Congressional Record, Volume 148 Issue 95 (Monday, July 15, 2002)

[Congressional Record Volume 148, Number 95 (Monday, July 15, 2002)]
[Senate]
[Pages S6734-S6793]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002

The PRESIDING OFFICER. Under the previous order, the Senate will now
resume consideration of S. 2673, which the clerk will report.

[[Page S6735]]

The assistant legislative clerk read as follows:

A bill (S. 2673) to improve quality and transparency in
financial reporting and independent audits and accounting
services for public companies, to create a Public Company
Accounting Oversight Board, to enhance the standard setting
process for accounting practices, to strengthen the
independence of firms that audit public companies, to
increase corporate responsibility and the usefulness of
corporate financial disclosure, to protect the objectivity
and independence of securities analysts, to improve
Securities and Exchange Commission resources and oversight,
and for other purposes.

Pending:

Edwards modified amendment No. 4187, to address rules of
professional responsibility for attorneys.
Reid (for Carnahan) modified amendment No. 4286 (to
amendment No. 4187), to require timely and public disclosure
of transactions involving management and principal
stockholders.

The PRESIDING OFFICER. Under the previous order, the Senator from
Michigan, Mr. Levin, is recognized.
Mr. LEVIN. Mr. President, I wonder if I might inquire as to how much
time I have on my allotted time under postcloture rules.
The PRESIDING OFFICER. The Senator has 36 minutes remaining.
Mr. LEVIN. I thank the Chair.
I will at a later time ask unanimous consent that the pending second-
degree amendment be laid aside so I can offer a germane second-degree
amendment relative to stock options.
My amendment, which is at the desk, would direct the independent
accounting standards board to review the accounting rule on stock
options and adopt an appropriate rule within 1 year.
It should not be necessary to seek unanimous consent. The whole
purpose of our postcloture rules is to allow those of us who have
germane amendments such as this one to offer that amendment, to have it
voted on. It is a frustration of the clear intent of our rules to not
allow germane amendments to be voted on after cloture is invoked.
We have a strict rule. It is called cloture. It ends debate. When
cloture was invoked, I had pending an amendment which would have given
the Securities and Exchange Commission greater powers to impose civil
fines administratively. It is an important addition to SEC powers. They
now have that power over brokers, but they don't have it over corporate
directors. They don't have it over corporate managers. They ought to
have the power to impose civil fines administratively--subject, of
course, to appeal to the courts--relative to corporate directors and
corporate officers.
That amendment, as relevant as it is to this bill, was frustrated
when cloture was invoked and when all the time up to that vote was
utilized so that my SEC amendment was not allowed to come up for a
vote.
Now we are in postcloture. Now we are under postcloture rules. The
question is whether or not the intent of those rules is going to be
carried out, which is to allow those of us who have germane amendments
to have a vote on those amendments.
The amendment on which I would like to have a vote cannot be voted on
because there is a pending first-degree amendment and a pending second-
degree amendment. So the second-degree amendment would have to be laid
aside in order to allow a vote. As long as the opponents of this stock
option accounting amendment don't allow the first- and second-degree
amendments that are pending to come to a vote, we are foreclosed from
offering germane amendments.
That is not the intent of our postcloture rule. I believe it is an
abuse of the intent of our postcloture rule. I hope it will not happen
here. I am hoping against hope that there will not be an objection to
my unanimous consent request so that this most critical issue can be
addressed by the Senate.
If we don't address this issue, it seems to me we are leaving a
significant gap in the reforms we are struggling so hard to adopt to
try to restore honesty to accounting rules.
In 1994, the Financial Accounting Standards Board issued a tentative
rule which said that stock options should be expensed like all other
forms of compensation. That is what they decided was the right thing to
do.
Well, Congress intervened. The executives intervened strongly, beat
back FASB with huge pressure, all set out in the FASB account of its
rule. By the way, one of the most extraordinary documents I have ever
read, as a matter of fact, in 24 years in the Senate, is that Financial
Accounting Standards Board history of their effort to bring honesty to
accounting for stock options, in their judgment, and how that effort
was beaten back by pressure from executives and from Congress so that
their very existence was at stake if they proceeded in a way which they
thought was right. All set forth in the record. It is quite an amazing
document.
So what FASB did was, they said: We can't survive if we do what we
think is right. So what we will do instead is we will urge people to
expense options. We will urge corporations to expense their options,
but we will not mandate it.
FASB said: If you don't expense options, at least disclose the cost
of the options as a footnote in your financial statements.
That was the way they decided to survive. This body voted, put some
of the pressure on FASB, basically told them to leave stock option
accounting alone. So we intervened on an accounting issue with a vote
of something like 90 to 10 or thereabouts.
The executives weighed in. I was at one of the meetings in
Connecticut when the executives weighed in heavily on this issue. So I
saw the pressure that was brought to bear on what should be an
independent accounting standards board.
Now we are doing something different in this bill. We are saying to
the board that we are going to give you an independent source of
funding. We are not going to make you dependent directly for your
funding from the very people you are seeking to regulate through your
accounting standards. So we are making some progress now by giving them
an independent source of funding.
What my amendment would do is take what is the most significant post-
Enron issue that is left open, which is accounting for these huge
amounts of stock options that go mainly to executives, and direct this
board that now has an independent source of funding to review--
``review'' is the key word--this matter and make an appropriate
decision within 1 year.
Mr. McCAIN. Will the Senator yield for a question?
Mr. LEVIN. I wonder if I can yield on the time of the Senator from
Arizona, because time is so limited here that I am going to have very
little. I think the Senator has a half hour and, assuming that the
Senator can be recognized, I believe that I only have about 10 or 15
minutes of time remaining. I wonder if the Senator from Texas would
permit that I be allowed to yield to the Senator from Arizona, if the
Senator from Arizona is willing to ask a question to be taken out of
his own time.
Mr. GRAMM. Reserving the right to object, the Senator started out
with a unanimous consent request and then launched into a speech.
The PRESIDING OFFICER. There is no request pending.
Mr. GRAMM. Maybe if the Senator would do his unanimous consent
request and then yield, that would be fine.
Mr. LEVIN. I would rather do my unanimous consent request at the end
of the time, rather than at the beginning of the time. I make a
parliamentary inquiry. If I make a unanimous consent--
Mr. GRAMM. I don't object to the Senator yielding. I wanted to be
sure we had the time we were supposed to have.
Mr. LEVIN. I ask unanimous consent that the Senator from Arizona, if
he is willing, be able to ask a question on his time. I yield to the
Senator from Arizona for that question and then I retain the floor.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. McCAIN. Mr. President, I will be very brief, due to the shortness
of time. I wonder if the Senator from Michigan remembers my comments
last Thursday when I referred to an old boxing term, ``the fix is in.''
There was no vote allowed on my amendment, which is a clearcut,
absolutely unequivocal statement about the use of stock options for
accounting. Does the Senator really believe that, since my amendment
was blocked by that side, his amendment is not going to be blocked by
this side?

[[Page S6736]]

The fix is in, I say to the Senator from Michigan. I hope he knows
that. This is a terrible mistake, a terrible mistake, because we are
not addressing what every observer knows is a vital and critical aspect
of reforming this system, which continues to so badly erode the
confidence of the American people, the investors, which is over half of
the American people.
I wonder if the Senator from Michigan remembers what I said last
week, that the fact is the fix is in. I didn't get a vote on my
amendment and the Senator from Michigan won't get one on his. Very
frankly, since that side blocked my vote, I can understand them
blocking this vote. I think it is wrong on both sides.

The American people deserve to know how we stand on the issue of
stock options. Does the Senator understand that?
Mr. REID. Will my friend yield for a question on my time?
Mr. LEVIN. I am happy to.
Mr. REID. The Senator will recall the Senator from Arizona talking
about the fix being in, and the Record will clearly reflect that the
Senator from Arizona asked that his amendment be in order postcloture,
and, as the Senator from Michigan will recall, I objected to that
because at that time we had 56 other amendments that were pending. They
also wanted them to be in order.
Mr. McCAIN. If the Senator will yield, that is not correct. Mine was
a motion to recommit.
Mr. REID. I am talking about the objection about which I was
involved, and does the Senator from Michigan recall that objection to
the unanimous consent request by the Senator from Arizona?
Mr. LEVIN. I believe I do recall the objection to the request, and I
would rather let the Record speak for itself as to the other matters
because I think the issue before us is a somewhat different issue than
we faced on the McCain-Levin amendment last week. Now we have a Levin-
McCain-Corzine amendment, which is somewhat different. I supported
Senator McCain's amendment, and, indeed, I have been very active in
trying to get this accounting rule adopted in the way the independent
accounting board wants to have it adopted. That is the key emphasis.
Mr. SARBANES. Will the Senator yield on my time for a question?
Mr. LEVIN. I am happy to yield.
Mr. SARBANES. As I understand the Senator's amendment--the one he
will be seeking to offer.
Mr. LEVIN. I will be seeking unanimous consent to have the second-
degree amendment laid aside so that I can do so.
Mr. SARBANES. As I understand it, this amendment is not the Congress
trying to legislate what the accounting standard should be; is that
correct?
Mr. LEVIN. The Senator is correct.
Mr. SARBANES. I think that is important because I, frankly, do not
think that the Congress should get into the business of trying to
legislate accounting standards. I don't think we have the expertise or
the competence to do it. And it turns established accounting standards
into a straight-out political exercise, and I don't think that is wise.
As I understand the Senator's amendment, it would simply reference
the issue of the treatment of stock options to the financial accounting
standards board, for them to make their own independent judgment as to
how this matter should be treated, is that correct?
Mr. LEVIN. The Senator is correct.
Mr. SARBANES. And I understand that the terms of reference are such
that it does not presuppose a particular substantive conclusion; it is,
in effect, left open, or even level, however you want to describe it--a
level playing field for FASB, the expert body that has been established
to make these judgments to make its own independent judgment as to how
these matters should be addressed, is that correct?
Mr. LEVIN. The amendment directs FASB to review the issue and adopt
an appropriate standard. Those are the words in the amendment. I must
tell my good friend from Maryland, however, that there is a history
here that cannot be ignored.
The history is that FASB tried to adopt a standard in 1994. They said
what the right standard was. They were beaten back and brow-beaten and
pressured, so they had to give up what they believed is right. That is
in their own history. Then they recommended to corporations to expense
options, because that is the right thing to do. But they offered an
option to corporations to simply disclose the value of options in their
financial statement in a footnote. They left that option open.
So I have two hopes here. One is that there will not be an objection
to a vote on this amendment. For the life of me, I cannot see how
anybody can object to a vote on an amendment, which simply tells the
independent accounting standards board to reach an appropriate
decision.
Now, we did intervene 8 years ago, and I believed it was wrong for us
to intervene. Nine of us voted no; 90 voted yes. We told them: Do not
change the rule; do not expense options.
In my judgment, it was wrong procedurally and it was wrong in terms
of the substance. But it is my hope that, No. 1, we will be allowed to
have a vote, and, No. 2, it would be my expectation, however, if it is
left to the independence of FASB, that FASB would continue to do what
they said was the right thing, which is to expense options.
It is left to their independent judgment to reach an appropriate
conclusion under the language of my amendment.
Mr. SARBANES. So it would be FASB's call?
Mr. LEVIN. It would be FASB's call.
Mr. SARBANES. Mr. President, I simply want to say I am supportive of
this amendment. I think this is the right way to go about it.
Let me repeat, I do not think the Congress itself should be in the
business of legislating accounting standards, but this amendment does
not do that. It references the issue to the very body that has been
established to accomplish that, which has the expertise and the
competence. The amendment also helps to underscore the independence of
FASB and a congressional perception that they should call it as they
see it. I hope at the appropriate time the Senator will be able to
obtain permission to bring his amendment before the body.
I thank the Senator for yielding.
The PRESIDING OFFICER. The majority leader is recognized.
Mr. DASCHLE. I am sorry. I think the Senator from Michigan has the
floor.
The PRESIDING OFFICER. The Senator from Michigan has the floor.
Mr. LEVIN. I ask unanimous consent that I yield to the majority
leader for whatever time he wishes to take and that time not be taken
from the few minutes I have remaining, and that the floor be returned
to me at that time.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DASCHLE. Mr. President, I will use my leader time so as not to
take any time still allotted to the Senator from Michigan.
I hope we can get the unanimous consent request that the Senator from
Michigan is propounding. I will also say that this is not a question of
if he can get consent and ultimately bring the amendment to the floor.
One way or the other we will have a vote on the Levin amendment. It may
not be on this bill this afternoon if we fail, but our colleagues need
to know we will have a vote on this amendment. This will occur. If I
have to offer it myself, we will have a vote on this amendment. So we
can do it this afternoon, we can do it tomorrow, or we can do it next
week. We are going to have a vote on this amendment. Senators need to
take that into account before they object.
Let me say as strongly as I can, this amendment belongs on this bill.
This is exactly what I think we ought to be doing, and I think on a
bipartisan basis there is strong support for what Senator Levin is
proposing.
I want to speak briefly this afternoon, in my leader time, on the
amendment itself. I think it is important, as my colleagues have been
noting, that the Levin amendment contains precisely the right solution
to the difficult problems of determining the proper accounting
treatment for stock options. It reserves that judgment for the
appropriate body, the Financial Accounting Standards Board. They are
the ones given the authority, they are the ones with the credibility,
they are the ones with the standing to make the right

[[Page S6737]]

decisions about this very important and complex matter.
I argue this is the heart of our ability to deal with the accounting
reforms that are in the Sarbanes and Leahy bills.
It has become all too clear that accounting standards are complex and
can be easily manipulated by aggressive and sometimes unscrupulous
corporate executives. Unfortunately, FASB's weak, dependent condition
has contributed to those manipulations. In fact, it is arguable that
the undermining of FASB's independence was the necessary precondition
to the crisis in confidence afflicting our capital markets today.

One of the many virtues of the Sarbanes bill is that it corrects that
situation. It provides for a new, improved FASB, giving it for the
first time full financial independence from the accounting industry.
That certainly is the first and most vital improvement we need with
respect to establishing clarity and regularity of accounting standards.
Another needed improvement is for those of us in Congress to allow
FASB to do its job. In 1994--and my colleagues have referenced this--
when this issue was last taken up by the Senate, I am proud to say I
was one of nine Senators who voted against the Senate intruding itself
on FASB's decisionmaking process. That is the only reason I opposed my
colleague's amendment last week. As well intended as it is, in my view
it did the same thing on the other side that they were trying to do 9
years ago. It asserts Congress's authority to undermine the
independence of that board. I opposed it 9 years ago, and I oppose it
today, but for obviously different results.
At the same time, the Senate was coming at the options issue from the
direction of prohibiting expenses back in 1994, and as I said today the
momentum is the opposite, but the right course is the same. Let the
experts on the accounting standards board do their job and make the
appropriate decision. Eight years ago, the technical accounting
questions were essentially the same as they are today, although
obviously 8 years have given us an entirely different perspective than
the one we had back then. Nonetheless, the questions are still real.
Accountants still debate the relative merits of the opposing sides. We
still have expert opinion going both ways. On the one hand, the
argument is made that if options are not expensed, bottom lines look
far more attractive than they actually should be, and the investors can
be deceived by the distorted financial pictures that result.
On the other hand, we hear that it is inherently impossible to value
options with no concrete reality behind what the options will actually
be worth when they are exercised. There is also a real debate about the
incentive effects of options.
Supporters argue that they better align an employee's interests with
the company's. Opponents contend they result in a ``pump and dump''
mentality, with senior executives seeking to inflate their stock prices
at any cost so they can quickly and cynically enrich themselves.
In contrast to those complex questions, the Levin amendment is
simplicity itself. It is one sentence. It says that FASB shall:

Review the accounting treatment of employee stock options
and shall, within one year of enactment, adopt an appropriate
generally-accepted accounting principle for the treatment of
employee stock options--

End of issue.
The business of setting accounting standards is lodged, by the Levin
amendment, in the board that the Sarbanes bill expressly seeks to
strengthen and improve. I fully support the Levin amendment and the
philosophy behind it. Congress should not be engaged in setting
technical accounting rules. We should be seeking to do the reverse:
Establish an independent FASB that can help restore confidence in the
accuracy of financial information.
I observe in this context that because of that principle, as I said a
moment ago, while well intended, I believe the McCain amendment went
too far and did exactly what we were trying to do in 1994 but on the
flip side. Restoring independence to the accounting standards is one of
the overriding objectives of the Sarbanes bill, and that is one of my
main reasons for supporting it as strongly as I do. That was my primary
reason for voting in 1994 against a previous attempt to direct FASB in
its decision about expensing, and it is the primary reason for
supporting the Levin amendment today.
So I will end on this particular issue where I began. There will be a
vote on the Levin amendment. It will be today, tomorrow, next week, or
at some point in the future, but Senators should not be misled. If
there is an objection today, it by no means ends the debate. We might
as well have it. We might as well get it. We might as well include it
in the Sarbanes bill because it will be included in one fashion or
another, ultimately, before the work has been done in the Senate on
this very important, complex, and comprehensive challenge we face.
The PRESIDING OFFICER. The Senator from Michigan is recognized.
Mr. LEVIN. How much time do I have remaining?
The PRESIDING OFFICER. The Senator has 25 minutes remaining.
Mr. LEVIN. Mr. President, I quote from a few observers what the
stakes are in this vote and what the stakes have been in terms of the
way in which stock options have not been expensed, have been stealth
compensation, have fueled the incredible increase in terms of executive
pay, and have been a driving force behind the deceptive accounting
practices which have bedeviled this Nation and undermined public
confidence in the credibility of our financial statements.
Robert Samuelson, an economist, said the following:

The point is that the growth of stock options has created
huge conflicts of interest that executives will be hard-
pressed to avoid. Indeed, many executives will coax as many
options as possible from their compensation committees,
typically composed of ``outside'' directors. But because
``directors are [manipulated] by management, sympathetic to
them, or simply ineffectual,'' the amounts may well be
excessive. . . .
Stock options are not evil, but unless we curb the present
madness, we are courting continual trouble.

This is what a retired vice president at J.P. Morgan and Company
said: There can be no real reform without honest accounting for stock
options. A decade ago, the Financial Accounting Standards Board
recommended options be counted as a cost against earnings like all
other forms of compensation, but corporate lobbyists resisted and
Congress did their bidding. Alan Greenspan and Warren Buffett, among
others, are calling for the same change now, but it remains to be seen
whether the accounting profession can act without congressional
interference. Treating options like other forms of pay would make
executive compensation transparent, diminish the temptation to cook the
books, and make managers less inclined towards excessive risk taking.
Warren Buffett, who was quoted by Senator McCain last week, said the
following: If options aren't a form of compensation, what are they? If
compensation isn't an expense, what is it? If expenses shouldn't go
into the calculation of earnings, where in the world should they go?
A New York Times editorial of March 31 of this year stated:

We have no quarrel with the business lobby's claim that
stock options have helped fuel America's entrepreneurship,
particularly in Silicon Valley. But in the interest of
truthful accounting and greater financial integrity, options
should be treated as what they are, a worthy form of
compensation that companies must report as an expense.

Robert Felton, director of McKinsey & Company's Seattle office, said:

Because they have so much at stake with these huge grants,
options are likely to have encouraged some managers to cheat
and cook the books.

Allan Sloan of Newsweek:

. . . options are a free lunch for companies. . . .
I'm all in favor of employees becoming millionaires via
options--I'm an employee, after all--but I'm also in favor of
companies providing profit-and-loss statements that show the
real profit and loss. Ignoring options' costs and low-balling
CEO packages are simply outrageous. When campaigns start
expensing options and disclosing true CEO and director
compensation numbers, I'll believe that they've seen the
light.
According to the Economist, last year, stock options
accounted for 58 percent of the pay of chief executives of
large American companies. So over half the compensation of
our CEOs of major companies now comes from stock options. To
leave that expense off the financial statements' bottom line
is to distort what is going on at companies. It is

[[Page S6738]]

part of the reason we have not had accurately reflective
financial statements at our corporations. It is part of the
reason for the soup we are in right now.

Where financial statements have been giving a false picture of what a
company's financial situation is, it has provided stealth compensation
in huge amounts to executives, it has watered down the value of stock
to the owners of a corporation. That is why now we have such tremendous
support from the organizations which represent stockholders.
That is why, for instance, TIAA-CREF, the largest pension fund in the
United States for teachers is supportive of changing the accounting for
stock options. It is why the Council for Institutional Investors, which
is the leading shareholders organization for pension funds, now favors
expensing stock options in order to give an accurate reflection of what
a company's financial statement is. It is why the AFL-CIO supports the
amendments offered last week and the amendment which hopefully will be
offered today if we are allowed to have a vote on this.
Alan Greenspan says this is the top post-Enron reform. Expensing
stock options is the top post-Enron reform. That is the Chairman of the
Federal Reserve. Paul Volcker, former Federal Reserve Chairman,
supports a change in stock option accounting. Arthur Levitt, former SEC
Chairman, supports the change; Warren Buffett, as we mentioned; and a
host of economists. Standard & Poor's believes you have to expense
stock options if you are going to show an accurate earnings
calculation; Citizens for Tax Justice; Consumer Federation of America;
Consumers Union, and on and on.
The Washington Post of April 18 says the following:

. . . expert consensus favors treating options as a corporate
expense, which would mean that reported earnings might
actually reflect reality. . . . But nobody wants to ban this
form of compensation; the goal is merely to have it counted
as an expense.

That is the end of that particular quote. I would like the entire
quote printed in the Record, and I ask unanimous consent that all the
editorials and comments that I referred to be printed in the Record in
full.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From the Washington Post, Jan. 30, 2002]

Stock Option Madness

(By Robert J. Samuelson)

As the Enron scandal broadens, we may miss the forest for
the trees. The multiplying investigations have created a
massive whodunit. Who destroyed documents? Who misled
investors? Who twisted or broke accounting rules? The answers
may explain what happened at Enron but not necessarily why.
We need to search for deeper causes, beginning with stock
options. Here's a good idea gone bad--stock options foster a
corrosive climate that tempts many executives, and not just
those at Enron, to play fast and loose when reporting
profits.
As everyone knows, stock options exploded in the late 1980s
and the '90s. The theory was simple. If you made top
executives and managers into owners, they would act in
shareholders' interests. Executives' pay packages became
increasingly skewed toward options. In 2000, the typical
chief executive officer of one of the country's 350 major
companies earned about $5.2 million, with almost half of that
reflecting stock options, according to William M. Mercer
Inc., a consulting firm. About half of those companies also
had stock-option programs for at least half their employees.
Up to a point, the theory worked. Twenty years ago,
America's corporate managers were widely criticized. Japanese
and German companies seemed on a roll. By contrast, their
American rivals seemed stodgy, complacent and bureaucratic.
Stock options were one tool in a managerial upheaval that
refocused attention away from corporate empire-building and
toward improved profit-ability and efficiency.
All this contributed to the 1990's economic revival. By
holding down costs, companies restrained inflation. By
aggressively promoting new products and technologies,
companies boosted production and employment. But slowly stock
options became corrupted by carelessness, overuse and greed.
As more executives developed big personal stakes in options,
the task of keeping the stock price rising became separate
from improving the business and its profitability. This is
what seems to have happened at Enron.
The company adored stock options. About 60 percent of
employees received an annual award of options, equal to 5
percent of their base salary. Executives and top managers got
more. At year-end 2000, all Enron managers and workers had
options that could be exercised for nearly 47 million shares.
Under a typical plan, a recipient gets an option to buy a
given number of shares at the market price on the day the
option is issued. This is called ``the strike price.'' But
the option usually cannot be exercised for a few years. If
the stock's price rises in that time, the option can yield a
tidy profit. The lucky recipient buys at the strike price and
sells at the market price. On the 47 million Enron options,
the average ``strike'' price was about $30, and at the end of
2000, the market price was $83. The potential profit was
nearly $2.5 billion.
Given the huge rewards, it would have been astonishing if
Enron's managers had not become obsessed with the company's
stock price and--to the extent possible--tried to influence
it. And while Enron's stock soared, why would anyone complain
about accounting shenanigans? Whatever the resulting abuses,
the pressures are not unique to Enron. It takes a naive view
of human nature to think that many executives won't strive to
maximize their personal wealth.
This is an invitation to abuse. To influence stock prices,
executives can issue optimistic profit projections. They can
delay some spending, such as research and development (this
temporarily helps profits). They can engage in stock buybacks
(these raise per-share earnings, because fewer shares are
outstanding). And, of course, they can exploit accounting
rules. Even temporary blips in stock prices can create
opportunities to unload profitable options.
The point is that the growth of stock options has created
huge conflicts of interest that executives will be hard-
pressed to avoid. Indeed, many executives will coax as many
options as possible from their compensation committees,
typically composed of ``outside'' directors. But because
``directors are [manipulated] by management, sympathetic to
them, or simply ineffectual,'' the amounts may well be
excessive, argue Harvard law professors Lucian Arye Bebchuk
and Jesse Fried and attorney David Walker in a recent study.
Stock options are not evil, but unless we curb the present
madness, we are courting continual trouble. Here are three
ways to check the overuse of options.
(1) Change the accounting--count options as a cost.
Amazingly, when companies issue stock options, they do not
have to make a deduction to profits. This encourages
companies to create new options. By one common accounting
technique, Enron's options would have required deductions of
almost $2.4 billion from 1998 through 2000. That would have
virtually eliminated the company's profits.
(2) Index stock options to the market. If a company's
shares rise in tandem with the overall stock market, the
gains don't reflect any management contribution--and yet,
most options still increase in value. Executives get a
windfall. Options should reward only for gains above the
market.
(3) Don't reprice options if the stock falls. Some
corporate boards of directors issue new options at lower
prices if the company's stock falls. What's the point?
Options are supposed to prod executive to improve the
company's profits and stock price. Why protect them if they
fail?
Within limits, stock options represent a useful reward for
management. But we lost those limits, and options became a
kind of free money sprinkled about by uncritical corporate
directors. The unintended result was a morally lax, get-rich-
quick mentality. Unless companies restore limits--prodded, if
need be, by new government regulations--one large lesson of
the Enron scandal will have been lost.
____

[From the Washington Post, April 18, 2002]

Money Talks

Alan Greenspan, perhaps the nation's most revered
economist, thinks employee stock options should be counted,
like salaries, as a company expense. Warren Buffet, perhaps
the nation's foremost investor, has long argued the same
line. The Financial Accounting Standards Board, the expert
group that writes accounting rules, reached the same
conclusion eight years ago. The London-based International
Accounting Standards Board recently recommended the same
approach. In short, a rather unshort list of experts endorses
the common-sense idea that, whether you get paid in cash or
company cars or options, the expense should be recorded. Yet
today's Senate Finance Committee hearing on the issue is
likely to be filled with dissenting voices. There could
hardly be a better gauge of money's power in politics.
Why does this matter? Because the current rules--which
allow companies to grant executives and other employees
millions of dollars in stock options without recording a dime
of expenses--make a mockery of corporate accounts. Companies
that grant stock options lavishly can be reporting large
profits when the truth is that they are taking a large loss.
In 2000, for example, Yahoo reported a profit of $71 million,
but the real number after adjusting for the cost of employee
stock options was a loss of $1.3 billion. Cisco reported $4.6
billion in profits; the real number was a $2.7 billion loss.
By reporting make-believe profits, companies may have conned
investors into bidding up their stock prices. This is one
cause of the Internet bubble, whose bursting helped
precipitate last year's economic slowdown.
It is not surprising, therefore, that the expert consensus
favors treating options as a corporate expense, which would
mean that reported earnings might actually reflect reality.
But the dissenters are intimidated by neither experts nor
logic. They claim that the value of options is uncertain, so
they

[[Page S6739]]

have no idea what number to put into the accounts. But the
price of an option can actually be calculated quite
precisely, and managers have no difficulty doing the math for
the purposes of tax reporting. The dissenters also claim that
options are crucial to the health of young companies. But
nobody wants to ban this form of compensation; the goal is
merely to have it counted as an expense. Finally, dissenters
say that options need not be so counted because granting them
involves no cash outlay. But giving employees something that
has cash value amounts to giving them cash.
The dissenters include weighty figures in both parties.
Sen. Joe Lieberman (D-Conn.) is the chief opponent of options
sanity in the Senate, and last week President Bush himself
declared that Mr. Greenspan is wrong on this issue. What
might be behind this? Many of the corporate executives who
give generously to politicians are themselves the
beneficiaries of options--often to the tune of millions of
dollars. High-tech companies, an important source of campaign
cash, are fighting options reform with all they've got. But
if these lobbyists are allowed to win the argument, they will
undermine a key principle of the financial system. Accounting
rules are meant to ensure that investors get good
information. Without good information, they cannot know which
companies will best use capital, and the whole economy
suffers in the long run.
____

[From the New York Times, March 31, 2002]

Stock Option Excesses

In his Congressional testimony last month, Jeffrey
Skilling, Enron's former chief executive, offered a primer on
the misuses of stock options. Options, he said, are the most
egregious way for companies to pump up their profits
artificially. They also netted him a tidy $62.5 million in
2000 and helped Enron pay no income taxes in four of the last
five years.
Stock options, in theory, aren't a bad idea. By giving
employees the chance to buy a company's stock in the future
at today's price, corporations can provide an extra incentive
for hard work and can augment compensation. The New York
Times Company awards option to its top executives. But like
other rational business practices that got out of hand during
the boom years of the late 1990's, options have been abused
by some companies and are in need of reform.
A good place to start would be for Congress to end the
conflict between how the tax laws and the accounting rules
treat employees options. Alan Greenspan, the Federal Reserve
chairman, has identified that as one of the most pressing
post-Enron reforms affecting corporate governance.
That conflict creates a loophole that has allowed companies
to treat stock options as essentially free money during the
recent dot-come bubble. A company does not have to report
grants of stock options as an expense on its profit-and-loss
statements, as it does with other forms of compensation, but
it can deduct the options as an expense from its tax
liability when employees exercise them.
As a result, corporate executives can award themselves
oodles of stock options without fear of denting their profit
reports. Once the options are exercised, the company can
treat the appreciation in the shares' value--the employees'
profit--as an expense for tax purposes. At Enron, stock
option deductions alone turned what would have been a federal
income tax bill of $112 million in 2000 into a $278 million
refund. Mr. Greenspan said last week that Federal Reserve
Board research found that the average earnings growth rate of
the S&P 500 companies between 1995 and 2000 would have been
reduced by nearly a quarter if the companies had reported
their stock options as expenses on financial statements.
A decade ago, the accounting industry proposed a sensible
rule to make companies report options as expenses, but it was
beaten back by fierce corporate lobbying. Now Senators John
McCain and Carl Levin have proposed a bill that would end the
double standard, disallowing the tax deduction for any
company that fails to report options as an expense.
They are backed in that effort by investors like Warren
Buffet and big institutions like pension plans, which are
rightly incensed by abusive executive compensation schemes.
They are tired of unseemly practices like the repricing of
options to ensure that executives still get windfalls if the
stock price falls. Making interest-free loans for executives
to acquire stock (often forgiven if the bet does not pay off)
is another dubious compensation practice.
We have no quarrel with the business lobby's claim that
stock options have helped fuel America's entrepreneurship,
particularly in Silicon Valley. But in the interest of
truthful accounting and greater financial integrity options
should be treated as what they are: a worthy form of
compensation that companies must report as an expense.
Congress must end the dot-com-era notion that options equal
free money. That would be a first step toward reassuring
investors that top executives cannot treat publicly traded
companies as Ponzi schemes created for their own enrichment.
______

[From Newsweek, May 20, 2002]

Show Me the Money (All of it)

(By Allan Sloan)

Watching corporate America these days is like watching
drunks at a revival meeting. They're vowing to sin no more,
to tell shareholders the straight truth instead of playing
accounting games, to embrace ``transparency'' so outsiders
can see what's going on. But talk is cheap. When it comes to
action on two key reforms--accounting for stock options, and
showing the value of chief executives' compensation
packages--corporations are as opaque as ever.
The accounting first. As things stand now, options are a
free lunch for companies--employees place a high value on
them, but companies can issue as many as they want without
hurting corporate profits. That's because companies don't
have to count options value as an expense. With reform in the
air because of Enron, old-math types like Warren Buffett and
Alan Greenspan are pushing to change accounting rules to
force companies to count the value of stock options as an
expense in their profit-and-loss statements. Accounting rule
makers proposed this a decade ago, but backed down under
political pressure generated by corporations, especially in
options-happy Silicon Valley. Then there's a second, little-
known aspect of the options-accounting debate. If companies
have to count the value of options as an expense, they would
come under huge pressure to report their value as
compensation to the CEO, and to members of the board. Under
current rules, a company has to show shareholders a table
that includes how much it gave the CEO in salary, bonus,
long-term compensation and other benefits. But the table has
to show only the number of options granted to the CEO, not
their economic value. To find that, you have to hunt on other
pages--and you may not find it at all if the company opts to
report a different way. ``The original idea was to have the
value of options in the table, not the number of options,''
says Graef Crystal, a compensation expert who worked on the
disclosure rules. But, he says, the SEC backed down after
companies objected.
It's easy to see why companies would have been upset at
having to count options as compensation. In most pay filings
I see these days, the economic value of CEO and directors'
options exceeds their cash payments. So counting options
would more than double the typical package.
To see how this works, let's look at Dell Computer and
Knight Ridder, two companies I just happen to have looked at
recently. Dell's most recent statement shows that Michael
Dell, its billionaire owner and founder, earned $2.6 million
in salary and bonus. Not starvation wages, but not much for a
big-time CEO. On a different page, you see that he got
options the company valued at $26 million. That's major
moolah. Dell directors were paid a $40,000 annual retainer
fee, but also got options on $850,000 worth of Stock. The
option's economic value: around $300,000. Note that I'm not
accusing Dell of hiding anything--it's following the
rules.
Dell shows why options have economic value when they're
granted, even if the stock subsequently falls. The directors
got their options when Dell stock was about $52, double
today's price. By getting options on $850,000 of stock rather
than buying 16,298 shares, directors avoided losing money--
and didn't have to tie up $850,000. Meanwhile, they had the
same upside as regular investors who risked $850,000. The
company says its compensation packages are skewed toward
options, so that employees and directors don't make out
unless regular stockholders do.
Now to Knight Ridder, which has been on a cost-cutting kick
for years. Last year chairman Tony Ridder got $935,720 in
salary and no bonus. He also got options on 150,000 shares.
Knight Ridder values the options at about $1.6 million, but
by most rules of thumb, they were worth twice that much.
Knight Ridder directors got a $40,000 annual fee--and 4,000
options. The options were worth about $42,500 by Knight
Ridder's math, about $85,000 by conventional math. Knight
Ridder says its figures are lower because it assumes its
options are exercised much quicker than other analysts
assume.
I'm all in favor of employees becoming millionaires via
options--I'm an employee, after all--but I'm also in favor of
companies providing profit-and-loss statements that show the
real profit and loss. Ignoring options' costs and low-balling
CEO pay packages are simply outrageous. When companies start
expensing options and disclosing true CEO and director
compensation numbers, I'll believe they've seen the light.
Until then, I'll assume that they're still on the bottle.
____

[From the Wall Street Journal, May 3, 2002]

Accounting for Options

(By Joseph E. Stiglitz)

Deja vu. The post-Enron imbroglio over stock options is a
reminder that history--if forgotten--does indeed repeat
itself. Eight years ago, while serving on President Clinton's
Council of Economic Advisers, I was involved in a heated
debate over information disclosure. The Financial Accounting
Standards Board had proposed a new standard that would
require firms to account for the value of executive options
in their balance sheets and income statements.
When FASB made its proposal for what would have clearly
been an improvement in accounting practices, Silicon Valley
and Wall Street were united in their opposition. The
arguments put forward then are the same as those put forward
today, and they are as specious and self-serving now as they
were eight years ago.

Outrageous

The most outrageous argument--but the one that had the
greatest impact--was that

[[Page S6740]]

disclosing the information would adversely affect share
prices. That is, if people only knew how much their equity
claims on the firm could be diluted by options, they would
pay less for their shares! True, and that is precisely why
the disclosure is so important. Markets can only allocate
resources efficiently when prices accurately reflect
underlying values, and that requires as good information as
possible. If markets overestimate the value of a particular
set of ventures, resources will mistakenly flow in that
direction. This is partly what caused the dot-com and telecom
bubbles. Irrational exuberance played its part, but so too
did bad accounting--i.e., distorted information.
To be sure, information will never be perfect and
asymmetries of information are pervasive. But one of the key
insights of the modern theory of information is that
participants do not always have an incentive to disclose
fully and accurately all the relevant information, and so it
is important to have standards.
This is where the second specious argument enters: Critics
of FASB`s proposal claimed that it is impossible to value
options accurately, and accordingly, it would be misleading
to include the options within the standard accounting
frameworks. To better understand the falsity of this
argument, let's take a closer look at how stock options
really work.
The basic economics of stock options are simple. Issuing
stock options does not create resources out of thin air.
Executives like stock options because they have value. But
the value however measured, comes at the expense of other
shareholders. The right of managers to buy shares is the
right to dilute the ownership claims of existing
shareholders. When markets work well--when information is
good--the market will value today the issuance of a right to
dilute, even when that dilution may never occur, and if it
does occur, would happen sometime in the future.
The existing owners of the firm will participate less in
the upside potential of the market them they would have in
the absence of the options. In principle, they can calculate
the circumstances when the executives are likely to exercise
their options, and therefore can calculate the diminution in
their potential gains from owning shares in the company. That
is why when this information is disclosed in ways that can
easily be understood by investors, it will lead to a fall in
the company's share price.
Making such calculations, however, is not easy or costless.
In principle, each shareholder could go through each of the
items in the firm's accounts to construct his own
``estimates'' but that would be a foolish waste of resources,
and the transaction costs would put a major damper on capital
markets and the market economy. That is why we have
accounting standards. Such information is like a public good:
Better standards--more transparency--lead to better resource
allocation and better functioning markets; and if
participants have more confidence in markets, they will be
more willing to entrust their money to markets.
Which brings us back to the argument that it is
``impossible'' to value options. Companies do, of course,
have ways of calculating the value of options and do it
themselves all the time for their own internal planning
purposes.
AS for the question of whether an estimate based on a
publicly-disclosed formula would be misleading, because it is
only an estimate, that is true of many line items that are
central to our accounting frameworks, such as depreciation,
`Calculations about the value of options would be just as, or
even more, accurate than standard depreciation estimates are
of the market value of the declines in asset values that come
with use and obsolescence--something which is a line item on
every accounting framework in corporate America and most of
the world. Of this much we can be sure: zero, the implied
valuation used by companies now when describing the cost of
options in their balance sheets and income statements, is a
vast underestimate.
Those who argue against including options within the
standard accounting frameworks try to have it both ways: They
believe that market participants are smart enough to read
through dozens of footnotes to figure out the implications of
options for the value of their shares, but so dumb that they
would be misled by the more accurate numbers that would be
provided under the reform proposals, and unable to redo the
calculations themselves.

Transparency

There is one more reason for the U.S. to be resolute in
improving our accounting standards by including better
accounting for options. During the East Asia crisis the U.S.
preached the virtues of transparency but then refused to do
anything about regulating the murky world of offshore
banking. America also preached the virtues of our accounting
standards only to find that the world was laughing at Enron
and Arthur Andersen. Tightening our rules on accounting of
options would signal that the U.S. is serious about openness,
serious about improving its accounting standards--despite the
special interests opposed to changes--and willing to learn
from its mistakes.
Many of the same forces that allied themselves in the 1990s
against changes in accounting for options are now trying to
suppress this attempt to make our market economy work better.
In the earlier episode, the National Economic Council, the
U.S. Treasury, and the Department of Commerce intervened in
what was supposed to be an independent accounting board, and
put pressure on FASB to rescind its proposed regulations.
They won, and the country lost. Today, there is a risk once
again of political intervention. At least this time, the
voices of responsible economic leadership, such as Alan
Greenspan, are speaking out. I only hope that this time they
will succeed.
____

Mr. LEVIN. Mr. President, the Republican staff of the Joint Economic
Committee put out a report called, ``Understanding the Stock Option
Debate.''
They have gone through a lengthy analysis dated July 9, 2002, in
which they conclude the following:

Existing accounting principles provide an unambiguous
answer. Stock option awards should indeed be treated as a
cost in financial statements.

It is quite clear to me that two things are true. No. 1, that how we
treat stock options is an essential part of the post-Enron reform
effort. That is No. 1. No. 2, it seems clear to me that there is at
least a likelihood that a majority of this body, if allowed to vote on
this amendment, will vote to refer this matter to an independent
accounting standards board which has its own source of revenue, free
from the kind of pressure which it was under in 1994 and 1995, to reach
an appropriate conclusion.
Do I believe that conclusion will be the same as they reached in
1994? I do. It is very clear to me they would reach such a conclusion
and should reach such a conclusion. But as our colleagues have pointed
out, that is up to the board under this amendment. We would not be
adopting a standard.
In all honesty, I expect they would continue on the same course they
were on 8 years ago when they were violently thrown off course by
people who had control over the purse strings of the organization. I
would expect that would happen. But under this amendment, it is their
call, not ours.
I support the McCain amendment because I believe, as I believed then,
that the accounting standards board wanted to expense options and that
we, in executive pressure, interfered with that decision on their part.
That is why I believe Senator McCain's amendment is also appropriate.
But we cannot even get a vote on that amendment. Last week, we were not
able to bring that amendment to a vote.
But this amendment is different. This amendment says to the
independent board: review this issue. Make an appropriate decision
within a year.
For the life of me I not only do not see how folks--regardless of the
side of this particular issue that they are on--could vote against such
an amendment when it does not tell them what to do but just asks them
to review it and decide within a year as to what the appropriate
accounting method is. I do not understand why, in the middle of a
debate on the reforms which are essential to restore public confidence
after the Enron fiasco, this Senate should not be allowed to vote on
this issue on this bill.
When the majority leader announced that one way or another we will
get to a vote on this amendment, I was glad to hear that. I didn't know
he was going to say that, but I certainly was glad he said that. But it
seems to me that adds a reason we ought to vote for this amendment on
this bill.
This is the right place. Surely it is the right time. There has
perhaps never been a more critical moment in our economic history in
the last few decades than we are facing right now, to help us restore
public confidence. It will be an additional contribution to that
restoration of public confidence if we take this action. If we say yes,
8 years ago we did intervene, but now we don't want to tell the
accounting standards board that they should not expense options. That
was 8 years ago. What we are telling them now is: Do the right thing.
We know what they tried to do 8 years ago. It is laid out in the
record by them. They wanted to do what they believed was the right
thing. If they had done so, they would have been put out of business.
Now we have an opportunity, it seems to me, to do the right thing
ourselves, which is to tell the board that has the responsibility to
adopt accounting standards, to adopt what they believe is the
appropriate standard. That is the right thing to do.

[[Page S6741]]

Mr. REID. Will the Senator yield for a question on my time?
Mr. LEVIN. I will be happy to.
Mr. REID. Is the Senator aware that the stock market, the Dow as of
now is down 338 points as of today?
Mr. LEVIN. I was not aware of that. But it surely adds an additional
urgency, if we need additional urgency, for why we should do everything
in our power to restore public confidence in the financial systems in
this country.
I left off one of my cosponsors before. Senator Biden is a cosponsor
of the amendment, which is at the desk.
I will ask unanimous consent we be able to vote on that at a later
moment.
I wonder if I could ask the Chair how much time I have remaining.
The PRESIDING OFFICER. The Senator has 12 minutes remaining.
Mr. LEVIN. I understand Senator McCain would like to speak at this
time. I see the Republican manager on the floor, so I do not know if
this fits his particular timetable or not.
I ask unanimous consent I be allowed to yield to Senator McCain on
his----
Mr. REID. I object.
The PRESIDING OFFICER. Objection is heard.
Mr. LEVIN. Mr. President, at this time I ask unanimous consent to lay
aside the pending second-degree amendment, No. 4286, and call up for
consideration my amendment 4283, on stock options, which is a second-
degree amendment to the Edwards amendment No. 4187.
The PRESIDING OFFICER. Is there objection?
Mr. GRAMM. Mr. President, reserving the right to object, let me say
there is something on which I agree with the majority leader. That is,
at some point we are going to make a judgment on this issue. But we are
currently in a situation where we have 97 first-degree amendments that
have been filed. We have 24 second-degree amendments. We have 3
different approaches to this issue.
Senator McCain wants to make a decision and set a policy.
Senator Levin, as I read it, wants a fair trial and then a hanging.
And Senator Enzi and others would simply like to have a fair trial.
What is the right outcome? I think that is subject to debate. That is
why I think we ought to have the debate. The idea that when we have
three different approaches, we are going to decide that one of them is
going to be debated on, voted on, but not all three of them is
something we should not expect to happen.
I do not support Senator McCain's amendment, but he has every right,
it seems to me, to have it considered. And I am certainly willing to
vote on it. There may be people who do not want to vote on this issue,
but I am not one of them. So I certainly do object. I object.
The PRESIDING OFFICER. Objection is heard.
Several Senators addressed the Chair.
The PRESIDING OFFICER. The Senator from Michigan has the floor.
Mr. LEVIN. Mr. President, the only way we are going to get to debate
and votes is if we allow the pending amendments which are the first-
and second-degree amendments to be voted on so we can move to other
amendments without having one gatekeeper denying opportunity for all
the others on this floor to offer amendments and have them voted on.
That is not the intention of cloture and postcloture.
I do not believe this process has been used in this way before,
where, postcloture, germane amendments are supposed to be taken up and
voted on, where first- and second-degree amendments have not been
disposed of so they can be used, not with the consent of their
sponsors, but they are used by others to block consideration of the
amendments.
The Senator from Texas says he would like to have a debate and vote.
There is one way to do it. Let's dispose of the second-degree
amendment, take up the Carnahan amendment and vote on it, take up the
Edwards amendment and vote on it.
Mr. GRAMM. Will the Senator yield?
Mr. LEVIN. I will be happy to yield on the Senator's time.
The PRESIDING OFFICER. Is there objection?
Mr. DORGAN. Reserving the right to object, Mr. President, the Senator
from Michigan is claiming his 1 hour. I understand he has been yielding
back and forth. I assume we could, under these circumstances, have one
Senator run the entire 30 hours, as long as they keep yielding to other
Senators.
There are others of us, of course, who want to be heard and who want
to offer amendments.
Mr. GRAMM. I think that is fair. I withdraw my request.
Mr. LEVIN. I yield the floor.
The PRESIDING OFFICER. The Senator from Texas is recognized.
Mr. GRAMM. Mr. President, I think if we want to deal with this issue
today, probably the way to deal with it is to have a unanimous consent
agreement and have a vote on all three amendments--have a vote on
Senator McCain's amendment, have a vote on the Levin amendment, have a
vote on Senator Enzi's amendment so that we would have the full range
of choices. But to suggest that nothing is standing in the way except a
few obstacles to everybody having their will is to neglect the fact
that 97 amendments have been filed as first-degree amendments and 24
second-degree amendments.
So, therefore, by definition, I assume if I suggest and ask unanimous
consent that each and every amendment be voted on, someone would object
since our leadership has plans for this week and next week. I think it
might be possible if we want to deal with this issue today to have a
unanimous consent agreement where Senator McCain would get a vote on
his amendment, where the Senator from Michigan would get a vote on his
amendment, and where Senator Enzi would get a vote on his amendment.
Then we would have a range of choices.
I would be amenable to such an agreement if the Senator wanted to
shop that around on his side of the aisle. We could do a hotline and
see if it would fly. But in the absence of some agreement where the
other two gradations on this spectrum of opinion would have their day
to debate this amendment and have it voted on, I don't think we are
going to be able to do that. It might very well be that we need a
separate bill to deal with this issue. If a Senator were to offer this
amendment in earnest, I would want an opportunity to amend it. I think
having FASB look at this issue--which they are certainly going to do
after this bill is agreed to because this is going to be a self-funded
agency, and they are going to have greater independence--I think having
them look at it is something that we ought to do. But I think we
shouldn't pretend to ourselves that the Levin amendment is a neutral
amendment.
Asking them to look at it when it mandates by law after having looked
at it that within 12 months they adopt in appropriate generally
accepted accounting principles for the treatment of employee stock
options--there is nothing neutral about that; in other words, study it
and within a year adopt a rule.
As I understand it, Senator Enzi and others would have the SEC do a
study and make a recommendation based on their study.
If this amendment were going to be dealt with in isolation, I would
want an opportunity to at least leave it to FASB as to what they
determine rather than mandating that they ought to issue a new
accounting principle. It may be that they would determine not to do
that.
Let me reiterate that I don't have any concern about voting on this
issue. Maybe I should reserve my time. I want to speak on this at some
point. We have several Members here who are going to speak. I have to
be here for the whole time.
I reserve the remainder of my time.
The PRESIDING OFFICER. The Senator from Nevada is recognized.
Mr. REID. I don't think this is necessary. But so there is no
question about it, I ask unanimous consent that the time Senator
Daschle used be counted against the 30 hours.
The PRESIDING OFFICER. Is there objection?
Mr. GRAMM. Reserving the right to object, I did not hear.
Mr. REID. I wanted Senator Daschle's time to be counted against the
30 hours.
Mr. GRAMM. Yes.
The PRESIDING OFFICER. Without objection, it is so ordered.
The Senator from North Dakota.
Mr. DORGAN. Mr. President, we are in a postcloture period of some 30

[[Page S6742]]

hours. I understand we will complete that at 6 o'clock or so this
afternoon.
What is happening here is really an outrage, from my standpoint. We
are in postcloture. I have a germane amendment. I have been here every
single day since this bill came to the floor of the Senate prepared and
ready to offer my amendment. Now, postcloture, I have a germane
amendment. And the only way, apparently, that I can offer my amendment
is if the Senator from Texas is willing to allow me to offer it. That
is not the way the Senate should work.
I want to briefly describe my amendment.
My amendment requires the disgorgement of profits, bonuses,
incentives and so on that the CEOs of corporations receive 12 months
prior to bankruptcy.
That is not in the bill at the present time. It ought to be in the
bill.
The bill contains a disgorgement provision requiring the return of
incentives and bonus payments received prior to a restatement of
earnings. I support that being in the bill, but there is nothing about
the requirement to divest all those bonuses and incentive payments 12
months prior to bankruptcy. That ought to be in this bill.
Let me describe some of the problems that we are dealing with. We
have been holding some hearings over in the Commerce Committee on the
subject of Enron. Here is what some Enron officers got before Enron
went bankrupt:
Kenneth Lay, $101 million; Ken Rice, $72.7 million; Jeffrey Skilling,
$66.9 million; Stan Horton, $45 million; Andy Fastow, $30.4 million.
They did pretty well at the top. Of course, they have already filed
bankruptcy with their corporation.
Should some of this be given back?
I have a constituent in North Dakota who wrote to me and said: I
worked for Enron for a good many years. I built up a retirement fund of
$330,000. It is now worth $1,700. That was my family's retirement fund.
What am I to do? I have lost it all.
But not everybody lost it all with respect to Enron. Those close to
the top made a fortune, and the folks at the bottom lost their shirts.
Most of the investors and employees lost everything.
The question I ask with my amendment is, Should we include a
provision in this bill that requires the give-back of this unwarranted
compensation in the form of bonuses, incentives, and various things 12
months prior to bankruptcy? The answer is, of course, we should require
it. We ought not to be debating this. This amendment ought to be
accepted.
Let me describe some of the other folks who believe this ought to be
done.
Mr. Richard Breeden, former SEC Chairman from 1989-1993 says:

We have long required officers and directors to disgorge
``short-swing'' profits for purchases and sales within a six-
month period . . . we should consider disgorgement to the
company of any net proceeds of stock sales or option
exercises within six-months or a year prior to bankruptcy
filing.

