[House Report 107-414]
[From the U.S. Government Publishing Office]



107th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     107-414

======================================================================



 
CORPORATE AND AUDITING ACCOUNTABILITY, RESPONSIBILITY, AND TRANSPARENCY 
                              ACT OF 2002

                                _______
                                

 April 22, 2002.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

               MINORITY, ADDITIONAL, AND DISSENTING VIEWS

                        [To accompany H.R. 3763]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 3763) to protect investors by improving the accuracy 
and reliability of corporate disclosures made pursuant to the 
securities laws, and for other purposes, having considered the 
same, report favorably thereon with an amendment and recommend 
that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................    16
Background and Need for Legislation..............................    18
Hearings.........................................................    19
Committee Consideration..........................................    20
Committee Votes..................................................    20
Committee Oversight Findings.....................................    34
Performance Goals and Objectives.................................    34
New Budget Authority, Entitlement Authority, and Tax Expenditures    35
Committee Cost Estimate..........................................    35
Congressional Budget Office Estimate.............................    35
Federal Mandates Statement.......................................    35
Advisory Committee Statement.....................................    35
Constitutional Authority Statement...............................    35
Applicability to Legislative Branch..............................    35
Section-by-Section Analysis of the Legislation...................    36
Changes in Existing Law Made by the Bill, as Reported............    48
Minority, Additional, and Dissenting Views.......................    49

                               Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``Corporate and 
Auditing Accountability, Responsibility, and Transparency Act of 
2002''.
  (b) Table of Contents.--

Sec. 1. Short title; table of contents.
Sec. 2. Auditor oversight.
Sec. 3. Improper influence on conduct of audits.
Sec. 4. Real-time disclosure of financial information.
Sec. 5. Insider trades during pension fund blackout periods prohibited.
Sec. 6. Improved transparency of corporate disclosures.
Sec. 7. Improvements in reporting on insider transactions and 
relationships.
Sec. 8. Codes of conduct.
Sec. 9. Enhanced oversight of periodic disclosures by issuers.
Sec. 10. Retention of records.
Sec. 11. Commission authority to bar persons from serving as officers 
or directors.
Sec. 12. Disgorging insiders profits from trades prior to correction of 
erroneous financial statements.
Sec. 13. Securities and Exchange Commission authority to provide 
relief.
Sec. 14. Study of rules relating to analyst conflicts of interest.
Sec. 15. Review of corporate governance practices.
Sec. 16. Study of enforcement actions.
Sec. 17. Study of credit rating agencies.
Sec. 18. Study of investment banks and other financial institutions.
Sec. 19. Study of model rules for attorneys of issuers.
Sec. 20. Enforcement authority.
Sec. 21. Exclusion for investment companies.
Sec. 22. Definitions.

SEC. 2. AUDITOR OVERSIGHT.

  (a) Certified Financial Statement Requirements.--If a financial 
statement is required by the securities laws or any rule or regulation 
thereunder to be certified by an independent public or certified 
accountant, an accountant shall not be considered to be qualified to 
certify such financial statement, and the Securities and Exchange 
Commission shall not accept a financial statement certified by an 
accountant, unless such accountant--
          (1) is subject to a system of review by a public regulatory 
        organization that complies with the requirements of this 
        section and the rules prescribed by the Commission under this 
        section; and
          (2) has not been determined in the most recent review 
        completed under such system to be not qualified to certify such 
        a statement.
  (b) Establishment of PRO.--The Commission shall by rule establish the 
criteria by which a public regulatory organization may be recognized 
for purposes of this section. Such criteria shall include the following 
requirements:
          (1)(A) The board of such organization shall be comprised of 
        five members, three of whom shall be public members who are not 
        members of the accounting profession and two of whom shall be 
        persons licensed to practice public accounting and who have 
        recent experience in auditing public companies.
          (B) Each member of the board of such organization shall be a 
        person who meets such standards of financial literacy as are 
        determined by the Commission.
          (C) For purposes of this paragraph, a person shall not be 
        considered a member of the accounting profession if such person 
        has not worked in such profession for any of the last two years 
        prior to the date of such person's appointment to the board.
          (2) Such organization is so organized and has the capacity--
                  (A) to be able to carry out the purposes of this 
                section and to comply, and to enforce compliance by 
                accountants and persons associated with accountants, 
                with the provisions of this Act, professional ethics 
                and competency standards, and the rules of the 
                organization;
                  (B) to perform a review of the work product 
                (including the quality thereof) of an accountant or a 
                person associated with an accountant; and
                  (C) to perform a review of any potential conflicts of 
                interest between an accountant (or a person associated 
                with an accountant) and the issuer, the issuer's board 
                of directors and committees thereof, officers, and 
                affiliates of such issuer, that may result in an 
                impairment of auditor independence.
          (3) Such organization shall have the authority to impose 
        sanctions, which, if there is a finding of knowing or 
        intentional misconduct, may include a determination that an 
        accountant is not qualified to certify a financial statement, 
        or any categories of financial statements, required by the 
        securities laws, or that a person associated with an accountant 
        is not qualified to participate in such certification, if, 
        after conducting a review and providing fair procedures and an 
        opportunity for a hearing, the organization finds that--
                  (A) such accountant or person associated with an 
                accountant has violated the standards of independence, 
                ethics, or competency in the profession;
                  (B) such accountant or person associated with an 
                accountant has been found by the Commission or a court 
                of competent jurisdiction to have violated the 
                securities laws or a rule or regulation thereunder 
                (provided in both cases that any applicable time period 
                for appeal has expired);
                  (C) an audit conducted by such accountant or any 
                person associated with an accountant has been 
                materially affected by an impairment of auditor 
                independence;
                  (D) such accountant or person associated with an 
                accountant has performed both auditing services and 
                consulting services in violation of the rules 
                prescribed by the Commission pursuant to subsection 
                (c); or
                  (E) such accountant or any person associated with an 
                accountant has impeded, obstructed, or otherwise not 
                cooperated in such review.
          (4) Any such organization shall disclose publicly, and make 
        available for public comment, proposed procedures and methods 
        for conducting such reviews.
          (5) Any such organization shall have in place procedures to 
        minimize and deter conflicts of interest involving the public 
        members of such organization, and have in place procedures to 
        resolve such conflicts.
          (6) Any such organization shall have in place procedures for 
        notifying the boards of accountancy of the States of the 
        results of reviews and evidence under paragraphs (2) and (3).
          (7) Any such organization shall have in place procedures for 
        notifying the Commission of any findings of such reviews, 
        including any findings regarding suspected violations of the 
        securities laws.
          (8) Any such organization shall consult with boards of 
        accountancy of the States.
          (9) Any such organization shall have in place a mechanism to 
        allow the organization to operate on a self-funded basis. Such 
        funding mechanism shall ensure that such organization is not 
        solely dependent upon members of the accounting profession for 
        such funding and operations.
          (10) Any such organization shall have the authority to 
        request, in a manner established by the Commission, that the 
        Commission, by subpoena or otherwise, compel the testimony of 
        witnesses or the production of any books, papers, 
        correspondence, memoranda, or other records relevant to any 
        accountant review proceeding or necessary or appropriate for 
        the organization to carry out its purposes. The Commission 
        shall comply with any such request from such an organization if 
        the Commission determines that compliance with the request 
        would assist the organization in its accountant review 
        proceeding or in carrying out its purposes, unless the 
        Commission determines that compliance would not be in the 
        public interest. The issuance and enforcement of a subpoena 
        requested under this paragraph shall be deemed to be made 
        pursuant to, and shall be made in accordance with, the 
        provisions of subsections (b) and (c) of section 21 of the 
        Securities and Exchange Act of 1934 (15 U.S.C. 78u(b)-(c)). For 
        purposes of taking evidence, the Commission in its discretion 
        may designate the Board, or any member thereof, as officers 
        pursuant to section 21(b) of such Act.
  (c) Prohibition on the Offer of Both Audit and Consulting Services.--
          (1) Modification of regulations required.--The Commission 
        shall revise its regulations pertaining to auditor independence 
        to require that an accountant shall not be considered 
        independent with respect to an audit client if the accountant 
        provides to the client the following nonaudit services, as such 
        terms are defined in such regulations as in effect on the date 
        of enactment of this Act, and subject to such conditions and 
        exemptions as the Commission shall prescribe:
                  (A) financial information system design or 
                implementation; or
                  (B) internal audit services.
          (2) Review of prohibited nonaudit services.--The Commission 
        is authorized to review the impact on the independence of 
        auditors of the scope of services provided by auditors to 
        issuers in order to determine whether the list of prohibited 
        nonaudit services under paragraph (1) shall be modified. In 
        conducting such review, the Commission shall consider the 
        impact of the provision of a service on an auditor's 
        independence where provision of the service creates a conflict 
        of interest with the audit client.
          (3) Additions by rule.--After conducting the review required 
        by paragraph (2) and at any other time, the Commission may, by 
        rule consistent with the protection of investors and the public 
        interest, modify the list of prohibited nonaudit services under 
        paragraph (1).
          (4) Report.--The Commission shall report to the Committee on 
        Financial Services of the House of Representatives and the 
        Committee on Banking, Housing, and Urban Affairs of the Senate 
        on its conduct of any reviews as required by this section. The 
        report shall include a discussion of regulatory or legislative 
        steps that are recommended or that may be necessary to address 
        concerns identified in the study.
          (5) Conforming revision.--The Commission shall revise its 
        regulations pertaining to accountant fee disclosure items, as 
        set forth in paragraphs (e)(1) through (e)(3) of item 9 from 
        Schedule 14A (17 CFR 240.14a-101), in light of paragraph (1) of 
        this subsection and after making a determination as to whether 
        such disclosures are necessary.
          (6) Deadline for rulemaking.--The Commission shall--
                  (A) within 90 days after the date of enactment of 
                this Act, propose, and
                  (B) within 270 days after such date, prescribe,
        the revisions to its regulations required by this subsection.
  (d) PRO Accountant Review Proceedings.--
          (1) Review proceeding findings.--Any findings made pursuant 
        to an accountant review conducted under this section that a 
        financial statement audited by such accountant and submitted to 
        the Commission may have been materially affected by an 
        impairment of auditor independence, or by a violation of 
        professional ethics and competency standards, shall be 
        submitted to the Commission. The Commission shall promptly 
        notify an issuer of any such finding that relates to the 
        financial statements of such issuer.
          (2) Confidential treatment of proceedings pending sec 
        review.--
                  (A) No disclosure.--Except as otherwise provided in 
                this section, but notwithstanding any other provision 
                of law, neither the Commission, a recognized public 
                regulatory organization, nor any other person shall 
                disclose any information concerning any accountant 
                review proceeding and the findings therein.
                  (B) Specific withholding not authorized.--Nothing in 
                this subsection shall--
                          (i) authorize a recognized public regulatory 
                        organization to withhold information from the 
                        Commission;
                          (ii) authorize such board or the Commission 
                        to withhold information concerning an 
                        accountant review proceeding from an accountant 
                        or person associated with an accountant that is 
                        the subject of such proceeding;
                          (iii) authorize the Commission to withhold 
                        information from Congress; or
                          (iv) prevent the Commission from complying 
                        with a request for information from any other 
                        Federal department or agency requesting 
                        information for purposes within the scope of 
                        its jurisdiction, or complying with an order of 
                        a court of the United States in an action 
                        brought by the United States or the Commission.
                  (C) Duration of withholding.--Neither the Commission 
                nor the recognized public regulatory organization shall 
                disclose the results of any such finding until the 
                completion of any review by the Commission under 
                subsections (e) and (f), or the conclusion of the 30-
                day period for seeking review if no motion seeking 
                review is filed within such period.
                  (D) Treatment under foia.--For purposes of section 
                552 of title 5, United States Code, this subsection 
                shall be considered a statute described in subsection 
                (b)(3)(B) of such section 552.
          (3) Nonpreclusive effect of pro findings.--A finding by a 
        recognized public regulatory organization that an individual 
        audit of an issuer met or failed to meet any applicable 
        standard with respect to the quality of such audit shall not be 
        construed in any action arising out of the securities laws as 
        indicative of compliance or noncompliance with the securities 
        laws or with any standard of liability arising thereunder.
  (e) Review of Sanctions.--
          (1) Notice.--If any recognized public regulatory 
        organization--
                  (A) makes a finding with respect to or imposes any 
                final disciplinary sanction on any accountant;
                  (B) prohibits or limits any person in respect to 
                access to services offered by such organization; or
                  (C) makes a finding with respect to or imposes any 
                final disciplinary sanction on any person associated 
                with an accountant or bars any person from becoming 
                associated with an accountant,
        the recognized public regulatory organization shall promptly 
        submit notice thereof with the Commission. The notice shall be 
        in such form and contain such information as the Commission, by 
        rule, may prescribe as necessary or appropriate in furtherance 
        of the purposes of this section.
          (2) Review by commission.--Any action with respect to which a 
        recognized public regulatory organization is required by 
        paragraph (1) of this subsection to submit notice shall be 
        subject to review by the Commission, on its own motion, or upon 
        application by any person aggrieved thereby filed within 30 
        days after the date such notice was filed with the Commission 
        and received by such aggrieved person, or within such longer 
        period as the Commission may determine. Application to the 
        Commission for review, or the institution of review by the 
        Commission on its own motion, shall not operate as a stay of 
        such action unless the Commission otherwise orders, summarily 
        or after notice and opportunity for hearing on the question of 
        a stay (which hearing may consist solely of the submission of 
        affidavits or presentation of oral arguments). The Commission 
        shall establish for appropriate cases an expedited procedure 
        for consideration and determination of the question of a stay.
  (f) Conduct of Commission Review.--
          (1) Basis for action.--In any proceeding to review a final 
        disciplinary sanction imposed by a recognized public regulatory 
        organization on an accountant or a person associated with such 
        accountant, after notice and opportunity for hearing (which 
        hearing may consist solely of consideration of the record 
        before the recognized public regulatory organization and 
        opportunity for the presentation of supporting reasons to 
        affirm, modify, or set aside the sanction)--
                  (A) if the Commission finds that such accountant or 
                person associated with an accountant has engaged in 
                such acts or practices, or has omitted such acts, as 
                the recognized public regulatory organization has found 
                him to have engaged in or omitted, that such acts or 
                practices, or omissions to act, are in violation of 
                such provisions of this section, or of professional 
                ethics and competency standards, and that such 
                provisions are, and were applied in a manner, 
                consistent with the purposes of this section, the 
                Commission, by order, shall so declare and, as 
                appropriate, affirm the sanction imposed by the 
                recognized public regulatory organization, modify the 
                sanction in accordance with paragraph (2) of this 
                subsection, or remand to the recognized public 
                regulatory organization for further proceedings; or
                  (B) if the Commission does not make any such finding, 
                it shall, by order, set aside the sanction imposed by 
                the recognized public regulatory organization and, if 
                appropriate, remand to the recognized public regulatory 
                organization for further proceedings.
          (2) Reduction of sanctions.--If the Commission, having due 
        regard for the public interest and the protection of investors, 
        finds after a proceeding in accordance with paragraph (1) of 
        this subsection that a sanction imposed by a recognized public 
        regulatory organization upon an accountant or person associated 
        with an accountant imposes any burden on competition not 
        necessary or appropriate in furtherance of the purposes of this 
        Act or is excessive or oppressive, the Commission may cancel, 
        reduce, or require the remission of such sanction.
  (g) Review and Approval of Rules.--
          (1) Submission, publication, and comment.--Each recognized 
        public regulatory organization shall file with the Commission, 
        in accordance with such rules as the Commission may prescribe, 
        copies of any proposed rule or any proposed change in, addition 
        to, or deletion from the rules of such recognized public 
        regulatory organization (hereinafter in this subsection 
        collectively referred to as a ``proposed rule change'') 
        accompanied by a concise general statement of the basis and 
        purpose of such proposed rule change. The Commission shall, 
        upon the filing of any proposed rule change, publish notice 
        thereof together with the terms of substance of the proposed 
        rule change or a description of the subjects and issues 
        involved. The Commission shall give interested persons an 
        opportunity to submit written data, views, and arguments 
        concerning such proposed rule change. No proposed rule change 
        shall take effect unless approved by the Commission or 
        otherwise permitted in accordance with the provisions of this 
        subsection.
          (2) Approval or proceedings.--Within 35 days of the date of 
        publication of notice of the filing of a proposed rule change 
        in accordance with paragraph (1) of this subsection, or within 
        such longer period as the Commission may designate up to 90 
        days of such date if it finds such longer period to be 
        appropriate and publishes its reasons for so finding or as to 
        which the recognized public regulatory organization consents, 
        the Commission shall--
                  (A) by order approve such proposed rule change; or
                  (B) institute proceedings to determine whether the 
                proposed rule change should be disapproved. Such 
                proceedings shall include notice of the grounds for 
                disapproval under consideration and opportunity for 
                hearing and be concluded within 180 days of the date of 
                publication of notice of the filing of the proposed 
                rule change. At the conclusion of such proceedings the 
                Commission, by order, shall approve or disapprove such 
                proposed rule change. The Commission may extend the 
                time for conclusion of such proceedings for up to 60 
                days if it finds good cause for such extension and 
                publishes its reasons for so finding or for such longer 
                period as to which the recognized public regulatory 
                organization consents.
          (3) Basis for approval or disapproval.--The Commission shall 
        approve a proposed rule change of a recognized public 
        regulatory organization if it finds that such proposed rule 
        change is consistent with the requirements of this Act and the 
        rules and regulations thereunder applicable to such 
        organization. The Commission shall disapprove a proposed rule 
        change of a recognized public regulatory organization if it 
        does not make such finding. The Commission shall not approve 
        any proposed rule change prior to the 30th day after the date 
        of publication of notice of the filing thereof, unless the 
        Commission finds good cause for so doing and publishes its 
        reasons for so finding.
          (4) Rules effective upon filing.--
                  (A) Notwithstanding the provisions of paragraph (2) 
                of this subsection, a proposed rule change may take 
                effect upon filing with the Commission if designated by 
                the recognized public regulatory organization as (i) 
                constituting a stated policy, practice, or 
                interpretation with respect to the meaning, 
                administration, or enforcement of an existing rule of 
                the recognized public regulatory organization, (ii) 
                establishing or changing a due, fee, or other charge 
                imposed by the recognized public regulatory 
                organization, or (iii) concerned solely with the 
                administration of the recognized public regulatory 
                organization or other matters which the Commission, by 
                rule, consistent with the public interest and the 
                purposes of this subsection, may specify as outside the 
                provisions of such paragraph (2).
                  (B) Notwithstanding any other provision of this 
                subsection, a proposed rule change may be put into 
                effect summarily if it appears to the Commission that 
                such action is necessary for the protection of 
                investors, or otherwise in accordance with the purposes 
                of this title. Any proposed rule change so put into 
                effect shall be filed promptly thereafter in accordance 
                with the provisions of paragraph (1) of this 
                subsection.
                  (C) Any proposed rule change of a recognized public 
                regulatory organization which has taken effect pursuant 
                to subparagraph (A) or (B) of this paragraph may be 
                enforced by such organization to the extent it is not 
                inconsistent with the provisions of this Act, the 
                securities laws, the rules and regulations thereunder, 
                and applicable Federal and State law. At any time 
                within 60 days of the date of filing of such a proposed 
                rule change in accordance with the provisions of 
                paragraph (1) of this subsection, the Commission 
                summarily may abrogate the change in the rules of the 
                recognized public regulatory organization made thereby 
                and require that the proposed rule change be refiled in 
                accordance with the provisions of paragraph (1) of this 
                subsection and reviewed in accordance with the 
                provisions of paragraph (2) of this subsection, if it 
                appears to the Commission that such action is necessary 
                or appropriate in the public interest, for the 
                protection of investors, or otherwise in furtherance of 
                the purposes of this Act. Commission action pursuant to 
                the preceding sentence shall not affect the validity or 
                force of the rule change during the period it was in 
                effect, shall not be subject to court review, and shall 
                not be deemed to be ``final agency action'' for 
                purposes of section 704 of title 5, United States Code.
  (h) Commission Action To Change Rules.--The Commission, by rule, may 
abrogate, add to, and delete from (hereinafter in this subsection 
collectively referred to as ``amend'') the rules of a recognized public 
regulatory organization as the Commission deems necessary or 
appropriate to insure the fair administration of the recognized public 
regulatory organization, to conform its rules to requirements of this 
Act, the securities laws, and the rules and regulations thereunder 
applicable to such organization, or otherwise in furtherance of the 
purposes of this Act, in the following manner:
          (1) The Commission shall notify the recognized public 
        regulatory organization and publish notice of the proposed 
        rulemaking in the Federal Register. The notice shall include 
        the text of the proposed amendment to the rules of the 
        recognized public regulatory organization and a statement of 
        the Commission's reasons, including any pertinent facts, for 
        commencing such proposed rulemaking.
          (2) The Commission shall give interested persons an 
        opportunity for the oral presentation of data, views, and 
        arguments, in addition to an opportunity to make written 
        submissions. A transcript shall be kept of any oral 
        presentation.
          (3) A rule adopted pursuant to this subsection shall 
        incorporate the text of the amendment to the rules of the 
        recognized public regulatory organization and a statement of 
        the Commission's basis for and purpose in so amending such 
        rules. This statement shall include an identification of any 
        facts on which the Commission considers its determination so to 
        amend the rules of the recognized public regulatory agency to 
        be based, including the reasons for the Commission's 
        conclusions as to any of such facts which were disputed in the 
        rulemaking.
          (4)(A) Except as provided in paragraphs (1) through (3) of 
        this subsection, rulemaking under this subsection shall be in 
        accordance with the procedures specified in section 553 of 
        title 5, United States Code, for rulemaking not on the record.
          (B) Nothing in this subsection shall be construed to impair 
        or limit the Commission's power to make, or to modify or alter 
        the procedures the Commission may follow in making, rules and 
        regulations pursuant to any other authority under the 
        securities laws.
          (C) Any amendment to the rules of a recognized public 
        regulatory organization made by the Commission pursuant to this 
        subsection shall be considered for all purposes to be part of 
        the rules of such recognized public regulatory organization and 
        shall not be considered to be a rule of the Commission.
  (i) Commission Oversight of the PRO.--
          (1) Records and examinations.--A public regulatory 
        organization shall make and keep for prescribed periods such 
        records, furnish such copies thereof, and make and disseminate 
        such reports as the Commission, by rule, prescribes as 
        necessary or appropriate in the public interest, for the 
        protection of investors, or otherwise in furtherance of the 
        purposes of this Act or the securities laws.
          (2) Additional duties; special reviews.--A public regulatory 
        organization shall perform such other duties or functions as 
        the Commission, by rule or order, determines are necessary or 
        appropriate in the public interest or for the protection of 
        investors and to carry out the purposes of this Act and the 
        securities laws, including conducting a special review of a 
        particular public accounting firm's quality control system or a 
        special review of a particular aspect of some or all public 
        accounting firms' quality control systems.
          (3) Annual report; proposed budget.--
                  (A) Submission of annual report and budget.--A public 
                regulatory organization shall submit an annual report 
                and its proposed budget to the Commission for review 
                and approval, by order, at such times and in such form 
                as the Commission shall prescribe.
                  (B) Contents of annual report.--Each annual report 
                required by subparagraph (A) shall include--
                          (i) a detailed description of the activities 
                        of the public regulatory organization;
                          (ii) the audited financial statements of the 
                        public regulatory organization;
                          (iii) a detailed explanation of the fees and 
                        charges imposed by the public regulatory 
                        organization under subsection (b)(9); and
                          (iv) such other matters as the public 
                        regulatory organization or the Commission deems 
                        appropriate.
                  (C) Transmittal of annual report to congress.--The 
                Commission shall transmit each approved annual report 
                received under subparagraph (A) to the Committee on 
                Financial Services of the United States House of 
                Representatives and the Committee on Banking, Housing, 
                and Urban Affairs of the United States Senate. At the 
                same time it transmits a public regulatory 
                organization's annual report under this subparagraph, 
                the Commission shall include a written statement of its 
                views of the functioning and operations of the public 
                regulatory organization.
                  (D) Public availability.--Following transmittal of 
                each approved annual report under subparagraph (C), the 
                Commission and the public regulatory organization shall 
                make the approved annual report publicly available.
          (4) Disapproval of election of pro member.--The Commission is 
        authorized, by order, if in its opinion such action is 
        necessary or appropriate in the public interest, for the 
        protection of investors, or otherwise in furtherance of the 
        purposes of this Act or the securities laws, to disapprove the 
        election of any member of a public regulatory organization if 
        the Commission determines, after notice and opportunity for 
        hearing, that the person elected is unfit to serve on the 
        public regulatory organization.
  (j) Clarification of Application of PRO Authority.--The authority 
granted to any such organization in this section shall only apply to 
the actions of accountants related to the certification of financial 
statements required by securities laws and not other actions or actions 
for other clients of the accounting firm or any accountant that does 
not certify financial statements for publicly traded companies.
  (k) Deadline for Rulemaking.--The Commission shall--
          (1) within 90 days after the date of enactment of this Act, 
        propose, and
          (2) within 270 days after such date, prescribe,
rules to implement this section.
  (l) Effective Date; Transition Provisions.--
          (1) Effective date.--Except as provided in paragraph (2), 
        subsection (a) of this section shall be effective with respect 
        to any certified financial statement for any fiscal year that 
        ends more than one year after the Commission recognizes a 
        public regulatory organization pursuant to this section.
          (2) Delay in establishment of board.--If the Commission has 
        failed to recognize any public regulatory organization pursuant 
        to this section within one year after the date of enactment of 
        this Act, the Commission shall perform the duties of such 
        organization with respect to any certified financial statement 
        for any fiscal year that ends before one year after any such 
        board is recognized by the Commission.

SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.

  (a) Rules To Prohibit.--It shall be unlawful in contravention of such 
rules or regulations as the Commission shall prescribe as necessary and 
appropriate in the public interest or for the protection of investors 
for any officer, director, or affiliated person of an issuer of any 
security registered under section 12 of the Securities Exchange Act of 
1934 (15 U.S.C. 78l) to take any action to fraudulently influence, 
coerce, manipulate, or mislead any independent public or certified 
accountant engaged in the performance of an audit of the financial 
statements of such issuer for the purpose of rendering such financial 
statements materially misleading. In any civil proceeding, the 
Commission shall have exclusive authority to enforce this section and 
any rule or regulation hereunder.
  (b) No Preemption of Other Law.--The provisions of subsection (a) 
shall be in addition to, and shall not supersede or preempt, any other 
provision of law or any rule or regulation thereunder.
  (c) Deadline for Rulemaking.--The Commission shall--
          (1) within 90 days after the date of enactment of this Act, 
        propose, and
          (2) within 270 days after such date, prescribe,
the rules or regulations required by this section.

SEC. 4. REAL-TIME DISCLOSURE OF FINANCIAL INFORMATION.

  (a) Real-Time Issuer Disclosures Required.--
          (1) Obligations.--Every issuer of a security registered under 
        section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 
        78l) shall file with the Commission and disclose to the public, 
        on a rapid and essentially contemporaneous basis, such 
        information concerning the financial condition or operations of 
        such issuer as the Commission determines by rule is necessary 
        in the public interest and for the protection of investors. 
        Such rule shall--
                  (A) specify the events or circumstances giving rise 
                to the obligation to disclose or update a disclosure;
                  (B) establish requirements regarding the rapidity and 
                timeliness of such disclosure;
                  (C) identify the means whereby the disclosure 
                required shall be made, which shall ensure the broad, 
                rapid, and accurate dissemination of the information to 
                the public via electronic or other communications 
                device;
                  (D) identify the content of the information to be 
                disclosed; and
                  (E) without limiting the Commission's general 
                exemptive authority, specify any exemptions or 
                exceptions from such requirements.
          (2) Enforcement.--The Commission shall have exclusive 
        authority to enforce this section and any rule or regulation 
        hereunder in civil proceedings.
  (b) Electronic Disclosure of Insider Transactions.--
          (1) Disclosures of trading.--The Commission shall, by rule, 
        require--
                  (A) that a disclosure required by section 16 of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78p) of the 
                sale of any securities of an issuer, or any security 
                futures product (as defined in section 3(a)(56) of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(56))) 
                or any security-based swap agreement (as defined in 
                section 206B of the Gramm-Leach-Bliley Act) that is 
                based in whole or in part on the securities of such 
                issuer, by an officer or director of the issuer of 
                those securities, or by a beneficial owner of such 
                securities, shall be made available electronically to 
                the Commission and to the issuer by such officer, 
                director, or beneficial owner before the end of the 
                next business day after the day on which the 
                transaction occurs;
                  (B) that the information in such disclosure be made 
                available electronically to the public by the 
                Commission, to the extent permitted under applicable 
                law, upon receipt, but in no case later than the end of 
                the next business day after the day on which the 
                disclosure is received under subparagraph (A); and
                  (C) that, in any case in which the issuer maintains a 
                corporate website, such information shall be made 
                available by such issuer on that website, before the 
                end of the next business day after the day on which the 
                disclosure is received by the Commission under 
                subparagraph (A).
          (2) Transactions included.--The rule prescribed under 
        paragraph (1) shall require the disclosure of the following 
        transactions:
                  (A) Direct or indirect sales or other transfers of 
                securities of the issuer (or any interest therein) to 
                the issuer or an affiliate of the issuer.
                  (B) Loans or other extensions of credit extended to 
                an officer, director, or other person affiliated with 
                the issuer on terms or conditions not otherwise 
                available to the public.
          (3) Other formats; forms.--In the rule prescribed under 
        paragraph (1), the Commission shall provide that electronic 
        filing and disclosure shall be in lieu of any other format 
        required for such disclosures on the day before the date of 
        enactment of this subsection. The Commission shall revise such 
        forms and schedules required to be filed with the Commission 
        pursuant to paragraph (1) as necessary to facilitate such 
        electronic filing and disclosure.

SEC. 5. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS PROHIBITED.

  (a) Prohibition.--It shall be unlawful for any person who is directly 
or indirectly the beneficial owner of more than 10 percent of any class 
of any equity security (other than an exempted security) which is 
registered under section 12 of the Securities Exchange Act of 1934 (15 
U.S.C. 78l) or who is a director or an officer of the issuer of such 
security, directly or indirectly, to purchase (or otherwise acquire) or 
sell (or otherwise transfer) any equity security of any issuer (other 
than an exempted security), during any blackout period with respect to 
such equity security.
  (b) Remedy.--Any profit realized by such beneficial owner, director, 
or officer from any purchase (or other acquisition) or sale (or other 
transfer) in violation of this section shall inure to and be 
recoverable by the issuer irrespective of any intention on the part of 
such beneficial owner, director, or officer in entering into the 
transaction. Suit to recover such profit may be instituted at law or in 
equity in any court of competent jurisdiction by the issuer, or by the 
owner of any security of the issuer in the name and in behalf of the 
issuer if the issuer shall fail or refuse to bring such suit within 60 
days after request or shall fail diligently to prosecute the same 
thereafter; but no such suit shall be brought more than 2 years after 
the date such profit was realized. This subsection shall not be 
construed to cover any transaction where such beneficial owner was not 
such both at the time of the purchase and sale, or the sale and 
purchase, of the security or security-based swap (as defined in section 
206B of the Gramm-Leach-Bliley Act) involved, or any transaction or 
transactions which the Commission by rules and regulations may exempt 
as not comprehended within the purposes of this subsection.
  (c) Rulemaking Permitted.--The Commission may issue rules to clarify 
the application of this subsection, to ensure adequate notice to all 
persons affected by this subsection, and to prevent evasion thereof.
  (d) Definition.--For purposes of this section, the term ``beneficial 
owner'' has the meaning provided such term in rules or regulations 
issued by the Securities and Exchange Commission under section 16 of 
the Securities Exchange Act of 1934 (15 U.S.C. 78p).

SEC. 6. IMPROVED TRANSPARENCY OF CORPORATE DISCLOSURES.

  (a) Modification of Regulations Required.--The Commission shall 
revise its regulations under the securities laws pertaining to the 
disclosures required in periodic financial reports and registration 
statements to require such reports to include adequate and appropriate 
disclosure of--
          (1) the issuer's off-balance sheet transactions and 
        relationships with unconsolidated entities or other persons, to 
        the extent they are not disclosed in the financial statements 
        and are reasonably likely to materially affect the liquidity or 
        the availability of, or requirements for, capital resources, or 
        the financial condition or results of operations of the issuer; 
        and
          (2) loans extended to officers, directors, or other persons 
        affiliated with the issuer on terms or conditions that are not 
        otherwise available to the public.
  (b) Deadline for Rulemaking.--The Commission shall--
          (1) within 90 days after the date of enactment of this Act, 
        propose, and
          (2) within 270 days after such date, prescribe,
the revisions to its regulations required by subsection (a).
  (c) Analysis Required.--
          (1) Transparency, completeness, and usefulness of financial 
        statements.--The Commission shall conduct an analysis of the 
        extent to which, consistent with the protection of investors 
        and the public interest, disclosure of additional or 
        reorganized information may be required to improve the 
        transparency, completeness, or usefulness of financial 
        statements and other corporate disclosures filed under the 
        securities laws.
          (2) Alternatives to be considered.--In conducting the 
        analysis required by paragraph (1), the Commission shall 
        consider--
                  (A) requiring the identification of the key 
                accounting principles that are most important to the 
                issuer's reported financial condition and results of 
                operation, and that require management's most 
                difficult, subjective, or complex judgments;
                  (B) requiring an explanation, where material, of how 
                different available accounting principles applied, the 
                judgments made in their application, and the likelihood 
                of materially different reported results if different 
                assumptions or conditions were to prevail;
                  (C) in the case of any issuer engaged in the business 
                of trading non-exchange traded contracts, requiring an 
                explanation of such trading activities when such 
                activities require the issuer to account for contracts 
                at fair value, but for which a lack of market price 
                quotations necessitates the use of fair value 
                estimation techniques;
                  (D) establishing requirements relating to the 
                presentation of information in clear and understandable 
                format and language; and
                  (E) requiring such other disclosures, included in the 
                financial statements or in other disclosure by the 
                issuer, as would in the Commission's view improve the 
                transparency of such issuer's financial statements and 
                other required corporate disclosures.
          (3) Rules required.--If the Commission, on the basis of the 
        analysis required by this subsection, determines that it is 
        necessary in the public interest or for the protection of 
        investors and would improve the transparency of issuer 
        financial statements, the Commission may prescribe rules 
        reflecting the results of such analysis and the considerations 
        required by paragraph (2). In prescribing such rules, the 
        Commission may seek to minimize the paperwork and cost burden 
        on the issuer consistent with achieving the public interest and 
        investor protection purposes of such rules.

SEC. 7. IMPROVEMENTS IN REPORTING ON INSIDER TRANSACTIONS AND 
                    RELATIONSHIPS.

  (a) Specific Objectives.--The Commission shall initiate a proceeding 
to propose changes in its rules and regulations with respect to 
financial reporting to improve the transparency and clarity of the 
information available to investors and to require increased financial 
disclosure with respect to the following:
          (1) Insider relationships and transactions.--Relationships 
        and transactions--
                  (A) between the issuer, affiliates of the issuer, and 
                officers, directors, or employees of the issuer or such 
                affiliates; and
                  (B) between officers, directors, employees, or 
                affiliates of the issuer and entities that are not 
                otherwise affiliated with the issuer,
        to the extent such arrangement or transaction creates a 
        conflict of interest for such persons. Such disclosure shall 
        provide a description of such elements of the transaction as 
        are necessary for an understanding of the business purpose and 
        economic substance of such transaction (including 
        contingencies). The disclosure shall provide sufficient 
        information to determine the effect on the issuer's financial 
        statements and describe compensation arrangements of interested 
        parties to such transactions.
          (2) Relationships with philanthropic organizations.--
        Relationships between the registrant or any executive officer 
        of the registrant and any not-for-profit organization on whose 
        board a director or immediate family member serves or of which 
        a director or immediate family member serves as an officer or 
        in a similar capacity. Relationships that shall be disclosed 
        include contributions to the organization in excess of $10,000 
        made by the registrant or any executive officer in the last 
        five years and any other activity undertaken by the registrant 
        or any executive officer that provides a material benefit to 
        the organization. Material benefit includes lobbying.
          (3) Insider-controlled affiliates.--Relationships in which 
        the registrant or any executive officer exercises significant 
        control over an entity in which a director or immediate family 
        member owns an equity interest or to which a director or 
        immediate family member has extended credit. Significant 
        control should be defined with reference to the contractual and 
        governance arrangements between the registrant or executive 
        officer, as the case may be, and the entity.
          (4) Joint ownership.--Joint ownership by a registrant or 
        executive officer and a director or immediate family member of 
        any real or personal property.
          (5) Provision of services by related persons.--The provision 
        of any professional services, including legal, financial 
        advisory or medical services, by a director or immediate family 
        member to any executive officer of the registrant in the last 
        five years.
  (b) Deadlines.--The Commission shall complete the rulemaking required 
by this section within 180 days after the date of enactment of this 
Act.

SEC. 8. CODES OF CONDUCT.

  (a) Rules Required.--Within 180 days after the date of enactment of 
this Act, the New York Stock Exchange, the American Stock Exchange and 
the Nasdaq Stock Market (or any successor to such entities), shall file 
with the Commission proposed rule changes that would prohibit the 
listing of any security issued by an issuer that has not adopted a 
senior financial officers code of ethics applicable to its principal 
financial officer, its comptroller or principal accounting officer, or 
persons performing similar functions that establishes such standards as 
are reasonably necessary to promote honest and ethical conduct, the 
avoidance of conflicts of interest, full, fair, accurate, timely and 
understandable disclosure in the issuer's periodic reports and 
compliance with applicable governmental rules and regulations. The 
Commission shall approve such proposed rule changes pursuant to the 
requirement of section 19(b)(2) of the Securities Act of 1934.
  (b) Other Exchanges.--The Commission, by rule or regulation, may 
require any other national securities exchange, to propose rule changes 
necessary to comply with the provisions of subsection (a) of this 
section if the Commission determines such action is necessary or 
appropriate in the public interest and consistent with the protection 
of investors.
  (c) Further Standards.--In addition to the requirements of 
subsections (a) and (b), the Commission may, by rule or regulation, 
prescribe further standards of conduct for senior financial officers as 
necessary or appropriate in the public interest and consistent with the 
protection of investors.
  (d) Changes in Codes of Conduct.--Within 180 days after the date of 
enactment of this Act, the Commission shall revise its regulations 
concerning matters requiring prompt disclosure on Form 8K to require 
the immediate disclosure, by means of such Form and by the Internet or 
other electronic means, by any issuer of any change in, or waiver of, 
the code of ethics of such issuer.

SEC. 9. ENHANCED OVERSIGHT OF PERIODIC DISCLOSURES BY ISSUERS.

  (a) Regular and Systematic Review.--The Securities and Exchange 
Commission shall review disclosures made by issuers pursuant to the 
Securities Exchange Act of 1934 (including reports filed on form 10-K) 
on a basis that is more regular and systematic than that in practice on 
the date of enactment on this Act. Such review shall include a review 
of an issuer's financial statements.
  (b) Risk Rating System.--For purposes of the reviews required by 
subsection (a), the Commission shall establish a risk rating system 
whereby issuers receive a risk rating by the Commission, which shall be 
used to determine the frequency of such reviews. In designing such a 
risk rating system the Commission shall consider, among other factors 
the following:
          (1) Emerging companies with disparities in price to earning 
        ratios.
          (2) Issuers with the largest market capitalization.
          (3) Issuers whose operations significantly impact any 
        material sector of the economy.
          (4) Systemic factors such as the effect on niche markets or 
        important subsectors of the economy.
          (5) Issuers that experience significant volatility in their 
        stock price as compared to other issuers.
          (6) Any other factor the Commission may consider relevant.
  (c) Minimum Review Period.--In no event shall an issuer be reviewed 
less than once every three years by the Commission.
  (d) Prohibition of Disclosure of Risk Rating.--Notwithstanding any 
other provision of law, the Commission shall not disclose the risk 
rating of any issuer described in subsection (b).

SEC. 10. RETENTION OF RECORDS.

