H1544 CONGRESSIONAL RECORD — HOUSE April 24, 2002 should have had the opportunity to discuss the So our amendment, also rejected by the PERMISSION FOR COMMITTEE ON modest and reasonable package of amend- Rules Committee, did three things to imple- FINANCIAL SERVICES TO FILE ments I put before the Rules Committee to ment the Bush plan. First, it requires CEOs SUPPLEMENTAL REPORT ON H.R. strengthen this woefully inadequate bill. and CFOs to certify the accuracy of their firms’ 3764, SECURITIES AND EXCHANGE This House should have the opportunity to financial statements. Violation of this provision COMMISSION AUTHORIZATION consider and debate thoughtfully proposals to would carry with it criminal (in the event that ACT OF 2002 strengthen H.R. 3763, the so-called Corporate the violation is willful), civil, and other pen- Mr. OXLEY. Mr. Speaker, I ask unan- and Auditing Accountability, Responsibility, alties provided for under the securities laws. imous consent that the Committee on and Transparency Act of 2002. This bill claims H.R. 3763 contains no similar provision. It is Financial Services be permitted to file to address many of the financial disclosure essential that Congress require officers of and accounting issues raised by the collapse a supplemental report on H.R. 3764. public companies to stand behind their public of Enron. Unfortunately, the kinds of financial The SPEAKER pro tempore. Is there abuses that led to this unprecedented debacle disclosures. That is the absolute minimum we objection to the request of the gen- will not be stopped—or even very much im- should require. tleman from Ohio? peded—by this Republican bill. It is cosmetic Second, this amendment required corporate There was no objection. and simply pretends to bring about reform. officers who falsify their financial statements to f ‘‘Don’t look for a major overhaul of the ac- surrender their compensation, including stock CORPORATE AND AUDITING AC- counting industry soon,’’ says the Wall Street bonuses and other incentive pay. it empow- COUNTABILITY, RESPONSI- Journal in a recent article criticizing the Oxley ered the Securities and Exchange Commis- bill because it ‘‘punts’’ overhaul ‘‘to just where BILITY, AND TRANSPARENCY sion (SEC), in an administrative proceeding, or ACT OF 2002 the industry would like it—the Securities and in court, to seek such a disgorgement. H.R. Exchange Commission.’’ 3763 requires only a study of the question: The SPEAKER pro tempore. Pursu- This bill does virtually nothing to correct the should guilty CEOs forfeit their stock bonuses. ant to House Resolution 395 and rule systemic flaws in our financial reporting sys- XVIII, the Chair declares the House in tem. It fails to strengthen oversight of auditors Third, this amendment empowered the SEC the Committee of the Whole House on and accountants, and fails to hold corporate to bar officers and directors from serving in the State of the Union for the consider- executives fully accountable for their mis- that capacity for a public company if they are ation of the bill, H.R. 3763. deeds. Unless major improvements are made, found guilty of wrongdoing and determined to H.R. 3763 will do nothing to restore integrity to be unfit. It would also remove judicial hurdles b 1105 our financial markets and will not protect the to seeking such a bar in court. Incredibly, the IN THE COMMITTEE OF THE WHOLE savings and pensions plans of millions of Republican bill actually makes ti harder to ob- Accordingly, the House resolved Americans that remain threatened by future tain officer and director bars. It codifies restric- itself into the Committee of the Whole Enrons. tive judicial standards that would make it sub- House on the State of the Union for the The House should have had the opportunity stantially more difficult for the SEC to obtain consideration of the bill (H.R. 3763) to today to work its will on several key areas. officer and director bars—a change which the protect investors by improving the ac- First, I offered an amendment in the Rules head of the SEC’s Enforcement Division has curacy and reliability of corporate dis- Committee to create a powerful new regu- stated publicly is highly problematic. In this re- closures made pursuant to the securi- latory board to ensure that auditors will be gard, H.R. 3763 is a serious step backward. ties laws, and for other purposes, with truly independent and objective. My amend- The Rules Committee even refused to allow Mr. SWEENEY in the chair. ment provided for a regulator that (1) sets The Clerk read the title of the bill. audit and quality standards for auditors of pub- debate on my amendment that gave share- holders a voice in executive compensation de- The CHAIRMAN. Pursuant to the lic companies; (2) possesses sweeping inves- rule, the bill is considered as having tigative and disciplinary powers over audit cisions by requiring that a majority of share- holders approve any stock options plan for an been read the first time. firms; and (3) is controlled by a board com- Under the rule, the gentleman from prised of public members—not the accounting officer or director. H.R. 3763 does not include Ohio (Mr. OXLEY) and the gentleman industry. My amendment took a decidedly dif- a similar provision. Would anyone argue on from Pennsylvania (Mr. KANJORSKI) this floor that shareholders should not have a ferent approach than H.R. 3763, which punts each will control 30 minutes. almost all of the functions and powers of the voice in the lucrative stock option plans of offi- The Chair recognizes the gentleman regulator to the SEC. Only a regulator with ex- cers and directors. After all, it is the share- from Ohio (Mr. OXLEY). plicit powers and duties, and a defined com- holders who own public companies, not man- Mr. OXLEY. Mr. Chairman, I yield position, such as the one I proposed, will en- agement. myself such time as I may consume. sure that the abuses we witnessed in the Finally, the Rules Committee refused to give Today, the House turns to H.R. 3763, Enron debacle will not be repeated. this body an opportunity to debate and vote on In addition, the Republican bill purports to the Corporate and Auditing Account- an amendment to ensure that stock analysts prohibit auditors from providing their audit cli- ability, Responsibility, and Trans- ents with two consulting services: financial re- are truly independent and objective. My parency Act. To my colleagues on both porting systems design and internal auditing. amendment achieved this by (1) barring ana- sides of the aisle, today we must act. In fact, the bill prohibits nothing. Instead, it lysts from holding stock in the companies they We must act for our Nation’s investors, simply codifies existing SEC rules that provide cover; (2) prohibiting analysts’ pay from being retirees, and employees of publicly only very limited restrictions on these services. based on their firms’ investment banking rev- traded companies; and that covers a In contrast, my amendment clarifies the defini- enue; and (3) barring their firm’s investment large majority of Americans. tions of these two services in a way that will banking department from having any input into In recent months our struggling actually ban them. In the case of any non- analysts’ pay or promotion. As with other im- economy has absorbed a number of audit consultant services that are not prohib- portant issues in this legislation, H.R. 3763 shocks. We have endured two large ited, my amendment requires approval by the only requires a study. bankruptcies, Enron and Global Cross- ing. Thousands of jobs have been lost audit committee of the firm’s board of direc- Today we are on the verge of squandering for hardworking employees. Billions of tors. an opportunity for real reform. I urge my col- Second, in a spirit of bipartisanship and dollars are gone from investment port- leagues to consider our substitute and do folios and retirement plans. Investor comity with our Republican friends. Mr. KAN- something real to prevent the next Enron. JORSKI and I have taken President Bush’s pro- confidence has understandably posals on corporate responsibility and execu- Mr. SESSIONS. Mr. Speaker, I yield wavered. tive accountability and prepared an amend- back the balance of my time, and I Congress has examined these issues ment to give them legislative substance and move the previous question on the res- for 4 months. The Committee on Finan- real teeth. Rather than implement the Presi- olution. cial Services alone held seven hearings, dent’s proposals, the GOP bill either regresses The previous question was ordered. took testimony from 33 witnesses; and from current law or does nothing to hold CEOs we are but one of many panels. We accountable. It amazes me that the Repub- The resolution was agreed to. know now what happened, and we know lican bill summarily rejected the President’s A motion to reconsider was laid on what needs to be done. Now it is our re- own plan to promote corporate responsibility. the table. sponsibility to do something about it.

VerDate Apr 18 2002 00:28 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00008 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.011 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1545 We owe action to the American in- We need to empower the SEC to act nances conducted for the benefit of the vestor who faithfully puts away money without tying its hands and within investing public. When an auditor also every month in his IRA or his 401(k) flexible statutory changes. receives a million dollars from the plan. We owe action to the employees Let us remember that a strong regu- company for nonaudit services, com- who lost their jobs, and we owe action lator is not one that is completely dic- mon sense dictates that those nonaudit to all of the American companies who tated to by Congress. A strong regu- fees may influence the auditors’ judg- are operating in good faith and work- lator has some say over his jurisdic- ment in favor of the client. ing to grow. tion, some power and discretion to While H.R. 3763 partially bans two I would like to say a word of thanks shape the capital markets; and I trust nonaudit services, it does not go far to the President and his staff for all of the SEC with this authority and so enough to eliminate the serious poten- the support and encouragement we does our bill. tial for undermining the independence have received throughout the process CARTA makes it a crime for anybody of auditors. Additionally, H.R. 3763 pro- of drafting and moving this bill. His 10- to interfere with a corporate audit. It tects corporate wrongdoers by actually point plan was very much on the same requires CEOs and other corporate in- making it more difficult to ban guilty track as our bill, and the White House siders to disclose within 48 hours when officers and directors from serving in has helped us improve the bill every they sell company stock so that inves- other public companies. In particular, step of the way. tors and employees and retirees know the bill codifies high standards that I also want to say a word of thanks if a corporate officer is getting out. It the SEC complains significantly im- to the 16 Democrats who voted for the prohibits insider sales of company pedes its abilities to obtain officer and bill on final passage in the Committee stock while the employee retirement director bars in court. We must fix this on Financial Services. We appreciate plan is locked down. problem. their support for our sound legislative Strengthening these areas of cor- Finally, the bill prescribes studies, bipartisan product. porate responsibility, accounting over- not legislative action, on some major President Bush has asked us to move sight, and investor information is an issues raised by Enron, whether CEOs on his plan; and clearly, this is a na- important priority as our economy re- who misled investors about the finan- tional priority. We need to encourage covers. Let us show the American peo- cial health of their companies should greater corporate responsibility. We ple that we can respond in a meaning- surrender their bonuses and fat stock need to strengthen and modernize our ful way to their very real economic option and whether stock analysts are accounting oversight, and we need to concerns. Pass CARTA today. pitching stocks they do not believe in. make sure that investors have timely Mr. Chairman, I reserve the balance In sum, Mr. Chairman, the Congress and clear information. There is a real of my time. should not shirk its responsibility by urgency. We cannot undo the past, but Mr. KANJORSKI. Mr. Chairman, I delegating these urgent problems to we can help to prevent future Enrons yield myself such time as I may need. the SEC or shunting them off to the and Global Crossings; and we ought to Mr. Chairman, I rise to oppose H.R. oblivion of bureaucratic studies. We do just that today. 3763, the Corporate and Auditing Ac- have an opportunity and a responsi- In our zeal to act, we can easily do countability, Responsibility, and bility to restore integrity to capital more harm than good. It is easy to do Transparency Act. The dramatic col- markets. Quick fixes will not do the something extreme. We can easily lapse of Enron exposed many systemic job. smother American businesses with red problems to the intricate public-pri- Ultimately, Mr. Chairman, we must tape. We can punish those who have vate network that monitors excess in work together on a bipartisan basis to done nothing wrong. We can damage our Nation’s capital markets, including develop an appropriate response to the the capital markets and the economy deficits and corporate governance and collapse of Enron and the overabun- in the process. insufficiencies in audit independence dance of earning restatements by our I say let us do the difficult thing. Let and oversight. Nation’s publicly traded companies. Al- us accomplish something that is wor- H.R. 3763 responds to these problems though we have made improvements in thy, as the President has charged us, in a largely illusory and superficial the bill since its introduction, it will and CARTA strikes that balance. way. It will not sufficiently restore represent only superficial reform at CARTA recognizes the need for cor- public confidence in the integrity of best. Meaningful reform will require porate leaders to act responsibly and our capital markets; and it will not lengthy deliberation and a substantial holds them accountable if they fail to significantly improve the protections strengthening of the bill before us do so. for investments, pensions and savings today. CARTA ensures the highest stand- of millions of hardworking Americans Mr. Chairman, there is an old idea of ards of auditor independence, ethics and retirees. For example, in the words lost opportunities. As the Congress ad- and confidence and establishes a public of the Wall Street Journal, the bill dresses this serious problem today, we regulatory organization for account- ‘‘punts’’ an overhaul of the accounting are missing an opportunity for Con- ants of publicly traded companies, industry to the Securities and Ex- gress not to delegate its responsibility something that has never been done be- change Commission. to the SEC or not to dodge its responsi- fore. Although H.R. 3763 creates a new or- bility to the American public, but to CARTA improves corporate disclo- ganization to oversee accountants that take time and effort and deliberation sures by requiring companies to pro- audit public companies, much of the necessary to make a bill that will pro- vide the public with more information bill’s language is simply too vague to tect the investing public, will arm the about their financial condition. ensure that essential standards for ef- regulatory agencies with the authority CARTA makes important improve- fective oversight will be met, giving they need to ensure the protection of ments in the area of corporate trans- the SEC near-total flexibility in estab- the investing public, and to signifi- parency, requiring that companies dis- lishing guidelines for the new oversight cantly improve the confidence in the close to investors important company body. American market. news on a real-time basis. Given the importance of this over- CARTA also directs the SEC to re- sight role, Congress should not dele- b 1115 quire greater disclosure for off-balance gate this task. We should create a Just last night I had the occasion to sheet transactions. strong auditor regulatory board with speak with some members of the in- I am confident that we are striking sufficient investigation and discipli- vesting community, and they called to the right balance, particularly when it nary powers. my attention that never in their expe- comes to the role of the Securities and The legislation also preserves audi- rience in the last 25–30 years have they Exchange Commission. CARTA gives tors’ cozy relationships with their cli- seen a loss of confidence in the capital the SEC the flexibility to deal with ents by not prohibiting consultant markets of the United States as has re- problems without legislating every services that create conflicts of inter- cently been exposed in the last several time. Congress created the SEC pre- est. Audits are supposed to be inde- months since the Enron collapse. The cisely to deal with situations like this. pendent assessments on a company’s fi- capital markets of the United States

VerDate Apr 18 2002 00:28 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00009 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.016 pfrm15 PsN: H24PT1 H1546 CONGRESSIONAL RECORD — HOUSE April 24, 2002 are the greatest in the world, but they The gentleman is right; we need to to investors that did not match the re- are that way because the Congress at act quickly on this important issue. We ality. times of need and at times of over- are calling on our colleagues to take The tremendous growth in investiga- abundance of activities and reckless- this opportunity to restore trans- tions opened by the SEC this year indi- ness in the markets have stood tall to parency and accountability to the au- cates the problem is getting worse and enact legislation to straighten the dited financial statements of America’s worse. The question we will debate markets out and to send a signal to the companies. today essentially is whether we are investing public that the Congress will Mr. ROGERS of Michigan. Reclaim- ready to recognize and make real oversee and protect their interests as ing my time, Mr. Chairman, it is my changes to address the systemic weak- best can be had in a capitalist system. understanding that this bill does not nesses undermining our capital mar- Today’s legislation does not meet create a new Federal bureaucracy to kets or not. The bill before us is cos- that mark. As the Wall Street Journal oversee the accounting profession but, metic. The bill before us is a press re- said, ‘‘This bill punts.’’ As The Wash- rather, creates a private sector regu- lease. Look at this morning’s editorial ington Post said this morning, ‘‘The lator to do that job. in The Washington Post. It says, basi- chairman punts.’’ I urge us to oppose Mr. OXLEY. Mr. Chairman, if the cally, that the bill takes a punt at the this legislation at this time, and I en- gentleman will continue to yield, that problem. Look at the editorial in yes- courage my colleagues to do the same. is correct. We are giving the SEC the terday’s Wall Street Journal. It says, Mr. OXLEY. Mr. Chairman, I am tools to oversee this new PRO, but it is basically, the same thing. It chastised pleased to yield 3 minutes to the gen- going to be funded by the private sec- the accounting profession for its resist- tleman from Michigan (Mr. ROGERS), a tor. ance to all efforts at reform. The Jour- valuable member of the committee. Mr. ROGERS of Michigan. Mr. Chair- nal opined that ‘‘The accountants may Mr. ROGERS of Michigan. Mr. Chair- man, I want to see that this PRO is up think that they have outsmarted ev- man, I rise today in support of the Cor- and running in an expeditious fashion. eryone by sinking reforms along with porate and Auditing Accountability, Does the PRO have the authority to Andersen. And they may be right. On Responsibility, and Transparency Act contract for services with other private the other hand, if there’s another of 2002, and I want to congratulate the sector companies or regulators to Enron out there, they may wish they’d chairman on this bill that was reported make this happen as quickly as pos- taken Mr. Volcker’s advice.’’ out of the Committee on Financial sible? I think it is safe to say it is only a Services last week on a strong bipar- Mr. OXLEY. That is correct. Under matter of time before the next Enron tisan vote under his leadership. the legislation, the SEC or the PRO or Global Crossing appears, and today’s This bill brings needed reforms and could consult or contract with private bill will do nothing to prevent it. oversight to the accounting industry. sector regulators and companies to get There are many areas in which the It ensures that those with the greatest the necessary insight as well as the bill before us fails to provide true re- interest in ensuring that the informa- systems and processes to get this orga- form. First, it fails to establish a tion provided to the marketplace re- nization on its feet in a timely manner. strong regulator to oversee the ac- garding public companies is accurate I am confident the SEC and the PRO counting profession, largely delegating and complete and facilitates the fair will take such measures as necessary decisions as to both its powers and du- and efficient functioning of the mar- to move with all deliberate speed. ties and makeup to the SEC. You do kets. Mr. ROGERS of Michigan. Reclaim- not need a law to do that; the SEC Mr. Chairman, this is an important ing my time once again, Mr. Chairman, could do that today. The bill provides piece of legislation that does not cre- I thank the distinguished chairman for virtually nothing. ate a new Federal bureaucracy funded clarifying this point and I thank him Secondly, the bill fails to limit in by taxpayers; rather, it requires a new for his leadership on this very impor- any way the nonaudit services that private sector oversight body to review tant bill. auditors can provide to their audit cli- the accounting firms that audit finan- The CHAIRMAN. Without objection, ents, not even going as far as the ac- cial statements. This new body, called the gentleman from New York (Mr. LA- counting industry has said it would go the Public Regulatory Organization, FALCE) will control the time of the voluntarily to limit their conflicts of would have broad powers to discipline gentleman from Pennsylvania (Mr. interest. The accounting industry has accountants that violate the most KANJORSKI). said they should and will go further basic codes of ethics, standards of inde- There was no objection. than the bill goes, and they will not go pendence, and standards of com- Mr. LAFALCE. Mr. Chairman, I yield far enough on their own voluntarily. petency. myself 5 minutes. As the Wall Street Journal said yes- Mr. Chairman, this bill is necessary (Mr. LAFALCE asked and was given terday, the credibility of their audits to restore the faith in our markets. permission to revise and extend his re- matter more than their ability to offer This bill brings credibility and integ- marks.) other services that let them live like rity to the process by protecting Mr. LAFALCE. Mr. Chairman, today investment bankers. against conflicts of interest in the ac- we consider legislation to address the And, third, the bill fails to effec- counting industry. This piece of legis- serious problems in our capital mar- tively implement any of the measures lation is important because we need to kets raised by the collapse of Enron, proposed by President Bush himself to act now. We need to pass this bill problems of corporate abuse, problems improve executive responsibility and today. We need to give the SEC and of accounting fraud, problems of earn- improve the ability of the SEC to bar this new PRO the tools to be up and ings manipulation, and problems of an- or seek disgorgement from executives. running quickly to protect the future alyst hype. All of these have destroyed In some areas, it actually represents a of investments in this country. public confidence in our markets and step backwards, making it more dif- Mr. Chairman, at this time I would jeopardized the investments and retire- ficult for the SEC to do its job, making like to have a colloquy with my good ment savings of millions of working it harder, rather than easier, for the friend, the gentleman from Ohio (Mr. Americans. Millions of working Ameri- SEC to bar officers or directors who OXLEY), the distinguished chairman of cans have been robbed. have committed securities fraud from the Committee on Financial Services. Now, Enron provided a catalyst for serving in other public companies. Mr. OXLEY. Mr. Chairman, will the our consideration of these issues, but it Fourth, the bill fails to make any im- gentleman yield? is not the first or even the most recent provements in the area of corporate Mr. ROGERS of Michigan. I yield to example of what has become a common governance of public companies by giv- the gentleman from Ohio. phenomenon: earnings manipulation, ing the audit committees of their Mr. OXLEY. Mr. Chairman, I thank deceptive accounting, and hyped ana- boards of directors the authority they the gentleman from Michigan and I lyst reports by some of our largest need over auditors to truly protect want to commend him for his efforts on companies. Company after company shareholder interest. this bill, for his fight for the integrity has been found to have manipulated And, fifth, and very importantly, it of America’s financial markets. their accounting to present a picture fails to include any measures to limit

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00010 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.018 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1547 the incentives for securities analysts offer other services that let them live like in- and the Department of Labor. As the to serve as salesmen for their firms’ in- vestment bankers.’’ appropriate agencies uncover new vestment banking business rather than Third, the bill fails to effectively implement issues, we are going to continue our being objective analysts. It fails to ad- any of the measures proposed by the Presi- work to ensure that we act prudently, dress the problem of research analysts dent to improve executive responsibility and appropriately, and responsibly. As with being compensated based upon the improve the ability of the SEC to bar or seek the medical profession, though, our business they are able to generate for disgorgement from executives. In some areas, overriding goal has to be, first, do no the investment banking arm of their it represents a step backwards, making it harm. We must be focused in our work firms. It allows the continuance of re- more difficult for the SEC to do its job, making and make sure our response is effec- search analysts being hucksters for the it harder, rather than easier, for the SEC to tive, restores public confidence, and investment banking arms rather than bar officers or directors who have committed has a positive impact on the market. owing a responsibility to give honest securities fraud from serving in other public CARTA is reasonable and respon- investment advice to the public at companies. Moreover, it fails to empower the sible. CARTA creates a new Public large. SEC to require corporate wrong-doers to dis- Regulatory Organization with real Now, I would like to have had a de- gorge their bonuses and other compensation power to discipline accountants who bate on these important issues on the after committing securities fraud. violate the standards of ethics, com- floor individually, but the rule does not Fourth, the bill fails to make any improve- petency, and independence. CARTA permit the offering of individual ments to the corporate governance of public makes it a crime for any corporate of- amendments. And, therefore, I will companies by giving the audit committees of ficial to mislead or coerce an account- offer my substitute to accomplish that. their boards of directors the authority they ant in the course of conducting an Mr. Chairman, today we consider legislation need over auditors to truly protect shareholder audit. CARTA requires real-time dis- to address the serious problems in our capital interests. closures of significant financial infor- markets raised by the collapse of Enron— Fifth, it fails to include any measures to limit mation to ensure that employees and problems of corporate abuse and accounting the incentives for securities analysts to serve investors know about important events fraud that have destroyed public confidence in as salesmen for their firms’ investment bank- as they happen, instead of when the our markets and jeopardized the investments ing business rather than objective analysts. quarterly report comes out. and retirement savings of millions of working I would like to have had a debate on these These are just a few of the significant Americans. While Enron has provided the cat- important issues on the floor today, but the reforms made in this legislation. alyst for our consideration of these issues, it is rule does not permit me to offer amendments CARTA is a strong reform. It gives not the first or even the most recent example on these individual issues. I will offer a sub- greater authority to the Securities and of what has become a common phe- stitute, however, that cures many of the de- Exchange Commission to act, and it is nomenon—earnings manipulation and decep- fects of the Republican bill. My substitute will: stronger authority than in the Demo- tive accounting by our largest companies. Establish a tough and credible overseer for cratic substitute. It takes significant Company after company has been found to the accounting industry; include effective limits steps to ensure accountants are truly have manipulated their accounting to present on the two non-audit services included in the independent and corporations are clear a picture to investors that did not match re- existing bill; provide corporate audit commit- and honest in their statements. It is a bipartisan bill. It was sup- ality. The tremendous growth in investigations tees with authority over the full scope of a ported in committee by both Demo- opened by the SEC this year indicates the company’s relationship with its auditor; hold crats and Republicans. The committee executives responsible for the accuracy of problem is only getting worse. vote on final passage of 49 to 12 dem- The question we will debate today essen- their companies’ financial statements; enable onstrates that there is real agreement tially is whether we are ready to recognize and the SEC to seek disgorgement of bonuses in the House that the provisions con- make real changes to address the systemic and profits on options or to bar officers and di- tained in this legislation will move us weaknesses undermining our capital markets. rectors who have committed wrongdoing from forward to our goal of restoring public The bill before us does not represent real re- serving in other public companies; and finally, confidence in our accounting system form, as even the Wall Street Journal recog- eliminate the conflicts that result in Wall Street and corporate disclosures. nized in an editorial yesterday in which it analysts hyping the stocks of their investment Mr. Chairman, I urge colleagues on chastised the accounting profession for its re- banking clients. both sides of the aisle to join us with Mr. OXLEY. Mr. Chairman, I yield 3 sistance to all efforts at reform. The Journal the strong support of CARTA so we can minutes to the gentlewoman from New opined that ‘‘[t]he accountants may think that prevent mistakes, misstatements, and York (Mrs. KELLY), the chair of the they’ve outsmarted everyone by sinking re- obfuscations we witnessed in the fail- Subcommittee on Oversight and Inves- forms along with Andersen. And they may be ures of Global Crossing, Enron, and Ar- tigations. right. On the other hand, if there’s another thur Andersen from being repeated and Mrs. KELLY. Mr. Chairman, I rise Enron out there, they may wish they’d taken harming others. today in strong support for the Cor- Mr. Volcker’s advice.’’ I think it’s safe to say Mr. LAFALCE. Mr. Chairman, I yield that it’s only a matter of time before the next porate Auditor Accountability, Re- 2 minutes to the gentlewoman from sponsibility, and Transparency Act, Enron or Global Crossing appears, and this Ohio (Mrs. JONES). bill will do nothing to prevent it. known as the CARTA Act. I thank my Mrs. JONES of Ohio. Mr. Chairman, There are many areas in which the bill be- good friend, the gentleman from Ohio, to my colleague, the gentleman from fore us fails to provide true reform: for yielding me this time. the great State of Ohio (Mr. OXLEY), First, it fails to establish a strong regulator This legislation represents the first and to the ranking member, the gen- to oversee the accounting profession, largely positive step forward to restore public tleman from the great State of New confidence to our Nation’s accounting delegating decisions as to its powers and du- York (Mr. LAFALCE), I am pleased to ties to the SEC. Without an explicit statutory industry. Since the dramatic failures have had an opportunity to serve on mandate, the regulator will be subject to the in both Global Crossing and Enron, we the Committee on Financial Services intensive efforts of the accounting industry to have heard from countless former em- as we have debated this legislation. avoid reform of any kind. Congress should ployees and investors who have been But what is clear to me is the Amer- give the new regulator effective disciplinary harmed because of the lack of trans- ican public expects us to do more than and investigative powers and clear authority to parency, the lack of auditor independ- pass strong legislation that does not go set standards for auditors of public companies, ence, and the lack of timely and clear far enough. I just want to put in the disclosures. CARTA takes substantive rather than just enforcing the standards set by RECORD a copy of The Washington Post the accounting industry bodies. steps to address all of these issues, editorial that fully addresses many of Second, the bill fails to limit in any way the with a focused approach that will re- the issues. non-audit services that auditors can provide to store confidence in the industry. Let me tell my colleagues a few their audit clients, not even going as far as the Let me be clear. The legislation is things I am concerned about. accounting industry has said it would go vol- not the complete solution. There are untarily to limit their conflicts of interest. As the many investigations which continue b 1130 Journal said yesterday, ‘‘[t]he credibility of with the Securities and Exchange Com- Mr. Chairman, I do not believe that their audits matter more than their ability to mission, the Department of Justice, this current legislation that is before

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00011 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.020 pfrm15 PsN: H24PT1 H1548 CONGRESSIONAL RECORD — HOUSE April 24, 2002 the House of Representatives addresses consulting services for their clients, but it and urge my colleagues’ support for the Cor- the issue wherein the CEOs, like the stops short of requiring an outright halt to porate and Auditing Accountability, Responsi- CEO at Enron and Global Crossing, consulting and the conflicts of interest that bility and Transparency Act. ensue. The bill says nothing about the re- We must return confidence back to the mar- were able to take their 401(k) dollars volving door between auditors and their cli- out of the pot, and leave workers like ents—Enron, for example, hired several Ar- kets and to the accounting profession. Indi- Mrs. Linton, who I read about in the thur Andersen auditors—even though audi- vidual investors have to be certain that the in- newspaper, stuck with not receiving tors who are angling for jobs from their cus- formation they are receiving is accurate and any other dollars. tomers are unlikely to show much independ- complete. Certainly the media and many in Now, what we have not addressed, ence from them. The bill is also silent on the this Congress have been focused on the and I am not an SEC attorney, but I do rotation of audit firms. If an auditor knew Enron bankruptcy—the largest in U.S. his- know there is a piece or a rule that al- that, after a few years, a different outside tory—but Enron is merely a symptom of a auditor would scrutinize its efforts, this lows a CEO to put in place a plan to would create a strong incentive to keep the larger problem. dispose of his assets in a particular numbers honest. The current structure for regulation and company, as long as they have in place The Oxley bill does at least boost the oversight of the accounting industry consists a plan to do so. We need to put in place SEC’s budget substantially, and it has the of Federal and State regulators and a complex a plan that would also allow workers to right mood music. But given the outrage system of self-regulation by the industry itself. be able to access their dollars in the that Congress has expressed about the Enron Although the SEC has broad authority to regu- same fashion that CEOs do. Or if they scandal, this is a weak effort. Just this week, late all aspects of corporate accounting and Enron announced that it had discovered a are not able to do so, that the CEOs further $14 billion worth of assets in its bal- the auditing of publicly-traded companies, the would be held accountable. ance sheet that don’t really exist after all, SEC historically has not directly regulated the Let me go to another point that I and it confessed that a ‘‘material portion’’ of industry because of a lack of resources. In- raised at the Enron hearings, which is this overstatement was due to accounting stead, they have investigated and taken en- with regard to the SEC. I have a lot of irregularities. This kind of confession fur- forcement action in only the most egregious respect for the SEC and their chair- ther undermines investors’ trust in financial cases. Consequently, the most comprehensive man, Mr. Harvey Pitt; but the reality disclosures. Congress needs to restore that supervision of accountants and auditors has trust with tough legislation. Perhaps the of the matter is that we should not Senate can deliver if the House won’t. been exercised by the industry’s trade asso- leave our job to the SEC. We should ciation, the American Institute of Certified Pub- Mr. OXLEY. Mr. Chairman, I yield 2 give the SEC clear direction on what lic Accountants, a voluntary organization fund- minutes to the gentlewoman from New we want done, when we want it done, ed entirely by the industry. Jersey (Mrs. ROUKEMA). and how we want it done. For example, (Mrs. ROUKEMA asked and was H.R. 3763 includes numerous provisions to the records of Enron were not reviewed given permission to revise and extend strengthen supervision and oversight of the by the SEC. That presents a real prob- her remarks.) accounting industry, increase standards of cor- lem for me and other Members as we Mrs. ROUKEMA. Mr. Chairman, I porate responsibility, and improve the quality review this process. commend the gentleman from Ohio of corporate disclosure and the auditing of Finally, I am worried about a private (Mr. OXLEY) and the gentleman from publicly-traded companies. The specifics of organization giving advice and counsel Louisiana (Mr. BAKER) for this legisla- these provisions have been properly outlined on many of these issues to the Con- tion. This legislation has numerous by the Chairman. gress. Let me just say that the Arthur provisions which provide and strength- First, this legislation establishes a public Andersen relationship with Global en oversight of the accounting indus- regulatory organization (PRO) to oversee and Crossing, the CEO said that he thought try, what we have really learned from review accounts that certify financial state- that relationship was okay. If he Enron and Global Crossing failures. ments required under the securities law. This thought it was okay, what does that But the specifics of these provisions new board would be subject to direct SEC au- say about other private industry peo- have been properly outlined by the thority and supervision. In addition it makes it ple. chairman, and I will not go into those illegal—subject to SEC civil penalties—for any The material previously referred to is again. However, I will stress one in par- corporate official to interfere, mislead, or co- as follows: ticular, and that is it includes impor- erce an accountant performing an audit of the [From the Washington Post, Apr. 24, 2002] tant safeguards for individuals who in- company. Second, this legislation requires increased MR. OXLEY PUNTS vest in the 401(k) plans. That is an ex- and meaningful disclosures, such as informa- The HOUSE is due to vote today on a pack- cellent provision in this legislation. age of post-Enron reforms prepared by Rep. Mr. Chairman, I want to say to Mem- tion about special purpose entities and other Michael Oxley (R–Ohio), chairman of the Fi- bers that there are some who argue off-balance sheet transactions. It requires real- nancial Services Committee. The bill is a that this bill does not go far enough. I time disclosure of financial information and im- troubling sign of how easily the momentum will say to those critics that we must mediate disclosures by corporate insiders for reform can be dissipated. Though it pur- take care not to overreact to this situ- when they sell securities they own in their ports to deal with many of the audit reforms ation and create greater problems than company. discussed during dozens of congressional we have here. This bill represents a This legislation also includes important safe- hearings since January, it actually pulls its giant step in the right direction to re- guards and protections for individuals who in- punches. Democrats will get a chance to vest in 401(k) plans. The bill prohibits cor- offer some better provisions in the House forming the system. We need to enact today, but nobody expects them to pass. It this legislation and let the regulatory porate executives from buying and selling will be up to the Senate, if it can ever termi- process go forward. Clearly we should company stock during ‘‘blackout’’ periods nate its interminable debates on energy, to revisit this issue in the months ahead, when rank-and-file company employees are produce a stronger bill. but this bill does include sound, strong, barred from doing so in their pension 401(k) The Oxley bill purports to set up a new unprecedented measures that I believe plans and allows companies, and other share- regulatory board to oversee and discipline will go a long way in reforming the sit- holders to go to court to recover any profits auditors, which everybody agrees is needed. uation. made from such illegal transactions. The But it would not give this body powers of subpoena, which would undermine its au- A Member mentioned earlier Chair- measure also establishes procedures under thority; and it would allow auditors to fill man Paul Volcker’s oversight and ac- which the SEC may recover any profits some of the board’s positions, which could tivity in terms of the Andersen ques- gained, or losses avoided, by executives undermine its independence. The details of tion. Clearly, Mr. Volcker’s analysis through stock trades in the six months prior to the new board would be left to the Securities will be helpful to us and significant in a company’s restatement of earnings, if the and Exchange Commission, which would laying the groundwork for extended executive had knowledge that the company’s have to decide among other things how the consideration in the future for what- accounting was misleading. new body would be funded. Given the SEC’s ever additional reforms we may need. Finally, H.R. 3763 authorizes new resources vulnerability to industry lobbying, there is a and responsibilities for the SEC, requires the danger that the result will fall short of Clearly, we must not overreact and cre- what’s needed. ate today further problems and create SEC to review the audited corporate financial The Oxley bill takes other half-steps and more loopholes. reports of all publicly-traded companies at side-steps. It directs the SEC to prohibit I want to commend Chairmen OXLEY and least every three years, and allows the SEC to auditors from performing certain types of BAKER for their leadershiop on this legislation ban corporate officers and directors whom the