That is Mr. Breeden, former SEC Chairman.
Henry Paulson, CEO, Goldman Sachs, who worked in the Nixon
administration, said:

The business community has been given a black eye by the
activities of and behavior of some CEOs and other notable
insiders who sold large numbers of shares just before
dramatic declines in their companies' share prices . . . in
the case of CEOs and other inside directors, we should raise
the bar and mandate a one year ``claw-back'' in the case of
bankruptcy, regardless of the reason.

He is right. This bill doesn't require it. There is no ``claw-back''
in this bill. There ought to be 1 year prior to bankruptcy.
I don't mean to diminish the importance of other issues that we have
just discussed. The other issues are very important. On the issue of
how stock options are treated, in 1994, I was one of nine Senators who
voted against the proposal back then that would handcuff FASB. I come
to that issue with fairly clean hands.
Let me say that while that issue is important, I have been here every
single day this bill has been on the floor to offer this simple
amendment on disgorgement in the face of bankruptcies. If there are
people in corporations at the top of those companies who make $100
million or $70 million or $50 million, and then the company files for
bankruptcy, do you not believe that some of that ought to be required
to be given back? The folks at the bottom lost everything they had.
They lost their life savings. They lost everything, and the folks at
the top got rich. Shouldn't there be a requirement in this bill to
disgorge those profits? Does anybody think that is unreasonable?

The Senator from Texas left the Chamber as I was beginning to speak.
I was hoping I might get his attention. But as I understand where we
are, we have a first- and a second-degree amendment. The first-degree
amendment is the Edwards amendment. It is followed by a second-degree
amendment, which is the Carnahan amendment.
In order for anyone to offer an amendment postcloture today, we must
ask consent to set aside these amendments so we can offer our
amendment. My understanding is, if someone here does not agree with
that, then he can prevent that from happening. My understanding is that
that is precisely what would happen.
So the result is, for the next 5 hours, we will have gatekeepers who
require us to say: Captain, may I? May I offer an amendment? And they
will say: No, you may not. We will not allow the setting aside of the
pending amendments.
So we will limp along to the end of the 30 hours not being able to
offer germane amendments to this bill. It is outrageous, simply an
outrageous process that puts us here. I think there will be a good
number of Members of the Senate who, in the future, will consider this
and find ways to avoid our being put in this position again.
But what I would like to do is have a debate about this amendment at
some point. And perhaps there are people in the Senate who want to
stand up and say: Do you know what I think? I think if somebody takes
home $50 or $80 million 6 months before bankruptcy, in the form of
incentive payments and bonuses, they ought to be able to keep it, even
if they drove this company right straight into the ground.
Is there one person who will stand up in the Senate today to support
that? Does one person want to support that position? Well, we will see.
In the year before the Enron Corporation filed for bankruptcy,
Kenneth Lay, the chairman of that company, and 140 other company
officials received $310 million in salaries, bonuses, long-term
incentives, loan advances, and other payments.
Does anybody here want to stand up and say: ``That makes a lot of
sense.''? Anybody? Does anybody agree they should keep all that money?
Do we hear nothing because they don't have the floor, or is it that
nobody here believes the top officials of Enron should keep $310
million prior to filing for bankruptcy, where their employees lost they
jobs, lost their life savings in their 401(k)s, their investors lost
their money?
How about NTL, Incorporated? It is a Manhattan TV cable operator that
filed for bankruptcy in May, just several months after it gave its
chief executive officer $18.9 million. It made him one of the 30
highest paid CEOs in New York, putting him ahead of IBM's Louis
Gerstner. That company had $14 billion in losses. And the CEO, Mr.
Knapp, had a salary of $277,000, a bonus of $561,000, and stock options
worth $18 million.
So does anybody here think he ought to keep all that money, just let
the investors and the employees lose, but the people at the top keep
it--just walk away on some gilded, golden carpet?
There are plenty of other examples, of course.
In recent months, we have heard all of these discussions about what
has happened at the top in the boardroom by companies that wanted to
find the line, and then go right to it, and then go across it, if they
could. And there are accounting firms that were the enablers, who said:
Yes, go ahead and do that. And the law firms were on the side,
collecting big fees, saying: Yes, go ahead and do that--and the CEOs
without moral conscience. The result is, they got rich and the little
folks got broke.

My amendment is very simple. My amendment says that 1 year prior to
bankruptcy, if you are getting the big bucks, big bonuses, big
incentives, big stock options, and you want to take off with $50 or
$100 million, and leave everybody else flat on their back, you cannot
do it; you have to give it back. Very simple.

[[Page S6743]]

No one can misunderstand the amendment. This amendment is not strange
or foreign to anyone. This bill will fall short of the mark, this bill
will be incomplete, if we just proceed now to the final vote this
afternoon and we are told: You cannot offer this amendment. We will not
consider this amendment. And we do not want to require the give-back of
millions of dollars by CEOs who receive that money prior to bankruptcy.
If that is the message this Senate sends from this bill this
afternoon, this Senate has a lot of explaining to do.
We came to this debate with great promise. I have been to the floor a
couple of times complimenting the Banking Committee, complimenting all
on the Banking Committee who worked to put this bill together. But I
said there were areas where it needed to be improved. This is one of
them. This is the lightest load you will ever be asked to carry, in my
judgment, to support an amendment of this type: The disgorgement of
ill-earned profits by CEOs who led their corporations to bankruptcy but
waltzed off with millions of dollars in their pockets and left everyone
else--the bondholders, the stockholders, the employees--holding the
bag.
This is not heavy lifting, to do this amendment. It is absurd if the
Senate says: No, we will have nothing to do with that. Our position is,
let's call this corporate responsibility. Let's change the accounting
standards. But, by the way, let's let those people who essentially
looted the corporation from the top--drove it into bankruptcy, and then
left town--let's give them a big wave and say: So long, God bless you,
and I hope your future is a good one with all those millions of
dollars. If we do that, this Senate has a lot of explaining to do.
A good many corporate leaders, respected business officials in this
country, have said this must be in a bill, this should be in a bill,
there is no excuse for it not being in a bill.
So I have amendment No. 4214 at the desk. Let me ask unanimous
consent that we set aside the Carnahan amendment, which is a second-
degree amendment to the Edwards amendment, for the purpose of allowing
consideration of amendment No. 4214. Let me make the first unanimous
consent request first.
I ask unanimous consent that we set aside the Carnahan second-degree
amendment for the purpose of considering my amendment.
The PRESIDING OFFICER (Mr. Wyden). Is there objection?
Mr. ENZI. On behalf of the ranking member of the Banking Committee, I
object.
The PRESIDING OFFICER. Objection is heard.
Mr. DORGAN. Mr. President, let me say, again, I think the process is
an outrage--an outrage. We are in a situation today where we have 4 or
5 hours left postcloture, and we are told that no one in the Senate has
a right to offer an amendment because someone has set himself up as a
gatekeeper saying: I will object to setting aside the Carnahan second-
degree amendment.
What kind of a way is that to legislate? Is someone afraid he will
lose on this amendment, that he will lose the vote? Is that the purpose
of the objection, that he is afraid we will have a vote, Senators will
vote for my amendment, and therefore he will lose, so the words ``I
object'' become a proxy for avoiding a loss on an important amendment?
How many votes do you think would exist in the Senate for saying: We
want to enable CEOs, who ran the corporation into the ground and took
$20 million out and then filed bankruptcy, to keep the money; we want
them to keep the bonus, to keep the stock option, to keep the
commission payment, to keep the money? How many votes do you think
exist for that? Ten, maybe 12? Probably zero.
I think the Senator from Virginia is correct. Probably no one would
stand up and support that proposition. So the question is why are we
not allowing amendments to be voted on this afternoon? I would be happy
to yield to someone to answer that. Is there someone who can answer
that? Perhaps we could find out on whose behalf the Senator from
Wyoming objected.
How much time do I have remaining?
The PRESIDING OFFICER. The Senator from North Dakota has 29 minutes
remaining.
Mr. DORGAN. Parliamentary inquiry: Are we entitled, as a Senator, to
1 hour postcloture, those of us who are recognized?
The PRESIDING OFFICER. The Senator from North Dakota is correct.
Mr. DORGAN. Several of my colleagues wish to speak. I want them to be
able to speak. I hope they will offer amendments.
I will guarantee them this: I will not be objecting to an amendment
if they want to offer them. They have a right to offer an amendment
today. They have a right to get a vote on the amendment. I will not
object to that.
The parliamentary inquiry is, I have just made a unanimous consent
request that has been objected to. Am I prevented from making an
identical request following the presentation by the two Senators on the
floor?
The PRESIDING OFFICER. The Senator is not prevented from making
unanimous consent requests.
Mr. DORGAN. That will give me some time then to snoop around the
cloakrooms and the corners and the nooks and crannies in the Capitol to
find out who won't come to the floor and answer the question I have
asked.
Why will we not get a vote on the simple proposition that those
corporate leaders who run their corporation into bankruptcy and who
take $10, $20, $30, or $50 million out of it just prior to bankruptcy--
why will we not allow a vote on an amendment that would require them to
disgorge themselves of that profit? Why should that ill-gotten gain not
be used to help the employees, help the investors, help others recover,
who lost everything? Why should one group in this circumstance walk off
into the sunset with a pocketful of gold, leaving everyone in their
wake, employees, investors, and others who lost everything they had?
Perhaps in the next hour or so, I will find someone in the Chamber or
in the anterooms who will say: I am the one who decided you should not
get a vote because I believe that those CEOs ought to be able to get
away with that money; that is the American way.
My guess is the Senator from Virginia was right when he shook his
head. I think this amendment passes 100 to nothing or very close to
that, and I hope he and others will help me get it to a vote before 6
o'clock.
Obviously I am a little irritated about the process. It stinks. That
is not a genteel way to say that. But postcloture, if we have germane
amendments, we should be able to be here to offer those amendments.
That is not now the case.
I will be here the next couple of hours trying to see if we can find
a way to cause enough trouble in as short a time as possible to allow
these amendments to be offered.
I yield the floor.
The PRESIDING OFFICER. The Senator from Virginia.
Mr. ALLEN. Mr. President, I would like to use a portion of my 1 hour
of time to say I agree with the purpose and the intent of the Dorgan
amendment. I understand Senator Grassley of Iowa has a similar
amendment that would disgorge or claw back into some ill-gotten gains
of executives for the benefit of creditors and victims of their
malfeasance or illegal acts.
I wish to speak not on process. Although, process seems to drive a
lot of what happens in this body.
I would like to talk to my colleagues and the American people about
the merits of certain ideas or the demerits of certain ideas that have
been raised. There have been several measures dealing with the issue of
stock options.
Senator McCain's measure was a direct hit. I don't like it, but it
was an accountable approach in getting rid of or killing stock options.
We had Senator Levin's amendment, with Senator McCain, which was more
of an indirect or ricochet killing of stock options by granting that
study to FASB, when everyone knows what FASB's position is.
There is another option regarding stock options which I would like to
discuss as the approach that ought to be taken. The majority leader,
Senator Daschle, mentioned that we may have a vote on it today. We may
have a vote on it tomorrow, but some day we will have a vote. There
ought to be a full and fair discussion of the approach we ought to take
as well as what the potential adverse impacts could be if either the
study by FASB or the direct

[[Page S6744]]

killing of stock options, as far as requiring the expensing of them,
were to occur.
The more wise and prudent approach is one that was chiefly sponsored
by my good friend Senator Enzi of Wyoming, along with Senators
Lieberman, Boxer, myself, and others who joined with us, Senators
Murray, Cantwell, Bennett, Wyden, Lott, Burns, Frist, Craig and Ensign.
Our amendment is a more comprehensive, reasonable alternative that has
the Securities and Exchange Commission review and make regulatory or
legislative recommendations to Congress.
Clearly, in today's climate, with the stock market dropping again
today, with the scandals from Global Crossing, Enron, the crisis at
WorldCom, it is axiomatic that there is a pressing need for accounting
reform to address the corporate abuses and accounting firm malfeasance.
The bill, as it is presented, is a very good bill. I think it addresses
the two key areas that need to be addressed.
It is focused, number one, on transparency. That means that people
can readily and easily discern the true financial condition of a
company in which they may want to invest.
Secondly, you need deterrence, stiffer criminal and civil sanctions
for illegal actions by corporate officers. There may be a few things
added to make it better, but this bill essentially addresses those two
focused goals. Indeed, enhanced transparency and improved corporate
governance may restore some investor confidence and foster proper
disclosure for investment decisions. More stringent penalties will
provide a deterrence and substantial disincentive for the corporate
wrongdoing that has led to this understandable firestorm of skepticism
as a fallout from the scandalous, fraudulent misrepresentations by
executives in many companies.
In our effort to reform, we must not enact measures that stifle
innovation and endanger the American entrepreneurial spirit. Congress
should not harm future opportunities for employees to own a part of
their company for whom they work. Unfortunately, the Levin-McCain
amendment does just that by unjustifiably upsetting the current tax
treatment of stock options. It is unnecessary and unwise to change
these particular accounting policies.
It is virtually impossible to accurately determine the worth or value
of a stock option.
Now, how are you going to predict the future performance of a
company? How are you going to predict the future share value of a
company, especially with the vicissitudes of the stock market these
days? For example, somebody is granted a stock option by a company--a
new company--and the stock is trading, after an IPO, at $5 a share. The
option to this employee is to be able to purchase 1,000 shares of that
company at $10 a share.
Now, nobody is going to exercise a stock option until the share value
reaches the strike price, or $10, and it may never get to $10. It may
take 5 years before that share value gets above $10 a share, where
somebody would exercise the option. So it is very difficult to
determine what is the actual value of that stock option when it is
granted.
The amendment Mr. Levin has proposed will affect current law.
Currently employers are not required to expense stock option grants on
their financial statements. But they are permitted to deduct the
employees' gains at exercise--that is, down the road--as a compensation
expense.
Now, this makes good sense. After all, a stock option grant does not
require a cash outlay like other expenses such as wages.
Moreover, there is no transparency problem with failing to expense
stock option grants because they are disclosed on the company's
financial statement. If somebody says there ought to be better
disclosure, or it should be in bolder print, or it should be
highlighted more and the disclosure needs to be more clear, that is
fine. But I don't think it is necessary, in the midst of better
disclosure and transparency, to kill this otherwise largely salutary
idea and beneficial idea of stock options. Nonetheless, the amendments
by Senators McCain and Levin mandate that any company taking a
deduction must report the stock option as an expense on their income
statement, profit and loss statement, and the deduction may not exceed
the reported expense.
Mr. LEVIN. Will the Senator yield for a question?
Mr. ALLEN. I yield.
Mr. LEVIN. Is the Senator aware that the Levin-McCain amendment he is
referring to is not the amendment being offered at this time? There is
another amendment, and they are totally different matters involving the
taxation issue. This is not a taxation amendment at all. Hopefully, it
will come before the Senate today.
Mr. ALLEN. Mr. President, I say to the Senator from Michigan, I
understand his amendment offered today was one to have FASB study the
issue. Senator McCain's amendment was one to require the expensing of
stock options. I realize they are two different matters.
Mr. LEVIN. And that neither one addresses tax issues. That is a
totally separate bill, not in either the McCain-Levin or the Levin-
McCain accounting standard.
Mr. ALLEN. I say to the Senator that in the event you, in effect,
require the expenses of stock options, that does affect the tax
treatment and the desirability of stock options.
Mr. LEVIN. Thank you.
Mr. ALLEN. I thank the Senator from Michigan.
Now, the problematic aspect of these ideas is that, if you take away
the current method of accounting and taxation of stock options, a
company can only take a deduction up to the amount they expense at the
time of the grant. Since the expense would be taken at the time of the
grant, the tax deduction would be taken at the time of the exercise. If
the value was too low at the time of the grant, then you are not going
to get the full extent of your deduction. So the point is that if we
are not careful here, with all these approaches of changing the tax
treatment, changing the expensing rules, or having it be done by FASB,
the result is a convoluted tax increase on companies.

Now, what will happen if these tax increases or this inability to
actually determine the value of the stock option occurs, which may or
may not be exercised at some unknown future date, all of this
consternation, inaccuracy, unpredictability--the potential of actually
a tax increase, in effect--many companies will find this tax and
accounting scheme is so onerous they will discontinue offering options
to all but maybe a few senior executives who can bargain for them.
I think the idea of doing away with stock options, or making them
less desirable, is a substantial detrimental impact on not only
companies but many, particularly those companies in the high-tech
sector and small startups. New businesses have powered our economy in
the last decade and, hopefully, they will do so in the future. Small
companies motivate employees with stock options. That is the way they
keep employees. Especially the startups who will get folks to serve on
the board and pay them for that service in stock options.
I think it is a good idea for people to care about a company doing
well in the future; not only looking for a paycheck, but also caring
about how well a company will do.
Indeed, in the last 10 years, the number of workers who received
stock options has grown dramatically--from about 1 million in 1992 to
10 million today. First, as I said, the benefits of stock options has
enabled companies to recruit and keep quality workers. Absent stock
options, many smaller companies lack the capital. They don't have the
money to attract top-notch talent. Investors will be less likely to
invest in companies that retain stock option plans because the
company's earnings will be artificially deflated by this phantom
expense.
Finally, and perhaps most important, stock options enhance
productivity by providing employees with a greater stake in their
company's performance.
Mr. President, these options are particularly important to rank and
file employees who receive relatively modest salaries and wages. There
is one company that has a pretty good presence in Virginia--Electronic
Arts--which recently told me that stock options enabled many of its
employees to purchase their first homes, to send their children to
college, or to provide for their aging parents. Thus, the desirability
of stock options as incentives is

[[Page S6745]]

readily apparent, and we should not adopt any measure that would
effectively eliminate their use as a form of employee compensation.
That is not to say that I oppose all stock option reform. In fact, I
fully support President Bush's proposal that requires shareholder
approval for stock option plans. I think the idea of equitable
treatment in the exercise of options by employees or executives is well
founded. But I am joining with Senators Lieberman, Boxer, Enzi, and
others in offering the amendment that directs the Securities and
Exchange Commission to conduct a comprehensive study and to make
recommendations regarding the accounting treatment of stock options,
which is the way to go.
We may introduce this proposal as a free-standing bill. Maybe we will
not vote on it today but here is the approach that we ought to take.
The SEC will conduct an analysis and make regulatory and legislative
recommendations on the treatment of stock options in which the
Commission shall analyze the following: No. 1, the accounting treatment
for employees' stock options, including the accuracy of available stock
option pricing models; No. 2, the adequacy of current disclosure
requirements to investors and shareholders on stock options; No. 3, the
adequacy of corporate governance requirements, including shareholder
approval of stock option plans; No. 4, any need for new stock holding
period requirements for senior executives; No. 5, the benefit and
detriment of any new option expenses rules on, A, the productivity and
performance of large, medium, and small companies and startup
enterprises and, B, the recruitment and retention of skilled workers.
The Commission shall submit its regulatory and legislative
recommendations to Congress and supporting analyses of those matters as
far as any changes indicated in the treatment of stock options within
180 days.
In my view, this is the reasonable alternative we ought to be taking.
I urge my colleagues to support this approach rather than adopting,
whether it is today or in the future, Senator McCain's measure that he
introduced last week or Senator Levin's study today. I think either of
those would be harmful and damaging to both American industry and to
working men and women.
The Senator from Michigan mentioned evidence, or observations, of
others as to the impact of his recommendations and his amendment. I
think it is very good for us to look at what people who will be
affected say about the measures that are passed in the Senate. I think
it is important that we be accountable to those who are affected and we
should listen to them.
I have some other observations, as far as the issue of stock options
is concerned. This first I will share is the views of the Information
Technology Industry Council. They expressed their support for the
potential alternative amendment cosponsored by Senators Lieberman,
Enzi, Boxer, and Allen that would direct the Securities and Exchange
Commission to examine the accounting treatment of stock options and
make recommendations.
The Information Technology Industry Council stated that, in
particular, those entrepreneurial high-tech companies that are willing
to take the risk in the pursuit of technological innovation have
offered stock options as an incentive to attract and retain employees.
Unfortunately, the expensing of options would end the practice of
providing most employees with stock options. The result would be a
reversal of the trends toward employee ownership and a significant
reduction in financial opportunities for thousands of workers.
Let me share another observation, and this comes from the
Telecommunications Industry Association, and I read, in part:

This sense of personal ownership referring to stock options
helps develop the innovative entrepreneurial spirit that has
characterized the high tech industry over the last decade.
Should the rules for options suddenly change and be treated
as a cash expense, the number of employees that receive the
benefit would be drastically reduced, most likely leaving
only members of the top management as recipients.

They conclude with this comment:
Adoption of this type of measure is a knee jerk reaction to
situations such as occurred with Enron, which is not what we
need. It is not in the best long-term interest of our
country.

Another observation from a large group of trade associations:
American Electronic Association, Bankers Association, Alabama
Information Technology Association, the Arizona Software and Internet
Association, Biotechnology Industry Organization, Business Software
Alliance, Information Technology Association of America, National
Association of Manufacturers, the Retail Federation, Semiconductor
Equipment and Materials International, as well as the Semiconductor
Industry Association, Software and Information Industry Association,
Software Finance and Tax Executives Council, the Tax Council, the
Technology Network, and the U.S. Chamber of Commerce wrote me and said
that the stock options tax bill--not the Levin amendment but, rather,
the tax treatment changes--that legislation would, if enacted,
discourage broad-based rank and file access to stock options. It would
lead to investor confusion, less accurate financial statements, and
raise taxes on companies issuing stock options.
Now we have heard also some scholarly points of view. It is nice to
hear what some of these esteemed individuals may say from time to time
on the issue of stock options. Others in the body have quoted from
Warren Buffett, a person for whom we all have a great deal of respect.
But in another scholarly work from two gentlemen, economics professors
at Princeton University and New York University, Dr. Malkiel, professor
of economics at Princeton, and Dr. Baumol, professor of economics at
New York University, say this:

Warren Buffett and other critics suggest that the income
statement should reflect an expense to the firm measured by
the cash equivalent value of options. There are two problems
with these views. First, if we were to consider the expense
of options to be equivalent to that of cash wages, there is
no way to measure that cost, the value of options at the time
they are issued, with any reasonable precision. The Nobel
Prize winning Black-Scholes model does an excellent job of
predicting the prices at which short-term options trade in
the market, but the Black-Scholes formula does not provide
reliable estimates for longer term options such as those
lasting 6 months to one year, and market prices often differ
substantially from predicted values. Because employee stock
options have durations of 5 to 10 years, are complicated by
not investing immediately, are contingent on continuing
employment and subject to various restrictions, it is
virtually impossible to put a precise estimate on the options
value. Moreover, employees' options cannot be sold, violating
one of the key Black-Scholes assumptions.

They conclude by saying that by targeting all stock options rather
than stock option abuses, politicians are risking destruction of equity
compensation instruments that have been engines of innovation and
entrepreneurship.
Finally, an observation today from the Software Finance and Tax
Executives Council. They call themselves by the acronym SoFTEC.

SoFTEC believes that Senator Levin's amendment essentially
dictates a pre-determined result without requiring the FASB
to analyze other relevant issues surrounding stock options.
Rather than mandate FASB to achieve a predetermined result,
SoFTEC believes that the SEC currently has the ability and
authority to properly study all of the issues surrounding
stock options and make recommendations based upon not only
the technical accounting issue but the public policy
implications as well.

So I will conclude my time by requesting of my colleagues, whether we
vote on it today, this afternoon, this evening, or in the future, that
we act responsibly. It is fine to be worrying about the details of
procedure and accounting minutia, but it is important also to
understand the impact of this on our free enterprise system. While we
are doing a lot of good as far as greater scrutiny, greater
transparency, and greater punishment for wrongdoers are concerned, let
us make sure we do no harm because the way that this stock market is
going to change is with more investment, more risk taking, more jobs
being created, and that entrepreneurial spirit that rewards people who
take risks, who are creative, who are innovative. That is what is going
to improve our economy, our competitiveness as a country, as well as
the stock market eventually.
The point is we do not need to come up with new, convoluted ways to
increase taxes on companies that we want to invest in and improve our

[[Page S6746]]

country, and I hope we will support the free enterprise system and, in
doing so, look at reasonable, logical, wise, and fully comprehended
decision-making as we move forward in these very uncharted waters of
making major changes in stock options.
The bill as it stands now is an outstanding bill. There can be
improvements made to it, such as the amendments of Senator Grassley and
Senator Dorgan, but let us not have the perfect be the enemy of the
very good, and let us make sure we do no harm. By fouling up stock
options for many men and women working in this country, it would
certainly do a great deal of harm.
I yield the floor.
Several Senators addressed the Chair.
The PRESIDING OFFICER. I think the Senator from Delaware was first to
seek recognition.
Mr. BIDEN. Mr. President, I say to my friend from Iowa if he has a
time constraint, I will yield to him. Just so he knows, I was in the
Chamber before he came. I took a phone call and came back. But if the
Senator has a time constraint, I have 10 to 12 minutes, but I will be
happy to yield.
Mr. GRASSLEY. If I only have to listen to a 10- or 12-minute speech,
I will be glad to wait.
Mr. BIDEN. I hope the Senator listens very closely. He may learn
something. I know I learn when I listen, and I do not always listen
enough.
Mr. President, let me begin where the Senator from Virginia ended,
and that is that I think the bill fashioned by Senator Sarbanes and
this committee does exactly what the Senator from Virginia was
suggesting. That would be balanced; we do not do more harm than good.

If you look at other times--and I have been a Senator for a while--we
faced crises such as this, we have had occasion to overreact. We have
found sometimes that the cure is worse than the disease. I note we
probably did that in my early days here with Senate campaign financing
and other issues.
There is a real balance that the Senator from Maryland has struck. I
compliment the Senator. I cannot think of any Senator better positioned
to be chief spokesman for the Senate and Congress on this issue, not
only for the American people but all our allies and the investors
worldwide.
The dollar now has weakened drastically. In my capacity as chairman
of the Foreign Affairs Committee, I have had occasion to meet with
leading government officials from European countries and from Asia,
asking me, as if I were some kind of broker: Can we continue to invest
in your market? Is it real? What is going on? How much more is coming?
We are fortunate to have the steady and always cautious voice of the
Senator from Maryland, whose background academically as well as
politically suits him well, and in this moment, as probably no one else
in this place is better prepared, to take on this issue. I compliment
the Senator and his quiet, reasoned voice, and his profound
understanding of the problem we face as well as his determination to
move ahead and try to restore confidence. It is a welcome circumstance
at the moment. I compliment the Senator.
I realize from listening to him and knowing him as well as I do, as a
point of personal privilege, some will discount my remarks because they
know the Senator and I are close personal friends and I admire him as
much as anyone I have served in all my years in the Senate. I
understand there are other things that he may or may not have wanted to
put in the bill to strengthen our position and the Nation's position
and the economy, but he wants to make sure there is consensus and
overwhelming support of whatever we do. This is not a circumstance of
questioning motives and wondering whether it is more for show than for
serious reconstruction of the circumstances.
I say at the outset, I have one disagreement with the President of
the United States. Although there probably, pray God, are only a ``few
really bad apples''--I think that was his phrase--in the corporate
world, I do think we have a systemic problem. The marvel is that there
are so many men and women in corporate America who have high moral
standards and have overcome a fairly overwhelming temptation that
exists in the way business is being done, the way in which we have
loosened some of the not regulations, loosened some of the oversight on
corporate America. It is a testament to the fact that there are so many
honorable people running America's major corporations and multinational
corporations.
The fact is, we have a systemic problem which leads me to my friend
from Michigan, Senator Levin. Senator Levin, Senator McCain, Senator
Corzine, Senator Edwards, myself, and several others, in varying
degrees, think what this debate is all about is fundamental fairness
and efficiency of our economy. A lot of what we read about these days
is focused on corporate scandals, individual villains, their schemes,
their greed. There is plenty of that and maybe more than I can remember
any time in my Senate career.
I believe we need to focus on the behavior of corporate executives
who have betrayed their positions of power, recklessly endangering the
careers of tens of thousands of employees and the savings of millions
of Americans. That is why it was so important the Senate unanimously
adopted my amendment last week and the amendment which was contained in
that of the Senator from Vermont for stronger penalties for corporate
crime.

In the hearings I have held in my criminal law subcommittee in the
Judiciary Committee, I made clear from the outset--and I try never to
overpromise what criminal law can do, even though we are only now
finally beginning to rectify and make our criminal justice system
reflect our values more clearly--that is not a solution. It is a part
of a solution. The Senator from Iowa and I conducted hearings in that
subcommittee. We have asked for stronger penalties. We have passed
them. One small example: If you were to violate the Federal law
relating to pension security, ERISA, it is a misdemeanor that could
cost someone their entire pension or 1,000 people their pensions,
totaling hundreds of millions of dollars. It is a misdemeanor. All you
get is up to 1 year in jail. Yet if you steal my automobile--I live 2
miles from the Pennsylvania State line, in Delaware--and you drive
across the State line into Pennsylvania, you get 10 years under Federal
law. Something is awry.
Criminal penalties are not the answer. They are just rectifying this
incredible inequity within our system. Hopefully we are beginning to
reestablish some sense of faith in the system where average people
think big guys get away with it and little guys go to jail.
Punishing and deterring corporate crime, although it is a major part
of our response to excesses committed by some of the most privileged
and powerful corporate executives, is not enough. We face another
fundamental problem. It is the loss of trust in our system, most
apparent, perhaps, in the recent drop in the stock market. More than
200 off the DOW in the days following the President's speech, and when
I came to the floor the DOW was down 300 points. I don't know where it
is right now. I hope and pray to God it has moved up.
The fact is, there is a profound lack of confidence at the moment in
our economy. There used to be a chairman of the board of the Dupont
Company, a big, old farm boy from Ohio. He had great big hands. I
remember, he was a wonderful guy, a first-rate chemist, first-rate
scientist, as well as corporate executive. I was meeting with him one
day and said: We have a problem; we are in the hole. And he turned and
looked at me and said: My father always said, Joe, when you get in the
hole, stop digging.
Maybe the President should stop making speeches for a couple of days.
He has spoken twice and the market went down 500 points while he was
speaking. It is not because of a lack of anything in the President, but
people are looking for real change. They assume that if there is any
rhetoric, it must not be likely to be followed by something real.
The Senator from Maryland has done something real. What the Senator
from Utah and his committee has done is real. This is real. This
underlying bill is real; it is positive; it is substantial. The bottom
line is, no pun intended, there is a profound lack of confidence

[[Page S6747]]

at the moment and that our economy can be shaken right now to the very
foundations of our market democracy. For a market democracy to work, we
have to have faith in our economy that will continue to create
opportunities for job advancement and that our Government will continue
to promote, as our Constitution requires, the general welfare.
In recent months, to be reminded how much we have in common, how much
of our unique blessings we have come to take for granted prior to
September 11, we were reminded that in the end we are all in this thing
together. Among those blessings we had come to take for granted was the
most dynamic economy in the world, that had just come off the longest,
strongest expansion in history. In the new economic arena, we are now
reminded how much we depend on trust in each other to make our markets
work.
That sounds silly. No one was using the word trust before when we
talked of the market economy. We talked innovation, the new economy,
productivity, et cetera, but when you cut it all aside, it is all based
upon trust, which is based upon transparency. If you cannot get out
there and make your judgment to invest or not invest in a corporation
with a clear sense that you have been told everything that is
reasonable to tell you about the state of affairs of that company, then
you might as well play the lottery.
You might as well come on over to Delaware and play the slot machines
at Delaware Park. You have about the same shot, unless you are on the
inside.
The task we are debating today is how to restore the strength of our
economy, which is to restore the trust. At the core of that task is
revival of confidence that consumers and investors, including foreign
investors, need to get back into the market.
This is going to turn around, Mr. President. You and I both know it.
I am absolutely sure it is going to turn around. The question is, how
many bodies will be littered along the way; how many pensions will be
lost; how many jobs will be lost; how long is it going to take? It will
turn around.
I am sure the greatest strength of our system continues to be its
resiliency: Our ability to see change as opportunity. I am sure of that
because we have met this kind of adversity before. Every time we have
come out stronger.
I remember when the Senator from Maryland and I were on the Banking
Committee in those dark days of the savings and loan crisis. We made it
through. We made some very difficult decisions that, I might add, Japan
and other countries have not made, and it resulted in an even stronger
economy. So I am confident we can come out of this stronger.
After the glare from all the glitter during the boom phase and as our
vision becomes a lot clearer, we know that our economy is, in fact,
fundamentally stronger than it was, notwithstanding what is going on
now. Productivity gains were real. Information technology and corporate
reorganization created real growth. It was not imaginary. It was not
like these profit margins that people were suggesting they had on the
balance sheets that were a lie. There actually was growth.
The economy, the marketplace has created real growth. In what
economists like to call the real economy where jobs are created, where
goods are produced, the real economy is faster and more efficient today
than it was a decade ago. Even old industries in our manufacturing
sector have gained from advances in new materials, as well as
improvement in information sharing and organization.
We also know that a lot of what looked like growth, particularly in
the financial sector, was only paper profits and a lot of it was
written in disappearing ink. Profits and paper valuations were all too
often inflated by wishful thinking, by self-dealing analysts, by
accounting gimmicks, and by outright fraud.
The amendment I am proud to support offered by Senators Levin and
Corzine and others addresses one of the most glaring problems behind
those inflated profit statements that fueled the stock boom that is now
unwinding.
Stock options are, as advocates tell us, a useful device. They can
reward employees when companies are so young that they have little else
to offer. Of course, we all want to encourage startup companies in
every responsible way we can. Also, stock options in theory, and
sometimes in practice, keep employees' and corporate officers'
incentives tied to the growth of their companies, but unlike virtually
every other kind of compensation the firm can give its employees, stock
options do not have to be listed on annual reports as an expense, and
that means the more stock options you give, the less compensation you
have to report, the lower your reported expenses, the higher your
reported bottom line.
That part is simple, and that is a big reason stock options became so
attractive not only for the good things they can do, but also for the
convenient way they inflated earnings statements and I would even say,
if I want to go overboard and defend corporate America, even defending
those corporate executives who when they take the train up to Wall
Street and have some 30-year-odd or 35-year-old guy sitting around a
table saying: OK, what are you going to do next quarter? And giant
companies that are strong and mature would say: We are going to do as
well as last quarter. That is not good enough. We are going to
downgrade your stock and your company.

I remember one CEO of a major Fortune 10 company telling me, I have
to do one of three things: I have to say, so be it, and keep on the
long-term course or go out there and find some new product on the
shelf, which I wish I had, that could increase productivity and profit,
or go home and do something. The ``do something'' usually meant go home
and cut the number of employees you have, cut expenses.
Guess what. I do not think these are bad, evil, and venal people.
They went home, and there is an easy way to do it. Let's make sure
compensation is not reflected as an expense. So instead of paying the
top executives an additional $15 million in compensation, give them
stock options. Guess what. The bottom line looked $15 million better
than it did before.
That is not rocket science, and it may have been produced by Wall
Street's desire for immediate gratification, immediate response.
Whatever the reason, it turned out to be as much of a liability in the
literal sense, as much as a damaging impact as the good things it could
do by tying the employees' fate as well as the CEO's fate to their
company.
I see my friend from Utah standing. Does he want to ask me a
question?
Mr. BENNETT. Mr. President, will the Senator yield for a question?
Mr. BIDEN. I will be happy to yield.
Mr. BENNETT. Mr. President, the Senator is going into territory I
will deal with in my statement, but to keep it all in context as he is
talking, I must raise this question. The Senator is one of the
historians of the Senate. He has been around a good long time and
probably will be around for longer than I will.
Does the Senator from Delaware remember that in 1993 when we
increased taxes in the Clinton tax increase, we also put a limit of $1
million on the total amount of deductions a company could take for
salary for its employees?
In other words, that CEO could not be paid over $1 million for his or
her services and have the company deduct that as a legitimate expense
for tax purposes.
Mr. BIDEN. To be honest with the Senator, I do not remember that.
Mr. BENNETT. Will the Senator agree that might have been part of the
reason why companies, in an effort to attract and hold the best
executive talent, would have moved away from traditional compensation,
that the Senator and I both understood when we were growing up and
applying for jobs, and into the more esoteric area of stock options
because stock options were, in fact, not deductible; whereas, good old-
fashioned pay for services rendered was given a tax disadvantage as a
result of the Clinton tax bill?
Mr. BIDEN. In response to the Senator, I have to check more closely.
I have great respect for my friend from Utah. Based on what he says, it
seems to me it would have had a negative impact rather than a positive
impact. That is one of the things we talk about at the front end.
Whatever we do here should have a positive impact. There is something
else stock options do, too. Because

[[Page S6748]]

stock options are predominantly awarded to top executives, they are a
great way to give yourself a sweetheart deal, with a powerful incentive
for executives to look for ways to inflate stock prices so their stock
options, at least for a while, are worth millions, even hundreds of
millions of dollars.
Here is what Business Week said about stock options back in March:

Options grants that promised to turn caretaker corporate
managers into multimillionaires in just a few years encourage
some to ignore the basics in favor of pumping up stock
prices.

And pump they did. Here is how much stock options distorted the
bottom line for some of the biggest and best companies in America. One
study by a London-based consulting firm, Smither and Company, looked at
the use of stock options by 145 of the largest U.S. companies.
They found that those firms overstated profit by 30 percent in 1995,
36 percent in 1996, 56 percent in 1997, and 50 percent in 1998.
Other analysts, including the Federal Reserve, have found the same
thing.
These are huge distortions in the picture the public was given about
these companies and a huge distortion in information investors were
using to allocate capital. That kind of distortion was clearly a big
factor, maybe in addition to what my friend from Utah says, in driving
up those stock prices that are now falling back to Earth.
This is no simple problem. The 200 biggest firms now allocate more
than 16 percent of their stock in options. Let me repeat that.
The 200 biggest firms now allocate more than 16 percent of their
stock in options, mostly for their very top executives.
The potential for distortion and the temptation to distort is great.
Remember these stock options are predominantly given to top
executives.
One study in 1998 found that 220 of the top managers at Fortune 500
firms received an average of 279 time the number of stock options
awarded to each of the firms' other employees.
Two hundred and seventy-nine times what ordinary employees got.
Despite the increased use of stock options this is clearly a device
top management has largely preserved for itself, and the kind of
incentives they created are now all too clear.
This amendment takes what I believe is the most restrained and most
careful approach to the problem of stock options.
It does not legislate accounting standards, and it does not dictate
outcomes.
It tells the Financial Accounting Standards Board that it is given
new resources and new independence by the underlying Sarbanes
amendment. It provides for FASB to come up with appropriate techniques
to account for stock options, it does not dictate a one-size-fits-all
at this moment, and it gives them a year to do it.
This is not about Government intervention this is about getting us
out of the way of what every expert from Alan Greenspan to Warren
Buffett and FASB itself says should be done.
It does nothing to interfere with the issuing of stock options.
It is about giving shareholders and investors the information they
need to reassert their control over America's corporations. That will
help to promote companies' long-term value, and reduce the temptation
to pump up short-term stock prices.
This amendment can help promote a stronger form of stockholder
democracy, to cure a system that a greedy few have turned to their own
personal advantage. That kind of democracy needs openness and clarity--
honest information to make informed decisions.
This amendment is real reform, and I urge my colleagues to support
it.
I thank my friend from Utah for his intervention, and I thank my
friend from Iowa for listening.
I yield the floor.
The PRESIDING OFFICER. The Senator from Iowa.
Mr. GRASSLEY. I yield to the Senator from Virginia, just to make a
unanimous consent request.
The PRESIDING OFFICER (Mr. Nelson of Nebraska). The Senator from
Virginia.
Mr. ALLEN. Mr. President, I yield the remainder of my hour to Senator
Gramm, the Senator from Texas, who is the Republican manager of this
bill.
The PRESIDING OFFICER. The Senator has that right. Time is yielded.
The Senator from Iowa.
Mr. GRASSLEY. Before I forget, Mr. President, I make the request that
the unused portion of my hour that I will not be using here, I would
like to also have given to the Senator from Texas.
The PRESIDING OFFICER. The Senator has that right.
Mr. GRASSLEY. Mr. President, I have five amendments I filed: (i) An
amendment providing for a team of oversight auditors, (ii) an amendment
providing for prebankruptcy bonuses paid to top executives be pulled
back into the bankrupt corporation's estate, (iii) an amendment
providing the Securities Exchange Commission with disgorgement
remedies, (iv) an amendment providing that auditors who sell tax
shelter products cannot opine on the financial effects of the tax
shelter deal; and, (v) last, an amendment providing whistleblower
protection to the accountants and others who want to disclose financial
statement misconduct.
I am pleased, in regard to the last amendment I just announced about
whistleblowers, Senators Leahy and Hatch accepted that proposal as part
of their amendment which has been adopted.
I am not going to speak about the other four. I am just going to
speak about one of those. It is the first amendment I put on my list,
an amendment providing for a team of oversight auditors.
As I said, I congratulate my colleagues, Senators Sarbanes and Enzi
on their hard work in moving S. 2673 out of Committee and bringing the
bill to the floor for further debate. The reform bill is a great step
in the right direction for tackling some of the difficult accounting
problems our Nation currently faces. Nevertheless, I believe the reform
bill isn't quite tough enough on several issues and should be
strengthened further, consequently, the amendment.
In my view, the recent rash of accounting scandals did not result
from incompetency or lack of rigorous training of accounting
professionals. Neither has the problem lied principally with misguided
auditing standards known as GAAS or ill-considered accounting rules
known as GAAP.
The Worldcom debacle, among others, further demonstrated that the
problem does not rest entirely with a company's external auditors--
whose best efforts may not detect financial misrepresentations if fraud
is repeatedly covered up by corporate insiders or contrived to defeat
established internal controls. Instead, each of the most recent
corporate accounting scandals appear to have arisen from egregiously
bad behavior of corporate insiders and internal accountants--with
varying degrees of complicity by those companies' external auditors.
Thus, as a matter of principle, I agree with the ``bad apples''
theory being offered by many. However, I believe addressing those bad
apples requires additional oversight--and not just of a company's
external accountants but of the internal accounting function itself.
To that end, I further respond to the President's call for increased
oversight and would like to offer an amendment that would strengthen
the provisions Sarbanes-Enzi bill by expanding the powers of the
oversight board to require the performance of ``spot audits.'' The
underlying bill which focuses on monitoring external auditors woud be
amended to provide additional board oversight of internal corporate
accounting.
Specfically, my amendment would charge the Board with responisibility
for conducting oversight audits or ``spot audits'' of public companies.
The board would serve in a role analogous to the Internal Revenue
Service or the Federal Bank Examiner. The IRS, for example, achieves
voluntary public compliance through review of a very limited number of
federal tax returns each year. The IRS does not verify each and every
tax return. Similarly, the Federal Bank Examiner sporadically and
randomly audits various banks throughout the country. Such ``spot
auditing'' has been an extremely effective oversight tool for the
banking industry and one which has resulted in higher levels of
regulatory compliance. In similar fashion, I believe that accountants
and corporate America will prepare more carefully their financial

[[Page S6749]]

statements if exposed to the risk of compliance review by the board's
oversight auditors.
Even in self-regulated form, the accounting industry has long
recognized the need for a second level of review. To that end, 24 years
ago the ACIPA established the peer review process by which one
accounting firm would review audit work of another accounting firm. For
example, Deloitte & Touche was for many years the assigned peer
reviewer of Arthur Andersen. Industry-wide self-checking on top of
industry self-regulation seems ill-conceived and has been widely
critized for its effectiveness by lawmakers and the SEC.
Over the past 25 years, a Big Five accounting firm has never issued a
qualified report against another Big Five accounting firm at the end of
any peer review despite the subsequent discovery of numerous
irregularities including numerous conflicts of interest from stock
ownership in audit clients. This recognized need for a second level of
review is longstanding although the mechanism originally established by
the accounting industry seems to have proven largely inadequate.
Some may ask why the Board should be granted powers which may be
exercised currently by the SEC. The answer is simply resources.
Providing an effective mechanism for spot checking the books of various
issuers requires a dedicated audit staff to carry out those purposes.
Having resources dedicated to a regulatory review process would allow
the oversight board to take a proactive approach in reviewing for
accounting irregularities and take the SEC out of a purely reactive
posture with respect to corporate accounting fraud. The SEC has done a
great job of investigating corporate scandals once detected.
Unfortunately, by the time many of the recent scandals were discovered,
things had progressed too far. We were unable to salvage the companies
and the life savings of thousands of employees and shareholders. I
believe the oversight auditor would provide a deterrent to committing
fraud when coupled with tougher criminal sanctions. I further believe
that earlier detection could prevent the absolute destruction of
companies in which fraud remains uncovered for too long a period of
time.
I note that the concept of an oversight auditor within the public
oversight board was rejected in the accounting reform proposal offered
by the SEC and Harvey Pitt on June 20. The draft emphasized that the
SEC's vision of a newly created public oversight board reassured
corporate America that the newly-created oversight board would require
the cooperation of audited corporations ``only to the extent necessary
to further . . . reviews or proceedings regarding the [audit
corporation's] accountant.'' The draft further promised that the new
oversight board would not conduct ``roving investigations'' of audited
corporations nor would the board sanction those corporations. It occurs
to me that by shifting exclusive focus and responsibility to accounting
firms, we ignore the underlying behavior of corporate wrongdoers who
have principal responsibility for fair and accurate financial reporting
to corporate shareholders.
Under my proposal, the newly created oversight board would be charged
with reviewing the financial statements of issuers and focusing its
resources on highest-risk audit areas and questionable accounting
practices of which it is aware from the SEC Division of Enforcement or
other sources such as whistleblowers under provisions I heartily
supported.
Upon discovery, the board would refer findings of possible accounting
or auditing irregularity to the Division of Enforcement with respect to
issuers or other appropriate federal and state enforcement officials
such as the President's newly-created Fraud Task Force within the
Department of Justice. This referral mechanism would ensure that those
agencies continue to have primary authority and responsibility for
conducting comprehensive corporate investigations of possible
wrongdoing. The oversight board, of course, would have authority to
conduct investigations of possible wrongdoing with respect to the
involvement of accounting firms within its jurisdiction.
That is a basic summary of what this amendment would accomplish. I
urge my colleagues to support establishment of an oversight auditor as
a means of improving the compliance of corporate issuers and their
external accounting firms and detecting irregularities at a much
earlier point in the system when a shareholder value remains
salvageable.
It seems to me that my amendment comes down to just a simple case of
common sense. As I think proven so many times before, auditors need to
be audited in the same way the IRS does it for tax returns and in the
same way bank examiners do it in the case of bank audits. If auditors
know their work will itself be audited, they will think twice about
looking the other way on shady deals, as we have seen.
My amendment would put some very specific teeth in the Sarbanes-Enzi
bill.
At this point, I was hoping the Senator from Texas was going to be
here because I have done so much for him on a lot of Finance Committee
bills. I'm referring to tax bills, including the recent CARE bill and
the recent energy bill. I have helped him with so many amendments that
he wanted. I was sure he would be willing to help me get unanimous
consent to get my amendment up, particularly in light of the fact that
last week I was assured when it wasn't on the list that it would be on
the list. Then I came back and found that it meant being last on the
list.
Now we are getting down to the end. I would like to have what I
consider kind of a commitment, although it probably is not an ironclad
commitment, that I be on the list, and, obviously, I would be able to
get a vote on my amendment.
At this point, I ask unanimous consent that the pending amendment be
laid aside for the purpose of taking up my amendment just described,
which is amendment No. 4232.
The PRESIDING OFFICER. Is there objection?
Mr. ENZI. In light of the discussions, I have to object.
Mr. GRASSLEY. Was the President going to put my unanimous consent
before the Senate?
The PRESIDING OFFICER. I did.
Mr. GRASSLEY. I did not hear the President do that.
The PRESIDING OFFICER. The Senator from Wyoming objects.
Mr. GRASSLEY. Mr. President, before I yield the floor, I would like
to have just a short discussion of something that bothers me. In the
Senate we have a right to be, and a responsibility to be,
intellectually honest about these issues with which we are faced here.
I have heard so much during this debate--not so much during the
debate, because that wouldn't be fair, but more probably in news
conferences held by Senators on the other side of the aisle--about the
Democrats wishing to use Enron and WorldCom events very much as, I
think, political issues. I think maybe the Democrats are hoping for a
``November storm'' in which our economy is weak and no progress is made
on accounting reforms.
As this bill goes through the Senate, through conference, and comes
back, I hope we will realize that there is enough blame to go around.
But, most importantly, I think it is wrong. For instance, the
distinguished majority leader on ``Face the Nation'' recently
attributed the current crisis to the alleged ``permissive'' attitude in
the Bush administration towards business. I didn't see any
``permissiveness'' in the President's speech last week. I don't think
very many people did.
But I think we also need to remember, while a lot of this mischief
was going on by corporations, that during the decades of the 1990s and
now in the 21st century there were 2 years in which Democrats
controlled Congress. In those two years, we had a Republican President.
That was the first Bush Presidency. There was a period of time when the
Democrats controlled both Houses of Congress and the White House. That
was 1993-1994. Then there were 6 years that Republicans controlled the
Congress--1994-2000, and the Democrats controlled the Presidency. Then
there were 135 days last year that Congress was controlled by
Republicans, and the President of the United States, but only 135 days
out of a 12-year period of time, if you want to use the 1990s plus now.
And what has happened has happened on the watch of both Republicans and
Democrats.

[[Page S6750]]

I think that to say a President has been President 18 months and this
crisis before us is because of a ``permissive'' attitude in the Bush
administration towards business just doesn't hold water.
I have a chart behind me. I hope I am very clear in making this more
accurate than what I just said. The yellow is the 2 years of the Bush
administration going back to 1994, and the other color covers the
Clinton administration. But let's forget about the Bush administration
and the Clinton administration. Let's just realize what the facts are.