  (a) Duty To Retain Records.--Any independent public or certified 
accountant who certifies a financial statement as required by the 
securities laws or any rule or regulation thereunder shall prepare and 
maintain for a period of no less than 7 years, final audit work papers 
and other information related to any accountants report on such 
financial statements in sufficient detail to support the opinion or 
assertion reached in such accountants report. The Commission may 
prescribe rules specifying the application and requirements of this 
section.
  (b) Accountant's Report.--For purposes of subsection (a), the term 
``accountant's report'' means a document in which an accountant 
identifies a financial statement and sets forth his opinion regarding 
such financial statement or an assertion that an opinion cannot be 
expressed.

SEC. 11. COMMISSION AUTHORITY TO BAR PERSONS FROM SERVING AS OFFICERS 
                    OR DIRECTORS.

  (a) Commission Authority To Prohibit Persons From Serving as Officers 
or Directors.--Notwithstanding any other provision of the securities 
laws, in any cease-and-desist proceeding under section 8A(a) of the 
Securities Act of 1933 or section 21C(a) of the Securities and Exchange 
Act of 1934, the Commission may issue an order to prohibit, 
conditionally or unconditionally, permanently or for such period of 
time as it shall determine, any person who has violated section 
17(a)(1) of the Securities Act of 1933 or section 10(b) of the 
Securities Exchange Act of 1934 (or any rule or regulation thereunder) 
from acting as an officer or director of any issuer that has a class of 
securities registered pursuant to section 12 of the Securities Exchange 
Act of 1934 or that is required to file reports pursuant to section 
15(d) of such Act if the person's conduct demonstrates substantial 
unfitness to serve as an officer or director of any such issuer.
  (b) Finding of Substantial Unfitness.--In making any determination 
that a person's conduct demonstrates substantial unfitness to serve as 
an officer or director of any such issuer, the Commission shall 
consider--
          (1) the severity of the persons conduct giving rise to the 
        violation, and the persons role or position when he engaged in 
        the violation;
          (2) the person's degree of scienter;
          (3) the person's economic gain as a result of the violation; 
        and
          (4) the likelihood that the conduct giving rise to the 
        violation, or similar conduct as defined in subsection (a), may 
        recur if the person is not so prohibited.
  (c) Automatic Stay Pending Appeal.--The enforcement of any Commission 
order pursuant to subsection (a) shall be stayed--
          (1) for a period of at least 60 days after the entry of any 
        such order or decision; and
          (2) upon the filing of a timely application for judicial 
        review of such order or decision, pending the entry of a final 
        order resolving the application for judicial review.

SEC. 12. DISGORGING INSIDERS PROFITS FROM TRADES PRIOR TO CORRECTION OF 
                    ERRONEOUS FINANCIAL STATEMENTS.

  (a) Analysis Required.--The Commission shall conduct an analysis of 
whether, and under what conditions, any officer or director of an 
issuer should be required to disgorge profits gained, or losses 
avoided, in the sale of the securities of such issuer during the six 
month period immediately preceding the filing of a restated financial 
statement on the part of such issuer.
  (b) Disgorgement Rules Authorized.--If the Commission determines that 
imposing the requirement described in subsection (a) is necessary or 
appropriate in the public interest or for the protection investors, and 
would not unduly impair the operations of issuers or the orderly 
operation of the securities markets, the Commission shall prescribe a 
rule requiring the disgorgement of all profits gained or losses avoided 
in the sale of the securities of the issuer by any officer or director 
thereof. Such rule shall--
          (1) describe the conditions under which any officer or 
        director shall be required to disgorge profits, including what 
        constitutes a restatement for purposes of operation of the 
        rule;
          (2) establish exceptions and exemptions from such rule as 
        necessary to carry out the purposes of this section;
          (3) identify the scienter requirement that should be used in 
        order to determine to impose the requirement to disgorge; and
          (4) specify that the enforcement of such rule shall lie 
        solely with the Commission, and that any profits so disgorged 
        shall inure to the issuer.
  (c) No Preemption of Other Law.--Unless otherwise specified by the 
Commission, in the case of any rule promulgated pursuant to subsection 
(b), such rule shall be in addition to, and shall not supersede or 
preempt, the Commission's authority to seek disgorgement under any 
other provision of law.

SEC. 13. SECURITIES AND EXCHANGE COMMISSION AUTHORITY TO PROVIDE 
                    RELIEF.

  (a) Proceeds of Enron and Andersen Enforcement Actions.--If in any 
administrative or judicial proceeding brought by the Securities and 
Exchange Commission against--
          (1) the Enron Corporation, any subsidiary or affiliate of 
        such Corporation, or any officer, director, or principal 
        shareholder of such Corporation, subsidiary, or affiliate for 
        any violation of the securities laws; or
          (2) Arthur Andersen L.L.C., any subsidiary or affiliate of 
        Arthur Andersen L.L.C., or any general or limited partner of 
        Arthur Andersen L.L.C., or such subsidiary or affiliate, for 
        any violation of the securities laws with respect to any 
        services performed for or in relation to the Enron Corporation, 
        any subsidiary or affiliate of such Corporation, or any 
        officer, director, or principal shareholder of such 
        Corporation, subsidiary, or affiliate;
the Commission obtains an order providing for an accounting and 
disgorgement of funds, such disgorgement fund (including any addition 
to such fund required or permitted under this section) shall be 
allocated in accordance with the requirements of this section.
  (b) Priority for Former Enron Employees.--The Commission shall, by 
order, establish an allocation system for the disgorgement fund. Such 
system shall provide that, in allocating the disgorgement fund amount 
the victims of the securities laws violations described in subsection 
(a), the first priority shall be given to individuals who were employed 
by the Enron Corporation, or a subsidiary or affiliate of such 
Corporation, and who were participants in an individual account plan 
established by such Corporation, subsidiary, or affiliate. Such 
allocations among such individuals shall be in proportion to the extent 
to which the nonforfeitable accrued benefit of each such individual 
under the plan was invested in the securities of such Corporation, 
subsidiary, or affiliate.
  (c) Addition of Civil Penalties.--If, in any proceeding described in 
subsection (a), the Commission assesses and collects any civil penalty, 
the Commission shall, notwithstanding section 21(d)(3)(C)(i) or 
21A(d)(1) of the Securities Exchange Act of 1934, or any other 
provision of the securities laws, be payable to the disgorgement fund.
  (d) Acceptance of Additional Donations.--The Commission is authorized 
to accept, hold, administer, and utilize gifts, bequests and devises of 
property, both real and personal, to the United States for the 
disgorgement fund. Gifts, bequests, and devises of money and proceeds 
from sales of other property received as gifts, bequests, or devises 
shall be deposited in the disgorgement fund and shall be available for 
allocation in accordance with subsection (b).
  (e) Definitions.--As used in this section:
          (1) Disgorgement fund.--The term ``disgorgement fund'' means 
        a disgorgement fund established in any administrative or 
        judicial proceeding described in subsection (a).
          (2) Subsidiary or affiliate.--The term ``subsidiary or 
        affiliate'' when used in relation to a person means any entity 
        that controls, is controlled by, or is under common control 
        with such person.
          (3) Officer, director, or principal shareholder.--The term 
        ``officer, director, or principal shareholder'' when used in 
        relation to the Enron Corporation, or any subsidiary or 
        affiliate of such Corporation, means any person that is subject 
        to the requirements of section 16 of the Securities Exchange 
        Act of 1934 (15 U.S.C. 78p) in relation to the Enron 
        Corporation, or any subsidiary or affiliate of such 
        Corporation.
          (4) Nonforfeitable; accrued benefit; individual account 
        plan.--The terms ``nonforfeitable'', ``accrued benefit'', and 
        ``individual account plan'' have the meanings provided such 
        terms, respectively, in paragraphs (19), (23), and (34) of 
        section 3 of the Employee Retirement Income Security Act of 
        1974 (29 U.S.C. 1002(19), (23), (34)).

SEC. 14. STUDY OF RULES RELATING TO ANALYST CONFLICTS OF INTEREST.

  (a) Study and Review Required.--The Commission shall conduct a study 
and review of any final rules by any self-regulatory organization 
registered with the Commission related to matters involving equity 
research analysts conflicts of interest. Such study and report shall 
include a review of the effectiveness of such final rules in addressing 
matters relating to the objectivity and integrity of equity research 
analyst reports and recommendations.
  (b) Report Required.--The Commission shall submit a report to the 
Committee on Financial Services of the House of Representatives and the 
Committee on Banking, Housing, and Urban Affairs of the Senate on such 
study and review no later than 180 days after any such final rules by 
any self-regulatory organization registered with the Commission are 
delivered to the Commission. Such report shall include recommendations 
to the Congress, including any recommendations for additional self-
regulatory organization rulemaking regarding matters involving equity 
research analysts. The Commission shall annually submit an update on 
such review.

SEC. 15. REVIEW OF CORPORATE GOVERNANCE PRACTICES.

  (a) Study of Corporate Practices.--The Commission shall conduct a 
study and review of current corporate governance standards and 
practices to determine whether such standards and practices are serving 
the best interests of shareholders. Such study and review shall include 
an analysis of--
          (1) whether current standards and practices promote full 
        disclosure of relevant information to shareholders;
          (2) whether corporate codes of ethics are adequate to protect 
        shareholders, and to what extent deviations from such codes are 
        tolerated;
          (3) to what extent conflicts of interests are aggressively 
        reviewed, and whether adequate means for redressing such 
        conflicts exist;
          (4) to what extent sufficient legal protections exist or 
        should be adopted to ensure that any manager who attempts to 
        manipulate or unduly influence an audit will be subject to 
        appropriate sanction and liability, including liability to 
        investors or shareholders pursuing a private cause of action 
        for such manipulation or undue influence;
          (5) whether rules, standards, and practices relating to 
        determining whether independent directors are in fact 
        independent are adequate;
          (6) whether rules, standards, and practices relating to the 
        independence of directors serving on audit committees are 
        uniformly applied and adequate to protect investor interests;
          (7) whether the duties and responsibilities of audit 
        committees should be established by the Commission; and
          (8) what further or additional practices or standards might 
        best protect investors and promote the interests of 
        shareholders.
  (b) Participation of State Regulators.--In conducting the study 
required under subsection (a), the Commission shall seek the views of 
the securities and corporate regulators of the various States.
  (c) Report Required.--The Commission shall submit a report on the 
analysis required under subsection (a) as a part of the Commission's 
next annual report submitted after the date of enactment of this Act.

SEC. 16. STUDY OF ENFORCEMENT ACTIONS.

  (a) Study Required.--The Commission shall review and analyze all 
enforcement actions by the Commission involving violations of reporting 
requirements imposed under the securities laws, and restatements of 
financial statements, over the last five years to identify areas of 
reporting that are most susceptible to fraud, inappropriate 
manipulation, or inappropriate earnings management, such as revenue 
recognition and the accounting treatment of off-balance sheet special 
purpose entities.
  (b) Report Required.--The Commission shall report its findings to the 
Committee on Financial Services of the House of Representatives and the 
Committee on Banking, Housing, and Urban Affairs of the Senate within 
180 days of the date of enactment of this Act and shall use such 
findings to revise its rules and regulations, as necessary. The report 
shall include a discussion of regulatory or legislative steps that are 
recommended or that may be necessary to address concerns identified in 
the study.

SEC. 17. STUDY OF CREDIT RATING AGENCIES.

  (a) Study Required.--The Commission shall conduct a study of the role 
and function of credit rating agencies in the operation of the 
securities market. Such study shall examine--
          (1) the role of the credit rating agencies in the evaluation 
        of issuers of securities;
          (2) the importance of that role to investors and the 
        functioning of the securities markets;
          (3) any impediments to the accurate appraisal by credit 
        rating agencies of the financial resources and risks of issuers 
        of securities;
          (4) any measures which may be required to improve the 
        dissemination of information concerning such resources and 
        risks when credit rating agencies announce credit ratings;
          (5) any barriers to entry into the business of acting as a 
        credit rating agency, and any measures needed to remove such 
        barriers; and
          (6) any conflicts of interest in the operation of credit 
        rating agencies and measures to prevent such conflicts or 
        ameliorate the consequences of such conflicts.
  (b) Report Required.--The Commission shall submit a report on the 
analysis required by subsection (a) to the President, the Committee on 
Financial Services of the House of Representatives, and the Committee 
on Banking, Housing, and Urban Affairs of the Senate within 180 days 
after the date of enactment of this Act. The report shall include a 
discussion of regulatory or legislative steps that are recommended or 
that may be necessary to address concerns identified in the study.

SEC. 18. STUDY OF INVESTMENT BANKS

  (a) GAO Study.--The Comptroller General shall conduct a study on the 
role played by investment banks and financial advisors in assisting 
public companies in manipulating their earnings and obfuscating their 
true financial condition. The study should address the role of the 
investment banks--
          (1) in the collapse of the Enron Corporation, including with 
        respect to the design and implementation of derivatives 
        transactions, transactions involving special purpose vehicles, 
        and other financing arrangements that may have had the effect 
        of altering the company's reported financial statements in ways 
        that obscured the true financial picture of the company;
          (2) in the failure of Global Crossing, including with respect 
        to transactions involving swaps of fiber optic cable capacity, 
        in designing transactions that may have had the effect of 
        altering the company's reported financial statements in ways 
        that obscured the true financial picture of the company; and
          (3) generally, in creating and marketing transactions 
        designed solely to enable companies to manipulate revenue 
        streams, obtain loans, or move liabilities off balance sheets 
        without altering the economic and business risks faced by the 
        companies or any other mechanism to obscure a company's 
        financial picture.
  (b) Report.--The General Accounting Office shall report to the 
Congress within 180 days after the date of enactment of this Act on the 
results of the study required by this section. The report shall include 
a discussion of regulatory or legislative steps that are recommended or 
that may be necessary to address concerns identified in the study.

SEC. 19. STUDY OF MODEL RULES FOR ATTORNEYS OF ISSUERS.

  (a) In General.--The Comptroller General shall conduct a study of the 
Model Rules of Professional Conduct promulgated by the American Bar 
Association and rules of professional conduct applicable to attorneys 
established by the Commission to determine--
          (1) whether such rules provide sufficient guidance to 
        attorneys representing corporate clients who are issuers 
        required to file periodic disclosures under section 13 or 15 of 
        the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o), as to 
        the ethical responsibilities of such attorneys to--
                  (A) warn clients of possible fraudulent or illegal 
                activities of such clients and possible consequences of 
                such activities;
                  (B) disclose such fraudulent or illegal activities to 
                appropriate regulatory or law enforcement authorities; 
                and
                  (C) manage potential conflicts of interests with 
                clients; and
          (2) whether such rules provide sufficient protection to 
        corporate shareholders, especially with regards to conflicts of 
        interest between attorneys and their corporate clients.
  (b) Report Required.--The Comptroller General shall report to the 
Committee on Financial Services of the House of Representatives and the 
Committee on Banking, Housing, and Urban Affairs of the Senate on the 
results of the study required by this section. Such report shall 
include any recommendations of the General Accounting Office with 
regards to--
          (1) possible changes to the Model Rules and the rules of 
        professional conduct applicable to attorneys established by the 
        Commission to provide increased protection to shareholders;
          (2) whether restrictions should be imposed to require that an 
        attorney, having represented a corporation or having been 
        employed by a firm which represented a corporation, may not be 
        employed as general counsel to that corporation until a certain 
        period of time has expired; and
          (3) regulatory or legislative steps that are recommended or 
        that may be necessary to address concerns identified in the 
        study.

SEC. 20. ENFORCEMENT AUTHORITY.

  For the purposes of enforcing and carrying out this Act, the 
Commission shall have all of the authorities granted to the Commission 
under the securities laws. Actions of the Commission under this Act, 
including actions on rules or regulations, shall be subject to review 
in the same manner as actions under the securities laws.

SEC. 21. EXCLUSION FOR INVESTMENT COMPANIES.

  Sections 4, 6, 9, and 15 of this Act shall not apply to an investment 
company registered under section 8 of the Investment Company Act of 
1940 (15 U.S.C. 80a-8).

SEC. 22. DEFINITIONS.

  As used in this Act:
          (1) Blackout period.--The term ``blackout period'' with 
        respect to the equity securities of any issuer--
                  (A) means any period during which the ability of at 
                least fifty percent of the participants or 
                beneficiaries under all applicable individual account 
                plans maintained by the issuer to purchase (or 
                otherwise acquire) or sell (or otherwise transfer) an 
                interest in any equity of such issuer is suspended by 
                the issuer or a fiduciary of the plan; but
                  (B) does not include--
                          (i) a period in which the employees of an 
                        issuer may not allocate their interests in the 
                        individual account plan due to an express 
                        investment restriction--
                                  (I) incorporated into the individual 
                                account plan; and
                                  (II) timely disclosed to employees 
                                before joining the individual account 
                                plan or as a subsequent amendment to 
                                the plan; or
                          (ii) any suspension described in subparagraph 
                        (A) that is imposed solely in connection with 
                        persons becoming participants or beneficiaries, 
                        or ceasing to be participants or beneficiaries, 
                        in an applicable individual account plan by 
                        reason of a corporate merger, acquisition, 
                        divestiture, or similar transaction.
          (2) Boards of accountancy of the states.--The term ``boards 
        of accountancy of the States'' means any organization or 
        association chartered or approved under the law of any State 
        with responsibility for the registration, supervision, or 
        regulation of accountants.
          (3) Commission.--The term ``Commission'' means the Securities 
        and Exchange Commission.
          (4) Individual account plan.--The term ``individual account 
        plan'' has the meaning provided such term in section 3(34) of 
        the Employee Retirement Income Security Act of 1974 (29 U.S.C. 
        1002(34)).
          (5) Issuer.--The term ``issuer'' shall have the meaning set 
        forth in section 2(a)(4) of the Securities Act of 1933 (15 
        U.S.C. 77b(a)(4)).
          (6) Person associated with an accountant.--The term ``person 
        associated with an accountant'' means any partner, officer, 
        director, or manager of such accountant (or any person 
        occupying a similar status or performing similar functions), 
        any person directly or indirectly controlling, controlled by, 
        or under common control with such accountant, or any employee 
        of such accountant who performs a supervisory role in the 
        auditing process.
          (7) Recognized public regulatory organization.--The term 
        ``recognized public regulatory organization'' means a public 
        regulatory organization that the Commission has recognized as 
        meeting the criteria established by the Commission under 
        subsection (b) of section 2.
          (8) Securities laws.--The term ``securities laws'' means the 
        Securities Act of 1933 (15 U.S.C. 77a et seq.), the Securities 
        Exchange Act of 1934 (15 U.S.C. 78a et seq.), the Trust 
        Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the Investment 
        Company Act of 1940 (15 U.S.C. 80a-1 et seq.), the Investment 
        Advisers Act of 1940 (15 U.S.C. 80b et seq.), and the 
        Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa et 
        seq.), notwithstanding any contrary provision of any such Act.

