[Congressional Record Volume 148, Number 19 (Thursday, February 28, 2002)]
[Extensions of Remarks]
[Pages E238-E239]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




        COMPREHENSIVE INVESTOR PROTECTION ACT OF 2002, H.R. 3818

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                      Thursday, February 28, 2002

  Mr. LaFALCE. Mr. Speaker, today, I am very eased to join with 
Minority Leader Gephardt and many of my Democratic colleagues in 
introducing the Comprehensive Investor Protection Act of 2002. Well 
before the failure of Enron, I had spoken out frequently on my concerns 
that fraudulent financial reporting and earnings manipulation by public 
companies was endangering the savings and retirement plans of many 
Americans. Now that Enron has made the systemic problems in our 
financial oversight and disclosure systems all too clear to everyone, 
we have an opportunity to adopt serious reforms to correct the 
weaknesses that are undermining confidence in our capital markets.
  Our bill will significantly enhance the independence and oversight of 
the accounting industry and puts on the table a full range of reforms 
to make real improvements in investor protection.
  The bill adopts the proposal made by former SEC Chairman Levitt in 
2000 to separate audit and consulting functions by prohibiting 
substantially all non-audit services that auditors have been providing 
to their audit clients, in addition to incorporating other significant 
provisions aimed at enhancing auditor independence.
  The bill creates a Public Accounting Regulatory Board to provide 
strong and effective oversight of the auditing industry. We provide 
this new regulator with explicit, broad oversight authority and a 
stable funding source to ensure it can take tough action to provide 
effective oversight of the auditing industry, including direct 
inspection of audits.
  The bill changes the way that auditors work with audit clients by 
ensuring that the audit committee is responsible for hiring and firing 
auditors. This has been advocated by five former SEC Chairmen as a way 
to make sure that auditors are clearly and directly responsible to the 
audit committee and shareholders, not to management.
  The bill restores both joint and several liability and aiding and 
abetting liability for auditors and other outside professionals, as 
advocated by consumer and investor groups.
  The bill places additional restrictions on securities analysts, 
including restrictions that have already been adopted by some major 
securities firms, but that were not included in the measures proposed 
by the NYSE and NASD last week.
  Finally, an essential step in restoring the vitality of the financial 
reporting system is to provide a significant increase in SEC resources. 
I have been very pleased to see that our Republican colleagues have now 
heard my year-long calls for a significant increase in SEC resources. 
But I have been very concerned that the increase that they call for 
does not provide for pay parity for SEC staff generally. Funding pay 
parity is essential for the SEC to be able to hire and retain 
experienced, professional staff needed to restore confidence in our 
capital markets and our financial reporting system. My bill addresses 
this by authorizing a doubling of staff for the Division of Corporate 
Finance, the Office of the Chief Accountant, and the Division of 
Enforcement, while providing full pay parity for all SEC staff.
  I thank my colleagues for joining me today in introducing a bill that 
I believe represents a significant step forward in restoring the 
integrity of our system and providing investors the protections they 
expect and deserve.

 Summary of 2002 Comprehensive Investor Protection Act (``CIPA'') H.R. 
                                  3818

       Auditor Independence: CIPA would seek to ensure that an 
     auditor's first duty is to the public by substantially 
     limiting the non-audit services an auditor may provide to an 
     audit client. The prohibited services to an audit client 
     include, among others: (1) bookkeeping; (2) financial 
     information systems design (3) valuation services and 
     fairness opinions; (4) internal audit services; (5) 
     managerial services (i.e. acting as a director or officer); 
     and (6) broker-dealer, investment adviser or investment 
     banking services. Tax-related services and other non-audit 
     services not otherwise enumerated would be subject to the 
     approval of the audit committee, which would evaluate the 
     effect of the provision of such services on the auditor's 
     independence.
       Corporate Governance and additional Independence 
     requirements: CIPA includes a list of critical reforms in 
     corporate governance and auditor independence, including:
       (1) requiring a 4-year rotation of a registrant's auditor, 
     with the possibility of one 4-year extension so long as the 
     Public Accounting Regulatory Board approves such extension, 
     after due review and inspection of the audit.
       (2) vesting the audit committee with the power to hire and 
     fire its auditors;
       (3) requiring the audit committee to meet quarterly with 
     its auditors and have an opportunity to do so outside the 
     presence of management;
       (4) requiring a 2-year cooling off period for certain 
     former auditor employees before they could work for an audit 
     client;
       (5) making it unlawful for the issuer to improperly 
     influence an auditor in the performance of an audit;
       (6) prohibiting directors from providing consulting 
     services to the issuer; and
       (7) prohibiting the issuer from making charitable 
     contributions to organizations associated with any director.
       In addition, the bill would require extensive disclosures 
     to make transparent to shareholders and investors the 
     relationships that compromise independence that now prevail 
     on many corporate boards among officers, directors and 
     affiliates of the issuer.
       Regulation of the Auditors: CIPA would create a strong 
     public regulator, with clearly defined duties and powers 
     mandated by Congress, to provide comprehensive oversight of 
     accountants.
       A super majority of a 7-member board would be selected from 
     the public and would represent the interests of shareholders, 
     investors, pension beneficiaries and future retirees.
       The Chairman of the Board would be appointed jointly by the 
     SEC and the Comptroller General.
       An Appointment Committee, consisting of the Chairman of the 
     Board, the Chairman of the SEC, and the Comptroller General 
     shall select the six remaining Board members

