[Congressional Record (Bound Edition), Volume 148 (2002), Part 9]
[Senate]
[Pages 12915-12977]
[From the U.S. 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.
  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

[[Page 12916]]

     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

[[Page 12917]]

clearcut, absolutely unequivocal statement about the use of stock 
options for accounting. Does the Senator really believe that, since my 
amendment was blocked by that side, his amendment is not going to be 
blocked by this side?
  The fix is in, I say to the Senator from Michigan. I hope he knows 
that. This is a terrible mistake, a terrible mistake, because we are 
not addressing what every observer knows is a vital and critical aspect 
of reforming this system, which continues to so badly erode the 
confidence of the American people, the investors, which is over half of 
the American people.
  I wonder if the Senator from Michigan remembers what I said last 
week, that the fact is the fix is in. I didn't get a vote on my 
amendment and the Senator from Michigan won't get one on his. Very 
frankly, since that side blocked my vote, I can understand them 
blocking this vote. I think it is wrong on both sides.
  The American people deserve to know how we stand on the issue of 
stock options. Does the Senator understand that?
  Mr. REID. Will my friend yield for a question on my time?
  Mr. LEVIN. I am happy to.
  Mr. REID. The Senator will recall the Senator from Arizona talking 
about the fix being in, and the Record will clearly reflect that the 
Senator from Arizona asked that his amendment be in order postcloture, 
and, as the Senator from Michigan will recall, I objected to that 
because at that time we had 56 other amendments that were pending. They 
also wanted them to be in order.
  Mr. McCAIN. If the Senator will yield, that is not correct. Mine was 
a motion to recommit.
  Mr. REID. I am talking about the objection about which I was 
involved, and does the Senator from Michigan recall that objection to 
the unanimous consent request by the Senator from Arizona?
  Mr. LEVIN. I believe I do recall the objection to the request, and I 
would rather let the Record speak for itself as to the other matters 
because I think the issue before us is a somewhat different issue than 
we faced on the McCain-Levin amendment last week. Now we have a Levin-
McCain-Corzine amendment, which is somewhat different. I supported 
Senator McCain's amendment, and, indeed, I have been very active in 
trying to get this accounting rule adopted in the way the independent 
accounting board wants to have it adopted. That is the key emphasis.
  Mr. SARBANES. Will the Senator yield on my time for a question?
  Mr. LEVIN. I am happy to yield.
  Mr. SARBANES. As I understand the Senator's amendment--the one he 
will be seeking to offer.
  Mr. LEVIN. I will be seeking unanimous consent to have the second-
degree amendment laid aside so that I can do so.
  Mr. SARBANES. As I understand it, this amendment is not the Congress 
trying to legislate what the accounting standard should be; is that 
correct?
  Mr. LEVIN. The Senator is correct.
  Mr. SARBANES. I think that is important because I, frankly, do not 
think that the Congress should get into the business of trying to 
legislate accounting standards. I don't think we have the expertise or 
the competence to do it. And it turns established accounting standards 
into a straight-out political exercise, and I don't think that is wise.
  As I understand the Senator's amendment, it would simply reference 
the issue of the treatment of stock options to the financial accounting 
standards board, for them to make their own independent judgment as to 
how this matter should be treated, is that correct?
  Mr. LEVIN. The Senator is correct.
  Mr. SARBANES. And I understand that the terms of reference are such 
that it does not presuppose a particular substantive conclusion; it is, 
in effect, left open, or even level, however you want to describe it--a 
level playing field for FASB, the expert body that has been established 
to make these judgments to make its own independent judgment as to how 
these matters should be addressed, is that correct?
  Mr. LEVIN. The amendment directs FASB to review the issue and adopt 
an appropriate standard. Those are the words in the amendment. I must 
tell my good friend from Maryland, however, that there is a history 
here that cannot be ignored.
  The history is that FASB tried to adopt a standard in 1994. They said 
what the right standard was. They were beaten back and brow-beaten and 
pressured, so they had to give up what they believed was 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

[[Page 12918]]

there is strong support for what Senator Levin is proposing.
  I want to speak briefly this afternoon, in my leader time, on the 
amendment itself. I think it is important, as my colleagues have been 
noting, that the Levin amendment contains precisely the right solution 
to the difficult problems of determining the proper accounting 
treatment for stock options. It reserves that judgment for the 
appropriate body, the Financial Accounting Standards Board. They are 
the ones given the authority, they are the ones with the credibility, 
they are the ones with the standing to make the right decisions about 
this very important and complex matter.
  I argue this is the heart of our ability to deal with the accounting 
reforms that are in the Sarbanes and Leahy bills.
  It has become all too clear that accounting standards are complex and 
can be easily manipulated by aggressive and sometimes unscrupulous 
corporate executives. Unfortunately, FASB's weak, dependent condition 
has contributed to those manipulations. In fact, it is arguable that 
the undermining of FASB's independence was the necessary precondition 
to the crisis in confidence afflicting our capital markets today.
  One of the many virtues of the Sarbanes bill is that it corrects that 
situation. It provides for a new, improved FASB, giving it for the 
first time full financial independence from the accounting industry. 
That certainly is the first and most vital improvement we need with 
respect to establishing clarity and regularity of accounting standards.
  Another needed improvement is for those of us in Congress to allow 
FASB to do its job. In 1994--and my colleagues have referenced this--
when this issue was last taken up by the Senate, I am proud to say I 
was one of nine Senators who voted against the Senate intruding itself 
on FASB's decisionmaking process. That is the only reason I opposed my 
colleague's amendment last week. As well intended as it is, in my view 
it did the same thing on the other side that they were trying to do 9 
years ago. It asserts Congress's authority to undermine the 
independence of that board. I opposed it 9 years ago, and I oppose it 
today, but for obviously different results.
  At the same time, the Senate was coming at the options issue from the 
direction of prohibiting expenses back in 1994, and as I said today the 
momentum is the opposite, but the right course is the same. Let the 
experts on the accounting standards board do their job and make the 
appropriate decision. Eight years ago, the technical accounting 
questions were essentially the same as they are today, although 
obviously 8 years have given us an entirely different perspective than 
the one we had back then. Nonetheless, the questions are still real. 
Accountants still debate the relative merits of the opposing sides. We 
still have expert opinion going both ways. On the one hand, the 
argument is made that if options are not expensed, bottom lines look 
far more attractive than they actually should be, and the investors can 
be deceived by the distorted financial pictures that result.
  On the other hand, we hear that it is inherently impossible to value 
options with no concrete reality behind what the options will actually 
be worth when they are exercised. There is also a real debate about the 
incentive effects of options.
  Supporters argue that they better align an employee's interests with 
the company's. Opponents contend they result in a ``pump and dump'' 
mentality, with senior executives seeking to inflate their stock prices 
at any cost so they can quickly and cynically enrich themselves.
  In contrast to those complex questions, the Levin amendment is 
simplicity itself. It is one sentence. It says that FASB shall:

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

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

       The point is that the growth of stock options has created 
     huge conflicts of interest that executives will be hard-
     pressed to avoid. Indeed, many executives will coax as many 
     options as possible from their compensation committees, 
     typically composed of ``outside'' directors. But because 
     ``directors are [manipulated] by 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.


[[Page 12919]]


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

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

  Allan Sloan of Newsweek:

     . . . options are a free lunch for companies. . . .
       I'm all in favor of employees becoming millionaires via 
     options--I'm an employee, after all--but I'm also in favor of 
     companies providing profit-and-loss statements that show the 
     real profit and loss. Ignoring options' costs and low-balling 
     CEO packages are simply outrageous. When campaigns start 
     expensing options and disclosing true CEO and director 
     compensation numbers, I'll believe that they've seen the 
     light.
       According to the Economist, last year, stock options 
     accounted for 58 percent of the pay of chief executives of 
     large American companies. So over half the compensation of 
     our CEOs of major companies now comes from stock options. To 
     leave that expense off the financial statements' bottom line 
     is to distort what is going on at companies. It is part of 
     the reason we have not had accurately reflective financial 
     statements at our corporations. It is part of the reason for 
     the soup we are in right now.

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

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

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

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

                          Stock Option Madness

                        (By Robert J. Samuelson)

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


               [From the Washington Post, April 18, 2002]

                              Money Talks

       Alan Greenspan, perhaps the nation's most revered 
     economist, thinks employee stock options should be counted, 
     like salaries, as a company expense. Warren Buffet, perhaps 
     the nation's foremost investor, has long argued the same 
     line. The Financial Accounting Standards Board, the expert 
     group that

[[Page 12920]]

     writes accounting rules, reached the same conclusion eight 
     years ago. The London-based International Accounting 
     Standards Board recently recommended the same approach. In 
     short, a rather unshort list of experts endorses the common-
     sense idea that, whether you get paid in cash or company cars 
     or options, the expense should be recorded. Yet today's 
     Senate Finance Committee hearing on the issue is likely to be 
     filled with dissenting voices. There could hardly be a better 
     gauge of money's power in politics.
       Why does this matter? Because the current rules--which 
     allow companies to grant executives and other employees 
     millions of dollars in stock options without recording a dime 
     of expenses--make a mockery of corporate accounts. Companies 
     that grant stock options lavishly can be reporting large 
     profits when the truth is that they are taking a large loss. 
     In 2000, for example, Yahoo reported a profit of $71 million, 
     but the real number after adjusting for the cost of employee 
     stock options was a loss of $1.3 billion. Cisco reported $4.6 
     billion in profits; the real number was a $2.7 billion loss. 
     By reporting make-believe profits, companies may have conned 
     investors into bidding up their stock prices. This is one 
     cause of the Internet bubble, whose bursting helped 
     precipitate last year's economic slowdown.
       It is not surprising, therefore, that the expert consensus 
     favors treating options as a corporate expense, which would 
     mean that reported earnings might actually reflect reality. 
     But the dissenters are intimidated by neither experts nor 
     logic. They claim that the value of options is uncertain, so 
     they have no idea what number to put into the accounts. But 
     the price of an option can actually be calculated quite 
     precisely, and managers have no difficulty doing the math for 
     the purposes of tax reporting. The dissenters also claim that 
     options are crucial to the health of young companies. But 
     nobody wants to ban this form of compensation; the goal is 
     merely to have it counted as an expense. Finally, dissenters 
     say that options need not be so counted because granting them 
     involves no cash outlay. But giving employees something that 
     has cash value amounts to giving them cash.
       The dissenters include weighty figures in both parties. 
     Sen. Joe Lieberman (D-Conn.) is the chief opponent of options 
     sanity in the Senate, and last week President Bush himself 
     declared that Mr. Greenspan is wrong on this issue. What 
     might be behind this? Many of the corporate executives who 
     give generously to politicians are themselves the 
     beneficiaries of options--often to the tune of millions of 
     dollars. High-tech companies, an important source of campaign 
     cash, are fighting options reform with all they've got. But 
     if these lobbyists are allowed to win the argument, they will 
     undermine a key principle of the financial system. Accounting 
     rules are meant to ensure that investors get good 
     information. Without good information, they cannot know which 
     companies will best use capital, and the whole economy 
     suffers in the long run.
                                  ____


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

                         Stock Option Excesses

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

                     [From Newsweek, May 20, 2002]

                     Show Me the Money (All of it)

                            (By Allan Sloan)

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

[[Page 12921]]

     no bonus. He also got options on 150,000 shares. Knight 
     Ridder values the options at about $1.6 million, but by most 
     rules of thumb, they were worth twice that much. Knight 
     Ridder directors got a $40,000 annual fee--and 4,000 options. 
     The options were worth about $42,500 by Knight Ridder's math, 
     about $85,000 by conventional math. Knight Ridder says its 
     figures are lower because it assumes its options are 
     exercised much quicker than other analysts assume.
       I'm all in favor of employees becoming millionaires via 
     options--I'm an employee, after all--but I'm also in favor of 
     companies providing profit-and-loss statements that show the 
     real profit and loss. Ignoring options' costs and low-balling 
     CEO pay packages are simply outrageous. When companies start 
     expensing options and disclosing true CEO and director 
     compensation numbers, I'll believe they've seen the light. 
     Until then, I'll assume that they're still on the bottle.
                                  ____


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

                         Accounting for Options

                        (By Joseph E. Stiglitz)

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


                               Outrageous

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


                              Transparency

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

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

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

  It is quite clear to me that two things are true. No. 1, that how we 
treat stock options is an essential part of the post-Enron reform 
effort. That is No. 1. No. 2, it seems clear to me that there is at 
least a likelihood that a majority of this body, if allowed to vote on 
this amendment, will vote to refer this matter to an independent 
accounting standards board which has its own source of revenue, free 
from the kind of pressure which it was under in 1994 and 1995, to reach 
an appropriate conclusion.
  Do I believe that conclusion will be the same as they reached in 
1994? I do. It is very clear to me they would reach such a conclusion 
and should reach such a conclusion. But as our colleagues have pointed 
out, that is up to the board under this amendment. We would not be 
adopting a standard.
  In all honesty, I expect they would continue on the same course they 
were on 8 years ago when they were violently thrown off course by 
people who had control over the purse strings of the organization. I 
would expect that would happen. But under this amendment, it is their 
call, not ours.
  I support the McCain amendment because I believe, as I believed then, 
that the accounting standards board wanted to expense options and that 
we, in executive pressure, interfered with that decision on their part. 
That is why I believe Senator McCain's amendment is also appropriate. 
But we cannot even get a vote on that amendment. Last week, we were not 
able to bring that amendment to a vote.

[[Page 12922]]

  But this amendment is different. This amendment says to the 
independent board: review this issue. Make an appropriate decision 
within a year.
  For the life of me I not only do not see how folks--regardless of the 
side of this particular issue that they are on--could vote against such 
an amendment when it does not tell them what to do but just asks them 
to review it and decide within a year as to what the appropriate 
accounting method is. I do not understand why, in the middle of a 
debate on the reforms which are essential to restore public confidence 
after the Enron fiasco, this Senate should not be allowed to vote on 
this issue on this bill.
  When the majority leader announced that one way or another we will 
get to a vote on this amendment, I was glad to hear that. I didn't know 
he was going to say that, but I certainly was glad he said that. But it 
seems to me that adds a reason we ought to vote for this amendment on 
this bill.
  This is the right place. Surely it is the right time. There has 
perhaps never been a more critical moment in our economic history in 
the last few decades than we are facing right now, to help us restore 
public confidence. It will be an additional contribution to that 
restoration of public confidence if we take this action. If we say yes, 
8 years ago we did intervene, but now we don't want to tell the 
accounting standards board that they should not expense options. That 
was 8 years ago. What we are telling them now is: Do the right thing.
  We know what they tried to do 8 years ago. It is laid out in the 
record by them. They wanted to do what they believed was the right 
thing. If they had done so, they would have been put out of business.
  Now we have an opportunity, it seems to me, to do the right thing 
ourselves, which is to tell the board that has the responsibility to 
adopt accounting standards, to adopt what they believe is the 
appropriate standard. That is the right thing to do.
  Mr. REID. Will the Senator yield for a question on my time?
  Mr. LEVIN. I will be happy to.
  Mr. REID. Is the Senator aware that the stock market, the Dow as of 
now is down 338 points as of today?
  Mr. LEVIN. I was not aware of that. But it surely adds an additional 
urgency, if we need additional urgency, for why we should do everything 
in our power to restore public confidence in the financial systems in 
this country.
  I left off one of my cosponsors before. Senator Biden is a cosponsor 
of the amendment, which is at the desk.
  I will ask unanimous consent we be able to vote on that at a later 
moment.
  I wonder if I could ask the Chair how much time I have remaining.
  The PRESIDING OFFICER. The Senator has 12 minutes remaining.
  Mr. LEVIN. I understand Senator McCain would like to speak at this 
time. I see the Republican manager on the floor, so I do not know if 
this fits his particular timetable or not.
  I ask unanimous consent I be allowed to yield to Senator McCain on 
his----
  Mr. REID. I object.
  The PRESIDING OFFICER. Objection is heard.
  Mr. LEVIN. Mr. President, at this time I ask unanimous consent to lay 
aside the pending second-degree amendment, No. 4286, and call up for 
consideration my amendment 4283, on stock options, which is a second-
degree amendment to the Edwards amendment No. 4187.
  The PRESIDING OFFICER. Is there objection?
  Mr. GRAMM. Mr. President, reserving the right to object, let me say 
there is something on which I agree with the majority leader. That is, 
at some point we are going to make a judgment on this issue. But we are 
currently in a situation where we have 97 first-degree amendments that 
have been filed. We have 24 second-degree amendments. We have 3 
different approaches to this issue.
  Senator McCain wants to make a decision and set a policy.
  Senator Levin, as I read it, wants a fair trial and then a hanging.
  And Senator Enzi and others would simply like to have a fair trial.
  What is the right outcome? I think that is subject to debate. That is 
why I think we ought to have the debate. The idea that when we have 
three different approaches, we are going to decide that one of them is 
going to be debated on, voted on, but not all three of them is 
something we should not expect to happen.
  I do not support Senator McCain's amendment, but he has every right, 
it seems to me, to have it considered. And I am certainly willing to 
vote on it. There may be people who do not want to vote on this issue, 
but I am not one of them. So I certainly do object. I object.
  The PRESIDING OFFICER. Objection is heard.
  Several Senators addressed the Chair.
  The PRESIDING OFFICER. The Senator from Michigan has the floor.
  Mr. LEVIN. Mr. President, the only way we are going to get to debate 
and votes is if we allow the pending amendments which are the first- 
and second-degree amendments to be voted on so we can move to other 
amendments without having one gatekeeper denying opportunity for all 
the others on this floor to offer amendments and have them voted on. 
That is not the intention of cloture and postcloture.
  I do not believe this process has been used in this way before, 
where, postcloture, germane amendments are supposed to be taken up and 
voted on, where first- and second-degree amendments have not been 
disposed of so they can be used, not with the consent of their 
sponsors, but they are used by others to block consideration of the 
amendments.
  The Senator from Texas says he would like to have a debate and vote. 
There is one way to do it. Let's dispose of the second-degree 
amendment, take up the Carnahan amendment and vote on it, take up the 
Edwards amendment and vote on it.
  Mr. GRAMM. Will the Senator yield?
  Mr. LEVIN. I will be happy to yield on the Senator's time.
  The PRESIDING OFFICER. Is there objection?
  Mr. DORGAN. Reserving the right to object, Mr. President, the Senator 
from Michigan is claiming his 1 hour. I understand he has been yielding 
back and forth. I assume we could, under these circumstances, have one 
Senator run the entire 30 hours, as long as they keep yielding to other 
Senators.
  There are others of us, of course, who want to be heard and who want 
to offer amendments.
  Mr. GRAMM. I think that is fair. I withdraw my request.
  Mr. LEVIN. I yield the floor.
  The PRESIDING OFFICER. The Senator from Texas is recognized.
  Mr. GRAMM. Mr. President, I think if we want to deal with this issue 
today, probably the way to deal with it is to have a unanimous consent 
agreement and have a vote on all three amendments--have a vote on 
Senator McCain's amendment, have a vote on the Levin amendment, have a 
vote on Senator Enzi's amendment so that we would have the full range 
of choices. But to suggest that nothing is standing in the way except a 
few obstacles to everybody having their will is to neglect the fact 
that 97 amendments have been filed as first-degree amendments and 24 
second-degree amendments.
  So, therefore, by definition, I assume if I suggest and ask unanimous 
consent that each and every amendment be voted on, someone would object 
since our leadership has plans for this week and next week. I think it 
might be possible if we want to deal with this issue today to have a 
unanimous consent agreement where Senator McCain would get a vote on 
his amendment, where the Senator from Michigan would get a vote on his 
amendment, and where Senator Enzi would get a vote on his amendment. 
Then we would have a range of choices.
  I would be amenable to such an agreement if the Senator wanted to 
shop that around on his side of the aisle. We could do a hotline and 
see if it would fly. But in the absence of some agreement where the 
other two gradations on this spectrum of opinion would have their day 
to debate this amendment and have it voted on, I don't think we are 
going to be able to

[[Page 12923]]

do that. It might very well be that we need a separate bill to deal 
with this issue. If a Senator were to offer this amendment in earnest, 
I would want an opportunity to amend it. I think having FASB look at 
this issue--which they are certainly going to do after this bill is 
agreed to because this is going to be a self-funded agency, and they 
are going to have greater independence--I think having them look at it 
is something that we ought to do. But I think we shouldn't pretend to 
ourselves that the Levin amendment is a neutral amendment.
  Asking them to look at it when it mandates by law after having looked 
at it that within 12 months they adopt in appropriate generally 
accepted accounting principles for the treatment of employee stock 
options--there is nothing neutral about that; in other words, study it 
and within a year adopt a rule.
  As I understand it, Senator Enzi and others would have the SEC do a 
study and make a recommendation based on their study.
  If this amendment were going to be dealt with in isolation, I would 
want an opportunity to at least leave it to FASB as to what they 
determine rather than mandating that they ought to issue a new 
accounting principle. It may be that they would determine not to do 
that.
  Let me reiterate that I don't have any concern about voting on this 
issue. Maybe I should reserve my time. I want to speak on this at some 
point. We have several Members here who are going to speak. I have to 
be here for the whole time.
  I reserve the remainder of my time.
  The PRESIDING OFFICER. The Senator from Nevada is recognized.
  Mr. REID. I don't think this is necessary. But so there is no 
question about it, I ask unanimous consent that the time Senator 
Daschle used be counted against the 30 hours.
  The PRESIDING OFFICER. Is there objection?
  Mr. GRAMM. Reserving the right to object, I did not hear.
  Mr. REID. I wanted Senator Daschle's time to be counted against the 
30 hours.
  Mr. GRAMM. Yes.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The Senator from North Dakota.
  Mr. DORGAN. Mr. President, we are in a postcloture period of some 30 
hours. I understand we will complete that at 6 o'clock or so this 
afternoon.
  What is happening here is really an outrage, from my standpoint. We 
are in postcloture. I have a germane amendment. I have been here every 
single day since this bill came to the floor of the Senate prepared and 
ready to offer my amendment. Now, 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

[[Page 12924]]

point. And perhaps there are people in the Senate who want to stand up 
and say: Do you know what I think? I think if somebody takes home $50 
or $80 million 6 months before bankruptcy, in the form of incentive 
payments and bonuses, they ought to be able to keep it, even if they 
drove this company right straight into the ground.
  Is there one person who will stand up in the Senate today to support 
that? Does one person want to support that position? Well, we will see.
  In the year before the Enron Corporation filed for bankruptcy, 
Kenneth Lay, the chairman of that company, and 140 other company 
officials received $310 million in salaries, bonuses, long-term 
incentives, loan advances, and other payments.
  Does anybody here want to stand up and say: ``That makes a lot of 
sense.''? Anybody? Does anybody agree they should keep all that money? 
Do we hear nothing because they don't have the floor, or is it that 
nobody here believes the top officials of Enron should keep $310 
million prior to filing for bankruptcy, where their employees lost they 
jobs, lost their life savings in their 401(k)s, their investors lost 
their money?
  How about NTL, Incorporated? It is a Manhattan TV cable operator that 
filed for bankruptcy in May, just several months after it gave its 
chief executive officer $18.9 million. It made him one of the 30 
highest paid CEOs in New York, putting him ahead of IBM's Louis 
Gerstner. That company had $14 billion in losses. And the CEO, Mr. 
Knapp, had a salary of $277,000, a bonus of $561,000, and stock options 
worth $18 million.
  So does anybody here think he ought to keep all that money, just let 
the investors and the employees lose, but the people at the top keep 
it--just walk away on some gilded, golden carpet?
  There are plenty of other examples, of course.
  In recent months, we have heard all of these discussions about what 
has happened at the top in the boardroom by companies that wanted to 
find the line, and then go right to it, and then go across it, if they 
could. And there are accounting firms that were the enablers, who said: 
Yes, go ahead and do that. And the law firms were on the side, 
collecting big fees, saying: Yes, go ahead and do that--and the CEOs 
without moral conscience. The result is, they got rich and the little 
folks got broke.
  My amendment is very simple. My amendment says that 1 year prior to 
bankruptcy, if you are getting the big bucks, big bonuses, big 
incentives, big stock options, and you want to take off with $50 or 
$100 million, and leave everybody else flat on their back, you cannot 
do it; you have to give it back. Very simple.
  No one can misunderstand the amendment. This amendment is not strange 
or foreign to anyone. This bill will fall short of the mark, this bill 
will be incomplete, if we just proceed now to the final vote this 
afternoon and we are told: You cannot offer this amendment. We will not 
consider this amendment. And we do not want to require the give-back of 
millions of dollars by CEOs who receive that money prior to bankruptcy.
  If that is the message this Senate sends from this bill this 
afternoon, this Senate has a lot of explaining to do.
  We came to this debate with great promise. I have been to the floor a 
couple of times complimenting the Banking Committee, complimenting all 
on the Banking Committee who worked to put this bill together. But I 
said there were areas where it needed to be improved. This is one of 
them. This is the lightest load you will ever be asked to carry, in my 
judgment, to support an amendment of this type: The disgorgement of 
ill-earned profits by CEOs who led their corporations to bankruptcy but 
waltzed off with millions of dollars in their pockets and left everyone 
else--the bondholders, the stockholders, the employees--holding the 
bag.
  This is not heavy lifting, to do this amendment. It is absurd if the 
Senate says: No, we will have nothing to do with that. Our position is, 
let's call this corporate responsibility. Let's change the accounting 
standards. But, by the way, let's let those people who essentially 
looted the corporation from the top--drove it into bankruptcy, and then 
left town--let's give them a big wave and say: So long, God bless you, 
and I hope your future is a good one with all those millions of 
dollars. If we do that, this Senate has a lot of explaining to do.
  A good many corporate leaders, respected business officials in this 
country, have said this must be in a bill, this should be in a bill, 
there is no excuse for it not being in a bill.
  So I have amendment No. 4214 at the desk. Let me ask unanimous 
consent that we set aside the Carnahan amendment, which is a second-
degree amendment to the Edwards amendment, for the purpose of allowing 
consideration of amendment No. 4214. Let me make the first unanimous 
consent request first.
  I ask unanimous consent that we set aside the Carnahan second-degree 
amendment for the purpose of considering my amendment.
  The PRESIDING OFFICER (Mr. Wyden). Is there objection?
  Mr. ENZI. On behalf of the ranking member of the Banking Committee, I 
object.
  The PRESIDING OFFICER. Objection is heard.
  Mr. DORGAN. Mr. President, let me say, again, I think the process is 
an outrage--an outrage. We are in a situation today where we have 4 or 
5 hours left postcloture, and we are told that no one in the Senate has 
a right to offer an amendment because someone has set himself up as a 
gatekeeper saying: I will object to setting aside the Carnahan second-
degree amendment.
  What kind of a way is that to legislate? Is someone afraid he will 
lose on this amendment, that he will lose the vote? Is that the purpose 
of the objection, that he is afraid we will have a vote, Senators will 
vote for my amendment, and therefore he will lose, so the words ``I 
object'' become a proxy for avoiding a loss on an important amendment?
  How many votes do you think would exist in the Senate for saying: We 
want to enable CEOs, who ran the corporation into the ground and took 
$20 million out and then filed bankruptcy, to keep the money; we want 
them to keep the bonus, to keep the stock option, to keep the 
commission payment, to keep the money? How many votes do you think 
exist for that? Ten, maybe 12? Probably zero.
  I think the Senator from Virginia is correct. Probably no one would 
stand up and support that proposition. So the question is why are we 
not allowing amendments to be voted on this afternoon? I would be happy 
to yield to someone to answer that. Is there someone who can answer 
that? Perhaps we could find out on whose behalf the Senator from 
Wyoming objected.
  How much time do I have remaining?
  The PRESIDING OFFICER. The Senator from North Dakota has 29 minutes 
remaining.
  Mr. DORGAN. Parliamentary inquiry: Are we entitled, as a Senator, to 
1 hour postcloture, those of us who are recognized?
  The PRESIDING OFFICER. The Senator from North Dakota is correct.
  Mr. DORGAN. Several of my colleagues wish to speak. I want them to be 
able to speak. I hope they will offer amendments.
  I will guarantee them this: I will not be objecting to an amendment 
if they want to offer them. They have a right to offer an amendment 
today. They have a right to get a vote on the amendment. I will not 
object to that.
  The parliamentary inquiry is, I have just made a unanimous consent 
request that has been objected to. Am I prevented from making an 
identical request following the presentation by the two Senators on the 
floor?
  The PRESIDING OFFICER. The Senator is not prevented from making 
unanimous consent requests.
  Mr. DORGAN. That will give me some time then to snoop around the 
cloakrooms and the corners and the nooks and crannies in the Capitol to 
find out who won't come to the floor and answer the question I have 
asked.
  Why will we not get a vote on the simple proposition that those 
corporate leaders who run their corporation into bankruptcy and who 
take $10,