In the case of Enron, it became public in the year 2001, but the
restated earnings and the mischief went on all the way back to at least
the beginning of 1997 because 1997, 1998, 1999, 2000, and the first two
quarters of 2001 were restated earnings.
Adelphia: Half of 1998, all of 1999, all of 2000--before they were
public in 2001--but restated earnings for all those.
Go down to Xerox. It was found by the end of the year 2000 everything
that was done wrong in Xerox. The restated earnings of 1997, 1998,
1999, and 2000 came before there was ever a President George Bush.
There were restated earnings for Rite Aid for 1998, 1999, and 2000.
You can go down the list. What the chart says, better than I can say,
is that it is not a permissive attitude by this President that has put
us in this position. It is because of the lack of transparency that was
implied in what the accounting profession and audit committees and
boards of directors, who ought to be watching management, were doing,
and the Securities Exchange Commission under the spirit of the 1933 law
of what they should have been doing. I suppose there are a lot of
others as well.
But now politics should be put to the side. We should not be making
these statements. We ought to be correcting the situation so that
people have confidence and so that the crooks who are running our
corporations and doing these things that are evidenced here. When I say
``crooks running our corporations,'' I mean the ones who would do this
sort of thing to their stockholders and to the country and to the
economy--so that they cannot get away with that in the future.
That is what this bill is all about. I complimented Senator Sarbanes
and Senator Enzi about this bill. I think it would have been improved
with my amendment. But, quite obviously, that is not the way the game
is being played. So I am sorry that my amendment could not be put to a
vote.
The PRESIDING OFFICER. The Senator from Utah.
Mr. BENNETT. Mr. President, I have spent most of the afternoon in the
Chamber listening to this debate, which I have found to be
illuminating, occasionally informative. I want to do what I can to
perhaps add to the information, if not to some of the light.
I made reference, in my colloquy with the Senator from Delaware, to
the decision that was made by the Congress back in 1993 to put a limit
on the amount of compensation that executives could receive in terms of
traditional dollar salary. And the limit was $1 million.
I remember some of the rhetoric that flew around this floor at that
time, filled this Chamber--how terrible it was that people were being
paid these outlandish salaries and that somehow it would benefit the
people at the bottom of our economic ladder if there was a limit placed
on those salaries. And so recognizing that they could not outlaw the
salaries, Congress could do the next best thing--or, if I might say,
the next worst thing--and say: All right, they can pay themselves these
big salaries, but, by George, we will not allow a tax deduction for
anything over $1 million.
Then, recognizing that would probably produce all kinds of
difficulty, Congress said: Except in a number of areas. And one of the
areas of exceptions was that nonsalary compensation could exceed $1
million and be expensed if it were approved by the shareholders.
In my view, this was a strong incentive to move towards stock
options. After all, if you are running a public company and your
services are worth $5 million or $10 million on the open market, you
are not going to stay with a company that will only pay you $1 million
in cash if a competing company will come along and offer you the $5
million or $10 million you think you are worth in the form of other
compensation.
So as we get lyrical around here about how terrible stock options
are, and how stock options lead to all kinds of excess, we should
remember that Congress, in its excess of enthusiasm for a form of wage
and price controls, helped contribute to this situation.
We do not like to have institutional memory. We do not like to be
held accountable for our actions 4 our 5 years after those actions are
taken. But, in this case, I think it is appropriate for us to remember
the past while we are getting so exercised about what it is we plan to
do in the future.
If I might, Mr. President, be a little autobiographical for a moment,
I would like to trace my own experience with stock options. I have
reflected on this, and I think it has perhaps some value in this
debate.
I was working for the JC Penney Company in the mid-1960s. I was
interested, when I went to work for the Penney Company, to find out
that company had a tremendously innovative and singular form of
compensation; that is, no one in the company was paid more than $25,000
a year--no one. The president, the chairman of the board, none of the
vice presidents--no one was paid more than $25,000 a year.
There was a pool of profits that was created, and in addition to your
$25,000 salary, you were given points in the pool. It was assumed that
the pool was divided up in such a way that any one point in the pool
was worth $1. So when I went to work for the Penney Company in 1964, my
salary was, as I recall, $10,000 a year. I was not important enough to
get to the exalted $25,000 a year stage. But I was given 2,500 points
in the pool, which meant that if the company met its earnings
objectives, I would get another $2,500; in other words, my real salary
would be $12,500.
So I did everything I could to make sure that every point in the pool
was, in fact, worth $1. I did what I could to turn off the lights. I
did what I could to save expenses. I did what I could to drive sales so
that the company would meet its goal.
My memory is that in one of those years each point was worth 93
cents; that is, the company fell 7 percent short of its projection. And
every one of us in the company who was having that kind of a salary
circumstance felt that 7 percent hit. In the example I have just given,
instead of getting another $2,500 at the end of the year, I would have
that $2,500 shaved by 7 percent. I would get my $10,000 salary, plus 93
percent of the additional $2,500.
There were stories in the Penney Company that were legendary about
managers who would get transferred from one Penney store to another. At
the time, as I recall, the limit was not $25,000, it was $10,000. So
$10,000 per year was the maximum anyone in the company was paid. A
store manager who was transferred from a relatively small store to a
relatively large one in a large city was sure he was going to get a big
raise. He got his first check, and it was for $10,000 a year. And he
said: But my expenses are higher. I am running a store that is two or
three times bigger. It doesn't matter; you get $10,000 a year. At the
end of the year, when they added up the profits of that store, he got a
bonus based on the profits of the store he was managing, and the bonus
was about $100,000. Well, he had an obvious incentive to see to it that
store was profitable.

What does any of this have to do with stock options? That system that
was followed by the Penney Company that helped drive its growth all
those years--where compensation was tied to performance, not only your
personal performance as in the case of the store manager I described
but in the company's performance, as in my own case--that program was
scrapped. We went to a more traditional kind of compensation. As part
of the traditional kind of compensation, we had stock options.
I got a little comfortable with the old system because I remember 1
year where each point in the pool was worth $1.23. The company did much
better than it had anticipated, and I got a 23 percent upward kick in
my compensation.
I questioned: Why are we getting away from this because it seems to
me this works?

[[Page S6751]]

The answer was: Wall Street requires it.
Well, that wasn't enough of an answer for me. I said: What do you
mean Wall Street requires it?
They said: The analysts at Wall Street have said to us, until you
give stock options, we are not going to believe that you are serious
about the future of your company because stock options are not tied to
immediate profits. Stock options are tied to future profits. And until
you put some of your compensation to your executives and key employees
in the form of stock options, we will not believe that you believe the
future of your company is as bright as you say it is. We want them to
have a stake in the future.
So as it was explained to me, in the scrapping of this unique
compensation plan that I think the JC Penney Company was the only
company in the country, if not the world, that followed it, in the
scrapping of that plan, you had to adopt some form of stock options. So
they did adopt stock options.
I didn't stay around long enough to take advantage of them. I entered
the Nixon administration in 1969 and gave up my vesting in a number of
circumstances at the Penney Company. Frankly, I was a little nervous
about that because I thought I had a bright future financially if I had
stayed at the Penney Company. And again, as I say, at the end of the
year, when they sent me the money that had been accumulating in my
behalf during the part of the year I worked there, each point was worth
$1.23. That said to me, once again, how much more money I would have
had if I had stayed with Penney instead of coming with the Government.
That is a separate issue. I will not go down that road any further. I
am glad I made the decision I made. I probably would not be a Senator
if I had not.
The point is, the compensation of employees should be tied to the
future and benefit and prosperity of the company, and stock options
were created with that in mind. What we have seen them become, since
1993, when they were not available as part of an intelligent
compensation mix, but they were made more valuable by tax treatment by
the Congress making an accounting decision, what we have seen is that
stock options have accumulated the bad name we have been hearing about
here on the floor. I am not sure I agree with everything that has been
said about how terrible stock options are, but I do recognize they have
led to some excesses.
In the New York Times, on July 12, there was an editorial signed by
Walter Cadette, senior scholar at the Levy Institute of Bard College
and retired vice president of J.P. Morgan. With a background at J.P.
Morgan, in my view, he has a little bit more credibility than some of
the people who write editorials for the New York Times. But he made the
same point that has been going around the floor here in some of the
rhetoric when he says:

Options . . . hold out the promise of wealth beyond
imaging. All it takes is a set of books good enough to send a
stock price soaring, if only for a while. If real earnings
are not there, they can be manufactured--for long enough, in
any case, for executives to cash out. This, in essence, is
what happened at Enron, WorldCom, Xerox--indeed, at quite a
long list of companies.

That is not congruent with the explanation about stock options I
received back in the 1960s, when I had my first opportunity to
participate in stock options in a Fortune 500 company. That is
something that is new, that has come along.
So we are back to the fundamental question of this bill, which is,
How do we account for the performance of a company in a way that will
allow investors to make an intelligent judgment about the value of the
company?
That is the fundamental issue here. It is fundamental enough that I
think I ought to repeat it: How do we account for the performance of
the company in an accurate enough manner to allow investors to make an
intelligent decision about the future of that company?
Some will say to us: That is a very easy question to answer.
Congressman Gephardt has been quoted in the press as suggesting that
accounting is a science. It is a simple matter of black and white, of
adding 1 and 1 and getting 2.
That is not the case, however much we would like to believe that is
the case. Yes, when you are talking about some aspects of accounting
for a company's performance, it is a simple matter of adding up the
numbers and reporting them. But in a company as complex as today's
modern industrial corporation, there are a whole series of judgment
calls that must be made. It is not just a matter of adding up all of
the sales. It is not just a matter of adding up all of the costs.
Back to my example of the JC Penney Company, this is a matter of a
judgment call being made. What is the judgment of the value of this
company if it does not trust its executives enough with stock options?
Analysts on Wall Street who are trained and experienced came to one
judgment call: that the Penney Company was not worth as much without
stock options as it would be with them--nothing whatever to do with the
bottom line, nothing whatever to do with how many socks we sold or how
many shoes we sold or how many shirts we sold. It was a judgment call
on the value of the company based on accounting decisions.
Are we going to account for compensation strictly on the basis of the
Penney Company's system or are we going to make a judgment call based
on stock options?
Well, the Penney Company did what it believed it had to do under
those circumstances and, of course, went forward in its history.
The point here is that there are judgment calls to be made every day
in every circumstance with respect to accounting, and they will
determine how the public, the investing public, will respond to the
company that makes them.
That raises the question of what should those calls be and who should
determine what those calls should be.
There is a term we use. It is called GAAP. It stands for generally
accepted accounting principles. The very phrase itself defines what it
is we are talking about. If we want to make an accounting decision as
to what something is worth, we should make the decision within the
parameters of GAAP; that is, we should make the decision on the basis
that is generally accepted.
Let me give an example of what happens when you go outside the basis
of what is generally accepted accounting principles. I was involved
with an investor and he put out appropriate balance sheets, accounting
information, profit and loss statements, and so on. He got a very angry
call from one of the subinvestors. This was the kind of man who would
sell shares in his overall project primarily to doctors and dentists.
He said to me once:

I will not sell shares to lawyers.

I said:

Why not? Isn't a lawyer's money just as good as a doctor's
or a dentist's money?

He said:

No, because lawyers are trained to find problems and I
don't want sub-investors who spend all of their time looking
for problems.

Well, he got a phone call from a physician who said to him:

I have looked at your financial information and you are
lying to me.

He said:

What do you mean I am lying to you?

He said:

It is right here in your documents. You said this
particular venture made X hundreds of thousands of dollars
last year. Now you have given me your financial statements
and I have found out you didn't make a penny.

The man said:

What are you talking about?

He said:

I have it right here. Here is a list of your assets and a
list of your liabilities and they match each other to the
exact cent. You didn't make any money.

Well, generally accepted accounting principles say that a balance
sheet always has to balance, that the number on one side and the number
on the other side must equal each other to the penny. This man did not
understand generally accepted accounting procedures, he wanted to keep
books a different kind of way, and he was misled. The solution, of
course, was to educate him on what those generally accepted accounting
procedures ought to be. Once he generally accepted what those
procedures were, he could read the profit and loss statement, the
balance sheet, and he could discover that the man, in fact, was not
lying to him and that, in fact, the venture had made several hundreds
of thousands of dollars that year.

[[Page S6752]]

Now, let's come to Wall Street, let's come to Enron, let's come to
all of the things that we are talking about here. One of the things we
have heard in many of the hearings that I have attended on this subject
is that if you were a sophisticated analyst of financial statements,
you could, in fact, find all of the information that you needed in the
footnotes of the various financial statements that were published. You
did not need the kinds of disclosure that this bill is calling for.
Well, I examined that, listened to that testimony, listened to the
people who made that point, and came to the conclusion that they are
right. If you are sophisticated enough to be able to go through every
single footnote, examine every single side comment, and plow through
all of the boilerplate that makes up a standard financial release, you
could create an accurate picture of that corporation--except in those
cases where there was outright fraud. In my opinion, Enron was a case
of outright fraud, not a case of hiding things in footnotes; it was a
case of lying.
Quite frankly, there is nothing we can do in this Chamber, or
anywhere else in a legislative forum, to stop people who determine that
they are going to lie, who are determined they are going to commit
fraud. That will happen no matter what kind of a bill we pass. We can
raise the penalty and thereby discourage it a little more--and there
are proposals to do that--but we cannot stop it. If someone is
determined he is going to break the law, and he thinks he can lie and
get away with it, he will still do it regardless of the bills that we
pass here.
But what we can do, what we should do, and what this bill is crafted
to do is to make it easier for the ordinary investor to understand what
a company is worth, make it so that the generally accepted accounting
principles conform with generally understood activities with respect to
the business world.
The question is, how can we establish accounting rules that will make
it possible for the ordinary investor to understand what is going on
and not restrict understanding to those who can read the footnotes, who
can decipher all of the boilerplate. I don't think we will ever get
there in a perfect world. Life being what it is, with the lawyers
coming in and requiring careful terms of art to be spelled out, we will
never get to the point where someone who does not have any kind of
legal understanding of the terms of art can read this as easily as he
or she could read Harry Potter. However, we can move in that direction,
and I feel this bill does so move.
The one thing that we should be most careful of, however, is to avoid
having Congress set the accounting rules. Why? If Congress sets the
accounting rules, it will--to use a phrase we use here derisively
sometimes--take an act of Congress to turn that around. And having set
the rules, Congress is very reluctant to come back in an act of
Congress and change them. But if the rules are set by the regulatory
bodies over which Congress exerts some oversight responsibility, they
can be changed much more easily as more information comes along and as
people begin to discover that what they did previously maybe doesn't
make as much sense.
I offer as exhibit A Congress's action to outlaw the deductibility of
cash compensation above a million dollars--something that, in
retrospect, now looks like it was a pretty stupid thing for us to have
done. But we have done it, and the chances of trying to get a bill
through that would undo it are very slim. If we stay out of the
business--we in Congress--of making these kinds of accounting
decisions, we will be better off, the economy will be better off, more
people will keep their jobs, et cetera.
Let me close on that particular subject with that particular idea in
mind, and that is that Congress from time to time wants to step into
the marketplace, repeal the law of supply and demand, and assert our
judgment over the judgment of the marketplace. I have said many times,
and will say many times hence, if I could add to what we have carved in
marble around here, I would say: ``You cannot repeal the law of supply
and demand.'' But we keep trying to do it with wage and price controls.
We keep trying to repeal the law of supply and demand.
We tried to do it in 1993 when we said we will do something about the
excessive compensation of executives. We won't say that the marketplace
and the law of supply and demand will determine what people get paid;
we will legislate it. We will legislate it with tax policy. We will do
some social engineering through tax policy. We keep trying to do that
all the time, and it almost always produces a perverse effect.
Let me address this question of overwhelmingly big salaries and
compensation--as if there was something really evil about that, really
corrupting about that. Maybe there is, in terms of the impact that that
sort of compensation has in the lives of an individual, but it is the
marketplace at work.
Let me give an example with which I think everybody might be
familiar. I am not talking about Jack Welch, the CEO of GE. I am not
talking about Ken Lay at Enron. Let's talk about somebody with whom
most people can identify. Let's talk about Wayne Gretzky.
Wayne Gretzky has been called, accurately in my view, the greatest
hockey player who ever lived. Along with that, Wayne Gretzky is the
highest paid hockey player who ever lived. At the time the decision was
made by the hockey team that brought Wayne Gretzky into the United
States and paid him an incredible sum of money, there was a great hue
and cry: How can one individual be worth this much money? For what?
Knocking a solid piece of whatever hockey pucks are made out of around
on the ice, for that he is worth $20 million, $30 million, $50
million--whatever it was--a year?
The owner of the team came out of some obscurity long enough to say:
Yes, he is worth that much money, and let me explain to you why. Then
he outlined what the ticket sales for his team were the year before he
hired Wayne Gretzky and what the ticket sales for his team were the
year he announced the hiring of Wayne Gretzky. The number was several
times the total amount that Wayne Gretzky was being paid.
The owner said: On a percentage basis, he is a bargain. He is a steal
at the price I got him.
These numbers are representative rather than absolute, but they stick
in my memory that they were paying Gretzky something like $40 million
or $50 million and the increase in ticket sales was going to be
something like $120 million to $150 million.
The owner said: If I had to, I would pay him twice as much because I
am getting the benefit.
People say: But that is measurable. Michael Jordan did the same thing
for the Washington Wizards. We can figure that out with accounting. But
what these chief executive officers are being paid is obscene.
If you are a shareholder of General Electric, Mr. President, and you
looked at what Jack Welch, the CEO of General Electric, did with that
company during the time he had it in his stewardship, would you look
back on that total period and say we paid Jack Welch too much money? Or
would you look back on the amount of the value of General Electric that
was generated under his stewardship and say he was a bargain; he was a
steal; we could have paid him twice what we paid him and still come out
well ahead?
You say: But look at all of the executives who flew their companies
right into the sea. Look at the executives who destroyed their firms.
Yet they got this same amount of money.
If I may go back again to the sports world, have we not seen sports
teams pay very large salaries, responding to the law of supply and
demand, for coaches who had losing seasons? For quarterbacks who ended
up being on the waiver list? Those of us in the Washington, DC, area
have had a lot of experience with quarterbacks. Does that mean we are
going to stop trying to get the right quarterback for the Washington
Redskins by saying we will pay them average salaries in the National
Football League so that there will not be any more of these obscene
salaries and failures?
Several things will happen if the Washington Redskins take that point
of view. No. 1, they will start to lose even more than they have lost
in the past. And, No. 2, the fans will stop coming and the savings that
you will make in buying a quarterback that you can get for $400,000 or
$500,000 a year, compared to the one that you are gambling $10 million
or $20 million on will

[[Page S6753]]

all disappear as the ticket sales fall off, the television revenue
disappears, and people do not want to come anymore.

Yes, there have been corporate executives who have been vastly
overpaid. There have been CEOs who have been hired on the basis of
their reputation, just as football coaches who have been hired on the
basis of their reputation, who, to lure them into the company, have
been given great packages and then failed to deliver. But there are
also the Jack Welches of this world who have turned out to be bargains
no matter how much they were paid.
Who should make the decision as to how much they should be paid? The
answer is, The marketplace should do it. The law of supply and demand
should do it. Someone who has demonstrated that he or she has the
capacity to build, maintain, and expand a corporation with tremendous
value for the shareholders is someone who can demand very high salaries
because he or she is in very short supply.
We can complain all we want to about the social inequity of a CEO who
is earning $20 million, $30 million, $40 million a year and someone who
is working in that company for minimum wage, but it is the same
principle as saying: Look at the difference between Wayne Gretzky down
on the ice earning $20 million, $30 million, $40 million a year and
someone selling hot dogs in the stands. If Wayne Gretzky were not on
the ice, there would not be anybody in the stands to buy the hot dogs.
Wayne Gretzky and his skills are in much shorter supply than someone
who can stand in the stands and sell hot dogs.
We should not in our frenzy in this whole debate get so carried away
with our desire to deal with those who have damaged the system by their
failure to live up to their responsibilities that we, once again, make
any statements that would cause us to try to repeal the law of supply
and demand.
I see my colleagues are seeking recognition. I have carried on long
enough. I leave with this one last thought: If we are going to deal
with these issues, we should deal with them in the way this bill deals
with them and not in the proposal that Congress itself should set
accounting standards or should set wages or caps or compensation.
Past history tells us Congress can act in a hurry but repent at great
leisure.
Mr. GRAMM. We have a unanimous consent request and a request for the
yeas and nays that I want to make while we have at least a handful of
Members here. I ask for the yeas and nays on the Edwards amendment.
The PRESIDING OFFICER. It is not in order to request the yeas and
nays.
Mr. GRAMM. I ask unanimous consent that it be in order to request the
yeas and nays on both pending amendments.
The PRESIDING OFFICER. Is there objection?
Without objection, it is in order to seek the yeas and nays at this
point.
Mr. GRAMM. I ask for the yeas and nays on the pending Edwards
amendment.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mr. GRAMM. I now ask for the yeas and nays on the Carnahan amendment.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The yeas and nays were ordered.
Mr. GRAMM. The Democrat floor leader had a unanimous consent request
he wants to propound.
Mr. REID. Mr. President, we are in the process of working that out
now. I think we will be able to do that later.
Several Senators addressed the Chair.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. ENSIGN. Mr. President, I ask unanimous consent that I be allowed
to speak for up to 10 minutes as in morning business, with the time
consumed counting against the postcloture debate.
The PRESIDING OFFICER. Without objection, it is so ordered.
The Senator from Nevada.
Mr. REID. Mr. President, it is also my understanding that the Senator
from Nevada is going to yield an hour to the manager of the bill; is
that right?
Mr. ENSIGN. If you require the 50 minutes that will be left against.
Mr. REID. Or whatever time is left.
Mr. ENSIGN. Yes.
Mr. REID. Mr. President, I understand he has a right to do that; is
that true?
The PRESIDING OFFICER. The Senator has a right to yield time. The
manager of the bill may receive up to 44 additional minutes. The
Senator from Nevada.
Mr. ENSIGN. Mr. President, at the end of my remarks, I will yield
whatever time the Senator from Texas can receive.
Mr. President, I want to talk about something a little different than
what we have been talking about today, although I have very strong
feelings about the bill and think that both the managers of the bill,
along with Senator Enzi from Wyoming, have done a terrific job in
addressing some very serious problems out there. I still believe there
are a few problems with the bill we need to clean up in conference.
I do think the overall legislation has some positive reforms that
must be implemented to try to restore some confidence back in the
investing public.

Prescription Drugs

Mr. ENSIGN. Mr. President, what I want to talk about is something we
are going to be dealing with later this week--as early as tomorrow from
what I understand--and that is the whole idea of prescription drugs
within Medicare. Earlier today, Senators Hagel, Gramm, Lugar, Inhofe,
and I all introduced a new prescription drug bill. It is the
compilation of work mainly that Senator Hagel and I have been doing for
the last couple of years. We think it is a proposal that deserves the
attention of our colleagues, and I encourage them to study this
proposal.
I want to start by reading an e-mail I received from a senior citizen
back in Nevada. This e-mail came in at 11:21 p.m. Pacific standard
time, so obviously this person was up late at night thinking about the
whole issue of prescription drugs. Let me read it:
I urge you to ponder very honestly the proposed prescription coverage
with Medicare. Many social problems arise due to the fact that many
persons who need medication to maintain some sort of life existence are
not able to purchase the needed medications. Must we continue to choose
housing or our medications? Please step back and consider if an elderly
or disabled person in your own family were in this precarious
situation. Would you not step up to the moral plate and fight to find
funding for Medicare covered prescriptions?
I think this person summed up very well what a lot of seniors are
feeling: They are having to choose sometimes between the type of food
they eat and prescription drugs; sometimes between whether they can
turn their air-conditioner on in the summertime or their heat on in the
wintertime and prescription drugs; sometimes between rent and
prescription drugs.
There are several proposals, and I commend the people who have been
working on their proposals, but, frankly, the reason we decided to
introduce this bill is that some of the other bills, especially when
one looks into the outyears, are so costly that they literally could
bankrupt the Medicare system in and of itself.
Our bill does a few things. First, it is available to every
beneficiary, and it is also available faster than any of the other
prescription drug proposals. Our bill can be implemented as early as
January 1, 2004, whereas the earliest the other proposals can be
implemented is 1 full year later.
Our bill is also the most affordable bill, especially to the
taxpayer. We are waiting for the final score from CBO, but we think it
is going to come in somewhere around $150 billion over the next 10
years. The next cheapest proposal, that we are aware of, is around $370
billion, and when one looks at the full cost of a 10-year program,
other programs can be up to a trillion dollars.
A trillion dollars is not something this country can afford,
especially under current economic conditions, and especially when we
think about young people who would like to see Medicare as a benefit to
them someday.
So we must enact a reform that not only America can afford but also
senior citizens can afford, and we think we

[[Page S6754]]

have come up with that balance. Basically, the way the program would
work is, every senior on a voluntary basis would be able to get a
prescription drug discount card. For a $25 annual fee, they would sign
up and get this prescription drug discount card. They would then go buy
their prescription drugs, and all seniors would save because of volume
discount buying. We would use the private sector to do this. They would
save, on average, 25 to 40 percent on their drugs. That is a huge
savings right upfront that every senior could achieve.

On top of that savings, seniors up to 200 percent of poverty would
next spend, on average, about $100 a month out-of-pocket; then after
that, other than a very small copay, the Federal Government would cover
the rest of their prescription drug costs.
This is what seniors are looking for. In my campaign in the year
2000, I took this plan all over the State of Nevada and talked to low-
income, moderate-income, and higher income seniors groups about it. I
told them that people who are in the lower income bracket are going to
get most of the benefit, and for people in the higher income bracket,
it is going to cost them more money, as it should.
In some of the other programs, no matter whether one is a lower
income or higher income senior, they basically are treated the same. I
personally do not think Ross Perot or somebody in his income category
should be treated the same as somebody who makes $15,000 a year. There
should be some difference. Under our bill, there is a great difference
in the way those two categories of people would be treated.
The reason our bill is less costly to the taxpayer is one simple
fact: All the other bills give a percentage of first dollar coverage.
Whether it is 50 percent or whatever the coverage, after a very small
deductible, they all start covering right away. Our bill says the
senior is going to pay about the first $100 a month out of pocket, and
then after that, our coverage kicks in.
About 50 percent of the seniors do not have $1,200 worth of
prescription drug costs per year, so about half the seniors, other than
the discounts they will get because of the prescription drug discount
card, actually will not use it. But, frankly, most seniors can afford
about $100 a month for prescription drugs. It is for that diabetic
patient or that heart patient or that cancer patient who has maybe
about $500, or $300, or $400, or whatever it is, a month that they are
paying in current prescription drug costs. These are the people that
really cannot afford their prescription drugs, and our bill helps that
person much more than most of the other plans.
The reason our bill saves so much money is that we keep the patient
accountable for the drugs they are getting. They do not have somebody
else paying for it and as they get the benefit. That is one of the
biggest problems we have with our current health care system: There is
no accountability with patients. They are receiving the benefit
regardless of the cost, and so they do not think about shopping because
somebody else is paying the bill.
We do not have market forces working in the health care field today,
and if we enact a prescription drug benefit without utilizing market
forces, someday we are really going to regret it because we will have
severely out of control costs.
The bill we have introduced, we believe, is more fiscally responsible
and targets most of the benefit for those who truly need it the most.
We can enact it a lot more quickly than some of the other programs, and
it is permanent. It is because of those factors that we believe this
bill is the bill that our colleagues should take a look at supporting.
We would be happy to meet with anybody to talk to them about the bill
and possibly about cosponsoring the bill. Do not be turned off because
one political party may be offering one bill and the other party
offering another bill. We are offering an alternative to either of
those bills, and we think this bill, with its fiscal responsibility to
the taxpayer, is the bill that people should support.
In closing, I look forward to engaging in a meaningful debate on
prescription drugs after we deal with this accounting reform issue--and
this issue is so important, and I see my friend from Wyoming who has
done so much work on the bill, and I applaud him and the others who
have worked on this bill. But later in the week as we are debating this
prescription drug benefit proposal, we need to take a serious look and
not play politics because seniors cannot afford for us to play politics
with the prescription drug issue. We need to work together in a
bipartisan, rather, in a nonpartisan fashion, so seniors can get the
help they so deserve.
I ask unanimous consent that under the provisions of rule XXII, I may
yield whatever time I can yield back to Senator Gramm. I understand it
is 44 minutes, and I yield that amount of time to Senator Gramm.
The PRESIDING OFFICER (Ms. Cantwell). The Senator has that right.
The Senator from Georgia.
Mr. KENNEDY. Will the Senator yield?
Mr. CLELAND. I am happy to yield.
Mr. KENNEDY. We have had two speakers from the other side. I ask
unanimous consent to follow the Senator from Georgia.
The PRESIDING OFFICER. Without objection, it is so ordered.
The Senator from Wyoming.
Mr. ENZI. Reserving the right to object, and I will not object, some
of us have been on the floor all this time waiting to speak, as well.
We hope for a chance to speak before we reach the end of the day.
I will not object.
The PRESIDING OFFICER. The Senator from Georgia.
Mr. CLELAND. Madam President, I ask recognition to discuss my
amendment No. 4236. This amendment addresses the accountability of
corporate officers and directors. I strongly support the legislation
before us which addresses the critical need to create an environment of
accountability within corporate America. We need to send a strong
message to corporate executives that the days of living large while
lying, cheating, and stealing from the American people are over.
Control of a company certainly has its advantages, but it also carries
important obligations and duties. My amendment would address a
situation like Enron where officers cashed in on bonuses, severance
packages and millions of dollars in stock sales as they saw the light
of the train coming through the tunnel. Unfortunately for thousands of
Enron employees and investors, they had no similar warning and were not
able to bail themselves out before many lost not just their jobs, but
their life savings as well. My amendment would make sure that officers
and directors who know what is happening, who know that financial
reports are being manipulated, can't cash in on this knowledge while
leaving employees and investors holding the bag. It is the duty of
officers and directors to know what is happening in the corporation and
to blow the whistle when they know there is wrongdoing.
In the case of Enron, 10 executives or directors joined CEO Ken Lay
and Chief Financial Officer Andrew Fastow in siphoning off company
proceeds and reaping millions of dollars when they sold their Enron
shares high. Together these 12 individuals made stock profits totaling
more than $30 million before the company took a public nose dive at the
end of last year. These corporate high rollers were reaping huge
profits at the same time thousands of hard working Americans were
losing more than a billion dollars in retirement savings, including
$127 million in lost retirement savings in my home State alone by
teachers and State employees.
Corporate greed, should not be rewarded. The underlying bill requires
that when a corporation has to file a restated financial report because
of misconduct in the original report, the CEO and CFO have to give back
any profits they have made from bonuses and stock sales for a year
after the original report. My amendment would expand on the bill by
calling into account all officers and directors who know about the
misconduct in filing the financial report and through that knowledge
abuse the company's trust and the trust of their employees. It would
also mandate that officers and directors who have knowledge of
wrongdoing in their financial reports would not only have to give up
bonuses and profits but also their severance packages. Why should
someone like

[[Page S6755]]

Jeff Skilling get a parachute as he bails out of a disaster he helped
to create?
This amendment, my amendment, deserves support. It is endorsed by
Arthur Levitt, one of this nation's most distinguished financial
authorities. It is high time we call corporate executives on the carpet
and hold them accountable. It is time we create an atmosphere that
encourages responsible behavior and restores the confidence of the
American people in the economy of this country.
The PRESIDING OFFICER. Under the previous order, the Senator from
Massachusetts is to be recognized.
Mr. KENNEDY. I am happy to yield.
Mr. REID. I will take a couple of minutes.
Mr. KENNEDY. I guess I just yielded the floor.
I yield to the Senator and ask recognition afterwards.
Mr. REID. We have had some very long speeches by those on the other
side and I thought it appropriate we respond.
The ranking member of the Finance Committee had all these charts
indicating that all the problems were not the problems of this
administration. The fact is, we realize there is a lot of blame to go
around. With do not try to whitewash this issue.
The fact is, the President of the United States appointed the SEC
Commissioner, who stated in the hearings he wanted a friendlier, a more
gentle Securities and Exchange Commission.
That statement speaks for itself.
We also have to understand that actions speak louder than words. What
I mean is, we have a Federal Government today, this administration,
that is basically run like corporate America. That has to change. That
is what this legislation is all about.
When there is a situation where the President of the United States is
being written up in editorials all over the country and news articles
throughout the country over his dealings with stock, borrowing money
that basically he did not have, to pay back the principle until you
sell your stock--no one else gets deals like that. The commentators are
looking at that, as they should. Of course, the dealings that the Vice
President had with Halliburton, we would like to know more about that.
But the Vice President is treating that like he treated his energy task
force: in complete secrecy, contrary to how we should be running this
Government.
I believe we have a situation that cries out for passing this
legislation as quickly as possible. This administration must step
forward and recognize they are part of the problem, until they start
talking about supporting this legislation, as I understand the
President did today. I think that is wonderful. I understand he is
going to help us get this through conference. I think that is
important. I would like to see it before the August recess. It is
important this legislation move forward.
Actions speak louder than words. This administration has to do more
than talk about what needs to be done. They have to work with us in
solving the problems of corporate America today.
The PRESIDING OFFICER. The Senator from Massachusetts.
Mr. KENNEDY. Madam President, there are many important provisions in
the legislation before the Senate to increase corporate accountability.
I had hoped to offer an amendment to make workers' retirement plans
whole again when the corporate executives cheat.
After the collapse of Enron--the largest bankruptcy in U.S. history--
the President and many Republicans in Congress suggested that it was an
isolated example of corporate wrongdoing. Since that time, the nation
has witnessed a continuing series of corporate scandals which have
demonstrated otherwise.
The lack of corporate responsibility in the United States has
undermined the credibility of our markets and devastated the retirement
savings of millions of Americans. This widespread abuse of corporate
power has also jeopardized our nation's economic recovery and hurt the
legitimacy of our fundamental institutions. We must take bold action
this week to ensure that corporations are made accountable and that
workers and investors are protected against these abuses.
In the past month, we have seen a jury criminally convict the Arthur
Andersen accounting firm for engaging in the obstruction of justice to
cover up the Enron debacle. We have seen WorldCom admit that it wrongly
reported its true financial condition by nearly $4 billion. Just last
week, the Wall Street Journal reported that Merck recorded $12.4
billion in revenue from a subsidiary that it never actually collected.
In response to these scandals the President gave a speech last week,
which the White House likened to the words of former President Teddy
Roosevelt. Unlike our nation's great trust-buster, the President failed
to lay out a comprehensive plan to restore America's confidence in our
economic system.
Hard-working Americans and their families have suffered immensely as
a result of these scandals and the failure of the Administration to
take decisive action. Workers have lost their jobs, their health
benefits, and their retirement savings. Today, over 47 million workers
rely on 401(k) plans and the stock market for retirement security. We
can't wait for the next report of corporate fraud, the next round of
layoffs, and retirement losses before we take serious action.
This wave of corporate scandals is undermining the confidence of
investors in the U.S. economy. Mutual fund investors have lost about
$700 billion in just the last 15 months. In May of this year, new
investments in stock funds declined by nearly two-thirds from the
previous month. As foreign investors lose confidence in the
transparency of U.S. corporations, these investors are pulling out of
the U.S. market and the value of the dollar is now falling against
foreign currency. With an unemployment rate of 5.9 percent, America's
workers can ill afford to have their economic prospects dimmed by
corporate corruption.
Its time--in fact its long past time--to pass tough new laws to
prevent future abuses of corporate power. We must reform our accounting
system, enact criminal penalties for corporate wrongdoers, and pass new
protections for workers.
Senator Sarbanes' accounting bill is critical to reforming our public
accounting system and ensuring transparency and accountability for
corporations in the United States. The legislation creates an
independent oversight board; it restricts the non-audit services than
an accounting firm can provide to the public companies that it audits;
it holds corporate executives responsible for the accuracy of corporate
financial statements; it requires corporate insiders to report stock
sales and corporate loans to the SEC; and it provides additional
resources to the SEC to improve its investigation and enforcement
capabilities. We all owe a debt of gratitude to our colleague, Senator
Paul Sarbanes, for shepherding this legislation through the Banking
Committee and bringing it before the Senate.
In addition to these accounting reforms, we must hold corporate
executives accountable when they mislead workers and undermine their
retirement security. At Enron, executives cashed out more than a
billion dollars of stock while Enron workers lost nearly a billion
dollars from their 401(k) retirement plans. Thousands of Enron workers
lost virtually all of their retirement savings. Enron executives got
rich off stock options even as they drove the company into the ground
and systematically misled workers about the true financial state of the
company. Ken Lay now has a pension of nearly half a million dollars a
year for life. Many Enron workers have nothing at all.
These are all statements that were made by Mr. Lay. Ken Lay's lies
encouraged workers to buy Enron stock at $49. He ``never felt better
about the prospects of the company.'' He predicted to employees a
``significantly higher stock price,'' saying it was ``an incredible
bargain'' as it was going down. Mr. Lay has a pension of nearly half a
million dollars a year. At WorldCom, the workers lost more than half of
their retirement savings as the stock dropped from $60 to just 6 cents.
Workers across the country also lost big as a result corporate
wrongdoing at WorldCom. The brave firefighters and police officers of
New York City lost $100 million from their pension fund.

[[Page S6756]]

Over 20,000 workers have been laid off in the last few weeks because of
the actions of WorldCom executives. Yet, those same executives made out
like bandits. Former WorldCom CEO Bernie Ebbers is guaranteed a million
and a half dollars for the rest of his life while WorldCom workers face
a bleak financial future.
Sadly, Enron and WorldCom are not just isolated tales of corporate
greed that hurt America's workers. At Kmart, 22,000 workers were laid
off. At Lucent, 16,000 workers were laid off. At Xerox, over 13,000
workers were laid off. At Tyco, almost 10,000 workers were laid off. At
Global Crossing, over 9,000 workers were laid off.
These corporate debacles reveal a much deeper crisis of corporate
values. In America, people who work hard all their lives deserve
retirement security in their golden years. It is wrong--dead wrong--to
expect Americans to face poverty in retirement after decades of working
and saving.
For far too long, corporate executives have been obsessed with their
own compensation instead of the long-term health of the companies they
lead. Executives, like those at Enron and Wordcom, should not put their
own short-term gain ahead of the long-term interests of workers and
shareholders. They must not be rewarded for doing so. At Enron, workers
were systematically misled by Enron executives about the financial
situation of the company. For years, Enron, like many other companies,
pushed its workers to buy company stock with their own 401(k)
contributions.
Until the bitter end, Enron executives continued to promote Enron
stock to workers in a series of e-mails. On August 14, Enron CEO
Kenneth Lay told workers that he ``never felt better about the
prospects for the company.'' On August 27, Lay predicted to workers a
``significantly higher stock price.'' And on September 26, Lay called
Enron stock ``an incredible bargain.'' Even as they promised the moon,
Lay and other executives were cashing out their stock for a billion
dollars.
If Enron and WorldCom scandals teach us anything, it's that we must
stop rewarding corporate misbehavior.
Our amendment--it is cosponsored by Senator Gregg of New Hampshire--
makes it clear that executives who give workers misleading information
about the company stock in their 401(k) plans face serious penalties.
The amendment is the civil law parallel to the Leahy criminal
provisions, which punish executives for defrauding investors. The
amendment is also the ERISA civil law parallel to the Biden amendment,
which increases the ERISA criminal penalties. When executives lie and
mislead workers about company stock, they must face real penalties.
Under current pension law, Enron executives, like Ken Lay, and Arthur
Anderson, cannot be held responsible for workers' losses in their
401(k) plan. The amendment makes a corporate ``insider''--an officer or
director or the independent public accountant--responsible under
pension law if the insider misleads workers about the company's stock.
America's workers need this amendment to hold Ken Lay and other
executives engaged in wrongdoing accountable. The amendment empowers
workers to seek restitution when executives knowingly abuse workers'
pensions. If workers lose their retirement savings due to deliberate
corporate mismanagement, then they should have the right under our laws
to hold those top executives accountable in a court of law, and recover
what they lost. This right could make the difference for a family
between an impoverished retirement and a comfortable retirement that
they earned.
The economic health of our nation depends on reigning in the abuses
of corporate power which we have witnessed in recent months. Restoring
the credibility of accounting standards, as the Sarbanes bill would do,
is critical to restoring confidence in our markets. At the same time,
we must also restore basic fairness to our system.
When corporations like Enron fail because of executive wrongdoing,
corporate executives get golden parachutes but workers are left with a
tin cup when it comes to their retirement. Corporate criminals must be
made to pay for their misdeeds.
We see from this chart what has happened: Ken Lay, $457,000 a year
for life, retirement savings were decimated, 4,200 layoffs; former
WorldCom CEO, Bernard Ebbers, $1.5 million a year, retirement savings
decimated, 20,000 layoffs; Richard McGinn, $12.5 million lump sum pay
for Lucent, retirement savings decimated, layoffs for 16,000; Charles
Conway, $9 million lump sum pension, retirement savings decimated
22,000 layoffs.
This has to stop. Today we have a critical opportunity to protect
workers and investors against future abuses of corporate power. We must
not let these hard-working Americans down.
Madam President, I ask unanimous consent to temporarily lay aside the
pending amendment in order that I may offer the Kennedy-Gregg
amendment, which I send to the desk at this time.
The PRESIDING OFFICER. Is there objection?
Mr. GRAMM. I object.
The PRESIDING OFFICER. Objection is heard. The Senator from
Massachusetts retains the floor.
Mr. KENNEDY. Madam President, I have heard objection. We tried to get
this amendment up during the period of the last week and were closed
out. It is a simple amendment. It is an amendment that can do more to
protect workers' interests than many other proposals. I think we ought
to have some accountability for those who willingly mislead, willingly
and knowingly mislead workers, and then benefit from insider
information.
It would just give them a cause of action, a specific case, no
punitive damages. It would be a factual situation which would have to
be decided in the courts of law. But it does seem to me to offer a real
meaningful opportunity to protect workers and the savings of workers
from the kind of gross abuse we have seen currently here in the Senate.
Mr. DORGAN. Madam President, will the Senator yield for a brief
question?
Mr. KENNEDY. I am glad to yield for a question.
Mr. DORGAN. Madam President, the Senator from Massachusetts has just
propounded a unanimous consent request on an amendment that makes good
sense to me, and it certainly should be added to this bill. I assume it
is a germane amendment. We are postcloture. At the very least, he
should have gotten a vote on the amendment. But I wonder if the Senator
from Massachusetts knows that this has gone on all afternoon. I offered
an amendment a couple of hours ago that was simple and germane. It
should have had a vote. It said that if the CEOs and directors of a
corporation waltz out the door with millions of dollars of bonuses,
stock options, and incentive pay, and then the company goes bankrupt,
they have to give it back. I couldn't get that amendment up for a vote
because of the same objection.
I wonder if the Senator from Massachusetts might conclude from this
that the things here in the final hour which are germane have a right
to be considered and heard on behalf of the workers and the
shareholders and the folks who didn't get rich but the folks who lost
everything. I wonder if there is not a pattern here that the Senator
from Massachusetts sees and that others see to shut down those
amendments and protect the folks at the top while the folks at the
bottom lost everything.
Mr. KENNEDY. Madam President, this amendment is relevant. But under
the strict rules of the Senate, it would not be considered germane,
although I think a commonsense evaluation or review of the amendment's
purpose and what the underlying bill is about would certainly appear to
I think most people to be an important strengthening provision if we
are interested in corporate responsibility and protection for workers.
It is certainly relevant, but under the technical rules it is not
germane.
But I think anyone who knows what this bill is really all about
understands what is happening in these circumstances. This would
certainly be a very strengthening provision in the underlying
provisions. We were unable to get the opportunity to have the
consideration because we were foreclosed from that opportunity at the
end of last week and we are getting objections this week.
I think that is unfortunate. As I understand it, the most current
support for this is overwhelmingly among Republicans and Democrats
alike across

[[Page S6757]]

this country. They understand. It doesn't take a lot of debate or
discussion to understand what accountability is all about. Under the
existing laws, they can only have accountability, not for those who are
at the CEO level, who are really the ones making these judgments and
decisions upon which workers are relying, but they would only be able
to sue lesser figures in the corporate ladder. Therefore, this is not
an effective remedy for workers.
We are trying to provide an effective remedy for workers who are
being shortchanged. It makes eminently good sense. It is eminently
fair. It is eminently responsible. It is eminently relevant. But there
has been objection to it.
I want to give assurance to the Senator that we look forward to
offering this amendment at another time at the first opportunity.
Mr. REID. Madam President, I ask unanimous consent that Senator Byrd
be recognized today at 5 until 15 after the hour to speak.
The PRESIDING OFFICER. Is there objection?
Without objection, it is so ordered.
Mr. REID. Madam President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. REID. Madam President, I ask unanimous consent the order for the
quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.

insider trading

Mr. GRAMM. S. 2673 includes provisions prohibiting insider trading of
company stock during so-called blackouts--or periods during which
pension plan participants are unable to exercise control over the
assets in their accounts. In order to implement the insider trading
prohibition, it was necessary to provide a definition of a blackout
period. The Banking Committee also provided a 30-day notice requirement
prior to a blackout, so workers and executives alike would know when
the insider trading prohibition would be effective.
Mr. GRASSLEY. Mr. President, there appears to be broad consensus that
pension plan administrators should be required to provide 30 days'
notice to affected plan participants before limiting their ability to
exercise the rights provided through their pension plans. These advance
blackout notices will become integral requirements for how pension
plans will operate in the future. Because of this, notice requirements
were included both in the pension bill reported by the Health,
Education, Labor, and Pensions, HELP, Committee on March 21, and in the
bill reported by the Finance Committee unanimously on July 11.
Mr. GREGG. I agree with the Senator from Iowa. Although the general
concepts are agreed upon, however, there are differences between these
provisions in all three bills that affect the operations of pension
plans, and will clearly need to be worked out before the bill is sent
to the President's desk. Harmonizing these requirements will require a
careful balance between the rights of pension participants and the
financial burdens on plan administrators.
Mr. KENNEDY. I certainly agree with the remarks of my colleagues. My
bill provides pension plan participants with written notice 30 days
before a plan blackout begins, and prohibits blackouts from continuing
for an unreasonable time. This important disclosure to pension plan
participants is within the jurisdiction of the HELP Committee.
Mr. BAUCUS. I also agree with the remarks of my colleagues. As
chairman of the Finance Committee, which also has jurisdiction over
pension plans, I join the chairman of the HELP Committee and the
ranking members of both the Finance and HELP Committees in urging the
chairman and ranking member of the Banking Committee to work with us as
you go to conference on S. 2673, to ensure that the blackout provisions
are drafted in such a way as to ensure the proper operation of the
pension system.
Mr. SARBANES. I look forward to consulting with both the Finance
Committee and the Health, Education, Labor, and Pensions Committee as
we go to conference to make sure the provisions are appropriately
drafted.

Corporate Responsibility for Financial Reports

Mr. GRAHAM. Section 302 of S. 2673 involves Corporate Responsibility
for Financial Reports. I am concerned that in subsection (b), where the
CEO and CFO sign documents to verify the accuracy of financial reports,
the bill's language says they shall ``certify'' the accuracy of the
financial documents. In my view, this language should read ``certify
under oath'' in order to be consistent with current Securities and
Exchange Commission, SEC, regulations. You can clearly see that the SEC
currently requires that these statements to be under oath. Let's not
create a lower standard in this bill than currently exists in
regulation.
Mr. SARBANES. I appreciate the Senator's interest, and I hope his
concerns can be addressed in conference.
Mr. GRAHAM. I thank the Senator for his assistance on this issue and
his leadership on this legislation.
I ask unanimous consent that Exhibit A of the order be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From SEC website www.sec.gov, June 27, 2002, OMB Number: 3235-0569;
Expires: January 31, 2003]

Exhibit A--Statement Under Oath of Principal Executive
Officer and Principal Financial Officer Regarding Facts
and Circumstances Relating to Exchange Act Filings
I, [Name of principal executive officer or principal
financial officer], state and attest that:
(1) To the best of my knowledge, based upon a review of the
covered reports of [company name], and, except as corrected
or supplemented in a subsequent covered report: no covered
report contained an untrue statement of a material fact as of
the end of the period covered by such report (or in the case
of a report on Form 8-K or definitive proxy materials, as of
the date on which it was filed); and no covered report
omitted to state a material fact necessary to make the
statements in the covered report, in light of the
circumstances under which they were made, not misleading as
of the end of the period covered by such report (or in the
case of a report on Form 8-K or definitive proxy materials,
as of the date on which it was filed).
(2) I [have/have not] reviewed the contents of this
statement with [the Company's audit committee] [in the
absence of an audit committee, the independent members of the
Company's board of directors].
(3) In this statement under oath, each of the following, if
filed on or before the date of this statement, is a ``covered
report'':
[identify most recent Annual Report on Form 10-K filed with
the Commission] of [company name];
all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of [company name] filed with the
Commission subsequent to the filing of the Form 10-K
identified above; and
any amendments to any of the foregoing.

GUIDANCE TO STATE REGULATORY AUTHORITIES

Mr. ENSIGN. Mr. President, the purpose of this amendment is to ensure
that State regulators do not automatically apply the provisions of this
bill to accounting firms, particularly small accounting firms and firms
that service small businesses without first looking at the possible
harmful unintended consequences to those small businesses. The
standards applied by the board under this act could create undue
burdens and cost if applied to nonpublic accounting companies and other
accounting firms that provide services to small business clients.
Mr. GRAMM. I agree with my friend, the Senator from Nevada, and want
to add that what we need to avoid is a possible cascading effect,
starting with the Federal Government, that could eventually hurt the
small accounting businesses in this country.
Mr. ENSIGN. Many of these small businesses rely on their CPA or
auditor to provide objective, trusted advice and counsel on a broad
range of tax and business related issues. Without this amendment, we
will end up harming thousands of American accounting firms and their
small business clients.
Mr. GRAMM. Mr. President, I think the Senator from Nevada is right
about the harmful affects this legislation could have on small
businesses, not only the small accounting firms in this country, but
also the small business clients of those companies. This

[[Page S6758]]

amendment says to the State regulators to look very carefully at the
effects this legislation could have for smaller and medium-sized firms,
and also on small businesses that may rely on larger firms for their
audit work.
Mr. ENSIGN. I thank the Senator from Texas for his comments.
Mr. KOHL. Mr. President, as a businessman, I have been deeply
concerned about the reports of fraudulent and even criminal behavior at
prominent American corporations. When I worked in business on a daily
basis, this is not the kind of behavior I saw or expected from my
peers. It is imperative that we respond to the corporate malfeasance
which has been roiling our markets. The impact of these acts, all for
the sake of boosting short-term profits, has been broad, costing many
their jobs and others their savings.
The free market is the underpinning of our economic system, the key
to the growth and development of our Nation in the last two centuries.
The many creative and dynamic businesses which make up our democratic
capitalism make important contributions in the form of good paying jobs
and the taxes which pay for critical services, such as our national
defense. Above all, these businesses are good citizens in their
communities. As a result, businessmen are important and highly valued
people in our society. The vast majority of businessmen act in good
faith and with integrity. It is the bad apples who give the rest a bad
name.
Our system has been abused. Unfortunately, those who have raped the
system have reaped financial gain, while the rest have lost jobs,
savings and pensions. They and their boards violated the public trust.
Those who are lucky enough to be in positions of leadership have an
enormous responsibility to enhance and not damage our economy.
Unfortunately, the current system of regulation has not been sufficient
to prevent bad actors from abusing their positions. That is why we are
taking action today. We must build more accountability into our economy
because the bad actors--even if they are not in great numbers--have
impacted our whole economy. The stock market is no longer the
playground of the rich: We are now in an era when as many as 50 percent
of the American people have some of their assets in the stock market,
meaning enormous repercussions if companies are misrepresenting their
financial positions.
I agree with the President that ethical behavior and corporate
responsibility are essential if we are to restore the confidence of the
American people in our free markets. However, the colossal corporate
wrongdoing we have seen uncovered--in 2001 alone, 270 public companies
had to restate the numbers in their financial statements--requires that
we step up to the plate and address some of the structural problems
which have allowed these frauds to occur.
That is why I support S. 2673, the Public Accounting and Corporate
Reform Investor Protection Act of 2002.
There are those who have said this legislation is too strong. I
disagree. This legislation will not have a negative impact on people
doing their jobs as they should. We have an obligation to protect
investors, employees, citizens. We are saying to CEOs, their fellow
executives, and their boards: We expect you to do your jobs correctly,
with integrity, and if you don't, you will be held accountable.
It is not enough to challenge corporate America to do better. We must
make clear that there is a cost to engaging in accounting and
securities fraud. That is why I supported the Leahy amendment, a
version of the Corporate and Criminal Fraud Accountability Act. This
amendment strengthens existing criminal penalties for corporate crime,
creates a securities fraud felony punishable by up to 10 years in
prison, and creates a new crime for schemes to defraud shareholders.
The amendment also would establish a new felony antishredding provision
and would protect corporate whistleblowers.
The strength of the Sarbanes bill is not in the penalties alone. The
bill addresses conflicts of interest which have permitted these crimes
to occur and is a balanced approach which will help prevent corporate
fraud from occurring in the first place.
The bill sets up a strong, independent, and full-time oversight board
with broad authorities to regulate auditors of public companies, set
auditing standards, and investigate violations of accounting practices.
The Public Accounting Oversight Board proposed in the bill is a better
alternative to the part-time board currently being pushed by the SEC.
That board would leave standard setting to the accounting profession
and would most likely perpetuate the status quo. It is the lack of
clear standards coming from the current system of self-regulation which
has been the root of many of the frauds being revealed today.
The Sarbanes bill also restricts the nonaudit services a public
accounting firm may provide to its clients that are public companies.
These consulting services are clear conflicts of interest for
independent auditors. We cannot rely on auditors to serve as the
watchdogs of publicly traded companies if they are deeply invested in
these same companies. If we cannot rely on the auditors, than how are
we to rely on the markets?
Finally, the Sarbanes bill addresses the problem of stock analyst
conflicts of interest. The Merrill Lynch case recently settled in New
York is an egregious example of stock analysts pushing stocks that they
actually thought had little value. Most often the motive for pushing
stocks of questionable value is to boost their own investment banking
departments which are underwriting these stocks. The bill before us
today addresses this problem and requires the SEC to adopt rules
designed to protect the independence and integrity of securities
analysts.
I have no illusions that one bill will be the panacea for all that
currently ails corporate America. For example, I believe there is more
we should do, beyond the corporate disclosures in this bill, to address
problems with corporate boards. We have a responsibility, however, to
restore confidence in our markets and in the solid businesses which
make up these markets so that our economy can thrive. Only decisive
action can prevent this fraud on the American people from happening
again.
Mrs. MURRAY. Mr. President, over the past year as Americans have
worked hard to restart our economy, we have been hit by report after
report of irregularities, misconduct, and blatant conflicts of interest
by corporate executives, auditors, and brokerage firms.
The current corporate and auditing scandals are hurting American
families. Thousands of jobs and retirement accounts have disappeared.
Millions of current investors have watched their gains evaporate. Our
economic recovery looks more distant. And most importantly for our
long-term prosperity, investors are no longer confident that the
financial information provided by public companies and their auditors
is accurate.
Congress cannot restore the jobs and retirement savings caused by
this wave of corporate and auditing scandals. It can act to strengthen
oversight of the accounting industry, to demand greater responsibility
from corporate executives, and to address conflicts of interest in
brokerage firms.
Today I am voting for reform. We need to send a strong message to
working and retired Americans, to investors, and to the executives and
auditors of publicly held companies that this Senate will act to
restore accountability and faith in our free market system. The
Senate's bipartisan accounting reform bill will do just that.
First, the bill limits its scope to publicly held companies. The bill
does not attempt to federalize accounting oversight. Instead, it
strengthens the Federal Government's historic role of regulating
publicly traded companies and their auditors. The State boards of
accountancy will continue their important role of regulating
accountants who audit private companies.
Second, the legislation establishes a strong, independent Public
Company Accounting Oversight Board. The board is empowered to set
auditing, quality control, and ethics standards, to inspect registered
accounting firms, to conduct investigations, and to take disciplinary
actions. As a check on the board's power, its decisions are subject to
oversight and review by the Securities and Exchange Commission, SEC.