[[Page E239]]

     from nominations received from groups representing 
     institutional investors and pension funds (public employee 
     pension plans, pension plans organized pursuant to the Taft-
     Hartley Act (i.e. union-related pension plans), and pension 
     plans organized pursuant to ERISA).
       The Board shall have the power to establish its own rules. 
     Rulemaking would be subject to SEC approval and to public 
     comment.
       The Board will be self-funded through assessments on public 
     companies that receive the benefit of audit services.
       The duties of the Board include: (1) establishing quality 
     standards relating to audits; (2) performing direct quality 
     reviews of individual audits; (3) conducting comprehensive 
     and direct inspections of auditing firms; (4) setting 
     independence standards; and (5) establishing ethical 
     standards.
       The Board will have a full range of disciplinary powers.
       The Board will have sweeping investigative powers including 
     the ability to compel testimony and subpoena documents from 
     auditors and their clients. It shall also have the power to 
     refer matters to the SEC for investigation or additional 
     action.
       Enhanced Financial Disclosure: CIPA directs the SEC to 
     conduct rulemaking to significantly improve financial 
     disclosure relating to: (1) the treatment of special purpose 
     entities; (2) related party transactions; (3) the creation of 
     a plain English financial statement disclosure regime; and 
     (4) earnings manipulation.
       Expansion of SEC Resources: CIPA would double the resources 
     for the Divisions of Enforcement and Corporation Finance, as 
     well as the Office of the Chief Accountant. Moreover, CIPA 
     would fund pay parity for the entire Commission staff. The 
     total SEC authorization would amount to $876 million for 
     fiscal 2003.
       Real-Time Disclosure of Affiliate Stock Sales: CIPA would 
     require real-time disclosure of insider stock sales and 
     disclosure of affiliated-party dispositions of stock and 
     related derivative instruments.
       Restoration of Joint and Several Liability for Accountants: 
     CIPA would hold auditors fully responsible for their actions. 
     This legislation would overturn provisions of existing law to 
     provide for joint and several liability for auditors when: 
     (1) an accounting firm provides both auditing and non-
     auditing services (such as consulting services) to an issuer; 
     (2) the defendant knowingly committed a violation of the 
     securities laws; (3) an accounting firm failed to comply with 
     the financial fraud reporting provisions of the securities 
     laws; or (4) the issuer of the securities that are the 
     subject of the fraud has become insolvent. This replaces the 
     current proportional liability standard.
       Restoration of Aiding and Abetting Liability for 
     Accountants and Outside Professionals: CIPA would provide a 
     private right of action against anyone (auditors, lawyers and 
     other outside professionals) who knowingly or recklessly 
     provides substantial assistance to another person in 
     violation of the securities laws.
       Lockdowns: CIPA would prohibit stock sales by insiders at 
     any time when employees are subject to a lockdown on their 
     401(k)s.
       Destruction of Records: CIPA would require auditors to 
     retain certain key files for 7 years relating to an audit so 
     that they would be available for investigations.
       Statute of Limitations: Provides that an implied right of 
     action arising under the Securities and Exchange Act of 1934 
     may be brought no later than the earlier of 5 years after the 
     date on which the alleged violation occurred or 3 years after 
     which the violation was discovered.
       Analyst Conflict of Interest: CIPA would go beyond the 
     requirements in the recent rulemaking proposed by the NASD 
     and NYSE by: (1) banning analysts from holding stock in the 
     companies that they cover; (2) prohibiting analyst 
     compensation from being based wholly or in part on investment 
     banking revenue; and (3) requiring the NYSE and NASD to 
     establish criteria for evaluating analyst research quality 
     and also requiring analyst compensation to be based 
     principally on the quality of their research.
       Enhanced SEC Review of Issuers: CIPA requires the SEC to 
     review on a more regular and systematic basis the public 
     disclosures made by issuers, especially reports filed on form 
     10-K. CIPA would require the SEC to establish a risk-rating 
     system which shall be used to determine the frequency of such 
     reviews. Companies with large disparities in price to 
     earnings ratios (i.e. ``dot com-like'' companies) would be 
     among those ripe for regular review.
       Current Disclosure: CIPA would provide for the 
     establishment of a ``current disclosure regime'' as suggested 
     by SEC Chairman Pitt. The goal would be to change the way 
     issuers communicate with investors by providing more 
     meaningful and current information about their financial 
     results, including providing useful trend information.
       Study of the Role of Credit Rating Agencies: CIPA would 
     require the SEC to study the role of credit rating agencies 
     and make recommendations concerning the establishment of 
     minimum standards, among other things.

     

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