Whether we agree or disagree on matters he
always brings a great deal of thought to the debate. He has
been a fine member of the Banking Committee, and I have enjoyed
my service with him for many years. I do not want to be too
complimentary. I will reserve any final glowing accolades for
when we have completed the process. We have a conference to go
through yet.
Again, my compliments to Senator Sarbanes.
What we are doing is important. This is extremely important
legislation. I said earlier it may be more important what
message it is we are sending; that we are not sitting in the
bleachers, we are not just standing by as these events unfold.
All Members of this Chamber can take great pride that the
Senate of the United States has responded with a responsible
bill we think is going to make a difference. I yield the floor.
Mr. Sarbanes. What is the time situation?
The Presiding Officer. The Senator from Maryland controls
almost 14 minutes, and the Senator from Texas controls just
under 12 minutes.
Mr. Sarbanes. I yield 4 minutes to the Senator from
Missouri.
The Presiding Officer. The Senator from Missouri is
recognized for 4 minutes.
Mrs. Carnahan. Mr. President, my amendment requires that
when corporate insiders, such as CEOs, trade the stock of the
companies they manage, they must take reasonable steps to
disclose those transactions to their shareholders. Current law
requires that insiders file disclosure forms with the
Securities and Exchange Commission. However, almost all of
these forms are filed on paper and average investors have no
practical way of seeing these disclosures. My amendment
requires that these disclosure forms be filed electronically
and that the SEC make these disclosures available to the public
over the Internet.
This amendment also requires that corporations disclose
insider transactions on their own Web sites. Investors have a
right to know if corporate officers are dumping their stock.
However, it is meaningless to require these disclosures if
investors have no practical way of ever seeing these
disclosures. Without this amendment, the disclosure forms
simply sit in a file cabinet at the SEC in Washington. My
amendment ensures that investors have access to this important
information.
In the 3 years leading up to its bankruptcy, as Enron's top
officers touted the company's stock, they sold more than $1.1
billion worth of their own holdings. Ken Lay alone sold more
than $100 million worth of Enron stock while telling others to
buy it. Enron's vice president of human resources, Cindy Olsen,
was asked by employees if they should invest 100 percent of
their retirement funds in Enron. She replied: ``Absolutely.''
But within 3 months she personally unloaded $1 million worth of
Enron stock. Had Enron employees only known, they might have
been skeptical about this advice.
Investors are entitled to know how executives are acting
with their own shares of their company's stock, and my
amendment will ensure they will.
I yield my remaining time back to the Senator from
Maryland.
The Presiding Officer. Who yields time?
Mr. Gramm. Mr. President, I yield 8 minutes to Senator
Enzi, and might I say on my time, not his 8 minutes, that I
want to thank Senator Enzi for his contribution to this bill,
for his work from beginning to end. He has been a major
contributor to the bill. He has proven that knowledge sometimes
is a nice thing to have.
Our standard in Washington for objectivity is that you came
in off the turnip truck and you know absolutely nothing and
therefore you are objective, but I would say that Senator Enzi
proves that it is nice every once in awhile to have somebody
who knows what he is talking about. I think in many ways, large
and small, the good things in this bill he has had a very
positive impact on and the bad things in the bill he could not
do anything about anyway--that was a joke, I would say to the
Senator from Maryland.
In any case, I do want to congratulate Senator Enzi for all
the contributions he has made.
The Presiding Officer. The Senator from Wyoming is
recognized for 8 minutes.
Mr. Enzi. I thank the Senator from Texas for his gracious
comments.
It has been mentioned several times today that there is
nervousness in the stock market. There has been since we
started debating this issue. I am very convinced that some of
that is because people may read some of the amendments that
have been suggested and recognize the legislative principle
that, if it is worth reacting to, it is worth overreacting to.
That ought to be enough to scare anybody.
We have had extensive debate. In fact, one reporter I
talked to asked me if we were going to pass the McCain bill.
The reporter talked about the accounting reform, and I had to
say, no, that is the Sarbanes bill we have been working on. It
is not stock options, in spite of the threat we had the other
day.
We usually do bills the way we have done this one--with a
lot of cooperative talk. We then make arrangements to develop
the best possible outcome. The accounting reform bill before us
is designed in such a way that we set up processes that people
with accountability and responsibility and knowledge have to
oversee. This bill does not tell them exactly how to do the
details of accounting. It gives a fair process for accountants
to be able to do the details of accounting.
In past years, we have decided we knew more than the people
who had the expertise in the area of accounting and we have
given them direction on how to do it. We almost made that
mistake again. For instance, the McCain amendment was very
simplistic. In one paragraph it told people how to do
accounting that may actually take about 500 pages to explain.
It would have caused the most massive restatements in the
history of the United States, and restatements right now make
everybody nervous. People ought to realize that some
restatements are caused by changes in rules, not by people
doing things wrong. So investors should always review
restatements and determine the actual cause. I certainly hope
it is never Congress, but I suspect it very well could be.
Another proposal that was going to be put before us was one
telling FASB, this Financial Accounting Standards Board,
exactly what they were supposed to examine next and what they
were supposed to resolve in the next year. I have to say, FASB
is working on some important things because they have been
examining what Congress has been debating and they know in
greater detail than we do what caused the massive restatements.
I have to say, I do not believe it was stock options. It was
likely a number of other things that need to be investigated.
This Financial Accounting Standards Board is diligently
looking at these issues. They are looking at some high-profile
rules in the areas of accounting for intangibles and accounting
for special purpose entities. We have talked a lot about
special purpose entities, and our hearings showed that they may
have been a cause for the Enron collapse. Also, they are
looking at accounting for guarantees and examining a final rule
on liabilities and equity. They are also studying whether to
create a rule on revenue recognition.
Those five things probably put one to sleep, but they are
important to have resolved to make sure we do not have problems
with companies in the future. We have to be careful now and in
the days to follow that we ensure we use all of FASB's
expertise, knowledge, and staff to resolve high publicity
problems of accounting.
In this bill, we have made the Financial Accounting
Standards Board more independent. We have provided them with
independent funding so they no longer must beg for donations
and perhaps encounter a conflict of interest. Through this
process, we should not insert ourselves and say we are going to
tell them exactly what is important.
I would like to thank Senator Sarbanes and Senator Gramm
for the extraordinary work they have put into the process. Last
week was an extremely difficult week. I thank them for the
careful work and review they have done on every single one of
the amendments that has been submitted, and the process they
established to make sure this bill would not get out of hand,
that it would not be an overreaction, and that when we finish
it tonight and we can reassure America it is still okay to
invest in the stock market.
We are fortunate on the Banking Committee to have these two
people I consider to be the finest public servants in Congress.
They have worked long and hard to assure that the product that
came out was bipartisan and reflected the views of as many
Members as possible. I also thank the members of the staff who
worked diligently on the bill.
From my own staff, Katherine McGuire, Kristi Sansonetti,
and Michael Thompson. From Senator Gramm's staff, Wayne
Abernathy, Linda Lord, Stacie Thomas, and Michele Jackson. And
from Chairman Sarbanes' staff, Steve Harris, Steve Kroll, Dean
Shahinian, Marty Gruenberg, and Lindsey Graham and Vince
Meehan. All of these staffers have spent many late nights and
weekends working to build this legislation.
This legislation is badly needed. The markets have been in
a steady decline for several months now. While I do not believe
it is Washington's job to step in every time the market is in a
decline, I do believe that when markets move as a reaction to
illegal or unethical acts, then we have obviously not made
penalties severe enough to dissuade this type of behavior.
Congress had to act in this climate.
However, I would also like to comment on a few things
happening outside of the real debate--namely the attacks on SEC
Chairman Harvey Pitt. I have to say that Chairman Pitt and I
may not always agree, but I believe the recent attacks on him
to be unwarranted. Mr. Pitt has come under fire for having
represented some of the accounting firms who have been
criticized in recent restatements. I believe Chairman Pitt's
work in the private sector is a great asset to investors. We
need individuals who are willing to work in government who know
and understand the industries they regulate. I do not want
lifelong government bureaucrats monitoring these companies.
These restatements did not all of a sudden appear when
Chairman Pitt was confirmed. In most cases, they begun during
the late 1990s when companies became intent on not seeing the
Internet bubble burst. I have to ask what was going on at the
SEC while these companies were filling all of these false
financial statements? What I imagine happened was that the
companies, who are very familiar with who is at the Commission
and where the resources are being devoted, thought they could
take advantage of the situation because no one was paying
attention.
Look at what has happened since Chairman Pitt has taken
office. He has opened a record number of investigations of
restatements filed by public companies. He has taken steps to
break the relationship between research analysts and investment
bankers. He has supported legislation that will increase
penalties on corporate executives engaged in fraudulent
behavior. And, he has indicated his support of this
legislation, which by the way, I anticipate to be supported by
the majority of the Senate later today.
The numbers are clear. In Chairman Levitt's last year as
Chairman, 503 total enforcement actions were filed. Already
this year, Chairman Pitt has filed 415. Officer and Director
Bars for 2000 were 38--this year so far 71. Subpoenaed
enforcement proceedings in 2000 were 9--this year 18. The
numbers go on and on. My point is that Chairman Pitt seems to
be left cleaning up the mess his predecessor left in corporate
America.
I offer my support for these actions taken by Chairman
Pitt. Instead of attacking him, I am more concerned about what
was happening at the SEC that bred this climate where
executives felt compelled to engage in this unethical behavior.
Why weren't some of these actions taken three or four years
ago? Did the SEC Chairman not see the potential conflicts that
could arise out of research analysts getting compensation based
on investment banking business?
Therefore, I would say that I commend Chairman Pitt for the
work he is doing. From what I understand, the actions he is
taking at the SEC have struck fear throughout the corporate
community that they had better get their act together.
This legislation before us now will also go far in
restoring faith in the markets. It will provide assurances to
investors that we will not sit by and watch executives shatter
the retirement dreams of workers while leaving themselves with
millions of dollars. It will show the American people that we
will work to make financial statements transparent and accurate
to make sure they know as much about the company's financial
state as possible.
The legislation builds an accounting oversight board to
oversee the accountants who prepare financial statements of
public companies. This board will have broad authority to
enforce and discipline rules by which accountants must live.
The board will have full access to accounting firms' records
and policies to require uniformity throughout the industry when
it comes to ethics and independence. Accountants must know that
someone is watching over them to require that their work is in
the best interest of investors. This legislation will also
provide for the SEC to have the resources they need to enforce
the law.
However, I also do not want this legislation to provide a
payday for the trial lawyers. The competitiveness of the
accounting industry is at stake and we can ill afford to lose
another firm solely because we didn't offer proper protections
in this legislation. I am in no way indicating that accounting
firms should have new, special protections. The only thing I am
asking is that accounting firms aren't exposed to more
liability after this bill is enacted than they were before.
I am not sure some Members truly understand the situation
facing accounting firms. We are down to the final four firms.
These are the only firms that have the expertise and resources
to audit companies such as Microsoft, Coca Cola, and the
thousands of other large companies. If we subject them to the
will of the trial bar, it will only be a matter of time before
we lose the rest of the firms one by one.
I know that, given what has happened recently with the
restatements, it is easy to be critical of accountants and easy
to legislate them. I agree we do need legislation, but what
also needs to be understood is that overlegislating could be
drastic to the economy. In the long run, if we overlegislate,
it could be detrimental for the future of capital formation in
this country.
Once again, I thank the Chairman for all of the work he and
his staff have done with this legislation. I think it is a good
bill, and I do intend to support it. I also think it will
continue to improve through the Conference process and when all
is said and done, investors will respond positively to passage
of this legislation.
I wish to speak about the Financial Accounting Standards
Boards, known as FASB, which has been referenced many times
throughout the course of discussion on the underlying
accounting bill, the Public Company Accounting Reform and
Investor Protection Act of 2002.
Some of the pending amendments have referenced FASB and
directed or mandated it to change how companies must expense
stock options or to perform a study on how to expense stock
options. In addition, the McCain amendment sets the accounting
standard for expensing stock options, without allowing FASB to
set rules on this form of expensing. The Levin amendment
mandates FASB conduct a one-year study on expensing stock
options, and then adopt a rule based on a narrow set of
external parameters. The Levin amendment implicates a desire to
have such expensing done.
In order to understand some of the problems with these
types of amendments, it is important to understand exactly what
FASB does. Since 1973, FASB has been the designated
organization in the private sector for establishing standard of
financial accounting and reporting. In short, those standards
govern the preparation of all financial reports.
The mission of FASB is ``to establish and improve standards
of financial accounting and reporting for the guidance and
education of the public, including issuers, auditors and users
of financial information.''
To accomplish this mission, FASB acts to improve the
usefulness of financial reporting; keep standards current to
reflect changes in the methods of doing business and the
economic environment; consider any significant areas of
deficiency in financial reporting; promote the international
convergence of accounting standards together with improving the
quality of financial reporting; and improve the common
understanding of the nature and purposes of information
contained in financial reports.
FASB follows certain precepts in its activities. One is to
be objective in its decision making. Another is to carefully
weigh the views of its constituents in developing concepts and
standards. But its ultimate determination must be the Board's,
based on research, public input and careful deliberation. It
also aspires to promulgate standards only when the expected
benefits exceed the perceived costs.
Overall, FASB was created to serve as an independent agency
with an independent agenda. However, FASB is currently funded
by companies and accounting firms. The long standing concern
was that FASB did not act wholly independently, and succumbed
to industry pressures in order to get the funding it needed to
operate. Back in 1993 and 1994, when expensing of stock options
was an issue, some critics say FASB succumbed to pressure by
industry and Congress when it created a dual method of either
expensing stock options at the time of grant, or placing the
information in a footnote as a form of public disclosure of
possible stock dilution.
The underlying accounting reform bill fixes this perceived
problem of independence and autonomy by providing FASB with
funding from both issuers and the accounting firms. Because of
this change, FASB will be completely independent from the very
companies it will set standards for in the future. This is a
good start.
It is also important to understand that, historically, FASB
has never been directed by Congress through legislation to
adopt one particular standard for accounting, including expense
accounting. It has also never been directed by Congress to
perform a study. FASB's role is not to perform studies for
Congress and they should not be bogged down performing them for
political purposes.
Following that precedent, the Senate Banking Committee made
certain nothing in the bill directs FASB to take any particular
action. In other words, there is no Federal mandate to FASB,
nor should there be, if it is to remain an independent
authority. In addition, why should Congress, a body without
expertise in accounting standards for publically traded
companies, set these standards?
I, and many other members, as well as Federal Reserve
Chairman, Alan Greenspan, believe that Congress has no business
setting accounting standards. Instead, the Securities and
Exchange Commission and FASB are the entities with the
expertise needed to make these types of determinations.
Ordinarily, FASB establishes plans with milestones it works
towards. Congress should not dictate what plans and milestones
it should work towards or address. FASB also never sets
artificial deadlines on when to reach a conclusion. As an
independent agency, it carefully and deliberately makes its
determinations and sets rules, without adhering to outside
pressures or timetables. Just as Congress should not set
accounting standards for FASB to follow, it also should not set
artificial deadlines for FASB to adhere to either.
Nevertheless, some members have filed amendments asking
FASB to not only take a specific action, but instructing it as
to a specific timetable. One amendment actually sets an
accounting standard, thereby instructing FASB to immediately
change expensing standards. Another mandates FASB complete an
expensing study within a year. These amendment set unrealistic
timetables and mandates.
It is important to remember that FASB already has its hands
full with important projects to help improve financial
standards and reporting. It is currently working towards
promulgating high profile rules in the areas of accounting for
intangibles; accounting for special purpose entities;
accounting for guarantees; and a final rule on liabilities and
equity. FASB has also added to its agenda a project to research
and create a rule on revenue recognition.
Let us not forget that the improper use of special purpose
entities played a role in the downfall of Enron. Stock options
had nothing to do with Enron's bankruptcy.
The projects FASB is concentrating on are important
projects which will help clarify financial statements for
investors. FASB itself needs to cue up and prioritize its
projects based on what is more important to financial
accounting and reporting. Congress should not dictate what
those priorities should be or the timetable it must adhere to.
If some of the amendments we are looking at are accepted,
Congress will establish a bad precedent of setting up a
timetable and prioritizing projects for FASB. Congress will be
putting stock option expensing--an accounting standard which
did not cause the collapse of Enron or the demise of other big
companies--at the front of the cue.
And another question we need to ask ourselves is whether
FASB has the manpower to perform the mandates and timetables
Congress would be providing through the McCain and Levin
amendments. Already, FASB is shifting its personnel to
different projects to try to timely promulgate needed rules.
While the underlying accounting bill will help these staffing
problems by providing independent funding, in the short term,
FASB cannot possibly perform the mandates of some of the
amendments within the time frames given.
I hope I have given members some solid reasoning on why
Congress should not begin setting accounting standards. Should
we really be doing something we do not fully understand? There
are already agencies to perform this type of rulemaking, and
they are the SEC and FASB. They are fully aware of the debate
surrounding stock options. We don't need to mandate FASB to
make a new rule. I am certain if FASB deems it appropriate, it
will be looking at this issue in the future.
The Presiding Officer. Who yields time?
Mr. Sarbanes. Mr. President, I yield 4 minutes to the
junior Senator from North Dakota.
Mr. Dorgan. Mr. President, in the final moments, I hope
again to persuade my colleagues to accept by unanimous consent
my amendment dealing with corporate bankruptcy. Let me again
say what this amendment is.
It says that during the 12 months preceding a bankruptcy,
CEOs who have received stock options, bonuses and other
performance-based payments shall not be able to keep that kind
of compensation. If they ride a company down to bankruptcy,
they know the inside details of that company and got incentive-
based compensation, including stock options, they ought not
ride off in the sunset with a pocketful of gold while the
employees and investors lose everything they have. That is not
the right thing. A bankruptcy disgorgement proposal ought to be
part of this bill. Everyone in this Chamber knows it should be
part of this bill. Former SEC Chairman Breeden, a Republican,
says it ought to be in this bill. I quoted other CEOs who say
it should. Pass this bill without it and this bill is
incomplete.
My colleague said he thought maybe the market, which has
been so volatile recently, has been frightened by amendments
that have been considered by Congress. I don't think so. I
think the market has been volatile, up and down like a yo-yo,
because we have story after story on the news in this country
about financial crooks. These are crooks who have cooked the
books of their corporations, cheated investors, pulled the rug
out from under their employees, and ruined some good companies.
They did it in broad daylight, under the nose of their
accounting firms and law firms.
It seems to me those CEOs who made millions, in some cases
over $100 million prior to bankruptcy, ought to give that money
back. That money ought to go to help those who lost their life
savings and those who lost their jobs.
We have in this bill a provision that says if there is a
restatement of earnings, you have to give back some of these
incentive-based compensation packages. However, the bill is
silent on the issue of bankruptcy. What about top executives
who ride their company right into the ground and run off with
$50 million in their pockets and leave everyone else flat on
their back? How about asking those executives to disgorge
themselves of their ill-gotten gains? How about telling them in
this legislation that they must give that money back? That is
what my amendment would do.
I want to talk about the SEC, but I don't have time at the
moment. I will save that for another day.
This process has been a travesty of the Senate, in my
judgment, having someone as a gatekeeper and preventing us from
bringing up germane amendments. It does not make sense. That is
not the way the Senate is supposed to work.
I ask unanimous consent to lay aside the Edwards and
Carnahan amendments so I may offer amendment 4214 on bankruptcy
disgorgement.
Mr. Gramm. I object.
The Presiding Officer. The Senator from North Dakota.
Mr. Dorgan. How much time remains?
The Presiding Officer. Forty seconds.
Mr. Dorgan. Mr. President, this is, of course, the last
chapter on amendments, and a pretty sad book. I know people
will go up to the gallery--and I understand someone is at a
press conference from the other side--claiming credit for this
bill. I want to know who wants to run up to the press
conference and claim credit for preventing an amendment that
says you must disgorge ill-gotten gains, incentive-based
compensation, if you ran a company into bankruptcy. I want
somebody to go to the press gallery and take credit for
blocking that kind of legislation. Tomorrow I want to read
about it. Who takes credit? Someone ought to take credit for
blocking an amendment that ought to be passed in the Senate by
a 100 to zero vote.
The Presiding Officer. Who yields time?
Mr. Gramm. Mr. President, I will not get into a debate with
the Senator. There is nothing ill-gotten in this amendment.
This amendment does not belong in this bill.
We have a provision in this bill. If you violate the law,
then you have to give back what you have earned from the
company in terms of any kind of incentive in bonus.
But to say that people who work for a company that goes
bankrupt has to give back compensation is to guarantee that a
company that is in trouble would never get anybody to go to
work for them. They would never have an opportunity to be
saved. That amendment does not belong in this bill. It makes no
sense in the logic.
Mr. Dorgan. Will the Senator yield?
Mr. Gramm. I will not yield.
If you did something wrong, making you give back what you
earned belongs in this bill. And it is in this bill. Not only
belongs, it is here.
But to simply say because somebody worked for a company
that goes broke, that they have to give back compensation, that
sounds great in the environment we are in, but, look, I have a
company, we are in deep trouble, and we try to go out and hire
a top-notch person to come in and save us, and we pay him a
compensation to try to do it. To say we will take it back if he
fails, as if that is an ill-gotten gain, I am sorry, I don't
think that is good economic policy. I don't think it is smart.
It has nothing to do with the provisions of this bill.
Mr. Dorgan. Mr. President, perhaps the Senator from Texas
would like a explanation.
Mr. Sarbanes. I yield 1 minute.
Mr. Dorgan. I deeply appreciate the Senator from Maryland
yielding.
What the Senator from Texas misses is we are talking about
incentive-based compensation. Should someone who gets
incentives for running the corporation into bankruptcy be able
to keep that? I don't think so for somebody that gets a big
bonus while he runs the company into bankruptcy, or for someone
that gets big stock options while she runs the company into
bankruptcy.
The Senator tried to win a debate we were not having. He
says we will take compensation away from someone who is engaged
in working for a corporation that went into bankruptcy. No,
this is about incentive-based compensation and profits. It is
not about taking away their salary. It is about saying if you
are paid on an incentive basis and you are running that
corporation into bankruptcy, you ought not to be getting the
bonus. If you did, you ought to give it back. You ought not get
stock options; if you did, you ought to give it back.
This is simply about something my friend has missed. It is
about incentive-compensation and the fact that you ought not
walk out of a corporation you ran into bankruptcy with a
pocketful of gold while you left the employees and the
investors flat on their back. This is not an amendment that is
hard to understand.
I regret very much it has been blocked. I regret especially
we were not allowed to vote on this amendment. That is the
travesty, in my judgment.
Mr. Gramm. Mr. President, I think you could debate whether
the amendment is understood or not. I think I understand it
perfectly. In fact, there are people in this country who are
turnaround specialists, who are hired to try to save companies.
If somebody did something wrong, if they violated the law, then
make them give back compensation. You put them to death, if you
want to put them to death. But to simply say, if you hire
somebody with an incentive package to save the company, and the
company goes broke, that you are going to take it back, that is
up to the bankruptcy court to decide.
So this ill-gotten gain business is good rhetoric, but it
has absolutely nothing to do with this amendment. I reserve the
remainder of my time.
The Presiding Officer. Who yields time? Just 29 seconds
remain to the Senator from Texas, and 5\1/2\ minutes remain to
the Senator from Maryland.
Mr. Sarbanes. Mr. President, what is the time situation?
The Presiding Officer. The Senator from Maryland has 5
minutes remaining, the Senator from Texas has 30 seconds.
Mr. Gramm. Mr. President, the Senator from Maryland should
have the right to end the debate.
I think we have two bills: One in the Senate, one in the
House. We can come up with a better bill than either. I think
America will survive under either bill. Given the environment
we are in, that represents some achievement, and I am proud of
it.
I think we will come out of conference with a better bill
than the House bill and a better bill than the Senate bill. I
think people will be proud of what we did.
If I were an investor today, and I had a lot of money, I
would invest in the stock market today.
The Presiding Officer. The time of the Senator has expired.
The Senator from Maryland has 4 minutes 45 seconds remaining.
Mr. Sarbanes. Mr. President, we have been trying to clear
amendments. We have yesterday--not yesterday, but on Friday we
adopted three amendments on the basis of a unanimous consent
request. We have worked through two additional amendments. I am
going to offer them now.
One is an amendment by Senator Shelby for a study with
respect to aider and abettor violations of the Federal
securities law. I ask unanimous consent that the pending
amendment be set aside; that the Shelby amendment, No. 4261, be
called up and modified with a modification that I send to the
desk; that the amendment as modified be agreed to; and then we
then return to the regular order which, as I understand it,
would be the Edwards as modified by the Carnahan amendment.
The Presiding Officer. Is there objection? Without
objection, it is so ordered.
AMENDMENT NO. 4261, AS MODIFIED
Mr. Sarbanes. I send the amendment to the desk.
The Presiding Officer. The clerk will report.
The bill clerk read as follows:
The Senator from Maryland (Mr. Sarbanes) for Mr. Shelby,
proposes an amendment numbered 4261, as modified.
The amendment is as follow:
(Purpose: To require the SEC to conduct a study and submit a report to
the Congress on aider and abettor violations of the Federal
securities laws)
On page 108 after line 15, insert the following:
``(c)(1) The Commission shall conduct a study to determine based
upon information for the period from January 1, 1998 to December 31,
2001--
``(A) the number of ``securities professionals,'' which term shall
mean public accountants, public accounting firms, investment bankers,
investment advisers, brokers, dealers, attorneys, and other securities
professionals practicing before the Commission--
``(i) who have been found to have aided and abetted a violation of
the Federal securities laws, including rules or regulations promulgated
thereunder (hereinafter collectively referred to as ``Federal
securities laws''), but who have not been sanctioned, disciplined, or
otherwise penalized as a primary violator in any administrative action
or civil proceeding, including in any settlement of such actions or
proceedings (referred to hereinafter as ``aiders and abettors'') and
``(ii) who have been found to have been primary violators of the
Federal securities laws;
``(B) a description of the Federal securities laws violations
committed by aiders and abettors and by primary violators, including--
``(i) the specific provisions of the Federal securities laws
violated;
``(ii) the specific sanctions and penalties imposed upon, such
aiders and abetters and primary violators, including the amount of any
monetary penalties assessed upon and collected from such persons;
``(iii) the occurrence of multiple violations by the same person or
persons either as an aider or abetter or as a primary violator; and
``(iv) whether as to each such violator disciplinary sanctions have
been imposed, including any censure, suspension, temporary bar, or
permanent bar to practice before the Commission; and
``(C) the amount of disgorgement, restitution or any other fines or
payments the Commission has (i) assessed upon and (ii) collected from
aiders and abetters and from primary violators.
``(2) A report based upon the study conducted pursuant to
subsection (c)(1) shall be submitted to the Senate Committee on
Banking, Housing, and Urban Affairs no later than six months after the
date of enactment of the ``Public Company Accounting Reform and
Investor Protection Act of 2002.''.
Page 78 strike lines 15-24 and insert the following:
In supervising non-registered public accounting firms and their
associated persons, appropriate State regulatory authorities should
make an independent determination of the proper standards applicable,
particularly taking into consideration the size and nature of the
business of the accounting firms they supervise and the size and nature
of the business of the clients of those firms. The standards applied by
the Board under this Act should not be presumed to be applicable for
purposes of this section for small and medium sized nonregistered
public accounting firms.
The Presiding Officer. Without objection, the amendment as
modified is agreed to.
The amendment (No. 4261), as modified, was agreed to.
Mr. Sarbanes. Was the Ensign amendment also on that
amendment?
I urge the adoption of the amendments.
The Presiding Officer. The amendments have been agreed to.
Mr. Sarbanes. Mr. President, I move to reconsider the vote.
Mr. Gramm. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. Sarbanes. Mr. President, in the regular order we are
back with the Edwards and Carnahan amendments pending?
The Presiding Officer. That is correct.
Mr. Sarbanes. I have a couple of minutes?
The Presiding Officer. There remains 1 minute.
Mr. Sarbanes. Mr. President, I think the Senate is about to
take a major step to contributing to the restoration of
investor confidence.
This legislation establishes a strong independent board to
oversee auditors of the public companies. The board can set
standards, investigate, and discipline accountants. It will be
overseen by the SEC, but it will have independent funding and
membership. I think this marks the end of weak self-regulation
with respect to public company auditors.
It addresses pervasive conflicts of interest by ensuring
auditor independence by restricting them from providing a
defined list of consulting services. Other consulting services
on the part of the auditor can be permitted if preapproved by
the company's audit company.
This legislation strengthens corporate responsibility. It
establishes safeguards to protect investment /analyst
conflicts, and it gives the SEC expanded staff resources so it
has the resources to carry out its mandate of protecting
investors in this critical time.
It is no exaggeration to say the crisis in our markets has
put the plans and hopes and dreams of millions of Americans at
risk. To restore market integrity on which investor confidence
depends, we should move expeditiously to move this legislation
into law.
I want to express my deep appreciation to my colleagues
with whom we have worked for many weeks: To Senator Gramm, the
ranking member of the committee with whom we interact in an
interesting and, on occasions, exciting fashion; to Senator
Enzi, who made a major contribution; to Senators Dodd and
Corzine on our side of the aisle who played an essential role
and introduced vital legislation on this issue very early on;
to Senator Durbin who also introduced significant legislation
on this subject, and to many other colleagues; and to Senator
Reid, who has been extraordinarily helpful here on the floor of
the U.S. Senate.
Mr. Reid. Mr. President, I ask unanimous consent the 1
minute Senator Carnahan has--she is not going to be using it--
that it be given to the Senator from Maryland.
The Presiding Officer. The Senator from Maryland has an
additional minute.
Mr. Sarbanes. Mr. President, we don't do this work by
ourselves. We all know that very well. We rely very heavily on
dedicated, absolutely dedicated staff members. I am going to
take the closing time I have to simply read their names into
the Record: Dean Shahinian, Steve Kroll, Lynsey Graham, Vincent
Meehan, Sarah Kline, Judy Keenan, Jesse Jacobs, Aaron Klein,
Marty Gruenberg and Steve Harris of the Banking Committee
staff; Wayne Abernathy and Linda Lord of Senator Gramm's staff
on the committee. There has also been the staff of the
individual Members.
I particularly want to acknowledge Mike Thompson and
Katherine McGuire of Senator Enzi's staff, and Alex Sternhell
and Naomi Camper, Jon Berger, Jimmy Williams, Catherine Cruz
Wojtasik, Leslie Wooley, Margaret Simmons, Matt Young, Roger
Hollingsworth and Matt Pippin.
I express my very deep appreciation. The dedication these
staff members demonstrated over the last few months was just
extraordinary: Long nights, weekends, day in and day out. I
hope very much they will take a measure of satisfaction in the
sense that they have made a very important and significant
contribution to better public policy in this country.
I yield the floor.