[[Page 12925]]

$20, $30, or $50 million out of it just prior to bankruptcy--why will 
we not allow a vote on an amendment that would require them to disgorge 
themselves of that profit? Why should that ill-gotten gain not be used 
to help the employees, help the investors, help others recover, who 
lost everything? Why should one group in this circumstance walk off 
into the sunset with a pocketful of gold, leaving everyone in their 
wake, employees, investors, and others who lost everything they had?
  Perhaps in the next hour or so, I will find someone in the Chamber or 
in the anterooms who will say: I am the one who decided you should not 
get a vote because I believe that those CEOs ought to be able to get 
away with that money; that is the American way.
  My guess is the Senator from Virginia was right when he shook his 
head. I think this amendment passes 100 to nothing or very close to 
that, and I hope he and others will help me get it to a vote before 6 
o'clock.
  Obviously I am a little irritated about the process. It stinks. That 
is not a genteel way to say that. But postcloture, if we have germane 
amendments, we should be able to be here to offer those amendments. 
That is not now the case.
  I will be here the next couple of hours trying to see if we can find 
a way to cause enough trouble in as short a time as possible to allow 
these amendments to be offered.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Virginia.
  Mr. ALLEN. Mr. President, I would like to use a portion of my 1 hour 
of time to say I agree with the purpose and the intent of the Dorgan 
amendment. I understand Senator Grassley of Iowa has a similar 
amendment that would disgorge or claw back into some ill-gotten gains 
of executives for the benefit of creditors and victims of their 
malfeasance or illegal acts.
  I wish to speak not on process. Although, process seems to drive a 
lot of what happens in this body.
  I would like to talk to my colleagues and the American people about 
the merits of certain ideas or the demerits of certain ideas that have 
been raised. There have been several measures dealing with the issue of 
stock options.
  Senator McCain's measure was a direct hit. I don't like it, but it 
was an accountable approach in getting rid of or killing stock options. 
We had Senator Levin's amendment, with Senator McCain, which was more 
of an indirect or ricochet killing of stock options by granting that 
study to FASB, when everyone knows what FASB's position is.
  There is another option regarding stock options which I would like to 
discuss as the approach that ought to be taken. The majority leader, 
Senator Daschle, mentioned that we may have a vote on it today. We may 
have a vote on it tomorrow, but some day we will have a vote. There 
ought to be a full and fair discussion of the approach we ought to take 
as well as what the potential adverse impacts could be if either the 
study by FASB or the direct killing of stock options, as far as 
requiring the expensing of them, were to occur.
  The more wise and prudent approach is one that was chiefly sponsored 
by my good friend Senator Enzi of Wyoming, along with Senators 
Lieberman, Boxer, myself, and others who joined with us, Senators 
Murray, Cantwell, Bennett, Wyden, Lott, Burns, Frist, Craig and Ensign. 
Our amendment is a more comprehensive, reasonable alternative that has 
the Securities and Exchange Commission review and make regulatory or 
legislative recommendations to Congress.
  Clearly, in today's climate, with the stock market dropping again 
today, with the scandals from Global Crossing, Enron, the crisis at 
WorldCom, it is axiomatic that there is a pressing need for accounting 
reform to address the corporate abuses and accounting firm malfeasance. 
The bill, as it is presented, is a very good bill. I think it addresses 
the two key areas that need to be addressed.
  It is focused, number one, on transparency. That means that people 
can readily and easily discern the true financial condition of a 
company in which they may want to invest.
  Secondly, you need deterrence, stiffer criminal and civil sanctions 
for illegal actions by corporate officers. There may be a few things 
added to make it better, but this bill essentially addresses those two 
focused goals. Indeed, enhanced transparency and improved corporate 
governance may restore some investor confidence and foster proper 
disclosure for investment decisions. More stringent penalties will 
provide a deterrence and substantial disincentive for the corporate 
wrongdoing that has led to this understandable firestorm of skepticism 
as a fallout from the scandalous, fraudulent misrepresentations by 
executives in many companies.
  In our effort to reform, we must not enact measures that stifle 
innovation and endanger the American entrepreneurial spirit. Congress 
should not harm future opportunities for employees to own a part of 
their company for whom they work. Unfortunately, the Levin-McCain 
amendment does just that by unjustifiably upsetting the current tax 
treatment of stock options. It is unnecessary and unwise to change 
these particular accounting policies.
  It is virtually impossible to accurately determine the worth or value 
of a stock option.
  Now, how are you going to predict the future performance of a 
company? How are you going to predict the future share value of a 
company, especially with the vicissitudes of the stock market these 
days? For example, somebody is granted a stock option by a company--a 
new company--and the stock is trading, after an IPO, at $5 a share. The 
option to this employee is to be able to purchase 1,000 shares of that 
company at $10 a share.
  Now, nobody is going to exercise a stock option until the share value 
reaches the strike price, or $10, and it may never get to $10. It may 
take 5 years before that share value gets above $10 a share, where 
somebody would exercise the option. So it is very difficult to 
determine what is the actual value of that stock option when it is 
granted.
  The amendment Mr. Levin has proposed will affect current law. 
Currently employers are not required to expense stock option grants on 
their financial statements. But they are permitted to deduct the 
employees' gains at exercise--that is, down the road--as a compensation 
expense.
  Now, this makes good sense. After all, a stock option grant does not 
require a cash outlay like other expenses such as wages.
  Moreover, there is no transparency problem with failing to expense 
stock option grants because they are disclosed on the company's 
financial statement. If somebody says there ought to be better 
disclosure, or it should be in bolder print, or it should be 
highlighted more and the disclosure needs to be more clear, that is 
fine. But I don't think it is necessary, in the midst of better 
disclosure and transparency, to kill this otherwise largely salutary 
idea and beneficial idea of stock options. Nonetheless, the amendments 
by Senators McCain and Levin mandate that any company taking a 
deduction must report the stock option as an expense on their income 
statement, profit and loss statement, and the deduction may not exceed 
the reported expense.
  Mr. LEVIN. Will the Senator yield for a question?
  Mr. ALLEN. I yield.
  Mr. LEVIN. Is the Senator aware that the Levin-McCain amendment he is 
referring to is not the amendment being offered at this time? There is 
another amendment, and they are totally different matters involving the 
taxation issue. This is not a taxation amendment at all. Hopefully, it 
will come before the Senate today.
  Mr. ALLEN. Mr. President, I say to the Senator from Michigan, I 
understand his amendment offered today was one to have FASB study the 
issue. Senator McCain's amendment was one to require the expensing of 
stock options. I realize they are two different matters.
  Mr. LEVIN. And that neither one addresses tax issues. That is a 
totally separate bill, not in either the McCain-Levin or the Levin-
McCain accounting standard.

[[Page 12926]]


  Mr. ALLEN. I say to the Senator that in the event you, in effect, 
require the expenses of stock options, that does affect the tax 
treatment and the desirability of stock options.
  Mr. LEVIN. Thank you.
  Mr. ALLEN. I thank the Senator from Michigan.
  Now, the problematic aspect of these ideas is that, if you take away 
the current method of accounting and taxation of stock options, a 
company can only take a deduction up to the amount they expense at the 
time of the grant. Since the expense would be taken at the time of the 
grant, the tax deduction would be taken at the time of the exercise. If 
the value was too low at the time of the grant, then you are not going 
to get the full extent of your deduction. So the point is that if we 
are not careful here, with all these approaches of changing the tax 
treatment, changing the expensing rules, or having it be done by FASB, 
the result is a convoluted tax increase on companies.
  Now, what will happen if these tax increases or this inability to 
actually determine the value of the stock option occurs, which may or 
may not be exercised at some unknown future date, all of this 
consternation, inaccuracy, unpredictability--the potential of actually 
a tax increase, in effect--many companies will find this tax and 
accounting scheme is so onerous they will discontinue offering options 
to all but maybe a few senior executives who can bargain for them.
  I think the idea of doing away with stock options, or making them 
less desirable, is a substantial detrimental impact on not only 
companies but many, particularly those companies in the high-tech 
sector and small startups. New businesses have powered our economy in 
the last decade and, hopefully, they will do so in the future. Small 
companies motivate employees with stock options. That is the way they 
keep employees. Especially the startups who will get folks to serve on 
the board and pay them for that service in stock options.
  I think it is a good idea for people to care about a company doing 
well in the future; not only looking for a paycheck, but also caring 
about how well a company will do.
  Indeed, in the last 10 years, the number of workers who received 
stock options has grown dramatically--from about 1 million in 1992 to 
10 million today. First, as I said, the benefits of stock options has 
enabled companies to recruit and keep quality workers. Absent stock 
options, many smaller companies lack the capital. They don't have the 
money to attract top-notch talent. Investors will be less likely to 
invest in companies that retain stock option plans because the 
company's earnings will be artificially deflated by this phantom 
expense.
  Finally, and perhaps most important, stock options enhance 
productivity by providing employees with a greater stake in their 
company's performance.
  Mr. President, these options are particularly important to rank and 
file employees who receive relatively modest salaries and wages. There 
is one company that has a pretty good presence in Virginia--Electronic 
Arts--which recently told me that stock options enabled many of its 
employees to purchase their first homes, to send their children to 
college, or to provide for their aging parents. Thus, the desirability 
of stock options as incentives is readily apparent, and we should not 
adopt any measure that would effectively eliminate their use as a form 
of employee compensation.
  That is not to say that I oppose all stock option reform. In fact, I 
fully support President Bush's proposal that requires shareholder 
approval for stock option plans. I think the idea of equitable 
treatment in the exercise of options by employees or executives is well 
founded. But I am joining with Senators Lieberman, Boxer, Enzi, and 
others in offering the amendment that directs the Securities and 
Exchange Commission to conduct a comprehensive study and to make 
recommendations regarding the accounting treatment of stock options, 
which is the way to go.
  We may introduce this proposal as a free-standing bill. Maybe we will 
not vote on it today but here is the approach that we ought to take. 
The SEC will conduct an analysis and make regulatory and legislative 
recommendations on the treatment of stock options in which the 
Commission shall analyze the following: No. 1, the accounting treatment 
for employees' stock options, including the accuracy of available stock 
option pricing models; No. 2, the adequacy of current disclosure 
requirements to investors and shareholders on stock options; No. 3, the 
adequacy of corporate governance requirements, including shareholder 
approval of stock option plans; No. 4, any need for new stock holding 
period requirements for senior executives; No. 5, the benefit and 
detriment of any new option expenses rules on, A, the productivity and 
performance of large, medium, and small companies and startup 
enterprises and, B, the recruitment and retention of skilled workers.
  The Commission shall submit its regulatory and legislative 
recommendations to Congress and supporting analyses of those matters as 
far as any changes indicated in the treatment of stock options within 
180 days.
  In my view, this is the reasonable alternative we ought to be taking. 
I urge my colleagues to support this approach rather than adopting, 
whether it is today or in the future, Senator McCain's measure that he 
introduced last week or Senator Levin's study today. I think either of 
those would be harmful and damaging to both American industry and to 
working men and women.
  The Senator from Michigan mentioned evidence, or observations, of 
others as to the impact of his recommendations and his amendment. I 
think it is very good for us to look at what people who will be 
affected say about the measures that are passed in the Senate. I think 
it is important that we be accountable to those who are affected and we 
should listen to them.
  I have some other observations, as far as the issue of stock options 
is concerned. This first I will share is the views of the Information 
Technology Industry Council. They expressed their support for the 
potential alternative amendment cosponsored by Senators Lieberman, 
Enzi, Boxer, and Allen that would direct the Securities and Exchange 
Commission to examine the accounting treatment of stock options and 
make recommendations.
  The Information Technology Industry Council stated that, in 
particular, those entrepreneurial high-tech companies that are willing 
to take the risk in the pursuit of technological innovation have 
offered stock options as an incentive to attract and retain employees.
  Unfortunately, the expensing of options would end the practice of 
providing most employees with stock options. The result would be a 
reversal of the trends toward employee ownership and a significant 
reduction in financial opportunities for thousands of workers.
  Let me share another observation, and this comes from the 
Telecommunications Industry Association, and I read, in part:

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

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

  Another observation from a large group of trade associations: 
American Electronic Association, Bankers Association, Alabama 
Information Technology Association, the Arizona Software and Internet 
Association, Biotechnology Industry Organization, Business Software 
Alliance, Information Technology Association of America, National 
Association of Manufacturers, the Retail Federation, Semiconductor 
Equipment and Materials International, as well as the Semiconductor 
Industry Association, Software and Information Industry Association, 
Software Finance and Tax Executives

[[Page 12927]]

Council, the Tax Council, the Technology Network, and the U.S. Chamber 
of Commerce wrote me and said that the stock options tax bill--not the 
Levin amendment but, rather, the tax treatment changes--that 
legislation would, if enacted, discourage broad-based rank and file 
access to stock options. It would lead to investor confusion, less 
accurate financial statements, and raise taxes on companies issuing 
stock options.
  Now we have heard also some scholarly points of view. It is nice to 
hear what some of these esteemed individuals may say from time to time 
on the issue of stock options. Others in the body have quoted from 
Warren Buffett, a person for whom we all have a great deal of respect. 
But in another scholarly work from two gentlemen, economics professors 
at Princeton University and New York University, Dr. Malkiel, professor 
of economics at Princeton, and Dr. Baumol, professor of economics at 
New York University, say this:

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

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

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

  So I will conclude my time by requesting of my colleagues, whether we 
vote on it today, this afternoon, this evening, or in the future, that 
we act responsibly. It is fine to be worrying about the details of 
procedure and accounting minutia, but it is important also to 
understand the impact of this on our free enterprise system. While we 
are doing a lot of good as far as greater scrutiny, greater 
transparency, and greater punishment for wrongdoers are concerned, let 
us make sure we do no harm because the way that this stock market is 
going to change is with more investment, more risk taking, more jobs 
being created, and that entrepreneurial spirit that rewards people who 
take risks, who are creative, who are innovative. That is what is going 
to improve our economy, our competitiveness as a country, as well as 
the stock market eventually.
  The point is we do not need to come up with new, convoluted ways to 
increase taxes on companies that we want to invest in and improve our 
country, and I hope we will support the free enterprise system and, in 
doing so, look at reasonable, logical, wise, and fully comprehended 
decision-making as we move forward in these very uncharted waters of 
making major changes in stock options.
  The bill as it stands now is an outstanding bill. There can be 
improvements made to it, such as the amendments of Senator Grassley and 
Senator Dorgan, but let us not have the perfect be the enemy of the 
very good, and let us make sure we do no harm. By fouling up stock 
options for many men and women working in this country, it would 
certainly do a great deal of harm.
  I yield the floor.
  Several Senators addressed the Chair.
  The PRESIDING OFFICER. I think the Senator from Delaware was first to 
seek recognition.
  Mr. BIDEN. Mr. President, I say to my friend from Iowa if he has a 
time constraint, I will yield to him. Just so he knows, I was in the 
Chamber before he came. I took a phone call and came back. But if the 
Senator has a time constraint, I have 10 to 12 minutes, but I will be 
happy to yield.
  Mr. GRASSLEY. If I only have to listen to a 10- or 12-minute speech, 
I will be glad to wait.
  Mr. BIDEN. I hope the Senator listens very closely. He may learn 
something. I know I learn when I listen, and I do not always listen 
enough.
  Mr. President, let me begin where the Senator from Virginia ended, 
and that is that I think the bill fashioned by Senator Sarbanes and 
this committee does exactly what the Senator from Virginia was 
suggesting. That would be balanced; we do not do more harm than good.
  If you look at other times--and I have been a Senator for a while--we 
faced crises such as this, we have had occasion to overreact. We have 
found sometimes that the cure is worse than the disease. I note we 
probably did that in my early days here with Senate campaign financing 
and other issues.
  There is a real balance that the Senator from Maryland has struck. I 
compliment the Senator. I cannot think of any Senator better positioned 
to be chief spokesman for the Senate and Congress on this issue, not 
only for the American people but all our allies and the investors 
worldwide.
  The dollar now has weakened drastically. In my capacity as chairman 
of the Foreign Affairs Committee, I have had occasion to meet with 
leading government officials from European countries and from Asia, 
asking me, as if I were some kind of broker: Can we continue to invest 
in your market? Is it real? What is going on? How much more is coming?
  We are fortunate to have the steady and always cautious voice of the 
Senator from Maryland, whose background academically as well as 
politically suits him well, and in this moment, as probably no one else 
in this place is better prepared, to take on this issue. I compliment 
the Senator and his quiet, reasoned voice, and his profound 
understanding of the problem we face as well as his determination to 
move ahead and try to restore confidence. It is a welcome circumstance 
at the moment. I compliment the Senator.
  I realize from listening to him and knowing him as well as I do, as a 
point of personal privilege, some will discount my remarks because they 
know the Senator and I are close personal friends and I admire him as 
much as anyone I have served in all my years in the Senate. I 
understand there are other things that he may or may not have wanted to 
put in the bill to strengthen our position and the Nation's position 
and the economy, but he wants to make sure there is consensus and 
overwhelming support of whatever we do. This is not a circumstance of 
questioning motives and wondering whether it is more for show than for 
serious reconstruction of the circumstances.
  I say at the outset, I have one disagreement with the President of 
the United States. Although there probably, pray God, are only a ``few 
really bad apples''--I think that was his phrase--in the corporate 
world, I do think we have a systemic problem. The marvel is that there 
are so many men and women in corporate America who have high moral 
standards and have overcome a fairly overwhelming temptation that 
exists in the way business is being done, the way in which we have 
loosened some of the not regulations, loosened some of the oversight on 
corporate America. It is a testament to the fact that there are so many 
honorable people running America's major corporations and multinational 
corporations.

[[Page 12928]]

  The fact is, we have a systemic problem which leads me to my friend 
from Michigan, Senator Levin. Senator Levin, Senator McCain, Senator 
Corzine, Senator Edwards, myself, and several others, in varying 
degrees, think what this debate is all about is fundamental fairness 
and efficiency of our economy. A lot of what we read about these days 
is focused on corporate scandals, individual villains, their schemes, 
their greed. There is plenty of that and maybe more than I can remember 
any time in my Senate career.
  I believe we need to focus on the behavior of corporate executives 
who have betrayed their positions of power, recklessly endangering the 
careers of tens of thousands of employees and the savings of millions 
of Americans. That is why it was so important the Senate unanimously 
adopted my amendment last week and the amendment which was contained in 
that of the Senator from Vermont for stronger penalties for corporate 
crime.
  In the hearings I have held in my criminal law subcommittee in the 
Judiciary Committee, I made clear from the outset--and I try never to 
overpromise what criminal law can do, even though we are only now 
finally beginning to rectify and make our criminal justice system 
reflect our values more clearly--that is not a solution. It is a part 
of a solution. The Senator from Iowa and I conducted hearings in that 
subcommittee. We have asked for stronger penalties. We have passed 
them. One small example: If you were to violate the Federal law 
relating to pension security, ERISA, it is a misdemeanor that could 
cost someone their entire pension or 1,000 people their pensions, 
totaling hundreds of millions of dollars. It is a misdemeanor. All you 
get is up to 1 year in jail. Yet if you steal my automobile--I live 2 
miles from the Pennsylvania State line, in Delaware--and you drive 
across the State line into Pennsylvania, you get 10 years under Federal 
law. Something is awry.
  Criminal penalties are not the answer. They are just rectifying this 
incredible inequity within our system. Hopefully we are beginning to 
reestablish some sense of faith in the system where average people 
think big guys get away with it and little guys go to jail.
  Punishing and deterring corporate crime, although it is a major part 
of our response to excesses committed by some of the most privileged 
and powerful corporate executives, is not enough. We face another 
fundamental problem. It is the loss of trust in our system, most 
apparent, perhaps, in the recent drop in the stock market. More than 
200 off the DOW in the days following the President's speech, and when 
I came to the floor the DOW was down 300 points. I don't know where it 
is right now. I hope and pray to God it has moved up.
  The fact is, there is a profound lack of confidence at the moment in 
our economy. There used to be a chairman of the board of the Dupont 
Company, a big, old farm boy from Ohio. He had great big hands. I 
remember, he was a wonderful guy, a first-rate chemist, first-rate 
scientist, as well as corporate executive. I was meeting with him one 
day and said: We have a problem; we are in the hole. And he turned and 
looked at me and said: My father always said, Joe, when you get in the 
hole, stop digging.
  Maybe the President should stop making speeches for a couple of days. 
He has spoken twice and the market went down 500 points while he was 
speaking. It is not because of a lack of anything in the President, but 
people are looking for real change. They assume that if there is any 
rhetoric, it must not be likely to be followed by something real.
  The Senator from Maryland has done something real. What the Senator 
from Utah and his committee has done is real. This is real. This 
underlying bill is real; it is positive; it is substantial. The bottom 
line is, no pun intended, there is a profound lack of confidence at the 
moment and that our economy can be shaken right now to the very 
foundations of our market democracy. For a market democracy to work, we 
have to have faith in our economy that will continue to create 
opportunities for job advancement and that our Government will continue 
to promote, as our Constitution requires, the general welfare.
  In recent months, to be reminded how much we have in common, how much 
of our unique blessings we have come to take for granted prior to 
September 11, we were reminded that in the end we are all in this thing 
together. Among those blessings we had come to take for granted was the 
most dynamic economy in the world, that had just come off the longest, 
strongest expansion in history. In the new economic arena, we are now 
reminded how much we depend on trust in each other to make our markets 
work.
  That sounds silly. No one was using the word trust before when we 
talked of the market economy. We talked innovation, the new economy, 
productivity, et cetera, but when you cut it all aside, it is all based 
upon trust, which is based upon transparency. If you cannot get out 
there and make your judgment to invest or not invest in a corporation 
with a clear sense that you have been told everything that is 
reasonable to tell you about the state of affairs of that company, then 
you might as well play the lottery.
  You might as well come on over to Delaware and play the slot machines 
at Delaware Park. You have about the same shot, unless you are on the 
inside.
  The task we are debating today is how to restore the strength of our 
economy, which is to restore the trust. At the core of that task is 
revival of confidence that consumers and investors, including foreign 
investors, need to get back into the market.
  This is going to turn around, Mr. President. You and I both know it. 
I am absolutely sure it is going to turn around. The question is, how 
many bodies will be littered along the way; how many pensions will be 
lost; how many jobs will be lost; how long is it going to take? It will 
turn around.
  I am sure the greatest strength of our system continues to be its 
resiliency: Our ability to see change as opportunity. I am sure of that 
because we have met this kind of adversity before. Every time we have 
come out stronger.
  I remember when the Senator from Maryland and I were on the Banking 
Committee in those dark days of the savings and loan crisis. We made it 
through. We made some very difficult decisions that, I might add, Japan 
and other countries have not made, and it resulted in an even stronger 
economy. So I am confident we can come out of this stronger.
  After the glare from all the glitter during the boom phase and as our 
vision becomes a lot clearer, we know that our economy is, in fact, 
fundamentally stronger than it was, notwithstanding what is going on 
now. Productivity gains were real. Information technology and corporate 
reorganization created real growth. It was not imaginary. It was not 
like these profit margins that people were suggesting they had on the 
balance sheets that were a lie. There actually was growth.
  The economy, the marketplace has created real growth. In what 
economists like to call the real economy where jobs are created, where 
goods are produced, the real economy is faster and more efficient today 
than it was a decade ago. Even old industries in our manufacturing 
sector have gained from advances in new materials, as well as 
improvement in information sharing and organization.
  We also know that a lot of what looked like growth, particularly in 
the financial sector, was only paper profits and a lot of it was 
written in disappearing ink. Profits and paper valuations were all too 
often inflated by wishful thinking, by self-dealing analysts, by 
accounting gimmicks, and by outright fraud.
  The amendment I am proud to support offered by Senators Levin and 
Corzine and others addresses one of the most glaring problems behind 
those inflated profit statements that fueled the stock boom that is now 
unwinding.
  Stock options are, as advocates tell us, a useful device. They can 
reward employees when companies are so young that they have little else 
to

[[Page 12929]]

offer. Of course, we all want to encourage startup companies in every 
responsible way we can. Also, stock options in theory, and sometimes in 
practice, keep employees' and corporate officers' incentives tied to 
the growth of their companies, but unlike virtually every other kind of 
compensation the firm can give its employees, stock options do not have 
to be listed on annual reports as an expense, and that means the more 
stock options you give, the less compensation you have to report, the 
lower your reported expenses, the higher your reported bottom line.
  That part is simple, and that is a big reason stock options became so 
attractive not only for the good things they can do, but also for the 
convenient way they inflated earnings statements and I would even say, 
if I want to go overboard and defend corporate America, even defending 
those corporate executives who when they take the train up to Wall 
Street and have some 30-year-old or 35-year-old guy sitting around a 
table saying: OK, what are you going to do next quarter? And giant 
companies that are strong and mature would say: We are going to do as 
well as last quarter. That is not good enough. We are going to 
downgrade your stock and your company.
  I remember one CEO of a major Fortune 10 company telling me, I have 
to do one of three things: I have to say, so be it, and keep on the 
long-term course or go out there and find some new product on the 
shelf, which I wish I had, that could increase productivity and profit, 
or go home and do something. The ``do something'' usually meant go home 
and cut the number of employees you have, cut expenses.
  Guess what. I do not think these are bad, evil, and venal people. 
They went home, and there is an easy way to do it. Let's make sure 
compensation is not reflected as an expense. So instead of paying the 
top executives an additional $15 million in compensation, give them 
stock options. Guess what. The bottom line looked $15 million better 
than it did before.
  That is not rocket science, and it may have been produced by Wall 
Street's desire for immediate gratification, immediate response. 
Whatever the reason, it turned out to be as much of a liability in the 
literal sense, as much as a damaging impact as the good things it could 
do by tying the employees' fate as well as the CEO's fate to their 
company.
  I see my friend from Utah standing. Does he want to ask me a 
question?
  Mr. BENNETT. Mr. President, will the Senator yield for a question?
  Mr. BIDEN. I will be happy to yield.
  Mr. BENNETT. Mr. President, the Senator is going into territory I 
will deal with in my statement, but to keep it all in context as he is 
talking, I must raise this question. The Senator is one of the 
historians of the Senate. He has been around a good long time and 
probably will be around for longer than I will.
  Does the Senator from Delaware remember that in 1993 when we 
increased taxes in the Clinton tax increase, we also put a limit of $1 
million on the total amount of deductions a company could take for 
salary for its employees?
  In other words, that CEO could not be paid over $1 million for his or 
her services and have the company deduct that as a legitimate expense 
for tax purposes.
  Mr. BIDEN. To be honest with the Senator, I do not remember that.
  Mr. BENNETT. Will the Senator agree that might have been part of the 
reason why companies, in an effort to attract and hold the best 
executive talent, would have moved away from traditional compensation, 
that the Senator and I both understood when we were growing up and 
applying for jobs, and into the more esoteric area of stock options 
because stock options were, in fact, not deductible; whereas, good old-
fashioned pay for services rendered was given a tax disadvantage as a 
result of the Clinton tax bill?
  Mr. BIDEN. In response to the Senator, I have to check more closely. 
I have great respect for my friend from Utah. Based on what he says, it 
seems to me it would have had a negative impact rather than a positive 
impact. That is one of the things we talk about at the front end.
  Whatever we do here should have a positive impact. There is something 
else stock options do, too. Because stock options are predominantly 
awarded to top executives, they are a great way to give yourself a 
sweetheart deal, with a powerful incentive for executives to look for 
ways to inflate stock prices so their stock options, at least for a 
while, are worth millions, even hundreds of millions of dollars.
  Here is what Business Week said about stock options back in March:

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

  And pump they did. Here is how much stock options distorted the 
bottom line for some of the biggest and best companies in America. One 
study by a London-based consulting firm, Smither and Company, looked at 
the use of stock options by 145 of the largest U.S. companies.
  They found that those firms overstated profit by 30 percent in 1995, 
36 percent in 1996, 56 percent in 1997, and 50 percent in 1998.
  Other analysts, including the Federal Reserve, have found the same 
thing.
  These are huge distortions in the picture the public was given about 
these companies and a huge distortion in information investors were 
using to allocate capital. That kind of distortion was clearly a big 
factor, maybe in addition to what my friend from Utah says, in driving 
up those stock prices that are now falling back to Earth.
  This is no simple problem. The 200 biggest firms now allocate more 
than 16 percent of their stock in options. Let me repeat that.
  The 200 biggest firms now allocate more than 16 percent of their 
stock in options, mostly for their very top executives.
  The potential for distortion and the temptation to distort is great.
  Remember these stock options are predominantly given to top 
executives.
  One study in 1998 found that 220 of the top managers at Fortune 500 
firms received an average of 279 times the number of stock options 
awarded to each of the firms' other employees.
  Two hundred and seventy-nine times what ordinary employees got.
  Despite the increased use of stock options this is clearly a device 
top management has largely preserved for itself, and the kind of 
incentives they created are now all too clear.
  This amendment takes what I believe is the most restrained and most 
careful approach to the problem of stock options.
  It does not legislate accounting standards, and it does not dictate 
outcomes.
  It tells the Financial Accounting Standards Board that it is given 
new resources and new independence by the underlying Sarbanes 
amendment. It provides for FASB to come up with appropriate techniques 
to account for stock options, it does not dictate a one-size-fits-all 
at this moment, and it gives them a year to do it.
  This is not about Government intervention this is about getting us 
out of the way of what every expert from Alan Greenspan to Warren 
Buffett and FASB itself says should be done.
  It does nothing to interfere with the issuing of stock options.
  It is about giving shareholders and investors the information they 
need to reassert their control over America's corporations. That will 
help to promote companies' long-term value, and reduce the temptation 
to pump up short-term stock prices.
  This amendment can help promote a stronger form of stockholder 
democracy, to cure a system that a greedy few have turned to their own 
personal advantage. That kind of democracy needs openness and clarity--
honest information to make informed decisions.
  This amendment is real reform, and I urge my colleagues to support 
it.
  I thank my friend from Utah for his intervention, and I thank my 
friend from Iowa for listening.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Iowa.
  Mr. GRASSLEY. I yield to the Senator from Virginia, just to make a 
unanimous consent request.

[[Page 12930]]

  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 would be 
amended to provide additional board oversight of internal corporate 
accounting.
  Specifically, my amendment would charge the Board with responsibility 
for conducting oversight audits or ``spot audits'' of public companies. 
The board would serve in a role analogous to the Internal Revenue 
Service or the Federal Bank Examiner. The IRS, for example, achieves 
voluntary public compliance through review of a very limited number of 
federal tax returns each year. The IRS does not verify each and every 
tax return. Similarly, the Federal Bank Examiner sporadically and 
randomly audits various banks throughout the country. Such ``spot 
auditing'' has been an extremely effective oversight tool for the 
banking industry and one which has resulted in higher levels of 
regulatory compliance. In similar fashion, I believe that accountants 
and corporate America will prepare more carefully their financial 
statements if exposed to the risk of compliance review by the board's 
oversight auditors.
  Even in self-regulated form, the accounting industry has long 
recognized the need for a second level of review. To that end, 24 years 
ago the ACIPA established the peer review process by which one 
accounting firm would review audit work of another accounting firm. For 
example, Deloitte & Touche was for many years the assigned peer 
reviewer of Arthur Andersen. Industry-wide self-checking on top of 
industry self-regulation seems ill-conceived and has been widely 
criticized 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

[[Page 12931]]

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 toward business. I didn't see any 
``permissiveness'' in the President's speech last week. I don't think 
very many people did.
  But I think we also need to remember, while a lot of this mischief 
was going on by corporations, that during the decades of the 1990s and 
now in the 21st century there were 2 years in which Democrats 
controlled Congress. In those two years, we had a Republican President. 
That was the first Bush Presidency. There was a period of time when the 
Democrats controlled both Houses of Congress and the White House. That 
was 1993-1994. Then there were 6 years that Republicans controlled the 
Congress--1994-2000, and the Democrats controlled the Presidency. Then 
there were 135 days last year that Congress was controlled by 
Republicans, and the President of the United States, but only 135 days 
out of a 12-year period of time, if you want to use the 1990s plus now. 
And what has happened has happened on the watch of both Republicans and 
Democrats.
  I think that to say a President has been President 18 months and this 
crisis before us is because of a ``permissive'' attitude in the Bush 
administration toward 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

[[Page 12932]]

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 toward 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?
  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

[[Page 12933]]

     enough, in any case, for executives to cash out. This, in 
     essence, is what happened at Enron, WorldCom, Xerox--indeed, 
     at quite a long list of companies.

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

       I will not sell shares to lawyers.

  I said:

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

  He said:

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

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

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

  He said:

       What do you mean I am lying to you?

  He said:

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

  The man said:

       What are you talking about?

  He said:

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

  Well, generally accepted accounting principles say that a balance 
sheet always has to balance, that the number on one side and the number 
on the other side must equal each other to the penny. This man did not 
understand generally accepted accounting procedures, he wanted to keep 
books a different kind of way, and he was misled. The solution, of 
course, was to educate him on what those generally accepted accounting 
procedures ought to be. Once he generally accepted what those 
procedures were, he could read the profit and loss statement, the 
balance sheet, and he could discover that the man, in fact, was not 
lying to him and that, in fact, the venture had made several hundreds 
of thousands of dollars that year.
  Now, let's come to Wall Street, let's come to Enron, let's come to 
all of the things that we are talking about here. One of the things we 
have heard in many of the hearings that I have attended on this subject 
is that if you were a sophisticated analyst of financial statements, 
you could, in fact, find all of the information that you needed in the 
footnotes of the various financial statements that were published. You 
did not need the kinds of disclosure that this bill is calling for.
  Well, I examined that, listened to that testimony, listened to the 
people who made that point, and came to the conclusion that they are 
right. If you are sophisticated enough to be able to go through every 
single footnote, examine every single side comment, and plow through 
all of the boilerplate that makes up a standard financial release, you 
could create an accurate picture of that corporation--except in those 
cases where there was outright fraud. In my opinion, Enron was a case 
of outright fraud, not a case of hiding things in footnotes; it was a 
case of lying.
  Quite frankly, there is nothing we can do in this Chamber, or 
anywhere else in a legislative forum, to stop people who determine that 
they are going to lie, who are determined they are going to commit 
fraud. That will happen no matter what kind of a bill we pass. We can 
raise the penalty and thereby discourage it a little more--and there 
are proposals to do that--but we cannot stop it. If someone is 
determined he is going to break the law, and he thinks he can lie and 
get away with it, he will still do it regardless of the bills that we 
pass here.
  But what we can do, what we should do, and what this bill is crafted 
to do is to make it easier for the ordinary investor to understand what 
a company is worth, make it so that the generally accepted accounting 
principles conform with generally understood activities with respect to 
the business world.
  The question is, how can we establish accounting rules that will make 
it possible for the ordinary investor to understand what is going on 
and not restrict understanding to those who can read the footnotes, who 
can decipher all of the boilerplate. I don't think we will ever get 
there in a perfect world. Life being what it is, with the lawyers 
coming in and requiring careful terms of art to be spelled out, we will 
never get to the point where someone who does not have any kind of 
legal understanding of the terms of art can read this as easily as he 
or she could read Harry Potter. However, we can move in that direction, 
and I feel this bill does so move.
  The one thing that we should be most careful of, however, is to avoid 
having Congress set the accounting rules.

[[Page 12934]]

Why? If Congress sets the accounting rules, it will--to use a phrase we 
use here derisively sometimes--take an act of Congress to turn that 
around. And having set the rules, Congress is very reluctant to come 
back in an act of Congress and change them. But if the rules are set by 
the regulatory bodies over which Congress exerts some oversight 
responsibility, they can be changed much more easily as more 
information comes along and as people begin to discover that what they 
did previously maybe doesn't make as much sense.
  I offer as exhibit A Congress's action to outlaw the deductibility of 
cash compensation above a million dollars--something that, in 
retrospect, now looks like it was a pretty stupid thing for us to have 
done. But we have done it, and the chances of trying to get a bill 
through that would undo it are very slim. If we stay out of the 
business--we in Congress--of making these kinds of accounting 
decisions, we will be better off, the economy will be better off, more 
people will keep their jobs, et cetera.
  Let me close on that particular subject with that particular idea in 
mind, and that is that Congress from time to time wants to step into 
the marketplace, repeal the law of supply and demand, and assert our 
judgment over the judgment of the marketplace. I have said many times, 
and will say many times hence, if I could add to what we have carved in 
marble around here, I would say: ``You cannot repeal the law of supply 
and demand.'' But we keep trying to do it with wage and price controls. 
We keep trying to repeal the law of supply and demand.
  We tried to do it in 1993 when we said we will do something about the 
excessive compensation of executives. We won't say that the marketplace 
and the law of supply and demand will determine what people get paid; 
we will legislate it. We will legislate it with tax policy. We will do 
some social engineering through tax policy. We keep trying to do that 
all the time, and it almost always produces a perverse effect.
  Let me address this question of overwhelmingly big salaries and 
compensation--as if there was something really evil about that, really 
corrupting about that. Maybe there is, in terms of the impact that that 
sort of compensation has in the lives of an individual, but it is the 
marketplace at work.
  Let me give an example with which I think everybody might be 
familiar. I am not talking about Jack Welch, the CEO of GE. I am not 
talking about Ken Lay at Enron. Let's talk about somebody with whom 
most people can identify. Let's talk about Wayne Gretzky.
  Wayne Gretzky has been called, accurately in my view, the greatest 
hockey player who ever lived. Along with that, Wayne Gretzky is the 
highest paid hockey player who ever lived. At the time the decision was 
made by the hockey team that brought Wayne Gretzky into the United 
States and paid him an incredible sum of money, there was a great hue 
and cry: How can one individual be worth this much money? For what? 
Knocking a solid piece of whatever hockey pucks are made out of around 
on the ice, for that he is worth $20 million, $30 million, $50 
million--whatever it was--a year?
  The owner of the team came out of some obscurity long enough to say: 
Yes, he is worth that much money, and let me explain to you why. Then 
he outlined what the ticket sales for his team were the year before he 
hired Wayne Gretzky and what the ticket sales for his team were the 
year he announced the hiring of Wayne Gretzky. The number was several 
times the total amount that Wayne Gretzky was being paid.
  The owner said: On a percentage basis, he is a bargain. He is a steal 
at the price I got him.
  These numbers are representative rather than absolute, but they stick 
in my memory that they were paying Gretzky something like $40 million 
or $50 million and the increase in ticket sales was going to be 
something like $120 million to $150 million.
  The owner said: If I had to, I would pay him twice as much because I 
am getting the benefit.
  People say: But that is measurable. Michael Jordan did the same thing 
for the Washington Wizards. We can figure that out with accounting. But 
what these chief executive officers are being paid is obscene.
  If you are a shareholder of General Electric, Mr. President, and you 
looked at what Jack Welch, the CEO of General Electric, did with that 
company during the time he had it in his stewardship, would you look 
back on that total period and say we paid Jack Welch too much money? Or 
would you look back on the amount of the value of General Electric that 
was generated under his stewardship and say he was a bargain; he was a 
steal; we could have paid him twice what we paid him and still come out 
well ahead?
  You say: But look at all of the executives who flew their companies 
right into the sea. Look at the executives who destroyed their firms. 
Yet they got this same amount of money.
  If I may go back again to the sports world, have we not seen sports 
teams pay very large salaries, responding to the law of supply and 
demand, for coaches who had losing seasons? For quarterbacks who ended 
up being on the waiver list? Those of us in the Washington, DC, area 
have had a lot of experience with quarterbacks. Does that mean we are 
going to stop trying to get the right quarterback for the Washington 
Redskins by saying we will pay them average salaries in the National 
Football League so that there will not be any more of these obscene 
salaries and failures?
  Several things will happen if the Washington Redskins take that point 
of view. No. 1, they will start to lose even more than they have lost 
in the past. And, No. 2, the fans will stop coming and the savings that 
you will make in buying a quarterback that you can get for $400,000 or 
$500,000 a year, compared to the one that you are gambling $10 million 
or $20 million on will all disappear as the ticket sales fall off, the 
television revenue disappears, and people do not want to come anymore.
  Yes, there have been corporate executives who have been vastly 
overpaid. There have been CEOs who have been hired on the basis of 
their reputation, just as football coaches who have been hired on the 
basis of their reputation, who, to lure them into the company, have 
been given great packages and then failed to deliver. But there are 
also the Jack Welches of this world who have turned out to be bargains 
no matter how much they were paid.
  Who should make the decision as to how much they should be paid? The 
answer is, The marketplace should do it. The law of supply and demand 
should do it. Someone who has demonstrated that he or she has the 
capacity to build, maintain, and expand a corporation with tremendous 
value for the shareholders is someone who can demand very high salaries 
because he or she is in very short supply.
  We can complain all we want to about the social inequity of a CEO who 
is earning $20 million, $30 million, $40 million a year and someone who 
is working in that company for minimum wage, but it is the same 
principle as saying: Look at the difference between Wayne Gretzky down 
on the ice earning $20 million, $30 million, $40 million a year and 
someone selling hot dogs in the stands. If Wayne Gretzky were not on 
the ice, there would not be anybody in the stands to buy the hot dogs. 
Wayne Gretzky and his skills are in much shorter supply than someone 
who can stand in the stands and sell hot dogs.
  We should not in our frenzy in this whole debate get so carried away 
with our desire to deal with those who have damaged the system by their 
failure to live up to their responsibilities that we, once again, make 
any statements that would cause us to try to repeal the law of supply 
and demand.
  I see my colleagues are seeking recognition. I have carried on long 
enough. I leave with this one last thought: If we are going to deal 
with these issues, we should deal with them in the way this bill deals 
with them and not in the proposal that Congress itself should set 
accounting standards or should set wages or caps or compensation.
  Past history tells us Congress can act in a hurry but repent at great 
leisure.

[[Page 12935]]


  Mr. GRAMM. We have a unanimous consent request and a request for the 
yeas and nays that I want to make while we have at least a handful of 
Members here. I ask for the yeas and nays on the Edwards amendment.
  The PRESIDING OFFICER. It is not in order to request the yeas and 
nays.
  Mr. GRAMM. I ask unanimous consent that it be in order to request the 
yeas and nays on both pending amendments.
  The PRESIDING OFFICER. Is there objection?
  Without objection, it is in order to seek the yeas and nays at this 
point.
  Mr. GRAMM. I ask for the yeas and nays on the pending Edwards 
amendment.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  Mr. GRAMM. I now ask for the yeas and nays on the Carnahan amendment.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The yeas and nays were ordered.
  Mr. GRAMM. The Democrat floor leader had a unanimous consent request 
he wants to propound.
  Mr. REID. Mr. President, we are in the process of working that out 
now. I think we will be able to do that later.
  Several Senators addressed the Chair.
  The PRESIDING OFFICER. The Senator from Nevada.
  Mr. ENSIGN. Mr. President, I ask unanimous consent that I be allowed 
to speak for up to 10 minutes as in morning business, with the time 
consumed counting against the postcloture debate.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The Senator from Nevada.
  Mr. REID. Mr. President, it is also my understanding that the Senator 
from Nevada is going to yield an hour to the manager of the bill; is 
that right?
  Mr. ENSIGN. If you require the 50 minutes that will be left against.
  Mr. REID. Or whatever time is left.
  Mr. ENSIGN. Yes.
  Mr. REID. Mr. President, I understand he has a right to do that; is 
that true?
  The PRESIDING OFFICER. The Senator has a right to yield time. The 
manager of the bill may receive up to 44 additional minutes. The 
Senator from Nevada.
  Mr. ENSIGN. Mr. President, at the end of my remarks, I will yield 
whatever time the Senator from Texas can receive.
  Mr. President, I want to talk about something a little different than 
what we have been talking about today, although I have very strong 
feelings about the bill and think that both the managers of the bill, 
along with Senator Enzi from Wyoming, have done a terrific job in 
addressing some very serious problems out there. I still believe there 
are a few problems with the bill we need to clean up in conference.
  I do think the overall legislation has some positive reforms that 
must be implemented to try to restore some confidence back in the 
investing public.


                           Prescription Drugs

  Mr. ENSIGN. Mr. President, what I want to talk about is something we 
are going to be dealing with later this week--as early as tomorrow from 
what I understand--and that is the whole idea of prescription drugs 
within Medicare. Earlier today, Senators Hagel, Gramm, Lugar, Inhofe, 
and I all introduced a new prescription drug bill. It is the 
compilation of work mainly that Senator Hagel and I have been doing for 
the last couple of years. We think it is a proposal that deserves the 
attention of our colleagues, and I encourage them to study this 
proposal.
  I want to start by reading an e-mail I received from a senior citizen 
back in Nevada. This e-mail came in at 11:21 p.m. Pacific standard 
time, so obviously this person was up late at night thinking about the 
whole issue of prescription drugs. Let me read it:
  I urge you to ponder very honestly the proposed prescription coverage 
with Medicare. Many social problems arise due to the fact that many 
persons who need medication to maintain some sort of life existence are 
not able to purchase the needed medications. Must we continue to choose 
housing or our medications? Please step back and consider if an elderly 
or disabled person in your own family were in this precarious 
situation. Would you not step up to the moral plate and fight to find 
funding for Medicare covered prescriptions?
  I think this person summed up very well what a lot of seniors are 
feeling: They are having to choose sometimes between the type of food 
they eat and prescription drugs; sometimes between whether they can 
turn their air-conditioner on in the summertime or their heat on in the 
wintertime and prescription drugs; sometimes between rent and 
prescription drugs.
  There are several proposals, and I commend the people who have been 
working on their proposals, but, frankly, the reason we decided to 
introduce this bill is that some of the other bills, especially when 
one looks into the outyears, are so costly that they literally could 
bankrupt the Medicare system in and of itself.
  Our bill does a few things. First, it is available to every 
beneficiary, and it is also available faster than any of the other 
prescription drug proposals. Our bill can be implemented as early as 
January 1, 2004, whereas the earliest the other proposals can be 
implemented is 1 full year later.
  Our bill is also the most affordable bill, especially to the 
taxpayer. We are waiting for the final score from CBO, but we think it 
is going to come in somewhere around $150 billion over the next 10 
years. The next cheapest proposal, that we are aware of, is around $370 
billion, and when one looks at the full cost of a 10-year program, 
other programs can be up to a trillion dollars.
  A trillion dollars is not something this country can afford, 
especially under current economic conditions, and especially when we 
think about young people who would like to see Medicare as a benefit to 
them someday.
  So we must enact a reform that not only America can afford but also 
senior citizens can afford, and we think we have come up with that 
balance. Basically, the way the program would work is, every senior on 
a voluntary basis would be able to get a prescription drug discount 
card. For a $25 annual fee, they would sign up and get this 
prescription drug discount card. They would then go buy their 
prescription drugs, and all seniors would save because of volume 
discount buying. We would use the private sector to do this. They would 
save, on average, 25 to 40 percent on their drugs. That is a huge 
savings right upfront that every senior could achieve.
  On top of that savings, seniors up to 200 percent of poverty would 
next spend, on average, about $100 a month out-of-pocket; then after 
that, other than a very small copay, the Federal Government would cover 
the rest of their prescription drug costs.
  This is what seniors are looking for. In my campaign in the year 
2000, I took this plan all over the State of Nevada and talked to low-
income, moderate-income, and higher income seniors groups about it. I 
told them that people who are in the lower income bracket are going to 
get most of the benefit, and for people in the higher income bracket, 
it is going to cost them more money, as it should.
  In some of the other programs, no matter whether one is a lower 
income or higher income senior, they basically are treated the same. I 
personally do not think Ross Perot or somebody in his income category 
should be treated the same as somebody who makes $15,000 a year. There 
should be some difference. Under our bill, there is a great difference 
in the way those two categories of people would be treated.
  The reason our bill is less costly to the taxpayer is one simple 
fact: All the other bills give a percentage of first dollar coverage. 
Whether it is 50 percent or whatever the coverage, after a very small 
deductible, they all start covering right away. Our bill says the 
senior is going to pay about the first $100 a month out of pocket, and 
then after that, our coverage kicks in.
  About 50 percent of the seniors do not have $1,200 worth of 
prescription drug

[[Page 12936]]

costs per year, so about half the seniors, other than the discounts 
they will get because of the prescription drug discount card, actually 
will not use it. But, frankly, most seniors can afford about $100 a 
month for prescription drugs. It is for that diabetic patient or that 
heart patient or that cancer patient who has maybe about $500, or $300, 
or $400, or whatever it is, a month that they are paying in current 
prescription drug costs. These are the people that really cannot afford 
their prescription drugs, and our bill helps that person much more than 
most of the other plans.
  The reason our bill saves so much money is that we keep the patient 
accountable for the drugs they are getting. They do not have somebody 
else paying for it and as they get the benefit. That is one of the 
biggest problems we have with our current health care system: There is 
no accountability with patients. They are receiving the benefit 
regardless of the cost, and so they do not think about shopping because 
somebody else is paying the bill.
  We do not have market forces working in the health care field today, 
and if we enact a prescription drug benefit without utilizing market 
forces, someday we are really going to regret it because we will have 
severely out of control costs.
  The bill we have introduced, we believe, is more fiscally responsible 
and targets most of the benefit for those who truly need it the most. 
We can enact it a lot more quickly than some of the other programs, and 
it is permanent. It is because of those factors that we believe this 
bill is the bill that our colleagues should take a look at supporting.
  We would be happy to meet with anybody to talk to them about the bill 
and possibly about cosponsoring the bill. Do not be turned off because 
one political party may be offering one bill and the other party 
offering another bill. We are offering an alternative to either of 
those bills, and we think this bill, with its fiscal responsibility to 
the taxpayer, is the bill that people should support.
  In closing, I look forward to engaging in a meaningful debate on 
prescription drugs after we deal with this accounting reform issue--and 
this issue is so important, and I see my friend from Wyoming who has 
done so much work on the bill, and I applaud him and the others who 
have worked on this bill. But later in the week as we are debating this 
prescription drug benefit proposal, we need to take a serious look and 
not play politics because seniors cannot afford for us to play politics 
with the prescription drug issue. We need to work together in a 
bipartisan, rather, in a nonpartisan fashion, so seniors can get the 
help they so deserve.
  I ask unanimous consent that under the provisions of rule XXII, I may 
yield whatever time I can yield back to Senator Gramm. I understand it 
is 44 minutes, and I yield that amount of time to Senator Gramm.
  The PRESIDING OFFICER (Ms. Cantwell). The Senator has that right.
  The Senator from Georgia.
  Mr. KENNEDY. Will the Senator yield?
  Mr. CLELAND. I am happy to yield.
  Mr. KENNEDY. We have had two speakers from the other side. I ask 
unanimous consent to follow the Senator from Georgia.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The Senator from Wyoming.
  Mr. ENZI. Reserving the right to object, and I will not object, some 
of us have been on the floor all this time waiting to speak, as well. 
We hope for a chance to speak before we reach the end of the day.
  I will not object.
  The PRESIDING OFFICER. The Senator from Georgia.
  Mr. CLELAND. Madam President, I ask recognition to discuss my 
amendment No. 4236. This amendment addresses the accountability of 
corporate officers and directors. I strongly support the legislation 
before us which addresses the critical need to create an environment of 
accountability within corporate America. We need to send a strong 
message to corporate executives that the days of living large while 
lying, cheating, and stealing from the American people are over. 
Control of a company certainly has its advantages, but it also carries 
important obligations and duties. My amendment would address a 
situation like Enron where officers cashed in on bonuses, severance 
packages and millions of dollars in stock sales as they saw the light 
of the train coming through the tunnel. Unfortunately for thousands of 
Enron employees and investors, they had no similar warning and were not 
able to bail themselves out before many lost not just their jobs, but 
their life savings as well. My amendment would make sure that officers 
and directors who know what is happening, who know that financial 
reports are being manipulated, can't cash in on this knowledge while 
leaving employees and investors holding the bag. It is the duty of 
officers and directors to know what is happening in the corporation and 
to blow the whistle when they know there is wrongdoing.
  In the case of Enron, 10 executives or directors joined CEO Ken Lay 
and Chief Financial Officer Andrew Fastow in siphoning off company 
proceeds and reaping millions of dollars when they sold their Enron 
shares high. Together these 12 individuals made stock profits totaling 
more than $30 million before the company took a public nose dive at the 
end of last year. These corporate high rollers were reaping huge 
profits at the same time thousands of hard working Americans were 
losing more than a billion dollars in retirement savings, including 
$127 million in lost retirement savings in my home State alone by 
teachers and State employees.
  Corporate greed, should not be rewarded. The underlying bill requires 
that when a corporation has to file a restated financial report because 
of misconduct in the original report, the CEO and CFO have to give back 
any profits they have made from bonuses and stock sales for a year 
after the original report. My amendment would expand on the bill by 
calling into account all officers and directors who know about the 
misconduct in filing the financial report and through that knowledge 
abuse the company's trust and the trust of their employees. It would 
also mandate that officers and directors who have knowledge of 
wrongdoing in their financial reports would not only have to give up 
bonuses and profits but also their severance packages. Why should 
someone like Jeff Skilling get a parachute as he bails out of a 
disaster he helped to create?
  This amendment, my amendment, deserves support. It is endorsed by 
Arthur Levitt, one of this nation's most distinguished financial 
authorities. It is high time we call corporate executives on the carpet 
and hold them accountable. It is time we create an atmosphere that 
encourages responsible behavior and restores the confidence of the 
American people in the economy of this country.
  The PRESIDING OFFICER. Under the previous order, the Senator from 
Massachusetts is to be recognized.
  Mr. KENNEDY. I am happy to yield.
  Mr. REID. I will take a couple of minutes.
  Mr. KENNEDY. I guess I just yielded the floor.
  I yield to the Senator and ask recognition afterwards.
  Mr. REID. We have had some very long speeches by those on the other 
side and I thought it appropriate we respond.
  The ranking member of the Finance Committee had all these charts 
indicating that all the problems were not the problems of this 
administration. The fact is, we realize there is a lot of blame to go 
around. With do not try to whitewash this issue.
  The fact is, the President of the United States appointed the SEC 
Commissioner, who stated in the hearings he wanted a friendlier, a more 
gentle Securities and Exchange Commission.
  That statement speaks for itself.
  We also have to understand that actions speak louder than words. What 
I mean is, we have a Federal Government today, this administration, 
that is basically run like corporate America. That has to change. That 
is what this legislation is all about.