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00012 Fmt 4634 Sfmt 9920 E:\CR\FM\K24AP7.022 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1549 SEC finds guilty of violating securities law The Republican legislation before us of billions of dollars, but our markets from serving in similar positions in other pub- today does none of these things. The would be selling at trillions of dollars licly-traded companies. LaFalce substitute does. I urge my col- more in net capitalization if investors There are some that may argue today that leagues to vote ‘‘yes’’ on LaFalce and around the world did not have to won- this bill does not go far enough—I would say ‘‘no’’ on H.R. 3763. der whether the next Enron was right to those critics that we must take care not to Mr. OXLEY. Mr. Chairman, I yield 2 around the corner. overreact to this situation—this bill represents minutes to the gentlewoman from Illi- All three of our institutions failed a significant and proper first step. We need to nois (Mrs. BIGGERT), a valuable mem- our investors. The SEC failed to even enact this legislation—and let the regulatory ber of the Committee on Financial read the Enron financial statements, process go forth. Clearly, we may have to re- Services. let alone demand clarification of their visit this issue in the months and years ahead, Mrs. BIGGERT. Mr. Chairman, I rise incomprehensible footnotes. And when but this bill includes sound, strong and unprec- today in strong support of H.R. 3763. the SEC reauthorization bill comes to edented measures that I believe will go a long This is a good bill because it strikes this floor, it should come in regular way in addressing this current crisis. the right balance between doing order so that we can propose amend- Clearly, Chairman Paul Volker’s oversight enough to prevent another Enron and ments to improve the SEC. and analysis will be significant in laying the Andersen debacle, but not so much as The stock analysts and the auditors way for extended consideration for additional to overreact to it causing more harm. both failed as well; and they failed in reforms. The last thing we want is to federalize part because the current system clouds Mr. LAFALCE. Mr. Chairman, I yield the accounting industry and create a their judgment with excessive conflicts 2 minutes to the gentlewoman from seat for the government on every cor- of interest. The stock analysts are af- California (Ms. LEE). porate board from New York to San fected by the huge investment banking Ms. LEE. Mr. Chairman, I thank the Francisco and back again. fees so that they now not only rec- ranking member, the gentleman from This is a good bill because it helps re- ommended Enron as an investment, New York (Mr. LAFALCE), for yielding build the confidence of the American but they recommend a hold or a buy on me this time and for his leadership on people by restoring the integrity of the virtually every stock on the board. these tough issues. accounting industry. It increases cor- The auditors received not only their Mr. Chairman, I rise today in strong porate responsibility, reforms the ac- audit fee from their clients, but huge opposition to H.R. 3763. This is another counting industry, and forces busi- and unlimited fees for other services, sham bill that purports to fix the very nesses to disclose much more financial sometimes five or 10 times the fees serious problems that have arisen from information in real-time. Holding cor- they received for auditing; and this the Enron debacle, but instead it takes porate officers responsible for their ac- bill, while providing a list of services us backwards in protecting the Amer- tions is a big part of the foundation of that they are not to provide, does noth- ican public. H.R. 3763 is supposed to im- this bill. As President Bush said not ing to cap the total fee that they re- pose tougher standards on auditors to long ago, our goal is better rules so ceive. prevent future Enrons where workers that conflicts, suspicion, and broken We need to restore confidence in our lost their pensions and investors lost faith can be avoided in the first place. markets. If Congress does its job, our money because Enron cooked its books. That is what this bill does in several capital markets will once again be the However, H.R. 3763 does nothing to pro- ways. For example, an amendment that envy of the world. But we cannot do it tect employees and investors. It allows I offered last week provides the SEC just by passing this bill. The LaFalce corporate auditors to continue to per- the administrative authority to bar substitute at least takes us further form both auditing and consulting persons accused of malfeasance from down the road toward reform; and then functions, which got Enron into this serving as officers or directors of pub- we need to do even more to deal with mess in the first place. lic companies pending judicial appeal. the SEC, the stock analysts, and the The GOP bill puts investors and Mr. Chairman, it is unfortunate that total amount of fees received by audi- workers at greater risk than they are no one understands the concept of ex- tors for nonaudit services. now. It does not hold corporate wrong- ecutive accountability or lack thereof Mr. OXLEY. Mr. Chairman, I yield 3 doers criminally accountable if they better than the 500 Andersen employees minutes to the gentlewoman from knowingly release misleading financial from my district. They ask, How on Pennsylvania (Ms. HART), an out- statements, and it does not increase earth can the alleged sins of a handful standing member of our Committee on oversight of the accounting industry. of partners uproot the lives of so many Financial Services. We need true reform. That is why I innocent employees? One of them went Ms. HART. Mr. Chairman, I rise in am supporting the LaFalce substitute further, asking me in a recent letter if support of the CARTA bill as it stands. which takes important steps to protect one out of our 535 Congressmen and The Committee on Financial Services workers and investors. It would set up Senators gets in trouble, should you all did an extensive amount of research on a seven-person board with members be fired? I think we all get the point. these issues, especially in light of the representing investors and pension And the point is that change is need- concerns raised by the Enron debacle. funds. Some of them can be account- ed in the accounting industry, and H.R. Several disturbing aspects about cor- ants; but others with important inter- 3763 is an important step in the right porate disclosures in financial state- ests can also be included, unlike the direction. With this legislation, we will ments were made very clear during this Republican legislation which will only avoid any more blanket charges to process, but one of the most alarming permit auditors and former auditors on groups of accountants, and instead was the unequal treatment of employ- the board. Workers and investors also bring justice to the particular account- ees and what they were and were not deserve a seat at the table. ants at fault. Some have argued that allowed to do with company stock that The LaFalce substitute also bans the standard may prove to be unrea- they received in their retirement plans. auditors from consulting services that sonably high or it goes too far. I re- I have here what will happen as a re- create conflicts of interest, requires spectfully disagree. H.R. 3763 empowers sult of the CARTA bill. Pre-Enron CEOs to surrender their stock bonuses the SEC to take a bite out of corporate there was little disclosure. Financial when they commit fraud, and makes it crime. information was all in legal jargon. easier for SEC to remove corporate Mr. Chairman, I encourage all of my People could not really understand it. wrong-doers. colleagues to support this bill. There was insider auditing, as we saw Ken Lay and the other Enron execu- Mr. LAFALCE. Mr. Chairman, I yield in the Enron case, deals made among tives do not deserve millions of dollars 2 minutes to the gentleman from Cali- the auditors with the company which in payoffs when their workers have lost fornia (Mr. SHERMAN). were really not fair or right or a true their future. We must hold companies (Mr. SHERMAN asked and was given representation of the actual financial accountable when they engage in fraud permission to revise and extend his re- situation of the company. Also, insider that jeopardizes the retirement secu- marks.) trading during blackouts, those execu- rity of our Nation’s workers and our Mr. SHERMAN. Mr. Chairman, Enron tives were allowed to sell their stock; economy. not only cost its own shareholders tens those regular people, the employees,

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00013 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.008 pfrm15 PsN: H24PT1 H1550 CONGRESSIONAL RECORD — HOUSE April 24, 2002 unfortunately were not, and ended up markets. It does establish an oversight Mr. BAKER. Mr. Chairman, I thank losing a lot of money because of the de- function of auditors of public compa- the gentleman for yielding me this ceit involved with the financial state- nies. It amends the law to crack down time and wish to express my deep ap- ments. on insider self-dealing, where you had preciation for his leadership in helping Post-Enron, under the CARTA bill we corporate managers really treating the committee construct what I think have full disclosure. We also have public companies as private banks, and is one of the most significant reform something very important, and that is I am glad the committee adopted a few pieces of legislation in financial mar- the financial information that all in- amendments I offered to deal with kets in this Congress. vestors get in plain English. No more that. It continues the process of elimi- In listening to the debate, many games. Under CARTA, plain English so nating the conflict between inde- would assume that we have done noth- that everybody understands exactly pendent auditors and the companies ing. In listening to the debate, many what is going on with the company. they audit. would assume there are those in the Also something extremely important, Some will say it does not go far Congress who would like to sit on the the independent audit versus the in- enough, but at least it begins that board of every board of directors of sider audit. We need to make sure that process. It was strengthened by an every corporation in America, because Americans have confidence in financial amendment that the gentleman from that is the only way we could possibly statements and invest wisely. North Carolina (Mr. WATT) and I of- have protection for individuals and It will also close the loophole on in- fered and, quite frankly, the gentleman consumers. In listening to the debate, sider trading during blackouts. This is from New York’s substitute strength- one would believe that some think it is one of the most important things that ens that even further. It puts the Secu- inappropriate for a corporation to was revealed to us during Enron, and rities and Exchange Commission on no- make a profit. In the free enterprise one thing that this bill handles very tice and provides them with the re- system, it is clear, people invest, they sources, and it puts the Congress on no- well. work hard; if they convince consumers America’s investors have changed tice that there needs to be stronger and they are successful and beat their oversight of the players in the public significantly. It is important for us to competition, at the end of the day we markets. And it is quite a change from protect them and provide them with hope people make a profit. Some think where the SEC was under the prior the information that they need. More profit is gained only by ill-conceived, chairman, Mr. Levitt, who really did than half of American families, that is manipulative, backdoor deals at the take a strong stance in trying to root 90 million people, invest in the stock expense of working people. Where are out conflict of interest and, quite market, including mutual funds, pen- we? This is America. We are taught if frankly, ran into some of his toughest sions, and 401(k)s. This represents a you work hard, invest, that it is okay opponents in the Congress as much as growing trend. These people are invest- to make a profit, and one day if you out on Wall Street. ing in American companies that The committee should adopt the work hard you might be able to keep produce American jobs. In fact, a ma- Capuano amendment, which I think some of it. That was the basis of our jority of these investors, 67 percent of strengthens the oversight board in en- tax relief program: You work hard, you them, are our average Americans with suring that the makeup of that board pay your taxes to the Federal Govern- household income of $75,000 or less. is one that is truly independent. And ment. Mr. Chairman, these are American while there are things in the substitute Some say, ‘‘Let’s not give them their families that we are talking about. We I like and things I do not like, the com- money back. They might spend it. We need to protect them with CARTA. Ac- mittee should adopt it. But what I ought to keep it here in Washington cording to the National Center for Em- think this bill does that is so terribly and regulate them.’’ Some people ployee Ownership, 10 million employees important is that it puts the Congress watch business and they say, ‘‘If it’s in the United States received stock op- on record in saying that we will not making a profit, let’s first regulate it. tions as part of their benefits in 2001. tolerate abuses in the public market. If it’s still making a profit, let’s tax it. This is a 10-fold increase over 1992. This Maybe we need to go further. Maybe And if that doesn’t stop it, let’s sue it.’’ bill protects those employees and those we do not go far enough in the bill, and I think we have had enough of that. Americans. It protects those American I do not think a lot of bills we pass This bill is about common sense. It is jobs. here necessarily go far enough. I do not not lawful for a corporate executive to withhold material facts about the fi- b 1145 know that we know all the answers. But it also puts the regulators on no- nancial condition of his corporation. Finally, the benefits of the bipartisan tice and provides them with the re- And we go further and say, if you do, corporate responsibility bill is greater sources to do the job they are en- there is a penalty to pay. confidence. Americans will continue to trusted to do. And if they do not, then We provide for auditing independence invest. We want them to invest. It is the Congress should be willing to act by saying the audit committee works better for our future. There is more again. Because if we do not restore con- for the shareholder and has an obliga- confidence for them to invest, there fidence in the markets and ensure con- tion to report the true and accurate fi- will be more corporate stability and fidence in the markets, then we will nancial condition of the corporation, or the end result, which is what we all raise the cost of capital to great ex- there are consequences. want, is more jobs and a stronger econ- pense to the general economy, and Some have suggested we are doing omy. while we are concerned about the nothing with the analysts. Let me Mr. LAFALCE. Mr. Chairman, I yield Enron employees, many of whom are point out that last fall before the 21⁄2 minutes to the distinguished gen- my constituents, we as a Nation will Enron matter became public knowl- tleman from Texas (Mr. BENTSEN). suffer as well. I appreciate the start we edge, this committee, the Committee (Mr. BENTSEN asked and was given are making today. I hope we can con- on Financial Services, was working on permission to revise and extend his re- tinue the process. these sets of rules to provide new marks.) Mr. OXLEY. Mr. Chairman, let me standards for analysts’ conduct that go Mr. BENTSEN. Mr. Chairman, Enron, commend my friend, the able gen- far beyond anything I have heard sug- Global Crossing, the restatements at tleman from Texas, for his good work gested in the debate in the committee Xerox, Sunbeam and others are part of on the committee and on the floor. The today. We have taken action. We have the corporate excesses that have oc- committee will certainly miss his ex- taken action to preserve our free enter- curred as a result of the exuberant cellent leadership and insights next prise system, the ability to govern a nineties. The bill before us today, I be- year. I wanted to pass those remarks corporation and make a profit, employ lieve, is a good start but, as I said ear- along. individuals and provide opportunities lier, is by no means a panacea and will Mr. Chairman, I yield 4 minutes to for millions of investors to participate not solve all the problems that existed the gentleman from Louisiana (Mr. in the dynamic growth of this econ- or came about, but at least begins put- BAKER), the lead cosponsor of the omy. ting us in the right direction to hope- CARTA legislation and the chairman of In 1995, no one could invest online. fully restore some confidence to the the Subcommittee on Capital Markets. Today, there are over 800,000 trades a

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00014 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.027 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1551 day where working men and women dent’s call for corporate governance re- lem,’’ but it is a problem that we still take $100, $200, and invest it for their form. It simply calls for a study on have in the substitute. The gentleman child’s education, to purchase their whether CEOs who engage in fraud from New York went back and actually first home, and maybe their retire- should surrender their stock options. adopted the proposed rules, not the ment. That is the American way. Are The President does not think we need final rules as the base text has. He these the large institutional investors to study this matter. He has publicly went back to the proposed rules, throw who are making backroom deals with stated that they should disgorge those out all the comments by the consumer analysts and Wall Street CEOs? No, earnings. The President also does not groups, throw out all the comments by they are people who are working as we think corporate officers who engage in the business groups, throw out all the debate this bill this morning to try to fraud should be permitted to serve on comments by the labor organizations, make a few extra dollars to enhance another board. But again H.R. 3763 is throw out all the comments by those in the quality of their children’s future. silent on this matter. the academic world. He goes back to This bill makes sure that the finan- Is this bill better than what we cur- the original proposed rules, like start- cial statement they read, that the ana- rently have? Yes. But I want to urge ing all over again. That is not what lyst recommendations they research on my colleagues on both sides of the aisle this place is all about. It is about in- the Internet, that the corporate execu- who truly want to protect the interests cluding the public. tives’ representations about the future of investors to also support Ranking Mr. LAFALCE. Mr. Chairman, I yield of corporate profitability are true and Member LAFALCE’s substitute. myself 30 seconds. The gentleman from accurate. We cannot guarantee success. Mr. OXLEY. Mr. Chairman, I am Alabama (Mr. BACHUS) was referring to Of all the companies listed on the New pleased to yield 3 minutes to the gen- an amendment that was offered within York Exchange in the early 1900s, there tleman from Alabama (Mr. BACHUS), a the committee, but he is not referring is only one that is still listed there subcommittee chair. at all to the provision that is in the today. The dynamic free enterprise sys- Mr. BACHUS. I thank the gentleman substitute. So all his remarks were ir- tem is going to cause changes in our for yielding me this time. relevant to the provisions within the market that no one can predict and we Mr. Chairman, Members will recall substitute. cannot guarantee success or failure, that 2 years ago, the SEC proposed to Mr. Chairman, I yield 3 minutes to but what this Congress can guarantee limit auditors from doing several non- the gentleman from Texas (Mr. is that no one is misled or mistreated auditing functions for their clients, DOGGETT). consulting work and other nonauditing and all have equal opportunity. b 1200 What shall we do? Some would say services. When the SEC proposed that, this bill is insufficient. At the end of they do what they always do, what this Mr. DOGGETT. Mr. Chairman, a few this process, after all the amendments body has insisted they do, what they months ago, one really could not turn are considered and the gentleman from ought to do, that they put those pro- on the television at night or open a New York’s motion to recommit is fi- posals out for public comment, because newspaper without hearing about the nally disposed of and defeated, as I all knowledge does not come from plight of those who suffered in the hope it will be, you will have a decision Washington. It is not all inside the Enron-Andersen debacle—people whose to make. Do you vote for this bill on Beltway. They made 10 specific pro- tomorrow was stolen, many of them in- final passage or do you say ‘‘no’’ and posals to ban nonauditing services. nocent, hard-working employees for turn your back on the most meaningful Consumer groups came in and testified the very companies that were engaged reform effort you will ever have? before the Securities and Exchange in these questionable deals. Even ex- Mr. LAFALCE. Mr. Chairman, I yield Commission. Consumer groups came in pert investors, including those at a 2 minutes to the distinguished gentle- and testified before Arthur Levitt and public state retirement system in Aus- woman from Oregon (Ms. HOOLEY). the SEC. Industry groups came in and tin, Texas, lost millions of dollars in (Ms. HOOLEY of Oregon asked and testified. Over a 4- or 5-, 6-month pe- Enron investments. Many people who was given permission to revise and ex- riod, they looked at the rules, they lis- were working to prepare their own tax tend her remarks.) tened to witnesses, they refined the returns saw that Enron was not paying Ms. HOOLEY of Oregon. Mr. Chair- rules, they revised the rules. And in much in the way of taxes; in fact, it ap- man, I thank the ranking member for September, Arthur Levitt had this to parently was not paying any taxes at all of his hard work on this piece of say about that process of letting the all. legislation. I guess I am a little dif- public participate in how they are gov- There were two reactions to this de- ferent from some of the speakers so far erned. He said this: ‘‘Thanks to the bacle. There were some people, like the because I think that this legislation thoughtful and constructive public gentleman from New York (Mr. LA- before us is an improvement over the input, we see ways to revise the pro- FALCE) who said, how can we prevent current system. Is it perfect? No. Does posed rules to avoid unintended con- something like this from happening it go far enough? Probably not. Will it sequences and to address other legiti- again? What can we do? What is the prevent another Enron? Who knows? I mate concerns.’’ best way? Certainly, it is challenging do not think it is within the realm of There are unintended consequences and complex, but what is the best way possibility that we will ever be able to when you propose a rule. There are to be sure that more people do not suf- prevent people from being greedy and other legitimate concerns that people fer like this in the future? deceiving shareholders. Every single have when you put a rule out there for And then there was a second re- one of us knows that if this bill was in- public comment. As a result, Arthur sponse, the response we normally hear troduced before the Enron scandal, it Levitt said, ‘‘We’ve gone through this in Washington from those special inter- probably would have had a handful of process and we have got better rules, est lobbyists: how can we keep the cosponsors and probably never seen the we have got more effective rules, we loopholes, the back doors, the excep- light of day. But now we are being told have got a good product.’’ Basically tions, the special preferences and ex- that it is completely inadequate and that is what the bill that Chairman emptions that we worked so diligently does not do anything to address the BAKER and Chairman OXLEY have put over the years to be sure that Congress problems that led to the collapse of out for us, is the result of that process gave us, how can we be sure we keep Enron. I disagree. by Arthur Levitt, with public comment them in the future? This is the bottom line. H.R. 3763 is from consumer groups, labor groups In the face of this Enron-Andersen fi- going to strengthen our financial re- and industry groups. asco, those lobbyists, that second porting system which in turn will Both bills ban these nonauditing group, could not come with a straight strengthen our capital markets. It is a services. Both of them ban them. But face and say, ‘‘do nothing.’’ So their huge step in the right direction. How- the difference is that the gentleman best avenue to thwart any meaningful ever, that does not mean that this leg- from New York (Mr. LAFALCE) and, in reform was to say, ‘‘do next to noth- islation is comprehensive or that it fact, when I mentioned this in com- ing,’’ and we will call it ‘‘something’’; could not stand improvement. For ex- mittee, the gentleman from New York and that is precisely where we are ample, it completely ignores the Presi- said, ‘‘I realize that’s a major prob- today. The bill before us is ‘‘next to

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00015 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.029 pfrm15 PsN: H24PT1 H1552 CONGRESSIONAL RECORD — HOUSE April 24, 2002 nothing’’ and it is being called ‘‘some- to strengthen the overall financial sys- there are major problems with the thing’’ to blunt attempts to exact more tem in the most appropriate manner. It larger bill which does not offer strong far-reaching reform. is effective because it gets to the heart enough protections to prevent what ap- As if that were not bad enough, there of the issues that will prevent future pears to be a growing number of un- are some lobbyists who saw this Ander- Enrons from happening in this country, scrupulous corporate practices. sen-Enron crisis as an opportunity, an without drowning our businesses in a Instead of instituting real accounting opportunity to get a little more. And sea of red tape. reforms, the Republican bill leaves the so when we took up the pension bill a It is important that this legislation bulk of the work to the SEC, who can couple of weeks ago, the first response avoids the temptation to overreact and be pressured by the industry into in this House to Enron, instead of to over-legislate in a manner that is issuing so-called reforms that are doing something to help the employees, going to cripple the entire business meaningless. The Democratic sub- a little more discrimination was ap- community. In fact, the Federal Re- stitute, however, creates a powerful proved in favor of the executives at the serve Chairman, Alan Greenspan, re- new regulatory board with authority to top. Today, in this bill, instead of mak- cently testified that the Enron collapse set strict standards on auditors, with ing it more difficult for corporate has already generated a significant strong investigative and disciplinary wrongdoers to assume a position of re- shift in corporate transparency and re- powers, recognizing that years of the sponsibility at another corporation, sponsibility, highlighting the market’s accounting industry’s self-policing has this bill makes it easier. sometime ability to self-correct. Clear- failed. When it comes to tax problems, the ly, over-legislating would be counter- The Republican bill fails to ban con- same accountants that are causing productive and make it impossible for sultant services that create conflicts of many of these problems, as Forbes our markets to function properly. interest. The Democratic substitute magazine said a couple of years ago, Clearly we need to legislate, and I ensures auditor independence by pro- they are the ‘‘tax shelter hustlers,’’ think we have done that in this bill. hibiting consulting services that create ‘‘respectable accountants’’ who are out But legislating should not be the end of conflicts of interest, and gives audit peddling dicey corporate tax loopholes. the Congress’s role in addressing these committees of corporate boards au- And when today ends, they will still be issues. The collapse of Enron rep- thority to hire and fire auditors. The able to do it. The analysts will still be resents a combination of irresponsible Republican bill protects executive cor- able to think one thing and say an- actions on the part of some decision- porate wrongdoers by making it more other to those they advise to purchase makers with knowledge of the com- difficult to bar guilty officers and di- stock. The accountants will still be pany’s financial well-being, and a melt- rectors from serving at other public held to a level of responsibility under down of the financial safeguards that companies. The Democratic substitute this law that is less than even the mod- we have used to identify problems at a holds CEOs accountable for their finan- est changes President Bush proposed stage when corrective action still cial statements and subjects them to and less than what even the account- might be possible. We have to continue criminal penalties for knowingly lying. ants agreed to do voluntarily. to work directly with the private sec- It requires those who make false or Many people in this country, many tor to instill a spirit of corporate re- misleading statements to surrender Americans, are absolutely amazed that sponsibility. We must challenge Amer- their stock bonuses, and it also bars Enron could have fallen apart last year ica’s business leaders to meet the high- guilty officers and directors from serv- like it did. This year, they will be simi- est standards of ethics and responsi- ing at other public companies. larly amazed that Congress did next to bility to their employees and their The Democratic substitute bars ana- nothing about it. shareholders. lysts from holding stock in the compa- The CHAIRMAN. The Chair will ad- There have been dozens of legislative nies they cover and ending incentives vise Members that there are 51⁄2 min- measures introduced by both sides of to act as salesmen rather than objec- utes remaining on both sides of the de- the aisle to address these issues. It is tive experts. bate. time we put partisan wrangling aside Mr. OXLEY. Mr. Chairman, I am Mr. OXLEY. Mr. Chairman, I yield 2 and to move forward with the practical pleased to yield 2 minutes to the gen- minutes to the gentleman from New solutions that will actually help. We tleman from New York (Mr. GRUCCI), Jersey (Mr. FERGUSON), a new and valu- need to increase the American people’s one of our outstanding freshman mem- able member of our committee. confidence in our capital markets, be- bers of the committee. Mr. FERGUSON. Mr. Chairman, I cause by doing so, we will increase Mr. GRUCCI. Mr. Chairman, I thank want to commend the gentleman from their confidence in our economy at a the gentleman for yielding. Ohio (Mr. OXLEY) for his great work on time when our economy needs to con- First of all, I would like to thank the this legislation and for also working so tinue to grow. gentleman from Ohio (Mr. OXLEY) and closely with the major investigators: I urge my colleagues to support the my colleagues on the Committee on Fi- the Justice Department, the SEC, the CARTA legislation. nancial Services for their tireless ef- Enron and Andersen internal teams, to Mr. LAFALCE. Mr. Chairman, I yield fort to swiftly address this crisis. achieve the goal that we have been able 2 minutes to the very distinguished Mr. Chairman, the Enron debacle to achieve with this legislation. The gentlewoman from California (Ms. WA- highlights the need for reform of our Committee has heard from a diverse TERS), the ranking member of the Sub- accounting and investment standards. group of witnesses representing a broad committee on Financial Institutions. However, any bill in response to this spectrum of views from across America Ms. WATERS. Mr. Chairman, I rise in cannot go overboard in restricting our regarding the securities markets and opposition to H.R. 3763. I truly believe already self-regulating markets. For the government’s role in protecting in- the gentleman from Ohio (Mr. OXLEY), this purpose, I believe that this cor- vestors. the chairman of the committee, had porate responsibility bill strikes a The distinct differences in the testi- good intentions, and I appreciate that solid balance, and I am in favor of its mony, including former SEC officials he accepted one of my amendments on passage. and the securities industry and a lead- the disgorgement fund at SEC. How- First, the corporate responsibility ing consumer organization and the ac- ever, the bill simply does not respond bill creates a public regulatory organi- counting industry, have confirmed that to the outrageous and corrupt behavior zation to make sure accounting laws the committee and the members on the of Enron, Arthur Andersen, Global are followed and audits are done prop- committee have taken the necessary Crossing, and perhaps many other cor- erly. This is a necessary, commonsense steps to improve the current regu- porations and Wall Street firms. What approach to restoring investors’ faith. latory system with this legislation, the more harm to our citizens will we tol- Next, the bill applies the same stock CARTA legislation. erate? bailout period to corporate executives This legislation is a product of a mul- This bill does not recognize the as it does to employee shareholders, as titude of views and months of work by wake-up call we have been afforded. is only fair. Finally, it demands that the committee to improve the public’s This bill will not prevent another executives disclose their stock trades confidence in our capital markets and Enron from happening. Unfortunately, faster so employees and analysts truly

VerDate Apr 18 2002 00:57 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00016 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.051 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1553 know what is going on inside the com- are proven unfit, we need to be able to of the Democrats on the committee pany. bar them from serving as officers and supported the final passage of this leg- The beauty of the corporate responsi- directors on other publicly traded cor- islation to recommend it for a floor bility bill is that it does not try to put porations, and the SEC has complained vote. That is a positive development. the brakes on the wheels of our mar- that they do not have that power. So I stand here today supporting the kets. Instead, it restores fairness and President Bush says, proposal number bipartisan legislation that came out of honesty to the system, while leaving 5: ‘‘CEOs or other officers who clearly our committee, and I am very proud of its main tenets in place. It allows the abuse their power should lose their that. investor to still be a master of his or right to serve in any corporate leader- My friend, the gentleman from New her own destiny, but in a much safer ship positions.’’ York (Mr. LAFALCE), points out the al- environment. The self-regulating na- leged differences with the White House. b 1215 ture of our free enterprise system is Let me point out and read the state- left intact, and now it will be open to The Republican bill codifies bad judi- ment of administrative policy for the staying more clean. cial law and makes it more difficult for Members. The era of corporate mystery must the SEC to bar officers and directors. ‘‘The administration supports House end. Either we can let the corporate re- Our proposal adopts the reforms that passage of H.R. 3763 as an important sponsibility bill take us on a path to have been advocated by the SEC, an- step toward improving corporate re- transparency and legitimacy where other fundamental threshold dif- sponsibility. The bill is consistent with rules are valued and fraud is exposed ference. the President’s 10-point plan, and is and prevented, or we can watch as What about auditors? Well, we need a guided by the core principles of pro- more innocent Americans are deprived regulatory organization. The Repub- viding better information to investors, of their life savings by greed and cal- lican approach is to say to the SEC, making corporate officers more ac- lousness. Although the corporate re- ‘‘Well, if you think there should be reg- countable, and developing a stronger, sponsibility bill was written as a re- ulatory organization for accountants, more independent audit system.’’ sponse to recent events, it is common- then you should create one. It is discre- That is the statement of administra- sense legislation that should have been tionary on your part. You decide what tion policy. They support this legisla- considered long ago, and I urge my col- powers they will have and you decide tion. Let us support this bipartisan leagues to vote in favor of it. who shall serve.’’ proposal as we move forward. Mr. LAFALCE. Mr. Chairman, I yield We say that there shall be created an Mr. BARR of Georgia. Mr. Chairman, I rise myself the balance of the time remain- independent regulatory organization today in support of the Corporate Auditing and ing. for accountants, we specify what their Accountability, Responsibility and Trans- Mr. Chairman, we have an enormous, powers should be, and we also indicate parency Act (CARTA) of 2002, H.R. 3763. enormous problem on our hands. Inves- the type of person who should be ap- This legislation represents necessary—but tors have lost hundreds of billions of pointed: individuals who are represent- measured—response to the Enron and Global dollars, and sometimes it may have ative of the pension plans of private Crossing scandals. It is important Congress continues to re- been due to bad investment decisions employees, individuals who are rep- spond efficiently and effectively to the con- they made, but an awful lot of the time resentative of the pension plans of pub- cerns of American investors, retirees, and em- it was due to earnings manipulation or lic employees, et cetera. ployees. The Financial Services Committee analyst hype or corporate or account- And very importantly, with respect has worked hard in order to send this solid, bi- ing wrongdoing. We need to rise to the to research analysts, the Republican partisan legislation to the House floor. challenge. This bill just does not do bill says, well, we ought to study that I commend Chairman MICHAEL OXLEY for his problem. We say, look, the SEC has that. We could say, well, if we gave it continued efforts on this legislation. He has studied it. The SEC has given report a test and somebody gets 50 percent of been dedicated to work with Members on both after report showing conflicts. The At- the answers right, we would say, well, sides of the aisle, the industries and the ad- torney General of New York has come pass them. I think we flunk them if ministration in order to create a bill which out with unbelievable revelations. that is as good as they could do, espe- would strike a reasonable balance. cially if they do a poor job on all of the On all other legislation, for example, H.R. 3763 is a tough bill on auditor account- important issues. I think the main bill Graham-Leach-Bliley, we created fire- ability and corporate transparency and ad- does a very poor job on all of the im- walls between banking, securities, and dresses the weaknesses revealed in the bank- portant issues. insurance. We need a firewall within ruptcies by carefully strengthening the mar- Let us go to, for example, officers of securities firms with respect to the kets. In addition, H.R. 3763 will help to protect corporations. What should we do about compensation that research analysts America’s shareholders by providing better in- that? Well, the President has told us are given and the revenues that are formation to investors, making corporate offi- what he thinks should be done at a generated for the investment arm of cers more accountable, and developing a minimum. In President Bush’s 10-point the firm. The quality of research stronger, more independent audit system. plan, proposal number 3: ‘‘CEOs should should be the sole determinant of the Mr. Chairman, some may support the idea personally vouch for the veracity, compensation of research analysts. The to create even more regulation and bureauc- timeliness and fairness of their com- Republican bill does nothing on that. racy to prevent future collapses of major cor- pany’s public disclosures, including We take meaningful action. porations like Enron or Global Crossing. How- their financial statements.’’ The Re- Mr. OXLEY. Mr. Chairman, I yield ever, the idea does not bear out. Neither Con- publican bill punts on that. It does not myself the balance of my time. gress, nor the government should be in the do anything on that. Our substitute Mr. Chairman, this has been a worth- position of handcuffing the private sector and legislatively codifies what President while debate and I think does clearly how it does business. Bush asked for. point out some of the philosophical dif- H.R. 3763 gives the Securities and Ex- What about boards of directors? Well, ferences between at least a portion of change Commission the tools to identify future we have to make them more respon- the Democratic Party and the Repub- criminal wrongdoing, without imposing such sible. One way is to make sure that lican approach. strict regulatory guidelines that it would take they are responsible for both the hiring This committee acted. We are the an act of Congress to give any flexibility. Such and the firing of the auditors, so that only committee who have acted respon- restrictions would hamstring the agency and the auditors then would be independent sibly in this manner with moving legis- businesses. Moreover, we could, in the end, from the officers. The Republican bill lation forward. We had the first hear- wrap an endless stream of red tape around does nothing on that. Our bill specifi- ing in December on the Enron debacle. the capital markets. As we emerge from the cally says that it is a right and respon- We have had six subsequent hearings. most recent economic slowdown, it would be sibility of the board of directors, the We have had 33 witnesses. We had a the height of irresponsibility by this Congress audit committee in particular, to per- markup that lasted over 2 days, for 11 to dampen investment. form that function. hours. We debated this thoroughly. I urge my colleagues to pass H.R. 3763 Something else that we need to do to At the end of the process, at the end which would protect working families investing deal with officers or directors is if they of the process in committee, over half in their futures.