VOTE ON AMENDMENT NO. 4286
The Presiding Officer. All time has expired. The question
is on agreeing to amendment No. 4286. The yeas and nays have
been ordered. The clerk will call the roll.
Mr. Nickles. I announce that the Senator from Idaho (Mr.
Craig), the Senator from Idaho (Mr. Crapo), and the Senator
from North Carolina (Mr. Helms) are necessarily absent.
The result was announced--yeas 97, nays 0, as follows:
[Rollcall Vote No. 174 Leg.]
Yeas--97: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Daschle, Dayton, DeWine, Dodd,
Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold, Feinstein,
Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel, Harkin,
Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye, Jeffords,
Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin, Lieberman,
Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller, Murkowski,
Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid, Roberts,
Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby, Smith (NH),
Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas, Thompson,
Thurmond, Torricelli, Voinovich, Warner, Wellstone, Wyden
Not Voting--3: Craig, Crapo, Helms
The amendment (No. 4286) was agreed to.
Mr. Daschle. I move to reconsider the vote.
Mr. Gramm. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The Presiding Officer (Mrs. Lincoln). The majority leader.
Mr. Daschle. Madam President, under an earlier agreement,
the next four votes will all be 10-minute votes. I urge
Senators to stay in the well. We are going to cut it off at 10
minutes. If you are not here in 10 minutes, you have lost the
opportunity to vote. I urge Members to move forward, and we
will take on the next vote.
VOTE ON AMENDMENT NO. 4187, AS MODIFIED, AS AMENDED
The Presiding Officer. The question is on agreeing to
amendment No. 4187, as modified, as amended.
The yeas and nays have been ordered. The clerk will call
the roll.
The assistant legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from Idaho (Mr.
Crapo), the Senator from Idaho (Mr. Craig), and the Senator
from North Carolina (Mr. Helms) are necessarily absent.
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The result was announced--yeas 97, nays 0, as follows:
[Rollcall Vote No. 175 Leg.]
Yeas--97: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Daschle, Dayton, DeWine, Dodd,
Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold, Feinstein,
Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel, Harkin,
Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye, Jeffords,
Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin, Lieberman,
Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller, Murkowski,
Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid, Roberts,
Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby, Smith (NH),
Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas, Thompson,
Thurmond, Torricelli, Voinovich, Warner, Wellstone, Wyden
Not Voting--3: Craig, Crapo, Helms
The amendment (No. 4187), as modified, as amended, was
agreed to.
Mr. Sarbanes. Madam President, I move to reconsider the
vote.
Mr. Daschle. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The Presiding Officer. The question is on engrossment and
third reading of the bill.
The bill was ordered to be engrossed for a third reading
and was read the third time.
The Presiding Officer. The Senator from Maryland is
recognized.
Mr. Sarbanes. Madam President, I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There is a sufficient second.
The bill having been read the third time, the question is,
Shall it pass?
The clerk will call the roll.
The legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from Idaho (Mr.
Crapo), the Senator from Idaho (Mr. Craig), and the Senator
from North Carolina (Mr. Helms) are necessarily absent.
I further announce that if present and voting the Senator
from North Carolina (Mr. Helms) would vote ``yea''.
The result was announced--yeas 97, nays 0, as follows:
[Rollcall Vote No. 176 Leg.]
Yeas--97: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Daschle, Dayton, DeWine, Dodd,
Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi, Feingold, Feinstein,
Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg, Hagel, Harkin,
Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye, Jeffords,
Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin, Lieberman,
Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller, Murkowski,
Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid, Roberts,
Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby, Smith (NH),
Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas, Thompson,
Thurmond, Torricelli, Voinovich, Warner, Wellstone, Wyden
Not Voting--3: Craig, Crapo, Helms
The bill (S. 2673), as amended, was passed.
Mr. Sarbanes. Madam President, I move to reconsider the
vote.
Mr. Gramm. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The Presiding Officer. Under the previous order, the
Banking Committee is discharged from further consideration of
H.R. 3763, which the clerk will report by title.
The legislative clerk read as follows:
A 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.
The Presiding Officer. Under the previous order, all after
the enacting clause will be stricken and the text of S. 2673,
as passed, is inserted in lieu thereof.
The question is on the engrossment of the amendment and
third reading of the bill.
The amendment was ordered to be engrossed and the bill to
be read a third time.
The bill was read the third time.
The Presiding Officer. The bill having been read the third
time, the question is, Shall the bill pass?
The bill (H.R. 3763), as amended, was passed, as follows:
Strike out all after the enacting clause and insert:
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Public
Company Accounting Reform and Investor Protection Act of
2002''.
(b) Table of Contents.--The table of contents for this Act
is as follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Commission rules and enforcement.
TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards
and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.
TITLE II--AUDITOR INDEPENDENCE
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Preapproval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public
accounting firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory
authorities.
TITLE III--CORPORATE RESPONSIBILITY
Sec. 301. Public company audit committees.
Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods
prohibited.
TITLE IV--ENHANCED FINANCIAL DISCLOSURES
Sec. 401. Disclosures in periodic reports.
Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and
principal stockholders.
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406. Code of ethics for senior financial officers.
Sec. 407. Disclosure of audit committee financial expert.
TITLE V--ANALYST CONFLICTS OF INTEREST
Sec. 501. Treatment of securities analysts by registered
securities associations.
TITLE VI--COMMISSION RESOURCES AND AUTHORITY
Sec. 601. Authorization of appropriations.
Sec. 602. Appearance and practice before the Commission.
Sec. 603. Federal court authority to impose penny stock bars.
Sec. 604. Qualifications of associated persons of brokers and
dealers.
TITLE VII--STUDIES AND REPORTS
Sec. 701. GAO study and report regarding consolidation of
public accounting firms.
Sec. 702. Commission study and report regarding credit rating
agencies.
TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
Sec. 801. Short title.
Sec. 802. Criminal penalties for altering documents.
Sec. 803. Debts nondischargeable if incurred in violation of
securities fraud laws.
Sec. 804. Statute of limitations for securities fraud.
Sec. 805. Review of Federal sentencing guidelines for
obstruction of justice and extensive criminal fraud.
Sec. 806. Protection for employees of publicly traded companies
who provide evidence of fraud.
Sec. 807. Criminal penalties for defrauding shareholders of
publicly traded companies.
TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
Sec. 901. Short title.
Sec. 902. Criminal penalties for conspiracy to commit offense
or to defraud the United States.
Sec. 903. Criminal penalties for mail and wire fraud.
Sec. 904. Criminal penalties for violations of the Employee
Retirement Income Security Act of 1974.
Sec. 905. Amendment to sentencing guidelines relating to
certain white-collar offenses.
Sec. 906. Corporate responsibility for financial reports.
Sec. 907. Higher maximum penalties for mail and wire fraud.
Sec. 908. Tampering with a record or otherwise impeding an
official proceeding.
Sec. 909. Temporary freeze authority for the Securities and
Exchange Commission.
Sec. 910. Amendment to the Federal sentencing guidelines.
Sec. 911. Authority of the Commission to prohibit persons from
serving as officers or directors.
TITLE X--CORPORATE TAX RETURNS
Sec. 1001. Sense of the Senate regarding the signing of
corporate tax returns by chief executive officers.
SEC. 2. DEFINITIONS.
(a) In General.--In this Act, the following definitions
shall apply:
(1) Appropriate state regulatory authority.--The term
``appropriate State regulatory authority'' means the State
agency or other authority responsible for the licensure or
other regulation of the practice of accounting in the State or
States having jurisdiction over a registered public accounting
firm or associated person thereof, with respect to the matter
in question.
(2) Audit.--The term ``audit'' means an examination of the
financial statements of any issuer by an independent public
accounting firm in accordance with the rules of the Board or
the Commission (or, for the period preceding the adoption of
applicable rules of the Board under section 103, in accordance
with then-applicable generally accepted auditing and related
standards for such purposes), for the purpose of expressing an
opinion on such statements.
(3) Audit committee.--The term ``audit committee'' means--
(A) a committee (or equivalent body) established by and
amongst the board of directors of an issuer for the purpose of
overseeing the accounting and financial reporting processes of
the issuer and audits of the financial statements of the
issuer; and
(B) if no such committee exists with respect to an issuer,
the entire board of directors of the issuer.
(4) Audit report.--The term ``audit report'' means a
document or other record--
(A) prepared following an audit performed for purposes of
compliance by an issuer with the requirements of the securities
laws; and
(B) in which a public accounting firm either--
(i) sets forth the opinion of that firm regarding a
financial statement, report, or other document; or
(ii) asserts that no such opinion can be expressed.
(5) Board.--The term ``Board'' means the Public Company
Accounting Oversight Board established under section 101.
(6) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(7) Issuer.--The term ``issuer'' means an issuer (as
defined in section 3 of the Securities Exchange Act of 1934 (15
U.S.C. 78c)), the securities of which are registered under
section 12 of that Act (15 U.S.C. 78l), or that is required to
file reports pursuant to section 15(d) of that Act (15 U.S.C.
78o(d)), or that will be required to file such reports at the
end of a fiscal year of the issuer in which a registration
statement filed by such issuer has become effective pursuant to
the Securities Act of 1933 (15 U.S.C. 77a et. seq.), unless its
securities are registered under section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78c) on or before the end of
such fiscal year.
(8) Non-audit services.--The term ``non-audit services''
means any professional services provided to an issuer by a
registered public accounting firm, other than those provided to
an issuer in connection with an audit or a review of the
financial statements of an issuer.
(9) Person associated with a public accounting firm.--
(A) In general.--The terms ``person associated with a
public accounting firm'' (or with a ``registered public
accounting firm'') and ``associated person of a public
accounting firm'' (or of a ``registered public accounting
firm'') mean any individual proprietor, partner, shareholder,
principal, accountant, or other professional employee of a
public accounting firm, or any other independent contractor or
entity that, in connection with the preparation or issuance of
any audit report--
(i) shares in the profits of, or receives compensation in
any other form from, that firm; or
(ii) participates as agent or otherwise on behalf of such
accounting firm in any activity of that firm.
(B) Exemption authority.--The Board may, by rule, exempt
persons engaged only in ministerial tasks from the definition
in subparagraph (A), to the extent that the Board determines
that any such exemption is consistent with the purposes of this
Act, the public interest, or the protection of investors.
(10) Professional standards.--The term ``professional
standards'' means--
(A) accounting principles that are--
(i) established by the standard setting body described in
section 19(b) of the Securities Act of 1933, as amended by this
Act, or prescribed by the Commission under section 19(a) of
that Act (15 U.S.C. 17a(s)) or section 13(b) of the Securities
Exchange Act of 1934 (15 U.S.C. 78a(m)); and
(ii) relevant to audit reports for particular issuers, or
dealt with in the quality control system of a particular
registered public accounting firm; and
(B) auditing standards, standards for attestation
engagements, quality control policies and procedures, ethical
and competency standards, and independence standards (including
rules implementing title II) that the Board or the Commission
determines--
(i) relate to the preparation or issuance of audit reports
for issuers; and
(ii) are established or adopted by the Board under section
103(a), or are promulgated as rules of the Commission.
(11) Public accounting firm.--The term ``public accounting
firm'' means--
(A) a proprietorship, partnership, incorporated
association, corporation, limited liability company, limited
liability partnership, or other legal entity that is engaged in
the practice of public accounting or preparing or issuing audit
reports; and
(B) to the extent so designated by the rules of the Board,
any associated person of any entity described in subparagraph
(A).
(12) Registered public accounting firm.--The term
``registered public accounting firm'' means a public accounting
firm registered with the Board in accordance with this Act.
(13) Rules of the board.--The term ``rules of the Board''
means the bylaws and rules of the Board (as submitted to, and
approved, modified, or amended by the Commission, in accordance
with section 107), and those stated policies, practices, and
interpretations of the Board that the Commission, by rule, may
deem to be rules of the Board, as necessary or appropriate in
the public interest or for the protection of investors.
(14) Security.--The term ``security'' has the same meaning
as in section 3(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)).
(15) Securities laws.--The term ``securities laws'' means
the provisions of law referred to in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), as
amended by this Act, and includes the rules, regulations, and
orders issued by the Commission thereunder.
(16) State.--The term ``State'' means any State of the
United States, the District of Columbia, Puerto Rico, the
Virgin Islands, or any other territory or possession of the
United States.
(b) Conforming Amendment.--Section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) is
amended by inserting ``the Public Company Accounting Reform and
Investor Protection Act of 2002,'' before ``the Public''.
SEC. 3. COMMISSION RULES AND ENFORCEMENT.
(a) Regulatory Action.--The Commission shall promulgate
such rules and regulations, as may be necessary or appropriate
in the public interest or for the protection of investors, and
in furtherance of this Act.
(b) Enforcement.--
(1) In general.--A violation by any person of this Act, any
rule or regulation of the Commission issued under this Act, or
any rule of the Board shall be treated for all purposes in the
same manner as a violation of the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.) or the rules and regulations
issued thereunder, consistent with the provisions of this Act,
and any such person shall be subject to the same penalties, and
to the same extent, as for a violation of that Act or such
rules or regulations.
(2) Investigations, injunctions, and prosecution of
offenses.--Section 21 of the Securities Exchange Act of 1934
(15 U.S.C. 78u) is amended
(A) in subsection (a)(1), by inserting ``the rules of the
Public Company Accounting Oversight Board, of which such person
is a registered public accounting firm or a person associated
with such a firm,'' after ``is a participant,'';
(B) in subsection (d)(1), by inserting ``the rules of the
Public Company Accounting Oversight Board, of which such person
is a registered public accounting firm or a person associated
with such a firm,'' after ``is a participant,'';
(C) in subsection (e), by inserting ``the rules of the
Public Company Accounting Oversight Board, of which such person
is a registered public accounting firm or a person associated
with such a firm,'' after ``is a participant,''; and
(D) in subsection (f ), by inserting ``or the Public
Company Accounting Oversight Board'' after ``self-regulatory
organization'' each place that term appears.
(3) Cease-and-desist proceedings.--Section 21C(c)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2)) is
amended by inserting ``registered public accounting firm (as
defined in section 2 of the Public Company Accounting Reform
and Investor Protection Act of 2002),'' after ``government
securities dealer,''.
(c) Effect on Commission Authority.--Nothing in this Act or
the rules of the Board shall be construed to impair or limit--
(1) the authority of the Commission to regulate the
accounting profession, accounting firms, or persons associated
with such firms for purposes of enforcement of the securities
laws;
(2) the authority of the Commission to set standards for
accounting or auditing practices or auditor independence,
derived from other provisions of the securities laws or the
rules or regulations thereunder, for purposes of the
preparation and issuance of any audit report, or otherwise
under applicable law; or
(3) the ability of the Commission to take, on the
initiative of the Commission, legal, administrative, or
disciplinary action against any registered public accounting
firm or any associated person thereof.
TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
SEC. 101. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.
(a) Establishment of Board.--There is established the
Public Company Accounting Oversight Board, to oversee the audit
of public companies that are subject to the securities laws,
and related matters, in order to protect the interests of
investors and further the public interest in the preparation of
informative, accurate, and independent audit reports for
companies the securities of which are sold to, and held by and
for, public investors. The Board shall be a body corporate,
operate as a nonprofit corporation, and have succession until
dissolved by an Act of Congress.
(b) Status.--The Board shall not be an agency or
establishment of the United States Government, and, except as
otherwise provided in this Act, shall be subject to, and have
all the powers conferred upon a nonprofit corporation by, the
District of Columbia Nonprofit Corporation Act. No member or
person employed by, or agent for, the Board shall be deemed to
be an officer or employee of or agent for the Federal
Government by reason of such service.
(c) Duties of the Board.--The Board shall, subject to
action by the Commission under section 107, and once a
determination is made by the Commission under subsection (d) of
this section--
(1) register public accounting firms that prepare audit
reports for issuers, in accordance with section 102;
(2) establish or adopt, or both, by rule, auditing, quality
control, ethics, independence, and other standards relating to
the preparation of audit reports for issuers, in accordance
with section 103;
(3) conduct inspections of registered public accounting
firms, in accordance with section 104 and the rules of the
Board;
(4) conduct investigations and disciplinary proceedings
concerning, and impose appropriate sanctions where justified
upon, registered public accounting firms and associated persons
of such firms, in accordance with section 105;
(5) perform such other duties or functions as the Board
determines are necessary or appropriate to promote high
professional standards among, and improve the quality of audit
services offered by, registered public accounting firms and
associated persons thereof, or otherwise to carry out this Act,
in order to protect investors, or to further the public
interest;
(6) enforce compliance with this Act, the rules of the
Board, professional standards, and the securities laws relating
to the preparation and issuance of audit reports and the
obligations and liabilities of accountants with respect
thereto, by registered public accounting firms and associated
persons thereof; and
(7) set the budget and manage the operations of the Board
and the staff of the Board.
(d) Commission Determination.--The members of the Board
shall take such action (including hiring of staff, proposal of
rules, and adoption of initial and transitional auditing and
other professional standards) as may be necessary or
appropriate to enable the Commission to determine, not later
than 270 days after the date of enactment of this Act, that the
Board is so organized and has the capacity to carry out the
requirements of this title, and to enforce compliance with this
title by registered public accounting firms and associated
persons thereof.
(e) Board Membership.--
(1) Composition.--The Board shall have 5 members, appointed
from among prominent individuals of integrity and reputation
who have a demonstrated commitment to the interests of
investors and the public, and an understanding of the
responsibilities for and nature of the financial disclosures
required of issuers under the securities laws and the
obligations of accountants with respect to the preparation and
issuance of audit reports with respect to such disclosures.
(2) Limitation.--Two members, and only 2 members, of the
Board shall be or have been certified public accountants
pursuant to the laws of 1 or more States, provided that, if 1
of those 2 members is the chairperson, he or she may not have
been a practicing certified public accountant for at least 5
years prior to his or her appointment to the Board.
(3) Full-time independent service.--Each member of the
Board shall serve on a full-time basis, and may not, concurrent
with service on the Board, be employed by any other person or
engage in any other professional or business activity. No
member of the Board may share in any of the profits of, or
receive payments from, a public accounting firm (or any other
person, as determined by rule of the Commission), other than
fixed continuing payments, subject to such conditions as the
Commission may impose, under standard arrangements for the
retirement of members of public accounting firms.
(4) Appointment of board members.--
(A) Initial board.--Not later than 90 days after the date
of enactment of this Act, the Commission, after consultation
with the Chairman of the Board of Governors of the Federal
Reserve System and the Secretary of the Treasury, shall appoint
the chairperson and other initial members of the Board, and
shall designate a term of service for each.
(B) Vacancies.--A vacancy on the Board shall not affect the
powers of the Board, but shall be filled in the same manner as
provided for appointments under this section.
(5) Term of service.--
(A) In general.--The term of service of each Board member
shall be 5 years, and until a successor is appointed, except
that--
(i) the terms of office of the initial Board members (other
than the chairperson) shall expire in annual increments, 1 on
each of the first 4 anniversaries of the initial date of
appointment; and
(ii) any Board member appointed to fill a vacancy occurring
before the expiration of the term for which the predecessor was
appointed shall be appointed only for the remainder of that
term.
(B) Term limitation.--No person may serve as a member of
the Board, or as chairperson of the Board, for more than 2
terms, whether or not such terms of service are consecutive.
(6) Removal from office.--A member of the Board may be
removed by the Commission from office, in accordance with
section 107(d)(3), for good cause shown before the expiration
of the term of that member.
(f ) Powers of the Board.--In addition to any authority
granted to the Board otherwise in this Act, the Board shall
have the power, subject to section 107--
(1) to sue and be sued, complain and defend, in its
corporate name and through its own counsel, with the approval
of the Commission, in any Federal, State, or other court;
(2) to conduct its operations and maintain offices, and to
exercise all other rights and powers authorized by this Act, in
any State, without regard to any qualification, licensing, or
other provision of law in effect in such State (or a political
subdivision thereof );
(3) to lease, purchase, accept gifts or donations of or
otherwise acquire, improve, use, sell, exchange, or convey, all
of or an interest in any property, wherever situated;
(4) to appoint such employees, accountants, attorneys, and
other agents as may be necessary or appropriate, and to
determine their qualifications, define their duties, and fix
their salaries or other compensation (at a level that is
comparable to private sector self-regulatory, accounting,
technical, supervisory, or other staff or management
positions);
(5) to allocate, assess, and collect accounting support
fees established pursuant to section 109, for the Board, and
other fees and charges imposed under this title; and
(6) to enter into contracts, execute instruments, incur
liabilities, and do any and all other acts and things
necessary, appropriate, or incidental to the conduct of its
operations and the exercise of its obligations, rights, and
powers imposed or granted by this title.
(g) Rules of the Board.--The rules of the Board shall,
subject to the approval of the Commission--
(1) provide for the operation and administration of the
Board, the exercise of its authority, and the performance of
its responsibilities under this Act;
(2) permit, as the Board determines necessary or
appropriate, delegation by the Board of any of its functions to
an individual member or employee of the Board, or to a division
of the Board, including functions with respect to hearing,
determining, ordering, certifying, reporting, or otherwise
acting as to any matter, except that--
(A) the Board shall retain a discretionary right to review
any action pursuant to any such delegated function, upon its
own motion;
(B) a person shall be entitled to a review by the Board
with respect to any matter so delegated, and the decision of
the Board upon such review shall be deemed to be the action of
the Board for all purposes (including appeal or review
thereof ); and
(C) if the right to exercise a review described in
subparagraph (A) is declined, or if no such review is sought
within the time stated in the rules of the Board, then the
action taken by the holder of such delegation shall for all
purposes, including appeal or review thereof, be deemed to be
the action of the Board;
(3) establish ethics rules and standards of conduct for
Board members and staff, including a bar on practice before the
Board (and the Commission, with respect to Board-related
matters) of 1 year for former members of the Board, and
appropriate periods (not to exceed 1 year) for former staff of
the Board; and
(4) provide as otherwise required by this Act.
(h) Annual Report to the Commission.--The Board shall
submit an annual report (including its audited financial
statements) to the Commission, and the Commission shall
transmit a copy of that report to the Committee on Banking,
Housing, and Urban Affairs of the Senate, and the Committee on
Financial Services of the House of Representatives, not later
than 30 days after the date of receipt of that report by the
Commission.
SEC. 102. REGISTRATION WITH THE BOARD.
(a) Mandatory Registration.--Beginning 180 days after the
date of the determination of the Commission under section
101(d), it shall be unlawful for any person that is not a
registered public accounting firm to prepare or issue, or to
participate in the preparation or issuance of, any audit report
with respect to any issuer.
(b) Applications for Registration.--
(1) Form of application.--A public accounting firm shall
use such form as the Board may prescribe, by rule, to apply for
registration under this section.
(2) Contents of applications.--Each public accounting firm
shall submit, as part of its application for registration, in
such detail as the Board shall specify--
(A) the names of all issuers for which the firm prepared or
issued audit reports during the immediately preceding calendar
year, and for which the firm expects to prepare or issue audit
reports during the current calendar year;
(B) the annual fees received by the firm from each such
issuer for audit services, other accounting services, and non-
audit services, respectively;
(C) such other current financial information for the most
recently completed fiscal year of the firm as the Board may
reasonably request;
(D) a statement of the quality control policies of the firm
for its accounting and auditing practices;
(E) a list of all accountants associated with the firm who
participate in or contribute to the preparation of audit
reports, stating the license or certification number of each
such person, as well as the State license numbers of the firm
itself;
(F) information relating to criminal, civil, or
administrative actions or disciplinary proceedings pending
against the firm or any associated person of the firm in
connection with any audit report;
(G) copies of any periodic or annual disclosure filed by an
issuer with the Commission during the immediately preceding
calendar year which discloses accounting disagreements between
such issuer and the firm in connection with an audit report
furnished or prepared by the firm for such issuer; and
(H) such other information as the rules of the Board or the
Commission shall specify as necessary or appropriate in the
public interest or for the protection of investors.
(3) Consents.--Each application for registration under this
subsection shall include--
(A) a consent executed by the public accounting firm to
cooperation in and compliance with any request for testimony or
the production of documents made by the Board in the
furtherance of its authority and responsibilities under this
title (and an agreement to secure and enforce similar consents
from each of the associated persons of the public accounting
firm as a condition of their continued employment by or other
association with such firm); and
(B) a statement that such firm understands and agrees that
cooperation and compliance, as described in the consent
required by subparagraph (A), and the securing and enforcement
of such consents from its associated persons, in accordance
with the rules of the Board, shall be a condition to the
continuing effectiveness of the registration of the firm with
the Board.
(c) Action on Applications.--
(1) Timing.--The Board shall approve a completed
application for registration not later than 45 days after the
date of receipt of the application, in accordance with the
rules of the Board, unless the Board, prior to such date,
issues a written notice of disapproval to, or requests more
information from, the prospective registrant.
(2) Treatment.--A written notice of disapproval of a
completed application under paragraph (1) for registration
shall be treated as a disciplinary sanction for purposes of
sections 105(d) and 107(c).
(d) Periodic Reports.--Each registered public accounting
firm shall submit an annual report to the Board, and may be
required to report more frequently, as necessary to update the
information contained in its application for registration under
this section, and to provide to the Board such additional
information as the Board or the Commission may specify, in
accordance with subsection (b)(2).
(e) Public Availability.--Registration applications and
annual reports required by this subsection, or such portions of
such applications or reports as may be designated under rules
of the Board, shall be made available for public inspection,
subject to rules of the Board or the Commission, and to
applicable laws relating to the confidentiality of proprietary,
personal, or other information contained in such applications
or reports, provided that, in all events, the Board shall
protect from public disclosure information reasonably
identified by the subject accounting firm as proprietary
information.
(f ) Registration and Annual Fees.--The Board shall assess
and collect a registration fee and an annual fee from each
registered public accounting firm, in amounts that are
sufficient to recover the costs of processing and reviewing
applications and annual reports.
SEC. 103. AUDITING, QUALITY CONTROL, AND INDEPENDENCE STANDARDS AND
RULES.
(a) Auditing, Quality Control, and Ethics Standards.--
``(1) In general.--The Board shall, by rule, establish,
including, to the extent it determines appropriate, through
adoption of standards proposed by 1 or more professional groups
of accountants designated pursuant to paragraph (3)(A) or
advisory groups convened pursuant to paragraph (4), and amend
or otherwise modify or alter, such auditing and related
attestation standards, such quality control standards, and such
ethics standards to be used by registered public accounting
firms in the preparation and issuance of audit reports, as
required by this Act or the rules of the Commission, or as may
be necessary or appropriate in the public interest or for the
protection of investors.
(2) Rule requirements.--In carrying out paragraph (1), the
Board--
(A) shall include in the auditing standards that it adopts,
requirements that each registered public accounting firm
shall--
(i) prepare, and maintain for a period of not less than 7
years, audit work papers, and other information related to any
audit report, in sufficient detail to support the conclusions
reached in such report;
(ii) provide a concurring or second partner review and
approval of such audit report (and other related information),
and concurring approval in its issuance, by a qualified person
(as prescribed by the Board) associated with the public
accounting firm, other than the person in charge of the audit,
or by an independent reviewer (as prescribed by the Board); and
(iii) describe the scope of the auditor's testing of the
system of internal accounting controls of the issuer required
by section 13(b)(2) of the Securities Exchange Act of 1934 (15
U.S.C. 78m(b)(2)), and present (in such report or in a separate
report)--
(I) the findings of the auditor from such testing;
(II) an evaluation of whether such system of internal
accounting controls--
(aa) complies with the requirements of that section
13(b)(2); and
(bb) provides reasonable assurance that receipts and
expenditures of the issuer comply with applicable law, and are
being made in accordance with proper authorizations of the
management and directors of the issuer; and
(III) a description of significant defects in such internal
controls, and of any material noncompliance, of which the
auditor should know on the basis of such testing; and
(B) shall include, in the quality control standards that it
adopts with respect to the issuance of audit reports,
requirements for every registered public accounting firm
relating to--
(i) monitoring of professional ethics and independence from
issuers on behalf of which the firm issues audit reports;
(ii) consultation within such firm on accounting and
auditing questions;
(iii) supervision of audit work;
(iv) hiring, professional development, and advancement of
personnel;
(v) the acceptance and continuation of engagements;
(vi) internal inspection; and
(vii) such other requirements as the Board may prescribe,
subject to subsection (a)(1).
(3) Authority to adopt other standards.--
(A) In general.--In carrying out this subsection, the
Board--
(i) may adopt as its rules, subject to the terms of section
107, any portion of any statement of auditing standards or
other professional standards that the Board determines satisfy
the requirements of paragraph (1), and that were proposed by 1
or more professional groups of accountants that shall be
designated or recognized by the Board, by rule, for such
purpose, pursuant to this paragraph or 1 or more advisory
groups convened pursuant to paragraph (4); and
(ii) notwithstanding clause (i), shall retain full
authority to modify, supplement, revise, or subsequently amend,
modify, or repeal, in whole or in part, any portion of any
statement described in clause (i).
(B) Initial and transitional standards.--The Board shall
adopt standards described in subparagraph (A)(i) as initial or
transitional standards, to the extent the Board determines
necessary, prior to a determination of the Commission under
section 101(d), and such standards shall be separately approved
by the Commission at the time of that determination, without
regard to the procedures required by section 107 that otherwise
would apply to the approval of rules of the Board.
(4) Advisory groups.--The Board shall convene, or authorize
its staff to convene, such expert advisory groups as may be
appropriate, which may include practicing accountants and other
experts, as well as representatives of other interested groups,
subject to such rules as the Board may prescribe to prevent
conflicts of interest, to make recommendations concerning the
content (including proposed drafts) of auditing, quality
control, ethics, independence, or other standards required to
be established under this section.
(b) Independence Standards and Rules.--The Board shall
establish such rules as may be necessary or appropriate in the
public interest or for the protection of investors, to
implement, or as authorized under, title II of this Act.
(c) Cooperation With Designated Professional Groups of
Accountants and Advisory Groups.--
(1) In general.--The Board shall cooperate on an ongoing
basis with professional groups of accountants designated under
subsection (a)(3)(A) and advisory groups convened under
subsection (a)(4) in the examination of the need for changes in
any standards subject to its authority under subsection (a),
recommend issues for inclusion on the agendas of such
designated professional groups of accountants or advisory
groups, and take such other steps as it deems appropriate to
increase the effectiveness of the standard setting process.
(2) Board responses.--The Board shall respond in a timely
fashion to requests from designated professional groups of
accountants and advisory groups referred to in paragraph (1)
for any changes in standards over which the Board has
authority.
(d) Evaluation of Standard Setting Process.--The Board
shall include in the annual report required by section 101(h)
the results of its standard setting responsibilities during the
period to which the report relates, including a discussion of
the work of the Board with any designated professional groups
of accountants and advisory groups described in paragraphs
(3)(A) and (4) of subsection (a), and its pending issues agenda
for future standard setting projects.