[[Page 12937]]

  When there is a situation where the President of the United States is 
being written up in editorials all over the country and news articles 
throughout the country over his dealings with stock, borrowing money 
that basically he did not have, to pay back the principle until you 
sell your stock--no one else gets deals like that. The commentators are 
looking at that, as they should. Of course, the dealings that the Vice 
President had with Halliburton, we would like to know more about that. 
But the Vice President is treating that like he treated his energy task 
force: in complete secrecy, contrary to how we should be running this 
Government.
  I believe we have a situation that cries out for passing this 
legislation as quickly as possible. This administration must step 
forward and recognize they are part of the problem, until they start 
talking about supporting this legislation, as I understand the 
President did today. I think that is wonderful. I understand he is 
going to help us get this through conference. I think that is 
important. I would like to see it before the August recess. It is 
important this legislation move forward.
  Actions speak louder than words. This administration has to do more 
than talk about what needs to be done. They have to work with us in 
solving the problems of corporate America today.
  The PRESIDING OFFICER. The Senator from Massachusetts.
  Mr. KENNEDY. Madam President, there are many important provisions in 
the legislation before the Senate to increase corporate accountability. 
I had hoped to offer an amendment to make workers' retirement plans 
whole again when the corporate executives cheat.
  After the collapse of Enron--the largest bankruptcy in U.S. history--
the President and many Republicans in Congress suggested that it was an 
isolated example of corporate wrongdoing. Since that time, the nation 
has witnessed a continuing series of corporate scandals which have 
demonstrated otherwise.
  The lack of corporate responsibility in the United States has 
undermined the credibility of our markets and devastated the retirement 
savings of millions of Americans. This widespread abuse of corporate 
power has also jeopardized our nation's economic recovery and hurt the 
legitimacy of our fundamental institutions. We must take bold action 
this week to ensure that corporations are made accountable and that 
workers and investors are protected against these abuses.
  In the past month, we have seen a jury criminally convict the Arthur 
Andersen accounting firm for engaging in the obstruction of justice to 
cover up the Enron debacle. We have seen WorldCom admit that it wrongly 
reported its true financial condition by nearly $4 billion. Just last 
week, the Wall Street Journal reported that Merck recorded $12.4 
billion in revenue from a subsidiary that it never actually collected.
  In response to these scandals the President gave a speech last week, 
which the White House likened to the words of former President Teddy 
Roosevelt. Unlike our nation's great trust-buster, the President failed 
to lay out a comprehensive plan to restore America's confidence in our 
economic system.
  Hard-working Americans and their families have suffered immensely as 
a result of these scandals and the failure of the Administration to 
take decisive action. Workers have lost their jobs, their health 
benefits, and their retirement savings. Today, over 47 million workers 
rely on 401(k) plans and the stock market for retirement security. We 
can't wait for the next report of corporate fraud, the next round of 
layoffs, and retirement losses before we take serious action.
  This wave of corporate scandals is undermining the confidence of 
investors in the U.S. economy. Mutual fund investors have lost about 
$700 billion in just the last 15 months. In May of this year, new 
investments in stock funds declined by nearly two-thirds from the 
previous month. As foreign investors lose confidence in the 
transparency of U.S. corporations, these investors are pulling out of 
the U.S. market and the value of the dollar is now falling against 
foreign currency. With an unemployment rate of 5.9 percent, America's 
workers can ill afford to have their economic prospects dimmed by 
corporate corruption.
  Its time--in fact its long past time--to pass tough new laws to 
prevent future abuses of corporate power. We must reform our accounting 
system, enact criminal penalties for corporate wrongdoers, and pass new 
protections for workers.
  Senator Sarbanes' accounting bill is critical to reforming our public 
accounting system and ensuring transparency and accountability for 
corporations in the United States. The legislation creates an 
independent oversight board; it restricts the non-audit services than 
an accounting firm can provide to the public companies that it audits; 
it holds corporate executives responsible for the accuracy of corporate 
financial statements; it requires corporate insiders to report stock 
sales and corporate loans to the SEC; and it provides additional 
resources to the SEC to improve its investigation and enforcement 
capabilities. We all owe a debt of gratitude to our colleague, Senator 
Paul Sarbanes, for shepherding this legislation through the Banking 
Committee and bringing it before the Senate.
  In addition to these accounting reforms, we must hold corporate 
executives accountable when they mislead workers and undermine their 
retirement security. At Enron, executives cashed out more than a 
billion dollars of stock while Enron workers lost nearly a billion 
dollars from their 401(k) retirement plans. Thousands of Enron workers 
lost virtually all of their retirement savings. Enron executives got 
rich off stock options even as they drove the company into the ground 
and systematically misled workers about the true financial state of the 
company. Ken Lay now has a pension of nearly half a million dollars a 
year for life. Many Enron workers have nothing at all.
  These are all statements that were made by Mr. Lay. Ken Lay's lies 
encouraged workers to buy Enron stock at $49. He ``never felt better 
about the prospects of the company.'' He predicted to employees a 
``significantly higher stock price,'' saying it was ``an incredible 
bargain'' as it was going down. Mr. Lay has a pension of nearly half a 
million dollars a year. At WorldCom, the workers lost more than half of 
their retirement savings as the stock dropped from $60 to just 6 cents. 
Workers across the country also lost big as a result corporate 
wrongdoing at WorldCom. The brave firefighters and police officers of 
New York City lost $100 million from their pension fund. Over 20,000 
workers have been laid off in the last few weeks because of the actions 
of WorldCom executives. Yet, those same executives made out like 
bandits. Former WorldCom CEO Bernie Ebbers is guaranteed a million and 
a half dollars for the rest of his life while WorldCom workers face a 
bleak financial future.
  Sadly, Enron and WorldCom are not just isolated tales of corporate 
greed that hurt America's workers. At Kmart, 22,000 workers were laid 
off. At Lucent, 16,000 workers were laid off. At Xerox, over 13,000 
workers were laid off. At Tyco, almost 10,000 workers were laid off. At 
Global Crossing, over 9,000 workers were laid off.
  These corporate debacles reveal a much deeper crisis of corporate 
values. In America, people who work hard all their lives deserve 
retirement security in their golden years. It is wrong--dead wrong--to 
expect Americans to face poverty in retirement after decades of working 
and saving.
  For far too long, corporate executives have been obsessed with their 
own compensation instead of the long-term health of the companies they 
lead. Executives, like those at Enron and Wordcom, should not put their 
own short-term gain ahead of the long-term interests of workers and 
shareholders. They must not be rewarded for doing so. At Enron, workers 
were systematically misled by Enron executives about the financial 
situation of the company. For years, Enron, like many other companies, 
pushed its workers to buy

[[Page 12938]]

company stock with their own 401(k) contributions.
  Until the bitter end, Enron executives continued to promote Enron 
stock to workers in a series of e-mails. On August 14, Enron CEO 
Kenneth Lay told workers that he ``never felt better about the 
prospects for the company.'' On August 27, Lay predicted to workers a 
``significantly higher stock price.'' And on September 26, Lay called 
Enron stock ``an incredible bargain.'' Even as they promised the moon, 
Lay and other executives were cashing out their stock for a billion 
dollars.
  If Enron and WorldCom scandals teach us anything, it's that we must 
stop rewarding corporate misbehavior.
  Our amendment--it is cosponsored by Senator Gregg of New Hampshire--
makes it clear that executives who give workers misleading information 
about the company stock in their 401(k) plans face serious penalties. 
The amendment is the civil law parallel to the Leahy criminal 
provisions, which punish executives for defrauding investors. The 
amendment is also the ERISA civil law parallel to the Biden amendment, 
which increases the ERISA criminal penalties. When executives lie and 
mislead workers about company stock, they must face real penalties.
  Under current pension law, Enron executives, like Ken Lay, and Arthur 
Anderson, cannot be held responsible for workers' losses in their 
401(k) plan. The amendment makes a corporate ``insider''--an officer or 
director or the independent public accountant--responsible under 
pension law if the insider misleads workers about the company's stock.
  America's workers need this amendment to hold Ken Lay and other 
executives engaged in wrongdoing accountable. The amendment empowers 
workers to seek restitution when executives knowingly abuse workers' 
pensions. If workers lose their retirement savings due to deliberate 
corporate mismanagement, then they should have the right under our laws 
to hold those top executives accountable in a court of law, and recover 
what they lost. This right could make the difference for a family 
between an impoverished retirement and a comfortable retirement that 
they earned.
  The economic health of our nation depends on reigning in the abuses 
of corporate power which we have witnessed in recent months. Restoring 
the credibility of accounting standards, as the Sarbanes bill would do, 
is critical to restoring confidence in our markets. At the same time, 
we must also restore basic fairness to our system.
  When corporations like Enron fail because of executive wrongdoing, 
corporate executives get golden parachutes but workers are left with a 
tin cup when it comes to their retirement. Corporate criminals must be 
made to pay for their misdeeds.
  We see from this chart what has happened: Ken Lay, $457,000 a year 
for life, retirement savings were decimated, 4,200 layoffs; former 
WorldCom CEO, Bernard Ebbers, $1.5 million a year, retirement savings 
decimated, 20,000 layoffs; Richard McGinn, $12.5 million lump sum pay 
for Lucent, retirement savings decimated, layoffs for 16,000; Charles 
Conway, $9 million lump sum pension, retirement savings decimated 
22,000 layoffs.
  This has to stop. Today we have a critical opportunity to protect 
workers and investors against future abuses of corporate power. We must 
not let these hard-working Americans down.
  Madam President, I ask unanimous consent to temporarily lay aside the 
pending amendment in order that I may offer the Kennedy-Gregg 
amendment, which I send to the desk at this time.
  The PRESIDING OFFICER. Is there objection?
  Mr. GRAMM. I object.
  The PRESIDING OFFICER. Objection is heard. The Senator from 
Massachusetts retains the floor.
  Mr. KENNEDY. Madam President, I have heard objection. We tried to get 
this amendment up during the period of the last week and were closed 
out. It is a simple amendment. It is an amendment that can do more to 
protect workers' interests than many other proposals. I think we ought 
to have some accountability for those who willingly mislead, willingly 
and knowingly mislead workers, and then benefit from insider 
information.
  It would just give them a cause of action, a specific case, no 
punitive damages. It would be a factual situation which would have to 
be decided in the courts of law. But it does seem to me to offer a real 
meaningful opportunity to protect workers and the savings of workers 
from the kind of gross abuse we have seen currently here in the Senate.
  Mr. DORGAN. Madam President, will the Senator yield for a brief 
question?
  Mr. KENNEDY. I am glad to yield for a question.
  Mr. DORGAN. Madam President, the Senator from Massachusetts has just 
propounded a unanimous consent request on an amendment that makes good 
sense to me, and it certainly should be added to this bill. I assume it 
is a germane amendment. We are postcloture. At the very least, he 
should have gotten a vote on the amendment. But I wonder if the Senator 
from Massachusetts knows that this has gone on all afternoon. I offered 
an amendment a couple of hours ago that was simple and germane. It 
should have had a vote. It said that if the CEOs and directors of a 
corporation waltz out the door with millions of dollars of bonuses, 
stock options, and incentive pay, and then the company goes bankrupt, 
they have to give it back. I couldn't get that amendment up for a vote 
because of the same objection.
  I wonder if the Senator from Massachusetts might conclude from this 
that the things here in the final hour which are germane have a right 
to be considered and heard on behalf of the workers and the 
shareholders and the folks who didn't get rich but the folks who lost 
everything. I wonder if there is not a pattern here that the Senator 
from Massachusetts sees and that others see to shut down those 
amendments and protect the folks at the top while the folks at the 
bottom lost everything.
  Mr. KENNEDY. Madam President, this amendment is relevant. But under 
the strict rules of the Senate, it would not be considered germane, 
although I think a commonsense evaluation or review of the amendment's 
purpose and what the underlying bill is about would certainly appear to 
I think most people to be an important strengthening provision if we 
are interested in corporate responsibility and protection for workers. 
It is certainly relevant, but under the technical rules it is not 
germane.
  But I think anyone who knows what this bill is really all about 
understands what is happening in these circumstances. This would 
certainly be a very strengthening provision in the underlying 
provisions. We were unable to get the opportunity to have the 
consideration because we were foreclosed from that opportunity at the 
end of last week and we are getting objections this week.
  I think that is unfortunate. As I understand it, the most current 
support for this is overwhelmingly among Republicans and Democrats 
alike across this country. They understand. It doesn't take a lot of 
debate or discussion to understand what accountability is all about. 
Under the existing laws, they can only have accountability, not for 
those who are at the CEO level, who are really the ones making these 
judgments and decisions upon which workers are relying, but they would 
only be able to sue lesser figures in the corporate ladder. Therefore, 
this is not an effective remedy for workers.
  We are trying to provide an effective remedy for workers who are 
being shortchanged. It makes eminently good sense. It is eminently 
fair. It is eminently responsible. It is eminently relevant. But there 
has been objection to it.
  I want to give assurance to the Senator that we look forward to 
offering this amendment at another time at the first opportunity.
  Mr. REID. Madam President, I ask unanimous consent that Senator Byrd 
be recognized today at 5 until 15 after the hour to speak.
  The PRESIDING OFFICER. Is there objection?
  Without objection, it is so ordered.
  Mr. REID. Madam President, I suggest the absence of a quorum.

[[Page 12939]]

  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. REID. Madam President, I ask unanimous consent the order for the 
quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.


                            insider trading

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


             Corporate Responsibility for Financial Reports

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

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

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


                GUIDANCE TO STATE REGULATORY AUTHORITIES

  Mr. ENSIGN. Mr. President, the purpose of this amendment is to ensure 
that State regulators do not automatically apply the provisions of this 
bill to accounting firms, particularly small accounting firms and firms 
that service small businesses without first looking at the possible 
harmful unintended consequences to those small businesses. The 
standards applied by the board under this act could create undue 
burdens and cost if applied to nonpublic accounting companies and other 
accounting firms that provide services to small business clients.
  Mr. GRAMM. I agree with my friend, the Senator from Nevada, and want 
to add that what we need to avoid is a possible cascading effect, 
starting with the Federal Government, that could eventually hurt the 
small accounting businesses in this country.
  Mr. ENSIGN. Many of these small businesses rely on their CPA or 
auditor to provide objective, trusted advice and counsel on a broad 
range of tax and business related issues. Without this amendment, we 
will end up harming thousands of American accounting firms and their 
small business clients.
  Mr. GRAMM. Mr. President, I think the Senator from Nevada is right 
about the harmful affects this legislation could have on small 
businesses, not only the small accounting firms in this country, but 
also the small business clients of those companies. This amendment says 
to the State regulators to look very carefully at the effects this 
legislation could have for smaller and medium-sized firms, and also on 
small businesses that may rely on larger firms for their audit work.
  Mr. ENSIGN. I thank the Senator from Texas for his comments.
  Mr. KOHL. Mr. President, as a businessman, I have been deeply 
concerned about the reports of fraudulent and even criminal behavior at 
prominent American corporations. When I worked in business on a daily 
basis, this is not the kind of behavior I saw or expected from my 
peers. It is imperative that we respond to the corporate malfeasance 
which has been roiling our markets. The impact of these acts, all for 
the sake of boosting short-term profits, has been broad, costing many 
their jobs and others their savings.
  The free market is the underpinning of our economic system, the key 
to the growth and development of our Nation in the last two centuries. 
The many creative and dynamic businesses which make up our democratic 
capitalism make important contributions in the form of good paying jobs 
and the taxes which pay for critical services, such as our national 
defense. Above all, these

[[Page 12940]]

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

[[Page 12941]]

company stock at a time when their employees are prohibited from doing 
so.
  Fifth, the Senate bill would limit the growing pressure and conflicts 
of interest that affect the independence of stock analysts. Just as 
investors need to know that a company's financial reports are accurate, 
so should investors expect objective opinions from stock analysts.
  Finally, the bill would authorize additional funding for the SEC and 
would establish independent sources of funding for the new oversight 
board and FASB. As a member of the Senate Appropriations Committee, I 
will support full funding for the SEC.
  We need to work to prevent future scandals. We also need stronger 
criminal laws and penalties to address fraud and abuse by corporate 
executives and auditors. During last week's debate I voted for three 
amendments, including an amendment by Senator Leahy, that would close 
gaps in current law.
  I know some of my constituents in the accounting and business 
communities are concerned by a few of the steps in the Senate bill. As 
I talk to certified public accountants in my State, they have 
emphasized that it is critical to encourage greater competition in the 
public accounting field. I agree investors would be better served by 
more competition. The bill requires the Comptroller General, in 
consultation with various agencies and organizations, to identify the 
factors that have led to the consolidation of public accounting firms 
since 1989, the impact of consolidation, and ways to address it. While 
a study does not guarantee action, I look forward to reviewing its 
findings.
  It is time to restore confidence in corporate financial statements. 
It is time to hold people accountable who violate the public trust. I 
urge my colleagues to join me in supporting this legislation.
  Mrs. BOXER. Individual investors, saving for their retirement or 
their children's education, count on business leaders to play by the 
rules. They also count on financial industry professionals including 
accountants and research analysis to produce reliable, professional, 
and honest work.
  But recent business scandals at Enron, Tyco, Merrill Lynch, WorldCom 
and others are proving that without strong government oversight and 
regulation, greed will lead executives, accountants, and investment 
analysts to abuse the trust that American workers and investors have 
placed in them.
  We have to restore that trust. This bill is a good first step. It has 
the necessary teeth to clamp down on corporate irresponsibility. First, 
it creates a full-time independent board to set ethical auditing 
standards. Second, it prevents companies from providing most consulting 
services for the very same companies that they audit. Third, if 
enforced, it would send corporate executives who mislead shareholders 
to jail. Fourth, it forces Wall Street investment research analysts to 
disclose any conflicts of interest that they or their financial 
institution might have in the investment recommendations that they 
make. And finally, it protects whistleblowers who reveal unethical acts 
by the companies for which they work.
  I support this bill and would have supported even stronger 
legislation. I remain concerned that the public members on the board 
created in this bill are not chosen according to specific independence 
standards. I am also concerned that disclosure requirements do not 
include the holdings of family members of influential research analysts 
on Wall Street. And most importantly I had hoped we could do more to 
get funds to workers who lose their jobs as a result of executive 
misconduct. Those concerns aside, this bill is a good first step in 
restoring confidence in the system.
  Unfortunately, the House recently passed a bill that is weak and will 
not get the job done. It fails to establish a full-time board to design 
and enforce auditing standards, does not mandate jail time for 
securities fraud, and fails to protect whistleblowers. On the conflicts 
of interests that investment analysts are forced to disclose in the 
Senate bill, the House bill calls only for a study of the issue.
  I urge the President to go beyond rhetoric and endorse the Senate 
accounting reform bill so that we can get a strong bill out of 
conference. I also urge the President to join us in fighting for 
meaningful pension reform to ensure that American's retirement savings 
are protected.
  Mr. SMITH of Oregon. Mr. President, I rise today to take a few 
moments to praise the Banking Committee for bringing the Public Company 
Accounting Reform and Investor Protection Act of 2002 to the floor and 
all the hard work they have done in the past week. In the weeks before 
this bill came to the floor I thought that what we needed was some type 
of Investors' Bill of Rights.
  I had worked with colleagues on both sides of the aisle to come up 
with bipartisan goals to prevent corporate abuse and protect investors. 
I feel that much of the bill on the floor fulfills these goals. I feel 
that there are a few things that investors should see happen when we 
pass this bill. I believe that much of this bill will help, and in 
other areas we may have to work further.
  I believe that investors must have access to information about a 
company. We should ensure that every investor has access to clear and 
understandable information needed to judge a firm's financial 
performance, condition and risks. The SEC will have the power to make 
sure companies provide investors a true and fair picture of themselves. 
A company should disclose information in its control that a reasonable 
investor would find necessary to assess the company's value, without 
compromising competitive assets.
  I believe that investors should be able to trust the auditors. 
Investors rely on strong, fair and transparent auditory procedures and 
the concept of the Oversight Board in the Sarbanes bill is a sound one.
  I believe investors should be able to trust corporate CEOs. Unlike 
shareholders or even directors, corporate officers work full-time to 
promote and protect the well-being of the firm. A CEO bears 
responsibility for informing the firm's shareholders of its financial 
health. I support the concept of withholding CEO bonuses and other 
incentive-based forms of compensation in cases of illegal and unethical 
accounting. Further, I do believe that CEOs must vouch for the veracity 
of public disclosures including financial statements.
  I believe that investors should be able to trust stock analysts. 
Investors should be able to trust that recommendations made by analysts 
are not biased by promises of profit dependent on ratings. It is only 
common sense that there should be rules of conduct for stock analysts 
and that there must be disclosure requirements that might illuminate 
conflicts of interest.
  Finally, I believe that we should be able to rely on the Securities 
and Exchange Commission to protect investors and maintain the integrity 
of the securities market. Current funding is inadequate and should be 
increased to allow for greater oversight, ensuring investors' trust in 
good government.
  During the debate on this bill my attention has been called to the 
plight of public pension systems, such as Oregon's Public Employment 
Retirement System, known by the acronym PERS. PERS you see was invested 
in both Enron and WorldCom stock and has been hit hard by the debacles 
that occurred in each company. The PERS system lost about $46 million 
after Enron self-destructed and another $63 million following the 
WorldCom scandal.
  These losses occurred because false profits were inflated and 
corporate books were doctored. Under the PERS system, an 8 percent rate 
of return is guaranteed for the 290,000 Oregon active and retired 
members of PERS. Oregon taxpayers have to make up the difference 
following an ENRON debacle or WorldCom scandal, and my State's budget 
is not prepared for this kind of loss.
  While this bill goes far in creating accountability, I am interested 
in finding out if there is more we can do and am asking the General 
Accounting Office, in consultation with the Securities and Exchange 
Commission and the

[[Page 12942]]

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

[[Page 12943]]

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 in 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

[[Page 12944]]

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

[[Page 12945]]

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

               [From the Weekly Standard, July 22, 2002]

                      Big Business's Bad Behavior

                         (By Irwin M. Stelzer)

       No sensible person can quarrel with what the president told 
     the Wall Street biggies when he addressed them 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

[[Page 12946]]

     adequate resources. Corporate executives should be held 
     responsible for the accuracy of what they tell shareholders, 
     disclose their compensation in annual reports ``prominently 
     and in plain English,'' and explain what their ``compensation 
     package is in the best interest of the company'' Board 
     members should be independent and ``ask tough questions.'' 
     Shareholders should speak up. Most important, chief executive 
     officers should crate a ``moral tone'' that ensure the 
     company's top managers behave in accordance with the highest 
     ethical standards.
       The quarrel comes not with what the president said, but 
     with what he didn't say. In the game of matching his laundry 
     list of reforms against the inevitably longer list generated 
     by the Daschle-Leahy-Sarbanes-Gephardt crowd the president 
     inevitably loses, as last week's unanimous vote of Senate 
     Republicans for the Democrat's bill proves. Longer sounds 
     better if you're just compiling a laundry list of items aimed 
     at punishing politically unpopular corporate bad guys. Only 
     if there is a conceptual framework within which specific 
     reforms can be created and defended is there any hope that a 
     sensible corporate governance system will emerge from the 
     congressional legislation factory.
       Start with the fact that it is important to distinguish the 
     role of government from that of the private-sector 
     institutions that monitor corporate America. The latter can 
     be relied upon to act when the integrity of the system is 
     threatened, not because these private sector players are a 
     bunch of goodie-two-shoes, but for the more reliable reason 
     that honest markets and accurate profit reporting are in 
     their interest. Just as gamblers won't put their bets down 
     when they know a wheel to be rigged, so investors won't put 
     their money into shares if prices can be manipulated by 
     inflated profit reporting or special treatment of insiders.
       Hence we have a stream of quite sensible reforms proposed 
     by the Business Roundtable and the New York Stock Exchange, 
     some going beyond those being pushed by the president. And we 
     have companies scrambling to adopt governance rules and 
     accounting practices that will reassure investors that the 
     game is not rigged against them. No CEO wants to see his 
     company's stock battered by investors who fear that share 
     values will evaporate as profits are restated to eliminate 
     the imaginative counting of revenues (claim them now, before 
     the customer 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 nation's 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

