[Congressional Record Volume 148, Number 47 (Wednesday, April 24, 2002)]
[House]
[Pages H1544-H1592]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
CORPORATE AND AUDITING ACCOUNTABILITY, RESPONSIBILITY, AND TRANSPARENCY
ACT OF 2002
The SPEAKER pro tempore. Pursuant to House Resolution 395 and rule
XVIII, the Chair declares the House in the Committee of the Whole House
on the State of the Union for the consideration of the bill, H.R. 3763.
{time} 1105
In the Committee of the Whole
Accordingly, the House resolved itself into the Committee of the
Whole House on the State of the Union for the consideration of 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, with Mr. Sweeney in the chair.
The Clerk read the title of the bill.
The CHAIRMAN. Pursuant to the rule, the bill is considered as having
been read the first time.
Under the rule, the gentleman from Ohio (Mr. Oxley) and the gentleman
from Pennsylvania (Mr. Kanjorski) each will control 30 minutes.
The Chair recognizes the gentleman from Ohio (Mr. Oxley).
Mr. OXLEY. Mr. Chairman, I yield myself such time as I may consume.
Today, the House turns to H.R. 3763, the Corporate and Auditing
Accountability, Responsibility, and Transparency Act. To my colleagues
on both sides of the aisle, today we must act. We must act for our
Nation's investors, retirees, and employees of publicly traded
companies; and that covers a large majority of Americans.
In recent months our struggling economy has absorbed a number of
shocks. We have endured two large bankruptcies, Enron and Global
Crossing. Thousands of jobs have been lost for hardworking employees.
Billions of dollars are gone from investment portfolios and retirement
plans. Investor confidence has understandably wavered.
Congress has examined these issues for 4 months. The Committee on
Financial Services alone held seven hearings, took testimony from 33
witnesses; and we are but one of many panels. We know now what
happened, and we know what needs to be done. Now it is our
responsibility to do something about it.
[[Page H1545]]
We owe action to the American investor who faithfully puts away money
every month in his IRA or his 401(k) plan. We owe action to the
employees who lost their jobs, and we owe action to all of the American
companies who are operating in good faith and working to grow.
I would like to say a word of thanks to the President and his staff
for all of the support and encouragement we have received throughout
the process of drafting and moving this bill. His 10-point plan was
very much on the same track as our bill, and the White House has helped
us improve the bill every step of the way.
I also want to say a word of thanks to the 16 Democrats who voted for
the bill on final passage in the Committee on Financial Services. We
appreciate their support for our sound legislative bipartisan product.
President Bush has asked us to move on his plan; and clearly, this is
a national priority. We need to encourage greater corporate
responsibility. We need to strengthen and modernize our accounting
oversight, and we need to make sure that investors have timely and
clear information. There is a real urgency. We cannot undo the past,
but we can help to prevent future Enrons and Global Crossings; and we
ought to do just that today.
In our zeal to act, we can easily do more harm than good. It is easy
to do something extreme. We can easily smother American businesses with
red tape. We can punish those who have done nothing wrong. We can
damage the capital markets and the economy in the process.
I say let us do the difficult thing. Let us accomplish something that
is worthy, as the President has charged us, and CARTA strikes that
balance. CARTA recognizes the need for corporate leaders to act
responsibly and holds them accountable if they fail to do so.
CARTA ensures the highest standards of auditor independence, ethics
and confidence and establishes a public regulatory organization for
accountants of publicly traded companies, something that has never been
done before.
CARTA improves corporate disclosures by requiring companies to
provide the public with more information about their financial
condition.
CARTA makes important improvements in the area of corporate
transparency, requiring that companies disclose to investors important
company news on a real-time basis.
CARTA also directs the SEC to require greater disclosure for off-
balance sheet transactions.
I am confident that we are striking the right balance, particularly
when it comes to the role of the Securities and Exchange Commission.
CARTA gives the SEC the flexibility to deal with problems without
legislating every time. Congress created the SEC precisely to deal with
situations like this. We need to empower the SEC to act without tying
its hands and within flexible statutory changes.
Let us remember that a strong regulator is not one that is completely
dictated to by Congress. A strong regulator has some say over his
jurisdiction, some power and discretion to shape the capital markets;
and I trust the SEC with this authority and so does our bill.
CARTA makes it a crime for anybody to interfere with a corporate
audit. It requires CEOs and other corporate insiders to disclose within
48 hours when they sell company stock so that investors and employees
and retirees know if a corporate officer is getting out. It prohibits
insider sales of company stock while the employee retirement plan is
locked down.
Strengthening these areas of corporate responsibility, accounting
oversight, and investor information is an important priority as our
economy recovers. Let us show the American people that we can respond
in a meaningful way to their very real economic concerns. Pass CARTA
today.
Mr. Chairman, I reserve the balance of my time.
Mr. KANJORSKI. Mr. Chairman, I yield myself such time as I may need.
Mr. Chairman, I rise to oppose H.R. 3763, the Corporate and Auditing
Accountability, Responsibility, and Transparency Act. The dramatic
collapse of Enron exposed many systemic problems to the intricate
public-private network that monitors excess in our Nation's capital
markets, including deficits and corporate governance and
insufficiencies in audit independence and oversight.
H.R. 3763 responds to these problems in a largely illusory and
superficial way. It will not sufficiently restore public confidence in
the integrity of our capital markets; and it will not significantly
improve the protections for investments, pensions and savings of
millions of hardworking Americans and retirees. For example, in the
words of the Wall Street Journal, the bill ``punts'' an overhaul of the
accounting industry to the Securities and Exchange Commission.
Although H.R. 3763 creates a new organization to oversee accountants
that audit public companies, much of the bill's language is simply too
vague to ensure that essential standards for effective oversight will
be met, giving the SEC near-total flexibility in establishing
guidelines for the new oversight body.
Given the importance of this oversight role, Congress should not
delegate this task. We should create a strong auditor regulatory board
with sufficient investigation and disciplinary powers.
The legislation also preserves auditors' cozy relationships with
their clients by not prohibiting consultant services that create
conflicts of interest. Audits are supposed to be independent
assessments on a company's finances conducted for the benefit of the
investing public. When an auditor also receives a million dollars from
the company for nonaudit services, common sense dictates that those
nonaudit fees may influence the auditors' judgment in favor of the
client.
While H.R. 3763 partially bans two nonaudit services, it does not go
far enough to eliminate the serious potential for undermining the
independence of auditors. Additionally, H.R. 3763 protects corporate
wrongdoers by actually making it more difficult to ban guilty officers
and directors from serving in other public companies. In particular,
the bill codifies high standards that the SEC complains significantly
impedes its abilities to obtain officer and director bars in court. We
must fix this problem.
Finally, the bill prescribes studies, not legislative action, on some
major issues raised by Enron, whether CEOs who misled investors about
the financial health of their companies should surrender their bonuses
and fat stock option and whether stock analysts are pitching stocks
they do not believe in.
In sum, Mr. Chairman, the Congress should not shirk its
responsibility by delegating these urgent problems to the SEC or
shunting them off to the oblivion of bureaucratic studies. We have an
opportunity and a responsibility to restore integrity to capital
markets. Quick fixes will not do the job.
Ultimately, Mr. Chairman, we must work together on a bipartisan basis
to develop an appropriate response to the collapse of Enron and the
overabundance of earning restatements by our Nation's publicly traded
companies. Although we have made improvements in the bill since its
introduction, it will represent only superficial reform at best.
Meaningful reform will require lengthy deliberation and a substantial
strengthening of the bill before us today.
Mr. Chairman, there is an old idea of lost opportunities. As the
Congress addresses this serious problem today, we are missing an
opportunity for Congress not to delegate its responsibility to the SEC
or not to dodge its responsibility to the American public, but to take
time and effort and deliberation necessary to make a bill that will
protect the investing public, will arm the regulatory agencies with the
authority they need to ensure the protection of the investing public,
and to significantly improve the confidence in the American market.
{time} 1115
Just last night I had the occasion to speak with some members of the
investing community, and they called to my attention that never in
their experience in the last 25-30 years have they seen a loss of
confidence in the capital markets of the United States as has recently
been exposed in the last several months since the Enron collapse. The
capital markets of the United States
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are the greatest in the world, but they are that way because the
Congress at times of need and at times of over-abundance of activities
and recklessness in the markets have stood tall to enact legislation to
straighten the markets out and to send a signal to the investing public
that the Congress will oversee and protect their interests as best can
be had in a capitalist system.
Today's legislation does not meet that mark. As the Wall Street
Journal said, ``This bill punts.'' As The Washington Post said this
morning, ``The chairman punts.'' I urge us to oppose this legislation
at this time, and I encourage my colleagues to do the same.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 3 minutes to the
gentleman from Michigan (Mr. Rogers), a valuable member of the
committee.
Mr. ROGERS of Michigan. Mr. Chairman, I rise today in support of the
Corporate and Auditing Accountability, Responsibility, and Transparency
Act of 2002, and I want to congratulate the chairman on this bill that
was reported out of the Committee on Financial Services last week on a
strong bipartisan vote under his leadership.
This bill brings needed reforms and oversight to the accounting
industry. It ensures that those with the greatest interest in ensuring
that the information provided to the marketplace regarding public
companies is accurate and complete and facilitates the fair and
efficient functioning of the markets.
Mr. Chairman, this is an important piece of legislation that does not
create a new Federal bureaucracy funded by taxpayers; rather, it
requires a new private sector oversight body to review the accounting
firms that audit financial statements. This new body, called the Public
Regulatory Organization, would have broad powers to discipline
accountants that violate the most basic codes of ethics, standards of
independence, and standards of competency.
Mr. Chairman, this bill is necessary to restore the faith in our
markets. This bill brings credibility and integrity to the process by
protecting against conflicts of interest in the accounting industry.
This piece of legislation is important because we need to act now. We
need to pass this bill today. We need to give the SEC and this new PRO
the tools to be up and running quickly to protect the future of
investments in this country.
Mr. Chairman, at this time I would like to have a colloquy with my
good friend, the gentleman from Ohio (Mr. Oxley), the distinguished
chairman of the Committee on Financial Services.
Mr. OXLEY. Mr. Chairman, will the gentleman yield?
Mr. ROGERS of Michigan. I yield to the gentleman from Ohio.
Mr. OXLEY. Mr. Chairman, I thank the gentleman from Michigan and I
want to commend him for his efforts on this bill, for his fight for the
integrity of America's financial markets.
The gentleman is right; we need to act quickly on this important
issue. We are calling on our colleagues to take this opportunity to
restore transparency and accountability to the audited financial
statements of America's companies.
Mr. ROGERS of Michigan. Reclaiming my time, Mr. Chairman, it is my
understanding that this bill does not create a new Federal bureaucracy
to oversee the accounting profession but, rather, creates a private
sector regulator to do that job.
Mr. OXLEY. Mr. Chairman, if the gentleman will continue to yield,
that is correct. We are giving the SEC the tools to oversee this new
PRO, but it is going to be funded by the private sector.
Mr. ROGERS of Michigan. Mr. Chairman, I want to see that this PRO is
up and running in an expeditious fashion. Does the PRO have the
authority to contract for services with other private sector companies
or regulators to make this happen as quickly as possible?
Mr. OXLEY. That is correct. Under the legislation, the SEC or the PRO
could consult or contract with private sector regulators and companies
to get the necessary insight as well as the systems and processes to
get this organization on its feet in a timely manner. I am confident
the SEC and the PRO will take such measures as necessary to move with
all deliberate speed.
Mr. ROGERS of Michigan. Reclaiming my time once again, Mr. Chairman,
I thank the distinguished chairman for clarifying this point and I
thank him for his leadership on this very important bill.
The CHAIRMAN. Without objection, the gentleman from New York (Mr.
LaFalce) will control the time of the gentleman from Pennsylvania (Mr.
Kanjorski).
There was no objection.
Mr. LaFALCE. Mr. Chairman, I yield myself 5 minutes.
(Mr. LaFALCE asked and was given permission to revise and extend his
remarks.)
Mr. LaFALCE. Mr. Chairman, today we consider legislation to address
the serious problems in our capital markets raised by the collapse of
Enron, problems of corporate abuse, problems of accounting fraud,
problems of earnings manipulation, and problems of analyst hype. All of
these have destroyed public confidence in our markets and jeopardized
the investments and retirement savings of millions of working
Americans. Millions of working Americans have been robbed.
Now, Enron provided a catalyst for our consideration of these issues,
but it is not the first or even the most recent example of what has
become a common phenomenon: earnings manipulation, deceptive
accounting, and hyped analyst reports by some of our largest companies.
Company after company has been found to have manipulated their
accounting to present a picture to investors that did not match the
reality.
The tremendous growth in investigations opened by the SEC this year
indicates the problem is getting worse and worse. The question we will
debate today essentially is whether we are ready to recognize and make
real changes to address the systemic weaknesses undermining our capital
markets or not. The bill before us is cosmetic. The bill before us is a
press release. Look at this morning's editorial in The Washington Post.
It says, basically, that the bill takes a punt at the problem. Look at
the editorial in yesterday's Wall Street Journal. It says, basically,
the same thing. It chastised the accounting profession for its
resistance to all efforts at reform. The Journal opined that ``The
accountants may think that they have outsmarted everyone by sinking
reforms along with Andersen. And they may be right. On the other hand,
if there's another Enron out there, they may wish they'd taken Mr.
Volcker's advice.''
I think it is safe to say it is only a matter of time before the next
Enron or Global Crossing appears, and today's bill will do nothing to
prevent it.
There are many areas in which the bill before us fails to provide
true reform. First, it fails to establish a strong regulator to oversee
the accounting profession, largely delegating decisions as to both its
powers and duties and makeup to the SEC. You do not need a law to do
that; the SEC could do that today. The bill provides virtually nothing.
Secondly, the bill fails to limit in any way the nonaudit services
that auditors can provide to their audit clients, not even going as far
as the accounting industry has said it would go voluntarily to limit
their conflicts of interest. The accounting industry has said they
should and will go further than the bill goes, and they will not go far
enough on their own voluntarily.
As the Wall Street Journal said yesterday, the credibility of their
audits matter more than their ability to offer other services that let
them live like investment bankers.
And, third, the bill fails to effectively implement any of the
measures proposed by President Bush himself to improve executive
responsibility and improve the ability of the SEC to bar or seek
disgorgement from executives. In some areas, it actually represents a
step backwards, making it more difficult for the SEC to do its job,
making it harder, rather than easier, for the SEC to bar officers or
directors who have committed securities fraud from serving in other
public companies.
Fourth, the bill fails to make any improvements in the area of
corporate governance of public companies by giving the audit committees
of their boards of directors the authority they need over auditors to
truly protect shareholder interest.
And, fifth, and very importantly, it fails to include any measures to
limit
[[Page H1547]]
the incentives for securities analysts to serve as salesmen for their
firms' investment banking business rather than being objective
analysts. It fails to address the problem of research analysts being
compensated based upon the business they are able to generate for the
investment banking arm of their firms. It allows the continuance of
research analysts being hucksters for the investment banking arms
rather than owing a responsibility to give honest investment advice to
the public at large.
Now, I would like to have had a debate on these important issues on
the floor individually, but the rule does not permit the offering of
individual amendments. And, therefore, I will offer my substitute to
accomplish that.
Mr. Chairman, today we consider legislation to address the serious
problems in our capital markets raised by the collapse of Enron--
problems of corporate abuse and accounting fraud that have destroyed
public confidence in our markets and jeopardized the investments and
retirement savings of millions of working Americans. While Enron has
provided the catalyst for our consideration of these issues, it is not
the first or even the most recent example of what has become a common
phenomenon--earnings manipulation and deceptive accounting by our
largest companies. Company after company has been found to have
manipulated their accounting to present a picture to investors that did
not match reality. The tremendous growth in investigations opened by
the SEC this year indicates the problem is only getting worse.
The question we will debate today essentially is whether we are ready
to recognize and make real changes to address the systemic weaknesses
undermining our capital markets. The bill before us does not represent
real reform, as even the Wall Street Journal recognized in an editorial
yesterday in which it chastised the accounting profession for its
resistance to all efforts at reform. The Journal opined that ``[t]he
accountants may think that they've outsmarted everyone by sinking
reforms along with Andersen. And they may be right. On the other hand,
if there's another Enron out there, they may wish they'd taken Mr.
Volcker's advice.'' I think it's safe to say that it's only a matter of
time before the next Enron or Global Crossing appears, and this bill
will do nothing to prevent it.
There are many areas in which the bill before us fails to provide
true reform:
First, it fails to establish a strong regulator to oversee the
accounting profession, largely delegating decisions as to its powers
and duties to the SEC. Without an explicit statutory mandate, the
regulator will be subject to the intensive efforts of the accounting
industry to avoid reform of any kind. Congress should give the new
regulator effective disciplinary and investigative powers and clear
authority to set standards for auditors of public companies, rather
than just enforcing the standards set by the accounting industry
bodies.
Second, the bill fails to limit in any way the non-audit services
that auditors can provide to their audit clients, not even going as far
as the accounting industry has said it would go voluntarily to limit
their conflicts of interest. As the Journal said yesterday, ``[t]he
credibility of their audits matter more than their ability to offer
other services that let them live like investment bankers.''
Third, the bill fails to effectively implement any of the measures
proposed by the President to improve executive responsibility and
improve the ability of the SEC to bar or seek disgorgement from
executives. In some areas, it represents a step backwards, making it
more difficult for the SEC to do its job, making it harder, rather than
easier, for the SEC to bar officers or directors who have committed
securities fraud from serving in other public companies. Moreover, it
fails to empower the SEC to require corporate wrong-doers to disgorge
their bonuses and other compensation after committing securities fraud.
Fourth, the bill fails to make any improvements to the corporate
governance of public companies by giving the audit committees of their
boards of directors the authority they need over auditors to truly
protect shareholder interests.
Fifth, it fails to include any measures to limit the incentives for
securities analysts to serve as salesmen for their firms' investment
banking business rather than objective analysts.
I would like to have had a debate on these important issues on the
floor today, but the rule does not permit me to offer amendments on
these individual issues. I will offer a substitute, however, that cures
many of the defects of the Republican bill. My substitute will:
Establish a tough and credible overseer for the accounting industry;
include effective limits on the two non-audit services included in the
existing bill; provide corporate audit committees with authority over
the full scope of a company's relationship with its auditor; hold
executives responsible for the accuracy of their companies' financial
statements; enable the SEC to seek disgorgement of bonuses and profits
on options or to bar officers and directors who have committed
wrongdoing from serving in other public companies; and finally,
eliminate the conflicts that result in Wall Street analysts hyping the
stocks of their investment banking clients.
Mr. OXLEY. Mr. Chairman, I yield 3 minutes to the gentlewoman from
New York (Mrs. Kelly), the chair of the Subcommittee on Oversight and
Investigations.
Mrs. KELLY. Mr. Chairman, I rise today in strong support for the
Corporate Auditor Accountability, Responsibility, and Transparency Act,
known as the CARTA Act. I thank my good friend, the gentleman from
Ohio, for yielding me this time.
This legislation represents the first positive step forward to
restore public confidence to our Nation's accounting industry. Since
the dramatic failures in both Global Crossing and Enron, we have heard
from countless former employees and investors who have been harmed
because of the lack of transparency, the lack of auditor independence,
and the lack of timely and clear disclosures. CARTA takes substantive
steps to address all of these issues, with a focused approach that will
restore confidence in the industry.
Let me be clear. The legislation is not the complete solution. There
are many investigations which continue with the Securities and Exchange
Commission, the Department of Justice, and the Department of Labor. As
the appropriate agencies uncover new issues, we are going to continue
our work to ensure that we act prudently, appropriately, and
responsibly. As with the medical profession, though, our overriding
goal has to be, first, do no harm. We must be focused in our work and
make sure our response is effective, restores public confidence, and
has a positive impact on the market.
CARTA is reasonable and responsible. CARTA creates a new Public
Regulatory Organization with real power to discipline accountants who
violate the standards of ethics, competency, and independence. CARTA
makes it a crime for any corporate official to mislead or coerce an
accountant in the course of conducting an audit. CARTA requires real-
time disclosures of significant financial information to ensure that
employees and investors know about important events as they happen,
instead of when the quarterly report comes out.
These are just a few of the significant reforms made in this
legislation. CARTA is a strong reform. It gives greater authority to
the Securities and Exchange Commission to act, and it is stronger
authority than in the Democratic substitute. It takes significant steps
to ensure accountants are truly independent and corporations are clear
and honest in their statements.
It is a bipartisan bill. It was supported in committee by both
Democrats and Republicans. The committee vote on final passage of 49 to
12 demonstrates that there is real agreement in the House that the
provisions contained in this legislation will move us forward to our
goal of restoring public confidence in our accounting system and
corporate disclosures.
Mr. Chairman, I urge colleagues on both sides of the aisle to join us
with the strong support of CARTA so we can prevent mistakes,
misstatements, and obfuscations we witnessed in the failures of Global
Crossing, Enron, and Arthur Andersen from being repeated and harming
others.
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the gentlewoman from
Ohio (Mrs. Jones).
Mrs. JONES of Ohio. Mr. Chairman, to my colleague, the gentleman from
the great State of Ohio (Mr. Oxley), and to the ranking member, the
gentleman from the great State of New York (Mr. LaFalce), I am pleased
to have had an opportunity to serve on the Committee on Financial
Services as we have debated this legislation. But what is clear to me
is the American public expects us to do more than pass strong
legislation that does not go far enough. I just want to put in the
Record a copy of The Washington Post editorial that fully addresses
many of the issues.
Let me tell my colleagues a few things I am concerned about.
{time} 1130
Mr. Chairman, I do not believe that this current legislation that is
before
[[Page H1548]]
the House of Representatives addresses the issue wherein the CEOs, like
the CEO at Enron and Global Crossing, were able to take their 401(k)
dollars out of the pot, and leave workers like Mrs. Linton, who I read
about in the newspaper, stuck with not receiving any other dollars.
Now, what we have not addressed, and I am not an SEC attorney, but I
do know there is a piece or a rule that allows a CEO to put in place a
plan to dispose of his assets in a particular company, as long as they
have in place a plan to do so. We need to put in place a plan that
would also allow workers to be able to access their dollars in the same
fashion that CEOs do. Or if they are not able to do so, that the CEOs
would be held accountable.
Let me go to another point that I raised at the Enron hearings, which
is with regard to the SEC. I have a lot of respect for the SEC and
their chairman, Mr. Harvey Pitt; but the reality of the matter is that
we should not leave our job to the SEC. We should give the SEC clear
direction on what we want done, when we want it done, and how we want
it done. For example, the records of Enron were not reviewed by the
SEC. That presents a real problem for me and other Members as we review
this process.
Finally, I am worried about a private organization giving advice and
counsel on many of these issues to the Congress. Let me just say that
the Arthur Andersen relationship with Global Crossing, the CEO said
that he thought that relationship was okay. If he thought it was okay,
what does that say about other private industry people.
The material previously referred to is as follows:
[From the Washington Post, Apr. 24, 2002]
Mr. Oxley Punts
The HOUSE is due to vote today on a package of post-Enron
reforms prepared by Rep. Michael Oxley (R-Ohio), chairman of
the Financial Services Committee. The bill is a troubling
sign of how easily the momentum for reform can be dissipated.
Though it purports to deal with many of the audit reforms
discussed during dozens of congressional hearings since
January, it actually pulls its punches. Democrats will get a
chance to offer some better provisions in the House today,
but nobody expects them to pass. It will be up to the Senate,
if it can ever terminate its interminable debates on energy,
to produce a stronger bill.
The Oxley bill purports to set up a new regulatory board to
oversee and discipline auditors, which everybody agrees is
needed. But it would not give this body powers of subpoena,
which would undermine its authority; and it would allow
auditors to fill some of the board's positions, which could
undermine its independence. The details of the new board
would be left to the Securities and Exchange Commission,
which would have to decide among other things how the new
body would be funded. Given the SEC's vulnerability to
industry lobbying, there is a danger that the result will
fall short of what's needed.
The Oxley bill takes other half-steps and side-steps. It
directs the SEC to prohibit auditors from performing certain
types of consulting services for their clients, but it stops
short of requiring an outright halt to consulting and the
conflicts of interest that ensue. The bill says nothing about
the revolving door between auditors and their clients--Enron,
for example, hired several Arthur Andersen auditors--even
though auditors who are angling for jobs from their customers
are unlikely to show much independence from them. The bill is
also silent on the rotation of audit firms. If an auditor
knew that, after a few years, a different outside auditor
would scrutinize its efforts, this would create a strong
incentive to keep the numbers honest.
The Oxley bill does at least boost the SEC's budget
substantially, and it has the right mood music. But given the
outrage that Congress has expressed about the Enron scandal,
this is a weak effort. Just this week, Enron announced that
it had discovered a further $14 billion worth of assets in
its balance sheet that don't really exist after all, and it
confessed that a ``material portion'' of this overstatement
was due to accounting irregularities. This kind of confession
further undermines investors' trust in financial disclosures.
Congress needs to restore that trust with tough legislation.
Perhaps the Senate can deliver if the House won't.
Mr. OXLEY. Mr. Chairman, I yield 2 minutes to the gentlewoman from
New Jersey (Mrs. Roukema).
(Mrs. ROUKEMA asked and was given permission to revise and extend her
remarks.)
Mrs. ROUKEMA. Mr. Chairman, I commend the gentleman from Ohio (Mr.
Oxley) and the gentleman from Louisiana (Mr. Baker) for this
legislation. This legislation has numerous provisions which provide and
strengthen oversight of the accounting industry, what we have really
learned from Enron and Global Crossing failures. But the specifics of
these provisions have been properly outlined by the chairman, and I
will not go into those again. However, I will stress one in particular,
and that is it includes important safeguards for individuals who invest
in the 401(k) plans. That is an excellent provision in this
legislation.
Mr. Chairman, I want to say to Members that there are some who argue
that this bill does not go far enough. I will say to those critics that
we must take care not to overreact to this situation and create greater
problems than we have here. This bill represents a giant step in the
right direction to reforming the system. We need to enact this
legislation and let the regulatory process go forward. Clearly we
should revisit this issue in the months ahead, but this bill does
include sound, strong, unprecedented measures that I believe will go a
long way in reforming the situation.
A Member mentioned earlier Chairman Paul Volcker's oversight and
activity in terms of the Andersen question. Clearly, Mr. Volcker's
analysis will be helpful to us and significant in laying the groundwork
for extended consideration in the future for whatever additional
reforms we may need. Clearly, we must not overreact and create today
further problems and create more loopholes.
I want to commend Chairmen Oxley and Baker for their leadershiop on
this legislation and urge my colleagues' support for the Corporate and
Auditing Accountability, Responsibility and Transparency Act.
We must return confidence back to the markets and to the accounting
profession. Individual investors have to be certain that the
information they are receiving is accurate and complete. Certainly the
media and many in this Congress have been focused on the Enron
bankruptcy--the largest in U.S. history--but Enron is merely a symptom
of a larger problem.
The current structure for regulation and oversight of the accounting
industry consists of Federal and State regulators and a complex system
of self-regulation by the industry itself. Although the SEC has broad
authority to regulate all aspects of corporate accounting and the
auditing of publicly-traded companies, the SEC historically has not
directly regulated the industry because of a lack of resources.
Instead, they have investigated and taken enforcement action in only
the most egregious cases. Consequently, the most comprehensive
supervision of accountants and auditors has been exercised by the
industry's trade association, the American Institute of Certified
Public Accountants, a voluntary organization funded entirely by the
industry.
H.R. 3763 includes numerous provisions to strengthen supervision and
oversight of the accounting industry, increase standards of corporate
responsibility, and improve the quality of corporate disclosure and the
auditing of publicly-traded companies. The specifics of these
provisions have been properly outlined by the Chairman.
First, this legislation establishes a public regulatory organization
(PRO) to oversee and review accounts that certify financial statements
required under the securities law. This new board would be subject to
direct SEC authority and supervision. In addition it makes it illegal--
subject to SEC civil penalties--for any corporate official to
interfere, mislead, or coerce an accountant performing an audit of the
company.
Second, this legislation requires increased and meaningful
disclosures, such as information about special purpose entities and
other off-balance sheet transactions. It requires real-time disclosure
of financial information and immediate disclosures by corporate
insiders when they sell securities they own in their company.
This legislation also includes important safeguards and protections
for individuals who invest in 401(k) plans. The bill prohibits
corporate executives from buying and selling company stock during
``blackout'' periods when rank-and-file company employees are barred
from doing so in their pension 401(k) plans and allows companies, and
other shareholders to go to court to recover any profits made from such
illegal transactions. The measure also establishes procedures under
which the SEC may recover any profits gained, or losses avoided, by
executives through stock trades in the six months prior to a company's
restatement of earnings, if the executive had knowledge that the
company's accounting was misleading.
Finally, H.R. 3763 authorizes new resources and responsibilities for
the SEC, requires the SEC to review the audited corporate financial
reports of all publicly-traded companies at least every three years,
and allows the SEC to ban corporate officers and directors whom the
[[Page H1549]]
SEC finds guilty of violating securities law from serving in similar
positions in other publicly-traded companies.
There are some that may argue today that this bill does not go far
enough--I would say to those critics that we must take care not to
overreact to this situation--this bill represents a significant and
proper first step. We need to enact this legislation--and let the
regulatory process go forth. Clearly, we may have to revisit this issue
in the months and years ahead, but this bill includes sound, strong and
unprecedented measures that I believe will go a long way in addressing
this current crisis.
Clearly, Chairman Paul Volker's oversight and analysis will be
significant in laying the way for extended consideration for additional
reforms.
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the gentlewoman from
California (Ms. Lee).
Ms. LEE. Mr. Chairman, I thank the ranking member, the gentleman from
New York (Mr. LaFalce), for yielding me this time and for his
leadership on these tough issues.
Mr. Chairman, I rise today in strong opposition to H.R. 3763. This is
another sham bill that purports to fix the very serious problems that
have arisen from the Enron debacle, but instead it takes us backwards
in protecting the American public. H.R. 3763 is supposed to impose
tougher standards on auditors to prevent future Enrons where workers
lost their pensions and investors lost money because Enron cooked its
books. However, H.R. 3763 does nothing to protect employees and
investors. It allows corporate auditors to continue to perform both
auditing and consulting functions, which got Enron into this mess in
the first place.
The GOP bill puts investors and workers at greater risk than they are
now. It does not hold corporate wrong-doers criminally accountable if
they knowingly release misleading financial statements, and it does not
increase oversight of the accounting industry.
We need true reform. That is why I am supporting the LaFalce
substitute which takes important steps to protect workers and
investors. It would set up a seven-person board with members
representing investors and pension funds. Some of them can be
accountants; but others with important interests can also be included,
unlike the Republican legislation which will only permit auditors and
former auditors on the board. Workers and investors also deserve a seat
at the table.
The LaFalce substitute also bans auditors from consulting services
that create conflicts of interest, requires CEOs to surrender their
stock bonuses when they commit fraud, and makes it easier for SEC to
remove corporate wrong-doers.
Ken Lay and the other Enron executives do not deserve millions of
dollars in payoffs when their workers have lost their future. We must
hold companies accountable when they engage in fraud that jeopardizes
the retirement security of our Nation's workers and our economy.
The Republican legislation before us today does none of these things.
The LaFalce substitute does. I urge my colleagues to vote ``yes'' on
LaFalce and ``no'' on H.R. 3763.
Mr. OXLEY. Mr. Chairman, I yield 2 minutes to the gentlewoman from
Illinois (Mrs. Biggert), a valuable member of the Committee on
Financial Services.
Mrs. BIGGERT. Mr. Chairman, I rise today in strong support of H.R.
3763. This is a good bill because it strikes the right balance between
doing enough to prevent another Enron and Andersen debacle, but not so
much as to overreact to it causing more harm. The last thing we want is
to federalize the accounting industry and create a seat for the
government on every corporate board from New York to San Francisco and
back again.
This is a good bill because it helps rebuild the confidence of the
American people by restoring the integrity of the accounting industry.
It increases corporate responsibility, reforms the accounting industry,
and forces businesses to disclose much more financial information in
real-time. Holding corporate officers responsible for their actions is
a big part of the foundation of this bill. As President Bush said not
long ago, our goal is better rules so that conflicts, suspicion, and
broken faith can be avoided in the first place. That is what this bill
does in several ways. For example, an amendment that I offered last
week provides the SEC the administrative authority to bar persons
accused of malfeasance from serving as officers or directors of public
companies pending judicial appeal.
Mr. Chairman, it is unfortunate that no one understands the concept
of executive accountability or lack thereof better than the 500
Andersen employees from my district. They ask, How on earth can the
alleged sins of a handful of partners uproot the lives of so many
innocent employees? One of them went further, asking me in a recent
letter if one out of our 535 Congressmen and Senators gets in trouble,
should you all be fired? I think we all get the point.
And the point is that change is needed in the accounting industry,
and H.R. 3763 is an important step in the right direction. With this
legislation, we will avoid any more blanket charges to groups of
accountants, and instead bring justice to the particular accountants at
fault. Some have argued that the standard may prove to be unreasonably
high or it goes too far. I respectfully disagree. H.R. 3763 empowers
the SEC to take a bite out of corporate crime.
Mr. Chairman, I encourage all of my colleagues to support this bill.
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the gentleman from
California (Mr. Sherman).
(Mr. SHERMAN asked and was given permission to revise and extend his
remarks.)
Mr. SHERMAN. Mr. Chairman, Enron not only cost its own shareholders
tens of billions of dollars, but our markets would be selling at
trillions of dollars more in net capitalization if investors around the
world did not have to wonder whether the next Enron was right around
the corner.
All three of our institutions failed our investors. The SEC failed to
even read the Enron financial statements, let alone demand
clarification of their incomprehensible footnotes. And when the SEC
reauthorization bill comes to this floor, it should come in regular
order so that we can propose amendments to improve the SEC.
The stock analysts and the auditors both failed as well; and they
failed in part because the current system clouds their judgment with
excessive conflicts of interest. The stock analysts are affected by the
huge investment banking fees so that they now not only recommended
Enron as an investment, but they recommend a hold or a buy on virtually
every stock on the board.
The auditors received not only their audit fee from their clients,
but huge and unlimited fees for other services, sometimes five or 10
times the fees they received for auditing; and this bill, while
providing a list of services that they are not to provide, does nothing
to cap the total fee that they receive.
We need to restore confidence in our markets. If Congress does its
job, our capital markets will once again be the envy of the world. But
we cannot do it just by passing this bill. The LaFalce substitute at
least takes us further down the road toward reform; and then we need to
do even more to deal with the SEC, the stock analysts, and the total
amount of fees received by auditors for nonaudit services.
Mr. OXLEY. Mr. Chairman, I yield 3 minutes to the gentlewoman from
Pennsylvania (Ms. Hart), an outstanding member of our Committee on
Financial Services.
Ms. HART. Mr. Chairman, I rise in support of the CARTA bill as it
stands. The Committee on Financial Services did an extensive amount of
research on these issues, especially in light of the concerns raised by
the Enron debacle. Several disturbing aspects about corporate
disclosures in financial statements were made very clear during this
process, but one of the most alarming was the unequal treatment of
employees and what they were and were not allowed to do with company
stock that they received in their retirement plans.
I have here what will happen as a result of the CARTA bill. Pre-Enron
there was little disclosure. Financial information was all in legal
jargon. People could not really understand it. There was insider
auditing, as we saw in the Enron case, deals made among the auditors
with the company which were really not fair or right or a true
representation of the actual financial situation of the company. Also,
insider trading during blackouts, those executives were allowed to sell
their stock; those regular people, the employees,
[[Page H1550]]
unfortunately were not, and ended up losing a lot of money because of
the deceit involved with the financial statements.
Post-Enron, under the CARTA bill we have full disclosure. We also
have something very important, and that is the financial information
that all investors get in plain English. No more games. Under CARTA,
plain English so that everybody understands exactly what is going on
with the company.
Also something extremely important, the independent audit versus the
insider audit. We need to make sure that Americans have confidence in
financial statements and invest wisely.
It will also close the loophole on insider trading during blackouts.
This is one of the most important things that was revealed to us during
Enron, and one thing that this bill handles very well.
America's investors have changed significantly. It is important for
us to protect them and provide them with the information that they
need. More than half of American families, that is 90 million people,
invest in the stock market, including mutual funds, pensions, and
401(k)s. This represents a growing trend. These people are investing in
American companies that produce American jobs. In fact, a majority of
these investors, 67 percent of them, are our average Americans with
household income of $75,000 or less.
Mr. Chairman, these are American families that we are talking about.
We need to protect them with CARTA. According to the National Center
for Employee Ownership, 10 million employees in the United States
received stock options as part of their benefits in 2001. This is a 10-
fold increase over 1992. This bill protects those employees and those
Americans. It protects those American jobs.
{time} 1145
Finally, the benefits of the bipartisan corporate responsibility bill
is greater confidence. Americans will continue to invest. We want them
to invest. It is better for our future. There is more confidence for
them to invest, there will be more corporate stability and the end
result, which is what we all want, is more jobs and a stronger economy.
Mr. LaFALCE. Mr. Chairman, I yield 2\1/2\ minutes to the
distinguished gentleman from Texas (Mr. Bentsen).
(Mr. BENTSEN asked and was given permission to revise and extend his
remarks.)
Mr. BENTSEN. Mr. Chairman, Enron, Global Crossing, the restatements
at Xerox, Sunbeam and others are part of the corporate excesses that
have occurred as a result of the exuberant nineties. The bill before us
today, I believe, is a good start but, as I said earlier, is by no
means a panacea and will not solve all the problems that existed or
came about, but at least begins putting us in the right direction to
hopefully restore some confidence to the markets. It does establish an
oversight function of auditors of public companies. It amends the law
to crack down on insider self-dealing, where you had corporate managers
really treating public companies as private banks, and I am glad the
committee adopted a few amendments I offered to deal with that. It
continues the process of eliminating the conflict between independent
auditors and the companies they audit.
Some will say it does not go far enough, but at least it begins that
process. It was strengthened by an amendment that the gentleman from
North Carolina (Mr. Watt) and I offered and, quite frankly, the
gentleman from New York's substitute strengthens that even further. It
puts the Securities and Exchange Commission on notice and provides them
with the resources, and it puts the Congress on notice that there needs
to be stronger oversight of the players in the public markets. And it
is quite a change from where the SEC was under the prior chairman, Mr.
Levitt, who really did take a strong stance in trying to root out
conflict of interest and, quite frankly, ran into some of his toughest
opponents in the Congress as much as out on Wall Street.
The committee should adopt the Capuano amendment, which I think
strengthens the oversight board in ensuring that the makeup of that
board is one that is truly independent. And while there are things in
the substitute I like and things I do not like, the committee should
adopt it. But what I think this bill does that is so terribly important
is that it puts the Congress on record in saying that we will not
tolerate abuses in the public market.
Maybe we need to go further. Maybe we do not go far enough in the
bill, and I do not think a lot of bills we pass here necessarily go far
enough. I do not know that we know all the answers. But it also puts
the regulators on notice and provides them with the resources to do the
job they are entrusted to do. And if they do not, then the Congress
should be willing to act again. Because if we do not restore confidence
in the markets and ensure confidence in the markets, then we will raise
the cost of capital to great expense to the general economy, and while
we are concerned about the Enron employees, many of whom are my
constituents, we as a Nation will suffer as well. I appreciate the
start we are making today. I hope we can continue the process.
Mr. OXLEY. Mr. Chairman, let me commend my friend, the able gentleman
from Texas, for his good work on the committee and on the floor. The
committee will certainly miss his excellent leadership and insights
next year. I wanted to pass those remarks along.
Mr. Chairman, I yield 4 minutes to the gentleman from Louisiana (Mr.
Baker), the lead cosponsor of the CARTA legislation and the chairman of
the Subcommittee on Capital Markets.
Mr. BAKER. Mr. Chairman, I thank the gentleman for yielding me this
time and wish to express my deep appreciation for his leadership in
helping the committee construct what I think is one of the most
significant reform pieces of legislation in financial markets in this
Congress.
In listening to the debate, many would assume that we have done
nothing. In listening to the debate, many would assume there are those
in the Congress who would like to sit on the board of every board of
directors of every corporation in America, because that is the only way
we could possibly have protection for individuals and consumers. In
listening to the debate, one would believe that some think it is
inappropriate for a corporation to make a profit. In the free
enterprise system, it is clear, people invest, they work hard; if they
convince consumers and they are successful and beat their competition,
at the end of the day we hope people make a profit. Some think profit
is gained only by ill-conceived, manipulative, backdoor deals at the
expense of working people. Where are we? This is America. We are taught
if you work hard, invest, that it is okay to make a profit, and one day
if you work hard you might be able to keep some of it. That was the
basis of our tax relief program: You work hard, you pay your taxes to
the Federal Government.
Some say, ``Let's not give them their money back. They might spend
it. We ought to keep it here in Washington and regulate them.'' Some
people watch business and they say, ``If it's making a profit, let's
first regulate it. If it's still making a profit, let's tax it. And if
that doesn't stop it, let's sue it.'' I think we have had enough of
that. This bill is about common sense. It is not lawful for a corporate
executive to withhold material facts about the financial condition of
his corporation. And we go further and say, if you do, there is a
penalty to pay.
We provide for auditing independence by saying the audit committee
works for the shareholder and has an obligation to report the true and
accurate financial condition of the corporation, or there are
consequences.
Some have suggested we are doing nothing with the analysts. Let me
point out that last fall before the Enron matter became public
knowledge, this committee, the Committee on Financial Services, was
working on these sets of rules to provide new standards for analysts'
conduct that go far beyond anything I have heard suggested in the
debate in the committee today. We have taken action. We have taken
action to preserve our free enterprise system, the ability to govern a
corporation and make a profit, employ individuals and provide
opportunities for millions of investors to participate in the dynamic
growth of this economy.
In 1995, no one could invest online. Today, there are over 800,000
trades a
[[Page H1551]]
day where working men and women take $100, $200, and invest it for
their child's education, to purchase their first home, and maybe their
retirement. That is the American way. Are these the large institutional
investors who are making backroom deals with analysts and Wall Street
CEOs? No, they are people who are working as we debate this bill this
morning to try to make a few extra dollars to enhance the quality of
their children's future.
This bill makes sure that the financial statement they read, that the
analyst recommendations they research on the Internet, that the
corporate executives' representations about the future of corporate
profitability are true and accurate. We cannot guarantee success. Of
all the companies listed on the New York Exchange in the early 1900s,
there is only one that is still listed there today. The dynamic free
enterprise system is going to cause changes in our market that no one
can predict and we cannot guarantee success or failure, but what this
Congress can guarantee is that no one is misled or mistreated and all
have equal opportunity.
What shall we do? Some would say this bill is insufficient. At the
end of this process, after all the amendments are considered and the
gentleman from New York's motion to recommit is finally disposed of and
defeated, as I hope it will be, you will have a decision to make. Do
you vote for this bill on final passage or do you say ``no'' and turn
your back on the most meaningful reform effort you will ever have?
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the distinguished
gentlewoman from Oregon (Ms. Hooley).
(Ms. HOOLEY of Oregon asked and was given permission to revise and
extend her remarks.)
Ms. HOOLEY of Oregon. Mr. Chairman, I thank the ranking member for
all of his hard work on this piece of legislation. I guess I am a
little different from some of the speakers so far because I think that
this legislation before us is an improvement over the current system.
Is it perfect? No. Does it go far enough? Probably not. Will it prevent
another Enron? Who knows? I do not think it is within the realm of
possibility that we will ever be able to prevent people from being
greedy and deceiving shareholders. Every single one of us knows that if
this bill was introduced before the Enron scandal, it probably would
have had a handful of cosponsors and probably never seen the light of
day. But now we are being told that it is completely inadequate and
does not do anything to address the problems that led to the collapse
of Enron. I disagree.
This is the bottom line. H.R. 3763 is going to strengthen our
financial reporting system which in turn will strengthen our capital
markets. It is a huge step in the right direction. However, that does
not mean that this legislation is comprehensive or that it could not
stand improvement. For example, it completely ignores the President's
call for corporate governance reform. It simply calls for a study on
whether CEOs who engage in fraud should surrender their stock options.
The President does not think we need to study this matter. He has
publicly stated that they should disgorge those earnings. The President
also does not think corporate officers who engage in fraud should be
permitted to serve on another board. But again H.R. 3763 is silent on
this matter.
Is this bill better than what we currently have? Yes. But I want to
urge my colleagues on both sides of the aisle who truly want to protect
the interests of investors to also support Ranking Member LaFalce's
substitute.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 3 minutes to the
gentleman from Alabama (Mr. Bachus), a subcommittee chair.
Mr. BACHUS. I thank the gentleman for yielding me this time.