SEC. 104. INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS.
(a) In General.--The Board shall conduct a continuing
program of inspections to assess the degree of compliance of
each registered public accounting firm and associated persons
of that firm with this Act, the rules of the Board, the rules
of the Commission, or professional standards, in connection
with its performance of audits, issuance of audit reports, and
related matters involving issuers.
(b) Inspection Frequency.--
(1) In general.--Subject to paragraph (2), inspections
required by this section shall be conducted--
(A) annually with respect to each registered public
accounting firm that regularly provides audit reports for more
than 100 issuers; and
(B) not less frequently than once every 3 years with
respect to each registered public accounting firm that
regularly provides audit reports for 100 or fewer issuers.
(2) Adjustments to schedules.--The Board may, by rule,
adjust the inspection schedules set under paragraph (1) if the
Board finds that different inspection schedules are consistent
with the purposes of this Act, the public interest, and the
protection of investors.
(c) Procedures.--The Board shall, in each inspection under
this section, and in accordance with its rules for such
inspections--
(1) identify any act or practice or omission to act by the
registered public accounting firm, or by any associated person
thereof, revealed by such inspection that may be in violation
of this Act, the rules of the Board, the rules of the
Commission, the firm's own quality control policies, or
professional standards;
(2) report any such act, practice, or omission, if
appropriate, to the Commission and each appropriate State
regulatory authority; and
(3) begin a formal investigation or take appropriate
disciplinary action, if any, with respect to any such
violation, in accordance with this Act and the rules of the
Board.
(d) Conduct of Inspections.--In conducting an inspection of
a registered public accounting firm under this section, the
Board shall--
(1) inspect and review selected audit and review
engagements of the firm (which may include audit engagements
that are the subject of ongoing litigation or other controversy
between the firm and 1 or more third parties), performed at
various offices and by various associated persons of the firm,
as selected by the Board;
(2) evaluate the sufficiency of the quality control system
of the firm, and the manner of the documentation and
communication of that system by the firm; and
(3) perform such other testing of the audit, supervisory,
and quality control procedures of the firm as are necessary or
appropriate in light of the purpose of the inspection and the
responsibilities of the Board.
(e) Record Retention.--The rules of the Board may require
the retention by registered public accounting firms for
inspection purposes of records whose retention is not otherwise
required by section 103 or the rules issued thereunder.
(f ) Procedures for Review.--The rules of the Board shall
provide a procedure for the review of and response to a draft
inspection report by the registered public accounting firm
under inspection. The Board shall take such action with respect
to such response as it considers appropriate (including
revising the draft report or continuing or supplementing its
inspection activities before issuing a final report), but the
text of any such response, appropriately redacted to protect
information reasonably identified by the accounting firm as
confidential, shall be attached to and made part of the
inspection report.
(g) Report.--A written report of the findings of the Board
for each inspection under this section, subject to subsection
(h), shall be--
(1) transmitted, in appropriate detail, to the Commission
and each appropriate State regulatory authority, accompanied by
any letter or comments by the Board or the inspector, and any
letter of response from the registered public accounting firm;
and
(2) made available in appropriate detail to the public
(subject to section 105(b)(5)(A), and to the protection of such
confidential and proprietary information as the Board may
determine to be appropriate, or as may be required by law),
except that no portions of the inspection report that deal with
criticisms of or potential defects in the quality control
systems of the firm under inspection shall be made public if
those criticisms or defects are addressed by the firm, to the
satisfaction of the Board, not later than 12 months after the
date of the inspection report.
(h) Interim Commission Review.--
(1) Reviewable matters.--A registered public accounting
firm may seek review by the Commission, pursuant to such rules
as the Commission shall promulgate, if the firm--
(A) has provided the Board with a response, pursuant to
rules issued by the Board under subsection (f ), to the
substance of particular items in a draft inspection report, and
disagrees with the assessments contained in any final report
prepared by the Board following such response; or
(B) disagrees with the determination of the Board that
criticisms or defects identified in an inspection report have
not been addressed to the satisfaction of the Board within 12
months of the date of the inspection report, for purposes of
subsection (g)(2).
(2) Treatment of review.--Any decision of the Commission
with respect to a review under paragraph (1) shall not be
reviewable under section 25 of the Securities Exchange Act of
1934 (15 U.S.C. 78y), or deemed to be ``final agency action''
for purposes of section 704 of title 5, United States Code.
(3) Timing.--Review under paragraph (1) may be sought
during the 30-day period following the date of the event giving
rise to the review under subparagraph (A) or (B) of paragraph
(1).
SEC. 105. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.
(a) In General.--The Board shall establish, by rule,
subject to the requirements of this section, fair procedures
for the investigation and disciplining of registered public
accounting firms and associated persons of such firms.
(b) Investigations.--
(1) Authority.--In accordance with the rules of the Board,
the Board may conduct an investigation of any act or practice,
or omission to act, by a registered public accounting firm, any
associated person of such firm, or both, that may violate any
provision of this Act, the rules of the Board, the provisions
of the securities laws relating to the preparation and issuance
of audit reports and the obligations and liabilities of
accountants with respect thereto, including the rules of the
Commission issued under this Act, or professional standards,
regardless of how the act, practice, or omission is brought to
the attention of the Board.
(2) Testimony and document production.--In addition to such
other actions as the Board determines to be necessary or
appropriate, the rules of the Board may--
(A) require the testimony of the firm or of any person
associated with a registered public accounting firm, with
respect to any matter that the Board considers relevant or
material to an investigation;
(B) require the production of audit work papers and any
other document or information in the possession of a registered
public accounting firm or any associated person thereof,
wherever domiciled, that the Board considers relevant or
material to the investigation, and may inspect the books and
records of such firm or associated person to verify the
accuracy of any documents or information supplied;
(C) request the testimony of, and production of any
document in the possession of, any other person, including any
client of a registered public accounting firm that the Board
considers relevant or material to an investigation under this
section, with appropriate notice, subject to the needs of the
investigation, as permitted under the rules of the Board; and
(D) provide for procedures to seek issuance by the
Commission, in a manner established by the Commission, of a
subpoena to require the testimony of, and production of any
document in the possession of, any person, including any client
of a registered public accounting firm, that the Board
considers relevant or material to an investigation under this
section.
(3) Noncooperation with investigations.--
(A) In general.--If a registered public accounting firm or
any associated person thereof refuses to testify, produce
documents, or otherwise cooperate with the Board in connection
with an investigation under this section, the Board may--
(i) suspend or bar such person from being associated with a
registered public accounting firm, or require the registered
public accounting firm to end such association;
(ii) suspend or revoke the registration of the public
accounting firm; and
(iii) invoke such other lesser sanctions as the Board
considers appropriate, and as specified by rule of the Board.
(B) Procedure.--Any action taken by the Board under this
paragraph shall be subject to the terms of section 107(c).
(4) Referral.--The Board may refer an investigation under
this section--
(A) to the Commission;
(B) to any other Federal functional regulator (as defined
in section 509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6809)),
in the case of an investigation that concerns an audit report
for an institution that is subject to the jurisdiction of such
regulator; and
(C) at the direction of the Commission, to--
(i) the Attorney General of the United States;
(ii) the attorney general of 1 or more States; and
(iii) the appropriate State regulatory authority.
(5) Use of documents.--
(A) Confidentiality.--Except as provided in subparagraph
(B), all documents and information prepared or received by or
specifically for the Board, and deliberations of the Board and
its employees and agents, in connection with an inspection
under section 104 or with an investigation under this section,
shall be confidential and privileged as an evidentiary matter
(and shall not be subject to civil discovery or other legal
process) in any proceeding in any Federal or State court or
administrative agency, and shall be exempt from disclosure, in
the hands of an agency or establishment of the Federal
Government, under the Freedom of Information Act (5 U.S.C.
552a), or otherwise, unless and until presented in connection
with a public proceeding or released in accordance with
subsection (c).
(B) Availability to government agencies.--All information
referred to in subparagraph (A) may, in the discretion of the
Board, when determined by the Board to be necessary to
accomplish the purposes of this Act or to protect investors,
and without the loss of its status as confidential and
privileged in the hands of the Board, be made available to the
Commission, the Attorney General of the United States, to the
appropriate Federal functional regulator (as defined in section
509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6809)), other than
the Commission, with respect to an audit report for an
institution subject to the jurisdiction of such regulator, to
State attorneys general in connection with any criminal
investigation, and to any appropriate State regulatory
authority, which shall maintain such information as
confidential and privileged.
(6) Immunity.--Any employee of the Board engaged in
carrying out an investigation under this Act shall be immune
from any civil liability arising out of such investigation in
the same manner and to the same extent as an employee of the
Federal Government in similar circumstances.
(c) Disciplinary Procedures.--
(1) Notification; recordkeeping.--The rules of the Board
shall provide that in any proceeding by the Board to determine
whether a registered public accounting firm, or an associated
person thereof, should be disciplined, the Board shall--
(A) bring specific charges with respect to the firm or
associated person;
(B) notify such firm or associated person of, and provide
to the firm or associated person an opportunity to defend
against, such charges; and
(C) keep a record of the proceedings.
(2) Public hearings.--Hearings under this section shall not
be public, unless otherwise ordered by the Board for good cause
shown, with the consent of the parties to such hearing.
(3) Supporting statement.--A determination by the Board to
impose a sanction under this subsection shall be supported by a
statement setting forth--
(A) each act or practice in which the registered public
accounting firm, or associated person, has engaged (or omitted
to engage), or that forms a basis for all or a part of such
sanction;
(B) the specific provision of this Act, the securities
laws, the rules of the Board, or professional standards which
the Board determines has been violated; and
(C) the sanction imposed, including a justification for
that sanction.
(4) Sanctions.--If the Board finds, based on all of the
facts and circumstances, that a registered public accounting
firm or associated person thereof has engaged in any act or
practice, or omitted to act, in violation of this Act, the
rules of the Board, the provisions of the securities laws
relating to the preparation and issuance of audit reports and
the obligations and liabilities of accountants with respect
thereto, including the rules of the Commission issued under
this Act, or professional standards, the Board may impose such
disciplinary or remedial sanctions as it determines
appropriate, subject to applicable limitations under paragraph
(5), including--
(A) temporary suspension or permanent revocation of
registration under this title;
(B) temporary or permanent suspension or bar of a person
from further association with any registered public accounting
firm;
(C) temporary or permanent limitation on the activities,
functions, or operations of such firm or person (other than in
connection with required additional professional education or
training);
(D) a civil money penalty for each such violation, in an
amount equal to--
(i) not more than $100,000 for a natural person or
$2,000,000 for any other person; and
(ii) in any case to which paragraph (5) applies, not more
than $750,000 for a natural person or $15,000,000 for any other
person;
(E) censure;
(F) required additional professional education or training;
or
(G) any other appropriate sanction provided for in the
rules of the Board.
(5) Intentional or other knowing conduct.--The sanctions
and penalties described in subparagraphs (A) through (C) and
(D)(ii) of paragraph (4) shall only apply to--
(A) intentional or knowing conduct, including reckless
conduct, that results in violation of the applicable statutory,
regulatory, or professional standard; or
(B) repeated instances of negligent conduct, each resulting
in a violation of the applicable statutory, regulatory, or
professional standard.
(6) Failure to supervise.--
(A) In general.--The Board may impose sanctions under this
section on a registered accounting firm or upon the supervisory
personnel of such firm, if the Board finds that--
(i) the firm has failed reasonably to supervise an
associated person, either as required by the rules of the Board
relating to auditing or quality control standards, or
otherwise, with a view to preventing violations of this Act,
the rules of the Board, the provisions of the securities laws
relating to the preparation and issuance of audit reports and
the obligations and liabilities of accountants with respect
thereto, including the rules of the Commission under this Act,
or professional standards; and
(ii) such associated person commits a violation of this
Act, or any of such rules, laws, or standards.
(B) Rule of construction.--No associated person of a
registered public accounting firm shall be deemed to have
failed reasonably to supervise any other person for purposes of
subparagraph (A), if--
(i) there have been established in and for that firm
procedures, and a system for applying such procedures, that
comply with applicable rules of the Board and that would
reasonably be expected to prevent and detect any such violation
by such associated person; and
(ii) such person has reasonably discharged the duties and
obligations incumbent upon that person by reason of such
procedures and system, and had no reasonable cause to believe
that such procedures and system were not being complied with.
(7) Effect of suspension.--
(A) Association with a public accounting firm.--It shall be
unlawful for any person that is suspended or barred from being
associated with a registered public accounting firm under this
subsection willfully to become or remain associated with any
registered public accounting firm, or for any registered public
accounting firm that knew, or, in the exercise of reasonable
care should have known, of the suspension or bar, to permit
such an association, without the consent of the Board or the
Commission.
(B) Association with an issuer.--It shall be unlawful for
any person that is suspended or barred from being associated
with an issuer under this subsection willfully to become or
remain associated with any issuer in an accountancy or a
financial management capacity, and for any issuer that knew, or
in the exercise of reasonable care should have known, of such
suspension or bar, to permit such an association, without the
consent of the Board or the Commission.
(d) Reporting of Sanctions.--
(1) Recipients.--If the Board imposes a disciplinary
sanction, in accordance with this section, the Board shall
report the sanction to--
(A) the Commission;
(B) any appropriate State regulatory authority or any
foreign accountancy licensing board with which such firm or
person is licensed or certified; and
(C) the public (once any stay on the imposition of such
sanction has been lifted).
(2) Contents.--The information reported under paragraph (1)
shall include--
(A) the name of the sanctioned person;
(B) a description of the sanction and the basis for its
imposition; and
(C) such other information as the Board deems appropriate.
(e) Stay of Sanctions.--
(1) In general.--Application to the Commission for review,
or the institution by the Commission of review, of any
disciplinary action of the Board shall operate as a stay of any
such disciplinary action, unless and until the Commission
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)
that no such stay shall continue to operate.
(2) Expedited procedures.--The Commission shall establish
for appropriate cases an expedited procedure for consideration
and determination of the question of the duration of a stay
pending review of any disciplinary action of the Board under
this subsection.
SEC. 106. FOREIGN PUBLIC ACCOUNTING FIRMS.
(a) Applicability to Certain Foreign Firms.--
(1) In general.--Any foreign public accounting firm that
prepares or furnishes an audit report with respect to any
issuer, shall be subject to this Act and the rules of the Board
and the Commission issued under this Act, in the same manner
and to the same extent as a public accounting firm that is
organized and operates under the laws of the United States or
any State, except that registration pursuant to section 102
shall not by itself provide a basis for subjecting such a
foreign public accounting firm to the jurisdiction of the
Federal or State courts, other than with respect to
controversies between such firms and the Board.
(2) Board authority.--The Board may, by rule, determine
that a foreign public accounting firm (or a class of such
firms) that does not issue audit reports nonetheless plays such
a substantial role in the preparation and furnishing of such
reports for particular issuers, that it is necessary or
appropriate, in light of the purposes of this Act and in the
public interest or for the protection of investors, that such
firm (or class of firms) should be treated as a public
accounting firm (or firms) for purposes of registration under,
and oversight by the Board in accordance with, this title.
(b) Production of Audit Workpapers.--
(1) Consent by foreign firms.--If a foreign public
accounting firm issues an opinion or otherwise performs
material services upon which a registered public accounting
firm relies in issuing all or part of any audit report or any
opinion contained in an audit report, that foreign public
accounting firm shall be deemed to have consented--
(A) to produce its audit workpapers for the Board or the
Commission in connection with any investigation by either body
with respect to that audit report; and
(B) to be subject to the jurisdiction of the courts of the
United States for purposes of enforcement of any request for
production of such workpapers.
(2) Consent by domestic firms.--A registered public
accounting firm that relies upon the opinion of a foreign
public accounting firm, as described in paragraph (1), shall be
deemed--
(A) to have consented to supplying the audit workpapers of
that foreign public accounting firm in response to a request
for production by the Board or the Commission; and
(B) to have secured the agreement of that foreign public
accounting firm to such production, as a condition of its
reliance on the opinion of that foreign public accounting firm.
(c) Exemption Authority.--The Commission, and the Board,
subject to the approval of the Commission, may, by rule,
regulation, or order, and as the Commission (or Board)
determines necessary or appropriate in the public interest or
for the protection of investors, either unconditionally or upon
specified terms and conditions exempt any foreign public
accounting firm, or any class of such firms, from any provision
of this Act or the rules of the Board or the Commission issued
under this Act.
(d) Definition.--In this section, the term ``foreign public
accounting firm'' means a public accounting firm that is
organized and operates under the laws of a foreign government
or political subdivision thereof.
SEC. 107. COMMISSION OVERSIGHT OF THE BOARD.
(a) General Oversight Responsibility.--The Commission shall
have oversight and enforcement authority over the Board, as
provided in this Act.
(b) Rules of the Board.--
(1) Definition.--In this section, the term ``proposed
rule'' means any proposed rule of the Board, and any
modification of any such rule.
(2) Prior approval required.--No rule of the Board shall
become effective without prior approval of the Commission in
accordance with this section, other than as provided in section
103(a)(3)(B) with respect to initial or transitional standards.
(3) Approval criteria.--The Commission shall approve a
proposed rule, if it finds that the rule is consistent with the
requirements of this Act and the securities laws, or is
necessary or appropriate in the public interest or for the
protection of investors.
(4) Proposed rule procedures.--The provisions of paragraphs
(1) through (3) of section 19(b) of the Securities Exchange Act
of 1934 (15 U.S.C. 78s(b)) shall govern the proposed rules of
the Board, as fully as if the Board were a ``registered
securities association'' for purposes of that section 19(b),
except that, for purposes of this paragraph--
(A) the phrase ``consistent with the requirements of this
title and the rules and regulations thereunder applicable to
such organization'' in section 19(b)(2) of that Act shall be
deemed to read ``consistent with the requirements of title I of
the Public Company Accounting Reform and Investor Protection
Act of 2002, and the rules and regulations issued thereunder
applicable to such organization, or as necessary or appropriate
in the public interest or for the protection of investors'';
and
(B) the phrase ``otherwise in furtherance of the purposes
of this title'' in section 19(b)(3)(C) of that Act shall be
deemed to read ``otherwise in furtherance of the purposes of
title I of the Public Company Accounting Reform and Investor
Protection Act of 2002''.
(5) Commission authority to amend rules of the board.--The
provisions of section 19(c) of the Securities Exchange Act of
1934 (15 U.S.C. 78s(c)) shall govern the abrogation, deletion,
or addition to portions of the rules of the Board by the
Commission as fully as if the Board were a ``registered
securities association'' for purposes of that section 19(c),
except that the phrase ``to conform its rules to the
requirements of this title and the rules and regulations
thereunder applicable to such organization, or otherwise in
furtherance of the purposes of this title'' in section 19(c) of
that Act shall, for purposes of this paragraph, be deemed to
read ``to assure the fair administration of the Public Company
Accounting Oversight Board, conform the rules promulgated by
that Board to the requirements of title I of the Public Company
Accounting Reform and Investor Protection Act of 2002, or
otherwise further the purposes of that Act, the securities
laws, and the rules and regulations thereunder applicable to
that Board''.
(c) Commission Review of Disciplinary Action Taken by the
Board.--
(1) Notice of sanction.--The Board shall promptly file
notice with the Commission of any final sanction on any
registered public accounting firm or on any associated person
thereof, in such form and containing such information as the
Commission, by rule, may prescribe.
(2) Review of sanctions.--The provisions of sections
19(d)(2) and 19(e)(1) of the Securities Exchange Act of 1934
(15 U.S.C. 78s (d)(2) and (e)(1)) shall govern the review by
the Commission of final disciplinary sanctions imposed by the
Board (including sanctions imposed under section 105(b)(3) of
this Act for noncooperation in an investigation of the Board),
as fully as if the Board were a self-regulatory organization
and the Commission were the appropriate regulatory agency for
such organization for purposes of those sections 19(d)(2) and
19(e)(1), except that, for purposes of this paragraph--
(A) section 105(e) of this Act (rather than that section
19(d)(2)) shall govern the extent to which application for, or
institution by the Commission on its own motion of, review of
any disciplinary action of the Board operates as a stay of such
action;
(B) references in that section 19(e)(1) to ``members'' of
such an organization shall be deemed to be references to
registered public accounting firms;
(C) the phrase ``consistent with the purposes of this
title'' in that section 19(e)(1) shall be deemed to read
``consistent with the purposes of this title and title I of the
Public Company Accounting Reform and Investor Protection Act of
2002'';
(D) references to rules of the Municipal Securities
Rulemaking Board in that section 19(e)(1) shall not apply; and
(E) the reference to section 19(e)(2) of the Securities
Exchange Act of 1934 shall refer instead to section 107(c)(3)
of this Act.
(3) Commission modification authority.--The Commission may
enhance, modify, cancel, reduce, or require the remission of a
sanction imposed by the Board upon a registered public
accounting firm or associated person thereof, if the
Commission, having due regard for the public interest and the
protection of investors, finds, after a proceeding in
accordance with this subsection, that the sanction--
(A) is not necessary or appropriate in furtherance of this
Act or the securities laws; or
(B) is excessive, oppressive, inadequate, or otherwise not
appropriate to the finding or the basis on which the sanction
was imposed.
(d) Censure of the Board; Other Sanctions.--
(1) Rescission of board authority.--The Commission, by
rule, consistent with the public interest, the protection of
investors, and the other purposes of this Act and the
securities laws, may relieve the Board of any responsibility to
enforce compliance with any provision of this Act, the
securities laws, the rules of the Board, or professional
standards.
(2) Censure of the board; limitations.--The Commission may,
by order, as it determines 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, censure or impose limitations upon the activities,
functions, and operations of the Board, if the Commission
finds, on the record, after notice and opportunity for a
hearing, that the Board--
(A) has violated or is unable to comply with any provision
of this Act, the rules of the Board, or the securities laws; or
(B) without reasonable justification or excuse, has failed
to enforce compliance with any such provision or rule, or any
professional standard by a registered public accounting firm or
an associated person thereof.
(3) Censure of board members; removal from office.--The
Commission may, 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,
remove from office or censure any member of the Board, if the
Commission finds, on the record, after notice and opportunity
for a hearing, that such member--
(A) has willfully violated any provision of this Act, the
rules of the Board, or the securities laws;
(B) has willfully abused the authority of that member; or
(C) without reasonable justification or excuse, has failed
to enforce compliance with any such provision or rule, or any
professional standard by any registered public accounting firm
or any associated person thereof.
SEC. 108. ACCOUNTING STANDARDS.
(a) Amendment to Securities Act of 1933.--Section 19 of the
Securities Act of 1933 (15 U.S.C. 77s) is amended--
(1) by redesignating subsections (b) and (c) as subsections
(c) and (d), respectively; and
(2) by inserting after subsection (a) the following:
``(b) Recognition of Accounting Standards.--
``(1) In general.--In carrying out its authority under
subsection (a) and under section 13(b) of the Securities
Exchange Act of 1934, the Commission may recognize, as
`generally accepted' for purposes of the securities laws, any
accounting principles established by a standard setting body--
``(A) that--
``(i) is organized as a private entity;
``(ii) has, for administrative and operational purposes, a
board of trustees (or equivalent body) serving in the public
interest, the majority of whom are not, concurrent with their
service on such board, and have not been during the 2-year
period preceding such service, associated persons of any
registered public accounting firm;
``(iii) is funded as provided in section 109 of the Public
Company Accounting Reform and Investor Protection Act of 2002;
``(iv) has adopted procedures to ensure prompt
consideration, by majority vote of its members, of changes to
accounting principles necessary to reflect emerging accounting
issues and changing business practices;
``(v) considers, in adopting accounting principles, the
need to keep standards current in order to reflect changes in
the business environment, the extent to which international
convergence on high quality accounting standards is necessary
or appropriate in the public interest and for the protection of
investors; and
``(B) that the Commission determines has the capacity to
assist the Commission in fulfilling the requirements of
subsection (a) and section 13(b) of the Securities Exchange Act
of 1934, because, at a minimum, the standard setting body is
capable of improving the accuracy and effectiveness of
financial reporting and the protection of investors under the
securities laws.
``(2) Annual report.--A standard setting body described in
paragraph (1) shall submit an annual report to the Commission
and the public, containing audited financial statements of that
standard setting body.''.
(b) Commission Authority.--The Commission shall promulgate
such rules and regulations to carry out section 19(b) of the
Securities Act of 1933, as added by this section, as it deems
necessary or appropriate in the public interest or for the
protection of investors.
(c) No Effect on Commission Powers.--Nothing in this Act,
including this section and the amendment made by this section,
shall be construed to impair or limit the authority of the
Commission to establish accounting principles or standards for
purposes of enforcement of the securities laws.
(d) Study and Report on Adopting Principles-Based
Accounting.--
(1) Study.--
(A) In general.--The Commission shall conduct a study on
the adoption by the United States financial reporting system of
a principles-based accounting system.
(B) Study topics.--The study required by subparagraph (A)
shall include an examination of--
(i) the extent to which principles-based accounting and
financial reporting exists in the United States;
(ii) the length of time required for change from a rules-
based to a principles-based financial reporting system;
(iii) the feasibility of and proposed methods by which a
principles-based system may be implemented; and
(iv) a thorough economic analysis of the implementation of
a principles-based system.
(2) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report on
the results of the study required by paragraph (1) to the
Committee on Banking, Housing, and Urban Affairs of the Senate
and the Committee on Financial Services of the House of
Representatives.
SEC. 109. FUNDING.
(a) In General.--The Board, and the standard setting body
designated pursuant to section 19(b) of the Securities Act of
1933, as amended by section 108, shall be funded as provided in
this section.
(b) Annual Budgets.--The Board and the standard setting
body referred to in subsection (a) shall each establish a
budget for each fiscal year, which shall be reviewed and
approved according to their respective internal procedures not
less than 1 month prior to the commencement of the fiscal year
to which the budget pertains. The budget of the Board shall be
subject to approval by the Commission.
(c) Sources and Uses of Funds.--
(1) Recoverable budget expenses.--The budget of the Board
(reduced by any registration or annual fees received under
section 102(e) for the year preceding the year for which the
budget is being computed), and all of the budget of the
standard setting body referred to in subsection (a), for each
fiscal year of each of those 2 entities, shall be payable from
annual accounting support fees, in accordance with subsections
(d) and (e).
(2) Funds generated from the collection of monetary
penalties.--Subject to the availability in advance in an
appropriations Act, and notwithstanding subsection (h), all
funds collected by the Board as a result of the assessment of
monetary penalties shall be used to fund a merit scholarship
program for undergraduate and graduate students enrolled in
accredited accounting degree programs, which program is to be
administered by the Board or by an entity or agent identified
by the Board.
(d) Annual Accounting Support Fee for the Board.--
(1) Establishment of fee.--The Board shall establish, with
the approval of the Commission, a reasonable annual accounting
support fee (or a formula for the computation thereof ), as may
be necessary or appropriate to establish and maintain the
Board.
(2) Assessments.--The rules of the Board under paragraph
(1) shall provide for the equitable allocation, assessment, and
collection by the Board (or an agent appointed by the Board) of
the fee established under paragraph (1), among issuers, in
accordance with subsection (f ), allowing for differentiation
among classes of issuers, as appropriate.
(e) Annual Accounting Support Fee for Standard Setting
Body.--The annual accounting support fee for the standard
setting body referred to in subsection (a)--
(1) shall be allocated in accordance with subsection (f ),
and assessed and collected against each issuer, on behalf of
the standard setting body, by 1 or more appropriate designated
collection agents, as may be necessary or appropriate to pay
for the budget and provide for the expenses of that standard
setting body, and to provide for an independent, stable source
of funding for such body, subject to review by the Commission;
and
(2) may differentiate among different classes of issuers.
(f ) Allocation of Accounting Support Fees Among Issuers.--
Any amount due from issuers (or a particular class of issuers)
under this section to fund the budget of the Board or the
standard setting body referred to in subsection (a) shall be
allocated among and payable by each issuer (or each issuer in a
particular class, as applicable) in an amount equal to the
total of such amount, multiplied by a fraction--
(1) the numerator of which is the average monthly equity
market capitalization of the issuer for the 12-month period
immediately preceding the beginning of the fiscal year to which
such budget relates; and
(2) the denominator of which is the average monthly equity
market capitalization of all such issuers for such 12-month
period.
(g) Conforming Amendments.--Section 13(b)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(b)(2)) is
amended--
(1) in subparagraph (A), by striking ``and'' at the end;
(2) in subparagraph (B), by striking the period at the end
and inserting the following: ``; and
``(C) notwithstanding any other provision of law, pay the
allocable share of such issuer of a reasonable annual
accounting support fee or fees, determined in accordance with
section 109 of the Public Company Accounting Reform and
Investor Protection Act of 2002.''.
(h) Rule of Construction.--Nothing in this section shall be
construed to render either the Board, the standard setting body
referred to in subsection (a), or both, subject to procedures
in Congress to authorize or appropriate public funds, or to
prevent such organization from utilizing additional sources of
revenue for its activities, such as earnings from publication
sales, provided that each additional source of revenue shall
not jeopardize, in the judgment of the Commission, the actual
and perceived independence of such organization.
TITLE II--AUDITOR INDEPENDENCE
SEC. 201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS.
(a) Prohibited Activities.--Section 10A of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1) is amended by adding at
the end the following:
``(g) Prohibited Activities.--It shall be unlawful for a
registered public accounting firm (and any associated person of
that firm, to the extent determined appropriate by the
Commission) that performs for any issuer any audit required by
this title or the rules of the Commission under this title or,
beginning 180 days after the date of commencement of the
operations of the Public Company Accounting Oversight Board
established under section 101 of the Public Company Accounting
Reform and Investor Protection Act of 2002 (in this section
referred to as the `Board'), the rules of the Board, to provide
to that issuer, contemporaneously with the audit, any non-audit
service, including--
``(1) bookkeeping or other services related to the
accounting records or financial statements of the audit client;
``(2) financial information systems design and
implementation;
``(3) appraisal or valuation services, fairness opinions,
or contribution-in-kind reports;
``(4) actuarial services;
``(5) internal audit outsourcing services;
``(6) management functions or human resources;
``(7) broker or dealer, investment adviser, or investment
banking services;
``(8) legal services and expert services unrelated to the
audit; and
``(9) any other service that the Board determines, by
regulation, is impermissible.
``(h) Preapproval Required for Non-Audit Services.--A
registered public accounting firm may engage in any non-audit
service, including tax services, that is not described in any
of paragraphs (1) through (9) of subsection (g) for an audit
client, only if the activity is approved in advance by the
audit committee of the issuer, in accordance with subsection
(i).''.
(b) Exemption Authority.--The Board may, on a case by case
basis, exempt any person, issuer, public accounting firm, or
transaction from the prohibition on the provision of services
under section 10A(g) of the Securities Exchange Act of 1934 (as
added by this section), to the extent that such exemption is
necessary or appropriate in the public interest and is
consistent with the protection of investors, and subject to
review by the Commission in the same manner as for rules of the
Board under section 107.