[[Page 12947]]

     rotation of auditors on something like the five-year basis 
     favored by Senate Democrats, although necessary to prevent 
     over-identification between client and auditor, is a classic 
     cartel market-sharing arrangement--all legal, in this case.)
       Analysts are another group who now face perverse 
     incentives. Investors may have been naive to believe that 
     these students of income statements, balance sheets, and 
     other economic data would provide honest advice about a 
     company's financial condition and prospects. But they had a 
     right to such a belief, since the commissions they pay their 
     brokers are supposed to be in return for such advice. Along 
     comes New York State Attorney General Eliot Spitzer and 
     revelations that some of these supposed agents of the 
     shareholders' interests are recommending stocks they know to 
     be ``shitty'' in order to win investment banking business for 
     their partners and increased compensation for themselves. All 
     of this in the presence of Chinese walls erected to separate 
     bankers from analysts. It took no Joshua-plus-trumpet to 
     bring these walls down; the prospect of hefty banking fees 
     was quite enough. Jack Grubman, the Salomon Smith Barney (a 
     division of Citigroup) analyst famous for his enthusiastic 
     recommendations of WorldCom stock, last week told the House 
     Financial Services Committee, ``No one can sit here on Wall 
     Street and deny to anybody on this committee that banking is 
     not a consideration in the compensation of analysts of a 
     full-service firm.'' Forget the double negative: Grubman was 
     conceding that part of his salary, which reached $20 million 
     per year, came from the $140 million in underwriting fees 
     that his firm received from WorldCom over the past five 
     years.
       Again, get the incentives right. One way, now preferred on 
     Wall Street, is to write contracts that make analysts' 
     compensation independent of the fees flowing into the 
     investment banking divisions of the large firms. But just how 
     analysts can prosper if the banking division isn't earning 
     enough to pay the rent is unclear. Besides, unless analysts 
     suddenly become willing to issue ``sell'' recommendations 
     just when their investment banking partners are pitching a 
     company for business, this proposed reform is unlikely to be 
     effective, especially after the current heat is off and 
     congressional attention turns to other matters. True or not, 
     bankers believe that CEOs, being human (yes, most are), are 
     likely to take into account what a firm's analysts are saying 
     about their stock when selecting an investment banker. It 
     would be an unusual CEO, indeed, who would cheerfully receive 
     an investment banker after reading in the morning papers that 
     the banker's analyst-partner had just downgraded his 
     company's stock from a ``buy'' to a ``sell.'' Many investment 
     bankers--not all, but many--will find ways to persuade their 
     partner-analysts to be team players. Banking fees are large 
     enough to give them an enormous incentive to do just that.
       So, let's get the incentives right and mandate a separation 
     of the investment banking and stock-picking businesses, 
     another McCain proposal. Analysts would then have an 
     unambiguous incentive to make the best ``buy'' and ``sell'' 
     recommendations they possibly can, so as to build reputations 
     that will attract investors to them. And investors will get 
     something in return for their commission dollars--honest 
     advice from men and women expert in the analysis of corporate 
     financial data, competing with one another to attract clients 
     by creating a track record of picking winners.
       Which brings us to Directors. Again, we have a case of 
     skewed incentives. Directors are hired by managers to protect 
     shareholders from, er, those same managers. To make sure the 
     directors remain friendly, executives often shower them with 
     perks and consulting fees, the continuation of which depend 
     on the goodwill of the CEOs they are supposed to be 
     supervising. It is the rare director who chooses to feast on 
     the hand that feeds him, not merely because he is venal, but 
     because the courtesies lavished upon him genuinely persuade 
     him that the CEO is a decent chap, deserving of every million 
     he is paid.
       To get the incentives right, directors must be selected by 
     vigorously participating shareholders, most especially 
     institutional shareholders, from a slate of demonstrably 
     independent people who, although well compensated, have 
     reputations worth protecting. Nominations for that slate 
     should come from sources other than the company management, 
     to avoid a you-sit-on-my-compensation-committee-and-I'll-sit-
     on-yours, selection process. The directors should not accept 
     anything within the gift of the CEO; their directors' fees 
     should be compensation enough, and high enough to provide an 
     incentive to accumulate a record that will persuade 
     shareholders to reelect them at reasonably regular periodic 
     intervals--perhaps throwing in term limits to make sure that 
     directors and management don't develop too cozy a 
     relationship.
       Finally, we come to the CEO's and top managers. How to 
     create incentives to induce managers to act in the interests 
     of the shareholders who own the business has bedeviled 
     students of corporate governance ever since 1932, when Adolph 
     A. Berle Jr. and Gardiner C. Means published their classic 
     ``The Modern Corporation and Private Property,'' detailing 
     the potential for managerial abuse created by the separation 
     of ownership from control of large corporations. Managers 
     placing self-interest above the interests of owners were 
     immune to retaliation by far-flung and essentially powerless 
     shareholders. That situation was partially corrected when 
     Mike Milken and his debt-financed corporate raiders snatched 
     control of many companies from the worst abusers of 
     shareholders' interests, grounded fleets of corporate jets, 
     sold off hunting lodges, and generally sweated the fat out of 
     expenses--a wonderful example of markets working to correct 
     abuses that seemed beyond the reach of regulators.
       But nowadays there aren't many people who want to be like 
     Mike, so it is incumbent on policymakers to get managers' 
     incentives right. President Bush's proposal for publication 
     of compensation arrangements in an accessible format would be 
     a step in the right direction, its effectiveness attested to 
     by the howls of outrage it produced from some CEOs. Truly 
     independent boards, created along the lines described above, 
     would be another advance, since compensation committees not 
     beholden to corporate managements are more likely to relate 
     pay to performance than the supine committees that now exist 
     on some boards. Add in the requirement that options be 
     treated as profit-reducing expenses--another McCain proposal 
     that so horrified senators that it has for now been 
     derailed--and you will have a new parsimony that will keep 
     salaries to levels commensurate with effort and performance. 
     Under such a regime, executives would have a clear incentive 
     to spend their time creating efficiencies and new markets, 
     rather than figuring out how to cash in options, and how to 
     persuade their boards to revalue options if poor company 
     performance has driven the stock price below the price at 
     which the options may be exercised, rewarding executives 
     whether or not they have delivered long-term value for 
     shareholders.
       This may sound like an awful lot of regulation. But it is 
     of a special, self-liquidating sort. If we adopt policies 
     that get the incentives of all the players right, government 
     can then get out of the way so that the various actors can do 
     their thing--audit, advise on investments, monitor management 
     performance in the interests of owners, and manage the 
     company in a world in which managers' interests coincide with 
     those of shareholders. The right kind of regulation can be a 
     model of minimal--and effective--government.
       Irwin M. Stelzer is a contributing editor to The Weekly 
     Standard, director of regulatory studies at the Hudson 
     Institute, and a columnist for the Sunday Times (London).

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

           Leading the News: Coke to Expense Employee Options


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

                            (By Betsy McKay)

       Atlanta--Coca-Cola Co. said it will begin in the fourth 
     quarter to treat all employee stock options as an expense, a 
     move that could accelerate debate in corporate boardrooms 
     over whether to adopt that accounting practice.
       The beverage company's decision also could shape the 
     outcome of discussions today in the Senate over whether to 
     instruct a new accounting-oversight board to study the fate 
     of stock options--in particular, whether they should be 
     expensed as other forms of compensation.
       Republicans tried Friday to block the measure, offered as 
     an amendment to an accounting-overhaul bill. But Democrats 
     say they will try again before final passage of the 
     underlying accounting bill, expected late today.
       ``We are in a new environment,'' Gary Fayard, Coke's chief 
     financial officer, said in an interview. ``There had been a 
     loophole in the accounting, and we thought it was the right 
     time to step up to the plate.
       ``There's no doubt that stock options are compensation,'' 
     he added. ``If they weren't, none of us would want them.''
       Coke said its decision, announced yesterday morning, will 
     reduce earnings only slightly--by about a penny a share--for 
     2002. That reflects the fact that Coke doesn't grant options 
     as extensively as do some other companies. And while Coke 
     isn't the first public concern to make the accounting 
     change--Boeing Co. and Winn-Dixie Stores Inc. in recent years 
     began calculating stock options as an expense--its high 
     profile could prompt other businesses to consider calls from 
     investors, regulators and politicians for greater financial 
     candor.
       Last week, AMB Property Corp., a San Francisco-based owner 
     of industrial real estate, also said it would record stock 
     options as an expense.
       Proponents of expensing say options are compensation and 
     should be treated as such, especially since generous option 
     awards dilute the value of shares outstanding. Opponents say 
     options are difficult to value and argue that expensing would 
     confuse investors, not enlighten them. Changing accounting 
     rules would reduce earnings at some companies.
       In 1993, the Financial Accounting Standards Board tried to 
     mandate the expensing of

[[Page 12948]]

     options but retreated in the face of stiff opposition from 
     business leaders and Congress. The issue flared up again 
     after Enron Corp's demise late last year and has taken on new 
     life with recent disclosures of earnings misstatements at 
     WorldCom Inc.
       Coke's Chairman and Chief Executive Douglas Daft raised the 
     idea of recording stock options as an expense about two 
     months ago, Mr. Fayard said, as news of financial scandals 
     continued to unfold. About 10 days ago, with lawmakers 
     calling for tougher accounting standards, Mr. Daft fielded 
     the idea in phone calls to Warren Buffet and some other Coke 
     directors. Mr. Buffett, Coke's largest shareholder, for years 
     has been an outspoken proponent of expensing options.
       Mr. Daft pressed ahead with his proposal to make the 
     accounting change last week after President Bush called in a 
     speech for better corporate governance. Mr. Bush didn't 
     embrace the idea of forcing companies to expense options, but 
     numerous economists and financial experts, including Federal 
     Reserve Board Chairman Alan Greenspan, have endorsed the 
     move, and growing investor unease sent stocks plummeting last 
     week.
       Mr. Daft convened a meeting at 7 a.m. Thursday in Sun 
     Valley, Idaho, where he and several other directors were 
     attending a conference. The discussion, over breakfast in the 
     condominium of director Herbert Allen, was short. It wasn't 
     hard to win the directors' support; Mr. Buffett, in 
     particular, applauded the move.
       ``Our management's determination to change to the preferred 
     method of accounting for employee stock options ensures that 
     our earnings will more clearly reflect economic reality when 
     all compensation costs are recorded in the financial 
     statements,'' Mr. Daft said in a statement. A spokeswoman 
     said he wasn't available for further comment.
       ``I'm delighted,'' Mr. Buffett said in a telephone 
     interview. ``This tells shareholders what really happens in 
     terms of costs.'' The new plan, he said, also eliminates bias 
     in structuring compensation packages, encouraging Coke to 
     design packages that fit its and employees' needs without 
     regard for accounting.
       While Mr. Buffett said he never pushed Coke to treat stock 
     options as an expense, he said he did encourage the company 
     last week to take a further step and use independent 
     investment banks to determine the fair value of stock options 
     that Coke grants. The move is intended to ease concerns over 
     whether options that are expensed are being properly valued. 
     Coke will ask two investment banks, Goldman Sachs & Co. and 
     Citibank, to price options, and will expense the option value 
     based on the average of those firms' quotes.
       Coke said stock options will be expensed over the period in 
     which they vest, based on the value the day they are granted. 
     Coke's 2002 options plan authorizes as many as 120 million 
     shares, or 4.8% 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

[[Page 12949]]

any abuse of public trust. I believe that executives should be required 
to return moneys they received as a result of fraudulent accounting 
practices, as embodied in the Senate bill.
  Independence: Boards of directors must exercise independent judgment 
and a substantial majority of board members must be independent of 
management.
  Auditing reform: Strong oversight of the accounting profession is 
essential if we are to ensure independence of auditors and credibility 
of the auditing process.
  Pension protection: I fully support steps that will protect the 
retirement savings of American workers. Workers should have freedom to 
diversify and monitor their own retirement funds, giving confidence 
that their investments will not fall prey to unethical executives.
  I urge the SEC to move forward with the implementation of its 
proposed reforms. And, I strongly believe that the NYSE and the NASDAQ 
must proceed to improve their listing standards. I support the reform 
that works to strengthen our free enterprise system. It is our 
obligation as a Congress and as a country to ensure that the unethical 
few that are causing hardship for so many hard-working Americans, be 
swiftly brought to justice and face jail time. We will restore faith in 
our economic system for it is the greatest in the world. I support 
passage of the Senate bill.
  Mr. COCHRAN. Mr. President, while I support the passage of this bill, 
I think we ought to recognize the role the Administration is already 
playing to deal with these serious problems of corporate 
responsibility.
  I was pleased that President Bush announced last week his suggestions 
for corporate accounting reform. The President forcefully argued that 
higher ethical standards are an imperative to restore confidence in 
corporate America. Those standards should, in his words, ``be enforced 
by strict laws and upheld by responsible business leaders'' and that 
``corporations should not be disconnected from the values of our 
country.''
  I also support the President's executive order to create the 
Corporate Fraud Task Force. Combined with new criminal penalties for 
corporate fraud, this taskforce can help bring stability to our 
Nation's economy. The President has also asked the Securities and 
Exchange Commission to adopt new rules to make sure that auditors are 
truly independent from the businesses which they audit.
  We also need to be sure the SEC has the resources it needs to carry 
out its other important responsibilities.
  I am hopeful that the Appropriations Committee will be able to 
provide the necessary amount of funding for the SEC to hire the 
enforcement officers it needs and to acquire state-of-the-art 
technology that is necessary for the performance of its duties.
  With the passage of this bill by the Senate, we will be able, in 
conference, to work with the other body to produce a good bill that 
deals effectively with the problems in this area of very legitimate 
concern to our country.
  Mr. LEAHY. Mr. President, I want to compliment the majority leader 
for turning to the Sarbanes bill and the issue of corporate 
responsibility. I also want to thank Chairman Sarbanes for his 
leadership on the impressive bill that he has produced in the Banking 
Committee.
  So many times all that the public hears about Congress is about turf 
and partisanship. This comprehensive reform effort disproves those 
claims. Thanks to the leadership of the Majority Leader and Senator 
Sarbanes, the bill that we are about to vote on is a tough, 
comprehensive reform package that enjoys broad bipartisan support in 
the Senate. It brought together the best ideas from many Senators, from 
many Committees, and from both parties.
  From my standpoint, as Chairman of the Judiciary Committee, this has 
been an opportunity to benefit once again from the wonderful 
partnership that we have forged between the Banking Committee and the 
Judiciary Committee. After September 11, our two Committees worked 
together to write the anti terrorism provisions of the USA Patriot Act 
that dealt with money laundering. Here, with the 97-0 vote to adopt of 
the provisions of the Corporate and Criminal Fraud and Accountability 
Act, as a Leahy-McCain amendment to this bill, Senator Sarbanes and I 
have again united the forces and expertise of our Committees. This time 
we have done so to craft comprehensive laws to deal with financial 
wrongdoing, and again done so with bipartisan support in both 
Committees. I think that the final product is better and more complete 
because of our joint work. Thank you Chairman Sarbanes.
  But the joint effort did not stop with Senator Sarbanes and myself. 
Senators Biden, Hatch and the Minority Leader offered provisions that 
were also adopted by the Senate, adding aspects of the President's 
recent proposal. That is an impressive show of bipartisanship because 
those proposals were only made after the Senate had already begun 
debate on this bill. Despite the White House's refusal to help us shape 
our more comprehensive proposal, we did not hesitate to include the 
President's suggestions in our final product.
  The bill was further perfected by Senator Edwards' thoughtful 
amendment dealing with the conduct of corporate attorneys. Once again, 
we were able to draw on the expertise of a particular Senator to enlist 
the help of lawyers in stopping corporate fraud, not designing it. In 
short, we started with a fine bill from Senator Sarbanes, and have 
strengthened even further, never losing our strong bipartisan support.
  We need to remind ourselves of the underlying reasons for the 
bipartisan support behind these measures. Enron brought it to light, 
but it goes deeper. It's about a basic fairness and equity that 
transcends party lines. It's about rewarding people who play by the 
rules and punishing people who don't. It's about the basic American 
ideal of treating all people equally under the law.
  We cannot have a system where a pickpocket who steals $50 faces more 
jail time than a CEO who steals $50 million. The integrity of our 
financial system depends on accountability. The mounting scandals and 
declining stock market have damaged the integrity of our public markets 
and we must restore it.
  I was proud that the Judiciary Committee, joined by the Majority 
Leader and a bipartisan group of Senators including Senator McCain and 
others was able to make such an important contribution to this effort 
by contributing the provisions of S. 2010, the ``Corporate and Criminal 
Fraud Accountability Act,'' as it was unanimously reported out of the 
Judiciary Committee in April, as an amendment to the Sarbanes bill. 
Both in Committee in April and again last week on the floor, not a 
single Senator from either party has voted against the provisions of 
the Corporate and Criminal Fraud Accountability Act.
  We worked hard to reach across party lines on this measure, and I 
hope that the House of Representatives acknowledges that fact. I was 
glad to see in last Friday's newspapers that Speaker Hastert also 
endorsed the joint Sarbanes-Leahy measure after its adoption. I hope 
that the President can follow the leadership of Speaker Hastert and 
support the Senate measure as this bill moves forward.
  Recent events have served as a stark reminder that we need to 
reexamine our laws to make sure that they reflect our important and 
shared values of honesty and accountability. Enron has become a symbol 
for the torrent of corporate fraud scandals that have hit the front 
pages and battered our financial markets. Tyco, Xerox, WorldCom, 
Adelphia, Global Crossings, the list goes on.
  The things that happened at Enron did not happen by mistake. They 
were not the result of one or two ``bad apples.'' Senior management at 
Enron, assisted by an army of accountants and lawyers spun an intricate 
web of deceit. They engaged in a systematic fraud that allowed them to 
secretly take hundreds of millions of dollars out

[[Page 12950]]

of the company. This kind of fraud is not the work of a lone fraud 
artist. Rather, it is symptomatic of a corporate culture where greed 
has been inflated and honesty devalued.
  Unfortunately, as I have said and as the experts warned at our 
February 6 hearing, Enron does not appear to have been alone. Each week 
we read of corporation after corporation that has engaged in 
misconduct, and these are not small or marginal corporations. These are 
major mainstays of corporate America. The web of deceit woven by such 
publicly traded companies ensnares and victimizes the entire investing 
public who depend on the transparency and integrity of our markets for 
everything from their retirement nest eggs to their children's college 
funds. That is why this comprehensive reform is urgently needed to 
restore accountability in our markets.
  The Leahy-McCain amendment to the Sarbanes bill, approved 97-0 by the 
Senate, provided important provisions to ensure just such 
accountability.
  The Corporate and Criminal Fraud Accountability Act which I authored 
provides tough new criminal penalties to restore accountability and 
transparency in our markets. It accomplishes this in three ways:
  punishing criminals who commit fraud, preserving evidence to prove 
fraud, and protecting victims of fraud.
  Here are some of its major provisions as adopted by the unanimous 
Judiciary Committee in April and the unanimous Senate last week: It 
establishes a new crime of securities fraud, with a tough ten year jail 
sentence. It breaks the ``corporate code of silence'' by providing, for 
the first time, federal protection for corporate whistleblowers who 
report fraud to the authorities or testify at trial. It closes 
loopholes and toughens penalties for shredding documents as we learned 
had occurred at Arthur Andersen. It requires audit documents to be 
preserved for 5 years and provides tough criminal penalties for their 
destruction. It protects victims the right to recoup their losses by 
preventing fraud artists from hiding in bankruptcy or concealing their 
crime and using an unfair statute of limitations to hide.
  With these bipartisan provisions and others incorporated, this bill 
we have produced is truly a comprehensive measure. It tightens 
regulation of corporate misconduct, but it now also provides an 
important deterrent to fraud artists. This bill is going to send 
wrongdoers to jail and save documents from the shredder, which sends a 
powerful and clear message to potential corporate wrongdoers ``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

[[Page 12951]]

be read a third time, and the Senate vote on passage of the bill; that 
upon passage, the Banking Committee be discharged from further 
consideration of H.R. 3763, the House companion, and that the Senate 
then proceed to its consideration; that all after the enacting clause 
be stricken and the text of S. 2673, as passed, be inserted in lieu 
thereof; that the bill be read a third time, passed, and the motion to 
reconsider be laid upon the table; that upon passage of H.R. 3763, the 
Senate insist on its amendment, request a conference with the House on 
the disagreeing votes of the two Houses, and that the Chair be 
authorized to appoint conferees on the part of the Senate; that all 
succeeding votes in this vote sequence, after the first vote, be 
limited to 10 minutes; that there be up to 2 minutes of explanation 
prior to each vote, with no further intervening action or debate, with 
the 2 minutes equally divided in the usual form.
  The PRESIDING OFFICER. Is there objection?
  Mr. GRAMM. Madam President, reserving the right to object, I would 
like to propound a parliamentary inquiry. Under this agreement, when 
5:45 comes, we would begin to vote on the two amendments, and then vote 
on final passage, and no other amendment would be in order under the 
agreement; is that correct?
  The PRESIDING OFFICER. The Senator is correct.
  Mr. GRAMM. Madam President, I do not object. I think under this 
agreement we will have time to go back and forth. I would say that if 
it saves anyone time, we do not need a vote on the two pending 
amendments. We could do them by voice vote and proceed to final 
passage.
  Mr. REID. We will be happy to discuss that after the UC is entered.
  The PRESIDING OFFICER. Is there objection to the request?
  Without objection, it is so ordered.
  Mr. REID. Madam President, I ask unanimous consent that upon 
disposition of H.R. 3763, passage of S. 2673 be vitiated and the bill 
be returned to the calendar.
  The PRESIDING OFFICER. Is there objection?
  Without objection, it is so ordered.
  The PRESIDING OFFICER. The Senator from Texas.
  Mr. GRAMM. Madam President, I want to begin by very briefly 
responding to Senator Kennedy. I was somewhat taken aback at his 
suggestion that we set aside the two amendments and allow a nongermane 
amendment to be offered when, in fact, on a bipartisan basis, earlier 
this week, we decided not to deal with pension reform.
  So I want to make it clear to my colleagues that I am perfectly happy 
to deal with pension reform. I think a bipartisan consensus is evolving 
on pension reform. But we made a decision, on a bipartisan basis, 
earlier this week, not to put pension reform on this bill. Its day will 
come. I want to make that clear.
  Madam President, let me try to respond to several points that were 
made earlier today. I will try to be brief so that my other colleagues 
will have an opportunity to speak on my side of the aisle.
  I want, first, to talk about stock options. Then I want to talk about 
the bill before us and where we go from here. And I will try to be 
brief on all of them.
  First, let me make it clear that stock options are pretty important 
to the American economy. More than 6 million nonexecutive workers in 
America receive stock options every year. So when we finally get around 
to having a policy set on stock options--which I hope will be done by 
FASB, the accounting board, based on logic and reason--we need to take 
into account that 6 million people who are not executives of companies 
get stock options every year.
  We want to be sure that we are not endangering their ability to own a 
piece of America with the reforms designed to deal with a few people 
who violated the law in some cases, who did not act honorably in some 
cases.
  We want to be sure we do not deprive or preclude 6 million workers 
who are not executives--or people who did not violate the law, did not 
act dishonorably--from the ability to get stock options.
  Let me also say, in areas such as biotechology and the computer 
programming industries, that 55 percent of rank and file employees get 
stock options.
  So I just want to urge, as we are going about our business here, with 
all this talk about people who have made millions, that we do not 
forget that millions of Americans benefit from this, and we need to be 
careful about what we are doing.
  Let me say, secondly--and Senator Bennett made the point today; I 
made it last week--if you listen to what is being said in this debate, 
a big point is made of the fact that in 1994 we saw an explosion in the 
use of stock options and low-interest loans and other nonconventional 
forms of executive compensation.
  What happened to trigger that is in 1993, as a gratuitous provision 
in the 1993 tax bill, we changed the law so that if you are 
compensating an executive in corporate America and you pay that 
executive more than $1 million a year, you cannot count that 
compensation as a business expense. Of the top 30 companies in America, 
the level of compensation at that point was already substantially above 
the million-dollar mark. So because of what Congress did in 1994, 
having passed a law that said you could not pay people with a paycheck 
above a certain level and have it count as a business expense, we 
should not have been surprised that accountants and financial planners 
and people who were smart enough to make over $1 million a year found 
other ways to receive compensation.
  So I want to make it clear that the point I am making is, if you are 
looking for somebody to point the finger of blame at here--and many 
people are trying to do that--I think Congress is a good institution to 
point at because Congress eliminated the ability of companies to pay 
their executives the old-fashioned way.
  A lot has been made about who is at fault in all this. I would just 
simply make the following points. If somebody said to me: I know you 
don't know what caused all these current problems, but tell me; I am 
going to force you to tell me what you think the cause was. I would 
say: The inadequacy of GAAP accounting, which, in its current 
incarnation, works very well for old-style companies with assets that 
are written off.
  GAAP accounting fits the steel industry perfectly. It fits the 
automobile industry pretty well. But the problem in the 1990s--when 
productive power became knowledge, when companies with relatively 
little in the way of assets gained huge market caps because of people's 
assessment of their know-how and the technology embodied by the 
company--was that GAAP accounting did not keep pace with the reality of 
the world that we live in today and that we lived in the 1990s.
  It is very complicated to try to figure out what the values of these 
companies actually are by any conventional method where you are adding 
up their acquisition cost of assets and depreciating those assets.
  This created a giant void in GAAP accounting in the 1990s, and people 
pushed the envelope within that void. In some cases, it appears they 
violated the law; in other cases, they have certainly violated 
standards of ethics.
  Nothing we are doing in this bill is going to solve the problem in 
GAAP accounting. I am confident that over time we will find new ways of 
developing generally accepted accounting principles that don't rely on 
concepts such as goodwill, which don't make a lot of sense 
economically. But I do believe the bill before us is a step in the 
right direction.
  There are differences of opinion. Before we go to final passage, I 
want to make clear what those differences are. Senator Sarbanes and I 
both believe that we should have an independent accounting board. We 
both believe that that board should set and enforce ethics standards. 
We both believe that part of setting ethics standards is looking at 
auditor independence.

[[Page 12952]]

  Senator Sarbanes believes that we should write in law in some great 
detail what is entailed in auditor independence. I believe the problem 
with that is that while the law might fit General Motors, there are 
16,254 publicly traded companies in America, and I am concerned that 
there is no law that Congress can write that will fit all 16,254 
companies.
  My second problem is, if you make a mistake in writing the law, then 
you have to go back and pass another law to correct it. If we had set 
out Glass-Steagall, separating banking and securities, by regulation, 
my guess is that by the mid 1950s, we would have concluded that that 
was a mistake, and we would have fixed it. But since it was written 
into law, it couldn't be fixed by regulation. Regulators tried to make 
marginal changes. We ended up with a very unstable system, and we were 
only able to fix it by law in 1999.
  A second problem with writing the details of these different 
standards such as auditor independence into law is if you make a 
mistake, it is hard to fix it; whereas if you set up a board and, based 
on their expertise, they set out a regulation, if they make a mistake, 
they can fix it.
  My final point on setting these standards by law is, one size fits 
all never works. What we need is the flexibility for this board to set 
a standard and then determine, based on the circumstance of the 
individual company, what makes sense.
  I intend to vote for the bill on final passage. There are probably 10 
things in the bill I am opposed to. But we are going to conference with 
a House bill that is very different. I am confident that in conference 
we can write a bill that will be supported by both Houses of Congress 
and signed by the President. I think we can strengthen the bill where 
it needs to be strengthened. I think we can provide flexibility where 
it is needed to bring in reason and responsibility.
  Our objective has to be to fix what is broken in American capital 
markets and do it while minimizing the cost we impose on businesses, 
investors, and workers that did not violate the law and did not act in 
a nonethical manner.
  The sooner we can get to conference, the sooner we can write this 
bill and see the bill signed into law. We have reached the point where 
we have a bill before us that addresses the major issues that we 
decided to address.
  I know people have been unhappy about the inability to offer 
amendments today. The plain truth is, we have 97 first-degree 
amendments that have been filed and 24 second-degree amendments, and 
there was never any possibility that those amendments could be offered. 
We tried to come up with amendments that were agreed to and in the 
process, ended up excluding some people.
  Let me conclude my remarks, at least for the time being, by 
congratulating Senator Sarbanes on his leadership on this bill. 
Overall, he has done a good job. I do not agree with him on each and 
every part of it, but he has always been open. We have had many good 
discussions. I am confident that in the end we will write a bill that 
will be broadly supported and that will be in the interest of the 
country.
  The PRESIDING OFFICER. Under the previous order, the hour of 4:55 
having arrived, the Senator from West Virginia is recognized.