[[Page S6759]]

Third, this bill seeks to ensure that auditors are fulfilling their
public duties by ending potential conflicts of interest. Large
accounting firms typically provide both audit and nonaudit services to
their public company clients. The legislation would prohibit auditors
from performing specific nonauditing services, unless those services
are approved on a case-by-case basis by the Public Company Accounting
Oversight Board. All legal nonaudit services would need to be approved
by a public company's audit committee.
Fourth, the Senate legislation demands that corporate leaders take
greater responsibility. The bill requires that chief executive
officers, CEOs, and chief financial officers, CFOs, certify financial
reports, outlaws fraud and deception by managers in the auditing
process, prevents CEOs and CFOs from benefitting from misstatements
made in their financial reports, and prohibits corporate decisionmakers
from selling company stock at a time when their employees are
prohibited from doing so.
Fifth, the Senate bill would limit the growing pressure and conflicts
of interest that affect the independence of stock analysts. Just as
investors need to know that a company's financial reports are accurate,
so should investors expect objective opinions from stock analysts.
Finally, the bill would authorize additional funding for the SEC and
would establish independent sources of funding for the new oversight
board and FASB. As a member of the Senate Appropriations Committee, I
will support full funding for the SEC.
We need to work to prevent future scandals. We also need stronger
criminal laws and penalties to address fraud and abuse by corporate
executives and auditors. During last week's debate I voted for three
amendments, including an amendment by Senator Leahy, that would close
gaps in current law.
I know some of my constituents in the accounting and business
communities are concerned by a few of the steps in the Senate bill. As
I talk to certified public accountants in my State, they have
emphasized that it is critical to encourage greater competition in the
public accounting field. I agree investors would be better served by
more competition. The bill requires the Comptroller General, in
consultation with various agencies and organizations, to identify the
factors that have led to the consolidation of public accounting firms
since 1989, the impact of consolidation, and ways to address it. While
a study does not guarantee action, I look forward to reviewing its
findings.
It is time to restore confidence in corporate financial statements.
It is time to hold people accountable who violate the public trust. I
urge my colleagues to join me in supporting this legislation.
Mrs. BOXER. Individual investors, saving for their retirement or
their children's education, count on business leaders to play by the
rules. They also count on financial industry professionals including
accountants and research analysis to produce reliable, professional,
and honest work.
But recent business scandals at Enron, Tyco, Merrill Lynch, WorldCom
and others are proving that without strong government oversight and
regulation, greed will lead executives, accountants, and investment
analysts to abuse the trust that American workers and investors have
placed in them.
We have to restore that trust. This bill is a good first step. It has
the necessary teeth to clamp down on corporate irresponsibility. First,
it creates a full-time independent board to set ethical auditing
standards. Second, it prevents companies from providing most consulting
services for the very same companies that they audit. Third, if
enforced, it would send corporate executives who mislead shareholders
to jail. Fourth, it forces Wall Street investment research analysts to
disclose any conflicts of interest that they or their financial
institution might have in the investment recommendations that they
make. And finally, it protects whistleblowers who reveal unethical acts
by the companies for which they work.
I support this bill and would have supported even stronger
legislation. I remain concerned that the public members on the board
created in this bill are not chosen according to specific independence
standards. I am also concerned that disclosure requirements do not
include the holdings of family members of influential research analysts
on Wall Street. And most importantly I had hoped we could do more to
get funds to workers who lose their jobs as a result of executive
misconduct. Those concerns aside, this bill is a good first step in
restoring confidence in the system.
Unfortunately, the House recently passed a bill that is weak and will
not get the job done. It fails to establish a full-time board to design
and enforce auditing standards, does not mandate jail time for
securities fraud, and fails to protect whistleblowers. On the conflicts
of interests that investment analysts are forced to disclose in the
Senate bill, the House bill calls only for a study of the issue.
I urge the President to go beyond rhetoric and endorse the Senate
accounting reform bill so that we can get a strong bill out of
conference. I also urge the President to join us in fighting for
meaningful pension reform to ensure that American's retirement savings
are protected.
Mr. SMITH of Oregon. Mr. President, I rise today to take a few
moments to praise the Banking Committee for bringing the Public Company
Accounting Reform and Investor Protection Act of 2002 to the floor and
all the hard work they have done in the past week. In the weeks before
this bill came to the floor I thought that what we needed was some type
of Investors' Bill of Rights.
I had worked with colleagues on both sides of the aisle to come up
with bipartisan goals to prevent corporate abuse and protect investors.
I feel that much of the bill on the floor fulfills these goals. I feel
that there are a few things that investors should see happen when we
pass this bill. I believe that much of this bill will help, and in
other areas we may have to work further.
I believe that investors must have access to information about a
company. We should ensure that every investor has access to clear and
understandable information needed to judge a firm's financial
performance, condition and risks. The SEC will have the power to make
sure companies provide investors a true and fair picture of themselves.
A company should disclose information in its control that a reasonable
investor would find necessary to assess the company's value, without
compromising competitive assets.
I believe that investors should be able to trust the auditors.
Investors rely on strong, fair and transparent auditory procedures and
the concept of the Oversight Board in the Sarbanes bill is a sound one.
I believe investors should be able to trust corporate CEOs. Unlike
shareholders or even directors, corporate officers work full-time to
promote and protect the well-being of the firm. A CEO bears
responsibility for informing the firm's shareholders of its financial
health. I support the concept of withholding CEO bonuses and other
incentive-based forms of compensation in cases of illegal and unethical
accounting. Further, I do believe that CEOs must vouch for the veracity
of public disclosures including financial statements.
I believe that investors should be able to trust stock analysts.
Investors should be able to trust that recommendations made by analysts
are not biased by promises of profit dependent on ratings. It is only
common sense that there should be rules of conduct for stock analysts
and that there must be disclosure requirements that might illuminate
conflicts of interest.
Finally, I believe that we should be able to rely on the Securities
and Exchange Commission to protect investors and maintain the integrity
of the securities market. Current funding is inadequate and should be
increased to allow for greater oversight, ensuring investors' trust in
good government.
During the debate on this bill my attention has been called to the
plight of public pension systems, such as Oregon's Public Employment
Retirement System, known by the acronym PERS. PERS you see was invested
in both Enron and WorldCom stock and has been hit hard by the debacles
that occurred in each company. The PERS system lost about $46 million
after Enron self-destructed and another $63 million following the
WorldCom scandal.

[[Page S6760]]

These losses occurred because false profits were inflated and
corporate books were doctored. Under the PERS system, an 8 percent rate
of return is guaranteed for the 290,000 Oregon active and retired
members of PERS. Oregon taxpayers have to make up the difference
following an ENRON debacle or WorldCom scandal, and my State's budget
is not prepared for this kind of loss.
While this bill goes far in creating accountability, I am interested
in finding out if there is more we can do and am asking the General
Accounting Office, in consultation with the Securities and Exchange
Commission and the Department of Labor, to report to Congress on the
extent to which Federal securities laws have led to declines in the
value of stock in publicly traded companies and in public and private
pension plans.
I believe this study is necessary because many public and private
pension plans continue to rely on the continued stock growth in
publicly traded companies, much like the PERS system. I hope this study
will provide the needed information so public and private pension plans
can reevaluate future investments in publicly traded companies.
We cannot stand by and watch our hard working Americans ruin their
pension systems while corrupt corporate executives take advantage of
investors. I am proud of the work the Senate has done in the last week
in creating accountability and responsibility in corporate America and
look forward to working on this issue in a way that will help the
investors and pensioners in the PERS system in Oregon.
Mr. AKAKA. Mr. President, I rise today to express my support for the
Public Company Accounting Reform and Investor Protection Act of 2002. I
thank Chairman Sarbanes for his leadership and the Banking Committee's
staff for their efforts which have resulted in a measure which is fair,
realistic, and protects investors. The steady disclosure of accounting
scandals and corporate misdeeds underscores the need for legislation to
protect investors and to restore public trust in the accounting
industry and financial markets. Chairman Sarbanes has been the leading
voice for reform. Our Banking Committee held ten hearings on accounting
and investor protection issues in February and March. These hearings
produced extremely valuable information from which S. 2673 was
developed.
Public confidence has been shaken by the incidences of fraud and
misrepresentations revealed in the financial statements of companies.
Enron, Xerox, and WorldCom are just a few examples of corporations
which have misled investors with their financial statements. Since
1997, there have been almost 1,000 restatements of earnings by
companies. Investors have suffered substantial financial losses and are
unsure of the validity of the audits of public companies. There is a
lingering fear that there will be additional revelations of corporate
fraud or misrepresentation. This has already harmed investor confidence
and could continue to have an adverse impact on the financial markets.
I support this bill because it takes the appropriate steps to help
restore public trust in the accounting industry and financial markets.
S. 2673 would create an independent Public Accounting Oversight Board
to provide effective oversight over those in the accounting industry
responsible for auditing public companies. Previous attempts at
regulation have been complex and ineffective. As the numerous auditing
failures demonstrate, there is a need for an independent Board with
authority to adopt and enforce auditing, quality control, ethics, and
independence standards for auditors.
The legislation also requires additional corporate governance
procedures to make Chief Executive Officers and Chief Financial
Officers more directly responsible for the quality of financial
reporting made to investors. After the numerous misstatements and
corporate abuses that have occurred, this is a necessary step to ensure
that corporate executives are held accountable for the financial
statements of their companies. A particularly important provision in
the bill would require that CEOs and CFOs forfeit bonuses, incentive-
based compensation, and profits from stock sales if accounting
restatements result from material noncompliance with SEC financial
reporting requirements.
Rules to limit and disclose conflicts of interests for stock analysts
are included in the legislation. There is a concern that firms pressure
their analysts to provide favorable reports on current or potential
investment banking clients. This provision would provide protection to
those individual investors who often depend on analysts for making
investment decisions without being aware of the potential conflicts of
interest that the analysts may have with companies whose stock they
evaluate.
The Public Company Accounting Reform and Investor Protection Act also
authorizes additional appropriations for the Securities and Exchange
Commission in order to provide the resources necessary to protect
investors. According to the General Accounting Office, approximately
250 positions were vacant last year because the Commission was unable
to attract qualified candidates. Additional funding is needed to
attract and retain qualified employees. S. 2673 would authorize
appropriations of $776 million for the Commission, which is much
greater than President Bush's original budget request of $467 million.
I am pleased that the President is moving closer to supporting the
dollar amount included in the bill.
I also want to thank Chairman Sarbanes for including an amendment in
the bill which I have worked closely with the Committee staff in
developing. The amendment would require the General Accounting Office,
GAO, to conduct a study of the factors that have led to consolidation
in the accounting industry and the impact that this has had on the
securities markets. Since 1989, the Big 8 accounting firms have
narrowed down to the Big 5 and may soon become the Final 4. This study
is necessary to evaluate the impact that consolidation has had on
quality of audit services, audit costs, auditor independence, or other
problems for businesses. In addition, the study is necessary to
determine what can be done to increase competition among accounting
firms and whether federal or state regulations impede competition.
I am pleased that the Senate has worked in a strong bipartisan
fashion to strengthen this bill. Extremely valuable amendments have
been added to the original committee bill. In particular, the Leahy and
Biden amendments strengthen penalties for corporate fraud. These two
amendments will help provide much needed additional protection for
investors and retirement plan participants.
I encourage my colleagues to support the Public Accounting Reform and
Investor Protection Act of 2002 to restore public trust in the
accounting industry and the financial markets.
Mrs. FEINSTEIN. Mr. President, I rise to offer my support and
cosponsor an amendment to S. 2673 offered by the senior Senator from
New York, which would prohibit all loans by a corporation to its
directors or executive officers.
Among the abuses committed by senior executives and directors at
companies such as WorldCom, Enron, and Global Crossing is the practice
of issuing large, favorable loans to those executives and directors.
Those loans can create conflicts of interest that limit that the
ability of outside directors, in particular, to voice their criticism
of the institution.
Many years ago, I served on the board of directors of a bank, and
noted that at the time, several of the directors had hundreds of
thousands of dollars worth of outstanding loans at that bank.
At the time, this occurred to me to be wrong, and I could not
understand why these directors did not take out loans at another bank,
thereby avoiding any conflicts of interest.
The only conclusion I could draw was that the loans to these
directors were either easier to procure or made on more favorable terms
than loans from another bank would be.
I see no justification for providing loans to corporate directors or
executive officers. The goal of the reforms that we are currently
debating should be to create an environment in which outside directors
and major corporate officers act in as pure and honest a manner as
possible.

[[Page S6761]]

They should not enter into any appearance of conflict, such as the
conflict that occurs when the corporation that they serve extends them
a personal loan.
When an individual investor chooses to buy a stock, he or she does so
with the full knowledge that it might turn out to be a bad investment.
The stock may appreciate in value, but it might also go sour.
Anyone who makes that investment knows that the only way to be sure
not to lose any money is to keep the money in cash or buy a T-bill.
But that is not the way it worked for the CEOs and directors of some
of the largest public companies in this country.
For example, Bernard Ebbers, the former CEO of WorldCom, took out
$430 million in loans from his company between September 2000 and the
end of 2001.
When the SEC began investigating WorldCom earlier this year, $343
million in loans were still outstanding, most of which may never be
recovered by WorldCom's investors.
Those loans to Ebbers are far from unique in corporate America today.
One of the most egregious examples of this type of abuse recent months
is the disclosure of $3.1 billion in loans extended to family members
and affiliated business interests of the Rigas family by Adelphia
Communications, a publicly traded company controlled by the Rigas
family.
These loans were never disclosed to shareholders, and were apparently
used to shore up a wide variety of business deals involving Rigas
family members, including a golf course and an infusion of cash into
the Buffalo Sabres hockey team.
On July 9, President Bush went to Wall Street and called for, among
other things, ``an end to all company loans to corporate officers.''
I believe that the President was right, and have cosponsored this
amendment with that goal in mind.
Investors have a right to know exactly how much of their dividends
are going to pay for excessive pay packages. They also have a right to
expect that the board of directors is truly independent and that no
directors are tied too closely to the corporation they serve because of
loans they have received from it.
Ms. SNOWE. Mr. President, I rise today to speak in support of the
legislation we are considering, S. 2673, the Public Company Accounting
Reform and Investor Protection Act of 2002.
Last fall, we watched as a company once in the top 10 of the Fortune
500 imploded from the weight of its own complex efforts to mask debt
and hide losses. We watched as the company stock-laden retirement plans
of Enron's loyal employees dwindled by $1 billion. Meanwhile, company
executives cashed out their own shares while these employees were
barred from doing so. And finally, in congressional hearings, we
watched and listened as former Enron executives either chose to remain
silent, or pointed fingers of blame at everyone's actions except their
own.
Tragically, the bankruptcy of Enron was no anomaly in the business
sector. Rather, it was only the beginning. It ultimately proved to be a
watershed event, as several other companies have reevaluated their own
business and accounting methods, and found significant indiscretions.
Global Crossing, a telecommunications company, is being investigated by
the SEC and FBI in regard to questionable accounting practices used to
artificially inflate revenue. Adelphia Communications, a cable company,
is now in bankruptcy proceedings due to investigations by the SEC and
two federal grand juries for off-balance sheet loans to the company's
founders.
More recently, Xerox announced that it would restate 5 years of
results which could affect the true nature of what had been reported as
$6 billion in revenues. And on June 25, WorldCom announced that it had
misrepresented $3.8 billion in expenses over five quarters, therefore
allowing the company to report financial gain, when in reality, the
company was experiencing a net loss.
While the downward spiral of each of these companies was unique,
common threads are woven through each of their failures. First, the
insistence by executives that, above all else, stock price remain high
was an integral part of the creation of the financial woes of each
company; in essence, this short-term focus compromised the long-term
viability of these entities.
What has also been disturbing as these revelations have come to light
is the role played by the so-called independent auditors of the
companies under investigation. While the accountants are not the sole
perpetrators of the financial deception that has occurred, the apparent
lack of scrutiny of the financial statements of the aforementioned
companies has created an inherent mistrust in the accuracy and
integrity of the true nature of corporate earnings.
Furthermore, the practice of allowing auditing companies to perform
non-audit services can have the ultimate effect of allowing such
companies to audit the work of their own personnel. This practice
defeats the purpose of having an unbiased entity objectively reviewing
the merits and accuracy of financial statements.
The legislation we are considering in the Senate includes crucial
provisions that will play a pivotal role in restoring confidence in our
market system, and enhancing the public and private sector controls
that are in place to monitor the relevant entities. The legislation
creates a Public Accounting Oversight Board, which will be an entity
solely focused on companies that audit and account for publicly traded
firms. This oversight authority will include the ability to investigate
and punish any wrongdoing by companies under SEC jurisdiction as well
as their auditors. The bill also disallows simultaneous auditing and
consulting, while providing for the Board to approve certain exceptions
to non-specified non-audit services under this rule.

The pending legislation also makes important strides in ensuring that
any gain made by company executives be subject to retrieval if the
company has to prepare an accounting restatement due to certain
noncompliance with SEC regulations. As Treasury Secretary Paul O'Neill
so aptly states in response to the actions of Enron executives, ``I
really do believe that the CEO is in effect the steward for all the
people who work in their organization. And that with that
responsibility goes a commitment that the people come first and that
the practices are open and above board and without reproach.'' These
executives should not be able to leave their beleaguered companies,
pockets stuffed with profits from cashed out stock options, while
investors and employees suffer the consequences of questionable company
practices.
With the unanimous passage of the Leahy amendment, the Senate
recognized the need to strengthen penalties for the punishment of those
involved in corporate crime. For example, the amendment created a new
felony for persons involved in the destruction of evidences--to address
in the future such indiscretions as the document shredding perpetrated
by Arthur Andersen's Enron Audit team. In addition, the Leahy amendment
grants important whistleblower protections to company employees--like
Enron's Sherron Watkins--who bravely report wrongdoing occurring within
their own corporation.
The bottom line is that integrity and trust are at the core of a
successfully functioning market system. These recent business scandals
have severely damaged this foundation. And as with any foundation in
disrepair, leaving unaddressed the damage caused by lost faith in the
system will lead to continued instability, or worse.
Therefore, we in Congress have an obligation to do what we can to
maintain and build investor confidence and faith in our free market
system. I believe that the legislation we are considering today is a
crucial first step toward that end, as well as ensuring the full
rebound of our floundering economy.
Mrs. FEINSTEIN. Mr. President, I rise in support of S. 2673, the
Public Company Accounting Reform and Investor Protection Act of 2002.
Nearly every day, it seems, the front pages of our newspapers are
awash in stories about the latest corporate accounting scandal. Just 3
weeks ago we learned that WorldCom hid $3.8 billion in expenses in the
last five quarters alone.
And WorldCom is merely the latest member of an increasingly large
group of public corporations that have knowingly deceived shareholders,
directors,

[[Page S6762]]

and, in some cases, their own auditors. WorldCom, Enron, Tyco, Global
Crossing, Xerox--the list goes on and on.
Much attention has been focused on the huge sums that CEOs and other
senior executives have extracted from these companies in the form of
incentive pay, but even those large sums pale in comparison to the
total shareholder value that has been destroyed as a result of these
disclosures. At its peak, WorldCom's market capitalization exceeded
$190 billion, making it, for a time, the most valuable
telecommunications services company in the world. Now, WorldCom shares
are effectively worthless.
Despite a slowdown in the telecom industry, some of the value of
those shares might have been preserved had its executives relied on
sound management, instead of deceptive accounting, to make their
numbers.
Who will suffer most from the immense value decline associated with
WorldCom and other companies that have deceived their investors? Not
the senior executives, most of whom have stashed away enough of their
pay to let them spend the rest of their days in comfort. The people who
will really suffer are the thousands of employees whose retirement
savings were proudly invested in company stock; or the millions of
public employees whose pension funds held shares in these companies.
Those are the people who will bear the brunt of this value decline.
CalPERS, the pension fund set up to invest the retirement savings of
1.3 million public employees in my home State, has estimated that it
suffered a $580 million loss on WorldCom stocks and bonds. That means
that the average California public employee lost over $440, not
including any investments in WorldCom they may have held independently.
To give you some perspective on that amount, the amount of money lost
by California public employees due to the WorldCom fraud alone is
likely to exceed the entire sum of the tax rebate checks they received
as part of the President's tax cut last year.
In fact, every American who invests in our stock markets will suffer
as a result of these scandals, because every scandal further tarnishes
the reputation of American corporate honesty for investors around the
world. In recent months, those investors have pulled billions of
dollars in investments out of our country, further reducing the value
of stocks and weakening the dollar.
The only way that we can turn this culture around is by fostering a
corporate environment that rewards honest management by senior
executives and severely punishes fraudulent activities. That is exactly
what would be achieved by the bill proposed by Senator Sarbanes.
The Sarbanes bill tackles many of the major problem areas associated
with recent corporate scandals. Most importantly, the bill would make
it much more difficult for public companies to bypass or trample over
auditors in attempt to produce inaccurate or deceptive financial
statements.
For the first time, the Sarbanes bill creates a truly independent
accounting oversight board, staffed with objective, unbiased overseers,
who can enforce rules and prosecute violators without having to vet
their decisions elsewhere. Unlike the Public Oversight Board, which
depended on fees from the very auditors it was meant to regulate, this
new board will be funded by mandatory fees paid by all public
companies. These are fees that cannot be withheld at the whim of those
who have the greatest interest in undermining the work of the board.
The Sarbanes bill does not stop at the creation of this new board,
however. Rather, the bill strengthens areas of the law that have proven
inadequate to prevent the fraudulent corporate behavior that has become
so prevalent today.
The Sarbanes bill prevents auditors from controling the entire
financial reporting system at an individual company by both designing
the internal audit system, and then purporting to offer an unbiased
external audit. The bill will also stiffen the resolve and oversight of
board of director audit committees by requiring, among other
provisions, that all committee members be independent and that they be
given free reign to question auditors without executive officers
present.
But rather than rely solely on increased oversight, the bill moves to
reduce conflicts of interest at their source, by requiring the CEO and
CFO of a company that has had to restate its financial accounts to
disgorge any bonuses or other incentive pay they received in the year
prior to the misstatement.
Moreover, under an amendment sponsored by Senator Schumer and myself,
company loans to executive officers are now prohibited, sharply
limiting the types of ``hidden'' compensation that can be offered to
executives without being fully disclosed to shareholders. Our amendment
passed by a voice vote and will go a long way toward preventing the
types of loan-related abuses prevalent at WorldCom, Global Crossing,
and other companies now under investigation by the SEC for loan-related
abuses.
When Senator Sarbanes drafted this bill, he focused on the single
reform that matters most: increased transparency. Unfortunately, we may
witness more corporate failures like those of Enron or WorldCom. These
are failures that are brought on by over-investment, the accumulation
of excessive debt, or an ill-conceived belief in markets or services
that never live up to expectations.
What we cannot abide by, and what the Sarbanes bill goes a long way
toward preventing, is the ability of senior executives to hide those
bad decisions in misleading financial statements. By ensuring true
auditor oversight, creating meaningful penalties for senior executives
who defraud investors, and putting in place new disclosure
requirements, this bill will dramatically increase the quality and
timeliness of the information available to individual investors.
The United States is blessed with the best-regulated markets in the
world, and for that we have been rewarded with tremendous foreign
investment and a leadership position in world financial markets.
A vote in favor of this legislation is a vote to strengthen our
position and avoid a wholesale loss of investor confidence that would
be perilously difficult to restore.
Mr. HATCH. Mr. President, I wish today to express my support for S.
2673, the Public Company Accounting Reform and Investor Protection Act
of 2002. I am pleased that the Senate is acting decisively to impose
harsh, swift punishment on those corporate executives who exploit the
trust of their shareholders and employees while enriching themselves.
The recent corporate scandals demonstrate just how important it is to
hold corporate executives accountable. I believe it is equally
important for prosecutors to be provided with the tools necessary to
aid in the investigation of these forms of fraud.
During this debate, our colleagues on both sides have consistently
called for increased penalties for corporate fraud offenses. This week,
as the Dow Jones index plummeted nearly 300 points--representing the
biggest single day point drop since the week following the attacks of
September 11 we voted unanimously to adopt a series of amendments that
will strengthen criminal fraud penalties and create new criminal fraud
offenses. I cosponsored an amendment with Senator Biden to enhance
white collar penalties. And I supported an amendment offered by Senator
Lott, which incorporated the President's proposal by enhancing white
collar penalties, supplementing existing criminal laws, and increasing
the Security and Exchange Commission's administrative powers to enforce
this nation's securities laws. I also supported Senator Leahy's
amendment, a measure I worked to improve in committee. This amendment
includes new criminal and civil provisions that I believe will also
assist in deterring and punishing future corporate wrongdoing.
Further, I am glad to see the Senate finally considering legislation
that will overhaul government regulation of the accounting industry. I
agree with my distinguished colleague from Maryland that there is an
inherent conflict of interest between internal and external auditing.
The same people should not be installing the internal control system,
performing the internal audits, and then reporting on the financial
statements. The external auditor sometimes has to be tough as nails,
and willing to disagree with its client's top

[[Page S6763]]

executives. It is hard to be the bad cop when you are also the personal
trainer.
However, Congress cannot always second-guess the desires of
investors. In some cases, stockholders, bondholders, and other
stakeholders will be worse off if Congress imposes too strict a barrier
between consulting and auditing. This is especially true for small
businesses that may not be able to afford to hire both a consulting
firm and a separate accounting firm. And, as the President has noted,
in our fast-changing economy, Congressionally-imposed barriers between
different business practices can end up becoming Congressionally-
imposed barriers to productivity growth.
I think the bill before us represents an effort to strike a good
balance between these two competing goals of auditor independence and
business innovation. It prevents internal and external audit work from
being done by the same firm, and it establishes clear lines of
responsibility and accountability. At the same time, the corporation's
independent audit committee will be permitted to authorize certain
consulting services if they are convinced it is in the shareholders'
best interest. This audit committee, consisting of members of the
client's board of directors, will be required by law to be completely
independent of the corporation itself. This will mean that if the CEO
and other top corporate officials believe it is in their company's best
interests to have their accounting firm help with, for example, tax
consulting and preparation, the corporate officials will have to argue
the merits of their case before the independent audit committee. That
kind of independence makes good sense, and it makes good law.
The Federal Government needs to help investors whether banks, pension
funds, or individual investors in their quest for accurate information
about the financial condition of America's businesses. Doing so is
crucial for our economic long-term health. While Enron's and WorldCom's
financial shenanigans contain many differences, the similarities are
far more important. These were both firms that borrowed too much money
during the expansion years of the late 1990s. And when it started
getting tough to make the debt payments, both firms tried to hide their
financial difficulties through creative bookkeeping, cooked up at
company headquarters. They succeeded for a time, but the combination of
investor vigilance, media investigations, and government scrutiny are
eventually bringing the facts to light.
If there had been real financial transparency, both current
stockholders and potential investors could pierce the veil of
bookkeeping to immediately see these companies' true financial
situation. This may not have prevented the painful layoffs and tragic
loss of retirement assets by thousands of employees. However, with more
accurate and timely information, investors, directors, analysts,
financial institutions, and others could have intervened earlier and
helped to restructure these firms before all-out catastrophe
threatened. When it comes to business information, knowing sooner is
always better than knowing later.
And even more importantly, if corporate officials had faced the
threat of serious jail time and the certain knowledge that their
financial and accounting capers would be exposed to the world, they
would have been much less likely to have overborrowed and
underdisclosed in the first place. Mr. President, the bill on which we
will vote today, on which Senator Sarbanes and many of our colleagues
have worked so hard, contains solid provisions that I believe will put
real fear of serious consequences into the minds of corporate
wrongdoers.
Does this bill represent a perfect solution to the corporate
accountability issues presently facing our country? Of course not. I
would have written a different bill in several respects. However, I
believe that the bill is a good attempt to balance competing interests
and different political philosophies. As the bill goes to conference
with a House-passed bill that has some significant differences, I
expect the balance to improve even further.
Strengthening corporate accountability is crucial to our nation's
long-term welfare. If Congress and the President can act together to
help increase corporate transparency and restore investor confidence,
then businesses will be better able to raise investment capital.
Greater access to capital will enable U.S. businesses to fund the
groundbreaking research and to purchase the high-tech equipment that is
the foundation of America's long-term prosperity. And Americans from
all walks of life will reap the rewards.
Mr. McCAIN. Mr. President, I rise today as a proud cosponsor of
amendment No. 4283 that is being offered by Senator Levin. The
amendment says that the standard-setting body for accounting principles
that is set up in this bill shall review the accounting treatment of
employee stock options and shall within a year of enactment of this act
adopt an appropriately generally accepted accounting principle for the
treatment of employee stock options.
Unfortunately, this body is not going to get the opportunity to vote
on this reform or the reform I proposed last week requiring the
expensing of stock options. We want to help restore investors'
confidence for the long run, but we are being denied an opportunity to
do this. A simple vote on this amendment is all we ask. And yet, we are
being denied, and that is truly regrettable. I see no reason that a
vote should not be permitted on this amendment, but let's face it--the
fix is in.
I want to talk more about the expensing of stock options.
Americans have heard from the President and practically every Member
of the Senate about the vital need to restore trust and transparency in
business practices so we can begin to repair investors' faith in the
honesty of our companies and in our markets. We need more transparency
on a company's books so that any person wanting to invest their hard-
earned money has a true financial picture of the company they are
planning to invest in.
This issue of expensing stock options is not going to go away. Look
at what has just happened. Coca-Cola, a Fortune 100 company, just
announced that it will begin in the fourth quarter to treat all
employee stock options as an expense. And I believe more companies will
follow Coca-Cola's lead. It is only a matter of time.
Before I yield the floor, I would like to read a quote from a July
22, 2002 Weekly Standard article, ``Big Businesses Bad Behavior,'' in
which economist Irwin Stelzer, Director of Regulatory Studies at the
Hudson Institute, eloquently explains why governmental action is needed
to restore faith in our financial institutions. The ``opposition of
important segments of the business and accounting communities to
reform,'' he writes, ``means that government must take on the burden of
revising the institutional framework within which business operates--
setting the rules of the game that will allow markets to do their job
of allocating human and financial capital to its highest and best uses.
As Milton Friedman, no fan of big government, has written, society
needs rules and an umpire `to enforce compliance with rules on the part
of those few who would otherwise not play the game.' '' I couldn't
agree more.
I ask unanimous consent that the following articles be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From the Weekly Standard, July 22, 2002]

Big Business's Bad Behavior

(By Irwin M. Stelzer)

No sensible person can quarrel with what the president told
the Wall Street biggies he addressed last week. Crooks should
be forced to disgorge their ill-gotten gains, and should go
to a jail for extended periods. Enforcement agencies should
be given adequate resources. Corporate executives should be
held responsible for the accuracy of what they tell
shareholders, disclose their compensation in annual reports
``prominently and in plain English,'' and explain what their
``compensation package is in the best interest of the
company'' Board members should be independent and ``ask tough
questions.'' Shareholders should speak up. Most important,
chief executive officers should crate a ``moral tone'' that
ensure the company's top managers behave in accordance with
the highest ethical standards.
The quarrel comes not with what the president said, but
with what he didn't say. In the game of matching his laundry
list of reforms against the inevitably longer list generated
by the Daschle-Leahy-Sarbanes-Gephardt crowd the president
inevitably loses, as last week's unanimous vote of Senate
Republicans for the Democrat's bill proves. Longer

[[Page S6764]]

sounds better if you're just compiling a laundry list of
items aimed at punishing politically unpopular corporate bad
guys. Only if there is a conceptual framework within which
specific reforms can be created and defended is there any
hope that a sensible corporate governance system will emerge
from the congressional legislation factory.
Start with the fact that it is important to distinguish the
role of government from that of the private-sector
institutions that monitor corporate America. The latter can
be relied upon to act when the integrity of the system is
threatened, not because these private sector players are a
bunch of goodie-two-shoes, but for the more reliable reason
that honest markets and accurate profit reporting are in
their interest. Just as gamblers won't put their bets down
when they know a wheel to be rigged, so investors won't put
their money into shares if prices can be manipulated by
inflated profit reporting or special treatment of insiders.
Hence we have a stream of quite sensible reforms proposed
by the Business Roundtable and the New York Stock Exchange,
some going beyond those being pushed by the president. And we
have companies scrambling to adopt governance rules and
accounting practices that will reassure investors that the
game is not rigged against them. No CEO wants to see his
company's stock battered by investors who fear that share
values will evaporate as profits are restated to eliminate
the imaginative counting of revenues (claim them now, before
the customers pays or even considers paying) and of costs
(capitalize rather than expense every outlay, regardless of
the life of the item purchased). Plummeting share prices are
dangerous to the careers of chief executives.
But, as the president recognized when he called for higher
ethical standards, self-interest cannot be relied upon to
produce honest business dealings unless that self-interest
includes what Adam Smith called a ``desire to be both
respected and respectable,'' and such esteem is seen to flow
not from ``wealth and greatness'' but from ``wisdom and
virtue.'' Which may be what Bush had in mind when he said
that we need ``men and women of character, who know the
difference between ambition and destructive greed'' to lead
our major corporations. And it may be what he had in mind
when, immediately after delivering talk, he returned to
Washington to award the Presidential Medal of freedom--
America's highest civilian honor--not to the nations' richest
(Intel founder Gordon Moore may have been the one exception),
but instead to folks who have enriched our national life with
their sharp iconoclasm (Irving Kristol), gentle humor (Bill
Cosby), and quiet devotion of family and good causes (Nancy
Reagan).
Still, neither self-interest reform nor a new emphasis on
business ethics can be relied upon to save capitalism from
the capitalists. Immediately after the president's speech the
White House was bombarded with calls from CEOs protesting his
demand that they disclose their compensation packages in
easily accessible terms. I well recall the reaction when,
several years ago, I made a similar suggestion at a think-
tank-sponsored meeting of top business and government
officials. One captain of industry replied that he would not
tell his shareholders how much he earns lest he encourage
kidnappers (as if they would only become aware of his
affluence if he revealed it in his company's annual report).
Nor did anything the president said persuade the
accountants to call off their lobbyists, who continue to
oppose reforms that would make their devotion to the accuracy
of their audit statements unambivalent. Or convince CEOs of
Silicon Valley and other high-tech companies to bow to Alan
Greenspan's call for them to report their share options as
the expenses they most certainly are. Again, I recall a
discussion that followed a similar proposal I made several
years ago. One CEO said that he couldn't place a value on
these options for purposes of reporting to shareholders, even
though he could value those same options for the purpose of
deducting their cost from his profits for tax purposes.
Another claimed that if he treated options as an expense, he
would wipe out his entire reported earnings, an argument, I
suppose, for refusing to account for almost any expense that
constitutes a threat to reported profits--what might be
called the WorldCom excuse. (For the economy as a whole,
experts estimate that expensing of options would reduce
aggregate corporate profits by about 8 percent.) Note that
the issue is not whether companies, especially start-ups,
should be allowed to use options to attract talented staff,
but whether they should have to treat this compensation as an
expense when reporting profits. As Greenspan points out,
refusing to deduct the cost of options diverts capital and
other resources from truly profitable to only apparently
profitable firms.
This opposition of important segments of the business and
accounting communities to reform means that government must
take on the burden of revising the institutional framework
within which business operates--setting the rules of the game
that will allow markets to do their job of allocating human
and financial capital to its highest and best uses. As Milton
Friedman, no fan of big government, has written, society
needs rules and an umpire ``to enforce compliance with rules
on the part of those few who would otherwise not play the
game.''
To keep rules to a Friedmanesque minimum, we need a
conceptual framework for reform rather than competing laundry
lists. The first step is to understand the limits of criminal
sanctions. Yes, it makes sense for the Senate to insist, as
it did unanimously last week, that the crimes perpetrated by
some corporate managers and accountants be defined as
precisely as possible. Yes, criminal sanctions can be used to
make life miserable for those caught with their fingers in
the till and to deter from evildoing those for whom Adam
Smith's ``desire to be respectable and to be respected'' is
insufficient inducement to decent behavior. But, as law
professors David Skeel and William Stuntz recently pointed
out in the New York Times, ``Criminal laws lead people to
focus on what is legal instead of what is right. . . . In
today's world, executives are more likely to ask what they
can get away with legally than what's fair and honest.'' The
Senate was pleased with itself for toughening the laws under
which executives will operate, but criminalizing bad behavior
is no guarantee of future good behavior--behavior that is not
merely indictment-avoiding, but is efficiency- and wealth-
enhancing.
Instead, policymakers should turn to that trusty guideline,
``Get the incentives right.'' The problems we are facing stem
from the fact that we have provided the four guardians of
shareholder interests--auditors, analysts, directors, and
corporate managers--with the wrong incentives.
Auditors know that success or failure in their profession
depends not so much on the accuracy and realism of their
audits, as on their ability to conduct themselves so as not
to imperil the flow of consulting fees to their firms. Enron
paid Arthur Andersen as much or more in consulting than in
auditing fees; Andersen's $12 million in consulting fees from
WorldCom dwarfed its $4 million audit fee. It would have
taken a brave auditor indeed to fly in the face of these
clear incentives and tell Enron's management that placing
some item off-balance-sheet might be technically legal, but
would obscure the company's true financial condition, or to
insist on access to documents that might have revealed
WorldCom's recording of current expenses as capital
investments. Rather than rely on such strength of character,
some 70 percent of the directors surveyed by McKinsey & Co.
now say they will in the future oppose the granting of such
contracts, a policy that Arthur Levitt, Bill Clinton's SEC
chairman, was unable to push through over the massed
opposition of the accountants' lobbyists. All of which makes
Bush's silence on this subject rather odd, and the Senate
Democrats' insistence on a broader prohibition on consulting
than is contained in the House Republicans' bill more likely
to get the auditors' incentives lined up with shareholder
interests.
Once those incentives are in place, other provisions of the
House and Senate bills become unnecessary. Both bills call
for still more regulation of auditors, and create still
another regulatory body to set and oversee accounting
standards. One need not be an apologist for the accounting
profession to suggest that such a move would merely continue
the failed practice of attempting to control auditors by
closely supervising them. There is no reason to believe that
such supervision will be any more successful in the future
than it has been in the past, especially since in the end
auditors are required only to say that they followed often
complex and arcane rules that necessarily involve the
exercise of judgment.
Instead of such ongoing regulation, including half measures
that merely restrict auditors from engaging in some specified
form of consulting activity, let's get the incentives right
by complete, mandated separation of the audit and consulting
businesses, as John McCain proposes. Lead the CPAs not into
temptation, and reliance on porous Chinese walls becomes
unnecessary. Auditors will compete for business on the basis
of their ability to provide a product that gives investors
confidence in the transparency and accuracy of the company
accounts, with the uplifting effect that will have on the
prices of their clients' shares. (Audit firms are unlikely to
compete on price, since the risks associated with the audit
business have risen. There are only four major firms, and
rotation of auditors on something like the five-year basis
favored by Senate Democrats, although necessary to prevent
over-identification between client and auditor, is a classic
cartel market-sharing arrangement--all legal, in this case.)
Analysts are another group who now face perverse
incentives. Investors may have been naive to believe that
these students of income statements, balance sheets, and
other economic data would provide honest advice about a
company's financial condition and prospects. But they had a
right to such a belief, since the commissions they pay their
brokers are supposed to be in return for such advice. Along
comes New York State Attorney General Eliot Spitzer and
revelations that some of these supposed agents of the
shareholders' interests are recommending stocks they know to
be ``shitty'' in order to win investment banking business for
their partners and increased compensation for themselves. All
of this in the presence of Chinese walls erected to separate
bankers from analysts. It took no Joshua-plus-trumpet to
bring these walls down; the prospect of hefty banking fees
was quite enough. Jack Grubman, the Salomon Smith Barney (a
division of Citigroup) analyst famous for his enthusiastic
recommendations of WorldCom stock, last week told the House
Financial Services Committee, ``No one can sit here on Wall
Street and deny to anybody on this

[[Page S6765]]

committee that banking is not a consideration in the
compensation of analysts of a full-service firm.'' Forget the
double negative: Grubman was conceding that part of his
salary, which reached $20 million per year, came from the
$140 million in underwriting fees that his firm received from
WorldCom over the past five years.
Again, get the incentives right. One way, now preferred on
Wall Street, is to write contracts that make analysts'
compensation independent of the fees flowing into the
investment banking divisions of the large firms. But just how
analysts can prosper if the banking division isn't earning
enough to pay the rent is unclear. Besides, unless analysts
suddenly become willing to issue ``sell'' recommendations
just when their investment banking partners are pitching a
company for business, this proposed reform is unlikely to be
effective, especially after the current heat is off and
congressional attention turns to other matters. True or not,
bankers believe that CEOs, being human (yes, most are), are
likely to take into account what a firm's analysts are saying
about their stock when selecting an investment banker. It
would be an unusual CEO, indeed, who would cheerfully receive
an investment banker after reading in the morning papers that
the banker's analyst-partner had just downgraded his
company's stock from a ``buy'' to a ``sell.'' Many investment
bankers--not all, but many--will find ways to persuade their
partner-analysts to be team players. Banking fees are large
enough to give them an enormous incentive to do just that.
So, let's get the incentives right and mandate a separation
of the investment banking and stock-picking businesses,
another McCain proposal. Analysts would then have an
unambiguous incentive to make the best ``buy'' and ``sell''
recommendations they possibly can, so as to build reputations
that will attract investors to them. And investors will get
something in return for their commission dollars--honest
advice from men and women expert in the analysis of corporate
financial data, competing with one another to attract
clients by creating a track record of picking winners.
Which brings us to Directors. Again, we have a case of
skewed incentives. Directors are hired by managers to protect
shareholders from, er, those same managers. To make sure the
directors remain friendly, executives often shower them with
perks and consulting fees, the continuation of which depend
on the goodwill of the CEOs they are supposed to be
supervising. It is the rare director who chooses to feast on
the hand that feeds him, not merely because he is venal, but
because the courtesies lavished upon him genuinely persuade
him that the CEO is a decent chap, deserving of every million
he is paid.
To get the incentives right, directors must be selected by
vigorously participating shareholders, most especially
institutional shareholders, from a slate of demonstrably
independent people who, although well compensated, have
reputations worth protecting. Nominations for that slate
should come from sources other than the company management,
to avoid a you-sit-on-my-compensation-committee-and-I'll-sit-
on-yours, selection process. The directors should not accept
anything within the gift of the CEO; their directors' fees
should be compensation enough, and high enough to provide an
incentive to accumulate a record that will persuade
shareholders to reelect them at reasonably regular periodic
intervals--perhaps throwing in term limits to make sure that
directors and management don't develop too cozy a
relationship.
Finally, we come to the CEO's and top managers. How to
create incentives to induce managers to act in the interests
of the shareholders who own the business has bedeviled
students of corporate governance ever since 1932, when Adolph
A. Berle Jr. and Gardiner C. Means published their classic
``The Modern Corporation and Private Property,'' detailing
the potential for managerial abuse created by the separation
of ownership from control of large corporations. Managers
placing self-interest above the interests of owners were
immune to retaliation by far-flung and essentially powerless
shareholders. That situation was partially corrected when
Mike Milken and his debt-financed corporate raiders snatched
control of many companies from the worst abusers of
shareholders' interests, grounded fleets of corporate jets,
sold off hunting lodges, and generally sweated the fat out of
expenses--a wonderful example of markets working to correct
abuses that seemed beyond the reach of regulators.
But nowadays there aren't many people who want to be like
Mike, so it is incumbent on policymakers to get managers'
incentives right. President Bush's proposal for publication
of compensation arrangements in an accessible format would be
a step in the right direction, its effectiveness attested to
by the howls of outrage it produced from some CEOs. Truly
independent boards, created along the lines described above,
would be another advance, since compensation committees not
beholden to corporate managements are more likely to relate
pay to performance than the supine committees that now exist
on some boards. Add in the requirement that options be
treated as profit-reducing expenses--another McCain proposal
that so horrified senators that it has for now been
derailed--and you will have a new parsimony that will keep
salaries to levels commensurate with effort and performance.
Under such a regime, executives would have a clear incentive
to spend their time creating efficiencies and new markets,
rather than figuring out how to cash in options, and how to
persuade their boards to revalue options if poor company
performance has driven the stock price below the price at
which the options may be exercised, rewarding executives
whether or not they have delivered long-term value for
shareholders.
This may sound like an awful lot of regulation. But it is
of a special, self-liquidating sort. If we adopt policies
that get the incentives of all the players right, government
can then get out of the way so that the various actors can do
their thing--audit, advise on investments, monitor management
performance in the interests of owners, and manage the
company in a world in which managers' interests coincide with
those of shareholders. The right kind of regulation can be a
model of minimal--and effective--government.
Irwin M. Stelzer is a contributing editor to The Weekly
Standard, director of regulatory studies at the Hudson
Institute, and a columnist for the Sunday Times (London).

[From the Wall Street Journal, July 15, 2002]

Leading the News: Coke to Expense Employee Options

move may spur others to follow and could shape current talks in senate

(By Betsy McKay)

Atlanta--Coca-Cola Co. said it will begin in the fourth
quarter to treat all employee stock options as an expense, a
move that could accelerate debate in corporate boardrooms
over whether to adopt that accounting practice.
The beverage company's decision also could shape the
outcome of discussions today in the Senate over whether to
instruct a new accounting-oversight board to study the fate
of stock options--in particular, whether they should be
expensed as other forms of compensation.
Republicans tried Friday to block the measure, offered as
an amendment to an accounting-overhaul bill. But Democrats
say they will try again before final passage of the
underlying accounting bill, expected late today.
``We are in a new environment,'' Gary Fayard, Coke's chief
financial officer, said in an interview. ``There had been a
loophole in the accounting, and we thought it was the right
time to step up to the plate.
``There's no doubt that stock options are compensation,''
he added. ``If they weren't, none of us would want them.''
Coke said its decision, announced yesterday morning, will
reduce earnings only slightly--by about a penny a share--for
2002. That reflects the fact that Coke doesn't grant options
as extensively as do some other companies. And while Coke
isn't the first public concern to make the accounting
change--Boeing Co. and Winn-Dixie Stores Inc. in recent years
began calculating stock options as an expense--its high
profile could prompt other businesses to consider calls from
investors, regulators and politicians for greater financial
candor.
Last week, AMB Property Corp., a San Francisco-based owner
of industrial real estate, also said it would record stock
options as an expense.
Proponents of expensing say options are compensation and
should be treated as such, especially since generous option
awards dilute the value of shares outstanding. Opponents say
options are difficult to value and argue that expensing would
confuse investors, not enlighten them. Changing accounting
rules would reduce earnings at some companies.
In 1993, the Financial Accounting Standards Board tried to
mandate the expensing of options but retreated in the face of
stiff opposition from business leaders and Congress. The
issue flared up again after Enron Corp's demise late last
year and has taken on new life with recent disclosures of
earnings misstatements at WorldCom Inc.
Coke's Chairman and Chief Executive Douglas Daft raised the
idea of recording stock options as an expense about two
months ago, Mr. Fayard said, as news of financial scandals
continued to unfold. About 10 days ago, with lawmakers
calling for tougher accounting standards, Mr. Daft fielded
the idea in phone calls to Warren Buffet and some other Coke
directors. Mr. Buffett, Coke's largest shareholder, for years
has been an outspoken proponent of expensing options.
Mr. Daft pressed ahead with his proposal to make the
accounting change last week after President Bush called in a
speech for better corporate governance. Mr. Bush didn't
embrace the idea of forcing companies to expense options, but
numerous economists and financial experts, including Federal
Reserve Board Chairman Alan Greenspan, have endorsed the
move, and growing investor unease sent stocks plummeting last
week.
Mr. Daft convened a meeting at 7 a.m. Thursday in Sun
Valley, Idaho, where he and several other directors were
attending a conference. The discussion, over breakfast in the
condominium of director Herbert Allen, was short. It wasn't
hard to win the directors' support; Mr. Buffett, in
particular, applauded the move.
``Our management's determination to change to the preferred
method of accounting for employee stock options ensures that
our earnings will more clearly reflect economic reality when
all compensation costs are recorded in the financial
statements,'' Mr. Daft said in a statement. A spokeswoman
said he wasn't available for further comment.