SEC. 202. PREAPPROVAL REQUIREMENTS.
Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding at
the end the following:
``(i) Preapproval Requirements.--
``(1) In general.--
``(A) Audit committee action.--All auditing services (which
may entail providing comfort letters in connection with
securities underwritings) and non-audit services, other than as
provided in subparagraph (B), provided to an issuer by the
auditor of the issuer shall be preapproved by the audit
committee of the issuer.
``(B) De minimus exception.--The preapproval requirement
under subparagraph (A) is waived with respect to the provision
of non-audit services for an issuer, if--
``(i) the aggregate amount of all such non-audit services
provided to the issuer constitutes not more than 5 percent of
the total amount of revenues paid by the issuer to its auditor;
``(ii) such services were not recognized by the issuer at
the time of the engagement to be non-audit services; and
``(iii) such services are promptly brought to the attention
of the audit committee of the issuer and approved by the audit
committee prior to the completion of the audit, by 1 or more
members of the audit committee who are members of the board of
directors to whom authority to grant such approvals has been
delegated by the audit committee.
``(2) Disclosure to investors.--Approval by an audit
committee of an issuer under this subsection of a non-audit
service to be performed by the auditor of the issuer shall be
disclosed to investors in periodic reports required by section
13(a).
``(3) Delegation authority.--The audit committee of an
issuer may delegate to 1 or more designated members of the
audit committee who are independent directors of the board of
directors, the authority to grant preapprovals required by this
subsection. The decisions of any member to whom authority is
delegated under this paragraph to preapprove an activity under
this subsection shall be presented to the full audit committee
at each of its scheduled meetings.
``(4) Approval of audit services for other purposes.--In
carrying out its duties under subsection (m)(2), if the audit
committee of an issuer approves an audit service within the
scope of the engagement of the auditor, such audit service
shall be deemed to have been preapproved for purposes of this
subsection.''.
SEC. 203. AUDIT PARTNER ROTATION.
Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding at
the end the following:
``(j) Audit Partner Rotation.--It shall be unlawful for a
registered public accounting firm to provide audit services to
an issuer if the lead audit partner (having primary
responsibility for the audit) or the audit partner responsible
for reviewing the audit that is assigned to perform those audit
services has performed audit services for that issuer in each
of the 5 previous fiscal years of that issuer.''.
SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES.
Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding at
the end the following:
``(k) Reports to Audit Committees.--Each registered public
accounting firm that performs for any issuer any audit required
by this title shall timely report to the audit committee of the
issuer--
``(1) all critical accounting policies and practices to be
used;
``(2) all alternative treatments of financial information
within generally accepted accounting principles that have been
discussed with management officials of the issuer,
ramifications of the use of such alternative disclosures and
treatments, and the treatment preferred by the registered
public accounting firm; and
``(3) other material written communications between the
registered public accounting firm and the management of the
issuer, such as any management letter or schedule of unadjusted
differences.''.
SEC. 205. CONFORMING AMENDMENTS.
(a) Definitions.--Section 3(a) of the Securities Exchange
Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end
the following:
``(58) Audit committee.--The term `audit committee' means--
``(A) a committee (or equivalent body) established by and
amongst the board of directors of an issuer for the purpose of
overseeing the accounting and financial reporting processes of
the issuer and audits of the financial statements of the
issuer; and
``(B) if no such committee exists with respect to an
issuer, the entire board of directors of the issuer.
``(59) Registered public accounting firm.--The term
`registered public accounting firm' has the same meaning as in
section 3 of the Public Company Accounting Reform and Investor
Protection Act of 2002.''.
(b) Auditor Requirements.--Section 10A of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1) is amended--
(1) by striking ``an independent public accountant'' each
place that term appears and inserting ``a registered public
accounting firm'';
(2) by striking ``the independent public accountant'' each
place that term appears and inserting ``the registered public
accounting firm'';
(3) in subsection (c), by striking ``No independent public
accountant'' and inserting ``No registered public accounting
firm''; and
(4) in subsection (b)--
(A) by striking ``the accountant'' each place that term
appears and inserting ``the firm'';
(B) by striking ``such accountant'' each place that term
appears and inserting ``such firm''; and
(C) in paragraph (4), by striking ``the accountant's
report'' and inserting ``the report of the firm''.
(c) Other References.--The Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.) is amended--
(1) in section 12(b)(1) (15 U.S.C. 78l(b)(1)), by striking
``independent public accountants'' each place that term appears
and inserting ``a registered public accounting firm''; and
(2) in subsections (e) and (i) of section 17 (15 U.S.C.
78q), by striking ``an independent public accountant'' each
place that term appears and inserting ``a registered public
accounting firm''.
(d) Conforming Amendment.--Section 10A(f ) of the
Securities Exchange Act of 1934 (15 U.S.C. 78k(f )) is
amended--
(1) by striking ``Definition'' and inserting
``Definitions''; and
(2) by adding at the end the following: ``As used in this
section, the term `issuer' means an issuer (as defined in
section 3), the securities of which are registered under
section 12, or that is required to file reports pursuant to
section 15(d), or that will be required to file such reports at
the end of a fiscal year of the issuer in which a registration
statement filed by such issuer has become effective pursuant to
the Securities Act of 1933 (15 U.S.C. 77a et. seq.), unless its
securities are registered under section 12 of this title on or
before the end of such fiscal year.''.
SEC. 206. CONFLICTS OF INTEREST.
Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding at
the end the following:
``(l) Conflicts of Interest.--It shall be unlawful for a
registered public accounting firm to perform for an issuer any
audit service required by this title, if a chief executive
officer, controller, chief financial officer, chief accounting
officer or any person serving in an equivalent position for the
issuer was employed by that registered independent public
accounting firm and participated in any capacity in the audit
of that issuer during the 1-year period preceding the date of
the initiation of the audit.''.
SEC. 207. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC ACCOUNTING
FIRMS.
(a) Study and Review Required.--The Comptroller General of
the United States shall conduct a study and review of the
potential effects of requiring the mandatory rotation of
registered public accounting firms.
(b) Report Required.--Not later than 1 year after the date
of enactment of this Act, the Comptroller General shall submit
a report to the Committee on Banking, Housing, and Urban
Affairs of the Senate and the Committee on Financial Services
of the House of Representatives on the results of the study and
review required by this section.
(c) Definition.--For purposes of this section, the term
``mandatory rotation'' refers to the imposition of a limit on
the period of years in which a particular registered public
accounting firm may be the auditor of record for a particular
issuer.
SEC. 208. COMMISSION AUTHORITY.
(a) Commission Regulations.--Not later than 180 days after
the date of enactment of this Act, the Commission shall issue
final regulations to carry out each of subsections (g) through
(l) of section 10A of the Securities Exchange Act of 1934, as
added by this title.
(b) Auditor Independence.--It shall be unlawful for any
registered public accounting firm (or an associated person
thereof, as applicable) to prepare or issue any audit report
with respect to any issuer, if the firm or associated person
engages in any activity with respect to that issuer prohibited
by any of subsections (g) through (l) of section 10A of the
Securities Exchange Act of 1934, as added by this title, or any
rule or regulation of the Commission or of the Board issued
thereunder.
SEC. 209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY AUTHORITIES.
In supervising nonregistered public accounting firms and
their associated persons, appropriate State regulatory
authorities should make an independent determination of the
proper standards applicable, particularly taking into
consideration the size and nature of the business of the
accounting firms they supervise and the size and nature of the
business of the clients of those firms. The standards applied
by the Board under this Act should not be presumed to be
applicable for purposes of this section for small and medium
sized nonregistered public accounting firms.
TITLE III--CORPORATE RESPONSIBILITY
SEC. 301. PUBLIC COMPANY AUDIT COMMITTEES.
Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78f ) is amended by adding at the end the following:
``(m) Standards Relating to Audit Committees.--
``(1) Commission rules.--
``(A) In general.--Effective not later than 270 days after
the date of enactment of this subsection, the Commission shall,
by rule, direct the national securities exchanges and national
securities associations to prohibit the listing of any security
of an issuer that is not in compliance with the requirements of
any portion of paragraphs (2) through (6).
``(B) Opportunity to cure defects.--The rules of the
Commission under subparagraph (A) shall provide for appropriate
procedures for an issuer to have an opportunity to cure any
defects that would be the basis for a prohibition under
subparagraph (A), before the imposition of such prohibition.
``(2) Responsibilities relating to registered public
accounting firms.--The audit committee of each issuer, in its
capacity as a committee of the board of directors, shall be
directly responsible for the appointment, compensation, and
oversight of the work of any registered public accounting firm
employed by that issuer (including resolution of disagreements
between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit
report or related work, and each such registered public
accounting firm shall report directly to the audit committee.
``(3) Independence.--
``(A) In general.--Each member of the audit committee of
the issuer shall be a member of the board of directors of the
issuer, and shall otherwise be independent.
``(B) Criteria.--In order to be considered to be
independent for purposes of this paragraph, a member of an
audit committee of an issuer may not, other than in his or her
capacity as a member of the audit committee, the board of
directors, or any other board committee--
``(i) accept any consulting, advisory, or other
compensatory fee from the issuer; or
``(ii) be an affiliated person of the issuer or any
subsidiary thereof.
``(C) Exemption authority.--The Commission may exempt from
the requirements of subparagraph (B) a particular relationship
with respect to audit committee members, as the Commission
determines appropriate in light of the circumstances.
``(4) Complaints.--Each audit committee shall establish
procedures for--
``(A) the receipt, retention, and treatment of complaints
received by the issuer regarding accounting, internal
accounting controls, or auditing matters; and
``(B) the confidential, anonymous submission by employees
of the issuer of concerns regarding questionable accounting or
auditing matters.
``(5) Authority to engage advisers.--Each audit committee
shall have the authority to engage independent counsel and
other advisers, as it determines necessary to carry out its
duties.
``(6) Funding.--Each issuer shall provide for appropriate
funding, as determined by the audit committee, in its capacity
as a committee of the board of directors, for payment of
compensation--
``(A) to the registered public accounting firm employed by
the issuer for the purpose of rendering or issuing an audit
report; and
``(B) to any advisers employed by the audit committee under
paragraph (5).''.
SEC. 302. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) Certification of Periodic Reports.--Each periodic
report containing financial statements filed by an issuer with
the Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934, shall be accompanied by a
written statement by the chief executive officer and chief
financial officer (or the equivalent thereof ) of the issuer.
(b) Content.--The statement required by subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report, and that
those financial statements and disclosures fairly present, in
all material respects, the operations and financial condition
of the issuer.
(c) Foreign Reincorporations Have No Effect.--Nothing in
this section 302 shall be interpreted or applied in any way to
allow any issuer to lessen the legal force of the statement
required under this section 302, by an issuer having
reincorporated or having engaged in any other transaction that
resulted in the transfer of the corporate domicile or offices
of the issuer from inside the United States to outside of the
United States.
SEC. 303. 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 or
director of an issuer, or any other person acting under the
direction thereof, 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 that issuer for the
purpose of rendering such financial statements materially
misleading.
(b) Enforcement.--In any civil proceeding, the Commission
shall have exclusive authority to enforce this section and any
rule or regulation issued under this section.
(c) 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 issued thereunder.
(d) Deadline for Rulemaking.--The Commission shall--
(1) propose the rules or regulations required by this
section, not later than 90 days after the date of enactment of
this Act; and
(2) issue final rules or regulations required by this
section, not later than 270 days after that date of enactment.
SEC. 304. FORFEITURE OF CERTAIN BONUSES AND PROFITS.
(a) Additional Compensation Prior to Noncompliance With
Commission Financial Reporting Requirements.--If an issuer is
required to prepare an accounting restatement due to the
material noncompliance of the issuer, as a result of
misconduct, with any financial reporting requirement under the
securities laws, the chief executive officer and chief
financial officer of the issuer shall reimburse the issuer
for--
(1) any bonus or other incentive-based or equity-based
compensation received by that person from the issuer during the
12-month period following the first public issuance or filing
with the Commission (whichever first occurs) of the financial
document embodying such financial reporting requirement; and
(2) any profits realized from the sale of securities of the
issuer during that 12-month period.
(b) Commission Exemption Authority.--The Commission may
exempt any person from the application of subsection (a), as it
deems necessary and appropriate.
SEC. 305. OFFICER AND DIRECTOR BARS AND PENALTIES.
(a) Unfitness Standard.--
(1) Securities exchange act of 1934.--Section 21(d)(2) of
the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(2)) is
amended by striking ``substantial unfitness'' and inserting
``unfitness''.
(2) Securities act of 1933.--Section 20(e) of the
Securities Act of 1933 (15 U.S.C. 77t(e)) is amended by
striking ``substantial unfitness'' and insert ``unfitness''.
(b) Equitable Relief.--Section 21(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended--
(1) by redesignating paragraphs (2) through (4) as
paragraphs (3) through (5), respectively; and
(2) by inserting after paragraph (1) the following:
``(2) Equitable relief.--In any action or proceeding
brought or instituted by the Commission under any provision of
the securities laws, the Commission may seek, and any Federal
court may grant, any equitable relief that may be appropriate
or necessary for the benefit of investors.''.
SEC. 306. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS
PROHIBITED.
(a) Prohibition.--It shall be unlawful for any director or
executive officer of an issuer of any equity security (other
than an exempted security), directly or indirectly, to
purchase, sell, or otherwise acquire or transfer any equity
security of the issuer (other than an exempted security),
during any blackout period with respect to such equity
security, in accordance with any exception provided by rule of
the Commission pursuant to subsection (d).
(b) Effectiveness.--
(1) Notice requirements.--Except as provided in paragraph
(2), no blackout period may take effect earlier than 30 days
after the date on which written notice of such blackout period
is provided by the plan administrator to the participants or
beneficiaries.
(2) Exception.--The 30-day notice requirement in paragraph
(1) shall not apply, and notice under paragraph (1) shall be
furnished as soon as is reasonably possible, in any case in
which--
(A) a deferral of the blackout period would violate the
requirements of subparagraph (A) or (B) of section 404(a)(1) of
the Employment Retirement Income Security Act of 1974, and a
fiduciary of the plan so reasonably determines in writing; or
(B) the inability to provide the 30-day notice is due to
events that were unforeseeable, or circumstances beyond the
reasonable control of the plan administrator, and a fiduciary
of the plan so reasonably determines in writing.
(3) Written notice.--The notice required to be provided
under paragraph (1) shall be in writing, except that such
notice may be in electronic form to the extent that such form
is reasonably accessible to the recipient.
(c) Remedy.--
(1) In general.--Any profit realized by a director or
executive officer referred to in subsection (a) from any
purchase, sale, or other acquisition or transfer in violation
of this section shall inure to and be recoverable by the
issuer, irrespective of any intention on the part of such
director or executive officer in entering into the transaction.
(2) Actions to recover profits.--An action to recover
profits in accordance with this section 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 fails or refuses
to bring such action within 60 days after the date of request,
or fails diligently to prosecute the action thereafter, except
that no such suit shall be brought more than 2 years after the
date on which such profit was realized.
(d) Rulemaking Authorized.--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.
(e) Definitions.--For purposes of this section--
(1) the term ``blackout period'', with respect to the
equity securities of any issuer--
(A) means any period during which the ability of not fewer
than 50 percent of the participants or beneficiaries under all
applicable individual account plans maintained by the issuer to
purchase, sell, or otherwise acquire or transfer an interest in
any equity of such issuer held in such an individual account
plan, is suspended by the issuer or a fiduciary of the plan;
and
(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; and
(2) the term ``individual account plan'' has the same
meaning as in section 3(34) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1002(34)).
TITLE IV--ENHANCED FINANCIAL DISCLOSURES
SEC. 401. DISCLOSURES IN PERIODIC REPORTS.
(a) Disclosures Required.--Section 13 of the Securities
Exchange Act of 1934 (15 U.S.C. 78m) is amended by adding at
the end the following:
``(i) Accuracy of Financial Reports.--Each financial report
that is required to be prepared in accordance with generally
accepted accounting principles under this title and filed with
the Commission shall reflect all material correcting
adjustments that have been identified by a registered public
accounting firm in accordance with generally accepted
accounting principles and the rules and regulations of the
Commission.
``(j) Off-Balance Sheet Transactions.--Not later than 180
days after the date of enactment of the Public Company
Accounting Reform and Investor Protection Act of 2002, the
Commission shall issue final rules providing that each annual
and quarterly financial report required to be filed with the
Commission shall disclose all material off-balance sheet
transactions, arrangements, obligations (including contingent
obligations), and other relationships of the issuer with
unconsolidated entities or other persons, that may have a
material current or future effect on financial condition,
changes in financial condition, results of operations,
liquidity, capital expenditures, capital resources, or
significant components of revenues or expenses.''.
(b) Commission Rules on Pro Forma Figures.--Not later than
180 days after the date of enactment of this Act, the
Commission shall issue final rules providing that pro forma
financial information included in any periodic or other report
filed with the Commission pursuant to the securities laws, or
in any public disclosure or press or other release, shall be
presented in a manner that--
(1) does not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the
pro forma financial information, in light of the circumstances
under which it is presented, not misleading; and
(2) reconciles it with the financial condition and results
of operations of the issuer under generally accepted accounting
principles.
(c) Study and Report on Special Purpose Entities.--
(1) Study required.--The Commission shall, not later than 1
year after the effective date of adoption of off-balance sheet
disclosure rules required by section 13(j) of the Securities
Exchange Act of 1934, as added by this section, complete a
study of filings by issuers and their disclosures to
determine--
(A) the extent of off-balance sheet transactions, including
assets, liabilities, leases, losses, and the use of special
purpose entities; and
(B) whether generally accepted accounting rules result in
financial statements of issuers reflecting the economics of
such off-balance sheet transactions to investors in a
transparent fashion.
(2) Report and recommendations.--Not later than 6 months
after the date of completion of the study required by paragraph
(1), the Commission shall submit a report to the President, the
Committee on Banking, Housing, and Urban Affairs of the Senate,
and the Committee on Financial Services of the House of
Representatives, setting forth--
(A) the amount or an estimate of the amount of off-balance
sheet transactions, including assets, liabilities, leases, and
losses of, and the use of special purpose entities by, issuers
filing periodic reports pursuant to section 13 or 15 of the
Securities Exchange Act of 1934;
(B) the extent to which special purpose entities are used
to facilitate off-balance sheet transactions;
(C) whether generally accepted accounting principles or the
rules of the Commission result in financial statements of
issuers reflecting the economics of such transactions to
investors in a transparent fashion;
(D) whether generally accepted accounting principles
specifically result in the consolidation of special purpose
entities sponsored by an issuer in cases in which the issuer
has the majority of the risks and rewards of the special
purpose entity; and
(E) any recommendations of the Commission for improving the
transparency and quality of reporting off-balance sheet
transactions in the financial statements and disclosures
required to be filed by an issuer with the Commission.
SEC. 402. ENHANCED CONFLICT OF INTEREST PROVISIONS.
(a) Prohibition on Personal Loans to Executives.--Section
13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as
amended by this Act, is amended by adding at the end the
following:
``(k) Prohibition on Personal Loans to Executives.--
``(1) In general.--It shall be unlawful for any issuer,
directly or indirectly, to extend or maintain credit, or
arrange for the extension of credit, in the form of a personal
loan to or for any director or executive officer (or equivalent
thereof ) of that issuer.
``(2) Limitation.--Paragraph (1) does not preclude any home
improvement and manufactured home loans (as that term is
defined in section 5 of the Home Owners Loan Act), consumer
credit (as defined in section 103 of the Truth in Lending Act),
or any extension of credit under an open end credit plan (as
defined in section 103 of the Truth in Lending Act (15 U.S.C.
1602)), that is--
``(A) made in the ordinary course of the consumer credit
business of such issuer;
``(B) of a type that is generally made available by such
issuer to the public; and
``(C) made by such issuer on market terms, or terms that
are no more favorable than those offered by the issuer to the
general public for such loans.''.
SEC. 403. DISCLOSURES OF TRANSACTIONS INVOLVING MANAGEMENT AND
PRINCIPAL STOCKHOLDERS.
Section 16(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78p(a)) is amended--
(1) by striking ``security, shall file,'' and inserting the
following:
``(1) shall file''; and
(2) by striking ``beneficial owner, and'' and all that
follows through the end of the subsection and inserting the
following: ``beneficial owner; and
``(2) if there has been a change in such ownership, or if
such person shall have purchased or sold a security-based swap
agreement (as defined in section 206B of the Gramm-Leach-Bliley
Act) involving such equity security, shall file with the
Commission (and if such security is registered on a national
securities exchange, shall also file with the exchange), a
statement before the end of the second business day following
the day on which the subject transaction has been executed, or
at such other time as the Commission shall establish, by rule,
in any case in which the Commission determines that such 2-day
period is not feasible, indicating ownership by that person at
the date of filing, any such changes in such ownership, and
such purchases and sales of the security-based swap agreements
as have occurred since the most recent such filing under this
paragraph.''.
SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.
(a) Rules Required.--The Commission shall prescribe rules
requiring each annual report required by section 13 of the
Securities Exchange Act of 1934 (15 U.S.C. 78m) to contain an
internal control report, which shall--
(1) state the responsibility of management for establishing
and maintaining an adequate internal control structure and
procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent
fiscal year of the issuer, of the effectiveness of the internal
control structure and procedures of the issuer for financial
reporting.
(b) Internal Control Evaluation and Reporting.--With
respect to the internal control assessment required by
subsection (a), each registered public accounting firm that
prepares or issues the audit report for the issuer shall attest
to, and report on, the assessment made by the management of the
issuer. An attestation made under this subsection shall be made
in accordance with standards for attestation engagements issued
or adopted by the Board. Any such attestation shall not be the
subject of a separate engagement.
SEC. 405. EXEMPTION.
Nothing in section 401, 402, or 404, the amendments made by
those sections, or the rules of the Commission under those
sections shall apply to any investment company registered under
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-
8).
SEC. 406. CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS.
(a) Code of Ethics Disclosure.--The Commission shall issue
rules to require each issuer, together with periodic reports
required pursuant to sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, to disclose whether or not, and if not,
the reason therefor, such issuer has adopted a code of ethics
for senior financial officers, applicable to its principal
financial officer, comptroller or principal accounting officer,
or persons performing similar functions.
(b) Changes in Codes of Ethics.--The Commission shall
revise its regulations concerning matters requiring prompt
disclosure on Form 8-K (or any successor thereto) to require
the immediate disclosure, by means of the filing of such form,
dissemination by the Internet or by other electronic means, by
any issuer of any change in or waiver of the code of ethics of
the issuer.
(c) Definition.--In this section, the term ``code of
ethics'' means such standards as are reasonably necessary to
promote--
(1) honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest between
personal and professional relationships;
(2) full, fair, accurate, timely, and understandable
disclosure in the periodic reports required to be filed by the
issuer; and
(3) compliance with applicable governmental rules and
regulations.
(d) Deadline for Rulemaking.--The Commission shall--
(1) propose rules to implement this section, not later than
90 days after the date of enactment of this Act; and
(2) issue final rules to implement this section, not later
than 180 days after that date of enactment.
SEC. 407. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT.
(a) Rules Defining ``Financial Expert''.--The Commission
shall issue rules, as necessary or appropriate in the public
interest and consistent with the protection of investors, to
require each issuer, together with periodic reports required
pursuant to sections 13(a) and 15(d) of the Securities Exchange
Act of 1934, to disclose whether or not, and if not, the
reasons therefor, the audit committee of that issuer is
comprised of at least 1 member who is a financial expert, as
such term is defined by the Commission.
(b) Considerations.--In defining the term ``financial
expert'' for purposes of subsection (a), the Commission shall
consider whether a person has, through education and experience
as a public accountant or auditor or a principal financial
officer, comptroller, or principal accounting officer of an
issuer, or from a position involving the performance of similar
functions--
(1) an understanding of generally accepted accounting
principles and financial statements;
(2) experience in--
(A) the preparation or auditing of financial statements of
generally comparable issuers; and
(B) the application of such principles in connection with
the accounting for estimates, accruals, and reserves;
(3) experience with internal accounting controls; and
(4) an understanding of audit committee functions.
(c) Deadline for Rulemaking.--The Commission shall--
(1) propose rules to implement this section, not later than
90 days after the date of enactment of this Act; and
(2) issue final rules to implement this section, not later
than 180 days after that date of enactment.
TITLE V--ANALYST CONFLICTS OF INTEREST
SEC. 501. TREATMENT OF SECURITIES ANALYSTS BY REGISTERED SECURITIES
ASSOCIATIONS.
(a) Rules Regarding Securities Analysts.--Section 15A of
the Securities Exchange Act of 1934 (15 U.S.C. 78o-3) is
amended by adding at the end the following:
``(n) Rules Regarding Securities Analysts.--
``(1) Analyst protections.--The Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange, shall
have adopted, not later than 1 year after the date of enactment
of this subsection, rules reasonably designed to address
conflicts of interest that can arise when research analysts
recommend equity securities in research reports and public
appearances, in order to improve the objectivity of research
and provide investors with more useful and reliable
information, including rules designed--
``(A) to foster greater public confidence in securities
research, and to protect the objectivity and independence of
securities analysts, by--
``(i) restricting the prepublication clearance or approval
of research reports by persons employed by the broker or dealer
who are engaged in investment banking activities, or persons
not directly responsible for investment research, other than
legal or compliance staff;
``(ii) limiting the supervision and compensatory evaluation
of securities analysts to officials employed by the broker or
dealer who are not engaged in investment banking activities;
and
``(iii) requiring that a broker or dealer and persons
employed by a broker or dealer who are involved with investment
banking activities may not, directly or indirectly, retaliate
against or threaten to retaliate against any securities analyst
employed by that broker or dealer or its affiliates as a result
of an adverse, negative, or otherwise unfavorable research
report that may adversely affect the present or prospective
investment banking relationship of the broker or dealer with
the issuer that is the subject of the research report, except
that such rules may not limit the authority of a broker or
dealer to discipline a securities analyst for causes other than
such research report in accordance with the policies and
procedures of the firm;
``(B) to define periods during which brokers or dealers who
have participated, or are to participate, in a public offering
of securities as underwriters or dealers should not publish or
otherwise distribute research reports relating to such
securities or to the issuer of such securities;
``(C) to establish structural and institutional safeguards
within registered brokers or dealers to assure that securities
analysts are separated by appropriate informational partitions
within the firm from the review, pressure, or oversight of
those whose involvement in investment banking activities might
potentially bias their judgment or supervision; and
``(D) to address such other issues as the Commission, or
such association or exchange, determines appropriate.
``(2) Disclosure.--The Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange, shall
have adopted, not later than 1 year after the date of enactment
of this subsection, rules reasonably designed to require each
securities analyst to disclose in public appearances, and each
registered broker or dealer to disclose in each research
report, as applicable, conflicts of interest that are known or
should have been known by the securities analyst or the broker
or dealer, to exist at the time of the appearance or the date
of distribution of the report, including--
``(A) the extent to which the securities analyst has debt
or equity investments in the issuer that is the subject of the
appearance or research report;
``(B) whether any compensation has been received by the
registered broker or dealer, or any affiliate thereof,
including the securities analyst, from the issuer that is the
subject of the appearance or research report, subject to such
exemptions as the Commission may determine appropriate and
necessary to prevent disclosure by virtue of this subparagraph
of material non-public information regarding specific potential
future investment banking transactions of such issuer, as is
appropriate in the public interest and consistent with the
protection of investors;
``(C) whether an issuer, the securities of which are
recommended in the appearance or research report, currently is,
or during the 1-year period preceding the date of the
appearance or date of distribution of the report has been, a
client of the registered broker or dealer, and if so, stating
the types of services provided to the issuer;
``(D) whether the securities analyst received compensation
with respect to a research report, based upon (among any other
factors) the investment banking revenues (either generally or
specifically earned from the issuer being analyzed) of the
registered broker or dealer; and
``(E) such other disclosures of conflicts of interest that
are material to investors, research analysts, or the broker or
dealer as the Commission, or such association or exchange,
determines appropriate.
``(3) Definitions.--In this subsection--
``(A) the term `securities analyst' means any associated
person of a registered broker or dealer that is principally
responsible for, and any associated person who reports directly
or indirectly to a securities analyst in connection with, the
preparation of the substance of a research report, whether or
not any such person has the job title of `securities analyst';
and
``(B) the term `research report' means a written or
electronic communication that includes an analysis of equity
securities of individual companies or industries, and that
provides information reasonably sufficient upon which to base
an investment decision.''.
(b) Enforcement.--Section 21B(a) of the Securities Exchange
Act of 1934 (15 U.S.C. 78u-2(a)) is amended by inserting
``15A(n),'' before ``15B''.
(c) Commission Authority.--The Commission may promulgate
and amend its regulations, or direct a registered securities
association or national securities exchange to promulgate and
amend its rules, to carry out section 15A(n) of the Securities
Exchange Act of 1934, as added by this section, as is necessary
for the protection of investors and in the public interest.
TITLE VI--COMMISSION RESOURCES AND AUTHORITY
SEC. 601. AUTHORIZATION OF APPROPRIATIONS.
Section 35 of the Securities Exchange Act of 1934 (15
U.S.C. 78kk) is amended to read as follows:
``SEC. 35. AUTHORIZATION OF APPROPRIATIONS.
``In addition to any other funds authorized to be
appropriated to the Commission, there are authorized to be
appropriated to carry out the functions, powers, and duties of
the Commission, $776,000,000 for fiscal year 2003, of which--
``(1) $102,700,000 shall be available to fund additional
compensation, including salaries and benefits, as authorized in
the Investor and Capital Markets Fee Relief Act (Public Law
107-123; 115 Stat. 2390 et seq.);
``(2) $108,400,000 shall be available for information
technology, security enhancements, and recovery and mitigation
activities in light of the terrorist attacks of September 11,
2001; and
``(3) $98,000,000 shall be available to add not fewer than
an additional 200 qualified professionals to provide enhanced
oversight of auditors and audit services required by the
Federal securities laws, and to improve Commission
investigative and disciplinary efforts with respect to such
auditors and services, as well as for additional professional
support staff necessary to strengthen the programs of the
Commission involving Full Disclosure and Prevention and
Suppression of Fraud, risk management, industry technology
review, compliance, inspections, examinations, market
regulation, and investment management.''.
SEC. 602. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.
(a) In General.--The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by inserting after section 4B
the following:
``SEC. 4C. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.
``(a) Authority To Censure.--The Commission may censure any
person, or deny, temporarily or permanently, to any person the
privilege of appearing or practicing before the Commission in
any way, if that person is found by the Commission, after
notice and opportunity for hearing in the matter--
``(1) not to possess the requisite qualifications to
represent others;
``(2) to be lacking in character or integrity, or to have
engaged in unethical or improper professional conduct; or
``(3) to have willfully violated, or willfully aided and
abetted the violation of, any provision of the securities laws
or the rules and regulations issued thereunder.