                           supplemental bill

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

[[Page 12953]]

war on terror are critical issues that demand prompt attention.'' I 
agree. I only wish that the same message would be made clear to the 
Office of Management and Budget.
  We have worked diligently in the Congress to get these critical 
homeland security monies out to federal and local personnel charged 
with protecting our people. Yet, we have been met by objection after 
objection by this administration.
  In March, the President insisted he needed more money for national 
defense in an urgent supplemental. We gave him every dollar he 
requested. In addition, the House and Senate provided more money for 
critical homeland defense needs.
  Instead of letting the House and Senate work out our differences and 
get the funding out, the White House started issuing veto threats 
before the Senate bill was even off of the floor. And last Thursday 
evening, just as all differences appeared to be worked out, the White 
House bomb throwers blew up the agreement with new demands.
  It makes one wonder how much the White House really needs that 
defense money and it certainly causes one to wonder how serious this 
administration really is about homeland security.
  Senator Stevens and I have beseeched the White House over and over 
again to have the Homeland Security Director come before our Committee 
to tell us about the needs for Homeland Security. Our requests were 
denied. We held days of hearings with administration officials, local 
firefighters, policemen, mayors and governors. We did our best and 
funded the needs as testimony we heard indicated.
  We wrote a good bill, and we were ready to convene the conference 
Friday. But our efforts were blown up by the OMB Director, suddenly and 
completely and with no warning until the very last minute, Thursday 
evening.
  So needs go wanting in our military and in our homeland defense 
effort. There is no excuse for such irresponsibility. Such tactics are 
not in the best interests of our people. Hollow rhetoric on homeland 
security will never replace solid funding for these needs.
  Political gamesmanship over issues so critical to our Nation and our 
people is irresponsible, arrogant and totally out of line.
  I deplore the arrogance with which the good faith efforts of both 
Houses of Congress have been treated by this White House. Apparently 
the security and safety of this nation and its people have taken a back 
seat to gamesmanship by a White House that has no respect for the 
people's representatives or for the people's urgent needs.
  Under OMB Director Mitch Daniels' stewardship, the Federal budget has 
gone from a surplus of $127 billion in FY 2001 to an estimated deficit 
for the current fiscal year of $165 billion. This is a swing of $292 
billion in just one year.
  The President is now threatening to veto the urgent national defense 
and homeland defense supplemental appropriations bill based on Mr. 
Daniels recommendation. Why? Because Mr. Daniels asserts that the bill 
spends too much money. Yet the conference report's spending levels that 
have been agreed to on a bipartisan and bicameral basis would increase 
the deficit by only about $600 million compared to the President's 
request.
  Mr. Daniels believes that the critical port security, border 
security, firefighting, law enforcement, nuclear security and other 
homeland defense programs funded in the supplemental can wait because 
the bill would increase the deficit by about $600 million, when his 
failed fiscal policy has resulted in a $292 billion swing in the 
deficit.
  The OMB Director seems to have forgotten, or perhaps never learned, 
that the appropriations process is about more than just numbers. Maybe 
at OMB, they can be bean counters, but here in Congress we are 
responsible for understanding what the numbers mean for the American 
people.
  Mr. Daniels is cynically focused only on the bottom line. In an 
effort to make the supplemental bill look smaller, he has proposed 
rescinding the balance of funds under the airline loan guarantee 
program. He asserts that this would produce $1.1 billion of savings. 
Yet these funds under the law can not be spent. There are no real 
savings here. The Congressional Budget Office would not score savings 
for this proposal. This is the kind of phony accounting that is getting 
our nation's corporations in trouble.
  This phony accounting is proof that Mr. Daniels does not care about 
homeland defense or about our national defense, or about fiscal 
discipline. This phony accounting proves that the President's veto 
threat is only about proving that he can force the Congress to hit some 
arbitrary bottom line. And the unmitigated gall of a high White House 
official coming to the Congress with an accounting gimmick at a time 
when that same White House is decrying phony accounting practices and 
scandals in the business community is beyond belief.
  We should not delay this conference one more day. There are some in 
Congress who suggest that we should throw our hands up on this bill and 
wait until the next fiscal year to address these priorities. Such 
statements ignore the critical needs facing the nation for defense and 
homeland security. Our fighting men and women need this money to 
prosecute the war on terrorism. Dr. Dov Zakheim--the Defense Department 
comptroller--said in a briefing on Friday that the Defense Department 
is hitting a wall and that our people in uniform cannot be paid if the 
Supplemental Bill is not enacted by the August break. He said in that 
briefing that there is good will on Capitol Hill, and he is right. We 
are trying to do the right thing for our people here at home and our 
fighting men and women in the field. It is deplorable that good will, 
hard work, and good intentions can be trashed by OMB Director with 
reckless abandon. I do not think this President or this nation are 
well-served by tactics and gamesmanship when the stakes are so high.
  Mr. President, I ask unanimous consent that a memorandum be printed 
in the Record which sets forth the highlights of the $7.2 billion for 
homeland defense in conference funding levels.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

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

       The tentative conference funding levels are $1.9 billion 
     above the President's request. A summary of the $1.9 billion 
     increase with examples of changes to the President's homeland 
     defense proposal follows:
       $701 million for first responder programs, $343 million 
     above the President's request, including:
       $150 million for firefighters, with the funds going 
     directly to the local firefighters. The President did not 
     request supplemental funds despite the fact that over $3.0 
     billion in applications from 18,000 fire departments were 
     received for the $360 million currently available.
       $100 million for State and local governments for improving 
     interoperability of communications equipment for fire, police 
     and emergency medical technicians, none of which was 
     requested. The funding flows through existing FEMA and 
     Justice program, rather than the new, centralized program at 
     FEMA, proposed by the President for FY 2003. In addition, we 
     are directing the National Institute of Standards and 
     Technology to take the lead in developing uniform standards 
     for interoperable State and local law enforcement, 
     firefighting and emergency medical communications equipment.
       $151 million for the Justice Department, $151 million above 
     the President's request to give to State and local 
     governments for improved training and equipment for law 
     enforcement personnel (rather than through FEMA). Funds would 
     also be used to improve the processing of security clearances 
     for state and local first responders so that State and local 
     governments can have information on potential security risks 
     and to promote mutual aid agreements to coordinate the 
     response of State and local governments to a terrorist 
     attack.
       $193 million, $134 million below the request for FEMA 
     grants to State and local governments to update their 
     emergency operations plans and to improve State emergency 
     operations centers. $25 million is approved for a new, 
     unauthorized program requested by the President, $25 million 
     below the request. The proposal establishes a Citizen Corps 
     within FEMA to promote volunteer service for emergency 
     preparedness.
       $54 million, $22 million above the President's request for 
     FEMA's search and rescue teams. Currently, there are 28 FEMA 
     search and rescue teams around the country that

[[Page 12954]]

     can be deployed to major disasters to assist local first 
     responders in search and rescue operations. Funding will be 
     used to upgrade equipment and training for responding to 
     events involving a biological, chemical or radiation attack.
       $37.1 million of unrequested funding for the National 
     Institute of Standards and Technology for developing uniform 
     guidelines for chemical, biological and radiation detection 
     equipment ($17.1 million) and for developing best practice 
     guidance for homeland security technologies ($20 million).
       $15.9 million for the Federal Law Enforcement Training 
     Center to expand training capacity for law enforcement 
     personnel of the new Transportation Security Administration.
       $739 million for port security programs, $465 million above 
     the President's request, including:
       $125 million for port security grants through the 
     Transportation Security Administration. Last Fall, Congress 
     approved $93 million of unrequested funds for port security 
     grants. DOT received $692 million of applications for the $93 
     million we provided. Despite this, the President did not 
     request additional funds.
       $528 million for the Coast Guard for port and maritime 
     security, $273 million above the President's request. 
     Increased funds would be used to: expedite vulnerability 
     assessments at our nation's ports, rather than follow the 
     Administration's current plan to do the assessments over the 
     next five years; add two new maritime safety and security 
     teams; purchase a total of six homeland security response 
     boats; and expand aviation assets as well as the shore 
     facilities to support them.
       $39 million for Customs to target and inspect suspect 
     shipping containers at overseas ports before they reach U.S. 
     ports. The Administration requested no funds for this 
     activity.
       $19.3 million, as requested for 34 additional personnel for 
     improved background checks for truck drivers, for improved 
     fraud detection for truck licensing and for improved fraud 
     detection for driver's licenses.
       $28 million of unrequested funding for the Safe Commerce 
     program to develop better procedures for securing the 
     contents of the 6 million containers that enter U.S. ports 
     each year.
       $251 million for bioterrorism funding, $251 million above 
     the President's request, including:
       $251 million for the Centers for Disease Control for 
     improved and secure facilities, including toxicology and 
     infectious disease labs, an emergency operations center and 
     for information technology security.
       $235 million, $209 million above the President's request to 
     improve security at our nuclear weapons facilities (Energy 
     requested the funds, but the White House did not request 
     them). Funding would be used to improve security of the 
     nuclear weapons stockpile, the national nuclear labs and our 
     nuclear weapons plants. Funds are included to establish a 911 
     system for local first responders to call when confronted 
     with nuclear hazzards, enhanced funding for the National 
     Center for Combating Terrorism, expansion of radiological 
     search teams, and establishment of a National Capital Area 
     Response Team at Andrews Air Force Base. Funds would also be 
     used to consolidate nuclear materials sites so fewer 
     locations need to be protected. Several requested items that 
     are approved include funds to improve security on the 
     electrical grid and funds to improve our capability to detect 
     radiation.
       $147 million, $128 million above the President's request 
     for cyber security to help deal with the threat to Federal 
     and private information systems. $82.6 million is provided to 
     Justice to improve the investigation and prosecution of cyber 
     crime, research to improve the detection of cyber crime, 
     ``data warehousing'' and ``data mining'' to help expose cyber 
     crime and for information sharing. $20 million is provided to 
     Commerce to develop unified Federal guidelines and procedures 
     for system security certification and to develop guidelines 
     and benchmarks for secure information systems. Funding is 
     also provided to improve wireless intrusion detection 
     systems. $25 million is provided to the Energy Department to 
     improve cyber security at our nuclear weapons plants and 
     labs. $19.3 million, as requested, is included for NSF for 
     scholarships to develop cyber security skills.
       $120 million for border security, $78 million more than 
     requested by the President, including $32 million for 
     Immigration and Naturalization Service Construction to 
     improve facilities on our nation's borders, $25 million for 
     better equipment for the additional personnel that are being 
     hired with the funds Congress provided at Fall and $5.7 
     million for the Justice Department to deploy to 30 more ports 
     the IDENT/IAFIS system for rapid response criminal background 
     checks by the INS of suspect aliens prior to their admission 
     into the country. $57 million for INS for identifying and 
     removing immigration felons from the country and for 
     information technology enhancements.
       $140 million of unrequested funding for the Department of 
     Agriculture to enhance our nation's food safety capabilities 
     and to protect against devastating plant and animal disease; 
     to increase support for the Food Safety and Inspection 
     Service, especially to ensure the safety of imported 
     products; for improved security at USDA labs in order to 
     secure bio-hazardous materials; funding for the Extension 
     Service to provide emergency training for first response in 
     rural areas; for FDA to improve the ability to inspect 
     imported products such as medical devices that contain or are 
     susceptible to being contaminated with radiation; and for 
     vulnerability assessments and security improvements to 
     protect rural water systems.
       471 million of unrequested funding for airport security, 
     including $150 million to insure that all small and medium 
     hub airports have all of the funds necessary to implement the 
     FAA's new airport security guidelines and that large airports 
     have some additional funding to meet those requirements; $225 
     million is provided above the President's request for 
     explosives detection equipment; $42 million is provided to 
     improve the security of the FAA air traffic control system; 
     $17 million is provided to improve airport terminal security 
     for our nation's airports; and $7.5 million is provided to 
     FAA to repair long range radar systems that the Department of 
     Defense believe must be continued for several years because 
     these assets are the only FAA radar capable of continually 
     tracking aircraft with disabled transponders. In addition, 
     $15 million is provided for improved air to ground 
     communications for the air marshals, $4 million for radiation 
     detection equipment for air cargo and $10 million is included 
     for improved technology for air cargo safety and other cargo 
     modes.
       $100 million for unrequested nuclear non-proliferation 
     programs. The best opportunity to stop a potential ``dirty'' 
     bomb is to minimize the opportunity for terrorists to get 
     their hands on nuclear material. Funds are included to 
     protect fissile material abroad, purchase radiation detectors 
     and to establish international standards for securing fissile 
     material.
       $108 million of unrequested funding for the Corps of 
     Engineers to improve security at Corps water projects.
       $92 million, $82 million above the President's request for 
     the FBI for counter terrorism and information technology 
     enhancements. In total, FBI receives $175 million when cyber 
     security funding is included.
       $50 million of unrequested funds for EPA to provide funds 
     to local governments to conduct vulnerability assessments on 
     our drinking water systems.
       Examples of the remaining $273 million, most of which was 
     unrequested include: $12 million for security at the 
     Smithsonian; $17.7 million for the National Park Service for 
     installation of bollards at the Jefferson Memorial and an in-
     ground retaining wall at the Washington Monument (requested 
     by the President in FY 2003); $26 million for the 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

[[Page 12955]]

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 boded well 
for the handling of this matter on the floor. So I commend him and 
others for reaching an accommodation that made this a strong, good 
bill.
  Mr. President, I want to take a few minutes toward the close of this 
debate to urge our colleagues to be supportive of this bill, and I hope 
Members of the other body will support what we have done in the Senate.
  The House passed legislation a number of weeks ago, prior to a lot of 
the events that have unfolded over the last 2 or 3 weeks. The argument 
today for a stronger Senate bill hardly needs to be made in light of 
events that occurred over the past number of days. Just today, the Dow 
is down some 40 points; Nasdaq is even. But over the last week, we have 
seen a continued decline in investor confidence and, of course, how 
that is reflected in the stock markets.
  Investors, both domestic and foreign, are losing confidence in our 
financial markets. Investor trust is contagious. I also point out the 
corollary to that: Investor mistrust is also contagious. What we are 
watching is an erosion of trust that has begun and is almost impossible 
to stop once it gets rolling. Obviously, a lot of factors will 
contribute to stemming this tide of continued erosion of investor trust 
and confidence.
  One of the things we can do is what we are doing today. Other people 
will have to add their voices to the debate. In my view, the President 
still has to be stronger than he has been. The House will have to rise 
to the occasion as we have endorsed in large measure what we have 
accomplished here, but our step, the first step, is the one we are 
taking this afternoon. Therefore, I think this is critically important.
  This is not just another bill we are passing. This is far more 
important. In fact, the impact of how people react may be more 
important than the actual wording and language of the bill. It is 
critically important we have as strong a vote as possible.
  If we fail to enact serious reforms--and this bill is serious 
reform--then I believe we endorse dangerous and discredited accounting 
practices that we have seen in the last 7 months alone cost 
shareholders and workers billions of dollars in their savings and 
pensions.
  The Nasdaq has fallen over 37 percent, and the Dow has fallen 17 
percent since the beginning of the year. Both Nasdaq and the Dow have 
dropped over 10 percent each in the past week alone. So Congress must 
act today, Mr. President, and act with a very strong voice to stem the 
rising tide of investor apprehension.
  Passage of this bill will not and cannot of itself restore investor 
confidence. More must be done to win back consumer faith, but this bill 
is a critical piece of the overall effort and, therefore, it is 
essentially important we adopt it.
  The part of the rationale of the original securities law in the 1930s 
was to increase public trust in America's financial markets and 
reliability of disclosed corporate financial information. Those laws 
over the past 70-plus years were a part of the modern economic 
foundation of our Nation, and they were designed to promote market 
efficiency and inspire investor confidence.
  The resulting market confidence in the statements of financial health 
of publicly traded companies has paved the way for America's rise as an 
economic superpower.
  I could make a strong case that the vote we are going to take today 
is for one of the most important bills impacting the Nation's financial 
markets since the 1930s. I say that because this legislation will 
fundamentally change the way publicly traded companies will do business 
and how the accounting profession performs its statutorily required 
audit function.
  Much has been said about what this legislation does not accomplish. 
Briefly, I wish to focus my remarks on what it does do and repeat, we 
are not solving every problem with this bill. There are a lot of other 
issues that need to be addressed, but we have to begin the process, it 
seems to me, by getting the accounting part of this equation right, and 
we will not know ultimately whether we have done all we could, but I 
think this is a major step in that direction.
  The bill, we now know, creates a new independent regulator for the 
accounting profession. The new body will act as a strong, independent, 
full-time board with significant authority to regulate auditors of 
public companies. The independent board will have clear authority for 
setting auditor standards and important investigative standards. It 
strengthens audit reporting standards for the accounting profession and 
contains significant prohibitions for accountants performing nonaudit 
services for audit clients, and it addresses the growing conflicts of 
interest that have been too pervasive throughout the accounting 
profession.
  It provides for the first time an independent funding source for the 
Financial Standards Accounting Board, which I think is also extremely 
important and one of the major reforms in this bill.
  There are additional dollars to provide the SEC with more firepower, 
if you will, to have more cops on the street so we might avoid some of 
the problems that have occurred in the past.
  It also improves corporate governance requirements and improves 
corporate disclosures. The bill grants additional authority and 
responsibility to the audit committees of publicly traded companies.
  Those are very important steps. The provisions contained in the 
legislation were carefully considered. We had 10 hearings, and by a 
vote of 17 to 4, the committee--the Presiding Officer being one--passed 
out this very fine legislation.
  Additionally, during floor consideration of this bill, Senator Leahy 
of Vermont added new criminal penalties for securities fraud. I commend 
him and strongly endorse the provision that won the overwhelming 
support of the Members. I hope it will add to our efforts of restoring 
investor confidence.
  One of the last issues I would like to address, because it has been 
talked about so much, is the stock options issue, which involved a lot 
of debate and discussion of the last number of days. I commend our 
colleague from Michigan, Senator Levin, who has made an extraordinary 
effort to find a resolution to this issue we all can support. 
Obviously, this question inspires more questions than answers in many 
ways, but I commend him for his thoughtfulness and energy that he has 
brought to this debate.
  The issue of whether or not stock options should be expensed is not 
an issue that is going to go away. It has to be addressed. I must 
admit, I am swayed by those who have a great deal of expertise in this 
area: Alan Greenspan, Warren Buffett, Paul Volcker, all of whom support 
the expensing of stock options.
  I also recognize the danger when Congress begins the process of 
legislating accounting standards.
  My friend from Texas and I have been involved in the past when there 
have been efforts by people who wanted to have us vote on some of these 
matters. I recall 3 or 4 years ago the debate was over pooling and 
purchasing accounting standards. I was very sympathetic to the 
arguments made by those advocating pooling. Certainly, if I were a 
member of FASB, I think I would have voted to allow that accounting 
standard to go forward, but the idea that the Senate might vote by 51 
to 49 to pick one accounting standard over another is just ludicrous on 
its face. We do not want to set a precedent, in my view, of the 
Congress of the United States deciding what accounting practices ought

[[Page 12956]]

to be. That is why we set up these boards to do the job.
  The approach taken by having the Accounting Standards Board, the SEC, 
and others look at these matters and get back to us with their 
recommendations is the appropriate and proper way to go. Despite the 
temptation of others to want to legislate these matters explicitly on 
the floor, I remind my colleagues who have done that in the past, we 
inevitably regret doing it when we set precedents such as those and are 
only duplicated by other ideas that temporarily may be very popular, 
may be politically attractive, but may be terrible economics as well.
  I applaud the effort to approach the stock option issue in the manner 
in which it has been addressed. I mentioned Senator Enzi. I mentioned 
my colleague from Texas as well. He and I worked many years on a lot of 
matters affecting the financial services sector of our economy. He does 
not have that many days left with us, and I am going to miss him. I 
told him that privately, and I tell him publicly that he is a valued 
Member of this institution. Whether we agree or disagree on matters he 
always brings a great deal of thought to the debate. He has been a fine 
member of the Banking Committee, and I have enjoyed my service with him 
for many years. I do not want to be too complimentary. I will reserve 
any final glowing accolades for when we have completed the process. We 
have a conference to go through yet.
  Again, my compliments to Senator Sarbanes.
  What we are doing is important. This is extremely important 
legislation. I said earlier it may be more important what message it is 
we are sending; that we are not sitting in the bleachers, we are not 
just standing by as these events unfold. All Members of this Chamber 
can take great pride that the Senate of the United States has responded 
with a responsible bill we think is going to make a difference. I yield 
the floor.
  Mr. SARBANES. What is the time situation?
  The PRESIDING OFFICER. The Senator from Maryland controls almost 14 
minutes, and the Senator from Texas controls just under 12 minutes.
  Mr. SARBANES. I yield 4 minutes to the Senator from Missouri.
  The PRESIDING OFFICER. The Senator from Missouri is recognized for 4 
minutes.
  Mrs. CARNAHAN. Mr. President, my amendment requires that when 
corporate insiders, such as CEOs, trade the stock of the companies they 
manage, they must take reasonable steps to disclose those transactions 
to their shareholders. Current law requires that insiders file 
disclosure forms with the Securities and Exchange Commission. However, 
almost all of these forms are filed on paper and average investors have 
no practical way of seeing these disclosures. My amendment requires 
that these disclosure forms be filed electronically and that the SEC 
make these disclosures available to the public over the Internet.
  This amendment also requires that corporations disclose insider 
transactions on their own Web sites. Investors have a right to know if 
corporate officers are dumping their stock. However, it is meaningless 
to require these disclosures if investors have no practical way of ever 
seeing these disclosures. Without this amendment, the disclosure forms 
simply sit in a file cabinet at the SEC in Washington. My amendment 
ensures that investors have access to this important information.
  In the 3 years leading up to its bankruptcy, as Enron's top officers 
touted the company's stock, they sold more than $1.1 billion worth of 
their own holdings. Ken Lay alone sold more than $100 million worth of 
Enron stock while telling others to buy it. Enron's vice president of 
human resources, Cindy Olsen, was asked by employees if they should 
invest 100 percent of their retirement funds in Enron. She replied: 
``Absolutely.'' But within 3 months she personally unloaded $1 million 
worth of Enron stock. Had Enron employees only known, they might have 
been skeptical about this advice.
  Investors are entitled to know how executives are acting with their 
own shares of their company's stock, and my amendment will ensure they 
will.
  I yield my remaining time back to the Senator from Maryland.
  The PRESIDING OFFICER. Who yields time?
  Mr. GRAMM. Mr. President, I yield 8 minutes to Senator Enzi, and 
might I say on my time, not his 8 minutes, that I want to thank Senator 
Enzi for his contribution to this bill, for his work from beginning to 
end. He has been a major contributor to the bill. He has proven that 
knowledge sometimes is a nice thing to have.
  Our standard in Washington for objectivity is that you came in off 
the turnip truck and you know absolutely nothing and therefore you are 
objective, but I would say that Senator Enzi proves that it is nice 
every once in awhile to have somebody who knows what he is talking 
about. I think in many ways, large and small, the good things in this 
bill he has had a very positive impact on and the bad things in the 
bill he could not do anything about anyway--that was a joke, I would 
say to the Senator from Maryland.
  In any case, I do want to congratulate Senator Enzi for all the 
contributions he has made.
  The PRESIDING OFFICER. The Senator from Wyoming is recognized for 8 
minutes.
  Mr. ENZI. I thank the Senator from Texas for his gracious comments.
  It has been mentioned several times today that there is nervousness 
in the stock market. There has been since we started debating this 
issue. I am very convinced that some of that is because people may read 
some of the amendments that have been suggested and recognize the 
legislative principle that, if it is worth reacting to, it is worth 
overreacting to. That ought to be enough to scare anybody.
  We have had extensive debate. In fact, one reporter I talked to asked 
me if we were going to pass the McCain bill. The reporter talked about 
the accounting reform, and I had to say, no, that is the Sarbanes bill 
we have been working on. It is not stock options, in spite of the 
threat we had the other day.
  We usually do bills the way we have done this one--with a lot of 
cooperative talk. We then make arrangements to develop the best 
possible outcome. The accounting reform bill before us is designed in 
such a way that we set up processes that people with accountability and 
responsibility and knowledge have to oversee. This bill does not tell 
them exactly how to do the details of accounting. It gives a fair 
process for accountants to be able to do the details of accounting.
  In past years, we have decided we knew more than the people who had 
the expertise in the area of accounting and we have given them 
direction on how to do it. We almost made that mistake again. For 
instance, the McCain amendment was very simplistic. In one paragraph it 
told people how to do accounting that may actually take about 500 pages 
to explain. It would have caused the most massive restatements in the 
history of the United States, and restatements right now make everybody 
nervous. People ought to realize that some restatements are caused by 
changes in rules, not by people doing things wrong. So investors should 
always review restatements and determine the actual cause. I certainly 
hope it is never Congress, but I suspect it very well could be.
  Another proposal that was going to be put before us was one telling 
FASB, this Financial Accounting Standards Board, exactly what they were 
supposed to examine next and what they were supposed to resolve in the 
next year. I have to say, FASB is working on some important things 
because they have been examining what Congress has been debating and 
they know in greater detail than we do what caused the massive 
restatements. I have to say, I do not believe it was stock options. It 
was likely a number of other things that need to be investigated.
  This Financial Accounting Standards Board is diligently looking at 
these issues. They are looking at some high-profile rules in the areas 
of accounting for intangibles and accounting for special purpose 
entities. We have talked a

[[Page 12957]]

lot about special purpose entities, and our hearings showed that they 
may have been a cause for the Enron collapse. Also, they are looking at 
accounting for guarantees and examining a final rule on liabilities and 
equity. They are also studying whether to create a rule on revenue 
recognition.
  Those five things probably put one to sleep, but they are important 
to have resolved to make sure we do not have problems with companies in 
the future. We have to be careful now and in the days to follow that we 
ensure we use all of FASB's expertise, knowledge, and staff to resolve 
high publicity problems of accounting.
  In this bill, we have made the Financial Accounting Standards Board 
more independent. We have provided them with independent funding so 
they no longer must beg for donations and perhaps encounter a conflict 
of interest. Through this process, we should not insert ourselves and 
say we are going to tell them exactly what is important.
  I would like to thank Senator Sarbanes and Senator Gramm for the 
extraordinary work they have put into the process. Last week was an 
extremely difficult week. I thank them for the careful work and review 
they have done on every single one of the amendments that has been 
submitted, and the process they established to make sure this bill 
would not get out of hand, that it would not be an overreaction, and 
that when we finish it tonight and we can reassure America it is still 
okay to invest in the stock market.
  We are fortunate on the Banking Committee to have these two people I 
consider to be the finest public servants in Congress. They have worked 
long and hard to assure that the product that came out was bipartisan 
and reflected the views of as many Members as possible. I also thank 
the members of the staff who worked diligently on the bill.
  From my own staff, Katherine McGuire, Kristi Sansonetti, and Michael 
Thompson. From Senator Gramm's staff, Wayne Abernathy, Linda Lord, 
Stacie Thomas, and Michele Jackson. And from Chairman Sarbanes' staff, 
Steve Harris, Steve Kroll, Dean Shahinian, Marty Gruenberg, and Lindsey 
Graham and Vince Meehan. All of these staffers have spent many late 
nights and weekends working to build this legislation.
  This legislation is badly needed. The markets have been in a steady 
decline for several months now. While I do not believe it is 
Washington's job to step in every time the market is in a decline, I do 
believe that when markets move as a reaction to illegal or unethical 
acts, then we have obviously not made penalties severe enough to 
dissuade this type of behavior. Congress had to act in this climate.
  However, I would also like to comment on a few things happening 
outside of the real debate--namely the attacks on SEC Chairman Harvey 
Pitt. I have to say that Chairman Pitt and I may not always agree, but 
I believe the recent attacks on him to be unwarranted. Mr. Pitt has 
come under fire for having represented some of the accounting firms who 
have been criticized in recent restatements. I believe Chairman Pitt's 
work in the private sector is a great asset to investors. We need 
individuals who are willing to work in government who know and 
understand the industries they regulate. I do not want lifelong 
government bureaucrats monitoring these companies.
  These restatements did not all of a sudden appear when Chairman Pitt 
was confirmed. In most cases, they begun during the late 1990s when 
companies became intent on not seeing the Internet bubble burst. I have 
to ask what was going on at the SEC while these companies were filling 
all of these false financial statements? What I imagine happened was 
that the companies, who are very familiar with who is at the Commission 
and where the resources are being devoted, thought they could take 
advantage of the situation because no one was paying attention.
  Look at what has happened since Chairman Pitt has taken office. He 
has opened a record number of investigations of restatements filed by 
public companies. He has taken steps to break the relationship between 
research analysts and investment bankers. He has supported legislation 
that will increase penalties on corporate executives engaged in 
fraudulent behavior. And, he has indicated his support of this 
legislation, which by the way, I anticipate to be supported by the 
majority of the Senate later today.
  The numbers are clear. In Chairman Levitt's last year as Chairman, 
503 total enforcement actions were filed. Already this year, Chairman 
Pitt has filed 415. Officer and Director Bars for 2000 were 38--this 
year so far 71. Subpoenaed enforcement proceedings in 2000 were 9--this 
year 18. The numbers go on and on. My point is that Chairman Pitt seems 
to be left cleaning up the mess his predecessor left in corporate 
America.
  I offer my support for these actions taken by Chairman Pitt. Instead 
of attacking him, I am more concerned about what was happening at the 
SEC that bred this climate where executives felt compelled to engage in 
this unethical behavior. Why weren't some of these actions taken three 
or four years ago? Did the SEC Chairman not see the potential conflicts 
that could arise out of research analysts getting compensation based on 
investment banking business?
  Therefore, I would say that I commend Chairman Pitt for the work he 
is doing. From what I understand, the actions he is taking at the SEC 
have struck fear throughout the corporate community that they had 
better get their act together.
  This legislation before us now will also go far in restoring faith in 
the markets. It will provide assurances to investors that we will not 
sit by and watch executives shatter the retirement dreams of workers 
while leaving themselves with millions of dollars. It will show the 
American people that we will work to make financial statements 
transparent and accurate to make sure they know as much about the 
company's financial state as possible.
  The legislation builds an accounting oversight board to oversee the 
accountants who prepare financial statements of public companies. This 
board will have broad authority to enforce and discipline rules by 
which accountants must live. The board will have full access to 
accounting firms' records and policies to require uniformity throughout 
the industry when it comes to ethics and independence. Accountants must 
know that someone is watching over them to require that their work is 
in the best interest of investors. This legislation will also provide 
for the SEC to have the resources they need to enforce the law.
  However, I also do not want this legislation to provide a payday for 
the trial lawyers. The competitiveness of the accounting industry is at 
stake and we can ill afford to lose another firm solely because we 
didn't offer proper protections in this legislation. I am in no way 
indicating that accounting firms should have new, special protections. 
The only thing I am asking is that accounting firms aren't exposed to 
more liability after this bill is enacted than they were before.
  I am not sure some Members truly understand the situation facing 
accounting firms. We are down to the final four firms. These are the 
only firms that have the expertise and resources to audit companies 
such as Microsoft, Coca Cola, and the thousands 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.