Mr. Chairman, Members will recall that 2 years ago, the SEC proposed
to limit auditors from doing several nonauditing functions for their
clients, consulting work and other nonauditing services. When the SEC
proposed that, they do what they always do, what this body has insisted
they do, what they ought to do, that they put those proposals out for
public comment, because all knowledge does not come from Washington. It
is not all inside the Beltway. They made 10 specific proposals to ban
nonauditing services. Consumer groups came in and testified before the
Securities and Exchange Commission. Consumer groups came in and
testified before Arthur Levitt and the SEC. Industry groups came in and
testified. Over a 4- or 5-, 6-month period, they looked at the rules,
they listened to witnesses, they refined the rules, they revised the
rules. And in September, Arthur Levitt had this to say about that
process of letting the public participate in how they are governed. He
said this: ``Thanks to the thoughtful and constructive public input, we
see ways to revise the proposed rules to avoid unintended consequences
and to address other legitimate concerns.''
There are unintended consequences when you propose a rule. There are
other legitimate concerns that people have when you put a rule out
there for public comment. As a result, Arthur Levitt said, ``We've gone
through this process and we have got better rules, we have got more
effective rules, we have got a good product.'' Basically that is what
the bill that Chairman Baker and Chairman Oxley have put out for us, is
the result of that process by Arthur Levitt, with public comment from
consumer groups, labor groups and industry groups.
Both bills ban these nonauditing services. Both of them ban them. But
the difference is that the gentleman from New York (Mr. LaFalce) and,
in fact, when I mentioned this in committee, the gentleman from New
York said, ``I realize that's a major problem,'' but it is a problem
that we still have in the substitute. The gentleman from New York went
back and actually adopted the proposed rules, not the final rules as
the base text has. He went back to the proposed rules, throw out all
the comments by the consumer groups, throw out all the comments by the
business groups, throw out all the comments by the labor organizations,
throw out all the comments by those in the academic world. He goes back
to the original proposed rules, like starting all over again. That is
not what this place is all about. It is about including the public.
Mr. LaFALCE. Mr. Chairman, I yield myself 30 seconds. The gentleman
from Alabama (Mr. Bachus) was referring to an amendment that was
offered within the committee, but he is not referring at all to the
provision that is in the substitute. So all his remarks were irrelevant
to the provisions within the substitute.
Mr. Chairman, I yield 3 minutes to the gentleman from Texas (Mr.
Doggett).
{time} 1200
Mr. DOGGETT. Mr. Chairman, a few months ago, one really could not
turn on the television at night or open a newspaper without hearing
about the plight of those who suffered in the Enron-Andersen debacle--
people whose tomorrow was stolen, many of them innocent, hard-working
employees for the very companies that were engaged in these
questionable deals. Even expert investors, including those at a public
state retirement system in Austin, Texas, lost millions of dollars in
Enron investments. Many people who were working to prepare their own
tax returns saw that Enron was not paying much in the way of taxes; in
fact, it apparently was not paying any taxes at all.
There were two reactions to this debacle. There were some people,
like the gentleman from New York (Mr. LaFalce) who said, how can we
prevent something like this from happening again? What can we do? What
is the best way? Certainly, it is challenging and complex, but what is
the best way to be sure that more people do not suffer like this in the
future?
And then there was a second response, the response we normally hear
in Washington from those special interest lobbyists: how can we keep
the loopholes, the back doors, the exceptions, the special preferences
and exemptions that we worked so diligently over the years to be sure
that Congress gave us, how can we be sure we keep them in the future?
In the face of this Enron-Andersen fiasco, those lobbyists, that
second group, could not come with a straight face and say, ``do
nothing.'' So their best avenue to thwart any meaningful reform was to
say, ``do next to nothing,'' and we will call it ``something''; and
that is precisely where we are today. The bill before us is ``next to
[[Page H1552]]
nothing'' and it is being called ``something'' to blunt attempts to
exact more far-reaching reform.
As if that were not bad enough, there are some lobbyists who saw this
Andersen-Enron crisis as an opportunity, an opportunity to get a little
more. And so when we took up the pension bill a couple of weeks ago,
the first response in this House to Enron, instead of doing something
to help the employees, a little more discrimination was approved in
favor of the executives at the top. Today, in this bill, instead of
making it more difficult for corporate wrongdoers to assume a position
of responsibility at another corporation, this bill makes it easier.
When it comes to tax problems, the same accountants that are causing
many of these problems, as Forbes magazine said a couple of years ago,
they are the ``tax shelter hustlers,'' ``respectable accountants'' who
are out peddling dicey corporate tax loopholes. And when today ends,
they will still be able to do it. The analysts will still be able to
think one thing and say another to those they advise to purchase stock.
The accountants will still be held to a level of responsibility under
this law that is less than even the modest changes President Bush
proposed and less than what even the accountants agreed to do
voluntarily.
Many people in this country, many Americans, are absolutely amazed
that Enron could have fallen apart last year like it did. This year,
they will be similarly amazed that Congress did next to nothing about
it.
The CHAIRMAN. The Chair will advise Members that there are 5\1/2\
minutes remaining on both sides of the debate.
Mr. OXLEY. Mr. Chairman, I yield 2 minutes to the gentleman from New
Jersey (Mr. Ferguson), a new and valuable member of our committee.
Mr. FERGUSON. Mr. Chairman, I want to commend the gentleman from Ohio
(Mr. Oxley) for his great work on this legislation and for also working
so closely with the major investigators: the Justice Department, the
SEC, the Enron and Andersen internal teams, to achieve the goal that we
have been able to achieve with this legislation. The Committee has
heard from a diverse group of witnesses representing a broad spectrum
of views from across America regarding the securities markets and the
government's role in protecting investors.
The distinct differences in the testimony, including former SEC
officials and the securities industry and a leading consumer
organization and the accounting industry, have confirmed that the
committee and the members on the committee have taken the necessary
steps to improve the current regulatory system with this legislation,
the CARTA legislation.
This legislation is a product of a multitude of views and months of
work by the committee to improve the public's confidence in our capital
markets and to strengthen the overall financial system in the most
appropriate manner. It is effective because it gets to the heart of the
issues that will prevent future Enrons from happening in this country,
without drowning our businesses in a sea of red tape.
It is important that this legislation avoids the temptation to
overreact and to over-legislate in a manner that is going to cripple
the entire business community. In fact, the Federal Reserve Chairman,
Alan Greenspan, recently testified that the Enron collapse has already
generated a significant shift in corporate transparency and
responsibility, highlighting the market's sometime ability to self-
correct. Clearly, over-legislating would be counterproductive and make
it impossible for our markets to function properly.
Clearly we need to legislate, and I think we have done that in this
bill. But legislating should not be the end of the Congress's role in
addressing these issues. The collapse of Enron represents a combination
of irresponsible actions on the part of some decisionmakers with
knowledge of the company's financial well-being, and a meltdown of the
financial safeguards that we have used to identify problems at a stage
when corrective action still might be possible. We have to continue to
work directly with the private sector to instill a spirit of corporate
responsibility. We must challenge America's business leaders to meet
the highest standards of ethics and responsibility to their employees
and their shareholders.
There have been dozens of legislative measures introduced by both
sides of the aisle to address these issues. It is time we put partisan
wrangling aside and to move forward with the practical solutions that
will actually help. We need to increase the American people's
confidence in our capital markets, because by doing so, we will
increase their confidence in our economy at a time when our economy
needs to continue to grow.
I urge my colleagues to support the CARTA legislation.
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the very
distinguished gentlewoman from California (Ms. Waters), the ranking
member of the Subcommittee on Financial Institutions.
Ms. WATERS. Mr. Chairman, I rise in opposition to H.R. 3763. I truly
believe the gentleman from Ohio (Mr. Oxley), the chairman of the
committee, had good intentions, and I appreciate that he accepted one
of my amendments on the disgorgement fund at SEC. However, the bill
simply does not respond to the outrageous and corrupt behavior of
Enron, Arthur Andersen, Global Crossing, and perhaps many other
corporations and Wall Street firms. What more harm to our citizens will
we tolerate?
This bill does not recognize the wake-up call we have been afforded.
This bill will not prevent another Enron from happening. Unfortunately,
there are major problems with the larger bill which does not offer
strong enough protections to prevent what appears to be a growing
number of unscrupulous corporate practices.
Instead of instituting real accounting reforms, the Republican bill
leaves the bulk of the work to the SEC, who can be pressured by the
industry into issuing so-called reforms that are meaningless. The
Democratic substitute, however, creates a powerful new regulatory board
with authority to set strict standards on auditors, with strong
investigative and disciplinary powers, recognizing that years of the
accounting industry's self-policing has failed.
The Republican bill fails to ban consultant services that create
conflicts of interest. The Democratic substitute ensures auditor
independence by prohibiting consulting services that create conflicts
of interest, and gives audit committees of corporate boards authority
to hire and fire auditors. The Republican bill protects executive
corporate wrongdoers by making it more difficult to bar guilty officers
and directors from serving at other public companies. The Democratic
substitute holds CEOs accountable for their financial statements and
subjects them to criminal penalties for knowingly lying. It requires
those who make false or misleading statements to surrender their stock
bonuses, and it also bars guilty officers and directors from serving at
other public companies.
The Democratic substitute bars analysts from holding stock in the
companies they cover and ending incentives to act as salesmen rather
than objective experts.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 2 minutes to the
gentleman from New York (Mr. Grucci), one of our outstanding freshman
members of the committee.
Mr. GRUCCI. Mr. Chairman, I thank the gentleman for yielding.
First of all, I would like to thank the gentleman from Ohio (Mr.
Oxley) and my colleagues on the Committee on Financial Services for
their tireless effort to swiftly address this crisis.
Mr. Chairman, the Enron debacle highlights the need for reform of our
accounting and investment standards. However, any bill in response to
this cannot go overboard in restricting our already self-regulating
markets. For this purpose, I believe that this corporate responsibility
bill strikes a solid balance, and I am in favor of its passage.
First, the corporate responsibility bill creates a public regulatory
organization to make sure accounting laws are followed and audits are
done properly. This is a necessary, commonsense approach to restoring
investors' faith. Next, the bill applies the same stock bailout period
to corporate executives as it does to employee shareholders, as is only
fair. Finally, it demands that executives disclose their stock trades
faster so employees and analysts truly
[[Page H1553]]
know what is going on inside the company.
The beauty of the corporate responsibility bill is that it does not
try to put the brakes on the wheels of our markets. Instead, it
restores fairness and honesty to the system, while leaving its main
tenets in place. It allows the investor to still be a master of his or
her own destiny, but in a much safer environment. The self-regulating
nature of our free enterprise system is left intact, and now it will be
open to staying more clean.
The era of corporate mystery must end. Either we can let the
corporate responsibility bill take us on a path to transparency and
legitimacy where rules are valued and fraud is exposed and prevented,
or we can watch as more innocent Americans are deprived of their life
savings by greed and callousness. Although the corporate responsibility
bill was written as a response to recent events, it is commonsense
legislation that should have been considered long ago, and I urge my
colleagues to vote in favor of it.
Mr. LaFALCE. Mr. Chairman, I yield myself the balance of the time
remaining.
Mr. Chairman, we have an enormous, enormous problem on our hands.
Investors have lost hundreds of billions of dollars, and sometimes it
may have been due to bad investment decisions they made, but an awful
lot of the time it was due to earnings manipulation or analyst hype or
corporate or accounting wrongdoing. We need to rise to the challenge.
This bill just does not do that. We could say, well, if we gave it a
test and somebody gets 50 percent of the answers right, we would say,
well, pass them. I think we flunk them if that is as good as they could
do, especially if they do a poor job on all of the important issues. I
think the main bill does a very poor job on all of the important
issues.
Let us go to, for example, officers of corporations. What should we
do about that? Well, the President has told us what he thinks should be
done at a minimum. In President Bush's 10-point plan, proposal number
3: ``CEOs should personally vouch for the veracity, timeliness and
fairness of their company's public disclosures, including their
financial statements.'' The Republican bill punts on that. It does not
do anything on that. Our substitute legislatively codifies what
President Bush asked for.
What about boards of directors? Well, we have to make them more
responsible. One way is to make sure that they are responsible for both
the hiring and the firing of the auditors, so that the auditors then
would be independent from the officers. The Republican bill does
nothing on that. Our bill specifically says that it is a right and
responsibility of the board of directors, the audit committee in
particular, to perform that function.
Something else that we need to do to deal with officers or directors
is if they are proven unfit, we need to be able to bar them from
serving as officers and directors on other publicly traded
corporations, and the SEC has complained that they do not have that
power. President Bush says, proposal number 5: ``CEOs or other officers
who clearly abuse their power should lose their right to serve in any
corporate leadership positions.''
{time} 1215
The Republican bill codifies bad judicial law and makes it more
difficult for the SEC to bar officers and directors. Our proposal
adopts the reforms that have been advocated by the SEC, another
fundamental threshold difference.
What about auditors? Well, we need a regulatory organization. The
Republican approach is to say to the SEC, ``Well, if you think there
should be regulatory organization for accountants, then you should
create one. It is discretionary on your part. You decide what powers
they will have and you decide who shall serve.''
We say that there shall be created an independent regulatory
organization for accountants, we specify what their powers should be,
and we also indicate the type of person who should be appointed:
individuals who are representative of the pension plans of private
employees, individuals who are representative of the pension plans of
public employees, et cetera.
And very importantly, with respect to research analysts, the
Republican bill says, well, we ought to study that problem. We say,
look, the SEC has studied it. The SEC has given report after report
showing conflicts. The Attorney General of New York has come out with
unbelievable revelations.
On all other legislation, for example, Graham-Leach-Bliley, we
created firewalls between banking, securities, and insurance. We need a
firewall within securities firms with respect to the compensation that
research analysts are given and the revenues that are generated for the
investment arm of the firm. The quality of research should be the sole
determinant of the compensation of research analysts. The Republican
bill does nothing on that. We take meaningful action.
Mr. OXLEY. Mr. Chairman, I yield myself the balance of my time.
Mr. Chairman, this has been a worthwhile debate and I think does
clearly point out some of the philosophical differences between at
least a portion of the Democratic Party and the Republican approach.
This committee acted. We are the only committee who have acted
responsibly in this manner with moving legislation forward. We had the
first hearing in December on the Enron debacle. We have had six
subsequent hearings. We have had 33 witnesses. We had a markup that
lasted over 2 days, for 11 hours. We debated this thoroughly.
At the end of the process, at the end of the process in committee,
over half of the Democrats on the committee supported the final passage
of this legislation to recommend it for a floor vote. That is a
positive development. So I stand here today supporting the bipartisan
legislation that came out of our committee, and I am very proud of
that.
My friend, the gentleman from New York (Mr. LaFalce), points out the
alleged differences with the White House. Let me point out and read the
statement of administrative policy for the Members.
``The administration supports House passage of H.R. 3763 as an
important step toward improving corporate responsibility. The bill is
consistent with the President's 10-point plan, and is guided by the
core principles of providing better information to investors, making
corporate officers more accountable, and developing a stronger, more
independent audit system.''
That is the statement of administration policy. They support this
legislation. Let us support this bipartisan proposal as we move
forward.
Mr. BARR of Georgia. Mr. Chairman, I rise today in support of the
Corporate Auditing and Accountability, Responsibility and Transparency
Act (CARTA) of 2002, H.R. 3763. This legislation represents necessary--
but measured--response to the Enron and Global Crossing scandals.
It is important Congress continues to respond efficiently and
effectively to the concerns of American investors, retirees, and
employees. The Financial Services Committee has worked hard in order to
send this solid, bipartisan legislation to the House floor.
I commend Chairman Michael Oxley for his continued efforts on this
legislation. He has been dedicated to work with Members on both sides
of the aisle, the industries and the administration in order to create
a bill which would strike a reasonable balance.
H.R. 3763 is a tough bill on auditor accountability and corporate
transparency and addresses the weaknesses revealed in the bankruptcies
by carefully strengthening the markets. In addition, H.R. 3763 will
help to protect America's shareholders by providing better information
to investors, making corporate officers more accountable, and
developing a stronger, more independent audit system.
Mr. Chairman, some may support the idea to create even more
regulation and bureaucracy to prevent future collapses of major
corporations like Enron or Global Crossing. However, the idea does not
bear out. Neither Congress, nor the government should be in the
position of handcuffing the private sector and how it does business.
H.R. 3763 gives the Securities and Exchange Commission the tools to
identify future criminal wrongdoing, without imposing such strict
regulatory guidelines that it would take an act of Congress to give any
flexibility. Such restrictions would hamstring the agency and
businesses. Moreover, we could, in the end, wrap an endless stream of
red tape around the capital markets. As we emerge from the most recent
economic slowdown, it would be the height of irresponsibility by this
Congress to dampen investment.
I urge my colleagues to pass H.R. 3763 which would protect working
families investing in their futures.
[[Page H1554]]
Mr. BEREUTER. Mr. Chairman, this Member rises today to express his
support for H.R. 3763, the Corporate and Auditing Accountability,
Responsibility and Transparency Act of 2002. This bill, of which I am
an original cosponsor, is necessary to protect investors by ensuring
auditor independence in the accounting of publicly traded companies.
This Member would express his appreciation to the distinguished
gentleman from Ohio, Mr. Oxley, the chairman of the House Financial
Services Committee, for introducing H.R. 3763. In addition, this Member
would like to express his appreciation to the distinguished gentleman
from Louisiana, Mr. Baker, the chairman of the Financial Services
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises, for his efforts in getting this measure to the House floor
for consideration.
In large part, H.R. 3763 is a response to the grossly negligent
activities by Arthur Andersen in their accounting audit of the Enron
Corporation. For example, Arthur Andersen provided both consulting and
auditing services to Enron, which certainly would appear to be an
obvious conflict of interest. In addition, after the Securities and
Exchange Commission, SEC, began investigating the Enron matter, Arthur
Andersen nonetheless allegedly continued to destroy documents and e-
mails related to its audit of Enron.
Therefore, H.R. 3763, among many things, would do the following:
First, prohibit firms from offering the consulting services of
financial information system design and internal audit services to
companies that are externally auditing.
Second, establish a new public regulatory board, the Public
Regulatory Organizations PROs, to conduct oversight over the accounting
industry. The PROs would be under the direct authority of the SEC.
Currently, accountants are subject to partial oversight by their
professional organization, the American Institute of Certified Public
Accountants; the Federal Accounting Standards Board; and the State
Boards of Accountancy, which license accountants. Under H.R. 3763, the
power of these State boards is not diminished.
Third, prohibit corporate executives from buying or selling company
stock during any period where 401(k) plan participants are unable to
buy or sell securities. This provision would address the particular
actions of Enron corporate executives who sold their stock when 401(k)
participants were prohibited from selling their shares of stock.
Fourth, make it a crime for a corporate official to fraudulently
influence, coerce, manipulate, or mislead an accountant performing an
audit of a company.
Fifth, require companies to make real-time disclosures of financial
information that is important to investors, such as material changes in
a company's financial condition.
Sixth, require corporate executives to disclose when they sell
securities they own in the company immediately. Current regulations
allow corporate executives up to 40 days to make such disclosures.
This Member would also like to note that while H.R. 3763 is certainly
a step towards protecting investors in the future, he also hopes that
the corporate executives at Enron and the relevant auditors at Arthur
Andersen are punished in the proper manner for their grossly
irresponsible, probably illegal, corporate behavior.
In closing, this Member urges his colleagues to support H.R. 3763.
Mrs. MINK of Hawaii. Mr. Chairman, H.R. 3763, the Corporate
Accountability, Responsibility, and Transparency Act of 2002, does not
go far enough to reform the accounting industry and strengthen
corporate disclosure rules, which are critical to restoring investor
confidence, which was shattered by the collapse of the Enron
Corporation.
The implosion of what was once the Nation's seventh largest company
and dominant energy-trading enterprise proved that the integrity of the
system of checks and balances that is supposed to prevent an Enron-like
debacle has been compromised. The system's failure has devastated
thousands of individuals and their families.
Enron's employees, the vast majority of whom were unaware of the
breadth and scope of the company's questionable financial dealings,
lost not only their jobs but also much of their life savings. Enron's
executives fared considerably better, cashing in $1.1 billion in stock,
as they overstated the company's revenues and concealed much of its
debt in off-balance-sheet partnerships.
The employees of Arthur Andersen LLP, the auditing firm responsible
for verifying the accuracy of Enron's books, have similarly been
victimized by the actions of a relative handful of Anderson partners
and personnel that chose to overlook Enron's fraudulent bookkeeping
activities. Today, Arthur Andersen LLP faces huge civil lawsuits and is
steadily losing clients, thereby causing many of its employees to
become unemployed.
In addition to the employees of Enron and Arthur Andersen, many
thousands of investors that relied on the supposed independent advice
of stock analysts were victimized by the Enron debacle. Because Wall
Street investment companies reaped huge fees for brokering Enron's
numerous deals, they continued to lavish praise on the company's stock,
even after it nosedived in October 2001.
While H.R. 3763 is intended to strengthen the independent auditing of
publicly traded companies, it does not address actual accounting
standards. For example, it is silent on the question of whether certain
types of debt may be moved off a company's balance sheets, which, it
cannot be stressed enough, was a hallmark of Enron's accounting
machinations. The Democratic substitute to H.R. 3763 would: Require
CEOs to certify the accuracy of their company's financial statements;
allow the Securities and Exchange Commission to bar those guilty of
wrongdoing from serving as corporate officers; prohibit auditors from
performing consulting and auditing services for the same client; and
prohibit analysts from owning stock in the companies on which they
report.
Investor confidence is the bedrock upon which our market system is
built. Investors must have full confidence that business executives
will look after the long-term interests of their companies, directors
will look after the interests of shareholders, auditors will verify the
accuracy of financial statements, and analysts will offer sound
investment advice. There is no question that investor confidence has
been badly shaken, if not lost. If that confidence is to be fully
restored, more than good intentions are required. It will require
provisions with force and teeth. It will, in short, require the
Democratic substitute. I strongly urge my colleagues to vote for it.
Mr. CASTLE. Mr. Chairman, I rise today to express my strong support
for the Corporate and Auditing Accountability, Responsibility, and
Transparency Act. Americans should know that this is the second piece
of legislation the House has passed to protect them from future
``Enrons.'' Earlier this month, the House passed legislation to enhance
pension protections and give employees more tools to diversify their
retirement plans.
This legislation is designed to enhance the independence of the
accounting industry to make sure the stock markets and investors have a
more accurate picture of a corporation's financial conditions so they
can make wise and informed decisions on where to invest their money. In
particular, the bill creates a new Public Regulatory Organization, PRO,
to oversee the activities of accountant. The PRO would be subject to
direct SEC authority. A majority of the PRO board members will be
independent of the accounting industry to assure that the PRO itself is
not ``captured'' by the very industry it is regulating.
One of the other Enron-related problems this bill addresses is the
failure to disclose the types of off-balance-sheet partnerships that
Enron used to distort its financial condition. This bill requires
prompt disclosure of these partnerships.
This bill also reigns in corporate management sales of company stock.
Among the most disturbing actions Enron executives took was to sell
their company stock at the same time there was a blackout period on the
employees 401(k) retirement plan. They were preserving their own assets
at the same time their employees were losing their retirements as the
Enron ship continued to sink. From now on, whenever employee stock
trades are prohibited, corporate management stock trades will also be
prohibited.
Finally, while some have urged Congress to take further steps, I want
to caution people that freezing additional reforms in legislation based
upon our current understanding of the causes of these problems can lead
to its own set of problems. In passing Gramm-Leach-Bliley a few years
ago, Congress finally fixed some of the mistakes that were made in
attempting to address the causes of the Great Depression. Critics
should also note that this legislation calls on the SEC and other
regulators to explore additional reforms. Congress will maintain active
oversight of the SEC as they continue to develop sound ideas to prevent
future Enrons.
Mr. Chairman, again, I want to express my strong support for this
bill and urge my colleagues on both sides of the aisle to join the 49
bipartisan members of the House Financial Services Committee who
reported this bill favorably to the House floor. This is a responsible
step toward preventing future Enrons that does not punish the innocent.
Mr. STARK. Mr. Chairman, I rise in opposition to H.R. 3763, the
Corporate and Auditor Responsibility Act, because the bill does nothing
to prevent another Enron debacle from occurring in the future.
Enron's collapse has highlighted major gaps in our securities laws.
These gaps jeopardize the retirement savings of millions of hard
working Americans who have their retirement funds invested in
securities. After the Enron collapse, the American people
overwhelmingly called for strong measures to prevent such a debacle
from happening again. They called on Congress to act, but this bill
falls far short.
[[Page H1555]]
This so-called ``Corporate and Auditor Responsibility Act'' is
nothing more than a political document for Republicans to appear like
they are protecting investors and workers when, in fact, they are
protecting corporations and CEOs. H.R. 3763 would actually increase the
likelihood of another Enron situation because it limits the SEC's
authority to prohibit Enron's corporate officers and directors from
serving in such positions in the future if they are found guilty of
misconduct.
What happened to the GOP mantra of holding executives accountable for
corporate misconduct? H.R. 3763 fails miserably to hold CEOs even
remotely accountable for their actions. Even President Bush thinks it
makes sense to have a company's CEO certify the accuracy of their
financial statements. This bill fails to take even that small step.
The Enron scandal happened less than 6 months ago, yet my Republican
colleagues have quickly forgotten some of its major components. While
thousands of Enron employees were being told to invest their retirement
savings in Enron securities, Enron's CEO sold millions of dollars worth
of company stock. Corporate officers knew that hollow deals were taking
place to prop up the stock price, and the employees had to pay the
price.
Shouldn't company CEOs be responsible for signing on the dotted line
and verifying the company's books? Of course they should! Which makes
it all the more unfathomable that the GOP would submit a bill without a
provision to hold CEOs responsible for the veracity of their company's
bottom line. Our Republican friends are basically saying to Ken Lay:
feel free to get another CEO gig, create some new tax shelters for the
company, prop up the stock price and then walk away with millions in
personal profit. Today's bill does nothing to prevent that.
In contrast, the Democratic substitute addresses the more egregious
corporate misconduct issues.
First and foremost, the Democratic substitute requires the CEO and
chief financial officer (CFO) of publicly-traded companies to certify
the accuracy and veracity of the company's financial statements. This
is a reasonable first step to ensure that executives be held
accountable for misleading investors and employees.
Next, the Democratic substitute allows the Securities and Exchange
Commission (SEC) to recover all executive compensation received
(including salaries, commissions, fees, bonuses, and stock options) for
any period during which the executive falsified a company's financial
statements. The Republican bill only allows the SEC to recover stock
transaction proceeds for the six months prior to a corporate
restatement of earnings. Under the Republican bill, an executive making
a $3 million salary, who falsifies company financial records, will be
able to keep it. He can also keep hundreds of millions of dollars in
stock option proceeds accumulated under falsified accounting from
previous years.
Finally, the Democratic substitute bill will empower the SEC to bar
directors and officers found guilty of corporate misconduct from
holding similar positions in the future. CEOs who mislead and defraud
their investors and employees must not be allowed to return to similar
positions. Without a strong provision such as this, incentives will
continue to abound for CEOs to choose personal profit over corporate
integrity.
This Republican bill is another sham on the American public who
expect Congress to pass effective legislation to restore corporate
accountability. I urge my colleagues to vote for the Democratic
substitute and no on the Republican bill.
Mr. PAUL. Mr. Chairman, seldom in history have supporters of
increased state power failed to take advantage of a real or perceived
crisis to increase government interference in our economic and/or
personal lives. Therefore we should not be surprised that the events
surrounding the Enron bankruptcy are being used to justify the
expansion of Federal regulatory power contained in H.R. 3763, the
Corporate and Auditing Accountability, Responsibility, and Transparency
Act of 2002 (CARTA).
So ingrained is the idea that new Federal regulations will prevent
future Enrons, that today's debate will largely be between CARTA's
supporters and those who believe this bill does not provide enough
Federal regulation and control. I would like to suggest that before
Congress imposes new regulations on the accounting profession, perhaps
we should consider whether the problems the regulations are designed to
address were at least in part caused by prior government interventions
into the market. Perhaps Congress could even consider the almost
heretical idea that reducing Federal control of the markets is in the
public's best interest. Congress should also consider whether the new
regulations will have costs which might outweigh any (marginal) gains.
Finally, Mr. Speaker, Congress should contemplate whether we actually
have any constitutional authorization to impose these new regulations,
instead of simply stretching the Commerce Clause to justify the program
de jour.
CARTA establishes a new bureaucracy with enhanced oversight authority
of accounting firms, as well as the authority to impose new mandates on
these firms. CARTA also imposes new regulations regarding investing in
stocks and enhances the power of the Securities and Exchange Commission
(SEC). However, Mr. Speaker, companies are already required by Federal
law to comply with numerous mandates, including obtaining audited
financial statements from certified accountants. These mandates have
enriched accounting firms and may have given them market power beyond
what they could obtain in a free market. These laws also give corrupt
firms an opportunity to attempt to use political power to gain special
treatment for Federal lawmakers and regulators at the expense of their
competitors and even, as alleged in the Enron case, their employees and
investors.
When Congress establishes a regulatory state it creates an
opportunity for corruption. Unless CARTA eliminates original sin, it
will not eliminate fraud. In fact, by creating a new bureaucracy and
further politicizing the accounting profession, CARTA may create new
opportunities for the unscrupulous to manipulate the system to their
advantage.
Even if CARTA transformed all (or at least all accountants) into
angels, it could still harm individual investors. First, new
regulations inevitably raise the overhead costs of investing. This will
affect the entire economy as it lessens the capital available to
businesses, thus leading to lower rates of economic growth and job
creation. Meanwhile, individual investors will have less money for
their retirement, their children's education, or to make a down payment
on a new home.
Government regulations also harm investors by inducing a sense of
complacency. Investors are much less likely to invest prudently and ask
tough questions of the companies they are investing in when they
believe government regulations are protecting their investments.
However, as mentioned above, government regulations are unable to
prevent all fraudulent activity, much less prevent all instances of
imprudent actions. In fact, as also pointed out above, complex
regulations create opportunities for illicit actions by both the
regulator and the regulated, Mr. Chairman, publicly held corporations
already comply with massive amounts of SEC regulations, including the
filing of quarterly reports that disclose minute details of assets and
liabilities. If these disclosures rules failed to protect Enron
investors, will more red tape really solve anything?
In truth, investing carries risk, and it is not the role of the
Federal Government to bail our every investor who loses money. In a
true free market, investors are responsible for their own decisions,
good or bad. This responsibility leads them to vigorously analyze
companies before they invest, using independent financial analysts. In
our heavily regulated environment, however, investors and analysts
equate SEC compliance with reputability. The more we look to the
government to protect us from investment mistakes, the less competition
there if for truly independent evaluations of investment risk.
Increased Federal interference in the market could also harm
consumers by crippling innovative market mechanisms to hold corporate
managers accountable to their shareholders. Ironically, Mr. Chairman,
current SEC regulations make it difficult for shareholders to challenge
management decisions. Thus government regulations encourage managers to
disregard shareholder interests!
Unfortunately, the Federal Government has a history of crippling
market mechanisms to protect shareholders. As former Treasury official
Bruce Bartlett pointed out in a recent Washington Times column, during
the 1980s, so-called corporate raiders helped keep corporate management
accountable to shareholders through devices such as the ``junk'' bond,
which made corporate takeovers easier. Thanks to the corporate raiders,
managers knew they had to be responsive to shareholders needs or they
would become a potential target for a takeover.
Unfortunately, the backlash against corporate raiders, led by
demographic politicians and power-hungry bureaucrats eager to expand
the financial police state, put an end to hostile takeovers. Bruce
Bartlett, in the Washington Times column sited above, described the
effects of this action on shareholders, ``Without the threat of a
takeover, manaagers have been able to go back to ignoring shareholders,
treating them like a nuisance, and giving themselves bloated salaries
and perks, with little oversight from corporate boards. Now insulated
from shareholders once again, managers could engage in unsound
practices with little fear of punishment for failure.'' Ironically, the
Federal power grab which killed the corporate raider may have set the
stage for the Enron debacle, which is now being used as an excuse for
yet another Federal power grab!
If left alone by Congress, the market is perfectly capable of
disciplining businesses who engage in unsound practices. After all,
before
[[Page H1556]]
the government intervened, Arthur Andersen and Enron had already begun
to pay a stiff penalty, a penalty delivered by individual investors
acting through the market. This shows that not only can the market
deliver punishment, but it can also deliver this punishment swifter and
more efficiently than the government. We cannot know what efficient
means of disciplining companies would emerge from a market process but
we can know they would be better at meeting the needs of investors than
a top-down regulatory approach.
Of course, while the supporters of increased regulation claim Enron
as a failure of ``ravenous capitalism,'' the truth is Enron was a
phenomenon of the mixed economy, rather than the operations of the free
market. Enron provides a perfect example of the dangers of corporate
subsidies. The company was (and is) one of the biggest beneficiaries of
Export-Import (Ex-Im) Bank and Overseas Private Investment Corporation
(OPIC) subsidies. These programs make risky loans to foreign
governments and businesses for projects involving American companies.
While they purport to help developing nations, Ex-Im and OPIC are in
truth nothing more than naked subsidies for certain politically-favored
American corporations, particularly corporations like Enron that lobby
hard and give huge amounts of cash to both political parties. Rather
than finding ways to exploit the Enron mess to expand Federal power,
perhaps Congress should stop aiding corporations like Enron that pick
the taxpayer's pockets through Ex-Im and OPIC.
If nothing else, Mr. Chairman, Enron's success at obtaining State
favors is another reason to think twice about expanding political
control over the economy. After all, allegations have been raised that
Enron used the same clout by which it received corporate welfare to
obtain other ``favors'' from regulators and politicians, such as
exemptions from regulations that applied to their competitors. This is
not an uncommon phenomenon when one has a regulatory state, the result
of which is that winners and losers are picked according to who has the
most political clout.
Congress should also examine the role the Federal Reserve played in
the Enron situation. Few in Congress seem to understand how the Federal
Reserve system artificially inflates stock prices and causes financial
bubbles. Yet, what other explanation can there be when a company goes
from a market value of more than $75 billion to virtually nothing in
just a few months? The obvious truth is that Enron was never really
worth anything near $75 billion, but the media focuses only on the
possibility of deceptive practices by management, ignoring the primary
cause of stock overvaluations: Fed expansion of money and credit.
The Fed consistently increased the money supply (by printing dollars)
throughout the 1990s, while simultaneously lowering interest rates.
When dollars are plentiful, and interest rates are artificially low,
the cost of borrowing becomes cheap. This is why so many Americans are
more deeply in debt than ever before. This easy credit environment made
it possible for Enron to secure hundreds of millions in
uncollateralized loans, loans that now cannot be repaid. The cost of
borrowing money, like the cost of everything else, should be
established by the free market--not by government edict. Unfortunately,
however, the trend toward overvaluation will continue until the Fed
stops creating money out of thin air and stops keeping interest rates
artificially low.
Finally, Mr. Chairman, I would remind my colleagues that Congress has
no constitutional authority to regulate the financial markets or the
accounting profession. Instead, responsibility for enforcing laws
against fraud are under the jurisdiction of the state and local
governments. This decentralized approach actually reduces the
opportunity for the type of corruption referred to above--after all, it
is easier to corrupt one Federal official than 50 State Officials.
In conclusion, the legislation before us today expands Federal power
over the accounting profession and the financial markets. By creating
new opportunities for unscrupulous actors to maneuver through the
regulatory labyrinth, increasing the costs of investing, and preempting
the market's ability to come up with creative ways to hold corporate
officials accountable, this legislation harms the interests of
individual workers and investors. Furthermore, this legislation exceeds
the constitutional limits on Federal power, interfering in matters the
10th amendment reserves to state and local law enforcement. I therefore
urge my colleagues to reject this bill. Instead, Congress should focus
on ending corporate welfare programs which provide taxpayer dollars to
large politically-connected companies, and ending the misguided
regulatory and monetary policies that helped create the Enron debacle.
Mr. BLUMENAUER. Mr. Chairman, I rise today in support of H.R. 3763,
the Corporate and Auditing Accountability and Responsibility Act. This
bill moves policy in the direction necessary to strengthen corporate
and auditor oversight needed to prevent future debacles that we have
seen recently at Enron and Global Crossing, and in the past with the
Savings and Loan catastrophe.
These oversight failures have led to the loss of hundreds of billions
of dollars of savings by innocent investors and employees. These losses
have shattered the lives of families, including those in my district
who are employed at Portland General Electric, which was purchased by
Enron in 1997. Congress owes it to the American public to put in place
measures that will eliminate conflicts of interest, lack of
independence, and special protections given to accountants and lawyers,
which have all been critical factors leading to corporate and industry
failures.
Due to the severe impact that these corporate failures create, I urge
the House to implement more significant reforms by passing the
Democratic Substitute amendment, which:
Creates an independent regulatory board that can set strict standards
for auditor independence, with sweeping investigative and disciplinary
powers over audit firms.
Holds corporate CEOs accountable by requiring them to certify the
accuracy of their financial statements and empowers the SEC to bar
those guilty of wrongdoing from serving as corporate officers or
directors at other companies.
Prohibits auditors from doing consulting work for the same clients
they are in charge of auditing, thereby insuring that auditors remain
independent and are not subject to conflicts of interests.
Bans analysts from owning stocks in the companies on which they
report and prohibits their pay from being based on their investment
firm's banking revenue.
The Democratic approach ensures that our corporate leaders, financial
statement auditors, and stock analysts have adequate independent
oversight and regulations to fulfill their professional duties.
However, I also support the underlying bill, H.R. 3763, which begins
the process of putting in place the reforms needed to prevent future
tragedies that are so devastating to the savings and lives of American
workers and investors.
Mr. SHOWS. Mr. Chairman, today I rise in favor of commonsense
legislation that provides necessary reform for the auditing profession.
The Corporate and Auditing Accountability, Responsibility, and
Transparency Act (CAARTA) offers the appropriate framework for
addressing the concerns raised by the Enron debacle and the revelation
of improprieties by its auditor, Arthur Andersen.
The consumers, employees, and investors affected by the demise of
Enron due to unlawful misrepresentation of financial information
deserve both answers and solutions so that confidence in accounting
independence, objectivity, and integrity is restored. However,
government should not overreact with prescriptive regulations. Instead,
we should provide thoughtful and balanced measures that encourage sound
auditing practices yet mandate compliance.
Auditors must maintain an independent relationship with businesses
whose books are under review. CAARTA establishes the appropriate
guidelines for determining true auditor independence without treading
the slippery slope of unnecessary and debilitating regulation. Small
businesses throughout Mississippi rely on their local accountants to
provide more than just auditing services. These businesses rely on
advice and counsel for all types of accounting problems such as
bookkeeping, payroll services budgeting, and income tax preparation. We
must keep local accountants and small businesses in Rural America in
mind when we legislate policy that might impact these relationships in
the future.
With these small businesses and local accountants in mind, I oppose
any provision requiring auditors of publicly traded companies to meet a
netcapital requirement of 50% of its annual audit revenue from publicly
traded companies. I agree that auditors of SEC reporting companies
ought to have enough capital and insurance to cover the liability they
incur when an audit is performed; however, my concern remains with the
small businesses and accountants in Rural America whose practices could
eventually fall under the same requirement, devastating local, small-
town accountants and debilitating the services they currently provide.
I support CAARTA's creation of a public regulatory organization (PRO)
made up of both members of the public and members of the accounting
profession. The American public and the accounting profession will be
better served by this independent governmental body that is given the
authority to sanction and discipline those accountants who violate
codes of ethics, standards of independence and competency, or
securities laws.
As United States Comptroller General David Walker identified in his
written testimony before the Financial Services committee on April 9,
2002, the current self-regulatory system for
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auditors ``involves many players in a fragmented system that is not
well coordinated, involves certain conflicts of interest, lacks
effective communication, and has a discipline system that is largely
perceived as being ineffective.'' Mr. Walker concluded, ``direct
government intervention to statutorily create a new independent Federal
government body to regulate the accounting profession is needed.'' I
support this conclusion and the means and degree by which CAARTA
creates a public regulatory board to address those concerns.
There were two specific issues that I would have liked strengthened
or included in this reform package: a stronger section providing for
disgorgement of bonuses and other incentives and the inclusion of a
requirement for CEOs and CFOs to be held accountable for their
companies' financial statements. CEOs must not be allowed to profit
from inaccurate and falsified financial statements. Bonuses and other
incentive-based forms of compensation should be given back to the
workers who lost their pensions and the consumers who lost their
investments resulting from misconduct and erroneous accounting
statements at the hands and direction of corporate executives.
Furthermore, CEOs and CFOs must be responsible for a company's
financial statement and certify its accuracy. This is a good business
practice that is now, unfortunately, no longer the norm.
We must restore confidence in the accounting profession by enacting
legislation that ensures accurate and responsible financial disclosure.
CAARTA represents commonsense reform, which makes a deliberate attempt
to safeguard American workers, investors, and consumers.
Mr. SHAYS. Mr. Chairman, I want to commend Chairman Mike Oxley and
Chairman Richard Baker for their work on the legislation we are
debating. The reforms contained in this accounting bill represent a
balanced approach between industry and government oversight and I am
pleased to support it.
The Corporate and Auditing Accountability, Responsibility, and
Transparency Act meets the tests for reform put forward by President
Bush. It prohibits accounting firms from offering certain controversial
consulting services to companies they're also auditing. And it
establishes a new, public regulatory board to certify any accountant
wishing to audit the financial statement required from public issuers
of stock. This board will have enforcement powers and will be under the
direction of the Securities and Exchange Commission.
Under CAARTA, all publicly-traded companies will be responsible for
ensuring that their accounting firms are in good standing and for
having their financial statement certified by the regulatory board.
Well, maybe I shouldn't be so quick to say ``all'' publicly-traded
companies. You see, there are two giant private corporations that enjoy
a very special privilege from the federal government: they are
completely exempt from our federal securities laws.
Mr. Chairman, these companies are Fannie Mae and Freddie Mac, and all
the important improvements this legislation makes won't apply one iota
to them.
After studying the collapse of Enron and Global Crossing, the
Financial Services Committee determined that a number of reforms were
necessary to restore confidence in corporate America. These reforms
build on the Securities Act of 1933 and the Securities Exchange Act of
1934, the two landmark securities laws to which all publicly-traded
companies, except Fannie and Freddie, must adhere.
The reforms contained in this legislation will strengthen securities
laws and accounting standards--except when it comes to Fannie and
Freddie. This legislation improves transparency in our capital markets
and protects investors--unless they're investing in Fannie Mae and
Freddie Mac securities.
What this legislation highlights is that we have two separate rules
in corporate America: those that apply to Fannie and Freddie, and those
that apply to every other publicly-traded company.
The Financial Services Committee has had a number of hearings on the
unfair advantages these two secondary mortgage companies have over the
rest of the mortgage industry. With Chairman Oxley's support, I hope we
can continue to ask Fannie Mae and Freddie Mac why they can't play by
the same rules as all other companies and why they continue to seek
exemptions from federal laws designed to protect investors.
The CHAIRMAN. All time for general debate has expired.
Pursuant to the rule, the committee amendment in the nature of a
substitute printed in the bill shall be considered as an original bill
for the purpose of amendment under the 5-minute rule and shall be
considered as read.
The text of the committee amendment in the nature of a substitute is
as follows:
H.R. 3763
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Corporate
and Auditing Accountability, Responsibility, and Transparency
Act of 2002''.
(b) Table of Contents.--
Sec. 1. Short title; table of contents.
Sec. 2. Auditor oversight.
Sec. 3. Improper influence on conduct of audits.
Sec. 4. Real-time disclosure of financial information.
Sec. 5. Insider trades during pension fund blackout periods prohibited.
Sec. 6. Improved transparency of corporate disclosures.
Sec. 7. Improvements in reporting on insider transactions and
relationships.
Sec. 8. Codes of conduct.
Sec. 9. Enhanced oversight of periodic disclosures by issuers.
Sec. 10. Retention of records.
Sec. 11. Commission authority to bar persons from serving as officers
or directors.
Sec. 12. Disgorging insiders profits from trades prior to correction of
erroneous financial statements.
Sec. 13. Securities and Exchange Commission authority to provide
relief.
Sec. 14. Study of rules relating to analyst conflicts of interest.
Sec. 15. Review of corporate governance practices.
Sec. 16. Study of enforcement actions.
Sec. 17. Study of credit rating agencies.
Sec. 18. Study of investment banks and other financial institutions.
Sec. 19. Study of model rules for attorneys of issuers.
Sec. 20. Enforcement authority.
Sec. 21. Exclusion for investment companies.
Sec. 22. Definitions.
SEC. 2. AUDITOR OVERSIGHT.
(a) Certified Financial Statement Requirements.--If a
financial statement is required by the securities laws or any
rule or regulation thereunder to be certified by an
independent public or certified accountant, an accountant
shall not be considered to be qualified to certify such
financial statement, and the Securities and Exchange
Commission shall not accept a financial statement certified
by an accountant, unless such accountant--
(1) is subject to a system of review by a public regulatory
organization that complies with the requirements of this
section and the rules prescribed by the Commission under this
section; and
(2) has not been determined in the most recent review
completed under such system to be not qualified to certify
such a statement.