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00017 Fmt 4634 Sfmt 9920 E:\CR\FM\K24AP7.034 pfrm15 PsN: H24PT1 H1554 CONGRESSIONAL RECORD — HOUSE April 24, 2002 Mr. BEREUTER. Mr. Chairman, this Mem- In closing, this Member urges his colleagues Mr. CASTLE. Mr. Chairman, I rise today to ber rises today to express his support for H.R. to support H.R. 3763. express my strong support for the Corporate 3763, the Corporate and Auditing Account- Mrs. MINK of Hawaii. Mr. Chairman, H.R. and Auditing Accountability, Responsibility, ability, Responsibility and Transparency Act of 3763, the Corporate Accountability, Responsi- and Transparency Act. Americans should 2002. This bill, of which I am an original co- bility, and Transparency Act of 2002, does not know that this is the second piece of legisla- sponsor, is necessary to protect investors by go far enough to reform the accounting indus- tion the House has passed to protect them ensuring auditor independence in the account- try and strengthen corporate disclosure rules, from future ‘‘Enrons.’’ Earlier this month, the ing of publicly traded companies. which are critical to restoring investor con- House passed legislation to enhance pension This Member would express his apprecia- fidence, which was shattered by the collapse protections and give employees more tools to tion to the distinguished gentleman from Ohio, of the Enron Corporation. diversify their retirement plans. Mr. OXLEY, the chairman of the House Finan- The implosion of what was once the Na- This legislation is designed to enhance the cial Services Committee, for introducing H.R. tion’s seventh largest company and dominant independence of the accounting industry to 3763. In addition, this Member would like to energy-trading enterprise proved that the in- make sure the stock markets and investors express his appreciation to the distinguished tegrity of the system of checks and balances have a more accurate picture of a corpora- gentleman from Louisiana, Mr. BAKER, the that is supposed to prevent an Enron-like de- tion’s financial conditions so they can make chairman of the Financial Services Sub- bacle has been compromised. The system’s wise and informed decisions on where to in- committee on Capital Markets, Insurance, and failure has devastated thousands of individuals vest their money. In particular, the bill creates Government Sponsored Enterprises, for his ef- and their families. a new Public Regulatory Organization, PRO, forts in getting this measure to the House floor Enron’s employees, the vast majority of to oversee the activities of accountant. The for consideration. whom were unaware of the breadth and scope PRO would be subject to direct SEC authority. In large part, H.R. 3763 is a response to the of the company’s questionable financial deal- A majority of the PRO board members will be grossly negligent activities by Arthur Andersen ings, lost not only their jobs but also much of independent of the accounting industry to as- in their accounting audit of the Enron Corpora- their life savings. Enron’s executives fared sure that the PRO itself is not ‘‘captured’’ by tion. For example, Arthur Andersen provided considerably better, cashing in $1.1 billion in the very industry it is regulating. both consulting and auditing services to stock, as they overstated the company’s reve- One of the other Enron-related problems Enron, which certainly would appear to be an nues and concealed much of its debt in off- this bill addresses is the failure to disclose the obvious conflict of interest. In addition, after balance-sheet partnerships. types of off-balance-sheet partnerships that the Securities and Exchange Commission, The employees of Arthur Andersen LLP, the Enron used to distort its financial condition. SEC, began investigating the Enron matter, auditing firm responsible for verifying the accu- This bill requires prompt disclosure of these Arthur Andersen nonetheless allegedly contin- racy of Enron’s books, have similarly been vic- partnerships. ued to destroy documents and e-mails related timized by the actions of a relative handful of This bill also reigns in corporate manage- to its audit of Enron. Anderson partners and personnel that chose ment sales of company stock. Among the Therefore, H.R. 3763, among many things, to overlook Enron’s fraudulent bookkeeping most disturbing actions Enron executives took would do the following: activities. Today, Arthur Andersen LLP faces was to sell their company stock at the same First, prohibit firms from offering the con- huge civil lawsuits and is steadily losing cli- time there was a blackout period on the em- sulting services of financial information system ents, thereby causing many of its employees ployees 401(k) retirement plan. They were design and internal audit services to compa- to become unemployed. preserving their own assets at the same time nies that are externally auditing. In addition to the employees of Enron and their employees were losing their retirements Second, establish a new public regulatory Arthur Andersen, many thousands of investors as the Enron ship continued to sink. From now board, the Public Regulatory Organizations that relied on the supposed independent ad- on, whenever employee stock trades are pro- PROs, to conduct oversight over the account- vice of stock analysts were victimized by the hibited, corporate management stock trades ing industry. The PROs would be under the di- Enron debacle. Because Wall Street invest- will also be prohibited. rect authority of the SEC. Currently, account- ment companies reaped huge fees for Finally, while some have urged Congress to ants are subject to partial oversight by their brokering Enron’s numerous deals, they con- take further steps, I want to caution people professional organization, the American Insti- tinued to lavish praise on the company’s that freezing additional reforms in legislation tute of Certified Public Accountants; the Fed- stock, even after it nosedived in October 2001. based upon our current understanding of the eral Accounting Standards Board; and the While H.R. 3763 is intended to strengthen causes of these problems can lead to its own State Boards of Accountancy, which license the independent auditing of publicly traded set of problems. In passing Gramm-Leach-Bli- accountants. Under H.R. 3763, the power of companies, it does not address actual ac- ley a few years ago, Congress finally fixed these State boards is not diminished. counting standards. For example, it is silent on some of the mistakes that were made in at- Third, prohibit corporate executives from the question of whether certain types of debt tempting to address the causes of the Great buying or selling company stock during any may be moved off a company’s balance Depression. Critics should also note that this period where 401(k) plan participants are un- sheets, which, it cannot be stressed enough, legislation calls on the SEC and other regu- able to buy or sell securities. This provision was a hallmark of Enron’s accounting machi- lators to explore additional reforms. Congress would address the particular actions of Enron nations. The Democratic substitute to H.R. will maintain active oversight of the SEC as corporate executives who sold their stock 3763 would: Require CEOs to certify the accu- they continue to develop sound ideas to pre- when 401(k) participants were prohibited from racy of their company’s financial statements; vent future Enrons. selling their shares of stock. allow the Securities and Exchange Commis- Mr. Chairman, again, I want to express my Fourth, make it a crime for a corporate offi- sion to bar those guilty of wrongdoing from strong support for this bill and urge my col- cial to fraudulently influence, coerce, manipu- serving as corporate officers; prohibit auditors leagues on both sides of the aisle to join the late, or mislead an accountant performing an from performing consulting and auditing serv- 49 bipartisan members of the House Financial audit of a company. ices for the same client; and prohibit analysts Services Committee who reported this bill fa- Fifth, require companies to make real-time from owning stock in the companies on which vorably to the House floor. This is a respon- disclosures of financial information that is im- they report. sible step toward preventing future Enrons that portant to investors, such as material changes Investor confidence is the bedrock upon does not punish the innocent. in a company’s financial condition. which our market system is built. Investors Mr. STARK. Mr. Chairman, I rise in opposi- Sixth, require corporate executives to dis- must have full confidence that business ex- tion to H.R. 3763, the Corporate and Auditor close when they sell securities they own in the ecutives will look after the long-term interests Responsibility Act, because the bill does noth- company immediately. Current regulations of their companies, directors will look after the ing to prevent another Enron debacle from oc- allow corporate executives up to 40 days to interests of shareholders, auditors will verify curring in the future. make such disclosures. the accuracy of financial statements, and ana- Enron’s collapse has highlighted major gaps This Member would also like to note that lysts will offer sound investment advice. There in our securities laws. These gaps jeopardize while H.R. 3763 is certainly a step towards is no question that investor confidence has the retirement savings of millions of hard protecting investors in the future, he also been badly shaken, if not lost. If that con- working Americans who have their retirement hopes that the corporate executives at Enron fidence is to be fully restored, more than good funds invested in securities. After the Enron and the relevant auditors at Arthur Andersen intentions are required. It will require provi- collapse, the American people overwhelmingly are punished in the proper manner for their sions with force and teeth. It will, in short, re- called for strong measures to prevent such a grossly irresponsible, probably illegal, cor- quire the Democratic substitute. I strongly urge debacle from happening again. They called on porate behavior. my colleagues to vote for it. Congress to act, but this bill falls far short.

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00018 Fmt 4634 Sfmt 9920 E:\CR\FM\A24AP7.013 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1555 This so-called ‘‘Corporate and Auditor Re- This Republican bill is another sham on the Government regulations also harm investors sponsibility Act’’ is nothing more than a polit- American public who expect Congress to pass by inducing a sense of complacency. Investors ical document for Republicans to appear like effective legislation to restore corporate ac- are much less likely to invest prudently and they are protecting investors and workers countability. I urge my colleagues to vote for ask tough questions of the companies they when, in fact, they are protecting corporations the Democratic substitute and no on the Re- are investing in when they believe government and CEOs. H.R. 3763 would actually increase publican bill. regulations are protecting their investments. the likelihood of another Enron situation be- Mr. PAUL. Mr. Chairman, seldom in history However, as mentioned above, government cause it limits the SEC’s authority to prohibit have supporters of increased state power regulations are unable to prevent all fraudulent Enron’s corporate officers and directors from failed to take advantage of a real or perceived activity, much less prevent all instances of im- serving in such positions in the future if they crisis to increase government interference in prudent actions. In fact, as also pointed out are found guilty of misconduct. our economic and/or personal lives. Therefore above, complex regulations create opportuni- What happened to the GOP mantra of hold- we should not be surprised that the events ties for illicit actions by both the regulator and ing executives accountable for corporate mis- surrounding the Enron bankruptcy are being the regulated, Mr. Chairman, publicly held cor- conduct? H.R. 3763 fails miserably to hold used to justify the expansion of Federal regu- porations already comply with massive CEOs even remotely accountable for their ac- latory power contained in H.R. 3763, the Cor- amounts of SEC regulations, including the fil- tions. Even President Bush thinks it makes porate and Auditing Accountability, Responsi- ing of quarterly reports that disclose minute sense to have a company’s CEO certify the bility, and Transparency Act of 2002 (CARTA). details of assets and liabilities. If these disclo- So ingrained is the idea that new Federal accuracy of their financial statements. This bill sures rules failed to protect Enron investors, fails to take even that small step. regulations will prevent future Enrons, that to- day’s debate will largely be between CARTA’s will more red tape really solve anything? The Enron scandal happened less than 6 In truth, investing carries risk, and it is not supporters and those who believe this bill months ago, yet my Republican colleagues the role of the Federal Government to bail our does not provide enough Federal regulation have quickly forgotten some of its major com- every investor who loses money. In a true free and control. I would like to suggest that before ponents. While thousands of Enron employees market, investors are responsible for their own Congress imposes new regulations on the ac- were being told to invest their retirement sav- decisions, good or bad. This responsibility counting profession, perhaps we should con- ings in Enron securities, Enron’s CEO sold leads them to vigorously analyze companies sider whether the problems the regulations are millions of dollars worth of company stock. before they invest, using independent financial designed to address were at least in part Corporate officers knew that hollow deals analysts. In our heavily regulated environment, were taking place to prop up the stock price, caused by prior government interventions into the market. Perhaps Congress could even however, investors and analysts equate SEC and the employees had to pay the price. compliance with reputability. The more we Shouldn’t company CEOs be responsible for consider the almost heretical idea that reduc- look to the government to protect us from in- signing on the dotted line and verifying the ing Federal control of the markets is in the vestment mistakes, the less competition there company’s books? Of course they should! public’s best interest. Congress should also if for truly independent evaluations of invest- Which makes it all the more unfathomable that consider whether the new regulations will have ment risk. the GOP would submit a bill without a provi- costs which might outweigh any (marginal) Increased Federal interference in the market sion to hold CEOs responsible for the veracity gains. Finally, Mr. Speaker, Congress should could also harm consumers by crippling inno- of their company’s bottom line. Our Repub- contemplate whether we actually have any vative market mechanisms to hold corporate lican friends are basically saying to Ken Lay: constitutional authorization to impose these managers accountable to their shareholders. feel free to get another CEO gig, create some new regulations, instead of simply stretching Ironically, Mr. Chairman, current SEC regula- new tax shelters for the company, prop up the the Commerce Clause to justify the program tions make it difficult for shareholders to chal- stock price and then walk away with millions de jour. lenge management decisions. Thus govern- in personal profit. Today’s bill does nothing to CARTA establishes a new bureaucracy with ment regulations encourage managers to dis- prevent that. enhanced oversight authority of accounting In contrast, the Democratic substitute ad- firms, as well as the authority to impose new regard shareholder interests! dresses the more egregious corporate mis- mandates on these firms. CARTA also im- Unfortunately, the Federal Government has conduct issues. poses new regulations regarding investing in a history of crippling market mechanisms to First and foremost, the Democratic sub- stocks and enhances the power of the Securi- protect shareholders. As former Treasury offi- stitute requires the CEO and chief financial of- ties and Exchange Commission (SEC). How- cial Bruce Bartlett pointed out in a recent ficer (CFO) of publicly-traded companies to ever, Mr. Speaker, companies are already re- Washington Times column, during the 1980s, certify the accuracy and veracity of the com- quired by Federal law to comply with numer- so-called corporate raiders helped keep cor- pany’s financial statements. This is a reason- ous mandates, including obtaining audited fi- porate management accountable to share- able first step to ensure that executives be nancial statements from certified accountants. holders through devices such as the ‘‘junk’’ held accountable for misleading investors and These mandates have enriched accounting bond, which made corporate takeovers easier. employees. firms and may have given them market power Thanks to the corporate raiders, managers Next, the Democratic substitute allows the beyond what they could obtain in a free mar- knew they had to be responsive to share- Securities and Exchange Commission (SEC) ket. These laws also give corrupt firms an op- holders needs or they would become a poten- to recover all executive compensation re- portunity to attempt to use political power to tial target for a takeover. ceived (including salaries, commissions, fees, gain special treatment for Federal lawmakers Unfortunately, the backlash against cor- bonuses, and stock options) for any period and regulators at the expense of their com- porate raiders, led by demographic politicians during which the executive falsified a com- petitors and even, as alleged in the Enron and power-hungry bureaucrats eager to ex- pany’s financial statements. The Republican case, their employees and investors. pand the financial police state, put an end to bill only allows the SEC to recover stock trans- When Congress establishes a regulatory hostile takeovers. Bruce Bartlett, in the Wash- action proceeds for the six months prior to a state it creates an opportunity for corruption. ington Times column sited above, described corporate restatement of earnings. Under the Unless CARTA eliminates original sin, it will the effects of this action on shareholders, Republican bill, an executive making a $3 mil- not eliminate fraud. In fact, by creating a new ‘‘Without the threat of a takeover, manaagers lion salary, who falsifies company financial bureaucracy and further politicizing the ac- have been able to go back to ignoring share- records, will be able to keep it. He can also counting profession, CARTA may create new holders, treating them like a nuisance, and keep hundreds of millions of dollars in stock opportunities for the unscrupulous to manipu- giving themselves bloated salaries and perks, option proceeds accumulated under falsified late the system to their advantage. with little oversight from corporate boards. accounting from previous years. Even if CARTA transformed all (or at least Now insulated from shareholders once again, Finally, the Democratic substitute bill will all accountants) into angels, it could still harm managers could engage in unsound practices empower the SEC to bar directors and officers individual investors. First, new regulations in- with little fear of punishment for failure.’’ Iron- found guilty of corporate misconduct from evitably raise the overhead costs of investing. ically, the Federal power grab which killed the holding similar positions in the future. CEOs This will affect the entire economy as it corporate raider may have set the stage for who mislead and defraud their investors and lessens the capital available to businesses, the Enron debacle, which is now being used employees must not be allowed to return to thus leading to lower rates of economic growth as an excuse for yet another Federal power similar positions. Without a strong provision and job creation. Meanwhile, individual inves- grab! such as this, incentives will continue to tors will have less money for their retirement, If left alone by Congress, the market is per- abound for CEOs to choose personal profit their children’s education, or to make a down fectly capable of disciplining businesses who over corporate integrity. payment on a new home. engage in unsound practices. After all, before

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00019 Fmt 4634 Sfmt 9920 E:\CR\FM\A24AP7.021 pfrm15 PsN: H24PT1 H1556 CONGRESSIONAL RECORD — HOUSE April 24, 2002 the government intervened, Arthur Andersen Finally, Mr. Chairman, I would remind my and stock analysts have adequate inde- and Enron had already begun to pay a stiff colleagues that Congress has no constitutional pendent oversight and regulations to fulfill their penalty, a penalty delivered by individual in- authority to regulate the financial markets or professional duties. However, I also support vestors acting through the market. This shows the accounting profession. Instead, responsi- the underlying bill, H.R. 3763, which begins that not only can the market deliver punish- bility for enforcing laws against fraud are the process of putting in place the reforms ment, but it can also deliver this punishment under the jurisdiction of the state and local needed to prevent future tragedies that are so swifter and more efficiently than the govern- governments. This decentralized approach ac- devastating to the savings and lives of Amer- ment. We cannot know what efficient means tually reduces the opportunity for the type of ican workers and investors. of disciplining companies would emerge from corruption referred to above—after all, it is Mr. SHOWS. Mr. Chairman, today I rise in a market process but we can know they would easier to corrupt one Federal official than 50 favor of commonsense legislation that pro- be better at meeting the needs of investors State Officials. than a top-down regulatory approach. In conclusion, the legislation before us today vides necessary reform for the auditing profes- Of course, while the supporters of increased expands Federal power over the accounting sion. regulation claim Enron as a failure of ‘‘rav- profession and the financial markets. By cre- The Corporate and Auditing Accountability, enous capitalism,’’ the truth is Enron was a ating new opportunities for unscrupulous ac- Responsibility, and Transparency Act phenomenon of the mixed economy, rather tors to maneuver through the regulatory lab- (CAARTA) offers the appropriate framework than the operations of the free market. Enron yrinth, increasing the costs of investing, and for addressing the concerns raised by the provides a perfect example of the dangers of preempting the market’s ability to come up Enron debacle and the revelation of impropri- corporate subsidies. The company was (and with creative ways to hold corporate officials eties by its auditor, Arthur Andersen. is) one of the biggest beneficiaries of Export- accountable, this legislation harms the inter- Import (Ex-Im) Bank and Overseas Private In- The consumers, employees, and investors ests of individual workers and investors. Fur- vestment Corporation (OPIC) subsidies. These affected by the demise of Enron due to unlaw- thermore, this legislation exceeds the constitu- programs make risky loans to foreign govern- ful misrepresentation of financial information tional limits on Federal power, interfering in ments and businesses for projects involving deserve both answers and solutions so that matters the 10th amendment reserves to state American companies. While they purport to confidence in accounting independence, ob- help developing nations, Ex-Im and OPIC are and local law enforcement. I therefore urge my colleagues to reject this bill. Instead, Congress jectivity, and integrity is restored. However, in truth nothing more than naked subsidies for government should not overreact with pre- certain politically-favored American corpora- should focus on ending corporate welfare pro- grams which provide taxpayer dollars to large scriptive regulations. Instead, we should pro- tions, particularly corporations like Enron that vide thoughtful and balanced measures that lobby hard and give huge amounts of cash to politically-connected companies, and ending the misguided regulatory and monetary poli- encourage sound auditing practices yet man- both political parties. Rather than finding ways date compliance. to exploit the Enron mess to expand Federal cies that helped create the Enron debacle. power, perhaps Congress should stop aiding Mr. BLUMENAUER. Mr. Chairman, I rise Auditors must maintain an independent rela- corporations like Enron that pick the tax- today in support of H.R. 3763, the Corporate tionship with businesses whose books are payer’s pockets through Ex-Im and OPIC. and Auditing Accountability and Responsibility under review. CAARTA establishes the appro- If nothing else, Mr. Chairman, Enron’s suc- Act. This bill moves policy in the direction nec- priate guidelines for determining true auditor cess at obtaining State favors is another rea- essary to strengthen corporate and auditor independence without treading the slippery son to think twice about expanding political oversight needed to prevent future debacles slope of unnecessary and debilitating regula- control over the economy. After all, allegations that we have seen recently at Enron and tion. Small businesses throughout Mississippi have been raised that Enron used the same Global Crossing, and in the past with the Sav- rely on their local accountants to provide more clout by which it received corporate welfare to ings and Loan catastrophe. than just auditing services. These businesses obtain other ‘‘favors’’ from regulators and poli- These oversight failures have led to the loss rely on advice and counsel for all types of ac- ticians, such as exemptions from regulations of hundreds of billions of dollars of savings by counting problems such as bookkeeping, pay- that applied to their competitors. This is not an innocent investors and employees. These roll services budgeting, and income tax prepa- uncommon phenomenon when one has a reg- losses have shattered the lives of families, in- ration. We must keep local accountants and ulatory state, the result of which is that win- cluding those in my district who are employed small businesses in Rural America in mind ners and losers are picked according to who at Portland General Electric, which was pur- when we legislate policy that might impact has the most political clout. chased by Enron in 1997. Congress owes it to these relationships in the future. Congress should also examine the role the the American public to put in place measures Federal Reserve played in the Enron situation. that will eliminate conflicts of interest, lack of With these small businesses and local ac- Few in Congress seem to understand how the independence, and special protections given countants in mind, I oppose any provision re- Federal Reserve system artificially inflates to accountants and lawyers, which have all quiring auditors of publicly traded companies stock prices and causes financial bubbles. been critical factors leading to corporate and to meet a netcapital requirement of 50% of its Yet, what other explanation can there be when industry failures. annual audit revenue from publicly traded a company goes from a market value of more Due to the severe impact that these cor- companies. I agree that auditors of SEC re- than $75 billion to virtually nothing in just a porate failures create, I urge the House to im- porting companies ought to have enough cap- few months? The obvious truth is that Enron plement more significant reforms by passing ital and insurance to cover the liability they was never really worth anything near $75 bil- the Democratic Substitute amendment, which: incur when an audit is performed; however, lion, but the media focuses only on the possi- Creates an independent regulatory board my concern remains with the small businesses bility of deceptive practices by management, that can set strict standards for auditor inde- and accountants in Rural America whose ignoring the primary cause of stock overvalu- pendence, with sweeping investigative and practices could eventually fall under the same ations: Fed expansion of money and credit. disciplinary powers over audit firms. requirement, devastating local, small-town ac- The Fed consistently increased the money Holds corporate CEOs accountable by re- countants and debilitating the services they supply (by printing dollars) throughout the quiring them to certify the accuracy of their fi- currently provide. 1990s, while simultaneously lowering interest nancial statements and empowers the SEC to I support CAARTA’s creation of a public rates. When dollars are plentiful, and interest bar those guilty of wrongdoing from serving as regulatory organization (PRO) made up of rates are artificially low, the cost of borrowing corporate officers or directors at other compa- both members of the public and members of becomes cheap. This is why so many Ameri- nies. the accounting profession. The American pub- cans are more deeply in debt than ever be- Prohibits auditors from doing consulting lic and the accounting profession will be better fore. This easy credit environment made it work for the same clients they are in charge served by this independent governmental body possible for Enron to secure hundreds of mil- of auditing, thereby insuring that auditors re- that is given the authority to sanction and dis- lions in uncollateralized loans, loans that now main independent and are not subject to con- cipline those accountants who violate codes of cannot be repaid. The cost of borrowing flicts of interests. money, like the cost of everything else, should Bans analysts from owning stocks in the ethics, standards of independence and com- be established by the free market—not by companies on which they report and prohibits petency, or securities laws. government edict. Unfortunately, however, the their pay from being based on their investment As United States Comptroller General David trend toward overvaluation will continue until firm’s banking revenue. Walker identified in his written testimony be- the Fed stops creating money out of thin air The Democratic approach ensures that our fore the Financial Services committee on April and stops keeping interest rates artificially low. corporate leaders, financial statement auditors, 9, 2002, the current self-regulatory system for

VerDate Apr 18 2002 02:25 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00020 Fmt 4634 Sfmt 9920 E:\CR\FM\A24AP7.023 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1557 auditors ‘‘involves many players in a frag- Securities Act of 1933 and the Securities Ex- SEC. 2. AUDITOR OVERSIGHT. mented system that is not well coordinated, in- change Act of 1934, the two landmark securi- (a) CERTIFIED FINANCIAL STATEMENT RE- volves certain conflicts of interest, lacks effec- ties laws to which all publicly-traded compa- QUIREMENTS.—If a financial statement is re- quired by the securities laws or any rule or reg- tive communication, and has a discipline sys- nies, except Fannie and Freddie, must adhere. ulation thereunder to be certified by an inde- tem that is largely perceived as being ineffec- The reforms contained in this legislation will pendent public or certified accountant, an ac- tive.’’ Mr. Walker concluded, ‘‘direct govern- strengthen securities laws and accounting countant shall not be considered to be qualified ment intervention to statutorily create a new standards—except when it comes to Fannie to certify such financial statement, and the Se- independent Federal government body to reg- and Freddie. This legislation improves trans- curities and Exchange Commission shall not ac- ulate the accounting profession is needed.’’ I parency in our capital markets and protects in- cept a financial statement certified by an ac- support this conclusion and the means and vestors—unless they’re investing in Fannie countant, unless such accountant— degree by which CAARTA creates a public Mae and Freddie Mac securities. (1) is subject to a system of review by a public regulatory organization that complies with the regulatory board to address those concerns. What this legislation highlights is that we requirements of this section and the rules pre- There were two specific issues that I would have two separate rules in corporate America: scribed by the Commission under this section; have liked strengthened or included in this re- those that apply to Fannie and Freddie, and and form package: a stronger section providing for those that apply to every other publicly-traded (2) has not been determined in the most recent disgorgement of bonuses and other incentives company. review completed under such system to be not and the inclusion of a requirement for CEOs The Financial Services Committee has had qualified to certify such a statement. and CFOs to be held accountable for their a number of hearings on the unfair advan- (b) ESTABLISHMENT OF PRO.—The Commission shall by rule establish the criteria by which a companies’ financial statements. CEOs must tages these two secondary mortgage compa- public regulatory organization may be recog- not be allowed to profit from inaccurate and nies have over the rest of the mortgage indus- nized for purposes of this section. Such criteria falsified financial statements. Bonuses and try. With Chairman OXLEY’s support, I hope we shall include the following requirements: other incentive-based forms of compensation can continue to ask Fannie Mae and Freddie (1)(A) The board of such organization shall be should be given back to the workers who lost Mac why they can’t play by the same rules as comprised of five members, three of whom shall their pensions and the consumers who lost all other companies and why they continue to be public members who are not members of the their investments resulting from misconduct seek exemptions from federal laws designed accounting profession and two of whom shall be and erroneous accounting statements at the to protect investors. persons licensed to practice public accounting and who have recent experience in auditing hands and direction of corporate executives. The CHAIRMAN. All time for general public companies. Furthermore, CEOs and CFOs must be re- debate has expired. (B) Each member of the board of such organi- sponsible for a company’s financial statement Pursuant to the rule, the committee zation shall be a person who meets such stand- and certify its accuracy. This is a good busi- amendment in the nature of a sub- ards of financial literacy as are determined by ness practice that is now, unfortunately, no stitute printed in the bill shall be con- the Commission. longer the norm. sidered as an original bill for the pur- (C) For purposes of this paragraph, a person We must restore confidence in the account- pose of amendment under the 5-minute shall not be considered a member of the ac- ing profession by enacting legislation that en- rule and shall be considered as read. counting profession if such person has not worked in such profession for any of the last sures accurate and responsible financial dis- The text of the committee amend- two years prior to the date of such person’s ap- closure. CAARTA represents commonsense ment in the nature of a substitute is as pointment to the board. reform, which makes a deliberate attempt to follows: (2) Such organization is so organized and has safeguard American workers, investors, and H.R. 3763 the capacity— (A) to be able to carry out the purposes of this consumers. Be it enacted by the Senate and House of Rep- section and to comply, and to enforce compli- Mr. SHAYS. Mr. Chairman, I want to com- resentatives of the United States of America in ance by accountants and persons associated mend Chairman MIKE OXLEY and Chairman Congress assembled, with accountants, with the provisions of this RICHARD BAKER for their work on the legisla- SECTION 1. SHORT TITLE; TABLE OF CONTENTS. Act, professional ethics and competency stand- tion we are debating. The reforms contained in (a) SHORT TITLE.—This Act may be cited as ards, and the rules of the organization; this accounting bill represent a balanced ap- the ‘‘Corporate and Auditing Accountability, (B) to perform a review of the work product proach between industry and government Responsibility, and Transparency Act of 2002’’. (including the quality thereof) of an accountant oversight and I am pleased to support it. (b) TABLE OF CONTENTS.— or a person associated with an accountant; and The Corporate and Auditing Accountability, Sec. 1. Short title; table of contents. (C) to perform a review of any potential con- Responsibility, and Transparency Act meets Sec. 2. Auditor oversight. flicts of interest between an accountant (or a the tests for reform put forward by President Sec. 3. Improper influence on conduct of audits. person associated with an accountant) and the Sec. 4. Real-time disclosure of financial infor- issuer, the issuer’s board of directors and com- Bush. It prohibits accounting firms from offer- mation. mittees thereof, officers, and affiliates of such ing certain controversial consulting services to Sec. 5. Insider trades during pension fund issuer, that may result in an impairment of companies they’re also auditing. And it estab- blackout periods prohibited. auditor independence. lishes a new, public regulatory board to certify Sec. 6. Improved transparency of corporate dis- (3) Such organization shall have the authority any accountant wishing to audit the financial closures. to impose sanctions, which, if there is a finding statement required from public issuers of Sec. 7. Improvements in reporting on insider of knowing or intentional misconduct, may in- stock. This board will have enforcement pow- transactions and relationships. clude a determination that an accountant is not ers and will be under the direction of the Se- Sec. 8. Codes of conduct. qualified to certify a financial statement, or any Sec. 9. Enhanced oversight of periodic disclo- categories of financial statements, required by curities and Exchange Commission. sures by issuers. the securities laws, or that a person associated Under CAARTA, all publicly-traded compa- Sec. 10. Retention of records. with an accountant is not qualified to partici- nies will be responsible for ensuring that their Sec. 11. Commission authority to bar persons pate in such certification, if, after conducting a accounting firms are in good standing and for from serving as officers or direc- review and providing fair procedures and an op- having their financial statement certified by the tors. portunity for a hearing, the organization finds regulatory board. Sec. 12. Disgorging insiders profits from trades that— Well, maybe I shouldn’t be so quick to say prior to correction of erroneous fi- (A) such accountant or person associated with ‘‘all’’ publicly-traded companies. You see, nancial statements. an accountant has violated the standards of Sec. 13. Securities and Exchange Commission independence, ethics, or competency in the pro- there are two giant private corporations that authority to provide relief. fession; enjoy a very special privilege from the federal Sec. 14. Study of rules relating to analyst con- (B) such accountant or person associated with government: they are completely exempt from flicts of interest. an accountant has been found by the Commis- our federal securities laws. Sec. 15. Review of corporate governance prac- sion or a court of competent jurisdiction to have Mr. Chairman, these companies are Fannie tices. violated the securities laws or a rule or regula- Mae and Freddie Mac, and all the important Sec. 16. Study of enforcement actions. tion thereunder (provided in both cases that any improvements this legislation makes won’t Sec. 17. Study of credit rating agencies. applicable time period for appeal has expired); apply one iota to them. Sec. 18. Study of investment banks and other fi- (C) an audit conducted by such accountant or After studying the collapse of Enron and nancial institutions. any person associated with an accountant has Sec. 19. Study of model rules for attorneys of been materially affected by an impairment of Global Crossing, the Financial Services Com- issuers. auditor independence; mittee determined that a number of reforms Sec. 20. Enforcement authority. (D) such accountant or person associated with were necessary to restore confidence in cor- Sec. 21. Exclusion for investment companies. an accountant has performed both auditing porate America. These reforms build on the Sec. 22. Definitions. services and consulting services in violation of