[[Page S6766]]

``I'm delighted,'' Mr. Buffett said in a telephone
interview. ``This tells shareholders what really happens in
terms of costs.'' The new plan, he said, also eliminates bias
in structuring compensation packages, encouraging Coke to
design packages that fit its and employees' needs without
regard for accounting.
While Mr. Buffett said he never pushed Coke to treat stock
options as an expense, he said he did encourage the company
last week to take a further step and use independent
investment banks to determine the fair value of stock options
that Coke grants. The move is intended to ease concerns over
whether options that are expensed are being properly valued.
Coke will ask two investment banks, Goldman Sachs & Co. and
Citibank, to price options, and will expense the option value
based on the average of those firms' quotes.
Coke said stock options will be expensed over the period in
which they vest, based on the value the day they are granted.
Coke's 2002 options plan authorizes as many as 120 million
shares, or 4.8% of the company's share outstanding. The
company usually issues 25 million to 30 million shares a
year, however.
For 2001, Coke's top five officers received options on 3.7
million shares, including options on one million shares for
Mr. Daft. About 8,200 of Coke's 38,000 employees received
options during 2001.
Mr. Buffett predicted Mr. Daft's move could make him
``unpopular'' among other CEOs, but he also said that while
business leaders had managed to quash efforts in 1993 to
force expensing of stock options, the current environment
could force them now to accept it.
``I'm sure a few others will do it,'' he said. ``It may be
that good practices drive out the bad.''
Sen. John McCain (R., Ariz.) issued a statement applauding
Coke's decision and expressing hope that ``other companies
will follow suit.''
Judy Fischer, managing director of Executive Compensation
Advisory Services, in Alexandria, Va., said she believes
other corporations will follow Coke. ``If a corporation can
do it without a lot of problems to their bottom line, I think
a lot will follow suit,'' she said.
However, it wasn't clear how other companies will react,
particularly high-tech businesses that rely heavily on stock
options. A spokesman for Santa Clara, Calif., semiconductor
maker Intel Corp., where all employees are eligible for stock
options, said he couldn't comment on Coke's move. One
lobbyist was skeptical. ``I doubt just because one company
made this decision that other companies will follow suit,''
said Ralph Hellmann, top lobbyist for the Information
Technology Industry Council, a high-tech trade association in
Washington. ``Each individual company is going to make its
own determination.'' Looking beyond 2002, Coke's Mr. Fayard
said earnings per share will be reduced by about three cents
in 2003, with the reduction gradually increasing to about
nine cents a share by 2006, he said. But the change won't
affect the company's cash flow, he said.
Mr. DOMENICI. Mr. President, I rise first in support of our free
market economy. The revelations over the last few months of corporate
officials having betrayed the trust of their employees and their
investors is simply unacceptable. These corporate officials must be
prosecuted to the full extent of the law and if additional penalties
are required, then we should enact them.
But let us not forget, that despite these terrible, unconscionable
acts perpetrated by some CEOs on their workers and investors, the
principles of our free market economy remain the envy of the world.
These principles have allowed our economy to be the most productive,
most innovative, most creative system, that has created income and
employment only dreamed of in other parts of the world.
One of these principles is property rights. But it seems that some
corporate managers have forgotten that the companies they run are not
their personal property to operate however they see fit or for their
own benefit. The exuberance of the 1990s that Chairman Greenspan warned
us about and the extraordinary income and wealth generated during that
period, allowed for unethical persons in our business sector to exploit
this time of growth for their own selfish purposes and to bend the
rules for their own benefit.
So as we pursue new rules to punish those who have betrayed a trust--
and we must--let us not allow the pendulum to swing so far that it
jeopardizes the innovation and vitality of our economic system for the
future. Rather than working against the principles that make our
economic system so great, our actions should affirm these principles.
I am angry, shocked and extremely concerned about the revelations
that have emerged in the past 6 months concerning the accounting
practices of a number of public companies. To operate efficiently our
free market system requires a high level of honesty and trustworthiness
among its participants, especially among its key decisionmakers.
In the long run our economy--our stand of living--reflects not only
our inventiveness and hard work but our moral character. Corporate
executives have to be worthy of the key role they play. With all their
wealth and high position comes responsibility. Sadly, some executives
were not worthy of this responsibility.
Restoring the public's trust is of paramount importance. America's
system of corporate governance and its trust in our financial reporting
mechanisms have been shaken and restoring this trust is of critical
importance. It will take more than words to restore that confidence and
trust. It will take something that I, Senator Dodd and others have been
lecturing on for many years, and this is something not easily
legislated. It will take a renewed awareness of the ethics of
responsibility. It will take a reaffirmation that ``Character Counts.''
Reaffirming that ``Character Counts'' means not only encouraging our
young people to live by the six pillars--trustworthiness, respect,
responsibility, fairness, caring, and citizenship--but expecting that
our corporate leaders adhere to these traits and conduct themselves
accordingly.
Cooking the books has hurt thousands and thousands of hard-working
Americans. American companies must adhere to the highest standards of
public accounting ethics. Despite these abuses, as I have said our
economy remains strong and the vast majority of CEOs are honest and
abide by the rules. Unfortunately, a few bad characters have tainted
the reputation of our enterprise system.
The President and the Congress are addressing reform. I will support
these reform efforts that are aimed at regaining trust and confidence
in our Nation's financial markets and ensure that American workers are
protected from unscrupulous corporations. No violation of the public's
trust can be tolerated.
But I also believe more can be done, and this bill before us moves us
in that direction. I support:
Full and accurate disclosure: I endorse the SEC's proposals to
require CEOs to certify that their financial statements completely and
accurately reflect the true condition of the company.
Trust and accountability: Corporate leaders must be held accountable
for any abuse of public trust. I believe that executives should be
required to return moneys they received as a result of fraudulent
accounting practices, as embodied in the Senate bill.
Independence: Boards of directors must exercise independent judgment
and a substantial majority of board members must be independent of
management.
Auditing reform: Strong oversight of the accounting profession is
essential if we are to ensure independence of auditors and credibility
of the auditing process.
Pension protection: I fully support steps that will protect the
retirement savings of American workers. Workers should have freedom to
diversify and monitor their own retirement funds, giving confidence
that their investments will not fall prey to unethical executives.
I urge the SEC to move forward with the implementation of its
proposed reforms. And, I strongly believe that the NYSE and the NASDAQ
must proceed to improve their listing standards. I support the reform
that works to strengthen our free enterprise system. It is our
obligation as a Congress and as a country to ensure that the unethical
few that are causing hardship for so many hard-working Americans, be
swiftly brought to justice and face jail time. We will restore faith in
our economic system for it is the greatest in the world. I support
passage of the Senate bill.
Mr. COCHRAN. Mr. President, while I support the passage of this bill,
I think we ought to recognize the role the Administration is already
playing to deal with these serious problems of corporate
responsibility.
I was pleased that President Bush announced last week his suggestions
for corporate accounting reform. The President forcefully argued that
higher

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ethical standards are an imperative to restore confidence in corporate
America. Those standards should, in his words, ``be enforced by strict
laws and upheld by responsible business leaders'' and that
``corporations should not be disconnected from the values of our
country.''
I also support the President's executive order to create the
Corporate Fraud Task Force. Combined with new criminal penalties for
corporate fraud, this taskforce can help bring stability to our
Nation's economy. The President has also asked the Securities and
Exchange Commission to adopt new rules to make sure that auditors are
truly independent from the businesses which they audit.
We also need to be sure the SEC has the resources it needs to carry
out its other important responsibilities.
I am hopeful that the Appropriations Committee will be able to
provide the necessary amount of funding for the SEC to hire the
enforcement officers it needs and to acquire state-of-the-art
technology that is necessary for the performance of its duties.
With the passage of this bill by the Senate, we will be able, in
conference, to work with the other body to produce a good bill that
deals effectively with the problems in this area of very legitimate
concern to our country.
Mr. LEAHY. Mr. President, I want to compliment the majority leader
for turning to the Sarbanes bill and the issue of corporate
responsibility. I also want to thank Chairman Sarbanes for his
leadership on the impressive bill that he has produced in the Banking
Committee.
So many times all that the public hears about Congress is about turf
and partisanship. This comprehensive reform effort disproves those
claims. Thanks to the leadership of the Majority Leader and Senator
Sarbanes, the bill that we are about to vote on is a tough,
comprehensive reform package that enjoys broad bipartisan support in
the Senate. It brought together the best ideas from many Senators, from
many Committees, and from both parties.
From my standpoint, as Chairman of the Judiciary Committee, this has
been an opportunity to benefit once again from the wonderful
partnership that we have forged between the Banking Committee and the
Judiciary Committee. After September 11, our two Committees worked
together to write the anti terrorism provisions of the USA Patriot Act
that dealt with money laundering. Here, with the 97-0 vote to adopt of
the provisions of the Corporate and Criminal Fraud and Accountability
Act, as a Leahy-McCain amendment to this bill, Senator Sarbanes and I
have again united the forces and expertise of our Committees. This time
we have done so to craft comprehensive laws to deal with financial
wrongdoing, and again done so with bipartisan support in both
Committees. I think that the final product is better and more complete
because of our joint work. Thank you Chairman Sarbanes.
But the joint effort did not stop with Senator Sarbanes and myself.
Senators Biden, Hatch and the Minority Leader offered provisions that
were also adopted by the Senate, adding aspects of the President's
recent proposal. That is an impressive show of bipartisanship because
those proposals were only made after the Senate had already begun
debate on this bill. Despite the White House's refusal to help us shape
our more comprehensive proposal, we did not hesitate to include the
President's suggestions in our final product.
The bill was further perfected by Senator Edwards' thoughtful
amendment dealing with the conduct of corporate attorneys. Once again,
we were able to draw on the expertise of a particular Senator to enlist
the help of lawyers in stopping corporate fraud, not designing it. In
short, we started with a fine bill from Senator Sarbanes, and have
strengthened even further, never losing our strong bipartisan support.
We need to remind ourselves of the underlying reasons for the
bipartisan support behind these measures. Enron brought it to light,
but it goes deeper. It's about a basic fairness and equity that
transcends party lines. It's about rewarding people who play by the
rules and punishing people who don't. It's about the basic American
ideal of treating all people equally under the law.
We cannot have a system where a pickpocket who steals $50 faces more
jail time than a CEO who steals $50 million. The integrity of our
financial system depends on accountability. The mounting scandals and
declining stock market have damaged the integrity of our public markets
and we must restore it.
I was proud that the Judiciary Committee, joined by the Majority
Leader and a bipartisan group of Senators including Senator McCain and
others was able to make such an important contribution to this effort
by contributing the provisions of S. 2010, the ``Corporate and Criminal
Fraud Accountability Act,'' as it was unanimously reported out of the
Judiciary Committee in April, as an amendment to the Sarbanes bill.
Both in Committee in April and again last week on the floor, not a
single Senator from either party has voted against the provisions of
the Corporate and Criminal Fraud Accountability Act.
We worked hard to reach across party lines on this measure, and I
hope that the House of Representatives acknowledges that fact. I was
glad to see in last Friday's newspapers that Speaker Hastert also
endorsed the joint Sarbanes-Leahy measure after its adoption. I hope
that the President can follow the leadership of Speaker Hastert and
support the Senate measure as this bill moves forward.
Recent events have served as a stark reminder that we need to
reexamine our laws to make sure that they reflect our important and
shared values of honesty and accountability. Enron has become a symbol
for the torrent of corporate fraud scandals that have hit the front
pages and battered our financial markets. Tyco, Xerox, WorldCom,
Adelphia, Global Crossings, the list goes on.
The things that happened at Enron did not happen by mistake. They
were not the result of one or two ``bad apples.'' Senior management at
Enron, assisted by an army of accountants and lawyers spun an intricate
web of deceit. They engaged in a systematic fraud that allowed them to
secretly take hundreds of millions of dollars out of the company. This
kind of fraud is not the work of a lone fraud artist. Rather, it is
symptomatic of a corporate culture where greed has been inflated and
honesty devalued.
Unfortunately, as I have said and as the experts warned at our
February 6 hearing, Enron does not appear to have been alone. Each week
we read of corporation after corporation that has engaged in
misconduct, and these are not small or marginal corporations. These are
major mainstays of corporate America. The web of deceit woven by such
publicly traded companies ensnares and victimizes the entire investing
public who depend on the transparency and integrity of our markets for
everything from their retirement nest eggs to their children's college
funds. That is why this comprehensive reform is urgently needed to
restore accountability in our markets.
The Leahy-McCain amendment to the Sarbanes bill, approved 97-0 by the
Senate, provided important provisions to ensure just such
accountability.
The Corporate and Criminal Fraud Accountability Act which I authored
provides tough new criminal penalties to restore accountability and
transparency in our markets. It accomplishes this in three ways:
punishing criminals who commit fraud, preserving evidence to prove
fraud, and protecting victims of fraud.
Here are some of its major provisions as adopted by the unanimous
Judiciary Committee in April and the unanimous Senate last week: It
establishes a new crime of securities fraud, with a tough ten year jail
sentence. It breaks the ``corporate code of silence'' by providing, for
the first time, federal protection for corporate whistleblowers who
report fraud to the authorities or testify at trial. It closes
loopholes and toughens penalties for shredding documents as we learned
had occurred at Arthur Andersen. It requires audit documents to be
preserved for 5 years and provides tough criminal penalties for their
destruction. It protects victims the right to recoup their losses by
preventing fraud artists from hiding in bankruptcy or concealing their
crime and using an unfair statute of limitations to hide.

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With these bipartisan provisions and others incorporated, this bill
we have produced is truly a comprehensive measure. It tightens
regulation of corporate misconduct, but it now also provides an
important deterrent to fraud artists. This bill is going to send
wrongdoers to jail and save documents from the shredder, which sends a
powerful and clear message to potential corporate wrongdoers ``dont do
it.'' As a former prosecutor, I have discovered that nothing focuses
attention to morality like the prospect of a long prison sentence.
In the Senate, as we have been debating and shaping specific and
comprehensive reform proposals, we had been trying for months
unsuccessfully to get the President's support. The Administration had
stayed on the sidelines during this important debate .
For whatever reason, perhaps the mounting scandals or the declining
market, the President decided last week to speak out against corporate
fraud. He spoke again today on our economy. I welcome his participation
and hope that he will follow up his speeches by supporting real reform.
It is amazing to me that with such broad bipartisan support and now on
the verge of Senate passage, that the Administration has still not
given a clear statement supporting the bill on which we are now about
to vote.
Although I now understand that a White House official reportedly said
that they agreed with the ``goals'' of this reform bill, I was
disappointed that the President has not yet voiced his support for this
bipartisan measure about to pass the Senate. Supporting the ``goals''
is a good first step but it is nonetheless a baby step. I read in the
paper last week that the President does not want to ``tip his hand.''
This is not a game of poker, however. This is the time for Presidential
leadership with the integrity of our markets at stake. When there are
specific proposals passing the U.S. Senate by an overwhelming majority
of Senators from both parties and the Speaker of the House is
supporting the measures as well one wonders what it will take for the
President to express his opinion.
For those of us in the Senate, like myself, Senator Sarbanes, Senator
McCain, Majority Leader Daschle, and others who have worked hard to
come up with specific and bipartisan reform proposals, the ``goals''
have been clear for a long time. It is now time for comprehensive
action.
While the President's proposal was short on details, some of it did
sound familiar to those of us on the Judiciary Committee. Three of the
President's proposals are found in S. 2010, the Corporate and Criminal
Fraud Accountability Act, which we adopted 97-0 in the Senate: One, The
President advocates for strengthening the laws punishing document
shredding and obstruction of justice. That is in our bill. Two, The
President wants the Sentencing Commission to raise penalties for
corporate misconduct. That is in our bill. Three, The President wants
the Sentencing Commission to raise the penalties for the existing fraud
laws. That is in our bill as well.
I am glad the President adopted three proposals from my bill, even if
he will only say that he supports the `` goals.'' As I said, we were
also quick to write up his ideas into concrete proposals and include
them in our bill. Unfortunately, the President's proposal failed to
include many of the important provisions in the bipartisan Leahy
amendment. It fails to create a new crime to punish securities fraud to
directly punish corporate wrongdoers. It fails to provide
whistleblowers with protection that will break the corporate code of
silence. Remember, you can put whatever criminal laws you want on the
books but unless there are witnesses who are not scared to help
prosecutors prove what happened no one will be held accountable. It
fails to protect victims of fraud by allowing them to recover their
losses from a fraud artist who declares bankruptcy. It fails to
establish a realistic statute of limitations to allow victims to recoup
their losses when a fraud artist can manage to conceal his crimes for
long enough, a change that has received strong bipartisan support
dating back to the SEC under former President Bush.
As I said, I was glad to hear the President finally join this reform
debate. Now is not the time, though, for half measures. We need
comprehensive action. We were glad to include the President's proposals
in the Senate bill, but we unanimously agreed to more comprehensive
reform, including the Leahy bill.
Now I hope that the President will support such comprehensive reform
as is found in this bill. I hope that his rhetoric is backed by action
and that his generalities are backed with specifics.
Speaker Hastert has now publicly supported the Sarbanes bill and the
Leahy amendment. I hope that the President will support the bill's
provisions as it moves forward to conference and will appeal to other
Republican House members not to water it down. That will be the true
test of his resolve to restore accountability to our markets.
It is time for action, comprehensive action that will restore
confidence and accountability in our public markets. The Sarbanes bill,
including the unanimously approved Leahy-McCain amendment incorporating
the Corporate and Criminal Fraud Accountability Act, provides just such
action.
Let's pass this comprehensive bill and send the President a strong
measure to sign into law. Congress must act to restore integrity in our
capital markets to strengthen our economy.
Mr. REID. Madam President, I ask unanimous consent that at 5:45 p.m.
today all time postcloture expire, and that all the time available, not
counting the time available for Senator Byrd, be equally divided and
controlled between the two managers or their designees; that without
further intervening action, the Senate proceed to vote on or in
relation to the Carnahan amendment No. 4286, to be immediately followed
by a vote in relation to the Edwards amendment No. 4187, as amended, if
amended; that upon disposition of these amendments, the bill be read a
third time, and the Senate vote on passage of the bill; that upon
passage, the Banking Committee be discharged from further consideration
of H.R. 3763, the House companion, and that the Senate then proceed to
its consideration; that all after the enacting clause be stricken and
the text of S. 2673, as passed, be inserted in lieu thereof; that the
bill be read a third time, passed, and the motion to reconsider be laid
upon the table; that upon passage of H.R. 3763, the Senate insist on
its amendment, request a conference with the House on the disagreeing
votes of the two Houses, and that the Chair be authorized to appoint
conferees on the part of the Senate; that all succeeding votes in this
vote sequence, after the first vote, be limited to 10 minutes; that
there be up to 2 minutes of explanation prior to each vote, with no
further intervening action or debate, with the 2 minutes equally
divided in the usual form.
The PRESIDING OFFICER. Is there objection?
Mr. GRAMM. Madam President, reserving the right to object, I would
like to propound a parliamentary inquiry. Under this agreement, when
5:45 comes, we would begin to vote on the two amendments, and then vote
on final passage, and no other amendment would be in order under the
agreement; is that correct?
The PRESIDING OFFICER. The Senator is correct.
Mr. GRAMM. Madam President, I do not object. I think under this
agreement we will have time to go back and forth. I would say that if
it saves anyone time, we do not need a vote on the two pending
amendments. We could do them by voice vote and proceed to final
passage.
Mr. REID. We will be happy to discuss that after the UC is entered.
The PRESIDING OFFICER. Is there objection to the request?
Without objection, it is so ordered.
Mr. REID. Madam President, I ask unanimous consent that upon
disposition of H.R. 3763, passage of S. 2673 be vitiated and the bill
be returned to the calendar.
The PRESIDING OFFICER. Is there objection?
Without objection, it is so ordered.
The PRESIDING OFFICER. The Senator from Texas.
Mr. GRAMM. Madam President, I want to begin by very briefly
responding to Senator Kennedy. I was somewhat taken aback at his
suggestion that we set aside the two amendments and allow a nongermane
amendment to

[[Page S6769]]

be offered when, in fact, on a bipartisan basis, earlier this week, we
decided not to deal with pension reform.
So I want to make it clear to my colleagues that I am perfectly happy
to deal with pension reform. I think a bipartisan consensus is evolving
on pension reform. But we made a decision, on a bipartisan basis,
earlier this week, not to put pension reform on this bill. Its day will
come. I want to make that clear.

Madam President, let me try to respond to several points that were
made earlier today. I will try to be brief so that my other colleagues
will have an opportunity to speak on my side of the aisle.
I want, first, to talk about stock options. Then I want to talk about
the bill before us and where we go from here. And I will try to be
brief on all of them.
First, let me make it clear that stock options are pretty important
to the American economy. More than 6 million nonexecutive workers in
America receive stock options every year. So when we finally get around
to having a policy set on stock options--which I hope will be done by
FASB, the accounting board, based on logic and reason--we need to take
into account that 6 million people who are not executives of companies
get stock options every year.
We want to be sure that we are not endangering their ability to own a
piece of America with the reforms designed to deal with a few people
who violated the law in some cases, who did not act honorably in some
cases.
We want to be sure we do not deprive or preclude 6 million workers
who are not executives--or people who did not violate the law, did not
act dishonorably--from the ability to get stock options.
Let me also say, in areas such as biotechology and the computer
programming industries, that 55 percent of rank and file employees get
stock options.
So I just want to urge, as we are going about our business here, with
all this talk about people who have made millions, that we do not
forget that millions of Americans benefit from this, and we need to be
careful about what we are doing.
Let me say, secondly--and Senator Bennett made the point today; I
made it last week--if you listen to what is being said in this debate,
a big point is made of the fact that in 1994 we saw an explosion in the
use of stock options and low-interest loans and other nonconventional
forms of executive compensation.
What happened to trigger that is in 1993, as a gratuitous provision
in the 1993 tax bill, we changed the law so that if you are
compensating an executive in corporate America and you pay that
executive more than $1 million a year, you cannot count that
compensation as a business expense. Of the top 30 companies in America,
the level of compensation at that point was already substantially above
the million-dollar mark. So because of what Congress did in 1994,
having passed a law that said you could not pay people with a paycheck
above a certain level and have it count as a business expense, we
should not have been surprised that accountants and financial planners
and people who were smart enough to make over $1 million a year found
other ways to receive compensation.
So I want to make it clear that the point I am making is, if you are
looking for somebody to point the finger of blame at here--and many
people are trying to do that--I think Congress is a good institution to
point at because Congress eliminated the ability of companies to pay
their executives the old-fashioned way.
A lot has been made about who is at fault in all this. I would just
simply make the following points. If somebody said to me: I know you
don't know what caused all these current problems, but tell me; I am
going to force you to tell me what you think the cause was. I would
say: The inadequacy of GAAP accounting, which, in its current
incarnation, works very well for old-style companies with assets that
are written off.
GAAP accounting fits the steel industry perfectly. It fits the
automobile industry pretty well. But the problem in the 1990s--when
productive power became knowledge, when companies with relatively
little in the way of assets gained huge market caps because of people's
assessment of their know-how and the technology embodied by the
company--was that GAAP accounting did not keep pace with the reality of
the world that we live in today and that we lived in the 1990s.
It is very complicated to try to figure out what the values of these
companies actually are by any conventional method where you are adding
up their acquisition cost of assets and depreciating those assets.
This created a giant void in GAAP accounting in the 1990s, and people
pushed the envelope within that void. In some cases, it appears they
violated the law; in other cases, they have certainly violated
standards of ethics.
Nothing we are doing in this bill is going to solve the problem in
GAAP accounting. I am confident that over time we will find new ways of
developing generally accepted accounting principles that don't rely on
concepts such as goodwill, which don't make a lot of sense
economically. But I do believe the bill before us is a step in the
right direction.
There are differences of opinion. Before we go to final passage, I
want to make clear what those differences are. Senator Sarbanes and I
both believe that we should have an independent accounting board. We
both believe that that board should set and enforce ethics standards.
We both believe that part of setting ethics standards is looking at
auditor independence.
Senator Sarbanes believes that we should write in law in some great
detail what is entailed in auditor independence. I believe the problem
with that is that while the law might fit General Motors, there are
16,254 publicly traded companies in America, and I am concerned that
there is no law that Congress can write that will fit all 16,254
companies.
My second problem is, if you make a mistake in writing the law, then
you have to go back and pass another law to correct it. If we had set
out Glass-Steagall, separating banking and securities, by regulation,
my guess is that by the mid 1950s, we would have concluded that that
was a mistake, and we would have fixed it. But since it was written
into law, it couldn't be fixed by regulation. Regulators tried to make
marginal changes. We ended up with a very unstable system, and we were
only able to fix it by law in 1999.
A second problem with writing the details of these different
standards such as auditor independence into law is if you make a
mistake, it is hard to fix it; whereas if you set up a board and, based
on their expertise, they set out a regulation, if they make a mistake,
they can fix it.
My final point on setting these standards by law is, one size fits
all never works. What we need is the flexibility for this board to set
a standard and then determine, based on the circumstance of the
individual company, what makes sense.
I intend to vote for the bill on final passage. There are probably 10
things in the bill I am opposed to. But we are going to conference with
a House bill that is very different. I am confident that in conference
we can write a bill that will be supported by both Houses of Congress
and signed by the President. I think we can strengthen the bill where
it needs to be strengthened. I think we can provide flexibility where
it is needed to bring in reason and responsibility.
Our objective has to be to fix what is broken in American capital
markets and do it while minimizing the cost we impose on businesses,
investors, and workers that did not violate the law and did not act in
a nonethical manner.
The sooner we can get to conference, the sooner we can write this
bill and see the bill signed into law. We have reached the point where
we have a bill before us that addresses the major issues that we
decided to address.
I know people have been unhappy about the inability to offer
amendments today. The plain truth is, we have 97 first-degree
amendments that have been filed and 24 second-degree amendments, and
there was never any possibility that those amendments could be offered.
We tried to come up with amendments that were agreed to and in the
process, ended up excluding some people.
Let me conclude my remarks, at least for the time being, by
congratulating Senator Sarbanes on his leadership on this bill.
Overall, he has done a

[[Page S6770]]

good job. I do not agree with him on each and every part of it, but he
has always been open. We have had many good discussions. I am confident
that in the end we will write a bill that will be broadly supported and
that will be in the interest of the country.
The PRESIDING OFFICER. Under the previous order, the hour of 4:55
having arrived, the Senator from West Virginia is recognized.

supplemental bill

Mr. BYRD. Madam President, there is a game being played with the
critical issue of homeland security. It is a political game which could
have disastrous consequences.
The White House is talking big about homeland security, exhibiting
strong presidential interest in homeland security, trotting out
proposals for a whole new Department of Homeland Security, and
publicizing alerts.
It is strange, then, strange indeed that despite its public
pronouncements on homeland security, the White House refuses to back
the rhetoric up with resources.
Twice--once last year, and currently--large bipartisan majorities in
both Houses of Congress have withstood veto threats from this
administration and insisted on significant funding increases for
homeland security.
President Bush's own appointees have all but begged the President's
OMB Director for additional funds to fight the war on terrorism here at
home. Many of these requests are urgent and quite compelling, yet the
OMB has continually rejected a surprising number of these pleas. It is
as if this administration has delivered an internal unfunded mandate to
its own cabinet secretaries and Federal workers. Fight the war on
terrorism on every front here in the homeland. Fight vigorously. Spare
nothing, but make sure you do it on a shoestring. Protect our people
here at home, but protect them on the cheap.
The Department of Energy proposed a total of $380 million to fund
projects to enhance the security of radioactive materials here at home
and overseas, including: better security measures to safeguard the
transport of nuclear weapons within the United States; improvements in
the ways in which we secure and store plutonium; cleaning up,
transporting, and protecting low-level radioactive materials that could
be used in a ``dirty bomb.''
For these and similar activities $380 million was asked for by the
Secretary of Energy. But do you know what? That request fell on deaf
ears at the Office of Management and Budget. Despite all of the
worrying and nail biting about what would happen if some lunatic
obtained radioactive material and detonated a ``dirty bomb'' on the
mall in Washington or in some other large city, the OMB provided less
than $27 million or about 7 percent of the Energy Department's request.
Let me say that again: The OMB provided less than $27 million or about
7 percent of the Energy Department's request. This urgent supplemental
bill contains $361 million for the Department to dedicate to securing
these dangerous and vulnerable materials. That is $334 million above
the amount requested by the President.
Another striking omission from the Bush supplemental request for
homeland security involved efforts to deport those individuals who
entered the country on visas that have now expired. Currently there are
an estimated 8 million undocumented immigrants in the United States and
only 2,000 interior immigration enforcement officers nationwide. This
is a very dangerous situation. We know that terrorists live and plot
their crimes among us. The Immigration and Naturalization Service
requested $52 million for analysts to help find, arrest and deport
high-risk individuals who have disregarded the departure dates on their
visas.
OMB said no, nada, nix. It denied the entire request. The
supplemental bill, now stuck in conference because of the
administration's latest demands, contains $25 million that the
Appropriations Committee believes the INS can usefully spend this year
to address the need to locate some of these individuals. We also
include $88 million for construction and equipping of border
facilities, and for improved border inspections.
Last fall, OMB denied $1.5 billion in funding which the FBI requested
in the wake of the attack on the twin towers in New York. Part of the
FBI's funding request was for acceleration of a new computer system
that will be at the heart of all communications within the bureau. Also
included in the request were funds to enhance the internal security of
the FBI's systems and procedures; for ``cyber cops'' and for hazardous
materials personnel. The Congress provided $212 million above the
President's request to permit completion of the new computer system
much earlier than would be allowed under the Bush plan. In addition, we
have included--the Appropriations Committee--$175 million for cyber
security and counter terrorism in the supplemental that the White House
is now delaying--delayed at the last minute last Thursday evening.

I could go on, but suffice it to say that this administration talks a
good game about homeland security but it is unwilling to put its money
where its mouth is.
Over this past weekend, during his radio address, the President said
that, ``Strengthening our economy and protecting the homeland and
fighting the war on terror are critical issues that demand prompt
attention.'' I agree. I only wish that the same message would be made
clear to the Office of Management and Budget.
We have worked diligently in the Congress to get these critical
homeland security monies out to federal and local personnel charged
with protecting our people. Yet, we have been met by objection after
objection by this administration.
In March, the President insisted he needed more money for national
defense in an urgent supplemental. We gave him every dollar he
requested. In addition, the House and Senate provided more money for
critical homeland defense needs.
Instead of letting the House and Senate work out our differences and
get the funding out, the White House started issuing veto threats
before the Senate bill was even off of the floor. And last Thursday
evening, just as all differences appeared to be worked out, the White
House bomb throwers blew up the agreement with new demands.
It makes one wonder how much the White House really needs that
defense money and it certainly causes one to wonder how serious this
administration really is about homeland security.
Senator Stevens and I have beseeched the White House over and over
again to have the Homeland Security Director come before our Committee
to tell us about the needs for Homeland Security. Our requests were
denied. We held days of hearings with administration officials, local
firefighters, policemen, mayors and governors. We did our best and
funded the needs as testimony we heard indicated.
We wrote a good bill, and we were ready to convene the conference
Friday. But our efforts were blown up by the OMB Director, suddenly and
completely and with no warning until the very last minute, Thursday
evening.
So needs go wanting in our military and in our homeland defense
effort. There is no excuse for such irresponsibility. Such tactics are
not in the best interests of our people. Hollow rhetoric on homeland
security will never replace solid funding for these needs.
Political gamesmanship over issues so critical to our Nation and our
people is irresponsible, arrogant and totally out of line.
I deplore the arrogance with which the good faith efforts of both
Houses of Congress have been treated by this White House. Apparently
the security and safety of this nation and its people have taken a back
seat to gamesmanship by a White House that has no respect for the
people's representatives or for the people's urgent needs.
Under OMB Director Mitch Daniels' stewardship, the Federal budget has
gone from a surplus of $127 billion in FY 2001 to an estimated deficit
for the current fiscal year of $165 billion. This is a swing of $292
billion in just one year.
The President is now threatening to veto the urgent national defense
and homeland defense supplemental appropriations bill based on Mr.
Daniels recommendation. Why? Because Mr. Daniels asserts that the bill
spends too much money. Yet the conference report's spending levels that
have been

[[Page S6771]]

agreed to on a bipartisan and bicameral basis would increase the
deficit by only about $600 million compared to the President's request.

Mr. Daniels believes that the critical port security, border
security, firefighting, law enforcement, nuclear security and other
homeland defense programs funded in the supplemental can wait because
the bill would increase the deficit by about $600 million, when his
failed fiscal policy has resulted in a $292 billion swing in the
deficit.
The OMB Director seems to have forgotten, or perhaps never learned,
that the appropriations process is about more than just numbers. Maybe
at OMB, they can be bean counters, but here in Congress we are
responsible for understanding what the numbers mean for the American
people.
Mr. Daniels is cynically focused only on the bottom line. In an
effort to make the supplemental bill look smaller, he has proposed
rescinding the balance of funds under the airline loan guarantee
program. He asserts that this would produce $1.1 billion of savings.
Yet these funds under the law can not be spent. There are no real
savings here. The Congressional Budget Office would not score savings
for this proposal. This is the kind of phony accounting that is getting
our nation's corporations in trouble.
This phony accounting is proof that Mr. Daniels does not care about
homeland defense or about our national defense, or about fiscal
discipline. This phony accounting proves that the President's veto
threat is only about proving that he can force the Congress to hit some
arbitrary bottom line. And the unmitigated gall of a high White House
official coming to the Congress with an accounting gimmick at a time
when that same White House is decrying phony accounting practices and
scandals in the business community is beyond belief.
We should not delay this conference one more day. There are some in
Congress who suggest that we should throw our hands up on this bill and
wait until the next fiscal year to address these priorities. Such
statements ignore the critical needs facing the nation for defense and
homeland security. Our fighting men and women need this money to
prosecute the war on terrorism. Dr. Dov Zakheim--the Defense Department
comptroller--said in a briefing on Friday that the Defense Department
is hitting a wall and that our people in uniform cannot be paid if the
Supplemental Bill is not enacted by the August break. He said in that
briefing that there is good will on Capitol Hill, and he is right. We
are trying to do the right thing for our people here at home and our
fighting men and women in the field. It is deplorable that good will,
hard work, and good intentions can be trashed by OMB Director with
reckless abandon. I do not think this President or this nation are
well-served by tactics and gamesmanship when the stakes are so high.
Mr. President, I ask unanimous consent that a memorandum be printed
in the Record which sets forth the highlights of the $7.2 billion for
homeland defense in conference funding levels.
There being no objection, the material was ordered to be printed in
the Record, as follows:

Highlights of $7.2 Billion for Homeland Defense in Conference Funding
Levels

The tentative conference funding levels are $1.9 billion
above the President's request. A summary of the $1.9 billion
increase with examples of changes to the President's homeland
defense proposal follows:
$701 million for first responder programs, $343 million
above the President's request, including:
$150 million for firefighters, with the funds going
directly to the local firefighters. The President did not
request supplemental funds despite the fact that over $3.0
billion in applications from 18,000 fire departments were
received for the $360 million currently available.
$100 million for State and local governments for improving
interoperability of communications equipment for fire, police
and emergency medical technicians, none of which was
requested. The funding flows through existing FEMA and
Justice program, rather than the new, centralized program at
FEMA, proposed by the President for FY 2003. In addition, we
are directing the National Institute of Standards and
Technology to take the lead in developing uniform standards
for interoperable State and local law enforcement,
firefighting and emergency medical communications equipment.
$151 million for the Justice Department, $151 million above
the President's request to give to State and local
governments for improved training and equipment for law
enforcement personnel (rather than through FEMA). Funds would
also be used to improve the processing of security clearances
for state and local first responders so that State and local
governments can have information on potential security risks
and to promote mutual aid agreements to coordinate the
response of State and local governments to a terrorist
attack.
$193 million, $134 million below the request for FEMA
grants to State and local governments to update their
emergency operations plans and to improve State emergency
operations centers. $25 million is approved for a new,
unauthorized program requested by the President, $25 million
below the request. The proposal establishes a Citizen Corps
within FEMA to promote volunteer service for emergency
preparedness.
$54 million, $22 million above the President's request for
FEMA's search and rescue teams. Currently, there are 28 FEMA
search and rescue teams around the country that can be
deployed to major disasters to assist local first responders
in search and rescue operations. Funding will be used to
upgrade equipment and training for responding to events
involving a biological, chemical or radiation attack.
$37.1 million of unrequested funding for the National
Institute of Standards and Technology for developing uniform
guidelines for chemical, biological and radiation detection
equipment ($17.1 million) and for developing best practice
guidance for homeland security technologies ($20 million).
$15.9 million for the Federal Law Enforcement Training
Center to expand training capacity for law enforcement
personnel of the new Transportation Security Administration.
$739 million for port security programs, $465 million above
the President's request, including:
$125 million for port security grants through the
Transportation Security Administration. Last Fall, Congress
approved $93 million of unrequested funds for port security
grants. DOT received $692 million of applications for the $93
million we provided. Despite this, the President did not
request additional funds.
$528 million for the Coast Guard for port and maritime
security, $273 million above the President's request.
Increased funds would be used to: expedite vulnerability
assessments at our nation's ports, rather than follow the
Administration's current plan to do the assessments over the
next five years; add two new maritime safety and security
teams; purchase a total of six homeland security response
boats; and expand aviation assets as well as the shore
facilities to support them.
$39 million for Customs to target and inspect suspect
shipping containers at overseas ports before they reach U.S.
ports. The Administration requested no funds for this
activity.
$19.3 million, as requested for 34 additional personnel for
improved background checks for truck drivers, for improved
fraud detection for truck licensing and for improved fraud
detection for driver's licenses.
$28 million of unrequested funding for the Safe Commerce
program to develop better procedures for securing the
contents of the 6 million containers that enter U.S. ports
each year.
$251 million for bioterrorism funding, $251 million above
the President's request, including:
$251 million for the Centers for Disease Control for
improved and secure facilities, including toxicology and
infectious disease labs, an emergency operations center and
for information technology security.
$235 million, $209 million above the President's request to
improve security at our nuclear weapons facilities (Energy
requested the funds, but the White House did not request
them). Funding would be used to improve security of the
nuclear weapons stockpile, the national nuclear labs and our
nuclear weapons plants. Funds are included to establish a 911
system for local first responders to call when confronted
with nuclear hazzards, enhanced funding for the National
Center for Combating Terrorism, expansion of radiological
search teams, and establishment of a National Capital Area
Response Team at Andrews Air Force Base. Funds would also be
used to consolidate nuclear materials sites so fewer
locations need to be protected. Several requested items that
are approved include funds to improve security on the
electrical grid and funds to improve our capability to detect
radiation.
$147 million, $128 million above the President's request
for cyber security to help deal with the threat to Federal
and private information systems. $82.6 million is provided to
Justice to improve the investigation and prosecution of cyber
crime, research to improve the detection of cyber crime,
``data warehousing'' and ``data mining'' to help expose cyber
crime and for information sharing. $20 million is provided to
Commerce to develop unified Federal guidelines and procedures
for system security certification and to develop guidelines
and benchmarks for secure information systems. Funding is
also provided to improve wireless intrusion detection
systems. $25 million is provided to the Energy Department to
improve cyber security at our nuclear weapons plants and
labs. $19.3 million, as requested, is included for NSF for
scholarships to develop cyber security skills.
$120 million for border security, $78 million more than
requested by the President, including $32 million for
Immigration and Naturalization Service Construction to
improve

[[Page S6772]]

facilities on our nation's borders, $25 million for better
equipment for the additional personnel that are being hired
with the funds Congress provided at Fall and $5.7 million for
the Justice Department to deploy to 30 more ports the IDENT/
IAFIS system for rapid response criminal background checks by
the INS of suspect aliens prior to their admission into the
country. $57 million for INS for identifying and removing
immigration felons from the country and for information
technology enhancements.
$140 million of unrequested funding for the Department of
Agriculture to enhance our nation's food safety capabilities
and to protect against devastating plant and animal disease;
to increase support for the Food Safety and Inspection
Service, especially to ensure the safety of imported
products; for improved security at USDA labs in order to
secure bio-hazardous materials; funding for the Extension
Service to provide emergency training for first response in
rural areas; for FDA to improve the ability to inspect
imported products such as medical devices that contain or are
susceptible to being contaminated with radiation; and for
vulnerability assessments and security improvements to
protect rural water systems.
471 million of unrequested funding for airport security,
including $150 million to insure that all small and medium
hub airports have all of the funds necessary to implement the
FAA's new airport security guidelines and that large airports
have some additional funding to meet those requirements; $225
million is provided above the President's request for
explosives detection equipment; $42 million is provided to
improve the security of the FAA air traffic control system;
$17 million is provided to improve airport terminal security
for our nation's airports; and $7.5 million is provided to
FAA to repair long range radar systems that the Department of
Defense believe must be continued for several years because
these assets are the only FAA radar capable of continually
tracking aircraft with disabled transponders. In addition,
$15 million is provided for improved air to ground
communications for the air marshals, $4 million for radiation
detection equipment for air cargo and $10 million is included
for improved technology for air cargo safety and other cargo
modes.
$100 million for unrequested nuclear non-proliferation
programs. The best opportunity to stop a potential ``dirty''
bomb is to minimize the opportunity for terrorists to get
their hands on nuclear material. Funds are included to
protect fissile material abroad, purchase radiation detectors
and to establish international standards for securing fissile
material.
$108 million of unrequested funding for the Corps of
Engineers to improve security at Corps water projects.
$92 million, $82 million above the President's request for
the FBI for counter terrorism and information technology
enhancements. In total, FBI receives $175 million when cyber
security funding is included.
$50 million of unrequested funds for EPA to provide funds
to local governments to conduct vulnerability assessments on
our drinking water systems.
Examples of the remaining $273 million, most of which was
unrequested include: $12 million for security at the
Smithsonian; $17.7 million for the National Park Service for
installation of bollards at the Jefferson Memorial and an in-
ground retaining wall at the Washington Monument (requested
by the President in FY 2003); $26 million for the US
Geological Survey for high resolution mapping and imagery of
the nation's major cities for use in developing vulnerability
assessments of infrastructure and for expanded data storage
capacity; $28.5 million to expand Secret Service capacity to
combat electronic crimes; $23.6 million for the Legislative
branch for Capitol Police and for the Library of Congress to
cover part of the lost copyright fees from the slowed mail
and for costs associated with cleaning up the Hart building
after the anthrax attack; $19 million to improve response
capacity to chemical attacks and for research on the impact
of the release of toxic substances at the World Trade Center;
$15 million for improved bus safety; $7.2 million for NOAA to
develop back-up capacity for the supercomputers that support
our weather forecasting system; $17 million for security and
renovations of the Federal courts, $3 million above the
request; and $44 million for the District of Columbia and the
Washington Metro to improve security; consistent with the
congressionally-mandated District emergency operations plan
and FEMA's emergency plan for the National Capital Region,
and to construct decontamination and quarantine facilities at
Children's Hospital and the Washington Hospital Center.
The conference funding levels include $4.1 billion for the
new Transportation Security Administration, $331 million
below the request ($439 million of which is for unrequested
items highlighted under port security and airport security).
The conference funding levels also include the $87 million
President's Budget request for the Postal Service to improve
protection of postal customers and postal employees from a
bioterrorist attack, the $52 million President's Budget
request for improved security of Federal buildings and $3.8
million for the Office of Homeland Security, $1.2 million
below the President's request.

Mr. BYRD. Mr. President, I yield the floor.
The PRESIDING OFFICER (Mr. Carper). The Senator from Maryland is
recognized.
Mr. SARBANES. Mr. President, I yield 10 minutes to the distinguished
Senator from Connecticut.
The PRESIDING OFFICER. The Senator from Connecticut is recognized.
Mr. DODD. Mr. President, I thank the chairman of the committee. Let
me begin by stating that which I have said on several occasions: We are
all deeply indebted to the Senator from Maryland for the tremendous
work he has done as the chairman of the Banking Committee in fashioning
this legislation. He has worked with many of us to put this bill
together. My guess is that, within an hour or so, we will
overwhelmingly pass this bill before us. The chairman will be largely
responsible for the result.
I also commend my colleague from Wyoming, Senator Enzi, and others
who have worked very hard and have made it a bipartisan bill. Without
his leadership, I don't think that would have happened. We may have had
a partisan vote coming out of committee. That would not have bode well
for the handling of this matter on the floor. So I commend him and
others for reaching an accommodation that made this a strong, good
bill.
Mr. President, I want to take a few minutes toward the close of this
debate to urge our colleagues to be supportive of this bill, and I hope
Members of the other body will support what we have done in the Senate.
The House passed legislation a number of weeks ago, prior to a lot of
the events that have unfolded over the last 2 or 3 weeks. The argument
today for a stronger Senate bill hardly needs to be made in light of
events that occurred over the past number of days. Just today, the Dow
is down some 40 points; Nasdaq is even. But over the last week, we have
seen a continued decline in investor confidence and, of course, how
that is reflected in the stock markets.
Investors, both domestic and foreign, are losing confidence in our
financial markets. Investor trust is contagious. I also point out the
corollary to that: Investor mistrust is also contagious. What we are
watching is an erosion of trust that has begun and is almost impossible
to stop once it gets rolling. Obviously, a lot of factors will
contribute to stemming this tide of continued erosion of investor trust
and confidence.
One of the things we can do is what we are doing today. Other people
will have to add their voices to the debate. In my view, the President
still has to be stronger than he has been. The House will have to rise
to the occasion as we have endorsed in large measure what we have
accomplished here, but our step, the first step, is the one we are
taking this afternoon. Therefore, I think this is critically important.
This is not just another bill we are passing. This is far more
important. In fact, the impact of how people react may be more
important than the actual wording and language of the bill. It is
critically important we have as strong a vote as possible.
If we fail to enact serious reforms--and this bill is serious
reform--then I believe we endorse dangerous and discredited accounting
practices that we have seen in the last 7 months alone cost
shareholders and workers billions of dollars in their savings and
pensions.
The Nasdaq has fallen over 37 percent, and the Dow has fallen 17
percent since the beginning of the year. Both Nasdaq and the Dow have
dropped over 10 percent each in the past week alone. So Congress must
act today, Mr. President, and act with a very strong voice to stem the
rising tide of investor apprehension.
Passage of this bill will not and cannot of itself restore investor
confidence. More must be done to win back consumer faith, but this bill
is a critical piece of the overall effort and, therefore, it is
essentially important we adopt it.
The part of the rationale of the original securities law in the 1930s
was to increase public trust in America's financial markets and
reliability of disclosed corporate financial information. Those laws
over the past 70-plus years were a part of the modern economic
foundation of our Nation, and they were designed to promote market
efficiency and inspire investor confidence.
The resulting market confidence in the statements of financial health
of publicly traded companies has paved

[[Page S6773]]

the way for America's rise as an economic superpower.
I could make a strong case that the vote we are going to take today
is for one of the most important bills impacting the Nation's financial
markets since the 1930s. I say that because this legislation will
fundamentally change the way publicly traded companies will do business
and how the accounting profession performs its statutorily required
audit function.

Much has been said about what this legislation does not accomplish.
Briefly, I wish to focus my remarks on what it does do and repeat, we
are not solving every problem with this bill. There are a lot of other
issues that need to be addressed, but we have to begin the process, it
seems to me, by getting the accounting part of this equation right, and
we will not know ultimately whether we have done all we could, but I
think this is a major step in that direction.
The bill, we now know, creates a new independent regulator for the
accounting profession. The new body will act as a strong, independent,
full-time board with significant authority to regulate auditors of
public companies. The independent board will have clear authority for
setting auditor standards and important investigative standards. It
strengthens audit reporting standards for the accounting profession and
contains significant prohibitions for accountants performing nonaudit
services for audit clients, and it addresses the growing conflicts of
interest that have been too pervasive throughout the accounting
profession.
It provides for the first time an independent funding source for the
Financial Standards Accounting Board, which I think is also extremely
important and one of the major reforms in this bill.
There are additional dollars to provide the SEC with more firepower,
if you will, to have more cops on the street so we might avoid some of
the problems that have occurred in the past.
It also improves corporate governance requirements and improves
corporate disclosures. The bill grants additional authority and
responsibility to the audit committees of publicly traded companies.
Those are very important steps. The provisions contained in the
legislation were carefully considered. We had 10 hearings, and by a
vote of 17 to 4, the committee--the Presiding Officer being one--passed
out this very fine legislation.
Additionally, during floor consideration of this bill, Senator Leahy
of Vermont added new criminal penalties for securities fraud. I commend
him and strongly endorse the provision that won the overwhelming
support of the Members. I hope it will add to our efforts of restoring
investor confidence.
One of the last issues I would like to address, because it has been
talked about so much, is the stock options issue, which involved a lot
of debate and discussion of the last number of days. I commend our
colleague from Michigan, Senator Levin, who has made an extraordinary
effort to find a resolution to this issue we all can support.
Obviously, this question inspires more questions than answers in many
ways, but I commend him for his thoughtfulness and energy that he has
brought to this debate.
The issue of whether or not stock options should be expensed is not
an issue that is going to go away. It has to be addressed. I must
admit, I am swayed by those who have a great deal of expertise in this
area: Alan Greenspan, Warren Buffett, Paul Volcker, all of whom support
the expensing of stock options.
I also recognize the danger when Congress begins the process of
legislating accounting standards.
My friend from Texas and I have been involved in the past when there
have been efforts by people who wanted to have us vote on some of these
matters. I recall 3 or 4 years ago the debate was over pooling and
purchasing accounting standards. I was very sympathetic to the
arguments made by those advocating pooling. Certainly, if I were a
member of FASB, I think I would have voted to allow that accounting
standard to go forward, but the idea that the Senate might vote by 51
to 49 to pick one accounting standard over another is just ludicrous on
its face. We do not want to set a precedent, in my view, of the
Congress of the United States deciding what accounting practices ought
to be. That is why we set up these boards to do the job.

The approach taken by having the Accounting Standards Board, the SEC,
and others look at these matters and get back to us with their
recommendations is the appropriate and proper way to go. Despite the
temptation of others to want to legislate these matters explicitly on
the floor, I remind my colleagues who have done that in the past, we
inevitably regret doing it when we set precedents such as those and are
only duplicated by other ideas that temporarily may be very popular,
may be politically attractive, but may be terrible economics as well.
I applaud the effort to approach the stock option issue in the manner
in which it has been addressed. I mentioned Senator Enzi. I mentioned
my colleague from Texas as well. He and I worked many years on a lot of
matters affecting the financial services sector of our economy. He does
not have that many days left with us, and I am going to miss him. I
told him that privately, and I tell him publicly that he is a valued
Member of this institution. Whether we agree or disagree on matters he
always brings a great deal of thought to the debate. He has been a fine
member of the Banking Committee, and I have enjoyed my service with him
for many years. I do not want to be too complimentary. I will reserve
any final glowing accolades for when we have completed the process. We
have a conference to go through yet.
Again, my compliments to Senator Sarbanes.
What we are doing is important. This is extremely important
legislation. I said earlier it may be more important what message it is
we are sending; that we are not sitting in the bleachers, we are not
just standing by as these events unfold. All Members of this Chamber
can take great pride that the Senate of the United States has responded
with a responsible bill we think is going to make a difference. I yield
the floor.
Mr. SARBANES. What is the time situation?
The PRESIDING OFFICER. The Senator from Maryland controls almost 14
minutes, and the Senator from Texas controls just under 12 minutes.
Mr. SARBANES. I yield 4 minutes to the Senator from Missouri.
The PRESIDING OFFICER. The Senator from Missouri is recognized for 4
minutes.
Mrs. CARNAHAN. Mr. President, my amendment requires that when
corporate insiders, such as CEOs, trade the stock of the companies they
manage, they must take reasonable steps to disclose those transactions
to their shareholders. Current law requires that insiders file
disclosure forms with the Securities and Exchange Commission. However,
almost all of these forms are filed on paper and average investors have
no practical way of seeing these disclosures. My amendment requires
that these disclosure forms be filed electronically and that the SEC
make these disclosures available to the public over the Internet.
This amendment also requires that corporations disclose insider
transactions on their own Web sites. Investors have a right to know if
corporate officers are dumping their stock. However, it is meaningless
to require these disclosures if investors have no practical way of ever
seeing these disclosures. Without this amendment, the disclosure forms
simply sit in a file cabinet at the SEC in Washington. My amendment
ensures that investors have access to this important information.
In the 3 years leading up to its bankruptcy, as Enron's top officers
touted the company's stock, they sold more than $1.1 billion worth of
their own holdings. Ken Lay alone sold more than $100 million worth of
Enron stock while telling others to buy it. Enron's vice president of
human resources, Cindy Olsen, was asked by employees if they should
invest 100 percent of their retirement funds in Enron. She replied:
``Absolutely.'' But within 3 months she personally unloaded $1 million
worth of Enron stock. Had Enron employees only known, they might have
been skeptical about this advice.
Investors are entitled to know how executives are acting with their
own shares of their company's stock, and my amendment will ensure they
will.
I yield my remaining time back to the Senator from Maryland.