                          Purpose and Summary

    H.R. 3763, the Corporate and Auditing Accountability, 
Responsibility, and Transparency Act of 2002, will protect 
investors by improving the accuracy and reliability of 
corporate disclosures made pursuant to the securities laws. The 
bill achieves this goal through increased supervision of 
accountants that audit public companies, strengthened corporate 
responsibility, increased transparency of corporate financial 
statements, and protections for employee access to retirement 
accounts.
    With regard to increasing the supervision of accountants, 
the purpose of the legislation is to allow for the creation of 
a public regulatory organization or organizations, comprised of 
persons skilled and knowledgeable in issues related to the 
audit of public companies, to perform quality or other reviews 
of the activities of certified public accountants who report on 
financial statements that are required to be filed with the 
Securities and Exchange Commission (SEC). The legislation 
envisions that such an organization will enforce compliance by 
accountants with professional ethics and competency standards 
applicable to audits of such financial statements and establish 
such rules as are deemed necessary to provide for their review 
and enforcement, and provides for the oversight of such 
organizations by the Commission.
    The legislation also requires that the SEC promulgate rules 
that would bar the provision by auditors of certain nonaudit 
services to their audit clients. The Committee heard testimony 
that two nonaudit services--financial systems design and 
implementation and internal audit outsourcing--were perceived 
to raise issues about auditor independence. Because of the 
importance of public perceptions in this area, the Committee 
believes these services should be prohibited. The SEC had 
proposed to prohibit them during a rulemaking in 2000, but 
ultimately decided to allow them, subject to certain 
conditions.
    Although financial systems and internal audit work are the 
two nonaudit services that have raised significant investor 
concerns, the SEC is also authorized to modify its rules if 
auditing firms begin to offer other services that raise 
similarly significant independence concerns. Indeed, it is 
appropriate that these issues be considered carefully by an 
entity with the Commission's resources and expertise, and that 
whatever standards are established apply uniformly to public 
companies throughout the markets. A non-federal approach would 
lead to uncertainty in our capital markets, particularly if the 
standards applicable to public companies and audit firms varied 
by jurisdiction. The Committee believes that it is appropriate 
to continue dealing with nonaudit services by having the 
Commission proscribe specific services rather than casting 
doubt on a broad range of nonaudit services. In this regard, 
the Committee heard testimony that a broader ban on nonaudit 
services could undermine rather than improve audit quality, 
since certain such services can improve the auditor's 
understanding of the audit client's business activities. 
Likewise, a broader ban could reduce corporate efficiencies and 
impair auditing firms' ability to attract and retain tax and 
other nonaudit personnel who are essential to the audit 
process.
    The legislation will also ensure that the SEC has 
sufficient authority to bar individuals from serving as 
officers or directors of public companies if they demonstrate 
they are substantially unfit to serve and that company 
officials disgorge any profits they receive from selling their 
own shares of their company's stock prior to a restatement of 
the company's financial statements. The bill also prohibits any 
company official from fraudulently misleading an auditor and 
requires the SEC to conduct studies of several areas related to 
corporate responsibility in order to evaluate other areas of 
corporate conduct and disclosure which may need reform.
    The legislation requires the SEC to issue rules increasing 
the accuracy and transparency of company disclosures and will 
strengthenthe SEC's procedures for reviewing the financial 
statements of issuers that play a significant role in the economy. 
Further, the bill will require that the SEC explore the effectiveness 
of SRO rules relating to analysts, and report on the role and function 
of credit rating agencies.
    Finally, the legislation will protect employee access to 
their retirement accounts by preventing company insiders from 
trading their own shares in a company when their employees 
cannot do so because of a ``blackout'' in a company sponsored 
employee retirement account.
    The legislation is also designed to strengthen the SEC's 
procedures for reviewing the financial statements of issuers 
that play a significant role in the economy, explore the 
effectiveness of SRO rules relating to analysts, and report on 
the role and function of credit rating agencies.

                  Background and Need for Legislation

    The Federal securities laws are designed to ensure that 
public companies provide investors with full and accurate 
disclosure of the true financial condition of the company. 
Following the bankruptcies of Enron Corporation and Global 
Crossing LLC, and restatements of earnings by several prominent 
market participants, regulators, investors and others expressed 
concern about the adequacy of the current disclosure regime for 
public companies.
    Additionally, they expressed concerns about the role of 
auditors in approving corporate financial statements. Questions 
regarding the independence of auditors of public companies led 
to calls for greater supervision of the profession. The SEC 
raised the need for the creation of a new oversight body to 
review compliance of public auditors with the profession's 
standards of ethics and competency; this suggestion received 
widespread support.
    The bankruptcy of Enron Corporation also raised issues 
relating to the security of employee retirement accounts. When 
allegations arose that some Enron insiders were able to sell 
their company stock even as Enron employees were prohibited 
from doing so because of an administrative lockdown in the 
company's retirement plan, new calls arose for protecting the 
access of employees to their accounts to the same degree as 
insiders.
    The securities laws, and in particular the Securities 
Exchange Act of 1934, provide a host of protections for 
investors with regard to their access to company information. 
Reflecting the technology available to public companies and 
investors at that time, the securities laws largely reflect the 
paper-based system of reporting information that was prevalent 
up until the advent of the electronic age. With the creation of 
the internet and continuous televised coverage of the capital 
markets, the regulatory regime for speeding the availability of 
company information has been unable to keep pace with the 
nearly instantaneous demand for investor access to that 
information. On-line trading of securities broadly expanded 
both the number of participants in the securities markets and 
the volume of trading in those markets. This development also 
heightened the need for more rapid disclosure of company news.
    The increased public participation in the securities 
markets and the broader coverage of those markets also raised 
the profile of securities analysts that provide recommendations 
regarding equity securities. Responding to the concerns of some 
that analysts for companies that also underwrite and trade in 
the securities markets, the Subcommittee on Capital Markets, 
Insurance and Government Sponsored Enterprises held a series of 
hearings on the role of analysts in reporting on equity 
securities. Following these hearings, the securities industry 
developed a statement of best practices guiding analysts and 
their employers in avoiding conflicts of interest. This 
statement was later followed by a proposed rule by the self 
regulatory organizations (SROs) establishing guidelines for 
analysts and their employers to ensure that analyst 
recommendations are fair and unbiased. This proposal is 
currently under review by the SEC.
    The Committee's hearings on the Enron matter, the collapse 
of Global Crossing LLC, and the operations of the Nation's 
capital markets all indicated that reforms were necessary both 
for the regulators and the regulated. Further, the President's 
Plan to Improve Corporate Responsibility and Protect America's 
Investors, announced on March 7, 2002, outlined a path by which 
corporations and their investors can continue their partnership 
in growing the Nation's economy, and do so on fair and equal 
footing. This legislation responds to the problems of the 
marketplace through a fair and balanced approach that ensures 
that the Nation's capital markets continue to be the strongest 
in the world.

                                Hearings

    On March 13 and March 20, 2002, the Committee held 
legislative hearings on H.R. 3763. The following witnesses 
testified on March 13: former SEC Chairman Roderick Hills; Mr. 
Marc Lackritz, President, Securities Industry Association; Mr. 
Barry Melancon, President and CEO, American Institute of 
Certified Public Accountants; Mr. James Glassman, American 
Enterprise Institute; Mr. Ted White, California Public 
Employees' Retirement System; Mr. Lynn Turner, former Chief 
Accountant, Securities and Exchange Commission; and Ms.Barbara 
Roper, Director of Investor Protection for the Consumer Federation of 
America.
    On March 20, the following witnesses testified: SEC 
Chairman Harvey Pitt; Mr. Franklin Raines, appearing on behalf 
of the Business Roundtable; Mr. Phillip Livingston, President 
and CEO, Financial Executives International; Mr. H. Carl 
McCall, Comptroller, State of New York; Mr. Joseph V. DelRaso, 
Pepper Hamilton LLP; Mr. Jerry Jasinowski, President, National 
Association of Manufacturers; and Mr. Peter Chapman, TIAA-CREF. 
The Committee also received the written testimony of Deputy 
Undersecretary of the Treasury Mr. Peter Fisher.
    Pursuant to clause 2(j)(1) of rule XI of the Rules of the 
House of Representatives and rule 3(d) of the rules of the 
Committee on Financial Services, the Committee held another day 
of hearings at the request of the minority on April 9, 2002. 
The following witnesses testified: Mr. David Walker, 
Comptroller General of the United States, General Accounting 
Office; Mr. Richard Breeden, former Chairman, Securities and 
Exchange Commission; Mr. Donald Langevoort, Professor of Law, 
Georgetown University Law Center; and Mr. Damon Silvers, 
Associate General Counsel, AFL-CIO.

                        Committee Consideration

    The Subcommittee on Capital Markets, Insurance, and 
Government Sponsored Enterprises was discharged from the 
further consideration of H.R. 3763 on April 8, 2002.
    The Committee on Financial Services met in open session on 
April 11 and April 16, 2002 and ordered H.R. 3763 reported to 
the House with a favorable recommendation by a record vote of 
49 yeas and 12 nays, a quorum being present.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. A 
motion by Mr. Oxley to report the bill to the House with a 
favorable recommendation was agreed to by a record vote of 49 
yeas and 12 nays (Record vote no. 37), a quorum being present. 
The names of members voting for and against follow:
        YEAS                          NAYS
Mr. Oxley                           Mr. LaFalce
Mr. Leach                           Mr. Frank
Mrs. Roukema                        Mr. Kanjorski
Mr. Bereuter                        Ms. Waters
Mr. Baker                           Mr. Sanders
Mr. Bachus                          Mrs. Maloney of New York
Mr. Castle                          Mr. Ackerman
Mr. King                            Ms. Lee
Mr. Royce                           Mr. Inslee
Mr. Ney                             Ms. Schakowsky
Mr. Barr of Georgia                 Mr. Capuano
Mrs. Kelly                          Mr. Clay
Mr. Gillmor
Mr. Cox
Mr. Weldon of Florida
Mr. Ryun of Kansas
Mr. LaTourette
Mr. Manzullo
Mr. Ose
Mrs. Biggert
Mr. Green of Wisconsin
Mr. Toomey
Mr. Shays
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Watt of North Carolina
Mr. Bentsen
Mr. Maloney of Connecticut
Ms. Hooley of Oregon
Ms. Carson of Indiana
Mr. Sherman
Mr. Sandlin
Mr. Moore
Mr. Gonzalez
Mr. Ford
Mr. Hinojosa
Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
Mr. Israel
Mr. Ross

    Record votes were held on the adoption of the following 
amendments. The names of members voting for and against follow:

    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce (as modified by unanimous consent), no. 1a, 
establishing the Public Accounting Regulatory Board, was not 
agreed to by a record vote of 26 yeas and 33 nays (Record vote 
no. 25).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Leach
Mr. Kanjorski                       Mr. Bereuter
Ms. Waters                          Mr. Baker
Mr. Sanders                         Mr. Castle
Mrs. Maloney of New York            Mr. King
Mr. Gutierrez                       Mr. Royce
Mr. Watt of North Carolina          Mr. Ney
Mr. Ackerman                        Mr. Barr of Georgia
Ms. Hooley of Oregon                Mrs. Kelly
Ms. Carson of Indiana               Mr. Weldon of Florida
Mr. Sherman                         Mr. Ryun of Kansas
Mr. Sandlin                         Mr. Riley
Mr. Meeks of New York               Mr. LaTourette
Ms. Lee                             Mr. Manzullo
Mr. Mascara                         Mr. Ose
Mr. Inslee                          Mrs. Biggert
Ms. Schakowsky                      Mr. Green of Wisconsin
Mr. Moore                           Mr. Toomey
Mr. Gonzalez                        Mr. Shadegg
Mrs. Jones of Ohio                  Mr. Fossella
Mr. Capuano                         Mr. Gary G. Miller of
Mr. Hinojosa                          California
Mr. Clay                            Mr. Cantor
Mr. Israel                          Mr. Grucci
Mr. Ross                            Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Bentsen
                                    Mr. Maloney of Connecticut
                                    Mr. Lucas of Kentucky
                                    Mr. Shows

    An amendment to the amendment in the nature of a substitute 
by Mrs. Biggert, no. 1b, disgorgement of bonuses and other 
incentives, as amended, part 1 (page 1, line 1 through page 3, 
line 13) was agreed to by a voice vote and part 2 (page 3, line 
14 through page 5, line 2), was agreed to by a record vote 36 
yeas and 25 nays (Record vote no. 28).
        YEAS                          NAYS
Mr. Oxley                           Mr. LaFalce
Mr. Leach                           Mr. Frank
Mr. Bereuter                        Mr. Kanjorski
Mr. Baker                           Ms. Waters
Mr. Bachus                          Mr. Sanders
Mr. Castle                          Mrs. Maloney of New York
Mr. King                            Mr. Watt of North Carolina
Mr. Royce                           Mr. Ackerman
Mr. Lucas of Oklahoma               Mr. Bentsen
Mr. Ney                             Mr. Maloney of Connecticut
Mr. Barr of Georgia                 Ms. Hooley of Oregon
Mrs. Kelly                          Ms. Carson of Indiana
Mr. Paul                            Mr. Sherman
Mr. Gillmor                         Mr. Meeks of New York
Mr. Cox                             Ms. Lee
Mr. Weldon of Florida               Mr. Mascara
Mr. Ryun of Kansas                  Mr. Inslee
Mr. LaTourette                      Ms. Schakowsky
Mr. Manzullo                        Mr. Moore
Mr. Jones of North Carolina         Mr. Gonzalez
Mr. Ose                             Mrs. Jones of Ohio
Mrs. Biggert                        Mr. Capuano
Mr. Green of Wisconsin              Mr. Shows
Mr. Toomey                          Mr. Crowley
Mr. Shays                           Mr. Ross
Mr. Shadegg
Mr. Fossella
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Lucas of Kentucky

    An amendment by Mr. LaFalce to the amendment by Mrs. 
Biggert, no. 1b(2), addressing the disgorgement of bonuses and 
other incentives, was not agreed to by a record vote of 25 yeas 
and 30 nays (Record vote no. 26).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Bereuter
Mr. Kanjorski                       Mr. Baker
Ms. Waters                          Mr. Bachus
Mrs. Maloney of New York            Mr. Castle
Mr. Watt of North Carolina          Mr. King
Mr. Bentsen                         Mr. Royce
Mr. Maloney of Connecticut          Mr. Ney
Ms. Hooley of Oregon                Mrs. Kelly
Ms. Carson of Indiana               Mr. Paul
Mr. Sherman                         Mr. Weldon of Florida
Mr. Sandlin                         Mr. Ryun of Kansas
Mr. Meeks of New York               Mr. Riley
Ms. Lee                             Mr. LaTourette
Mr. Mascara                         Mr. Manzullo
Mr. Inslee                          Mr. Ose
Mr. Moore                           Mrs. Biggert
Mr. Gonzalez                        Mr. Green of Wisconsin
Mrs. Jones of Ohio                  Mr. Toomey
Mr. Capuano                         Mr. Shadegg
Mr. Hinojosa                        Mr. Fossella
Mr. Shows                           Mr. Gary G. Miller of
Mr. Crowley                           California
Mr. Clay                            Mr. Cantor
Mr. Israel                          Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Lucas of Kentucky

    An amendment by Mr. LaFalce to the amendment by Mrs. 
Biggert, no. 1b(4), allowing for the removal of unfit corporate 
officers or directors and prohibiting unfit persons from 
serving as an officer or director, was not agreed to by a 
record vote for 24 yeas and 25 nays (Record vote no. 27).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Leach
Mr. Kanjorski                       Mr. Bereuter
Ms. Waters                          Mr. Baker
Mr. Sanders                         Mr. Castle
Mrs. Maloney of New York            Mr. King
Mr. Gutierrez                       Mr. Ney
Mr. Watt of North Carolina          Mr. Barr of Georgia
Mr. Ackerman                        Mrs. Kelly
Mr. Bentsen                         Mr. Weldon of Florida
Mr. Maloney of Connecticut          Mr. Ryun of Kansas
Ms. Hooley of Oregon                Mr. LaTourette
Ms. Carson of Indiana               Mr. Jones of North Carolina
Mr. Sherman                         Mrs. Biggert
Mr. Mascara                         Mr. Green of Wisconsin
Mr. Inslee                          Mr. Toomey
Ms. Schakowsky                      Mr. Shays
Mr. Gonzalez                        Mr. Fossella
Mr. Capuano                         Mr. Gary G. Miller of
Mr. Lucas of Kentucky                  California
Mr. Shows                           Mr. Cantor
Mr. Crowley                         Mr. Grucci
Mr. Israel                          Ms. Hart
Mr. Ross                            Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi

    An amendment to the amendment in the nature of a substitute 
by Mr. Sherman, no. 1k, providing for auditor capital 
requirements, was not agreed to by a record vote of 9 yeas and 
49 nays (Record vote no. 29).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Sanders                         Mr. Leach
Mr. Gutierrez                       Mr. Bereuter
Mr. Sherman                         Mr. Baker
Mr. Sandlin                         Mr. Bachus
Mr. Meeks of New York               Mr. Castle
Ms. Lee                             Mr. King
Ms. Schakowsky                      Mr. Royce
Mr. Clay                            Mr. Ney
                                    Mr. Barr of Georgia
                                    Mrs. Kelly
                                    Mr. Paul
                                    Mr. Gillmor
                                    Mr. Weldon of Florida
                                    Mr. Ryun of Kansas
                                    Mr. LaTourette
                                    Mr. Manzullo
                                    Mrs. Biggert
                                    Mr. Green of Wisconsin
                                    Mr. Toomey
                                    Mr. Shays
                                    Mr. Shadegg
                                    Mr. Fossella
                                    Mr. Gary G. Miller of
                                      California
                                    Mr. Cantor
                                    Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Tiberi
                                    Mr. Frank
                                    Mr. Kanjorski
                                    Ms. Waters
                                    Mrs. Maloney of New York
                                    Mr. Watt of North Carolina
                                    Mr. Bentsen
                                    Mr. Maloney of Connecticut
                                    Ms. Hooley of Oregon
                                    Ms. Carson of Indiana
                                    Mr. Mascara
                                    Mr. Inslee
                                    Mr. Moore
                                    Mrs. Jones of Ohio
                                    Mr. Capuano
                                    Mr. Lucas of Kentucky
                                    Mr. Shows
                                    Mr. Crowley
                                    Mr. Israel
                                    Mr. Ross

    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1l, requiring that the CEO or CFO must 
certify financial statements, was not agreed to by a record 
vote of 29 yeas and 30 nays (Record vote no. 30).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Leach
Mr. Kanjorski                       Mr. Bereuter
Ms. Waters                          Mr. Baker
Mr. Sanders                         Mr. Castle
Mrs. Maloney of New York            Mr. King
Mr. Gutierrez                       Mr. Royce
Mr. Watt of North Carolina          Mr. Ney
Mr. Bentsen                         Mr. Barr of Georgia
Mr. Maloney of Connecticut          Mrs. Kelly
Ms. Hooley of Oregon                Mr. Paul
Ms. Carson of Indiana               Mr. Gillmor
Mr. Sherman                         Mr. Weldon of Florida
Mr. Sandlin                         Mr. Ryun of Kansas
Mr. Meeks of New York               Mr. LaTourette
Ms. Lee                             Mr. Manzullo
Mr. Mascara                         Mrs. Biggert
Mr. Inslee                          Mr. Green of Wisconsin
Ms. Schakowsky                      Mr. Toomey
Mr. Moore                           Mr. Shays
Mr. Gonzalez                        Mr. Shadegg
Mrs. Jones of Ohio                  Mr. Fossella
Mr. Capuano                         Mr. Cantor
Mr. Hinojosa                        Mr. Grucci
Mr. Shows                           Ms. Hart
Mr. Crowley                         Mrs. Capito
Mr. Clay                            Mr. Ferguson
Mr. Israel                          Mr. Rogers of Michigan
Mr. Ross                            Mr. Tiberi
                                    Mr. Lucas of Kentucky

    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce (as modified by unanimous consent), no. 1m, 
addressing analysts conflicts of interest, was not agreed to by 
a record vote of 25 yeas and 37 nays (Record vote no. 31).
        YEAS                          NAYS
Mr. Leach                           Mr. Oxley
Mr. Bachus                          Mr. Bereuter
Mr. Castle                          Mr. Baker
Mr. LaFalce                         Mr. King
Mr. Frank                           Mr. Royce
Mr. Kanjorski                       Mr. Ney
Ms. Waters                          Mr. Barr of Georgia
Mr. Sanders                         Mrs. Kelly
Mrs. Maloney of New York            Mr. Paul
Mr. Gutierrez                       Mr. Gillmor
Mr. Watt of North Carolina          Mr. Cox
Ms. Carson of Indiana               Mr. Weldon of Florida
Mr. Sherman                         Mr. Ryun of Kansas
Mr. Sandlin                         Mr. LaTourette
Mr. Meeks of New York               Mr. Manzullo
Ms. Lee                             Mr. Ose
Mr. Mascara                         Mrs. Biggert
Mr. Inslee                          Mr. Toomey
Ms. Schakowsky                      Mr. Shays
Mr. Gonzalez                        Mr. Shadegg
Mrs. Jones of Ohio                  Mr. Fossella
Mr. Capuano                         Mr. Gary G. Miller of
Mr. Hinojosa                           California
Mr. Clay                            Mr. Cantor
Mr. Israel                          Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Bentsen
                                    Mr. Maloney of Connecticut
                                    Ms. Hooley of Oregon
                                    Mr. Moore
                                    Mr. Lucas of Kentucky
                                    Mr. Shows
                                    Mr. Crowley
                                    Mr. Ross