(b) Establishment of PRO.--The Commission shall by rule
establish the criteria by which a public regulatory
organization may be recognized for purposes of this section.
Such criteria shall include the following requirements:
(1)(A) The board of such organization shall be comprised of
five members, three of whom shall be public members who are
not members of the accounting profession and two of whom
shall be persons licensed to practice public accounting and
who have recent experience in auditing public companies.
(B) Each member of the board of such organization shall be
a person who meets such standards of financial literacy as
are determined by the Commission.
(C) For purposes of this paragraph, a person shall not be
considered a member of the accounting profession if such
person has not worked in such profession for any of the last
two years prior to the date of such person's appointment to
the board.
(2) Such organization is so organized and has the
capacity--
(A) to be able to carry out the purposes of this section
and to comply, and to enforce compliance by accountants and
persons associated with accountants, with the provisions of
this Act, professional ethics and competency standards, and
the rules of the organization;
(B) to perform a review of the work product (including the
quality thereof) of an accountant or a person associated with
an accountant; and
(C) to perform a review of any potential conflicts of
interest between an accountant (or a person associated with
an accountant) and the issuer, the issuer's board of
directors and committees thereof, officers, and affiliates of
such issuer, that may result in an impairment of auditor
independence.
(3) Such organization shall have the authority to impose
sanctions, which, if there is a finding of knowing or
intentional misconduct, may include a determination that an
accountant is not qualified to certify a financial statement,
or any categories of financial statements, required by the
securities laws, or that a person associated with an
accountant is not qualified to participate in such
certification, if, after conducting a review and providing
fair procedures and an opportunity for a hearing, the
organization finds that--
(A) such accountant or person associated with an accountant
has violated the standards of independence, ethics, or
competency in the profession;
(B) such accountant or person associated with an accountant
has been found by the Commission or a court of competent
jurisdiction to have violated the securities laws or a rule
or regulation thereunder (provided in both cases that any
applicable time period for appeal has expired);
(C) an audit conducted by such accountant or any person
associated with an accountant has been materially affected by
an impairment of auditor independence;
(D) such accountant or person associated with an accountant
has performed both auditing services and consulting services
in violation of
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the rules prescribed by the Commission pursuant to subsection
(c); or
(E) such accountant or any person associated with an
accountant has impeded, obstructed, or otherwise not
cooperated in such review.
(4) Any such organization shall disclose publicly, and make
available for public comment, proposed procedures and methods
for conducting such reviews.
(5) Any such organization shall have in place procedures to
minimize and deter conflicts of interest involving the public
members of such organization, and have in place procedures to
resolve such conflicts.
(6) Any such organization shall have in place procedures
for notifying the boards of accountancy of the States of the
results of reviews and evidence under paragraphs (2) and (3).
(7) Any such organization shall have in place procedures
for notifying the Commission of any findings of such reviews,
including any findings regarding suspected violations of the
securities laws.
(8) Any such organization shall consult with boards of
accountancy of the States.
(9) Any such organization shall have in place a mechanism
to allow the organization to operate on a self-funded basis.
Such funding mechanism shall ensure that such organization is
not solely dependent upon members of the accounting
profession for such funding and operations.
(10) Any such organization shall have the authority to
request, in a manner established by the Commission, that the
Commission, by subpoena or otherwise, compel the testimony of
witnesses or the production of any books, papers,
correspondence, memoranda, or other records relevant to any
accountant review proceeding or necessary or appropriate for
the organization to carry out its purposes. The Commission
shall comply with any such request from such an organization
if the Commission determines that compliance with the request
would assist the organization in its accountant review
proceeding or in carrying out its purposes, unless the
Commission determines that compliance would not be in the
public interest. The issuance and enforcement of a subpoena
requested under this paragraph shall be deemed to be made
pursuant to, and shall be made in accordance with, the
provisions of subsections (b) and (c) of section 21 of the
Securities and Exchange Act of 1934 (15 U.S.C. 78u(b)-(c)).
For purposes of taking evidence, the Commission in its
discretion may designate the Board, or any member thereof, as
officers pursuant to section 21(b) of such Act.
(c) Prohibition on the Offer of Both Audit and Consulting
Services.--
(1) Modification of regulations required.--The Commission
shall revise its regulations pertaining to auditor
independence to require that an accountant shall not be
considered independent with respect to an audit client if the
accountant provides to the client the following nonaudit
services, as such terms are defined in such regulations as in
effect on the date of enactment of this Act, and subject to
such conditions and exemptions as the Commission shall
prescribe:
(A) financial information system design or implementation;
or
(B) internal audit services.
(2) Review of prohibited nonaudit services.--The Commission
is authorized to review the impact on the independence of
auditors of the scope of services provided by auditors to
issuers in order to determine whether the list of prohibited
nonaudit services under paragraph (1) shall be modified. In
conducting such review, the Commission shall consider the
impact of the provision of a service on an auditor's
independence where provision of the service creates a
conflict of interest with the audit client.
(3) Additions by rule.--After conducting the review
required by paragraph (2) and at any other time, the
Commission may, by rule consistent with the protection of
investors and the public interest, modify the list of
prohibited nonaudit services under paragraph (1).
(4) Report.--The Commission shall report to the Committee
on Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the
Senate on its conduct of any reviews as required by this
section. The report shall include a discussion of regulatory
or legislative steps that are recommended or that may be
necessary to address concerns identified in the study.
(5) Conforming revision.--The Commission shall revise its
regulations pertaining to accountant fee disclosure items, as
set forth in paragraphs (e)(1) through (e)(3) of item 9 from
Schedule 14A (17 CFR 240.14a-101), in light of paragraph (1)
of this subsection and after making a determination as to
whether such disclosures are necessary.
(6) Deadline for rulemaking.--The Commission shall--
(A) within 90 days after the date of enactment of this Act,
propose, and
(B) within 270 days after such date, prescribe,
the revisions to its regulations required by this subsection.
(d) PRO Accountant Review Proceedings.--
(1) Review proceeding findings.--Any findings made pursuant
to an accountant review conducted under this section that a
financial statement audited by such accountant and submitted
to the Commission may have been materially affected by an
impairment of auditor independence, or by a violation of
professional ethics and competency standards, shall be
submitted to the Commission. The Commission shall promptly
notify an issuer of any such finding that relates to the
financial statements of such issuer.
(2) Confidential treatment of proceedings pending sec
review.--
(A) No disclosure.--Except as otherwise provided in this
section, but notwithstanding any other provision of law,
neither the Commission, a recognized public regulatory
organization, nor any other person shall disclose any
information concerning any accountant review proceeding and
the findings therein.
(B) Specific withholding not authorized.--Nothing in this
subsection shall--
(i) authorize a recognized public regulatory organization
to withhold information from the Commission;
(ii) authorize such board or the Commission to withhold
information concerning an accountant review proceeding from
an accountant or person associated with an accountant that is
the subject of such proceeding;
(iii) authorize the Commission to withhold information from
Congress; or
(iv) prevent the Commission from complying with a request
for information from any other Federal department or agency
requesting information for purposes within the scope of its
jurisdiction, or complying with an order of a court of the
United States in an action brought by the United States or
the Commission.
(C) Duration of withholding.--Neither the Commission nor
the recognized public regulatory organization shall disclose
the results of any such finding until the completion of any
review by the Commission under subsections (e) and (f), or
the conclusion of the 30-day period for seeking review if no
motion seeking review is filed within such period.
(D) Treatment under foia.--For purposes of section 552 of
title 5, United States Code, this subsection shall be
considered a statute described in subsection (b)(3)(B) of
such section 552.
(3) Nonpreclusive effect of pro findings.--A finding by a
recognized public regulatory organization that an individual
audit of an issuer met or failed to meet any applicable
standard with respect to the quality of such audit shall not
be construed in any action arising out of the securities laws
as indicative of compliance or noncompliance with the
securities laws or with any standard of liability arising
thereunder.
(e) Review of Sanctions.--
(1) Notice.--If any recognized public regulatory
organization--
(A) makes a finding with respect to or imposes any final
disciplinary sanction on any accountant;
(B) prohibits or limits any person in respect to access to
services offered by such organization; or
(C) makes a finding with respect to or imposes any final
disciplinary sanction on any person associated with an
accountant or bars any person from becoming associated with
an accountant,
the recognized public regulatory organization shall promptly
submit notice thereof with the Commission. The notice shall
be in such form and contain such information as the
Commission, by rule, may prescribe as necessary or
appropriate in furtherance of the purposes of this section.
(2) Review by commission.--Any action with respect to which
a recognized public regulatory organization is required by
paragraph (1) of this subsection to submit notice shall be
subject to review by the Commission, on its own motion, or
upon application by any person aggrieved thereby filed within
30 days after the date such notice was filed with the
Commission and received by such aggrieved person, or within
such longer period as the Commission may determine.
Application to the Commission for review, or the institution
of review by the Commission on its own motion, shall not
operate as a stay of such action unless the Commission
otherwise orders, summarily or after notice and opportunity
for hearing on the question of a stay (which hearing may
consist solely of the submission of affidavits or
presentation of oral arguments). The Commission shall
establish for appropriate cases an expedited procedure for
consideration and determination of the question of a stay.
(f) Conduct of Commission Review.--
(1) Basis for action.--In any proceeding to review a final
disciplinary sanction imposed by a recognized public
regulatory organization on an accountant or a person
associated with such accountant, after notice and opportunity
for hearing (which hearing may consist solely of
consideration of the record before the recognized public
regulatory organization and opportunity for the presentation
of supporting reasons to affirm, modify, or set aside the
sanction)--
(A) if the Commission finds that such accountant or person
associated with an accountant has engaged in such acts or
practices, or has omitted such acts, as the recognized public
regulatory organization has found him to have engaged in or
omitted, that such acts or practices, or omissions to act,
are in violation of such provisions of this section, or of
professional ethics and competency standards, and that such
provisions are, and were applied in a manner, consistent with
the purposes of this section, the Commission, by order, shall
so declare and, as appropriate, affirm the sanction imposed
by the recognized public regulatory organization, modify the
sanction in accordance with paragraph (2) of this subsection,
or remand to the recognized public regulatory organization
for further proceedings; or
(B) if the Commission does not make any such finding, it
shall, by order, set aside the sanction imposed by the
recognized public regulatory organization and, if
appropriate, remand to the recognized public regulatory
organization for further proceedings.
(2) Reduction of sanctions.--If the Commission, having due
regard for the public interest and the protection of
investors, finds after a proceeding in accordance with
paragraph (1) of this subsection that a sanction imposed by a
recognized public regulatory organization upon an accountant
or person associated with an accountant imposes any burden on
competition not necessary or appropriate in furtherance of
the purposes of this Act or is excessive or oppressive, the
Commission may cancel, reduce, or require the remission of
such sanction.
[[Page H1559]]
(g) Review and Approval of Rules.--
(1) Submission, publication, and comment.--Each recognized
public regulatory organization shall file with the
Commission, in accordance with such rules as the Commission
may prescribe, copies of any proposed rule or any proposed
change in, addition to, or deletion from the rules of such
recognized public regulatory organization (hereinafter in
this subsection collectively referred to as a ``proposed rule
change'') accompanied by a concise general statement of the
basis and purpose of such proposed rule change. The
Commission shall, upon the filing of any proposed rule
change, publish notice thereof together with the terms of
substance of the proposed rule change or a description of the
subjects and issues involved. The Commission shall give
interested persons an opportunity to submit written data,
views, and arguments concerning such proposed rule change. No
proposed rule change shall take effect unless approved by the
Commission or otherwise permitted in accordance with the
provisions of this subsection.
(2) Approval or proceedings.--Within 35 days of the date of
publication of notice of the filing of a proposed rule change
in accordance with paragraph (1) of this subsection, or
within such longer period as the Commission may designate up
to 90 days of such date if it finds such longer period to be
appropriate and publishes its reasons for so finding or as to
which the recognized public regulatory organization consents,
the Commission shall--
(A) by order approve such proposed rule change; or
(B) institute proceedings to determine whether the proposed
rule change should be disapproved. Such proceedings shall
include notice of the grounds for disapproval under
consideration and opportunity for hearing and be concluded
within 180 days of the date of publication of notice of the
filing of the proposed rule change. At the conclusion of such
proceedings the Commission, by order, shall approve or
disapprove such proposed rule change. The Commission may
extend the time for conclusion of such proceedings for up to
60 days if it finds good cause for such extension and
publishes its reasons for so finding or for such longer
period as to which the recognized public regulatory
organization consents.
(3) Basis for approval or disapproval.--The Commission
shall approve a proposed rule change of a recognized public
regulatory organization if it finds that such proposed rule
change is consistent with the requirements of this Act and
the rules and regulations thereunder applicable to such
organization. The Commission shall disapprove a proposed rule
change of a recognized public regulatory organization if it
does not make such finding. The Commission shall not approve
any proposed rule change prior to the 30th day after the date
of publication of notice of the filing thereof, unless the
Commission finds good cause for so doing and publishes its
reasons for so finding.
(4) Rules effective upon filing.--
(A) Notwithstanding the provisions of paragraph (2) of this
subsection, a proposed rule change may take effect upon
filing with the Commission if designated by the recognized
public regulatory organization as (i) constituting a stated
policy, practice, or interpretation with respect to the
meaning, administration, or enforcement of an existing rule
of the recognized public regulatory organization, (ii)
establishing or changing a due, fee, or other charge imposed
by the recognized public regulatory organization, or (iii)
concerned solely with the administration of the recognized
public regulatory organization or other matters which the
Commission, by rule, consistent with the public interest and
the purposes of this subsection, may specify as outside the
provisions of such paragraph (2).
(B) Notwithstanding any other provision of this subsection,
a proposed rule change may be put into effect summarily if it
appears to the Commission that such action is necessary for
the protection of investors, or otherwise in accordance with
the purposes of this title. Any proposed rule change so put
into effect shall be filed promptly thereafter in accordance
with the provisions of paragraph (1) of this subsection.
(C) Any proposed rule change of a recognized public
regulatory organization which has taken effect pursuant to
subparagraph (A) or (B) of this paragraph may be enforced by
such organization to the extent it is not inconsistent with
the provisions of this Act, the securities laws, the rules
and regulations thereunder, and applicable Federal and State
law. At any time within 60 days of the date of filing of such
a proposed rule change in accordance with the provisions of
paragraph (1) of this subsection, the Commission summarily
may abrogate the change in the rules of the recognized public
regulatory organization made thereby and require that the
proposed rule change be refiled in accordance with the
provisions of paragraph (1) of this subsection and reviewed
in accordance with the provisions of paragraph (2) of this
subsection, if it appears to the Commission that such action
is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of this Act. Commission action pursuant to the
preceding sentence shall not affect the validity or force of
the rule change during the period it was in effect, shall
not be subject to court review, and shall not be deemed to
be ``final agency action'' for purposes of section 704 of
title 5, United States Code.
(h) Commission Action To Change Rules.--The Commission, by
rule, may abrogate, add to, and delete from (hereinafter in
this subsection collectively referred to as ``amend'') the
rules of a recognized public regulatory organization as the
Commission deems necessary or appropriate to insure the fair
administration of the recognized public regulatory
organization, to conform its rules to requirements of this
Act, the securities laws, and the rules and regulations
thereunder applicable to such organization, or otherwise in
furtherance of the purposes of this Act, in the following
manner:
(1) The Commission shall notify the recognized public
regulatory organization and publish notice of the proposed
rulemaking in the Federal Register. The notice shall include
the text of the proposed amendment to the rules of the
recognized public regulatory organization and a statement of
the Commission's reasons, including any pertinent facts, for
commencing such proposed rulemaking.
(2) The Commission shall give interested persons an
opportunity for the oral presentation of data, views, and
arguments, in addition to an opportunity to make written
submissions. A transcript shall be kept of any oral
presentation.
(3) A rule adopted pursuant to this subsection shall
incorporate the text of the amendment to the rules of the
recognized public regulatory organization and a statement of
the Commission's basis for and purpose in so amending such
rules. This statement shall include an identification of any
facts on which the Commission considers its determination so
to amend the rules of the recognized public regulatory agency
to be based, including the reasons for the Commission's
conclusions as to any of such facts which were disputed in
the rulemaking.
(4)(A) Except as provided in paragraphs (1) through (3) of
this subsection, rulemaking under this subsection shall be in
accordance with the procedures specified in section 553 of
title 5, United States Code, for rulemaking not on the
record.
(B) Nothing in this subsection shall be construed to impair
or limit the Commission's power to make, or to modify or
alter the procedures the Commission may follow in making,
rules and regulations pursuant to any other authority under
the securities laws.
(C) Any amendment to the rules of a recognized public
regulatory organization made by the Commission pursuant to
this subsection shall be considered for all purposes to be
part of the rules of such recognized public regulatory
organization and shall not be considered to be a rule of the
Commission.
(i) Commission Oversight of the PRO.--
(1) Records and examinations.--A public regulatory
organization shall make and keep for prescribed periods such
records, furnish such copies thereof, and make and
disseminate such reports as the Commission, by rule,
prescribes as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in
furtherance of the purposes of this Act or the securities
laws.
(2) Additional duties; special reviews.--A public
regulatory organization shall perform such other duties or
functions as the Commission, by rule or order, determines are
necessary or appropriate in the public interest or for the
protection of investors and to carry out the purposes of this
Act and the securities laws, including conducting a special
review of a particular public accounting firm's quality
control system or a special review of a particular aspect of
some or all public accounting firms' quality control systems.
(3) Annual report; proposed budget.--
(A) Submission of annual report and budget.--A public
regulatory organization shall submit an annual report and its
proposed budget to the Commission for review and approval, by
order, at such times and in such form as the Commission shall
prescribe.
(B) Contents of annual report.--Each annual report required
by subparagraph (A) shall include--
(i) a detailed description of the activities of the public
regulatory organization;
(ii) the audited financial statements of the public
regulatory organization;
(iii) a detailed explanation of the fees and charges
imposed by the public regulatory organization under
subsection (b)(9); and
(iv) such other matters as the public regulatory
organization or the Commission deems appropriate.
(C) Transmittal of annual report to congress.--The
Commission shall transmit each approved annual report
received under subparagraph (A) to the Committee on Financial
Services of the United States House of Representatives and
the Committee on Banking, Housing, and Urban Affairs of the
United States Senate. At the same time it transmits a public
regulatory organization's annual report under this
subparagraph, the Commission shall include a written
statement of its views of the functioning and operations of
the public regulatory organization.
(D) Public availability.--Following transmittal of each
approved annual report under subparagraph (C), the Commission
and the public regulatory organization shall make the
approved annual report publicly available.
(4) Disapproval of election of pro member.--The Commission
is authorized, by order, if in its opinion such action is
necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of this Act or the securities laws, to disapprove
the election of any member of a public regulatory
organization if the Commission determines, after notice and
opportunity for hearing, that the person elected is unfit
to serve on the public regulatory organization.
(j) Clarification of Application of PRO Authority.--The
authority granted to any such organization in this section
shall only apply to the actions of accountants related to the
certification of financial statements required by securities
laws and not other actions or actions for other clients of
the accounting firm or any accountant that does not certify
financial statements for publicly traded companies.
(k) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
[[Page H1560]]
(2) within 270 days after such date, prescribe,
rules to implement this section.
(l) Effective Date; Transition Provisions.--
(1) Effective date.--Except as provided in paragraph (2),
subsection (a) of this section shall be effective with
respect to any certified financial statement for any fiscal
year that ends more than one year after the Commission
recognizes a public regulatory organization pursuant to this
section.
(2) Delay in establishment of board.--If the Commission has
failed to recognize any public regulatory organization
pursuant to this section within one year after the date of
enactment of this Act, the Commission shall perform the
duties of such organization with respect to any certified
financial statement for any fiscal year that ends before one
year after any such board is recognized by the Commission.
SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.
(a) Rules To Prohibit.--It shall be unlawful in
contravention of such rules or regulations as the Commission
shall prescribe as necessary and appropriate in the public
interest or for the protection of investors for any officer,
director, or affiliated person of an issuer of any security
registered under section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 78l) to take any action to fraudulently
influence, coerce, manipulate, or mislead any independent
public or certified accountant engaged in the performance of
an audit of the financial statements of such issuer for the
purpose of rendering such financial statements materially
misleading. In any civil proceeding, the Commission shall
have exclusive authority to enforce this section and any rule
or regulation hereunder.
(b) No Preemption of Other Law.--The provisions of
subsection (a) shall be in addition to, and shall not
supersede or preempt, any other provision of law or any rule
or regulation thereunder.
(c) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
the rules or regulations required by this section.
SEC. 4. REAL-TIME DISCLOSURE OF FINANCIAL INFORMATION.
(a) Real-Time Issuer Disclosures Required.--
(1) Obligations.--Every issuer of a security registered
under section 12 of the Securities Exchange Act of 1934 (15
U.S.C. 78l) shall file with the Commission and disclose to
the public, on a rapid and essentially contemporaneous basis,
such information concerning the financial condition or
operations of such issuer as the Commission determines by
rule is necessary in the public interest and for the
protection of investors. Such rule shall--
(A) specify the events or circumstances giving rise to the
obligation to disclose or update a disclosure;
(B) establish requirements regarding the rapidity and
timeliness of such disclosure;
(C) identify the means whereby the disclosure required
shall be made, which shall ensure the broad, rapid, and
accurate dissemination of the information to the public via
electronic or other communications device;
(D) identify the content of the information to be
disclosed; and
(E) without limiting the Commission's general exemptive
authority, specify any exemptions or exceptions from such
requirements.
(2) Enforcement.--The Commission shall have exclusive
authority to enforce this section and any rule or regulation
hereunder in civil proceedings.
(b) Electronic Disclosure of Insider Transactions.--
(1) Disclosures of trading.--The Commission shall, by rule,
require--
(A) that a disclosure required by section 16 of the
Securities Exchange Act of 1934 (15 U.S.C. 78p) of the sale
of any securities of an issuer, or any security futures
product (as defined in section 3(a)(56) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(56))) or any security-
based swap agreement (as defined in section 206B of the
Gramm-Leach-Bliley Act) that is based in whole or in part on
the securities of such issuer, by an officer or director of
the issuer of those securities, or by a beneficial owner of
such securities, shall be made available electronically to
the Commission and to the issuer by such officer, director,
or beneficial owner before the end of the next business day
after the day on which the transaction occurs;
(B) that the information in such disclosure be made
available electronically to the public by the Commission, to
the extent permitted under applicable law, upon receipt, but
in no case later than the end of the next business day after
the day on which the disclosure is received under
subparagraph (A); and
(C) that, in any case in which the issuer maintains a
corporate website, such information shall be made available
by such issuer on that website, before the end of the next
business day after the day on which the disclosure is
received by the Commission under subparagraph (A).
(2) Transactions included.--The rule prescribed under
paragraph (1) shall require the disclosure of the following
transactions:
(A) Direct or indirect sales or other transfers of
securities of the issuer (or any interest therein) to the
issuer or an affiliate of the issuer.
(B) Loans or other extensions of credit extended to an
officer, director, or other person affiliated with the issuer
on terms or conditions not otherwise available to the public.
(3) Other formats; forms.--In the rule prescribed under
paragraph (1), the Commission shall provide that electronic
filing and disclosure shall be in lieu of any other format
required for such disclosures on the day before the date of
enactment of this subsection. The Commission shall revise
such forms and schedules required to be filed with the
Commission pursuant to paragraph (1) as necessary to
facilitate such electronic filing and disclosure.
SEC. 5. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS
PROHIBITED.
(a) Prohibition.--It shall be unlawful for any person who
is directly or indirectly the beneficial owner of more than
10 percent of any class of any equity security (other than an
exempted security) which is registered under section 12 of
the Securities Exchange Act of 1934 (15 U.S.C. 78l) or who is
a director or an officer of the issuer of such security,
directly or indirectly, to purchase (or otherwise acquire) or
sell (or otherwise transfer) any equity security of any
issuer (other than an exempted security), during any blackout
period with respect to such equity security.
(b) Remedy.--Any profit realized by such beneficial owner,
director, or officer from any purchase (or other acquisition)
or sale (or other transfer) in violation of this section
shall inure to and be recoverable by the issuer irrespective
of any intention on the part of such beneficial owner,
director, or officer in entering into the transaction. Suit
to recover such profit may be instituted at law or in equity
in any court of competent jurisdiction by the issuer, or by
the owner of any security of the issuer in the name and in
behalf of the issuer if the issuer shall fail or refuse to
bring such suit within 60 days after request or shall fail
diligently to prosecute the same thereafter; but no such suit
shall be brought more than 2 years after the date such profit
was realized. This subsection shall not be construed to cover
any transaction where such beneficial owner was not such both
at the time of the purchase and sale, or the sale and
purchase, of the security or security-based swap (as defined
in section 206B of the Gramm-Leach-Bliley Act) involved, or
any transaction or transactions which the Commission by rules
and regulations may exempt as not comprehended within the
purposes of this subsection.
(c) Rulemaking Permitted.--The Commission may issue rules
to clarify the application of this subsection, to ensure
adequate notice to all persons affected by this subsection,
and to prevent evasion thereof.
(d) Definition.--For purposes of this section, the term
``beneficial owner'' has the meaning provided such term in
rules or regulations issued by the Securities and Exchange
Commission under section 16 of the Securities Exchange Act of
1934 (15 U.S.C. 78p).
SEC. 6. IMPROVED TRANSPARENCY OF CORPORATE DISCLOSURES.
(a) Modification of Regulations Required.--The Commission
shall revise its regulations under the securities laws
pertaining to the disclosures required in periodic financial
reports and registration statements to require such reports
to include adequate and appropriate disclosure of--
(1) the issuer's off-balance sheet transactions and
relationships with unconsolidated entities or other persons,
to the extent they are not disclosed in the financial
statements and are reasonably likely to materially affect the
liquidity or the availability of, or requirements for,
capital resources, or the financial condition or results of
operations of the issuer; and
(2) loans extended to officers, directors, or other persons
affiliated with the issuer on terms or conditions that are
not otherwise available to the public.
(b) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
the revisions to its regulations required by subsection (a).
(c) Analysis Required.--
(1) Transparency, completeness, and usefulness of financial
statements.--The Commission shall conduct an analysis of the
extent to which, consistent with the protection of investors
and the public interest, disclosure of additional or
reorganized information may be required to improve the
transparency, completeness, or usefulness of financial
statements and other corporate disclosures filed under the
securities laws.
(2) Alternatives to be considered.--In conducting the
analysis required by paragraph (1), the Commission shall
consider--
(A) requiring the identification of the key accounting
principles that are most important to the issuer's reported
financial condition and results of operation, and that
require management's most difficult, subjective, or complex
judgments;
(B) requiring an explanation, where material, of how
different available accounting principles applied, the
judgments made in their application, and the likelihood of
materially different reported results if different
assumptions or conditions were to prevail;
(C) in the case of any issuer engaged in the business of
trading non-exchange traded contracts, requiring an
explanation of such trading activities when such activities
require the issuer to account for contracts at fair value,
but for which a lack of market price quotations necessitates
the use of fair value estimation techniques;
(D) establishing requirements relating to the presentation
of information in clear and understandable format and
language; and
(E) requiring such other disclosures, included in the
financial statements or in other disclosure by the issuer, as
would in the Commission's view improve the transparency of
such issuer's financial statements and other required
corporate disclosures.
(3) Rules required.--If the Commission, on the basis of the
analysis required by this subsection, determines that it is
necessary in the public interest or for the protection of
investors
[[Page H1561]]
and would improve the transparency of issuer financial
statements, the Commission may prescribe rules reflecting the
results of such analysis and the considerations required by
paragraph (2). In prescribing such rules, the Commission may
seek to minimize the paperwork and cost burden on the issuer
consistent with achieving the public interest and investor
protection purposes of such rules.
SEC. 7. IMPROVEMENTS IN REPORTING ON INSIDER TRANSACTIONS AND
RELATIONSHIPS.
(a) Specific Objectives.--The Commission shall initiate a
proceeding to propose changes in its rules and regulations
with respect to financial reporting to improve the
transparency and clarity of the information available to
investors and to require increased financial disclosure with
respect to the following:
(1) Insider relationships and transactions.--Relationships
and transactions--
(A) between the issuer, affiliates of the issuer, and
officers, directors, or employees of the issuer or such
affiliates; and
(B) between officers, directors, employees, or affiliates
of the issuer and entities that are not otherwise affiliated
with the issuer,
to the extent such arrangement or transaction creates a
conflict of interest for such persons. Such disclosure shall
provide a description of such elements of the transaction as
are necessary for an understanding of the business purpose
and economic substance of such transaction (including
contingencies). The disclosure shall provide sufficient
information to determine the effect on the issuer's financial
statements and describe compensation arrangements of
interested parties to such transactions.
(2) Relationships with philanthropic organizations.--
Relationships between the registrant or any executive officer
of the registrant and any not-for-profit organization on
whose board a director or immediate family member serves or
of which a director or immediate family member serves as an
officer or in a similar capacity. Relationships that shall be
disclosed include contributions to the organization in excess
of $10,000 made by the registrant or any executive officer in
the last five years and any other activity undertaken by the
registrant or any executive officer that provides a material
benefit to the organization. Material benefit includes
lobbying.
(3) Insider-controlled affiliates.--Relationships in which
the registrant or any executive officer exercises significant
control over an entity in which a director or immediate
family member owns an equity interest or to which a director
or immediate family member has extended credit. Significant
control should be defined with reference to the contractual
and governance arrangements between the registrant or
executive officer, as the case may be, and the entity.
(4) Joint ownership.--Joint ownership by a registrant or
executive officer and a director or immediate family member
of any real or personal property.
(5) Provision of services by related persons.--The
provision of any professional services, including legal,
financial advisory or medical services, by a director or
immediate family member to any executive officer of the
registrant in the last five years.
(b) Deadlines.--The Commission shall complete the
rulemaking required by this section within 180 days after the
date of enactment of this Act.
SEC. 8. CODES OF CONDUCT.
(a) Rules Required.--Within 180 days after the date of
enactment of this Act, the New York Stock Exchange, the
American Stock Exchange and the Nasdaq Stock Market (or any
successor to such entities), shall file with the Commission
proposed rule changes that would prohibit the listing of any
security issued by an issuer that has not adopted a senior
financial officers code of ethics applicable to its principal
financial officer, its comptroller or principal accounting
officer, or persons performing similar functions that
establishes such standards as are reasonably necessary to
promote honest and ethical conduct, the avoidance of
conflicts of interest, full, fair, accurate, timely and
understandable disclosure in the issuer's periodic reports
and compliance with applicable governmental rules and
regulations. The Commission shall approve such proposed rule
changes pursuant to the requirement of section 19(b)(2) of
the Securities Act of 1934.
(b) Other Exchanges.--The Commission, by rule or
regulation, may require any other national securities
exchange, to propose rule changes necessary to comply with
the provisions of subsection (a) of this section if the
Commission determines such action is necessary or appropriate
in the public interest and consistent with the protection of
investors.
(c) Further Standards.--In addition to the requirements of
subsections (a) and (b), the Commission may, by rule or
regulation, prescribe further standards of conduct for senior
financial officers as necessary or appropriate in the public
interest and consistent with the protection of investors.
(d) Changes in Codes of Conduct.--Within 180 days after the
date of enactment of this Act, the Commission shall revise
its regulations concerning matters requiring prompt
disclosure on Form 8K to require the immediate disclosure, by
means of such Form and by the Internet or other electronic
means, by any issuer of any change in, or waiver of, the code
of ethics of such issuer.
SEC. 9. ENHANCED OVERSIGHT OF PERIODIC DISCLOSURES BY
ISSUERS.
(a) Regular and Systematic Review.--The Securities and
Exchange Commission shall review disclosures made by issuers
pursuant to the Securities Exchange Act of 1934 (including
reports filed on form 10-K) on a basis that is more regular
and systematic than that in practice on the date of enactment
on this Act. Such review shall include a review of an
issuer's financial statements.
(b) Risk Rating System.--For purposes of the reviews
required by subsection (a), the Commission shall establish a
risk rating system whereby issuers receive a risk rating by
the Commission, which shall be used to determine the
frequency of such reviews. In designing such a risk rating
system the Commission shall consider, among other factors the
following:
(1) Emerging companies with disparities in price to earning
ratios.
(2) Issuers with the largest market capitalization.
(3) Issuers whose operations significantly impact any
material sector of the economy.
(4) Systemic factors such as the effect on niche markets or
important subsectors of the economy.
(5) Issuers that experience significant volatility in their
stock price as compared to other issuers.
(6) Any other factor the Commission may consider relevant.
(c) Minimum Review Period.--In no event shall an issuer be
reviewed less than once every three years by the Commission.
(d) Prohibition of Disclosure of Risk Rating.--
Notwithstanding any other provision of law, the Commission
shall not disclose the risk rating of any issuer described in
subsection (b).
SEC. 10. RETENTION OF RECORDS.
(a) Duty To Retain Records.--Any independent public or
certified accountant who certifies a financial statement as
required by the securities laws or any rule or regulation
thereunder shall prepare and maintain for a period of no less
than 7 years, final audit work papers and other information
related to any accountants report on such financial
statements in sufficient detail to support the opinion or
assertion reached in such accountants report. The Commission
may prescribe rules specifying the application and
requirements of this section.
(b) Accountant's Report.--For purposes of subsection (a),
the term ``accountant's report'' means a document in which an
accountant identifies a financial statement and sets forth
his opinion regarding such financial statement or an
assertion that an opinion cannot be expressed.
SEC. 11. COMMISSION AUTHORITY TO BAR PERSONS FROM SERVING AS
OFFICERS OR DIRECTORS.
(a) Commission Authority To Prohibit Persons From Serving
as Officers or Directors.--Notwithstanding any other
provision of the securities laws, in any cease-and-desist
proceeding under section 8A(a) of the Securities Act of 1933
or section 21C(a) of the Securities and Exchange Act of 1934,
the Commission may issue an order to prohibit, conditionally
or unconditionally, permanently or for such period of time as
it shall determine, any person who has violated section
17(a)(1) of the Securities Act of 1933 or section 10(b) of
the Securities Exchange Act of 1934 (or any rule or
regulation thereunder) from acting as an officer or director
of any issuer that has a class of securities registered
pursuant to section 12 of the Securities Exchange Act of 1934
or that is required to file reports pursuant to section 15(d)
of such Act if the person's conduct demonstrates substantial
unfitness to serve as an officer or director of any such
issuer.
(b) Finding of Substantial Unfitness.--In making any
determination that a person's conduct demonstrates
substantial unfitness to serve as an officer or director of
any such issuer, the Commission shall consider--
(1) the severity of the persons conduct giving rise to the
violation, and the persons role or position when he engaged
in the violation;
(2) the person's degree of scienter;
(3) the person's economic gain as a result of the
violation; and
(4) the likelihood that the conduct giving rise to the
violation, or similar conduct as defined in subsection (a),
may recur if the person is not so prohibited.
(c) Automatic Stay Pending Appeal.--The enforcement of any
Commission order pursuant to subsection (a) shall be stayed--
(1) for a period of at least 60 days after the entry of any
such order or decision; and
(2) upon the filing of a timely application for judicial
review of such order or decision, pending the entry of a
final order resolving the application for judicial review.
SEC. 12. DISGORGING INSIDERS PROFITS FROM TRADES PRIOR TO
CORRECTION OF ERRONEOUS FINANCIAL STATEMENTS.
(a) Analysis Required.--The Commission shall conduct an
analysis of whether, and under what conditions, any officer
or director of an issuer should be required to disgorge
profits gained, or losses avoided, in the sale of the
securities of such issuer during the six month period
immediately preceding the filing of a restated financial
statement on the part of such issuer.
(b) Disgorgement Rules Authorized.--If the Commission
determines that imposing the requirement described in
subsection (a) is necessary or appropriate in the public
interest or for the protection investors, and would not
unduly impair the operations of issuers or the orderly
operation of the securities markets, the Commission shall
prescribe a rule requiring the disgorgement of all profits
gained or losses avoided in the sale of the securities of the
issuer by any officer or director thereof. Such rule shall--
(1) describe the conditions under which any officer or
director shall be required to disgorge profits, including
what constitutes a restatement for purposes of operation of
the rule;
(2) establish exceptions and exemptions from such rule as
necessary to carry out the purposes of this section;
[[Page H1562]]
(3) identify the scienter requirement that should be used
in order to determine to impose the requirement to disgorge;
and
(4) specify that the enforcement of such rule shall lie
solely with the Commission, and that any profits so disgorged
shall inure to the issuer.
(c) No Preemption of Other Law.--Unless otherwise specified
by the Commission, in the case of any rule promulgated
pursuant to subsection (b), such rule shall be in addition
to, and shall not supersede or preempt, the Commission's
authority to seek disgorgement under any other provision of
law.
SEC. 13. SECURITIES AND EXCHANGE COMMISSION AUTHORITY TO
PROVIDE RELIEF.
(a) Proceeds of Enron and Andersen Enforcement Actions.--If
in any administrative or judicial proceeding brought by the
Securities and Exchange Commission against--
(1) the Enron Corporation, any subsidiary or affiliate of
such Corporation, or any officer, director, or principal
shareholder of such Corporation, subsidiary, or affiliate for
any violation of the securities laws; or
(2) Arthur Andersen L.L.C., any subsidiary or affiliate of
Arthur Andersen L.L.C., or any general or limited partner of
Arthur Andersen L.L.C., or such subsidiary or affiliate, for
any violation of the securities laws with respect to any
services performed for or in relation to the Enron
Corporation, any subsidiary or affiliate of such Corporation,
or any officer, director, or principal shareholder of such
Corporation, subsidiary, or affiliate;
the Commission obtains an order providing for an accounting
and disgorgement of funds, such disgorgement fund (including
any addition to such fund required or permitted under this
section) shall be allocated in accordance with the
requirements of this section.
(b) Priority for Former Enron Employees.--The Commission
shall, by order, establish an allocation system for the
disgorgement fund. Such system shall provide that, in
allocating the disgorgement fund amount the victims of the
securities laws violations described in subsection (a), the
first priority shall be given to individuals who were
employed by the Enron Corporation, or a subsidiary or
affiliate of such Corporation, and who were participants in
an individual account plan established by such Corporation,
subsidiary, or affiliate. Such allocations among such
individuals shall be in proportion to the extent to which the
nonforfeitable accrued benefit of each such individual under
the plan was invested in the securities of such Corporation,
subsidiary, or affiliate.
(c) Addition of Civil Penalties.--If, in any proceeding
described in subsection (a), the Commission assesses and
collects any civil penalty, the Commission shall,
notwithstanding section 21(d)(3)(C)(i) or 21A(d)(1) of the
Securities Exchange Act of 1934, or any other provision of
the securities laws, be payable to the disgorgement fund.
(d) Acceptance of Additional Donations.--The Commission is
authorized to accept, hold, administer, and utilize gifts,
bequests and devises of property, both real and personal, to
the United States for the disgorgement fund. Gifts, bequests,
and devises of money and proceeds from sales of other
property received as gifts, bequests, or devises shall be
deposited in the disgorgement fund and shall be available for
allocation in accordance with subsection (b).
(e) Definitions.--As used in this section:
(1) Disgorgement fund.--The term ``disgorgement fund''
means a disgorgement fund established in any administrative
or judicial proceeding described in subsection (a).
(2) Subsidiary or affiliate.--The term ``subsidiary or
affiliate'' when used in relation to a person means any
entity that controls, is controlled by, or is under common
control with such person.
(3) Officer, director, or principal shareholder.--The term
``officer, director, or principal shareholder'' when used in
relation to the Enron Corporation, or any subsidiary or
affiliate of such Corporation, means any person that is
subject to the requirements of section 16 of the Securities
Exchange Act of 1934 (15 U.S.C. 78p) in relation to the Enron
Corporation, or any subsidiary or affiliate of such
Corporation.
(4) Nonforfeitable; accrued benefit; individual account
plan.--The terms ``nonforfeitable'', ``accrued benefit'', and
``individual account plan'' have the meanings provided such
terms, respectively, in paragraphs (19), (23), and (34) of
section 3 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1002(19), (23), (34)).
SEC. 14. STUDY OF RULES RELATING TO ANALYST CONFLICTS OF
INTEREST.
(a) Study and Review Required.--The Commission shall
conduct a study and review of any final rules by any self-
regulatory organization registered with the Commission
related to matters involving equity research analysts
conflicts of interest. Such study and report shall include a
review of the effectiveness of such final rules in addressing
matters relating to the objectivity and integrity of equity
research analyst reports and recommendations.
(b) Report Required.--The Commission shall submit a report
to the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate on such study and review no later
than 180 days after any such final rules by any self-
regulatory organization registered with the Commission are
delivered to the Commission. Such report shall include
recommendations to the Congress, including any
recommendations for additional self-regulatory organization
rulemaking regarding matters involving equity research
analysts. The Commission shall annually submit an update on
such review.
SEC. 15. REVIEW OF CORPORATE GOVERNANCE PRACTICES.
(a) Study of Corporate Practices.--The Commission shall
conduct a study and review of current corporate governance
standards and practices to determine whether such standards
and practices are serving the best interests of shareholders.
Such study and review shall include an analysis of--
(1) whether current standards and practices promote full
disclosure of relevant information to shareholders;
(2) whether corporate codes of ethics are adequate to
protect shareholders, and to what extent deviations from such
codes are tolerated;
(3) to what extent conflicts of interests are aggressively
reviewed, and whether adequate means for redressing such
conflicts exist;
(4) to what extent sufficient legal protections exist or
should be adopted to ensure that any manager who attempts to
manipulate or unduly influence an audit will be subject to
appropriate sanction and liability, including liability to
investors or shareholders pursuing a private cause of action
for such manipulation or undue influence;
(5) whether rules, standards, and practices relating to
determining whether independent directors are in fact
independent are adequate;
(6) whether rules, standards, and practices relating to the
independence of directors serving on audit committees are
uniformly applied and adequate to protect investor interests;
(7) whether the duties and responsibilities of audit
committees should be established by the Commission; and
(8) what further or additional practices or standards might
best protect investors and promote the interests of
shareholders.
(b) Participation of State Regulators.--In conducting the
study required under subsection (a), the Commission shall
seek the views of the securities and corporate regulators of
the various States.
(c) Report Required.--The Commission shall submit a report
on the analysis required under subsection (a) as a part of
the Commission's next annual report submitted after the date
of enactment of this Act.
SEC. 16. STUDY OF ENFORCEMENT ACTIONS.
(a) Study Required.--The Commission shall review and
analyze all enforcement actions by the Commission involving
violations of reporting requirements imposed under the
securities laws, and restatements of financial statements,
over the last five years to identify areas of reporting that
are most susceptible to fraud, inappropriate manipulation, or
inappropriate earnings management, such as revenue
recognition and the accounting treatment of off-balance sheet
special purpose entities.
(b) Report Required.--The Commission shall report its
findings to the Committee on Financial Services of the House
of Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate within 180 days of the date of
enactment of this Act and shall use such findings to revise
its rules and regulations, as necessary. The report shall
include a discussion of regulatory or legislative steps that
are recommended or that may be necessary to address concerns
identified in the study.
SEC. 17. STUDY OF CREDIT RATING AGENCIES.
(a) Study Required.--The Commission shall conduct a study
of the role and function of credit rating agencies in the
operation of the securities market. Such study shall
examine--
(1) the role of the credit rating agencies in the
evaluation of issuers of securities;
(2) the importance of that role to investors and the
functioning of the securities markets;
(3) any impediments to the accurate appraisal by credit
rating agencies of the financial resources and risks of
issuers of securities;
(4) any measures which may be required to improve the
dissemination of information concerning such resources and
risks when credit rating agencies announce credit ratings;
(5) any barriers to entry into the business of acting as a
credit rating agency, and any measures needed to remove such
barriers; and
(6) any conflicts of interest in the operation of credit
rating agencies and measures to prevent such conflicts or
ameliorate the consequences of such conflicts.
(b) Report Required.--The Commission shall submit a report
on the analysis required by subsection (a) to the President,
the Committee on Financial Services of the House of
Representatives, and the Committee on Banking, Housing, and
Urban Affairs of the Senate within 180 days after the date of
enactment of this Act. The report shall include a discussion
of regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the
study.
SEC. 18. STUDY OF INVESTMENT BANKS
(a) GAO Study.--The Comptroller General shall conduct a
study on the role played by investment banks and financial
advisors in assisting public companies in manipulating their
earnings and obfuscating their true financial condition. The
study should address the role of the investment banks--
(1) in the collapse of the Enron Corporation, including
with respect to the design and implementation of derivatives
transactions, transactions involving special purpose
vehicles, and other financing arrangements that may have had
the effect of altering the company's reported financial
statements in ways that obscured the true financial picture
of the company;
(2) in the failure of Global Crossing, including with
respect to transactions involving swaps of fiber optic cable
capacity, in designing transactions that may have had the
effect of altering the company's reported financial
statements in ways that obscured the true financial picture
of the company; and
(3) generally, in creating and marketing transactions
designed solely to enable companies
[[Page H1563]]
to manipulate revenue streams, obtain loans, or move
liabilities off balance sheets without altering the economic
and business risks faced by the companies or any other
mechanism to obscure a company's financial picture.