[[Page 12958]]

  I wish to speak about the Financial Accounting Standards Boards, 
known as FASB, which has been referenced many times throughout the 
course of discussion on the underlying accounting bill, the Public 
Company Accounting Reform and Investor Protection Act of 2002.
  Some of the pending amendments have referenced FASB and directed or 
mandated it to change how companies must expense stock options or to 
perform a study on how to expense stock options. In addition, the 
McCain amendment sets the accounting standard for expensing stock 
options, without allowing FASB to set rules on this form of expensing. 
The Levin amendment mandates FASB conduct a one-year study on expensing 
stock options, and then adopt a rule based on a narrow set of external 
parameters. The Levin amendment implicates a desire to have such 
expensing done.
  In order to understand some of the problems with these types of 
amendments, it is important to understand exactly what FASB does. Since 
1973, FASB has been the designated organization in the private sector 
for establishing standard of financial accounting and reporting. In 
short, those standards govern the preparation of all financial reports.
  The mission of FASB is ``to establish and improve standards of 
financial accounting and reporting for the guidance and education of 
the public, including issuers, auditors and users of financial 
information.''
  To accomplish this mission, FASB acts to improve the usefulness of 
financial reporting; keep standards current to reflect changes in the 
methods of doing business and the economic environment; consider any 
significant areas of deficiency in financial reporting; promote the 
international convergence of accounting standards together with 
improving the quality of financial reporting; and improve the common 
understanding of the nature and purposes of information contained in 
financial reports.
  FASB follows certain precepts in its activities. One is to be 
objective in its decision making. Another is to carefully weigh the 
views of its constituents in developing concepts and standards. But its 
ultimate determination must be the Board's, based on research, public 
input and careful deliberation. It also aspires to promulgate standards 
only when the expected benefits exceed the perceived costs.
  Overall, FASB was created to serve as an independent agency with an 
independent agenda. However, FASB is currently funded by companies and 
accounting firms. The long standing concern was that FASB did not act 
wholly independently, and succumbed to industry pressures in order to 
get the funding it needed to operate. Back in 1993 and 1994, when 
expensing of stock options was an issue, some critics say FASB 
succumbed to pressure by industry and Congress when it created a dual 
method of either expensing stock options at the time of grant, or 
placing the information in a footnote as a form of public disclosure of 
possible stock dilution.
  The underlying accounting reform bill fixes this perceived problem of 
independence and autonomy by providing FASB with funding from both 
issuers and the accounting firms. Because of this change, FASB will be 
completely independent from the very companies it will set standards 
for in the future. This is a good start.
  It is also important to understand that, historically, FASB has never 
been directed by Congress through legislation to adopt one particular 
standard for accounting, including expense accounting. It has also 
never been directed by Congress to perform a study. FASB's role is not 
to perform studies for Congress and they should not be bogged down 
performing them for political purposes.
  Following that precedent, the Senate Banking Committee made certain 
nothing in the bill directs FASB to take any particular action. In 
other words, there is no federal mandate to FASB, nor should there be, 
if it is to remain an independent authority. In addition, why should 
Congress, a body without expertise in accounting standards for 
publically traded companies, set these standards?
  I, and many other members, as well as Federal Reserve Chairman, Alan 
Greenspan, believe that Congress has no business setting accounting 
standards. Instead, the Securities and Exchange Commission and FASB are 
the entities with the expertise needed to make these types of 
determinations.
  Ordinarily, FASB establishes plans with milestones it works towards. 
Congress should not dictate what plans and milestones it should work 
towards or address. FASB also never sets artificial deadlines on when 
to reach a conclusion. As an independent agency, it carefully and 
deliberately makes its determinations and sets rules, without adhering 
to outside pressures or timetables. Just as Congress should not set 
accounting standards for FASB to follow, it also should not set 
artificial deadlines for FASB to adhere to either.
  Nevertheless, some members have filed amendments asking FASB to not 
only take a specific action, but instructing it as to a specific 
timetable. One amendment actually sets an accounting standard, thereby 
instructing FASB to immediately change expensing standards. Another 
mandates FASB complete an expensing study within a year. These 
amendment set unrealistic timetables and mandates.
  It is important to remember that FASB already has its hands full with 
important projects to help improve financial standards and reporting. 
It is currently working towards promulgating high profile rules in the 
areas of accounting for intangibles; accounting for special purpose 
entities; accounting for guarantees; and a final rule on liabilities 
and equity. FASB has also added to its agenda a project to research and 
create a rule on revenue recognition.
  Let us not forget that the improper use of special purpose entities 
played a role in the downfall of Enron. Stock options had nothing to do 
with Enron's bankruptcy.
  The projects FASB is concentrating on are important projects which 
will help clarify financial statements for investors. FASB itself needs 
to cue up and prioritize its projects based on what is more important 
to financial accounting and reporting. Congress should not dictate what 
those priorities should be or the timetable it must adhere to.
  If some of the amendments we are looking at are accepted, Congress 
will establish a bad precedent of setting up a timetable and 
prioritizing projects for FASB. Congress will be putting stock option 
expensing--an accounting standard which did not cause the collapse of 
Enron or the demise of other big companies--at the front of the cue.
  And another question we need to ask ourselves is whether FASB has the 
manpower to perform the mandates and timetables Congress would be 
providing through the McCain and Levin amendments. Already, FASB is 
shifting its personnel to different projects to try to timely 
promulgate needed rules. While the underlying accounting bill will help 
these staffing problems by providing independent funding, in the short 
term, FASB cannot possibly perform the mandates of some of the 
amendments within the time frames given.
  I hope I have given members some solid reasoning on why Congress 
should not begin setting accounting standards. Should we really be 
doing something we do not fully understand? There are already agencies 
to perform this type of rulemaking, and they are the SEC and FASB. They 
are fully aware of the debate surrounding stock options. We don't need 
to mandate FASB to make a new rule. I am certain if FASB deems it 
appropriate, it will be looking at this issue in the future.
  The PRESIDING OFFICER. Who yields time?
  Mr. SARBANES. Mr. President, I yield 4 minutes to the junior Senator 
from North Dakota.
  Mr. DORGAN. Mr. President, in the final moments, I hope again to 
persuade my colleagues to accept by unanimous consent my amendment 
dealing with corporate bankruptcy. Let me again say what this amendment 
is.
  It says that during the 12 months preceding a bankruptcy, CEOs who

[[Page 12959]]

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.
  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

[[Page 12960]]

think America will survive under either bill. Given the environment we 
are in, that represents some achievement, and I am proud of it.
  I think we will come out of conference with a better bill than the 
House bill and a better bill than the Senate bill. I think people will 
be proud of what we did.
  If I were an investor today, and I had a lot of money, I would invest 
in the stock market today.
  The PRESIDING OFFICER. The time of the Senator has expired. The 
Senator from Maryland has 4 minutes 45 seconds remaining.
  Mr. SARBANES. Mr. President, we have been trying to clear amendments. 
We have yesterday--not yesterday, but on Friday we adopted three 
amendments on the basis of a unanimous consent request. We have worked 
through two additional amendments. I am going to offer them now.
  One is an amendment by Senator Shelby for a study with respect to 
aider and abettor violations of the Federal securities law. I ask 
unanimous consent that the pending amendment be set aside; that the 
Shelby amendment, No. 4261, be called up and modified with a 
modification that I send to the desk; that the amendment as modified be 
agreed to; and then we then return to the regular order which, as I 
understand it, would be the Edwards as modified by the Carnahan 
amendment.
  The PRESIDING OFFICER. Is there objection? Without objection, it is 
so ordered.


                    Amendment No. 4261, As Modified

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

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

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

  The PRESIDING OFFICER. Without objection, the amendment as modified 
is agreed to.
  The amendment (No. 4261), as modified, was agreed to.
  Mr. SARBANES. Was the Ensign amendment also on that amendment?
  I urge the adoption of the amendments.
  The PRESIDING OFFICER. The amendments have been agreed to.
  Mr. SARBANES. Mr. President, I move to reconsider the vote.
  Mr. GRAMM. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.
  Mr. SARBANES. Mr. President, in the regular order we are back with 
the Edwards and Carnahan amendments pending?
  The PRESIDING OFFICER. That is correct.
  Mr. SARBANES. I have a couple of minutes?
  The PRESIDING OFFICER. There remains 1 minute.
  Mr. SARBANES. Mr. President, I think the Senate is about to take a 
major step to contributing to the restoration of investor confidence.
  This legislation establishes a strong independent board to oversee 
auditors of the public companies. The board can set standards, 
investigate, and discipline accountants. It will be overseen by the 
SEC, but it will have independent funding and membership. I think this 
marks the end of weak self-regulation with respect to public company 
auditors.
  It addresses pervasive conflicts of interest by ensuring auditor 
independence by restricting them from providing a defined list of 
consulting services. Other consulting services on the part of the 
auditor can be permitted if preapproved by the company's audit company.
  This legislation strengthens corporate responsibility. It establishes 
safeguards to protect investment/analyst conflicts, and it gives the 
SEC expanded staff resources so it has the resources to carry out its 
mandate of protecting investors in this critical time.
  It is no exaggeration to say the crisis in our markets has put the 
plans and hopes and dreams of millions of Americans at risk. To restore 
market integrity on which investor confidence depends, we should move 
expeditiously to move this legislation into law.
  I want to express my deep appreciation to my colleagues with whom we 
have worked for many weeks: To Senator Gramm, the ranking member of the 
committee with whom we interact in an interesting and, on occasions, 
exciting fashion; to Senator Enzi, who made a major contribution; to 
Senators Dodd and Corzine on our side of the aisle who played an 
essential role and introduced vital legislation on this issue very 
early on; to Senator Durbin who also introduced significant legislation 
on this subject, and to many other colleagues; and to Senator Reid, who 
has been extraordinarily helpful here on the floor of the U.S. Senate.
  Mr. REID. Mr. President, I ask unanimous consent the 1 minute Senator 
Carnahan has--she is not going to be using it--that it be given to the 
Senator from Maryland.
  The PRESIDING OFFICER. The Senator from Maryland has an additional 
minute.
  Mr. SARBANES. Mr. President, we don't do this work by ourselves. We 
all know that very well. We rely very heavily on dedicated, absolutely 
dedicated staff members. I am going to take the closing time I have to 
simply read their names into the Record: Dean Shahinian, Steve Kroll, 
Lynsey Graham, Vincent Meehan, Sarah Kline, Judy Keenan, Jesse Jacobs, 
Aaron 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.

[[Page 12961]]

  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

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

                             NOT VOTING--3

     Craig
     Crapo
     Helms
  The amendment (No. 4187), as modified, as amended, was agreed to.
  Mr. SARBANES. Madam President, I move to reconsider the vote.
  Mr. DASCHLE. I move to lay that motion on the table.
  The motion to lay on the table was agreed to.
  The PRESIDING OFFICER. The question is on engrossment and third 
reading of the bill.
  The bill was ordered to be engrossed for a third reading and was read 
the third time.
  The PRESIDING OFFICER. The Senator from Maryland is recognized.
  Mr. SARBANES. Madam President, I ask for the yeas and nays.
  The PRESIDING OFFICER. Is there a sufficient second?
  There is a sufficient second.
  The bill having been read the third time, the question is, Shall it 
pass?
  The clerk will call the roll.
  The legislative clerk called the roll.
  Mr. NICKLES. I announce that the Senator from Idaho (Mr. Crapo), the 
Senator from Idaho (Mr. Craig), and the Senator from North Carolina 
(Mr. Helms) are necessarily absent.
  I further announce that if present and voting the Senator from North 
Carolina (Mr. Helms) would vote ``yea''.
  The result was announced--yeas 97, nays 0, as follows:

                      [Rollcall Vote No. 176 Leg.]

                                YEAS--97

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

                             NOT VOTING--3

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

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

  The PRESIDING OFFICER. Under the previous order, all after the 
enacting clause will be stricken and the text of S. 2673, as passed, is 
inserted in lieu thereof.
  The question is on the engrossment of the amendment and third reading 
of the bill.

[[Page 12962]]

  The amendment was ordered to be engrossed and the bill to be read a 
third time.
  The bill was read the third time.
  The PRESIDING OFFICER. The bill having been read the third time, the 
question is, Shall the bill pass?
  The bill (H.R. 3763), as amended, was passed, as follows:
       Strike out all after the enacting clause and insert:

     SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

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

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

           TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

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

                     TITLE II--AUDITOR INDEPENDENCE

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

                  TITLE III--CORPORATE RESPONSIBILITY

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

                TITLE IV--ENHANCED FINANCIAL DISCLOSURES

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

                 TITLE V--ANALYST CONFLICTS OF INTEREST

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

              TITLE VI--COMMISSION RESOURCES AND AUTHORITY

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

                     TITLE VII--STUDIES AND REPORTS

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

        TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY

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

           TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS

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

                     TITLE X--CORPORATE TAX RETURNS

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

     SEC. 2. DEFINITIONS.

       (a) In General.--In this Act, the following definitions 
     shall apply:
       (1) Appropriate state regulatory authority.--The term 
     ``appropriate State regulatory authority'' means the State 
     agency or other authority responsible for the licensure or 
     other regulation of the practice of accounting in the State 
     or States having jurisdiction over a registered public 
     accounting firm or associated person thereof, with respect to 
     the matter in question.
       (2) Audit.--The term ``audit'' means an examination of the 
     financial statements of any issuer by an independent public 
     accounting firm in accordance with the rules of the Board or 
     the Commission (or, for the period preceding the adoption of 
     applicable rules of the Board under section 103, in 
     accordance with then-applicable generally accepted auditing 
     and related standards for such purposes), for the purpose of 
     expressing an opinion on such statements.
       (3) Audit committee.--The term ``audit committee'' means--
       (A) a committee (or equivalent body) established by and 
     amongst the board of directors of an issuer for the purpose 
     of overseeing the accounting and financial reporting 
     processes of the issuer and audits of the financial 
     statements of the issuer; and
       (B) if no such committee exists with respect to an issuer, 
     the entire board of directors of the issuer.
       (4) Audit report.--The term ``audit report'' means a 
     document or other record--
       (A) prepared following an audit performed for purposes of 
     compliance by an issuer with the requirements of the 
     securities laws; and
       (B) in which a public accounting firm either--
       (i) sets forth the opinion of that firm regarding a 
     financial statement, report, or other document; or
       (ii) asserts that no such opinion can be expressed.
       (5) Board.--The term ``Board'' means the Public Company 
     Accounting Oversight Board established under section 101.
       (6) Commission.--The term ``Commission'' means the 
     Securities and Exchange Commission.
       (7) Issuer.--The term ``issuer'' means an issuer (as 
     defined in section 3 of the Securities Exchange Act of 1934 
     (15 U.S.C. 78c)), the securities of which are registered 
     under section 12 of that Act (15 U.S.C. 78l), or that is 
     required to file reports pursuant to section 15(d) of that 
     Act (15 U.S.C. 78o(d)), or that will be required to file such 
     reports at the end of a fiscal year of the issuer in which a 
     registration statement filed by such issuer has become 
     effective pursuant to the Securities Act of 1933 (15 U.S.C. 
     77a et. seq.), unless its securities are registered under 
     section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 
     78c) on or before the end of such fiscal year.
       (8) Non-audit services.--The term ``non-audit services'' 
     means any professional services provided to an issuer by a 
     registered public accounting firm, other than those provided 
     to an issuer in connection with an audit or a review of the 
     financial statements of an issuer.
       (9) Person associated with a public accounting firm.--
       (A) In general.--The terms ``person associated with a 
     public accounting firm'' (or with a ``registered public 
     accounting firm'') and ``associated person of a public 
     accounting firm'' (or of a ``registered public accounting 
     firm'') mean any individual proprietor, partner, shareholder, 
     principal, accountant, or other professional employee of a 
     public accounting firm, or any other independent contractor 
     or entity that, in connection with the preparation or 
     issuance of any audit report--
       (i) shares in the profits of, or receives compensation in 
     any other form from, that firm; or
       (ii) participates as agent or otherwise on behalf of such 
     accounting firm in any activity of that firm.
       (B) Exemption authority.--The Board may, by rule, exempt 
     persons engaged only in ministerial tasks from the definition 
     in subparagraph (A), to the extent that the Board determines 
     that any such exemption is consistent with the purposes of 
     this Act, the public interest, or the protection of 
     investors.
       (10) Professional standards.--The term ``professional 
     standards'' means--
       (A) accounting principles that are--
       (i) established by the standard setting body described in 
     section 19(b) of the Securities Act of 1933, as amended by 
     this Act, or prescribed by the Commission under section 19(a) 
     of that Act (15 U.S.C. 17a(s)) or section 13(b) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78a(m)); and

[[Page 12963]]

       (ii) relevant to audit reports for particular issuers, or 
     dealt with in the quality control system of a particular 
     registered public accounting firm; and
       (B) auditing standards, standards for attestation 
     engagements, quality control policies and procedures, ethical 
     and competency standards, and independence standards 
     (including rules implementing title II) that the Board or the 
     Commission determines--
       (i) relate to the preparation or issuance of audit reports 
     for issuers; and
       (ii) are established or adopted by the Board under section 
     103(a), or are promulgated as rules of the Commission.
       (11) Public accounting firm.--The term ``public accounting 
     firm'' means--
       (A) a proprietorship, partnership, incorporated 
     association, corporation, limited liability company, limited 
     liability partnership, or other legal entity that is engaged 
     in the practice of public accounting or preparing or issuing 
     audit reports; and
       (B) to the extent so designated by the rules of the Board, 
     any associated person of any entity described in subparagraph 
     (A).
       (12) Registered public accounting firm.--The term 
     ``registered public accounting firm'' means a public 
     accounting firm registered with the Board in accordance with 
     this Act.
       (13) Rules of the board.--The term ``rules of the Board'' 
     means the bylaws and rules of the Board (as submitted to, and 
     approved, modified, or amended by the Commission, in 
     accordance with section 107), and those stated policies, 
     practices, and interpretations of the Board that the 
     Commission, by rule, may deem to be rules of the Board, as 
     necessary or appropriate in the public interest or for the 
     protection of investors.
       (14) Security.--The term ``security'' has the same meaning 
     as in section 3(a) of the Securities Exchange Act of 1934 (15 
     U.S.C. 78c(a)).
       (15) Securities laws.--The term ``securities laws'' means 
     the provisions of law referred to in section 3(a)(47) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), as 
     amended by this Act, and includes the rules, regulations, and 
     orders issued by the Commission thereunder.
       (16) State.--The term ``State'' means any State of the 
     United States, the District of Columbia, Puerto Rico, the 
     Virgin Islands, or any other territory or possession of the 
     United States.
       (b) Conforming Amendment.--Section 3(a)(47) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) is 
     amended by inserting ``the Public Company Accounting Reform 
     and Investor Protection Act of 2002,'' before ``the Public''.

     SEC. 3. COMMISSION RULES AND ENFORCEMENT.

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

           TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

     SEC. 101. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.

       (a) Establishment of Board.--There is established the 
     Public Company Accounting Oversight Board, to oversee the 
     audit of public companies that are subject to the securities 
     laws, and related matters, in order to protect the interests 
     of investors and further the public interest in the 
     preparation of informative, accurate, and independent audit 
     reports for companies the securities of which are sold to, 
     and held by and for, public investors. The Board shall be a 
     body corporate, operate as a nonprofit corporation, and have 
     succession until dissolved by an Act of Congress.
       (b) Status.--The Board shall not be an agency or 
     establishment of the United States Government, and, except as 
     otherwise provided in this Act, shall be subject to, and have 
     all the powers conferred upon a nonprofit corporation by, the 
     District of Columbia Nonprofit Corporation Act. No member or 
     person employed by, or agent for, the Board shall be deemed 
     to be an officer or employee of or agent for the Federal 
     Government by reason of such service.
       (c) Duties of the Board.--The Board shall, subject to 
     action by the Commission under section 107, and once a 
     determination is made by the Commission under subsection (d) 
     of this section--
       (1) register public accounting firms that prepare audit 
     reports for issuers, in accordance with section 102;
       (2) establish or adopt, or both, by rule, auditing, quality 
     control, ethics, independence, and other standards relating 
     to the preparation of audit reports for issuers, in 
     accordance with section 103;
       (3) conduct inspections of registered public accounting 
     firms, in accordance with section 104 and the rules of the 
     Board;
       (4) conduct investigations and disciplinary proceedings 
     concerning, and impose appropriate sanctions where justified 
     upon, registered public accounting firms and associated 
     persons of such firms, in accordance with section 105;
       (5) perform such other duties or functions as the Board 
     determines are necessary or appropriate to promote high 
     professional standards among, and improve the quality of 
     audit services offered by, registered public accounting firms 
     and associated persons thereof, or otherwise to carry out 
     this Act, in order to protect investors, or to further the 
     public interest;
       (6) enforce compliance with this Act, the rules of the 
     Board, professional standards, and the securities laws 
     relating to the preparation and issuance of audit reports and 
     the obligations and liabilities of accountants with respect 
     thereto, by registered public accounting firms and associated 
     persons thereof; and
       (7) set the budget and manage the operations of the Board 
     and the staff of the Board.
       (d) Commission Determination.--The members of the Board 
     shall take such action (including hiring of staff, proposal 
     of rules, and adoption of initial and transitional auditing 
     and other professional standards) as may be necessary or 
     appropriate to enable the Commission to determine, not later 
     than 270 days after the date of enactment of this Act, that 
     the Board is so organized and has the capacity to carry out 
     the requirements of this title, and to enforce compliance 
     with this title by registered public accounting firms and 
     associated persons thereof.
       (e) Board Membership.--
       (1) Composition.--The Board shall have 5 members, appointed 
     from among prominent individuals of integrity and reputation 
     who have a demonstrated commitment to the interests of 
     investors and the public, and an understanding of the 
     responsibilities for and nature of the financial disclosures 
     required of issuers under the securities laws and the 
     obligations of accountants with respect to the preparation 
     and issuance of audit reports with respect to such 
     disclosures.
       (2) Limitation.--Two members, and only 2 members, of the 
     Board shall be or have been certified public accountants 
     pursuant to the laws of 1 or more States, provided that, if 1 
     of those 2 members is the chairperson, he or she may not have 
     been a practicing certified public accountant for at least 5 
     years prior to his or her appointment to the Board.
       (3) Full-time independent service.--Each member of the 
     Board shall serve on a full-time basis, and may not, 
     concurrent with service on the Board, be employed by any 
     other person or engage in any other professional or business 
     activity. No member of the Board may share in any of the 
     profits of, or receive payments from, a public accounting 
     firm (or any other person, as determined by rule of the 
     Commission), other than fixed continuing payments, subject to 
     such conditions as the Commission may impose, under standard 
     arrangements for the retirement of members of public 
     accounting firms.
       (4) Appointment of board members.--
       (A) Initial board.--Not later than 90 days after the date 
     of enactment of this Act, the Commission, after consultation 
     with the Chairman of the Board of Governors of the Federal 
     Reserve System and the Secretary of the Treasury, shall 
     appoint the chairperson and other initial members of the 
     Board, and shall designate a term of service for each.
       (B) Vacancies.--A vacancy on the Board shall not affect the 
     powers of the Board, but shall be filled in the same manner 
     as provided for appointments under this section.
       (5) Term of service.--
       (A) In general.--The term of service of each Board member 
     shall be 5 years, and until a successor is appointed, except 
     that--

[[Page 12964]]

       (i) the terms of office of the initial Board members (other 
     than the chairperson) shall expire in annual increments, 1 on 
     each of the first 4 anniversaries of the initial date of 
     appointment; and
       (ii) any Board member appointed to fill a vacancy occurring 
     before the expiration of the term for which the predecessor 
     was appointed shall be appointed only for the remainder of 
     that term.
       (B) Term limitation.--No person may serve as a member of 
     the Board, or as chairperson of the Board, for more than 2 
     terms, whether or not such terms of service are consecutive.
       (6) Removal from office.--A member of the Board may be 
     removed by the Commission from office, in accordance with 
     section 107(d)(3), for good cause shown before the expiration 
     of the term of that member.
       (f) Powers of the Board.--In addition to any authority 
     granted to the Board otherwise in this Act, the Board shall 
     have the power, subject to section 107--
       (1) to sue and be sued, complain and defend, in its 
     corporate name and through its own counsel, with the approval 
     of the Commission, in any Federal, State, or other court;
       (2) to conduct its operations and maintain offices, and to 
     exercise all other rights and powers authorized by this Act, 
     in any State, without regard to any qualification, licensing, 
     or other provision of law in effect in such State (or a 
     political subdivision thereof);
       (3) to lease, purchase, accept gifts or donations of or 
     otherwise acquire, improve, use, sell, exchange, or convey, 
     all of or an interest in any property, wherever situated;
       (4) to appoint such employees, accountants, attorneys, and 
     other agents as may be necessary or appropriate, and to 
     determine their qualifications, define their duties, and fix 
     their salaries or other compensation (at a level that is 
     comparable to private sector self-regulatory, accounting, 
     technical, supervisory, or other staff or management 
     positions);
       (5) to allocate, assess, and collect accounting support 
     fees established pursuant to section 109, for the Board, and 
     other fees and charges imposed under this title; and
       (6) to enter into contracts, execute instruments, incur 
     liabilities, and do any and all other acts and things 
     necessary, appropriate, or incidental to the conduct of its 
     operations and the exercise of its obligations, rights, and 
     powers imposed or granted by this title.
       (g) Rules of the Board.--The rules of the Board shall, 
     subject to the approval of the Commission--
       (1) provide for the operation and administration of the 
     Board, the exercise of its authority, and the performance of 
     its responsibilities under this Act;
       (2) permit, as the Board determines necessary or 
     appropriate, delegation by the Board of any of its functions 
     to an individual member or employee of the Board, or to a 
     division of the Board, including functions with respect to 
     hearing, determining, ordering, certifying, reporting, or 
     otherwise acting as to any matter, except that--
       (A) the Board shall retain a discretionary right to review 
     any action pursuant to any such delegated function, upon its 
     own motion;
       (B) a person shall be entitled to a review by the Board 
     with respect to any matter so delegated, and the decision of 
     the Board upon such review shall be deemed to be the action 
     of the Board for all purposes (including appeal or review 
     thereof); and
       (C) if the right to exercise a review described in 
     subparagraph (A) is declined, or if no such review is sought 
     within the time stated in the rules of the Board, then the 
     action taken by the holder of such delegation shall for all 
     purposes, including appeal or review thereof, be deemed to be 
     the action of the Board;
       (3) establish ethics rules and standards of conduct for 
     Board members and staff, including a bar on practice before 
     the Board (and the Commission, with respect to Board-related 
     matters) of 1 year for former members of the Board, and 
     appropriate periods (not to exceed 1 year) for former staff 
     of the Board; and
       (4) provide as otherwise required by this Act.
       (h) Annual Report to the Commission.--The Board shall 
     submit an annual report (including its audited financial 
     statements) to the Commission, and the Commission shall 
     transmit a copy of that report to the Committee on Banking, 
     Housing, and Urban Affairs of the Senate, and the Committee 
     on Financial Services of the House of Representatives, not 
     later than 30 days after the date of receipt of that report 
     by the Commission.