    An amendment to the amendment in the nature of a substitute 
by Mr. Sherman, no. 1n, addressing attestation authority, was 
not agreed to by a record vote of 16 yeas and 46 nays (Record 
vote no. 32).
        YEAS                          NAYS
Mr. Bereuter                        Mr. Oxley
Mr. LaFalce                         Mr. Leach
Mr. Frank                           Mr. Baker
Ms. Waters                          Mr. Bachus
Mr. Sanders                         Mr. Castle
Mr. Gutierrez                       Mr. King
Mr. Sherman                         Mr. Royce
Mr. Sandlin                         Mr. Lucas of Oklahoma
Mr. Meeks of New York               Mr. Ney
Ms. Lee                             Mr. Barr of Georgia
Mr. Mascara                         Mrs. Kelly
Ms. Schakowsky                      Mr. Paul
Mr. Gonzalez                        Mr. Gillmor
Mrs. Jones of Ohio                  Mr. Weldon of Florida
Mr. Hinojosa                        Mr. Ryun of Kansas
Mr. Clay                            Mr. Riley
                                    Mr. LaTourette
                                    Mr. Manzullo
                                    Mr. Ose
                                    Mrs. Biggert
                                    Mr. Shays
                                    Mr. Shadegg
                                    Mr. Fossella
                                    Mr. Gary G. Miller of California
                                    Mr. Cantor
                                    Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Kanjorski
                                    Mrs. Maloney of New York
                                    Mr. Watt of North Carolina
                                    Mr. Bentsen
                                    Mr. Maloney of Connecticut
                                    Ms. Hooley of Oregon
                                    Ms. Carson of Indiana
                                    Mr. Inslee
                                    Mr. Moore
                                    Mr. Capuano
                                    Mr. Lucas of Kentucky
                                    Mr. Shows
                                    Mr. Crowley
                                    Mr. Israel
                                    Mr. Ross

    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1v, requiring audit committee approval of 
nonaudit services, was not agreed to by a record vote of 19 
yeas and 31 nays (Record vote no. 33).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Bereuter
Mr. Kanjorski                       Mr. Baker
Mr. Sanders                         Mr. Bachus
Mrs. Maloney of New York            Mr. Castle
Mr. Watt of North Carolina          Mr. King
Mr. Ackerman                        Mr. Royce
Mr. Bentsen                         Mr. Lucas of Oklahoma
Ms. Hooley of Oregon                Mr. Ney
Ms. Carson of Indiana               Mrs. Kelly
Mr. Sherman                         Mr. Gillmor
Mr. Inslee                          Mr. Weldon of Florida
Ms. Schakowsky                      Mr. Ryun of Kansas
Mr. Gonzalez                        Mr. LaTourette
Mr. Capuano                         Mr. Manzullo
Mr. Ford                            Mr. Jones of North Carolina
Mr. Hinojosa                        Mr. Ose
Mr. Crowley                         Mrs. Biggert
Mr. Israel                          Mr. Green of Wisconsin
                                    Mr. Shays
                                    Mr. Fossella
                                    Mr. Cantor
                                    Mr. Grucci
                                    Ms. Hart
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Maloney of Connecticut
                                    Mr. Moore
                                    Mr. Lucas of Kentucky
                                    Mr. Shows

    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, 1cc, prohibiting independent directors from 
serving as consultants, was not agreed to by a record vote of 
20 yeas and 38 nays (Record vote no. 34).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Leach
Mr. Kanjorski                       Mrs. Roukema
Ms. Waters                          Mr. Bereuter
Mr. Sanders                         Mr. Baker
Mrs. Maloney of New York            Mr. Bachus
Mr. Ackerman                        Mr. Castle
Mr. Maloney of Connecticut          Mr. King
Ms. Hooley of Oregon                Mr. Ney
Ms. Carson of Indiana               Mr. Barr of Georgia
Mr. Sherman                         Mrs. Kelly
Mr. Inslee                          Mr. Gillmor
Ms. Schakowsky                      Mr. Cox
Mr. Moore                           Mr. Weldon of Florida
Mr. Gonzalez                        Mr. Ryun of Kansas
Mr. Capuano                         Mr. LaTourette
Mr. Hinojosa                        Mr. Manzullo
Mr. Clay                            Mr. Jones of North Carolina
Mr. Israel                          Mr. Ose
Mr. Ross                            Mrs. Biggert
                                    Mr. Green of Wisconsin
                                    Mr. Toomey
                                    Mr. Shays
                                    Mr. Shadegg
                                    Mr. Fossella
                                    Mr. Gary G. Miller of
                                      California
                                    Mr. Cantor
                                    Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Watt of North Carolina
                                    Mr. Bentsen
                                    Mr. Lucas of Kentucky
                                    Mr. Shows
                                    Mr. Crowley

    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1dd, providing for shareholder approval 
executive stock option plans, was not agreed to by a record 
vote of 22 yeas and 34 nays (Record vote no. 35).
        YEAS                          NAYS
Mr. Leach                           Mr. Oxley
Mrs. Roukema                        Mr. Baker
Mr. Bereuter                        Mr. Bachus
Mr. Castle                          Mr. King
Mr. Gillmor                         Mr. Royce
Mr. LaFalce                         Mr. Ney
Mr. Kanjorski                       Mr. Barr of Georgia
Ms. Waters                          Mrs. Kelly
Mr. Sanders                         Mr. Cox
Mrs. Maloney of New York            Mr. Weldon of Florida
Mr. Watt of North Carolina          Mr. Ryun of Kansas
Mr. Ackerman                        Mr. LaTourette
Mr. Bentsen                         Mr. Manzullo
Ms. Hooley of Oregon                Mr. Jones of North Carolina
Ms. Carson of Indiana               Mr. Ose
Mr. Sherman                         Mrs. Biggert
Mr. Moore                           Mr. Green of Wisconsin
Mr. Gonzalez                        Mr. Toomey
Mr. Capuano                         Mr. Shays
Mr. Ford                            Mr. Shadegg
Mr. Hinojosa                        Mr. Fossella
Mr. Shows                           Mr. Cantor
                                    Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Maloney of Connecticut
                                    Mr. Inslee
                                    Mr. Lucas of Kentucky
                                    Mr. Crowley
                                    Mr. Israel
                                    Mr. Ross

    An amendment to the amendment in the nature of a substitute 
by Mr. Ackerman, no. 1hh, auditor independence, was not agreed 
to by a record vote of 18 yeas and 40 nays (record vote no. 
36).
        YEAS                          NAYS
Mr. LaFalce                         Mr. Oxley
Mr. Frank                           Mr. Leach
Mr. Kanjorski                       Mrs. Roukema
Ms. Waters                          Mr. Bereuter
Mr. Sanders                         Mr. Baker
Mrs. Maloney of New York            Mr. Bachus
Mr. Watt of North Carolina          Mr. Castle
Mr. Ackerman                        Mr. King
Ms. Carson of Indiana               Mr. Royce
Mr. Sherman                         Mr. Barr of Georgia
Ms. Lee                             Mrs. Kelly
Mr. Inslee                          Mr. Gillmor
Mr. Capuano                         Mr. Cox
Mr. Ford                            Mr. Weldon of Florida
Mr. Hinojosa                        Mr. Ryun of Kansas
Mr. Crowley                         Mr. LaTourette
Mr. Clay                            Mr. Manzullo
Mr. Israel                          Mr. Ose
                                    Mrs. Biggert
                                    Mr. Green of Wisconsin
                                    Mr. Toomey
                                    Mr. Shays
                                    Mr. Shadegg
                                    Mr. Fossella
                                    Mr. Gary G. Miller of California
                                    Mr. Cantor
                                    Mr. Grucci
                                    Ms. Hart
                                    Mrs. Capito
                                    Mr. Ferguson
                                    Mr. Rogers of Michigan
                                    Mr. Tiberi
                                    Mr. Bentsen
                                    Mr. Maloney of Connecticut
                                    Ms. Hooley of Oregon
                                    Mr. Moore
                                    Mr. Gonzalez
                                    Mr. Lucas of Kentucky
                                    Mr. Shows
                                    Mr. Ross

    The following other amendments were also considered by the 
Committee:

    An amendment in the nature of a substitute by Mr. Oxley, 
no. 1, making various technical and substantive changes to the 
bill, was agreed to by a voice vote.
    An amendment by Mr. Lucas of Kentucky to the amendment by 
Mrs. Biggert, no. 1b(1), addressing the composition of the PRO, 
was agreed to by a voice vote.
    An amendment by Mr. Watt to the amendment by Mrs. Biggert, 
no. 1b(3), striking the scienter requirement, was NOT AGREED TO 
by a voice vote.
    An amendment by Ms. Hooley of Indiana and Mr. Maloney of 
Connecticut to the amendment by Mrs. Biggert, no. 1b(5), 
requiring that any independent public or certified accountant 
who certifies a financial statement to maintain the audit work 
papers and other related information for a minimum of 7 years, 
was agreed to by a voice vote.
    An amendment by Mr. Watt to the amendment by Mrs. Biggert, 
no. 1b(6), striking certain language from the amendment, was 
not agreed to by a voice vote.
    An amendment by Mr. Capuano to the amendment by Mrs. 
Biggert, no. 1b(7), addressing the qualification time of public 
members of the PRO, was not agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mrs. Maloney of New York, no. 1c, making changes in the code 
of ethics, was agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. Watt, no. 1d, striking a requirement to consult with 
State regulators, an amendment to the amendment in the nature 
of a substitute by Mr. Watt, no. 1e, addressing the filing of 
disclosures in other formats, an amendment to the amendment in 
the nature of a substitute by Mr. Bentsen, no. 1f, addressing 
transactions involving real time disclosure, an amendment to 
the amendment in the nature of a substitute by Mr. Bentsen, no. 
1g, calling for improved transparency of loans to officers and 
directors, an amendment to the amendment in the nature of a 
substitute by Ms. Waters, no. 1h, providing that disgorgement 
funds be distributed to pension fund victims, an amendment to 
the amendment in the nature of a substitute by Mr. LaFalce, no. 
1i, addressing enhanced oversight of periodic disclosures by 
issuers, and an amendment to the amendment in the nature of a 
substitute by Mr. LaFalce, no. 1j, addressing disclosure of 
insider and director relationships, were agreed to en bloc by 
unanimous consent.
    An amendment to the amendment in the nature of a 
substitute, by Mr. Gonzalez, (as amended by unanimous consent), 
no. 1o, requiring a GAO study of certain standards of 
professional conduct for attorneys and their protection of 
investors, was agreed to by a voice vote.
    An amendment by Mr. Watt to the amendment by Mr. Gonzales, 
no. 1o(1), requiring the report to identify pertinent 
regulatory or legislative steps, was AGREED TO by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1p, addressing real time disclosure of 
financial information, was agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. Watt, no. 1q, requiring recommendations for regulatory 
and statutory changes to studies, and an amendment to the 
amendment in the nature of a substitute by Mr. Watt, no. 1r, 
addressing regulations for penalties for manipulation of 
auditors, were offered en bloc and were agreed to by a voice 
vote
    An amendment to the amendment in the nature of a substitute 
by Mr. Watt, (as modified by unanimous consent), no. 1s, 
minimizing burdensome rules on issuers for disclosures required 
under the bill, was agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mrs. Maloney, no. 1t, restoring oversight of energy 
derivatives to the Commodity Futures Trading Commission, was 
withdrawn.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1u, addressing auditor independence, was 
not agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. Sherman, no. 1w, addressing the scope of non-audit 
practice, was withdrawn.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce (as modified by unanimous consent), no. 1x, 
addressing auditor/issuer employment restrictions (cooling-off 
period), was not agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1y, addressing the role of audit committee, 
was not agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. Bentsen and Mr. Watt (as modified by unanimous consent), 
no. 1z, providing authority to bar additional nonaudit 
services, was agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. Kanjorski (as modified by unanimous consent), no. 1aa, 
lengthening the statute of limitations for certain private 
rights of action, was not agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1bb, addressing the removal of unfit 
corporate officers, was not agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce (as modified by unanimous consent), no. 1ee, 
requesting a GAO study of investment banks, was AGREED TO by a 
voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. LaFalce, no. 1ff, requiring the mandatory rotation of 
auditors every 8 years, was withdrawn.
    An amendment to the amendment in the nature of a substitute 
by Mr. Kanjorski, no. 1gg, restoring aiding and abetting 
liability, was withdrawn.
    An amendment to the amendment in the nature of a substitute 
by Mr. Capuano and Mr. Lucas of Kentucky, no. 1ii, clarifying 
PRO activity, was agreed to by a voice vote.
    An amendment to the amendment in the nature of a substitute 
by Mr. Inslee, no. 1jj, addressing energy pricing disclosure, 
was withdrawn.
    Substitute amendment to the amendment in the nature of a 
substitute offered by Mr. LaFalce, no. 1kk, was not agreed to 
by a voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee held a hearing and made 
findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    H.R. 3763 authorizes the Commission to take steps designed 
to increase the oversight of accountants that certify financial 
statements required under the securities laws, increase 
transparency of financial statements filed with the Commission, 
and increase the accountability of officers and directors of 
public companies. The legislation promotes these goals and 
objectives by directing the Commission to undertake rule 
makings and studies in areas related to the above goals.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee finds that this 
legislation would result in no new budget authority, 
entitlement authority, or tax expenditures or revenues.

                        Committee Cost Estimate

    A cost estimate prepared by the Director of the 
Congressional Budget Office pursuant to section 402 of the 
Congressional Budget Act of 1974 was not available in time for 
the filing of this report. The Committee estimates that budget 
authority will be made available to the SEC at approximately 
the levels authorized in the legislation.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, a cost estimate provided by the 
Congressional Budget Office pursuant to section 402 of the 
Congressional Budget Act of 1974 was not made available to the 
Committee in time for the filing of this report. The Chairman 
of the Committee shall cause such estimate to be printed in the 
Congressional Record upon its receipt by the Committee.

                       Federal Mandates Statement

    An estimate of Federal mandates prepared by the Director of 
the Congressional Budget Office pursuant to section 423 of the 
Unfunded Mandates Reform Act was not made available to the 
Committee in time for the filing of this report. The Chairman 
of the Committee shall cause such estimate to be printed in the 
Congressional Record upon its receipt by the Committee.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             Section-by-Section Analysis of the Legislation


Section 1. Short Title

    Designates this title as the ``Corporate and Auditing 
Accountability, Responsibility and Transparency Act of 2002.''