(b) Report.--The General Accounting Office shall report to
the Congress within 180 days after the date of enactment of
this Act on the results of the study required by this
section. The report shall include a discussion of regulatory
or legislative steps that are recommended or that may be
necessary to address concerns identified in the study.
SEC. 19. STUDY OF MODEL RULES FOR ATTORNEYS OF ISSUERS.
(a) In General.--The Comptroller General shall conduct a
study of the Model Rules of Professional Conduct promulgated
by the American Bar Association and rules of professional
conduct applicable to attorneys established by the Commission
to determine--
(1) whether such rules provide sufficient guidance to
attorneys representing corporate clients who are issuers
required to file periodic disclosures under section 13 or 15
of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o),
as to the ethical responsibilities of such attorneys to--
(A) warn clients of possible fraudulent or illegal
activities of such clients and possible consequences of such
activities;
(B) disclose such fraudulent or illegal activities to
appropriate regulatory or law enforcement authorities; and
(C) manage potential conflicts of interests with clients;
and
(2) whether such rules provide sufficient protection to
corporate shareholders, especially with regards to conflicts
of interest between attorneys and their corporate clients.
(b) Report Required.--The Comptroller General shall report
to the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate on the results of the study
required by this section. Such report shall include any
recommendations of the General Accounting Office with regards
to--
(1) possible changes to the Model Rules and the rules of
professional conduct applicable to attorneys established by
the Commission to provide increased protection to
shareholders;
(2) whether restrictions should be imposed to require that
an attorney, having represented a corporation or having been
employed by a firm which represented a corporation, may not
be employed as general counsel to that corporation until a
certain period of time has expired; and
(3) regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the
study.
SEC. 20. ENFORCEMENT AUTHORITY.
For the purposes of enforcing and carrying out this Act,
the Commission shall have all of the authorities granted to
the Commission under the securities laws. Actions of the
Commission under this Act, including actions on rules or
regulations, shall be subject to review in the same manner as
actions under the securities laws.
SEC. 21. EXCLUSION FOR INVESTMENT COMPANIES.
Sections 4, 6, 9, and 15 of this Act shall not apply to an
investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8).
SEC. 22. DEFINITIONS.
As used in this Act:
(1) Blackout period.--The term ``blackout period'' with
respect to the equity securities of any issuer--
(A) means any period during which the ability of at least
fifty percent of the participants or beneficiaries under all
applicable individual account plans maintained by the issuer
to purchase (or otherwise acquire) or sell (or otherwise
transfer) an interest in any equity of such issuer is
suspended by the issuer or a fiduciary of the plan; but
(B) does not include--
(i) a period in which the employees of an issuer may not
allocate their interests in the individual account plan due
to an express investment restriction--
(I) incorporated into the individual account plan; and
(II) timely disclosed to employees before joining the
individual account plan or as a subsequent amendment to the
plan; or
(ii) any suspension described in subparagraph (A) that is
imposed solely in connection with persons becoming
participants or beneficiaries, or ceasing to be participants
or beneficiaries, in an applicable individual account plan by
reason of a corporate merger, acquisition, divestiture, or
similar transaction.
(2) Boards of accountancy of the states.--The term ``boards
of accountancy of the States'' means any organization or
association chartered or approved under the law of any State
with responsibility for the registration, supervision, or
regulation of accountants.
(3) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(4) Individual account plan.--The term ``individual account
plan'' has the meaning provided such term in section 3(34) of
the Employee Retirement Income Security Act of 1974 (29
U.S.C. 1002(34)).
(5) Issuer.--The term ``issuer'' shall have the meaning set
forth in section 2(a)(4) of the Securities Act of 1933 (15
U.S.C. 77b(a)(4)).
(6) Person associated with an accountant.--The term
``person associated with an accountant'' means any partner,
officer, director, or manager of such accountant (or any
person occupying a similar status or performing similar
functions), any person directly or indirectly controlling,
controlled by, or under common control with such accountant,
or any employee of such accountant who performs a supervisory
role in the auditing process.
(7) Recognized public regulatory organization.--The term
``recognized public regulatory organization'' means a public
regulatory organization that the Commission has recognized as
meeting the criteria established by the Commission under
subsection (b) of section 2.
(8) Securities laws.--The term ``securities laws'' means
the Securities Act of 1933 (15 U.S.C. 77a et seq.), the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), the
Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the
Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.), and
the Securities Investor Protection Act of 1970 (15 U.S.C.
78aaa et seq.), notwithstanding any contrary provision of any
such Act.
The CHAIRMAN. No amendment to the committee amendment in the nature
of a substitute is in order except those printed in House Report 107-
418. Each amendment may be offered only in the order printed in the
report, by a Member designated in the report, shall be considered as
read, shall be debatable for the time specified in the report, equally
divided and controlled by the proponent and an opponent, shall not be
subject to amendment, and shall not be subject to a demand for division
of the question.
It is now in order to consider amendment No. 1 printed in House
Report 107-418.
Amendment No. 1 Offered by Mr. Oxley
Mr. OXLEY. Mr. Chairman, I offer amendment No. 1 made in order
pursuant to the rule.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment No. 1 offered by Mr. Oxley:
Page 9, line 24, strike ``study'' and insert ``reviews''.
Page 11, line 10, insert ``or'' after ``review''.
Page 11, line 17, strike ``board'' and insert
``organization''.
Page 33, line 7, strike ``Definition'' and insert
``Definitions''; on line 8, strike ``term `beneficial owner'
has the meaning'' and insert ``terms `officer', `director',
and `beneficial owner' have the meanings''; and line 9,
strike ``term'' and insert ``terms''.
Page 39, strike line 5 and all that follows through page
40, line 9; and on page 40, line 10, strike ``(d) Changes in
Codes of Conduct.--''.
Page 42, lines 9 and 11, strike ``accountants report'' and
insert ``accountant's report''.
Page 42, line 17, insert ``or her'' after ``his'', and
beginning on line 18, strike ``an opinion cannot be
expressed'' and insert ``he or she cannot express an
opinion''.
Page 53, line 23, strike ``the role played by'' and insert
``whether'', and on line 24, strike ``in assisting'' and
insert ``assisted''.
Page 54, line 18, insert ``which may have been'' before
``designed solely''.
Page 57, line 9, insert ``7, 8,'' after ``6,''.
The CHAIRMAN. Pursuant to House Resolution 395, the gentleman from
Ohio (Mr. Oxley) and a Member opposed each will control 5 minutes.
The Chair recognizes the gentleman from Ohio (Mr. Oxley).
Mr. OXLEY. Mr. Chairman, I yield myself 5 minutes to explain the
amendment.
Mr. Chairman, this manager's amendment clarifies the language in a
few portions of the legislation to give greater effect to the
committee's intent in reporting out H.R. 3763.
The amendment clarifies that certain terms used in the bill are meant
to be consistent with how those terms are used in the securities laws.
It also removes some language that the committee had adopted which
would have required self-regulatory organizations to undertake specific
rule-makings. Because this is not standard practice under the
securities laws, that language was deleted, with the consent of its
original sponsor, the gentlewoman from New York (Mrs. Maloney).
However, important provisions relating to the requirement that issuers
may make public any waiver of their code of ethics was retained.
The amendment also clarifies a section directing the GAO to conduct a
study of investment banks. The original sponsor of the language, the
gentleman from New York (Mr. LaFalce) agrees with these changes, which
were designed to ensure that the GAO study is fair, impartial, and
accurate.
Lastly, the amendment specifies that certain provisions of the bill
are not designed to apply to investment companies that are currently
registered with the SEC. Because these investment companies are already
fully regulated by the SEC under the Investment Company Act of 1940,
application of the noted provisions to them would be inappropriate.
Mr. Chairman, these changes mostly fall within the realm of technical
and conforming amendments. I know of no opposition to these amendments,
and I certainly urge their adoption.
[[Page H1564]]
Mr. Chairman, I reserve the balance of my time.
Mr. CAPUANO. Mr. Chairman, I rise to claim the time on my side.
The CHAIRMAN. The gentleman from Massachusetts (Mr. Capuano) is
recognized for 5 minutes.
Mr. CAPUANO. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, we have no objection to the manager's amendment.
Mr. Chairman, I yield back the balance of my time.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 2 minutes to the
gentleman from Virginia (Mr. Cantor).
Mr. CANTOR. Mr. Chairman, I thank the gentleman for yielding time to
me.
Mr. Chairman, I rise in support of the manager's amendment and the
underlying bill. Mr. Chairman, the aim of this legislation is to ensure
a continued faith in our capital markets, and to allow America's
families and the investing public to continue to benefit from the free
flow of accurate information.
This bill, the manager's amendment, provides a surgical strike
approach to address the issues arising out of the Enron bankruptcy
without hampering our markets' ability to thrive and the benefit they
provide to America's families.
We have heard discussion today on the floor, Mr. Chairman, about the
issues that arose under the Enron bankruptcy: the issue about the
blackout period, the fact that we ought not have employees blacked out
while executives have the ability to sell company stock. That is
addressed.
We also have addressed in the bill the disclosure of off-balance-
sheet transactions, that they all must be disclosed.
The other side speaks about the fact that certain specified nonaudit
services are not prohibited under this legislation, but I would bring
to the body's attention that there were 10 nonaudit services that the
SEC proposed restrictions on. Of these ten, seven were prohibited by
the SEC's final independent rules, and two, two of them, the financial
systems work and internal auditing ability, are prohibited under the
chairman's bill.
The one remaining nonaudit service was expert services, which the SEC
decided in its final rule should not be prohibited. Accordingly, Mr.
Chairman, the other side is largely proposing redundant legislation
that is already in place under existing rules, except for one.
There is one major problem with the proposal coming from the other
side. By adopting word for word the SEC's proposed rules, the other
side would codify prohibitory and definitional language that the SEC,
through notice and comment rule-making, has already determined to be
unacceptable.
Mr. Chairman, I urge adoption of the manager's amendment and the
underlying bill.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 1 minute to the
gentleman from Florida (Mr. Weldon).
Mr. WELDON of Florida. Mr. Chairman, I thank the gentleman for
yielding time to me.
Enron was a great tragedy; it was a tragedy for the employees, for
the investors, and it was a tragedy for the American public. It was a
tragedy for our Nation.
We clearly need legislation. We need legislation that will give
investors better access to information necessary to judge a firm's
performance, the financial risk, the condition of that company. We need
legislation that will give investors prompt information that is
critical to decide whether or not they should make an investment.
We also need legislation that will deal with dishonest and
unscrupulous CEOs, legislation that will bar them from serving as an
officer of a company, that will force them to disclose critical
information about what they are doing when they buy or sell stock in
that company.
This legislation before us addresses all of those issues. It would be
a greater tragedy if we were, in this body, to introduce legislation
that would create unnecessary and burdensome red tape for American
industries, that would nationalize the accounting industry. It would be
inappropriate for us to put forward legislation that would create
ambiguous and difficult-to-understand standards.
This is a good bill. I urge all colleagues on both sides of the aisle
to support it. I commend the chairman and the subcommittee chairman who
worked on this very important legislation.
Mr. OXLEY. Mr. Chairman, I yield the final 30 seconds, with
apologies, to my good friend, the gentleman from California (Mr.
Royce).
Mr. ROYCE. Mr. Chairman, I thank the gentleman for yielding time to
me.
Mr. Chairman, I will be brief. By creating an independent regulatory
organization comprised of a majority of financial experts from outside
of the accounting profession, this bill brings much needed reform and
oversight to the status quo ante of self-regulation within the auditing
profession.
By requiring that CEOs and other corporate insiders disclose their
trades in company stock within 48 hours, within 48 hours of making that
trade, this bill will increase the speed and transparency of
information disclosure necessary for the efficient operation of our
capital markets.
By preventing these same executives from unloading these shares
during the lockdown of an employee pension account, it ensures that all
stakeholders in a company are treated equitably and fairly, not as
first- and second-class shareholders in equity.
For these reasons, I urge support for the manager's amendment and for
the underlying bill. I thank the chairman, the gentleman from Ohio (Mr.
Oxley), for the Corporate and Auditing Accountability, Responsibility,
Transparency Act of 2002.
The CHAIRMAN. Does any Member rise in opposition?
If not, the question is on the amendment offered by the gentleman
from Ohio (Mr. Oxley).
The amendment was agreed to.
The CHAIRMAN. It is now in order to consider amendment No. 2 printed
in House Report 107-418.
Amendment No. 2 Offered by Mr. Capuano
Mr. CAPUANO. Mr. Chairman, I offer amendment No. 2.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment No. 2 offered by Mr. Capuano:
Page 3, beginning on line 21, strike paragraph (1) of
section 2(b) through page 4, line 9, and insert the
following:
(1)(A) The board of such organization shall be comprised of
five members--
(i) two of whom shall be persons who are licensed to
practice public accounting and who have recent experience in
auditing public companies;
(ii) two of whom may be persons who are licensed to
practice public accounting, if such person has not worked in
the accounting profession for any of the last two years prior
to the date of such person's appointment to the board; and
(iii) one of whom shall be a person who has never been
licensed to practice public accounting.
(B) Each member of the board of such organization shall be
a person who meets such standards of financial literacy as
are determined by the Commission.
The CHAIRMAN. Pursuant to House Resolution 395, the gentleman from
Massachusetts (Mr. Capuano) and a Member in opposition each will
control 10 minutes.
The Chair recognizes the gentleman from Massachusetts (Mr. Capuano).
Mr. CAPUANO. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, this amendment is relatively simple. It does one small
item in the proposed bill which simply guarantees that one, only one of
the five seats, will be someone who has never been licensed as an
accountant.
It simply is the best way that I could think of to guarantee that the
general public has at least one voice at the table. The other four
seats are just as submitted in the current draft; namely, two seats
shall be people who are licensed to practice accounting, and two people
may have a license to practice accounting, as long as they have not
practiced in the last 2 years.
It is exactly what the bill says, with the sole exception of one
person who has never been licensed. I think that is the least we can do
to guarantee the general public, the investing public, has at least one
seat at the table without having been subject to practice for the last
30 or 40 years.
Mr. Chairman, I reserve the balance of my time.
The CHAIRMAN. For what purpose does the gentleman from Ohio (Mr.
Oxley) rise?
Mr. OXLEY. Mr. Chairman, I claim the time in opposition to the
amendment, though I am not opposed to the amendment.
[[Page H1565]]
The CHAIRMAN. Without objection, the gentleman from Ohio (Mr. Oxley)
is recognized for 10 minutes.
There was no objection.
Mr. OXLEY. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, I thank my friend, the gentleman from Massachusetts
(Mr. Capuano), a fine member of the Committee, for his good work on
this amendment. I rise in strong support of it. By clarifying that at
least two members of the five-member public reporting organization
created by CARTA must be certified public accountants, the Capuano
amendment recognizes the need for accounting expertise.
Equally important, it guarantees that at least one member of the
board, and potentially three, is not a CPA. That would guarantee a
level of independence from the accounting profession that is absolutely
essential to keeping our financial reporting system the best in the
world.
Mr. Chairman, I thank the gentleman and urge all Members to vote aye.
{time} 1230
Mr. OXLEY. Mr. Chairman, I support the Capuano amendment.
Mr. Chairman, I have no further speakers, and I yield back the
balance of my time.
Mr. CAPUANO. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN. The question is on the amendment offered by the
gentleman from Massachusetts (Mr. Capuano).
The amendment was agreed to.
The CHAIRMAN. It is now in order to consider Amendment No. 3 printed
in House Report 107-418.
Amendment No. 3 Offered by Mr. Sherman
Mr. SHERMAN. Mr. Chairman, I offer an amendment.
The CHAIRMAN. The Clerk will designate the amendment.
The text of the amendment is as follows:
Amendment No. 3 offered by Mr. Sherman:
In section 21 strike ``and 15'' amd insert ``and 16'' and
after section 13, insert the following new section (and
redesignate the succeeding sections and conform the table of
contents accordingly):
SEC. 14. AUDITOR MINIMUM CAPITAL.
(a) Regulation Required.--The Commission shall revise its
regulations pertaining to auditor independence to require
that an accountant shall not be considered independent unless
such accountant complies with such capital adequacy standards
as the Commission shall prescribe by regulation.
(b) Minimum Standard.--The capital adequacy standards
established by the Commission pursuant to this section shall
require that the net capital of an accountant be equal to not
less than one-half of the annual audit revenue received by
such accountant from issuers registered with the Commission.
(c) Treatment of capital and revenue.--For purposes of this
section--
(1) net capital shall include the sum of capital, reserves,
and malpractice insurance available to the accountant for the
performance of audit functions; and
(2) annual audit revenue shall include the sum of all audit
fees received by the accountant, but shall not include any
fees for non-audit services, as such terms are defined in
regulations of the Commission in effect on the date of
enactment of this Act.
The CHAIRMAN. Pursuant to House Resolution 395, the gentleman from
California (Mr. Sherman) and a Member opposed each will control 10
minutes.
The Chair recognizes the gentleman from California (Mr. Sherman).
Mr. SHERMAN. Mr. Chairman, I yield myself such as I may consume.
Mr. Chairman, I know there are others that would like to speak in
favor of this amendment, but this whole process has gone more quickly
than expected, so we will see if they can make it here to the floor.
Mr. Chairman, the financial auditing system is the only one where the
umpire is paid by one of the teams. That is to say, we have a situation
where the auditor must make tough judgment calls, particularly as to
how to apply generally accepted accounting principals which are not
mechanical but, rather, require judgment. And the firm must make those
judgments relative to the client, sometimes being the difference
between whether the stock sells for $20 a share or $40 a share. The
auditing firm must make that decision affecting the clients when they
are being paid by that client.
The one financial check on this is the fact that if the auditor does
not make the right decision, but is rather negligent, they may be sued.
The other check on this, of course, is the integrity and the
professionalism of the individual auditors involved in the process. But
our system, our capitalist system works well when we rely on the good
spirit of people but also on financial incentives, financial checks and
balances. Those financial checks and balances, however, ring hollow in
the present system.
Back when I was practicing--and, Mr. Chairman, that was a long time
ago, I had hair when I was doing it, that tells us how long ago it
was--we had general partnerships that were the Big Eight, now the Big
Five accounting firms. That meant that every partner's personal assets
were on the line if the firm committed malpractice. So of course the
firms purchased malpractice insurance. And it meant that if an investor
was hurt by malpractice, that that investor would at least get some
compensation.
Now our corporate laws have changed. There are professional
corporations, limited liability companies, and limited liability
partnerships.
As a result, those investors hurt by auditor malpractice can only
look to the assets of the firm. It makes sense that we make sure that
there are at least some assets there so that investors hurt by
accounting malpractice at least get some compensation.
That is not the case at the present time. Arthur Andersen is supposed
to be paying $217 million, not in relation to Enron, but in relation to
the Baptist Foundation of Arizona audit in which they also committed
malpractice. And now it looks like those investors are not going to be
paid. It looks like the Enron investors are not going to get a penny
from Arthur Andersen. Why? Because Arthur Andersen has virtually no
malpractice insurance and virtually no reserves.
Mr. Chairman, if you are going to drive your car, you might hurt
somebody. And that is why every State in this Union requires you to
have some sort of reserve or auto insurance. If you are going to
operate a fleet of thousands of taxis, certainly you would have
insurance, because driving down Main Street you might make a mistake
and hurt somebody.
Well, driving on Wall Street is also potentially dangerous. And those
who drive down Wall Street and can cause billions of dollars of harm if
they are not careful, should also have the same insurance required of
every driver in this country. Wall Street is as dangerous for
pedestrians as Main Street, and that is why I have proposed this
amendment.
I want to be very clear on what it does not do. It does not have an
effect on the 99 percent of CPA firms that do not audit public
companies. It has virtually no effect on the regional firms that do a
very few SEC audits. It requires them to have such minimal capital
reserves that if they just own their own computers, they meet the test.
They probably would have malpractice insurance anyway.
This bill affects the Big Five firms. It says that those firms that
do 99.5 percent of all the SEC auditing have to have reserves or they
have to have malpractice insurance. It ensures that if investors are
hit on Wall Street, they will at least get some recompense. We provide
that assurances to pedestrians. We ought to provide it to investors as
well.
Mr. Chairman, I reserve the balance of my time.
Mr. OXLEY. Mr. Chairman, I claim the time in opposition to the
amendment.
The CHAIRMAN. The gentleman from Ohio (Mr. Oxley) is recognized for
10 minutes.
Mr. OXLEY. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, the amendment before us requires audit firms to
establish and maintain huge capital reserves, at least 50 percent of
annual audit revenue. The Sherman amendment was offered in committee
and defeated by an overwhelming margin of 49 to 9. Though well
intentioned, it would establish a burdensome and wholly unprecedented
requirement, expanding government's reach into the financing and
structuring of audits firms. Minimum capital requirements would harm
small audit firms in particular and would result in less stability for
public companies, higher audit cost for public companies, lower profits
for investors, and more speculative lawsuits.
[[Page H1566]]
Clearly this is a case of using a sledgehammer to crack a nut.
I urge all Members to oppose this amendment and support the base
bill.
Mr. Chairman, I reserve the balance of my time.
Mr. SHERMAN. Mr. Chairman, how much time do I have remaining?
The CHAIRMAN. The gentleman from California has 5 minutes remaining.
Mr. SHERMAN. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, let me respond to the comments of our distinguished
chairman.
This is hardly a sledgehammer. Keep in mind that 20 years ago, every
one of the accounting firms, big and small, had far more reserves
available to those who were affected by accounting malpractice. Twenty,
30 years ago, they were all general partnerships, so they had
malpractice insurance. One of the reasons they had it is that the
personal assets of every partner were on the line. The assets available
to the creditors of Arthur Andersen 30 years ago would have been tens
of billions of dollars, adjusted for inflation, talking about 2002
dollars. Today we have an empty shell.
I remind the House that when they ask poor people in each district
who need to drive somewhere to work to earn the minimum wage, we insist
they have liability insurance, because while we are concerned about
their ability to drive, we are also concerned that those who are hurt
by negligence get at least something. And yet we turn to what will
probably be the Big Four accounting firms, each with many billions of
dollars of revenue, and say that they do not have to have any liability
insurance.
Is that a fair society? Do we really believe that driving down Wall
Street is not as hazardous as driving down any street in America?
Certainly all the automobile accidents in this country will not add up
to the losses suffered by Enron investors. If we require those who
drive to have insurance and we do not regard that as an undue burden on
driving, how can we say that auditing publicly traded corporations, an
activity engaged in by only five accounting firms for the most part,
maybe two or three others, are we going to say that the five or eight
or nine largest accounting firms in the country do not need any
liability insurance? I do not think we should. I think at this time it
is reasonable to say that if you are engaging in activity that only
exists because the securities law requires it, if you are receiving
billions of dollars in fees because publicly-traded companies are
required by Federal law to have an audit, then you ought to have
liability insurance.
I will give another example. If a small plumbing contractor wishes to
do the plumbing on a Federal building or a State construction project,
surely we would require a completion bond or other insurance that the
work will be done appropriately. How can we turn to individual drivers
and say they must have insurance, the smallest companies who do
construction work, and say they must have insurance, and then turn to
the Big Four accounting firms and say they can walk away scot-free no
matter what liability a court imposes on them? It is an illusory
liability. The Enron investors will probably get nothing from Arthur
Andersen.
I do not think that is a fair system. I think instead it is
reasonable to require that those who engage in activities which may
make them liable to someone else have reasonable amounts of insurance.
I want to repeat, this bill will affect only the Big Four or, today,
Big Five accounting firms. It will have no effect on the 99 percent of
firms who do no SEC auditing and will have no effect or virtually no
effect on the four, five, or six other regional firms who may have a
very few SEC audits. Only when a firm is deriving a very large
percentage of its revenue from SEC audit does this bill have any
effect.
So I ask my colleagues to require that investors who are mamed on
Wall Street at least be able to get some amounts of compensation, as
they would if they were hurt walking across the street in their
hometown.
Mr. Chairman, I reserve the balance of my time.
Mr. OXLEY. Mr. Chairman, I yield 3 minutes to the gentleman from
Richmond, Virginia (Mr. Cantor).
Mr. CANTOR. Mr. Chairman, I rise in opposition to the gentleman from
California's (Mr. Sherman) amendment, and with all due respect, I beg
to differ. We are not talking about insurance here. What we are talking
about is a totally unprecedented and, in my opinion, unjustified
expansion of government's reach into the financing and structuring of
accounting firms.
Let us address the first issue that the gentleman from Ohio (Mr.
Oxley) made here, that this particular amendment would really
contribute to the instability of any public company that was required
to have audited financial statements. Just imagine if the auditing firm
dipped below the required level of reserve while that firm was in the
middle of an audit. That public company who is required to have the
audited financial statements would be left in the lurch. There would be
no other option in that firm than to go out and seek another accounting
firm to restart the audit or pick up where the one that is now
disqualified left off, thus adding to the cost of having audited
financial statements. In addition, I think it would take away from the
quality of the audit itself.
Mr. Chairman, I would also say that in any other instance where the
government requires a certain capital, minimum capital requirement, for
instance the banking industry, there is some type of quasi-guarantee
relationship that the government has and in some sense is the insurer
of the industry. In this particular case, there is no relationship by
the government to the auditing firm. In the case of the banks, the
government is there to provide some type of confidence to the
depositors that their personal funds will be insured to a certain
extent. Here there is no such relationship and, in fact, auditing firms
are precluded from maintaining any deposits from individuals or from
clients.
Think about the effect that this amendment would have on small
accounting firms. Many firms with reduced access to capital and costly
insurance will be now precluded from seeking or acquiring business
elsewhere. When we are talking about a firm having to have 50 percent
of the annual audit fee in reserve, that is a tremendous financial and
capital hurdle for most American businesses, not just to mention
auditing firms. Such a requirement to have that type of reserve will
certainly add to the cost of the financial audit, ultimately adding to
the cost and taking away the benefit to the investors in that company.
Mr. Chairman, I would say this amendment goes in the wrong direction
and I urge my colleagues to oppose the amendment.
{time} 1245
The CHAIRMAN. The Chair will advise Members that the gentleman from
Ohio (Mr. Oxley) has 6 minutes remaining. The gentleman the California
(Mr. Sherman) has 30 seconds remaining.
Mr. SHERMAN. Mr. Chairman, I yield myself the remaining time.
This bill will not adversely affect small accounting firms. It
restores a system similar to what we had 30 years ago when every firm
had malpractice insurance because the LLC and LLP structures had yet to
be invented under State law. We in the federal government require that
an audit be conducted because of the securities law, and we ought to
require that those who will rely on those financial statements will get
some compensation in the event that auditor malpractice takes place.
State governments require insurance to drive a car. We ought to
require insurance to drive on Wall Street.
Mr. OXLEY. Mr. Chairman, I yield myself such time as I may consume.
Before yielding back, I would only reiterate the fact that we debated
this in committee, the same amendment. The gentleman from California
was able to get nine votes in favor of his amendment, 49 against. I
think the committee understood the issue and reacted accordingly.
Ms. JACKSON-LEE of Texas. Mr. Chairman, I rise in support of the
Sherman amendment to H.R. 3763, the Corporate and Auditing
Accountability and Responsibility Act.
This amendment would establish capital standards for accounting
companies that audit publicly traded companies.
This amendment would require the SEC to set capital standards at a
level no lower than
[[Page H1567]]
half of the firm's annual audit revenues. Moreover, it allows auditors
to apply capital, reserves and malpractice insurance to meet this net
capital requirement.
Accounting firms that fail to maintain required levels of capital
reserves would be prohibited from auditing publicly traded companies.
As evidenced by the relationship between Enron and its auditor,
Arthur Andersen, there are many flaws in the system that needs fixing.
This amendment is another step in the right direction.
It is very likely that because Arthur Andersen did not carry adequate
malpractice insurance, the Enron shareholders, many of them former
Enron employees, will not see any monetary compensation from their
auditor. This amendment does not and will not hurt small accounting
firms because nearly all SEC audits are done by the big five accounting
firms.
It is important to note that this amendment is being offered so that
auditors of SEC reporting companies will to have enough capital and
insurance to cover the liability they incur when they perform a large
audit and would only affect auditors performing audits for companies
required to file disclosures with the SEC.
This is an important amendment and I urge you to support it.
Mr. OXLEY. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN. The question is on the amendment offered by the
gentleman from California (Mr. Sherman).
The amendment was rejected.
The CHAIRMAN. It is now in order to consider amendment No. 4 printed
in House Report 107-418.
Amendment No. 4 in the Nature of a Substitute Offered by Mr. Kucinich
Mr. KUCINICH. Mr. Chairman, I offer an amendment in the nature of a
substitute.
The CHAIRMAN. The Clerk will designate the amendment in the nature of
a substitute.
The text of the amendment in the nature of a substitute is as
follows:
Amendment No. 4 in the nature of a substitute offered by
Mr. Kucinich:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Investor, Shareholder, and
Employee Protection Act of 2002''.
SEC. 2. FINDINGS.
The Congress finds the following:
(1) The failure of accounting firms to provide accurate
audits of its clients is not a new or isolated problem.
(2) Accounting firms have been implicated in failed audits
that have cost investors billions of dollars when earnings
restatements sent stock prices tumbling.
(3) Auditors have an inherent conflict of interest. They
are hired, and fired, by their audit clients.
(4) This conflict of interest pressures auditors to sign
off on substandard financial statements rather than risk
losing a large client.
(5) Auditing a public company for the benefit of small as
well as large investors requires independence.
(6) Therefore the only truly independent audit is one by a
governmental agency.
(7) The Federal Bureau of Audits, closely regulated by the
Commission, will provide honest audits of all publicly traded
companies.
SEC. 3. ESTABLISHMENT OF BUREAU.
(a) Establishment.--There is hereby established within the
Commission an independent regulatory agency to be known as
the Federal Bureau of Audits.
(b) Function of the Bureau.--The Bureau shall conduct an
annual audit of the financial statements that are required be
submitted by reporting issuers and to be certified under the
securities laws or the rules or regulations thereunder.
(c) Officers.--
(1) Bureau Head.--The head of the Bureau shall be a
Director, who shall be appointed by the President, by and
with the advice and consent of the Senate.
(2) Additional Officers.--There shall also be in the Bureau
a Deputy Director and an Inspector General, each of whom
shall be appointed by the President, by and with the advice
and consent of the Senate.
(3) Terms.--The Director, Deputy Director, and Inspector
General shall be appointed for terms of 12 years, except
that--
(A) the first term of office of the Deputy Director shall
be eight years; and
(B) the first term of office of the Inspector General shall
be 4 years.
(d) Independence.--Except as provided in sections 4 and 5,
in the performance of their functions, the officers,
employees, or other personnel of the Bureau shall not be
responsible to or subject to the supervision or direction of
any officer, employee, or agent of any other part of the
Commission.
(e) Administrative Support.--The Commission shall provide
to the Bureau such support and facilities as the Director
determines it needs to carry out its functions.
(f) Rules.--The Bureau is authorized to establish such
procedural and administrative rules as are necessary to the
exercise of its functions, but the Bureau may not establish
any auditing standards within the jurisdiction of the
Commission under sections 4 and 5.
(g) Additional Authority.--In carrying out any of its
functions, the Bureau shall have the power to hold hearings,
sign and issue subpoenas, administer oaths, examine
witnesses, and receive evidence at any place in the United
States it may designate. The Bureau may, by one or more of
its officers or by such agents as it may designate, conduct
any hearing or other inquiry necessary or appropriate to its
functions, except that nothing in this subsection shall be
deemed to supersede the provisions of section 556 of title 5,
United States Code relating to hearing examiners.
(h) Conflict of Interest Provisions.--A person previously
employed by the Bureau may not accept employment or
compensation from an issuer audited by the Bureau or an
accountant that provides audit related services to an issuer
audited by the Bureau for 10 years after the last day of
employment at the Bureau. Any current employee of the Bureau
shall be required to place all investments in a blind trust,
in accordance with regulations prescribed by the Commission.
The employees of the Bureau who conduct the audits shall be
exempt from the civil service pay system under section 4802
of title 5, United States Code, and shall be paid salaries
that are competitive with similar private sector employment.
(i) Legal Representation.--Except as provided in section
518 of title 28, United States Code, relating to litigation
before the Supreme Court, attorneys designated by the
Director of the Bureau may appear for, and represent the
Bureau in, any civil action brought in connection with any
function carried out by the Bureau pursuant to this Act or as
otherwise authorized by law.
SEC. 4. ASSUMPTION OF AUTHORITY BY COMMISSION OVER AUDITING
STANDARDS.
(a) Assumption of Authority.--Pursuant to its authority
under the securities laws to require the certification, in
accordance with the rules of the Commission, of financial
statements and other documents of reporting issuers of
securities, the Commission shall, by rule, establish and
revise as necessary auditing standards for audits of such
financial statements.
(b) Incorporation of Current Standards.--In adopting
auditing standards under this section, the Commission shall
incorporate generally accepted auditing standards in effect
on the date of enactment of this Act, with such modifications
as the Commission determines are necessary and appropriate in
the public interest and for the protection of investors.
(c) Additional Requirements for Rules.--The rules
prescribed by the Commission under subsection (a)--
(1) shall be available for public comment for not less than
90 days;
(2) shall be prescribed not less than 180 days after the
date of enactment of this Act; and
(3) shall be effective on the first January 1 that occurs
after the end of such 180 days.
SEC. 5. FEES FOR THE RECOVERY OF COSTS OF OPERATIONS.
(a) In General.--The Commission shall in accordance with
this section assess and collect a fee on each reporting
issuer whose financial statements are audited by the Bureau.
This section applies as of the first fiscal year that begins
after the date of enactment of this Act (referred to in this
section as the `first applicable fiscal year').
(b) Total Fee Revenues; Individual Fee Amounts.--The total
fee revenues collected under subsection (a) for a fiscal year
shall be the amounts appropriated under subsection (d)(2) for
such fiscal year. Individual fees shall be assessed by the
Commission on the basis of an estimate by the Commission of
the amount necessary to ensure that the sum of the fees
collected for such fiscal year equals the amount so
appropriated.
(c) Fee Waiver or Reduction.--The Commission shall grant a
waiver from or a reduction of a fee assessed under subsection
(a) if the Commission finds that the fee to be paid will
exceed the anticipated present and future costs of the
operations of the Bureau.
(d) Crediting and Availability of Fees.--
(1) In general.--Fees collected for a fiscal year pursuant
to subsection (a) shall be credited to the appropriation
account for salaries and expenses of the Bureau and shall be
available until expended without fiscal year limitation.
(2) Appropriations.--
(A) First fiscal year.--For the first applicable fiscal
year, there shall be available for the salaries and expenses
of the Bureau $5,150,000,000.
(B) Subsequent fiscal years.--For each of the four fiscal
years following the first applicable fiscal year, there shall
be available for the salaries and expenses of the Bureau an
amount equal to the amount made available by paragraph (1)
for the first applicable fiscal year, multiplied by the
adjustment factor for such fiscal year (as defined in
subsection (f)).
(e) Collection of Unpaid Fees.--In any case where the
Commission does not receive payment of a fee assessed under
subsection (a) within 30 days after it is due, such fee shall
be treated as a claim of the United States Government subject
to subchapter II of chapter 37 of title 31, United States
Code.
(f) Definition of Adjustment Factor.--For purposes of this
section, the term `adjustment factor' applicable to a fiscal
year is the lower of--
[[Page H1568]]
(1) the Consumer Price Index for all urban consumers (all
items; United States city average) for April of the preceding
fiscal year divided by such Index for April of the first
applicable fiscal year; or
(2) the total of discretionary budget authority provided
for programs in categories other than the defense category
for the immediately preceding fiscal year (as reported in the
Office of Management and Budget sequestration preview report,
if available, required under section 254(c) of the Balanced
Budget and Emergency Deficit Control Act of 1985) divided by
such budget authority for the first applicable fiscal year
(as reported in the Office of Management and Budget final
sequestration report submitted for such year).
For purposes of this subsection, the terms ``budget
authority'' and ``category'' have the meaning given such
terms in the Balanced Budget and Emergency Deficit Control
Act of 1985.
SEC. 5. DEFINITIONS.
As used in this Act:
(1) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(2) Securities laws.--The term ``securities laws'' means
the Securities Act of 1933 (15 U.S.C. 77a et seq.), the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), the
Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the
Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.), and
the Securities Investor Protection Act of 1970 (15 U.S.C.
78aaa et seq.).
(3) Reporting Issuer.--The term ``reporting issuer'' means
any registrant under section 12 of the Securities Exchange
Act of 1934 (15 U.S.C. 78l) or any other issuer required to
file periodic reports under section 13 or 15 of such Act (15
U.S.C. 78m, 78o).
The CHAIRMAN. Pursuant to House Resolution 395, the gentleman from
Ohio (Mr. Kucinich) and a Member opposed each will control 10 minutes.
The Chair recognizes the gentleman from Ohio (Mr. Kucinich).
Mr. KUCINICH. Mr. Chairman, I yield myself such time as I may
consume.
Mr. Chairman, I include for the Record an article in the New Yorker
entitled ``The Accountants' War,'' and it has many interesting details
about the collapse of accounting responsibilities in this country. It
says that Enron was forced to reveal that its profits had been off by
about 20 percent over 3 years and that as early as 1997 Arthur Andersen
had known that Enron was inflating its income, but when Enron declined
to correct the numbers, Andersen certified them anyway.
[From the New Yorker, Apr. 22, 2002]
The Accountants' War
(By Jane Mayer)
Nothing, it has been said, is duller than accounting--until
someone is defrauded. And after every modern financial
diseaster--the stock-market crash of 1929, the bankruptcy of
the Penn Central Railroad in 1970, the savings-and-loan
crisis of the eighties, and now the bankruptcy of the Enron
Corporation--investors have tended to ask the same question:
where were the auditors?
Arthur Levitt, Jr., who was the chairman of the Securities
and Exchange Commission under President Bill Clinton,
believes that in the years leading up to Enron's collapse the
auditors were busy organizing themselves into a lobbying
force on Capitol Hill--one that has been singularly
effective. Levitt, who issued a series of warnings about the
accounting profession in those years, suggests that the aim
of the so-called Big Five accounting firms--
PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young,
K.P.M.G., and Arthur Andersen, Enron's auditor--was to weaken
federal oversight, block proposed reform and overpower the
federal regulators who stood in their way. ``They waged a war
against us, a total war,'' Levitt said.
Some have portrayed Enron's crash and the woes of Arthur
Andersen simply as huge business failures. ``There are always
going to be bad apples,'' said Jay Velasquez, a former aide
to Senator Phil Gramm, who is now a Washington lobbyist for
the accounting profession, and who has fought increased
regulation. Barry Melancon, who heads the American Institute
of Certified Public Accountants, the profession's trade
group, which has three hundred and fifty thousand members,
fears that those who are trying to impose political solutions
will overreact. ``We live in a free-market system,'' Melancon
told me. ``Businesses fail. People are not infallible.''
But Levitt casts the Enron story in starker terms. It is,
as he puts it, ``the story of the nineties''--a battle
between public and private interests that is being fought at
a time when there is more corporate money in politics than
ever before. ``This is about corporate greed,'' Levitt told
me. ``It is the result of two decades of erosion of business
ethics. It was the ultimate nexus of business and politics.
If there was ever an example where money and lobbying damaged
the public interest, this was clearly it.''
Levitt, who is seventy-one and has silver hair, exhibits a
starchy correctness. He still seems bitter about his war with
the accounting trade, and called one adversary ``an oily
weasel'' and another ``a sly mongoose'' as he spoke about the
influence of money on politics. ``It used to be that if
industries had a problem they would try to work it out with
the regulatory authorities,'' he said, in his sleek office at
the Carlyle Group, in midtown Manhattan, surrounded by
mementos of years in public life. ``Now they bypass the
regulators completely, and go right to Congress.'' Their
campaign contributions lend them clout. ``It's almost
impossible to compete with the effect that money has on these
congressmen.'' Enron's campaign contributions and its
political power have received much attention, but two of the
top five accounting firms--Arthur Andersen and Deloitte--and
the accountants' trade association actually spent more during
the 2000 elections. ``The money was enormous,'' Levitt said.
``Look at the end result.''
Not many years ago, Levitt was considered a consummate Wall
Street insider, even an operator. In 1993, when President
Clinton picked him to run the Securities and Exchange
Commission, he was a centrist, a well-connected fundraiser
who had contributed to both parties. He had founded his own
lobbying organization, the American Business Conference, to
advocate the interests of small business on Capitol Hill. He
was also someone with a knack for cultivating famous and
powerful friends. In the nineteen-sixties, he joined a
successful start-up New York firm as a stockbroker, and he
eventually counted among his clients Leonard Bernstein,
Aaron Copland, and Kenneth Clark. Three of Levitt's
original partners were Sanford Weill, who became the
chairman of Citigroup; Arthur Carter, now the publisher of
the New York Observer; and Roger Berlind, who became a
Broadway producer. (Levitt had his own ties to Broadway;
his aunt was Ethel Merman). Levitt thrived, too, and by
the late sixties he was running Shearson Hayden Stone,
which later became Shearson Lehman Brothers.
In 1977, after being asked to head a search committee for
the next leader of the American Stock Exchange, he got the
job himself. A few years later, he was thinking of investing
in The National Journal, a policy-oriented magazine in
Washington, when he learned of the publication's interest in
acquiring Roll Call, a struggling newspaper on Capitol Hill.
Levitt declined to invest in The National Journal but bought
Roll Call himself, for about five hundred thousand dollars.
Seven years later, he sold it for fifteen million dollars.
At the same time, Levitt was drawn to public life. He had
grown up in a political household, the only son of Arthur
Levitt, Sr., a Democrat who for twenty-four years was the New
York State comptroller. Both his father and his mother, a
public-school teacher in Brooklyn, were dependent on public
pensions for their retirement, and they cared deeply about
the protection of small investors.
When Levitt began his S.E.C. job, he acknowledged the
populist tradition of the Roosevelt Administration, which
created the S.E.C. in 1934, to insure the integrity of
American financial markets. The agency's new Web site carried
the motto of his most famous predecessor, William O. Douglas:
``We are the investors' advocates.'' The S.E.C.'s basic
requirement was that all publicly traded companies register
with the agency and submit to annual independent audits.
Douglas liked to say that the S.E.C. was ``the shotgun behind
the door.'' But Levitt soon discovered that the agency's
arsenal was no match for the bull markets of the nineties.
The new economy spawned new accounting schemes that raised
concerns almost from the start.
One early fight was over stock options. Many pointed out
that the accounting convention that kept these expenses,
unlike ordinary executive compensation, off the books was
deceptive. It meant that investors could not see a company's
real liabilities. Levitt recalls that when he took office the
first thing that Senators David Boren and Carl Levin, who
were both active in regulatory reform, told him was that he
``had to do something about stock options.''
Congress soon got involved in the stock-option fight, and
the politicization of accounting became more apparent than
ever. Supporters of Wall Street and Silicon Valley, including
many ordinarily pro-regulatory Democrats, fought against
changing the stock-option rules; one, for example, was
Senator Joseph Lieberman, of Connecticut, a state with a
large concentration of Fortune 500 companies, many of which
are campaign contributors. More surprising, the accounting
profession, rather than remaining neutral, joined forces with
its clients to fight the change. Together, they exerted
pressure on the organization that sets the rules for the
accounting business, the Financial Accounting Standards
Board, or F.A.S.B. ``This was a defining moment for me,''
Levitt said. A lawyer who was with the S.E.C. at the time
says, ``The accountants were going beyond good accounting.
They were advocating a business position. They wanted to keep
their customers happy. It was quite unseemly.''
At first, Levitt played a hesitant role. In what he now
regards as his ``biggest mistake'' at the commission, he,
too, urged the F.A.S.B. to back off. His rationale, he said,
was a fear that, if the board tried to resist the anti-
regulatory feeling then sweeping Congress, it would be
crushed altogether. (Sarah Teslik, the executive director
of the Council of Institutional Investors, an advocate for
shareholders, is among those who
[[Page H1569]]
argue that Levitt ``wasn't the hero he makes himself out
of be.'') Levitt told me that the episode showed him that
the accounting trade was undergoing a cultural
transformation. Instead of overseeing corporate America,
it was joining forces with it. ``The kind of greed that
produced Enron and Arthur Anderson was symbolized by the
way the companies dealt with stock options,'' he said. ``I
realized something was wrong.''
Until the Second World War, the American accounting
industry has stayed close to its eighteenth-century roots in
bookkeeping. But with the rise of information technology the
accounting firms branched into consulting. During the
nineteen-nineties, the Big Five doubled their collective
revenues, to $26.1 billion. Their consulting practices, in
particular, were hugely profitable, and brought in three
times as much revenue as auditing did, according to a study
soon to be published in The Accounting Review. Auditors
started coming under pressure to attract non-audit business.