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the rules prescribed by the Commission pursuant (4) REPORT.—The Commission shall report to (e) REVIEW OF SANCTIONS.— to subsection (c); or the Committee on Financial Services of the (1) NOTICE.—If any recognized public regu- (E) such accountant or any person associated House of Representatives and the Committee on latory organization— with an accountant has impeded, obstructed, or Banking, Housing, and Urban Affairs of the (A) makes a finding with respect to or imposes otherwise not cooperated in such review. Senate on its conduct of any reviews as required any final disciplinary sanction on any account- (4) Any such organization shall disclose pub- by this section. The report shall include a dis- ant; licly, and make available for public comment, cussion of regulatory or legislative steps that are (B) prohibits or limits any person in respect to proposed procedures and methods for con- recommended or that may be necessary to ad- access to services offered by such organization; ducting such reviews. dress concerns identified in the study. or (C) makes a finding with respect to or imposes (5) Any such organization shall have in place (5) CONFORMING REVISION.—The Commission any final disciplinary sanction on any person procedures to minimize and deter conflicts of in- shall revise its regulations pertaining to ac- associated with an accountant or bars any per- terest involving the public members of such or- countant fee disclosure items, as set forth in son from becoming associated with an account- ganization, and have in place procedures to re- paragraphs (e)(1) through (e)(3) of item 9 from ant, solve such conflicts. Schedule 14A (17 CFR 240.14a–101), in light of (6) Any such organization shall have in place paragraph (1) of this subsection and after mak- the recognized public regulatory organization procedures for notifying the boards of account- ing a determination as to whether such disclo- shall promptly submit notice thereof with the ancy of the States of the results of reviews and sures are necessary. Commission. The notice shall be in such form evidence under paragraphs (2) and (3). and contain such information as the Commis- (7) Any such organization shall have in place (6) DEADLINE FOR RULEMAKING.—The Commis- sion shall— sion, by rule, may prescribe as necessary or ap- procedures for notifying the Commission of any propriate in furtherance of the purposes of this findings of such reviews, including any findings (A) within 90 days after the date of enactment of this Act, propose, and section. regarding suspected violations of the securities (2) REVIEW BY COMMISSION.—Any action with (B) within 270 days after such date, prescribe, laws. respect to which a recognized public regulatory (8) Any such organization shall consult with the revisions to its regulations required by this organization is required by paragraph (1) of this boards of accountancy of the States. subsection. subsection to submit notice shall be subject to (9) Any such organization shall have in place (d) PRO ACCOUNTANT REVIEW PROCEEDINGS.— review by the Commission, on its own motion, or a mechanism to allow the organization to oper- (1) REVIEW PROCEEDING FINDINGS.—Any find- upon application by any person aggrieved there- ate on a self-funded basis. Such funding mecha- ings made pursuant to an accountant review by filed within 30 days after the date such no- nism shall ensure that such organization is not conducted under this section that a financial tice was filed with the Commission and received solely dependent upon members of the account- statement audited by such accountant and sub- by such aggrieved person, or within such longer ing profession for such funding and operations. mitted to the Commission may have been materi- period as the Commission may determine. Appli- (10) Any such organization shall have the au- ally affected by an impairment of auditor inde- cation to the Commission for review, or the in- thority to request, in a manner established by pendence, or by a violation of professional eth- stitution of review by the Commission on its own the Commission, that the Commission, by sub- ics and competency standards, shall be sub- motion, shall not operate as a stay of such ac- poena or otherwise, compel the testimony of wit- mitted to the Commission. The Commission shall tion unless the Commission otherwise orders, nesses or the production of any books, papers, promptly notify an issuer of any such finding summarily or after notice and opportunity for correspondence, memoranda, or other records that relates to the financial statements of such hearing on the question of a stay (which hear- relevant to any accountant review proceeding or issuer. ing may consist solely of the submission of affi- necessary or appropriate for the organization to (2) CONFIDENTIAL TREATMENT OF PROCEEDINGS davits or presentation of oral arguments). The carry out its purposes. The Commission shall PENDING SEC REVIEW.— Commission shall establish for appropriate cases comply with any such request from such an or- (A) NO DISCLOSURE.—Except as otherwise pro- an expedited procedure for consideration and ganization if the Commission determines that vided in this section, but notwithstanding any determination of the question of a stay. compliance with the request would assist the or- other provision of law, neither the Commission, (f) CONDUCT OF COMMISSION REVIEW.— ganization in its accountant review proceeding a recognized public regulatory organization, nor (1) BASIS FOR ACTION.—In any proceeding to or in carrying out its purposes, unless the Com- any other person shall disclose any information review a final disciplinary sanction imposed by mission determines that compliance would not concerning any accountant review proceeding a recognized public regulatory organization on be in the public interest. The issuance and en- and the findings therein. an accountant or a person associated with such forcement of a subpoena requested under this (B) SPECIFIC WITHHOLDING NOT AUTHORIZED.— accountant, after notice and opportunity for paragraph shall be deemed to be made pursuant Nothing in this subsection shall— hearing (which hearing may consist solely of to, and shall be made in accordance with, the (i) authorize a recognized public regulatory consideration of the record before the recognized provisions of subsections (b) and (c) of section 21 organization to withhold information from the public regulatory organization and opportunity of the Securities and Exchange Act of 1934 (15 Commission; for the presentation of supporting reasons to af- U.S.C. 78u(b)–(c)). For purposes of taking evi- (ii) authorize such board or the Commission to firm, modify, or set aside the sanction)— (A) if the Commission finds that such ac- dence, the Commission in its discretion may des- withhold information concerning an accountant countant or person associated with an account- ignate the Board, or any member thereof, as of- review proceeding from an accountant or person ant has engaged in such acts or practices, or ficers pursuant to section 21(b) of such Act. associated with an accountant that is the sub- (c) PROHIBITION ON THE OFFER OF BOTH has omitted such acts, as the recognized public ject of such proceeding; AUDIT AND CONSULTING SERVICES.— regulatory organization has found him to have (iii) authorize the Commission to withhold in- (1) MODIFICATION OF REGULATIONS RE- engaged in or omitted, that such acts or prac- formation from Congress; or QUIRED.—The Commission shall revise its regu- tices, or omissions to act, are in violation of (iv) prevent the Commission from complying lations pertaining to auditor independence to such provisions of this section, or of professional with a request for information from any other require that an accountant shall not be consid- ethics and competency standards, and that such ered independent with respect to an audit client Federal department or agency requesting infor- provisions are, and were applied in a manner, if the accountant provides to the client the fol- mation for purposes within the scope of its juris- consistent with the purposes of this section, the lowing nonaudit services, as such terms are de- diction, or complying with an order of a court of Commission, by order, shall so declare and, as fined in such regulations as in effect on the date the United States in an action brought by the appropriate, affirm the sanction imposed by the of enactment of this Act, and subject to such United States or the Commission. recognized public regulatory organization, mod- conditions and exemptions as the Commission (C) DURATION OF WITHHOLDING.—Neither the ify the sanction in accordance with paragraph shall prescribe: Commission nor the recognized public regulatory (2) of this subsection, or remand to the recog- (A) financial information system design or im- organization shall disclose the results of any nized public regulatory organization for further plementation; or such finding until the completion of any review proceedings; or (B) internal audit services. by the Commission under subsections (e) and (f), (B) if the Commission does not make any such (2) REVIEW OF PROHIBITED NONAUDIT SERV- or the conclusion of the 30-day period for seek- finding, it shall, by order, set aside the sanction ICES.—The Commission is authorized to review ing review if no motion seeking review is filed imposed by the recognized public regulatory or- the impact on the independence of auditors of within such period. ganization and, if appropriate, remand to the the scope of services provided by auditors to (D) TREATMENT UNDER FOIA.—For purposes of recognized public regulatory organization for issuers in order to determine whether the list of section 552 of title 5, United States Code, this further proceedings. prohibited nonaudit services under paragraph subsection shall be considered a statute de- (2) REDUCTION OF SANCTIONS.—If the Commis- (1) shall be modified. In conducting such review, scribed in subsection (b)(3)(B) of such section sion, having due regard for the public interest the Commission shall consider the impact of the 552. and the protection of investors, finds after a provision of a service on an auditor’s independ- (3) NONPRECLUSIVE EFFECT OF PRO FINDINGS.— proceeding in accordance with paragraph (1) of ence where provision of the service creates a A finding by a recognized public regulatory or- this subsection that a sanction imposed by a rec- conflict of interest with the audit client. ganization that an individual audit of an issuer ognized public regulatory organization upon an (3) ADDITIONS BY RULE.—After conducting the met or failed to meet any applicable standard accountant or person associated with an ac- review required by paragraph (2) and at any with respect to the quality of such audit shall countant imposes any burden on competition other time, the Commission may, by rule con- not be construed in any action arising out of the not necessary or appropriate in furtherance of sistent with the protection of investors and the securities laws as indicative of compliance or the purposes of this Act or is excessive or op- public interest, modify the list of prohibited noncompliance with the securities laws or with pressive, the Commission may cancel, reduce, or nonaudit services under paragraph (1). any standard of liability arising thereunder. require the remission of such sanction.

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(g) REVIEW AND APPROVAL OF RULES.— Commission that such action is necessary for the the Commission pursuant to this subsection (1) SUBMISSION, PUBLICATION, AND COM- protection of investors, or otherwise in accord- shall be considered for all purposes to be part of MENT.—Each recognized public regulatory orga- ance with the purposes of this title. Any pro- the rules of such recognized public regulatory nization shall file with the Commission, in ac- posed rule change so put into effect shall be organization and shall not be considered to be a cordance with such rules as the Commission filed promptly thereafter in accordance with the rule of the Commission. may prescribe, copies of any proposed rule or provisions of paragraph (1) of this subsection. (i) COMMISSION OVERSIGHT OF THE PRO.— any proposed change in, addition to, or deletion (C) Any proposed rule change of a recognized (1) RECORDS AND EXAMINATIONS.—A public from the rules of such recognized public regu- public regulatory organization which has taken regulatory organization shall make and keep for latory organization (hereinafter in this sub- effect pursuant to subparagraph (A) or (B) of prescribed periods such records, furnish such section collectively referred to as a ‘‘proposed this paragraph may be enforced by such organi- copies thereof, and make and disseminate such rule change’’) accompanied by a concise general zation to the extent it is not inconsistent with reports as the Commission, by rule, prescribes as statement of the basis and purpose of such pro- the provisions of this Act, the securities laws, necessary or appropriate in the public interest, posed rule change. The Commission shall, upon the rules and regulations thereunder, and appli- for the protection of investors, or otherwise in the filing of any proposed rule change, publish cable Federal and State law. At any time within furtherance of the purposes of this Act or the se- notice thereof together with the terms of sub- 60 days of the date of filing of such a proposed curities laws. stance of the proposed rule change or a descrip- rule change in accordance with the provisions (2) ADDITIONAL DUTIES; SPECIAL REVIEWS.—A tion of the subjects and issues involved. The of paragraph (1) of this subsection, the Commis- public regulatory organization shall perform Commission shall give interested persons an op- sion summarily may abrogate the change in the such other duties or functions as the Commis- portunity to submit written data, views, and ar- rules of the recognized public regulatory organi- sion, by rule or order, determines are necessary guments concerning such proposed rule change. zation made thereby and require that the pro- or appropriate in the public interest or for the No proposed rule change shall take effect unless posed rule change be refiled in accordance with protection of investors and to carry out the pur- approved by the Commission or otherwise per- the provisions of paragraph (1) of this sub- poses of this Act and the securities laws, includ- mitted in accordance with the provisions of this section and reviewed in accordance with the ing conducting a special review of a particular subsection. provisions of paragraph (2) of this subsection, if public accounting firm’s quality control system (2) APPROVAL OR PROCEEDINGS.—Within 35 it appears to the Commission that such action is or a special review of a particular aspect of days of the date of publication of notice of the necessary or appropriate in the public interest, some or all public accounting firms’ quality con- filing of a proposed rule change in accordance for the protection of investors, or otherwise in trol systems. (3) ANNUAL REPORT; PROPOSED BUDGET.— with paragraph (1) of this subsection, or within furtherance of the purposes of this Act. Commis- (A) SUBMISSION OF ANNUAL REPORT AND BUDG- such longer period as the Commission may des- sion action pursuant to the preceding sentence ET.—A public regulatory organization shall sub- ignate up to 90 days of such date if it finds such shall not affect the validity or force of the rule mit an annual report and its proposed budget to longer period to be appropriate and publishes its change during the period it was in effect, shall the Commission for review and approval, by reasons for so finding or as to which the recog- not be subject to court review, and shall not be order, at such times and in such form as the nized public regulatory organization consents, deemed to be ‘‘final agency action’’ for purposes Commission shall prescribe. the Commission shall— of section 704 of title 5, United States Code. (B) CONTENTS OF ANNUAL REPORT.—Each an- (A) by order approve such proposed rule (h) COMMISSION ACTION TO CHANGE RULES.— nual report required by subparagraph (A) shall change; or The Commission, by rule, may abrogate, add to, (B) institute proceedings to determine whether include— and delete from (hereinafter in this subsection (i) a detailed description of the activities of the proposed rule change should be disapproved. collectively referred to as ‘‘amend’’) the rules of the public regulatory organization; Such proceedings shall include notice of the a recognized public regulatory organization as (ii) the audited financial statements of the grounds for disapproval under consideration the Commission deems necessary or appropriate public regulatory organization; and opportunity for hearing and be concluded to insure the fair administration of the recog- (iii) a detailed explanation of the fees and within 180 days of the date of publication of no- nized public regulatory organization, to conform charges imposed by the public regulatory orga- tice of the filing of the proposed rule change. At its rules to requirements of this Act, the securi- nization under subsection (b)(9); and the conclusion of such proceedings the Commis- ties laws, and the rules and regulations there- (iv) such other matters as the public regu- sion, by order, shall approve or disapprove such under applicable to such organization, or other- latory organization or the Commission deems proposed rule change. The Commission may ex- wise in furtherance of the purposes of this Act, appropriate. tend the time for conclusion of such proceedings in the following manner: (C) TRANSMITTAL OF ANNUAL REPORT TO CON- for up to 60 days if it finds good cause for such (1) The Commission shall notify the recog- GRESS.—The Commission shall transmit each ap- extension and publishes its reasons for so find- nized public regulatory organization and pub- proved annual report received under subpara- ing or for such longer period as to which the lish notice of the proposed rulemaking in the graph (A) to the Committee on Financial Serv- recognized public regulatory organization con- Federal Register. The notice shall include the ices of the United States House of Representa- sents. text of the proposed amendment to the rules of tives and the Committee on Banking, Housing, (3) BASIS FOR APPROVAL OR DISAPPROVAL.— the recognized public regulatory organization and Urban Affairs of the United States Senate. The Commission shall approve a proposed rule and a statement of the Commission’s reasons, At the same time it transmits a public regulatory change of a recognized public regulatory organi- including any pertinent facts, for commencing organization’s annual report under this sub- zation if it finds that such proposed rule change such proposed rulemaking. paragraph, the Commission shall include a writ- is consistent with the requirements of this Act (2) The Commission shall give interested per- ten statement of its views of the functioning and and the rules and regulations thereunder appli- sons an opportunity for the oral presentation of operations of the public regulatory organiza- cable to such organization. The Commission data, views, and arguments, in addition to an tion. shall disapprove a proposed rule change of a opportunity to make written submissions. A (D) PUBLIC AVAILABILITY.—Following trans- recognized public regulatory organization if it transcript shall be kept of any oral presen- mittal of each approved annual report under does not make such finding. The Commission tation. subparagraph (C), the Commission and the pub- shall not approve any proposed rule change (3) A rule adopted pursuant to this subsection lic regulatory organization shall make the ap- prior to the 30th day after the date of publica- shall incorporate the text of the amendment to proved annual report publicly available. tion of notice of the filing thereof, unless the the rules of the recognized public regulatory or- (4) DISAPPROVAL OF ELECTION OF PRO MEM- Commission finds good cause for so doing and ganization and a statement of the Commission’s BER.—The Commission is authorized, by order, publishes its reasons for so finding. basis for and purpose in so amending such rules. if in its opinion such action is necessary or ap- (4) RULES EFFECTIVE UPON FILING.— This statement shall include an identification of propriate in the public interest, for the protec- (A) Notwithstanding the provisions of para- any facts on which the Commission considers its tion of investors, or otherwise in furtherance of graph (2) of this subsection, a proposed rule determination so to amend the rules of the rec- the purposes of this Act or the securities laws, to change may take effect upon filing with the ognized public regulatory agency to be based, disapprove the election of any member of a pub- Commission if designated by the recognized pub- including the reasons for the Commission’s con- lic regulatory organization if the Commission lic regulatory organization as (i) constituting a clusions as to any of such facts which were dis- determines, after notice and opportunity for stated policy, practice, or interpretation with re- puted in the rulemaking. hearing, that the person elected is unfit to serve spect to the meaning, administration, or en- (4)(A) Except as provided in paragraphs (1) on the public regulatory organization. forcement of an existing rule of the recognized through (3) of this subsection, rulemaking under (j) CLARIFICATION OF APPLICATION OF PRO public regulatory organization, (ii) establishing this subsection shall be in accordance with the AUTHORITY.—The authority granted to any or changing a due, fee, or other charge imposed procedures specified in section 553 of title 5, such organization in this section shall only by the recognized public regulatory organiza- United States Code, for rulemaking not on the apply to the actions of accountants related to tion, or (iii) concerned solely with the adminis- record. the certification of financial statements required tration of the recognized public regulatory orga- (B) Nothing in this subsection shall be con- by securities laws and not other actions or ac- nization or other matters which the Commission, strued to impair or limit the Commission’s power tions for other clients of the accounting firm or by rule, consistent with the public interest and to make, or to modify or alter the procedures the any accountant that does not certify financial the purposes of this subsection, may specify as Commission may follow in making, rules and statements for publicly traded companies. outside the provisions of such paragraph (2). regulations pursuant to any other authority (k) DEADLINE FOR RULEMAKING.—The Com- (B) Notwithstanding any other provision of under the securities laws. mission shall— this subsection, a proposed rule change may be (C) Any amendment to the rules of a recog- (1) within 90 days after the date of enactment put into effect summarily if it appears to the nized public regulatory organization made by of this Act, propose, and

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00023 Fmt 4634 Sfmt 6333 E:\CR\FM\A24AP7.018 pfrm15 PsN: H24PT1 H1560 CONGRESSIONAL RECORD — HOUSE April 24, 2002 (2) within 270 days after such date, prescribe, (A) that a disclosure required by section 16 of ulations may exempt as not comprehended with- rules to implement this section. the Securities Exchange Act of 1934 (15 U.S.C. in the purposes of this subsection. (l) EFFECTIVE DATE; TRANSITION PROVI- 78p) of the sale of any securities of an issuer, or (c) RULEMAKING PERMITTED.—The Commis- SIONS.— any security futures product (as defined in sec- sion may issue rules to clarify the application of (1) EFFECTIVE DATE.—Except as provided in tion 3(a)(56) of the Securities Exchange Act of this subsection, to ensure adequate notice to all paragraph (2), subsection (a) of this section 1934 (15 U.S.C. 78c(a)(56))) or any security-based persons affected by this subsection, and to pre- shall be effective with respect to any certified fi- swap agreement (as defined in section 206B of vent evasion thereof. nancial statement for any fiscal year that ends the Gramm-Leach-Bliley Act) that is based in (d) DEFINITION.—For purposes of this section, more than one year after the Commission recog- whole or in part on the securities of such issuer, the term ‘‘beneficial owner’’ has the meaning nizes a public regulatory organization pursuant by an officer or director of the issuer of those se- provided such term in rules or regulations issued to this section. curities, or by a beneficial owner of such securi- by the Securities and Exchange Commission (2) DELAY IN ESTABLISHMENT OF BOARD.—If ties, shall be made available electronically to the under section 16 of the Securities Exchange Act the Commission has failed to recognize any pub- Commission and to the issuer by such officer, di- of 1934 (15 U.S.C. 78p). lic regulatory organization pursuant to this sec- rector, or beneficial owner before the end of the SEC. 6. IMPROVED TRANSPARENCY OF COR- tion within one year after the date of enactment next business day after the day on which the PORATE DISCLOSURES. of this Act, the Commission shall perform the transaction occurs; (a) MODIFICATION OF REGULATIONS RE- duties of such organization with respect to any (B) that the information in such disclosure be QUIRED.—The Commission shall revise its regu- certified financial statement for any fiscal year made available electronically to the public by lations under the securities laws pertaining to that ends before one year after any such board the Commission, to the extent permitted under the disclosures required in periodic financial re- is recognized by the Commission. applicable law, upon receipt, but in no case ports and registration statements to require such SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF later than the end of the next business day after reports to include adequate and appropriate dis- AUDITS. the day on which the disclosure is received closure of— (a) RULES TO PROHIBIT.—It shall be unlawful under subparagraph (A); and (1) the issuer’s off-balance sheet transactions in contravention of such rules or regulations as (C) that, in any case in which the issuer and relationships with unconsolidated entities the Commission shall prescribe as necessary and maintains a corporate website, such information or other persons, to the extent they are not dis- appropriate in the public interest or for the pro- shall be made available by such issuer on that closed in the financial statements and are rea- tection of investors for any officer, director, or website, before the end of the next business day sonably likely to materially affect the liquidity affiliated person of an issuer of any security after the day on which the disclosure is received or the availability of, or requirements for, cap- registered under section 12 of the Securities Ex- by the Commission under subparagraph (A). ital resources, or the financial condition or re- change Act of 1934 (15 U.S.C. 78l) to take any (2) TRANSACTIONS INCLUDED.—The rule pre- sults of operations of the issuer; and action to fraudulently influence, coerce, manip- scribed under paragraph (1) shall require the (2) loans extended to officers, directors, or ulate, or mislead any independent public or cer- disclosure of the following transactions: other persons affiliated with the issuer on terms (A) Direct or indirect sales or other transfers tified accountant engaged in the performance of or conditions that are not otherwise available to of securities of the issuer (or any interest there- an audit of the financial statements of such the public. in) to the issuer or an affiliate of the issuer. (b) DEADLINE FOR RULEMAKING.—The Com- issuer for the purpose of rendering such finan- (B) Loans or other extensions of credit ex- cial statements materially misleading. In any mission shall— tended to an officer, director, or other person af- (1) within 90 days after the date of enactment civil proceeding, the Commission shall have ex- filiated with the issuer on terms or conditions clusive authority to enforce this section and any of this Act, propose, and not otherwise available to the public. (2) within 270 days after such date, prescribe, rule or regulation hereunder. (3) OTHER FORMATS; FORMS.—In the rule pre- the revisions to its regulations required by sub- (b) NO PREEMPTION OF OTHER LAW.—The pro- scribed under paragraph (1), the Commission section (a). visions of subsection (a) shall be in addition to, shall provide that electronic filing and disclo- (c) ANALYSIS REQUIRED.— and shall not supersede or preempt, any other sure shall be in lieu of any other format re- (1) TRANSPARENCY, COMPLETENESS, AND USE- provision of law or any rule or regulation there- quired for such disclosures on the day before the FULNESS OF FINANCIAL STATEMENTS.—The Com- under. date of enactment of this subsection. The Com- mission shall conduct an analysis of the extent (c) DEADLINE FOR RULEMAKING.—The Com- mission shall revise such forms and schedules re- to which, consistent with the protection of in- mission shall— quired to be filed with the Commission pursuant vestors and the public interest, disclosure of ad- (1) within 90 days after the date of enactment to paragraph (1) as necessary to facilitate such ditional or reorganized information may be re- of this Act, propose, and electronic filing and disclosure. quired to improve the transparency, complete- (2) within 270 days after such date, prescribe, SEC. 5. INSIDER TRADES DURING PENSION FUND ness, or usefulness of financial statements and the rules or regulations required by this section. BLACKOUT PERIODS PROHIBITED. other corporate disclosures filed under the secu- SEC. 4. REAL-TIME DISCLOSURE OF FINANCIAL (a) PROHIBITION.—It shall be unlawful for rities laws. INFORMATION. any person who is directly or indirectly the ben- (2) ALTERNATIVES TO BE CONSIDERED.—In con- (a) REAL-TIME ISSUER DISCLOSURES RE- eficial owner of more than 10 percent of any ducting the analysis required by paragraph (1), QUIRED.— class of any equity security (other than an ex- the Commission shall consider— (1) OBLIGATIONS.—Every issuer of a security empted security) which is registered under sec- (A) requiring the identification of the key ac- registered under section 12 of the Securities Ex- tion 12 of the Securities Exchange Act of 1934 counting principles that are most important to change Act of 1934 (15 U.S.C. 78l) shall file with (15 U.S.C. 78l) or who is a director or an officer the issuer’s reported financial condition and re- the Commission and disclose to the public, on a of the issuer of such security, directly or indi- sults of operation, and that require manage- rapid and essentially contemporaneous basis, rectly, to purchase (or otherwise acquire) or sell ment’s most difficult, subjective, or complex such information concerning the financial con- (or otherwise transfer) any equity security of judgments; dition or operations of such issuer as the Com- any issuer (other than an exempted security), (B) requiring an explanation, where material, mission determines by rule is necessary in the during any blackout period with respect to such of how different available accounting principles public interest and for the protection of inves- equity security. applied, the judgments made in their applica- tors. Such rule shall— (b) REMEDY.—Any profit realized by such ben- tion, and the likelihood of materially different (A) specify the events or circumstances giving eficial owner, director, or officer from any pur- reported results if different assumptions or con- rise to the obligation to disclose or update a dis- chase (or other acquisition) or sale (or other ditions were to prevail; closure; transfer) in violation of this section shall inure (C) in the case of any issuer engaged in the (B) establish requirements regarding the ra- to and be recoverable by the issuer irrespective business of trading non-exchange traded con- pidity and timeliness of such disclosure; of any intention on the part of such beneficial tracts, requiring an explanation of such trading (C) identify the means whereby the disclosure owner, director, or officer in entering into the activities when such activities require the issuer required shall be made, which shall ensure the transaction. Suit to recover such profit may be to account for contracts at fair value, but for broad, rapid, and accurate dissemination of the instituted at law or in equity in any court of which a lack of market price quotations neces- information to the public via electronic or other competent jurisdiction by the issuer, or by the sitates the use of fair value estimation tech- communications device; owner of any security of the issuer in the name niques; (D) identify the content of the information to and in behalf of the issuer if the issuer shall fail (D) establishing requirements relating to the be disclosed; and or refuse to bring such suit within 60 days after presentation of information in clear and under- (E) without limiting the Commission’s general request or shall fail diligently to prosecute the standable format and language; and exemptive authority, specify any exemptions or same thereafter; but no such suit shall be (E) requiring such other disclosures, included exceptions from such requirements. brought more than 2 years after the date such in the financial statements or in other disclosure (2) ENFORCEMENT.—The Commission shall profit was realized. This subsection shall not be by the issuer, as would in the Commission’s view have exclusive authority to enforce this section construed to cover any transaction where such improve the transparency of such issuer’s finan- and any rule or regulation hereunder in civil beneficial owner was not such both at the time cial statements and other required corporate dis- proceedings. of the purchase and sale, or the sale and pur- closures. (b) ELECTRONIC DISCLOSURE OF INSIDER chase, of the security or security-based swap (as (3) RULES REQUIRED.—If the Commission, on TRANSACTIONS.— defined in section 206B of the Gramm-Leach-Bli- the basis of the analysis required by this sub- (1) DISCLOSURES OF TRADING.—The Commis- ley Act) involved, or any transaction or trans- section, determines that it is necessary in the sion shall, by rule, require— actions which the Commission by rules and reg- public interest or for the protection of investors

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00024 Fmt 4634 Sfmt 6333 E:\CR\FM\A24AP7.018 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1561 and would improve the transparency of issuer of ethics applicable to its principal financial of- reached in such accountants report. The Com- financial statements, the Commission may pre- ficer, its comptroller or principal accounting of- mission may prescribe rules specifying the appli- scribe rules reflecting the results of such anal- ficer, or persons performing similar functions cation and requirements of this section. ysis and the considerations required by para- that establishes such standards as are reason- (b) ACCOUNTANT’S REPORT.—For purposes of graph (2). In prescribing such rules, the Com- ably necessary to promote honest and ethical subsection (a), the term ‘‘accountant’s report’’ mission may seek to minimize the paperwork conduct, the avoidance of conflicts of interest, means a document in which an accountant and cost burden on the issuer consistent with full, fair, accurate, timely and understandable identifies a financial statement and sets forth achieving the public interest and investor pro- disclosure in the issuer’s periodic reports and his opinion regarding such financial statement tection purposes of such rules. compliance with applicable governmental rules or an assertion that an opinion cannot be ex- SEC. 7. IMPROVEMENTS IN REPORTING ON IN- and regulations. The Commission shall approve pressed. SIDER TRANSACTIONS AND RELA- such proposed rule changes pursuant to the re- SEC. 11. COMMISSION AUTHORITY TO BAR PER- TIONSHIPS. quirement of section 19(b)(2) of the Securities SONS FROM SERVING AS OFFICERS (a) SPECIFIC OBJECTIVES.—The Commission Act of 1934. OR DIRECTORS. shall initiate a proceeding to propose changes in (b) OTHER EXCHANGES.—The Commission, by (a) COMMISSION AUTHORITY TO PROHIBIT PER- its rules and regulations with respect to finan- rule or regulation, may require any other na- SONS FROM SERVING AS OFFICERS OR DIREC- cial reporting to improve the transparency and tional securities exchange, to propose rule TORS.—Notwithstanding any other provision of clarity of the information available to investors changes necessary to comply with the provisions the securities laws, in any cease-and-desist pro- and to require increased financial disclosure of subsection (a) of this section if the Commis- ceeding under section 8A(a) of the Securities Act with respect to the following: sion determines such action is necessary or ap- of 1933 or section 21C(a) of the Securities and (1) INSIDER RELATIONSHIPS AND TRANS- propriate in the public interest and consistent Exchange Act of 1934, the Commission may issue ACTIONS.—Relationships and transactions— with the protection of investors. an order to prohibit, conditionally or uncondi- (A) between the issuer, affiliates of the issuer, (c) FURTHER STANDARDS.—In addition to the tionally, permanently or for such period of time and officers, directors, or employees of the issuer requirements of subsections (a) and (b), the as it shall determine, any person who has vio- or such affiliates; and Commission may, by rule or regulation, pre- lated section 17(a)(1) of the Securities Act of (B) between officers, directors, employees, or scribe further standards of conduct for senior fi- 1933 or section 10(b) of the Securities Exchange affiliates of the issuer and entities that are not nancial officers as necessary or appropriate in Act of 1934 (or any rule or regulation there- otherwise affiliated with the issuer, the public interest and consistent with the pro- under) from acting as an officer or director of to the extent such arrangement or transaction tection of investors. any issuer that has a class of securities reg- creates a conflict of interest for such persons. (d) CHANGES IN CODES OF CONDUCT.—Within istered pursuant to section 12 of the Securities Such disclosure shall provide a description of 180 days after the date of enactment of this Act, Exchange Act of 1934 or that is required to file such elements of the transaction as are nec- the Commission shall revise its regulations con- reports pursuant to section 15(d) of such Act if essary for an understanding of the business pur- cerning matters requiring prompt disclosure on the person’s conduct demonstrates substantial pose and economic substance of such trans- Form 8K to require the immediate disclosure, by unfitness to serve as an officer or director of action (including contingencies). The disclosure means of such Form and by the Internet or any such issuer. (b) FINDING OF SUBSTANTIAL UNFITNESS.—In shall provide sufficient information to determine other electronic means, by any issuer of any making any determination that a person’s con- the effect on the issuer’s financial statements change in, or waiver of, the code of ethics of duct demonstrates substantial unfitness to serve and describe compensation arrangements of in- such issuer. as an officer or director of any such issuer, the terested parties to such transactions. SEC. 9. ENHANCED OVERSIGHT OF PERIODIC DIS- Commission shall consider— CLOSURES BY ISSUERS. (2) RELATIONSHIPS WITH PHILANTHROPIC ORGA- (1) the severity of the persons conduct giving NIZATIONS.—Relationships between the reg- (a) REGULAR AND SYSTEMATIC REVIEW.—The rise to the violation, and the persons role or po- istrant or any executive officer of the registrant Securities and Exchange Commission shall re- sition when he engaged in the violation; and any not-for-profit organization on whose view disclosures made by issuers pursuant to the (2) the person’s degree of scienter; board a director or immediate family member Securities Exchange Act of 1934 (including re- (3) the person’s economic gain as a result of serves or of which a director or immediate fam- ports filed on form 10–K) on a basis that is more the violation; and ily member serves as an officer or in a similar regular and systematic than that in practice on (4) the likelihood that the conduct giving rise capacity. Relationships that shall be disclosed the date of enactment on this Act. Such review to the violation, or similar conduct as defined in include contributions to the organization in ex- shall include a review of an issuer’s financial subsection (a), may recur if the person is not so cess of $10,000 made by the registrant or any ex- statements. prohibited. ecutive officer in the last five years and any (b) RISK RATING SYSTEM.—For purposes of the (c) AUTOMATIC STAY PENDING APPEAL.—The other activity undertaken by the registrant or reviews required by subsection (a), the Commis- enforcement of any Commission order pursuant any executive officer that provides a material sion shall establish a risk rating system whereby to subsection (a) shall be stayed— benefit to the organization. Material benefit in- issuers receive a risk rating by the Commission, (1) for a period of at least 60 days after the cludes lobbying. which shall be used to determine the frequency entry of any such order or decision; and (3) INSIDER-CONTROLLED AFFILIATES.—Rela- of such reviews. In designing such a risk rating (2) upon the filing of a timely application for tionships in which the registrant or any execu- system the Commission shall consider, among judicial review of such order or decision, pend- tive officer exercises significant control over an other factors the following: ing the entry of a final order resolving the ap- entity in which a director or immediate family (1) Emerging companies with disparities in plication for judicial review. member owns an equity interest or to which a price to earning ratios. SEC. 12. DISGORGING INSIDERS PROFITS FROM director or immediate family member has ex- (2) Issuers with the largest market capitaliza- TRADES PRIOR TO CORRECTION OF tended credit. Significant control should be de- tion. ERRONEOUS FINANCIAL STATE- MENTS. fined with reference to the contractual and gov- (3) Issuers whose operations significantly im- (a) ANALYSIS REQUIRED.—The Commission ernance arrangements between the registrant or pact any material sector of the economy. shall conduct an analysis of whether, and executive officer, as the case may be, and the (4) Systemic factors such as the effect on under what conditions, any officer or director of entity. niche markets or important subsectors of the an issuer should be required to disgorge profits (4) JOINT OWNERSHIP.—Joint ownership by a economy. gained, or losses avoided, in the sale of the secu- registrant or executive officer and a director or (5) Issuers that experience significant vola- rities of such issuer during the six month period immediate family member of any real or personal tility in their stock price as compared to other immediately preceding the filing of a restated fi- property. issuers. nancial statement on the part of such issuer. (5) PROVISION OF SERVICES BY RELATED PER- (6) Any other factor the Commission may con- (b) DISGORGEMENT RULES AUTHORIZED.—If sider relevant. SONS.—The provision of any professional serv- the Commission determines that imposing the re- (c) MINIMUM REVIEW PERIOD.—In no event ices, including legal, financial advisory or med- quirement described in subsection (a) is nec- shall an issuer be reviewed less than once every ical services, by a director or immediate family essary or appropriate in the public interest or three years by the Commission. member to any executive officer of the registrant for the protection investors, and would not un- (d) PROHIBITION OF DISCLOSURE OF RISK RAT- in the last five years. duly impair the operations of issuers or the or- ING.—Notwithstanding any other provision of (b) DEADLINES.—The Commission shall com- derly operation of the securities markets, the law, the Commission shall not disclose the risk plete the rulemaking required by this section Commission shall prescribe a rule requiring the rating of any issuer described in subsection (b). within 180 days after the date of enactment of disgorgement of all profits gained or losses this Act. SEC. 10. RETENTION OF RECORDS. avoided in the sale of the securities of the issuer SEC. 8. CODES OF CONDUCT. (a) DUTY TO RETAIN RECORDS.—Any inde- by any officer or director thereof. Such rule (a) RULES REQUIRED.—Within 180 days after pendent public or certified accountant who cer- shall— the date of enactment of this Act, the New York tifies a financial statement as required by the (1) describe the conditions under which any Stock Exchange, the American Stock Exchange securities laws or any rule or regulation there- officer or director shall be required to disgorge and the Nasdaq Stock Market (or any successor under shall prepare and maintain for a period profits, including what constitutes a restatement to such entities), shall file with the Commission of no less than 7 years, final audit work papers for purposes of operation of the rule; proposed rule changes that would prohibit the and other information related to any account- (2) establish exceptions and exemptions from listing of any security issued by an issuer that ants report on such financial statements in suf- such rule as necessary to carry out the purposes has not adopted a senior financial officers code ficient detail to support the opinion or assertion of this section;