Section 2. Auditor Oversight

    Subsection 2(a). The Federal securities laws, and the rules 
and regulations thereunder, require that certain financial 
statements of public companies be audited by an independent 
public or certified public accountant and filed with the 
Securities and Exchange Commission. The legislation requires 
the establishment of a public regulatory organization (PRO) to 
perform certain review and disciplinary functions with respect 
to accountants who audit those financial statements. Subsection 
2(a) provides that the Commission may not accept any financial 
statement unless the certifying accountant (1) is subject to a 
system of review by a PRO established in accordance with the 
section and (2) has not been determined in the most recent such 
review to be not qualified to audit the statements.
    Subsection 2(b). Subsection 2(b) requires the Commission to 
adopt rules establishing criteria by which an organization may 
become a ``recognized PRO.'' Subsection 2(b) specifies certain 
criteria that must be included. The board of any PRO must 
include members of the accounting profession and ``public 
members'' who are not members of the accounting profession. The 
board must be composed of five members, at least three of whom 
are ``public members'' and two of whom are members of the 
accounting profession with recent experience in auditing public 
companies. The Board will often be faced with complex and 
specialized issues related to financial reporting and the 
application of professional and other competency standards in 
real-world settings. Board members who are licensed, practicing 
accountants and who understand the issues involved in audits of 
public companies will bring a valuable perspective and needed 
expertise to the Board's deliberations.
    Paragraph 2(b)(1) further provides that each member of the 
Board shall meet such standards of financial literacy as 
determined by the Commission. This requirement is intended to 
ensure that only individuals whose background demonstrates a 
solid understanding of the purposes and methods of financial 
reporting, and the auditing of financial statements, shall 
serve on the Board.
    The details of the Board's specific operations, such as the 
frequency of Board meetings, staffing levels, and the full- or 
part-time nature of service on the Board, are left to the 
discretion of the Commission.
    Subsection 2(b) also makes clear that a PRO must have the 
capacity to enforce compliance by accountants, and persons 
associated with accountants, with the provisions of the bill, 
professional ethics and competency standards, and the PRO's own 
rules. A PRO must have the authority to impose sanctions, 
including the power to bar accountants temporarily or 
permanently from reviewing financial statements of public 
companies if the PRO finds that the accountant acted knowingly 
or intentionally. A PRO must also be organized, and have the 
capacity, to review accountants' work product and to review 
potential conflicts of interest involving accountants. As 
subsection 2(j) further clarifies, such reviews are not 
intended to include work performed for non-public companies or 
any nonaudit work.
    A PRO must also have in place procedures to minimize, 
deter, and resolve conflicts of interest involving its board 
members. A PRO must also publicly disclose, and make available 
for public comment, its proposed review procedures and methods. 
A PRO must consult with State boards of accountancy and must 
have in place procedures for notifying those boards and the 
Commission of the results and findings of the PRO's reviews. 
Paragraph 2(b)(9) provides that the PRO have a mechanism to 
allow the organization to operate on a self-funded basis and to 
ensure that the organization is not solely dependent upon 
members of the accounting profession for funding. The phrase 
``not solely dependent'' is intended to require that the PRO 
have a mechanism to obtain funding from other users of audited 
financial statements who will benefit from the PRO's oversight 
of accountants and persons associated with accountants.
    An organization that satisfies the criteria to be a 
recognized PRO is granted the authority to impose sanctions 
against the accountants it reviews. Sanctions may be imposed 
only after the PRO has conducted a review and provided an 
opportunity for a fair hearing and has made any of the 
following findings: that the accountant or associated person 
(1) violated professional standards of independence, ethics, or 
competency; (2) has been found by the Commission or a court of 
competent jurisdiction to have violated the Federal securities 
laws or a rule or regulation thereunder; (3) conducted an audit 
under circumstances in which independence standards were 
violated, (including new independence standards which section 2 
requires the Commission to adopt, as discussed below) or (4) 
impeded, obstructed, or failed to cooperate with the PRO's 
review. By referring to the profession's standards of 
independence, ethics, or competency, subparagraph 2(b)(3)(A) 
authorizes the PRO to sanction violations of the Code of 
Professional Conduct, U.S. Auditing Standards, and the 
profession's Statements on Quality Control Standards as they 
exist today or may be modified in the future. The PRO will have 
the authority to enforce these standards, but standard-setting 
powers will remain with the SEC and/or the profession as is the 
case today.
    Subparagraph 2(b)(3)(C) empowers the PRO to impose 
sanctions on an accountant when the PRO finds that the 
accountant (or an associated person) has conducted an audit 
that was materially affected by an impairment of auditor 
independence. Subparagraph 2(b)(3)(C), which requires a 
determination of material impact on the audit, should govern 
most instances of alleged violations of independence, although 
there may be certain serious violations that could result in 
sanctions under subparagraph 2(b)(3)(A) even though a material 
impact is lacking.
    The PRO's sanctions may include a determination that an 
accountant is not qualified to certify a financial statement, 
or certain categories of financial statements, or that a 
particular person associated with an accountant is not 
qualified to participate in the certification of a financial 
statement or certain categories of financial statements. 
Paragraph 2(b)(3) is not intended to require the PRO to 
conclude, in all cases of knowing or intentional misconduct, 
that a particular person or audit firm is not qualified to 
participate in the certification of financial statements. 
Moreover, as subsection 2(j) states expressly, because the 
PRO's jurisdiction runs to the qualification of accountants to 
perform audit services for public companies, disqualification 
by the PRO does not preclude an accountant or a person 
associated with an accountant from performing audit services 
for non-public companies or from performing any nonaudit 
services.
    The PRO is given the authority to request the SEC subpoena 
or otherwise compel the testimony of witnesses or the 
production of documents for purposes of conducting auditor 
reviews. This subpoena power should be exercised in order to 
ensure that relevant information is obtained from persons or 
entities not otherwise within the PRO's sanctioning authority. 
The taking of evidence referred to in the last sentence of this 
subsection includes both the taking of testimony and the 
production of documentary evidence.
    Subsection 2(c). Paragraph 2(c)(1) requires the Commission 
to revise its regulations to provide that, for financial 
statements required to be certified by an independent public or 
certified public accountant, an accountant will not be 
considered independent of its audit client if it provides that 
client with financial information system design or 
implementation services or internal audit services. Paragraph 
2(c)(2) authorizes the Commission to review the impact of 
nonaudit services on auditor independence in the event services 
that have not previously been the subject of Commission or 
congressional scrutiny are offered by accounting firms, in 
order to determine whether the list of prohibited nonaudit 
services should be modified. Subsection 2(c) does not mandate 
that the Commission prescribe new rules relating to nonaudit 
services and is intended only to clarify that the Commission 
must report the results of any such review to the Committee. 
Paragraph 2(c)(5) requires that the Commission revise its 
regulations regarding disclosures of audit and other services 
if such disclosures are still deemed necessary in light of the 
new prohibitions on financial systems design and implementation 
and internal audit outsourcing, and to ensure that audit 
services, services provided in connection with an audit, and 
all other services are appropriately categorized. Under 
Paragraph 2(c)(6), the Commission is required to propose and 
make final such revisions within 90 and 270 days, respectively, 
of the enactment of the bill.
    Subsection 2(d). Subsection 2(d) sets out certain 
procedures to govern the PRO review and hearing process. 
Paragraph 2(d)(1) provides that any finding made pursuant to an 
accountant review that a financial statement audited by an 
accountant and submitted to the Commission may have been 
materially affected by an impairment of auditor independence, 
or by a violation of professional ethics and competency 
standards, must be submitted to the Commission, and that the 
Commission must promptly notify an issuer of any such finding 
that relates to the issuer's financial statements. The Board 
should act in all instances with regard for fairness and due 
process. For this reason, the notifications required by this 
subsection should be made only after the accountant or audit 
firm is formally notified of the Board's finding and provided a 
meaningful opportunity to contest it, pursuant to procedures to 
be established by the Board.
    Neither the Commission, the PRO, nor any other person shall 
disclose any information concerning an accountant review 
proceeding or the findings therein except as is authorized by 
the Act, and are exempt from disclosure under the Freedom of 
Information Act. Paragraph 2(d)(2) provides for protection 
against disclosure, whether voluntarily or through discovery, 
compulsory process, or any other rule, statute, or law, of 
information developed by or submitted to the PRO during its 
review and investigatory activity and its review proceedings, 
subject to the provisions of subparagraphs (2)(B) and (2)(C). 
These confidentiality provisions govern with regard to other 
provisions of this legislation, including any provisions 
relating to any notifications required by this section. Neither 
the Commission nor the PRO may disclose the results of any 
finding until the completion of Commission review, or the 
conclusion of the 30-day period for seeking review, if no 
motion for review is filed within the period. This provision 
does not authorize the Commission to withhold information from 
Congress, or prevent the Commission from complying with a 
request from another Federal agency, or a Federal court order 
in an action brought by the United States, or the Commission. 
If the PRO provides information to a Federal department or 
agency other than the SEC, such information remains subject to 
the protections against disclosure otherwise provided for by 
this subsection. Paragraph (d)(3) provides that the findings of 
the PRO are made inadmissible in any civil proceeding as 
evidence of any alleged violation of the securities laws, and 
are not to be accorded collateral estoppel effect as to 
compliance or noncompliance with the law or any standard of 
liability, in any judicial or administrative proceeding.
    Subsection 2(e). Subsection 2(e) sets out certain 
procedures for Commission review of PRO proceedings. The 
Commission is authorized to review PRO findings and sanctions 
and is authorized to affirm, modify, or set aside the 
sanctions. The reference to the submission of affidavits and 
the presentation of oral arguments in paragraph 2(e)(2) is not 
meant to preclude the submission of legal briefs or memoranda 
on the issues before the Commission.
    Subsection 2(f). Commission review must include an 
opportunity for a hearing, though the Commission may limit the 
hearing solely to consideration of the record before the PRO 
and the opportunity for the presentation of supporting reasons 
to affirm, modify, or set aside the sanction. While the hearing 
before the Commission must consist of the record before the PRO 
and arguments for or against affirmation, modification, or 
rejection of the PRO's findings and conclusions, this 
limitation is not meant to preclude the Commission from 
considering newly discovered evidence for which there is a 
reasonable explanation as to why it was not available or 
presented in the PRO's proceeding, nor is it meant to preclude 
the Commission from taking into account evidence that the 
Commission concludes that the PRO improperly failed to 
consider.
    Subsection 2(g). A recognized PRO is required to file with 
the Commission any proposed rule or rule change. The Commission 
shallpublish notice of the proposed rule and give interested 
persons an opportunity to comment. The Commission must approve any such 
proposed rule if the Commission finds that the proposal is consistent 
with the requirements of this bill and the relevant rules and 
regulations thereunder. Certain categories of rules may be given effect 
immediately upon being filed with the Commission, though the Commission 
has authority summarily to abrogate any such rule and require that it 
be filed as a proposed rule for notice and comment.
    Subsection 2(h). Subsection 2(h) authorizes the Commission 
to abrogate, add to, or delete from the rules of a PRO on the 
Commission's own initiative after publishing notice and giving 
interested persons an opportunity to submit data, views, and 
arguments on the proposal.
    Subsection 2(i). Subsection 2(i) provides that a PRO shall 
make and keep for prescribed periods such records and reports 
as the Commission by rule requires. Paragraph 2(i)(2) 
authorizes the Commission, by rule or order, to enable a PRO to 
perform duties and functions that the Commission determines are 
necessary and appropriate for the public interest or the 
protection of investors, and to carry out the purposes of this 
bill and the securities laws.
    Consistent with other provisions throughout this section, a 
PRO cannot be authorized under this subsection to enforce the 
securities laws or to promulgate accounting, audit or other 
professional standards. A PRO has power to make rules for its 
internal processes and for its enforcement activities. The 
Commission may not delegate any substantive rulemaking power 
that it has to a PRO.
    Subsection 2(j). Subsection 2(j) confirms that the 
authority of any PRO reaches only the actions of accountants 
related to the review or audit of public companies.
    Subsection 2(k). Subsection 2(k) provides that the 
Commission must propose rules to implement section 2 within 90 
days and shall implement such rules within 270 days of 
prescribing them.
    Subsection 2(l). Subsection 2(l) establishes effective 
dates and transition periods. Paragraph 2(l)(2) provides that 
if the Commission has failed to recognize any PRO within one 
year after the date of enactment of the Act, the Commission 
must perform the duties of the PRO with respect to any 
certified financial statement for any fiscal year that ends 
before one year after any PRO is recognized by the Commission. 
This subsection is not intended to expand the powers of the 
Commission or the size of the federal bureaucracy but rather to 
have the specified functions performed by a PRO. The Commission 
should devote the resources necessary to ensure that a 
qualified PRO is recognized within one year after the date of 
enactment of the bill and should recognize any qualified PRO on 
a timely basis. In the event that it is not possible to 
recognize a PRO within one year, the Commission should ensure 
that a PRO is approved as soon as possible after that one-year 
deadline, and in the interim the Commission should not act to 
assume or to exercise the functions of the PRO beyond the 
degree necessary for investor protection.

Section 3. Improper Influence on Conduct of Audits

    Section 3 makes it unlawful for any officer, director, or 
affiliated person of an issuer to take any action, in 
contravention of a rule adopted by the Commission, to 
fraudulently influence, coerce, manipulate, or mislead any 
independent public or certified accountant engaged in auditing 
that issuer's financial statements, for the purpose of 
rendering such financial statements materially misleading. The 
Commission has exclusive civil authority to enforce section 3 
and any rule or regulation thereunder. The authority conferred 
by this section is in addition to, and does not preempt, any 
other authority of the Commission with respect to this area, 
such as the Commission's current authority under Exchange Act 
Rule 13b2-2, which prohibits making materially false or 
misleading statements to auditors, and the Commission's cease-
and-desist authority under Section 21C of the Exchange Act or 
its injunctive powers under Section 21 of the Act with respect 
to third parties who cause others to violate, or aid and abet 
violations of, the securities laws and rules and regulations 
thereunder.

Section 4. Real-Time Disclosure of Financial Information

    Section 4 amends section 13 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78m), to require the Commission to adopt 
rules requiring issuers of securities registered under section 
12 of that Act to make public disclosure, on a rapid and 
essentially contemporaneous basis, of information concerning 
the issuer's financial condition and operations. The Commission 
has exclusive civil authority to enforce this provision and any 
rule or regulation thereunder.
    Section 4 also provides that the Commission must adopt 
rules providing that any disclosure required by the Federal 
securities laws, or rules or regulations thereunder, concerning 
any sale of securities by an officer, director, or other 
affiliated person of the issuer of the securities must be made 
electronically to the Commission before the end of the business 
day following the day of the transaction, and must be made 
available electronically by the Commission before the end of 
the business day following the day received by the Commission. 
Any issuer that maintains a corporate web site is also required 
to publishthe disclosure, by any of its officers, directors, or 
affiliated persons, on its web site by the end of the day following the 
day the disclosure is received by the Commission. The Commission must 
also revise its forms and schedules as necessary to facilitate 
compliance with these requirements.

Section 5. Insider Trades During Pension Fund Blackout Periods 
        Prohibited

    Section 5 makes it unlawful for any person who holds, 
directly or indirectly, beneficial ownership of more than 10 
percent of any class of equity securities (other than exempted 
securities) registered pursuant to section 12 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78l), or is a director or 
officer of the issuer of those securities, to purchase or sell, 
directly or indirectly, any equity securities of the issuer 
(other than exempted securities) during a blackout period. A 
``blackout period'' is defined in section 22 of this bill.
    Section 5 also provides for recovery, by the issuer, of any 
profit resulting from a trade made in violation of this 
provision. If the issuer fails to bring a suit within 60 days 
of a request to do so, or fails to prosecute the suit 
diligently, an owner of any security of the issuer may bring a 
suit in the issuer's name. No suit may be brought after 2 years 
from the date the profit was realized. Section 5 does not 
govern transactions where the beneficial owner was not such at 
both the time of the purchase and sale, or any transaction 
exempted by the Commission as not within the purposes of 
section 5. Section 5 permits the Commission to issue rules 
clarifying the application of this provision, to ensure 
adequate notice to all persons affected, and to prevent evasion 
of this provision.

Section 6. Improved Transparency of Corporate Disclosures

    Section 6 requires the Commission to revise its regulations 
under the securities laws to expand the disclosure requirements 
for the financial reports and registration statements of public 
companies, so that they provide adequate and appropriate 
disclosure of certain of an issuer's off-balance sheet 
transactions and relationships. Section 6 requires these new 
disclosures to the extent that the transactions or 
relationships are not otherwise reported in the issuer's 
financial statements at fair value, and are reasonably likely 
to materially affect the issuer's liquidity or availability of, 
or requirements for, capital resources, or the financial 
condition or results of operations of the issuer. The Committee 
intends that these disclosures would be made on a fair value 
basis. Issuers must also disclose loans extended to officers, 
directors or other persons affiliated with the issuer on terms 
or conditions that are not otherwise available to the public.
    Section 6 also requires the Commission to conduct an 
analysis of the extent to which disclosure of additional or 
reorganized information may be required to improve the 
transparency, completeness or usefulness of financial 
statements and other disclosures. In its analysis, the 
Commission must consider requiring the identification of the 
key accounting principles that are most important to the 
issuer's reported financial condition or results of operation, 
and that require the most difficult, complex or subjective 
judgments by management. The Commission must also consider 
requiring an explanation, where material, of how different 
available accounting principles applied, along with the 
judgments made in their application and the likelihood of 
materially different reported results if different assumptions 
were to prevail. In addition, the Commission must consider 
requiring an explanation of trading activities where an issuer 
engages in the business of trading non-exchange traded 
contracts, accounted for at fair value, but where a lack of 
market price quotations necessitates the use of fair value 
estimation techniques. Finally, the Commission must consider 
establishing requirements relating to the presentation of 
information in plain language, and requiring any other 
disclosures in financial statements or other disclosure 
documents that would improve transparency.

Section 7. Improvements in Reporting on Insider Transactions and 
        Relationships

    Section 7 requires the Commission to initiate a proceeding 
to propose changes in its rules and regulations with respect to 
financial reporting to require increased disclosure of 
relationships between the issuer and affiliates of the issuer 
and officers, directors or employees of the issuer; and 
officers, directors or employees of the affiliate and unrelated 
other entities to the extent such relationships create a 
conflict of interest for those individuals. The proceeding must 
examine relationships with philanthropic organizations, insider 
controlled affiliates, joint ownership interests in real 
property, and the provision of services by related persons. If 
a rulemaking is initiated pursuant to this section, the 
Commission is directed to do so within 180 days of the 
enactment of the bill.

Section 8. Codes of Conduct

    Section 8 directs the New York Stock Exchange, the American 
Stock Exchange and the Nasdaq stock market to file with the 
Commission proposed rules that would prohibit their listing any 
securityfor a company that has not adopted a code of ethics for 
the company's senior officials. The Commission is given the authority 
to impose this requirement on any other national securities exchange.
    Section 8 requires that the Commission revise its 
regulations pertaining to disclosures on form 8K to require the 
immediate disclosure of any change or waiver of such code of 
ethics of an issuer.

Section 9. Enhanced Oversight of Periodic Disclosures by Issuers

    Section 9 directs the Commission to review disclosures of 
issuers required to file statements under the securities laws 
on a more regular and systematic basis. The Commission is 
directed to create a risk rating system to determine the 
frequency of such reviews. The Commission is directed to ensure 
that no issuer shall be reviewed less than once every three 
years. The section provides that the Commission may not 
disclose the risk rating of any issuer.

Section 10. Retention of Records

    Subsection 10(a) requires CPAs who certify financial 
statements under the securities laws to prepare and maintain 
final audit work papers and other information that are 
necessary to support an accountants report on such financial 
statements for a period of no less than 7 years. The term 
``work papers'' was used as a term of art, to be defined with 
reference to the professional standards governing the subject.
    Subsection 10(b) defines the term ``accountants report'' to 
mean a document in which an accountant identifies a financial 
statement and sets forth his opinion regarding that financial 
statement or an assertion that an opinion cannot be expressed.
    The purpose of this section is to ensure that necessary 
auditing documents are retained in the event that a CPA's 
conclusions are subsequently reviewed. At the same time, the 
legislation is not intended to impose unnecessary or 
excessively costly burdens on accountants, or to require that 
every document, or every iteration of a document, be preserved. 
The requirements of this section may be satisfied through the 
use of electronic records.

Section 11. Commission Authority to Bar Persons from Serving as 
        Officers or Directors

    Section 11 gives the Commission authority to issue an order 
in connection with a cease-and-desist proceeding to bar a 
person who has violated section 17(a)(1) of the Securities Act 
of 1933 (Securities Act) or section 10(b) of the Securities 
Exchange Act of 1934 (Exchange Act) from acting as an officer 
or director of a company that is registered with or required to 
file reports with the Commission (public company), if that 
person's conduct demonstrates substantial unfitness to serve as 
an officer or director of a public company. Under current law, 
section 20(e) of the Securities Act and section 21(d)(2) of the 
Exchange Act, the Commission can only obtain such a bar in a 
Federal court proceeding.
    The administrative bar authority granted in section 11 is 
an extraordinary remedy, allowing the Commission effectively to 
deprive a person of his or her livelihood. In other 
circumstances where the Commission or other Federal agencies 
have similar authority, the agency generally has plenary 
regulatory authority over the industry in which the individual 
is employed and the bar extends only to that industry. For 
example, under section 15(b)(6) of the Exchange Act, the 
Commission has the authority to bar an individual from being 
associated with a broker or dealer, and section 203(f) of the 
Investment Advisers Act of 1940 gives the Commission authority 
to bar an individual from being associated with an investment 
adviser. Brokers, dealers and investment advisers are all 
subject to comprehensive regulatory schemes overseen by the 
Commission. See also 12 U.S.C. 1818(e)(1) (2002) (permitting 
debarment of banking officials); 15 U.S.C. 80a-35 (2002) 
(permitting debarment of officers, directors or members of 
investment company advisory boards). On the other hand, while 
the securities laws require disclosure by public companies, 
there has been no legislative mandate to the Commission to 
create a comprehensive regulatory scheme applicable to public 
companies or their employees and directors. Such a mandate 
would be antithetical to the disclosure philosophy of our 
securities laws, which has been the basis for the development 
of our strong securities markets. Moreover, while an individual 
barred from the securities industry may seek employment in many 
other industries, an individual barred from serving as an 
officer or director of a public company is prohibited from 
employment in such capacity by over 17,000 companies.
    The Committee has therefore included several protections in 
section 11 to make clear that the standard for the Commission 
to apply in issuing a bar order is high, and to ensure that the 
Commission exercises this authority with care and only in 
circumstances where it is justified by the magnitude of the 
individual's offense and the need to protect investors from 
potential recidivism by the individual.
    The first protection is the requirement in paragraph (a) 
that the Commission must find that a person's conduct 
demonstrates ``substantial unfitness'' to serve as an officer 
or director of a public company before he or she can be barred. 
This is the same standard that is applicable to Federal court 
proceedings in which the Commission seeksto bar an individual 
from serving as an officer or director of a public company.
    The Committee also believes it is appropriate to set forth 
factors for the Commission to consider in making a 
determination whether an individual's conduct demonstrates 
substantial unfitness. These factors are derived from case law 
interpreting this standard under section 20(e) of the 
Securities Act and section 21(d)(2) of the Exchange Act. See, 
e.g., SEC v. McCaskey, 2001 U.S. Dist. LEXIS 13571 (S.D.N.Y. 
2001); SEC v. Farrell, 1996 U.S. Dist. LEXIS 22681 (W.D.N.Y. 
1996); SEC v. Patel, 61 F.3d 137 (2d Cir. 1995); SEC v. Shah, 
1993 U.S. Dist. LEXIS 10347 (S.D.N.Y. 1993); see also Jayne W. 
Barnard, When is a Corporate Executive ``Substantially Unfit to 
Serve,'' 70 N.C.L. Rev. 1489 (1992). They are: (1) the severity 
of the person's conduct giving rise to the violation, and the 
person's role or position when engaged in the violation; (2) 
the person's degree of scienter; (3) the person's economic gain 
as a result of the violation; and (4) the likelihood that the 
conduct giving rise to the violation, or similar conduct as 
defined in subsection (a), may recur if the person is not so 
prohibited. Paragraph (b) omits one of the factors considered 
by the courts, whether the person is a ``repeat offender.'' The 
Committee believes that repeat offender status is an implicit 
consideration in the fourth factor, the likelihood that similar 
conduct will recur.
    An additional protection is provided in paragraph (c), 
which stays the enforcement of a Commission bar order during 
the period in which application may be made for judicial review 
of the bar order and, if a timely application for judicial 
review is made, pending the entry of a final order resolving 
the application. This will prevent an individual from losing 
his or her position while exercising the right of appeal to a 
Federal court. Without this stay provision, the Committee is 
concerned that an administrative bar would have its intended 
effect even if ultimately deemed by a court to have been 
inappropriate, in that the individual would have been deprived 
of his or her livelihood in the intervening period and might 
have a difficult time attaining a comparable position to that 
lost due to the improper bar.
    Finally, the Committee notes that section 11 provides, as 
does section 20(e) of the Securities Act and section 21(d)(2) 
of the Exchange Act, that the Commission may issue an order to 
bar an individual conditionally or unconditionally, and 
permanently or for such period of time as it shall determine 
(emphasis added). Accordingly, the Committee expects that the 
Commission will, as the courts have done, issue orders tailored 
to the individuals and facts before it. See SEC v. McCaskey, 
2001 U.S. Dist. LEXIS 13571 (S.D.N.Y. 2001) (rejecting 
permanent bar order in favor of six-year bar); SEC v. Farrell, 
1996 U.S. Dist. LEXIS 22681 (W.D.N.Y 1996) (rejecting 
comprehensive bar order in favor of industry specific bar).