At some firms, like Andersen, auditors compensation depended
upon their ability to sell other services to clients; equity
partners began to be paid like investment bankers.
Inevitably, there were conflicts between the independent role
required of an auditor and the applicant role of a salesman
trying to expand services.
At Enron, for example, Andersen did consulting on taxes and
on internal auditing. Both projects threatened to put the
outside auditors in the awkward position of assessing their
own company's work. The relationship was further compromised
by the fact that Enron's management included many former
Andersen employees, among them the company's president, vice-
president, and chief accounting officer. Auditors were thus
in the position of judging former colleagues--and prospective
bosses.
More than a year ago, well before Enron's problems became
public, an internal e-mail revealed that fourteen
top Andersen partners had pointed out several of the
financial schemes that eventually contributed to Enron's
fall. In a discussion about retaining Enron as a client
the partners considered whether Enron's ``aggressive . . .
transaction structuring'' was too risky. It appears from
the e-mail, however, that the partners' concerns were
outweighed by possible future rewards. The e-mail noted
that their fees ``could reach $100 million per year.''
``If you get too friendly and too relaxed, you can wind up
nodding your head yes when you should be saying no,'' said
Charles Bowsher, a former head of the General Accounting
Office, who worked at Andersen for many years and has been
retained to help reform the firm. ``There's a lot of art in
addition to science in accounting.'' Bowsher says that ``most
fraud flourishes in gray areas.'' But James Cox, a professor
of corporate and securities law at Duke University, suggests
that Enron's accounting gimmickry was black-and-white. ``It
was not even close,'' he said. ``It was dead wrong.''
Levitt said that, as the country's senior guardian of fair
markets, he watched the transformation of the accounting
profession with alarm. ``The brakes on the worst instincts of
the business community weren't working,'' he says. ``The
gatekeepers were letting down the gates.'' The number of
audit failures afflicting corporate America was increasing;
Lynn Turner, who served under Levitt as the chief accountant
at the S.E.C., estimates that investors lost a hundred
billion dollars owing to faulty, misleading, or fraudulent
audits in the six years preceding Enron's crash. Many of the
best-known corporations in the country were affected, among
them Cendant, W. R. Grace, Sunbeam, Xerox, Lucent, and Oxford
Health Plans. In fact, the number of publicly traded
companies forced to re-state their earnings went from three
in 1981 to a hundred and fifty-eight last year, according to
a doctoral thesis at New York University's Stern School of
Business. (Barry Melancon, of the American Institute of
Certified Public Accountants, calls concern over these
numbers misleading, noting that they represent ``fewer than
one per cent of the audits performed.'')
Shareholder lawsuits against the accounting firms
proliferated. In response, the Big Five and their trade
association united as a political force. According to the
nonpartisan Center for Responsive Politics, between 1989 and
2001 accounting firms spent nearly thirty-nine million
dollars on political contributions. The contributions
were bipartisan, reaching more than half the current
members of the House and ninety-four of a hundred
senators.
By 1995, this investment had started to pay off. Congress
passed the Private Securities Litigation Reform Act, making
it harder for shareholders to sue businesses and their
auditors when the businesses failed. The legislation was
championed by the Speaker of the House, Newt Gingrich, as
part of his Contract with America. ``What we were after was
trying to get rid of the frivolous, merit-less cases,'' Mark
Gitenstein, a lawyer and lobbyist who helped shape the
legislation, said. ``We convinced Congress that you needed a
system that did a better job of screening the marginal cases
from the serious ones.'' The resulting legislation, Professor
Cox said, reversed ``eighty years of federal procedure.''
At first, Levitt tried to fight the private-securities
bill, but when it became clear that the federal regulators
couldn't compete with the accountants' clout in Congress, he
looked for a compromise. ``It was a case where the industry
had more power that the regulators,'' he said. Then, as now,
there were approximately seventy-five lobbyists for every
member of the House and Senate; in the Gingrich era, they
were more integrated into the lawmaking process than ever
before. Jeffrey Peck, a former Democratic Senate aide who was
then the head of Arthur Andersen's Washington lobbying office
and is now an outside lobbyist for the firm, says that after
this fight there was ``really bad feeling'' between Levitt
and the profession. ``It was as if two people had gone out on
a first date and had a bad time,'' he says. ``But the rules
required them to keep dating.''
Levitt told me that he has always been proud of his ability
to create consensus, and in the spring of 1996 he tried to
involve the profession in reforming itself. He urged the big
accounting firms to strengthen their oversight system and
toughen discipline for transgressors. He proposed giving
investors and other members of the public a bigger role. But,
he said, the accountants resisted, and progress was made only
after ``huge fights.''
Rules governing auditors' independence hadn't been updated
in two decades. To examine the growing number of questions
about conflicts of interest, Levitt created a new board,
whose membership was divided between independent business
leaders and people from the accounting industry. ``They
were constantly deadlocked by differences of opinion,''
Levitt said, and added, ``When I asked for support, I
never got it. I never heard in any speech they''--the
accountants--``gave the words `public interest.' They were
so stilted, and terse, and non-productive--I realized it
was an industry that completely lacked leadership.''.
The accounting industry hired Harvey Pitt, who was known as
one of the smartest and most aggressive private-securities
lawyers in the country. Pitt responded to Levitt's call for
greater public oversight by arguing, in a lengthy white
paper, that the accounting firms were better off policing
themselves. ``The staff regarded his white paper as a kick in
the stomach, because it was so one-sided and
confrontational,'' Levitt said. One S.E.C. official recalls
that Pitt made the negotiations over the new board ``the most
horrible ever,'' and Lynn Turner says, ``It was doomed from
day one.''
Pitt, who was appointed by President George W. Bush to
succeed Levitt as chairman of the S.E.C., said, ``There was a
lot of misperception about what the white paper said. For
some reason, early on people seemed to get in their mind that
I opposed what Levitt did,'' to reform accounting. ``I tried
to give him may own help on a personal basis.''
In the summer of 1998, Levitt received a report about a
problem in Pricewaterhouse's Tampa office. According to the
report, nine executives there had made eighty investments in
companies that they were supposed to be auditing--a violation
of the most basic independence standards. Under the S.E.C.'s
direction, the firm initiated a company-wide investigation.
To the shame of the entire profession, it turned up more than
eight thousand such violations. The S.E.C. fined
Pricewaterhouse two and a half million dollars, and called
for an investigation into compliance with independence rules
at the rest of the Big Five firms; Levitt asked an
independent group, the Public Oversight Board, which had been
created after the Penn Central collapse, to undertake this
task.
Levitt also took his battle public, in the fall of 1998, he
gave a speech that attacked the ``number game.'' He said,
``Accounting is being perverted. Auditors who want to retain
their clients are under pressure not to stand in the way.''
He explained, ``Auditors and analysts are participants in a
game of nods and winks. . . . I fear we are witnessing an
erosion in the quality of earnings, and therefore the quality
of financial reporting.'' In conclusion, he said, ``Today
American markets enjoy the confidence of the world. How many
half-truths and accounting sleights of hand will it take to
tarnish that faith?''
The Public Oversight Board, made up of major business
figures, was supposed to act as the profession's conscience.
But in May, 2000, before its investigation could be
completed, the P.O.B.'s head, Charles Bowsher, received a
letter from officials at the American Institute of Certified
Public Accountants, which finances the board, announcing that
it would ``not approve nor authorize'' funding for further
investigations. Bowsher, who had himself been a high-ranking
officer with Arthur Andersen before becoming the head of the
General Accounting Office, says that he was shocked; the
industry was effectively stopping the investigation. Melvin
Laird, a former Secretary of Defense, who was the longest-
serving member of the P.O.B., called it ``the worst incident
in my seventeen years.'' Barry Melancon, the head of the
trade association, defended the association's position. ``We
were never opposed to the concept,'' he told me, referring to
the investigation. ``We just felt the P.O.B. was undertaking
a project that it couldn't define.''
At the same time, the S.E.C. was uncovering a huge case of
accounting fraud involving the garbage-disposal company Waste
Management: Arthur Andersen had put an unqualified seal of
approval on numbers that the government said it either knew
or should have known were misleading. As if in anticipation
of the revolving-door conflicts at Enron, practically ever
C.F.O. and C.A.O. in Waste Management's history had come from
Andersen, S.E.C. enforcement documents from the investigation
reveal something
[[Page H1570]]
else: at least two of the partners who were singled out for
scrutiny by the S.E.C. re- mained in influential positions at
Andersen while being investigated, and both have now
surfaced in connection with the Enron affair. (One
executive, Robert Kutsenda, who was later barred by the
S.E.C. from auditing public companies for a year, was
placed in charge of redesigning the firm's policy on which
documents to retain and which to shred, an issue in the
Enron case. Kutsenda and Steve Samek, who was also
investigated in the Waste Management case but not publicly
sanctioned, were among those involved in the discussion of
whether to retain Enron as a client. None of the
executives involved in the Waste Management matter were
fired by Andersen, which last year agreed to pay a seven-
million-dollar penalty to the S.E.C., without admitting or
denying guilt, after it was charged with fraud. In
addition, two of the Andersen partners targeted by the
S.E.C. in the fraud case now serve on the profession's
standard-setting board, the F.A.S.B.)
By 2000, Levitt, faced with what he calls the Big Five's
``fortress mentality,'' had initiated a series of meetings
with the firms at which he insisted that they needed to do
more to police themselves. Levitt's message, Turner told me,
was that the firms could either cooperate with an
investigation into their compliance with independence rules
or ``we'll issue the subpoenas tomorrow--take your pick.''
In the spring of 2000, the S.E.C. announced that it planned
to draft new rules that would greatly restrict accountants'
ability to consult for the same companies they audited.
Arthur Andersen reportedly argued that this would cut its
market potential by forty per cent, and vowed to fight back.
A June meeting in Deloitte's New York headquarters with the
heads of the three firms who most vehemently opposed the new
rules ``was so icy you could have stored cold meat in that
room,'' Turner says. The heads of Andersen, Deloitte, and
K.P.M.G. joined Melancon on one side of a conference table.
(Price-waterhouse and Ernst & Young were more supportive of
Levitt, and didn't attend.) Levitt and two S.E.C. officials
were on the other. When Levitt made it clear that he intended
to move forward, Andersen's chief executive, Robert Grafton,
declared, ``This is war.''
``It was unbelievable, just unbelievable,'' Turner
recalled. ``They all went after Arthur. They made clear that
everything was fair game.'' Turner says that the attitude of
the firms was ``You know we're going to win anyway in the
end, so why not save us the expense, and give up now?''
``As soon as I left that meeting,'' Levitt told me, ``it
was clear the fight was going to Capitol Hill.'' Such clashes
over commercial interests are commonplace in Congress, but
``this wasn't about legislation,'' he said. ``It was about
S.E.C. rule-making--we're supposed to be an independent
agency. I'd never seen anything like it at the S.E.C.''
During this period, Levitt said, he got a letter from
Representative W.J. (Billy) Tauzin, of Louisiana, the
chairman of the House Energy and Commerce Committee, who has
received more than two hundred and eighty thousand dollars
from the accounting industry over the past decade. The letter
consisted of four pages of pointed questions. In a not very
veiled threat, Tauzin asked how many violations Levitt and
the other members of the S.E.C. would have if their stock
holdings were subjected to the independence rules being
proposed for the accountants. He also demanded that Levitt
produce proof that non-audit consulting undermines auditors'
accuracy. ``It was a shot across the bow from the industry,''
Levitt says. ``They were saying, `If you go forward, expect a
lot of pain.' ''
In the following weeks, he said, Tauzin ``badgered me
relentlessly. He knew what the accountants were doing before
I did. He was working very closely with them. I don't mean to
sound cynical, but is it because he loves accountants?'' At
one point, relations between the two men grew so bad that
Levitt hung up on Tauzin, because he felt that ``his words
and his tone were threatening.''
Tauzin was not alone. In the four weeks after Levitt
announced his intention to go through with the proposed new
rules, forty-six more congressmen wrote to him questioning
them. Data from the Center for Responsive Politics show that
in 2000 the accountants contributed more than ten million
dollars to political campaigns and spent $12.6 million on
federal lobbying. Arthur Andersen alone nearly doubled its
lobbying budget in the second half of the year, to $1.6
million. Among the lobbyists hired by the industry were
Vic Fazio, a former congressman; Jack Quinn, a former
Clinton White House counsel; Ed Gillespie, a former Bush
campaign adviser; Patrick Griffin, Clinton's former
congressional liaison; Dan Brouillette, a former aide to
Tauzin who is now an Assistant Energy Secretary; and a
number of other former Hill staff people.
Now, however, Tauzin has joined in the public outrage
toward Enron and Andersen; in a House hearing that he
chaired, he called the case ``an old-fashioned example of
theft by insiders, and a failure of those responsible for
them to prevent that theft.'' He told me that money hadn't
influenced his earlier defense of the accountants.
``Donations have never bought anybody any slack with this
committee,'' he said. ``I'm not saying that contributions
don't have the power to corrupt. They do. But I always assume
people contribute to me because they like the work I do.''
By early fall of 2000, Levitt says, he began to hear
another kind of threat; lobbyists told him that if he didn't
back off there would be a push to cut the S.E.C.'s funding.
``They were going to place a rider on our appropriations
budget,'' Levitt said, still sounding as if he could not
believe it. Jay Velasquez, a lobbyist for the accountants at
the time, confirmed this. ``You have to consider all your
options,'' he said. ``There is no doubt that the rider was a
consideration. In these battles, everything is on the
table.'' Henry Bonilla, a Texas Republican with an anti-
regulatory temperament who is a member of the House
Appropriations Committee, was prepared to attach the rider.
Bowsher, the former G.A.O. head, says that such threats were
once unthinkable. ``In the old days, the S.E.C. was off
limits to that kind of pressure. It was a place the private
sector respected. Nobody, nobody, would have thought about
asking Congress to cut the budget.''
Representative Tom Udall, a Democrat from New Mexico, says
that his staff urged him to sign a widely circulated letter
to Levitt opposing the proposed rules, because so many of his
colleagues had. ``There's sort of a herd mentality,'' he
said. He refused; he knew Levitt slightly, through mutual
friends in Santa Fe. ``Levitt was out to solve these
things before people realized there was a problem. That's
the sign of a leader. But the special interests have such
a hold on members of Congress that they were able to stop
a lot of things.''
Levitt initiated a nationwide series of public hearings
about accounting abuses, fighting back as if he were involved
in a political campaign. Damon Silvers, an A.F.L.-C.I.O.
official who supported the S.E.C.'s position, recalls that
``Levitt looked like a figure from some old movie--he was
sitting at a huge desk at the S.E.C. with a bank of phones,
talking on several lines at once.''
But by then Levitt's eight-year term at the S.E.C. was
about to expire, and the accounting-industry supporters
developed a new strategy: they started to oppose the rule's
substance on procedural grounds, arguing that there hadn't
been enough time for public hearings. ``Of course, we knew
that by calling for more time it would mean the end of
Levitt,'' one lobbyist said.
With the accounting firms threatening to take the S.E.C. to
court if he went ahead with the rules, Levitt tried to strike
a deal with the three firms who opposed him, at which point
the two firms who had previously supported him turned against
him. That night, one aide recalled, Levitt gave up. ``I lost
it,'' Levitt said.
In the end, he kept negotiating, and the S.E.C. agreed to
let the firms continue to consult for the companies they
audited. But the firms agreed to disclose the details to
investors. ``I knew it wasn't enough, but I thought we'd be
overruled by Congress in one fashion or another,'' Levitt
said. ``The part of me that was insecure wanted a bird in the
hand.''
Almost exactly a year later, Enron's outside auditor,
Arthur Andersen L.L.P., a company whose image had virtually
defined Midwestern probity, made an astonishing admission.
During the previous three years, when it had vouched for
Enron's financial statements, the company's net income had
actually been inflated by almost six hundred million dollars.
In a financial market where stocks plummet if corporate
earnings fall a penny short of projections, Enron was forced
to reveal that its profits had been off by about twenty per
cent over three years. As early as 1997, Andersen had known
that Enron was inflating its income. But when Enron declined
to correct the numbers Andersen certified them anyway.
Within six months, Enron had filed for bankruptcy and
Andersen had been indicted on charges of obstruction of
justice for destroying documents related to its Enron
work. Investors lost an estimated ninety-three billion
dollars, a sum nearly equal to the amount of the economic-
stimulus package that President Bush requested for the
entire country. In the year before Enron's crash, Andersen
had collected a million dollars a week from Enron for its
expertise. More than half of that, Andersen acknowledged,
in compliance with the new S.E.C. rule, was for non-
auditing work.
``If these reforms had been in place earlier, we wouldn't
have had an Enron,'' Lynn Turner told me. He laughed, but the
laugh sounded a little forced as he spoke about Congress's
newfound interest in reform. ``Maybe the congressman were
listening more than I thought--we just weren't giving them
enough money,'' he said.
Not long ago, Levitt was called to testify before Congress
about what went wrong at Arthur Andersen. ``It was a play
within a play,'' he told me. He said that he has little hope
for meaningful change in the profession, despite all the
bills under consideration, and despite commitments from
Harvey Pitt, his successor at the S.E.C. Before Enron
collapsed, Pitt promised the accountants ``kinder and
gentler'' treatment than Levitt had shown them, but he has
since sharpened his rhetoric and proposed a great many
reforms. Pitt told me that his work for the accountants has
made him better able to persuade them to change their ways
because, ``to put it bluntly, I know where the bodies are
buried.'' But Pitt dismissed Levitt's approach--separating
auditing from consulting--as ``a simplistic solution to a
complex problem,'' and told me that he thought it could prove
counterproductive. ``A firm that does only audits may be
incompetent,'' he said.
``That's the same argument that the accountants put
forward,'' Levitt said with a sigh. ``I didn't accept it
then, and I accept it
[[Page H1571]]
even less today. I have to conclude it's specious. It's very
sad. The Administration is missing a glorious opportunity to
reform this industry.''
The failure of Arthur Andersen to provide an accurate audit of Enron
for several years is not a new or isolated problem. All of the Big Five
accounting firms have been implicated in failed audits that cost
investors billions of dollars when earnings restatements sent stock
tumbling. I have here a chart that shows how failed audits have cost
investors billions, how a company named MicroStrategy with
PricewaterhouseCoopers, the auditor, lost $10 billion, $10.4 billion in
lost market capitalization; and the list is a pretty extensive list.
For-profit private auditors have an inherent conflict of interest.
They are hired and fired by their audit clients. If their draft audit
does not please the firm they are auditing, they may lose future
business unless they change their ways to please the firm.
As a result, auditors have a strong incentive to sign-off on
substandard financial statements rather than risk losing a client. The
integrity and the independence of the audit is undermined by the
profit-seeking motive of the private auditing firm.
This amendment which I have brought before the House would ensure the
independence of the audit, and I am offering a substitute amendment.
Actually, this bill creates a Federal bureau of audits to regulate
corporate America's books by auditing all publicly traded companies.
Americans rely on the FBI to protect them from criminals and
terrorists, but who protects the American shareholders from corporate
criminals? The Enron scandal suggests that we need audit cops, the
Federal bureau of audits. This is a conservative pro-free market
amendment to the Corporate and Auditing Accountability, Responsibility,
and Transparency Act because it guarantees shareholders accurate and
partial information about their investments that requires an absolute
separation between the auditors and companies they audit.
Mr. Chairman, I reserve the balance of my time.
Mr. OXLEY. Mr. Chairman, I rise to claim the time in opposition to
the amendment.
The CHAIRMAN. The gentleman from Ohio (Mr. Oxley) is recognized for
10 minutes.
Mr. OXLEY. Mr. Chairman, I yield myself such time as I may consume.
This amendment offered by my friend from Ohio would basically create
a Federal bureau of audits. The Kucinich amendment would actually put
the Federal Government in charge of auditing the 17,000 public
companies in the United States, essentially nationalizing the
accounting profession; and that is simply not a good idea. In fact, it
is really quite dangerous.
Overnight we would go from having the strongest capital market system
in the world, with the best accounting, most integrity and most
transparent disclosures to investors, to becoming the laughingstock of
the global economy. Remember, this is the same Federal Government that
cannot deliver a letter on time, cannot keep out illegal immigrants,
and cannot buy a hammer for under $500.
The amendment would create a massive bureaucracy that is almost
unimaginable, produce truly disastrous results, reducing substantially
the quality of public audits and financial disclosures to investors.
America's nearly 100 million investors, and investors from all over the
world for that matter, would no longer have confidence in the audited
financial statements of our 17,000 public companies.
It is not hyperbole to say this amendment would do great damage to
our capital markets; but if my colleagues think the solution to the
Enron problem is attacking with the creativity and efficiency of the
DMV, then they should support this amendment. If they think, as I do,
that a fair and balanced approach by experts is the best way to protect
American investors, they should support the base bill and oppose this
amendment.
Mr. Chairman, I strongly urge all Members to vote ``no'' on this very
dangerous proposal, and later I will tell my colleagues what I really
think.
Mr. Chairman, I reserve the balance of my time.
Mr. KUCINICH. Mr. Chairman, I yield myself such time as I may
consume.
It is good to see my friend from Ohio's feelings about this,
particularly in light of the fact that America's investors have lost
over $100 billion in a system where people are allowed to profit where
they cook the books.
Mr. Chairman, I yield 2 minutes to the gentlewoman from Texas (Ms.
Jackson-Lee), who knows firsthand from the constituents she represents
in Texas what happens under this current system.
(Ms. JACKSON-LEE of Texas asked and was given permission to revise
and extend her remarks.)
Ms. JACKSON-LEE of Texas. Mr. Chairman, I thank the gentleman from
Ohio (Mr. Kucinich) very much for his distinguished leadership on this
issue, and I cannot thank the gentleman from New York (Mr. LaFalce)
enough for the leadership he has given to this, and may I personally on
the floor of the House thank him for the assistance he has given to ex-
Enron employees. We are very much appreciative of that.
Let me announce to the House that right now we are in the midst of
very, very intense negotiations to simply be able to provide a refund
of the severance pay that is owed over 4,000 employees that was
canceled out by the bankruptcy filing over the weekend; and the day
after it was cancelled, 4,000 of my constituents and Houstonians were
laid out into the street.
I believe, unlike one of the journalists who suggested that those of
us who represent Enron are trying to reconstruct ourselves, and I would
like to take him on on that issue, I think what we are trying to do is
to think out of the box and be able to respond to what the American
people would like. They want some very strong legislation that answers
these concerns, and that is why I am supporting the Brad Sherman
amendment. I am supporting the LaFalce substitute, and I come to the
floor for the gentleman from Ohio (Mr. Kucinich) because I believe that
the previous announcement is incorrect.
The American people want a strong oversight bureau such as the
Federal bureau of audits within the SEC. One of the problems was the
weakness of the SEC in dealing with the debacle that occurred. We are
not castigating those hardworking employees that are now trying to
rebuild Enron in another name and do its business selling gas, but what
we are saying is because there was no one looking into the dark of
night, turning the light bulb on and letting us know about these audits
that were coming in, individuals who could divest themselves of their
investments, independent individuals who are not consulting and
auditing at the same time, not only did we bring a company down that we
in Houston believe was a great corporate citizen, giving to all the
charities around; but we have put a taint on corporate America.
It is imperative that we pass the Kucinich amendment, the Sherman
amendment, and the LaFalce substitute.
Mr. Chairman, I rise today in support of the Kucinich substitute to
H.R. 3763, the Corporate and Auditing Accountability and Responsibility
Act.
This substitute would create a new office, the Federal Bureau of
Audits, within the SEC. This office would be responsible for performing
annual audits on the financial statements of all publicly-traded
companies and replaces the current system of private auditors.
This new office would be afforded adequate powers to investigate,
such as the power to hold hearings, issue subpoenas, administer oaths
and examine witnesses. Moreover, Bureau employees would be required to
place their investments in a blind trust and they would be prohibited
from taking jobs or consulting fees from any company audited by the
bureau for 10 years from the time they leave the agency.
I believe that this substitute adequately addresses the relationship
between audit firms and companies that hire them. This Congress has
witnessed and investigated in detail the conflict of interest that
could occur in such a partnership.
Moreover, it guarantees shareholders accurate, impartial information
about their investments. Many of my constituents in the 18th
Congressional District were employed by Enron and deceived by shady
auditing practices. They are now jobless and it is the responsibility
of this body to see that this never happens again.
I urge my colleagues to vote for the Kucinich substitute.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 2 minutes to the
gentlewoman from New York (Mrs.
[[Page H1572]]
Kelly), the chairman of the Subcommittee on Oversight and
Investigations of the Committee on Financial Services.
Mrs. KELLY. Mr. Chairman, I rise in opposition to the amendment
offered by the gentleman from Ohio (Mr. Kucinich). This amendment is
not balanced. It goes too far, and I do not believe it would do
anything but great harm to the businesses of this country.
The free market is important, and it is important that we do not do
things that will have unintended consequences and choke that free
market. This amendment could do away with all accounting firms because,
as the amendment states, and I quote, ``The only truly independent
audit is one by a government agency.''
As we heard, the amendment creates the Federal bureau of audits. I
guess it is modeled after the FBI so I can see auditors storming into
companies with their calculators drawn, demanding individuals to freeze
and drop their pencils.
The amendment seems to envision that the most efficient and effective
auditor would be the U.S. Government. Somehow I just cannot agree with
that, and I think this amendment is important for us to take a good
look at for its unintended consequences.
I think the author is looking to combine the same level of efficiency
to accounting that HUD brought to housing, perhaps. I imagine that the
author is looking for the effectiveness of the IRS in its customer
service.
Finally, with the accounting expertise of the Department of Defense
with $100 hammers, I am sure our corporations will be in the best hands
possible.
This amendment does not understand, I think, the concepts of
reasonable, responsive response from our government, and I think this
amendment needs to be defeated. I urge Members on both sides of the
aisle to think about this and join us in the opposition to the
amendment.
Mr. KUCINICH. Mr. Chairman, I yield myself such time as I may
consume.
I want to point out that Arthur Andersen not only participated in a
fraud, it manipulated this Congress to ensure that the firm could
participate in other frauds with deceptive company executives.
Mr. Chairman, I yield 2 minutes to the gentleman from California (Mr.
Filner).
Mr. FILNER. Mr. Chairman, I thank the gentleman from Ohio (Mr.
Kucinich) for yielding me the time.
I rise in support of the Kucinich and Progressive Caucus substitute
to H.R. 3763. This substitute restores integrity to investor-owned
companies by ensuring that the investors and taxpayers and employees
get an accurate assessment of a corporation.
We know that the Enron debacle demonstrated how corrupting the so-
called free market is when corporate officials and auditing firms are
intertwined. When we create the Federal bureau of audits we remove this
corrupting influence, and appointments for 12 years remove the
temptation of Congress to tamper with the watchdog duties.
So let us remove the conflict of interest between corporations and
auditing firms they can hire and fire. We can guarantee shareholders
accurate and impartial information about their investments, and that is
the true free market solution to this problem.
The underlying bill is more than a no no bill. It is a no no no no no
no no no no bill because does the bill help the SEC recover ill-gotten
gains from corporate executives? No. Does it make CEOs responsible for
their companies' public disclosures? No. Does it help the SEC send
those who commit fraud to jail? No. Does it bar bad executives from
serving in other companies? No. Does it make auditors independent? No.
Does it ensure the oversight board is independent? No. Does it give the
oversight board a clear mandate? No. Does it require auditors to be
rotated? No. Does it close the revolving doors between accountants and
their clients? No.
The underlying bill could be termed the Ken Lay Protection Act. We
can no longer have the fox guarding the hen house. The Kucinich
amendment fixes the problem.
{time} 1300
The CHAIRMAN. The Chair advises Members that the gentleman from Ohio
(Mr. Oxley) has 6 minutes remaining and the gentleman from Ohio (Mr.
Kucinich) has 2\1/2\ minutes remaining.
Mr. OXLEY. Mr. Chairman, I would inquire of the Chair whether the
gentleman from Ohio has further speakers.
Mr. KUCINICH. Right here. I will be closing. Mr. Chairman, I have the
right to close on this?
The CHAIRMAN. The Chair will advise the Member that the gentleman
from Ohio (Mr. Oxley) has the right to close.
Mr. KUCINICH. Mr. Chairman, I reserve the balance of my time.
Mr. OXLEY. Mr. Chairman, I yield 2 minutes to the gentleman from
Louisiana (Mr. Baker).
Mr. BAKER. Mr. Chairman, I thank the gentleman for yielding me this
time.
The Kucinich amendment is an interesting one in its practical effect.
We are going to create a government entity that is going to have the
sole and specific authority to evaluate the financial condition of
17,000 public corporations. Now, if anyone has tried to read a single
financial statement and understand it and then evaluate its accuracy,
one can pretty quickly determine that this is a responsibility beyond
any magnitude that anyone could possibly comprehend.
The amendment, I am sure, is based on a good-faith effort to be
responsive to the Enron crisis, but this would be the crisis of all
crises. We would have a complete inability to have a free flow of
information from the corporation to their investors without this
intervening government regulatory body giving its stamp of approval.
I do not know how many of you have ever had any difficulty, let us
say, with the IRS in trying to work through its maze of regulatory
constraints and get a direct answer overnight on whether or not you are
filing the form properly. This is like taking the IRS and sticking it
in the corporate board room of every corporation in America. This will
not work.
I understand the gentleman's concerns and share those concerns. Many
innocent third parties were harmed by the failure of Enron, Global
Crossing, and perhaps others yet to be disclosed. And I feel for those
individuals who likely will never get any of those funds back in their
retirement accounts or who have lost their jobs. But let us make it
clear, there are ongoing criminal investigations, and prosecutions
certainly to follow, because under the simplest of rules, under rule
10(b)5 of the SEC's regulations, there was fraud committed. People are
going to jail.
What we are trying to do is to create a manner in which a free flow
of accurate information can be given to investors to make quality
decisions. That is what the underlying bill will do.
Mr. KUCINICH. Mr. Chairman, I yield myself 1 minute.
Americans are urged to own a piece of the rock; invest in corporate
America. We have gone from a psychology of owning a piece of the rock
to owning a piece of the Brooklyn Bridge. Because what is happening is
that investors are not being given accurate information by accountants
who have an inherent conflict of interest.
It is said the pen is mightier than the sword. Well, this pencil is
mightier than the free market, apparently, because a pencil can change
the nature of the free market by misstating earnings and then restating
earnings and having the value of the stock drop. And then what happens
to investors? Nothing. They lose it all.
We need to take a stand here. A free market requires accurate
information to operate efficiently. My amendment is the only amendment
that guarantees accurate information for investors, and my amendment is
profoundly conservative. It is totally dedicated to protecting and
conserving the property of investors.
Who is taking a stand here for the investors, to make sure that
investors get information that is accurate and upon which they can make
decisions on how they are going to spend their money?
Mr. Chairman, I reserve the balance of my time.
Mr. OXLEY. Mr. Chairman, I understand I have the right to close and I
plan to do so, and would so indicate to my friend.
Mr. KUCINICH. How much time remains, Mr. Chairman?
The CHAIRMAN. The gentleman from Ohio (Mr. Kucinich) has 1\1/2\
minutes remaining, the gentleman from
[[Page H1573]]
Ohio (Mr. Oxley) has 4 minutes remaining.
Mr. KUCINICH. Mr. Chairman, I continue to reserve the balance of my
time, unless the gentleman is going to close right now.
Mr. OXLEY. I am prepared to close.
Mr. LaFALCE. Mr. Chairman, will the gentleman from Ohio yield me 1
minute?
Mr. OXLEY. Mr. Chairman, I am pleased to yield 1 minute to the
gentleman from New York (Mr. LaFalce).
Mr. LaFALCE. Mr. Chairman, I want to commend the gentleman from Ohio
(Mr. Kucinich) for his good-faith effort to deal with the problem, and
if we were starting anew, I might well favor this approach.
We do have examiners for our banks, our national banks and our State
banks, and they work for the government. We do have examiners for our
thrifts, and they work for the government. We do have examiners for our
credit unions, and they work for the government. It works. And the
reason we had examiners for the government is because we trusted them.
We thought that they would be representing the public interest.
We devised this system in an era when most people put almost all of
their money in banks, in thrifts, in credit unions. That is no longer
the case. Now, most people are putting most of their hard-earned money
in publicly traded corporations.
And while I suspect the amendment of the gentleman from Ohio (Mr.
Kucinich) goes further than we can politically do at this juncture, I
commend him for at least raising the issue.
Mr. KUCINICH. Mr. Chairman, I yield myself the balance of my time.
Let us go to middle America, where men and women who work hard all
their lives to establish some kind of a financial nest egg put their
faith not only in the market, but in this country, and invest in
various corporate enterprises. Mr. and Mrs. Middle America are the
backbone of this economy. They work, they help produce taxes for this
country, and they help produce wealth that can continue to grow and
make America the strong country which it is.
What happens when they cannot have confidence that the earnings
statements of the companies in which they are investing are real? What
if there is no credibility for a market that one day goes up and the
other day goes down because people are lying about their books?
There is something that is at stake here that is much larger than
this bill that is before the House for debate. And what is at stake
here is the confidence that people need to have in our free market
system. And the only way you can rescue that in a climate where the
accounting industry has basically stolen a march on regulators is to
retrieve the role of the government in assuring that people's
investments are going to be protected.
That is what this amendment is about. The free market economy again
requires accurate information to operate efficiently. And so I ask all
of my colleagues, where is your commitment to free markets today? Where
will you stand when your constituents ask what happened to my
investment; why did they lie to me; and why did you not do something
about it?
Mr. OXLEY. Mr. Chairman, I yield myself the balance of my time.
I would welcome my friend from Ohio to the conservative ranks if I
really thought this amendment was conservative in nature, but it is
hardly that. This is a big government solution. It is a one-size-fits-
all solution. It is essentially the neutron bomb. I guess his message
is, if you have lost faith in the free market, you need to have faith
in big government.
I do not think people are ready to make that leap. I think they
understand intuitively, based on their investments, that they trust the
free market, and they trust that our markets are the most open and
efficient markets in the world, represented by the American
marketplace. That is really the message.
And, indeed, people have changed dramatically. Probably just a few
years ago when I first came to Congress, two-thirds of people's savings
were in bank accounts and only a third in equities. That is totally
turned around now. We have become a Nation of investors from a Nation
of savers, and that is a positive development. We have 46 million in
401(k) plans that are invested in those accounts. We have over half of
the households today invested in equities.
We have the most robust market in the history of the world. Let us
not change that. Let us not endanger that free market with the Kucinich
amendment. I ask the Members to vote against the Kucinich amendment and
for the underlying bill.
Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN. All time has expired.
The question is on the amendment in the nature of a substitute
offered by the gentleman from Ohio (Mr. Kucinich).
The question was taken; and the Chairman announced that the noes
appeared to have it.
Recorded Vote
Mr. KUCINICH. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 39,
noes 381, not voting 14, as follows:
[Roll No. 107]
AYES--39
Abercrombie
Baldwin
Berkley
Bonior
Clayton
Clyburn
Conyers
Davis (IL)
Evans
Filner
Frank
Green (TX)
Gutierrez
Hastings (FL)
Hilliard
Jackson (IL)
Jackson-Lee (TX)
Kaptur
Kennedy (RI)
Kucinich
Lee
Lewis (GA)
McDermott
McKinney
Mink
Olver
Owens
Pascrell
Pastor
Payne
Roybal-Allard
Sanders
Schakowsky
Solis
Stark
Thompson (MS)
Waters
Watson (CA)
Woolsey
NOES--381
Ackerman
Aderholt
Akin
Allen
Andrews
Armey
Baca
Bachus
Baird
Baker
Baldacci
Ballenger
Barcia
Barr
Barrett
Bartlett
Barton
Bass
Becerra
Bentsen
Bereuter
Berman
Berry
Biggert
Bilirakis
Bishop
Blumenauer
Blunt
Boehlert
Boehner
Bonilla
Bono
Boozman
Borski
Boswell
Boucher
Boyd
Brady (PA)
Brady (TX)
Brown (FL)
Brown (OH)
Brown (SC)
Bryant
Burr
Burton
Buyer
Callahan
Calvert
Camp
Cannon
Cantor
Capito
Capps
Capuano
Cardin
Carson (IN)
Carson (OK)
Castle
Chabot
Chambliss
Clay
Clement
Coble
Collins
Combest
Condit
Cooksey
Costello
Cox
Coyne
Cramer
Crane
Crenshaw
Crowley
Cubin
Culberson
Cummings
Cunningham
Davis (CA)
Davis (FL)
Davis, Jo Ann
Davis, Tom
Deal
DeFazio
Delahunt
DeLauro
DeLay
DeMint
Deutsch
Diaz-Balart
Dicks
Dingell
Doggett
Dooley
Doolittle
Doyle
Dreier
Duncan
Dunn
Edwards
Ehlers
Ehrlich
Emerson
Engel
Eshoo
Etheridge
Everett
Farr
Fattah
Ferguson
Flake
Fletcher
Foley
Forbes
Ford
Fossella
Frelinghuysen
Frost
Gallegly
Ganske
Gekas
Gephardt
Gibbons
Gillmor
Gilman
Gonzalez
Goode
Goodlatte
Gordon
Goss
Graham
Granger
Graves
Green (WI)
Greenwood
Grucci
Gutknecht
Hall (OH)
Hall (TX)
Hansen
Harman
Hastings (WA)
Hayes
Hayworth
Hefley
Herger
Hill
Hilleary
Hinchey
Hinojosa
Hobson
Hoeffel
Hoekstra
Holden
Holt
Honda
Hooley
Horn
Hostettler
Hoyer
Hulshof
Hunter
Hyde
Inslee
Isakson
Israel
Issa
Istook
Jefferson
Jenkins
John
Johnson (CT)
Johnson (IL)
Johnson, E. B.
Johnson, Sam
Jones (NC)
Jones (OH)
Kanjorski
Keller
Kelly
Kennedy (MN)
Kerns
Kildee
Kilpatrick
Kind (WI)
King (NY)
Kingston
Kirk
Kleczka
Knollenberg
Kolbe
LaFalce
LaHood
Lampson
Langevin
Lantos
Larsen (WA)
Larson (CT)
Latham
LaTourette
Leach
Levin
Lewis (CA)
Lewis (KY)
Linder
Lipinski
LoBiondo
Lofgren
Lowey
Lucas (KY)
Lucas (OK)
Luther
Lynch
Maloney (CT)
Maloney (NY)
Manzullo
Markey
Mascara
Matheson
Matsui
McCarthy (MO)
McCarthy (NY)
McCollum
McCrery
McGovern
McHugh
McInnis
McIntyre
McKeon
McNulty
Meehan
Meek (FL)
Meeks (NY)
Menendez
Mica
Millender-McDonald
Miller, Dan
Miller, Gary
Miller, George
Miller, Jeff
Mollohan
Moore
Moran (KS)
Moran (VA)
Morella
Murtha
Myrick
Nadler
Napolitano
Neal
Nethercutt
Ney
Northup
Norwood
Nussle
Oberstar
Obey
Ortiz
Osborne
Ose
Otter
Oxley
Pallone
Paul
Pelosi
Pence
Peterson (MN)
Peterson (PA)
Petri
[[Page H1574]]
Phelps
Pickering
Pitts
Platts
Pombo
Pomeroy
Portman
Price (NC)
Putnam
Quinn
Radanovich
Rahall
Ramstad
Rangel
Rehberg
Reyes
Reynolds
Rivers
Roemer
Rogers (KY)
Rogers (MI)
Rohrabacher
Ros-Lehtinen
Ross
Rothman
Roukema
Royce
Rush
Ryan (WI)
Ryun (KS)
Sabo
Sanchez
Sandlin
Sawyer
Saxton
Schaffer
Schiff
Schrock
Scott
Sensenbrenner
Serrano
Sessions
Shadegg
Shaw
Shays
Sherman
Sherwood
Shimkus
Shows
Shuster
Simmons
Simpson
Skeen
Skelton
Slaughter
Smith (MI)
Smith (NJ)
Smith (TX)
Snyder
Souder
Spratt
Stearns
Stenholm
Strickland
Stump
Stupak
Sullivan
Sununu
Sweeney
Tancredo
Tanner
Tauscher
Tauzin
Taylor (MS)
Taylor (NC)
Terry
Thomas
Thompson (CA)
Thornberry
Thurman
Tiahrt
Tiberi
Tierney
Toomey
Towns
Turner
Udall (CO)
Udall (NM)
Upton
Velazquez
Visclosky
Vitter
Walden
Walsh
Wamp
Watkins (OK)
Watt (NC)
Watts (OK)
Waxman
Weldon (FL)
Weldon (PA)
Weller
Wexler
Whitfield
Wicker
Wilson (NM)
Wilson (SC)
Wolf
Wu
Wynn
Young (AK)
Young (FL)
NOT VOTING--14
Blagojevich
DeGette
English
Gilchrest
Hart
Houghton
Pryce (OH)
Regula
Riley
Rodriguez
Smith (WA)
Thune
Traficant
Weiner
{time} 1333
Messrs. BACA, KINGSTON, SAXTON, Mrs. DAVIS of California, Messrs.
CUMMINGS, GEORGE MILLER of California, BURR of North Carolina and Ms.
CARSON of Indiana changed their vote from ``aye'' to ``no.''
So the amendment in the nature of a substitute was rejected.
The result of the vote was announced as above recorded.
Stated against:
Mr. ENGLISH. Mr. Speaker, on rollcall vote No. 107, I was unavoidably
detained at an event with several of my colleagues and missed the vote.
Had I been present, I would have voted ``no.''
Mr. WEINER. Mr. Speaker, on Wednesday, April 24, 2002, I was
unavoidably detained and missed rollcall vote No. 107. Had I been
present, I would have voted ``no.''
The CHAIRMAN. It is now in order to consider amendment No. 5 printed
in House Report 107-418.
Amendment in the Nature of a Substitute No. 5 Offered by Mr. LaFalce
Mr. LaFALCE. Mr. Chairman, I offer an amendment in the nature of a
substitute.
The CHAIRMAN. The Clerk will designate the amendment in the nature of
a substitute.
The text of the amendment in the nature of a substitute is as
follows:
Amendment in the nature of a substitute No. 5 offered by
Mr. LaFalce:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Corporate
and Auditing Accountability, Responsibility, and Transparency
Act of 2002''.
(b) Table of Contents.--
Sec. 1. Short title; table of contents.
Sec. 2. Auditor oversight.
Sec. 3. Improper influence on conduct of audits.
Sec. 4. Real-time disclosure of financial information.
Sec. 5. Insider trades during pension fund blackout periods prohibited.
Sec. 6. Improved transparency of corporate disclosures.
Sec. 7. Improvements in reporting on insider transactions and
relationships.
Sec. 8. Enhanced oversight of periodic disclosures by issuers.
Sec. 9. Retention of records.
Sec. 10. Removal of unfit corporate officers.
Sec. 11. Disgorgement required.
Sec. 12. CEO and CFO accountability for disclosure.
Sec. 13. Securities and Exchange Commission authority to provide
relief.
Sec. 14. Authorization of appropriations of the Securities and Exchange
Commission.
Sec. 15. Analyst conflicts of interest.
Sec. 16. Independent directors.
Sec. 17. Enforcement of audit committee governance practices.
Sec. 18. Review of corporate governance practices.
Sec. 19. Study of enforcement actions.
Sec. 20. Study of credit rating agencies.
Sec. 21. Study of investment banks
Sec. 22. Study of model rules for attorneys of issuers.
Sec. 23. Enforcement authority.
Sec. 24. Exclusion for investment companies.
Sec. 25. Definitions.
SEC. 2. AUDITOR OVERSIGHT.
(a) Certified Financial Statement Requirements.--If a
financial statement is required by the securities laws or any
rule or regulation thereunder to be certified by an
independent public or certified accountant, an accountant
shall not be considered to be qualified to certify such
financial statement, and the Securities and Exchange
Commission shall not accept a financial statement certified
by an accountant, unless such accountant--
(1) is subject to a system of review by a public regulatory
organization that complies with the requirements of this
section and the rules prescribed by the Commission under this
section; and
(2) has not been determined in the most recent review
completed under such system to be not qualified to certify
such a statement.
(b) Establishment of PRO.--
(1) Establishment required.--Not later than 90 days after
the date of enactment of this section, the Commission shall
establish a public regulatory organization to perform the
duties set forth in this section.
(2) Chairman.--The Chairman of the public regulatory
organization shall be appointed by the Commission for a term
of 5 years.
(3) Appointment of public regulatory organization
members.--There shall be 6 additional public regulatory
organization members, who shall be selected jointly by the
Chairman of the public regulatory organization and the
Chairman of the Commission.
(4) Accountant members.--Up to 2 of the members may be
present or former certified public accountants, provided such
members--
(A) are not currently in public practices;
(B) have not been a person associated with a public
accounting firm for a period of at least 3 years; and
(C) agree to not be a person associated with a public
accounting firm or to receive consulting fees from a public
accounting firm for a period of 5 years after leaving the
public regulatory organization.