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(3) identify the scienter requirement that (3) OFFICER, DIRECTOR, OR PRINCIPAL SHARE- (c) REPORT REQUIRED.—The Commission shall should be used in order to determine to impose HOLDER.—The term ‘‘officer, director, or prin- submit a report on the analysis required under the requirement to disgorge; and cipal shareholder’’ when used in relation to the subsection (a) as a part of the Commission’s (4) specify that the enforcement of such rule Enron Corporation, or any subsidiary or affil- next annual report submitted after the date of shall lie solely with the Commission, and that iate of such Corporation, means any person that enactment of this Act. any profits so disgorged shall inure to the is subject to the requirements of section 16 of the SEC. 16. STUDY OF ENFORCEMENT ACTIONS. issuer. Securities Exchange Act of 1934 (15 U.S.C. 78p) (a) STUDY REQUIRED.—The Commission shall (c) NO PREEMPTION OF OTHER LAW.—Unless in relation to the Enron Corporation, or any review and analyze all enforcement actions by otherwise specified by the Commission, in the subsidiary or affiliate of such Corporation. the Commission involving violations of reporting case of any rule promulgated pursuant to sub- (4) NONFORFEITABLE; ACCRUED BENEFIT; INDI- requirements imposed under the securities laws, section (b), such rule shall be in addition to, VIDUAL ACCOUNT PLAN.—The terms ‘‘nonforfeit- and restatements of financial statements, over and shall not supersede or preempt, the Commis- able’’, ‘‘accrued benefit’’, and ‘‘individual ac- the last five years to identify areas of reporting sion’s authority to seek disgorgement under any count plan’’ have the meanings provided such that are most susceptible to fraud, inappropriate other provision of law. terms, respectively, in paragraphs (19), (23), and manipulation, or inappropriate earnings man- SEC. 13. SECURITIES AND EXCHANGE COMMIS- (34) of section 3 of the Employee Retirement In- agement, such as revenue recognition and the SION AUTHORITY TO PROVIDE RE- come Security Act of 1974 (29 U.S.C. 1002(19), accounting treatment of off-balance sheet spe- LIEF. (23), (34)). cial purpose entities. (a) PROCEEDS OF ENRON AND ANDERSEN EN- SEC. 14. STUDY OF RULES RELATING TO ANALYST (b) REPORT REQUIRED.—The Commission shall FORCEMENT ACTIONS.—If in any administrative CONFLICTS OF INTEREST. report its findings to the Committee on Finan- or judicial proceeding brought by the Securities (a) STUDY AND REVIEW REQUIRED.—The Com- cial Services of the House of Representatives and Exchange Commission against— mission shall conduct a study and review of any and the Committee on Banking, Housing, and (1) the Enron Corporation, any subsidiary or final rules by any self-regulatory organization Urban Affairs of the Senate within 180 days of affiliate of such Corporation, or any officer, di- registered with the Commission related to mat- the date of enactment of this Act and shall use rector, or principal shareholder of such Cor- ters involving equity research analysts conflicts such findings to revise its rules and regulations, poration, subsidiary, or affiliate for any viola- of interest. Such study and report shall include as necessary. The report shall include a discus- tion of the securities laws; or a review of the effectiveness of such final rules sion of regulatory or legislative steps that are (2) Arthur Andersen L.L.C., any subsidiary or in addressing matters relating to the objectivity recommended or that may be necessary to ad- affiliate of Arthur Andersen L.L.C., or any gen- and integrity of equity research analyst reports dress concerns identified in the study. eral or limited partner of Arthur Andersen and recommendations. SEC. 17. STUDY OF CREDIT RATING AGENCIES. L.L.C., or such subsidiary or affiliate, for any (b) REPORT REQUIRED.—The Commission shall (a) STUDY REQUIRED.—The Commission shall violation of the securities laws with respect to submit a report to the Committee on Financial conduct a study of the role and function of any services performed for or in relation to the Services of the House of Representatives and the credit rating agencies in the operation of the se- Enron Corporation, any subsidiary or affiliate Committee on Banking, Housing, and Urban Af- curities market. Such study shall examine— of such Corporation, or any officer, director, or fairs of the Senate on such study and review no (1) the role of the credit rating agencies in the principal shareholder of such Corporation, sub- later than 180 days after any such final rules by evaluation of issuers of securities; sidiary, or affiliate; any self-regulatory organization registered with (2) the importance of that role to investors the Commission obtains an order providing for the Commission are delivered to the Commission. and the functioning of the securities markets; (3) any impediments to the accurate appraisal an accounting and disgorgement of funds, such Such report shall include recommendations to by credit rating agencies of the financial re- disgorgement fund (including any addition to the Congress, including any recommendations sources and risks of issuers of securities; such fund required or permitted under this sec- for additional self-regulatory organization rule- (4) any measures which may be required to im- tion) shall be allocated in accordance with the making regarding matters involving equity re- prove the dissemination of information con- requirements of this section. search analysts. The Commission shall annually cerning such resources and risks when credit (b) PRIORITY FOR FORMER ENRON EMPLOY- submit an update on such review. rating agencies announce credit ratings; EES.—The Commission shall, by order, establish SEC. 15. REVIEW OF CORPORATE GOVERNANCE (5) any barriers to entry into the business of an allocation system for the disgorgement fund. PRACTICES. acting as a credit rating agency, and any meas- Such system shall provide that, in allocating the (a) STUDY OF CORPORATE PRACTICES.—The ures needed to remove such barriers; and disgorgement fund amount the victims of the se- Commission shall conduct a study and review of (6) any conflicts of interest in the operation of curities laws violations described in subsection current corporate governance standards and credit rating agencies and measures to prevent (a), the first priority shall be given to individ- practices to determine whether such standards such conflicts or ameliorate the consequences of uals who were employed by the Enron Corpora- and practices are serving the best interests of such conflicts. tion, or a subsidiary or affiliate of such Cor- shareholders. Such study and review shall in- (b) REPORT REQUIRED.—The Commission shall poration, and who were participants in an indi- clude an analysis of— submit a report on the analysis required by sub- vidual account plan established by such Cor- (1) whether current standards and practices section (a) to the President, the Committee on poration, subsidiary, or affiliate. Such alloca- promote full disclosure of relevant information Financial Services of the House of Representa- tions among such individuals shall be in propor- to shareholders; tives, and the Committee on Banking, Housing, tion to the extent to which the nonforfeitable (2) whether corporate codes of ethics are ade- and Urban Affairs of the Senate within 180 days accrued benefit of each such individual under quate to protect shareholders, and to what ex- after the date of enactment of this Act. The re- the plan was invested in the securities of such tent deviations from such codes are tolerated; port shall include a discussion of regulatory or Corporation, subsidiary, or affiliate. (3) to what extent conflicts of interests are ag- legislative steps that are recommended or that (c) ADDITION OF CIVIL PENALTIES.—If, in any gressively reviewed, and whether adequate may be necessary to address concerns identified proceeding described in subsection (a), the Com- means for redressing such conflicts exist; in the study. mission assesses and collects any civil penalty, (4) to what extent sufficient legal protections SEC. 18. STUDY OF INVESTMENT BANKS the Commission shall, notwithstanding section exist or should be adopted to ensure that any (a) GAO STUDY.—The Comptroller General 21(d)(3)(C)(i) or 21A(d)(1) of the Securities Ex- manager who attempts to manipulate or unduly shall conduct a study on the role played by in- change Act of 1934, or any other provision of the influence an audit will be subject to appropriate vestment banks and financial advisors in assist- securities laws, be payable to the disgorgement sanction and liability, including liability to in- ing public companies in manipulating their fund. vestors or shareholders pursuing a private cause earnings and obfuscating their true financial (d) ACCEPTANCE OF ADDITIONAL DONATIONS.— of action for such manipulation or undue influ- condition. The study should address the role of The Commission is authorized to accept, hold, ence; the investment banks— administer, and utilize gifts, bequests and de- (5) whether rules, standards, and practices re- (1) in the collapse of the Enron Corporation, vises of property, both real and personal, to the lating to determining whether independent di- including with respect to the design and imple- United States for the disgorgement fund. Gifts, rectors are in fact independent are adequate; mentation of derivatives transactions, trans- bequests, and devises of money and proceeds (6) whether rules, standards, and practices re- actions involving special purpose vehicles, and from sales of other property received as gifts, be- lating to the independence of directors serving other financing arrangements that may have quests, or devises shall be deposited in the on audit committees are uniformly applied and had the effect of altering the company’s re- disgorgement fund and shall be available for al- adequate to protect investor interests; ported financial statements in ways that ob- location in accordance with subsection (b). (7) whether the duties and responsibilities of scured the true financial picture of the com- (e) DEFINITIONS.—As used in this section: audit committees should be established by the pany; (1) DISGORGEMENT FUND.—The term Commission; and (2) in the failure of Global Crossing, including ‘‘disgorgement fund’’ means a disgorgement (8) what further or additional practices or with respect to transactions involving swaps of fund established in any administrative or judi- standards might best protect investors and pro- fiber optic cable capacity, in designing trans- cial proceeding described in subsection (a). mote the interests of shareholders. actions that may have had the effect of altering (2) SUBSIDIARY OR AFFILIATE.—The term ‘‘sub- (b) PARTICIPATION OF STATE REGULATORS.—In the company’s reported financial statements in sidiary or affiliate’’ when used in relation to a conducting the study required under subsection ways that obscured the true financial picture of person means any entity that controls, is con- (a), the Commission shall seek the views of the the company; and trolled by, or is under common control with such securities and corporate regulators of the var- (3) generally, in creating and marketing person. ious States. transactions designed solely to enable companies

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to manipulate revenue streams, obtain loans, or (B) does not include— Amendment No. 1 offered by Mr. OXLEY: move liabilities off balance sheets without alter- (i) a period in which the employees of an Page 9, line 24, strike ‘‘study’’ and insert ing the economic and business risks faced by the issuer may not allocate their interests in the in- ‘‘reviews’’. companies or any other mechanism to obscure a dividual account plan due to an express invest- Page 11, line 10, insert ‘‘or’’ after ‘‘review’’. company’s financial picture. ment restriction— Page 11, line 17, strike ‘‘board’’ and insert (b) REPORT.—The General Accounting Office (I) incorporated into the individual account ‘‘organization’’. shall report to the Congress within 180 days plan; and Page 33, line 7, strike ‘‘DEFINITION’’ and in- after the date of enactment of this Act on the re- (II) timely disclosed to employees before join- sert ‘‘DEFINITIONS’’; on line 8, strike ‘‘term sults of the study required by this section. The ing the individual account plan or as a subse- ‘beneficial owner’ has the meaning’’ and in- report shall include a discussion of regulatory quent amendment to the plan; or sert ‘‘terms ‘officer’, ‘director’, and ‘bene- or legislative steps that are recommended or that (ii) any suspension described in subparagraph ficial owner’ have the meanings’’; and line 9, may be necessary to address concerns identified (A) that is imposed solely in connection with strike ‘‘term’’ and insert ‘‘terms’’. in the study. persons becoming participants or beneficiaries, Page 39, strike line 5 and all that follows through page 40, line 9; and on page 40, line SEC. 19. STUDY OF MODEL RULES FOR ATTOR- or ceasing to be participants or beneficiaries, in HANGES IN ODES OF ON NEYS OF ISSUERS. an applicable individual account plan by reason 10, strike ‘‘(d) C C C - DUCT.—’’. (a) IN GENERAL.—The Comptroller General of a corporate merger, acquisition, divestiture, Page 42, lines 9 and 11, strike ‘‘accountants shall conduct a study of the Model Rules of Pro- or similar transaction. (2) BOARDS OF ACCOUNTANCY OF THE STATES.— report’’ and insert ‘‘accountant’s report’’. fessional Conduct promulgated by the American Page 42, line 17, insert ‘‘or her’’ after ‘‘his’’, Bar Association and rules of professional con- The term ‘‘boards of accountancy of the States’’ means any organization or association char- and beginning on line 18, strike ‘‘an opinion duct applicable to attorneys established by the cannot be expressed’’ and insert ‘‘he or she Commission to determine— tered or approved under the law of any State with responsibility for the registration, super- cannot express an opinion’’. (1) whether such rules provide sufficient guid- Page 53, line 23, strike ‘‘the role played by’’ ance to attorneys representing corporate clients vision, or regulation of accountants. (3) COMMISSION.—The term ‘‘Commission’’ and insert ‘‘whether’’, and on line 24, strike who are issuers required to file periodic disclo- ‘‘in assisting’’ and insert ‘‘assisted’’. sures under section 13 or 15 of the Securities Ex- means the Securities and Exchange Commission. (4) INDIVIDUAL ACCOUNT PLAN.—The term ‘‘in- Page 54, line 18, insert ‘‘which may have change Act of 1934 (15 U.S.C. 78m, 78o), as to been’’ before ‘‘designed solely’’. the ethical responsibilities of such attorneys to— dividual account plan’’ has the meaning pro- vided such term in section 3(34) of the Employee Page 57, line 9, insert ‘‘7, 8,’’ after ‘‘6,’’. (A) warn clients of possible fraudulent or ille- The CHAIRMAN. Pursuant to House gal activities of such clients and possible con- Retirement Income Security Act of 1974 (29 sequences of such activities; U.S.C. 1002(34)). Resolution 395, the gentleman from (B) disclose such fraudulent or illegal activi- (5) ISSUER.—The term ‘‘issuer’’ shall have the Ohio (Mr. OXLEY) and a Member op- ties to appropriate regulatory or law enforce- meaning set forth in section 2(a)(4) of the Secu- posed each will control 5 minutes. ment authorities; and rities Act of 1933 (15 U.S.C. 77b(a)(4)). The Chair recognizes the gentleman (6) PERSON ASSOCIATED WITH AN ACCOUNT- (C) manage potential conflicts of interests from Ohio (Mr. OXLEY). with clients; and ANT.—The term ‘‘person associated with an ac- countant’’ means any partner, officer, director, Mr. OXLEY. Mr. Chairman, I yield (2) whether such rules provide sufficient pro- myself 5 minutes to explain the amend- tection to corporate shareholders, especially or manager of such accountant (or any person with regards to conflicts of interest between at- occupying a similar status or performing similar ment. torneys and their corporate clients. functions), any person directly or indirectly Mr. Chairman, this manager’s (b) REPORT REQUIRED.—The Comptroller Gen- controlling, controlled by, or under common amendment clarifies the language in a eral shall report to the Committee on Financial control with such accountant, or any employee few portions of the legislation to give Services of the House of Representatives and the of such accountant who performs a supervisory greater effect to the committee’s in- Committee on Banking, Housing, and Urban Af- role in the auditing process. tent in reporting out H.R. 3763. fairs of the Senate on the results of the study re- (7) RECOGNIZED PUBLIC REGULATORY ORGANI- The amendment clarifies that certain quired by this section. Such report shall include ZATION.—The term ‘‘recognized public regu- latory organization’’ means a public regulatory terms used in the bill are meant to be any recommendations of the General Account- consistent with how those terms are ing Office with regards to— organization that the Commission has recog- (1) possible changes to the Model Rules and nized as meeting the criteria established by the used in the securities laws. It also re- the rules of professional conduct applicable to Commission under subsection (b) of section 2. moves some language that the com- attorneys established by the Commission to pro- (8) SECURITIES LAWS.—The term ‘‘securities mittee had adopted which would have vide increased protection to shareholders; laws’’ means the Securities Act of 1933 (15 required self-regulatory organizations (2) whether restrictions should be imposed to U.S.C. 77a et seq.), the Securities Exchange Act to undertake specific rule-makings. Be- require that an attorney, having represented a of 1934 (15 U.S.C. 78a et seq.), the Trust Inden- ture Act of 1939 (15 U.S.C. 77aaa et seq.), the In- cause this is not standard practice corporation or having been employed by a firm under the securities laws, that lan- which represented a corporation, may not be vestment Company Act of 1940 (15 U.S.C. 80a–1 employed as general counsel to that corporation et seq.), the Investment Advisers Act of 1940 (15 guage was deleted, with the consent of until a certain period of time has expired; and U.S.C. 80b et seq.), and the Securities Investor its original sponsor, the gentlewoman (3) regulatory or legislative steps that are rec- Protection Act of 1970 (15 U.S.C. 78aaa et seq.), from New York (Mrs. MALONEY). How- ommended or that may be necessary to address notwithstanding any contrary provision of any ever, important provisions relating to concerns identified in the study. such Act. the requirement that issuers may SEC. 20. ENFORCEMENT AUTHORITY. The CHAIRMAN. No amendment to make public any waiver of their code of For the purposes of enforcing and carrying the committee amendment in the na- ethics was retained. out this Act, the Commission shall have all of ture of a substitute is in order except The amendment also clarifies a sec- the authorities granted to the Commission under those printed in House Report 107–418. tion directing the GAO to conduct a the securities laws. Actions of the Commission under this Act, including actions on rules or Each amendment may be offered only study of investment banks. The origi- regulations, shall be subject to review in the in the order printed in the report, by a nal sponsor of the language, the gen- same manner as actions under the securities Member designated in the report, shall tleman from New York (Mr. LAFALCE) laws. be considered as read, shall be debat- agrees with these changes, which were SEC. 21. EXCLUSION FOR INVESTMENT COMPA- able for the time specified in the re- designed to ensure that the GAO study NIES. port, equally divided and controlled by is fair, impartial, and accurate. Sections 4, 6, 9, and 15 of this Act shall not the proponent and an opponent, shall Lastly, the amendment specifies that apply to an investment company registered not be subject to amendment, and shall certain provisions of the bill are not under section 8 of the Investment Company Act designed to apply to investment com- of 1940 (15 U.S.C. 80a–8). not be subject to a demand for division panies that are currently registered SEC. 22. DEFINITIONS. of the question. As used in this Act: It is now in order to consider amend- with the SEC. Because these invest- (1) BLACKOUT PERIOD.—The term ‘‘blackout ment No. 1 printed in House Report ment companies are already fully regu- period’’ with respect to the equity securities of 107–418. lated by the SEC under the Investment any issuer— AMENDMENT NO. 1 OFFERED BY MR. OXLEY Company Act of 1940, application of the (A) means any period during which the ability Mr. OXLEY. Mr. Chairman, I offer noted provisions to them would be in- of at least fifty percent of the participants or amendment No. 1 made in order pursu- appropriate. beneficiaries under all applicable individual ac- Mr. Chairman, these changes mostly count plans maintained by the issuer to pur- ant to the rule. chase (or otherwise acquire) or sell (or otherwise The CHAIRMAN. The Clerk will des- fall within the realm of technical and transfer) an interest in any equity of such issuer ignate the amendment. conforming amendments. I know of no is suspended by the issuer or a fiduciary of the The text of the amendment is as fol- opposition to these amendments, and I plan; but lows: certainly urge their adoption.

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00027 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.018 pfrm15 PsN: H24PT1 H1564 CONGRESSIONAL RECORD — HOUSE April 24, 2002 Mr. Chairman, I reserve the balance Mr. WELDON of Florida. Mr. Chair- The CHAIRMAN. Does any Member of my time. man, I thank the gentleman for yield- rise in opposition? Mr. CAPUANO. Mr. Chairman, I rise ing time to me. If not, the question is on the amend- to claim the time on my side. Enron was a great tragedy; it was a ment offered by the gentleman from The CHAIRMAN. The gentleman tragedy for the employees, for the in- Ohio (Mr. OXLEY). from Massachusetts (Mr. CAPUANO) is vestors, and it was a tragedy for the The amendment was agreed to. recognized for 5 minutes. American public. It was a tragedy for The CHAIRMAN. It is now in order to Mr. CAPUANO. Mr. Chairman, I yield our Nation. consider amendment No. 2 printed in myself such time as I may consume. We clearly need legislation. We need House Report 107–418. Mr. Chairman, we have no objection legislation that will give investors bet- AMENDMENT NO. 2 OFFERED BY MR. CAPUANO to the manager’s amendment. ter access to information necessary to Mr. CAPUANO. Mr. Chairman, I offer Mr. Chairman, I yield back the bal- judge a firm’s performance, the finan- amendment No. 2. ance of my time. cial risk, the condition of that com- The CHAIRMAN. The Clerk will des- Mr. OXLEY. Mr. Chairman, I am ignate the amendment. pleased to yield 2 minutes to the gen- pany. We need legislation that will give investors prompt information that is The text of the amendment is as fol- tleman from Virginia (Mr. CANTOR). lows: Mr. CANTOR. Mr. Chairman, I thank critical to decide whether or not they Amendment No. 2 offered by Mr. CAPUANO: the gentleman for yielding time to me. should make an investment. We also need legislation that will Page 3, beginning on line 21, strike para- Mr. Chairman, I rise in support of the graph (1) of section 2(b) through page 4, line manager’s amendment and the under- deal with dishonest and unscrupulous 9, and insert the following: lying bill. Mr. Chairman, the aim of CEOs, legislation that will bar them (1)(A) The board of such organization shall this legislation is to ensure a contin- from serving as an officer of a com- be comprised of five members— ued faith in our capital markets, and pany, that will force them to disclose (i) two of whom shall be persons who are li- to allow America’s families and the in- critical information about what they censed to practice public accounting and who vesting public to continue to benefit are doing when they buy or sell stock have recent experience in auditing public from the free flow of accurate informa- in that company. companies; tion. This legislation before us addresses (ii) two of whom may be persons who are licensed to practice public accounting, if This bill, the manager’s amendment, all of those issues. It would be a great- such person has not worked in the account- provides a surgical strike approach to er tragedy if we were, in this body, to ing profession for any of the last two years address the issues arising out of the introduce legislation that would create prior to the date of such person’s appoint- Enron bankruptcy without hampering unnecessary and burdensome red tape ment to the board; and our markets’ ability to thrive and the for American industries, that would (iii) one of whom shall be a person who has benefit they provide to America’s fami- nationalize the accounting industry. It never been licensed to practice public ac- lies. would be inappropriate for us to put counting. We have heard discussion today on forward legislation that would create (B) Each member of the board of such orga- nization shall be a person who meets such the floor, Mr. Chairman, about the ambiguous and difficult-to-understand issues that arose under the Enron standards of financial literacy as are deter- standards. mined by the Commission. bankruptcy: the issue about the black- This is a good bill. I urge all col- out period, the fact that we ought not The CHAIRMAN. Pursuant to House leagues on both sides of the aisle to Resolution 395, the gentleman from have employees blacked out while ex- support it. I commend the chairman ecutives have the ability to sell com- Massachusetts (Mr. CAPUANO) and a and the subcommittee chairman who Member in opposition each will control pany stock. That is addressed. worked on this very important legisla- We also have addressed in the bill the 10 minutes. tion. The Chair recognizes the gentleman disclosure of off-balance-sheet trans- Mr. OXLEY. Mr. Chairman, I yield actions, that they all must be dis- from Massachusetts (Mr. CAPUANO). the final 30 seconds, with apologies, to Mr. CAPUANO. Mr. Chairman, I yield closed. my good friend, the gentleman from The other side speaks about the fact myself such time as I may consume. California (Mr. ROYCE). that certain specified nonaudit services Mr. Chairman, this amendment is Mr. ROYCE. Mr. Chairman, I thank are not prohibited under this legisla- relatively simple. It does one small the gentleman for yielding time to me. tion, but I would bring to the body’s at- item in the proposed bill which simply Mr. Chairman, I will be brief. By cre- tention that there were 10 nonaudit guarantees that one, only one of the ating an independent regulatory orga- services that the SEC proposed restric- five seats, will be someone who has nization comprised of a majority of fi- tions on. Of these ten, seven were pro- never been licensed as an accountant. nancial experts from outside of the ac- hibited by the SEC’s final independent It simply is the best way that I could counting profession, this bill brings rules, and two, two of them, the finan- think of to guarantee that the general much needed reform and oversight to cial systems work and internal audit- public has at least one voice at the the status quo ante of self-regulation ing ability, are prohibited under the table. The other four seats are just as within the auditing profession. chairman’s bill. submitted in the current draft; namely, The one remaining nonaudit service By requiring that CEOs and other two seats shall be people who are li- was expert services, which the SEC de- corporate insiders disclose their trades censed to practice accounting, and two cided in its final rule should not be pro- in company stock within 48 hours, people may have a license to practice hibited. Accordingly, Mr. Chairman, within 48 hours of making that trade, accounting, as long as they have not the other side is largely proposing re- this bill will increase the speed and practiced in the last 2 years. dundant legislation that is already in transparency of information disclosure It is exactly what the bill says, with place under existing rules, except for necessary for the efficient operation of the sole exception of one person who one. our capital markets. has never been licensed. I think that is There is one major problem with the By preventing these same executives the least we can do to guarantee the proposal coming from the other side. from unloading these shares during the general public, the investing public, By adopting word for word the SEC’s lockdown of an employee pension ac- has at least one seat at the table with- proposed rules, the other side would count, it ensures that all stakeholders out having been subject to practice for codify prohibitory and definitional lan- in a company are treated equitably and the last 30 or 40 years. guage that the SEC, through notice fairly, not as first- and second-class Mr. Chairman, I reserve the balance and comment rule-making, has already shareholders in equity. of my time. determined to be unacceptable. For these reasons, I urge support for The CHAIRMAN. For what purpose Mr. Chairman, I urge adoption of the the manager’s amendment and for the does the gentleman from Ohio (Mr. manager’s amendment and the under- underlying bill. I thank the chairman, OXLEY) rise? lying bill. the gentleman from Ohio (Mr. OXLEY), Mr. OXLEY. Mr. Chairman, I claim Mr. OXLEY. Mr. Chairman, I am for the Corporate and Auditing Ac- the time in opposition to the amend- pleased to yield 1 minute to the gen- countability, Responsibility, Trans- ment, though I am not opposed to the tleman from Florida (Mr. WELDON). parency Act of 2002. amendment.

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00028 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.038 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1565 The CHAIRMAN. Without objection, ant, but shall not include any fees for non- Foundation of Arizona audit in which the gentleman from Ohio (Mr. OXLEY) audit services, as such terms are defined in they also committed malpractice. And is recognized for 10 minutes. regulations of the Commission in effect on now it looks like those investors are There was no objection. the date of enactment of this Act. not going to be paid. It looks like the Mr. OXLEY. Mr. Chairman, I yield The CHAIRMAN. Pursuant to House Enron investors are not going to get a myself such time as I may consume. Resolution 395, the gentleman from penny from Arthur Andersen. Why? Be- Mr. Chairman, I thank my friend, the California (Mr. SHERMAN) and a Mem- cause Arthur Andersen has virtually no gentleman from Massachusetts (Mr. ber opposed each will control 10 min- malpractice insurance and virtually no CAPUANO), a fine member of the Com- utes. reserves. mittee, for his good work on this The Chair recognizes the gentleman Mr. Chairman, if you are going to amendment. I rise in strong support of from California (Mr. SHERMAN). drive your car, you might hurt some- it. By clarifying that at least two Mr. SHERMAN. Mr. Chairman, I body. And that is why every State in members of the five-member public re- yield myself such as I may consume. this Union requires you to have some porting organization created by Mr. Chairman, I know there are oth- sort of reserve or auto insurance. If CARTA must be certified public ac- ers that would like to speak in favor of you are going to operate a fleet of countants, the Capuano amendment this amendment, but this whole proc- thousands of taxis, certainly you would recognizes the need for accounting ex- ess has gone more quickly than ex- have insurance, because driving down pertise. pected, so we will see if they can make Main Street you might make a mistake Equally important, it guarantees it here to the floor. and hurt somebody. that at least one member of the board, Mr. Chairman, the financial auditing Well, driving on Wall Street is also and potentially three, is not a CPA. system is the only one where the um- potentially dangerous. And those who That would guarantee a level of inde- pire is paid by one of the teams. That drive down Wall Street and can cause pendence from the accounting profes- is to say, we have a situation where the billions of dollars of harm if they are sion that is absolutely essential to auditor must make tough judgment not careful, should also have the same keeping our financial reporting system calls, particularly as to how to apply insurance required of every driver in the best in the world. generally accepted accounting prin- this country. Wall Street is as dan- Mr. Chairman, I thank the gentleman cipals which are not mechanical but, gerous for pedestrians as Main Street, and urge all Members to vote aye. rather, require judgment. And the firm and that is why I have proposed this must make those judgments relative to b 1230 amendment. the client, sometimes being the dif- I want to be very clear on what it Mr. OXLEY. Mr. Chairman, I support ference between whether the stock does not do. It does not have an effect the Capuano amendment. sells for $20 a share or $40 a share. The on the 99 percent of CPA firms that do Mr. Chairman, I have no further auditing firm must make that decision not audit public companies. It has vir- speakers, and I yield back the balance affecting the clients when they are tually no effect on the regional firms of my time. being paid by that client. that do a very few SEC audits. It re- Mr. CAPUANO. Mr. Chairman, I yield The one financial check on this is the quires them to have such minimal cap- back the balance of my time. fact that if the auditor does not make ital reserves that if they just own their The CHAIRMAN. The question is on the right decision, but is rather neg- own computers, they meet the test. the amendment offered by the gen- ligent, they may be sued. The other They probably would have malpractice tleman from Massachusetts (Mr. check on this, of course, is the integ- insurance anyway. CAPUANO). rity and the professionalism of the in- This bill affects the Big Five firms. It The amendment was agreed to. dividual auditors involved in the proc- says that those firms that do 99.5 per- The CHAIRMAN. It is now in order to ess. But our system, our capitalist sys- cent of all the SEC auditing have to consider Amendment No. 3 printed in tem works well when we rely on the have reserves or they have to have House Report 107–418. good spirit of people but also on finan- malpractice insurance. It ensures that AMENDMENT NO. 3 OFFERED BY MR. SHERMAN cial incentives, financial checks and if investors are hit on Wall Street, they Mr. SHERMAN. Mr. Chairman, I offer balances. Those financial checks and will at least get some recompense. We an amendment. balances, however, ring hollow in the provide that assurances to pedestrians. The CHAIRMAN. The Clerk will des- present system. We ought to provide it to investors as ignate the amendment. Back when I was practicing—and, Mr. well. The text of the amendment is as fol- Chairman, that was a long time ago, I Mr. Chairman, I reserve the balance lows: had hair when I was doing it, that tells of my time. Amendment No. 3 offered by Mr. SHERMAN: us how long ago it was—we had general Mr. OXLEY. Mr. Chairman, I claim In section 21 strike ‘‘and 15’’ amd insert partnerships that were the Big Eight, the time in opposition to the amend- ‘‘and 16’’ and after section 13, insert the fol- now the Big Five accounting firms. ment. lowing new section (and redesignate the suc- That meant that every partner’s per- The CHAIRMAN. The gentleman ceeding sections and conform the table of contents accordingly): sonal assets were on the line if the firm from Ohio (Mr. OXLEY) is recognized for committed malpractice. So of course SEC. 14. AUDITOR MINIMUM CAPITAL. 10 minutes. (a) REGULATION REQUIRED.—The Commis- the firms purchased malpractice insur- Mr. OXLEY. Mr. Chairman, I yield sion shall revise its regulations pertaining to ance. And it meant that if an investor myself such time as I may consume. auditor independence to require that an ac- was hurt by malpractice, that that in- Mr. Chairman, the amendment before countant shall not be considered independent vestor would at least get some com- us requires audit firms to establish and unless such accountant complies with such pensation. maintain huge capital reserves, at capital adequacy standards as the Commis- Now our corporate laws have least 50 percent of annual audit rev- sion shall prescribe by regulation. changed. There are professional cor- enue. The Sherman amendment was of- (b) MINIMUM STANDARD.—The capital ade- porations, limited liability companies, fered in committee and defeated by an quacy standards established by the Commis- sion pursuant to this section shall require and limited liability partnerships. overwhelming margin of 49 to 9. that the net capital of an accountant be As a result, those investors hurt by Though well intentioned, it would es- equal to not less than one-half of the annual auditor malpractice can only look to tablish a burdensome and wholly un- audit revenue received by such accountant the assets of the firm. It makes sense precedented requirement, expanding from issuers registered with the Commission. that we make sure that there are at government’s reach into the financing (c) TREATMENT OF CAPITAL AND REVENUE.— least some assets there so that inves- and structuring of audits firms. Min- For purposes of this section— tors hurt by accounting malpractice at imum capital requirements would (1) net capital shall include the sum of cap- least get some compensation. harm small audit firms in particular ital, reserves, and malpractice insurance available to the accountant for the perform- That is not the case at the present and would result in less stability for ance of audit functions; and time. Arthur Andersen is supposed to public companies, higher audit cost for (2) annual audit revenue shall include the be paying $217 million, not in relation public companies, lower profits for in- sum of all audit fees received by the account- to Enron, but in relation to the Baptist vestors, and more speculative lawsuits.