[[Page S6774]]

The PRESIDING OFFICER. Who yields time?
Mr. GRAMM. Mr. President, I yield 8 minutes to Senator Enzi, and
might I say on my time, not his 8 minutes, that I want to thank Senator
Enzi for his contribution to this bill, for his work from beginning to
end. He has been a major contributor to the bill. He has proven that
knowledge sometimes is a nice thing to have.
Our standard in Washington for objectivity is that you came in off
the turnip truck and you know absolutely nothing and therefore you are
objective, but I would say that Senator Enzi proves that it is nice
every once in awhile to have somebody who knows what he is talking
about. I think in many ways, large and small, the good things in this
bill he has had a very positive impact on and the bad things in the
bill he could not do anything about anyway--that was a joke, I would
say to the Senator from Maryland.
In any case, I do want to congratulate Senator Enzi for all the
contributions he has made.
The PRESIDING OFFICER. The Senator from Wyoming is recognized for 8
minutes.
Mr. ENZI. I thank the Senator from Texas for his gracious comments.
It has been mentioned several times today that there is nervousness
in the stock market. There has been since we started debating this
issue. I am very convinced that some of that is because people may read
some of the amendments that have been suggested and recognize the
legislative principle that, if it is worth reacting to, it is worth
overreacting to. That ought to be enough to scare anybody.
We have had extensive debate. In fact, one reporter I talked to asked
me if we were going to pass the McCain bill. The reporter talked about
the accounting reform, and I had to say, no, that is the Sarbanes bill
we have been working on. It is not stock options, in spite of the
threat we had the other day.
We usually do bills the way we have done this one--with a lot of
cooperative talk. We then make arrangements to develop the best
possible outcome. The accounting reform bill before us is designed in
such a way that we set up processes that people with accountability and
responsibility and knowledge have to oversee. This bill does not tell
them exactly how to do the details of accounting. It gives a fair
process for accountants to be able to do the details of accounting.
In past years, we have decided we knew more than the people who had
the expertise in the area of accounting and we have given them
direction on how to do it. We almost made that mistake again. For
instance, the McCain amendment was very simplistic. In one paragraph it
told people how to do accounting that may actually take about 500 pages
to explain. It would have caused the most massive restatements in the
history of the United States, and restatements right now make everybody
nervous. People ought to realize that some restatements are caused by
changes in rules, not by people doing things wrong. So investors should
always review restatements and determine the actual cause. I certainly
hope it is never Congress, but I suspect it very well could be.
Another proposal that was going to be put before us was one telling
FASB, this Financial Accounting Standards Board, exactly what they were
supposed to examine next and what they were supposed to resolve in the
next year. I have to say, FASB is working on some important things
because they have been examining what Congress has been debating and
they know in greater detail than we do what caused the massive
restatements. I have to say, I do not believe it was stock options. It
was likely a number of other things that need to be investigated.
This Financial Accounting Standards Board is diligently looking at
these issues. They are looking at some high-profile rules in the areas
of accounting for intangibles and accounting for special purpose
entities. We have talked a lot about special purpose entities, and our
hearings showed that they may have been a cause for the Enron collapse.
Also, they are looking at accounting for guarantees and examining a
final rule on liabilities and equity. They are also studying whether to
create a rule on revenue recognition.
Those five things probably put one to sleep, but they are important
to have resolved to make sure we do not have problems with companies in
the future. We have to be careful now and in the days to follow that we
ensure we use all of FASB's expertise, knowledge, and staff to resolve
high publicity problems of accounting.
In this bill, we have made the Financial Accounting Standards Board
more independent. We have provided them with independent funding so
they no longer must beg for donations and perhaps encounter a conflict
of interest. Through this process, we should not insert ourselves and
say we are going to tell them exactly what is important.
I would like to thank Senator Sarbanes and Senator Gramm for the
extraordinary work they have put into the process. Last week was an
extremely difficult week. I thank them for the careful work and review
they have done on every single one of the amendments that has been
submitted, and the process they established to make sure this bill
would not get out of hand, that it would not be an overreaction, and
that when we finish it tonight and we can reassure America it is still
okay to invest in the stock market.
We are fortunate on the Banking Committee to have these two people I
consider to be the finest public servants in Congress. They have worked
long and hard to assure that the product that came out was bipartisan
and reflected the views of as many Members as possible. I also thank
the members of the staff who worked diligently on the bill.
From my own staff, Katherine McGuire, Kristi Sansonetti, and Michael
Thompson. From Senator Gramm's staff, Wayne Abernathy, Linda Lord,
Stacie Thomas, and Michele Jackson. And from Chairman Sarbanes' staff,
Steve Harris, Steve Kroll, Dean Shahinian, Marty Gruenberg, and Lindsey
Graham and Vince Meehan. All of these staffers have spent many late
nights and weekends working to build this legislation.
This legislation is badly needed. The markets have been in a steady
decline for several months now. While I do not believe it is
Washington's job to step in every time the market is in a decline, I do
believe that when markets move as a reaction to illegal or unethical
acts, then we have obviously not made penalties severe enough to
dissuade this type of behavior. Congress had to act in this climate.
However, I would also like to comment on a few things happening
outside of the real debate--namely the attacks on SEC Chairman Harvey
Pitt. I have to say that Chairman Pitt and I may not always agree, but
I believe the recent attacks on him to be unwarranted. Mr. Pitt has
come under fire for having represented some of the accounting firms who
have been criticized in recent restatements. I believe Chairman Pitt's
work in the private sector is a great asset to investors. We need
individuals who are willing to work in government who know and
understand the industries they regulate. I do not want lifelong
government bureaucrats monitoring these companies.
These restatements did not all of a sudden appear when Chairman Pitt
was confirmed. In most cases, they begun during the late 1990s when
companies became intent on not seeing the Internet bubble burst. I have
to ask what was going on at the SEC while these companies were filling
all of these false financial statements? What I imagine happened was
that the companies, who are very familiar with who is at the Commission
and where the resources are being devoted, thought they could take
advantage of the situation because no one was paying attention.
Look at what has happened since Chairman Pitt has taken office. He
has opened a record number of investigations of restatements filed by
public companies. He has taken steps to break the relationship between
research analysts and investment bankers. He has supported legislation
that will increase penalties on corporate executives engaged in
fraudulent behavior. And, he has indicated his support of this
legislation, which by the way, I anticipate to be supported by the
majority of the Senate later today.
The numbers are clear. In Chairman Levitt's last year as Chairman,
503 total enforcement actions were filed. Already this year, Chairman
Pitt has

[[Page S6775]]

filed 415. Officer and Director Bars for 2000 were 38--this year so far
71. Subpoenaed enforcement proceedings in 2000 were 9--this year 18.
The numbers go on and on. My point is that Chairman Pitt seems to be
left cleaning up the mess his predecessor left in corporate America.
I offer my support for these actions taken by Chairman Pitt. Instead
of attacking him, I am more concerned about what was happening at the
SEC that bred this climate where executives felt compelled to engage in
this unethical behavior. Why weren't some of these actions taken three
or four years ago? Did the SEC Chairman not see the potential conflicts
that could arise out of research analysts getting compensation based on
investment banking business?

Therefore, I would say that I commend Chairman Pitt for the work he
is doing. From what I understand, the actions he is taking at the SEC
have struck fear throughout the corporate community that they had
better get their act together.
This legislation before us now will also go far in restoring faith in
the markets. It will provide assurances to investors that we will not
sit by and watch executives shatter the retirement dreams of workers
while leaving themselves with millions of dollars. It will show the
American people that we will work to make financial statements
transparent and accurate to make sure they know as much about the
company's financial state as possible.
The legislation builds an accounting oversight board to oversee the
accountants who prepare financial statements of public companies. This
board will have broad authority to enforce and discipline rules by
which accountants must live. The board will have full access to
accounting firms' records and policies to require uniformity throughout
the industry when it comes to ethics and independence. Accountants must
know that someone is watching over them to require that their work is
in the best interest of investors. This legislation will also provide
for the SEC to have the resources they need to enforce the law.
However, I also do not want this legislation to provide a payday for
the trial lawyers. The competitiveness of the accounting industry is at
stake and we can ill afford to lose another firm solely because we
didn't offer proper protections in this legislation. I am in no way
indicating that accounting firms should have new, special protections.
The only thing I am asking is that accounting firms aren't exposed to
more liability after this bill is enacted than they were before.
I am not sure some Members truly understand the situation facing
accounting firms. We are down to the final four firms. These are the
only firms that have the expertise and resources to audit companies
such as Microsoft, Coca Cola, and the thousands other large companies.
If we subject them to the will of the trial bar, it will only be a
matter of time before we lose the rest of the firms one by one.
I know that, given what has happened recently with the restatements,
it is easy to be critical of accountants and easy to legislate them. I
agree we do need legislation, but what also needs to be understood is
that overlegislating could be drastic to the economy. In the long run,
if we overlegislate, it could be detrimental for the future of capital
formation in this country.
Once again, I thank the Chairman for all of the work he and his staff
have done with this legislation. I think it is a good bill, and I do
intend to support it. I also think it will continue to improve through
the Conference process and when all is said and done, investors will
respond positively to passage of this legislation.
I wish to speak about the Financial Accounting Standards Boards,
known as FASB, which has been referenced many times throughout the
course of discussion on the underlying accounting bill, the Public
Company Accounting Reform and Investor Protection Act of 2002.
Some of the pending amendments have referenced FASB and directed or
mandated it to change how companies must expense stock options or to
perform a study on how to expense stock options. In addition, the
McCain amendment sets the accounting standard for expensing stock
options, without allowing FASB to set rules on this form of expensing.
The Levin amendment mandates FASB conduct a one-year study on expensing
stock options, and then adopt a rule based on a narrow set of external
parameters. The Levin amendment implicates a desire to have such
expensing done.
In order to understand some of the problems with these types of
amendments, it is important to understand exactly what FASB does. Since
1973, FASB has been the designated organization in the private sector
for establishing standard of financial accounting and reporting. In
short, those standards govern the preparation of all financial reports.
The mission of FASB is ``to establish and improve standards of
financial accounting and reporting for the guidance and education of
the public, including issuers, auditors and users of financial
information.''
To accomplish this mission, FASB acts to improve the usefulness of
financial reporting; keep standards current to reflect changes in the
methods of doing business and the economic environment; consider any
significant areas of deficiency in financial reporting; promote the
international convergence of accounting standards together with
improving the quality of financial reporting; and improve the common
understanding of the nature and purposes of information contained in
financial reports.
FASB follows certain precepts in its activities. One is to be
objective in its decision making. Another is to carefully weigh the
views of its constituents in developing concepts and standards. But its
ultimate determination must be the Board's, based on research, public
input and careful deliberation. It also aspires to promulgate standards
only when the expected benefits exceed the perceived costs.

Overall, FASB was created to serve as an independent agency with an
independent agenda. However, FASB is currently funded by companies and
accounting firms. The long standing concern was that FASB did not act
wholly independently, and succumbed to industry pressures in order to
get the funding it needed to operate. Back in 1993 and 1994, when
expensing of stock options was an issue, some critics say FASB
succumbed to pressure by industry and Congress when it created a dual
method of either expensing stock options at the time of grant, or
placing the information in a footnote as a form of public disclosure of
possible stock dilution.
The underlying accounting reform bill fixes this perceived problem of
independence and autonomy by providing FASB with funding from both
issuers and the accounting firms. Because of this change, FASB will be
completely independent from the very companies it will set standards
for in the future. This is a good start.
It is also important to understand that, historically, FASB has never
been directed by Congress through legislation to adopt one particular
standard for accounting, including expense accounting. It has also
never been directed by Congress to perform a study. FASB's role is not
to perform studies for Congress and they should not be bogged down
performing them for political purposes.
Following that precedent, the Senate Banking Committee made certain
nothing in the bill directs FASB to take any particular action. In
other words, there is no federal mandate to FASB, nor should there be,
if it is to remain an independent authority. In addition, why should
Congress, a body without expertise in accounting standards for
publically traded companies, set these standards?
I, and many other members, as well as Federal Reserve Chairman, Alan
Greenspan, believe that Congress has no business setting accounting
standards. Instead, the Securities and Exchange Commission and FASB are
the entities with the expertise needed to make these types of
determinations.
Ordinarily, FASB establishes plans with milestones it works towards.
Congress should not dictate what plans and milestones it should work
towards or address. FASB also never sets artificial deadlines on when
to reach a conclusion. As an independent agency, it carefully and
deliberately makes its determinations and sets rules, without adhering
to outside pressures or timetables. Just as Congress should not set

[[Page S6776]]

accounting standards for FASB to follow, it also should not set
artificial deadlines for FASB to adhere to either.

Nevertheless, some members have filed amendments asking FASB to not
only take a specific action, but instructing it as to a specific
timetable. One amendment actually sets an accounting standard, thereby
instructing FASB to immediately change expensing standards. Another
mandates FASB complete an expensing study within a year. These
amendment set unrealistic timetables and mandates.
It is important to remember that FASB already has its hands full with
important projects to help improve financial standards and reporting.
It is currently working towards promulgating high profile rules in the
areas of accounting for intangibles; accounting for special purpose
entities; accounting for guarantees; and a final rule on liabilities
and equity. FASB has also added to its agenda a project to research and
create a rule on revenue recognition.
Let us not forget that the improper use of special purpose entities
played a role in the downfall of Enron. Stock options had nothing to do
with Enron's bankruptcy.
The projects FASB is concentrating on are important projects which
will help clarify financial statements for investors. FASB itself needs
to cue up and prioritize its projects based on what is more important
to financial accounting and reporting. Congress should not dictate what
those priorities should be or the timetable it must adhere to.
If some of the amendments we are looking at are accepted, Congress
will establish a bad precedent of setting up a timetable and
prioritizing projects for FASB. Congress will be putting stock option
expensing--an accounting standard which did not cause the collapse of
Enron or the demise of other big companies--at the front of the cue.
And another question we need to ask ourselves is whether FASB has the
manpower to perform the mandates and timetables Congress would be
providing through the McCain and Levin amendments. Already, FASB is
shifting its personnel to different projects to try to timely
promulgate needed rules. While the underlying accounting bill will help
these staffing problems by providing independent funding, in the short
term, FASB cannot possibly perform the mandates of some of the
amendments within the time frames given.

I hope I have given members some solid reasoning on why Congress
should not begin setting accounting standards. Should we really be
doing something we do not fully understand? There are already agencies
to perform this type of rulemaking, and they are the SEC and FASB. They
are fully aware of the debate surrounding stock options. We don't need
to mandate FASB to make a new rule. I am certain if FASB deems it
appropriate, it will be looking at this issue in the future.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. Mr. President, I yield 4 minutes to the junior Senator
from North Dakota.
Mr. DORGAN. Mr. President, in the final moments, I hope again to
persuade my colleagues to accept by unanimous consent my amendment
dealing with corporate bankruptcy. Let me again say what this amendment
is.
It says that during the 12 months preceding a bankruptcy, CEOs who
have received stock options, bonuses and other performance-based
payments shall not be able to keep that kind of compensation. If they
ride a company down to bankruptcy, they know the inside details of that
company and got incentive-based compensation, including stock options,
they ought not ride off in the sunset with a pocketful of gold while
the employees and investors lose everything they have. That is not the
right thing. A bankruptcy disgorgement proposal ought to be part of
this bill. Everyone in this Chamber knows it should be part of this
bill. Former SEC Chairman Breeden, a Republican, says it ought to be in
this bill. I quoted other CEOs who say it should. Pass this bill
without it and this bill is incomplete.
My colleague said he thought maybe the market, which has been so
volatile recently, has been frightened by amendments that have been
considered by Congress. I don't think so. I think the market has been
volatile, up and down like a yo-yo, because we have story after story
on the news in this country about financial crooks. These are crooks
who have cooked the books of their corporations, cheated investors,
pulled the rug out from under their employees, and ruined some good
companies. They did it in broad daylight, under the nose of their
accounting firms and law firms.
It seems to me those CEOs who made millions, in some cases over $100
million prior to bankruptcy, ought to give that money back. That money
ought to go to help those who lost their live savings and those who
lost their jobs.
We have in this bill a provision that says if there is a restatement
of earnings, you have to give back some of these incentive-based
compensation packages. However, the bill is silent on the issue of
bankruptcy. What about top executives who ride their company right into
the ground and run off with $50 million in their pockets and leave
everyone else flat on their back? How about asking those executives to
disgorge themselves of their ill-gotten gains? How about telling them
in this legislation that they must give that money back? That is what
my amendment would do.
I want to talk about the SEC, but I don't have time at the moment. I
will save that for another day.
This process has been a travesty of the Senate, in my judgment,
having someone as a gatekeeper and preventing us from bringing up
germane amendments. It does not make sense. That is not the way the
Senate is supposed to work.
I ask unanimous consent to lay aside the Edwards and Carnahan
amendments so I may offer amendment 4214 on bankruptcy disgorgement.
Mr. GRAMM. I object.
The PRESIDING OFFICER. The Senator from North Dakota.
Mr. DORGAN. How much time remains?
The PRESIDING OFFICER. Forty seconds.
Mr. DORGAN. Mr. President, this is, of course, the last chapter on
amendments, and a pretty sad book. I know people will go up to the
gallery--and I understand someone is at a press conference from the
other side--claiming credit for this bill. I want to know who wants to
run up to the press conference and claim credit for preventing an
amendment that says you must disgorge ill-gotten gains, incentive-based
compensation, if you ran a company into bankruptcy. I want somebody to
go to the press gallery and take credit for blocking that kind of
legislation. Tomorrow I want to read about it. Who takes credit?
Someone ought to take credit for blocking an amendment that ought to be
passed in the Senate by a 100 to zero vote.
The PRESIDING OFFICER. Who yields time?
Mr. GRAMM. Mr. President, I will not get into a debate with the
Senator. There is nothing ill-gotten in this amendment. This amendment
does not belong in this bill.
We have a provision in this bill. If you violate the law, then you
have to give back what you have earned from the company in terms of any
kind of incentive in bonus.
But to say that people who work for a company that goes bankrupt has
to give back compensation is to guarantee that a company that is in
trouble would never get anybody to go to work for them. They would
never have an opportunity to be saved. That amendment does not belong
in this bill. It makes no sense in the logic.
Mr. DORGAN. Will the Senator yield?
Mr. GRAMM. I will not yield.
If you did something wrong, making you give back what you earned
belongs in this bill. And it is in this bill. Not only belongs, it is
here.
But to simply say because somebody worked for a company that goes
broke, that they have to give back compensation, that sounds great in
the environment we are in, but, look, I have a company, we are in deep
trouble, and we try to go out and hire a top-notch person to come in
and save us, and we pay him a compensation to try to do it. To say we
will take it back if he fails, as if that is an ill-gotten gain, I am
sorry, I don't think that is good economic policy. I don't think it is
smart. It has nothing to do with the provisions of this bill.
Mr. DORGAN. Mr. President, perhaps the Senator from Texas would like
a explanation.

[[Page S6777]]

Mr. SARBANES. I yield 1 minute.
Mr. DORGAN. I deeply appreciate the Senator from Maryland yielding.
What the Senator from Texas misses is we are talking about incentive-
based compensation. Should someone who gets incentives for running the
corporation into bankruptcy be able to keep that? I don't think so for
somebody that gets a big bonus while he runs the company into
bankruptcy, or for someone that gets big stock options while she runs
the company into bankruptcy.
The Senator tried to win a debate we were not having. He says we will
take compensation away from someone who is engaged in working for a
corporation that went into bankruptcy. No, this is about incentive-
based compensation and profits. It is not about taking away their
salary. It is about saying if you are paid on an incentive basis and
you are running that corporation into bankruptcy, you ought not to be
getting the bonus. If you did, you ought to give it back. You ought not
get stock options; if you did, you ought to give it back.
This is simply about something my friend has missed. It is about
incentive-compensation and the fact that you ought not walk out of a
corporation you ran into bankruptcy with a pocketful of gold while you
left the employees and the investors flat on their back. This is not an
amendment that is hard to understand.
I regret very much it has been blocked. I regret especially we were
not allowed to vote on this amendment. That is the travesty, in my
judgment.
Mr. GRAMM. Mr. President, I think you could debate whether the
amendment is understood or not. I think I understand it perfectly. In
fact, there are people in this country who are turnaround specialists,
who are hired to try to save companies. If somebody did something
wrong, if they violated the law, then make them give back
compensation. You put them to death, if you want to put them to death.
But to simply say, if you hire somebody with an incentive package to
save the company, and the company goes broke, that you are going to
take it back, that is up to the bankruptcy court to decide.

So this ill-gotten gain business is good rhetoric, but it has
absolutely nothing to do with this amendment. I reserve the remainder
of my time.
The PRESIDING OFFICER. Who yields time? Just 29 seconds remain to the
Senator from Texas, and 5\1/2\ minutes remain to the Senator from
Maryland.
Mr. SARBANES. Mr. President, what is the time situation?
The PRESIDING OFFICER. The Senator from Maryland has 5 minutes
remaining, the Senator from Texas has 30 seconds.
Mr. GRAMM. Mr. President, the Senator from Maryland should have the
right to end the debate.
I think we have two bills: One in the Senate, one in the House. We
can come up with a better bill than either. I think America will
survive under either bill. Given the environment we are in, that
represents some achievement, and I am proud of it.
I think we will come out of conference with a better bill than the
House bill and a better bill than the Senate bill. I think people will
be proud of what we did.
If I were an investor today, and I had a lot of money, I would invest
in the stock market today.
The PRESIDING OFFICER. The time of the Senator has expired. The
Senator from Maryland has 4 minutes 45 seconds remaining.
Mr. SARBANES. Mr. President, we have been trying to clear amendments.
We have yesterday--not yesterday, but on Friday we adopted three
amendments on the basis of a unanimous consent request. We have worked
through two additional amendments. I am going to offer them now.
One is an amendment by Senator Shelby for a study with respect to
aider and abettor violations of the Federal securities law. I ask
unanimous consent that the pending amendment be set aside; that the
Shelby amendment, No. 4261, be called up and modified with a
modification that I send to the desk; that the amendment as modified be
agreed to; and then we then return to the regular order which, as I
understand it, would be the Edwards as modified by the Carnahan
amendment.
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.

Amendment No. 4261, As Modified

Mr. SARBANES. I send the amendment to the desk.
The PRESIDING OFFICER. The clerk will report.
The bill clerk read as follows:
The Senator from Maryland (Mr. Sarbanes) for Mr. Shelby, proposes an
amendment numbered 4261, as modified.
The amendment is as follow:

(Purpose: To require the SEC to conduct a study and submit a report to
the Congress on aider and abettor violations of the Federal securities
laws)

On page 108 after line 15, insert the following:
``(c)(1) The Commission shall conduct a study to determine
based upon information for the period from January 1, 1998 to
December 31, 2001--
``(A) the number of ``securities professionals,'' which
term shall mean public accountants, public accounting firms,
investment bankers, investment advisers, brokers, dealers,
attorneys, and other securities professionals practicing
before the Commission--
``(i) who have been found to have aided and abetted a
violation of the Federal securities laws, including rules or
regulations promulgated thereunder (hereinafter collectively
referred to as ``Federal securities laws''), but who have not
been sanctioned, disciplined, or otherwise penalized as a
primary violator in any administrative action or civil
proceeding, including in any settlement of such actions or
proceedings (referred to hereinafter as ``aiders and
abettors'') and
``(ii) who have been found to have been primary violators
of the Federal securities laws;
``(B) a description of the Federal securities laws
violations committed by aiders and abettors and by primary
violators, including--
``(i) the specific provisions of the Federal securities
laws violated;
``(ii) the specific sanctions and penalties imposed upon,
such aiders and abetters and primary violators, including the
amount of any monetary penalties assessed upon and collected
from such persons;
``(iii) the occurrence of multiple violations by the same
person or persons either as an aider or abetter or as a
primary violator; and
``(iv) whether as to each such violator disciplinary
sanctions have been imposed, including any censure,
suspension, temporary bar, or permanent bar to practice
before the Commission; and
``(C) the amount of disgorgement, restitution or any other
fines or payments the Commission has (i) assessed upon and
(ii) collected from aiders and abetters and from primary
violators.
``(2) A report based upon the study conducted pursuant to
subsection (c)(1) shall be submitted to the Senate Committee
on Banking, Housing, and Urban Affairs no later than six
months after the date of enactment of the ``Public Company
Accounting Reform and Investor Protection Act of 2002.''.
Page 78 strike lines 15-24 and insert the following:
In supervising non-registered public accounting firms and
their associated persons, appropriate State regulatory
authorities should make an independent determination of the
proper standards applicable, particularly taking into
consideration the size and nature of the business of the
accounting firms they supervise and the size and nature of
the business of the clients of those firms. The standards
applied by the Board under this Act should not be presumed to
be applicable for purposes of this section for small and
medium sized nonregistered public accounting firms.

The PRESIDING OFFICER. Without objection, the amendment as modified
is agreed to.
The amendment (No. 4261), as modified, was agreed to.
Mr. SARBANES. Was the Ensign amendment also on that amendment?
I urge the adoption of the amendments.
The PRESIDING OFFICER. The amendments have been agreed to.
Mr. SARBANES. Mr. President, I move to reconsider the vote.
Mr. GRAMM. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. SARBANES. Mr. President, in the regular order we are back with
the Edwards and Carnahan amendments pending?
The PRESIDING OFFICER. That is correct.
Mr. SARBANES. I have a couple of minutes?
The PRESIDING OFFICER. There remains 1 minute.
Mr. SARBANES. Mr. President, I think the Senate is about to take a
major step to contributing to the restoration of investor confidence.
This legislation establishes a strong independent board to oversee
auditors

[[Page S6778]]

of the public companies. The board can set standards, investigate, and
discipline accountants. It will be overseen by the SEC, but it will
have independent funding and membership. I think this marks the end of
weak self-regulation with respect to public company auditors.
It addresses pervasive conflicts of interest by ensuring auditor
independence by restricting them from providing a defined list of
consulting services. Other consulting services on the part of the
auditor can be permitted if preapproved by the company's audit company.
This legislation strengthens corporate responsibility. It establishes
safeguards to protect investment/analyst conflicts, and it gives the
SEC expanded staff resources so it has the resources to carry out its
mandate of protecting investors in this critical time.
It is no exaggeration to say the crisis in our markets has put the
plans and hopes and dreams of millions of Americans at risk. To restore
market integrity on which investor confidence depends, we should move
expeditiously to move this legislation into law.
I want to express my deep appreciation to my colleagues with whom we
have worked for many weeks: To Senator Gramm, the ranking member of the
committee with whom we interact in an interesting and, on occasions,
exciting fashion; to Senator Enzi, who made a major contribution; to
Senators Dodd and Corzine on our side of the aisle who played an
essential role and introduced vital legislation on this issue very
early on; to Senator Durbin who also introduced significant legislation
on this subject, and to many other colleagues; and to Senator Reid, who
has been extraordinarily helpful here on the floor of the U.S. Senate.
Mr. REID. Mr. President, I ask unanimous consent the 1 minute Senator
Carnahan has--she is not going to be using it--that it be given to the
Senator from Maryland.
The PRESIDING OFFICER. The Senator from Maryland has an additional
minute.
Mr. SARBANES. Mr. President, we don't do this work by ourselves. We
all know that very well. We rely very heavily on dedicated, absolutely
dedicated staff members. I am going to take the closing time I have to
simply read their names into the Record: Dean Shahinian, Steve Kroll,
Lynsey Graham, Vincent Meehan, Sarah Kline, Judy Keenan, Jesse Jacobs,
Aaron Kline, Marty Gruenberg and Steve Harris of the Banking Committee
staff; Wayne Abernathy and Linda Lord of Senator Gramm's staff on the
committee. There has also been the staff of the individual Members.
I particularly want to acknowledge Mike Thompson and Katherine
McGuire of Senator Enzi's staff, and Alex Sternhell and Naomi Camper,
Jon Berger, Jimmy Williams, Catherine Cruz Wojtasik, Leslie Wooley,
Margaret Simmons, Mat Young, Roger Hollingsworth and Matt Pippin.
I express my very deep appreciation. The dedication these staff
members demonstrated over the last few months was just extraordinary:
Long nights, weekends, day in and day out. I hope very much they will
take a measure of satisfaction in the sense that they have made a very
important and significant contribution to better public policy in this
country.
I yield the floor.

Vote On Amendment No. 4286

The PRESIDING OFFICER. All time has expired. The question is on
agreeing to amendment No. 4286. The yeas and nays have been ordered.
The clerk will call the roll.
Mr. NICKLES. I announce that the Senator from Idaho (Mr. Craig), the
Senator from Idaho (Mr. Crapo), and the Senator from North Carolina
(Mr. Helms) are necessarily absent.
The result was announced--yeas 97, nays 0, as follows:

[Rollcall Vote No. 174 Leg.]

YEAS--97

Akaka
Allard
Allen
Baucus
Bayh
Bennett
Biden
Bingaman
Bond
Boxer
Breaux
Brownback
Bunning
Burns
Byrd
Campbell
Cantwell
Carnahan
Carper
Chafee
Cleland
Clinton
Cochran
Collins
Conrad
Corzine
Daschle
Dayton
DeWine
Dodd
Domenici
Dorgan
Durbin
Edwards
Ensign
Enzi
Feingold
Feinstein
Fitzgerald
Frist
Graham
Gramm
Grassley
Gregg
Hagel
Harkin
Hatch
Hollings
Hutchinson
Hutchison
Inhofe
Inouye
Jeffords
Johnson
Kennedy
Kerry
Kohl
Kyl
Landrieu
Leahy
Levin
Lieberman
Lincoln
Lott
Lugar
McCain
McConnell
Mikulski
Miller
Murkowski
Murray
Nelson (FL)
Nelson (NE)
Nickles
Reed
Reid
Roberts
Rockefeller
Santorum
Sarbanes
Schumer
Sessions
Shelby
Smith (NH)
Smith (OR)
Snowe
Specter
Stabenow
Stevens
Thomas
Thompson
Thurmond
Torricelli
Voinovich
Warner
Wellstone
Wyden

NOT VOTING--3

Craig
Crapo
Helms
The amendment (No. 4286) was agreed to.
Mr. DASCHLE. I move to reconsider the vote.
Mr. GRAMM. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The PRESIDING OFFICER (Mrs. Lincoln). The majority leader.
Mr. DASCHLE. Madam President, under an earlier agreement, the next
four votes will all be 10-minute votes. I urge Senators to stay in the
well. We are going to cut it off at 10 minutes. If you are not here in
10 minutes, you have lost the opportunity to vote. I urge Members to
move forward, and we will take on the next vote.

Vote on Amendment No. 4187, As Modified, As Amended

The PRESIDING OFFICER. The question is on agreeing to amendment No.
4187, as modified, as amended.
The yeas and nays have been ordered. The clerk will call the roll.
The assistant legislative clerk called the roll.
Mr. NICKLES. I announce that the Senator from Idaho (Mr. Crapo), the
Senator from Idaho (Mr. Craig), and the Senator from North Carolina
(Mr. Helms) are necessarily absent.
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 97, nays 0, as follows:

[Rollcall Vote No. 175 Leg.]

YEAS--97

NOT VOTING--3

Craig
Crapo
Helms
The amendment (No. 4187), as modified, as amended, was agreed to.
Mr. SARBANES. Madam President, I move to reconsider the vote.
Mr. DASCHLE. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The PRESIDING OFFICER. The question is on engrossment and third
reading of the bill.
The bill was ordered to be engrossed for a third reading and was read
the third time.
The PRESIDING OFFICER. The Senator from Maryland is recognized.
Mr. SARBANES. Madam President, I ask for the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The bill having been read the third time, the question is, Shall it
pass?
The clerk will call the roll.
The legislative clerk called the roll.
Mr. NICKLES. I announce that the Senator from Idaho (Mr. Crapo), the
Senator from Idaho (Mr. Craig), and

[[Page S6779]]

the Senator from North Carolina (Mr. Helms) are necessarily absent.
I further announce that if present and voting the Senator from North
Carolina (Mr. Helms) would vote ``yea''.
The result was announced--yeas 97, nays 0, as follows:

[Rollcall Vote No. 176 Leg.]

YEAS--97

NOT VOTING--3

Craig
Crapo
Helms
The bill (S. 2673), as amended, was passed.
Mr. SARBANES. Madam President, I move to reconsider the vote.
Mr. GRAMM. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The PRESIDING OFFICER. Under the previous order, the Banking
Committee is discharged from further consideration of H.R. 3763, which
the clerk will report by title.
The legislative clerk read as follows:

A bill (H.R. 3763) to protect investors by improving the
accuracy and reliability of corporate disclosures made
pursuant to the securities laws, and for other purposes.

The PRESIDING OFFICER. Under the previous order, all after the
enacting clause will be stricken and the text of S. 2673, as passed, is
inserted in lieu thereof.
The question is on the engrossment of the amendment and third reading
of the bill.
The amendment was ordered to be engrossed and the bill to be read a
third time.
The bill was read the third time.
The PRESIDING OFFICER. The bill having been read the third time, the
question is, Shall the bill pass?
The bill (H.R. 3763), as amended, was passed, as follows:
Strike out all after the enacting clause and insert:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) Short Title.--This Act may be cited as the ``Public
Company Accounting Reform and Investor Protection Act of
2002''.
(b) Table of Contents.--The table of contents for this Act
is as follows:

Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Commission rules and enforcement.

TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and
rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.

TITLE II--AUDITOR INDEPENDENCE

Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Preapproval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting
firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.

TITLE III--CORPORATE RESPONSIBILITY

Sec. 301. Public company audit committees.
Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods
prohibited.

TITLE IV--ENHANCED FINANCIAL DISCLOSURES

Sec. 401. Disclosures in periodic reports.
Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and
principal stockholders.
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406. Code of ethics for senior financial officers.
Sec. 407. Disclosure of audit committee financial expert.

TITLE V--ANALYST CONFLICTS OF INTEREST

Sec. 501. Treatment of securities analysts by registered securities
associations.

TITLE VI--COMMISSION RESOURCES AND AUTHORITY

Sec. 601. Authorization of appropriations.
Sec. 602. Appearance and practice before the Commission.
Sec. 603. Federal court authority to impose penny stock bars.
Sec. 604. Qualifications of associated persons of brokers and dealers.

TITLE VII--STUDIES AND REPORTS

Sec. 701. GAO study and report regarding consolidation of public
accounting firms.
Sec. 702. Commission study and report regarding credit rating agencies.

TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY

Sec. 801. Short title.
Sec. 802. Criminal penalties for altering documents.
Sec. 803. Debts nondischargeable if incurred in violation of securities
fraud laws.
Sec. 804. Statute of limitations for securities fraud.
Sec. 805. Review of Federal sentencing guidelines for obstruction of
justice and extensive criminal fraud.
Sec. 806. Protection for employees of publicly traded companies who
provide evidence of fraud.
Sec. 807. Criminal penalties for defrauding shareholders of publicly
traded companies.

TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS

Sec. 901. Short title.
Sec. 902. Criminal penalties for conspiracy to commit offense or to
defraud the United States.
Sec. 903. Criminal penalties for mail and wire fraud.
Sec. 904. Criminal penalties for violations of the Employee Retirement
Income Security Act of 1974.
Sec. 905. Amendment to sentencing guidelines relating to certain white-
collar offenses.
Sec. 906. Corporate responsibility for financial reports.
Sec. 907. Higher maximum penalties for mail and wire fraud.
Sec. 908. Tampering with a record or otherwise impeding an official
proceeding.
Sec. 909. Temporary freeze authority for the Securities and Exchange
Commission.
Sec. 910. Amendment to the Federal sentencing guidelines.
Sec. 911. Authority of the Commission to prohibit persons from serving
as officers or directors.

TITLE X--CORPORATE TAX RETURNS

Sec. 1001. Sense of the Senate regarding the signing of corporate tax
returns by chief executive officers.

SEC. 2. DEFINITIONS.

(a) In General.--In this Act, the following definitions
shall apply:
(1) Appropriate state regulatory authority.--The term
``appropriate State regulatory authority'' means the State
agency or other authority responsible for the licensure or
other regulation of the practice of accounting in the State
or States having jurisdiction over a registered public
accounting firm or associated person thereof, with respect to
the matter in question.
(2) Audit.--The term ``audit'' means an examination of the
financial statements of any issuer by an independent public
accounting firm in accordance with the rules of the Board or
the Commission (or, for the period preceding the adoption of
applicable rules of the Board under section 103, in
accordance with then-applicable generally accepted auditing
and related standards for such purposes), for the purpose of
expressing an opinion on such statements.
(3) Audit committee.--The term ``audit committee'' means--
(A) a committee (or equivalent body) established by and
amongst the board of directors of an issuer for the purpose
of overseeing the accounting and financial reporting
processes of the issuer and audits of the financial
statements of the issuer; and
(B) if no such committee exists with respect to an issuer,
the entire board of directors of the issuer.
(4) Audit report.--The term ``audit report'' means a
document or other record--
(A) prepared following an audit performed for purposes of
compliance by an issuer with the requirements of the
securities laws; and
(B) in which a public accounting firm either--
(i) sets forth the opinion of that firm regarding a
financial statement, report, or other document; or

[[Page S6780]]

(ii) asserts that no such opinion can be expressed.
(5) Board.--The term ``Board'' means the Public Company
Accounting Oversight Board established under section 101.
(6) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(7) Issuer.--The term ``issuer'' means an issuer (as
defined in section 3 of the Securities Exchange Act of 1934
(15 U.S.C. 78c)), the securities of which are registered
under section 12 of that Act (15 U.S.C. 78l), or that is
required to file reports pursuant to section 15(d) of that
Act (15 U.S.C. 78o(d)), or that will be required to file such
reports at the end of a fiscal year of the issuer in which a
registration statement filed by such issuer has become
effective pursuant to the Securities Act of 1933 (15 U.S.C.
77a et. seq.), unless its securities are registered under
section 12 of the Securities Exchange Act of 1934 (15 U.S.C.
78c) on or before the end of such fiscal year.
(8) Non-audit services.--The term ``non-audit services''
means any professional services provided to an issuer by a
registered public accounting firm, other than those provided
to an issuer in connection with an audit or a review of the
financial statements of an issuer.
(9) Person associated with a public accounting firm.--
(A) In general.--The terms ``person associated with a
public accounting firm'' (or with a ``registered public
accounting firm'') and ``associated person of a public
accounting firm'' (or of a ``registered public accounting
firm'') mean any individual proprietor, partner, shareholder,
principal, accountant, or other professional employee of a
public accounting firm, or any other independent contractor
or entity that, in connection with the preparation or
issuance of any audit report--
(i) shares in the profits of, or receives compensation in
any other form from, that firm; or
(ii) participates as agent or otherwise on behalf of such
accounting firm in any activity of that firm.
(B) Exemption authority.--The Board may, by rule, exempt
persons engaged only in ministerial tasks from the definition
in subparagraph (A), to the extent that the Board determines
that any such exemption is consistent with the purposes of
this Act, the public interest, or the protection of
investors.
(10) Professional standards.--The term ``professional
standards'' means--
(A) accounting principles that are--
(i) established by the standard setting body described in
section 19(b) of the Securities Act of 1933, as amended by
this Act, or prescribed by the Commission under section 19(a)
of that Act (15 U.S.C. 17a(s)) or section 13(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78a(m)); and
(ii) relevant to audit reports for particular issuers, or
dealt with in the quality control system of a particular
registered public accounting firm; and
(B) auditing standards, standards for attestation
engagements, quality control policies and procedures, ethical
and competency standards, and independence standards
(including rules implementing title II) that the Board or the
Commission determines--
(i) relate to the preparation or issuance of audit reports
for issuers; and
(ii) are established or adopted by the Board under section
103(a), or are promulgated as rules of the Commission.
(11) Public accounting firm.--The term ``public accounting
firm'' means--
(A) a proprietorship, partnership, incorporated
association, corporation, limited liability company, limited
liability partnership, or other legal entity that is engaged
in the practice of public accounting or preparing or issuing
audit reports; and
(B) to the extent so designated by the rules of the Board,
any associated person of any entity described in subparagraph
(A).
(12) Registered public accounting firm.--The term
``registered public accounting firm'' means a public
accounting firm registered with the Board in accordance with
this Act.
(13) Rules of the board.--The term ``rules of the Board''
means the bylaws and rules of the Board (as submitted to, and
approved, modified, or amended by the Commission, in
accordance with section 107), and those stated policies,
practices, and interpretations of the Board that the
Commission, by rule, may deem to be rules of the Board, as
necessary or appropriate in the public interest or for the
protection of investors.
(14) Security.--The term ``security'' has the same meaning
as in section 3(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)).
(15) Securities laws.--The term ``securities laws'' means
the provisions of law referred to in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), as
amended by this Act, and includes the rules, regulations, and
orders issued by the Commission thereunder.
(16) State.--The term ``State'' means any State of the
United States, the District of Columbia, Puerto Rico, the
Virgin Islands, or any other territory or possession of the
United States.
(b) Conforming Amendment.--Section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) is
amended by inserting ``the Public Company Accounting Reform
and Investor Protection Act of 2002,'' before ``the Public''.

SEC. 3. COMMISSION RULES AND ENFORCEMENT.

(a) Regulatory Action.--The Commission shall promulgate
such rules and regulations, as may be necessary or
appropriate in the public interest or for the protection of
investors, and in furtherance of this Act.
(b) Enforcement.--
(1) In general.--A violation by any person of this Act, any
rule or regulation of the Commission issued under this Act,
or any rule of the Board shall be treated for all purposes in
the same manner as a violation of the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.) or the rules and regulations
issued thereunder, consistent with the provisions of this
Act, and any such person shall be subject to the same
penalties, and to the same extent, as for a violation of that
Act or such rules or regulations.
(2) Investigations, injunctions, and prosecution of
offenses.--Section 21 of the Securities Exchange Act of 1934
(15 U.S.C. 78u) is amended
(A) in subsection (a)(1), by inserting ``the rules of the
Public Company Accounting Oversight Board, of which such
person is a registered public accounting firm or a person
associated with such a firm,'' after ``is a participant,'';
(B) in subsection (d)(1), by inserting ``the rules of the
Public Company Accounting Oversight Board, of which such
person is a registered public accounting firm or a person
associated with such a firm,'' after ``is a participant,'';
(C) in subsection (e), by inserting ``the rules of the
Public Company Accounting Oversight Board, of which such
person is a registered public accounting firm or a person
associated with such a firm,'' after ``is a participant,'';
and
(D) in subsection (f), by inserting ``or the Public Company
Accounting Oversight Board'' after ``self-regulatory
organization'' each place that term appears.
(3) Cease-and-desist proceedings.--Section 21C(c)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2)) is
amended by inserting ``registered public accounting firm (as
defined in section 2 of the Public Company Accounting Reform
and Investor Protection Act of 2002),'' after ``government
securities dealer,''.
(c) Effect on Commission Authority.--Nothing in this Act or
the rules of the Board shall be construed to impair or
limit--
(1) the authority of the Commission to regulate the
accounting profession, accounting firms, or persons
associated with such firms for purposes of enforcement of the
securities laws;
(2) the authority of the Commission to set standards for
accounting or auditing practices or auditor independence,
derived from other provisions of the securities laws or the
rules or regulations thereunder, for purposes of the
preparation and issuance of any audit report, or otherwise
under applicable law; or
(3) the ability of the Commission to take, on the
initiative of the Commission, legal, administrative, or
disciplinary action against any registered public accounting
firm or any associated person thereof.

TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

SEC. 101. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.

(a) Establishment of Board.--There is established the
Public Company Accounting Oversight Board, to oversee the
audit of public companies that are subject to the securities
laws, and related matters, in order to protect the interests
of investors and further the public interest in the
preparation of informative, accurate, and independent audit
reports for companies the securities of which are sold to,
and held by and for, public investors. The Board shall be a
body corporate, operate as a nonprofit corporation, and have
succession until dissolved by an Act of Congress.
(b) Status.--The Board shall not be an agency or
establishment of the United States Government, and, except as
otherwise provided in this Act, shall be subject to, and have
all the powers conferred upon a nonprofit corporation by, the
District of Columbia Nonprofit Corporation Act. No member or
person employed by, or agent for, the Board shall be deemed
to be an officer or employee of or agent for the Federal
Government by reason of such service.
(c) Duties of the Board.--The Board shall, subject to
action by the Commission under section 107, and once a
determination is made by the Commission under subsection (d)
of this section--
(1) register public accounting firms that prepare audit
reports for issuers, in accordance with section 102;
(2) establish or adopt, or both, by rule, auditing, quality
control, ethics, independence, and other standards relating
to the preparation of audit reports for issuers, in
accordance with section 103;
(3) conduct inspections of registered public accounting
firms, in accordance with section 104 and the rules of the
Board;
(4) conduct investigations and disciplinary proceedings
concerning, and impose appropriate sanctions where justified
upon, registered public accounting firms and associated
persons of such firms, in accordance with section 105;
(5) perform such other duties or functions as the Board
determines are necessary or appropriate to promote high
professional standards among, and improve the quality of
audit services offered by, registered public accounting firms
and associated persons thereof, or otherwise to carry out
this Act, in order to protect investors, or to further the
public interest;
(6) enforce compliance with this Act, the rules of the
Board, professional standards, and the securities laws
relating to the preparation and issuance of audit reports and
the obligations and liabilities of accountants with respect
thereto, by registered public accounting firms and associated
persons thereof; and
(7) set the budget and manage the operations of the Board
and the staff of the Board.
(d) Commission Determination.--The members of the Board
shall take such action (including hiring of staff, proposal
of rules, and adoption of initial and transitional auditing
and other professional standards) as may be necessary or
appropriate to enable the Commission

[[Page S6781]]

to determine, not later than 270 days after the date of
enactment of this Act, that the Board is so organized and has
the capacity to carry out the requirements of this title, and
to enforce compliance with this title by registered public
accounting firms and associated persons thereof.
(e) Board Membership.--
(1) Composition.--The Board shall have 5 members, appointed
from among prominent individuals of integrity and reputation
who have a demonstrated commitment to the interests of
investors and the public, and an understanding of the
responsibilities for and nature of the financial disclosures
required of issuers under the securities laws and the
obligations of accountants with respect to the preparation
and issuance of audit reports with respect to such
disclosures.
(2) Limitation.--Two members, and only 2 members, of the
Board shall be or have been certified public accountants
pursuant to the laws of 1 or more States, provided that, if 1
of those 2 members is the chairperson, he or she may not have
been a practicing certified public accountant for at least 5
years prior to his or her appointment to the Board.
(3) Full-time independent service.--Each member of the
Board shall serve on a full-time basis, and may not,
concurrent with service on the Board, be employed by any
other person or engage in any other professional or business
activity. No member of the Board may share in any of the
profits of, or receive payments from, a public accounting
firm (or any other person, as determined by rule of the
Commission), other than fixed continuing payments, subject to
such conditions as the Commission may impose, under standard
arrangements for the retirement of members of public
accounting firms.
(4) Appointment of board members.--
(A) Initial board.--Not later than 90 days after the date
of enactment of this Act, the Commission, after consultation
with the Chairman of the Board of Governors of the Federal
Reserve System and the Secretary of the Treasury, shall
appoint the chairperson and other initial members of the
Board, and shall designate a term of service for each.
(B) Vacancies.--A vacancy on the Board shall not affect the
powers of the Board, but shall be filled in the same manner
as provided for appointments under this section.
(5) Term of service.--
(A) In general.--The term of service of each Board member
shall be 5 years, and until a successor is appointed, except
that--
(i) the terms of office of the initial Board members (other
than the chairperson) shall expire in annual increments, 1 on
each of the first 4 anniversaries of the initial date of
appointment; and
(ii) any Board member appointed to fill a vacancy occurring
before the expiration of the term for which the predecessor
was appointed shall be appointed only for the remainder of
that term.
(B) Term limitation.--No person may serve as a member of
the Board, or as chairperson of the Board, for more than 2
terms, whether or not such terms of service are consecutive.
(6) Removal from office.--A member of the Board may be
removed by the Commission from office, in accordance with
section 107(d)(3), for good cause shown before the expiration
of the term of that member.
(f) Powers of the Board.--In addition to any authority
granted to the Board otherwise in this Act, the Board shall
have the power, subject to section 107--
(1) to sue and be sued, complain and defend, in its
corporate name and through its own counsel, with the approval
of the Commission, in any Federal, State, or other court;
(2) to conduct its operations and maintain offices, and to
exercise all other rights and powers authorized by this Act,
in any State, without regard to any qualification, licensing,
or other provision of law in effect in such State (or a
political subdivision thereof);
(3) to lease, purchase, accept gifts or donations of or
otherwise acquire, improve, use, sell, exchange, or convey,
all of or an interest in any property, wherever situated;
(4) to appoint such employees, accountants, attorneys, and
other agents as may be necessary or appropriate, and to
determine their qualifications, define their duties, and fix
their salaries or other compensation (at a level that is
comparable to private sector self-regulatory, accounting,
technical, supervisory, or other staff or management
positions);
(5) to allocate, assess, and collect accounting support
fees established pursuant to section 109, for the Board, and
other fees and charges imposed under this title; and
(6) to enter into contracts, execute instruments, incur
liabilities, and do any and all other acts and things
necessary, appropriate, or incidental to the conduct of its
operations and the exercise of its obligations, rights, and
powers imposed or granted by this title.
(g) Rules of the Board.--The rules of the Board shall,
subject to the approval of the Commission--
(1) provide for the operation and administration of the
Board, the exercise of its authority, and the performance of
its responsibilities under this Act;
(2) permit, as the Board determines necessary or
appropriate, delegation by the Board of any of its functions
to an individual member or employee of the Board, or to a
division of the Board, including functions with respect to
hearing, determining, ordering, certifying, reporting, or
otherwise acting as to any matter, except that--
(A) the Board shall retain a discretionary right to review
any action pursuant to any such delegated function, upon its
own motion;
(B) a person shall be entitled to a review by the Board
with respect to any matter so delegated, and the decision of
the Board upon such review shall be deemed to be the action
of the Board for all purposes (including appeal or review
thereof); and
(C) if the right to exercise a review described in
subparagraph (A) is declined, or if no such review is sought
within the time stated in the rules of the Board, then the
action taken by the holder of such delegation shall for all
purposes, including appeal or review thereof, be deemed to be
the action of the Board;
(3) establish ethics rules and standards of conduct for
Board members and staff, including a bar on practice before
the Board (and the Commission, with respect to Board-related
matters) of 1 year for former members of the Board, and
appropriate periods (not to exceed 1 year) for former staff
of the Board; and
(4) provide as otherwise required by this Act.
(h) Annual Report to the Commission.--The Board shall
submit an annual report (including its audited financial
statements) to the Commission, and the Commission shall
transmit a copy of that report to the Committee on Banking,
Housing, and Urban Affairs of the Senate, and the Committee
on Financial Services of the House of Representatives, not
later than 30 days after the date of receipt of that report
by the Commission.

SEC. 102. REGISTRATION WITH THE BOARD.