(5) Nominations.--In making appointments of members, the
Chairman of the public regulatory organization and the
Chairman of the Commission shall consult with, and make
appointments from nominations received from--
(A) institutional investors;
(B) public employee pension plans;
(C) pension plans organized pursuant to the Employee
Retirement Income Security Act of 1974; and
(D) pension plans organized pursuant to the Taft-Hartley
Act.
(6) Terms.--The members of the public regulatory
organization shall have terms of 4 years, except that the
Chairman of the public regulatory organization and the
Chairman of the Commission shall adopt procedures for
staggering the initial terms of the members first so
appointed to provide for a reasonable overlapping of the
terms of office of subsequently elected members.
(7) Full-time basis.--The members of the public regulatory
organization shall serve on a full-time basis, severing all
business ties with former firms or employers prior to
beginning service on the public regulatory organization.
(8) Rules.--Following selection of the initial members of
the public regulatory organization, the public regulatory
organization shall propose and adopt rules, which shall
provide for--
(A) the operation and administration of the public
regulatory organization, including the compensation of the
members of the public regulatory organization, which shall be
at a level comparable to similar professional positions in
the private sector;
(B) the appointment and compensation of such employees,
attorneys, and consultants as may be necessary or appropriate
to carry out the public regulatory organization's functions
under this section;
(C) the registration of public accounting firms with the
public regulatory organization pursuant to subsections (d);
and
(D) the matters described in subsections (e) and (f).
(9) Funding of the public regulatory organization.--
(A) Self-financing.--The public regulatory organization
shall establish rules for the assessment and collection of
fees sufficient to recover the costs and expenses of the
public regulatory organization and to permit the public
regulatory organization to operate on a self-financing basis.
(B) Assessment and collection.--The fees shall be assessed
on issuers that file any financial statements, reports, or
other documents with the Commission under the securities laws
that must be certified by a public accounting firm. The fees
shall be collected through the public accounting firm that
certifies such statement, report, or document.
(C) Payment a condition of registration.--The public
regulatory organization shall terminate or suspend the
registration under subsection (d) of any public accounting
firm that fails to collect and transmit a fee assessed under
this subsection.
(c) Prohibition on the Offer of Both Audit and Consulting
Services.--
(1) Modification of regulations required.--The Commission
shall revise its regulations pertaining to auditor
independence to require that an accountant shall not be
considered independent with respect to an audit client if the
accountant provides to the client the following nonaudit
services, subject to such conditions and exemptions as the
Commission shall prescribe:
(A) financial information system design or implementation;
or
(B) internal audit services.
(2) Audit committee approval of nonaudit services.--The
Commission shall
[[Page H1575]]
revise its regulations pertaining to auditor independence to
require that--
(A) an accountant shall not be considered to be independent
for purposes of certifying the financial statements or other
documents of an issuer required to be filed with the
Commission under the securities laws for any fiscal year of
the issuer if, during such fiscal year, the accountant
provides any nonaudit services unless the provision of such
nonaudit services was approved in advance by the audit
committee or, in the absence of an audit committee, the
equivalent board committee or the entire board of directors;
and
(B) in approving such services, the audit committee shall
evaluate the impact of the provision of such services on the
independence of the auditor.
(3) Review of prohibited nonaudit services.--The Commission
is authorized to review the impact on the independence of
auditors of the scope of services provided by auditors to
issuers in order to determine whether the list of prohibited
nonaudit services under paragraph (1) shall be modified. In
conducting such review, the Commission shall consider the
impact of the provision of a service on an auditor's
independence where provision of the service creates a
conflict of interest with the audit client.
(4) Additions by rule.--After conducting the review
required by paragraph (3) and at any other time, the
Commission may, by rule consistent with the protection of
investors and the public interest, modify the list of
prohibited nonaudit services under paragraph (1).
(5) Report.--The Commission shall report to the Committee
on Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the
Senate on its conduct of any reviews as required by this
section. The report shall include a discussion of regulatory
or legislative steps that are recommended or that may be
necessary to address concerns identified in the study.
(6) Definitions.--For purposes of this subsection:
(A) Financial information system design or
implementation.--The term ``financial information systems
design or implementation'' means designing or implementing a
hardware or software system used to generate information that
is significant to the audit client's financial statements
taken as a whole, not including services an accountant
performs in connection with the assessment, design, and
implementation of internal accounting controls and risk
management controls.
(B) Internal audit services.--The term ``internal audit
services'' means internal audit services for an audit client
or an affiliate of an audit client, not including
nonrecurring evaluations of discrete items or programs and
operational internal audits unrelated to the internal
accounting controls, financial systems, or financial
statements.
(7) Deadline for rulemaking.--The Commission shall--
(A) within 90 days after the date of enactment of this Act,
propose, and
(B) within 270 days after such date, prescribe,
the revisions to its regulations required by this subsection.
(d) Registration With Public Regulatory Organization.--
(1) Registration required.--Beginning 1 year after the date
on which all initial members of the public regulatory
organization have been selected in accordance with subsection
(b), it shall be unlawful for a public accounting firm to
furnish an accountant's report on any financial statement,
report, or other document required to be filed with the
Commission under any Federal securities law, unless such firm
is registered with the public regulatory organization.
(2) Application for registration.--A public accounting firm
may be registered under this subsection by filing with the
public regulatory organization an application for
registration in such form and containing such information as
the public regulatory organization, by rule, may prescribe.
Each application shall include--
(A) the names of all clients of the public accounting firm
for which the firm furnishes accountant's reports on
financial statements, reports, or other documents filed with
the Commission;
(B) financial information of the public accounting firm for
its most recent fiscal year, including its annual revenues
from accounting and auditing services, its assets, and its
liabilities;
(C) a statement of the public accounting firm's policies
and procedures with respect to quality control of its
accounting and auditing practice;
(D) information relating to criminal, civil, or
administrative actions or formal disciplinary proceedings
pending against such firm, or any person associated with such
firm, in connection with an accountant's report furnished by
such firm;
(E) a list of persons associated with the public accounting
firm who are certified public accountants, including any
State professional license or certification number for each
such person; and
(F) such other information that is reasonably related to
the public regulatory organization's responsibilities as the
public regulatory organization considers necessary or
appropriate.
(3) Periodic reports.--Once in each year, or more
frequently as the public regulatory organization, by rule,
may prescribe, each public accounting firm registered with
the public regulatory organization shall submit reports to
the public regulatory organization updating the information
contained in its application for registration and containing
such additional information that is reasonably related to the
public regulatory organization's responsibilities as the
public regulatory organization, by rule, may prescribe.
(4) Exemptions.--The Commission, by rule or order, upon its
own motion or upon application, may conditionally or
unconditionally exempt any public accounting firm or any
accountant's report, or any class of public accounting firms
or any class of accountant's reports, from any provisions of
this section or the rules or regulations issued hereunder, if
the Commission finds that such exemption is consistent with
the public interest, the protection of investors, and the
purposes of this section.
(5) Confidentiality.--The public regulatory organization
may, by rule, designate portions of the filings required
pursuant to paragraphs (2) and (3) as privileged and
confidential. This paragraph shall be considered to be a
statute described in section 552(b)(3)(B) of title 5, United
States Code, for purposes of that section 552.
(e) Duties Regarding Quality Control.--
(1) Objectives; attainment.--The public regulatory
organization shall seek to promote a high level of
professional conduct among public accounting firms registered
with the public regulatory organization, to improve the
quality of audit services provided by such firms, and, in
general, to protect investors and promote the public
interest. The public regulatory organization shall attain
these objectives--
(A) by establishing standards regarding the performance of
financial audits in accordance with the requirements of
paragraph (2);
(B) by the direct performance of quality reviews and
inspections of audits in accordance with the requirements of
paragraphs (3) and (4); and
(C) by the supervision and oversight of peer review
organizations in accordance with the requirements of
paragraph (5).
(2) Audit quality standards.--
(A) In general.--The public regulatory organization shall,
by rule, establish quality standards applicable to the
conduct of audit services provided by public accounting
firms. Such standards shall include--
(i) independence standards;
(ii) quality control standards;
(iii) professional and ethical standards; and
(iv) such other standards as the public regulatory
organization determines to be necessary to carry out the
objectives specified in paragraph (1).
(B) Specific contents of standards.--In establishing the
quality standards required by subparagraph (A), the public
regulatory organization shall also establish--
(i) procedures for the monitoring by public accounting
firms of their compliance with professional ethical standards
established by the public regulatory organization, including
its independence from its audit clients;
(ii) procedures for the assignment of personnel to audit
engagements;
(iii) procedures for consultation within a public
accounting firm or with other accountants relating to
accounting and auditing questions;
(iv) procedures for the supervision of audit work;
(v) procedures for the review of decisions to accept and
retain audit clients;
(vi) procedures for the internal inspection of the public
accounting firms own compliance with such policies and
procedures;
(vii) requirements for public accounting firms to prepare
and maintain for a period of no less than 7 years, audit work
papers and other information related to any audit report, in
sufficient detail to support the conclusions reached in an
audit report issued by a public accounting firm; and
(viii) procedures establishing ``concurring'' or ``second''
partner review systems for the evaluation and review of audit
work by a partner that is not in charge of the conduct of the
audit.
(3) Direct reviews of public accounting firms.--The public
regulatory organization shall, by rule, establish procedures
for the conduct of a continuing program of inspections of
each public accounting firm registered with the public
regulatory organization to assess compliance by such firm,
and by persons associated with such firm, with applicable
provisions of this Act, the securities laws, the rules and
regulations thereunder, the rules adopted by the public
regulatory organization, and professional standards. Except
as provided in paragraph (5), the public regulatory
organization shall annually inspect each public accounting
firm that audits more than 100 issuers on an ongoing annual
basis, to the extent practicable, and all other public
accounting firms no less than at least once every 3 years. In
conducting such inspections, the public regulatory
organization shall, among other things, inspect selected
audit and review engagements. The review shall include
evaluations of the firm's quality control procedures and
compliance with all legal and ethical requirements. In
connection with each review, the public regulatory
organization shall prepare a report of its findings and such
report, accompanied by any letter of comments by the public
regulatory organization or reviewer and any letter of
response from the firm under review, shall be made available
to the public. The public regulatory organization shall take
any appropriate disciplinary
[[Page H1576]]
or remedial action based on its findings after completion of
such review and an opportunity for a hearing.
(4) Quality review of individual audits.--The public
regulatory organization shall, by rule, establish procedures
for the conduct of direct inspection and review of individual
audits of issuers and standards under which it will evaluate
audit service quality. A finding by the public regulatory
organization that an individual audit of an issuer did or did
not meet the standards of the public regulatory organization
with respect to the quality of the audit shall not be
construed in any action arising out of the securities laws as
indicative of compliance or noncompliance with the securities
laws or with any standard of liability arising thereunder.
(5) Use of professional peer review organizations.--
(A) Option to utilize peer review organizations.--The
public regulatory organization may, by rule, establish
requirements for the use of peer review organizations for the
purposes of conducting the continuing program of inspections
to assess compliance as required by paragraph (3) of each
public accounting firm registered with the public regulatory
organization. Such rule shall provide for appropriate
oversight and supervision of such peer review organization by
the public regulatory organization to ensure that such
inspections meet the requirements of such paragraph.
(B) Penalties.--If the public regulatory organization
establishes requirements for the conduct of peer reviews
under subparagraph (A), the violation by a public accounting
firm or a person associated with such a firm of a rule of the
peer review organization to which the firm belongs shall
constitute grounds for--
(i) the imposition of disciplinary sanctions by the public
regulatory organization pursuant to subsection (g); and
(ii) denial to the public accounting firm or person
associated with such firm of the privilege of appearing or
practicing before the Commission.
(6) Confidentiality.--Except as otherwise provided by this
section, all reports, memoranda, and other information
provided to the public regulatory organization solely for
purposes of paragraph (3) or (4), or to a peer review
organization certified by the public regulatory organization,
shall be confidential, unless such confidentiality is
expressly waived by the person or entity that created or
provided the information.
(f) Disciplinary Duties of public regulatory
organization.--The public regulatory organization shall have
the following duties and powers:
(1) Investigations and disciplinary proceedings.--The
public regulatory organization shall establish fair
procedures for investigating and disciplining public
accounting firms registered with the public regulatory
organization, and persons associated with such firms, for
violations of the Federal securities laws, the rules or
regulations issued thereunder, the rules adopted by the
public regulatory organization, or professional standards in
connection with the preparation of an accountant's report on
a financial statement, report, or other document filed with
the Commission.
(2) Investigation procedures.--
(A) In general.--The public regulatory organization may
conduct an investigation of any act, practice, or omission by
a public accounting firm registered with the public
regulatory organization, or by any person associated with
such firm, in connection with the preparation of an
accountant's report on a financial statement, report, or
other document filed with the Commission that may violate any
applicable provision of the Federal securities laws, the
rules and regulations issued thereunder, the rules adopted by
the public regulatory organization, or professional
standards, whether such act, practice, or omission is the
subject of a criminal, civil, or administrative action, or a
disciplinary proceeding, or otherwise is brought to the
attention of the public regulatory organization.
(B) Powers of public regulatory organization.--For purposes
of an investigation under this paragraph, the public
regulatory organization may, in addition to such other
actions as the public regulatory organization determines to
be necessary or appropriate--
(i) require the testimony of any person associated with a
public accounting firm registered with the public regulatory
organization, with respect to any matter which the public
regulatory organization considers relevant or material to the
investigation;
(ii) require the production of audit workpapers and any
other document or information in the possession of a public
accounting firm registered with the public regulatory
organization, or any person associated with such firm,
wherever domiciled, that the public regulatory organization
considers relevant or material to the investigation, and may
examine the books and records of such firm to verify the
accuracy of any documents or information so supplied; and
(iii) request the testimony of any person and the
production of any document in the possession of any person,
including a client of a public accounting firm registered
with the public regulatory organization, that the public
regulatory organization considers relevant or material to the
investigation.
(C) Suspension or revocation of registration for
noncompliance.--The refusal of any person associated with a
public accounting firm registered with the public regulatory
organization to testify, or the refusal of any such person to
produce documents or otherwise cooperate with the public
regulatory organization, in connection with an investigation
or hearing under this section, shall be cause for suspending
or barring such person from associating with a public
accounting firm registered with the public regulatory
organization, or such other appropriate sanction authorized
by paragraph (3)(B) as the public regulatory organization
shall determine. The refusal of any public accounting firm
registered with the public regulatory organization to produce
documents or otherwise cooperate with the public regulatory
organization, in connection with an investigation or hearing
under this section, shall be cause for the suspension or
revocation of the registration of such firm, or such other
appropriate sanction authorized by paragraph (3)(B) as the
public regulatory organization shall determine.
(D) Referral to commission.--
(i) In general.--If the public regulatory organization is
unable to conduct or complete an investigation or hearing
under this section because of the refusal of any client of a
public accounting firm registered with the public regulatory
organization, or any other person, to testify, produce
documents, or otherwise cooperate with the public regulatory
organization in connection with such investigation, the
public regulatory organization shall report such refusal to
the Commission.
(ii) Investigation.--The Commission may designate the
public regulatory organization or one or more officers of the
public regulatory organization who shall be empowered, in
accordance with such procedures as the Commission may adopt,
to subpoena witnesses, compel their attendance, and require
the production of any books, papers, correspondence,
memoranda, or other records relevant to any investigation by
the public regulatory organization. Attendance of witnesses
and the production of any records may be required from any
place in the United States or any State at any designated
place of hearing. Enforcement of a subpoena issued by the
public regulatory organization, or an officer of the public
regulatory organization, pursuant to this subparagraph shall
occur in the manner provided for in section 21(c).
Examination of witnesses subpoenaed pursuant to this
subparagraph shall be conducted before an officer authorized
to administer oaths by the laws of the United States or of
the place where the examination is held.
(iii) Referrals to commission.--The public regulatory
organization may refer any investigation to the Commission,
as the public regulatory organization deems appropriate.
(E) Immunity from civil liability.--An employee of the
public regulatory organization engaged in carrying out an
investigation or disciplinary proceeding under this section
shall be immune from any civil liability arising out of such
investigation or disciplinary proceeding in the same manner
and to the same extent as an employee of the Federal
Government in similar circumstances.
(3) Disciplinary procedures.--
(A) Decision to discipline.--In a proceeding by the public
regulatory organization to determine whether a public
accounting firm, or a person associated with such firm,
should be disciplined, the public regulatory organization
shall bring specific charges, notify such firm or person of
the charges, give such firm or person an opportunity to
defend against such charges, and keep a record of such
actions.
(B) Sanctions.--If the public regulatory organization,
after conducting a review and providing an opportunity for a
hearing, finds that a public accounting firm, or a person
associated with such firm, has engaged in any act, practice,
or omission in violation of the Federal securities laws, the
rules or regulations issued thereunder, the rules adopted by
the public regulatory organization, or professional
standards, the public regulatory organization may impose such
disciplinary sanctions as it deems appropriate, including--
(i) temporary or permanent revocation or suspension of
registration under this section;
(ii) limitation of activities, functions, and operations;
(iii) fine;
(iv) censure;
(v) in the case of a person associated with a public
accounting firm, suspension or bar from being associated with
a public accounting firm registered with the public
regulatory organization; and
(vi) any such other disciplinary sanction or remedial
action as the public regulatory organization has established
by rule that the public regulatory organization determines to
be appropriate to prevent the recurrence of the violation.
(C) Statement required.--A determination by the public
regulatory organization to impose a disciplinary sanction
shall be supported by a written statement by the public
regulatory organization that shall be made available to the
public and that sets forth--
(i) any act or practice in which the public accounting firm
or person associated with such firm has been found to have
engaged, or which such firm or person has been found to have
omitted;
(ii) the specific provision of the Federal securities laws,
the rules or regulations issued thereunder, the rules adopted
by the public regulatory organization, or professional
standards which any such act, practice, or omission is deemed
to violate; and
(iii) the sanction imposed and the reasons therefor.
[[Page H1577]]
(D) Prohibition on association.--It shall be unlawful--
(i) for any person as to whom a suspension or bar is in
effect willfully to be or to become associated with a public
accounting firm registered with the public regulatory
organization, in connection with the preparation of an
accountant's report on any financial statement, report, or
other document filed with the Commission, without the consent
of the public regulatory organization or the Commission; and
(ii) for any public accounting firm registered with the
public regulatory organization to permit such a person to
become, or remain, associated with such firm without the
consent of the public regulatory organization or the
Commission, if such firm knew or, in the exercise of
reasonable care should have known, of such suspension or bar.
(4) Reporting of sanctions.--If the public regulatory
organization imposes a disciplinary sanction against a public
accounting firm, or a person associated with such firm, the
public regulatory organization shall report such sanction to
the Commission, to the appropriate State or foreign licensing
public regulatory organization or public regulatory
organizations with which such firm or such person is licensed
or certified to practice public accounting, and to the
public. The information reported shall include--
(A) the name of the public accounting firm, or person
associated with such firm, against whom the sanction is
imposed;
(B) a description of the acts, practices, or omissions upon
which the sanction is based;
(C) the nature of the sanction; and
(D) such other information respecting the circumstances of
the disciplinary action (including the name of any client of
such firm affected by such acts, practices, or omissions) as
the public regulatory organization deems appropriate.
(5) Discovery and admissibility of public regulatory
organization material.--
(A) Discoverability.--
(i) In general.--Except as provided in subparagraph (C),
all reports, memoranda, and other information prepared,
collected, or received by the public regulatory organization,
and the deliberations and other proceedings of the public
regulatory organization and its employees and agents in
connection with an investigation or disciplinary proceeding
under this section shall not be subject to any form of civil
discovery, including demands for production of documents and
for testimony of individuals, in connection with any
proceeding in any State or Federal court, or before any State
or Federal administrative agency. This subparagraph shall not
apply to any information provided to the public regulatory
organization that would have been subject to discovery from
the person or entity that provided it to the public
regulatory organization, but is no longer available from that
person or entity.
(ii) Exemption.--Submissions to the public regulatory
organization by or on behalf of a public accounting firm or
person associated with such a firm or on behalf of any other
participant in a public regulatory organization proceeding
(other than a public hearing), including documents generated
by the public regulatory organization itself, shall be exempt
from discovery to the same extent as the material described
in clause (i), whether in the possession of the public
regulatory organization or any other person, if such
submission--
(I) is prepared specifically for the purpose of the public
regulatory organization proceeding; and
(II) addresses the merits of the issues under investigation
by the public regulatory organization.
(iii) Hearings public.--Except as otherwise ordered by the
public regulatory organization on its own motion or on the
motion of a party, all hearings under this paragraph shall be
open to the public.
(B) Admissibility.--
(i) In general.--Except as provided in subparagraph (C),
all reports, memoranda, and other information prepared,
collected, or received by the public regulatory organization,
the deliberations and other proceedings of the public
regulatory organization and its employees and agents in
connection with an investigation or disciplinary proceeding
under this section, the fact that an investigation or
disciplinary proceeding has been commenced, and the public
regulatory organization's determination with respect to any
investigation or disciplinary proceeding shall be
inadmissible in any proceeding in any State or Federal court
or before any State or Federal administrative agency.
(ii) Treatment of certain documents.--Submissions to the
public regulatory organization by or on behalf of a public
accounting firm or person associated with such a firm or on
behalf of any other participant in a public regulatory
organization proceeding, including documents generated by the
public regulatory organization itself, shall be inadmissible
to the same extent as the material described in clause (i),
if such submission--
(I) is prepared specifically for the purpose of the public
regulatory organization proceedings; and
(II) addresses the merits of the issues under investigation
by the public regulatory organization.
(C) Availability and admissibility of information.--
(i) In general.--All information referred to in
subparagraphs (A) and (B) shall be--
(I) available to the Commission;
(II) available to any other Federal department or agency in
connection with the exercise of its regulatory authority to
the extent that such information would be available to such
agency from the Commission as a result of a Commission
enforcement investigation;
(III) available to Federal and State authorities in
connection with any criminal investigation or proceeding;
(IV) admissible in any action brought by the Commission or
any other Federal department or agency pursuant to its
regulatory authority, to the extent that such information
would be available to such agency from the Commission as a
result of a Commission enforcement investigation and in any
criminal action; and
(V) available to State licensing public regulatory
organizations to the extent authorized in paragraph (6).
(ii) Other limitations.--Any documents or other information
provided to the Commission or other authorities pursuant to
clause (i) shall be subject to the limitations on discovery
and admissibility set forth in subparagraphs (A) and (B).
(6) Participation by state licensing public regulatory
organizations.--
(A) Notice.--When the public regulatory organization
institutes an investigation pursuant to paragraph (2)(A), it
shall notify the State licensing public regulatory
organizations in the States in which the public accounting
firm or person associated with such firm engaged in the act
or failure to act alleged to have violated professional
standards, of the pendency of the investigation, and shall
invite the State licensing public regulatory organizations to
participate in the investigation.
(B) Acceptance by state public regulatory organization.--If
a State licensing public regulatory organization elects to
join in the investigation, its representatives shall
participate, pursuant to rules established by the public
regulatory organization, in investigating the matter and in
presenting the evidence justifying the charges in any hearing
pursuant to paragraph (3)(A).
(C) State sanctions permitted.--If the public regulatory
organization or the Commission imposes a sanction upon a
public accounting firm or person associated with such a firm,
and that determination either is not subjected to judicial
review or is upheld on judicial review, a State licensing
public regulatory organization may impose a sanction on the
basis of the public regulatory organization's report pursuant
to paragraph (4). Any sanction imposed by the State licensing
public regulatory organization under this clause shall be
inadmissible in any proceeding in any State or Federal court
or before any State or Federal administrative agency.
(g) Review and Approval of Rules.--
(1) Submission, publication, and comment.--Each recognized
public regulatory organization shall file with the
Commission, in accordance with such rules as the Commission
may prescribe, copies of any proposed rule or any proposed
change in, addition to, or deletion from the rules of such
recognized public regulatory organization (hereinafter in
this subsection collectively referred to as a ``proposed rule
change'') accompanied by a concise general statement of the
basis and purpose of such proposed rule change. The
Commission shall, upon the filing of any proposed rule
change, publish notice thereof together with the terms of
substance of the proposed rule change or a description of the
subjects and issues involved. The Commission shall give
interested persons an opportunity to submit written data,
views, and arguments concerning such proposed rule change. No
proposed rule change shall take effect unless approved by the
Commission or otherwise permitted in accordance with the
provisions of this subsection.
(2) Approval or proceedings.--Within 35 days of the date of
publication of notice of the filing of a proposed rule change
in accordance with paragraph (1) of this subsection, or
within such longer period as the Commission may designate up
to 90 days of such date if it finds such longer period to be
appropriate and publishes its reasons for so finding or as to
which the recognized public regulatory organization consents,
the Commission shall--
(A) by order approve such proposed rule change; or
(B) institute proceedings to determine whether the proposed
rule change should be disapproved. Such proceedings shall
include notice of the grounds for disapproval under
consideration and opportunity for hearing and be concluded
within 180 days of the date of publication of notice of the
filing of the proposed rule change. At the conclusion of such
proceedings the Commission, by order, shall approve or
disapprove such proposed rule change. The Commission may
extend the time for conclusion of such proceedings for up to
60 days if it finds good cause for such extension and
publishes its reasons for so finding or for such longer
period as to which the recognized public regulatory
organization consents.
(3) Basis for approval or disapproval.--The Commission
shall approve a proposed rule change of a recognized public
regulatory organization if it finds that such proposed rule
change is consistent with the requirements of this Act and
the rules and regulations thereunder applicable to such
organization. The Commission shall disapprove a proposed rule
change of a recognized public regulatory organization if it
does not make such finding. The Commission shall not approve
any proposed rule change prior to the
[[Page H1578]]
30th day after the date of publication of notice of the
filing thereof, unless the Commission finds good cause for so
doing and publishes its reasons for so finding.
(4) Rules effective upon filing.--
(A) Notwithstanding the provisions of paragraph (2) of this
subsection, a proposed rule change may take effect upon
filing with the Commission if designated by the recognized
public regulatory organization as (i) constituting a stated
policy, practice, or interpretation with respect to the
meaning, administration, or enforcement of an existing rule
of the recognized public regulatory organization, (ii)
establishing or changing a due, fee, or other charge imposed
by the recognized public regulatory organization, or (iii)
concerned solely with the administration of the recognized
public regulatory organization or other matters which the
Commission, by rule, consistent with the public interest and
the purposes of this subsection, may specify as outside the
provisions of such paragraph (2).
(B) Notwithstanding any other provision of this subsection,
a proposed rule change may be put into effect summarily if it
appears to the Commission that such action is necessary for
the protection of investors, or otherwise in accordance with
the purposes of this title. Any proposed rule change so put
into effect shall be filed promptly thereafter in accordance
with the provisions of paragraph (1) of this subsection.
(C) Any proposed rule change of a recognized public
regulatory organization which has taken effect pursuant to
subparagraph (A) or (B) of this paragraph may be enforced by
such organization to the extent it is not inconsistent with
the provisions of this Act, the securities laws, the rules
and regulations thereunder, and applicable Federal and State
law. At any time within 60 days of the date of filing of such
a proposed rule change in accordance with the provisions of
paragraph (1) of this subsection, the Commission summarily
may abrogate the change in the rules of the recognized public
regulatory organization made thereby and require that the
proposed rule change be refiled in accordance with the
provisions of paragraph (1) of this subsection and reviewed
in accordance with the provisions of paragraph (2) of this
subsection, if it appears to the Commission that such action
is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of this Act. Commission action pursuant to the
preceding sentence shall not affect the validity or force of
the rule change during the period it was in effect, shall not
be subject to court review, and shall not be deemed to be
``final agency action'' for purposes of section 704 of title
5, United States Code.
(h) Commission Action To Change Rules.--The Commission, by
rule, may abrogate, add to, and delete from (hereinafter in
this subsection collectively referred to as ``amend'') the
rules of a recognized public regulatory organization as the
Commission deems necessary or appropriate to insure the fair
administration of the recognized public regulatory
organization, to conform its rules to requirements of this
Act, the securities laws, and the rules and regulations
thereunder applicable to such organization, or otherwise in
furtherance of the purposes of this Act, in the following
manner:
(1) The Commission shall notify the recognized public
regulatory organization and publish notice of the proposed
rulemaking in the Federal Register. The notice shall include
the text of the proposed amendment to the rules of the
recognized public regulatory organization and a statement of
the Commission's reasons, including any pertinent facts, for
commencing such proposed rulemaking.
(2) The Commission shall give interested persons an
opportunity for the oral presentation of data, views, and
arguments, in addition to an opportunity to make written
submissions. A transcript shall be kept of any oral
presentation.
(3) A rule adopted pursuant to this subsection shall
incorporate the text of the amendment to the rules of the
recognized public regulatory organization and a statement of
the Commission's basis for and purpose in so amending such
rules. This statement shall include an identification of any
facts on which the Commission considers its determination so
to amend the rules of the recognized public regulatory agency
to be based, including the reasons for the Commission's
conclusions as to any of such facts which were disputed in
the rulemaking.
(4)(A) Except as provided in paragraphs (1) through (3) of
this subsection, rulemaking under this subsection shall be in
accordance with the procedures specified in section 553 of
title 5, United States Code, for rulemaking not on the
record.
(B) Nothing in this subsection shall be construed to impair
or limit the Commission's power to make, or to modify or
alter the procedures the Commission may follow in making,
rules and regulations pursuant to any other authority under
the securities laws.
(C) Any amendment to the rules of a recognized public
regulatory organization made by the Commission pursuant to
this subsection shall be considered for all purposes to be
part of the rules of such recognized public regulatory
organization and shall not be considered to be a rule of the
Commission.
(i) Commission Oversight of the PRO.--
(1) Records and examinations.--A public regulatory
organization shall make and keep for prescribed periods such
records, furnish such copies thereof, and make and
disseminate such reports as the Commission, by rule,
prescribes as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in
furtherance of the purposes of this Act or the securities
laws.
(2) Additional duties; special reviews.--A public
regulatory organization shall perform such other duties or
functions as the Commission, by rule or order, determines are
necessary or appropriate in the public interest or for the
protection of investors and to carry out the purposes of this
Act and the securities laws, including conducting a special
review of a particular public accounting firm's quality
control system or a special review of a particular aspect of
some or all public accounting firms' quality control systems.
(3) Annual report; proposed budget.--
(A) Submission of annual report and budget.--A public
regulatory organization shall submit an annual report and its
proposed budget to the Commission for review and approval, by
order, at such times and in such form as the Commission shall
prescribe.
(B) Contents of annual report.--Each annual report required
by subparagraph (A) shall include--
(i) a detailed description of the activities of the public
regulatory organization;
(ii) the audited financial statements of the public
regulatory organization;
(iii) a detailed explanation of the fees and charges
imposed by the public regulatory organization under
subsection (b)(9); and
(iv) such other matters as the public regulatory
organization or the Commission deems appropriate.
(C) Transmittal of annual report to congress.--The
Commission shall transmit each approved annual report
received under subparagraph (A) to the Committee on Financial
Services of the United States House of Representatives and
the Committee on Banking, Housing, and Urban Affairs of the
United States Senate. At the same time it transmits a public
regulatory organization's annual report under this
subparagraph, the Commission shall include a written
statement of its views of the functioning and operations of
the public regulatory organization.
(D) Public availability.--Following transmittal of each
approved annual report under subparagraph (C), the Commission
and the public regulatory organization shall make the
approved annual report publicly available.
(4) Disapproval of election of pro member.--The Commission
is authorized, by order, if in its opinion such action is
necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of this Act or the securities laws, to disapprove
the election of any member of a public regulatory
organization if the Commission determines, after notice and
opportunity for hearing, that the person elected is unfit to
serve on the public regulatory organization.
(j) Clarification of Application of PRO Authority.--The
authority granted to any such organization in this section
shall only apply to the actions of accountants related to the
certification of financial statements required by securities
laws and not other actions or actions for other clients of
the accounting firm or any accountant that does not certify
financial statements for publicly traded companies.
(k) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
rules to implement this section.
(l) Effective Date; Transition Provisions.--
(1) Effective date.--Except as provided in paragraph (2),
subsection (a) of this section shall be effective with
respect to any certified financial statement for any fiscal
year that ends more than one year after the Commission
recognizes a public regulatory organization pursuant to this
section.
(2) Delay in establishment of board.--If the Commission has
failed to recognize any public regulatory organization
pursuant to this section within one year after the date of
enactment of this Act, the Commission shall perform the
duties of such organization with respect to any certified
financial statement for any fiscal year that ends before one
year after any such board is recognized by the Commission.
SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.
(a) Rules To Prohibit.--It shall be unlawful in
contravention of such rules or regulations as the Commission
shall prescribe as necessary and appropriate in the public
interest or for the protection of investors for any officer,
director, or affiliated person of an issuer of any security
registered under section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 78l) to take any action to fraudulently
influence, coerce, manipulate, or mislead any independent
public or certified accountant engaged in the performance of
an audit of the financial statements of such issuer for the
purpose of rendering such financial statements materially
misleading. In any civil proceeding, the Commission shall
have exclusive authority to enforce this section and any rule
or regulation hereunder.
(b) No Preemption of Other Law.--The provisions of
subsection (a) shall be in addition to, and shall not
supersede or preempt, any other provision of law or any rule
or regulation thereunder.
(c) Deadline for Rulemaking.--The Commission shall--
[[Page H1579]]
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
the rules or regulations required by this section.
SEC. 4. REAL-TIME DISCLOSURE OF FINANCIAL INFORMATION.
(a) Real-Time Issuer Disclosures Required.--
(1) Obligations.--Every issuer of a security registered
under section 12 of the Securities Exchange Act of 1934 (15
U.S.C. 78l) shall file with the Commission and disclose to
the public, on a rapid and essentially contemporaneous basis,
such information concerning the financial condition or
operations of such issuer as the Commission determines by
rule is necessary in the public interest and for the
protection of investors. Such rule shall--
(A) specify the events or circumstances giving rise to the
obligation to disclose or update a disclosure;
(B) establish requirements regarding the rapidity and
timeliness of such disclosure;
(C) identify the means whereby the disclosure required
shall be made, which shall ensure the broad, rapid, and
accurate dissemination of the information to the public via
electronic or other communications device;
(D) identify the content of the information to be
disclosed; and
(E) without limiting the Commission's general exemptive
authority, specify any exemptions or exceptions from such
requirements.
(2) Enforcement.--The Commission shall have exclusive
authority to enforce this section and any rule or regulation
hereunder in civil proceedings.
(b) Electronic Disclosure of Insider Transactions.--
(1) Disclosures of trading.--The Commission shall, by rule,
require--
(A) that a disclosure required by section 16 of the
Securities Exchange Act of 1934 (15 U.S.C. 78p) of the sale
of any securities of an issuer, or any security futures
product (as defined in section 3(a)(56) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(56))) or any security-
based swap agreement (as defined in section 206B of the
Gramm-Leach-Bliley Act) that is based in whole or in part on
the securities of such issuer, by an officer or director of
the issuer of those securities, or by a beneficial owner of
such securities, shall be made available electronically to
the Commission and to the issuer by such officer, director,
or beneficial owner before the end of the next business day
after the day on which the transaction occurs;
(B) that the information in such disclosure be made
available electronically to the public by the Commission, to
the extent permitted under applicable law, upon receipt, but
in no case later than the end of the next business day after
the day on which the disclosure is received under
subparagraph (A); and
(C) that, in any case in which the issuer maintains a
corporate website, such information shall be made available
by such issuer on that website, before the end of the next
business day after the day on which the disclosure is
received by the Commission under subparagraph (A).
(2) Transactions included.--The rule prescribed under
paragraph (1) shall require the disclosure of the following
transactions:
(A) Direct or indirect sales or other transfers of
securities of the issuer (or any interest therein) to the
issuer or an affiliate of the issuer.
(B) Loans or other extensions of credit extended to an
officer, director, or other person affiliated with the issuer
on terms or conditions not otherwise available to the public.
(3) Other formats; forms.--In the rule prescribed under
paragraph (1), the Commission shall provide that electronic
filing and disclosure shall be in lieu of any other format
required for such disclosures on the day before the date of
enactment of this subsection. The Commission shall revise
such forms and schedules required to be filed with the
Commission pursuant to paragraph (1) as necessary to
facilitate such electronic filing and disclosure.
SEC. 5. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS
PROHIBITED.
(a) Prohibition.--It shall be unlawful for any person who
is directly or indirectly the beneficial owner of more than
10 percent of any class of any equity security (other than an
exempted security) which is registered under section 12 of
the Securities Exchange Act of 1934 (15 U.S.C. 78l) or who is
a director or an officer of the issuer of such security,
directly or indirectly, to purchase (or otherwise acquire) or
sell (or otherwise transfer) any equity security of any
issuer (other than an exempted security), during any blackout
period with respect to such equity security.
(b) Remedy.--Any profit realized by such beneficial owner,
director, or officer from any purchase (or other acquisition)
or sale (or other transfer) in violation of this section
shall inure to and be recoverable by the issuer irrespective
of any intention on the part of such beneficial owner,
director, or officer in entering into the transaction. Suit
to recover such profit may be instituted at law or in equity
in any court of competent jurisdiction by the issuer, or by
the owner of any security of the issuer in the name and in
behalf of the issuer if the issuer shall fail or refuse to
bring such suit within 60 days after request or shall fail
diligently to prosecute the same thereafter; but no such suit
shall be brought more than 2 years after the date such profit
was realized. This subsection shall not be construed to cover
any transaction where such beneficial owner was not such both
at the time of the purchase and sale, or the sale and
purchase, of the security or security-based swap (as defined
in section 206B of the Gramm-Leach-Bliley Act) involved, or
any transaction or transactions which the Commission by rules
and regulations may exempt as not comprehended within the
purposes of this subsection.
(c) Rulemaking Permitted.--The Commission may issue rules
to clarify the application of this subsection, to ensure
adequate notice to all persons affected by this subsection,
and to prevent evasion thereof.
(d) Definition.--For purposes of this section, the term
``beneficial owner'' has the meaning provided such term in
rules or regulations issued by the Securities and Exchange
Commission under section 16 of the Securities Exchange Act of
1934 (15 U.S.C. 78p).
SEC. 6. IMPROVED TRANSPARENCY OF CORPORATE DISCLOSURES.
(a) Modification of Regulations Required.--The Commission
shall revise its regulations under the securities laws
pertaining to the disclosures required in periodic financial
reports and registration statements to require such reports
to include adequate and appropriate disclosure of--
(1) the issuer's off-balance sheet transactions and
relationships with unconsolidated entities or other persons,
to the extent they are not disclosed in the financial
statements and are reasonably likely to materially affect the
liquidity or the availability of, or requirements for,
capital resources, or the financial condition or results of
operations of the issuer; and
(2) loans extended to officers, directors, or other persons
affiliated with the issuer on terms or conditions that are
not otherwise available to the public.
(b) Deadline for Rulemaking.--The Commission shall--
(1) within 90 days after the date of enactment of this Act,
propose, and
(2) within 270 days after such date, prescribe,
the revisions to its regulations required by subsection (a).
(c) Analysis Required.--
(1) Transparency, completeness, and usefulness of financial
statements.--The Commission shall conduct an analysis of the
extent to which, consistent with the protection of investors
and the public interest, disclosure of additional or
reorganized information may be required to improve the
transparency, completeness, or usefulness of financial
statements and other corporate disclosures filed under the
securities laws.
(2) Alternatives to be considered.--In conducting the
analysis required by paragraph (1), the Commission shall
consider--
(A) requiring the identification of the key accounting
principles that are most important to the issuer's reported
financial condition and results of operation, and that
require management's most difficult, subjective, or complex
judgments;
(B) requiring an explanation, where material, of how
different available accounting principles applied, the
judgments made in their application, and the likelihood of
materially different reported results if different
assumptions or conditions were to prevail;
(C) in the case of any issuer engaged in the business of
trading non-exchange traded contracts, requiring an
explanation of such trading activities when such activities
require the issuer to account for contracts at fair value,
but for which a lack of market price quotations necessitates
the use of fair value estimation techniques;
(D) establishing requirements relating to the presentation
of information in clear and understandable format and
language; and
(E) requiring such other disclosures, included in the
financial statements or in other disclosure by the issuer, as
would in the Commission's view improve the transparency of
such issuer's financial statements and other required
corporate disclosures.
(3) Rules required.--If the Commission, on the basis of the
analysis required by this subsection, determines that it is
necessary in the public interest or for the protection of
investors and would improve the transparency of issuer
financial statements, the Commission may prescribe rules
reflecting the results of such analysis and the
considerations required by paragraph (2). In prescribing such
rules, the Commission may seek to minimize the paperwork and
cost burden on the issuer consistent with achieving the
public interest and investor protection purposes of such
rules.
SEC. 7. IMPROVEMENTS IN REPORTING ON INSIDER TRANSACTIONS AND
RELATIONSHIPS.
(a) Specific Objectives.--The Commission shall initiate a
proceeding to propose changes in its rules and regulations
with respect to financial reporting to improve the
transparency and clarity of the information available to
investors and to require increased financial disclosure with
respect to the following:
(1) Insider relationships and transactions.--Relationships
and transactions--
(A) between the issuer, affiliates of the issuer, and
officers, directors, or employees of the issuer or such
affiliates; and
(B) between officers, directors, employees, or affiliates
of the issuer and entities that are not otherwise affiliated
with the issuer,
to the extent such arrangement or transaction creates a
conflict of interest for such persons. Such disclosure shall
provide a description of such elements of the transaction
[[Page H1580]]
as are necessary for an understanding of the business purpose
and economic substance of such transaction (including
contingencies). The disclosure shall provide sufficient
information to determine the effect on the issuer's financial
statements and describe compensation arrangements of
interested parties to such transactions.
(2) Relationships with philanthropic organizations.--
Relationships between the registrant or any executive officer
of the registrant and any not-for-profit organization on
whose board a director or immediate family member serves or
of which a director or immediate family member serves as an
officer or in a similar capacity. Relationships that shall be
disclosed include contributions to the organization in excess
of $10,000 made by the registrant or any executive officer in
the last five years and any other activity undertaken by the
registrant or any executive officer that provides a material
benefit to the organization. Material benefit includes
lobbying.
(3) Insider-controlled affiliates.--Relationships in which
the registrant or any executive officer exercises significant
control over an entity in which a director or immediate
family member owns an equity interest or to which a director
or immediate family member has extended credit. Significant
control should be defined with reference to the contractual
and governance arrangements between the registrant or
executive officer, as the case may be, and the entity.
(4) Joint ownership.--Joint ownership by a registrant or
executive officer and a director or immediate family member
of any real or personal property.
(5) Provision of services by related persons.--The
provision of any professional services, including legal,
financial advisory or medical services, by a director or
immediate family member to any executive officer of the
registrant in the last five years.
(b) Deadlines.--The Commission shall complete the
rulemaking required by this section within 180 days after the
date of enactment of this Act.
SEC. 8. ENHANCED OVERSIGHT OF PERIODIC DISCLOSURES BY
ISSUERS.
(a) Regular and Systematic Review.--The Securities and
Exchange Commission shall review disclosures made by issuers
pursuant to the Securities Exchange Act of 1934 (including
reports filed on form 10-K) on a basis that is more regular
and systematic than that in practice on the date of enactment
on this Act. Such review shall include a review of an
issuer's financial statements.
(b) Risk Rating System.--For purposes of the reviews
required by subsection (a), the Commission shall establish a
risk rating system whereby issuers receive a risk rating by
the Commission, which shall be used to determine the
frequency of such reviews. In designing such a risk rating
system the Commission shall consider, among other factors the
following:
(1) Emerging companies with disparities in price to earning
ratios.
(2) Issuers with the largest market capitalization.
(3) Issuers whose operations significantly impact any
material sector of the economy.
(4) Systemic factors such as the effect on niche markets or
important subsectors of the economy.
(5) Issuers that experience significant volatility in their
stock price as compared to other issuers.
(6) Any other factor the Commission may consider relevant.
(c) Minimum Review Period.--In no event shall an issuer be
reviewed less than once every three years by the Commission.
(d) Prohibition of Disclosure of Risk Rating.--
Notwithstanding any other provision of law, the Commission
shall not disclose the risk rating of any issuer described in
subsection (b).
SEC. 9. RETENTION OF RECORDS.
(a) Duty To Retain Records.--Any independent public or
certified accountant who certifies a financial statement as
required by the securities laws or any rule or regulation
thereunder shall prepare and maintain for a period of no less
than 7 years, final audit work papers and other information
related to any accountants report on such financial
statements in sufficient detail to support the opinion or
assertion reached in such accountants report. The Commission
may prescribe rules specifying the application and
requirements of this section.
(b) Accountant's Report.--For purposes of subsection (a),
the term ``accountant's report'' means a document in which an
accountant identifies a financial statement and sets forth
his opinion regarding such financial statement or an
assertion that an opinion cannot be expressed.
SEC. 10. REMOVAL OF UNFIT CORPORATE OFFICERS.
(a) Removal in Judicial Proceedings.--
(1) 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 inserting
``unfitness''.