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00029 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.041 pfrm15 PsN: H24PT1 H1566 CONGRESSIONAL RECORD — HOUSE April 24, 2002 Clearly this is a case of using a sledge- other insurance that the work will be try. In this particular case, there is no hammer to crack a nut. done appropriately. How can we turn to relationship by the government to the I urge all Members to oppose this individual drivers and say they must auditing firm. In the case of the banks, amendment and support the base bill. have insurance, the smallest compa- the government is there to provide Mr. Chairman, I reserve the balance nies who do construction work, and say some type of confidence to the deposi- of my time. they must have insurance, and then tors that their personal funds will be Mr. SHERMAN. Mr. Chairman, how turn to the Big Four accounting firms insured to a certain extent. Here there much time do I have remaining? and say they can walk away scot-free is no such relationship and, in fact, au- The CHAIRMAN. The gentleman no matter what liability a court im- diting firms are precluded from main- from California has 5 minutes remain- poses on them? It is an illusory liabil- taining any deposits from individuals ing. ity. The Enron investors will probably or from clients. Mr. SHERMAN. Mr. Chairman, I get nothing from Arthur Andersen. Think about the effect that this yield myself such time as I may con- I do not think that is a fair system. amendment would have on small ac- sume. I think instead it is reasonable to re- counting firms. Many firms with re- Mr. Chairman, let me respond to the quire that those who engage in activi- duced access to capital and costly in- comments of our distinguished chair- ties which may make them liable to surance will be now precluded from man. someone else have reasonable amounts seeking or acquiring business else- This is hardly a sledgehammer. Keep of insurance. I want to repeat, this bill where. When we are talking about a in mind that 20 years ago, every one of will affect only the Big Four or, today, firm having to have 50 percent of the the accounting firms, big and small, Big Five accounting firms. It will have annual audit fee in reserve, that is a had far more reserves available to no effect on the 99 percent of firms who tremendous financial and capital hur- those who were affected by accounting do no SEC auditing and will have no ef- dle for most American businesses, not malpractice. Twenty, 30 years ago, fect or virtually no effect on the four, just to mention auditing firms. Such a they were all general partnerships, so five, or six other regional firms who requirement to have that type of re- they had malpractice insurance. One of may have a very few SEC audits. Only serve will certainly add to the cost of the reasons they had it is that the per- when a firm is deriving a very large the financial audit, ultimately adding sonal assets of every partner were on percentage of its revenue from SEC to the cost and taking away the benefit the line. The assets available to the audit does this bill have any effect. to the investors in that company. creditors of Arthur Andersen 30 years So I ask my colleagues to require Mr. Chairman, I would say this ago would have been tens of billions of that investors who are mamed on Wall amendment goes in the wrong direction dollars, adjusted for inflation, talking Street at least be able to get some and I urge my colleagues to oppose the about 2002 dollars. Today we have an amounts of compensation, as they amendment. empty shell. would if they were hurt walking across b 1245 I remind the House that when they the street in their hometown. ask poor people in each district who Mr. Chairman, I reserve the balance The CHAIRMAN. The Chair will ad- need to drive somewhere to work to of my time. vise Members that the gentleman from earn the minimum wage, we insist they Mr. OXLEY. Mr. Chairman, I yield 3 Ohio (Mr. OXLEY) has 6 minutes re- have liability insurance, because while minutes to the gentleman from Rich- maining. The gentleman the California we are concerned about their ability to mond, Virginia (Mr. CANTOR). (Mr. SHERMAN) has 30 seconds remain- drive, we are also concerned that those Mr. CANTOR. Mr. Chairman, I rise in ing. who are hurt by negligence get at least opposition to the gentleman from Cali- Mr. SHERMAN. Mr. Chairman, I something. And yet we turn to what fornia’s (Mr. SHERMAN) amendment, yield myself the remaining time. will probably be the Big Four account- and with all due respect, I beg to differ. This bill will not adversely affect ing firms, each with many billions of We are not talking about insurance small accounting firms. It restores a dollars of revenue, and say that they here. What we are talking about is a system similar to what we had 30 years do not have to have any liability insur- totally unprecedented and, in my opin- ago when every firm had malpractice ance. ion, unjustified expansion of govern- insurance because the LLC and LLP Is that a fair society? Do we really ment’s reach into the financing and structures had yet to be invented under believe that driving down Wall Street structuring of accounting firms. State law. We in the federal govern- is not as hazardous as driving down any Let us address the first issue that the ment require that an audit be con- street in America? Certainly all the gentleman from Ohio (Mr. OXLEY) ducted because of the securities law, automobile accidents in this country made here, that this particular amend- and we ought to require that those who will not add up to the losses suffered by ment would really contribute to the in- will rely on those financial statements Enron investors. If we require those stability of any public company that will get some compensation in the who drive to have insurance and we do was required to have audited financial event that auditor malpractice takes not regard that as an undue burden on statements. Just imagine if the audit- place. driving, how can we say that auditing ing firm dipped below the required State governments require insurance publicly traded corporations, an activ- level of reserve while that firm was in to drive a car. We ought to require in- ity engaged in by only five accounting the middle of an audit. That public surance to drive on Wall Street. firms for the most part, maybe two or company who is required to have the Mr. OXLEY. Mr. Chairman, I yield three others, are we going to say that audited financial statements would be myself such time as I may consume. the five or eight or nine largest ac- left in the lurch. There would be no Before yielding back, I would only re- counting firms in the country do not other option in that firm than to go iterate the fact that we debated this in need any liability insurance? I do not out and seek another accounting firm committee, the same amendment. The think we should. I think at this time it to restart the audit or pick up where gentleman from California was able to is reasonable to say that if you are en- the one that is now disqualified left off, get nine votes in favor of his amend- gaging in activity that only exists be- thus adding to the cost of having au- ment, 49 against. I think the com- cause the securities law requires it, if dited financial statements. In addition, mittee understood the issue and re- you are receiving billions of dollars in I think it would take away from the acted accordingly. fees because publicly-traded companies quality of the audit itself. Ms. JACKSON-LEE of Texas. Mr. Chair- are required by Federal law to have an Mr. Chairman, I would also say that man, I rise in support of the Sherman amend- audit, then you ought to have liability in any other instance where the gov- ment to H.R. 3763, the Corporate and Auditing insurance. ernment requires a certain capital, Accountability and Responsibility Act. I will give another example. If a minimum capital requirement, for in- This amendment would establish capital small plumbing contractor wishes to do stance the banking industry, there is standards for accounting companies that audit the plumbing on a Federal building or some type of quasi-guarantee relation- publicly traded companies. a State construction project, surely we ship that the government has and in This amendment would require the SEC to would require a completion bond or some sense is the insurer of the indus- set capital standards at a level no lower than

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00030 Fmt 4634 Sfmt 9920 E:\CR\FM\K24AP7.045 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1567 half of the firm’s annual audit revenues. More- SEC. 3. ESTABLISHMENT OF BUREAU. require the certification, in accordance with over, it allows auditors to apply capital, re- (a) ESTABLISHMENT.—There is hereby es- the rules of the Commission, of financial tablished within the Commission an inde- serves and malpractice insurance to meet this statements and other documents of reporting pendent regulatory agency to be known as issuers of securities, the Commission shall, net capital requirement. the Federal Bureau of Audits. Accounting firms that fail to maintain re- by rule, establish and revise as necessary au- (b) FUNCTION OF THE BUREAU.—The Bureau diting standards for audits of such financial quired levels of capital reserves would be pro- shall conduct an annual audit of the finan- statements. hibited from auditing publicly traded compa- cial statements that are required be sub- nies. mitted by reporting issuers and to be cer- (b) INCORPORATION OF CURRENT STAND- As evidenced by the relationship between tified under the securities laws or the rules ARDS.—In adopting auditing standards under Enron and its auditor, Arthur Andersen, there or regulations thereunder. this section, the Commission shall incor- are many flaws in the system that needs fix- (c) OFFICERS.— porate generally accepted auditing standards (1) BUREAU HEAD.—The head of the Bureau ing. This amendment is another step in the in effect on the date of enactment of this shall be a Director, who shall be appointed Act, with such modifications as the Commis- right direction. by the President, by and with the advice and It is very likely that because Arthur Ander- sion determines are necessary and appro- consent of the Senate. priate in the public interest and for the pro- sen did not carry adequate malpractice insur- (2) ADDITIONAL OFFICERS.—There shall also tection of investors. ance, the Enron shareholders, many of them be in the Bureau a Deputy Director and an former Enron employees, will not see any Inspector General, each of whom shall be ap- (c) ADDITIONAL REQUIREMENTS FOR RULES.—The rules prescribed by the Com- monetary compensation from their auditor. pointed by the President, by and with the ad- mission under subsection (a)— This amendment does not and will not hurt vice and consent of the Senate. (3) TERMS.—The Director, Deputy Director, (1) shall be available for public comment small accounting firms because nearly all SEC for not less than 90 days; audits are done by the big five accounting and Inspector General shall be appointed for terms of 12 years, except that— (2) shall be prescribed not less than 180 firms. (A) the first term of office of the Deputy days after the date of enactment of this Act; It is important to note that this amendment Director shall be eight years; and and is being offered so that auditors of SEC re- (B) the first term of office of the Inspector (3) shall be effective on the first January 1 porting companies will to have enough capital General shall be 4 years. that occurs after the end of such 180 days. and insurance to cover the liability they incur (d) INDEPENDENCE.—Except as provided in SEC. 5. FEES FOR THE RECOVERY OF COSTS OF when they perform a large audit and would sections 4 and 5, in the performance of their OPERATIONS. functions, the officers, employees, or other only affect auditors performing audits for com- (a) IN GENERAL.—The Commission shall in panies required to file disclosures with the personnel of the Bureau shall not be respon- sible to or subject to the supervision or di- accordance with this section assess and col- SEC. rection of any officer, employee, or agent of lect a fee on each reporting issuer whose fi- This is an important amendment and I urge any other part of the Commission. nancial statements are audited by the Bu- you to support it. (e) ADMINISTRATIVE SUPPORT.—The Com- reau. This section applies as of the first fis- Mr. OXLEY. Mr. Chairman, I yield mission shall provide to the Bureau such cal year that begins after the date of enact- back the balance of my time. support and facilities as the Director deter- ment of this Act (referred to in this section The CHAIRMAN. The question is on mines it needs to carry out its functions. as the ‘first applicable fiscal year’). the amendment offered by the gen- (f) RULES.—The Bureau is authorized to es- (b) TOTAL FEE REVENUES; INDIVIDUAL FEE tleman from California (Mr. SHERMAN). tablish such procedural and administrative AMOUNTS.—The total fee revenues collected The amendment was rejected. rules as are necessary to the exercise of its under subsection (a) for a fiscal year shall be The CHAIRMAN. It is now in order to functions, but the Bureau may not establish the amounts appropriated under subsection consider amendment No. 4 printed in any auditing standards within the jurisdic- (d)(2) for such fiscal year. Individual fees tion of the Commission under sections 4 and House Report 107–418. shall be assessed by the Commission on the 5. AMENDMENT NO. 4 IN THE NATURE OF A basis of an estimate by the Commission of (g) ADDITIONAL AUTHORITY.—In carrying SUBSTITUTE OFFERED BY MR. KUCINICH out any of its functions, the Bureau shall the amount necessary to ensure that the sum Mr. KUCINICH. Mr. Chairman, I offer have the power to hold hearings, sign and of the fees collected for such fiscal year an amendment in the nature of a sub- issue subpoenas, administer oaths, examine equals the amount so appropriated. stitute. witnesses, and receive evidence at any place (c) FEE WAIVER OR REDUCTION.—The Com- The CHAIRMAN. The Clerk will des- in the United States it may designate. The mission shall grant a waiver from or a reduc- ignate the amendment in the nature of Bureau may, by one or more of its officers or tion of a fee assessed under subsection (a) if a substitute. by such agents as it may designate, conduct the Commission finds that the fee to be paid The text of the amendment in the na- any hearing or other inquiry necessary or will exceed the anticipated present and fu- ture of a substitute is as follows: appropriate to its functions, except that ture costs of the operations of the Bureau. Amendment No. 4 in the nature of a sub- nothing in this subsection shall be deemed to supersede the provisions of section 556 of (d) CREDITING AND AVAILABILITY OF FEES.— stitute offered by Mr. KUCINICH: title 5, United States Code relating to hear- (1) IN GENERAL.—Fees collected for a fiscal Strike all after the enacting clause and in- year pursuant to subsection (a) shall be cred- sert the following: ing examiners. (h) CONFLICT OF INTEREST PROVISIONS.—A ited to the appropriation account for salaries SECTION 1. SHORT TITLE. person previously employed by the Bureau and expenses of the Bureau and shall be This Act may be cited as the ‘‘Investor, may not accept employment or compensa- available until expended without fiscal year Shareholder, and Employee Protection Act tion from an issuer audited by the Bureau or limitation. of 2002’’. an accountant that provides audit related (2) APPROPRIATIONS.— SEC. 2. FINDINGS. services to an issuer audited by the Bureau (A) FIRST FISCAL YEAR.—For the first appli- The Congress finds the following: for 10 years after the last day of employment cable fiscal year, there shall be available for (1) The failure of accounting firms to pro- at the Bureau. Any current employee of the the salaries and expenses of the Bureau vide accurate audits of its clients is not a Bureau shall be required to place all invest- $5,150,000,000. new or isolated problem. ments in a blind trust, in accordance with (B) SUBSEQUENT FISCAL YEARS.—For each of (2) Accounting firms have been implicated regulations prescribed by the Commission. the four fiscal years following the first appli- in failed audits that have cost investors bil- The employees of the Bureau who conduct cable fiscal year, there shall be available for lions of dollars when earnings restatements the audits shall be exempt from the civil the salaries and expenses of the Bureau an sent stock prices tumbling. service pay system under section 4802 of title amount equal to the amount made available (3) Auditors have an inherent conflict of 5, United States Code, and shall be paid sala- by paragraph (1) for the first applicable fis- interest. They are hired, and fired, by their ries that are competitive with similar pri- cal year, multiplied by the adjustment factor audit clients. vate sector employment. for such fiscal year (as defined in subsection (4) This conflict of interest pressures audi- (i) LEGAL REPRESENTATION.—Except as pro- (f)). tors to sign off on substandard financial vided in section 518 of title 28, United States (e) COLLECTION OF UNPAID FEES.—In any statements rather than risk losing a large Code, relating to litigation before the Su- case where the Commission does not receive client. preme Court, attorneys designated by the Di- payment of a fee assessed under subsection (5) Auditing a public company for the ben- rector of the Bureau may appear for, and (a) within 30 days after it is due, such fee efit of small as well as large investors re- represent the Bureau in, any civil action shall be treated as a claim of the United quires independence. brought in connection with any function car- States Government subject to subchapter II (6) Therefore the only truly independent ried out by the Bureau pursuant to this Act of chapter 37 of title 31, United States Code. audit is one by a governmental agency. or as otherwise authorized by law. (7) The Federal Bureau of Audits, closely SEC. 4. ASSUMPTION OF AUTHORITY BY COMMIS- (f) DEFINITION OF ADJUSTMENT FACTOR.— regulated by the Commission, will provide SION OVER AUDITING STANDARDS. For purposes of this section, the term ‘ad- honest audits of all publicly traded compa- (a) ASSUMPTION OF AUTHORITY.—Pursuant justment factor’ applicable to a fiscal year is nies. to its authority under the securities laws to the lower of—

VerDate Apr 18 2002 02:25 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00031 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.028 pfrm15 PsN: H24PT1 H1568 CONGRESSIONAL RECORD — HOUSE April 24, 2002 (1) the Consumer Price Index for all urban into a lobbying force on Capitol Hill—one In 1977, after being asked to head a search consumers (all items; United States city av- that has been singularly effective. Levitt, committee for the next leader of the Amer- erage) for April of the preceding fiscal year who issued a series of warnings about the ac- ican Stock Exchange, he got the job himself. divided by such Index for April of the first counting profession in those years, suggests A few years later, he was thinking of invest- applicable fiscal year; or that the aim of the so-called Big Five ac- ing in The National Journal, a policy-ori- (2) the total of discretionary budget au- counting firms—PricewaterhouseCoopers, ented magazine in Washington, when he thority provided for programs in categories Deloitte & Touche, Ernst & Young, K.P.M.G., learned of the publication’s interest in ac- other than the defense category for the im- and Arthur Andersen, Enron’s auditor—was quiring Roll Call, a struggling newspaper on mediately preceding fiscal year (as reported to weaken federal oversight, block proposed Capitol Hill. Levitt declined to invest in The in the Office of Management and Budget se- reform and overpower the federal regulators National Journal but bought Roll Call him- questration preview report, if available, re- who stood in their way. ‘‘They waged a war self, for about five hundred thousand dollars. quired under section 254(c) of the Balanced against us, a total war,’’ Levitt said. Seven years later, he sold it for fifteen mil- Budget and Emergency Deficit Control Act Some have portrayed Enron’s crash and lion dollars. the woes of Arthur Andersen simply as huge of 1985) divided by such budget authority for At the same time, Levitt was drawn to the first applicable fiscal year (as reported in business failures. ‘‘There are always going to be bad apples,’’ said Jay Velasquez, a former public life. He had grown up in a political the Office of Management and Budget final aide to Senator Phil Gramm, who is now a household, the only son of Arthur Levitt, sequestration report submitted for such Washington lobbyist for the accounting pro- Sr., a Democrat who for twenty-four years year). fession, and who has fought increased regula- was the New York State comptroller. Both For purposes of this subsection, the terms tion. Barry Melancon, who heads the Amer- his father and his mother, a public-school ‘‘budget authority’’ and ‘‘category’’ have the ican Institute of Certified Public Account- teacher in Brooklyn, were dependent on pub- meaning given such terms in the Balanced ants, the profession’s trade group, which has lic pensions for their retirement, and they Budget and Emergency Deficit Control Act three hundred and fifty thousand members, cared deeply about the protection of small of 1985. fears that those who are trying to impose po- investors. SEC. 5. DEFINITIONS. litical solutions will overreact. ‘‘We live in a When Levitt began his S.E.C. job, he ac- As used in this Act: free-market system,’’ Melancon told me. knowledged the populist tradition of the (1) COMMISSION.—The term ‘‘Commission’’ ‘‘Businesses fail. People are not infallible.’’ Roosevelt Administration, which created the means the Securities and Exchange Commis- But Levitt casts the Enron story in starker S.E.C. in 1934, to insure the integrity of sion. terms. It is, as he puts it, ‘‘the story of the American financial markets. The agency’s (2) SECURITIES LAWS.—The term ‘‘securities nineties’’—a battle between public and pri- new Web site carried the motto of his most laws’’ means the Securities Act of 1933 (15 vate interests that is being fought at a time famous predecessor, William O. Douglas: U.S.C. 77a et seq.), the Securities Exchange when there is more corporate money in poli- ‘‘We are the investors’ advocates.’’ The tics than ever before. ‘‘This is about cor- Act of 1934 (15 U.S.C. 78a et seq.), the Trust S.E.C.’s basic requirement was that all pub- porate greed,’’ Levitt told me. ‘‘It is the re- Indenture Act of 1939 (15 U.S.C. 77aaa et licly traded companies register with the sult of two decades of erosion of business seq.), the Investment Company Act of 1940 agency and submit to annual independent ethics. It was the ultimate nexus of business (15 U.S.C. 80a–1 et seq.), the Investment Ad- audits. Douglas liked to say that the S.E.C. and politics. If there was ever an example visers Act of 1940 (15 U.S.C. 80b et seq.), and where money and lobbying damaged the pub- was ‘‘the shotgun behind the door.’’ But the Securities Investor Protection Act of lic interest, this was clearly it.’’ Levitt soon discovered that the agency’s ar- 1970 (15 U.S.C. 78aaa et seq.). Levitt, who is seventy-one and has silver senal was no match for the bull markets of (3) REPORTING ISSUER.—The term ‘‘report- hair, exhibits a starchy correctness. He still the nineties. The new economy spawned new ing issuer’’ means any registrant under sec- seems bitter about his war with the account- accounting schemes that raised concerns al- tion 12 of the Securities Exchange Act of 1934 ing trade, and called one adversary ‘‘an oily most from the start. (15 U.S.C. 78l) or any other issuer required to weasel’’ and another ‘‘a sly mongoose’’ as he One early fight was over stock options. file periodic reports under section 13 or 15 of spoke about the influence of money on poli- Many pointed out that the accounting con- such Act (15 U.S.C. 78m, 78o). tics. ‘‘It used to be that if industries had a vention that kept these expenses, unlike or- The CHAIRMAN. Pursuant to House problem they would try to work it out with dinary executive compensation, off the Resolution 395, the gentleman from the regulatory authorities,’’ he said, in his books was deceptive. It meant that investors Ohio (Mr. KUCINICH) and a Member op- sleek office at the Carlyle Group, in midtown could not see a company’s real liabilities. Manhattan, surrounded by mementos of Levitt recalls that when he took office the posed each will control 10 minutes. years in public life. ‘‘Now they bypass the The Chair recognizes the gentleman first thing that Senators David Boren and regulators completely, and go right to Con- Carl Levin, who were both active in regu- from Ohio (Mr. KUCINICH). gress.’’ Their campaign contributions lend latory reform, told him was that he ‘‘had to Mr. KUCINICH. Mr. Chairman, I yield them clout. ‘‘It’s almost impossible to com- do something about stock options.’’ pete with the effect that money has on these myself such time as I may consume. Congress soon got involved in the stock-op- congressmen.’’ Enron’s campaign contribu- Mr. Chairman, I include for the tion fight, and the politicization of account- tions and its political power have received RECORD an article in the New Yorker ing became more apparent than ever. Sup- much attention, but two of the top five ac- entitled ‘‘The Accountants’ War,’’ and porters of Wall Street and Silicon Valley, in- counting firms—Arthur Andersen and cluding many ordinarily pro-regulatory it has many interesting details about Deloitte—and the accountants’ trade asso- Democrats, fought against changing the the collapse of accounting responsibil- ciation actually spent more during the 2000 stock-option rules; one, for example, was ities in this country. It says that elections. ‘‘The money was enormous,’’ Senator Joseph Lieberman, of Connecticut, a Enron was forced to reveal that its Levitt said. ‘‘Look at the end result.’’ state with a large concentration of Fortune profits had been off by about 20 percent Not many years ago, Levitt was considered a consummate Wall Street insider, even an 500 companies, many of which are campaign over 3 years and that as early as 1997 contributors. More surprising, the account- Arthur Andersen had known that operator. In 1993, when President Clinton picked him to run the Securities and Ex- ing profession, rather than remaining neu- Enron was inflating its income, but change Commission, he was a centrist, a tral, joined forces with its clients to fight when Enron declined to correct the well-connected fundraiser who had contrib- the change. Together, they exerted pressure numbers, Andersen certified them any- uted to both parties. He had founded his own on the organization that sets the rules for way. lobbying organization, the American Busi- the accounting business, the Financial Ac- counting Standards Board, or F.A.S.B. ‘‘This [From the New Yorker, Apr. 22, 2002] ness Conference, to advocate the interests of small business on Capitol Hill. He was also was a defining moment for me,’’ Levitt said. THE ACCOUNTANTS’ WAR someone with a knack for cultivating fa- A lawyer who was with the S.E.C. at the (By Jane Mayer) mous and powerful friends. In the nineteen- time says, ‘‘The accountants were going be- Nothing, it has been said, is duller than ac- sixties, he joined a successful start-up New yond good accounting. They were advocating counting—until someone is defrauded. And York firm as a stockbroker, and he eventu- a business position. They wanted to keep after every modern financial diseaster—the ally counted among his clients Leonard their customers happy. It was quite un- stock-market crash of 1929, the bankruptcy Bernstein, Aaron Copland, and Kenneth seemly.’’ of the Penn Central Railroad in 1970, the sav- Clark. Three of Levitt’s original partners At first, Levitt played a hesitant role. In ings-and-loan crisis of the eighties, and now were Sanford Weill, who became the chair- what he now regards as his ‘‘biggest mis- the bankruptcy of the Enron Corporation— man of Citigroup; Arthur Carter, now the take’’ at the commission, he, too, urged the investors have tended to ask the same ques- publisher of the New York Observer; and F.A.S.B. to back off. His rationale, he said, tion: where were the auditors? Roger Berlind, who became a Broadway pro- was a fear that, if the board tried to resist Arthur Levitt, Jr., who was the chairman ducer. (Levitt had his own ties to Broadway; the anti-regulatory feeling then sweeping of the Securities and Exchange Commission his aunt was Ethel Merman). Levitt thrived, Congress, it would be crushed altogether. under President Bill Clinton, believes that in too, and by the late sixties he was running (Sarah Teslik, the executive director of the the years leading up to Enron’s collapse the Shearson Hayden Stone, which later became Council of Institutional Investors, an advo- auditors were busy organizing themselves Shearson Lehman Brothers. cate for shareholders, is among those who

VerDate Apr 18 2002 02:25 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00032 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.043 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1569 argue that Levitt ‘‘wasn’t the hero he makes companies forced to re-state their earnings arguing, in a lengthy white paper, that the himself out of be.’’) Levitt told me that the went from three in 1981 to a hundred and accounting firms were better off policing episode showed him that the accounting fifty-eight last year, according to a doctoral themselves. ‘‘The staff regarded his white trade was undergoing a cultural trans- thesis at New York University’s Stern paper as a kick in the stomach, because it formation. Instead of overseeing corporate School of Business. (Barry Melancon, of the was so one-sided and confrontational,’’ America, it was joining forces with it. ‘‘The American Institute of Certified Public Ac- Levitt said. One S.E.C. official recalls that kind of greed that produced Enron and Ar- countants, calls concern over these numbers Pitt made the negotiations over the new thur Anderson was symbolized by the way misleading, noting that they represent board ‘‘the most horrible ever,’’ and Lynn the companies dealt with stock options,’’ he ‘‘fewer than one per cent of the audits per- Turner says, ‘‘It was doomed from day one.’’ said. ‘‘I realized something was wrong.’’ formed.’’) Pitt, who was appointed by President Until the Second World War, the American Shareholder lawsuits against the account- George W. Bush to succeed Levitt as chair- accounting industry has stayed close to its ing firms proliferated. In response, the Big man of the S.E.C., said, ‘‘There was a lot of eighteenth-century roots in bookkeeping. Five and their trade association united as a misperception about what the white paper But with the rise of information technology political force. According to the nonpartisan said. For some reason, early on people the accounting firms branched into con- Center for Responsive Politics, between 1989 seemed to get in their mind that I opposed sulting. During the nineteen-nineties, the and 2001 accounting firms spent nearly thir- what Levitt did,’’ to reform accounting. ‘‘I Big Five doubled their collective revenues, ty-nine million dollars on political contribu- tried to give him may own help on a personal to $26.1 billion. Their consulting practices, in tions. The contributions were bipartisan, basis.’’ particular, were hugely profitable, and reaching more than half the current mem- In the summer of 1998, Levitt received a re- brought in three times as much revenue as bers of the House and ninety-four of a hun- port about a problem in Pricewaterhouse’s auditing did, according to a study soon to be dred senators. Tampa office. According to the report, nine published in The Accounting Review. Audi- By 1995, this investment had started to pay executives there had made eighty invest- tors started coming under pressure to at- off. Congress passed the Private Securities ments in companies that they were supposed tract non-audit business. At some firms, like Litigation Reform Act, making it harder for to be auditing—a violation of the most basic Andersen, auditors compensation depended shareholders to sue businesses and their independence standards. Under the S.E.C.’s upon their ability to sell other services to auditors when the businesses failed. The leg- direction, the firm initiated a company-wide clients; equity partners began to be paid like islation was championed by the Speaker of investigation. To the shame of the entire investment bankers. Inevitably, there were the House, Newt Gingrich, as part of his Con- profession, it turned up more than eight conflicts between the independent role re- tract with America. ‘‘What we were after thousand such violations. The S.E.C. fined quired of an auditor and the applicant role of was trying to get rid of the frivolous, merit- Pricewaterhouse two and a half million dol- a salesman trying to expand services. less cases,’’ Mark Gitenstein, a lawyer and lars, and called for an investigation into At Enron, for example, Andersen did con- lobbyist who helped shape the legislation, compliance with independence rules at the sulting on taxes and on internal auditing. said. ‘‘We convinced Congress that you need- rest of the Big Five firms; Levitt asked an Both projects threatened to put the outside ed a system that did a better job of screening independent group, the Public Oversight auditors in the awkward position of assess- the marginal cases from the serious ones.’’ Board, which had been created after the ing their own company’s work. The relation- The resulting legislation, Professor Cox said, Penn Central collapse, to undertake this ship was further compromised by the fact reversed ‘‘eighty years of federal procedure.’’ task. that Enron’s management included many At first, Levitt tried to fight the private- Levitt also took his battle public, in the former Andersen employees, among them the securities bill, but when it became clear that fall of 1998, he gave a speech that attacked company’s president, vice-president, and the federal regulators couldn’t compete with the ‘‘number game.’’ He said, ‘‘Accounting is chief accounting officer. Auditors were thus the accountants’ clout in Congress, he being perverted. Auditors who want to retain in the position of judging former col- looked for a compromise. ‘‘It was a case their clients are under pressure not to stand leagues—and prospective bosses. where the industry had more power that the in the way.’’ He explained, ‘‘Auditors and an- More than a year ago, well before Enron’s regulators,’’ he said. Then, as now, there alysts are participants in a game of nods and problems became public, an internal e-mail were approximately seventy-five lobbyists winks. . . . I fear we are witnessing an ero- revealed that fourteen top Andersen partners for every member of the House and Senate; sion in the quality of earnings, and therefore had pointed out several of the financial in the Gingrich era, they were more inte- the quality of financial reporting.’’ In con- schemes that eventually contributed to grated into the lawmaking process than ever clusion, he said, ‘‘Today American markets Enron’s fall. In a discussion about retaining before. Jeffrey Peck, a former Democratic enjoy the confidence of the world. How many Enron as a client the partners considered Senate aide who was then the head of Arthur half-truths and accounting sleights of hand whether Enron’s ‘‘aggressive . . . transaction Andersen’s Washington lobbying office and is will it take to tarnish that faith?’’ structuring’’ was too risky. It appears from now an outside lobbyist for the firm, says The Public Oversight Board, made up of the e-mail, however, that the partners’ con- that after this fight there was ‘‘really bad major business figures, was supposed to act cerns were outweighed by possible future re- feeling’’ between Levitt and the profession. as the profession’s conscience. But in May, wards. The e-mail noted that their fees ‘‘It was as if two people had gone out on a 2000, before its investigation could be com- ‘‘could reach $100 million per year.’’ first date and had a bad time,’’ he says. ‘‘But pleted, the P.O.B.’s head, Charles Bowsher, ‘‘If you get too friendly and too relaxed, the rules required them to keep dating.’’ received a letter from officials at the Amer- you can wind up nodding your head yes when Levitt told me that he has always been ican Institute of Certified Public Account- you should be saying no,’’ said Charles Bow- proud of his ability to create consensus, and ants, which finances the board, announcing sher, a former head of the General Account- in the spring of 1996 he tried to involve the that it would ‘‘not approve nor authorize’’ ing Office, who worked at Andersen for many profession in reforming itself. He urged the funding for further investigations. Bowsher, years and has been retained to help reform big accounting firms to strengthen their who had himself been a high-ranking officer the firm. ‘‘There’s a lot of art in addition to oversight system and toughen discipline for with Arthur Andersen before becoming the science in accounting.’’ Bowsher says that transgressors. He proposed giving investors head of the General Accounting Office, says ‘‘most fraud flourishes in gray areas.’’ But and other members of the public a bigger that he was shocked; the industry was effec- James Cox, a professor of corporate and se- role. But, he said, the accountants resisted, tively stopping the investigation. Melvin curities law at Duke University, suggests and progress was made only after ‘‘huge Laird, a former Secretary of Defense, who that Enron’s accounting gimmickry was fights.’’ was the longest-serving member of the black-and-white. ‘‘It was not even close,’’ he Rules governing auditors’ independence P.O.B., called it ‘‘the worst incident in my said. ‘‘It was dead wrong.’’ hadn’t been updated in two decades. To ex- seventeen years.’’ Barry Melancon, the head Levitt said that, as the country’s senior amine the growing number of questions of the trade association, defended the asso- guardian of fair markets, he watched the about conflicts of interest, Levitt created a ciation’s position. ‘‘We were never opposed transformation of the accounting profession new board, whose membership was divided to the concept,’’ he told me, referring to the with alarm. ‘‘The brakes on the worst in- between independent business leaders and investigation. ‘‘We just felt the P.O.B. was stincts of the business community weren’t people from the accounting industry. ‘‘They undertaking a project that it couldn’t de- working,’’ he says. ‘‘The gatekeepers were were constantly deadlocked by differences of fine.’’ letting down the gates.’’ The number of opinion,’’ Levitt said, and added, ‘‘When I At the same time, the S.E.C. was uncover- audit failures afflicting corporate America asked for support, I never got it. I never ing a huge case of accounting fraud involving was increasing; Lynn Turner, who served heard in any speech they’’—the account- the garbage-disposal company Waste Man- under Levitt as the chief accountant at the ants—‘‘gave the words ‘public interest.’ They agement: Arthur Andersen had put an un- S.E.C., estimates that investors lost a hun- were so stilted, and terse, and non-produc- qualified seal of approval on numbers that dred billion dollars owing to faulty, mis- tive—I realized it was an industry that com- the government said it either knew or should leading, or fraudulent audits in the six years pletely lacked leadership.’’. have known were misleading. As if in antici- preceding Enron’s crash. Many of the best- The accounting industry hired Harvey pation of the revolving-door conflicts at known corporations in the country were af- Pitt, who was known as one of the smartest Enron, practically ever C.F.O. and C.A.O. in fected, among them Cendant, W. R. Grace, and most aggressive private-securities law- Waste Management’s history had come from Sunbeam, Xerox, Lucent, and Oxford Health yers in the country. Pitt responded to Andersen, S.E.C. enforcement documents Plans. In fact, the number of publicly traded Levitt’s call for greater public oversight by from the investigation reveal something