     SEC. 102. REGISTRATION WITH THE BOARD.

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

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

       (a) Auditing, Quality Control, and Ethics Standards.--
       ``(1) In general.--The Board shall, by rule, establish, 
     including, to the extent it determines appropriate, through 
     adoption of standards proposed by 1 or more professional 
     groups of accountants designated pursuant to paragraph (3)(A) 
     or advisory groups convened pursuant to paragraph (4), and 
     amend or otherwise modify or alter, such auditing and related 
     attestation standards, such quality control standards, and 
     such ethics standards to be used by registered public 
     accounting firms in the preparation and issuance of audit 
     reports, as required by this Act or the rules of the 
     Commission, or as may be necessary or appropriate in the 
     public interest or for the protection of investors.
       (2) Rule requirements.--In carrying out paragraph (1), the 
     Board--
       (A) shall include in the auditing standards that it adopts, 
     requirements that each registered public accounting firm 
     shall--
       (i) prepare, and maintain for a period of not less than 7 
     years, audit work papers, and other information related to 
     any audit report, in sufficient detail to support the 
     conclusions reached in such report;
       (ii) provide a concurring or second partner review and 
     approval of such audit report (and

[[Page 12965]]

     other related information), and concurring approval in its 
     issuance, by a qualified person (as prescribed by the Board) 
     associated with the public accounting firm, other than the 
     person in charge of the audit, or by an independent reviewer 
     (as prescribed by the Board); and
       (iii) describe the scope of the auditor's testing of the 
     system of internal accounting controls of the issuer required 
     by section 13(b)(2) of the Securities Exchange Act of 1934 
     (15 U.S.C. 78m(b)(2)), and present (in such report or in a 
     separate report)--

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

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

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

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

     SEC. 104. INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS.

       (a) In General.--The Board shall conduct a continuing 
     program of inspections to assess the degree of compliance of 
     each registered public accounting firm and associated persons 
     of that firm with this Act, the rules of the Board, the rules 
     of the Commission, or professional standards, in connection 
     with its performance of audits, issuance of audit reports, 
     and related matters involving issuers.
       (b) Inspection Frequency.--
       (1) In general.--Subject to paragraph (2), inspections 
     required by this section shall be conducted--
       (A) annually with respect to each registered public 
     accounting firm that regularly provides audit reports for 
     more than 100 issuers; and
       (B) not less frequently than once every 3 years with 
     respect to each registered public accounting firm that 
     regularly provides audit reports for 100 or fewer issuers.
       (2) Adjustments to schedules.--The Board may, by rule, 
     adjust the inspection schedules set under paragraph (1) if 
     the Board finds that different inspection schedules are 
     consistent with the purposes of this Act, the public 
     interest, and the protection of investors.
       (c) Procedures.--The Board shall, in each inspection under 
     this section, and in accordance with its rules for such 
     inspections--
       (1) identify any act or practice or omission to act by the 
     registered public accounting firm, or by any associated 
     person thereof, revealed by such inspection that may be in 
     violation of this Act, the rules of the Board, the rules of 
     the Commission, the firm's own quality control policies, or 
     professional standards;
       (2) report any such act, practice, or omission, if 
     appropriate, to the Commission and each appropriate State 
     regulatory authority; and
       (3) begin a formal investigation or take appropriate 
     disciplinary action, if any, with respect to any such 
     violation, in accordance with this Act and the rules of the 
     Board.
       (d) Conduct of Inspections.--In conducting an inspection of 
     a registered public accounting firm under this section, the 
     Board shall--
       (1) inspect and review selected audit and review 
     engagements of the firm (which may include audit engagements 
     that are the subject of ongoing litigation or other 
     controversy between the firm and 1 or more third parties), 
     performed at various offices and by various associated 
     persons of the firm, as selected by the Board;
       (2) evaluate the sufficiency of the quality control system 
     of the firm, and the manner of the documentation and 
     communication of that system by the firm; and
       (3) perform such other testing of the audit, supervisory, 
     and quality control procedures of the firm as are necessary 
     or appropriate in light of the purpose of the inspection and 
     the responsibilities of the Board.
       (e) Record Retention.--The rules of the Board may require 
     the retention by registered public accounting firms for 
     inspection purposes of records whose retention is not 
     otherwise required by section 103 or the rules issued 
     thereunder.
       (f) Procedures for Review.--The rules of the Board shall 
     provide a procedure for the review of and response to a draft 
     inspection report by the registered public accounting firm 
     under inspection. The Board shall take such action with 
     respect to such response as it considers appropriate 
     (including revising the draft report or continuing or 
     supplementing its inspection activities before issuing a 
     final report), but the text of any such response, 
     appropriately redacted to protect information reasonably 
     identified by the accounting firm as confidential, shall be 
     attached to and made part of the inspection report.
       (g) Report.--A written report of the findings of the Board 
     for each inspection under this section, subject to subsection 
     (h), shall be--
       (1) transmitted, in appropriate detail, to the Commission 
     and each appropriate State regulatory authority, accompanied 
     by any letter or comments by the Board or the inspector, and 
     any letter of response from the registered public accounting 
     firm; and
       (2) made available in appropriate detail to the public 
     (subject to section 105(b)(5)(A), and to the protection of 
     such confidential and proprietary information as the Board 
     may determine to be appropriate, or as may be required by 
     law), except that no portions of the inspection report that 
     deal with criticisms of or potential defects in the quality 
     control systems of the firm under inspection shall be made 
     public if those criticisms or defects are addressed by the 
     firm, to the satisfaction of the Board, not later than 12 
     months after the date of the inspection report.
       (h) Interim Commission Review.--
       (1) Reviewable matters.--A registered public accounting 
     firm may seek review by the Commission, pursuant to such 
     rules as the Commission shall promulgate, if the firm--
       (A) has provided the Board with a response, pursuant to 
     rules issued by the Board under subsection (f), to the 
     substance of particular items in a draft inspection report, 
     and disagrees with the assessments contained in any final 
     report prepared by the Board following such response; or
       (B) disagrees with the determination of the Board that 
     criticisms or defects identified in an inspection report have 
     not been addressed to the satisfaction of the Board within 12 
     months of the date of the inspection report, for purposes of 
     subsection (g)(2).
       (2) Treatment of review.--Any decision of the Commission 
     with respect to a review under paragraph (1) shall not be 
     reviewable under section 25 of the Securities Exchange Act of 
     1934 (15 U.S.C. 78y), or deemed to be ``final agency action'' 
     for purposes of section 704 of title 5, United States Code.
       (3) Timing.--Review under paragraph (1) may be sought 
     during the 30-day period following the

[[Page 12966]]

     date of the event giving rise to the review under 
     subparagraph (A) or (B) of paragraph (1).

     SEC. 105. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.

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

[[Page 12967]]

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

     SEC. 106. FOREIGN PUBLIC ACCOUNTING FIRMS.

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

     SEC. 107. COMMISSION OVERSIGHT OF THE BOARD.

       (a) General Oversight Responsibility.--The Commission shall 
     have oversight and enforcement authority over the Board, as 
     provided in this Act.
       (b) Rules of the Board.--
       (1) Definition.--In this section, the term ``proposed 
     rule'' means any proposed rule of the Board, and any 
     modification of any such rule.
       (2) Prior approval required.--No rule of the Board shall 
     become effective without prior approval of the Commission in 
     accordance with this section, other than as provided in 
     section 103(a)(3)(B) with respect to initial or transitional 
     standards.
       (3) Approval criteria.--The Commission shall approve a 
     proposed rule, if it finds that the rule is consistent with 
     the requirements of this Act and the securities laws, or is 
     necessary or appropriate in the public interest or for the 
     protection of investors.
       (4) Proposed rule procedures.--The provisions of paragraphs 
     (1) through (3) of section 19(b) of the Securities Exchange 
     Act of 1934 (15 U.S.C. 78s(b)) shall govern the proposed 
     rules of the Board, as fully as if the Board were a 
     ``registered securities association'' for purposes of that 
     section 19(b), except that, for purposes of this paragraph--
       (A) the phrase ``consistent with the requirements of this 
     title and the rules and regulations thereunder applicable to 
     such organization'' in section 19(b)(2) of that Act shall be 
     deemed to read ``consistent with the requirements of title I 
     of the Public Company Accounting Reform and Investor 
     Protection Act of 2002, and the rules and regulations issued 
     thereunder applicable to such organization, or as necessary 
     or appropriate in the public interest or for the protection 
     of investors''; and
       (B) the phrase ``otherwise in furtherance of the purposes 
     of this title'' in section 19(b)(3)(C) of that Act shall be 
     deemed to read ``otherwise in furtherance of the purposes of 
     title I of the Public Company Accounting Reform and Investor 
     Protection Act of 2002''.
       (5) Commission authority to amend rules of the board.--The 
     provisions of section 19(c) of the Securities Exchange Act of 
     1934 (15 U.S.C. 78s(c)) shall govern the abrogation, 
     deletion, or addition to portions of the rules of the Board 
     by the Commission as fully as if the Board were a 
     ``registered securities association'' for purposes of that 
     section 19(c), except that the phrase ``to conform its rules 
     to the requirements of this title and the rules and 
     regulations thereunder applicable to such organization, or 
     otherwise in furtherance of the purposes of this title'' in 
     section 19(c) of that Act shall, for purposes of this 
     paragraph, be deemed to read ``to assure the fair 
     administration of the Public Company Accounting Oversight 
     Board, conform the rules promulgated by that Board to the 
     requirements of title I of the Public Company Accounting 
     Reform and Investor Protection Act of 2002, or otherwise 
     further the purposes of that Act, the securities laws, and 
     the rules and regulations thereunder applicable to that 
     Board''.
       (c) Commission Review of Disciplinary Action Taken by the 
     Board.--
       (1) Notice of sanction.--The Board shall promptly file 
     notice with the Commission of any final sanction on any 
     registered public accounting firm or on any associated person 
     thereof, in such form and containing such information as the 
     Commission, by rule, may prescribe.
       (2) Review of sanctions.--The provisions of sections 
     19(d)(2) and 19(e)(1) of the Securities Exchange Act of 1934 
     (15 U.S.C. 78s (d)(2) and (e)(1)) shall govern the review by 
     the Commission of final disciplinary sanctions imposed by the 
     Board (including sanctions imposed under section 105(b)(3) of 
     this Act for noncooperation in an investigation of the 
     Board), as fully as if the Board were a self-regulatory 
     organization and the Commission were the appropriate 
     regulatory agency for such organization for purposes of those 
     sections 19(d)(2) and 19(e)(1), except that, for purposes of 
     this paragraph--
       (A) section 105(e) of this Act (rather than that section 
     19(d)(2)) shall govern the extent to which application for, 
     or institution by the Commission on its own motion of, review 
     of any disciplinary action of the Board operates as a stay of 
     such action;
       (B) references in that section 19(e)(1) to ``members'' of 
     such an organization shall be deemed to be references to 
     registered public accounting firms;
       (C) the phrase ``consistent with the purposes of this 
     title'' in that section 19(e)(1) shall be deemed to read 
     ``consistent with the purposes of this title and title I of 
     the Public Company Accounting Reform and Investor Protection 
     Act of 2002'';
       (D) references to rules of the Municipal Securities 
     Rulemaking Board in that section 19(e)(1) shall not apply; 
     and
       (E) the reference to section 19(e)(2) of the Securities 
     Exchange Act of 1934 shall refer instead to section 107(c)(3) 
     of this Act.
       (3) Commission modification authority.--The Commission may 
     enhance, modify, cancel, reduce, or require the remission of 
     a sanction imposed by the Board upon a registered public

[[Page 12968]]

     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.''.

[[Page 12969]]

       (h) Rule of Construction.--Nothing in this section shall be 
     construed to render either the Board, the standard setting 
     body referred to in subsection (a), or both, subject to 
     procedures in Congress to authorize or appropriate public 
     funds, or to prevent such organization from utilizing 
     additional sources of revenue for its activities, such as 
     earnings from publication sales, provided that each 
     additional source of revenue shall not jeopardize, in the 
     judgment of the Commission, the actual and perceived 
     independence of such organization.

                     TITLE II--AUDITOR INDEPENDENCE

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

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

     SEC. 202. PREAPPROVAL REQUIREMENTS.

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

     SEC. 203. AUDIT PARTNER ROTATION.

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

     SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES.

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

     SEC. 205. CONFORMING AMENDMENTS.

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

     SEC. 206. CONFLICTS OF INTEREST.

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

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

       (a) Study and Review Required.--The Comptroller General of 
     the United States shall

[[Page 12970]]

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

     SEC. 208. COMMISSION AUTHORITY.

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

     SEC. 209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY 
                   AUTHORITIES.

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

                  TITLE III--CORPORATE RESPONSIBILITY

     SEC. 301. PUBLIC COMPANY AUDIT COMMITTEES.

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

     SEC. 302. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.

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

     SEC. 303. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.

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

     SEC. 304. FORFEITURE OF CERTAIN BONUSES AND PROFITS.

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

     SEC. 305. OFFICER AND DIRECTOR BARS AND PENALTIES.

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

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

       (a) Prohibition.--It shall be unlawful for any director or 
     executive officer of an issuer of any equity security (other 
     than an exempted security), directly or indirectly, to 
     purchase, sell, or otherwise acquire or transfer any equity 
     security of the issuer (other than an exempted security), 
     during any blackout period with respect

[[Page 12971]]

     to such equity security, in accordance with any exception 
     provided by rule of the Commission pursuant to subsection 
     (d).
       (b) Effectiveness.--
       (1) Notice requirements.--Except as provided in paragraph 
     (2), no blackout period may take effect earlier than 30 days 
     after the date on which written notice of such blackout 
     period is provided by the plan administrator to the 
     participants or beneficiaries.
       (2) Exception.--The 30-day notice requirement in paragraph 
     (1) shall not apply, and notice under paragraph (1) shall be 
     furnished as soon as is reasonably possible, in any case in 
     which--
       (A) a deferral of the blackout period would violate the 
     requirements of subparagraph (A) or (B) of section 404(a)(1) 
     of the Employment Retirement Income Security Act of 1974, and 
     a fiduciary of the plan so reasonably determines in writing; 
     or
       (B) the inability to provide the 30-day notice is due to 
     events that were unforeseeable, or circumstances beyond the 
     reasonable control of the plan administrator, and a fiduciary 
     of the plan so reasonably determines in writing.
       (3) Written notice.--The notice required to be provided 
     under paragraph (1) shall be in writing, except that such 
     notice may be in electronic form to the extent that such form 
     is reasonably accessible to the recipient.
       (c) Remedy.--
       (1) In general.--Any profit realized by a director or 
     executive officer referred to in subsection (a) from any 
     purchase, sale, or other acquisition or transfer in violation 
     of this section shall inure to and be recoverable by the 
     issuer, irrespective of any intention on the part of such 
     director or executive officer in entering into the 
     transaction.
       (2) Actions to recover profits.--An action to recover 
     profits in accordance with this section may be instituted at 
     law or in equity in any court of competent jurisdiction by 
     the issuer, or by the owner of any security of the issuer in 
     the name and in behalf of the issuer if the issuer fails or 
     refuses to bring such action within 60 days after the date of 
     request, or fails diligently to prosecute the action 
     thereafter, except that no such suit shall be brought more 
     than 2 years after the date on which such profit was 
     realized.
       (d) Rulemaking Authorized.--The Commission may issue rules 
     to clarify the application of this subsection, to ensure 
     adequate notice to all persons affected by this subsection, 
     and to prevent evasion thereof.
       (e) Definitions.--For purposes of this section--
       (1) the term ``blackout period'', with respect to the 
     equity securities of any issuer--
       (A) means any period during which the ability of not fewer 
     than 50 percent of the participants or beneficiaries under 
     all applicable individual account plans maintained by the 
     issuer to purchase, sell, or otherwise acquire or transfer an 
     interest in any equity of such issuer held in such an 
     individual account plan, is suspended by the issuer or a 
     fiduciary of the plan; and
       (B) does not include--
       (i) a period in which the employees of an issuer may not 
     allocate their interests in the individual account plan due 
     to an express investment restriction--

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

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

                TITLE IV--ENHANCED FINANCIAL DISCLOSURES

     SEC. 401. DISCLOSURES IN PERIODIC REPORTS.

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

     SEC. 402. ENHANCED CONFLICT OF INTEREST PROVISIONS.

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

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

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

[[Page 12972]]



     SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.

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

     SEC. 405. EXEMPTION.

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

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

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

     SEC. 407. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT.

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

                 TITLE V--ANALYST CONFLICTS OF INTEREST

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

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

[[Page 12973]]

     2(a)) is amended by inserting ``15A(n),'' before ``15B''.
       (c) Commission Authority.--The Commission may promulgate 
     and amend its regulations, or direct a registered securities 
     association or national securities exchange to promulgate and 
     amend its rules, to carry out section 15A(n) of the 
     Securities Exchange Act of 1934, as added by this section, as 
     is necessary for the protection of investors and in the 
     public interest.

              TITLE VI--COMMISSION RESOURCES AND AUTHORITY

     SEC. 601. AUTHORIZATION OF APPROPRIATIONS.

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

     ``SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

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

     SEC. 602. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.

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

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

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

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

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

[[Page 12974]]



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

       (a) Brokers and Dealers.--Section 15(b)(4) of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78o) is amended--
       (1) by striking subparagraph (F) and inserting the 
     following:
       ``(F) is subject to any order of the Commission barring or 
     suspending the right of the person to be associated with a 
     broker or dealer;''; and
       (2) in subparagraph (G), by striking the period at the end 
     and inserting the following: ``; or
       ``(H) is subject to any final order of a State securities 
     commission (or any agency or officer performing like 
     functions), State authority that supervises or examines 
     banks, savings associations, or credit unions, State 
     insurance commission (or any agency or office performing like 
     functions), an appropriate Federal banking agency (as defined 
     in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
     1813(q))), or the National Credit Union Administration, 
     that--
       ``(i) bars such person from association with an entity 
     regulated by such commission, authority, agency, or officer, 
     or from engaging in the business of securities, insurance, 
     banking, savings association activities, or credit union 
     activities; or
       ``(ii) constitutes a final order based on violations of any 
     laws or regulations that prohibit fraudulent, manipulative, 
     or deceptive conduct.''.
       (b) Investment Advisers.--Section 203(e) of the Investment 
     Advisers Act of 1940 (15 U.S.C. 80b-3(e)) is amended by 
     striking paragraphs (7) and (8) and inserting the following:
       ``(7) is subject to any order of the Commission barring or 
     suspending the right of the person to be associated with an 
     investment adviser; or
       ``(8) is subject to any final order of a State securities 
     commission (or any agency or officer performing like 
     functions), State authority that supervises or examines 
     banks, savings associations, or credit unions, State 
     insurance commission (or any agency or office performing like 
     functions), an appropriate Federal banking agency (as defined 
     in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
     1813(q))), or the National Credit Union Administration, 
     that--
       ``(A) bars such person from association with an entity 
     regulated by such commission, authority, agency, or officer, 
     or from engaging in the business of securities, insurance, 
     banking, savings association activities, or credit union 
     activities; or
       ``(B) constitutes a final order based on violations of any 
     laws or regulations that prohibit fraudulent, manipulative, 
     or deceptive conduct.''.
       (c) Conforming Amendments.--
       (1) Securities exchange act of 1934.--The Securities 
     Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended--
       (A) in section 3(a)(39)(F) (15 U.S.C. 78c(a)(39)(F)), by 
     inserting ``, or is subject to an order or finding,'' before 
     ``enumerated'';
       (B) in each of sections 15(b)(6)(A)(i) (15 U.S.C. 
     78o(b)(6)(A)(i)), paragraphs (2) and (4) of section 15B(c) 
     (15 U.S.C. 78o-4(c)), and subparagraphs (A) and (C) of 
     section 15C(c)(1) (15 U.S.C. 78o-5(c)(1)) by striking ``or 
     omission'' each place that term appears, and inserting ``, or 
     is subject to an order or finding,''; and
       (C) in each of paragraphs (3)(A) and (4)(C) of section 
     17A(c) (15 U.S.C. 78q-1(c)), by inserting ``, or is subject 
     to an order or finding,'' before ``enumerated'' each place 
     that term appears.
       (2) Investment Advisers Act of 1940.--Section 203(f) of the 
     Investment Advisers Act of 1940 (15 U.S.C. 80b-3(f)) is 
     amended, by inserting ``or (3)'' after ``paragraph (2)''.

                     TITLE VII--STUDIES AND REPORTS

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

       (a) Study Required.--The Comptroller General of the United 
     States shall conduct a study--
       (1) to identify--
       (A) the factors that have led to the consolidation of 
     public accounting firms since 1989 and the consequent 
     reduction in the number of firms capable of providing audit 
     services to large national and 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

[[Page 12975]]

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

     SEC. 804. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.

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

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

       Pursuant to section 994 of title 28, United States Code, 
     and in accordance with this section, the United States 
     Sentencing Commission shall review and amend, as appropriate, 
     the Federal Sentencing Guidelines and related policy 
     statements to ensure that--
       (1) the base offense level and existing enhancements 
     contained in United States Sentencing Guideline 2J1.2 
     relating to obstruction of justice are sufficient to deter 
     and punish that activity;
       (2) the enhancements and specific offense characteristics 
     relating to obstruction of justice are adequate in cases 
     where--
       (A) documents and other physical evidence are actually 
     destroyed, altered, or fabricated;
       (B) the destruction, alteration, or fabrication of evidence 
     involves--
       (i) a large amount of evidence, a large number of 
     participants, or is otherwise extensive;
       (ii) the selection of evidence that is particularly 
     probative or essential to the investigation; or
       (iii) more than minimal planning; or
       (C) the offense involved abuse of a special skill or a 
     position of trust;
       (3) the guideline offense levels and enhancements for 
     violations of section 1519 or 1520 of title 18, United States 
     Code, as added by this title, are sufficient to deter and 
     punish that activity;
       (4) the guideline offense levels and enhancements under 
     United States Sentencing Guideline 2B1.1 (as in effect on the 
     date of enactment of this Act) are sufficient for a fraud 
     offense when the number of victims adversely involved is 
     significantly greater than 50;
       (5) a specific offense characteristic enhancing sentencing 
     is provided under United States Sentencing Guideline 2B1.1 
     (as in effect on the date of enactment of this Act) for a 
     fraud offense that endangers the solvency or financial 
     security of a substantial number of victims; and
       (6) the guidelines that apply to organizations in United 
     States Sentencing Guidelines, chapter 8, are sufficient to 
     deter and punish organizational criminal misconduct.

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

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

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

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

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

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

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

     ``Sec. 1348. Securities fraud

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

``1348. Securities fraud.''.

           TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS

     SEC. 901. SHORT TITLE.

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

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

       Section 371 of title 18, United States Code, is amended by 
     striking ``If two or more'' and all that follows through 
     ``If, however,'' and inserting the following:

[[Page 12976]]

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

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

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

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

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

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

       (a) Directive to the United States Sentencing Commission.--
     Pursuant to its authority under section 994(p) of title 18, 
     United States Code, and in accordance with this section, the 
     United States Sentencing Commission shall review and, as 
     appropriate, amend the Federal Sentencing Guidelines and 
     related policy statements to implement the provisions of this 
     title.
       (b) Requirements.--In carrying out this section, the 
     Sentencing Commission shall--
       (1) ensure that the sentencing guidelines and policy 
     statements reflect the serious nature of the offenses and the 
     penalties set forth in this title, the growing incidence of 
     serious fraud offenses which are identified above, and the 
     need to modify the sentencing guidelines and policy 
     statements to deter, prevent, and punish such offenses;
       (2) consider the extent to which the guidelines and policy 
     statements adequately address--
       (A) whether the guideline offense levels and enhancements 
     for violations of the sections amended by this title are 
     sufficient to deter and punish such offenses, and 
     specifically, are adequate in view of the statutory increases 
     in penalties contained in this title; and
       (B) whether a specific offense characteristic should be 
     added in United States Sentencing Guideline section 2B1.1 in 
     order to provide for stronger penalties for fraud when the 
     crime is committed by a corporate officer or director;
       (3) assure reasonable consistency with other relevant 
     directives and sentencing guidelines;
       (4) account for any additional aggravating or mitigating 
     circumstances that might justify exceptions to the generally 
     applicable sentencing ranges;
       (5) make any necessary conforming changes to the sentencing 
     guidelines; and
       (6) assure that the guidelines adequately meet the purposes 
     of sentencing as set forth in section 3553(a)(2) of title 18, 
     United States Code.

     SEC. 906. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.

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

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

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

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

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

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

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

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

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

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

     SEC. 910. AMENDMENT TO THE FEDERAL SENTENCING GUIDELINES.

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

[[Page 12977]]



     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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