(2) 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''.
(b) Removal in Administrative Proceedings.--
(1) Securities act of 1933.--Section 8A of the Securities
Act of 1933 (15 U.S.C. 77h-1) is amended by adding at the end
the following new subsection:
``(f) Authority 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.''.
(2) Securities exchange act of 1934.--Section 21C of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3) is amended
by adding at the end the following new subsection:
``(f) Authority 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.''.
SEC. 11. DISGORGEMENT REQUIRED.
(a) Administrative Actions.--Within 30 days after the date
of enactment of this Act, the Securities and Exchange
Commission shall prescribe regulations to require
disgorgement, in a proceeding pursuant to its authority under
section 21A, 21B, or 21C (15 U.S.C. 78u-1, 78u-2, 78u-3), of
salaries, commissions, fees, bonuses, options, profits from
securities transactions, and losses avoided through
securities transactions obtained by an officer or director of
an issuer during or for a fiscal year or other reporting
period if such officer or director engaged in misconduct
resulting in, or made or caused to be made in, the filing of
a financial statement for such fiscal year or reporting
period which--
(1) 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; or
(2) omitted to state a material fact necessary in order to
make the statements made, in the light of the circumstances
in which they were made, not misleading,
(b) Judicial Proceedings.--Section 21(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by adding
at the end the following new paragraph:
``(5) Additional disgorgement authority.--In any action or
proceeding brought or instituted by the Commission under the
securities laws against any person--
``(A) for engaging in misconduct resulting in, or making or
causing to be made in, the filing of a financial statement
which--
``(i) 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; or
``(ii) omitted to state a material fact necessary in order
to make the statements made, in the light of the
circumstances in which they were made, not misleading; or
``(B) for engaging in, causing, or aiding and abetting any
other violation of the securities laws or the rules and
regulations thereunder,
such person, in addition to being subject to any other
appropriate order, may be required to disgorge any or all
benefits received from any source in connection with the
conduct constituting, causing, or aiding and abetting the
violation, including (but not limited to) salary,
commissions, fees, bonuses, options, profits from securities
transactions, and losses avoided through securities
transactions.''.
SEC. 12. CEO AND CFO ACCOUNTABILITY FOR DISCLOSURE.
(a) Regulations Required.--The Securities and Exchange
Commission shall by rule require, for each company filing
periodic reports under section 13 or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)), that the
principal executive officer or officers and the principal
financial officer or officers, or persons performing similar
functions, certify in each annual or quarterly report filed
or submitted under either such section of such Act that--
(1) the signing officer has reviewed the report;
(2) based on the officer's knowledge, the report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements made, in light of the circumstances under which
such statements were made, not misleading;
(3) based on such officer's knowledge, the financial
statements, and other financial information included in the
report, fairly present in all material respects the financial
condition and results of operations of the issuer as of, and
for, the periods presented in the report;
(4) the signing officers--
(A) are responsible for establishing and maintaining
internal controls;
(B) have designed such internal controls to ensure that
material information relating to the issuer and its
consolidated subsidiaries is made known to such officers by
others within those entities, particularly during the period
in which the periodic reports are being prepared;
[[Page H1581]]
(C) have evaluated the effectiveness of the issuer's
internal controls as of a date within 90 days prior to the
report; and
(D) have presented in the report their conclusions about
the effectiveness of their internal controls based on their
evaluation as of that date;
(5) the signing officers have disclosed to the issuer's
auditors and the audit committee of the board of directors
(or persons fulfilling the equivalent function)--
(A) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
issuer's ability to record, process, summarize, and report
financial data and have identified for the issuer's auditors
any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the issuer's internal controls; and
(6) the signing officers have indicated in the report
whether or not there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
(b) Deadline.--The rules required by subsection (a) shall
be effective not later than 30 days after the date of
enactment of this Act.
SEC. 13. SECURITIES AND EXCHANGE COMMISSION AUTHORITY TO
PROVIDE RELIEF.
(a) Proceeds of Enron and Andersen Enforcement Actions.--If
in any administrative or judicial proceeding brought by the
Securities and Exchange Commission against--
(1) the Enron Corporation, any subsidiary or affiliate of
such Corporation, or any officer, director, or principal
shareholder of such Corporation, subsidiary, or affiliate for
any violation of the securities laws; or
(2) Arthur Andersen L.L.C., any subsidiary or affiliate of
Arthur Andersen L.L.C., or any general or limited partner of
Arthur Andersen L.L.C., or such subsidiary or affiliate, for
any violation of the securities laws with respect to any
services performed for or in relation to the Enron
Corporation, any subsidiary or affiliate of such Corporation,
or any officer, director, or principal shareholder of such
Corporation, subsidiary, or affiliate;
the Commission obtains an order providing for an accounting
and disgorgement of funds, such disgorgement fund (including
any addition to such fund required or permitted under this
section) shall be allocated in accordance with the
requirements of this section.
(b) Priority for Former Enron Employees.--The Commission
shall, by order, establish an allocation system for the
disgorgement fund. Such system shall provide that, in
allocating the disgorgement fund amount the victims of the
securities laws violations described in subsection (a), the
first priority shall be given to individuals who were
employed by the Enron Corporation, or a subsidiary or
affiliate of such Corporation, and who were participants in
an individual account plan established by such Corporation,
subsidiary, or affiliate. Such allocations among such
individuals shall be in proportion to the extent to which the
nonforfeitable accrued benefit of each such individual under
the plan was invested in the securities of such Corporation,
subsidiary, or affiliate.
(c) Addition of Civil Penalties.--If, in any proceeding
described in subsection (a), the Commission assesses and
collects any civil penalty, the Commission shall,
notwithstanding section 21(d)(3)(C)(i) or 21A(d)(1) of the
Securities Exchange Act of 1934, or any other provision of
the securities laws, be payable to the disgorgement fund.
(d) Acceptance of Additional Donations.--The Commission is
authorized to accept, hold, administer, and utilize gifts,
bequests and devises of property, both real and personal, to
the United States for the disgorgement fund. Gifts, bequests,
and devises of money and proceeds from sales of other
property received as gifts, bequests, or devises shall be
deposited in the disgorgement fund and shall be available for
allocation in accordance with subsection (b).
(e) Definitions.--As used in this section:
(1) Disgorgement fund.--The term ``disgorgement fund''
means a disgorgement fund established in any administrative
or judicial proceeding described in subsection (a).
(2) Subsidiary or affiliate.--The term ``subsidiary or
affiliate'' when used in relation to a person means any
entity that controls, is controlled by, or is under common
control with such person.
(3) Officer, director, or principal shareholder.--The term
``officer, director, or principal shareholder'' when used in
relation to the Enron Corporation, or any subsidiary or
affiliate of such Corporation, means any person that is
subject to the requirements of section 16 of the Securities
Exchange Act of 1934 (15 U.S.C. 78p) in relation to the Enron
Corporation, or any subsidiary or affiliate of such
Corporation.
(4) Nonforfeitable; accrued benefit; individual account
plan.--The terms ``nonforfeitable'', ``accrued benefit'', and
``individual account plan'' have the meanings provided such
terms, respectively, in paragraphs (19), (23), and (34) of
section 3 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1002(19), (23), (34)).
SEC. 14. AUTHORIZATION OF APPROPRIATIONS OF THE SECURITIES
AND EXCHANGE COMMISSION.
In addition to any other funds authorized to be
appropriated to the Securities and Exchange 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) not less that $134,000,000 shall be available for the
Division of Corporate Finance and for the Office of Chief
Accountant;
(2) not less than $326,000,000 shall be available for the
Division of Enforcement; and
(3) not less than $76,000,000 shall be available to
implement section 8 of the Investor and Capital Markets Fee
Relief Act, relating to pay comparability.
SEC. 15. ANALYST CONFLICTS OF INTEREST.
(a) Study and Review Required.--The Securities and Exchange
Commission shall conduct a study and review of any final
rules by any self-regulatory organization registered with the
Commission pursuant to section 19 of the Securities Exchange
Act of 1934 (15 U.S.C. 78s) related to matters involving
equity research analysts conflicts of interest. Such study
and report shall include a review of the effectiveness of
such final rules in addressing matters relating to the
objectivity and integrity of equity research analyst reports
and recommendations.
(b) Report Required.--The Securities and Exchange
Commission shall submit a report to the Committee on
Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the
Senate on such study and review no later than 180 days after
any such final rules by any self-regulatory organization
registered with the Commission pursuant to section 19 of the
Securities Exchange Act of 1934 are approved by the
Commission. Such report shall include recommendations to the
Congress, including any recommendations for additional self-
regulatory organization rulemaking regarding matters
involving equity research analysts. The Commission shall
annually submit an update on such review.
(c) Additional Rules Required.--Unless the final rules
reviewed by the Commission under subsections (a) and (b)
contain the following provisions, the Commission shall, by
rule--
(1) prohibit equity research analysts from--
(A) holding any beneficial interest in any equity security
(as such term in defined in section 3(a)(11) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) in any
issuer covered by such analyst; and
(B) receiving compensation based on the investment banking
revenues of the firm with which the analyst is associated, or
on the investment banking revenues of such firm and its
affiliates, except that this prohibition shall not prohibit
such an analyst from receiving compensation based on the
overall revenues of such firm or of such firm and its
affiliates;
(2) prohibit the investment banking department of such firm
from having any input in the compensation, hiring, firing, or
promotion of analysts; and
(3) require such self-regulatory organizations--
(A) to establish criteria for evaluating analyst research
quality; and
(B) to require analyst compensation to be based principally
on the quality of the equity research analyst's research.
SEC. 16. INDEPENDENT DIRECTORS.
(a) Rulemaking Required.--The Commission shall adopt rules,
effective no later than 6 months after the date of enactment
of this Act, to require that the independent directors on the
board of directors of any issuer of securities registered
under section 12 of the Securities Exchange Act of 1934 (15
U.S.C. 78l) be nominated for election by a nominating
committee that is composed exclusively of other independent
directors of such issuer.
(b) Independence.--The rules required by subsection (a)
shall require the same degree of independence for service on
the nominating committee of an issuer as is required for
purposes of service on the audit committee of an issuer by
the listing standards concerning corporate governance of the
exchange or association on which the securities of such
issuer are listed.
SEC. 17. ENFORCEMENT OF AUDIT COMMITTEE GOVERNANCE PRACTICES.
The Commission shall revise its regulations pertaining to
auditor independence to require that an accountant shall not
be considered to be independent for purposes of certifying
the financial statements or other documents of an issuer
required to be filed with the Commission under the securities
laws unless--
(1) an issuer's auditor is appointed by and reports
directly to the audit committee of the board of directors or,
in the absence of an audit committee, the board committee
performing equivalent functions or the entire board of
directors;
(2) the audit committee meets with the accountants engaged
to perform such audit on a regular basis, at least quarterly;
and
(3) the audit committee is provided with the opportunity to
meet with such accountants without the attendance at such
meetings of any officer, director, or other member of the
issuer's senior management.
SEC. 18. REVIEW OF CORPORATE GOVERNANCE PRACTICES.
(a) Study of Corporate Practices.--The Commission shall
conduct a study and review of current corporate governance
standards and practices to determine whether
[[Page H1582]]
such standards and practices are serving the best interests
of shareholders. Such study and review shall include an
analysis of--
(1) whether current standards and practices promote full
disclosure of relevant information to shareholders;
(2) whether corporate codes of ethics are adequate to
protect shareholders, and to what extent deviations from such
codes are tolerated;
(3) to what extent conflicts of interests are aggressively
reviewed, and whether adequate means for redressing such
conflicts exist;
(4) to what extent sufficient legal protections exist or
should be adopted to ensure that any manager who attempts to
manipulate or unduly influence an audit will be subject to
appropriate sanction and liability, including liability to
investors or shareholders pursuing a private cause of action
for such manipulation or undue influence;
(5) whether rules, standards, and practices relating to
determining whether independent directors are in fact
independent are adequate;
(6) whether rules, standards, and practices relating to the
independence of directors serving on audit committees are
uniformly applied and adequate to protect investor interests;
(7) whether the duties and responsibilities of audit
committees should be established by the Commission; and
(8) what further or additional practices or standards might
best protect investors and promote the interests of
shareholders.
(b) Participation of State Regulators.--In conducting the
study required under subsection (a), the Commission shall
seek the views of the securities and corporate regulators of
the various States.
(c) Report Required.--The Commission shall submit a report
on the analysis required under subsection (a) as a part of
the Commission's next annual report submitted after the date
of enactment of this Act.
SEC. 19. STUDY OF ENFORCEMENT ACTIONS.
(a) Study Required.--The Commission shall review and
analyze all enforcement actions by the Commission involving
violations of reporting requirements imposed under the
securities laws, and restatements of financial statements,
over the last five years to identify areas of reporting that
are most susceptible to fraud, inappropriate manipulation, or
inappropriate earnings management, such as revenue
recognition and the accounting treatment of off-balance sheet
special purpose entities.
(b) Report Required.--The Commission shall report its
findings to the Committee on Financial Services of the House
of Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate within 180 days of the date of
enactment of this Act and shall use such findings to revise
its rules and regulations, as necessary. The report shall
include a discussion of regulatory or legislative steps that
are recommended or that may be necessary to address concerns
identified in the study.
SEC. 20. STUDY OF CREDIT RATING AGENCIES.
(a) Study Required.--The Commission shall conduct a study
of the role and function of credit rating agencies in the
operation of the securities market. Such study shall
examine--
(1) the role of the credit rating agencies in the
evaluation of issuers of securities;
(2) the importance of that role to investors and the
functioning of the securities markets;
(3) any impediments to the accurate appraisal by credit
rating agencies of the financial resources and risks of
issuers of securities;
(4) any measures which may be required to improve the
dissemination of information concerning such resources and
risks when credit rating agencies announce credit ratings;
(5) any barriers to entry into the business of acting as a
credit rating agency, and any measures needed to remove such
barriers; and
(6) any conflicts of interest in the operation of credit
rating agencies and measures to prevent such conflicts or
ameliorate the consequences of such conflicts.
(b) Report Required.--The Commission shall submit a report
on the analysis required by subsection (a) to the President,
the Committee on Financial Services of the House of
Representatives, and the Committee on Banking, Housing, and
Urban Affairs of the Senate within 180 days after the date of
enactment of this Act. The report shall include a discussion
of regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the
study.
SEC. 21. STUDY OF INVESTMENT BANKS.
(a) GAO Study.--The Comptroller General shall conduct a
study on whether investment banks and financial advisors
assisted public companies in manipulating their earnings and
obfuscating their true financial condition. The study should
address the role of the investment banks--
(1) in the collapse of the Enron Corporation, including
with respect to the design and implementation of derivatives
transactions, transactions involving special purpose
vehicles, and other financing arrangements that may have had
the effect of altering the company's reported financial
statements in ways that obscured the true financial picture
of the company;
(2) in the failure of Global Crossing, including with
respect to transactions involving swaps of fiber optic cable
capacity, in designing transactions that may have had the
effect of altering the company's reported financial
statements in ways that obscured the true financial picture
of the company; and
(3) generally, in creating and marketing transactions which
may have been designed solely to enable companies to
manipulate revenue streams, obtain loans, or move liabilities
off balance sheets without altering the economic and business
risks faced by the companies or any other mechanism to
obscure a company's financial picture.
(b) Report.--The General Accounting Office shall report to
the Congress within 180 days after the date of enactment of
this Act on the results of the study required by this
section. The report shall include a discussion of regulatory
or legislative steps that are recommended or that may be
necessary to address concerns identified in the study.
SEC. 22. STUDY OF MODEL RULES FOR ATTORNEYS OF ISSUERS.
(a) In General.--The Comptroller General shall conduct a
study of the Model Rules of Professional Conduct promulgated
by the American Bar Association and rules of professional
conduct applicable to attorneys established by the Commission
to determine--
(1) whether such rules provide sufficient guidance to
attorneys representing corporate clients who are issuers
required to file periodic disclosures under section 13 or 15
of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o),
as to the ethical responsibilities of such attorneys to--
(A) warn clients of possible fraudulent or illegal
activities of such clients and possible consequences of such
activities;
(B) disclose such fraudulent or illegal activities to
appropriate regulatory or law enforcement authorities; and
(C) manage potential conflicts of interests with clients;
and
(2) whether such rules provide sufficient protection to
corporate shareholders, especially with regards to conflicts
of interest between attorneys and their corporate clients.
(b) Report Required.--The Comptroller General shall report
to the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate on the results of the study
required by this section. Such report shall include any
recommendations of the General Accounting Office with regards
to--
(1) possible changes to the Model Rules and the rules of
professional conduct applicable to attorneys established by
the Commission to provide increased protection to
shareholders;
(2) whether restrictions should be imposed to require that
an attorney, having represented a corporation or having been
employed by a firm which represented a corporation, may not
be employed as general counsel to that corporation until a
certain period of time has expired; and
(3) regulatory or legislative steps that are recommended or
that may be necessary to address concerns identified in the
study.
SEC. 23. ENFORCEMENT AUTHORITY.
For the purposes of enforcing and carrying out this Act,
the Commission shall have all of the authorities granted to
the Commission under the securities laws. Actions of the
Commission under this Act, including actions on rules or
regulations, shall be subject to review in the same manner as
actions under the securities laws.
SEC. 24. EXCLUSION FOR INVESTMENT COMPANIES.
Sections 4, 6, 9, and 15 of this Act shall not apply to an
investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8).
SEC. 25. DEFINITIONS.
As used in this Act:
(1) Blackout period.--The term ``blackout period'' with
respect to the equity securities of any issuer--
(A) means any period during which the ability of at least
fifty percent of the participants or beneficiaries under all
applicable individual account plans maintained by the issuer
to purchase (or otherwise acquire) or sell (or otherwise
transfer) an interest in any equity of such issuer is
suspended by the issuer or a fiduciary of the plan; but
(B) does not include--
(i) a period in which the employees of an issuer may not
allocate their interests in the individual account plan due
to an express investment restriction--
(I) incorporated into the individual account plan; and
(II) timely disclosed to employees before joining the
individual account plan or as a subsequent amendment to the
plan; or
(ii) any suspension described in subparagraph (A) that is
imposed solely in connection with persons becoming
participants or beneficiaries, or ceasing to be participants
or beneficiaries, in an applicable individual account plan by
reason of a corporate merger, acquisition, divestiture, or
similar transaction.
(2) Boards of accountancy of the states.--The term ``boards
of accountancy of the States'' means any organization or
association chartered or approved under the law of any State
with responsibility for the registration, supervision, or
regulation of accountants.
(3) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(4) Individual account plan.--The term ``individual account
plan'' has the meaning
[[Page H1583]]
provided such term in section 3(34) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002(34)).
(5) Issuer.--The term ``issuer'' shall have the meaning set
forth in section 2(a)(4) of the Securities Act of 1933 (15
U.S.C. 77b(a)(4)).
(6) Person associated with an accountant.--The term
``person associated with an accountant'' means any partner,
officer, director, or manager of such accountant (or any
person occupying a similar status or performing similar
functions), any person directly or indirectly controlling,
controlled by, or under common control with such accountant,
or any employee of such accountant who performs a supervisory
role in the auditing process.
(7) Public regulatory organization.--The term ``public
regulatory organization'' means the public regulatory
organization established by the Commission under subsection
(b) of section 2.
(8) Securities laws.--The term ``securities laws'' means
the Securities Act of 1933 (15 U.S.C. 77a et seq.), the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), the
Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the
Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.), and
the Securities Investor Protection Act of 1970 (15 U.S.C.
78aaa et seq.), notwithstanding any contrary provision of any
such Act.
The CHAIRMAN. Pursuant to House Resolution 395, the gentleman from
New York (Mr. LaFalce) and the gentleman from Ohio (Mr. Oxley) each
will control 20 minutes.
The Chair recognizes the gentleman from New York (Mr. LaFalce).
Mr. LaFALCE. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, Members can vote against the substitute, and they can
vote for final passage of the bill if they want. This will enable them
to put a press release out to the public telling them that they have
done something meaningful about the problem. This will also enable them
to go to corporate America, to the accounting profession, to Wall
Street and receive at the very least a pat on the back and they will
tell them a job well done because they will be very pleased that an
opportunity to enact meaningful reform has been passed and eluded and
avoided by passage of the Republican bill. I hope we will not let this
opportunity pass without meaningful reform.
My substitute is the barest minimum of what is necessary to have
meaningful reform. I say the barest minimum, because I wanted to try to
attract as many votes as I possibly could. What do we do? First of all,
with respect to auditing, we do a number of things. First of all, we
say there shall be a PRO, a professional review organization. We do not
make it permissive. We do not say it is something the SEC may do,
whatever they want to, if they want to. Secondly, we spell out what its
powers and responsibilities are. We make it a real organization with
powers and responsibilities in the legislation. We do not leave it
totally to the discretion of the SEC, which may or may not do
something.
And, third, we spell out the nature of the composition of this PRO.
We do not want all accountants, and now through an amendment it will
not be all accountants, but we do not want the Ken Lays of this world
on that review authority, either. And so we spell out that it shall
consist of representatives of groups such as pension plans of private
employees, pension plans of public employees, et cetera. So what it
shall do and who shall be on it are extremely important and there is a
fundamental difference between the gentleman from Ohio's approach which
the Washington Post this morning says punts on the issue and the
approach that we would take.
Secondly, who shall hire and who shall fire the auditors? We think
that is an important issue. There has been too close of a relation
between the CEOs, the CFOs, and the auditors. It has been an incestuous
relationship. We specify what virtually all good corporate governance
individuals have been calling for now, a delineation of the rights and
responsibilities of the boards of directors and most especially the
audit committee. We say that the hiring and the firing of the auditors
shall not be by the officers but by the audit committee of the board of
directors. That is a very important provision. We also think that there
should be a reasonable, but real, distinction between auditing and
nonauditing functions.
And so what we have done is taken the Republican version, not the
version that I offered in committee that the gentleman from Alabama
(Mr. Bachus) was referring to, and cleaned it up, took out the language
that made it meaningless so that with the deletion of about one
sentence, it can be meaningful; and that is all we have done on that
score. Except, of course, saying that the board of directors, too, is
the one that should be hiring and firing the auditors.
President Bush has also called for a certain type of action. The
Republican bill does nothing to effectuate what President Bush called
for. Our substitute, as President Bush called for, requires CEOs and
CFOs to certify the accuracy of their firm's financial statements. The
Republican bill says nothing on it and, therefore, leaves it to the
voluntary discretion of corporate America. That will not work.
The substitute also requires corporate officers who falsify their
financial statements to disgorge their compensation, including stock
bonuses and other incentive pay for any period in which they falsified
statements. The Republican bill does nothing on that score. It is
absolutely outrageous that corporate officers are able to walk away
with tens of millions of dollars or more in the past 2- or 3-year
period that they have been engaging in fraudulent activity and
misleading manipulation of their earnings statement at the expense of
investors. The investors should be able to go after that and obtain
redress from those officers and directors. The substitute does
something about it, as President Bush wants. The main bill, the
Republican bill, does nothing.
Our substitute also empowers the SEC in an enforcement proceeding to
bar officers and directors from serving as an officer or director of a
public company if they are found guilty of wrongdoing and determined to
be unfit. This too was proposed by the President. The SEC said that
existing case law makes it virtually impossible for them to do this, to
bar unfit officers and directors. And what have the Republicans done?
They have taken that bad case law and codified it. In that respect the
Republican bill is worse than the status quo.
Finally, with respect to securities analysts, the research analysts,
most individuals rely most heavily on the recommendations of Wall
Street. Yet we regrettably have learned that there has been a terrible
relationship between research analysts and the investment banking arms
of the securities firms. Research analysts have been compensated in
large part by the revenues they have been able to generate for the
investment banking arm of the firm because there are no fire walls
within those firms between the research analyst and the investment
banking.
The Republican bill has no fire walls whatsoever. Our substitute
creates fire walls. That is what has been called for by the Attorney
General of the State of New York, by the President of the AFL-CIO, et
cetera. Our bill says that the research analysts' compensation shall in
no way have any bearing to revenues that are generated by the
investment banking portion of the securities firm. This is extremely
important. What do the Republicans do? The Republicans say, Gee, that's
an issue we ought to think about.
If Members want to please corporate America, the officers, if they
want to please the accounting firms, if they want to please Wall Street
and be able to put out a piece of paper that says they have done
something about it, it will be a wrong piece of paper, it will be a
misleading piece of paper. They will be able to get a pat on the back
from all those special interests, but they will not really be helping
investors. Vote for the substitute. If the substitute passes, vote for
final passage. If the substitute should go down, oppose this cosmetic
approach that is being advanced to the floor today.
Mr. Chairman, I rise to offer a substitute for H.R. 3763. As I
described in detail earlier, the bill before us does virtually nothing
to correct the systemic flaws in our financial reporting system. The
substitute I offer will provide real reform to restore integrity to our
financial markets and protect the savings and pensions plans of
millions of Americans that remain threatened by future Enrons. My
substitute will provide improvement and reform in several major areas.
First, the substitute would create a powerful new regulatory board
with the authority and
[[Page H1584]]
responsibility to ensure that auditors will be truly independent and
objective. My substitute provides for a regulator that: Sets audit and
quality standards for auditors of public companies; possesses sweeping
investigative and disciplinary powers over audit firms; and is
controlled by a board comprised of public members and not the
accounting history. This is a decidedly different approach from H.R.
3763, which punts decisions on almost all of the functions and powers
of the regulator to the SEC. Only a regulator with explicit powers and
duties, and a defined composition, such as the one I propose, will
ensure that the abuses we witnessed in the Enron debacle will not be
repeated.
Second, while the Republican bill purports to prohibit auditors from
providing their audit clients with two nonaudit services--financial
reporting systems design and internal auditing--in reality, it
prohibits nothing, merely codifying the limited restrictions in
existing SEC rules. In contrast, my amendment modifies the definitions
of these two services to actually ban these consulting services, which
create significant conflicts of interest for auditors.
Third, the substitute includes important corporate governance reforms
that will ensure that the audit committees of public companies have the
authority they need to better protect shareholder interests. The
substitute ensures that audit committees, not management, are
responsible for hiring and firing the auditors. It requires that audit
committees approve any consulting services that auditors provide to an
audit client. These provisions will ensure that auditors give their
allegiance to shareholders, not to corporate management.
Fourth, in a bipartisan spirit, we have taken three meritorious
elements of President Bush's proposals on corporate responsibility and
executive accountability and given them legislative substance and real
teeth,unlike the provisions contained in H.R. 3763. Our substitute
requires CEOs and CFOs to certify the accuracy of their firms'
financial statements. Violation of this provision would carry with it
the civil penalties provided for under the securities laws, and
potentially criminal penalties for willful violations. The Republican
bill contains no similar provision. It is essential that Congress
require officers of public companies to stand behind their public
disclosures. It is the minimum we should require.
The substitute requires corporate officers who falsify their
financial statements to disgorge their compensation, including stock
bonuses and other incentive pay, for any period in which they falsified
statements. Our amendment would empower the Securities and Exchange
Commission, SEC, to seek such a disgorgement in an administrative
proceeding, or in court. H.R. 3763 requires only a study of this issue,
and limits the scope of any disgorgement actions by the SEC to 6 months
prior to a restatement.
The amendment would also empower the SEC in an enforcement proceeding
to bar officers and directors from serving as an officer or director of
a public company if they found guilty of wrongdoing and determined to
be unfit. It would also remove judicial hurdles to seeking such a bar
in court. H.R. 3763, however, makes obtaining director and officer bars
more difficult, codifying the most restrictive judicial standard, a
standard that the head of the SEC's Enforcement Division has stated
publicly is almost impossible to meet. We must not codify a standard
that makes it harder than ever for the SEC to obtain officer and
director bars at a time when accounting fraud and earnings manipulation
by corporate executive is at an all time high.
Finally, my substitute seeks to ensure that stock analysts are truly
independent and objective. The substitute achieves this by: Barring
analysts from holding stock in the companies they cover; prohibiting
analysts' pay from being based on their firms' investment banking
revenue; and barring their firm's investment banking department from
having any input in to analysts' pay or promotion. The revelations
brought to light by Eliot Spitzer, the NY State attorney general, in
his investigations of major Wall street firms' analysts, confirm the
need to address analysts' conflicts of interest. In urging the
Financial Services Committee to adopt reforms, Attorney General Spitzer
stated, ``[o]nly if the pernicious link between investment banking and
research compensation is severed will the public receive the unbiased
research it deserves and the public market's integrity be preserved.''
Unfortunately, as with other important topics in this legislation, the
Republican bill requires only a study.
The Democratic substitute is a strong reform bill that mandates tough
corporate responsibility and strict accounting industry reforms. I urge
Members to vote for the real reforms my substitute offers.
Mr. Chairman, I reserve the balance of my time.
Mr. OXLEY. Mr. Chairman, I yield myself 3 minutes. Mr. Chairman, as
we have heard throughout this debate, H.R. 3763 is a tough bill which
imposes much-needed reforms in the areas of auditor and corporate
responsibility and accountability. The legislation ensures that
investors in America's capital markets will know that they have access
to accurate and understandable information regarding publicly traded
companies.
In the committee's hearings and debate on H.R. 3763, we had an
opportunity to hear from a broad group of regulators, investors, and
corporate employees. We were told by some that our proposal went too
far. Others, not far enough. At the end of the day we decided to strike
a balance, create a bill that is tough but fair, which punishes those
who do wrong, while encouraging the vast number of America's honest and
ethical companies to keep up the good work.
During the debate on the bill, the committee had the opportunity to
consider a similar substitute amendment to the one Ranking Member
LaFalce is offering today. After a fair debate, the committee rejected
the amendment by voice vote. The committee then adopted H.R. 3763 along
bipartisan lines with a vote of 49 to 12 with more Members of the
minority voting for the bill than against it. We should not overturn
the bipartisan consensus reached by our committee. We should not reject
the balanced approach taken by the members of the committee, both
Republican and Democrat, which will make our markets stronger.
{time} 1345
I commend the ranking member, the gentleman from New York (Mr.
LaFalce) for his efforts throughout this process. In fact, many of his
ideas were adopted by the committee. But his substitute amendment
represents an honest difference of opinion between us.
I do not believe we should micromanage the tough, new accountant
regulatory body that we create. I do not believe we should preempt the
laws of the States with regard to how corporations are governed, and I
do not believe we should overturn the will of the committee when it
adopted this legislation.
The President supports H.R. 3763. This legislation represents the
ideas he presented in his 10-point plan on corporate responsibility.
Where the President requests legislation, we legislate. Where the plan
urges that the regulators be given the freedom to act, we give them
that freedom.
Mr. Chairman, I urge my colleagues to support the President's plan. I
urge my colleagues to support the bipartisan approach that the
committee took in passing CARTA. I ask all of my colleagues to reject
the LaFalce amendment and to pass H.R. 3763.
Mr. Chairman, I reserve the balance of my time.
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the gentleman from
Pennsylvania (Mr. Kanjorski), the distinguished ranking member of the
Subcommittee on Capital Markets, who has done an outstanding job in
this entire area and has shown tremendous leadership.
Mr. KANJORSKI. Mr. Chairman, I thank the gentleman from New York for
yielding me this time.
Mr. Chairman, I rise in favor of the substitute amendment. I heard
the chairman of the committee say that this is the embodiment of the
President's plan. If it is, then it is an example of the President
having spoken on one occasion as to what is necessary, and then seeing
it reduced to legislation that does not comport with what the President
indicated in his public appearances as to what he wanted us to do.
This is opting out. When we have an opportunity to do something well,
the underlying bill ignores or virtually sets aside any of the real
reform and just plasters over the defects within the system. The
substitute bill, although in my own opinion is maybe premature in
itself but we are stuck with the rules of having to come here, I
support the substitute because it at least puts meat on the bones. It
says something to corporate America, that we are going to hold you
responsible. We are going to hold corporate executives responsible when
they put out statements that are fraudulent or grossly overstated. We
are going to tell the accounting industry that they cannot have
conflicts of interest and, if they do, there is a penalty to be had,
and perhaps a loss of their business. We are going to say to Main
Street America
[[Page H1585]]
and the investors, that you can understand that corporate America plays
by the same rules you do, and that they are fair and they are honest
and they are straightforward; that they are not swindlers, that they
are not tellers of untruth in order to encourage 50 percent of the
American people to make investments in equities in our market today who
are getting information that they cannot rely on. Not in all instances,
not all corporations by a long shot, but enough that we see a need for
remedial legislation.
Instead, the underlying bill is an attempt to cover and do little or
nothing. But in the substitute bill, we have substance, we have
material that will correct some of the Enron problems, will give some
form of integrity back to Wall Street and some sort of support to Main
Street investors.
Mr. Chairman, I urge my colleagues to support the substitute
amendment and, if that fails, to vote ``no'' on the underlying bill.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 5 minutes to the
gentleman from Pennsylvania (Mr. Toomey).
Mr. TOOMEY. Mr. Chairman, I thank the gentleman for yielding me this
time. I would start by observing that the Enron debacle is obviously
devastating in many ways to many people. One of the most devastating
ways is the way that collapse has shaken public confidence and really
raised the question about financial reporting, even in the accounting
profession, and the stability of our financial markets.
This underlying bill is going to have several very significant and
very positive effects. It is going to help investors make better
informed investment decisions; there is no question about that. It is
going to require greater disclosure. It is going to enhance audit
quality and the quality of financial reporting. By doing those things,
it is going to increase the confidence in our capital markets, our
financial reporting system, and those effects can only be beneficial
for our financial system and our economy and our economic growth.
I would remind my colleagues that this bill passed our committee by a
vote of 49 to 12. It was obviously supported by a bipartisan effort,
and it takes some unprecedented measures. We take some very dramatic
steps, one of which is the creation of the Public Regulatory
Organization. This is going to be an organization that is going to be
able, for the first time, to really discipline accountants that violate
standards of ethics, competency, or independence, and it includes even
disbarment. This is a major step in the regulation of the accounting
profession, a dramatic departure from the traditional model in which
this profession was entirely self-regulated.
But I think that it is impossible for us to know today, here in this
Chamber, all of the answers to all of the questions that that
regulatory organization needs to address. That is why instead of
specifying in great detail every rule that we want them to promulgate,
what we ought to do instead is set the broad parameters, and then give
them the authority to carry this out, together with the regulators like
the SEC, and that is what the underlying bill does.
My main criticism of the substitute amendment is that it goes too far
in trying to micromanage this process in spelling out in great detail
rules that ought to be left to the SEC and to others.
Mr Chairman, the ranking member does an outstanding job and does a
lot of great work in our committee. Today's substitute differs from the
substitute he offered in the committee; it is more similar to ours than
the substitute offered in committee. Maybe in another few weeks we
would see something quite similar to our bill. In fact, it is not
enormously different. I do not think that the differences are that
huge, but they are important, and they differ in the sense that I think
the ranking member has gone too far in trying to specify details that
ought to be left to others.
Several have mentioned the President's principles that have been
discussed. Let there be no question about it: The President supports
this bill. The administration has issued a statement of their policy,
and it clearly supports this bill.
Let me look at a couple of the specifics in which the ranking member
gets very specific. Disgorgement is one. But look at what we do with
disgorgement. We take a very tough approach. It is unprecedented, the
approach we take in this bill. If an officer or director sells stock in
a company 6 months prior to a restatement, then the SEC can require the
disgorgement of any profits that were earned or avoided losses. That is
probably all we need to say about this. Let us let the specifics be
developed by the SEC. Instead, in the substitute, basically, the SEC's
rule is written for them. I do not think that is a good idea.
With regard to analyst conflicts, again, this bill tries to
micromanage how analyst conflicts should be addressed. But we have
entities, the NASD, the New York Stock Exchange, they are already in
the process of producing rules on how this is going to be governed. I
think the ranking member, as well as other members on this committee,
have had input on that rulemaking process. It is still under review. It
is they who should be doing this job, not us.
I think part of the problem with the substitute is an underlying
failure to appreciate the ability of the marketplace to impose some
discipline as well. But we have already seen how severely and
appropriately investors have responded to companies who have even
questionable accounting practices after this Enron debacle. It is not
as though the investment community has not noticed and has not taken
the precautions to demand certain greater disclosures and more
transparency in financial reports and to punish companies that have
engaged in perhaps dubious accounting principles, and that same kind of
discipline is going to continue; it is going to continue with respect
to analysts and other matters between the market's discipline.
In this bill, the underlying bill that the majority is proposing, we
take some unprecedented measures. I am very confident we are going to
encourage a greater degree of honesty and transparency in financial
statements. It is going to be extremely helpful. I would suggest to my
colleagues that we reject the substitute, reject the micromanagement of
what should be done by regulators who have the expertise in this area,
and support the underlying bill.
Mr. LaFALCE. Mr. Chairman, I yield 2 minutes to the gentlewoman from
New York City (Mrs. Maloney), the distinguished ranking minority member
of the Subcommittee on Domestic Monetary Policy.
Mrs. MALONEY of New York. Mr. Chairman, I thank the gentleman for
yielding me this time, and I rise in strong support of the LaFalce
substitute.
The implosion of Enron is a scandal on a massive scale that demands a
real response. Enron's failure has shaken the accounting industry, once
again exposed the conflicts Wall Street analysts face in rating stocks,
and ruined the lives of thousands of innocent employees and retirees.
For financial markets to work, investors must be able to trust the
information on which they base decisions. Auditors must not be under
pressure to cook the books because their firm is chasing a consulting
contract, and analysts must not have their compensation tied to
investment banking deals.
The LaFalce substitute best addresses each of these areas with
concrete, real reforms. The Enron scandal has done serious, lasting
damage to the reputation of the accounting industry. The majority of
accountants, many of whom live in my district, are honest and hard-
working, but this scandal has revealed serious weaknesses in the
industry's oversight structure, and only the substitute, the LaFalce
substitute, directly spells out standards for a new accounting
oversight board.
We need a new accounting oversight board because the current
structure has failed dramatically. There are 17,000 public companies in
the United States, and we may be down to just 4 major accounting firms
to audit financial statements. Therefore, we need stronger regulation.
It is not enough for Congress to delegate regulation of the industry
to the SEC. We owe it to the public to do the job ourselves and support
the LaFalce substitute.
Long after the con men of Enron fade from memory, the conflicts faced
by
[[Page H1586]]
accountants and analysts will still be in place unless Congress acts
now.
Mr. OXLEY. Mr. Chairman, I am pleased to yield 2 minutes to the
gentlewoman from New York (Mrs. Kelly).
Mrs. KELLY. Mr. Chairman, I rise in opposition to the substitute
amendment offered by the gentleman from New York (Mr. LaFalce).
The substitute makes clear the different philosophical positions from
which we seek to address the problems of the accounting industry. While
CARTA gives broad authority to the SEC to set up the new public
regulatory organization, this substitute stipulates exactly how it is
going to be set up, to what extent the powers will be, regardless of
what the experts may think, especially the experts at the SEC.
Unfortunately, I do not believe that most of these provisions would
actually do anything to prevent future Enrons and Global Crossings. So
I am thinking about what the American investors do. I think the
American investors will only risk their savings based on truth and
transparency in the market. No smart investor should be required to buy
a ``pig in a poke.''
This bill provides control without choking the free market. The
reason the people put their money in the market is to make a good
return on their money. Many Americans have saved for their retirement
through pension funds and 401(k)s. This money is often invested in the
markets, so the markets must function with transparency and truth if we
expect our citizens to invest their future in the stock of American
corporations and other investment vehicles that are offered in the
markets.
The CARTA act will ensure transparency and truth responsibly and
appropriately. This substitute was defeated during committee
consideration and does not enjoy the broad bipartisan support that the
underlying bill enjoys. So I urge my colleagues on both sides of the
aisle to join us in opposition to this amendment.
Mr. LaFALCE. Mr. Chairman, I yield myself 10 seconds to advise the
gentlewoman that this substitute was never offered in committee, and
what was offered was defeated on a voice vote, not a recorded vote.
Mr. Chairman, I yield 3 minutes to the gentleman from Michigan (Mr.
Dingell), the distinguished dean of the House of Representatives, and
the ranking member of the Committee on Energy and Commerce, who for so
many years had jurisdiction over the field of securities.
(Mr. DINGELL asked and was given permission to revise and extend his
remarks.)
{time} 1400
Mr. DINGELL. Mr. Chairman, I rise in strong support of the amendment
and in opposition to the bill. I say to the sponsors of the
legislation, shame. This is a piece of drivel. It is not a piece of
legislation, it is a gift to the accounting industry and those who
would steal from the American investing public.
Look at the history: Enron, Global Crossing, Baptist Foundation of
Arizona, Waste Management, Sunbeam, Xerox, Rite Aid, Microstrategy.
Accountants and fat cat officers of corporations stole billions and
lied to the American investing public. That is what happened, and that
is what needs to be corrected, and that is not what is addressed here.
The watchdogs in those cases and many others were asleep, or
benefiting from their wrongdoing, or just plain blind. What is the
response of the legislation to this outrage? The bill passes the buck
to the SEC on every major issue, and avoids addressing important issues
altogether by requiring that the SEC conduct studies.
If Members like studies and they want to waste money, that is a fine
way to do it. If they want to hurt the investing public, that is a fine
way. Enron would have loved this legislation. Anderson would have found
it to be splendid.
I would be embarrassed to put a piece of legislation of this kind on
the House floor. The LaFalce substitute ends the farcical self-
regulation by the accounting industry which is encouraged and fostered
by the committee bill. It creates a strong regulatory board that sets
strict standards for auditor independence and auditor quality, and it
is a shame if the House does not accomplish this important reform
today.
The LaFalce substitute also requires executives to surrender ill-
gotten gains made as a result of financial frauds, and empowers the SEC
to bar officers guilty of wrongdoing from serving with other companies
so that they may steal again. I think that that is necessary. It also
imposes strong penalties for lying, including criminal penalties.
The committee bill actually makes it harder for the SEC to bar
crooked executives from serving in other companies. On whose side are
the authors of this legislation?
Mr. Chairman, our financial markets run on confidence. Those on this
side apparently do not know that. If the people have confidence,
everybody makes lots of money. They do not run on money, and no
confidence will exist, where there is stealing, dishonesty, false
accounting, and the kinds of things which we have seen going on in the
accounting industry.
I would note that it is time that we deal with these things, and deal
vigorously. The American public wants action. They do not trust the
accounting, they do not trust the financial markets, and they want to
see something in which they can have faith.
Unless and until Members do something about the situation that the
American public sees, again with the Enrons and the other corporations
where this is going on, and about the Andersens, we are going to see no
confidence in the securities markets, and we are going to find that the
economy of this country is going to hurt.
I say vote for the LaFalce amendment, vote against the committee
bill. The committee bill is a sad, sorry, and repugnant joke. Vote for
a piece of legislation that protects the American public. Vote for a
piece of legislation that protects the investors of this Nation. Let us
give confidence to the markets, instead of passing a sorry, silly
charade like this.
Mr. OXLEY. Mr. Chairman, I yield myself 30 seconds.
Mr. Chairman, at least my friend, the gentleman from Michigan, has
been consistent in his strong support for big government and lack of
respect and recognition of the free market. So I congratulate him on
his consistency, if nothing else.
Mr. Chairman, I yield 3 minutes to the gentleman from Louisiana (Mr.
Baker), the chairman of the Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises.
Mr. BAKER. Mr. Chairman, I thank the gentleman for yielding time to
me.
I would join him in recognizing the importance of the preceding
speaker's remarks in characterizing the legislation now pending before
the House, as in free enterprise, as buyer beware. We should carefully
evaluate and analyze any representation made by some salesman as to his
product.
I think it is also an advisable warning to those listening to
speeches by Members of Congress.
Mr. Chairman, let me turn for a moment to the criticism of the bill
with regard to analysts' conduct. Some would have us believe that this
Congress has turned its back, protecting the Wall Street interests,
walking away from the working families of America, letting the
pillaging continue without restraint.
They seem to fail to remember just last year this committee, with
bipartisan help, spent hours in evaluating the approach to take in
resolving inappropriate conduct by analysts on Wall Street.
Let me explain. When a company wants to raise money on Wall Street,
they have to hire a firm to go sell their stock. In order to sell that
stock, they need to have a research department that says, is this a
good investment or not? And investors rely on that research,
understanding that the investment bank is separate from the research.
Well, unfortunately, that has not always been the case. Apparently,
in some limited instances, the research was held out by the investment
bank sort of as a marketing tool, to say, if you give us a good
research product, the investment bank gets the business, and huge
profits were made.
Here is the change: Research integrity is restored by having analyst
independence from investment bankers. The investment banker cannot talk
to the research analyst anymore. They
[[Page H1587]]
have to be maintained in separate divisions of the business, and there
are consequences if they do collude.
It restricts the ties between analysts' compensation and investment
banking transactions. If there is any connection, if there is, it must
be stated publicly in a report for all to see, or else there is a
violation of the law.
It prohibits promising favorable research for the investment bank to
get the work in compensation for the firm. So they cannot go out and
use the research department information for the investment bank to go
make the deal with the corporation. That is illegal. They cannot do it
anymore.