``(b) Definition.--With respect to any registered public
accounting firm, for purposes of this section, the term
`improper professional conduct' means--
``(1) intentional or knowing conduct, including reckless
conduct, that results in a violation of applicable professional
standards; and
``(2) negligent conduct in the form of--
``(A) a single instance of highly unreasonable conduct that
results in a violation of applicable professional standards in
circumstances in which the registered public accounting firm
knows, or should know, that heightened scrutiny is warranted;
or
``(B) repeated instances of unreasonable conduct, each
resulting in a violation of applicable professional standards,
that indicate a lack of competence to practice before the
Commission.
``(c) Study and Report.--(1) The Commission shall conduct a
study to determine based upon information for the period from
January 1, 1998 to December 31, 2001--
``(A) the number of `securities professionals', which term
shall mean public accountants, public accounting firms,
investment bankers, investment advisers, brokers, dealers,
attorneys, and other securities professionals practicing before
the Commission--
``(i) who have been found to have aided and abetted a
violation of the Federal securities laws, including rules or
regulations promulgated thereunder (hereinafter collectively
referred to as `Federal securities laws'), but who have not
been sanctioned, disciplined, or otherwise penalized as a
primary violator in any administrative action or civil
proceeding, including in any settlement of such actions or
proceedings (referred to hereinafter as `aiders and abettors');
and
``(ii) who have been found to have been primary violators
of the Federal securities laws;
``(B) a description of the Federal securities laws
violations committed by aiders and abettors and by primary
violators, including--
``(i) the specific provisions of the Federal securities
laws violated;
``(ii) the specific sanctions and penalties imposed upon,
such aiders and abettors and primary violators, including the
amount of any monetary penalties assessed upon and collected
from such persons;
``(iii) the occurrence of multiple violations by the same
person or persons either as an aider or abettor or as a primary
violator; and
``(iv) whether as to each such violator disciplinary
sanctions have been imposed, including any censure, suspension,
temporary bar, or permanent bar to practice before the
Commission; and
``(C) the amount of disgorgement, restitution or any other
fines or payments the Commission has (i) assessed upon and (ii)
collected from, aiders and abettors and from primary violators.
``(2) A report based upon the study conducted pursuant to
subsection (c)(1) shall be submitted to the Senate Committee on
Banking, Housing, and Urban Affairs no later than 6 months
after the date of enactment of the `Public Company Accounting
Reform and Investor Protection Act of 2002'.
``(d) Rules of Professional Responsibility for Attorneys.--
Not later than 180 days after the date of enactment of this
section, the Commission shall establish rules, in the public
interest and for the protection of investors, setting forth
minimum standards of professional conduct for attorneys
appearing and practicing before the Commission in any way in
the representation of public companies, including a rule
requiring an attorney to report evidence of a material
violation of securities law or breach of fiduciary duty or
similar violation by the company or any agent thereof to the
chief legal counsel or the chief executive officer of the
company (or the equivalent thereof ) and, if the counsel or
officer does not appropriately respond to the evidence
(adopting, as necessary, appropriate remedial measures or
sanctions with respect to the violation), requiring the
attorney to report the evidence to the audit committee of the
board of directors or to another committee of the board of
directors comprised solely of directors not employed directly
or indirectly by the company, or to the board of directors.''.
(b) Electronic Filing.--Notwithstanding the provisions of
section 403 of this Act, section 16(a)(2) of the Securities and
Exchange Act of 1934, as added by section 403, is amended to
read as follows:
``(2) if there has been a change in such ownership, or if
such person shall have purchased or sold a security-based swap
agreement (as defined in section 206B of the Gramm-Leach-Bliley
Act) involving such equity security, shall file electronically
with the Commission (and if such security is registered on a
national securities exchange, shall also file with the
exchange), a statement before the end of the second business
day following the day on which the subject transaction has been
executed, or at such other times as the Commission shall
establish, by rule, in any case in which the Commission
determines that such 2 day period is not feasible, and the
Commission shall provide that statement on a publicly
accessible Internet site not later than the end of the business
day following that filing, and the issuer (if the issuer
maintains a corporate website) shall provide that statement on
that corporate website not later than the end of the business
day following that filing (the requirements of this paragraph
with respect to electronic filing and providing the statement
on a corporate website shall take effect 1 year after the date
of enactment of this paragraph), indicating ownership by that
person at the date of filing, any such changes in such
ownership, and such purchases and sales of the security-based
swap agreements as have occurred since the most recent such
filing under this paragraph.''.
SEC. 603. FEDERAL COURT AUTHORITY TO IMPOSE PENNY STOCK BARS.
(a) Securities Exchange Act of 1934.--Section 21(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u(d)), as amended
by this Act, is amended by adding at the end the following:
``(7) Authority of a court to prohibit persons from
participating in an offering of penny stock.--
``(A) In general.--In any proceeding under paragraph (1)
against any person participating in, or, at the time of the
alleged misconduct who was participating in, an offering of
penny stock, the court may prohibit that person from
participating in an offering of penny stock, conditionally or
unconditionally, and permanently or for such period of time as
the court shall determine.
``(B) Definition.--For purposes of this paragraph, the term
`person participating in an offering of penny stock' includes
any person engaging in activities with a broker, dealer, or
issuer for purposes of issuing, trading, or inducing or
attempting to induce the purchase or sale of, any penny stock.
The Commission may, by rule or regulation, define such term to
include other activities, and may, by rule, regulation, or
order, exempt any person or class of persons, in whole or in
part, conditionally or unconditionally, from inclusion in such
term.
(b) Securities Act of 1933.--Section 20 of the Securities
Act of 1933 (15 U.S.C. 77t) is amended by adding at the end the
following:
``(g) Authority of a Court To Prohibit Persons From
Participating in an Offering of Penny Stock.--
``(1) In general.--In any proceeding under subsection (a)
against any person participating in, or, at the time of the
alleged misconduct, who was participating in, an offering of
penny stock, the court may prohibit that person from
participating in an offering of penny stock, conditionally or
unconditionally, and permanently or for such period of time as
the court shall determine.
``(2) Definition.--For purposes of this subsection, the
term `person participating in an offering of penny stock'
includes any person engaging in activities with a broker,
dealer, or issuer for purposes of issuing, trading, or inducing
or attempting to induce the purchase or sale of, any penny
stock. The Commission may, by rule or regulation, define such
term to include other activities, and may, by rule, regulation,
or order, exempt any person or class of persons, in whole or in
part, conditionally or unconditionally, from inclusion in such
term.''.
SEC. 604. QUALIFICATIONS OF ASSOCIATED PERSONS OF BROKERS AND DEALERS.
(a) Brokers and Dealers.--Section 15(b)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o) is amended--
(1) by striking subparagraph (F) and inserting the
following:
``(F) is subject to any order of the Commission barring or
suspending the right of the person to be associated with a
broker or dealer;''; and
(2) in subparagraph (G), by striking the period at the end
and inserting the following: ``; or
``(H) is subject to any final order of a State securities
commission (or any agency or officer performing like
functions), State authority that supervises or examines banks,
savings associations, or credit unions, State insurance
commission (or any agency or office performing like functions),
an appropriate Federal banking agency (as defined in section 3
of the Federal Deposit Insurance Act (12 U.S.C. 1813(q))), or
the National Credit Union Administration, that--
``(i) bars such person from association with an entity
regulated by such commission, authority, agency, or officer, or
from engaging in the business of securities, insurance,
banking, savings association activities, or credit union
activities; or
``(ii) constitutes a final order based on violations of any
laws or regulations that prohibit fraudulent, manipulative, or
deceptive conduct.''.
(b) Investment Advisers.--Section 203(e) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3(e)) is amended by
striking paragraphs (7) and (8) and inserting the following:
``(7) is subject to any order of the Commission barring or
suspending the right of the person to be associated with an
investment adviser; or
``(8) is subject to any final order of a State securities
commission (or any agency or officer performing like
functions), State authority that supervises or examines banks,
savings associations, or credit unions, State insurance
commission (or any agency or office performing like functions),
an appropriate Federal banking agency (as defined in section 3
of the Federal Deposit Insurance Act (12 U.S.C. 1813(q))), or
the National Credit Union Administration, that--
``(A) bars such person from association with an entity
regulated by such commission, authority, agency, or officer, or
from engaging in the business of securities, insurance,
banking, savings association activities, or credit union
activities; or
``(B) constitutes a final order based on violations of any
laws or regulations that prohibit fraudulent, manipulative, or
deceptive conduct.''.
(c) Conforming Amendments.--
(1) Securities Exchange Act of 1934.--The Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended--
(A) in section 3(a)(39)(F) (15 U.S.C. 78c(a)(39)(F)), by
inserting ``, or is subject to an order or finding,'' before
``enumerated'';
(B) in each of sections 15(b)(6)(A)(i) (15 U.S.C.
78o(b)(6)(A)(i)), paragraphs (2) and (4) of section 15B(c) (15
U.S.C. 78o-4(c)), and subparagraphs (A) and (C) of section
15C(c)(1) (15 U.S.C. 78o-5(c)(1)) by striking ``or omission''
each place that term appears, and inserting ``, or is subject
to an order or finding,''; and
(C) in each of paragraphs (3)(A) and (4)(C) of section
17A(c) (15 U.S.C. 78q-1(c)), by inserting ``, or is subject to
an order or finding,'' before ``enumerated'' each place that
term appears.
(2) Investment Advisers Act of 1940.--Section 203(f ) of
the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(f )) is
amended, by inserting ``or (3)'' after ``paragraph (2)''.
TITLE VII--STUDIES AND REPORTS
SEC. 701. GAO STUDY AND REPORT REGARDING CONSOLIDATION OF PUBLIC
ACCOUNTING FIRMS.
(a) Study Required.--The Comptroller General of the United
States shall conduct a study--
(1) to identify--
(A) the factors that have led to the consolidation of
public accounting firms since 1989 and the consequent reduction
in the number of firms capable of providing audit services to
large national and multinational business organizations that
are subject to the securities laws;
(B) the present and future impact of the condition
described in subparagraph (A) on capital formation and
securities markets, both domestic and international; and
(C) solutions to any problems identified under subparagraph
(B), including ways to increase competition and the number of
firms capable of providing audit services to large national and
multinational business organizations that are subject to the
securities laws;
(2) of the problems, if any, faced by business
organizations that have resulted from limited competition among
public accounting firms, including--
(A) higher costs;
(B) lower quality of services;
(C) impairment of auditor independence; or
(D) lack of choice; and
(3) whether and to what extent Federal or State regulations
impede competition among public accounting firms.
(b) Consultation.--In planning and conducting the study
under this section, the Comptroller General shall consult
with--
(1) the Commission;
(2) the regulatory agencies that perform functions similar
to the Commission within the other member countries of the
Group of Seven Industrialized Nations;
(3) the Department of Justice; and
(4) any other public or private sector organization that
the Comptroller General considers appropriate.
(c) Report Required.--Not later than 1 year after the date
of enactment of this Act, the Comptroller General shall submit
a report on the results of the study required by this section
to the Committee on Banking, Housing, and Urban Affairs of the
Senate and the Committee on Financial Services of the House of
Representatives.
SEC. 702. COMMISSION STUDY AND REPORT REGARDING CREDIT RATING AGENCIES.
(a) Study Required.--
(1) In general.--The Commission shall conduct a study of
the role and function of credit rating agencies in the
operation of the securities market.
(2) Areas of consideration.--The study required by this
subsection shall examine--
(A) the role of credit rating agencies in the evaluation of
issuers of securities;
(B) the importance of that role to investors and the
functioning of the securities markets;
(C) any impediments to the accurate appraisal by credit
rating agencies of the financial resources and risks of issuers
of securities;
(D) any barriers to entry into the business of acting as a
credit rating agency, and any measures needed to remove such
barriers;
(E) any measures which may be required to improve the
dissemination of information concerning such resources and
risks when credit rating agencies announce credit ratings; and
(F) 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 study 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 not later than 180 days after the
date of enactment of this Act.
TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
SEC. 801. SHORT TITLE.
This title may be cited as the ``Corporate and Criminal
Fraud Accountability Act of 2002''.
SEC. 802. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.
(a) In General.--Chapter 73 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1519. DESTRUCTION, ALTERATION, OR FALSIFICATION OF RECORDS IN
FEDERAL INVESTIGATIONS AND BANKRUPTCY
``Whoever knowingly alters, destroys, mutilates, conceals,
covers up, falsifies, or makes a false entry in any record,
document, or tangible object with the intent to impede,
obstruct, or influence the investigation or proper
administration of any matter within the jurisdiction of any
department or agency of the United States or any case filed
under title 11, or in relation to or contemplation of any such
matter or case, shall be fined under this title, imprisoned not
more than 10 years, or both.
``Sec. 1520. DESTRUCTION OF CORPORATE AUDIT RECORDS
``(a)(1) Any accountant who conducts an audit of an issuer
of securities to which section 10A(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1(a)) applies, shall
maintain all audit or review workpapers for a period of 5 years
from the end of the fiscal period in which the audit or review
was concluded.
``(2) The Securities and Exchange Commission shall
promulgate, within 180 days, after adequate notice and an
opportunity for comment, such rules and regulations, as are
reasonably necessary, relating to the retention of relevant
records such as workpapers, documents that form the basis of an
audit or review, memoranda, correspondence, communications,
other documents, and records (including electronic records)
which are created, sent, or received in connection with an
audit or review and contain conclusions, opinions, analyses, or
financial data relating to such an audit or review, which is
conducted by any accountant who conducts an audit of an issuer
of securities to which section 10A(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1(a)) applies.
``(b) Whoever knowingly and willfully violates subsection
(a)(1), or any rule or regulation promulgated by the Securities
and Exchange Commission under subsection (a)(2), shall be fined
under this title, imprisoned not more than 5 years, or both.
``(c) Nothing in this section shall be deemed to diminish
or relieve any person of any other duty or obligation, imposed
by Federal or State law or regulation, to maintain, or refrain
from destroying, any document.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by adding at the end the following new items:
``1519. Destruction, alteration, or falsification of records in
Federal investigations and bankruptcy.
``1520. Destruction of corporate audit records.''.
SEC. 803. DEBTS NONDISCHARGEABLE IF INCURRED IN VIOLATION OF SECURITIES
FRAUD LAWS.
Section 523(a) of title 11, United States Code, is
amended--
(1) in paragraph (17), by striking ``or'' after the
semicolon;
(2) in paragraph (18), by striking the period at the end
and inserting ``; or''; and
(3) by adding at the end, the following:
``(19) that--
``(A) arises under a claim relating to--
``(i) the violation of any of the Federal securities laws
(as that term is defined in section 3(a)(47) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), any State
securities laws, or any regulations or orders issued under such
Federal or State securities laws; or
``(ii) common law fraud, deceit, or manipulation in
connection with the purchase or sale of any security; and
``(B) results, in relation to any claim described in
subparagraph (A), from--
``(i) any judgment, order, consent order, or decree entered
in any Federal or State judicial or administrative proceeding;
``(ii) any settlement agreement entered into by the debtor;
or
``(iii) any court or administrative order for any damages,
fine, penalty, citation, restitutionary payment, disgorgement
payment, attorney fee, cost, or other payment owed by the
debtor.''.
SEC. 804. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.
(a) In General.--Section 1658 of title 28, United States
Code, is amended--
(1) by inserting ``(a)'' before ``Except''; and
(2) by adding at the end the following:
``(b) Notwithstanding subsection (a), a private right of
action that involves a claim of fraud, deceit, manipulation, or
contrivance in contravention of a regulatory requirement
concerning the securities laws, as defined in section 3(a)(47)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)),
may be brought not later than the earlier of--
``(1) two years after the discovery of the facts
constituting the violation; or
``(2) five years after such violation.''.
(b) Effective Date.--The limitations period provided by
section 1658(b) of title 28, United States Code, as added by
this section, shall apply to all proceedings addressed by this
section that are commenced on or after the date of enactment of
this Act.
(c) No Creation of Actions.--Nothing in this section shall
create a new, private right of action.
SEC. 805. REVIEW OF FEDERAL SENTENCING GUIDELINES FOR OBSTRUCTION OF
JUSTICE AND EXTENSIVE CRIMINAL FRAUD.
Pursuant to section 994 of title 28, United States Code,
and in accordance with this section, the United States
Sentencing Commission shall review and amend, as appropriate,
the Federal Sentencing Guidelines and related policy statements
to ensure that--
(1) the base offense level and existing enhancements
contained in United States Sentencing Guideline 2J1.2 relating
to obstruction of justice are sufficient to deter and punish
that activity;
(2) the enhancements and specific offense characteristics
relating to obstruction of justice are adequate in cases
where--
(A) documents and other physical evidence are actually
destroyed, altered, or fabricated;
(B) the destruction, alteration, or fabrication of evidence
involves--
(i) a large amount of evidence, a large number of
participants, or is otherwise extensive;
(ii) the selection of evidence that is particularly
probative or essential to the investigation; or
(iii) more than minimal planning; or
(C) the offense involved abuse of a special skill or a
position of trust;
(3) the guideline offense levels and enhancements for
violations of section 1519 or 1520 of title 18, United States
Code, as added by this title, are sufficient to deter and
punish that activity;
(4) the guideline offense levels and enhancements under
United States Sentencing Guideline 2B1.1 (as in effect on the
date of enactment of this Act) are sufficient for a fraud
offense when the number of victims adversely involved is
significantly greater than 50;
(5) a specific offense characteristic enhancing sentencing
is provided under United States Sentencing Guideline 2B1.1 (as
in effect on the date of enactment of this Act) for a fraud
offense that endangers the solvency or financial security of a
substantial number of victims; and
(6) the guidelines that apply to organizations in United
States Sentencing Guidelines, chapter 8, are sufficient to
deter and punish organizational criminal misconduct.
SEC. 806. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO
PROVIDE EVIDENCE OF FRAUD.
(a) In General.--Chapter 73 of title 18, United States
Code, is amended by inserting after section 1514 the following:
``Sec. 1514A. CIVIL ACTION TO PROTECT AGAINST RETALIATION IN FRAUD
CASES
``(a) Whistleblower Protection for Employees of Publicly
Traded Companies.--No company with a class of securities
registered under section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 78l), or that is required to file reports under
section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)), or any officer, employee, contractor, subcontractor,
or agent of such company, may discharge, demote, suspend,
threaten, harass, or in any other manner discriminate against
an employee in the terms and conditions of employment because
of any lawful act done by the employee--
``(1) to provide information, cause information to be
provided, or otherwise assist in an investigation regarding any
conduct which the employee reasonably believes constitutes a
violation of section 1341, 1343, 1344, or 1348, any rule or
regulation of the Securities and Exchange Commission, or any
provision of Federal law relating to fraud against
shareholders, when the information or assistance is provided to
or the investigation is conducted by--
``(A) a Federal regulatory or law enforcement agency;
``(B) any Member of Congress or any committee of Congress;
or
``(C) a person with supervisory authority over the employee
(or such other person working for the employer who has the
authority to investigate, discover, or terminate misconduct);
or
``(2) to file, cause to be filed, testify, participate in,
or otherwise assist in a proceeding filed or about to be filed
(with any knowledge of the employer) relating to an alleged
violation of section 1341, 1343, 1344, or 1348, any rule or
regulation of the Securities and Exchange Commission, or any
provision of Federal law relating to fraud against
shareholders.
``(b) Enforcement Action.--
``(1) In general.--A person who alleges discharge or other
discrimination by any person in violation of subsection (a) may
seek relief under subsection (c), by--
``(A) filing a complaint with the Secretary of Labor; or
``(B) if the Secretary has not issued a final decision
within 180 days of the filing of the complaint and there is no
showing that such delay is due to the bad faith of the
claimant, bringing an action at law or equity for de novo
review in the appropriate district court of the United States,
which shall have jurisdiction over such an action without
regard to the amount in controversy.
``(2) Procedure.--
``(A) In general.--An action under paragraph (1)(A) shall
be governed under the rules and procedures set forth in section
42121(b) of title 49, United States Code.
``(B) Exception.--Notification made under section
42121(b)(1) of title 49, United States Code, shall be made to
the person named in the complaint and to the employer.
``(C) Burdens of proof.--An action brought under paragraph
(1)(B) shall be governed by the legal burdens of proof set
forth in section 42121(b) of title 49, United States Code.
``(D) Statute of limitations.--An action under paragraph
(1) shall be commenced not later than 90 days after the date on
which the violation occurs.
``(c) Remedies.--
``(1) In general.--An employee prevailing in any action
under subsection (b)(1) shall be entitled to all relief
necessary to make the employee whole.
``(2) Compensatory damages.--Relief for any action under
paragraph (1) shall include--
``(A) reinstatement with the same seniority status that the
employee would have had, but for the discrimination;
``(B) the amount of back pay, with interest; and
``(C) compensation for any special damages sustained as a
result of the discrimination, including litigation costs,
expert witness fees, and reasonable attorney fees.
``(d) Rights Retained by Employee.--Nothing in this section
shall be deemed to diminish the rights, privileges, or remedies
of any employee under any Federal or State law, or under any
collective bargaining agreement.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by inserting after the item relating to section 1514
the following new item:
``1514A. Civil action to protect against retaliation in fraud
cases.''.
SEC. 807. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF PUBLICLY
TRADED COMPANIES.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. SECURITIES FRAUD
``Whoever knowingly executes, or attempts to execute, a
scheme or artifice--
``(1) to defraud any person in connection with any security
of an issuer with a class of securities registered under
section 12 of the Securities Exchange Act of 1934 (15 U.S.C.
78l) or that is required to file reports under section 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or
``(2) to obtain, by means of false or fraudulent pretenses,
representations, or promises, any money or property in
connection with the purchase or sale of any security of an
issuer with a class of securities registered under section 12
of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that
is required to file reports under section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); shall be
fined under this title, or imprisoned not more than 10 years,
or both.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 63 of title 18, United States Code, is
amended by adding at the end the following new item:
``1348. Securities fraud.''.
TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
SEC. 901. SHORT TITLE.
This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.
SEC. 902. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE OR TO
DEFRAUD THE UNITED STATES.
Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through ``If,
however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined or imprisoned, or both, as set forth in
the specific substantive offense which was the object of the
conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of such
persons do any act to effect the object of the conspiracy, each
person shall be fined under this title, or imprisoned not more
than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.
SEC. 903. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting ``10
years''.
SEC. 904. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.
Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(1) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.
SEC. 905. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-
COLLAR OFFENSES.
(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the need
to modify the sentencing guidelines and policy statements to
deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and specifically,
are adequate in view of the statutory increases in penalties
contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;
(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
SEC. 906. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:
``Sec. 1348. FAILURE OF CORPORATE OFFICERS TO CERTIFY FINANCIAL REPORTS
``(a) Certification of Periodic Financial Reports.--Each
periodic report containing financial statements filed by an
issuer with the Securities Exchange Commission pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written
statement by the chairman of the board, chief executive
officer, and chief financial officer (or equivalent thereof )
of the issuer.
``(b) Content.--The statement required under subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other
provision of law--
``(1) any person who recklessly and knowingly violates any
provision of this section shall upon conviction be fined not
more than $500,000, or imprisoned not more than 5 years, or
both; or
``(2) any person who willfully violates any provision of
this section shall upon conviction be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section
analysis for chapter 63 of title 18, United States Code, is
amended by adding at the end the following:
``1348. Failure of corporate officers to certify financial
reports.''.
SEC. 907. HIGHER MAXIMUM PENALTIES FOR MAIL AND WIRE FRAUD.
(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five'' and inserting ``ten''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five'' and inserting ``ten''.
SEC. 908. TAMPERING WITH A RECORD OR OTHERWISE IMPEDING AN OFFICIAL
PROCEEDING.
Section 1512 of title 18, United States Code, is amended--
(1) by re-designating subsections (c), (d), (e), (f ), (g),
(h), and (i) as subsections (d), (e), (f ), (g), (h), (i) and
(j);
(2) by inserting after subsection (b) the following new
subsection:
``(c) Whoever corruptly--
``(1) alters, destroys, mutilates, or conceals a record,
document, or other object, or attempts to do so, with the
intent to impair the object's integrity or availability for use
in an official proceeding; or
``(2) otherwise obstructs, influences, or impedes any
official proceeding, or attempts to do so; shall be fined under
this title or imprisoned not more than 10 years, or both.''.
SEC. 909. TEMPORARY FREEZE AUTHORITY FOR THE SECURITIES AND EXCHANGE
COMMISSION.
(a) In General.--The Securities Exchange Act of 1934 is
amended by inserting after section 21C(c)(2) (15 U.S.C. 78u-
3(c)(2)) the following:
``(3) Temporary freeze.--(A) Whenever, during the course of
a lawful investigation involving possible violations of the
Federal securities laws by an issuer of publicly traded
securities or any of its directors, officers, partners,
controlling persons, agents, or employees, it shall appear to
the Commission that it is likely that the issuer will make
extraordinary payments (whether compensation or otherwise) to
any of the foregoing persons, the Commission may petition a
Federal district court for a temporary order requiring the
issuer to escrow, subject to court supervision, those payments
in an interest-bearing account for 45 days. Such an order shall
be entered, if the court finds that the issuer is likely to
make such extraordinary payments, only after notice and
opportunity for a hearing, unless the court determines that
notice and hearing prior to entry of the order would be
impracticable or contrary to the public interest. A temporary
order shall become effective immediately and shall be served
upon the parties subject to it and, unless set aside, limited
or suspended by court of competent jurisdiction, shall remain
effective and enforceable for 45 days. The period of the order
may be extended by the court upon good cause shown for not
longer than 45 days, provided that the combined period of the
order not exceed 90 days.
``(B) If the individual affected by such order is charged
with violations of the Federal securities laws by the
expiration of the 45 days (or the expiration of any extended
period), the escrow would continue, subject to court approval,
until the conclusion of any legal proceedings. The issuer and
the affected director, officer, partner, controlling person,
agent or employee would have the right to petition the court
for review of the order. If the individual affected by such
order is not charged, the escrow will terminate at the
expiration of the 45 days (or the expiration of any extended
period), and the payments (with accrued interest) returned to
the issuer.''.
(b) Technical Amendment.--Section 21C(c)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2)) is
amended by striking ``This'' and inserting ``Paragraph (1) of
this''.
SEC. 910. AMENDMENT TO THE FEDERAL SENTENCING GUIDELINES.
(a) Request for Immediate Consideration by the United
States Sentencing Commission.--Pursuant to its authority under
section 994(p) of title 28, United States Code, and in
accordance with this section, the United States Sentencing
Commission is requested to--
(1) promptly review the sentencing guidelines applicable to
securities and accounting fraud and related offenses;
(2) expeditiously consider promulgation of new sentencing
guidelines or amendments to existing sentencing guidelines to
provide an enhancement for officers or directors of publicly
traded corporations who commit fraud and related offenses; and
(3) submit to Congress an explanation of actions taken by
the Commission pursuant to paragraph (2) and any additional
policy recommendations the Commission may have for combating
offenses described in paragraph (1).
(b) Other.--In carrying out this section, the Sentencing
Commission is requested to--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of securities, pension,
and accounting fraud and the need for aggressive and
appropriate law enforcement action to prevent such offenses;
(2) assure reasonable consistency with other relevant
directives and with other guidelines;
(3) account for any aggravating or mitigating circumstances
that might justify exceptions, including circumstances for
which the sentencing guidelines currently provide sentencing
enhancements;
(4) make any necessary conforming changes to the sentencing
guidelines; and
(5) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
(c) Emergency Authority and Deadline for Commission
Action.--The Commission is requested to promulgate the
guidelines or amendments provided for under this section as
soon as practicable, and in any event not later than the 120
days after the date of the enactment of this Act, in accordance
with the procedures set forth in section 21(a) of the
Sentencing Reform Act of 1987, as though the authority under
that Act had not expired.
SEC. 911. AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS FROM SERVING
AS OFFICERS OR DIRECTORS.
(a) In section 21C of the Securities Exchange Act of 1934,
add at the end a new subsection as follows:
``(f ) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 10(b) of this title or the
rules or regulations thereunder from acting as an officer or
director of any issuer that has a class of securities
registered pursuant to section 12 of this title or that is
required to file reports pursuant to section 15(d) of this
title if the person's conduct demonstrates unfitness to serve
as an officer or director of any such issuer.''.
(b) In section 8A of the Securities Act of 1933 add at the
end a new subsection as follows:
``(f ) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 17(a)(1) of this title 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 that Act if the person's
conduct demonstrates unfitness to serve as an officer or
director of any such issuer.''.
TITLE X--CORPORATE TAX RETURNS
SEC. 1001. SENSE OF THE SENATE REGARDING THE SIGNING OF CORPORATE TAX
RETURNS BY CHIEF EXECUTIVE OFFICERS.
It is the sense of the Senate that the Federal income tax
return of a corporation should be signed by the chief executive
officer of such corporation.
The Presiding Officer. The Senate insists on its amendment
and requests a conference with the House.
VOLUME 148, THURSDAY, JULY 25, 2002, NUMBER 103,
PAGES [S7350-S7365]
Sarbanes-Oxley Act of 2002--Conference Report
The Presiding Officer. Under the previous order, the Senate
will proceed to the consideration of the conference report to
acompany H.R. 3763, which the clerk will report.
The legislative clerk read as follows:
The committee of conference on the disagreeing votes of the
two Houses on the amendment of the Senate to 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 met, have
agreed that the House recede from its disagreement to the
amendment of the Senate, and agree to the same with an
amendment, and the Senate agree to the same, signed by a
majority of the conferees on the part of both Houses.
The Presiding Officer. The Senate will proceed to the
consideration of the conference report.
(The report is printed in the House proceedings of the
Record of July 24, 2002.)
The Presiding Officer. The Senator from Nevada is
recognized.
Mr. Reid. Madam President, I suggest the absence of a
quorum and ask that the time not be charged against either
manager.
The Presiding Officer. Without objection, it is so ordered.
The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Sarbanes. Madam President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Sarbanes. Madam President, parliamentary inquiry of the
Chair: What is pending before the Senate?
The Presiding Officer. The debate on the conference report
is limited to 2 hours equally divided.
Mr. Sarbanes. So there is 1 hour on each side.
The Presiding Officer. The Senator is correct.
Mr. Sarbanes. Madam President, I yield myself 10 minutes.
The Presiding Officer. Without objection, it is so ordered.
Mr. Sarbanes. Madam President, I am very pleased that we
are now considering the conference report on the Public Company
Accounting Reform and Investor Protection Act of 2002. The
Senate approved this legislation on July 15 on a 97-0 vote.
Conferees were named promptly both here and in the House, and
the conference committee immediately went to work.