(a) Mandatory Registration.--Beginning 180 days after the
date of the determination of the Commission under section
101(d), it shall be unlawful for any person that is not a
registered public accounting firm to prepare or issue, or to
participate in the preparation or issuance of, any audit
report with respect to any issuer.
(b) Applications for Registration.--
(1) Form of application.--A public accounting firm shall
use such form as the Board may prescribe, by rule, to apply
for registration under this section.
(2) Contents of applications.--Each public accounting firm
shall submit, as part of its application for registration, in
such detail as the Board shall specify--
(A) the names of all issuers for which the firm prepared or
issued audit reports during the immediately preceding
calendar year, and for which the firm expects to prepare or
issue audit reports during the current calendar year;
(B) the annual fees received by the firm from each such
issuer for audit services, other accounting services, and
non-audit services, respectively;
(C) such other current financial information for the most
recently completed fiscal year of the firm as the Board may
reasonably request;
(D) a statement of the quality control policies of the firm
for its accounting and auditing practices;
(E) a list of all accountants associated with the firm who
participate in or contribute to the preparation of audit
reports, stating the license or certification number of each
such person, as well as the State license numbers of the firm
itself;
(F) information relating to criminal, civil, or
administrative actions or disciplinary proceedings pending
against the firm or any associated person of the firm in
connection with any audit report;
(G) copies of any periodic or annual disclosure filed by an
issuer with the Commission during the immediately preceding
calendar year which discloses accounting disagreements
between such issuer and the firm in connection with an audit
report furnished or prepared by the firm for such issuer; and
(H) such other information as the rules of the Board or the
Commission shall specify as necessary or appropriate in the
public interest or for the protection of investors.
(3) Consents.--Each application for registration under this
subsection shall include--
(A) a consent executed by the public accounting firm to
cooperation in and compliance with any request for testimony
or the production of documents made by the Board in the
furtherance of its authority and responsibilities under this
title (and an agreement to secure and enforce similar
consents from each of the associated persons of the public
accounting firm as a condition of their continued employment
by or other association with such firm); and
(B) a statement that such firm understands and agrees that
cooperation and compliance, as described in the consent
required by subparagraph (A), and the securing and
enforcement of such consents from its associated persons, in
accordance with the rules of the Board, shall be a condition
to the continuing effectiveness of the registration of the
firm with the Board.
(c) Action on Applications.--
(1) Timing.--The Board shall approve a completed
application for registration not later than 45 days after the
date of receipt of the application, in accordance with the
rules of the Board, unless the Board, prior to such date,
issues a written notice of disapproval to, or requests more
information from, the prospective registrant.
(2) Treatment.--A written notice of disapproval of a
completed application under paragraph (1) for registration
shall be treated as a disciplinary sanction for purposes of
sections 105(d) and 107(c).
(d) Periodic Reports.--Each registered public accounting
firm shall submit an annual report to the Board, and may be
required to report more frequently, as necessary to update
the information contained in its application for registration
under this section, and to provide to the Board such
additional information as the Board or the Commission may
specify, in accordance with subsection (b)(2).
(e) Public Availability.--Registration applications and
annual reports required by this subsection, or such portions
of such applications or reports as may be designated under
rules of the Board, shall be made available for public
inspection, subject to rules of the Board or the Commission,
and to applicable laws relating to the confidentiality of
proprietary, personal, or

[[Page S6782]]

other information contained in such applications or reports,
provided that, in all events, the Board shall protect from
public disclosure information reasonably identified by the
subject accounting firm as proprietary information.
(f) Registration and Annual Fees.--The Board shall assess
and collect a registration fee and an annual fee from each
registered public accounting firm, in amounts that are
sufficient to recover the costs of processing and reviewing
applications and annual reports.

SEC. 103. AUDITING, QUALITY CONTROL, AND INDEPENDENCE
STANDARDS AND RULES.

(a) Auditing, Quality Control, and Ethics Standards.--
``(1) In general.--The Board shall, by rule, establish,
including, to the extent it determines appropriate, through
adoption of standards proposed by 1 or more professional
groups of accountants designated pursuant to paragraph (3)(A)
or advisory groups convened pursuant to paragraph (4), and
amend or otherwise modify or alter, such auditing and related
attestation standards, such quality control standards, and
such ethics standards to be used by registered public
accounting firms in the preparation and issuance of audit
reports, as required by this Act or the rules of the
Commission, or as may be necessary or appropriate in the
public interest or for the protection of investors.
(2) Rule requirements.--In carrying out paragraph (1), the
Board--
(A) shall include in the auditing standards that it adopts,
requirements that each registered public accounting firm
shall--
(i) prepare, and maintain for a period of not less than 7
years, audit work papers, and other information related to
any audit report, in sufficient detail to support the
conclusions reached in such report;
(ii) provide a concurring or second partner review and
approval of such audit report (and other related
information), and concurring approval in its issuance, by a
qualified person (as prescribed by the Board) associated with
the public accounting firm, other than the person in charge
of the audit, or by an independent reviewer (as prescribed by
the Board); and
(iii) describe the scope of the auditor's testing of the
system of internal accounting controls of the issuer required
by section 13(b)(2) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(b)(2)), and present (in such report or in a
separate report)--

(I) the findings of the auditor from such testing;
(II) an evaluation of whether such system of internal
accounting controls--

(aa) complies with the requirements of that section
13(b)(2); and
(bb) provides reasonable assurance that receipts and
expenditures of the issuer comply with applicable law, and
are being made in accordance with proper authorizations of
the management and directors of the issuer; and

(III) a description of significant defects in such internal
controls, and of any material noncompliance, of which the
auditor should know on the basis of such testing; and

(B) shall include, in the quality control standards that it
adopts with respect to the issuance of audit reports,
requirements for every registered public accounting firm
relating to--
(i) monitoring of professional ethics and independence from
issuers on behalf of which the firm issues audit reports;
(ii) consultation within such firm on accounting and
auditing questions;
(iii) supervision of audit work;
(iv) hiring, professional development, and advancement of
personnel;
(v) the acceptance and continuation of engagements;
(vi) internal inspection; and
(vii) such other requirements as the Board may prescribe,
subject to subsection (a)(1).
(3) Authority to adopt other standards.--
(A) In general.--In carrying out this subsection, the
Board--
(i) may adopt as its rules, subject to the terms of section
107, any portion of any statement of auditing standards or
other professional standards that the Board determines
satisfy the requirements of paragraph (1), and that were
proposed by 1 or more professional groups of accountants that
shall be designated or recognized by the Board, by rule, for
such purpose, pursuant to this paragraph or 1 or more
advisory groups convened pursuant to paragraph (4); and
(ii) notwithstanding clause (i), shall retain full
authority to modify, supplement, revise, or subsequently
amend, modify, or repeal, in whole or in part, any portion of
any statement described in clause (i).
(B) Initial and transitional standards.--The Board shall
adopt standards described in subparagraph (A)(i) as initial
or transitional standards, to the extent the Board determines
necessary, prior to a determination of the Commission under
section 101(d), and such standards shall be separately
approved by the Commission at the time of that determination,
without regard to the procedures required by section 107 that
otherwise would apply to the approval of rules of the Board.
(4) Advisory groups.--The Board shall convene, or authorize
its staff to convene, such expert advisory groups as may be
appropriate, which may include practicing accountants and
other experts, as well as representatives of other interested
groups, subject to such rules as the Board may prescribe to
prevent conflicts of interest, to make recommendations
concerning the content (including proposed drafts) of
auditing, quality control, ethics, independence, or other
standards required to be established under this section.
(b) Independence Standards and Rules.--The Board shall
establish such rules as may be necessary or appropriate in
the public interest or for the protection of investors, to
implement, or as authorized under, title II of this Act.
(c) Cooperation With Designated Professional Groups of
Accountants and Advisory Groups.--
(1) In general.--The Board shall cooperate on an ongoing
basis with professional groups of accountants designated
under subsection (a)(3)(A) and advisory groups convened under
subsection (a)(4) in the examination of the need for changes
in any standards subject to its authority under subsection
(a), recommend issues for inclusion on the agendas of such
designated professional groups of accountants or advisory
groups, and take such other steps as it deems appropriate to
increase the effectiveness of the standard setting process.
(2) Board responses.--The Board shall respond in a timely
fashion to requests from designated professional groups of
accountants and advisory groups referred to in paragraph (1)
for any changes in standards over which the Board has
authority.
(d) Evaluation of Standard Setting Process.--The Board
shall include in the annual report required by section 101(h)
the results of its standard setting responsibilities during
the period to which the report relates, including a
discussion of the work of the Board with any designated
professional groups of accountants and advisory groups
described in paragraphs (3)(A) and (4) of subsection (a), and
its pending issues agenda for future standard setting
projects.

SEC. 104. INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS.

(a) In General.--The Board shall conduct a continuing
program of inspections to assess the degree of compliance of
each registered public accounting firm and associated persons
of that firm with this Act, the rules of the Board, the rules
of the Commission, or professional standards, in connection
with its performance of audits, issuance of audit reports,
and related matters involving issuers.
(b) Inspection Frequency.--
(1) In general.--Subject to paragraph (2), inspections
required by this section shall be conducted--
(A) annually with respect to each registered public
accounting firm that regularly provides audit reports for
more than 100 issuers; and
(B) not less frequently than once every 3 years with
respect to each registered public accounting firm that
regularly provides audit reports for 100 or fewer issuers.
(2) Adjustments to schedules.--The Board may, by rule,
adjust the inspection schedules set under paragraph (1) if
the Board finds that different inspection schedules are
consistent with the purposes of this Act, the public
interest, and the protection of investors.
(c) Procedures.--The Board shall, in each inspection under
this section, and in accordance with its rules for such
inspections--
(1) identify any act or practice or omission to act by the
registered public accounting firm, or by any associated
person thereof, revealed by such inspection that may be in
violation of this Act, the rules of the Board, the rules of
the Commission, the firm's own quality control policies, or
professional standards;
(2) report any such act, practice, or omission, if
appropriate, to the Commission and each appropriate State
regulatory authority; and
(3) begin a formal investigation or take appropriate
disciplinary action, if any, with respect to any such
violation, in accordance with this Act and the rules of the
Board.
(d) Conduct of Inspections.--In conducting an inspection of
a registered public accounting firm under this section, the
Board shall--
(1) inspect and review selected audit and review
engagements of the firm (which may include audit engagements
that are the subject of ongoing litigation or other
controversy between the firm and 1 or more third parties),
performed at various offices and by various associated
persons of the firm, as selected by the Board;
(2) evaluate the sufficiency of the quality control system
of the firm, and the manner of the documentation and
communication of that system by the firm; and
(3) perform such other testing of the audit, supervisory,
and quality control procedures of the firm as are necessary
or appropriate in light of the purpose of the inspection and
the responsibilities of the Board.
(e) Record Retention.--The rules of the Board may require
the retention by registered public accounting firms for
inspection purposes of records whose retention is not
otherwise required by section 103 or the rules issued
thereunder.
(f) Procedures for Review.--The rules of the Board shall
provide a procedure for the review of and response to a draft
inspection report by the registered public accounting firm
under inspection. The Board shall take such action with
respect to such response as it considers appropriate
(including revising the draft report or continuing or
supplementing its inspection activities before issuing a
final report), but the text of any such response,
appropriately redacted to protect information reasonably
identified by the accounting firm as confidential, shall be
attached to and made part of the inspection report.
(g) Report.--A written report of the findings of the Board
for each inspection under this section, subject to subsection
(h), shall be--
(1) transmitted, in appropriate detail, to the Commission
and each appropriate State regulatory authority, accompanied
by any letter or comments by the Board or the inspector, and
any letter of response from the registered public accounting
firm; and
(2) made available in appropriate detail to the public
(subject to section 105(b)(5)(A), and to the protection of
such confidential and proprietary information as the Board
may determine to be appropriate, or as may be required by
law), except that no portions of the inspection report

[[Page S6783]]

that deal with criticisms of or potential defects in the
quality control systems of the firm under inspection shall be
made public if those criticisms or defects are addressed by
the firm, to the satisfaction of the Board, not later than 12
months after the date of the inspection report.
(h) Interim Commission Review.--
(1) Reviewable matters.--A registered public accounting
firm may seek review by the Commission, pursuant to such
rules as the Commission shall promulgate, if the firm--
(A) has provided the Board with a response, pursuant to
rules issued by the Board under subsection (f), to the
substance of particular items in a draft inspection report,
and disagrees with the assessments contained in any final
report prepared by the Board following such response; or
(B) disagrees with the determination of the Board that
criticisms or defects identified in an inspection report have
not been addressed to the satisfaction of the Board within 12
months of the date of the inspection report, for purposes of
subsection (g)(2).
(2) Treatment of review.--Any decision of the Commission
with respect to a review under paragraph (1) shall not be
reviewable under section 25 of the Securities Exchange Act of
1934 (15 U.S.C. 78y), or deemed to be ``final agency action''
for purposes of section 704 of title 5, United States Code.
(3) Timing.--Review under paragraph (1) may be sought
during the 30-day period following the date of the event
giving rise to the review under subparagraph (A) or (B) of
paragraph (1).

SEC. 105. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.

(a) In General.--The Board shall establish, by rule,
subject to the requirements of this section, fair procedures
for the investigation and disciplining of registered public
accounting firms and associated persons of such firms.
(b) Investigations.--
(1) Authority.--In accordance with the rules of the Board,
the Board may conduct an investigation of any act or
practice, or omission to act, by a registered public
accounting firm, any associated person of such firm, or both,
that may violate any provision of this Act, the rules of the
Board, the provisions of the securities laws relating to the
preparation and issuance of audit reports and the obligations
and liabilities of accountants with respect thereto,
including the rules of the Commission issued under this Act,
or professional standards, regardless of how the act,
practice, or omission is brought to the attention of the
Board.
(2) Testimony and document production.--In addition to such
other actions as the Board determines to be necessary or
appropriate, the rules of the Board may--
(A) require the testimony of the firm or of any person
associated with a registered public accounting firm, with
respect to any matter that the Board considers relevant or
material to an investigation;
(B) require the production of audit work papers and any
other document or information in the possession of a
registered public accounting firm or any associated person
thereof, wherever domiciled, that the Board considers
relevant or material to the investigation, and may inspect
the books and records of such firm or associated person to
verify the accuracy of any documents or information supplied;
(C) request the testimony of, and production of any
document in the possession of, any other person, including
any client of a registered public accounting firm that the
Board considers relevant or material to an investigation
under this section, with appropriate notice, subject to the
needs of the investigation, as permitted under the rules of
the Board; and
(D) provide for procedures to seek issuance by the
Commission, in a manner established by the Commission, of a
subpoena to require the testimony of, and production of any
document in the possession of, any person, including any
client of a registered public accounting firm, that the Board
considers relevant or material to an investigation under this
section.
(3) Noncooperation with investigations.--
(A) In general.--If a registered public accounting firm or
any associated person thereof refuses to testify, produce
documents, or otherwise cooperate with the Board in
connection with an investigation under this section, the
Board may--
(i) suspend or bar such person from being associated with a
registered public accounting firm, or require the registered
public accounting firm to end such association;
(ii) suspend or revoke the registration of the public
accounting firm; and
(iii) invoke such other lesser sanctions as the Board
considers appropriate, and as specified by rule of the Board.
(B) Procedure.--Any action taken by the Board under this
paragraph shall be subject to the terms of section 107(c).
(4) Referral.--The Board may refer an investigation under
this section--
(A) to the Commission;
(B) to any other Federal functional regulator (as defined
in section 509 of the Gramm-Leach-Bliley Act (15 U.S.C.
6809)), in the case of an investigation that concerns an
audit report for an institution that is subject to the
jurisdiction of such regulator; and
(C) at the direction of the Commission, to--
(i) the Attorney General of the United States;
(ii) the attorney general of 1 or more States; and
(iii) the appropriate State regulatory authority.
(5) Use of documents.--
(A) Confidentiality.--Except as provided in subparagraph
(B), all documents and information prepared or received by or
specifically for the Board, and deliberations of the Board
and its employees and agents, in connection with an
inspection under section 104 or with an investigation under
this section, shall be confidential and privileged as an
evidentiary matter (and shall not be subject to civil
discovery or other legal process) in any proceeding in any
Federal or State court or administrative agency, and shall be
exempt from disclosure, in the hands of an agency or
establishment of the Federal Government, under the Freedom of
Information Act (5 U.S.C. 552a), or otherwise, unless and
until presented in connection with a public proceeding or
released in accordance with subsection (c).
(B) Availability to government agencies.--All information
referred to in subparagraph (A) may, in the discretion of the
Board, when determined by the Board to be necessary to
accomplish the purposes of this Act or to protect investors,
and without the loss of its status as confidential and
privileged in the hands of the Board, be made available to
the Commission, the Attorney General of the United States, to
the appropriate Federal functional regulator (as defined in
section 509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6809)),
other than the Commission, with respect to an audit report
for an institution subject to the jurisdiction of such
regulator, to State attorneys general in connection with any
criminal investigation, and to any appropriate State
regulatory authority, which shall maintain such information
as confidential and privileged.
(6) Immunity.--Any employee of the Board engaged in
carrying out an investigation under this Act shall be immune
from any civil liability arising out of such investigation in
the same manner and to the same extent as an employee of the
Federal Government in similar circumstances.
(c) Disciplinary Procedures.--
(1) Notification; recordkeeping.--The rules of the Board
shall provide that in any proceeding by the Board to
determine whether a registered public accounting firm, or an
associated person thereof, should be disciplined, the Board
shall--
(A) bring specific charges with respect to the firm or
associated person;
(B) notify such firm or associated person of, and provide
to the firm or associated person an opportunity to defend
against, such charges; and
(C) keep a record of the proceedings.
(2) Public hearings.--Hearings under this section shall not
be public, unless otherwise ordered by the Board for good
cause shown, with the consent of the parties to such hearing.
(3) Supporting statement.--A determination by the Board to
impose a sanction under this subsection shall be supported by
a statement setting forth--
(A) each act or practice in which the registered public
accounting firm, or associated person, has engaged (or
omitted to engage), or that forms a basis for all or a part
of such sanction;
(B) the specific provision of this Act, the securities
laws, the rules of the Board, or professional standards which
the Board determines has been violated; and
(C) the sanction imposed, including a justification for
that sanction.
(4) Sanctions.--If the Board finds, based on all of the
facts and circumstances, that a registered public accounting
firm or associated person thereof has engaged in any act or
practice, or omitted to act, in violation of this Act, the
rules of the Board, the provisions of the securities laws
relating to the preparation and issuance of audit reports and
the obligations and liabilities of accountants with respect
thereto, including the rules of the Commission issued under
this Act, or professional standards, the Board may impose
such disciplinary or remedial sanctions as it determines
appropriate, subject to applicable limitations under
paragraph (5), including--
(A) temporary suspension or permanent revocation of
registration under this title;
(B) temporary or permanent suspension or bar of a person
from further association with any registered public
accounting firm;
(C) temporary or permanent limitation on the activities,
functions, or operations of such firm or person (other than
in connection with required additional professional education
or training);
(D) a civil money penalty for each such violation, in an
amount equal to--
(i) not more than $100,000 for a natural person or
$2,000,000 for any other person; and
(ii) in any case to which paragraph (5) applies, not more
than $750,000 for a natural person or $15,000,000 for any
other person;
(E) censure;
(F) required additional professional education or training;
or
(G) any other appropriate sanction provided for in the
rules of the Board.
(5) Intentional or other knowing conduct.--The sanctions
and penalties described in subparagraphs (A) through (C) and
(D)(ii) of paragraph (4) shall only apply to--
(A) intentional or knowing conduct, including reckless
conduct, that results in violation of the applicable
statutory, regulatory, or professional standard; or
(B) repeated instances of negligent conduct, each resulting
in a violation of the applicable statutory, regulatory, or
professional standard.
(6) Failure to supervise.--
(A) In general.--The Board may impose sanctions under this
section on a registered accounting firm or upon the
supervisory personnel of such firm, if the Board finds that--
(i) the firm has failed reasonably to supervise an
associated person, either as required by the rules of the
Board relating to auditing or quality control standards, or
otherwise, with a view to preventing violations of this Act,
the rules of the Board, the provisions of the securities laws
relating to the preparation and issuance of audit reports and
the obligations and liabilities of accountants with respect
thereto, including

[[Page S6784]]

the rules of the Commission under this Act, or professional
standards; and
(ii) such associated person commits a violation of this
Act, or any of such rules, laws, or standards.
(B) Rule of construction.--No associated person of a
registered public accounting firm shall be deemed to have
failed reasonably to supervise any other person for purposes
of subparagraph (A), if--
(i) there have been established in and for that firm
procedures, and a system for applying such procedures, that
comply with applicable rules of the Board and that would
reasonably be expected to prevent and detect any such
violation by such associated person; and
(ii) such person has reasonably discharged the duties and
obligations incumbent upon that person by reason of such
procedures and system, and had no reasonable cause to believe
that such procedures and system were not being complied with.
(7) Effect of suspension.--
(A) Association with a public accounting firm.--It shall be
unlawful for any person that is suspended or barred from
being associated with a registered public accounting firm
under this subsection willfully to become or remain
associated with any registered public accounting firm, or for
any registered public accounting firm that knew, or, in the
exercise of reasonable care should have known, of the
suspension or bar, to permit such an association, without the
consent of the Board or the Commission.
(B) Association with an issuer.--It shall be unlawful for
any person that is suspended or barred from being associated
with an issuer under this subsection willfully to become or
remain associated with any issuer in an accountancy or a
financial management capacity, and for any issuer that knew,
or in the exercise of reasonable care should have known, of
such suspension or bar, to permit such an association,
without the consent of the Board or the Commission.
(d) Reporting of Sanctions.--
(1) Recipients.--If the Board imposes a disciplinary
sanction, in accordance with this section, the Board shall
report the sanction to--
(A) the Commission;
(B) any appropriate State regulatory authority or any
foreign accountancy licensing board with which such firm or
person is licensed or certified; and
(C) the public (once any stay on the imposition of such
sanction has been lifted).
(2) Contents.--The information reported under paragraph (1)
shall include--
(A) the name of the sanctioned person;
(B) a description of the sanction and the basis for its
imposition; and
(C) such other information as the Board deems appropriate.
(e) Stay of Sanctions.--
(1) In general.--Application to the Commission for review,
or the institution by the Commission of review, of any
disciplinary action of the Board shall operate as a stay of
any such disciplinary action, unless and until the Commission
orders (summarily or after notice and opportunity for hearing
on the question of a stay, which hearing may consist solely
of the submission of affidavits or presentation of oral
arguments) that no such stay shall continue to operate.
(2) Expedited procedures.--The Commission shall establish
for appropriate cases an expedited procedure for
consideration and determination of the question of the
duration of a stay pending review of any disciplinary action
of the Board under this subsection.

SEC. 106. FOREIGN PUBLIC ACCOUNTING FIRMS.

(a) Applicability to Certain Foreign Firms.--
(1) In general.--Any foreign public accounting firm that
prepares or furnishes an audit report with respect to any
issuer, shall be subject to this Act and the rules of the
Board and the Commission issued under this Act, in the same
manner and to the same extent as a public accounting firm
that is organized and operates under the laws of the United
States or any State, except that registration pursuant to
section 102 shall not by itself provide a basis for
subjecting such a foreign public accounting firm to the
jurisdiction of the Federal or State courts, other than with
respect to controversies between such firms and the Board.
(2) Board authority.--The Board may, by rule, determine
that a foreign public accounting firm (or a class of such
firms) that does not issue audit reports nonetheless plays
such a substantial role in the preparation and furnishing of
such reports for particular issuers, that it is necessary or
appropriate, in light of the purposes of this Act and in the
public interest or for the protection of investors, that such
firm (or class of firms) should be treated as a public
accounting firm (or firms) for purposes of registration
under, and oversight by the Board in accordance with, this
title.
(b) Production of Audit Workpapers.--
(1) Consent by foreign firms.--If a foreign public
accounting firm issues an opinion or otherwise performs
material services upon which a registered public accounting
firm relies in issuing all or part of any audit report or any
opinion contained in an audit report, that foreign public
accounting firm shall be deemed to have consented--
(A) to produce its audit workpapers for the Board or the
Commission in connection with any investigation by either
body with respect to that audit report; and
(B) to be subject to the jurisdiction of the courts of the
United States for purposes of enforcement of any request for
production of such workpapers.
(2) Consent by domestic firms.--A registered public
accounting firm that relies upon the opinion of a foreign
public accounting firm, as described in paragraph (1), shall
be deemed--
(A) to have consented to supplying the audit workpapers of
that foreign public accounting firm in response to a request
for production by the Board or the Commission; and
(B) to have secured the agreement of that foreign public
accounting firm to such production, as a condition of its
reliance on the opinion of that foreign public accounting
firm.
(c) Exemption Authority.--The Commission, and the Board,
subject to the approval of the Commission, may, by rule,
regulation, or order, and as the Commission (or Board)
determines necessary or appropriate in the public interest or
for the protection of investors, either unconditionally or
upon specified terms and conditions exempt any foreign public
accounting firm, or any class of such firms, from any
provision of this Act or the rules of the Board or the
Commission issued under this Act.
(d) Definition.--In this section, the term ``foreign public
accounting firm'' means a public accounting firm that is
organized and operates under the laws of a foreign government
or political subdivision thereof.

SEC. 107. COMMISSION OVERSIGHT OF THE BOARD.

(a) General Oversight Responsibility.--The Commission shall
have oversight and enforcement authority over the Board, as
provided in this Act.
(b) Rules of the Board.--
(1) Definition.--In this section, the term ``proposed
rule'' means any proposed rule of the Board, and any
modification of any such rule.
(2) Prior approval required.--No rule of the Board shall
become effective without prior approval of the Commission in
accordance with this section, other than as provided in
section 103(a)(3)(B) with respect to initial or transitional
standards.
(3) Approval criteria.--The Commission shall approve a
proposed rule, if it finds that the rule is consistent with
the requirements of this Act and the securities laws, or is
necessary or appropriate in the public interest or for the
protection of investors.
(4) Proposed rule procedures.--The provisions of paragraphs
(1) through (3) of section 19(b) of the Securities Exchange
Act of 1934 (15 U.S.C. 78s(b)) shall govern the proposed
rules of the Board, as fully as if the Board were a
``registered securities association'' for purposes of that
section 19(b), except that, for purposes of this paragraph--
(A) the phrase ``consistent with the requirements of this
title and the rules and regulations thereunder applicable to
such organization'' in section 19(b)(2) of that Act shall be
deemed to read ``consistent with the requirements of title I
of the Public Company Accounting Reform and Investor
Protection Act of 2002, and the rules and regulations issued
thereunder applicable to such organization, or as necessary
or appropriate in the public interest or for the protection
of investors''; and
(B) the phrase ``otherwise in furtherance of the purposes
of this title'' in section 19(b)(3)(C) of that Act shall be
deemed to read ``otherwise in furtherance of the purposes of
title I of the Public Company Accounting Reform and Investor
Protection Act of 2002''.
(5) Commission authority to amend rules of the board.--The
provisions of section 19(c) of the Securities Exchange Act of
1934 (15 U.S.C. 78s(c)) shall govern the abrogation,
deletion, or addition to portions of the rules of the Board
by the Commission as fully as if the Board were a
``registered securities association'' for purposes of that
section 19(c), except that the phrase ``to conform its rules
to the requirements of this title and the rules and
regulations thereunder applicable to such organization, or
otherwise in furtherance of the purposes of this title'' in
section 19(c) of that Act shall, for purposes of this
paragraph, be deemed to read ``to assure the fair
administration of the Public Company Accounting Oversight
Board, conform the rules promulgated by that Board to the
requirements of title I of the Public Company Accounting
Reform and Investor Protection Act of 2002, or otherwise
further the purposes of that Act, the securities laws, and
the rules and regulations thereunder applicable to that
Board''.
(c) Commission Review of Disciplinary Action Taken by the
Board.--
(1) Notice of sanction.--The Board shall promptly file
notice with the Commission of any final sanction on any
registered public accounting firm or on any associated person
thereof, in such form and containing such information as the
Commission, by rule, may prescribe.
(2) Review of sanctions.--The provisions of sections
19(d)(2) and 19(e)(1) of the Securities Exchange Act of 1934
(15 U.S.C. 78s (d)(2) and (e)(1)) shall govern the review by
the Commission of final disciplinary sanctions imposed by the
Board (including sanctions imposed under section 105(b)(3) of
this Act for noncooperation in an investigation of the
Board), as fully as if the Board were a self-regulatory
organization and the Commission were the appropriate
regulatory agency for such organization for purposes of those
sections 19(d)(2) and 19(e)(1), except that, for purposes of
this paragraph--
(A) section 105(e) of this Act (rather than that section
19(d)(2)) shall govern the extent to which application for,
or institution by the Commission on its own motion of, review
of any disciplinary action of the Board operates as a stay of
such action;
(B) references in that section 19(e)(1) to ``members'' of
such an organization shall be deemed to be references to
registered public accounting firms;
(C) the phrase ``consistent with the purposes of this
title'' in that section 19(e)(1) shall be deemed to read
``consistent with the purposes of this title and title I of
the Public Company Accounting Reform and Investor Protection
Act of 2002'';

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(D) references to rules of the Municipal Securities
Rulemaking Board in that section 19(e)(1) shall not apply;
and
(E) the reference to section 19(e)(2) of the Securities
Exchange Act of 1934 shall refer instead to section 107(c)(3)
of this Act.
(3) Commission modification authority.--The Commission may
enhance, modify, cancel, reduce, or require the remission of
a sanction imposed by the Board upon a registered public
accounting firm or associated person thereof, if the
Commission, having due regard for the public interest and the
protection of investors, finds, after a proceeding in
accordance with this subsection, that the sanction--
(A) is not necessary or appropriate in furtherance of this
Act or the securities laws; or
(B) is excessive, oppressive, inadequate, or otherwise not
appropriate to the finding or the basis on which the sanction
was imposed.
(d) Censure of the Board; Other Sanctions.--
(1) Rescission of board authority.--The Commission, by
rule, consistent with the public interest, the protection of
investors, and the other purposes of this Act and the
securities laws, may relieve the Board of any responsibility
to enforce compliance with any provision of this Act, the
securities laws, the rules of the Board, or professional
standards.
(2) Censure of the board; limitations.--The Commission may,
by order, as it determines necessary or appropriate in the
public interest, for the protection of investors, or
otherwise in furtherance of the purposes of this Act or the
securities laws, censure or impose limitations upon the
activities, functions, and operations of the Board, if the
Commission finds, on the record, after notice and opportunity
for a hearing, that the Board--
(A) has violated or is unable to comply with any provision
of this Act, the rules of the Board, or the securities laws;
or
(B) without reasonable justification or excuse, has failed
to enforce compliance with any such provision or rule, or any
professional standard by a registered public accounting firm
or an associated person thereof.
(3) Censure of board members; removal from office.--The
Commission may, as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in
furtherance of the purposes of this Act or the securities
laws, remove from office or censure any member of the Board,
if the Commission finds, on the record, after notice and
opportunity for a hearing, that such member--
(A) has willfully violated any provision of this Act, the
rules of the Board, or the securities laws;
(B) has willfully abused the authority of that member; or
(C) without reasonable justification or excuse, has failed
to enforce compliance with any such provision or rule, or any
professional standard by any registered public accounting
firm or any associated person thereof.

SEC. 108. ACCOUNTING STANDARDS.

(a) Amendment to Securities Act of 1933.--Section 19 of the
Securities Act of 1933 (15 U.S.C. 77s) is amended--
(1) by redesignating subsections (b) and (c) as subsections
(c) and (d), respectively; and
(2) by inserting after subsection (a) the following:
``(b) Recognition of Accounting Standards.--
``(1) In general.--In carrying out its authority under
subsection (a) and under section 13(b) of the Securities
Exchange Act of 1934, the Commission may recognize, as
`generally accepted' for purposes of the securities laws, any
accounting principles established by a standard setting
body--
``(A) that--
``(i) is organized as a private entity;
``(ii) has, for administrative and operational purposes, a
board of trustees (or equivalent body) serving in the public
interest, the majority of whom are not, concurrent with their
service on such board, and have not been during the 2-year
period preceding such service, associated persons of any
registered public accounting firm;
``(iii) is funded as provided in section 109 of the Public
Company Accounting Reform and Investor Protection Act of
2002;
``(iv) has adopted procedures to ensure prompt
consideration, by majority vote of its members, of changes to
accounting principles necessary to reflect emerging
accounting issues and changing business practices;
``(v) considers, in adopting accounting principles, the
need to keep standards current in order to reflect changes in
the business environment, the extent to which international
convergence on high quality accounting standards is necessary
or appropriate in the public interest and for the protection
of investors; and
``(B) that the Commission determines has the capacity to
assist the Commission in fulfilling the requirements of
subsection (a) and section 13(b) of the Securities Exchange
Act of 1934, because, at a minimum, the standard setting body
is capable of improving the accuracy and effectiveness of
financial reporting and the protection of investors under the
securities laws.
``(2) Annual report.--A standard setting body described in
paragraph (1) shall submit an annual report to the Commission
and the public, containing audited financial statements of
that standard setting body.''.
(b) Commission Authority.--The Commission shall promulgate
such rules and regulations to carry out section 19(b) of the
Securities Act of 1933, as added by this section, as it deems
necessary or appropriate in the public interest or for the
protection of investors.
(c) No Effect on Commission Powers.--Nothing in this Act,
including this section and the amendment made by this
section, shall be construed to impair or limit the authority
of the Commission to establish accounting principles or
standards for purposes of enforcement of the securities laws.
(d) Study and Report on Adopting Principles-Based
Accounting.--
(1) Study.--
(A) In general.--The Commission shall conduct a study on
the adoption by the United States financial reporting system
of a principles-based accounting system.
(B) Study topics.--The study required by subparagraph (A)
shall include an examination of--
(i) the extent to which principles-based accounting and
financial reporting exists in the United States;
(ii) the length of time required for change from a rules-
based to a principles-based financial reporting system;
(iii) the feasibility of and proposed methods by which a
principles-based system may be implemented; and
(iv) a thorough economic analysis of the implementation of
a principles-based system.
(2) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
on the results of the study required by paragraph (1) to the
Committee on Banking, Housing, and Urban Affairs of the
Senate and the Committee on Financial Services of the House
of Representatives.

SEC. 109. FUNDING.

(a) In General.--The Board, and the standard setting body
designated pursuant to section 19(b) of the Securities Act of
1933, as amended by section 108, shall be funded as provided
in this section.
(b) Annual Budgets.--The Board and the standard setting
body referred to in subsection (a) shall each establish a
budget for each fiscal year, which shall be reviewed and
approved according to their respective internal procedures
not less than 1 month prior to the commencement of the fiscal
year to which the budget pertains. The budget of the Board
shall be subject to approval by the Commission.
(c) Sources and Uses of Funds.--
(1) Recoverable budget expenses.--The budget of the Board
(reduced by any registration or annual fees received under
section 102(e) for the year preceding the year for which the
budget is being computed), and all of the budget of the
standard setting body referred to in subsection (a), for each
fiscal year of each of those 2 entities, shall be payable
from annual accounting support fees, in accordance with
subsections (d) and (e).
(2) Funds generated from the collection of monetary
penalties.--Subject to the availability in advance in an
appropriations Act, and notwithstanding subsection (h), all
funds collected by the Board as a result of the assessment of
monetary penalties shall be used to fund a merit scholarship
program for undergraduate and graduate students enrolled in
accredited accounting degree programs, which program is to be
administered by the Board or by an entity or agent identified
by the Board.
(d) Annual Accounting Support Fee for the Board.--
(1) Establishment of fee.--The Board shall establish, with
the approval of the Commission, a reasonable annual
accounting support fee (or a formula for the computation
thereof), as may be necessary or appropriate to establish and
maintain the Board.
(2) Assessments.--The rules of the Board under paragraph
(1) shall provide for the equitable allocation, assessment,
and collection by the Board (or an agent appointed by the
Board) of the fee established under paragraph (1), among
issuers, in accordance with subsection (f), allowing for
differentiation among classes of issuers, as appropriate.
(e) Annual Accounting Support Fee for Standard Setting
Body.--The annual accounting support fee for the standard
setting body referred to in subsection (a)--
(1) shall be allocated in accordance with subsection (f),
and assessed and collected against each issuer, on behalf of
the standard setting body, by 1 or more appropriate
designated collection agents, as may be necessary or
appropriate to pay for the budget and provide for the
expenses of that standard setting body, and to provide for an
independent, stable source of funding for such body, subject
to review by the Commission; and
(2) may differentiate among different classes of issuers.
(f) Allocation of Accounting Support Fees Among Issuers.--
Any amount due from issuers (or a particular class of
issuers) under this section to fund the budget of the Board
or the standard setting body referred to in subsection (a)
shall be allocated among and payable by each issuer (or each
issuer in a particular class, as applicable) in an amount
equal to the total of such amount, multiplied by a fraction--
(1) the numerator of which is the average monthly equity
market capitalization of the issuer for the 12-month period
immediately preceding the beginning of the fiscal year to
which such budget relates; and
(2) the denominator of which is the average monthly equity
market capitalization of all such issuers for such 12-month
period.
(g) Conforming Amendments.--Section 13(b)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(b)(2)) is
amended--
(1) in subparagraph (A), by striking ``and'' at the end;
(2) in subparagraph (B), by striking the period at the end
and inserting the following: ``; and
``(C) notwithstanding any other provision of law, pay the
allocable share of such issuer of a reasonable annual
accounting support fee or fees, determined in accordance with
section 109 of the Public Company Accounting Reform and
Investor Protection Act of 2002.''.
(h) Rule of Construction.--Nothing in this section shall be
construed to render either the

[[Page S6786]]

Board, the standard setting body referred to in subsection
(a), or both, subject to procedures in Congress to authorize
or appropriate public funds, or to prevent such organization
from utilizing additional sources of revenue for its
activities, such as earnings from publication sales, provided
that each additional source of revenue shall not jeopardize,
in the judgment of the Commission, the actual and perceived
independence of such organization.

TITLE II--AUDITOR INDEPENDENCE

SEC. 201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS.

(a) Prohibited Activities.--Section 10A of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1) is amended by adding
at the end the following:
``(g) Prohibited Activities.--It shall be unlawful for a
registered public accounting firm (and any associated person
of that firm, to the extent determined appropriate by the
Commission) that performs for any issuer any audit required
by this title or the rules of the Commission under this title
or, beginning 180 days after the date of commencement of the
operations of the Public Company Accounting Oversight Board
established under section 101 of the Public Company
Accounting Reform and Investor Protection Act of 2002 (in
this section referred to as the `Board'), the rules of the
Board, to provide to that issuer, contemporaneously with the
audit, any non-audit service, including--
``(1) bookkeeping or other services related to the
accounting records or financial statements of the audit
client;
``(2) financial information systems design and
implementation;
``(3) appraisal or valuation services, fairness opinions,
or contribution-in-kind reports;
``(4) actuarial services;
``(5) internal audit outsourcing services;
``(6) management functions or human resources;
``(7) broker or dealer, investment adviser, or investment
banking services;
``(8) legal services and expert services unrelated to the
audit; and
``(9) any other service that the Board determines, by
regulation, is impermissible.
``(h) Preapproval Required for Non-Audit Services.--A
registered public accounting firm may engage in any non-audit
service, including tax services, that is not described in any
of paragraphs (1) through (9) of subsection (g) for an audit
client, only if the activity is approved in advance by the
audit committee of the issuer, in accordance with subsection
(i).''.
(b) Exemption Authority.--The Board may, on a case by case
basis, exempt any person, issuer, public accounting firm, or
transaction from the prohibition on the provision of services
under section 10A(g) of the Securities Exchange Act of 1934
(as added by this section), to the extent that such exemption
is necessary or appropriate in the public interest and is
consistent with the protection of investors, and subject to
review by the Commission in the same manner as for rules of
the Board under section 107.

SEC. 202. PREAPPROVAL REQUIREMENTS.

Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding
at the end the following:
``(i) Preapproval Requirements.--
``(1) In general.--
``(A) Audit committee action.--All auditing services (which
may entail providing comfort letters in connection with
securities underwritings) and non-audit services, other than
as provided in subparagraph (B), provided to an issuer by the
auditor of the issuer shall be preapproved by the audit
committee of the issuer.
``(B) De minimus exception.--The preapproval requirement
under subparagraph (A) is waived with respect to the
provision of non-audit services for an issuer, if--
``(i) the aggregate amount of all such non-audit services
provided to the issuer constitutes not more than 5 percent of
the total amount of revenues paid by the issuer to its
auditor;
``(ii) such services were not recognized by the issuer at
the time of the engagement to be non-audit services; and
``(iii) such services are promptly brought to the attention
of the audit committee of the issuer and approved by the
audit committee prior to the completion of the audit, by 1 or
more members of the audit committee who are members of the
board of directors to whom authority to grant such approvals
has been delegated by the audit committee.
``(2) Disclosure to investors.--Approval by an audit
committee of an issuer under this subsection of a non-audit
service to be performed by the auditor of the issuer shall be
disclosed to investors in periodic reports required by
section 13(a).
``(3) Delegation authority.--The audit committee of an
issuer may delegate to 1 or more designated members of the
audit committee who are independent directors of the board of
directors, the authority to grant preapprovals required by
this subsection. The decisions of any member to whom
authority is delegated under this paragraph to preapprove an
activity under this subsection shall be presented to the full
audit committee at each of its scheduled meetings.
``(4) Approval of audit services for other purposes.--In
carrying out its duties under subsection (m)(2), if the audit
committee of an issuer approves an audit service within the
scope of the engagement of the auditor, such audit service
shall be deemed to have been preapproved for purposes of this
subsection.''.

SEC. 203. AUDIT PARTNER ROTATION.

Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding
at the end the following:
``(j) Audit Partner Rotation.--It shall be unlawful for a
registered public accounting firm to provide audit services
to an issuer if the lead audit partner (having primary
responsibility for the audit) or the audit partner
responsible for reviewing the audit that is assigned to
perform those audit services has performed audit services for
that issuer in each of the 5 previous fiscal years of that
issuer.''.

SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES.

Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding
at the end the following:
``(k) Reports to Audit Committees.--Each registered public
accounting firm that performs for any issuer any audit
required by this title shall timely report to the audit
committee of the issuer--
``(1) all critical accounting policies and practices to be
used;
``(2) all alternative treatments of financial information
within generally accepted accounting principles that have
been discussed with management officials of the issuer,
ramifications of the use of such alternative disclosures and
treatments, and the treatment preferred by the registered
public accounting firm; and
``(3) other material written communications between the
registered public accounting firm and the management of the
issuer, such as any management letter or schedule of
unadjusted differences.''.

SEC. 205. CONFORMING AMENDMENTS.

(a) Definitions.--Section 3(a) of the Securities Exchange
Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the
end the following:
``(58) Audit committee.--The term `audit committee' means--
``(A) a committee (or equivalent body) established by and
amongst the board of directors of an issuer for the purpose
of overseeing the accounting and financial reporting
processes of the issuer and audits of the financial
statements of the issuer; and
``(B) if no such committee exists with respect to an
issuer, the entire board of directors of the issuer.
``(59) Registered public accounting firm.--The term
`registered public accounting firm' has the same meaning as
in section 3 of the Public Company Accounting Reform and
Investor Protection Act of 2002.''.
(b) Auditor Requirements.--Section 10A of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1) is amended--
(1) by striking ``an independent public accountant'' each
place that term appears and inserting ``a registered public
accounting firm'';
(2) by striking ``the independent public accountant'' each
place that term appears and inserting ``the registered public
accounting firm'';
(3) in subsection (c), by striking ``No independent public
accountant'' and inserting ``No registered public accounting
firm''; and
(4) in subsection (b)--
(A) by striking ``the accountant'' each place that term
appears and inserting ``the firm'';
(B) by striking ``such accountant'' each place that term
appears and inserting ``such firm''; and
(C) in paragraph (4), by striking ``the accountant's
report'' and inserting ``the report of the firm''.
(c) Other References.--The Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.) is amended--
(1) in section 12(b)(1) (15 U.S.C. 78l(b)(1)), by striking
``independent public accountants'' each place that term
appears and inserting ``a registered public accounting
firm''; and
(2) in subsections (e) and (i) of section 17 (15 U.S.C.
78q), by striking ``an independent public accountant'' each
place that term appears and inserting ``a registered public
accounting firm''.
(d) Conforming Amendment.--Section 10A(f) of the Securities
Exchange Act of 1934 (15 U.S.C. 78k(f)) is amended--
(1) by striking ``Definition'' and inserting
``Definitions''; and
(2) by adding at the end the following: ``As used in this
section, the term `issuer' means an issuer (as defined in
section 3), the securities of which are registered under
section 12, or that is required to file reports pursuant to
section 15(d), or that will be required to file such reports
at the end of a fiscal year of the issuer in which a
registration statement filed by such issuer has become
effective pursuant to the Securities Act of 1933 (15 U.S.C.
77a et. seq.), unless its securities are registered under
section 12 of this title on or before the end of such fiscal
year.''.

SEC. 206. CONFLICTS OF INTEREST.

Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78j-1), as amended by this Act, is amended by adding
at the end the following:
``(l) Conflicts of Interest.--It shall be unlawful for a
registered public accounting firm to perform for an issuer
any audit service required by this title, if a chief
executive officer, controller, chief financial officer, chief
accounting officer or any person serving in an equivalent
position for the issuer was employed by that registered
independent public accounting firm and participated in any
capacity in the audit of that issuer during the 1-year period
preceding the date of the initiation of the audit.''.

SEC. 207. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC
ACCOUNTING FIRMS.

(a) Study and Review Required.--The Comptroller General of
the United States shall conduct a study and review of the
potential effects of requiring the mandatory rotation of
registered public accounting firms.
(b) Report Required.--Not later than 1 year after the date
of enactment of this Act, the Comptroller General shall
submit a report to the Committee on Banking, Housing, and
Urban Affairs of the Senate and the Committee on Financial
Services of the House of Representatives on the results of
the study and review required by this section.
(c) Definition.--For purposes of this section, the term
``mandatory rotation'' refers to the imposition of a limit on
the period of years in

[[Page S6787]]

which a particular registered public accounting firm may be
the auditor of record for a particular issuer.

SEC. 208. COMMISSION AUTHORITY.

(a) Commission Regulations.--Not later than 180 days after
the date of enactment of this Act, the Commission shall issue
final regulations to carry out each of subsections (g)
through (l) of section 10A of the Securities Exchange Act of
1934, as added by this title.
(b) Auditor Independence.--It shall be unlawful for any
registered public accounting firm (or an associated person
thereof, as applicable) to prepare or issue any audit report
with respect to any issuer, if the firm or associated person
engages in any activity with respect to that issuer
prohibited by any of subsections (g) through (l) of section
10A of the Securities Exchange Act of 1934, as added by this
title, or any rule or regulation of the Commission or of the
Board issued thereunder.

SEC. 209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY
AUTHORITIES.

In supervising nonregistered public accounting firms and
their associated persons, appropriate State regulatory
authorities should make an independent determination of the
proper standards applicable, particularly taking into
consideration the size and nature of the business of the
accounting firms they supervise and the size and nature of
the business of the clients of those firms. The standards
applied by the Board under this Act should not be presumed to
be applicable for purposes of this section for small and
medium sized nonregistered public accounting firms.

TITLE III--CORPORATE RESPONSIBILITY

SEC. 301. PUBLIC COMPANY AUDIT COMMITTEES.

Section 10A of the Securities Exchange Act of 1934 (15
U.S.C. 78f) is amended by adding at the end the following:
``(m) Standards Relating to Audit Committees.--
``(1) Commission rules.--
``(A) In general.--Effective not later than 270 days after
the date of enactment of this subsection, the Commission
shall, by rule, direct the national securities exchanges and
national securities associations to prohibit the listing of
any security of an issuer that is not in compliance with the
requirements of any portion of paragraphs (2) through (6).
``(B) Opportunity to cure defects.--The rules of the
Commission under subparagraph (A) shall provide for
appropriate procedures for an issuer to have an opportunity
to cure any defects that would be the basis for a prohibition
under subparagraph (A), before the imposition of such
prohibition.
``(2) Responsibilities relating to registered public
accounting firms.--The audit committee of each issuer, in its
capacity as a committee of the board of directors, shall be
directly responsible for the appointment, compensation, and
oversight of the work of any registered public accounting
firm employed by that issuer (including resolution of
disagreements between management and the auditor regarding
financial reporting) for the purpose of preparing or issuing
an audit report or related work, and each such registered
public accounting firm shall report directly to the audit
committee.
``(3) Independence.--
``(A) In general.--Each member of the audit committee of
the issuer shall be a member of the board of directors of the
issuer, and shall otherwise be independent.
``(B) Criteria.--In order to be considered to be
independent for purposes of this paragraph, a member of an
audit committee of an issuer may not, other than in his or
her capacity as a member of the audit committee, the board of
directors, or any other board committee--
``(i) accept any consulting, advisory, or other
compensatory fee from the issuer; or
``(ii) be an affiliated person of the issuer or any
subsidiary thereof.
``(C) Exemption authority.--The Commission may exempt from
the requirements of subparagraph (B) a particular
relationship with respect to audit committee members, as the
Commission determines appropriate in light of the
circumstances.
``(4) Complaints.--Each audit committee shall establish
procedures for--
``(A) the receipt, retention, and treatment of complaints
received by the issuer regarding accounting, internal
accounting controls, or auditing matters; and
``(B) the confidential, anonymous submission by employees
of the issuer of concerns regarding questionable accounting
or auditing matters.
``(5) Authority to engage advisers.--Each audit committee
shall have the authority to engage independent counsel and
other advisers, as it determines necessary to carry out its
duties.
``(6) Funding.--Each issuer shall provide for appropriate
funding, as determined by the audit committee, in its
capacity as a committee of the board of directors, for
payment of compensation--
``(A) to the registered public accounting firm employed by
the issuer for the purpose of rendering or issuing an audit
report; and
``(B) to any advisers employed by the audit committee under
paragraph (5).''.

SEC. 302. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.

(a) Certification of Periodic Reports.--Each periodic
report containing financial statements filed by an issuer
with the Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934, shall be accompanied by a
written statement by the chief executive officer and chief
financial officer (or the equivalent thereof) of the issuer.
(b) Content.--The statement required by subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report, and that
those financial statements and disclosures fairly present, in
all material respects, the operations and financial condition
of the issuer.
(c) Foreign Reincorporations Have No Effect.--Nothing in
this section 302 shall be interpreted or applied in any way
to allow any issuer to lessen the legal force of the
statement required under this section 302, by an issuer
having reincorporated or having engaged in any other
transaction that resulted in the transfer of the corporate
domicile or offices of the issuer from inside the United
States to outside of the United States.

SEC. 303. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.

(a) Rules To Prohibit.--It shall be unlawful, in
contravention of such rules or regulations as the Commission
shall prescribe as necessary and appropriate in the public
interest or for the protection of investors, for any officer
or director of an issuer, or any other person acting under
the direction thereof, to take any action to fraudulently
influence, coerce, manipulate, or mislead any independent
public or certified accountant engaged in the performance of
an audit of the financial statements of that issuer for the
purpose of rendering such financial statements materially
misleading.
(b) Enforcement.--In any civil proceeding, the Commission
shall have exclusive authority to enforce this section and
any rule or regulation issued under this section.
(c) No Preemption of Other Law.--The provisions of
subsection (a) shall be in addition to, and shall not
supersede or preempt, any other provision of law or any rule
or regulation issued thereunder.
(d) Deadline for Rulemaking.--The Commission shall--
(1) propose the rules or regulations required by this
section, not later than 90 days after the date of enactment
of this Act; and
(2) issue final rules or regulations required by this
section, not later than 270 days after that date of
enactment.

SEC. 304. FORFEITURE OF CERTAIN BONUSES AND PROFITS.

(a) Additional Compensation Prior to Noncompliance With
Commission Financial Reporting Requirements.--If an issuer is
required to prepare an accounting restatement due to the
material noncompliance of the issuer, as a result of
misconduct, with any financial reporting requirement under
the securities laws, the chief executive officer and chief
financial officer of the issuer shall reimburse the issuer
for--
(1) any bonus or other incentive-based or equity-based
compensation received by that person from the issuer during
the 12-month period following the first public issuance or
filing with the Commission (whichever first occurs) of the
financial document embodying such financial reporting
requirement; and
(2) any profits realized from the sale of securities of the
issuer during that 12-month period.
(b) Commission Exemption Authority.--The Commission may
exempt any person from the application of subsection (a), as
it deems necessary and appropriate.

SEC. 305. OFFICER AND DIRECTOR BARS AND PENALTIES.