VerDate Apr 18 2002 02:25 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00033 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.048 pfrm15 PsN: H24PT1 H1570 CONGRESSIONAL RECORD — HOUSE April 24, 2002 else: at least two of the partners who were In the following weeks, he said, Tauzin ing-industry supporters developed a new singled out for scrutiny by the S.E.C. re- ‘‘badgered me relentlessly. He knew what the strategy: they started to oppose the rule’s mained in influential positions at Andersen accountants were doing before I did. He was substance on procedural grounds, arguing while being investigated, and both have now working very closely with them. I don’t that there hadn’t been enough time for pub- surfaced in connection with the Enron affair. mean to sound cynical, but is it because he lic hearings. ‘‘Of course, we knew that by (One executive, Robert Kutsenda, who was loves accountants?’’ At one point, relations calling for more time it would mean the end later barred by the S.E.C. from auditing pub- between the two men grew so bad that Levitt of Levitt,’’ one lobbyist said. lic companies for a year, was placed in hung up on Tauzin, because he felt that ‘‘his With the accounting firms threatening to charge of redesigning the firm’s policy on words and his tone were threatening.’’ take the S.E.C. to court if he went ahead which documents to retain and which to Tauzin was not alone. In the four weeks with the rules, Levitt tried to strike a deal shred, an issue in the Enron case. Kutsenda after Levitt announced his intention to go with the three firms who opposed him, at and Steve Samek, who was also investigated through with the proposed new rules, forty- which point the two firms who had pre- in the Waste Management case but not pub- six more congressmen wrote to him ques- viously supported him turned against him. licly sanctioned, were among those involved tioning them. Data from the Center for Re- That night, one aide recalled, Levitt gave up. in the discussion of whether to retain Enron sponsive Politics show that in 2000 the ac- ‘‘I lost it,’’ Levitt said. as a client. None of the executives involved countants contributed more than ten million In the end, he kept negotiating, and the dollars to political campaigns and spent $12.6 in the Waste Management matter were fired S.E.C. agreed to let the firms continue to million on federal lobbying. Arthur Andersen by Andersen, which last year agreed to pay a consult for the companies they audited. But alone nearly doubled its lobbying budget in seven-million-dollar penalty to the S.E.C., the firms agreed to disclose the details to in- the second half of the year, to $1.6 million. without admitting or denying guilt, after it vestors. ‘‘I knew it wasn’t enough, but I Among the lobbyists hired by the industry was charged with fraud. In addition, two of thought we’d be overruled by Congress in one were Vic Fazio, a former congressman; Jack the Andersen partners targeted by the S.E.C. fashion or another,’’ Levitt said. ‘‘The part Quinn, a former Clinton White House coun- in the fraud case now serve on the profes- of me that was insecure wanted a bird in the sel; Ed Gillespie, a former Bush campaign sion’s standard-setting board, the F.A.S.B.) hand.’’ By 2000, Levitt, faced with what he calls adviser; Patrick Griffin, Clinton’s former Almost exactly a year later, Enron’s out- the Big Five’s ‘‘fortress mentality,’’ had ini- congressional liaison; Dan Brouillette, a side auditor, Arthur Andersen L.L.P., a com- tiated a series of meetings with the firms at former aide to Tauzin who is now an Assist- pany whose image had virtually defined Mid- which he insisted that they needed to do ant Energy Secretary; and a number of other western probity, made an astonishing admis- more to police themselves. Levitt’s message, former Hill staff people. sion. During the previous three years, when Turner told me, was that the firms could ei- Now, however, Tauzin has joined in the it had vouched for Enron’s financial state- ther cooperate with an investigation into public outrage toward Enron and Andersen; ments, the company’s net income had actu- their compliance with independence rules or in a House hearing that he chaired, he called ally been inflated by almost six hundred mil- ‘‘we’ll issue the subpoenas tomorrow—take the case ‘‘an old-fashioned example of theft lion dollars. In a financial market where your pick.’’ by insiders, and a failure of those responsible stocks plummet if corporate earnings fall a In the spring of 2000, the S.E.C. announced for them to prevent that theft.’’ He told me penny short of projections, Enron was forced that it planned to draft new rules that would that money hadn’t influenced his earlier de- to reveal that its profits had been off by greatly restrict accountants’ ability to con- fense of the accountants. ‘‘Donations have about twenty per cent over three years. As sult for the same companies they audited. never bought anybody any slack with this early as 1997, Andersen had known that Arthur Andersen reportedly argued that this committee,’’ he said. ‘‘I’m not saying that Enron was inflating its income. But when would cut its market potential by forty per contributions don’t have the power to cor- Enron declined to correct the numbers An- cent, and vowed to fight back. A June meet- rupt. They do. But I always assume people dersen certified them anyway. Within six ing in Deloitte’s New York headquarters contribute to me because they like the work months, Enron had filed for bankruptcy and I do.’’ with the heads of the three firms who most Andersen had been indicted on charges of ob- By early fall of 2000, Levitt says, he began vehemently opposed the new rules ‘‘was so struction of justice for destroying documents icy you could have stored cold meat in that to hear another kind of threat; lobbyists told him that if he didn’t back off there would be related to its Enron work. Investors lost an room,’’ Turner says. The heads of Andersen, estimated ninety-three billion dollars, a sum Deloitte, and K.P.M.G. joined Melancon on a push to cut the S.E.C.’s funding. ‘‘They were going to place a rider on our appropria- nearly equal to the amount of the economic- one side of a conference table. (Price- stimulus package that President Bush re- waterhouse and Ernst & Young were more tions budget,’’ Levitt said, still sounding as if he could not believe it. Jay Velasquez, a quested for the entire country. In the year supportive of Levitt, and didn’t attend.) before Enron’s crash, Andersen had collected Levitt and two S.E.C. officials were on the lobbyist for the accountants at the time, confirmed this. ‘‘You have to consider all a million dollars a week from Enron for its other. When Levitt made it clear that he in- expertise. More than half of that, Andersen tended to move forward, Andersen’s chief ex- your options,’’ he said. ‘‘There is no doubt acknowledged, in compliance with the new ecutive, Robert Grafton, declared, ‘‘This is that the rider was a consideration. In these battles, everything is on the table.’’ Henry S.E.C. rule, was for non-auditing work. war.’’ ‘‘If these reforms had been in place earlier, ‘‘It was unbelievable, just unbelievable,’’ Bonilla, a Texas Republican with an anti- we wouldn’t have had an Enron,’’ Lynn Turn- Turner recalled. ‘‘They all went after Ar- regulatory temperament who is a member of er told me. He laughed, but the laugh sound- thur. They made clear that everything was the House Appropriations Committee, was ed a little forced as he spoke about fair game.’’ Turner says that the attitude of prepared to attach the rider. Bowsher, the the firms was ‘‘You know we’re going to win former G.A.O. head, says that such threats Congress’s newfound interest in reform. anyway in the end, so why not save us the were once unthinkable. ‘‘In the old days, the ‘‘Maybe the congressman were listening expense, and give up now?’’ S.E.C. was off limits to that kind of pressure. more than I thought—we just weren’t giving ‘‘As soon as I left that meeting,’’ Levitt It was a place the private sector respected. them enough money,’’ he said. told me, ‘‘it was clear the fight was going to Nobody, nobody, would have thought about Not long ago, Levitt was called to testify Capitol Hill.’’ Such clashes over commercial asking Congress to cut the budget.’’ before Congress about what went wrong at interests are commonplace in Congress, but Representative Tom Udall, a Democrat Arthur Andersen. ‘‘It was a play within a ‘‘this wasn’t about legislation,’’ he said. ‘‘It from New Mexico, says that his staff urged play,’’ he told me. He said that he has little was about S.E.C. rule-making—we’re sup- him to sign a widely circulated letter to hope for meaningful change in the profes- posed to be an independent agency. I’d never Levitt opposing the proposed rules, because sion, despite all the bills under consider- seen anything like it at the S.E.C.’’ so many of his colleagues had. ‘‘There’s sort ation, and despite commitments from Har- During this period, Levitt said, he got a of a herd mentality,’’ he said. He refused; he vey Pitt, his successor at the S.E.C. Before letter from Representative W.J. (Billy) Tau- knew Levitt slightly, through mutual friends Enron collapsed, Pitt promised the account- zin, of Louisiana, the chairman of the House in Santa Fe. ‘‘Levitt was out to solve these ants ‘‘kinder and gentler’’ treatment than Energy and Commerce Committee, who has things before people realized there was a Levitt had shown them, but he has since received more than two hundred and eighty problem. That’s the sign of a leader. But the sharpened his rhetoric and proposed a great thousand dollars from the accounting indus- special interests have such a hold on mem- many reforms. Pitt told me that his work for try over the past decade. The letter con- bers of Congress that they were able to stop the accountants has made him better able to sisted of four pages of pointed questions. In a lot of things.’’ persuade them to change their ways because, a not very veiled threat, Tauzin asked how Levitt initiated a nationwide series of pub- ‘‘to put it bluntly, I know where the bodies many violations Levitt and the other mem- lic hearings about accounting abuses, fight- are buried.’’ But Pitt dismissed Levitt’s ap- bers of the S.E.C. would have if their stock ing back as if he were involved in a political proach—separating auditing from con- holdings were subjected to the independence campaign. Damon Silvers, an A.F.L.–C.I.O. sulting—as ‘‘a simplistic solution to a com- rules being proposed for the accountants. He official who supported the S.E.C.’s position, plex problem,’’ and told me that he thought also demanded that Levitt produce proof recalls that ‘‘Levitt looked like a figure it could prove counterproductive. ‘‘A firm that non-audit consulting undermines audi- from some old movie—he was sitting at a that does only audits may be incompetent,’’ tors’ accuracy. ‘‘It was a shot across the bow huge desk at the S.E.C. with a bank of he said. from the industry,’’ Levitt says. ‘‘They were phones, talking on several lines at once.’’ ‘‘That’s the same argument that the ac- saying, ‘If you go forward, expect a lot of But by then Levitt’s eight-year term at the countants put forward,’’ Levitt said with a pain.’’’ S.E.C. was about to expire, and the account- sigh. ‘‘I didn’t accept it then, and I accept it

VerDate Apr 18 2002 03:09 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00034 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.052 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1571 even less today. I have to conclude it’s spe- the world, with the best accounting, represent Enron are trying to recon- cious. It’s very sad. The Administration is most integrity and most transparent struct ourselves, and I would like to missing a glorious opportunity to reform disclosures to investors, to becoming take him on on that issue, I think what this industry.’’ the laughingstock of the global econ- we are trying to do is to think out of The failure of Arthur Andersen to omy. Remember, this is the same Fed- the box and be able to respond to what provide an accurate audit of Enron for eral Government that cannot deliver a the American people would like. They several years is not a new or isolated letter on time, cannot keep out illegal want some very strong legislation that problem. All of the Big Five account- immigrants, and cannot buy a hammer answers these concerns, and that is ing firms have been implicated in for under $500. why I am supporting the Brad Sherman failed audits that cost investors bil- The amendment would create a mas- amendment. I am supporting the La- lions of dollars when earnings restate- sive bureaucracy that is almost un- Falce substitute, and I come to the ments sent stock tumbling. I have here imaginable, produce truly disastrous floor for the gentleman from Ohio (Mr. a chart that shows how failed audits results, reducing substantially the KUCINICH) because I believe that the have cost investors billions, how a quality of public audits and financial previous announcement is incorrect. company named MicroStrategy with disclosures to investors. America’s The American people want a strong PricewaterhouseCoopers, the auditor, nearly 100 million investors, and inves- oversight bureau such as the Federal lost $10 billion, $10.4 billion in lost tors from all over the world for that bureau of audits within the SEC. One market capitalization; and the list is a matter, would no longer have con- of the problems was the weakness of pretty extensive list. fidence in the audited financial state- the SEC in dealing with the debacle For-profit private auditors have an ments of our 17,000 public companies. that occurred. We are not castigating inherent conflict of interest. They are It is not hyperbole to say this amend- those hardworking employees that are hired and fired by their audit clients. If ment would do great damage to our now trying to rebuild Enron in another their draft audit does not please the capital markets; but if my colleagues name and do its business selling gas, firm they are auditing, they may lose think the solution to the Enron prob- but what we are saying is because future business unless they change lem is attacking with the creativity there was no one looking into the dark their ways to please the firm. and efficiency of the DMV, then they of night, turning the light bulb on and As a result, auditors have a strong should support this amendment. If they letting us know about these audits that incentive to sign-off on substandard fi- think, as I do, that a fair and balanced were coming in, individuals who could nancial statements rather than risk approach by experts is the best way to divest themselves of their investments, losing a client. The integrity and the protect American investors, they independent individuals who are not independence of the audit is under- should support the base bill and oppose consulting and auditing at the same mined by the profit-seeking motive of this amendment. time, not only did we bring a company the private auditing firm. Mr. Chairman, I strongly urge all down that we in Houston believe was a This amendment which I have Members to vote ‘‘no’’ on this very great corporate citizen, giving to all brought before the House would ensure dangerous proposal, and later I will tell the charities around; but we have put a the independence of the audit, and I am my colleagues what I really think. taint on corporate America. offering a substitute amendment. Actu- Mr. Chairman, I reserve the balance It is imperative that we pass the ally, this bill creates a Federal bureau of my time. Kucinich amendment, the Sherman of audits to regulate corporate Amer- Mr. KUCINICH. Mr. Chairman, I yield amendment, and the LaFalce sub- ica’s books by auditing all publicly myself such time as I may consume. stitute. traded companies. It is good to see my friend from Mr. Chairman, I rise today in support of the Americans rely on the FBI to protect Ohio’s feelings about this, particularly Kucinich substitute to H.R. 3763, the Cor- them from criminals and terrorists, in light of the fact that America’s in- porate and Auditing Accountability and Re- but who protects the American share- vestors have lost over $100 billion in a sponsibility Act. This substitute would create a new office, holders from corporate criminals? The system where people are allowed to the Federal Bureau of Audits, within the SEC. Enron scandal suggests that we need profit where they cook the books. This office would be responsible for per- audit cops, the Federal bureau of au- Mr. Chairman, I yield 2 minutes to forming annual audits on the financial state- dits. This is a conservative pro-free the gentlewoman from Texas (Ms. ments of all publicly-traded companies and re- market amendment to the Corporate JACKSON-LEE), who knows firsthand places the current system of private auditors. and Auditing Accountability, Responsi- from the constituents she represents in This new office would be afforded adequate bility, and Transparency Act because it Texas what happens under this current powers to investigate, such as the power to guarantees shareholders accurate and system. hold hearings, issue subpoenas, administer partial information about their invest- (Ms. JACKSON-LEE of Texas asked oaths and examine witnesses. Moreover, Bu- ments that requires an absolute sepa- and was given permission to revise and reau employees would be required to place ration between the auditors and com- extend her remarks.) their investments in a blind trust and they panies they audit. Ms. JACKSON-LEE of Texas. Mr. would be prohibited from taking jobs or con- Mr. Chairman, I reserve the balance Chairman, I thank the gentleman from sulting fees from any company audited by the of my time. Ohio (Mr. KUCINICH) very much for his bureau for 10 years from the time they leave Mr. OXLEY. Mr. Chairman, I rise to distinguished leadership on this issue, the agency. claim the time in opposition to the and I cannot thank the gentleman from I believe that this substitute adequately ad- amendment. New York (Mr. LAFALCE) enough for dresses the relationship between audit firms The CHAIRMAN. The gentleman the leadership he has given to this, and and companies that hire them. This Congress from Ohio (Mr. OXLEY) is recognized for may I personally on the floor of the has witnessed and investigated in detail the 10 minutes. House thank him for the assistance he conflict of interest that could occur in such a Mr. OXLEY. Mr. Chairman, I yield has given to ex-Enron employees. We partnership. myself such time as I may consume. are very much appreciative of that. Moreover, it guarantees shareholders accu- This amendment offered by my friend Let me announce to the House that rate, impartial information about their invest- from Ohio would basically create a right now we are in the midst of very, ments. Many of my constituents in the 18th Federal bureau of audits. The Kucinich very intense negotiations to simply be Congressional District were employed by amendment would actually put the able to provide a refund of the sever- Enron and deceived by shady auditing prac- Federal Government in charge of audit- ance pay that is owed over 4,000 em- tices. They are now jobless and it is the re- ing the 17,000 public companies in the ployees that was canceled out by the sponsibility of this body to see that this never United States, essentially national- bankruptcy filing over the weekend; happens again. izing the accounting profession; and and the day after it was cancelled, 4,000 I urge my colleagues to vote for the that is simply not a good idea. In fact, of my constituents and Houstonians Kucinich substitute. it is really quite dangerous. were laid out into the street. Mr. OXLEY. Mr. Chairman, I am Overnight we would go from having I believe, unlike one of the journal- pleased to yield 2 minutes to the gen- the strongest capital market system in ists who suggested that those of us who tlewoman from New York (Mrs.

VerDate Apr 18 2002 03:09 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00035 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.057 pfrm15 PsN: H24PT1 H1572 CONGRESSIONAL RECORD — HOUSE April 24, 2002 KELLY), the chairman of the Sub- reau of audits we remove this cor- of information from the corporation to committee on Oversight and Investiga- rupting influence, and appointments their investors without this inter- tions of the Committee on Financial for 12 years remove the temptation of vening government regulatory body Services. Congress to tamper with the watchdog giving its stamp of approval. Mrs. KELLY. Mr. Chairman, I rise in duties. I do not know how many of you have opposition to the amendment offered So let us remove the conflict of inter- ever had any difficulty, let us say, with by the gentleman from Ohio (Mr. est between corporations and auditing the IRS in trying to work through its KUCINICH). This amendment is not bal- firms they can hire and fire. We can maze of regulatory constraints and get anced. It goes too far, and I do not be- guarantee shareholders accurate and a direct answer overnight on whether lieve it would do anything but great impartial information about their in- or not you are filing the form properly. harm to the businesses of this country. vestments, and that is the true free This is like taking the IRS and stick- The free market is important, and it market solution to this problem. ing it in the corporate board room of is important that we do not do things The underlying bill is more than a no every corporation in America. This will that will have unintended con- no bill. It is a no no no no no no no no not work. sequences and choke that free market. no bill because does the bill help the I understand the gentleman’s con- This amendment could do away with SEC recover ill-gotten gains from cor- cerns and share those concerns. Many all accounting firms because, as the porate executives? No. Does it make innocent third parties were harmed by the failure of Enron, Global Crossing, amendment states, and I quote, ‘‘The CEOs responsible for their companies’ and perhaps others yet to be disclosed. only truly independent audit is one by public disclosures? No. Does it help the And I feel for those individuals who a government agency.’’ SEC send those who commit fraud to likely will never get any of those funds As we heard, the amendment creates jail? No. Does it bar bad executives back in their retirement accounts or the Federal bureau of audits. I guess it from serving in other companies? No. who have lost their jobs. But let us is modeled after the FBI so I can see Does it make auditors independent? make it clear, there are ongoing crimi- auditors storming into companies with No. Does it ensure the oversight board nal investigations, and prosecutions their calculators drawn, demanding in- is independent? No. Does it give the certainly to follow, because under the dividuals to freeze and drop their pen- oversight board a clear mandate? No. simplest of rules, under rule 10(b)5 of cils. Does it require auditors to be rotated? the SEC’s regulations, there was fraud The amendment seems to envision No. Does it close the revolving doors committed. People are going to jail. that the most efficient and effective between accountants and their clients? What we are trying to do is to create auditor would be the U.S. Government. No. a manner in which a free flow of accu- Somehow I just cannot agree with The underlying bill could be termed rate information can be given to inves- that, and I think this amendment is the Ken Lay Protection Act. We can no tors to make quality decisions. That is important for us to take a good look at longer have the fox guarding the hen what the underlying bill will do. for its unintended consequences. house. The Kucinich amendment fixes Mr. KUCINICH. Mr. Chairman, I yield I think the author is looking to com- the problem. myself 1 minute. bine the same level of efficiency to ac- Americans are urged to own a piece b 1300 counting that HUD brought to housing, of the rock; invest in corporate Amer- perhaps. I imagine that the author is The CHAIRMAN. The Chair advises ica. We have gone from a psychology of looking for the effectiveness of the IRS Members that the gentleman from Ohio owning a piece of the rock to owning a in its customer service. (Mr. OXLEY) has 6 minutes remaining piece of the Brooklyn Bridge. Because Finally, with the accounting exper- and the gentleman from Ohio (Mr. what is happening is that investors are tise of the Department of Defense with KUCINICH) has 21⁄2 minutes remaining. not being given accurate information $100 hammers, I am sure our corpora- Mr. OXLEY. Mr. Chairman, I would by accountants who have an inherent tions will be in the best hands possible. inquire of the Chair whether the gen- conflict of interest. This amendment does not under- tleman from Ohio has further speakers. It is said the pen is mightier than the stand, I think, the concepts of reason- Mr. KUCINICH. Right here. I will be sword. Well, this pencil is mightier able, responsive response from our gov- closing. Mr. Chairman, I have the right than the free market, apparently, be- ernment, and I think this amendment to close on this? cause a pencil can change the nature of needs to be defeated. I urge Members The CHAIRMAN. The Chair will ad- the free market by misstating earnings on both sides of the aisle to think vise the Member that the gentleman and then restating earnings and having about this and join us in the opposition from Ohio (Mr. OXLEY) has the right to the value of the stock drop. And then to the amendment. close. what happens to investors? Nothing. Mr. KUCINICH. Mr. Chairman, I yield Mr. KUCINICH. Mr. Chairman, I re- They lose it all. myself such time as I may consume. serve the balance of my time. We need to take a stand here. A free I want to point out that Arthur An- Mr. OXLEY. Mr. Chairman, I yield 2 market requires accurate information dersen not only participated in a fraud, minutes to the gentleman from Lou- to operate efficiently. My amendment it manipulated this Congress to ensure isiana (Mr. BAKER). is the only amendment that guarantees that the firm could participate in other Mr. BAKER. Mr. Chairman, I thank accurate information for investors, and my amendment is profoundly conserv- frauds with deceptive company execu- the gentleman for yielding me this ative. It is totally dedicated to pro- tives. time. tecting and conserving the property of Mr. Chairman, I yield 2 minutes to The Kucinich amendment is an inter- esting one in its practical effect. We investors. the gentleman from California (Mr. Who is taking a stand here for the in- are going to create a government enti- FILNER). vestors, to make sure that investors ty that is going to have the sole and Mr. FILNER. Mr. Chairman, I thank get information that is accurate and specific authority to evaluate the fi- the gentleman from Ohio (Mr. upon which they can make decisions on KUCINICH) for yielding me the time. nancial condition of 17,000 public cor- how they are going to spend their I rise in support of the Kucinich and porations. Now, if anyone has tried to money? Progressive Caucus substitute to H.R. read a single financial statement and Mr. Chairman, I reserve the balance 3763. This substitute restores integrity understand it and then evaluate its ac- of my time. to investor-owned companies by ensur- curacy, one can pretty quickly deter- Mr. OXLEY. Mr. Chairman, I under- ing that the investors and taxpayers mine that this is a responsibility be- stand I have the right to close and I and employees get an accurate assess- yond any magnitude that anyone could plan to do so, and would so indicate to ment of a corporation. possibly comprehend. my friend. We know that the Enron debacle The amendment, I am sure, is based Mr. KUCINICH. How much time re- demonstrated how corrupting the so- on a good-faith effort to be responsive mains, Mr. Chairman? called free market is when corporate to the Enron crisis, but this would be The CHAIRMAN. The gentleman officials and auditing firms are inter- the crisis of all crises. We would have a from Ohio (Mr. KUCINICH) has 11⁄2 min- twined. When we create the Federal bu- complete inability to have a free flow utes remaining, the gentleman from

VerDate Apr 18 2002 03:09 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00036 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.059 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1573 Ohio (Mr. OXLEY) has 4 minutes re- That is what this amendment is Lee Pascrell Stark maining. about. The free market economy again Lewis (GA) Pastor Thompson (MS) McDermott Payne Waters Mr. KUCINICH. Mr. Chairman, I con- requires accurate information to oper- McKinney Roybal-Allard Watson (CA) tinue to reserve the balance of my ate efficiently. And so I ask all of my Mink Sanders Woolsey time, unless the gentleman is going to colleagues, where is your commitment Olver Schakowsky Owens Solis close right now. to free markets today? Where will you Mr. OXLEY. I am prepared to close. stand when your constituents ask what NOES—381 Mr. LAFALCE. Mr. Chairman, will happened to my investment; why did Ackerman Dicks Kennedy (MN) the gentleman from Ohio yield me 1 they lie to me; and why did you not do Aderholt Dingell Kerns Akin Doggett Kildee minute? something about it? Allen Dooley Kilpatrick Mr. OXLEY. Mr. Chairman, I am Mr. OXLEY. Mr. Chairman, I yield Andrews Doolittle Kind (WI) pleased to yield 1 minute to the gen- myself the balance of my time. Armey Doyle King (NY) tleman from New York (Mr. LAFALCE). Baca Dreier Kingston I would welcome my friend from Ohio Bachus Duncan Kirk Mr. LAFALCE. Mr. Chairman, I want to the conservative ranks if I really Baird Dunn Kleczka to commend the gentleman from Ohio thought this amendment was conserv- Baker Edwards Knollenberg (Mr. KUCINICH) for his good-faith effort ative in nature, but it is hardly that. Baldacci Ehlers Kolbe to deal with the problem, and if we Ballenger Ehrlich LaFalce This is a big government solution. It is Barcia Emerson LaHood were starting anew, I might well favor a one-size-fits-all solution. It is essen- Barr Engel Lampson this approach. tially the neutron bomb. I guess his Barrett Eshoo Langevin We do have examiners for our banks, Bartlett Etheridge Lantos message is, if you have lost faith in the Barton Everett Larsen (WA) our national banks and our State free market, you need to have faith in Bass Farr Larson (CT) banks, and they work for the govern- big government. Becerra Fattah Latham ment. We do have examiners for our I do not think people are ready to Bentsen Ferguson LaTourette thrifts, and they work for the govern- Bereuter Flake Leach make that leap. I think they under- Berman Fletcher Levin ment. We do have examiners for our stand intuitively, based on their in- Berry Foley Lewis (CA) credit unions, and they work for the vestments, that they trust the free Biggert Forbes Lewis (KY) government. It works. And the reason Bilirakis Ford Linder market, and they trust that our mar- Bishop Fossella Lipinski we had examiners for the government kets are the most open and efficient Blumenauer Frelinghuysen LoBiondo is because we trusted them. We markets in the world, represented by Blunt Frost Lofgren thought that they would be rep- the American marketplace. That is Boehlert Gallegly Lowey resenting the public interest. Boehner Ganske Lucas (KY) really the message. Bonilla Gekas Lucas (OK) We devised this system in an era And, indeed, people have changed Bono Gephardt Luther when most people put almost all of dramatically. Probably just a few years Boozman Gibbons Lynch Borski Gillmor Maloney (CT) their money in banks, in thrifts, in ago when I first came to Congress, two- credit unions. That is no longer the Boswell Gilman Maloney (NY) thirds of people’s savings were in bank Boucher Gonzalez Manzullo case. Now, most people are putting accounts and only a third in equities. Boyd Goode Markey most of their hard-earned money in Brady (PA) Goodlatte Mascara That is totally turned around now. We Brady (TX) Gordon Matheson publicly traded corporations. have become a Nation of investors from And while I suspect the amendment Brown (FL) Goss Matsui a Nation of savers, and that is a posi- Brown (OH) Graham McCarthy (MO) of the gentleman from Ohio (Mr. tive development. We have 46 million Brown (SC) Granger McCarthy (NY) Bryant Graves McCollum KUCINICH) goes further than we can po- in 401(k) plans that are invested in litically do at this juncture, I com- Burr Green (WI) McCrery those accounts. We have over half of Burton Greenwood McGovern mend him for at least raising the issue. the households today invested in equi- Buyer Grucci McHugh Mr. KUCINICH. Mr. Chairman, I yield ties. Callahan Gutknecht McInnis myself the balance of my time. Calvert Hall (OH) McIntyre We have the most robust market in Let us go to middle America, where Camp Hall (TX) McKeon the history of the world. Let us not Cannon Hansen McNulty men and women who work hard all change that. Let us not endanger that Cantor Harman Meehan their lives to establish some kind of a Capito Hastings (WA) Meek (FL) free market with the Kucinich amend- financial nest egg put their faith not Capps Hayes Meeks (NY) ment. I ask the Members to vote Capuano Hayworth Menendez only in the market, but in this coun- against the Kucinich amendment and Cardin Hefley Mica try, and invest in various corporate en- for the underlying bill. Carson (IN) Herger Millender- terprises. Mr. and Mrs. Middle America Carson (OK) Hill McDonald Mr. Chairman, I yield back the bal- are the backbone of this economy. Castle Hilleary Miller, Dan ance of my time. Chabot Hinchey Miller, Gary They work, they help produce taxes for The CHAIRMAN. All time has ex- Chambliss Hinojosa Miller, George this country, and they help produce Clay Hobson Miller, Jeff pired. wealth that can continue to grow and Clement Hoeffel Mollohan The question is on the amendment in Coble Hoekstra Moore make America the strong country the nature of a substitute offered by Collins Holden Moran (KS) which it is. Combest Holt Moran (VA) What happens when they cannot have the gentleman from Ohio (Mr. Condit Honda Morella confidence that the earnings state- KUCINICH). Cooksey Hooley Murtha Costello Horn Myrick ments of the companies in which they The question was taken; and the Chairman announced that the noes ap- Cox Hostettler Nadler are investing are real? What if there is Coyne Hoyer Napolitano no credibility for a market that one peared to have it. Cramer Hulshof Neal RECORDED VOTE Crane Hunter Nethercutt day goes up and the other day goes Crenshaw Hyde Ney down because people are lying about Mr. KUCINICH. Mr. Chairman, I de- Crowley Inslee Northup their books? mand a recorded vote. Cubin Isakson Norwood There is something that is at stake A recorded vote was ordered. Culberson Israel Nussle Cummings Issa Oberstar here that is much larger than this bill The vote was taken by electronic de- Cunningham Istook Obey that is before the House for debate. vice, and there were—ayes 39, noes 381, Davis (CA) Jefferson Ortiz And what is at stake here is the con- not voting 14, as follows: Davis (FL) Jenkins Osborne Davis, Jo Ann John Ose fidence that people need to have in our [Roll No. 107] Davis, Tom Johnson (CT) Otter free market system. And the only way AYES—39 Deal Johnson (IL) Oxley DeFazio Johnson, E. B. Pallone you can rescue that in a climate where Abercrombie Davis (IL) Hilliard Delahunt Johnson, Sam Paul the accounting industry has basically Baldwin Evans Jackson (IL) DeLauro Jones (NC) Pelosi Berkley Filner Jackson-Lee stolen a march on regulators is to re- DeLay Jones (OH) Pence Bonior Frank (TX) trieve the role of the government in as- DeMint Kanjorski Peterson (MN) Clayton Green (TX) Kaptur Deutsch Keller Peterson (PA) suring that people’s investments are Clyburn Gutierrez Kennedy (RI) Diaz-Balart Kelly Petri going to be protected. Conyers Hastings (FL) Kucinich

VerDate Apr 18 2002 03:09 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00037 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.061 pfrm15 PsN: H24PT1 H1574 CONGRESSIONAL RECORD — HOUSE April 24, 2002