It limits analysts' own purchasing and trading of stocks on which
they issue research, and prohibits trading against their
recommendations. It would be wrong if I were an analyst to say, go buy,
gobble it up, America, this is a great stock, and privately I was in
the back room selling my own interest to protect my financial position.
This prohibits such conduct, and there are penalties, including up to
disbarment from the profession.
We require potential conflicts of interest to be disclosed clearly.
If we have missed something, if there is something inappropriate that
an investor should know, they have a professional obligation to
disclose it, and if they do not, there are penalties for that
inappropriate conduct.
We have taken action. We have stood up to Wall Street. We are
protecting working families across this country. To vote against this
bill would be in their disinterest.
Mr. LaFALCE. Mr. Chairman, I yield 1 minute to the gentleman from
Washington (Mr. Inslee), a member of the Committee.
(Mr. INSLEE asked and was given permission to revise and extend his
remarks.)
Mr. INSLEE. Mr. Chairman, I speak in favor of the substitute and
against the bill. This Enron collapse really did rock underlying
confidence in the American people, and I think all of us know that the
American people want and expect a real guard dog around their life's
savings, a bulldog, someone with teeth, vigilance.
This bill, charitably, has all the attributes of a Chihuahua. It
fails. It fails to do even what the President of the United States has
suggested to require CEO accountability.
It fails in dealing with board independence, to make sure that the
board answers to stockholders and not management by preventing payments
to the directors by management.
It fails to address the separation of accounting services that even
accounting companies have adopted on their own initiative.
It fails and it is disappointing. It is going to disappoint the
American people, but it will not surprise the American people that the
Republican Party, who gave us an energy policy based on Enron, is
giving us an accounting policy based on Arthur Andersen.
Mr. LaFALCE. Mr. Chairman, I yield 1 minute to the distinguished
gentleman from Texas (Mr. Bentsen), a member of the Committee.
(Mr. BENTSEN asked and was given permission to revise and extend his
remarks.)
Mr. BENTSEN. Mr. Chairman, the underlying bill is not perfect, and I
do not think the substitute is necessarily perfect, but there are
certain pieces of the substitute that I think would make the underlying
bill better.
Number one, the substitute is stronger on the issue of scope of
services for auditing firms. Originally, I thought the gentleman from
New York (Mr. LaFalce) went too far in the committee.
The language he has adopted would bolster the language that the
gentleman from North Carolina (Mr. Watt) and I put in the bill that was
accepted by the chairman, and I think that is very good in ensuring
that the SEC is on the job and doing what it is supposed to do.
Second of all, as the gentleman from Michigan (Mr. Dingell) pointed
out, the substitute is much stronger on giving authority to the SEC to
remove officers and directors who engage in misconduct in public
companies, and I think that needs to be done.
I have some concerns, as the gentleman from Louisiana (Mr. Baker)
pointed out, about the analyst provisions. I think they go too far. But
I think what the gentleman from New York (Mr. LaFalce) has put together
in the substitute would add greatly to where we want this bill to go
when it finally gets to the President's desk.
For those reasons, I think I will support the substitute.
Mr. LaFALCE. Mr. Chairman, I yield 1 minute and 15 seconds to the
distinguished gentleman from Massachusetts (Mr. Markey).
Mr. MARKEY. Mr. Chairman, I rise in support of the LaFalce substitute
and in opposition to the underlying bill.
Mr. Chairman, accounting is a boring profession. It is easier to
watch grass grow than be an accountant, unless people want to engage in
financial fraud. Then it is a fascinating subject, because it affects
thousands or millions of people, and that is what happened in this
country: Auditors decided they were going to be financiers at the same
time. They were going to play both roles.
They cannot do that, and this bill does not correct the fundamental,
underlying problem that caused the Enron-Arthur Andersen scandal. It
does not go nearly far enough to deal with the causes of the financial
chicanery that have turned, overnight, people who thought they had
their life's savings protected into those who are wondering about the
future.
Specifically, the public regulatory organization created by the bill
is a joke. It is set up in such a way that it will be dominated and
controlled by the accounting profession. It lacks the investigative and
enforcement powers needed to be an effective regulatory agency. The SEC
is not given the powers needed to properly oversee its operation.
There is not a proper separation between the auditing and the
consulting functions that led to the very core of the problems that
were created that have defrauded millions of Americans out of their
hard-won savings.
Mr. OXLEY. Mr. Chairman, I yield 1 minute to the gentlewoman from
Illinois (Mrs. Biggert).
Mrs. BIGGERT. Mr. Chairman, I rise today in opposition to the
amendment offered by the gentleman from New York (Mr. LaFalce), who
earlier claimed that the underlying bill would make it harder for the
SEC to ban officers and directors from serving on corporate boards.
Quite the contrary. For the first time in history, H.R. 3763 will
allow, through the administrative process, the SEC to provide greater
oversight of corporate officers. Currently, the SEC must go to court to
obtain such a ban. This change makes it easier, not harder, for the SEC
to go after malfeasance. H.R. 3763 does not allow such a ban to be
imposed without providing at least minimum standards for the SEC to
consider.
What we do in this bill is to provide the SEC with the tools it needs
to tighten corporate oversight without giving the SEC carte blanche
authority. We cannot, as someone suggests, grant the SEC unwarranted
powers that would alter its appropriate role in maintaining the
integrity of the capital markets, but we should give the SEC the
ability to efficiently remove those who have no business serving as
corporate officers.
Mr. LaFALCE. Mr. Chairman, I yield 1 minute to the distinguished
gentleman from the State of Washington (Mr. Baird).
Mr. BAIRD. Mr. Chairman, I thank the ranking member for yielding time
to me.
Mr. Chairman, thousands of workers of Portland General Electric lost
their entire life's savings when Enron collapsed. I praise the
gentleman from New York (Mr. LaFalce) for introducing legislation that
would have prevented that tragedy.
I am particularly concerned about a provision in the Republican
majority bill which does not allow State boards of accountancy to know
if there have been irregularities and penalties imposed. Let me refer
Members to a letter from James Caley, a CPA from Vancouver, Washington,
who called for precisely such notification.
Mr. Caley wrote, ``A system which encourages cooperation between
State and Federal regulatory agencies increases the overall
effectiveness of both entities, ensuring maximum protection to the
public.'' State agencies need to know if there have been irregularities
recognized by Federal entities. The Republican bill, the majority
[[Page H1588]]
bill, does not provide that notification. The substitute of the
gentleman from New York (Mr. LaFalce) does. I commend the gentleman for
including that.
{time} 1415
Mr. LaFALCE. Mr. Chairman, I yield myself the balance of my time.
Mr. Chairman, I do not want individuals to kid themselves. If Members
vote against this substitute or even if Members vote for the
substitute, it goes down and then Members vote for final passage of
this bill, Members are voting for basically a cover-up because we are
not dealing in a fundamental way with the fundamental problems. We are
not dealing with the problems of officers who either knowingly or
through negligence engage in wrongdoing. We are not dealing with the
problems of directors. We are not dealing with the problems of
auditors. We are not dealing adequately with the problems of research
of the securities firms.
You are relying on two things basically in your bill, the SROs, the
Self Regulatory Organizations. So let the officers and directors take
care of themselves. Let the securities individuals take care of
themselves. Let the accountants take care of themselves. And the magic
of the marketplace, you say the marketplace will punish. The
marketplace punishes investors. It does not punish the wrongdoers. You
have got it wrong.
Mr. OXLEY. Mr. Chairman, I yield myself the balance of my time.
Mr. Chairman, we have had a good debate here today about competing
ideas. We made some decisions about our direction and now it comes time
to cast our vote.
Today we are acting for America's employees, retirees and investors.
At the same time, we recognize that every company in America is not an
Enron, every company is not a Global Crossing. The vast majority of
American companies are led and managed by good, hard-working citizens.
They want to provide benefits and a good living for their employees and
they want their companies to prosper and grow. Similarly, the vast
majority of accountants are honest and trustworthy individuals who make
an invaluable contribution to our financial systems.
If we have learned anything in recent months, we have learned that we
need a strong and vibrant accounting community to give us that
objective view of companies' financial conditions.
We understand to overreact would make things worse, not better as
Chairman Greenspan and Chairman Pitt both admonished in testimony
before our committee. So we are not going to make life even more
difficult for every American company that is just trying to come out of
a slump. We will ask them to provide more and better information. We
will ask them to take on some more corporate responsibility, and we
will support the accounting industry with a solid and effective
oversight organization, while strengthening the Securities and Exchange
Commission.
We will ensure that the new rules for analysts are working as they
are intended, to provide higher-quality information for investors. We
are going to review corporate governance practices to ensure that they
adequately protect shareholders and employees. We will look at the
credit reporting agencies to ensure they are free of conflicts of
interest and provide accurate reports.
CARTA really gets to the heart of what went wrong. CEOs and other
corporate insiders will have to publicly reveal in 2 days when they
sell their company stock, as compared with 60 days now. It will be a
crime to try to interfere with an audit. And never again will employees
be locked into owning company stock while the executives are selling.
Mr. Chairman, today we have the chance to offer more than just talk.
Today we have a chance to take a scandal and offer a real solution.
Today, Mr. Chairman, we have an opportunity to pass a bipartisan
product that came out of the Committee on Financial Services. Oppose
the LaFalce substitute and pass CARTA.
Ms. SCHAKOWSKY. Mr. Chairman, I am dismayed that the Republican
leadership of this body has not responded to the widespread corruption
in our financial markets. The Republican so called ``reforms'' bill
will not protect investors and pension holders from conflicts of
interest and corporate greed. By failing to enact meaningful reform we
are failing the American people.
We all know that if not for Enron's collapse we would not consider
these important matters today. I am concerned that some want to
characterize the Enron collapse as just a case of one bad actor in the
market place. I disagree with that interpretation. Enron's collapse has
systemic causes. Corporate board of directors, Wall Street analysts,
and the big five accounting firms all have an economic incentive to
provide biased analysis of large, profitable companies.
Enron used its political ties to persuade the government to carry out
its business plan. Just take a look at California, President Bush, his
regulators, and congressional Republicans opposed price caps for
consumers while Enron manipulated the market, causing the California
energy crisis. Enron had incredible access to the White House.
President Bush received over $736,000 throughout his career as an
elected official. Vice President Cheney had at least six meetings with
Enron officials while drafting the Administration's energy plan.
Enron's economic and political power effectively muted people who were
skeptical of the company's economic stability. Enron is not an isolated
case and this is not only a business scandal it is also a political
scandal.
The fact of the matter is we do not have the laws and procedures in
place to protect common investors. I have little doubt that corporate
executives' greed and deception will victimize more people. We in
Congress cannot simply rely on free market dogma. The American people
deserve better than this sham of a reform bill.
I am a member of the Financial Services Committee and I voted against
final passage of this cosmetic excuse for a bill. I am dismayed to
report that Republicans on the committee refused to even pass an
amendment that called for CEO's and CFO's to certify financial
statements. I think most Americans would be surprised to learn that
this is not a requirement that already exists.
Employees and pension managers must be involved in corporate decision
making. Boards that are dominated by corporate executives are
inherently flawed, a lesson we learned from Enron's collapse.
Enron's collapse had a major impact on working families--many lost
their life savings while Enron's executives gained millions. It is
estimated that Illinois' state pension fund lost $25 million. That
means that hard working teachers, police officers, and firefighters who
worked for the public good may not be able to enjoy their hard-earned
retirement. Back home in my home Chicago thousands of Andersen
employees have, through no fault of their own, lost their jobs. For
this reason, as well as many others, it is important that we do act in
order to prevent those kinds of layoffs and to protect investors and
pension holders from unfettered corporate greed. I hope that the final
bill that is sent to the President's desk will make real reforms that
will help prevent this from occurring, again.
A real reform bill will:
Make sure that our auditors are independent.
Create a strong public regulatory body that does not have conflict of
interest or financial ties to the industry being regulated.
Ensure that investors have at least the same rights and receive the
same treatment as corporate executives.
Ensure those employees, investors and pension holders have access to
pertinent information and participate in corporate decision making.
Ensure that Enron executives cannot keep the money they stole from
their employees and investors.
Our ranking member, John LaFalce, has crafted an alternative that
will accomplish these goals. Please join me in voting for his
substitute.
Mr. OXLEY. Mr. Chairman, I yield back the balance of my time.
The CHAIRMAN. The question is on the amendment in the nature of a
substitute offered by the gentleman from New York (Mr. LaFalce).
The question was taken; and the Chairman announced that the noes
appeared to have it.
Recorded Vote
Mr. LaFALCE. Mr. Chairman, I demand a recorded vote.
A recorded vote was ordered.
The vote was taken by electronic device, and there were--ayes 202,
noes 219, not voting 13, as follows:
[Roll No. 108]
AYES--202
Abercrombie
Ackerman
Allen
Andrews
Baca
Baird
Baldacci
Baldwin
Barcia
Barrett
Becerra
Bentsen
Berkley
Berman
Berry
Bishop
Blumenauer
Bonior
Borski
Boswell
Boucher
Boyd
Brady (PA)
Brown (FL)
Brown (OH)
Capps
Capuano
Cardin
Carson (IN)
Carson (OK)
Clay
Clayton
Clement
[[Page H1589]]
Clyburn
Condit
Conyers
Costello
Coyne
Cramer
Crowley
Cummings
Davis (CA)
Davis (FL)
Davis (IL)
DeFazio
Delahunt
DeLauro
Deutsch
Dicks
Dingell
Doggett
Dooley
Doyle
Edwards
Engel
Eshoo
Etheridge
Evans
Farr
Fattah
Filner
Ford
Frank
Frost
Gephardt
Gonzalez
Gordon
Green (TX)
Gutierrez
Hall (OH)
Hall (TX)
Harman
Hastings (FL)
Hill
Hilliard
Hinchey
Hinojosa
Hoeffel
Holden
Holt
Honda
Hooley
Hoyer
Inslee
Israel
Jackson (IL)
Jackson-Lee (TX)
Jefferson
John
Johnson, E. B.
Jones (OH)
Kanjorski
Kaptur
Kennedy (RI)
Kildee
Kilpatrick
Kind (WI)
Kleczka
Kucinich
LaFalce
Lampson
Langevin
Lantos
Larsen (WA)
Larson (CT)
Lee
Levin
Lewis (GA)
Lipinski
Lofgren
Lowey
Luther
Lynch
Maloney (CT)
Maloney (NY)
Markey
Mascara
Matheson
Matsui
McCarthy (MO)
McCarthy (NY)
McCollum
McDermott
McGovern
McInnis
McIntyre
McKinney
McNulty
Meehan
Meek (FL)
Meeks (NY)
Menendez
Millender-McDonald
Miller, George
Mink
Mollohan
Moore
Moran (VA)
Murtha
Nadler
Napolitano
Neal
Oberstar
Olver
Ortiz
Owens
Pallone
Pascrell
Pastor
Payne
Pelosi
Phelps
Pomeroy
Price (NC)
Rahall
Rangel
Reyes
Rivers
Ross
Rothman
Roybal-Allard
Rush
Sabo
Sanchez
Sanders
Sandlin
Sawyer
Schakowsky
Schiff
Scott
Serrano
Sherman
Skelton
Slaughter
Snyder
Solis
Spratt
Stenholm
Strickland
Stupak
Tanner
Tauscher
Taylor (MS)
Thompson (CA)
Thompson (MS)
Thurman
Tierney
Towns
Turner
Udall (CO)
Udall (NM)
Velazquez
Visclosky
Waters
Watson (CA)
Watt (NC)
Waxman
Weiner
Wexler
Woolsey
Wu
Wynn
NOES--219
Aderholt
Akin
Armey
Bachus
Baker
Ballenger
Barr
Bartlett
Barton
Bass
Bereuter
Biggert
Bilirakis
Blunt
Boehlert
Boehner
Bonilla
Bono
Boozman
Brady (TX)
Brown (SC)
Bryant
Burr
Burton
Buyer
Callahan
Calvert
Camp
Cannon
Cantor
Capito
Castle
Chabot
Chambliss
Coble
Collins
Combest
Cooksey
Cox
Crane
Crenshaw
Cubin
Culberson
Cunningham
Davis, Jo Ann
Deal
DeLay
DeMint
Diaz-Balart
Doolittle
Dreier
Duncan
Dunn
Ehlers
Ehrlich
Emerson
English
Everett
Flake
Fletcher
Foley
Forbes
Fossella
Frelinghuysen
Gallegly
Ganske
Gekas
Gibbons
Gillmor
Gilman
Goode
Goodlatte
Goss
Graham
Granger
Graves
Green (WI)
Greenwood
Grucci
Gutknecht
Hansen
Hart
Hastings (WA)
Hayes
Hayworth
Hefley
Herger
Hilleary
Hobson
Hoekstra
Horn
Hostettler
Hulshof
Hunter
Hyde
Isakson
Issa
Istook
Jenkins
Johnson (CT)
Johnson (IL)
Johnson, Sam
Jones (NC)
Keller
Kelly
Kennedy (MN)
Kerns
King (NY)
Kingston
Kirk
Knollenberg
Kolbe
LaHood
Latham
LaTourette
Leach
Lewis (CA)
Lewis (KY)
Linder
LoBiondo
Lucas (KY)
Lucas (OK)
Manzullo
McCrery
McHugh
McKeon
Mica
Miller, Dan
Miller, Gary
Miller, Jeff
Moran (KS)
Morella
Myrick
Nethercutt
Ney
Northup
Norwood
Nussle
Osborne
Ose
Otter
Oxley
Paul
Pence
Peterson (MN)
Peterson (PA)
Petri
Pickering
Pitts
Platts
Pombo
Portman
Pryce (OH)
Putnam
Quinn
Radanovich
Ramstad
Regula
Rehberg
Reynolds
Riley
Roemer
Rogers (KY)
Rogers (MI)
Rohrabacher
Ros-Lehtinen
Roukema
Royce
Ryan (WI)
Ryun (KS)
Saxton
Schaffer
Schrock
Sensenbrenner
Sessions
Shadegg
Shaw
Shays
Sherwood
Shimkus
Shows
Shuster
Simmons
Simpson
Skeen
Smith (MI)
Smith (NJ)
Smith (TX)
Souder
Stearns
Stump
Sullivan
Sununu
Sweeney
Tancredo
Tauzin
Taylor (NC)
Terry
Thomas
Thornberry
Tiahrt
Tiberi
Toomey
Upton
Vitter
Walden
Walsh
Wamp
Watkins (OK)
Weldon (FL)
Weldon (PA)
Weller
Whitfield
Wicker
Wilson (NM)
Wilson (SC)
Wolf
Young (AK)
Young (FL)
NOT VOTING--13
Blagojevich
Davis, Tom
DeGette
Ferguson
Gilchrest
Houghton
Obey
Rodriguez
Smith (WA)
Stark
Thune
Traficant
Watts (OK)
{time} 1440
Mr. JOHNSON of Illinois and Mr. YOUNG of Alaska changed their vote
from ``aye'' to ``no.''
Messrs. UDALL of Colorado, McINNIS and BARCIA changed their vote from
``no'' to ``aye.''
So the amendment in the nature of a substitute was rejected.
The result of the vote was announced as above recorded.
Stated against:
Mr. WATTS of Oklahoma. Mr. Chairman, on rollcall No. 108, I was
inadvertently detained. Had I been present, I would have voted ``no.''
Mr. FERGUSON. Mr. Chairman, on rollcall No. 108, I was unavoidably
detained. Had I been present, I would have voted ``no.''
The CHAIRMAN. There being no further amendments permitted under the
rule, the question is on the committee amendment in the nature of a
substitute, as amended.
The amendment in the nature of a substitute, as amended, was agreed
to.
The CHAIRMAN. Under the rule, the Committee rises.
Accordingly, the Committee rose; and the Speaker pro tempore (Mr.
LaHood) having assumed the chair, Mr. Sweeney, Chairman of the
Committee of the Whole House on the State of the Union, reported that
that Committee, having had under consideration 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, pursuant to House Resolution 395, he reported the bill
back to the House with an amendment adopted by the Committee of the
Whole.
The SPEAKER pro tempore. Under the rule, the previous question is
ordered.
Is a separate vote demanded on any amendment to the committee
amendment in the nature of a substitute adopted by the Committee of the
Whole? If not, the question is on the amendment.
The amendment was agreed to.
The SPEAKER pro tempore. The question is on engrossment and third
reading of the bill.
The bill was ordered to be engrossed and read a third time, and was
read the third time.
Motion to Recommit Offered by Mr. LaFalce
Mr. LaFALCE. Mr. Speaker, I offer a motion to recommit.
The SPEAKER pro tempore. Is the gentleman opposed to the bill?
Mr. LaFALCE. I am, Mr. Speaker.
The SPEAKER pro tempore. The Clerk will report the motion to
recommit.
The Clerk read as follows:
Mr. LaFalce moves to recommit the bill H.R. 3763 to the
Committee on Financial Services with instructions to report
the same back to the House forthwith with the following
amendment:
Amendment to H.R. 3763, as Reported Offered by Mr. LaFalce of New York
(executive responsibility)
Strike sections 11 and 12 and insert the following (and
redesignate the succeeding sections and conform the table of
contents accordingly):
SEC. 11. REMOVAL OF UNFIT CORPORATE OFFICERS.
(a) Removal in Judicial Proceedings.--
(1) 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 inserting
``unfitness''.
(2) 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''.
(b) Removal in Administrative Proceedings.--
(1) Securities act of 1933.--Section 8A of the Securities
Act of 1933 (15 U.S.C. 77h-1) is amended by adding at the end
the following new subsection:
``(f) Authority 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.''.
(2) Securities exchange act of 1934.--Section 21C of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3) is amended
by adding at the end the following new subsection:
``(f) Authority 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
[[Page H1590]]
this title if the person's conduct demonstrates unfitness to
serve as an officer or director of any such issuer.''.
SEC. 12. DISGORGEMENT REQUIRED.
(a) Administrative Actions.--Within 30 days after the date
of enactment of this Act, the Securities and Exchange
Commission shall prescribe regulations to require
disgorgement, in a proceeding pursuant to its authority under
section 21A, 21B, or 21C of the Securities Exchange Act of
1934 (15 U.S.C. 78u-1, 78u-2, 78u-3), of salaries,
commissions, fees, bonuses, options, profits from securities
transactions, and losses avoided through securities
transactions obtained by an officer or director of an issuer
during or for a fiscal year or other reporting period if such
officer or director engaged in misconduct resulting in, or
made or caused to be made in, the filing of a financial
statement for such fiscal year or reporting period which--
(1) 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; or
(2) omitted to state a material fact necessary in order to
make the statements made, in the light of the circumstances
in which they were made, not misleading.
(b) Judicial Proceedings.--Section 21(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by adding
at the end the following new paragraph:
``(5) Additional disgorgement authority.--In any action or
proceeding brought or instituted by the Commission under the
securities laws against any person--
``(A) for engaging in misconduct resulting in, or making or
causing to be made in, the filing of a financial statement
which--
``(i) 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; or
``(ii) omitted to state a material fact necessary in order
to make the statements made, in the light of the
circumstances in which they were made, not misleading; or
``(B) for engaging in, causing, or aiding and abetting any
other violation of the securities laws or the rules and
regulations thereunder,
such person, in addition to being subject to any other
appropriate order, may be required to disgorge any or all
benefits received from any source in connection with the
conduct constituting, causing, or aiding and abetting the
violation, including (but not limited to) salary,
commissions, fees, bonuses, options, profits from securities
transactions, and losses avoided through securities
transactions.''.
SEC. 13. CEO AND CFO ACCOUNTABILITY FOR DISCLOSURE.
(a) Regulations Required.--The Securities and Exchange
Commission shall by rule require, for each company filing
periodic reports under section 13 or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)), that the
principal executive officer or officers and the principal
financial officer or officers, or persons performing similar
functions, certify in each annual or quarterly report filed
or submitted under either such section of such Act that--
(1) the signing officer has reviewed the report;
(2) based on the officer's knowledge, the report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements made, in light of the circumstances under which
such statements were made, not misleading;
(3) based on such officer's knowledge, the financial
statements, and other financial information included in the
report, fairly present in all material respects the financial
condition and results of operations of the issuer as of, and
for, the periods presented in the report;
(4) the signing officers--
(A) are responsible for establishing and maintaining
internal controls;
(B) have designed such internal controls to ensure that
material information relating to the issuer and its
consolidated subsidiaries is made known to such officers by
others within those entities, particularly during the period
in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer's
internal controls as of a date within 90 days prior to the
report; and
(D) have presented in the report their conclusions about
the effectiveness of their internal controls based on their
evaluation as of that date;
(5) the signing officers have disclosed to the issuer's
auditors and the audit committee of the board of directors
(or persons fulfilling the equivalent function)--
(A) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
issuer's ability to record, process, summarize, and report
financial data and have identified for the issuer's auditors
any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the issuer's internal controls; and
(6) the signing officers have indicated in the report
whether or not there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
(b) Deadline.--The rules required by subsection (a) shall
be effective not later than 30 days after the date of
enactment of this Act.
In section 21, strike ``and 15'' and insert ``and 16''.
Mr. LaFALCE (during the reading). Mr. Speaker, I ask unanimous
consent that the motion be considered as read and printed in the
Record.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from New York?
There was no objection.
The SPEAKER pro tempore. The gentleman from New York is recognized
for 5 minutes on his motion to recommit.
Mr. LaFALCE. Mr. Speaker, I am trying to make the motion to recommit
easy to vote for and very difficult to vote against, and how am I doing
this?
First of all, I am taking the Republican bill that has been passed in
its entirety with three exceptions, and the exceptions were all called
for by President George Bush who offered a 10-point plan. Three of
those points require, in my judgment, legislation.
The Republican bill does nothing about it. The motion to recommit
would report out the bill that the floor has just reported, but with
the three separate addition. What are they? First of all, let me read
from the President's proposal.
The President in proposal Number 3 says, CEOs should personally vouch
for the veracity, timeliness and fairness of their company's public
disclosures, including their financial statements. CEOs would
personally attest each quarter that the financial statements and
company disclosures accurately and fairly disclose the information of
which the CEO is aware that a reasonable investor should have to make
an informed investment decision. The Republican version leaves it up to
corporate America to do this or not do this. The motion to recommit
legislatively codifies this Presidential recommendation.
Secondly, the President said, CEOs or other officers should not be
allowed to profit from erroneous financial statements. We codify that,
too, and they say cannot profit from it and we could obtain their
moneys back.
{time} 1445
The motion to recommit also deals in a markedly different way from
the Republican bill with respect to the surrendering of officer
compensation, including stock bonuses and other incentive pay. The
motion to recommit empowers the SEC, in either an administrative
proceeding or in court, to seek such disgorgement.
The Republican bill says that the SEC shall study the issue and then,
if they make a determination that it is warranted, they can go back and
seek disgorgement, but only for what took place in the past 6 months;
and if something took place 7 months or so ago, they made $10 million,
$20 million, and they are home free under the Republican bill. That is
an absurdity.
Vote for the motion to recommit.
And then, third, I want to read to my colleagues from a speech given
by the head of enforcement of President Bush's SEC just about a month
or so ago. He is referring to judicially decreed tests that you have to
adhere to before you can declare an officer or director unfit to serve
at a future firm. And he says, ``These tests, which require, amongst
other things, a showing that the misconduct at issue is likely to
recur, has created an unreasonably high standard for obtaining a bar.
The result has been, unbelievably, that in some cases courts have
refused to impose permanent officer and director bars on individuals
who have engaged in egregious, even criminal misconduct.''
What do the Republicans do? They codify that test that the SEC
denounces. We give the SEC the authority they have said they need in
order to bar such individuals who are unfit from serving as future
officers and directors.
The only reason to vote against the motion to recommit is
partisanship. We ought to transcend that, because we are taking the
Republican bill and President Bush's recommendations which we have
codified. Do not go home and say that you have passed something that is
meaningful when corporate America and the accounting firms and Wall
Street are going to give you a pat on the back for letting them escape
once again.
[[Page H1591]]
Mr. OXLEY. Mr. Speaker, I rise in strong opposition to the motion to
recommit.
Mr. BAKER. Mr. Speaker, will the gentleman yield?
Mr. OXLEY. I yield to the gentleman from Louisiana, the chairman of
the Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises.
Mr. BAKER. Mr. Speaker, I thank the gentleman for yielding to me.
It was 1896, and the Dow Jones industrial average was constructed.
Today, 106 years later, only one United States corporation remains in
existence that was included in that publication of that first Dow Jones
average.
Capital markets, free markets, are difficult because of the enormous
competition that exists to succeed, but it yields tremendous benefit
for us all. Today, we are about a debate in how to best regulate those
aberrant actors in the marketplace.
Let it be understood, the vast majority of professionals who conduct
their business in all sectors of the marketplace today, are that,
professional. We are acting today to identify those few aberrant actors
who have brought about great harms to innocent third parties. And act
we shall.
It is important to recognize that in constructing this regulatory or
legislative oversight that we not go too far. In evidence of the point,
this bill came out of our committee by a 16-to-12 vote by Democrat
Members. They see it as reasonable. They see it as an appropriate first
step.
We have a higher obligation. All those working families today who
struggle to make ends meet and invest either in their 401(k) by payroll
deduction or by putting that $200 online investment through their
computer at home expect fairness. That is what this bill is about:
honest, transparent disclosure, so you can make informed decisions for
your family to buy that first home, invest for your children's
education, or for your own retirement.
Inscribed on this wall behind us is an admonition to Members of the
House that I read every day. ``Let us develop the resources of the
land, call forth its powers, build up its institutions, promote all its
great interests, and see whether we also in this hour, day, and
generation may perform something worthy to be remembered.''
Daniel Webster is telling us what our job is. Let us make a
difference. Let us stand for the working people of America today. Let
us not let the Wall Street interests take away people's future by
disclosing inappropriate information. That is what this bill is about.
It is about standing in the face of those who have abused their
corporate and business opportunities to the disinterest of their
employees and their investors.
We can make a difference. Vote down the motion to recommit and pass
this bill.
Mr. OXLEY. Mr. Speaker, reclaiming my time, the first provision in
the amendment which deals with removal of unfit corporate officers is
more appropriately addressed in the underlying bill. CARTA, the bill
before us, gives the SEC the authority to administratively bar
directors and officers from serving in public companies. Under our
legislation, the commission no longer would have to go to Federal Court
to do this. The SEC must consider a number of factors, longstanding
standards used by the courts, in order to make that determination. Our
language is endorsed by the White House.
CARTA also prevents corporate officers from profiting from erroneous
financial statements. Our legislation was carefully crafted with the
focus on bad actors. This language is also endorsed by the White House.
On the issue of CEO certification, we are sympathetic to this well-
intentioned legislative provision, but it is important to note that the
President never requested legislation to accomplish this objective. The
SEC already has the authority to require certification and is currently
considering whether to do so. The SEC is in the best position to decide
whether and how such a requirement would operate. It would do more harm
than good to legislatively mandate what such a rule would look like,
and that is exactly what we were told by Chairman Greenspan and
Chairman Pitt.
Proponents say this is the President's plan. The fact is, nothing
could be further from the truth. Let us be clear. The President
endorses the underlying legislation, the CARTA legislation. If my
friends want to advance the President's agenda, they should support the
underlying bill and reject the motion.
Oppose the motion to recommit. Pass this CARTA legislation, this
historic legislation. It is in the best interest of the investing
public and the United States.
The SPEAKER pro tempore (Mr. Sweeney). Without objection, the
previous question is ordered on the motion to recommit.
There was no objection.
The SPEAKER pro tempore. The question is on the motion to recommit.
The question was taken; and the Speaker pro tempore announced that
the noes appeared to have it.
Recorded Vote
Mr. LaFALCE. Mr. Speaker, I demand a recorded vote.
A recorded vote was ordered.
The SPEAKER pro tempore. Pursuant to clause 9 of rule XX, the Chair
will reduce to 5 minutes the minimum time for any electronic vote on
the question of passage.
The vote was taken by electronic device, and there were--ayes 205,
noes 222, not voting 7, as follows:
[Roll No. 109]
AYES--205
Abercrombie
Ackerman
Allen
Andrews
Baca
Baird
Baldacci
Baldwin
Barcia
Barrett
Becerra
Bentsen
Berkley
Berman
Berry
Bishop
Blumenauer
Bonior
Borski
Boswell
Boucher
Boyd
Brady (PA)
Brown (FL)
Brown (OH)
Capps
Capuano
Cardin
Carson (IN)
Carson (OK)
Clay
Clayton
Clement
Clyburn
Condit
Conyers
Costello
Coyne
Cramer
Crowley
Cummings
Davis (CA)
Davis (FL)
Davis (IL)
DeFazio
DeGette
Delahunt
DeLauro
Deutsch
Dicks
Dingell
Doggett
Dooley
Doyle
Edwards
Engel
Eshoo
Etheridge
Evans
Farr
Fattah
Filner
Ford
Frank
Frost
Gephardt
Gonzalez
Gordon
Green (TX)
Gutierrez
Hall (OH)
Hall (TX)
Harman
Hastings (FL)
Hill
Hilliard
Hinchey
Hinojosa
Hoeffel
Holden
Holt
Honda
Hooley
Hoyer
Inslee
Israel
Jackson (IL)
Jackson-Lee (TX)
Jefferson
John
Johnson, E. B.
Jones (OH)
Kanjorski
Kaptur
Kennedy (RI)
Kildee
Kilpatrick
Kind (WI)
Kleczka
Kucinich
LaFalce
Lampson
Langevin
Lantos
Larsen (WA)
Larson (CT)
Lee
Levin
Lewis (GA)
Lipinski
Lofgren
Lowey
Luther
Lynch
Maloney (CT)
Maloney (NY)
Markey
Mascara
Matheson
Matsui
McCarthy (MO)
McCarthy (NY)
McCollum
McDermott
McGovern
McIntyre
McKinney
McNulty
Meehan
Meek (FL)
Meeks (NY)
Menendez
Millender-McDonald
Miller, George
Mink
Mollohan
Moore
Moran (VA)
Murtha
Nadler
Napolitano
Neal
Oberstar
Obey
Olver
Ortiz
Owens
Pallone
Pascrell
Pastor
Payne
Pelosi
Phelps
Pomeroy
Price (NC)
Rahall
Rangel
Reyes
Rivers
Roemer
Ross
Rothman
Roybal-Allard
Rush
Sabo
Sanchez
Sanders
Sandlin
Sawyer
Schakowsky
Schiff
Scott
Serrano
Sherman
Skelton
Slaughter
Snyder
Solis
Spratt
Stark
Stenholm
Strickland
Stupak
Tanner
Tauscher
Taylor (MS)
Thompson (CA)
Thompson (MS)
Thurman
Tierney
Towns
Turner
Udall (CO)
Udall (NM)
Velazquez
Visclosky
Waters
Watson (CA)
Watt (NC)
Waxman
Weiner
Wexler
Woolsey
Wu
Wynn
NOES--222
Aderholt
Akin
Armey
Bachus
Baker
Ballenger
Barr
Bartlett
Barton
Bass
Bereuter
Biggert
Bilirakis
Blunt
Boehlert
Boehner
Bonilla
Bono
Boozman
Brady (TX)
Brown (SC)
Bryant
Burr
Burton
Buyer
Callahan
Calvert
Camp
Cannon
Cantor
Capito
Castle
Chabot
Chambliss
Coble
Collins
Combest
Cooksey
Cox
Crane
Crenshaw
Cubin
Culberson
Cunningham
Davis, Jo Ann
Davis, Tom
Deal
DeLay
DeMint
Diaz-Balart
Doolittle
Dreier
Duncan
Dunn
Ehlers
Ehrlich
Emerson
English
Everett
Ferguson
Flake
Fletcher
Foley
Forbes
Fossella
Frelinghuysen
Gallegly
Ganske
Gekas
Gibbons
Gillmor
Gilman
Goode
Goodlatte
Goss
Graham
Granger
Graves
Green (WI)
Greenwood
Grucci
Gutknecht
Hansen
Hart
Hastings (WA)
Hayes
Hayworth
Hefley
Herger
Hilleary
Hobson
Hoekstra
Horn
[[Page H1592]]
Hostettler
Hulshof
Hunter
Hyde
Isakson
Issa
Istook
Jenkins
Johnson (CT)
Johnson (IL)
Johnson, Sam
Jones (NC)
Keller
Kelly
Kennedy (MN)
Kerns
King (NY)
Kingston
Kirk
Knollenberg
Kolbe
LaHood
Latham
LaTourette
Leach
Lewis (CA)
Lewis (KY)
Linder
LoBiondo
Lucas (KY)
Lucas (OK)
Manzullo
McCrery
McHugh
McInnis
McKeon
Mica
Miller, Dan
Miller, Gary
Miller, Jeff
Moran (KS)
Morella
Myrick
Nethercutt
Ney
Northup
Norwood
Nussle
Osborne
Ose
Otter
Oxley
Paul
Pence
Peterson (MN)
Peterson (PA)
Petri
Pickering
Pitts
Platts
Pombo
Portman
Pryce (OH)
Putnam
Quinn
Radanovich
Ramstad
Regula
Rehberg
Reynolds
Riley
Rogers (KY)
Rogers (MI)
Rohrabacher
Ros-Lehtinen
Roukema
Royce
Ryan (WI)
Ryun (KS)
Saxton
Schaffer
Schrock
Sensenbrenner
Sessions
Shadegg
Shaw
Shays
Sherwood
Shimkus
Shows
Shuster
Simmons
Simpson
Skeen
Smith (MI)
Smith (NJ)
Smith (TX)
Souder
Stearns
Stump
Sullivan
Sununu
Sweeney
Tancredo
Tauzin
Taylor (NC)
Terry
Thomas
Thornberry
Tiahrt
Tiberi
Toomey
Upton
Vitter
Walden
Walsh
Wamp
Watkins (OK)
Watts (OK)
Weldon (FL)
Weldon (PA)
Weller
Whitfield
Wicker
Wilson (NM)
Wilson (SC)
Wolf
Young (AK)
Young (FL)
NOT VOTING--7
Blagojevich
Gilchrest
Houghton
Rodriguez
Smith (WA)
Thune
Traficant
{time} 1513
So the motion to recommit was rejected.
The result of the vote was announced as above recorded.
The SPEAKER pro tempore (Mr. Sweeney). The question is on the passage
of the bill.
The question was taken; and the Speaker pro tempore announced that
the ayes appeared to have it.
Recorded Vote
Mr. OXLEY. Mr. Speaker, I demand a recorded vote.
A recorded vote was ordered.
The SPEAKER pro tempore. This will be a 5-minute vote.
The vote was taken by electronic device, and there were--ayes 334,
noes 90, not voting 10, as follows:
[Roll No. 110]
AYES--334
Aderholt
Akin
Allen
Andrews
Armey
Baca
Bachus
Baird
Baker
Baldacci
Ballenger
Barcia
Barr
Bartlett
Barton
Bass
Bentsen
Bereuter
Berkley
Berry
Biggert
Bilirakis
Bishop
Blumenauer
Blunt
Boehlert
Boehner
Bonilla
Bono
Boozman
Boswell
Boucher
Boyd
Brady (TX)
Brown (FL)
Brown (SC)
Bryant
Burr
Burton
Buyer
Callahan
Calvert
Camp
Cannon
Cantor
Capito
Capps
Capuano
Cardin
Carson (OK)
Castle
Chabot
Chambliss
Clay
Clement
Coble
Collins
Combest
Condit
Cooksey
Costello
Cox
Cramer
Crane
Crenshaw
Crowley
Cubin
Culberson
Cummings
Cunningham
Davis (CA)
Davis (FL)
Davis, Jo Ann
Davis, Tom
Deal
DeLay
DeMint
Deutsch
Diaz-Balart
Dicks
Dooley
Doolittle
Doyle
Dreier
Duncan
Dunn
Edwards
Ehlers
Ehrlich
Emerson
English
Eshoo
Etheridge
Everett
Farr
Ferguson
Fletcher
Foley
Forbes
Ford
Fossella
Frelinghuysen
Frost
Gallegly
Ganske
Gekas
Gibbons
Gillmor
Gilman
Gonzalez
Goode
Goodlatte
Gordon
Goss
Graham
Granger
Graves
Green (TX)
Green (WI)
Greenwood
Grucci
Gutierrez
Gutknecht
Hall (OH)
Hall (TX)
Hansen
Harman
Hart
Hastings (WA)
Hayes
Hayworth
Hefley
Herger
Hill
Hilleary
Hilliard
Hinojosa
Hobson
Hoeffel
Hoekstra
Holden
Holt
Hooley
Horn
Hostettler
Hoyer
Hulshof
Hunter
Hyde
Inslee
Isakson
Israel
Issa
Istook
Jefferson
Jenkins
John
Johnson (CT)
Johnson (IL)
Johnson, E. B.
Johnson, Sam
Jones (NC)
Keller
Kelly
Kennedy (MN)
Kennedy (RI)
Kerns
Kind (WI)
King (NY)
Kingston
Kirk
Kleczka
Knollenberg
LaHood
Lampson
Langevin
Lantos
Larsen (WA)
Latham
LaTourette
Leach
Lewis (CA)
Lewis (KY)
Linder
Lipinski
LoBiondo
Lofgren
Lucas (KY)
Lucas (OK)
Luther
Maloney (CT)
Manzullo
Mascara
Matheson
Matsui
McCarthy (MO)
McCarthy (NY)
McCollum
McCrery
McHugh
McInnis
McIntyre
McKeon
Meeks (NY)
Menendez
Mica
Millender-McDonald
Miller, Dan
Miller, Gary
Miller, Jeff
Moore
Moran (KS)
Moran (VA)
Morella
Myrick
Napolitano
Nethercutt
Ney
Northup
Norwood
Nussle
Ortiz
Osborne
Ose
Otter
Oxley
Pallone
Pascrell
Pastor
Pence
Peterson (MN)
Peterson (PA)
Petri
Phelps
Pickering
Pitts
Platts
Pombo
Pomeroy
Portman
Price (NC)
Pryce (OH)
Putnam
Quinn
Radanovich
Ramstad
Regula
Rehberg
Reyes
Reynolds
Riley
Roemer
Rogers (KY)
Rogers (MI)
Rohrabacher
Ros-Lehtinen
Ross
Rothman
Roukema
Royce
Ryan (WI)
Ryun (KS)
Sanchez
Sandlin
Saxton
Schaffer
Schiff
Schrock
Sensenbrenner
Sessions
Shadegg
Shaw
Shays
Sherman
Sherwood
Shimkus
Shuster
Simmons
Simpson
Skeen
Skelton
Smith (NJ)
Smith (TX)
Snyder
Souder
Spratt
Stearns
Stenholm
Strickland
Stump
Stupak
Sullivan
Sununu
Sweeney
Tancredo
Tanner
Tauscher
Tauzin
Taylor (MS)
Taylor (NC)
Terry
Thomas
Thompson (CA)
Thompson (MS)
Thornberry
Thurman
Tiahrt
Tiberi
Toomey
Towns
Turner
Udall (CO)
Upton
Velazquez
Vitter
Walden
Walsh
Wamp
Watkins (OK)
Watt (NC)
Watts (OK)
Weiner
Weldon (FL)
Weldon (PA)
Weller
Whitfield
Wicker
Wilson (NM)
Wilson (SC)
Wolf
Wu
Wynn
Young (AK)
Young (FL)
NOES--90
Abercrombie
Ackerman
Baldwin
Barrett
Becerra
Berman
Bonior
Borski
Brady (PA)
Brown (OH)
Carson (IN)
Clayton
Clyburn
Conyers
Coyne
Davis (IL)
DeFazio
DeGette
Delahunt
DeLauro
Dingell
Doggett
Engel
Evans
Fattah
Filner
Flake
Frank
Gephardt
Hastings (FL)
Hinchey
Honda
Jackson (IL)
Jackson-Lee (TX)
Jones (OH)
Kanjorski
Kaptur
Kildee
Kilpatrick
Kucinich
LaFalce
Larson (CT)
Lee
Levin
Lewis (GA)
Lowey
Lynch
Maloney (NY)
Markey
McDermott
McGovern
McKinney
McNulty
Meehan
Meek (FL)
Miller, George
Mink
Mollohan
Murtha
Nadler
Neal
Oberstar
Obey
Olver
Owens
Paul
Payne
Pelosi
Rahall
Rangel
Rivers
Roybal-Allard
Rush
Sabo
Sanders
Sawyer
Schakowsky
Scott
Serrano
Slaughter
Solis
Stark
Tierney
Udall (NM)
Visclosky
Waters
Watson (CA)
Waxman
Wexler
Woolsey
NOT VOTING--10
Blagojevich
Gilchrest
Houghton
Kolbe
Rodriguez
Shows
Smith (MI)
Smith (WA)
Thune
Traficant
{time} 1524
Mr. NEAL of Massachusetts and Mr. RUSH changed their vote from
``aye'' to ``no.''
So the bill was passed.
The result of the vote was announced as above recorded.
A motion to reconsider was laid on the table.
____________________