(a) Unfitness Standard.--
(1) Securities exchange act of 1934.--Section 21(d)(2) of
the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(2)) is
amended by striking ``substantial unfitness'' and inserting
``unfitness''.
(2) Securities act of 1933.--Section 20(e) of the
Securities Act of 1933 (15 U.S.C. 77t(e)) is amended by
striking ``substantial unfitness'' and insert ``unfitness''.
(b) Equitable Relief.--Section 21(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended--
(1) by redesignating paragraphs (2) through (4) as
paragraphs (3) through (5), respectively; and
(2) by inserting after paragraph (1) the following:
``(2) Equitable relief.--In any action or proceeding
brought or instituted by the Commission under any provision
of the securities laws, the Commission may seek, and any
Federal court may grant, any equitable relief that may be
appropriate or necessary for the benefit of investors.''.

SEC. 306. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS
PROHIBITED.

(a) Prohibition.--It shall be unlawful for any director or
executive officer of an issuer of any equity security (other
than an exempted security), directly or indirectly, to
purchase, sell, or otherwise acquire or transfer any equity
security of the issuer (other than an exempted security),
during any blackout period with respect to such equity
security, in accordance with any exception provided by rule
of the Commission pursuant to subsection (d).
(b) Effectiveness.--
(1) Notice requirements.--Except as provided in paragraph
(2), no blackout period may take effect earlier than 30 days
after the date on which written notice of such blackout
period is provided by the plan administrator to the
participants or beneficiaries.
(2) Exception.--The 30-day notice requirement in paragraph
(1) shall not apply, and notice under paragraph (1) shall be
furnished as soon as is reasonably possible, in any case in
which--
(A) a deferral of the blackout period would violate the
requirements of subparagraph (A) or (B) of section 404(a)(1)
of the Employment Retirement Income Security Act of 1974, and
a fiduciary of the plan so reasonably determines in writing;
or
(B) the inability to provide the 30-day notice is due to
events that were unforeseeable, or circumstances beyond the
reasonable control of the plan administrator, and a fiduciary
of the plan so reasonably determines in writing.

[[Page S6788]]

(3) Written notice.--The notice required to be provided
under paragraph (1) shall be in writing, except that such
notice may be in electronic form to the extent that such form
is reasonably accessible to the recipient.
(c) Remedy.--
(1) In general.--Any profit realized by a director or
executive officer referred to in subsection (a) from any
purchase, sale, or other acquisition or transfer in violation
of this section shall inure to and be recoverable by the
issuer, irrespective of any intention on the part of such
director or executive officer in entering into the
transaction.
(2) Actions to recover profits.--An action to recover
profits in accordance with this section may be instituted at
law or in equity in any court of competent jurisdiction by
the issuer, or by the owner of any security of the issuer in
the name and in behalf of the issuer if the issuer fails or
refuses to bring such action within 60 days after the date of
request, or fails diligently to prosecute the action
thereafter, except that no such suit shall be brought more
than 2 years after the date on which such profit was
realized.
(d) Rulemaking Authorized.--The Commission may issue rules
to clarify the application of this subsection, to ensure
adequate notice to all persons affected by this subsection,
and to prevent evasion thereof.
(e) Definitions.--For purposes of this section--
(1) the term ``blackout period'', with respect to the
equity securities of any issuer--
(A) means any period during which the ability of not fewer
than 50 percent of the participants or beneficiaries under
all applicable individual account plans maintained by the
issuer to purchase, sell, or otherwise acquire or transfer an
interest in any equity of such issuer held in such an
individual account plan, is suspended by the issuer or a
fiduciary of the plan; and
(B) does not include--
(i) a period in which the employees of an issuer may not
allocate their interests in the individual account plan due
to an express investment restriction--

(I) incorporated into the individual account plan; and
(II) timely disclosed to employees before joining the
individual account plan or as a subsequent amendment to the
plan; or

(ii) any suspension described in subparagraph (A) that is
imposed solely in connection with persons becoming
participants or beneficiaries, or ceasing to be participants
or beneficiaries, in an applicable individual account plan by
reason of a corporate merger, acquisition, divestiture, or
similar transaction; and
(2) the term ``individual account plan'' has the same
meaning as in section 3(34) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1002(34)).

TITLE IV--ENHANCED FINANCIAL DISCLOSURES

SEC. 401. DISCLOSURES IN PERIODIC REPORTS.

(a) Disclosures Required.--Section 13 of the Securities
Exchange Act of 1934 (15 U.S.C. 78m) is amended by adding at
the end the following:
``(i) Accuracy of Financial Reports.--Each financial report
that is required to be prepared in accordance with generally
accepted accounting principles under this title and filed
with the Commission shall reflect all material correcting
adjustments that have been identified by a registered public
accounting firm in accordance with generally accepted
accounting principles and the rules and regulations of the
Commission.
``(j) Off-Balance Sheet Transactions.--Not later than 180
days after the date of enactment of the Public Company
Accounting Reform and Investor Protection Act of 2002, the
Commission shall issue final rules providing that each annual
and quarterly financial report required to be filed with the
Commission shall disclose all material off-balance sheet
transactions, arrangements, obligations (including contingent
obligations), and other relationships of the issuer with
unconsolidated entities or other persons, that may have a
material current or future effect on financial condition,
changes in financial condition, results of operations,
liquidity, capital expenditures, capital resources, or
significant components of revenues or expenses.''.
(b) Commission Rules on Pro Forma Figures.--Not later than
180 days after the date of enactment of this Act, the
Commission shall issue final rules providing that pro forma
financial information included in any periodic or other
report filed with the Commission pursuant to the securities
laws, or in any public disclosure or press or other release,
shall be presented in a manner that--
(1) does not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make
the pro forma financial information, in light of the
circumstances under which it is presented, not misleading;
and
(2) reconciles it with the financial condition and results
of operations of the issuer under generally accepted
accounting principles.
(c) Study and Report on Special Purpose Entities.--
(1) Study required.--The Commission shall, not later than 1
year after the effective date of adoption of off-balance
sheet disclosure rules required by section 13(j) of the
Securities Exchange Act of 1934, as added by this section,
complete a study of filings by issuers and their disclosures
to determine--
(A) the extent of off-balance sheet transactions, including
assets, liabilities, leases, losses, and the use of special
purpose entities; and
(B) whether generally accepted accounting rules result in
financial statements of issuers reflecting the economics of
such off-balance sheet transactions to investors in a
transparent fashion.
(2) Report and recommendations.--Not later than 6 months
after the date of completion of the study required by
paragraph (1), the Commission shall submit a report to the
President, the Committee on Banking, Housing, and Urban
Affairs of the Senate, and the Committee on Financial
Services of the House of Representatives, setting forth--
(A) the amount or an estimate of the amount of off-balance
sheet transactions, including assets, liabilities, leases,
and losses of, and the use of special purpose entities by,
issuers filing periodic reports pursuant to section 13 or 15
of the Securities Exchange Act of 1934;
(B) the extent to which special purpose entities are used
to facilitate off-balance sheet transactions;
(C) whether generally accepted accounting principles or the
rules of the Commission result in financial statements of
issuers reflecting the economics of such transactions to
investors in a transparent fashion;
(D) whether generally accepted accounting principles
specifically result in the consolidation of special purpose
entities sponsored by an issuer in cases in which the issuer
has the majority of the risks and rewards of the special
purpose entity; and
(E) any recommendations of the Commission for improving the
transparency and quality of reporting off-balance sheet
transactions in the financial statements and disclosures
required to be filed by an issuer with the Commission.

SEC. 402. ENHANCED CONFLICT OF INTEREST PROVISIONS.

(a) Prohibition on Personal Loans to Executives.--Section
13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as
amended by this Act, is amended by adding at the end the
following:
``(k) Prohibition on Personal Loans to Executives.--
``(1) In general.--It shall be unlawful for any issuer,
directly or indirectly, to extend or maintain credit, or
arrange for the extension of credit, in the form of a
personal loan to or for any director or executive officer (or
equivalent thereof) of that issuer.
``(2) Limitation.--Paragraph (1) does not preclude any home
improvement and manufactured home loans (as that term is
defined in section 5 of the Home Owners Loan Act), consumer
credit (as defined in section 103 of the Truth in Lending
Act), or any extension of credit under an open end credit
plan (as defined in section 103 of the Truth in Lending Act
(15 U.S.C. 1602)), that is--
``(A) made in the ordinary course of the consumer credit
business of such issuer;
``(B) of a type that is generally made available by such
issuer to the public; and
``(C) made by such issuer on market terms, or terms that
are no more favorable than those offered by the issuer to the
general public for such loans.''.

SEC. 403. DISCLOSURES OF TRANSACTIONS INVOLVING MANAGEMENT
AND PRINCIPAL STOCKHOLDERS.

Section 16(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78p(a)) is amended--
(1) by striking ``security, shall file,'' and inserting the
following:
``(1) shall file''; and
(2) by striking ``beneficial owner, and'' and all that
follows through the end of the subsection and inserting the
following: ``beneficial owner; and
``(2) if there has been a change in such ownership, or if
such person shall have purchased or sold a security-based
swap agreement (as defined in section 206B of the Gramm-
Leach-Bliley Act) involving such equity security, shall file
with the Commission (and if such security is registered on a
national securities exchange, shall also file with the
exchange), a statement before the end of the second business
day following the day on which the subject transaction has
been executed, or at such other time as the Commission shall
establish, by rule, in any case in which the Commission
determines that such 2-day period is not feasible, indicating
ownership by that person at the date of filing, any such
changes in such ownership, and such purchases and sales of
the security-based swap agreements as have occurred since the
most recent such filing under this paragraph.''.

SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.

(a) Rules Required.--The Commission shall prescribe rules
requiring each annual report required by section 13 of the
Securities Exchange Act of 1934 (15 U.S.C. 78m) to contain an
internal control report, which shall--
(1) state the responsibility of management for establishing
and maintaining an adequate internal control structure and
procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent
fiscal year of the issuer, of the effectiveness of the
internal control structure and procedures of the issuer for
financial reporting.
(b) Internal Control Evaluation and Reporting.--With
respect to the internal control assessment required by
subsection (a), each registered public accounting firm that
prepares or issues the audit report for the issuer shall
attest to, and report on, the assessment made by the
management of the issuer. An attestation made under this
subsection shall be made in accordance with standards for
attestation engagements issued or adopted by the Board. Any
such attestation shall not be the subject of a separate
engagement.

SEC. 405. EXEMPTION.

Nothing in section 401, 402, or 404, the amendments made by
those sections, or the rules of the Commission under those
sections shall apply to any investment company registered
under section 8 of the Investment Company Act of 1940 (15
U.S.C. 80a-8).

SEC. 406. CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS.

(a) Code of Ethics Disclosure.--The Commission shall issue
rules to require each issuer,

[[Page S6789]]

together with periodic reports required pursuant to sections
13(a) and 15(d) of the Securities Exchange Act of 1934, to
disclose whether or not, and if not, the reason therefor,
such issuer has adopted a code of ethics for senior financial
officers, applicable to its principal financial officer,
comptroller or principal accounting officer, or persons
performing similar functions.
(b) Changes in Codes of Ethics.--The Commission shall
revise its regulations concerning matters requiring prompt
disclosure on Form 8-K (or any successor thereto) to require
the immediate disclosure, by means of the filing of such
form, dissemination by the Internet or by other electronic
means, by any issuer of any change in or waiver of the code
of ethics of the issuer.
(c) Definition.--In this section, the term ``code of
ethics'' means such standards as are reasonably necessary to
promote--
(1) honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest between
personal and professional relationships;
(2) full, fair, accurate, timely, and understandable
disclosure in the periodic reports required to be filed by
the issuer; and
(3) compliance with applicable governmental rules and
regulations.
(d) Deadline for Rulemaking.--The Commission shall--
(1) propose rules to implement this section, not later than
90 days after the date of enactment of this Act; and
(2) issue final rules to implement this section, not later
than 180 days after that date of enactment.

SEC. 407. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT.

(a) Rules Defining ``Financial Expert''.--The Commission
shall issue rules, as necessary or appropriate in the public
interest and consistent with the protection of investors, to
require each issuer, together with periodic reports required
pursuant to sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, to disclose whether or not, and if not,
the reasons therefor, the audit committee of that issuer is
comprised of at least 1 member who is a financial expert, as
such term is defined by the Commission.
(b) Considerations.--In defining the term ``financial
expert'' for purposes of subsection (a), the Commission shall
consider whether a person has, through education and
experience as a public accountant or auditor or a principal
financial officer, comptroller, or principal accounting
officer of an issuer, or from a position involving the
performance of similar functions--
(1) an understanding of generally accepted accounting
principles and financial statements;
(2) experience in--
(A) the preparation or auditing of financial statements of
generally comparable issuers; and
(B) the application of such principles in connection with
the accounting for estimates, accruals, and reserves;
(3) experience with internal accounting controls; and
(4) an understanding of audit committee functions.
(c) Deadline for Rulemaking.--The Commission shall--
(1) propose rules to implement this section, not later than
90 days after the date of enactment of this Act; and
(2) issue final rules to implement this section, not later
than 180 days after that date of enactment.

TITLE V--ANALYST CONFLICTS OF INTEREST

SEC. 501. TREATMENT OF SECURITIES ANALYSTS BY REGISTERED
SECURITIES ASSOCIATIONS.

(a) Rules Regarding Securities Analysts.--Section 15A of
the Securities Exchange Act of 1934 (15 U.S.C. 78o-3) is
amended by adding at the end the following:
``(n) Rules Regarding Securities Analysts.--
``(1) Analyst protections.--The Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange, shall
have adopted, not later than 1 year after the date of
enactment of this subsection, rules reasonably designed to
address conflicts of interest that can arise when research
analysts recommend equity securities in research reports and
public appearances, in order to improve the objectivity of
research and provide investors with more useful and reliable
information, including rules designed--
``(A) to foster greater public confidence in securities
research, and to protect the objectivity and independence of
securities analysts, by--
``(i) restricting the prepublication clearance or approval
of research reports by persons employed by the broker or
dealer who are engaged in investment banking activities, or
persons not directly responsible for investment research,
other than legal or compliance staff;
``(ii) limiting the supervision and compensatory evaluation
of securities analysts to officials employed by the broker or
dealer who are not engaged in investment banking activities;
and
``(iii) requiring that a broker or dealer and persons
employed by a broker or dealer who are involved with
investment banking activities may not, directly or
indirectly, retaliate against or threaten to retaliate
against any securities analyst employed by that broker or
dealer or its affiliates as a result of an adverse, negative,
or otherwise unfavorable research report that may adversely
affect the present or prospective investment banking
relationship of the broker or dealer with the issuer that is
the subject of the research report, except that such rules
may not limit the authority of a broker or dealer to
discipline a securities analyst for causes other than such
research report in accordance with the policies and
procedures of the firm;
``(B) to define periods during which brokers or dealers who
have participated, or are to participate, in a public
offering of securities as underwriters or dealers should not
publish or otherwise distribute research reports relating to
such securities or to the issuer of such securities;
``(C) to establish structural and institutional safeguards
within registered brokers or dealers to assure that
securities analysts are separated by appropriate
informational partitions within the firm from the review,
pressure, or oversight of those whose involvement in
investment banking activities might potentially bias their
judgment or supervision; and
``(D) to address such other issues as the Commission, or
such association or exchange, determines appropriate.
``(2) Disclosure.--The Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange, shall
have adopted, not later than 1 year after the date of
enactment of this subsection, rules reasonably designed to
require each securities analyst to disclose in public
appearances, and each registered broker or dealer to disclose
in each research report, as applicable, conflicts of interest
that are known or should have been known by the securities
analyst or the broker or dealer, to exist at the time of the
appearance or the date of distribution of the report,
including--
``(A) the extent to which the securities analyst has debt
or equity investments in the issuer that is the subject of
the appearance or research report;
``(B) whether any compensation has been received by the
registered broker or dealer, or any affiliate thereof,
including the securities analyst, from the issuer that is the
subject of the appearance or research report, subject to such
exemptions as the Commission may determine appropriate and
necessary to prevent disclosure by virtue of this
subparagraph of material non-public information regarding
specific potential future investment banking transactions of
such issuer, as is appropriate in the public interest and
consistent with the protection of investors;
``(C) whether an issuer, the securities of which are
recommended in the appearance or research report, currently
is, or during the 1-year period preceding the date of the
appearance or date of distribution of the report has been, a
client of the registered broker or dealer, and if so, stating
the types of services provided to the issuer;
``(D) whether the securities analyst received compensation
with respect to a research report, based upon (among any
other factors) the investment banking revenues (either
generally or specifically earned from the issuer being
analyzed) of the registered broker or dealer; and
``(E) such other disclosures of conflicts of interest that
are material to investors, research analysts, or the broker
or dealer as the Commission, or such association or exchange,
determines appropriate.
``(3) Definitions.--In this subsection--
``(A) the term `securities analyst' means any associated
person of a registered broker or dealer that is principally
responsible for, and any associated person who reports
directly or indirectly to a securities analyst in connection
with, the preparation of the substance of a research report,
whether or not any such person has the job title of
`securities analyst'; and
``(B) the term `research report' means a written or
electronic communication that includes an analysis of equity
securities of individual companies or industries, and that
provides information reasonably sufficient upon which to base
an investment decision.''.
(b) Enforcement.--Section 21B(a) of the Securities Exchange
Act of 1934 (15 U.S.C. 78u-2(a)) is amended by inserting
``15A(n),'' before ``15B''.
(c) Commission Authority.--The Commission may promulgate
and amend its regulations, or direct a registered securities
association or national securities exchange to promulgate and
amend its rules, to carry out section 15A(n) of the
Securities Exchange Act of 1934, as added by this section, as
is necessary for the protection of investors and in the
public interest.

TITLE VI--COMMISSION RESOURCES AND AUTHORITY

SEC. 601. AUTHORIZATION OF APPROPRIATIONS.

Section 35 of the Securities Exchange Act of 1934 (15
U.S.C. 78kk) is amended to read as follows:

``SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

``In addition to any other funds authorized to be
appropriated to the Commission, there are authorized to be
appropriated to carry out the functions, powers, and duties
of the Commission, $776,000,000 for fiscal year 2003, of
which--
``(1) $102,700,000 shall be available to fund additional
compensation, including salaries and benefits, as authorized
in the Investor and Capital Markets Fee Relief Act (Public
Law 107-123; 115 Stat. 2390 et seq.);
``(2) $108,400,000 shall be available for information
technology, security enhancements, and recovery and
mitigation activities in light of the terrorist attacks of
September 11, 2001; and
``(3) $98,000,000 shall be available to add not fewer than
an additional 200 qualified professionals to provide enhanced
oversight of auditors and audit services required by the
Federal securities laws, and to improve Commission
investigative and disciplinary efforts with respect to such
auditors and services, as well as for additional professional
support staff necessary to strengthen the programs of the
Commission involving Full Disclosure and Prevention and
Suppression of Fraud, risk management, industry technology
review, compliance, inspections, examinations, market
regulation, and investment management.''.

[[Page S6790]]

SEC. 602. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.

(a) In General.--The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by inserting after section 4B
the following:

``SEC. 4C. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.

``(a) Authority To Censure.--The Commission may censure any
person, or deny, temporarily or permanently, to any person
the privilege of appearing or practicing before the
Commission in any way, if that person is found by the
Commission, after notice and opportunity for hearing in the
matter--
``(1) not to possess the requisite qualifications to
represent others;
``(2) to be lacking in character or integrity, or to have
engaged in unethical or improper professional conduct; or
``(3) to have willfully violated, or willfully aided and
abetted the violation of, any provision of the securities
laws or the rules and regulations issued thereunder.
``(b) Definition.--With respect to any registered public
accounting firm, for purposes of this section, the term
`improper professional conduct' means--
``(1) intentional or knowing conduct, including reckless
conduct, that results in a violation of applicable
professional standards; and
``(2) negligent conduct in the form of--
``(A) a single instance of highly unreasonable conduct that
results in a violation of applicable professional standards
in circumstances in which the registered public accounting
firm knows, or should know, that heightened scrutiny is
warranted; or
``(B) repeated instances of unreasonable conduct, each
resulting in a violation of applicable professional
standards, that indicate a lack of competence to practice
before the Commission.
``(c) Study and Report.--(1) The Commission shall conduct a
study to determine based upon information for the period from
January 1, 1998 to December 31, 2001--
``(A) the number of `securities professionals', which term
shall mean public accountants, public accounting firms,
investment bankers, investment advisers, brokers, dealers,
attorneys, and other securities professionals practicing
before the Commission--
``(i) who have been found to have aided and abetted a
violation of the Federal securities laws, including rules or
regulations promulgated thereunder (hereinafter collectively
referred to as `Federal securities laws'), but who have not
been sanctioned, disciplined, or otherwise penalized as a
primary violator in any administrative action or civil
proceeding, including in any settlement of such actions or
proceedings (referred to hereinafter as `aiders and
abettors'); and
``(ii) who have been found to have been primary violators
of the Federal securities laws;
``(B) a description of the Federal securities laws
violations committed by aiders and abettors and by primary
violators, including--
``(i) the specific provisions of the Federal securities
laws violated;
``(ii) the specific sanctions and penalties imposed upon,
such aiders and abettors and primary violators, including the
amount of any monetary penalties assessed upon and collected
from such persons;
``(iii) the occurrence of multiple violations by the same
person or persons either as an aider or abettor or as a
primary violator; and
``(iv) whether as to each such violator disciplinary
sanctions have been imposed, including any censure,
suspension, temporary bar, or permanent bar to practice
before the Commission; and
``(C) the amount of disgorgement, restitution or any other
fines or payments the Commission has (i) assessed upon and
(ii) collected from, aiders and abettors and from primary
violators.
``(2) A report based upon the study conducted pursuant to
subsection (c)(1) shall be submitted to the Senate Committee
on Banking, Housing, and Urban Affairs no later than 6 months
after the date of enactment of the `Public Company Accounting
Reform and Investor Protection Act of 2002'.
``(d) Rules of Professional Responsibility for Attorneys.--
Not later than 180 days after the date of enactment of this
section, the Commission shall establish rules, in the public
interest and for the protection of investors, setting forth
minimum standards of professional conduct for attorneys
appearing and practicing before the Commission in any way in
the representation of public companies, including a rule
requiring an attorney to report evidence of a material
violation of securities law or breach of fiduciary duty or
similar violation by the company or any agent thereof to the
chief legal counsel or the chief executive officer of the
company (or the equivalent thereof) and, if the counsel or
officer does not appropriately respond to the evidence
(adopting, as necessary, appropriate remedial measures or
sanctions with respect to the violation), requiring the
attorney to report the evidence to the audit committee of the
board of directors or to another committee of the board of
directors comprised solely of directors not employed directly
or indirectly by the company, or to the board of
directors.''.
(b) Electronic Filing.--Notwithstanding the provisions of
section 403 of this Act, section 16(a)(2) of the Securities
and Exchange Act of 1934, as added by section 403, is amended
to read as follows:
``(2) if there has been a change in such ownership, or if
such person shall have purchased or sold a security-based
swap agreement (as defined in section 206B of the Gramm-
Leach-Bliley Act) involving such equity security, shall file
electronically with the Commission (and if such security is
registered on a national securities exchange, shall also file
with the exchange), a statement before the end of the second
business day following the day on which the subject
transaction has been executed, or at such other times as the
Commission shall establish, by rule, in any case in which the
Commission determines that such 2 day period is not feasible,
and the Commission shall provide that statement on a publicly
accessible Internet site not later than the end of the
business day following that filing, and the issuer (if the
issuer maintains a corporate website) shall provide that
statement on that corporate website not later than the end of
the business day following that filing (the requirements of
this paragraph with respect to electronic filing and
providing the statement on a corporate website shall take
effect 1 year after the date of enactment of this paragraph),
indicating ownership by that person at the date of filing,
any such changes in such ownership, and such purchases and
sales of the security-based swap agreements as have occurred
since the most recent such filing under this paragraph.''.

SEC. 603. FEDERAL COURT AUTHORITY TO IMPOSE PENNY STOCK BARS.

(a) Securities Exchange Act of 1934.--Section 21(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u(d)), as
amended by this Act, is amended by adding at the end the
following:
``(7) Authority of a court to prohibit persons from
participating in an offering of penny stock.--
``(A) In general.--In any proceeding under paragraph (1)
against any person participating in, or, at the time of the
alleged misconduct who was participating in, an offering of
penny stock, the court may prohibit that person from
participating in an offering of penny stock, conditionally or
unconditionally, and permanently or for such period of time
as the court shall determine.
``(B) Definition.--For purposes of this paragraph, the term
`person participating in an offering of penny stock' includes
any person engaging in activities with a broker, dealer, or
issuer for purposes of issuing, trading, or inducing or
attempting to induce the purchase or sale of, any penny
stock. The Commission may, by rule or regulation, define such
term to include other activities, and may, by rule,
regulation, or order, exempt any person or class of persons,
in whole or in part, conditionally or unconditionally, from
inclusion in such term.
(b) Securities Act of 1933.--Section 20 of the Securities
Act of 1933 (15 U.S.C. 77t) is amended by adding at the end
the following:
``(g) Authority of a Court To Prohibit Persons From
Participating in an Offering of Penny Stock.--
``(1) In general.--In any proceeding under subsection (a)
against any person participating in, or, at the time of the
alleged misconduct, who was participating in, an offering of
penny stock, the court may prohibit that person from
participating in an offering of penny stock, conditionally or
unconditionally, and permanently or for such period of time
as the court shall determine.
``(2) Definition.--For purposes of this subsection, the
term `person participating in an offering of penny stock'
includes any person engaging in activities with a broker,
dealer, or issuer for purposes of issuing, trading, or
inducing or attempting to induce the purchase or sale of, any
penny stock. The Commission may, by rule or regulation,
define such term to include other activities, and may, by
rule, regulation, or order, exempt any person or class of
persons, in whole or in part, conditionally or
unconditionally, from inclusion in such term.''.

SEC. 604. QUALIFICATIONS OF ASSOCIATED PERSONS OF BROKERS AND
DEALERS.

(a) Brokers and Dealers.--Section 15(b)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o) is amended--
(1) by striking subparagraph (F) and inserting the
following:
``(F) is subject to any order of the Commission barring or
suspending the right of the person to be associated with a
broker or dealer;''; and
(2) in subparagraph (G), by striking the period at the end
and inserting the following: ``; or
``(H) is subject to any final order of a State securities
commission (or any agency or officer performing like
functions), State authority that supervises or examines
banks, savings associations, or credit unions, State
insurance commission (or any agency or office performing like
functions), an appropriate Federal banking agency (as defined
in section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813(q))), or the National Credit Union Administration,
that--
``(i) bars such person from association with an entity
regulated by such commission, authority, agency, or officer,
or from engaging in the business of securities, insurance,
banking, savings association activities, or credit union
activities; or
``(ii) constitutes a final order based on violations of any
laws or regulations that prohibit fraudulent, manipulative,
or deceptive conduct.''.
(b) Investment Advisers.--Section 203(e) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3(e)) is amended by
striking paragraphs (7) and (8) and inserting the following:
``(7) is subject to any order of the Commission barring or
suspending the right of the person to be associated with an
investment adviser; or
``(8) is subject to any final order of a State securities
commission (or any agency or officer performing like
functions), State authority that supervises or examines
banks, savings associations, or credit unions, State
insurance commission (or any agency or office performing like
functions), an appropriate Federal banking agency (as defined
in section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813(q))), or the National Credit Union Administration,
that--
``(A) bars such person from association with an entity
regulated by such commission, authority, agency, or officer,
or from engaging in the business of securities, insurance,
banking, savings association activities, or credit union
activities; or

[[Page S6791]]

``(B) constitutes a final order based on violations of any
laws or regulations that prohibit fraudulent, manipulative,
or deceptive conduct.''.
(c) Conforming Amendments.--
(1) Securities Exchange Act of 1934.--The Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended--
(A) in section 3(a)(39)(F) (15 U.S.C. 78c(a)(39)(F)), by
inserting ``, or is subject to an order or finding,'' before
``enumerated'';
(B) in each of sections 15(b)(6)(A)(i) (15 U.S.C.
78o(b)(6)(A)(i)), paragraphs (2) and (4) of section 15B(c)
(15 U.S.C. 78o-4(c)), and subparagraphs (A) and (C) of
section 15C(c)(1) (15 U.S.C. 78o-5(c)(1)) by striking ``or
omission'' each place that term appears, and inserting ``, or
is subject to an order or finding,''; and
(C) in each of paragraphs (3)(A) and (4)(C) of section
17A(c) (15 U.S.C. 78q-1(c)), by inserting ``, or is subject
to an order or finding,'' before ``enumerated'' each place
that term appears.
(2) Investment Advisers Act of 1940.--Section 203(f) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(f)) is
amended, by inserting ``or (3)'' after ``paragraph (2)''.

TITLE VII--STUDIES AND REPORTS

SEC. 701. GAO STUDY AND REPORT REGARDING CONSOLIDATION OF
PUBLIC ACCOUNTING FIRMS.

(a) Study Required.--The Comptroller General of the United
States shall conduct a study--
(1) to identify--
(A) the factors that have led to the consolidation of
public accounting firms since 1989 and the consequent
reduction in the number of firms capable of providing audit
services to large national and multi-national business
organizations that are subject to the securities laws;
(B) the present and future impact of the condition
described in subparagraph (A) on capital formation and
securities markets, both domestic and international; and
(C) solutions to any problems identified under subparagraph
(B), including ways to increase competition and the number of
firms capable of providing audit services to large national
and multinational business organizations that are subject to
the securities laws;
(2) of the problems, if any, faced by business
organizations that have resulted from limited competition
among public accounting firms, including--
(A) higher costs;
(B) lower quality of services;
(C) impairment of auditor independence; or
(D) lack of choice; and
(3) whether and to what extent Federal or State regulations
impede competition among public accounting firms.
(b) Consultation.--In planning and conducting the study
under this section, the Comptroller General shall consult
with--
(1) the Commission;
(2) the regulatory agencies that perform functions similar
to the Commission within the other member countries of the
Group of Seven Industrialized Nations;
(3) the Department of Justice; and
(4) any other public or private sector organization that
the Comptroller General considers appropriate.
(c) Report Required.--Not later than 1 year after the date
of enactment of this Act, the Comptroller General shall
submit a report on the results of the study required by this
section to the Committee on Banking, Housing, and Urban
Affairs of the Senate and the Committee on Financial Services
of the House of Representatives.

SEC. 702. COMMISSION STUDY AND REPORT REGARDING CREDIT RATING
AGENCIES.

(a) Study Required.--
(1) In general.--The Commission shall conduct a study of
the role and function of credit rating agencies in the
operation of the securities market.
(2) Areas of consideration.--The study required by this
subsection shall examine--
(A) the role of credit rating agencies in the evaluation of
issuers of securities;
(B) the importance of that role to investors and the
functioning of the securities markets;
(C) any impediments to the accurate appraisal by credit
rating agencies of the financial resources and risks of
issuers of securities;
(D) any barriers to entry into the business of acting as a
credit rating agency, and any measures needed to remove such
barriers;
(E) any measures which may be required to improve the
dissemination of information concerning such resources and
risks when credit rating agencies announce credit ratings;
and
(F) any conflicts of interest in the operation of credit
rating agencies and measures to prevent such conflicts or
ameliorate the consequences of such conflicts.
(b) Report Required.--The Commission shall submit a report
on the study required by subsection (a) to the President, the
Committee on Financial Services of the House of
Representatives, and the Committee on Banking, Housing, and
Urban Affairs of the Senate not later than 180 days after the
date of enactment of this Act.

TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY

SEC. 801. SHORT TITLE.

This title may be cited as the ``Corporate and Criminal
Fraud Accountability Act of 2002''.

SEC. 802. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.

(a) In General.--Chapter 73 of title 18, United States
Code, is amended by adding at the end the following:

``Sec. 1519. Destruction, alteration, or falsification of
records in Federal investigations and bankruptcy

``Whoever knowingly alters, destroys, mutilates, conceals,
covers up, falsifies, or makes a false entry in any record,
document, or tangible object with the intent to impede,
obstruct, or influence the investigation or proper
administration of any matter within the jurisdiction of any
department or agency of the United States or any case filed
under title 11, or in relation to or contemplation of any
such matter or case, shall be fined under this title,
imprisoned not more than 10 years, or both.

``Sec. 1520. Destruction of corporate audit records

``(a)(1) Any accountant who conducts an audit of an issuer
of securities to which section 10A(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1(a)) applies, shall
maintain all audit or review workpapers for a period of 5
years from the end of the fiscal period in which the audit or
review was concluded.
``(2) The Securities and Exchange Commission shall
promulgate, within 180 days, after adequate notice and an
opportunity for comment, such rules and regulations, as are
reasonably necessary, relating to the retention of relevant
records such as workpapers, documents that form the basis of
an audit or review, memoranda, correspondence,
communications, other documents, and records (including
electronic records) which are created, sent, or received in
connection with an audit or review and contain conclusions,
opinions, analyses, or financial data relating to such an
audit or review, which is conducted by any accountant who
conducts an audit of an issuer of securities to which section
10A(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78j-
1(a)) applies.
``(b) Whoever knowingly and willfully violates subsection
(a)(1), or any rule or regulation promulgated by the
Securities and Exchange Commission under subsection (a)(2),
shall be fined under this title, imprisoned not more than 5
years, or both.
``(c) Nothing in this section shall be deemed to diminish
or relieve any person of any other duty or obligation,
imposed by Federal or State law or regulation, to maintain,
or refrain from destroying, any document.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by adding at the end the following new items:

``1519. Destruction, alteration, or falsification of records in Federal
investigations and bankruptcy.
``1520. Destruction of corporate audit records.''.

SEC. 803. DEBTS NONDISCHARGEABLE IF INCURRED IN VIOLATION OF
SECURITIES FRAUD LAWS.

Section 523(a) of title 11, United States Code, is
amended--
(1) in paragraph (17), by striking ``or'' after the
semicolon;
(2) in paragraph (18), by striking the period at the end
and inserting ``; or''; and
(3) by adding at the end, the following:
``(19) that--
``(A) arises under a claim relating to--
``(i) the violation of any of the Federal securities laws
(as that term is defined in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), any
State securities laws, or any regulations or orders issued
under such Federal or State securities laws; or
``(ii) common law fraud, deceit, or manipulation in
connection with the purchase or sale of any security; and
``(B) results, in relation to any claim described in
subparagraph (A), from--
``(i) any judgment, order, consent order, or decree entered
in any Federal or State judicial or administrative
proceeding;
``(ii) any settlement agreement entered into by the debtor;
or
``(iii) any court or administrative order for any damages,
fine, penalty, citation, restitutionary payment, disgorgement
payment, attorney fee, cost, or other payment owed by the
debtor.''.

SEC. 804. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.

(a) In General.--Section 1658 of title 28, United States
Code, is amended--
(1) by inserting ``(a)'' before ``Except''; and
(2) by adding at the end the following:
``(b) Notwithstanding subsection (a), a private right of
action that involves a claim of fraud, deceit, manipulation,
or contrivance in contravention of a regulatory requirement
concerning the securities laws, as defined in section
3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(47)), may be brought not later than the earlier of--
``(1) two years after the discovery of the facts
constituting the violation; or
``(2) five years after such violation.''.
(b) Effective Date.--The limitations period provided by
section 1658(b) of title 28, United States Code, as added by
this section, shall apply to all proceedings addressed by
this section that are commenced on or after the date of
enactment of this Act.
(c) No Creation of Actions.--Nothing in this section shall
create a new, private right of action.

SEC. 805. REVIEW OF FEDERAL SENTENCING GUIDELINES FOR
OBSTRUCTION OF JUSTICE AND EXTENSIVE CRIMINAL
FRAUD.

Pursuant to section 994 of title 28, United States Code,
and in accordance with this section, the United States
Sentencing Commission shall review and amend, as appropriate,
the Federal Sentencing Guidelines and related policy
statements to ensure that--
(1) the base offense level and existing enhancements
contained in United States Sentencing Guideline 2J1.2
relating to obstruction of justice are sufficient to deter
and punish that activity;
(2) the enhancements and specific offense characteristics
relating to obstruction of justice are adequate in cases
where--

[[Page S6792]]

(A) documents and other physical evidence are actually
destroyed, altered, or fabricated;
(B) the destruction, alteration, or fabrication of evidence
involves--
(i) a large amount of evidence, a large number of
participants, or is otherwise extensive;
(ii) the selection of evidence that is particularly
probative or essential to the investigation; or
(iii) more than minimal planning; or
(C) the offense involved abuse of a special skill or a
position of trust;
(3) the guideline offense levels and enhancements for
violations of section 1519 or 1520 of title 18, United States
Code, as added by this title, are sufficient to deter and
punish that activity;
(4) the guideline offense levels and enhancements under
United States Sentencing Guideline 2B1.1 (as in effect on the
date of enactment of this Act) are sufficient for a fraud
offense when the number of victims adversely involved is
significantly greater than 50;
(5) a specific offense characteristic enhancing sentencing
is provided under United States Sentencing Guideline 2B1.1
(as in effect on the date of enactment of this Act) for a
fraud offense that endangers the solvency or financial
security of a substantial number of victims; and
(6) the guidelines that apply to organizations in United
States Sentencing Guidelines, chapter 8, are sufficient to
deter and punish organizational criminal misconduct.

SEC. 806. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED
COMPANIES WHO PROVIDE EVIDENCE OF FRAUD.

(a) In General.--Chapter 73 of title 18, United States
Code, is amended by inserting after section 1514 the
following:

``Sec. 1514A. Civil action to protect against retaliation in
fraud cases

``(a) Whistleblower Protection for Employees of Publicly
Traded Companies.--No company with a class of securities
registered under section 12 of the Securities Exchange Act of
1934 (15 U.S.C. 78l), or that is required to file reports
under section 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78o(d)), or any officer, employee, contractor,
subcontractor, or agent of such company, may discharge,
demote, suspend, threaten, harass, or in any other manner
discriminate against an employee in the terms and conditions
of employment because of any lawful act done by the
employee--
``(1) to provide information, cause information to be
provided, or otherwise assist in an investigation regarding
any conduct which the employee reasonably believes
constitutes a violation of section 1341, 1343, 1344, or 1348,
any rule or regulation of the Securities and Exchange
Commission, or any provision of Federal law relating to fraud
against shareholders, when the information or assistance is
provided to or the investigation is conducted by--
``(A) a Federal regulatory or law enforcement agency;
``(B) any Member of Congress or any committee of Congress;
or
``(C) a person with supervisory authority over the employee
(or such other person working for the employer who has the
authority to investigate, discover, or terminate misconduct);
or
``(2) to file, cause to be filed, testify, participate in,
or otherwise assist in a proceeding filed or about to be
filed (with any knowledge of the employer) relating to an
alleged violation of section 1341, 1343, 1344, or 1348, any
rule or regulation of the Securities and Exchange Commission,
or any provision of Federal law relating to fraud against
shareholders.
``(b) Enforcement Action.--
``(1) In general.--A person who alleges discharge or other
discrimination by any person in violation of subsection (a)
may seek relief under subsection (c), by--
``(A) filing a complaint with the Secretary of Labor; or
``(B) if the Secretary has not issued a final decision
within 180 days of the filing of the complaint and there is
no showing that such delay is due to the bad faith of the
claimant, bringing an action at law or equity for de novo
review in the appropriate district court of the United
States, which shall have jurisdiction over such an action
without regard to the amount in controversy.
``(2) Procedure.--
``(A) In general.--An action under paragraph (1)(A) shall
be governed under the rules and procedures set forth in
section 42121(b) of title 49, United States Code.
``(B) Exception.--Notification made under section
42121(b)(1) of title 49, United States Code, shall be made to
the person named in the complaint and to the employer.
``(C) Burdens of proof.--An action brought under paragraph
(1)(B) shall be governed by the legal burdens of proof set
forth in section 42121(b) of title 49, United States Code.
``(D) Statute of limitations.--An action under paragraph
(1) shall be commenced not later than 90 days after the date
on which the violation occurs.
``(c) Remedies.--
``(1) In general.--An employee prevailing in any action
under subsection (b)(1) shall be entitled to all relief
necessary to make the employee whole.
``(2) Compensatory damages.--Relief for any action under
paragraph (1) shall include--
``(A) reinstatement with the same seniority status that the
employee would have had, but for the discrimination;
``(B) the amount of back pay, with interest; and
``(C) compensation for any special damages sustained as a
result of the discrimination, including litigation costs,
expert witness fees, and reasonable attorney fees.
``(d) Rights Retained by Employee.--Nothing in this section
shall be deemed to diminish the rights, privileges, or
remedies of any employee under any Federal or State law, or
under any collective bargaining agreement.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 73 of title 18, United States Code, is
amended by inserting after the item relating to section 1514
the following new item:

``1514A. Civil action to protect against retaliation in fraud cases.''.

SEC. 807. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF
PUBLICLY TRADED COMPANIES.

(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:

``Sec. 1348. Securities fraud

``Whoever knowingly executes, or attempts to execute, a
scheme or artifice--
``(1) to defraud any person in connection with any security
of an issuer with a class of securities registered under
section 12 of the Securities Exchange Act of 1934 (15 U.S.C.
78l) or that is required to file reports under section 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or
``(2) to obtain, by means of false or fraudulent pretenses,
representations, or promises, any money or property in
connection with the purchase or sale of any security of an
issuer with a class of securities registered under section 12
of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or
that is required to file reports under section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(d));
shall be fined under this title, or imprisoned not more than
10 years, or both.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 63 of title 18, United States Code, is
amended by adding at the end the following new item:

``1348. Securities fraud.''.

TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS

SEC. 901. SHORT TITLE.

This title may be cited as the ``White-Collar Crime Penalty
Enhancement Act of 2002''.

SEC. 902. CRIMINAL PENALTIES FOR CONSPIRACY TO COMMIT OFFENSE
OR TO DEFRAUD THE UNITED STATES.

Section 371 of title 18, United States Code, is amended by
striking ``If two or more'' and all that follows through
``If, however,'' and inserting the following:
``(a) In General.--If 2 or more persons--
``(1) conspire to commit any offense against the United
States, in any manner or for any purpose, and 1 or more of
such persons do any act to effect the object of the
conspiracy, each person shall be fined or imprisoned, or
both, as set forth in the specific substantive offense which
was the object of the conspiracy; or
``(2) conspire to defraud the United States, or any agency
thereof in any manner or for any purpose, and 1 or more of
such persons do any act to effect the object of the
conspiracy, each person shall be fined under this title, or
imprisoned not more than 10 years, or both.
``(b) Misdemeanor Offense.--If, however,''.

SEC. 903. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.

(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five years'' and inserting
``10 years''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five years'' and inserting
``10 years''.

SEC. 904. CRIMINAL PENALTIES FOR VIOLATIONS OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974.

Section 501 of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1131) is amended--
(1) by striking ``$5,000'' and inserting ``$100,000'';
(1) by striking ``one year'' and inserting ``10 years'';
and
(3) by striking ``$100,000'' and inserting ``$500,000''.

SEC. 905. AMENDMENT TO SENTENCING GUIDELINES RELATING TO
CERTAIN WHITE-COLLAR OFFENSES.

(a) Directive to the United States Sentencing Commission.--
Pursuant to its authority under section 994(p) of title 18,
United States Code, and in accordance with this section, the
United States Sentencing Commission shall review and, as
appropriate, amend the Federal Sentencing Guidelines and
related policy statements to implement the provisions of this
title.
(b) Requirements.--In carrying out this section, the
Sentencing Commission shall--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of the offenses and the
penalties set forth in this title, the growing incidence of
serious fraud offenses which are identified above, and the
need to modify the sentencing guidelines and policy
statements to deter, prevent, and punish such offenses;
(2) consider the extent to which the guidelines and policy
statements adequately address--
(A) whether the guideline offense levels and enhancements
for violations of the sections amended by this title are
sufficient to deter and punish such offenses, and
specifically, are adequate in view of the statutory increases
in penalties contained in this title; and
(B) whether a specific offense characteristic should be
added in United States Sentencing Guideline section 2B1.1 in
order to provide for stronger penalties for fraud when the
crime is committed by a corporate officer or director;
(3) assure reasonable consistency with other relevant
directives and sentencing guidelines;
(4) account for any additional aggravating or mitigating
circumstances that might justify exceptions to the generally
applicable sentencing ranges;

[[Page S6793]]

(5) make any necessary conforming changes to the sentencing
guidelines; and
(6) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.

SEC. 906. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.

(a) In General.--Chapter 63 of title 18, United States
Code, is amended by adding at the end the following:

``Sec. 1348. Failure of corporate officers to certify
financial reports

``(a) Certification of Periodic Financial Reports.--Each
periodic report containing financial statements filed by an
issuer with the Securities Exchange Commission pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a
written statement by the chairman of the board, chief
executive officer, and chief financial officer (or equivalent
thereof) of the issuer.
``(b) Content.--The statement required under subsection (a)
shall certify the appropriateness of the financial statements
and disclosures contained in the periodic report or financial
report, and that those financial statements and disclosures
fairly present, in all material respects, the operations and
financial condition of the issuer.
``(c) Criminal Penalties.--Notwithstanding any other
provision of law--
``(1) any person who recklessly and knowingly violates any
provision of this section shall upon conviction be fined not
more than $500,000, or imprisoned not more than 5 years, or
both; or
``(2) any person who willfully violates any provision of
this section shall upon conviction be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.''.
(b) Technical and Conforming Amendment.--The section
analysis for chapter 63 of title 18, United States Code, is
amended by adding at the end the following:

``1348. Failure of corporate officers to certify financial reports.''.

SEC. 907. HIGHER MAXIMUM PENALTIES FOR MAIL AND WIRE FRAUD.

(a) Mail Fraud.--Section 1341 of title 18, United States
Code, is amended by striking ``five'' and inserting ``ten''.
(b) Wire Fraud.--Section 1343 of title 18, United States
Code, is amended by striking ``five'' and inserting ``ten''.

SEC. 908. TAMPERING WITH A RECORD OR OTHERWISE IMPEDING AN
OFFICIAL PROCEEDING.

Section 1512 of title 18, United States Code, is amended--
(1) by re-designating subsections (c), (d), (e), (f), (g),
(h), and (i) as subsections (d), (e), (f), (g), (h), (i) and
(j);
(2) by inserting after subsection (b) the following new
subsection:
``(c) Whoever corruptly--
``(1) alters, destroys, mutilates, or conceals a record,
document, or other object, or attempts to do so, with the
intent to impair the object's integrity or availability for
use in an official proceeding; or
``(2) otherwise obstructs, influences, or impedes any
official proceeding, or attempts to do so;
shall be fined under this title or imprisoned not more than
10 years, or both.''.

SEC. 909. TEMPORARY FREEZE AUTHORITY FOR THE SECURITIES AND
EXCHANGE COMMISSION.

(a) In General.--The Securities Exchange Act of 1934 is
amended by inserting after section 21C(c)(2) (15 U.S.C. 78u-
3(c)(2)) the following:
``(3) Temporary freeze.--(A) Whenever, during the course of
a lawful investigation involving possible violations of the
Federal securities laws by an issuer of publicly traded
securities or any of its directors, officers, partners,
controlling persons, agents, or employees, it shall appear to
the Commission that it is likely that the issuer will make
extraordinary payments (whether compensation or otherwise) to
any of the foregoing persons, the Commission may petition a
Federal district court for a temporary order requiring the
issuer to escrow, subject to court supervision, those
payments in an interest-bearing account for 45 days. Such an
order shall be entered, if the court finds that the issuer is
likely to make such extraordinary payments, only after notice
and opportunity for a hearing, unless the court determines
that notice and hearing prior to entry of the order would be
impracticable or contrary to the public interest. A temporary
order shall become effective immediately and shall be served
upon the parties subject to it and, unless set aside, limited
or suspended by court of competent jurisdiction, shall remain
effective and enforceable for 45 days. The period of the
order may be extended by the court upon good cause shown for
not longer than 45 days, provided that the combined period of
the order not exceed 90 days.
``(B) If the individual affected by such order is charged
with violations of the Federal securities laws by the
expiration of the 45 days (or the expiration of any extended
period), the escrow would continue, subject to court
approval, until the conclusion of any legal proceedings. The
issuer and the affected director, officer, partner,
controlling person, agent or employee would have the right to
petition the court for review of the order. If the individual
affected by such order is not charged, the escrow will
terminate at the expiration of the 45 days (or the expiration
of any extended period), and the payments (with accrued
interest) returned to the issuer.''.
(b) Technical Amendment.--Section 21C(c)(2) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2)) is
amended by striking ``This'' and inserting ``Paragraph (1) of
this''.

SEC. 910. AMENDMENT TO THE FEDERAL SENTENCING GUIDELINES.

(a) Request for Immediate Consideration by the United
States Sentencing Commission.--Pursuant to its authority
under section 994(p) of title 28, United States Code, and in
accordance with this section, the United States Sentencing
Commission is requested to--
(1) promptly review the sentencing guidelines applicable to
securities and accounting fraud and related offenses;
(2) expeditiously consider promulgation of new sentencing
guidelines or amendments to existing sentencing guidelines to
provide an enhancement for officers or directors of publicly
traded corporations who commit fraud and related offenses;
and
(3) submit to Congress an explanation of actions taken by
the Commission pursuant to paragraph (2) and any additional
policy recommendations the Commission may have for combating
offenses described in paragraph (1).
(b) Other.--In carrying out this section, the Sentencing
Commission is requested to--
(1) ensure that the sentencing guidelines and policy
statements reflect the serious nature of securities, pension,
and accounting fraud and the need for aggressive and
appropriate law enforcement action to prevent such offenses;
(2) assure reasonable consistency with other relevant
directives and with other guidelines;
(3) account for any aggravating or mitigating circumstances
that might justify exceptions, including circumstances for
which the sentencing guidelines currently provide sentencing
enhancements;
(4) make any necessary conforming changes to the sentencing
guidelines; and
(5) assure that the guidelines adequately meet the purposes
of sentencing as set forth in section 3553(a)(2) of title 18,
United States Code.
(c) Emergency Authority and Deadline for Commission
Action.--The Commission is requested to promulgate the
guidelines or amendments provided for under this section as
soon as practicable, and in any event not later than the 120
days after the date of the enactment of this Act, in
accordance with the procedures set forth in section 21(a) of
the Sentencing Reform Act of 1987, as though the authority
under that Act had not expired.

SEC. 911. AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS
FROM SERVING AS OFFICERS OR DIRECTORS.

(a) In section 21C of the Securities Exchange Act of 1934,
add at the end a new subsection as follows:
``(f) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 10(b) of this title or
the rules or regulations thereunder from acting as an officer
or director of any issuer that has a class of securities
registered pursuant to section 12 of this title or that is
required to file reports pursuant to section 15(d) of this
title if the person's conduct demonstrates unfitness to serve
as an officer or director of any such issuer.''.
(b) In section 8A of the Securities Act of 1933 add at the
end a new subsection as follows:
``(f) Authority of the Commission To Prohibit Persons From
Serving as Officers or Directors.--In any cease-and-desist
proceeding under subsection (a), the Commission may issue an
order to prohibit, conditionally or unconditionally, and
permanently or for such period of time as it shall determine,
any person who has violated section 17(a)(1) of this title
from acting as an officer or director of any issuer that has
a class of securities registered pursuant to section 12 of
the Securities Exchange Act of 1934 or that is required to
file reports pursuant to section 15(d) of that Act if the
person's conduct demonstrates unfitness to serve as an
officer or director of any such issuer.''.

TITLE X--CORPORATE TAX RETURNS

SEC. 1001. SENSE OF THE SENATE REGARDING THE SIGNING OF
CORPORATE TAX RETURNS BY CHIEF EXECUTIVE
OFFICERS.

It is the sense of the Senate that the Federal income tax
return of a corporation should be signed by the chief
executive officer of such corporation.
The PRESIDING OFFICER. The Senate insists on its amendment and
requests a conference with the House.

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