Agreement was reached yesterday in the early evening, about
7 o'clock, by the conference committee, and the House took up
the conference report this morning and acted on it earlier in
the day. The vote, I believe, was 422--3.
The conference report has now come over to us, and
obviously, under our procedures, it is our turn to proceed to
consider it.
This legislation establishes a carefully constructed
statutory framework to deal with the numerous conflicts of
interest that in recent years have undermined the integrity of
our capital markets and betrayed the trust of millions of
investors.
I say to my colleagues that in every one of its central
provisions, the conference report closely tracks or parallels
the provisions in the Senate bill for which, as I indicated
earlier, all the Members present at the time, 97 of us, voted
only a short time ago.
This legislation establishes a strong independent
accounting oversight board, thereby bringing to an end the
system of self-regulation in the accounting profession which,
regrettably, has not only failed to protect investors, as we
have seen in recent months, but which has in effect abused the
confidence in the markets, whose integrity investors have taken
almost as an article of faith.
This legislation reflects the extraordinary efforts of many
colleagues on both sides of the Capitol. I want especially to
recognize and express my deep gratitude to Senators Dodd and
Corzine who early on introduced legislation that in many
respects serves as the basis for titles 1 and 2 of this
legislation.
On the House side, Congressman LaFalce introduced
comprehensive legislation on which we drew.
I also wish to acknowledge the many important contributions
that my Republican colleague, Senator Enzi, made at every step
in the process. Senator Enzi had legislation of his own, but in
addition we worked very closely in the course of developing
this legislation. Again and again I was struck by the
thoughtfulness and reasonableness of his proposals for
improving in the legislation. While in the end not all of them
were included in the legislation, a significant number are, and
I thank him very much for all his contributions.
Before addressing the major provisions of the legislation,
let me make very clear that it applies exclusively to public
companies--that is, to companies registered with the Securities
and Exchange Commission. It is not applicable to provide
companies, who make up the vast majority of companies across
the country.
This legislation prohibits accounting firms from providing
certain specified consulting services if they are also the
auditors of the company. In our considered judgment, there are
certain consulting services which inherently carry with them
significant conflicts of interest. Auditors, in effect, find
themselves in the position of auditing their own work. They may
be acting as management of the company, for instance, on
personnel matters when, as the outside auditor, they were
supposed to be standing one step removed from the company as
the outside auditor. This is the reasoning behind the
prohibition.
What has happened in recent years is that the fees earned
from the consulting work have dwarfed the fees earned from the
auditors, which inevitably leads to concerns that punches may
be pulled on the audit to accommodate the significant and
remunerative involvement on the consulting side. Certain
enumerated consulting practices are therefore not allowed, with
the exception that a case-by-case exemption can be obtained
from the oversight board that this legislation establishes.
The auditor can engage in the balance of consulting
services with the pre-approval of the audit committee of the
corporation. And of course an auditor can engage in whatever
consulting services the firm and the corporation agree upon so
long as the firm is not also acting as the corporation's
auditor.
The bill sets significantly higher standards for corporate
responsibility governance. It requires public companies to have
independent audit committees and also enhances the role of the
audit committee, which will have responsibility for hiring and
firing the auditors and setting their compensation.
The legislation requires full and prompt disclosure of
stock sales by company executives. Senator Carnahan added an
important provision to the bill, requiring electronic filing
with respect to such sales. That requirement would take effect
in a year's time, to allow time for the necessary systems to be
put in place; once in place it will assure prompt and accurate
disclosure of these very significant transactions.
The legislation places limits on loans by corporations to
their executive officers. It sets certain requirements for
disclosure with respect to special purpose entities, which were
used by some corporations that have run into such serious
difficulty in recent months. It seeks to address the statement
of pro forma earnings, in order to assure a more complete and
accurate picture of a public company's financial position.
It also addresses the conflicts of interests that arise for
stock analysts to whom investors look for impartial research-
based advice about stocks. Unfortunately, many of these
analysts are under pressure to promote stocks in which their
broker-dealer firms may have an investment banking interest; on
the one hand they are supposed to give unbiased advice to
potential purchasers of stock, whether to buy or sell, but at
the same time the firm of which they are a part is interested
in developing a business relationship with the company on which
the analyst is passing judgment. It has been sobering to
discover that analysts have been formally recommending certain
stocks to the investing public, while at the same time
discussing them contemptuously among themselves. We have had
too many demonstrations of this occurring.
The legislation includes provisions to protect analysts
against retaliation, in cases where a negative recommendation
may invite retaliation. Furthermore, the bill authorizes
significant increases in funding for the Securities and
Exchange Commission, which for the first time in many years
will give it something close to the funding resources it needs.
There are also extensive criminal penalties contained in
this legislation. These were initially included in legislation
reported by the Judiciary Committee, which Senator Leahy
offered as an amendment to the bill. The House then passed its
own bill with respect to criminal penalties, a separate
standing bill, which in many instances doubled or even tripled
the penalties in the Leahy proposal as it came to the floor,
and the Leahy proposals were further supplemented by an
amendment from Senators Biden and Hatch and another from
Senator Lott.
The Presiding Officer. The Senator has consumed 10 minutes.
Mr. Sarbanes. I yield myself 4 additional minutes.
The Presiding Officer. The Senator has that right.
Mr. Sarbanes. These provisions, among other things, require
the CEOs and CFOs to certify their company's financial
statements under penalty of potentially severe punishments.
We provide a $776 million authorization for the SEC. I want
to spend a minute on this point, because it is very important.
The Senate Appropriations Committee is now working on an
appropriation that would contain $750 million for the SEC. It
is urgent that we provide adequate funding for the Commission,
whose responsibilities have expanded as the volume of market
activity has grown, but whose funding has lagged. Clearly, the
Commission must have the resources necessary to ensure a
decisive and expeditious response to the scandals we have seen
in recent months, and to minimize the likelihood that we will
see others in the future.
I must underscore this point. The Commission has been
underfunded, and the result has been understaffing, high staff
turnover and low morale as the Commission seeks to carry out
its work. The SEC must be in a position to address immediately
the problems of inadequate staff resources and inadequate pay.
At the moment, the SEC cannot offer its attorneys and
accountants the same level of salary and benefits that their
counterparts receive at the five Federal bank regulatory
agencies. Talented and dedicated staff attorneys and
accountants can increase their compensation by as much as one-
third simply by moving to another agency. This is an
intolerable situation. Pay parity has been authorized and now
must be funded; this legislation specifically provide the
necessary funding.
In addition, the authorization provides funding that will
enable the Commission to upgrade its technical capacities, its
computer systems, and it provides significant resources so that
the Commission can augment its staff of attorneys, accountants
and examiners at a time when they are needed to address a very
heavy workload burden.
As an aside, I mention that this morning the committee
reported to the Senate four nominees to bring the Securities
and Exchange Commission to its full complement of five members.
I very much hope we will be able to approve them next week so
that they will be able to take their positions before the
August recess. If we do, the Commission will be at full
strength. They will all be in place and ready to do the job,
and I think that is highly desirable.
In closing, let me say that I believe this conference
report reflects our best efforts to deal with issues which we
know to be numerous and complex. Throughout the process, we
have worked together carefully on these issues. We have sought
advice from the most distinguished and experienced
practitioners in the field. We held 10 hearings in March with
some of the very best experts in the country as our witnesses.
We have consulted extensively, and I hope my colleagues will
agree in good faith and across party lines. Our vision has been
broad, our purpose steady. I think our approach has been
reasonable.
We will send to the President legislation establishing a
solid statutory framework for the reforms we know are urgently
needed.
Our markets have benefited beyond measure from the
statutory framework that created the SEC nearly 70 years ago.
Indeed, I think we have had a tendency to take that for
granted. Those markets have been a very significant economic
asset for the United States, and an integral part of our
economic strength. This legislation will serve to complement
and reinforce that framework, which has served us well, and I
believe it will stand the test of time.
Our markets, which have the reputation of being the
fairest, the most efficient, the most transparent in the world,
have suffered greatly in recent times, so much so that they
seem to have lost the confidence of our investors. It is our
purpose, with this legislation and through other actions that
will have to be taken by the regulatory agencies and by the
private sector, to see that once again our capital markets
deserve the enviable reputation for fairness, efficiency, and
transparency that they have enjoyed through the years.
I yield the floor.
The Presiding Officer. The Senator from Texas.
Mr. Gramm. Madam President, I yield myself such time as I
may consume.
I want to begin with some thank-yous and congratulations.
First, I want to congratulate Senator Sarbanes on this bill,
and I want to make note that in a very difficult period, where
so many were trying to point the finger of blame, when it
seemed almost every day that people were clamoring to make the
strongest statement they could make to get the sound bite on
television, Senator Sarbanes could have taken that same route
in the Banking Committee. We are the committee that has
jurisdiction over the issues that had been at the very heart of
our recent concerns in the capital markets.
However, Senator Sarbanes did not take that route. I
congratulate him. He not only brought good reflection on
himself, but he helped raise the esteem that the Banking
Committee is held in and reflected well on the Senate. We had
hearings but we were focusing on what could be done to fix the
problem. As a result, those hearings were the most productive
that were held. They contributed to bringing us to where we
are.
Now let me make it clear, from the very beginning there has
been a broad consensus, and a very deep consensus, on 90
percent of the issues in this bill. One of my frustrations in
this debate--and when you are debating something as high
profile as this is, there are frustrations. I am not
complaining--as my wife says whenever I complain about this
job, not only did nobody force you to take it, but a lot of
good people worked hard to keep you from getting it--I am not
complaining, but part of our problem has been that the media
has wanted to present this as a debate that had to do with how
tough people were being, to the exclusion, often, in my
opinion, of how reasonable we need to be.
We have before the Senate a bill that is clearly an
improvement over the status quo. I don't care how disappointed
you are in any one provision--and on several provisions I am
very disappointed. No matter how disappointed a Member is, this
is an improvement over the status quo, and for two reasons. One
is obvious. That is, we needed stiffer criminal penalties. And,
second, we needed to create an independently funded and an
independently operating accounting oversight board so that we
could deal with ethics questions in a framework that will
promote high ethical standards, in the framework of
independence. In addition, we desperately needed to have an
independently funded FASB.
I would just say as an aside, Madam President, over the
years I have agreed with FASB in some of their decisions; I
have disagreed with FASB on some of their decisions. However, I
am proud to be able to say today I have never taken the
position that Congress ought to override FASB. As
incomprehensible as some of their rulings have been to my way
of thinking, having Congress vote on accounting standards is a
very dangerous thing.
Some of our colleagues want to vote on the whole issue of
expensing stock options. Wherever you come down on that issue,
having Congress vote on accounting standards is very dangerous,
very counterproductive. I hope that will not happen. Certainly,
I am not going to vote to impose accounting standards on this
board. We want FASB to set accounting standards. We want to be
sure they have the independence that is necessary to allow them
to do it.
In those areas there has never been a disagreement on this
bill. The disagreements that have occurred have had to do with
the perception of individual Members as to what was practical,
what was workable, what was desirable. The one view I have
always subscribed to, and I would have to say given my period
of service in public life I am more convinced of it than ever,
is that Thomas Jefferson was right when he said good men--he
would say good people today, of course--good men with the same
information are prone to have different opinions.
There is a natural tendency in the human mind to think, if
people disagree with you, that either, A, they don't know what
they are talking about; or B, they don't have good intentions.
I subscribe to the Jefferson thesis.
The areas where I disagree with the bill are pretty
straightforward. First of all, I believe there is a very real
problem in auditor independence. If I were a member of this new
accounting oversight board that we are going to put into place
and I had to vote on the nine prohibited areas that are written
into law in the bill, I would want to study them in detail. I
might very well support all nine of them. I do not believe they
should be written into law.
The advantages of letting the board set these standards--it
seems to me that there are three:
No. 1, the board is going to have more time and more
expertise than we have and is likely to do a better job.
No. 2, if we make a mistake and we write it into law, it is
hard to fix things that are written into law. As Alan Greenspan
has said, if Glass-Steagall, Depression-era banking
legislation, had been a regulation, it clearly would have been
changed by the 1950s. We did not change it until 1999. It took
a long time to change it.
Finally, and probably of greatest importance, there is a
natural tendency when we are talking about the problem in an
era where we are all reading about Enron and WorldCom and the
huge companies, to forget this law will apply to 16,254
companies. Many of these companies are quite small. One of the
advantages of allowing the accounting oversight board to set
out prohibitions on auditors performing other services in
regulation, instead of prescribing them in law, is that the
board can find a system whereby they can recognize what is
practical in dealing with smaller companies and how that might
differ from what is practical for General Motors.
An example that has come to my mind is one where I am
operating a small public company, stock traded on an exchange
or on Nasdaq, and I employ an accounting firm that has a CPA
who basically does my auditing. He is in Houston. I am trying
to hire a new bookkeeper in my company. I have three
candidates. When my auditor is in town auditing my books, I
say: I have these three candidates. I majored in physics in
college, and I don't know anything about accounting. Could you
interview these three bookkeepers and tell me who you think
would be best?
Under this bill, that would be illegal. That would be
providing a personnel service. It is prohibited for my auditor
to provide that service for me as well.
For General Motors, should your auditor be providing a
personnel service? My guess is they probably should not. But
for this small company in College Station, Texas, what this
prohibition ultimately will do is force them to do one of three
things: In all probability, they will hire the bookkeeper
without ever getting the advice of a CPA; No. 2, they can hire
another CPA to interview these three candidates for a
bookkeeper and pay them; No. 3, they can file for a waiver
through the SEC and through the board. Each option is a worse
choice from those available to such a small company today, and
a worse choice for its shareholders.
The bill allows a waiver on an individual company by
company basis. I rejoice that is the case. I personally believe
we should have given the board, with the agreement of the SEC,
the ability to grant blanket waivers based on the circumstances
of classes of individual companies.
For example, if you have already granted 1,000 waivers
where companies have applied for a waiver for a certain
requirement based on their size, their location, practicality,
the cost, whatever, at that point shouldn't the board be able
to say: We have established this principle, and if your company
meets these conditions, you are granted the waiver? Then, all
they have to do is prove they meet the conditions.
My concern--and who knows, maybe this will be true, maybe
it will not. The problem is we are legislating. We don't know.
We can't look into the future. My concern is that by not
granting them the ability to provide blanket waivers we are
going to force a lot of smaller companies to hire lawyers and
lobbyists to come to Washington to petition the SEC and the
board. My concern is that this is going to use up their time
and use up the resources of companies.
There is another side of this story and that is the concern
that blanket waivers could be used to get around the intent of
the law. How do you deal with that? How do you find a happy
balance? It is not an easy question. I would have to say I
believe we have imposed a one-size-fits-all regimentation that
is going to be difficult to deal with--not impossible to deal
with, but I think it is going to be difficult.
Another problem I have is that we have in this bill an
accounting oversight board. Its members are not elected
officials. They are not appointed in the sense that they are
not Government officials. They will have the ability to make
decisions that will affect the livelihood of Americans who are
in the accounting profession. They will literally have the
ability to say to a CPA: We are taking your license away and
you can never practice again in providing accounting services
to a publicly traded company.
Clearly, there are cases where that is justified. Clearly,
there are cases where people ought to be fined and, clearly,
there are cases where people ought to be put in prison. But I
think when you are taking people's livelihoods, they ought to
have an opportunity to appeal to the Federal district court
where they live.
I think there ought to be a burden on them to make their
case, and obviously the court is going to take into account
that this board, that was duly constituted, made a decision.
But I think that is an opportunity that people ought to have
that they do not have under this bill.
I am also concerned about litigation. During the whole
Clinton administration, there was only one bill where we
overrode the President's veto, and that was a bill having to do
with private securities litigation reform. We had a massive
number of predatory strike suits where people filed lawsuits
against companies. They almost always settled out of court. We
had one law firm that filed the lion's share of the lawsuits.
And the chief lawyer in that company said, in effect, ``It is
wonderful to practice law where you don't have clients.''
That was a mistake when he said that, but he said it.
We took action to try to eliminate or minimize this abuse.
In doing so, we codified a 1991 Supreme Court decision that
addressed what happens if you think you have been wronged. We
are not talking about criminal activity. We are not talking
about SEC enforcement. We are not talking about the Justice
Department. We are talking about civil disputes that people
have. Under that law, in codifying what the 1991 Supreme Court
decision said, we said that within a year after you believe you
have been wronged, you have to file your lawsuit, and within 3
years after the event happens, you have to file your lawsuit.
One of the things this bill does, which I oppose, is it
raises that to 2 years and 5 years, respectively. I would say
that if there were evidence that people were not getting these
lawsuits filed because of a lack of time, that under the
circumstances I think that increasing the statute of
limitations would have been justified. But as we have looked at
the data, the mean average lawsuit is filed 11 days after the
injury is discovered. Something like 90 percent of the lawsuits
are filed in the first 6 months. It seems to me that this
provision and other provisions of the bill that expand the
ability of people to sue may have a positive effect in making
people pay attention to their business, but we all know, based
on our legal system, that it is going to be abused and that
very heavy costs are going to be imposed on the private sector
of the economy as litigation costs ultimately are added to the
cost of the product that is produced and reduced from the stock
value held by shareholders.
I could go on and on. There are other people who want to
speak. We are under a time limit. But let me sum up.
I thought about this long and hard, and as I thought about
this bill, I had to weigh, Does it do more good than harm? I
have concluded that it does. It does less good than it could
have done; it does more harm than it should have done--we could
have corrected these things--but, quite frankly, in the
environment we were in it was impossible. In the environment we
were in, where everything was judged on some concept of being
tough rather than on practicality and workability, it was
impossible for us to come back and deal with these problems.
Finally, in the timeframe that we all faced in conference,
we never really got around to discussing the practical kinds of
things that do not seem important when you are writing law but
seem very important 2 or 5 years later when you are
implementing it.
Having said all that, I cannot stand up here and argue that
this bill has worsened the status quo. This bill is better than
the status quo for two reasons. No. 1, change needs to be made
and criminal penalties need to be raised. These independent
boards need to be established, and 90 percent of this bill, in
my opinion, clearly represents a step in the right direction.
But, second--and this may sound like strange logic but I
think it is important. I think to understand American
government you have to understand it. The American people
expect Congress to respond to a problem. We may not know the
answer. We may not have perfect knowledge. But they expect us
to try to do something about it. That in and of itself is an
argument to which we should respond.
I would argue--being a conservative, as everyone engaged in
this debate knows--I would argue we need to be careful. But in
the end this bill is an improvement on the status quo. It could
have been better. There are changes that could have been made
that were not. But in the end, I cannot argue that this bill
should not pass, should not become law. The President is going
to sign the bill, and clearly he should.
I do believe we will have to come back after the fact and
we will have to correct some of these issues. I think as time
goes on we will see we may not have done enough in one area.
Maybe we went overboard in another area. But the Congress will
meet again, people will be paid to do this work, and I am
confident that it will be done.
So let me conclude on this thought. I believe the
marketplace has gone a long way toward solving this problem. I
think the New York Stock Exchange action was excellent. Once
again, they are proving that they are a great institution. As I
have often said about the New York Stock Exchange, I feel as if
I am standing on holy ground at the New York Stock Exchange.
Every boardroom is different from what it was before this
crisis started. No one sitting on a board, corporate board or
an audit committee, will ever be the same. No auditors will
ever look at their task the way they did before all of this
started, at least for a very long time. or at least for a very
long time.
One of the advantages of having structure is when they
forget, the structure won't forget. I totally agree with that.
I think this represents a complement to it.
There is much in here I would have done differently. But in
the end, I think this is a response that people can say the
Government did hear, the Government did care, and Congress did
try to fix it. I don't doubt that there are mistakes in here. I
think I could name some, if asked to. But, on the whole, this
is a response that was aimed at the problem. People went about
it in a reasonable manner.
Certainly, the authors of this bill intended to do as good
a job as they could do.
I again want to congratulate Senator Sarbanes. I also want
to thank him, looking back now at how quickly the conference
went. I know people were unhappy when we had this period when
the floor was tied up, and there were numerous amendments
people wanted to add to the bill. But I think, given how the
whole thing played out, it worked out from that point of view
pretty much right.
If people on Wall Street are listening to the debate and
trying to figure out whether they should be concerned about
this bill, I think they can rightly feel that this bill could
have been much worse. I think if people had wanted to be
irresponsible, this is a bill on which they could have been
irresponsible and almost anything would have passed on the
floor of the Senate.
I think given where we are on this bill that it is a
testament to the fact that our system works pretty well.
I yield the floor.
The Presiding Officer (Mr. Edwards). Who yields time?
Mr. Gramm. Mr. President, I yield 12 minutes to the Senator
from Wyoming.
The Presiding Officer. The Senator from Wyoming.
Mr. Enzi. Thank you, Mr. President.
I am here today to speak in support of the conference
report to the accounting reform bill. I will be encouraging all
Senators to vote for the conference report.
This is earthshaking legislation that has been done with
tremendous speed. It had to be earthshaking because we are
trying to counteract the tremors from the volcanic action of
the mountaintop being blown off such companies as Enron,
WorldCom, Global Crossing, and others. Those collapses have set
up a series of tremors across this country.
Congress is not the one to solve all the problems. But as
Senator Gramm just mentioned, we are expected to work at
solving all of the problems. We have put in a huge effort on
this bill, and it will make a difference.
While we have been working, the stock market has been going
through some tremendous gyrations. I think some of those
reactions in the stock market were to see how carefully we
would consider and resolve this issue. I believe, the stock
market was worried that we would overreact. The market watched
to see if Congress would keep adding and adding things, until
we destroyed the whole system. They can now see that did not
happen--Congress acted responsibly. We took a long and tough
look at the problem and reacted, but we did not overreact. At
the same time corporations across the country have been making
sure they did not have the kinds of problems brought to light
in a few of these companies.
``Corporations'' should not be a bad word in this country.
This country was built on business.
I always like to mention that it was primarily built on
small business--small businesses that grew up, in many cases,
but nevertheless ideas that started out as a small business.
We have to keep our focus on those small businesses, and
make sure they are able to continue to operate in the climate
that we have in the United States and under the laws that we
pass.
I am pleased to say that the actions we took in this bill
provide some assurance to small businesses and small accounting
firms that they can continue to operate the way they have in
the past.
We have given encouragement to the States not to run out
and apply the same types of laws. I hope the States are paying
attention because they will ruin a very good thing if they
destroy small business. Keep the eye on small business, and we
will continue to have big business.
Corporations have been checking what has been going on in
their firms to a greater extent than they have ever before.
Boards, CEOs, CFOs, and audit committees have been checking to
see if they have the kinds of problems that brought down these
other companies.
It is much like when there is a plane crash. Right after a
plane crash is probably the safest time in the world to fly
because everybody checks their equipment ever so much more
carefully to make sure that the kind of defects that may have
caused other problems will not happen to them. And the effect
lasts for a long time afterwards.
Corporations have been checking their books. They have
begun changing procedures. Some of the changes they have made
have resulted in restatements. They have paid a price for doing
restatements. But they have done the right thing by doing a
restatement, and they should be recognized for that. I
mentioned speed before. The Senate is not designed for speed.
We started out slow. We held 10 hearings. We looked at the
issues very carefully, everybody resolved in writing their own
ideas.
One of the tough things about legislating is putting it
down in writing. The concepts are so easy, but the details are
so tough.
There are a number of people who drafted bills on this--
both in the House and in the Senate. On this side, Senator
Gramm and I drafted a bill. Senator Corzine and Senator Dodd
introduced a bill. Of course, Senator Sarbanes had the
overreaching bill, and I believe his benefited a little bit
from having copies of both the House and Senate bills on which
to build his bill. I compliment him for the way he took ideas
from all of these different approaches.
Again, it shows the value of legislating by a wide variety
of people. You get a wide variety of viewpoints, which actually
provides some insights into areas that a person might not have
thought about.
But, at any rate, we concluded the hearings, and we merged
the bill. This came to committee the week before the Fourth of
July. It passed out of committee in one day. It came to the
floor of this body just 2 weeks ago. And now, it has already
been conferenced, and come back to us for final passage. Part
of that is a result of the atmosphere we are in, and the need
for action. Timing can be everything on a bill. But part of it
is because of the concentration of people who worked on this.
This legislation is a response to problems highlighted by
the recent corporation failures of Enron, WorldCom, and others.
It does send a clear signal to corporate America that
executives can no longer abuse the trust their shareholders
place in them without severe consequences.
This legislation builds a strong and independent board to
oversee the accounting industry. It will eliminate the climate
of self-regulation that has historically guided accounting.
However, I would like to make one point clear. I believe
that, overall, accountants take their responsibilities very
seriously. They did before, and they do now. We have the best
system in the world. What we are doing with this is to maintain
that we have the best system in the world. Most accountants are
honest and hard working. They work for the benefit of the
investors with probably the same percentage of exceptions as
other professions.
This legislation will also provide for strong disciplinary
action against executives who break the law. No longer will
they be disciplined with a slap on the wrist. The bill
recognizes that executives who destroy the dreams of investors
by irresponsible and unethical behavior will be given the
severe punishment they deserve.
I also want to again thank Senator Sarbanes and Senator
Gramm for their leadership on this issue. They both have worked
tirelessly the past few months to get this bill finished in a
timely manner. I particularly appreciate some of the insights
Senator Gramm gave me as he worked on this bill in more detail
than most people ever achieve. It is his standard, and he
carried that out again this time, which did resolve a number of
the problems. I want to congratulate Senator Sarbanes, and
thank him for the way he conducted the hearings. A lot of
people do not realize that the Chairman of a committee usually
gets to pick most of the witnesses, and the ranking member gets
to pick a few of the witnesses.
As we went through these 10 hearings, I couldn't find any
witnesses that I wouldn't have picked were I given the
selection. There were some very qualified people who testified.
Some of them were even accountants. I did appreciate that. I
apologize for asking some questions of them but it was such a
great opportunity for me. My staff noticed that when the camera
focused in on the person giving the answer, the wedge of people
behind them were all asleep.
So what we dealt with is not the kind of thing that
Americans get really excited about. It is far too detailed for
us to get too excited about it. For accountants, these kinds of
discussions are almost like watching ESPN.
Senator Sarbanes did continue to meet with me and other
Members and continued to make changes that improved the bill.
There was a wide variety of Senators who worked on this bill. I
have mentioned Senators Dodd and Corzine and Gramm. Senator
Edwards worked with me on one provision that is in this bill to
make sure that not only accountants, analysts, CEOs, CFOs,
Boards and audit committees were addressed under this bill, but
lawyers have some responsibility, too.
I find it very exciting we are going to make lawyers have a
code of ethics when they are dealing with the Securities and
Exchange Commission, and that they are going to have an
obligation to report things when they find them. I know that
causes some consternation among some attorneys, but I think it
will make, overall, the same kind of improvements we are
expecting from everybody else.
Senators Allen, Gregg, Baucus, Grassley, and Kennedy all
worked on some provisions that we don't talk about too much;
again, it is in the detail area, but it has to do with the
blackout period when you are dealing with pension and other
stock sales by executives. I know the intense hours it took to
come up with a solution that would work. And if you have that
many people agreeing on it, there is probably a good chance it
will work.
Again, I congratulate all those people for their constraint
in limiting their ideas to what needed to be done for this
bill. A lot of ideas were floating around here on lots of
things we can with corporations and executives that people want
to have fixed, but this bill did maintain some real constraint
to stay on topic.
I do believe the conference report is an improved bill from
the one that passed the Senate. Again, I appreciate Senator
Sarbanes working with me to make some of the changes about
which I spoke.
One change we made changes the implication that not all
nonaudited services should be presumed illegal. The bill has
been changed to clearly allow the audit committee to make that
determination without the law implying that it is illegal.
In addition, he made some changes dealing with the testing
of internal compliance. I believe the new language more clearly
represents the true role of auditors. One of the problems we
dealt with throughout this process is educating Members on
exactly what the role of an auditor is. I believe the new
language represents that realization, and I thank the chairman
for making the change.
There is another important change in the provision dealing
with corporate loans. The provision would still prohibit
corporate executives from reaping millions of dollars in loans
from their companies, but the new language also realizes that
executives need to use things such as credit cards to conduct
their business. So this section is a vast improvement.
Another item I would like to comment on is the
understanding that insurance companies, many times, have audits
they must file with their State regulators. It would be
burdensome and expensive to require these companies to hire a
separate auditing firm to perform this responsibility. That
problem was also recognized, and the needed changes were made.
However, I also understand that due to the time
constraints, a report will not be filed with the bill. I think
this will pose a series of problems because we will not be
defining what the authors actually intended with certain
sections of the bill and allowing the same written discourse
that there would be on the bill. I think this may especially
cause problems with the extraordinary number of regulations
that are going to have to be written to implement the bill.
As the ranking member of the subcommittee with jurisdiction
over the Securities and Exchange Commission, I do intend to
work closely with the Commission to ensure that the new
regulations are consistent with what I see as congressional
intent. I will work with others to make sure these regulations
conform.
I ask the ranking member, could I have an additional 3
minutes?
Mr. Gramm. Sure.
Mr. President, I yield an additional 3 minutes to the
Senator from Wyoming.
The Presiding Officer. The Senator from Wyoming.
Mr. Enzi. I thank the Senator.
Mr. President, some of the issues that did not come up in
this bill dealt with FASB. We did something marvelous for FASB.
We made sure of its independence. One way we made sure of its
independence, besides citing in the law, was to make sure FASB
has independent funding. They will not have to come to Congress
with a budget. And they will not have to go to corporate
America for funding. They will get independent funding to be
able to do the job they need to do. That will inhibit us from
trying to change what they are doing in setting accounting
standards.
I am pleased to state that we have taken a look at the
things they are working on right now. They are working on four
issues that are extremely important to make sure what happened
with other companies will not happen again.
I have to tell you, in those four things they have listed
as a priority, one of them is not stock options and what to do
with them. They do need to address that, but I certainly hope
that Congress does not decide that what we see as a problem
does supersede other problems that may have caused collapses
such as Enron's.
So I hope we will not get in a position of dictating now to
FASB what they should be working on, and in what order, and to
what degree, or, worse yet, just going ahead and passing
accounting standards on our own.
With respect to section 302, the conference recognizes that
results presented in financial statements often necessarily
require accompanying disclosures in order to apprise investors
of the company's true financial condition and results of
operations. The supplemental information contained in these
additional disclosures increases transparency for investors.
Accordingly, the relevant officers must certify that the
financial statements together with the disclosures contained in
the periodic report, taken as a whole, are appropriate and
fairly represent, in all material respects, the operations and
financial condition of the issuer.
I also believe the conferees contemplate that the Board
will have discretion to contract or outsource certain tasks to
be undertaken pursuant to this legislation and the regulations
promulgated under the Act. The Board may outsource functions
which can be done more efficiently by existing and established
organization. An exercise of discretion in this manner does not
absolve the Board of responsibility for the proper execution of
the contracted or outsourced tasks.