Section 12. Disgorging Insiders Profits From Trades Prior to Correction 
        of Erroneous Financial Statements

    Section 12 directs the Commission to conduct an analysis of 
whether any officer or director of an issuer should be required 
to disgorge profits gained or losses avoided from the sale of 
the securities of such issuer during the six month period 
preceding the filing of a restated financial statement. The 
Commission is authorized to issue rules requiring disgorgement 
under those circumstances. The Committee intends that, if the 
Commission chooses to issue rules pursuant to this section, it 
do so only after providing safeguards and exemptions to ensure 
that such disgorgement is required only in cases where the 
Commission can prove extreme misconduct on the part of that 
officer or director. The Committee intends that the Commission 
would, in establishing any such rules, ensure fair and 
impartial procedures, with a right to appeal, for the 
adjudication of any action to require disgorgement.

Section 13. Securities and Exchange Commission Authority To Provide 
        Relief

    Section 13 provides that, if the Commission obtains funds 
pursuant to a disgorgement proceeding from Enron Corporation, 
Arthur Andersen LLC, or any affiliate, subsidiary, officer, 
director or principal shareholder thereof, the Commission will 
establish an allocation system for those funds that will give 
priority to former employees of Enron Corporation who were 
participants in its employee retirement plan. The section 
directs that any monies in payment of a civil penalty against 
Enron or Arthur Andersen must be paid into the disgorgement 
fund. The section also authorizes the Commission to accept 
donations for the disgorgement fund.

Section 14. Study of Rules Relating to Analyst Conflicts of Interest

    Section 14 requires the Commission to conduct a study and 
review of any final rules by any self-regulatory organization 
registered with the Commission, related to matters involving 
equity research analyst conflicts of interest. The study must 
include a review of the effectiveness of the final rules in 
addressing matters of objectivity and integrity of equity 
research analyst reports and recommendations. Section 14 also 
requires the Commission to submit a report on its study and 
review to Congress within 180 days of the delivery of the final 
rules to the Commission, with annual updates thereafter. 
Thereport to Congress must include recommendations, including any 
recommendations for additional self-regulatory organization rulemakings 
regarding equity research analysts.

Section 15. Review of Corporate Governance Practices

    Section 15 requires the Commission to conduct a study and 
review of corporate governance standards and practices, to 
determine whether they serve the best interests of 
shareholders. In conducting the study, the Commission must seek 
the views of State securities and corporate regulators, and 
must report on its analysis in its next annual report to 
Congress.
    The study must include an analysis of whether current 
standards and practices promote full disclosure to shareholders 
of relevant information; whether corporate codes of ethics are 
adequate for shareholder protection; the extent to which 
conflicts of interest are aggressively reviewed; the extent to 
which sufficient legal protection exists to ensure that any 
manager who attempts to manipulate or unduly influence an audit 
is subject to appropriate sanctions and liability; whether the 
rules, standards and practices relating to determining whether 
independent directors are in fact independent are adequate; 
whether rules relating to the independence of directors serving 
on audit committees are adequate to protect investors and are 
uniformly applied; whether the duties and responsibilities of 
audit committees should be established by the Commission; and 
what further or additional practices or standards might best 
protect investors and promote the interests of shareholders.

Section 16. Study of Enforcement Actions

    Section 16 requires the Commission to review and analyze 
all of its enforcement actions involving violations of 
securities law reporting requirements and all restatements of 
financial statements over the past five years. The purpose of 
the review is to identify the areas of reporting most 
susceptible to fraud, inappropriate manipulation or 
inappropriate earnings management, such as revenue recognition 
and the accounting treatment of off-balance sheet special 
purpose entities. The Commission must report its findings to 
Congress within 180 days of enactment, and use its findings to 
revise rules and regulations as necessary.

Section 17. Study of Credit Rating Agencies

    Section 17 requires the Commission to conduct a study of 
the role and function of credit rating agencies in the 
operation of the securities markets, and report on the analysis 
to the President and Congress within 180 days of enactment. In 
conducting the study, the Commission must examine the role of 
credit rating agencies in the evaluation of securities issuers, 
and the importance of that role to investors and the 
functioning of the securities markets; any impediments to the 
accurate appraisal by credit rating agencies of the financial 
resources and risks of issuers; any measures which may be 
required to improve the dissemination of information concerning 
such resources and risks when credit rating agencies announce 
credit ratings; any barriers to entry into the business of 
acting as a credit rating agency and measures needed to remove 
such barriers; and any conflicts of interests in the operation 
of credit rating agencies and measures to prevent those 
conflicts or ameliorate their consequences.

Section 18. Study of Investment Banks

    Section 18 directs the General Accounting Office (GAO) to 
conduct a study on the role of investment banks and financial 
advisors in assisting public companies in manipulating their 
earnings and obfuscating their true financial condition. The 
section directs the GAO to address the role of investment banks 
in the bankruptcy of Enron Corporation, the failure of Global 
Crossing, and in the creation and marketing of transactions 
designed to obfuscate a company's financial picture. The GAO is 
directed to report to Congress within 180 days of enactment of 
the bill.

Section 19. Study of Model Rules for Attorneys of Issuers

    Section 19 directs the Comptroller General to conduct a 
study of the Model Rules of Professional Conduct promulgated by 
the American Bar Association and rules of professional conduct 
applicable to attorneys established by the Commission to 
determine whether such rules provide adequate guidance to 
attorneys with respect to their ethical obligations. The 
Comptroller General is ordered to report to the House Financial 
Services Committee and the Senate Banking Committee.

Section 20. Enforcement Authority

    Section 20 grants the Commission all of the authorities 
granted to it under the securities laws in order to enforce the 
bill. Commission actions under the legislation, including 
actions on rules and regulations, are subject to review in the 
same manner as actions under the securities laws.

Section 21. Exclusion for Investment Companies

    Section 21 clarifies that certain provisions of the bill 
are not meant to apply to investment companies registered with 
the Commission under the Investment Company Act of 1940. 
Because those companies are already subject to a thorough 
regulatory regime, the application of these provisions would be 
inappropriate.

Section 22. Definitions

    Section 22 defines terms used in the bill.

         Changes in Existing Law Made by the Bill, as Reported

    The bill does not amend existing law.

                             MINORITY VIEWS

    The collapse of the Enron Corporation provided irrefutable 
evidence of serious, systemic problems in our financial 
reporting system and our capital markets. Far from being an 
isolated instance, Enron was only the most spectacular example 
of what has become a common phenomenon--earnings manipulation 
and deceptive accounting by our largest companies. Before 
Enron, company after company--Waste Management, Sunbeam, 
Cendant, W.R. Grace, and many others--were found to have 
manipulated their accounting to present a picture to investors 
that did not match reality. As evidenced by the record number 
of investigations opened by the SEC thus far this year, the 
problem has only become more acute.
    The safeguards that should protect investors from such 
practices have failed at every level in company after company, 
overwhelmed by the temptation for companies to cheat, 
overstate, or obscure their financial disclosure to improve 
short-term results and meet analyst or investor expectations. 
The stock prices of many companies have been whipsawed by any 
suggestion of possible accounting problems, indicating a clear 
decline in confidence in our financial reporting system. While 
this system has long been viewed as the best in the world, its 
reputation has suffered from a string of record financial 
restatements and prosecutions of some of our largest companies.
    Virtually all of the witnesses heard by the Committee spoke 
of the need for auditors to be willing to stand up to 
management and for audit committees to take real responsibility 
for audits and auditors. To do this, we must significantly 
alter the relationship of the auditor to its client, strengthen 
the functioning of audit committees, and provide meaningful 
ongoing oversight of the auditing profession. We should use 
this opportunity to restore the vitality of critical investor 
safeguards by ensuring that auditors and audit committees can 
once again act as the first line of defense in protecting 
investors. The market alone cannot provide an effective or 
lasting solution to these problems.
    To restore confidence in the integrity of our markets, this 
Congress should enact tough and credible legislation to address 
the serious and growing problem of earnings management and 
accounting fraud. There are a number of important areas in 
which the bill reported out of the Financial Services Committee 
should be improved:
    Oversight of the accounting industry. In spite of the 
critical role that auditors play in the financial reporting 
system for publicly traded companies under our securities laws, 
oversight of the industry has been left entirely to the 
industry itself, with little input from either the SEC or the 
public. While a broad consensus has formed on the need for a 
new public oversight body for the accounting profession, there 
are major differences on the attributes such a regulator must 
have to be credible and effective. The bill reported out of 
committee leaves these matters to SEC rulemaking, effectively 
allowing these issues to remain open to debate even after 
Congress has acted.
    Given the importance of these decisions to the 
effectiveness of the new regulator, Congress should not 
delegate this task. Without a clear mandate from Congress, the 
structure and role of the new regulator will be the subject of 
continued debate and will be more limited than needed to 
effectively oversee the auditing industry. Delegating decisions 
on its duties and powers to the SEC provide an opportunity for 
the authority of the new regulator to be weakened.
    The new regulator should have authority to set audit 
quality and independence standards, rather than just enforcing 
the standards set by industry bodies. While the regulator could 
chose to rely on existing industry standards if it determines 
they are adequate to ensure high-quality audits, the regulator 
should be able to use the results of the experience gained from 
reviewing auditors and audits to determine where new or more 
explicit standards are needed in problematic areas. Congress 
should strengthen the bill reported by Committee to provide 
this authority.
    The new regulator also should have clear disciplinary and 
investigative powers. Unlike the tangled jumble of existing 
industry organizations, the new regulator must be given the 
tools to provide meaningful quality control and to conduct 
timely investigations and disciplinary actions. It must have 
the ability to draw on its experiences to strengthen the 
industry standards as necessary to provide the high level of 
quality and independence that we expect of auditors of public 
companies. Clarifying the authority of the regulator will 
enable it to better coordinate with the SEC, rather than 
waiting years until after SEC actions are completed. The 
provisions of the bill reported out by the committee should be 
significantly improved in this regard.
    Auditor independence. While an auditor's first duty should 
be to the public, auditors currently are beholden to their 
audit clients for fees for non-audit services that may far 
exceed the audit fees they receive. Data now available under 
the Security and Exchange Commission's disclosure rule on non-
audit fees makes clear that, for the auditors of many large 
public companies, audit fees are a minute percentage of the 
fees they receive. The non-audit services that auditors provide 
to the public companies they audit must be limited and must be 
made subject to real oversight by the audit committees.
    The bill reported out of committee includes no real limits 
on the non-audit services that auditors provide to their audit 
clients. While H.R. 3763 includes a provision that purports to 
prohibit auditors from providing audit clients with two non-
audit services, financial information design and implementation 
and internal audit outsourcing. The language of the provision 
references the existing SEC rules in a way that includes only 
the limited restrictions that the SEC currently places on these 
services. By codifying existing regulatory carve-outs, the 
provision effectively makes no change in existing law, not even 
going as far as the accounting industry has announced it is 
willing to go voluntarily.
    The bill reported out of committee should have included 
real limits on the non-audit services that auditors provide to 
their audit clients where those services create conflicts for 
auditors, such as services that result in the auditor auditing 
its own work. Additionally, while some non-audit services do 
not create conflicts for auditors or are difficult to separate 
from audit work, the provision of such services by an auditor 
to its audit client should be carefully examined to ensure that 
the full scope of services provided are in the best interests 
of shareholders, rather than auditors or management.
    Congress should strengthen the bill reported by the 
committee to include provisions to ensure that the full scope 
of the relationship between an auditor and its audit client are 
subject to the control of the audit committee in order to 
enable the audit committee to effectively oversee the auditor. 
A requirement for audit committee approval of non-audit 
services would promote the independence of the audit by 
ensuring that it is responsible to the audit committee and 
shareholders, rather than to management. Such a provision would 
enable an audit committee to determine what makes sense for the 
individual company and its auditor in light of the full range 
of services and activities of its auditor.
    The role of the audit committee. The bill reported out of 
committee calls for a study of corporate governance, but does 
not in any meaningful way address to whom the outsider auditors 
report. In our view, the bill should have included a provision 
that would have required an issuer's auditor to be appointed by 
and report to the audit committee of the board of directors. In 
addition, it is vital that the audit committee has an ongoing 
dialogue with the outside auditor as a critical check on the 
veracity of the financial statements and internal controls of 
the company.
    The record before this Committee demonstrates that the 
audit committee has the responsibility to shareholders to make 
sure that their auditors are doing their job, raise the tough 
questions, and ensure that the financial picture of the company 
is accurate and portrays the true nature of the financial 
condition of the company. It is clear from the Enron case, as 
the special committee of the board of directors of Enron 
concluded, that at every level corporate oversight failed, 
including and perhaps most acutely at the audit committee 
level. It is important to vest the audit committee with the 
clear authority to closely oversee the work of the auditors and 
take seriously their oversight responsibilities.
    Mr. Harvey Pitt, Chairman of the Securities and Exchange 
Commission, said in a recent speech, ``while shareholder 
approval of outside auditors is now a well established aspect 
of corporate governance, I believe we should also explore 
whether the audit committee should be vested with the initial 
decision about which firm is recommended to the shareholders. I 
also believe that audit committees should have the authority to 
fire outside auditors (or prevent management from firing 
them).''
    Independent directors serving as consultants. The bill 
reported out of the Committee does not include provisions to 
ensure that independent directors are truly independent. The 
bill should have included a provision that would prevent the 
practice of paying independent directors as ``consultants'' 
while they serve on the board. Lynn Turner, former Chief 
Accountant of the SEC, among others, have argued that paying 
directors as consultants is back door compensation that 
fundamentally undermines their independence. The critical 
question is whether ``independent'' directors who are receiving 
significant consulting compensation would challenge the same 
management that is paying them to serve as consultants. Such a 
provision is a simple step in ensuring that directors act in 
the best interests of shareholders.
    Analysts conflicts. The role of many securities analysts in 
continuing to push Enron's stock even as the company was 
collapsing is well recognized. In spite of the evidence before 
us, the committee failed to address the core issues that 
undermine securities analysts' independence. That is, 
compensation arrangements of analysts at investment banks 
provide incentives to win and retain business, rather than 
provide investors with high-quality unbiased research.
    To ensure securities analyst independence Congress should 
have adopted a provision that would require:
           That the self regulatory organizations adopt 
        rules to ban equity research analysts from holding 
        equity interests in the companies that they cover;
           That analyst compensation not be based on 
        investment banking revenue, but permit compensation to 
        be based on the overall success of the firm;
           That the investment banking department have 
        no input into the compensation, hiring, firing and 
        promotion of securities analysts.
           That SROs establish criteria for evaluating 
        analyst research quality and require that analyst 
        compensation be principally based on the quality of an 
        analyst's research.
    Disgorgement of bonuses and other incentives. In an attempt 
to restore accountability among corporate officers, the 
President unveiled a 10 point plan. One of the meritorious 
items in that plan was a call to require disgorgement of 
incentive-based compensation from officers and directors in 
cases of false or misleading statements made by such officers 
that required an accounting restatement. Instead of attempting 
to implement this straightforward and common sense proposal, 
the Committee simply tasked the SEC to study the question of 
disgorgement. Additionally, the report language attempts to 
raise the bar to use of this remedy by stating that it should 
be used only where the Commission can prove ``extreme 
misconduct''. Establishing such a high standard will make it 
very difficult, if not impossible, for the Commission to obtain 
disgorgement of millions of dollars that executives have earned 
from stock sales at the same time they were committing 
securities fraud.
    We, however, believe that Congress should act quickly to 
provide the SEC with the power to require disgorgement of 
compensation in an administrative proceeding. Congress should 
have adopted a provision that requires the SEC to prescribe 
regulations to require disgorgement in certain proceedings to 
seek disgorgement of salaries, commissions, fees, bonuses and 
other incentive-based compensation obtained by an officer or 
director of an issuer who made or caused to be made the filing 
of financial statements that were at the time false or 
misleading.
    In addition, the bill should have included a provision that 
provides in any action or proceeding brought or instituted by 
the Commission under the securities laws against any person who 
made or caused to be made the filing of financial statements 
that were at the time false or misleading or for causing, or 
aiding and abetting any other violation of the securities laws 
may be required to disgorge salaries, commissions, fees, 
bonuses and other incentive-based compensation.
    CEO and CFO certification of financial statements. Another 
important policy initiative advanced by the President was a 
recommendation that the principal executive officer or officers 
and the principal financial officer or officers (CEO and CFO), 
or persons performing similar functions, certify to the 
accuracy of the financial statements included in each annual or 
quarterly report filed or submitted to the SEC. It reasonable 
to expect that corporate officers stand behind the company's 
public disclosure and be subject to sanction should they 
violate that certification. Regrettably, the bill reported out 
of the Committee did not include this worthwhile policy 
initiative. Congress should implement this initiative by 
including provisions to require the CEO and the CFO to certify 
that:
    1. Such officer has reviewed the report.
    2. To the officer's knowledge, the report does not contain 
any untrue statement of material fact or omit to state a 
material fact to make the statements made, not misleading.
    3. Based on the officer's knowledge, the financial 
statements, and other financial information fairly present the 
financial condition and results of the company as of, and for, 
the periods presented in the report.
    4. Such officers have created and maintained internal 
procedures to ensure that material information relating to the 
company is made known to them by others within the company.
    5. The company has evaluated its internal controls 
including the fact that the singing officers have disclosed to 
the auditors and the audit committee that: (a) all significant 
deficiencies in such controls and (b) any fraud, whether or not 
material, that involves management or other employees who have 
a significant role in the company's internal controls. In 
addition, the signing officers have indicated in the report to 
shareholders whether or not there were significant changes in 
internal controls subsequent to the date of the evaluation of 
internal controls and whether any corrective actions have been 
taken.
    If such provisions are adopted, the SEC would have 
available to it civil money penalties and injunctive power to 
enforce these provisions as provided in the Securities Exchange 
Act of 1934. Morever, a willful violation of these 
certifications would carry criminal sanctions under Section 32 
of the Securities Exchange Act of 1934.
    Officer and director bars. An amendment sponsored by the 
majority that was ultimately adopted has made it more difficult 
rather than less for the SEC in an administrative proceeding to 
seek an officer and director bar against individuals who are 
guilty of misconduct. The bill purports to authorize the SEC to 
bar officers and directors from serving as an officer or 
director in proceedings brought by the Commission under Section 
21(c) of the Securities and Exchange Act of 1934. Such a bar 
would be permitted if the ``person's conduct demonstrates 
substantial unfitness to serve as an officer or director of any 
issuer.'' In determining unfitness the Commission shall 
consider several factorsincluding ``the likelihood that the 
conduct giving rise to the violation, or similar conduct * * * may 
recur if the person is not so prohibited.''
    Congress provided the SEC with explicit authority to seek 
officer and director bars in 1990. Current statutory authority 
provides the Commission the power to seek an officer and 
director bar against any individual who violates Section 10(b) 
of the Securities Exchange Act or Section 17(a)(1) of the 
Securities Act, and whose ``conduct demonstrates substantial 
unfitness to serve as an officer or director'' of a public 
company. Unfortunately, the Commission's ability to obtain 
officer and director bars, however, has been limited by 
judicial interpretations of the phrase ``substantial 
unfitness'' that have created a very high standard for 
obtaining a bar. Several courts apply a six-part test which 
require, among other factors, a showing that the misconduct is 
likely to recur. This is precisely the same test that the bill 
reported out by this Committee codified. The Director of 
Enforcement of the SEC has said in a recent speech, ``the 
result has been, unbelievably, that in some cases courts have 
refused to impose permanent officer and director bars on 
individuals who have engaged in egregious--even criminal--
misconduct.'' The argument that this bill facilitates officer 
and director bars for those guilty of serious misconduct is an 
illusion. It codifies exactly the barriers that the SEC says 
are the problem.
    The bill should have included legislative modifications to 
existing law that facilitate officer and director removal in 
either a court proceeding or in an administrative action. For 
example, the Committee should have adopted a sensible and real 
approach to the problem by deleting the word ``substantial'' 
before unfitness in Section 21(d)(2) of the Exchange Act. The 
effect would have been to lessen the unreasonable barriers 
imposed by some courts on the SEC to obtain such bars. In 
addition, the Committee should have been empowered as a remedy 
in its own administrative proceeding to seek an officer and 
director bar without going to district court to seek such a 
bar, without imposing unreasonable factors that serve only to 
frustrate their efforts.
    These provisions, had they been adopted, would have given 
effect to the President's plan to make it easier for the SEC to 
bar officers and directors who have been determined to have 
committed serious misconduct. The majority amendment approved 
by the Committee on a party-line vote has only succeeded in 
making much more difficult, while claiming that they have 
enacted real reform.
    Shareholder approval of stock option plans. SEC Chairman 
Pitt has expressed his concern that stock options no longer 
serve to align the interests of management with those of 
shareholders and described specific measures that he felt were 
needed to make option plans work as intended. He stated that 
all stock option plans that allow a director or officer to 
acquire stock should be approved by shareholders, that 
decisions on granting options to senior management should be 
entrusted to a committee of independent directors, and that 
corporate boards should consider whether officers demonstrate 
sustained, long-term growth before options can be exercised.
    The growing evidence that many executives have reaped 
significant rewards from stock option plans even as their 
companies' earnings and stock prices have plummented calls for 
measures to realign shareholder and executive interests. The 
bill reported out of committee failed to include such 
provisions. Institutional investors, pension plans, and others 
have urged that shareholders be permitted to vote on stock 
option plans that are used to provide executive compensation. 
The manner in which stock options and other compensation is 
provided to executives is an important factor in aligning the 
interests of shareholders and executives, and should be subject 
to shareholder approval.
    Private litigants' rights. The Committee bill fails to 
address very serious problems that confront pension funds and 
other investors who seek compensation for securities fraud. In 
the 1991 Lampf case, in a 5-to-4 decision, the Supreme Court 
significantly shortened the period of time in which investors 
may bring securities fraud action. The decision requires the 
victims of fraud to bring suit by the earlier of 1 year from 
the discovery of the fraud or 3 years from the fraudulent act.
    Securities fraud is very difficult to detect because the 
guilty parties often hide or destroy incriminating evidence. 
The shorter period provide by Lampf does not allow individual 
investors adequate time to discover and pursue violations of 
securities laws. Moreover as the dissenting Justices in Lampf 
argued, the case's strict statute of limitations runs counter 
to the almost uniform rule in the United States rejecting short 
statutes of limitations for fraud-based causes of action.
    The unreasonably brief statue of limitations has already 
had an adverse impact in the Enron debacle. In February of this 
year, in testimony before the Senate Judiciary Committee, 
Christine O. Gregorie, the Attorney General for the State of 
Washington, testified that Washington State Pension fund 
suffered over $100 million in losses because of the misleading 
financial statements issued by Enron and audited by Andersen, 
but, was only able to make a claim for approximately $50 
million because of the restricted statute of limitations that 
applies to securities fraud cases.
    Both Democratic and Republican past-SEC Chairman have 
stressed the integral role of private lawsuits in maintaining 
investor confidence. However, since the Supreme Court's 1994 
decision in the Central Bank of Denver case, the victims of 
fraud have not been able to bring claims against the 
accountants, lawyers, investment banks and others who aid and 
abet issuers in misleading the public about the real state of 
company balance sheets.
    Our market regulatory system depends on the independent 
professionals who verify and analyze the disclosures of 
publicly held companies. The reduced threat of legal liability 
for these ``gatekeepers'' that has existed since 1994 has 
helped to create an environment of laxity, where gatekeepers do 
not do all that they reasonably can to protect the investing 
public.
    Although the Private Securities Litigation Reform Act 
partially overturned the Central Bank of Denver decision by 
restoring some of the SEC's authority to pursue aiders and 
abettors of securities fraud, that legislation failed to give 
the victims of fraud the right to sue those who aid issuers in 
misleading and defrauding the public. Moreover, the 1995 
legislation made it harder for the SEC to prove the complicity 
of aiders and abettors. The 1995 law requires the SEC to prove 
that a defendant had actual knowledge of the fraud. The 1995 
law does not permit the SEC to prosecute aiders and abettors 
who acted recklessly with regard to their client's fraud, which 
was the standard prior to the 1994 Supreme Court case.
    In 1995, both Federal and State securities regulators, 
academics and others (including a principal sponsor of the 1995 
legislation), urged Congress to overturn the Lampf and the 
Central Bank of Denver decisions. We should now heed these 
recommendations and provide investors a fairer system of 
redress in the courts.
    First, Congress should now enact a statute of limitations 
that provides that a private securities fraud case may be 
brought not later than the earlier of five years after the date 
on which the alleged violation occurred or three years after 
the date in which the alleged violation was discovered. Such a 
provision would provide a reasonable period of time in which to 
uncover and investigate fraud and, then, bring meritorious 
claims.
    Second, Congress should reverse the trend toward laxity by 
restoring a private right of action against those gatekeepers 
who are guilty of aiding securities fraud and by restoring the 
pre-1994 liability standards for the professionals who are 
supposed to protect the public.