I also believe that the Conferees expect that the Board and
the standard setting body will deem investment companies
registered under Section 8 of the Investment Company Act of
1940 to be a class of issuers for purposes of establishing the
fees pursuant to this section, and that investment companies as
a class will pay a fee rate that is consistent with the reduced
risk they pose to investors when compared to an individual
company. Audits of investment companies are substantially less
complex than audits of corporate entities. The failure to treat
investment companies as a separate class of issuers would
result in investment companies paying a disproportionate level
of fees.
In addition, I believe we need to be clear with respect to
the area of foreign issuers and their coverage under the bill's
broad definitions. While foreign issuers can be listed and
traded in the U.S. if they agree to conform to GAAP and New
York Stock Exchange rules, the SEC historically has permitted
the home country of the issuer to implement corporate
governance standards. Foreign issuers are not part of the
current problems being seen in the U.S. capital markets, and I
do not believe it was the intent of the conferees to export
U.S. standards disregarding the sovereignty of other countries
as well as their regulators.
I also realize inconsistencies appear in sections 302 and
906. The SEC is required to complete rulemaking within 30 days
after the date of enactment with regard to CEO certification
under section 302. However, section 906 suggests that
certification would be required upon enactment, thus the
penalties would go into effect before the certification
requirement is completed through the rulemaking process. I
believe it was the intent of the Conferees that the penalties
under section 906 should not become effective until the
rulemaking process is finalized.
Under the conference report, section 3(a) gives the SEC
wide authority to enact implementing regulations that are
``necessary or appropriate in the public interest.'' I believe
it is the intent of the conferees to permit the Commission wide
latitude in using their rulemaking authority to deal with
technical matters such as the scope of the definitions and
their applicability to foreign issuers. I would encourage the
SEC to use its authority to make the act as workable as
possible consistent with longstanding SEC interpretations.
Finally, I not only thank the Senators I have been able to
work with on this, but I also thank the staffs. I thank
particularly Katherine McGuire, my legislative director, and
Mike Thompson, who handles my banking issues. I also thank
Kristi Sansonetti, who works on all of my legal issues, and
Ilyse Schuman, who played a very important role in the blackout
pension period.
I thank, on Senator Sarbanes's staff, Steve Harris, Marty
Gruenberg, Steve Kroll, Dean Shahinian, Lynsey Graham, and
Vince Meehan.
I thank, on Senator Gramm's staff, Wayne Abernathy, Linda
Lord, who is probably one of the most knowledgeable lawyers in
this area I have ever encountered, Michelle Jackson and Stacie
Thomas.
And, on Senator Dodd's staff, I thank Alex Sternhell.
America will never know all the work these people have done
on this bill, the hours they have spent on it, daytime and
nighttime. I have seen them working in the early morning hours
on this, and that is after spending the previous night working
on it. They have just spent incredible time on this.
There is some incredible expertise among these people.
Without their help, we would have never gotten to this point.
So I thank all of them.
I thank the chairman and Senator Gramm and all the others
who have had a part in this. It is time we adopt this bill.
I yield the floor.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Mr. President, let me first say, I think
Senator Enzi has been extremely gracious in recognizing the
extraordinary contribution that has been made by the staff as
we have formulated this legislation. I appreciate him doing
that. I certainly associate myself with his remarks about the
dedication and the perseverance and the extraordinarily high
level of competence that is brought to this matter by staff on
both sides of the aisle--committee staff and personal staff.
Mr. President, I yield 10 minutes to the Senator from New
Jersey.
The Presiding Officer. The Senator from New Jersey.
Mr. Corzine. Mr. President, I am honored today to stand
before the Senate to express my strong support and appreciation
for the conference report that I suspect, within an hour or so,
we will adopt, and, hopefully, unanimously, as we did the
original bill that came out of the Senate.
I think it is historic. I think it is truly critical in
bringing about the kind of important reforms that will make a
real difference to our financial system, not just today but I
think as a standard it will be very much an important part of
the structure of our financial system for decades to come.
I have said often, since we have talked about this
legislation, that it really does, in my mind, fill a large gap
that has been missing in our securities laws that were written
70 years ago. I think it very well may be the most important
step we will have taken in that interim period, to make sure we
have a measured but strong securities and reporting structure
in our Nation that makes for the depth and breadth and beauty
and effectiveness of our financial markets.
This legislation, as has been noted, comprehensively deals
with reform of our accounting profession, enhances corporate
accountability, improves transparency, moderates conflicts in a
number of parts of our financial world, deals with the
transparency of corporate financial statements, strengthens the
SEC, tightens penalties and more securely sets the law, and
ultimately, I believe, will restore the trust, the needed
trust, and investor confidence in the integrity of America's
capital markets.
This was an absolutely necessary step at this time in our
Nation's history. There has been an enormous betrayal of trust,
demonstrated, certainly, by the headlines and the litany of
corporate abuses. Let me say, it goes deeper than just the
headlines. There have been 1,100 corporate earnings
restatements in the last 4 years. There is a basic loss of more
than just the simple sense of trust that people get from the
headlines. It is hard for people to make investment decisions
when they don't have good facts, good numbers, and the ability
to draw good conclusions about where the investor dollar should
go.
It has led to a misallocation of capital. And there was a
serious need for people to have reform in this area because
this betrayal really went at the heart of why people were
employees of various firms, why investors put their trust in
investing in companies, and why the American system, which so
relies on trust, has been called into question with respect to
the integrity of our financial markets in recent days.
It is an extraordinary step. I am pleased to have been a
part of it.
I see the chairman just left the Chamber. I want to take a
few moments to make sure he knows how strongly I feel about the
leadership he played. For those who were not a part of this
measured process that Chairman Sarbanes put forward--I have
said this to him personally--the 10 hearings we had were the
moral equivalent of a graduate finance program. I suspect that
very few times in congressional history have we seen the
breakdown in the detail and presentation of sophisticated
information, complicated topics, presented with the security
and integrity that were presented in our hearings that led to
the creation of this legislation. He did an incredible job of
putting together a bill.
I get a little nervous when I hear people say this was a
rush to justice, a rush to an answer. This was one of the most
thoughtful and measured programs of review put in place before
the legislation was written that absolutely could ever have
been conceived. He deserves enormous credit for making sure we
were thoughtful in the process.
Like Senator Enzi, I compliment all the staffs who were
involved in this. This was an incredible effort on all of their
parts. From the bottom of my heart--and I am sure all those
others who were involved in this process--I truly appreciate
the thoughtfulness and care they all gave to it.
I also would be remiss if I did not mention Senator Dodd
for his great help in originally putting together our
initiatives with regard to accounting reform, corporate
oversight, and resourcing the SEC, which I think are
fundamental parts of the legislation. We feel good about that.
I think Senator Dodd has taken an extraordinary step in
leadership.
Once again, I say to the Senator from Wyoming, this is
about making America better. It is fundamentally about doing
the right thing at the right time. His leadership on that, to
make sure we stayed constrained, as he says, thoughtful, and
measured about how we addressed the problem, has been most
appropriate, and I have appreciated the opportunity to work
with him. I compliment him for that effort.
I would say the same about the Presiding Officer. The
addition of a number of the amendments that have come,
particularly with regard to bringing in the responsibility that
is associated with lawyering in America, as important as it is
for accountants and CFOs and CEOs, I think was an important
step. There has been a lot of really great effort here.
Now that the chairman is back in the Chamber, I want to say
again, this is a classic example of quality leadership, of
thoughtful leadership, and getting to a result that will make a
difference in the lives of Americans in the years ahead.
This is a little more personal for me because for the 5
years before I came here, I was a CEO. Sometimes you want to
hide from that moniker these days since it is not so popular. I
think these days about the words of Andy Grove, who said that
he was ashamed and embarrassed by some of the actions and many
of the actions that are associated with the abuse we have seen.
I stand with Andy Grove on that.
This is not one of our prouder moments in our financial
system. But what does make me proud is that we could work
together in a bipartisan way to come to a thoughtful, measured
response that will make a difference, that really will move our
securities laws in a direction that will give the American
people confidence in how they read an income statement, when
they look at a balance sheet and when they judge where they
want to work, that they will have the necessary information.
I am not going to go into detail on the bill. Senator
Sarbanes and Senator Enzi did that. It is a great piece of
legislation. I don't think it went too far at all. In fact, I
think it is about spot on. I am sure there will be things we
will need to review in time, tweak with, but this is a good set
of initiatives which will make a difference in America's
financial system.
When we address these issues, it does beg to recognize that
there are additional tasks that need to be addressed. I heard
the chairman talk about it is not good enough to authorize; we
have to appropriate the funds to go with the necessary
obligations we put on the SEC; we need to make sure our new
advisory board actually has the resources. I think we do. But
their independence, their ability to function, will come
because they have the resources. The same as the SEC; we have
to do our job in the second part of this to make sure those
resources are available.
We do need to make sure the SEC Commissioners are in place
so that we can have a credible process of looking at
enforcement and review of laws and making sure that as we
structure the SEC in the days going forward, we have the best
of minds brought to bear there. I hope we can vote on these
Commissioners very quickly.
For myself--I know there are differences of views about
this--there are other unmet items on the agenda. Not
necessarily do they apply to this bill, but in my view we
should, as a nation, deal with the stock options issue. I don't
think Congress should write the accounting rules, but I believe
to recognize that stock options are an expense is relatively
self-evident to those who have operated in business. They are
used as a substitute for compensation. Compensation is an
expense. That is why you see Chairman Greenspan and all of what
I think is the critical weight of those who have observed on
this issue speaking out that this is an issue that needs to be
addressed. The Bermuda registry of companies, derivatives
regulation are also issues.
Could I have 1 additional minute?
Mr. Sarbanes. I yield an additional minute.
The Presiding Officer. The Senator may continue.
Mr. Corzine. We need to address these issues. There are
missing gaps in other parts of our oversight of our securities
markets and financial markets that need to be addressed.
Finally, I believe there is a gaping hole in our oversight
of what our investors and employees and the public need to see
addressed, and that is pension reform. I know working their way
through Congress right now are a number of initiatives on it.
Fewer than 50 percent of Americans have pensions. We have a
major need to address this. We should pull it together in as
thoughtful a way as Chairman Sarbanes has led our Senate to
this conclusion, led this debate to a positive conclusion. I
hope we will address that in the future. So, once again, I
express my great gratitude to all those involved. I
particularly thank Chairman Sarbanes for his strong leadership.
Mr. Sarbanes. Mr. President, I thank the able Senator from
New Jersey for his kind and gracious remarks about my efforts.
I underscore the enormously valuable contribution that Senator
Corzine made to the development not only of this legislation
but all of the work that has come before the committee. He
brought a perspective and perception here that were extremely
important, enabling us to work through some difficult issues. I
appreciate that.
I yield 7 minutes to the Senator from Vermont, chairman of
the Judiciary Committee.
The Presiding Officer. The Senator from Vermont is
recognized.
Mr. Leahy. Mr. President, I thank the chairman. The Senator
from California wishes 1 minute. I yield 1 minute to her.
Mrs. Boxer. Mr. President, I came to the floor to give my
deepest thanks to Senator Sarbanes and Senator Leahy for
leading us in just the way we needed to be led toward a tough,
fair reform that would lead to confidence in our financial
system. I also thank Senator Enzi for his work.
I was a stockbroker years ago, decades ago, and in those
days the big accounting firms were known for their integrity,
and CEOs were highly respected. That check and balance was lost
along the way and it must be restored.
I believe this bill will do it and our people will, once
again, have trust and confidence in our financial system. They
will know when they read an annual report and it is signed off
on by an accounting firm that it means what it says and says
what it means. That will bring the stock market back into
balance. It will not happen tomorrow. This isn't magic
legislation. But over time confidence will be restored and our
economy will be on solid footing once again. I thank my
friends.
Mr. Leahy. Mr. President, I thank Chairman Sarbanes for his
leadership on this impressive bill and on the conference
agreement. The then-Congressman Sarbanes was one of the first
people I met when I came to Washington as an elected Member of
this body. We have been friends from that time forward. I have
been so pleased to work with him.
I am proud that the conference agreement includes and
adopts the provisions of the Leahy-McCain amendment, which the
Senate adopted by a 97-to-0 vote--again, with the strong help
and support of the Senator from Maryland.
These provisions are nearly identical to the Corporate and
Criminal Fraud Accountability Act, which I introduced with
Majority Leader Daschle and others in February. It was reported
unanimously by the Senate Judiciary Committee in April.
The Presiding Officer helped get this through the Judiciary
Committee. The Leahy-McCain amendment provides new crimes with
tough criminal penalties to restore accountability and
transparency in our markets. It accomplishes this in three
ways: No. 1. It punishes criminals who commit corporate fraud.
No. 2. It preserves evidence that can prove corporate fraud.
No. 3. It protects victims of corporate fraud.
As a former prosecutor, I know nothing focuses one's
attention on the question of morality like seeing steel bars
closing on them for a number of years because of what they did.
The conference report includes a tough new crime of
securities fraud which will cover any scheme or artifice to
defraud investors. We added the longer jail term of the other
body.
There are three key provisions of the Senate-passed bill
that were not in the recently passed House bill but are now in
the conference agreement. I think they are truly an essential
part of a comprehensive reform measure. First, we extend the
statute of limitations in securities fraud cases. In many of
the State pension funds cases, the current short statute has
barred fraud victims from seeking recovery for Enron's misdeeds
in 1997 and 1998. For example, Washington State's policemen,
firefighters, and teachers were blocked from recovery of nearly
$50 million in Enron investments by the short statute of
limitations. That is why the last two SEC Chairmen--one a
Republican and the other a Democrat--endorsed a longer short
statute of limitations to provide victims with a fair chance to
recoup their losses.
Secondly, we include meaningful protections for corporate
whistleblowers, as passed by the Senate. We learned from
Sherron Watkins of Enron that these corporate insiders are the
key witnesses that need to be encouraged to report fraud and
help prove it in court. Enron wanted to silence her as a
whistleblower because Texas law would allow them to do it. Look
what they were doing on this chart. There is no way we could
have known about this without that kind of a whistleblower.
Look at this. They had all these hidden corporations--Jedi,
Kenobi, Chewco, Big Doe--I guess they must have had ``little
doe''--Yosemite, Cactus, Ponderosa, Raptor, Braveheart. I think
they were probably watching too many old reruns when they put
this together. The fact is, they were hiding hundreds of
millions of dollars of stockholders' money in their pension
funds. The provisions Senator Grassley and I worked out in
Judiciary Committee make sure whistleblowers are protected.
Third, we include new anti-shredding crimes and the
requirement that corporate audit documents be preserved for 5
years with a 10 year maximum penalty for willful violations.
Prosecutors cannot prove their cases without evidence. As the
Andersen case showed, instead of just incorporating the
loopholes from existing crimes and raising the penalties, we
need tough new provisions that will make sure key documents do
not get shredded in the first place.
It only takes a minute to warm up the shredder, but it can
take years for prosecutors and victims to prove a case.
The conference report also maintains almost identical
provisions to those authored by Senator Biden and approved
unanimously by the Senate. These include enhanced criminal
penalties for pension fraud, mail fraud, wire fraud, and a new
crime for certifying false financial reports. As chairman of
the Judiciary's Subcommittee on Crime and Drugs, Senator Biden
deserves praise for his leadership of these issues.
It is time for action--decisive and comprehensive reforms
that will restore confidence and accountability in our public
markets for the millions of Americans whose economic security
is threatened by corporate greed.
We cannot stop greed, but we can keep greed from
succeeding.
We have seized this moment to make a good beginning to
fashion protections for corporate fraud victims, preserve
evidence of corporate crimes and hold corporate wrongdoers
accountable. We have much to do to help repair the breaches of
trust that have so shattered confidence in our markets and
market information. We have made a good start today toward
restoring that confidence but more will be needed. In addition
we will need swift and strong enforcement actions and good
faith administration of the reform set forth in our conference
report. Our conference is concluding but our work is just
beginning.
Again, I thank the Senator from Maryland.
Mr. Sarbanes. Mr. President, I thank the Senator from
Vermont. I underscore again how important his contributions
were. The Senate Judiciary Committee reported out a bill
without opposition in the committee. That is something which
accompanied this legislation.
I yield 4 minutes to the Senator from South Dakota, and
then it is my intention to go to the Senator from North
Carolina.
Mr. Johnson. Mr. President, most of all I thank him for his
extraordinary leadership on the development of this landmark
legislation. I think it is fair to say this is the most
critically important piece of investor protection legislation
since the Securities Act of 1933 or the Securities Exchange Act
of 1934.
This comes on the heels of the disclosure of corporate
corruption that has been endemic in recent months, where we
have witnessed lost jobs, lost savings, lost pensions, and
ultimately lost confidence worldwide in America's capital
markets.
There is an urgency that strong legislation be passed by
this body and the Congress to restore confidence--restore both
the perception and the reality of integrity in our capital
markets.
This legislation is strong legislation. That is why it has
been applauded by editorial writers from the east coast to the
west coast. Senator Sarbanes has been the subject of much
congratulatory observation on the part of so many. This comes
on the heels of, frankly, much weaker legislation that had been
passed previously in the House of Representatives, the other
body.
By passing a strong Senate bill, we were able to go to
conference. I am proud to have served on that conference
committee and to craft legislation there that goes in the
direction of the Senate rather than in the direction of the
other body and gives this Nation strong securities legislation.
It provides a stiff penalty for corporate wrongdoing, creates a
strong oversight board to ensure that corporate audits are done
properly, and that the books, in fact, are not cooked. It
imposes tough new corporate responsibility standards and
implements control over stock analysts' conflicts of interest,
so they are not making a fortune while advising their clients
to invest. It requires public companies to quickly and
accurately disclose financial information. It ensures that the
Securities and Exchange Commission has the resources to
accomplish its mission of regulating the securities markets.
These important provisions will ensure that America's
financial markets remain efficient and transparent and the envy
of the world. It will benefit average people who may not have
had enough information to make informed decisions in the past
and certainly could not have possibly known that the books were
cooked, that the audits were incorrect, and that corruption was
running rife. They had no way of knowing that.
This will turn that around. This is not the last word, but
this is a critically important step in the right direction to
returning integrity to our markets. We can observe, having come
through this horrible experience in recent months of disclosure
after disclosure of corruption having taken place, a
recognition that free market economies can only work when there
is a cop on the beat. Free market economies can only work when
there are fair, well-enforced, and strictly enforced rules. A
free market economy without rules, without a cop on the beat,
is not an economy that will ever work at all.
This goes a long way, I believe, to reviving confidence in
America's economic future. It goes a long way to restoring the
fairness and transparency so that people may make their
investments--and investments may go up, and they may go down,
but they can know when they make those investments, they are
making those investments based on true and accurate analysis
and not on bogus numbers that some audit firm on the take has
been willing to put forward as the truth when, in fact, they
are not the truth.
Again, the whole Nation owes a great deal of gratitude to
Chairman Sarbanes and to the Senate, in this case, for what I
am confident is going to be an overwhelming vote in favor of
this legislation.
I yield the floor.
Mr. Sarbanes. Mr. President, I yield 6 minutes to the
Senator from North Carolina.
The Presiding Officer (Mr. Corzine). The Senator from North
Carolina.
Mr. Edwards. Mr. President, I thank, along with all my
colleagues, Senator Sarbanes for the extraordinary work he has
done on this bill. We are proud of him. America appreciates
very much what he and others who have worked with him have
done.
I also thank Senator Enzi, who is in the Chamber, and
Senator Corzine, who is presiding, for the work they have done
with me on what I think is an important part of this
legislation which, in addition to corporate CEOs and
accountants, is holding the lawyers involved in these
transactions responsible and accountable; that if they see
something wrong occurring, they should do something about it--
report it to their client, to the corporation, report it to the
CEO, the chief legal officer and, if necessary, report it to
the board.
In Congress, we are doing what needs to be done and
stepping to the plate with regard to corporate responsibility.
That is in striking contrast to what is going on in my home
State right now.
At a time when Americans are demanding more corporate
responsibility, when Congress is stepping up and doing what
needs to be done, the President has gone to North Carolina
today to ask for less corporate responsibility, to make it
easier on insurance companies and to make it harder on victims.
The President is in North Carolina today proposing some of
the smallest limits that have ever been proposed for families
who have suffered tragedies, serious problems, as a result of
poor medical care at a time when medical malpractice insurance
premiums constitute way less than 1 percent, substantially less
than 1 percent, of medical care costs in this country.
The President is holding a roundtable, as I speak, on this
subject. I would like to see how many victims of medical
negligence, of medical malpractice, people who have been
devastated and their lives devastated, are participating in
this roundtable. I know these people. For many years I have
represented them. I have been in their homes. I have been in
homes and spent time with families whose child will never walk,
who have been blinded for life, who have been crippled for
life, who have suffered injuries from which they will never
recover.
These children blinded for life, crippled for life,
severely injured for life--there is a description in the HHS
report on which the President is relying which talks about when
juries find they have been hurt and award money to them, they
describe it as ``winning the lottery ticket.'' The parents of a
child who has been blinded for life, the parents of a child who
will never walk, rest assured they do not believe they have the
winning lottery ticket.
My question is: How many of those people are the President
talking to when he is in North Carolina today? The next time he
comes back to North Carolina, we invite him to talk to some of
those people because those are the ordinary Americans to whom
he should be talking. Those are the people who are going to be
impacted. The children who have suffered serious injuries are
the ones who are going to have the greatest impact and have
their rights taken away by what the President is proposing.
Unfortunately, listening to ordinary people is not what
this administration does. They have done it time and time
again. It is stunning, but it is sad and consistent. When this
administration has a choice between protecting the rights of
big companies, big insurance companies versus the rights of
ordinary people, they choose the big insurance company, the big
companies every single time. They have been dragged kicking and
screaming to do something about corporate responsibility, which
we are doing in the Congress.
On the Patients' Bill of Rights, on which Senator Kennedy,
Senator McCain, and I have worked so hard, they have
consistently sided with the big HMOs, which is why we do not
have a Patients' Bill of Rights in this country.
On prescription drugs, when we tried to do something about
the cost of prescription drugs on the floor of the Senate, this
administration consistently sided with the big drug companies.
When it comes to the environment, this administration has
weakened clean air laws that protect the air for our children
and consistently sided with the big energy companies that are
polluting our air.
Today the President adds to that list, in going to the
State of North Carolina, the big insurance companies. This
President loves to talk about compassion. My question to him
is: Where is his compassion for the victims?
Mr. President, I yield the floor.
Mr. Bayh. Mr. President, I rise today in support of the
accounting reform and corporate responsibility conference
agreement. I do so, because I believe very strongly that it is
in the best interests of America at this critical time in our
history.
I believe it goes way beyond mere accounting issues. What
we are agreeing to today deals with the financial security of
millions of individual investors across this country, the
security of their pensions, their 401(k) programs, and their
other investments for the future of their children and their
grandchildren.
What we are talking about today involves the very vitality
of our economy, the amount of investment that will take place
in the economy, the number of jobs that will be created, and
the vitality of farms. It involves the standing of America in
the international economy, whether we will continue to be a
safe haven for investments from those abroad, attracting the
capital that helps us build a strong foundation for America's
economy.
More than anything else, this bill embodies the basic
values upon which this has been based. It clearly answers the
question: Will we continue to encourage those virtues that have
always characterized America and will our Nation continue to be
the land of opportunity based upon hard work, honesty, and
playing by the rules or, will we be perceived as the land of
opportunity based upon deceit. I believe that the right answer,
based upon traditional values and virtues, is embodied in the
accounting reform and corporate responsibility bill.
I congratulate our colleagues, Senators Sarbanes, Dodd,
Corzine and Enzi. They demonstrated leadership and foresight in
this issue.
Since the tragedies of 9/11, our country has been involved
in twin struggles: One, the physical national security of this
country; and, second, getting this economy moving again to
ensure the economic security of Americans across this country.
There are parallels between these two challenges. Both occurred
as a result of unexpected tragedies but have presented us with
opportunities to make this an even better, stronger, more
secure Nation. Both involve breaking the political gridlock and
the bureaucratic inertia that all too often make progress in
this Capitol difficult. And both involve striking the right
balance between individual freedom and liberty on the one hand,
that we cherish, and collective security, which makes
individual liberty meaningful, on the other.
Let me conclude where I began. This issue goes a long way
beyond mere accounting issues. It goes a long way beyond
economic policy. It goes to the very heart of who we are, what
we stand for as a people, and the kind of values we cherish in
the United States of America. This will protect individual
investors. It will help to ensure the integrity of our economy.
But more than anything else, it will ensure that those
Americans who have embraced our tradition with virtues, who
have worked hard and saved their money, who have played by the
rules, and are honest are able to get ahead in this society.
It will send a loud and clear signal to those who practice
corporate fraud that they do not have an avenue to success in
this country. That does not embody the best values of America.
I strongly support the accounting reform and corporate
responsibility conference agreement. I urge my colleagues to
enact this important legislation.
Mr. Kerry. Mr. President, I strongly support the Sarbanes-
Oxley Act of 2002 because it will help end the corporate abuses
that in recent months have plagued our economy and will help
restore confidence in our economy. I would like to take this
opportunity to express my appreciation for the efforts that
Senator Paul Sarbanes, Chairman of the Senate Banking, Housing
and Urban Affairs Committee, has made to develop and enact this
important legislation. As a former member of the Banking
Committee, I know how difficult it is to respond quickly to
recent events that affected our capital markets. However,
Senator Sarbanes has put together a coalition which led to a
unanimous vote in support of his bill in the Senate, and the
provisions of which is the base text for this conference
report.
The United States must stand for the fairest, most
transparent and efficient financial markets in the world.
However, the trust and confidence of the American people in
their financial markets have been dangerously eroded by the
emergence of serious accounting irregularities by some
companies and possible fraudulent actions by companies like
WorldCom, Inc., Enron, Arthur Andersen and others. Some
investment banks have been charged with publicly recommending
stocks for public purchase that their own analysts regarded as
junk.
The shocking malfeasance by these businesses and accounting
firms has put a strain on the growth of our economy. The
misconduct by a few senior executives has cost the jobs of
hard-working Americans, including 17,000 at WorldCom and
thousands more at companies accused of similar wrongdoing. The
lack of faith in our financial markets contributed to an
overall decline in stock values and has caused grave losses to
individual investors and pension funds. For example, the losses
to the California Public Employees Retirement System from the
recent WorldCom disclosures total more than $580 million.
The conference report creates a new Public Company
Accounting Oversight Board to oversee the auditing of companies
that are subject to the federal securities laws. The Board will
establish auditing, quality control, and ethical standards for
accounting firms. The conference report restricts accounting
firms from providing a number of non-audit services to its
audit clients to preserve the firm's independence. It also
requires accounting firms to change the lead or coordinating
partners for a company every five years.
The conference report requires CEOs to certify their
financial statements or face up to 20 years in prison for
falsifying information on reports. It keeps executives from
obtaining corporate loans that are not available to outsiders.
It requires public companies to provide periodic reports to the
SEC on off-balance transactions, arrangements, obligations and
other relationships that may have a material current or future
effect on the company's financial condition. It requires
directors, officers and 10 percent equity holders to report
their purchases and sales of company securities within two days
of the transaction.
I am pleased that the conference report includes the
Corporate Fraud and Criminal Fraud Accountability Act which
will provide for criminal prosecution and enhanced penalties of
persons who defraud investors in publicly traded securities or
alter or destroy evidence in Federal investigations. It will
also prohibit debts incurred in violation of securities fraud
laws from being discharged in bankruptcy and protect whistle
blowers who report fraud against retaliation by their
employers.
The conference report requires the SEC to adopt rules to
foster greater public confidence in securities research
including: protecting the objectivity and independence of stock
analysts who publish research intended for the public by
prohibiting the pre-publication clearance of such research or
recommendations by investment banking or other staff not
directly responsible for investment research; disclosing
whether the public company being analyzed has been a client of
the analyst's firm and what services the firm provided;
limiting the supervision of research analysts to officials not
engaged in investment banking activities; protecting securities
analysts from retaliation by investment banking staff.
The provisions included in this legislation will help
restore confidence in our capital markets and in turn will help
provide for future economic growth. It is an important first
step, not a last. Mr. President, I am pleased to support the
Conference Report and will continue to look for ways to improve
investor confidence in our financial markets.
Mr. Schumer. Mr. President, everyone knows that New York
City is the financial capital of the world. Yet as we continue
to rebuild our city in light of the tragic events of September
11, we are now faced with the devastating effects of depressed
markets and unsure investors, who are once again victims. With
more than half of American households investing in the markets,
we're all affected by a crisis in investor confidence.
I can't think of a more appropriate time than the present
for the Senate to debate legislation to restore dwindling
investor confidence and bring sound footing back to our
financial markets. Isn't it ironic? Just a few weeks ago, the
headlines read ``Sarbanes bill dead'' or ``Accounting Reform
Fading.''
In the wake of recent revelations about WorldCom and just 2
days ago Merck, corporate corruption has reached an all-time
high; we are now at a new level of corporate corruption. We've
reached a new low and the question every member of the Senate
must be asking is: ``Where does it end?''
Buzzwords like ``accounting fraud,'' ``corporate
corruption,'' ``Restatements,'' ``Cooking the books,'' are
being bandied about in the press, in the coffee shops, at the
dinner tables across America. Just this weekend at the Taste of
Buffalo, people came up to me and said ``Throw `em in jail,
Chuck!'' They were talking about the Ken Lay's, Bernard Ebers',
the Andrew Fasdow's of the corporate world. White collar
criminals who ran giant corporations and used tricky gimmicks
to rob investors of not only their hard money but also their
confidence in the strongest and fairest markets in the world. *
* * They are the investment giants: Enron, Arthur Andersen,
Adelphia, CMS Energy, Reliant Resources, Dynergy, Tyco
International, and now Xerox and WorldCom. A mere handful of
our nations top companies who have gone under as a result of
misrepresented earnings and poor management. In less than a
years time, these so-called investment giants through the great
gift of deceit and tricky accounting practices have reduced
themselves to mere shells of their former existence.
As a result, their use of tricky gimmicks to hide the real
picture and literally milk the system dry have caused investors
around the globe to question integrity of our nations markets,
which are supposed to be the strongest and most resilient
because they are perceived as the most open, most transparent
markets in the world. Up until now, the United States had been
a magnet for foreign investment. Yet, the selfish, greedy
actions of a small few have led to a steady and precipitous
drop in foreign investment in our financial markets.
It is no secret that greed played a major role in our
markets rapid decline and slow demise. The heads of these
entities stole millions, some billions of dollars from
investors, and it is now time that we make them pay for their
actions.
I commend the NASDAQ and the New York Stock Exchange for
their announcements of new, tough corporate governance
standards. The New York markets have taken the first steps to
correct corporate corruption, and now it is our turn to find
the right balance in light of these unsteady markets and times.