                                   John J. LaFalce.
                                   Paul E. Kanjorski.
                                   Bernard Sanders.
                                   Luis V. Gutierrez.
                                   Janice D. Schakowsky.

                    ADDITIONAL VIEWS OF MR. LaFALCE

    Auditor Rotation. The bill reported out by the Committee 
does not contain a provision relating to auditor rotation. 
Moreover, the bill does not provide for rotation of the audit 
partner as suggested by Chairman Pitt in his testimony before 
the Committee. Enron's failure heightened concerns about the 
sufficiency of the current rules and independence standards for 
auditors, particularly concerning the scope of non-audit 
services that auditors perform for their audit clients. Enron's 
auditor, for instance, received a very significant portion of 
its fees from Enron for services that were not related to its 
audit responsibilities. It also raised the real concern that 
auditors' were more interested in the client than their duty to 
the public.
    The bill should have included a provision to mandate 
rotation. Auditor rotation would provide a number of important 
benefits including:
          1. A new audit firm would bring to bear a skepticism 
        and fresh perspective that a long-term auditor may 
        lack;
          2. Second, auditors tend to rely excessively on prior 
        years' working papers, including prior tests of 
        client's internal control structure, particularly if 
        fees are concerned;
          3. Long-time auditors may come to believe that they 
        understand the totality of the client's issues, and may 
        look for those issues in the next audit rather than 
        staying open to the other possibilities; and
          4. An auditor may place less emphasis on retaining a 
        client relationship even at the cost of a compromised 
        audit if it knows the engagement will end after several 
        years.
    Auditor/Issuer Employment Restrictions. The bill reported 
out by the Committee does not provide for any restrictions on 
hiring of audit firm partners and other employees of an audit 
client. It therefore fails to address a critical issue that 
compromises the independence of an audit. As we saw 
dramatically in Enron and Global Crossing, members of the audit 
team often move to work for their audit clients. The bill 
should have included provisions that limit the practice of 
hiring members of an audit team who will then become the client 
of their former audit team colleagues. This dynamic creates a 
revolving door system that compromises the ability for auditors 
to challenge management regarding their accounting practices 
and public disclosure.
                                                   John J. LaFalce.

                    ADDITIONAL VIEWS OF MR. SHERMAN

    Mr. Chairman, I voted for H.R. 3763 with the hope that, on 
the House floor, we will improve this legislation. I do not 
know if I will support this legislation on the floor, if we are 
unable to improve it. As approved by the Committee, the bill is 
a modest but inadequate step forward.
                                                      Brad Sherman.

              ADDITIONAL VIEWS OF MESSRS. BENTSEN AND WATT

    The Bentsen/Watt amendment adopted by the Committee to H.R. 
3763, the Corporate and Auditing Accountability, Responsibility 
and Transparency Act of 2002, is designed to enhance the 
Securities and Exchange Commission's (the ``SEC'') authority 
with respect to scope of services provided by auditors deemed 
to be independent under the bill. Specifically, the Bentsen/
Watt amendment authorizes the SEC to review services provided 
by auditors of public companies to audit clients to determine 
whether the provision of such services would impact the 
auditor's independence. Additionally, the amendment provides 
authority for the SEC to adopt rules to modify the list of 
prohibited services in order to cure any such conflict. 
Finally, the amendment directs the SEC to report to Congress 
periodically on such reviews and rules.
    We offered this amendment because we believed that the 
underlying bill insufficiently addressed the need for ongoing 
oversight by the SEC of potential conflicts between auditors 
and their clients to the detriment of investors. Failure to 
adequately ensure auditor independence potentially puts 
investors at risk and undermines confidence in markets. 
Additionally, we believed efforts to expand the list of 
prohibited services by statute, while well intentioned, to be 
inflexible and would be better handled by regulators. While 
some have argued, not incorrectly, that the SEC has existing 
authority to address conflicts of auditors of public issuers, 
we also believe the Congress should be on record endorsing and 
encouraging such authority when necessary to protect investors 
and ensure confidence in the markets.

                                   Ken Bentsen.
                                   Melvin L. Watt.

                      DISSENTING VIEWS OF MR. PAUL

    Seldom in history have supporters of increased state power 
failed to take advantage of a real or perceived crisis to 
increase government interference in our economic and/or 
personal lives. Therefore we should not be surprised that the 
events surrounding the Enron bankruptcy are being used to 
justify the expansion of federal regulatory power contained in 
H.R. 3763, the Corporate and Auditing Accountability, 
Responsibility, and Transparency Act of 2002 (CARTA).
    So ingrained is the idea that new federal regulations will 
prevent future Enrons, that the debate on H.R. 3763 has largely 
been between CARTA's supporters and those who believe this bill 
does not provide enough federal regulation and control. I would 
like to suggest that before Congress imposes new regulations on 
the accounting profession, perhaps we should consider whether 
the problems the regulations are designed to address were at 
least in part caused by prior government interventions into the 
market. Perhaps Congress could even consider the almost 
heretical idea that reducing federal control of the markets is 
in the public's best interest. Congress should also consider 
whether the new regulations will have costs which might 
outweigh any (marginal) gains. Finally, Congress should 
contemplate whether we actually have any constitutional 
authorization to impose these new regulations, instead of 
simply stretching the Commerce Clause to justify the program de 
jour.
    CARTA establishes a new bureaucracy with enhanced oversight 
authority of accounting firms, as well as the authority to 
impose new mandates on these firms. CARTA also imposes new 
regulations regarding investing in stocks and enhances the 
power of the Securities and Exchange Commission (SEC). However, 
companies are already required by federal law to comply with 
numerous mandates, including obtaining audited financial 
statements from certified accountants. These mandates have 
enriched accounting firms and may have given them market power 
beyond what they could obtain in a free market. These laws also 
give corrupt firms an opportunity to attempt to use political 
power to gain special treatment for federal lawmakers and 
regulators at the expense of their competitors and even, as 
alleged in the Enron case, their employees and investors.
    When Congress establishes a regulatory state it creates an 
opportunity for corruption. Unless CARTA eliminates original 
sin, it will not eliminate fraud. In fact, by creating a new 
bureaucracy and further politicizing the accounting profession, 
CARTA may create new opportunities for the unscrupulous to 
manipulate the system to their advantage.
    Even if CARTA transformed all (or at least all accountants) 
into angels, it could still harm individual investors. First, 
new regulations inevitably raise the overhead costs of 
investing. This will affect the entire economy as it lessens 
the capital available to businesses, thus leading to lower 
rates of economic growth and job creation. Meanwhile, 
individual investors will have less money for their retirement, 
their children's education, or to make a down payment on a new 
home.
    Government regulations also harm investors by inducing a 
sense of complacency. Investors are much less likely to invest 
prudently and ask tough questions of the companies they are 
investing in when they believe government regulations are 
protecting their investments. However, as mentioned above, 
government regulations are unable to prevent all fraudulent 
activity, much less prevent all instances of imprudent actions. 
In fact, as also pointed out above, complex regulations create 
opportunities for illicit actions by both the regulator and the 
regulated. Publicly held corporations already comply with 
massive amounts of SEC regulations, including the filing of 
quarterly reports that disclose minute details of assets and 
liabilities. If these disclosure rules failed to protect Enron 
investors, will more red tape really solve anything?
    In truth, investing carries risk, and it is not the role of 
the federal government to bail out every investor who loses 
money. In a true free market, investors are responsible for 
their own decisions, good or bad. This responsibility leads 
them to vigorously analyze companies before they invest, using 
independent financial analysts. In our heavily regulated 
environment, however, investors and analysts equate SEC 
compliance with reputability. The more we look to the 
government to protect us from investment mistakes, the less 
competition there is for truly independent evaluations of 
investment risk.
    Increased federal interference in the market could also 
harm consumers by crippling innovative market mechanism to hold 
corporate managers accountable to their shareholders. As former 
Treasury official Bruce Bartlett pointed out in a recent 
Washington Times column, during the 1980s, so-called corporate 
raiders helped keep corporate management accountable to 
shareholders through devices such as the ``junk'' bond, which 
made corporate takeovers easier. Thanks to the corporate 
raiders, managers knew they had to be responsive to shareholder 
needs or they would become a potential target for a takeover.
    Unfortunately, the backlash against corporate raiders, led 
by demographic politicians and power-hungry bureaucrats eager 
to expand the financial police state, put an end to hostile 
takeovers. BruceBartlett, in the Washington Times column sited 
above, described the effects of this action on shareholders, ``Without 
the threat of a takeover, managers have been able to go back to 
ignoring shareholders, treating them like a nuisance, and giving 
themselves bloated salaries and perks, with little oversight from 
corporate boards. Now insulated from shareholders once again, managers 
could engage in unsound practices with little fear of punishment for 
failure.'' Ironically, the federal power grab which killed the 
corporate raider may have set the stage for the Enron debacle, which is 
now being used as an excuse for yet another federal power grab!
    The free market, if left alone by Congress, is perfectly 
capable of disciplining businesses who engage in unsound 
practices. After all, before the government intervened, Arthur 
Anderson and Enron had already begun to pay a stiff penalty, a 
penalty delivered by individual investors acting through the 
market. This shows that not only can the market deliver 
punishment, but it can also deliver this punishment swifter and 
more efficiently than the government. We cannot know what 
efficient means of disciplining companies would emerge from a 
market process but we can know they would be better at meeting 
the needs of investors than a top-down regulatory approach.
    Of course, while the supporters of increased regulation 
claim Enron as a failure of ``ravenous capitalism,'' the truth 
is Enron was a phenomenon of the mixed economy, rather than the 
operations of the free market. Enron provides a perfect example 
of the dangers of corporate subsidies. The company was (and is) 
one of the biggest beneficiaries of Export-Import (Ex-Im) Bank 
and Overseas Private Investment Corporation (OPIC) subsidies. 
These programs make risky loans to foreign governments and 
businesses for projects involving American companies. While 
they purport to help developing nations, Ex-Im and OPIC are in 
truth nothing more than naked subsidies for certain 
politically-favored American corporations, particularly 
corporations like Enron that lobby hard and give huge amounts 
of cash to both political parties. Rather than finding ways to 
exploit the Enron mess to expand federal power, perhaps 
Congress should stop aiding corporations like Enron pick the 
taxpayer's pockets through Ex-Im and OPIC.
    If nothing else, Enron's success at obtaining state favors 
is another reason to think twice abut expanding political 
control over the economy. After all, allegations have been 
raised that Enron used the same clout by which it received 
corporate welfare to obtain other ``favors'' from regulators 
and politicians, such as exemptions from regulations that 
applied to their competitors. This is not an uncommon 
phenomenon when one has a regulatory state, the result of which 
is that winners and losers are picked according to who has the 
most political clout.
    Congress should also examine the role the Federal Reserve 
played in the Enron situation. Few in Congress seem to 
understand how the Federal Reserve system artificially inflates 
stock prices and causes financial bubbles. Yet, what other 
explanation can there be when a company goes from a market 
value of more than $75 billion to virtually nothing in just a 
few months? The obvious truth is that Enron was never really 
worth anything near $75 billion, but the media focuses only on 
the possibility of deceptive practices by management, ignoring 
the primary cause of stock overvaluations: Fed expansion of 
money and credit.
    The Fed consistently increased the money supply (by 
printing dollars) throughout the 1990s, while simultaneously 
lowering interest rates. When dollars are plentiful, and 
interest rates are artificially low, the cost of borrowing 
becomes cheap. This is why so many Americans are more deeply in 
debt than ever before. This easy credit environment made it 
possible for Enron to secure hundreds of millions in 
uncollateralized loans, loans that now cannot be repaid. The 
cost of borrowing money, like the cost of everything else, 
should be established by the free market--not by government 
edict. Unfortunately, however, the trend toward overvaluation 
will continue until the Fed stops creating money out of thin 
air and stops keeping interest rates artificially low.
    Finally, I would remind my colleagues that Congress has no 
constitutional authority to regulate the financial markets or 
the accounting profession. Instead, responsibility for 
enforcing laws against fraud are under the jurisdiction of the 
state and local governments. This decentralized approach 
actually reduces the opportunity for the type of corruption 
referred to above--after all, it is easier to corrupt one 
federal official than 50 state officials!
    In conclusion, H.R. 3763 expands federal power over the 
accounting profession and the financial markets. By creating 
new opportunities for unscrupulous actors to maneuver through 
the regulatory labyrinth, increasing the costs of investing, 
and preempting the market's ability to come up with creative 
ways to hold corporate officials accountable, this legislation 
harms the interests of individual workers and investors. 
Furthermore, this legislation exceeds the constitutional limits 
on federal power, interfering in matters the 10th amendment 
reserves to state and local law enforcement. I therefore urge 
my colleagues to reject this bill. Instead, Congress should 
focus on ending corporate welfare programs which provide 
taxpayer dollars to large politically-connected companies, and 
ending the misguided regulatory and monetary policies that 
helped create the Enron debacle.
                                                          Ron Paul.

                    DISSENTING VIEWS OF MR. CAPUANO

    The Enron and Global Crossing bankruptcies and the increase 
in corporate earnings restatements have shaken the public's 
confidence in our financial system. Congress has a 
responsibility to help restore this confidence by enacting 
legislation that strengthens oversight of our accounting 
system, improves corporate governance, and modernizes financial 
reporting standards. While this legislation makes a number of 
significant reforms, I oppose H.R. 3763 because I have serious 
concerns with two provisions in the legislation reported by the 
Financial Services Committee.
    The first provision addresses the composition of the Public 
Regulatory Organization (PRO) created by the legislation. Under 
an amendment that was adopted, the board will consist of five 
members, with at least two of these being persons licensed to 
practice public accounting and with significant experience 
auditing public companies. The three other board members must 
be members of the public.
    Unfortunately, the definition of the public members of the 
board in the amendment is troubling. It specifically allows 
members of the accounting profession to serve as public members 
of the board as long as they have not practiced in at least two 
years. In addition, the legislation fails to adequately define 
``members of the accounting profession.'' This would 
potentially allow the entire board to be comprised of 
practicing and non-practicing members of the accounting 
profession.
    While I strongly believe that members of the accounting 
profession should serve on the PRO, and that all members should 
meet a standard of financial literacy, I also believe that at 
least one public member of the board should come from the 
accounting profession. Individuals working in other 
professions, including those managing pension funds, trading in 
the financial markets, those involved with corporate governance 
issues, or governmental experts on budgeting and finance could 
bring important knowledge, experience and perspective to the 
board. In addition, appointing members from outside the 
accounting profession will give the PRO greater credibility as 
a protector of investor interests.
    The second provision directs the Securities and Exchange 
Commission (SEC) to analyze whether officers and directors of 
issuers should be required to disgorge profits gained or losses 
avoided by the sale of securities related to the filing of a 
restatement of earnings on the part of the issuer. However, the 
bill only directs the SEC to investigate requiring disgorgement 
for transactions undertaken in the six months prior to the 
restatement. Since many SEC investigations uncover earnings 
manipulation over a span of several years, requiring 
disgorgements of inappropriate gains over a limited time period 
will not give an accurate picture of the profits gained by the 
manipulation of financial statements by insiders. This 
arbitrary six-month limit should be lifted.
    Without significant changes to these provisions to address 
these concerns, I cannot support this legislation.
                                                Michael E. Capuano.

                                
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