So what is the right balance? The right balance is one that
will not only offer strict corporate governance laws, protect
the average investor from being swindled out of his or her hard
earned savings by a fast-talking, wheeling and dealing broker,
but will also severely punish those individuals who
intentionally mislead investors with faulty practices. That is
why I am introducing the following amendments to the Public
Company Accounting Reform and Investor Protection Act of 2002
to further limit the ability of company execs from personally
manipulating and rigging the system for their personal benefit
and interest.
The first amendment prohibits companies from issuing
personal loans to company executives as seen with Worldcom,
whose CEO received more than $300,000 in loans from the
technology giant. Instead, CEOs will have to go to the bank,
just like everyone else, to acquire a loan; which, will reduce
the risk of CEOs ability to use company funds for personal
purposes.
The second amendment requires company execs to forfeit any
and all bonuses and additional compensation if their
restatements occur along with criminal liability.
It is my hope that by revealing the few bad apples at the
bottom of the barrel, and punishing these individuals for their
immoral behavior, we can save the rest of the industry and
restore confidence in our markets.
The legislation pending before us will make it harder for
companies to lie about their assets. Thats the least we can do
in re-establishing public confidence in corporate America. Our
common purpose today is to ensure that the Enron's, the Tyco's,
and the WorldCom's never happen again.
Now is the time for us to act. It is the least we can do to
shore up the investing public's confidence in our markets.
Mr. Wellstone. Mr. President, 2 years ago it was pretty
lonely being in favor of the auditor independence reforms that
then-SEC Chairman Arthur Levitt said were necessary to guard
against unprecedented accounting scandals. I am proud that I
was one of the few who thought Chairman Levitt was going in the
right direction. Unfortunately it took the implosion of several
multi-billion dollar firms, and a loss of tens of thousands of
jobs and hundreds of billions of dollars in investor equity, to
prove that he was right. Now America's capital markets have
been shaken by a dramatic loss in investor confidence,
threatening the economic recovery.
But today, Congress has acted. I rise today in strong
support of the Public Company Accounting Reform and Investor
Protection Act conference report. I commend the Senator from
Maryland, the Chairman of the Banking Committee for putting
together significant, structural reform of corporate governance
and auditor independence and for defending it in conference.
And I am heartened that the President and the House
leadership have finally agreed to comprehensive reform instead
of mere half-measures and tough rhetoric.
This bill holds the bad actors accountable for their fraud
and deception. But the legislation goes much further, as it
should, because the problem goes much deeper. We are faced with
more than the wrong doing of individual executives, we are
faced with a crisis in confidence in American capital markets
and American business.
This conference report retains the strong Senate reforms
virtually intact. It bars an auditor from offering audit
services and other consulting services to the same client. It
says publically traded companies must change the partner in
charge of the audit every five years. It strengthens oversight
of accountants, by establishing an independent board to set and
enforce standards. And it enhances disclosure. This alone is
real reform. But the bill does more. It makes corporate
executives more accountable to their shareholders. It makes
investment analysts more accountable to the public. And it's
bill contains strong penalties for corporate wrong-doers.
All and all, this legislation lets the sunshine back into
the smoke-filled corporate board rooms so that insiders have
harder time cheating the outsiders. It is structural reform
that restores checks and balances that will protect against
fraud, deception, and reckless carelessness.
We need to restore America's faith in corporate America. It
has gone beyond individual wrong doing. The system hides and
encourages corruption. Today the Congress passes strong reform.
Now I call on the President to make enactment and enforcement
of this new law a priority.
Mr. Bond. Mr. President, last night, the conference
committee released its final report on comprehensive accounting
reform and corporate governance legislation. The reaction of
our financial markets confirms that this legislation is
absolutely necessary to help restore integrity and confidence
to our free market system and our investment community.
However, in our rush to enact broad reforms, we may be
damaging the economic framework for small companies to reach
our capital markets. In the long term, the reforms will make
our economy stronger. In the short term, we will be creating
complete chaos for small publicly traded companies and
companies trying to gain the capital for growth through stock
offerings.
I am extremely disappointed in the conferees' decision not
to recognize this fact and provide the Securities and Exchange
Commission and the proposed Public Company Accounting Oversight
Board with greater flexibility in dealing with small firms.
Small business has been the driving force of our economy for
well over a decade. The high hurdles in the legislation are
necessary for large, conglomerate companies but they may be a
trip wire for our small business entrepreneurial community.
Mr. Sarbanes. Mr. President, I note that the Congress, in
the Enhanced Review of Periodic Disclosures section in the
Sarbanes-Oxley Act, provides for regular and systematic reviews
by the Securities and Exchange Commission of the periodic
reports filed by public companies that are listed on a national
securities exchange or on Nasdaq. The section requires that
there be some review of issuers' disclosures at least once
every three years. The bill identifies factors which the
Commission should consider in scheduling reviews, including the
issuer's capitalization, stock price volatility and
restatements of earnings. We expect the Commission to exercise
its discretion to determine the appropriate level and scope of
review for each company's reports in the furtherance of the
protection of investors and the public interest.
The Presiding Officer. Who yields time?
Mr. Sarbanes. Mr. President, may I ask what the time
situation is?
The Presiding Officer. The Senator from Maryland has 15
minutes 10 seconds. The Senator from Wyoming has 21 minutes 30
seconds.
Mr. Sarbanes. I yield 3 minutes to the Senator from New
York.
The Presiding Officer. The Senator from New York.
Mr. Schumer. I thank the Chair.
Mr. President, this is an extremely important day for our
capital markets, for our country, and for the future of our
economy. As we all know, capitalism has its ups and downs and
works in ups and downs, and there have been periods throughout
our history--I can think of the S&L crisis a decade ago--where
things get off track, out of control. It is our job as
Government not to interfere with entrepreneurial vigor, not to
create such regulation that they become a straitjacketed
company, but at the time when the markets show that things have
gotten off track, it is our job to help put them back on track.
There is a bottom line principle here: If investors,
whether throughout the United States or the rest of the world,
do not believe companies are on the level, they will not
invest. Unfortunately, the revelations of the last year have
given people the view that they are not on the level. That it
is not the same for them in terms of even information as it is
for somebody at the top, that the information they may be
getting may be wrong or distorted far beyond what they normally
would in the world. So this bill puts that back.
I think it is a carefully balanced bill. There are some
changes in it. There are some changes not in it that I would
like to have seen, but the perfect should not be the enemy of
the good. It is a good bill, a fine bill. In fact, when the
agreement was reached, the Dow Jones went up 400 points. I do
not think it was coincidental. Whether it be CEOs of large
companies or individual investors, the public is saying to us,
make it right. Look at the abuses that occurred in the past and
make sure they cannot occur again, and do it in a careful way
that keeps our markets fluid, liquid, deep, and important. I
think this bill does it.
I want to pay a great deal of tribute to our chairman,
Senator Sarbanes, and to so many others who made this bill a
reality. With the passage of this bill, we can tell investors,
while we have not cleared up every problem, and perhaps we will
come back and address this later--I think we will have to in a
couple areas--we have certainly made things better.
A few weeks ago, Washington looked as if it was dithering
in the face of crisis, but today we proudly act in a bipartisan
way to restore faith in our markets, the deepest, strongest,
and best markets in the world.
I dare say, I know there are some who are against any
change or any regulation, but our markets will be stronger
tomorrow than they were this morning when this bill passes the
House, the Senate, and is signed by the President.
The Presiding Officer. Who yields time?
Mr. Sarbanes. Mr. President, we are down quite far in our
time. Senator Dodd, who wishes to speak, is at a memorial
service. I suggest if the other side could use some of its
time, it would be helpful in balancing this out. I ask
unanimous consent that while we are trying to work this out the
time not be charged to either party, and I suggest the absence
of a quorum.
The Presiding Officer. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. Enzi. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Enzi. I suggest the absence of a quorum.
The Presiding Officer. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Sarbanes. Mr. President, I ask unanimous consent that
the order for the quorum call be rescinded.
The Presiding Officer. Without objection, it is so ordered.
Mr. Sarbanes. Mr. President, I yield 8 minutes to the
distinguished Senator from Connecticut.
The Presiding Officer. The Senator from Connecticut.
Mr. Dodd. Mr. President, when we opened the conference on
this legislation a week or so ago, I said my hope was the
passage of this bill would be quick, decisive, and unanimous.
Two out of three is not bad. We got quick and decisive and
almost unanimous. Our colleague from Texas, and our friend, was
unable to support the final product for reasons he has already
explained.
I thought we did an excellent job in moving as quickly as
we did. I believe passage of the legislation and the quick and
decisive manner and nearly unanimous way we achieved the result
and overwhelming support of the Senate and the House fulfill a
responsibility of Congress to protect investors. There is more
work to be done, but we have begun a significant part of the
journey. In fact, we traveled a great distance down the road in
fulfilling a congressional responsibility in responding to the
events that began to unfold, at least to the public's
awareness, last October. And the story is not yet complete. We
do not know the final results.
I have a few minutes in which to share some thoughts. I am
going to move quickly to share comments. I begin by commending
my colleague from Maryland, the chairman of the Banking
Committee, for the tremendous job he has done. I said
yesterday, any students of the Congress of the United States
who want to seek out good examples of how a legislative product
can be developed, nurtured, analyzed, discussed, debated, and
finally passed, this is about as good an example as I have seen
in recent years of how one ought to proceed. Certainly the
hearings we held in the Banking Committee I don't recall
attracting much attention. I don't recall a single one of the
12 hearings we held appearing on the nightly news or being lead
stories on some of the 24-hour news stations.
I recall a great many hearings where people sat there,
raised their right hand, and took the fifth amendment. That got
a lot of attention. The 12 hearings held in the Banking
Committee of the Senate, where we went through the deliberate,
slow, ponderous process of actually listening to people who had
something to say about what ought to be done to clean up this
mess, never made it on the nightly news that I am aware of.
I commend again my friend and colleague with whom I have
enjoyed my service in the Congress of the United States for
more than a quarter of a century. We have sat next to each
other for a good part of that time in both the House and in
this Chamber. I sit next to him on the Foreign Affairs
Committee and on the Banking Committee. If I could make the
choice and it would not be determined by seniority, I would
make him my choice for seatmate. I have great respect for him
and admire him immensely. He has proven the value of having
Paul Sarbanes as a Member of this body.
I also point out the Presiding Officer, one of the most
junior Members of this Chamber, who provided an incredible,
invaluable support and source of ideas, guidance. Rarely does a
new Member play such an important role on such an important
piece of legislation. Of any Member who was involved in this
process, Mike Enzi of Wyoming and others all would agree, in
any history written of the development of the bill, the role of
a freshman Senator from the State of New Jersey named Jon
Corzine needs to be talked about. He played a very important
role. We would not be here without him. I tip my hat to him and
to Mike Enzi, the only Member of this Chamber who actually knew
something at a practical level about what it was to be an
accountant and what life was like in the trenches.
For the staff and others who worked on this legislation,
this was not the most popular idea in the world. Had it not
been for unfolding events, I am not sure we would have
developed that kind of support. I will love to one day tell my
daughter, who is only an infant, that it was the power of our
persuasion which convinced a majority here to go along.
Not many understood the value, the substantive value, of
this bill. Mike Enzi did, a number of others did, there were
many in the House who did, but an awful lot of people, even as
late as a week ago, were suggesting maybe this bill was a bad
idea, and that it would not go anywhere, and it shouldn't go
anywhere; we ought to spend another couple of months thinking
about it.
Those notices were not a month old, or 2 months old; that
was 5 or 6 day ago. I understand it was the public's demand
that we respond to this that had an awful lot to do with the
support we garnered. That is all right. I never argue about how
you get support around here as long as you get it in the end.
We got it in the end, and that is the important news.
The fact is, we are about to vote overwhelmingly to support
a very critical piece of legislation. I am confident, as he has
already indicated, that the President will sign this bill into
law. We are already seeing markets respond, not entirely
because of this, but certainly in no small measure because of
the events that have unfolded and the parts Congress played.
The chairman of the committee has talked about part of the
bill. There are very important pieces, including the auditor
independence. The board will be revolutionary in how it
operates. Someone pointed out today, a lot of what the
regulators do will determine the value of what we have written
legislatively. I am confident that will be the case.
Having FASB now be compensated for and paid for from public
money and not relying on the largess and generosity of the
accounting industry to receive compensation will make a
significant difference in establishing accounting rules and
procedures. Certainly having prohibitions against those going
from the industry, working for the clients for whom they have
done audits, will have a beneficial effect on slowing down this
not only appearance of conflict, but certainly the conflicts of
interest that have occurred too often.
There are many other parts of the bill, including corporate
penalties, that were crafted by our colleague from Vermont and
other Members of the Judiciary Committee, that deserve a great
deal of credit for their contribution to this process. The
leadership, Senator Daschle, certainly for insisting we move as
rapidly as we did to get the product done in committee and get
it on the floor of the Senate, understanding how important this
issue would be to the shareholder interests and pensioners and
to others who depend upon a solid, strong economy for their
well-being--certainly their contribution is extremely important
as well.
We have seen the economy begin to do a bit better. I don't
think our work is done, despite the accomplishments in this
legislation. My hope would be that before this Senate adjourns
in a week and a half from now, we might deal with the pension
issue. I don't know if that will be possible. I know there are
a lot of other issues that need to be considered. My hope is if
we are not able to do that in the next week and a half, we will
come back soon after we reconvene in September.
I sit on the Health, Education, Labor, and Pensions
Committee with the presiding officer who is interested in that
committee. My hope is that we can deal with the pension reform
matters that are necessary, as well, for adoption by this
Congress before the 107th Congress adjourns.
Again, I commend all those involved. I thank Alex Sternhill
of my office, Steve Harris, Marty Gruenberg, all the Members
who worked with the chairman's committee and the full committee
of the Senate Banking Committee, and those on the minority
side, as well, who played an extremely important role.
While he disagreed with the final outcome of the bill, the
Senator from Texas and I have had a great relationship over
these many years we have served together. I have always enjoyed
being on his side. He is a tough opponent, but when we worked
together we have done some pretty good work around here and
passed some pretty good bills.
He is leaving and I believe the Senate will be less vibrant
an institution because of his absence. It is important that
this place be a place of ideas for debate to occur, and the
Senator from Texas has always made that kind of contribution.
The Presiding Officer. The time of the Senator has expired.
Mr. Dodd. Hang on. I am commending him. He is going to give
me more time.
Mr. Gramm. The Senator can have all the time he wants.
Mr. Dodd. Mr. President, I have learned after more than 20
years that if you want the minority to give you a little more
time, start complementing them. It is amazing. Egos are alive
and well in the Senate.
I am going to miss him. He is not done. We have more work,
obviously, in the remaining weeks, but this may be one of the
last major bills the Banking Committee considers. I don't know
what life holds for him down the road, but the good Lord is not
done with him yet.
I look forward to your vibrancy, your ideas, and your
passion in whatever role you decide to assume in the next part
of your life, and thank you for the tremendous work you have
given to the committee and this body through your service.
I thank again the chairman and other members of the
committee for contributing to what may be one of the most
important pieces of legislation this body will consider in the
107th Congress and one of the most important in the area of
financial services in many, many decades.
I yield the floor.
The Presiding Officer. Who yields time?
Mr. Gramm. Mr. President, how much time do we have?
The Presiding Officer. The Senator from Texas has 14
minutes.
Mr. Gramm. We were going to shoot for about 4:30 so I may
yield some of it back, depending on who comes over.
Let me, first, thank my dear colleague, Senator Dodd, for
his kind comments. I have enjoyed working with him over the
years. I very much appreciate the comments he made.
I want to say something about my staff. A famous
philosopher once said: In no way can you get a keener insight
into the true nature of a leader than by looking at the people
by whom he surrounds himself.
I would always be happy to have anybody judge me by Linda
Lord and by Wayne Abernathy. It is amazing how much impact
staffers have on the Senate. I am blessed in this area to have
two of the best staff people who have ever served any Senator
in the history of this country. On most issues on which I
worked with Linda Lord, she knows more about this subject than
anybody, and generally more than everybody else combined. In
working with her, I see that the Lord was a great
discriminator; he gave some people incredible ability and most
of us he gave relatively few, in the way of talents. I thank
her for the great job she has done.
I thank Wayne Abernathy. In the years I was chairman of the
Banking Committee, Wayne Abernathy was chairman of the Banking
Committee. In the day-to-day work, he has made an incredible
contribution. If there is an unfairness to it, it is that I
have gotten credit for all the good work that they have done,
and I am grateful for that.
I reserve the remainder of my time.
The Presiding Officer. Who yields time?
Mr. Sarbanes. How much time do I have remaining?
The Presiding Officer. The Senator has 3 minutes remaining.
Mr. Sarbanes. I yield 1 minute to the Senator from
Minnesota.
Mr. Wellstone. I thank the Senator from Maryland. I thank
him for his great leadership and the other Senators working on
this. I can only say this in 1 minute: I remember when Arthur
Levitt came by several years ago to talk with me about the need
for audit independence. Senator Sarbanes and others have made
that possible. Many people took their savings, converted it to
stock, and thought it would be there for their children or
grandchildren. Many people had 401(k)s they were counting on.
All of this has eroded in value. Investors do not have the
confidence in the economy. I think the key is to make the
structural change and make sure people can count on the
independent audits, that no one is cooking their books. This is
the best of government oversight. I am very proud to support
this legislation.
Once again, I thank the chair of the Banking Committee for
exceptional leadership.
I yield the floor.
The Presiding Officer. The Senator from Maryland.
Mr. Sarbanes. Mr. President, as Senator Gramm was speaking
earlier I was thinking to myself that he really was
exemplifying on the floor of the Senate the sort of dialog we
went through in the committee. As he was making an argument
about auditor independence, I was thinking that is really a
very reasonable argument and one to which we really paid
attention. I want to give the counterargument, and then make a
concluding comment about the terrific work of the staff on this
bill.
Senator Gramm has suggested that the conference report
should be changed to give the SEC or the Oversight Board
authority to grant broad categorical exemptions from the list
of non-audit services that Section 201 of the bill prohibits
registered public accounting firms to provide to public company
audit clients.
Such a change, in my view, would weaken one of the
fundamental objectives of the conference report: to draw a
bright line around a limited list of non-audit services that
accounting firms may not provide to public company audit
clients because their doing so creates a fundamental conflict
of interest for the accounting firms.
This limited list is based on a set of simple principles:
A public company auditor, in order to be independent,
should not audit its own work (as it would if it provided
internal audit outsourcing services, financial information
systems design, appraisal or valuation services, actuarial
services, or bookkeeping services to an audit client).
A public company auditor should not function as part of
management or as an employee of the audit client (as it would
if it provided human resources services such as recruiting,
hiring, and designing compensation packages for the officers,
directors, and managers of an audit client).
A public company auditor, to be independent, should not act
as an advocate of its audit client (as it would if it provided
legal and expert services to an audit client in judicial or
regulatory proceedings.)
A public company auditor should not be a promoter of the
company's stock or other financial interests (as it would be if
it served as a broker-dealer, investment adviser, or investment
banker for the company).
I want to emphasize that Section 201 does not bar
accounting firms from offering consulting services. It simply
requires that they not offer certain consulting services to
public companies for which they wish to serve as ``independent
auditor.'' An accounting firm is free to offer any services it
wants to any public companies it does not audit (or to any
private companies). It also may engage in any non-audit
service, including tax services, that is not on the list for an
audit client if the activity is approved in advance by the
audit committee of the public company.
The conference report does authorize the new Oversight
Board, on a case-by-case basis, to exempt any person, issuer,
public accounting firm, or transaction from the prohibition on
the provision of non-audit services to the extent that such
exemption is necessary or appropriate in the public interest
and is consistent with the protection of investors.
The exemptive authority provided the Board is intentionally
narrow to apply to individual cases where the application of
the statutory requirement would impose some extraordinary
hardship or circumstance that would merit an exemption
consistent with the protection of the public interest and the
protection of investors.
But the fundamental presumption of the provision is that
these non-audit services, by their very nature, present a
conflict of interest for an accounting firm if provided to a
public company audit client.
Arthur Andersen was conflicted because it served Enron as
both an auditor and a consultant, and for two years it also
served as Enron's internal auditor, essentially auditing its
own work. Enron was Andersen's largest client, and in 2000
Andersen earned $27 million in consulting fees from the company
($25 million in audit fees).
In its oversight hearing earlier this year on the failure
of Superior Bank in Hinsdale, Illinois, the Senate Banking
Committee learned first-hand the risks associated with allowing
accounting firms to audit their own work. In that case, the
accounting firm audited and certified a valuation of risky
residual assets calculated according to a methodology it had
provided as a consultant. The valuation was excessive and led
to the failure of the institution.
The SEC's recent actions against one of the large public
accounting firms (KPMG) in an enforcement case illustrates the
danger of allowing an accounting firm to serve as a broker
dealer, investment advisor, or investment banker for a public
company audit client (Porta Systems). In that case, the
accounting firm set up an affiliate and the affiliate provided
``turn around'' services to the issuer, including functioning
as the president of the company. There would have been no need
for an SEC action if the non-audit service were simply
prohibited.
The inherent conflict created by these consulting services
has been exacerbated by their rapid growth in the last 15
years. According to the SEC, 55 percent of the average revenue
of the big five accounting firms came from accounting and
auditing services in 1988. Twenty-two percent of the average
revenue came from management consulting services. By 1999,
those figures had fallen to 31 percent for accounting and
auditing services, and risen to 50 percent for management
consulting services. Recent data reported to the SEC showed on
average public accounting firms' non-audit fees comprised 73
percent of their total fees, or $2.69 in non-audit fees for
every $1.00 in audit fees.
A number of the most knowledgeable and thoughtful witnesses
who testified before the Senate Banking Committee in the
hearings held in preparation for this legislation argued that
the growth in the non-audit consulting business done by the
large accounting firms for their audit clients has so
compromised the independence of the audits that a complete
prohibition on the provision of consulting services by
accounting firms to their public audit clients is required.
Perhaps the strongest advocates of this view have been the
managers of large pension funds who are entrusted with people's
retirement savings.
For example, the California Public Employees' Retirement
System (CalPERS), manages pension and health benefits for more
than 1.3 million members and has aggregate holdings totaling
almost $150 billion. According to CalPERS CEO, James E. Burton:
the inherent conflicts created when an external auditor is
simultaneously receiving fees from a company for non-audit work
cannot be remedied by anything less than a bright-line ban. An
accounting firm should be an auditor or a consultant, but not
both to the same client.
John Biggs is CEO of Teachers Insurance and Annuity
Association College Retirement Equities Fund (TIAA-CREF), the
largest private pension system in the world, which manages
approximately $275 billion in pension assets for over 2 million
participants in the education and research community. Mr. Biggs
was also a member of the last Public Oversight Board. He told
the Committee that:
TIAA-CREF does not allow our public audit firm to provide
any consulting services to us, and our policy even bars our
auditor from providing tax services.
The conference report chose not to follow the approach of
imposing a complete prohibition on the provision of non-audit
services to audit clients. Instead it chose the approach of
identifying the non-audit services which by their very nature
pose a conflict of interest and should be prohibited. Among
those supporting this approach are former Comptroller General
Charles Bowsher, former SEC Chairman Arthur Levitt, and former
Federal Reserve Board Chairman Paul Volcker.
The argument is made that small companies, in particular,
may be burdened by this requirement and that the SEC should
have broad authority to grant categorical exemptions. It is
even argued that so many companies would seek case-by-case
exemptions that the SEC would become overwhelmed and would be
unable to process the exemptions in a timely manner.
The point is that if the provision of a non-audit service
to a public company audit client creates a conflict of interest
for the accounting firm that non-audit service should be
prohibited, whether the public company is large or small.
Investors rely on the audit in making their investment
decisions, and the independence of the audit should not be
compromised by the provision of the non-audit service. If a
legitimate exceptional hardship is imposed, then the Oversight
Board would have the authority to grant case-by-case
exemptions.
The present Comptroller General, David Walker, issued a
particularly strong statement in support of the approach to
auditor independence taken in the bill conference report I
would like to quote:
I believe that legislation that will provide a framework
and guidance for the SEC to use in setting independence
standards for public company audits is needed. History has
shown that the AICPA [American Institute of Certified Public
Accountants] and the SEC have failed to update their
independence standards in a timely fashion and that past
updates have not adequately protected the public's interests.
In addition, the accounting profession has placed too much
emphasis on growing non-audit fees and not enough emphasis on
modernizing the auditing profession for the 21st century
environment. Congress is the proper body to promulgate a
framework for the SEC to use in connection with independence
related regulatory and enforcement actions in order to help
ensure confidence in financial reporting and safeguard
investors and the public's interests. The independence
provision [of the bill] . . . strikes a reasoned and reasonable
balance that will enable auditors to perform a range of non-
audit services for their audit clients and an unlimited range
of non-audit services for their non-audit clients. . . . In my
opinion, the time to act on independence legislation is now.
This auditor independence provision is at the very center
of this legislation. It goes to the public trust granted to
public accounting firms by our securities laws which require
comprehensive financial statements that must be prepared, in
the words of the Securities Act of 1933, by ``an independent
public or certified accountant.''
The statutory independent audit requirement has two sides,
a private franchise and a public trust. It grants a franchise
to the nation's public accountants--their services, and only
their services--must be secured before an issuer of securities
can go to market, have the securities listed on the nation's
stock exchanges, or comply with the reporting requirements of
the securities laws. This is a source of significant private
benefit.
But the franchise is conditional. It comes in return for
the CPA's assumption of a public duty and obligation. As a
unanimous Supreme Court noted nearly 20 years ago:
In certifying the public reports that collectively depict a
corporation's financial status, the independent auditor assumes
a public responsibility. . . . [That auditor] owes ultimate
allegiance to the corporation's creditors and stockholders, as
well as to the investing public. This ``public watchdog''
function demands that the accountant maintain total
independence from the client at all times and requires complete
fidelity to the public trust.
We must cut the chord between the audit and the consulting
services which by their very nature undermine the independence
of the audit. We must break this culture that exists, and to do
that we need a bright line. In my view granting broad exemption
authority to the Oversight Board or the SEC to permit these
non-audit services would undermine the separation the
conference report is intended to establish.
I wanted to underscore the fact that there was a very
reasoned, intense discussion of these issues. There is reason
on both sides. I thought the Senator made a very strong
statement. I wanted to give the counterstatement here.
I share Senator Dodd's view about this exchange of ideas
and its importance to the functioning of this institution. The
Senator from Texas has certainly made an important contribution
in that regard.
I wish to take a moment to recognize the terrific work of
the staff. Senator Gramm referred to Wayne Abernathy and Linda
Lord, and of course Mike Thompson and Katherine McGuire of
Senator Enzi's staff; Laura Ayoud of the legislative counsel
who worked day and night to put this thing in legislative
language; the staff of the Banking Committee led by Steve
Harris, Dean Shahinian, Steve Kroll, Lynsey Graham, Vincent
Meehan, Sarah Kline, Judy Keenan, Jesse Jacobs, Craig Davis,
Marty Gruenberg, Gary Gensler, and, as I said, all led so ably
by Steve Harris.
We had the very able staff of the Senators on the
committee: Alex Sternhell, Naomi Camper, Jon Berger, Jimmy
Williams, Catherine Cruz Wojtasik, Leslie Wooley, Margaret
Simmons, Matt Young, Roger Hollingsworth, and Matt Pippin.
I thank again all my colleagues who participated. I think I
recognized most of them in the course of the day, and I want to
say just a word about Chairman Oxley and Congressman LaFalce on
the House side, who made it possible for us to work through
this conference and with whom we have worked so cooperatively
on so many issues that have come before our committee.
The Presiding Officer. The time of the Senator has expired.
Who yields time?
Mr. Sarbanes. How much time is remaining?
The Presiding Officer. The Senator from Maryland is without
time. There are 12 minutes for the Senator from Texas.
Mr. Gramm. Mr. President, we have reached the hour that we
set for a vote. I am ready to yield back the 12 minutes and
have the vote proceed.
I reiterate that this is a bill that was fraught with
danger in the environment that we were in. Literally anything
could have passed. I think, by a combination of good work and
some good fortune, that has not been the case. We have a
vehicle before us that I think will be complicated. It will be
difficult to implement.
I think we will probably change it in the future. But I
think in terms of our ability to prosper under the bill, and
for the economy to survive not only the illness but the
prescription of the doctor in this case, I think it is doable.
I yield the remainder of our time.
The Presiding Officer. The question is on agreeing to the
conference report.
Mr. Sarbanes. Mr. President, I ask for the yeas and nays.
The Presiding Officer. Is there a sufficient second?
There is a sufficient second.
The clerk will call the roll.
The assistant legislative clerk called the roll.
Mr. Nickles. I announce that the Senator from North
Carolina (Mr. Helms) is necessarily absent.
I further announce that if present and voting the Senator
from North Carolina (Mr. Helms) would vote ``yea.''
The Presiding Officer. Are there any other Senators in the
Chamber desiring to vote?
The result was announced--yeas 99, nays 0, as follows:
[Rollcall Vote No. 192 Leg.]
Yeas--99: Akaka, Allard, Allen, Baucus, Bayh, Bennett, Biden,
Bingaman, Bond, Boxer, Breaux, Brownback, Bunning, Burns, Byrd,
Campbell, Cantwell, Carnahan, Carper, Chafee, Cleland, Clinton,
Cochran, Collins, Conrad, Corzine, Craig, Crapo, Daschle, Dayton,
DeWine, Dodd, Domenici, Dorgan, Durbin, Edwards, Ensign, Enzi,
Feingold, Feinstein, Fitzgerald, Frist, Graham, Gramm, Grassley, Gregg,
Hagel, Harkin, Hatch, Hollings, Hutchinson, Hutchison, Inhofe, Inouye,
Jeffords, Johnson, Kennedy, Kerry, Kohl, Kyl, Landrieu, Leahy, Levin,
Lieberman, Lincoln, Lott, Lugar, McCain, McConnell, Mikulski, Miller,
Murkowski, Murray, Nelson (FL), Nelson (NE), Nickles, Reed, Reid,
Roberts, Rockefeller, Santorum, Sarbanes, Schumer, Sessions, Shelby,
Smith (NH), Smith (OR), Snowe, Specter, Stabenow, Stevens, Thomas,
Thompson, Thurmond, Torricelli, Voinovich, Warner, Wellstone, Wyden
Not Voting--1: Helms
The conference report was agreed to.
Mr. Sarbanes. Mr. President, I move to reconsider the vote.
Mr. Daschle. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. Reid. I suggest the absence of a quorum.
The Presiding Officer (Mr. Dayton). The clerk will call the
roll.
The assistant legislative clerk proceeded to call the roll.
Mr. Reid. Madam President, I ask unanimous consent that the
order for the quorum call be rescinded.
The Presiding Officer (Ms. Cantwell). Without objection, it
is so ordered.