Phelps Scott Thomas (b) TABLE OF CONTENTS.— (5) NOMINATIONS.—In making appointments Pickering Sensenbrenner Thompson (CA) Sec. 1. Short title; table of contents. of members, the Chairman of the public reg- Pitts Serrano Thornberry ulatory organization and the Chairman of Platts Sessions Sec. 2. Auditor oversight. Thurman Sec. 3. Improper influence on conduct of au- the Commission shall consult with, and Pombo Shadegg Tiahrt Pomeroy Shaw dits. make appointments from nominations re- Tiberi ceived from— Portman Shays Tierney Sec. 4. Real-time disclosure of financial in- (A) institutional investors; Price (NC) Sherman Toomey formation. Putnam Sherwood Towns Sec. 5. Insider trades during pension fund (B) public employee pension plans; Quinn Shimkus Turner blackout periods prohibited. (C) pension plans organized pursuant to the Radanovich Shows Udall (CO) Sec. 6. Improved transparency of corporate Employee Retirement Income Security Act Rahall Shuster disclosures. of 1974; and Ramstad Simmons Udall (NM) Rangel Simpson Upton Sec. 7. Improvements in reporting on insider (D) pension plans organized pursuant to Rehberg Skeen Velazquez transactions and relationships. the Taft-Hartley Act. Reyes Skelton Visclosky Sec. 8. Enhanced oversight of periodic dis- (6) TERMS.—The members of the public reg- Reynolds Slaughter Vitter closures by issuers. ulatory organization shall have terms of 4 Rivers Smith (MI) Walden Sec. 9. Retention of records. years, except that the Chairman of the pub- Roemer Smith (NJ) Walsh Sec. 10. Removal of unfit corporate officers. lic regulatory organization and the Chair- Rogers (KY) Smith (TX) Wamp Sec. 11. Disgorgement required. man of the Commission shall adopt proce- Rogers (MI) Snyder Watkins (OK) Sec. 12. CEO and CFO accountability for dis- dures for staggering the initial terms of the Rohrabacher Souder Watt (NC) closure. Ros-Lehtinen Spratt members first so appointed to provide for a Watts (OK) Sec. 13. Securities and Exchange Commis- reasonable overlapping of the terms of office Ross Stearns Waxman Rothman Stenholm sion authority to provide relief. of subsequently elected members. Weldon (FL) Sec. 14. Authorization of appropriations of Roukema Strickland Weldon (PA) (7) FULL-TIME BASIS.—The members of the Royce the Securities and Exchange Stump Weller public regulatory organization shall serve on Rush Stupak Wexler Commission. a full-time basis, severing all business ties Ryan (WI) Sullivan Whitfield Sec. 15. Analyst conflicts of interest. with former firms or employers prior to be- Ryun (KS) Sununu Sec. 16. Independent directors. ginning service on the public regulatory or- Sabo Sweeney Wicker Wilson (NM) Sec. 17. Enforcement of audit committee ganization. Sanchez Tancredo governance practices. Sandlin Tanner Wilson (SC) (8) RULES.—Following selection of the ini- Sawyer Tauscher Wolf Sec. 18. Review of corporate governance tial members of the public regulatory orga- Saxton Tauzin Wu practices. nization, the public regulatory organization Schaffer Taylor (MS) Wynn Sec. 19. Study of enforcement actions. shall propose and adopt rules, which shall Schiff Taylor (NC) Young (AK) Sec. 20. Study of credit rating agencies. provide for— Schrock Terry Young (FL) Sec. 21. Study of investment banks (A) the operation and administration of Sec. 22. Study of model rules for attorneys NOT VOTING—14 the public regulatory organization, including of issuers. the compensation of the members of the pub- Blagojevich Houghton Smith (WA) Sec. 23. Enforcement authority. DeGette Pryce (OH) Thune lic regulatory organization, which shall be at Sec. 24. Exclusion for investment compa- a level comparable to similar professional English Regula Traficant nies. Gilchrest Riley Weiner positions in the private sector; Hart Rodriguez Sec. 25. Definitions. (B) the appointment and compensation of SEC. 2. AUDITOR OVERSIGHT. b 1333 such employees, attorneys, and consultants (a) CERTIFIED FINANCIAL STATEMENT RE- as may be necessary or appropriate to carry Messrs. BACA, KINGSTON, SAXTON, QUIREMENTS.—If a financial statement is re- out the public regulatory organization’s Mrs. DAVIS of California, Messrs. quired by the securities laws or any rule or functions under this section; CUMMINGS, GEORGE MILLER of regulation thereunder to be certified by an (C) the registration of public accounting California, BURR of North Carolina independent public or certified accountant, firms with the public regulatory organiza- an accountant shall not be considered to be and Ms. CARSON of Indiana changed tion pursuant to subsections (d); and qualified to certify such financial statement, (D) the matters described in subsections (e) their vote from ‘‘aye’’ to ‘‘no.’’ and the Securities and Exchange Commis- and (f). So the amendment in the nature of a sion shall not accept a financial statement (9) FUNDING OF THE PUBLIC REGULATORY OR- substitute was rejected. certified by an accountant, unless such ac- GANIZATION.— The result of the vote was announced countant— (A) SELF-FINANCING.—The public regu- as above recorded. (1) is subject to a system of review by a latory organization shall establish rules for Stated against: public regulatory organization that complies the assessment and collection of fees suffi- Mr. ENGLISH. Mr. Speaker, on rollcall vote with the requirements of this section and the cient to recover the costs and expenses of the No. 107, I was unavoidably detained at an rules prescribed by the Commission under public regulatory organization and to permit event with several of my colleagues and this section; and the public regulatory organization to oper- (2) has not been determined in the most re- missed the vote. Had I been present, I would ate on a self-financing basis. cent review completed under such system to (B) ASSESSMENT AND COLLECTION.—The fees have voted ‘‘no.’’ be not qualified to certify such a statement. shall be assessed on issuers that file any fi- Mr. WEINER. Mr. Speaker, on Wednesday, (b) ESTABLISHMENT OF PRO.— nancial statements, reports, or other docu- April 24, 2002, I was unavoidably detained (1) ESTABLISHMENT REQUIRED.—Not later ments with the Commission under the secu- and missed rollcall vote No. 107. Had I been than 90 days after the date of enactment of rities laws that must be certified by a public present, I would have voted ‘‘no.’’ this section, the Commission shall establish accounting firm. The fees shall be collected The CHAIRMAN. It is now in order to a public regulatory organization to perform through the public accounting firm that cer- consider amendment No. 5 printed in the duties set forth in this section. tifies such statement, report, or document. House Report 107–418. (2) CHAIRMAN.—The Chairman of the public (C) PAYMENT A CONDITION OF REGISTRA- regulatory organization shall be appointed TION.—The public regulatory organization AMENDMENT IN THE NATURE OF A SUBSTITUTE by the Commission for a term of 5 years. shall terminate or suspend the registration NO. 5 OFFERED BY MR. LAFALCE (3) APPOINTMENT OF PUBLIC REGULATORY OR- under subsection (d) of any public account- Mr. LAFALCE. Mr. Chairman, I offer GANIZATION MEMBERS.—There shall be 6 addi- ing firm that fails to collect and transmit a an amendment in the nature of a sub- tional public regulatory organization mem- fee assessed under this subsection. stitute. bers, who shall be selected jointly by the (c) PROHIBITION ON THE OFFER OF BOTH The CHAIRMAN. The Clerk will des- Chairman of the public regulatory organiza- AUDIT AND CONSULTING SERVICES.— ignate the amendment in the nature of tion and the Chairman of the Commission. (1) MODIFICATION OF REGULATIONS RE- a substitute. (4) ACCOUNTANT MEMBERS.—Up to 2 of the QUIRED.—The Commission shall revise its The text of the amendment in the na- members may be present or former certified regulations pertaining to auditor independ- ture of a substitute is as follows: public accountants, provided such mem- ence to require that an accountant shall not bers— be considered independent with respect to an Amendment in the nature of a substitute (A) are not currently in public practices; audit client if the accountant provides to the No. 5 offered by Mr. LAFALCE: (B) have not been a person associated with client the following nonaudit services, sub- Strike all after the enacting clause and in- a public accounting firm for a period of at ject to such conditions and exemptions as sert the following: least 3 years; and the Commission shall prescribe: SECTION 1. SHORT TITLE; TABLE OF CONTENTS. (C) agree to not be a person associated (A) financial information system design or (a) SHORT TITLE.—This Act may be cited as with a public accounting firm or to receive implementation; or the ‘‘Corporate and Auditing Accountability, consulting fees from a public accounting (B) internal audit services. Responsibility, and Transparency Act of firm for a period of 5 years after leaving the (2) AUDIT COMMITTEE APPROVAL OF 2002’’. public regulatory organization. NONAUDIT SERVICES.—The Commission shall

VerDate Apr 18 2002 03:09 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00038 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.029 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1575 revise its regulations pertaining to auditor Commission under any Federal securities (B) by the direct performance of quality re- independence to require that— law, unless such firm is registered with the views and inspections of audits in accordance (A) an accountant shall not be considered public regulatory organization. with the requirements of paragraphs (3) and to be independent for purposes of certifying (2) APPLICATION FOR REGISTRATION.—A pub- (4); and the financial statements or other documents lic accounting firm may be registered under (C) by the supervision and oversight of peer of an issuer required to be filed with the this subsection by filing with the public reg- review organizations in accordance with the Commission under the securities laws for ulatory organization an application for reg- requirements of paragraph (5). any fiscal year of the issuer if, during such istration in such form and containing such (2) AUDIT QUALITY STANDARDS.— fiscal year, the accountant provides any information as the public regulatory organi- (A) IN GENERAL.—The public regulatory or- nonaudit services unless the provision of zation, by rule, may prescribe. Each applica- ganization shall, by rule, establish quality such nonaudit services was approved in ad- tion shall include— standards applicable to the conduct of audit vance by the audit committee or, in the ab- (A) the names of all clients of the public services provided by public accounting firms. sence of an audit committee, the equivalent accounting firm for which the firm furnishes Such standards shall include— board committee or the entire board of di- accountant’s reports on financial state- (i) independence standards; rectors; and ments, reports, or other documents filed (ii) quality control standards; (B) in approving such services, the audit with the Commission; (iii) professional and ethical standards; and committee shall evaluate the impact of the (B) financial information of the public ac- (iv) such other standards as the public reg- provision of such services on the independ- counting firm for its most recent fiscal year, ulatory organization determines to be nec- ence of the auditor. including its annual revenues from account- essary to carry out the objectives specified (3) REVIEW OF PROHIBITED NONAUDIT SERV- ing and auditing services, its assets, and its in paragraph (1). ICES.—The Commission is authorized to re- liabilities; (B) SPECIFIC CONTENTS OF STANDARDS.—In view the impact on the independence of audi- (C) a statement of the public accounting establishing the quality standards required tors of the scope of services provided by firm’s policies and procedures with respect by subparagraph (A), the public regulatory auditors to issuers in order to determine to quality control of its accounting and au- organization shall also establish— whether the list of prohibited nonaudit serv- diting practice; (i) procedures for the monitoring by public ices under paragraph (1) shall be modified. In (D) information relating to criminal, civil, accounting firms of their compliance with conducting such review, the Commission or administrative actions or formal discipli- professional ethical standards established by shall consider the impact of the provision of nary proceedings pending against such firm, the public regulatory organization, including a service on an auditor’s independence where or any person associated with such firm, in its independence from its audit clients; provision of the service creates a conflict of connection with an accountant’s report fur- (ii) procedures for the assignment of per- interest with the audit client. nished by such firm; sonnel to audit engagements; (4) ADDITIONS BY RULE.—After conducting (E) a list of persons associated with the (iii) procedures for consultation within a the review required by paragraph (3) and at public accounting firm who are certified pub- public accounting firm or with other ac- any other time, the Commission may, by lic accountants, including any State profes- countants relating to accounting and audit- rule consistent with the protection of inves- sional license or certification number for ing questions; tors and the public interest, modify the list (iv) procedures for the supervision of audit each such person; and of prohibited nonaudit services under para- work; (F) such other information that is reason- graph (1). (v) procedures for the review of decisions ably related to the public regulatory organi- (5) REPORT.—The Commission shall report to accept and retain audit clients; zation’s responsibilities as the public regu- to the Committee on Financial Services of (vi) procedures for the internal inspection latory organization considers necessary or the House of Representatives and the Com- of the public accounting firms own compli- appropriate. mittee on Banking, Housing, and Urban Af- ance with such policies and procedures; (3) PERIODIC REPORTS.—Once in each year, fairs of the Senate on its conduct of any re- (vii) requirements for public accounting or more frequently as the public regulatory views as required by this section. The report firms to prepare and maintain for a period of organization, by rule, may prescribe, each shall include a discussion of regulatory or no less than 7 years, audit work papers and public accounting firm registered with the legislative steps that are recommended or other information related to any audit re- that may be necessary to address concerns public regulatory organization shall submit port, in sufficient detail to support the con- identified in the study. reports to the public regulatory organization clusions reached in an audit report issued by updating the information contained in its (6) DEFINITIONS.—For purposes of this sub- a public accounting firm; and section: application for registration and containing (viii) procedures establishing ‘‘concurring’’ such additional information that is reason- (A) FINANCIAL INFORMATION SYSTEM DESIGN or ‘‘second’’ partner review systems for the ably related to the public regulatory organi- OR IMPLEMENTATION.—The term ‘‘financial evaluation and review of audit work by a information systems design or implementa- zation’s responsibilities as the public regu- partner that is not in charge of the conduct tion’’ means designing or implementing a latory organization, by rule, may prescribe. of the audit. hardware or software system used to gen- (4) EXEMPTIONS.—The Commission, by rule (3) DIRECT REVIEWS OF PUBLIC ACCOUNTING erate information that is significant to the or order, upon its own motion or upon appli- FIRMS.—The public regulatory organization audit client’s financial statements taken as cation, may conditionally or unconditionally shall, by rule, establish procedures for the a whole, not including services an account- exempt any public accounting firm or any conduct of a continuing program of inspec- ant performs in connection with the assess- accountant’s report, or any class of public tions of each public accounting firm reg- ment, design, and implementation of inter- accounting firms or any class of account- istered with the public regulatory organiza- nal accounting controls and risk manage- ant’s reports, from any provisions of this tion to assess compliance by such firm, and ment controls. section or the rules or regulations issued by persons associated with such firm, with hereunder, if the Commission finds that such (B) INTERNAL AUDIT SERVICES.—The term applicable provisions of this Act, the securi- ‘‘internal audit services’’ means internal exemption is consistent with the public in- ties laws, the rules and regulations there- audit services for an audit client or an affil- terest, the protection of investors, and the under, the rules adopted by the public regu- iate of an audit client, not including non- purposes of this section. latory organization, and professional stand- recurring evaluations of discrete items or (5) CONFIDENTIALITY.—The public regu- ards. Except as provided in paragraph (5), the programs and operational internal audits un- latory organization may, by rule, designate public regulatory organization shall annu- related to the internal accounting controls, portions of the filings required pursuant to ally inspect each public accounting firm that financial systems, or financial statements. paragraphs (2) and (3) as privileged and con- audits more than 100 issuers on an ongoing fidential. This paragraph shall be considered (7) DEADLINE FOR RULEMAKING.—The Com- annual basis, to the extent practicable, and mission shall— to be a statute described in section all other public accounting firms no less (A) within 90 days after the date of enact- 552(b)(3)(B) of title 5, United States Code, for than at least once every 3 years. In con- ment of this Act, propose, and purposes of that section 552. ducting such inspections, the public regu- (B) within 270 days after such date, pre- (e) DUTIES REGARDING QUALITY CONTROL.— latory organization shall, among other scribe, (1) OBJECTIVES; ATTAINMENT.—The public things, inspect selected audit and review en- the revisions to its regulations required by regulatory organization shall seek to pro- gagements. The review shall include evalua- this subsection. mote a high level of professional conduct tions of the firm’s quality control procedures (d) REGISTRATION WITH PUBLIC REGULATORY among public accounting firms registered and compliance with all legal and ethical re- ORGANIZATION.— with the public regulatory organization, to quirements. In connection with each review, (1) REGISTRATION REQUIRED.—Beginning 1 improve the quality of audit services pro- the public regulatory organization shall pre- year after the date on which all initial mem- vided by such firms, and, in general, to pro- pare a report of its findings and such report, bers of the public regulatory organization tect investors and promote the public inter- accompanied by any letter of comments by have been selected in accordance with sub- est. The public regulatory organization shall the public regulatory organization or re- section (b), it shall be unlawful for a public attain these objectives— viewer and any letter of response from the accounting firm to furnish an accountant’s (A) by establishing standards regarding the firm under review, shall be made available to report on any financial statement, report, or performance of financial audits in accord- the public. The public regulatory organiza- other document required to be filed with the ance with the requirements of paragraph (2); tion shall take any appropriate disciplinary

VerDate Apr 18 2002 03:09 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00039 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.031 pfrm15 PsN: H24PT1 H1576 CONGRESSIONAL RECORD — HOUSE April 24, 2002 or remedial action based on its findings after eral securities laws, the rules and regula- regulatory organization. Attendance of wit- completion of such review and an oppor- tions issued thereunder, the rules adopted by nesses and the production of any records tunity for a hearing. the public regulatory organization, or profes- may be required from any place in the (4) QUALITY REVIEW OF INDIVIDUAL AUDITS.— sional standards, whether such act, practice, United States or any State at any designated The public regulatory organization shall, by or omission is the subject of a criminal, place of hearing. Enforcement of a subpoena rule, establish procedures for the conduct of civil, or administrative action, or a discipli- issued by the public regulatory organization, direct inspection and review of individual nary proceeding, or otherwise is brought to or an officer of the public regulatory organi- audits of issuers and standards under which the attention of the public regulatory orga- zation, pursuant to this subparagraph shall it will evaluate audit service quality. A find- nization. occur in the manner provided for in section ing by the public regulatory organization (B) POWERS OF PUBLIC REGULATORY ORGANI- 21(c). Examination of witnesses subpoenaed that an individual audit of an issuer did or ZATION.—For purposes of an investigation pursuant to this subparagraph shall be con- did not meet the standards of the public reg- under this paragraph, the public regulatory ducted before an officer authorized to admin- ulatory organization with respect to the organization may, in addition to such other ister oaths by the laws of the United States quality of the audit shall not be construed in actions as the public regulatory organization or of the place where the examination is any action arising out of the securities laws determines to be necessary or appropriate— held. as indicative of compliance or noncompli- (i) require the testimony of any person as- (iii) REFERRALS TO COMMISSION.—The pub- ance with the securities laws or with any sociated with a public accounting firm reg- lic regulatory organization may refer any in- standard of liability arising thereunder. istered with the public regulatory organiza- vestigation to the Commission, as the public (5) USE OF PROFESSIONAL PEER REVIEW OR- tion, with respect to any matter which the regulatory organization deems appropriate. GANIZATIONS.— public regulatory organization considers rel- (E) IMMUNITY FROM CIVIL LIABILITY.—An (A) OPTION TO UTILIZE PEER REVIEW ORGANI- evant or material to the investigation; employee of the public regulatory organiza- ZATIONS.—The public regulatory organiza- (ii) require the production of audit tion engaged in carrying out an investiga- tion may, by rule, establish requirements for workpapers and any other document or in- tion or disciplinary proceeding under this the use of peer review organizations for the formation in the possession of a public ac- section shall be immune from any civil li- purposes of conducting the continuing pro- counting firm registered with the public reg- ability arising out of such investigation or gram of inspections to assess compliance as ulatory organization, or any person associ- disciplinary proceeding in the same manner required by paragraph (3) of each public ac- ated with such firm, wherever domiciled, and to the same extent as an employee of the counting firm registered with the public reg- that the public regulatory organization con- Federal Government in similar cir- ulatory organization. Such rule shall provide siders relevant or material to the investiga- cumstances. for appropriate oversight and supervision of tion, and may examine the books and records (3) DISCIPLINARY PROCEDURES.— such peer review organization by the public of such firm to verify the accuracy of any (A) DECISION TO DISCIPLINE.—In a pro- regulatory organization to ensure that such documents or information so supplied; and ceeding by the public regulatory organiza- inspections meet the requirements of such (iii) request the testimony of any person tion to determine whether a public account- paragraph. and the production of any document in the ing firm, or a person associated with such (B) PENALTIES.—If the public regulatory possession of any person, including a client firm, should be disciplined, the public regu- organization establishes requirements for of a public accounting firm registered with latory organization shall bring specific the conduct of peer reviews under subpara- the public regulatory organization, that the charges, notify such firm or person of the graph (A), the violation by a public account- public regulatory organization considers rel- charges, give such firm or person an oppor- ing firm or a person associated with such a evant or material to the investigation. tunity to defend against such charges, and firm of a rule of the peer review organization (C) SUSPENSION OR REVOCATION OF REG- keep a record of such actions. to which the firm belongs shall constitute ISTRATION FOR NONCOMPLIANCE.—The refusal (B) SANCTIONS.—If the public regulatory grounds for— of any person associated with a public ac- organization, after conducting a review and (i) the imposition of disciplinary sanctions counting firm registered with the public reg- providing an opportunity for a hearing, finds by the public regulatory organization pursu- ulatory organization to testify, or the re- that a public accounting firm, or a person as- ant to subsection (g); and fusal of any such person to produce docu- sociated with such firm, has engaged in any (ii) denial to the public accounting firm or ments or otherwise cooperate with the public act, practice, or omission in violation of the person associated with such firm of the privi- regulatory organization, in connection with Federal securities laws, the rules or regula- lege of appearing or practicing before the an investigation or hearing under this sec- tions issued thereunder, the rules adopted by Commission. tion, shall be cause for suspending or barring the public regulatory organization, or profes- (6) CONFIDENTIALITY.—Except as otherwise such person from associating with a public sional standards, the public regulatory orga- provided by this section, all reports, memo- accounting firm registered with the public nization may impose such disciplinary sanc- randa, and other information provided to the regulatory organization, or such other ap- tions as it deems appropriate, including— public regulatory organization solely for propriate sanction authorized by paragraph (i) temporary or permanent revocation or purposes of paragraph (3) or (4), or to a peer (3)(B) as the public regulatory organization suspension of registration under this section; review organization certified by the public shall determine. The refusal of any public (ii) limitation of activities, functions, and regulatory organization, shall be confiden- accounting firm registered with the public operations; tial, unless such confidentiality is expressly regulatory organization to produce docu- (iii) fine; waived by the person or entity that created ments or otherwise cooperate with the public (iv) censure; or provided the information. regulatory organization, in connection with (v) in the case of a person associated with (f) DISCIPLINARY DUTIES OF PUBLIC REGU- an investigation or hearing under this sec- a public accounting firm, suspension or bar LATORY ORGANIZATION.—The public regu- tion, shall be cause for the suspension or rev- from being associated with a public account- latory organization shall have the following ocation of the registration of such firm, or ing firm registered with the public regu- duties and powers: such other appropriate sanction authorized latory organization; and (1) INVESTIGATIONS AND DISCIPLINARY PRO- by paragraph (3)(B) as the public regulatory (vi) any such other disciplinary sanction or CEEDINGS.—The public regulatory organiza- organization shall determine. remedial action as the public regulatory or- tion shall establish fair procedures for inves- (D) REFERRAL TO COMMISSION.— ganization has established by rule that the tigating and disciplining public accounting (i) IN GENERAL.—If the public regulatory public regulatory organization determines to firms registered with the public regulatory organization is unable to conduct or com- be appropriate to prevent the recurrence of organization, and persons associated with plete an investigation or hearing under this the violation. such firms, for violations of the Federal se- section because of the refusal of any client of (C) STATEMENT REQUIRED.—A determina- curities laws, the rules or regulations issued a public accounting firm registered with the tion by the public regulatory organization to thereunder, the rules adopted by the public public regulatory organization, or any other impose a disciplinary sanction shall be sup- regulatory organization, or professional person, to testify, produce documents, or ported by a written statement by the public standards in connection with the preparation otherwise cooperate with the public regu- regulatory organization that shall be made of an accountant’s report on a financial latory organization in connection with such available to the public and that sets forth— statement, report, or other document filed investigation, the public regulatory organi- (i) any act or practice in which the public with the Commission. zation shall report such refusal to the Com- accounting firm or person associated with (2) INVESTIGATION PROCEDURES.— mission. such firm has been found to have engaged, or (A) IN GENERAL.—The public regulatory or- (ii) INVESTIGATION.—The Commission may which such firm or person has been found to ganization may conduct an investigation of designate the public regulatory organization have omitted; any act, practice, or omission by a public ac- or one or more officers of the public regu- (ii) the specific provision of the Federal se- counting firm registered with the public reg- latory organization who shall be empowered, curities laws, the rules or regulations issued ulatory organization, or by any person asso- in accordance with such procedures as the thereunder, the rules adopted by the public ciated with such firm, in connection with the Commission may adopt, to subpoena wit- regulatory organization, or professional preparation of an accountant’s report on a fi- nesses, compel their attendance, and require standards which any such act, practice, or nancial statement, report, or other docu- the production of any books, papers, cor- omission is deemed to violate; and ment filed with the Commission that may respondence, memoranda, or other records (iii) the sanction imposed and the reasons violate any applicable provision of the Fed- relevant to any investigation by the public therefor.

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(D) PROHIBITION ON ASSOCIATION.—It shall (iii) HEARINGS PUBLIC.—Except as other- the public regulatory organization, in inves- be unlawful— wise ordered by the public regulatory organi- tigating the matter and in presenting the (i) for any person as to whom a suspension zation on its own motion or on the motion of evidence justifying the charges in any hear- or bar is in effect willfully to be or to be- a party, all hearings under this paragraph ing pursuant to paragraph (3)(A). come associated with a public accounting shall be open to the public. (C) STATE SANCTIONS PERMITTED.—If the firm registered with the public regulatory (B) ADMISSIBILITY.— public regulatory organization or the Com- organization, in connection with the prepa- (i) IN GENERAL.—Except as provided in sub- mission imposes a sanction upon a public ac- ration of an accountant’s report on any fi- paragraph (C), all reports, memoranda, and counting firm or person associated with such nancial statement, report, or other docu- other information prepared, collected, or re- a firm, and that determination either is not ment filed with the Commission, without the ceived by the public regulatory organization, subjected to judicial review or is upheld on consent of the public regulatory organiza- the deliberations and other proceedings of judicial review, a State licensing public reg- tion or the Commission; and the public regulatory organization and its ulatory organization may impose a sanction (ii) for any public accounting firm reg- employees and agents in connection with an on the basis of the public regulatory organi- istered with the public regulatory organiza- investigation or disciplinary proceeding zation’s report pursuant to paragraph (4). tion to permit such a person to become, or under this section, the fact that an inves- Any sanction imposed by the State licensing remain, associated with such firm without tigation or disciplinary proceeding has been public regulatory organization under this the consent of the public regulatory organi- commenced, and the public regulatory orga- clause shall be inadmissible in any pro- zation or the Commission, if such firm knew nization’s determination with respect to any ceeding in any State or Federal court or be- investigation or disciplinary proceeding or, in the exercise of reasonable care should fore any State or Federal administrative shall be inadmissible in any proceeding in have known, of such suspension or bar. agency. any State or Federal court or before any (4) REPORTING OF SANCTIONS.—If the public (g) REVIEW AND APPROVAL OF RULES.— State or Federal administrative agency. regulatory organization imposes a discipli- (1) SUBMISSION, PUBLICATION, AND COM- (ii) TREATMENT OF CERTAIN DOCUMENTS.— nary sanction against a public accounting MENT.—Each recognized public regulatory or- Submissions to the public regulatory organi- firm, or a person associated with such firm, ganization shall file with the Commission, in zation by or on behalf of a public accounting the public regulatory organization shall re- firm or person associated with such a firm or accordance with such rules as the Commis- port such sanction to the Commission, to the on behalf of any other participant in a public sion may prescribe, copies of any proposed appropriate State or foreign licensing public regulatory organization proceeding, includ- rule or any proposed change in, addition to, regulatory organization or public regulatory ing documents generated by the public regu- or deletion from the rules of such recognized organizations with which such firm or such latory organization itself, shall be inadmis- public regulatory organization (hereinafter person is licensed or certified to practice sible to the same extent as the material de- in this subsection collectively referred to as public accounting, and to the public. The in- scribed in clause (i), if such submission— a ‘‘proposed rule change’’) accompanied by a formation reported shall include— (I) is prepared specifically for the purpose concise general statement of the basis and (A) the name of the public accounting firm, of the public regulatory organization pro- purpose of such proposed rule change. The or person associated with such firm, against ceedings; and Commission shall, upon the filing of any pro- whom the sanction is imposed; (II) addresses the merits of the issues posed rule change, publish notice thereof to- (B) a description of the acts, practices, or under investigation by the public regulatory gether with the terms of substance of the omissions upon which the sanction is based; organization. proposed rule change or a description of the (C) the nature of the sanction; and (C) AVAILABILITY AND ADMISSIBILITY OF IN- subjects and issues involved. The Commis- (D) such other information respecting the FORMATION.— sion shall give interested persons an oppor- circumstances of the disciplinary action (in- (i) IN GENERAL.—All information referred tunity to submit written data, views, and ar- cluding the name of any client of such firm to in subparagraphs (A) and (B) shall be— guments concerning such proposed rule affected by such acts, practices, or omis- (I) available to the Commission; change. No proposed rule change shall take sions) as the public regulatory organization (II) available to any other Federal depart- effect unless approved by the Commission or deems appropriate. ment or agency in connection with the exer- otherwise permitted in accordance with the (5) DISCOVERY AND ADMISSIBILITY OF PUBLIC cise of its regulatory authority to the extent provisions of this subsection. REGULATORY ORGANIZATION MATERIAL.— that such information would be available to (2) APPROVAL OR PROCEEDINGS.—Within 35 (A) DISCOVERABILITY.— such agency from the Commission as a result days of the date of publication of notice of (i) IN GENERAL.—Except as provided in sub- of a Commission enforcement investigation; the filing of a proposed rule change in ac- paragraph (C), all reports, memoranda, and (III) available to Federal and State au- cordance with paragraph (1) of this sub- other information prepared, collected, or re- thorities in connection with any criminal in- section, or within such longer period as the ceived by the public regulatory organization, vestigation or proceeding; Commission may designate up to 90 days of and the deliberations and other proceedings (IV) admissible in any action brought by such date if it finds such longer period to be of the public regulatory organization and its the Commission or any other Federal depart- appropriate and publishes its reasons for so employees and agents in connection with an ment or agency pursuant to its regulatory finding or as to which the recognized public investigation or disciplinary proceeding authority, to the extent that such informa- regulatory organization consents, the Com- under this section shall not be subject to any tion would be available to such agency from mission shall— form of civil discovery, including demands the Commission as a result of a Commission (A) by order approve such proposed rule for production of documents and for testi- enforcement investigation and in any crimi- change; or mony of individuals, in connection with any nal action; and (B) institute proceedings to determine proceeding in any State or Federal court, or (V) available to State licensing public reg- whether the proposed rule change should be before any State or Federal administrative ulatory organizations to the extent author- disapproved. Such proceedings shall include agency. This subparagraph shall not apply to ized in paragraph (6). notice of the grounds for disapproval under any information provided to the public regu- (ii) OTHER LIMITATIONS.—Any documents or consideration and opportunity for hearing latory organization that would have been other information provided to the Commis- and be concluded within 180 days of the date subject to discovery from the person or enti- sion or other authorities pursuant to clause of publication of notice of the filing of the ty that provided it to the public regulatory (i) shall be subject to the limitations on dis- proposed rule change. At the conclusion of organization, but is no longer available from covery and admissibility set forth in sub- such proceedings the Commission, by order, that person or entity. paragraphs (A) and (B). shall approve or disapprove such proposed (ii) EXEMPTION.—Submissions to the public (6) PARTICIPATION BY STATE LICENSING PUB- rule change. The Commission may extend regulatory organization by or on behalf of a LIC REGULATORY ORGANIZATIONS.— the time for conclusion of such proceedings public accounting firm or person associated (A) NOTICE.—When the public regulatory for up to 60 days if it finds good cause for with such a firm or on behalf of any other organization institutes an investigation pur- such extension and publishes its reasons for participant in a public regulatory organiza- suant to paragraph (2)(A), it shall notify the so finding or for such longer period as to tion proceeding (other than a public hear- State licensing public regulatory organiza- which the recognized public regulatory orga- ing), including documents generated by the tions in the States in which the public ac- nization consents. public regulatory organization itself, shall counting firm or person associated with such (3) BASIS FOR APPROVAL OR DISAPPROVAL.— be exempt from discovery to the same extent firm engaged in the act or failure to act al- The Commission shall approve a proposed as the material described in clause (i), leged to have violated professional stand- rule change of a recognized public regulatory whether in the possession of the public regu- ards, of the pendency of the investigation, organization if it finds that such proposed latory organization or any other person, if and shall invite the State licensing public rule change is consistent with the require- such submission— regulatory organizations to participate in ments of this Act and the rules and regula- (I) is prepared specifically for the purpose the investigation. tions thereunder applicable to such organiza- of the public regulatory organization pro- (B) ACCEPTANCE BY STATE PUBLIC REGU- tion. The Commission shall disapprove a pro- ceeding; and LATORY ORGANIZATION.—If a State licensing posed rule change of a recognized public reg- (II) addresses the merits of the issues public regulatory organization elects to join ulatory organization if it does not make under investigation by the public regulatory in the investigation, its representatives shall such finding. The Commission shall not ap- organization. participate, pursuant to rules established by prove any proposed rule change prior to the

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00041 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.031 pfrm15 PsN: H24PT1 H1578 CONGRESSIONAL RECORD — HOUSE April 24, 2002 30th day after the date of publication of no- (2) The Commission shall give interested United States Senate. At the same time it tice of the filing thereof, unless the Commis- persons an opportunity for the oral presen- transmits a public regulatory organization’s sion finds good cause for so doing and pub- tation of data, views, and arguments, in ad- annual report under this subparagraph, the lishes its reasons for so finding. dition to an opportunity to make written Commission shall include a written state- (4) RULES EFFECTIVE UPON FILING.— submissions. A transcript shall be kept of ment of its views of the functioning and op- (A) Notwithstanding the provisions of any oral presentation. erations of the public regulatory organiza- paragraph (2) of this subsection, a proposed (3) A rule adopted pursuant to this sub- tion. rule change may take effect upon filing with section shall incorporate the text of the (D) PUBLIC AVAILABILITY.—Following trans- the Commission if designated by the recog- amendment to the rules of the recognized mittal of each approved annual report under nized public regulatory organization as (i) public regulatory organization and a state- subparagraph (C), the Commission and the constituting a stated policy, practice, or in- ment of the Commission’s basis for and pur- public regulatory organization shall make terpretation with respect to the meaning, pose in so amending such rules. This state- the approved annual report publicly avail- administration, or enforcement of an exist- ment shall include an identification of any able. ing rule of the recognized public regulatory facts on which the Commission considers its (4) DISAPPROVAL OF ELECTION OF PRO MEM- organization, (ii) establishing or changing a determination so to amend the rules of the BER.—The Commission is authorized, by due, fee, or other charge imposed by the rec- recognized public regulatory agency to be order, if in its opinion such action is nec- ognized public regulatory organization, or based, including the reasons for the Commis- essary or appropriate in the public interest, (iii) concerned solely with the administra- sion’s conclusions as to any of such facts for the protection of investors, or otherwise tion of the recognized public regulatory or- which were disputed in the rulemaking. in furtherance of the purposes of this Act or ganization or other matters which the Com- (4)(A) Except as provided in paragraphs (1) the securities laws, to disapprove the elec- mission, by rule, consistent with the public through (3) of this subsection, rulemaking tion of any member of a public regulatory interest and the purposes of this subsection, under this subsection shall be in accordance organization if the Commission determines, may specify as outside the provisions of such with the procedures specified in section 553 after notice and opportunity for hearing, paragraph (2). of title 5, United States Code, for rulemaking that the person elected is unfit to serve on (B) Notwithstanding any other provision of not on the record. the public regulatory organization. this subsection, a proposed rule change may (B) Nothing in this subsection shall be con- (j) CLARIFICATION OF APPLICATION OF PRO be put into effect summarily if it appears to strued to impair or limit the Commission’s AUTHORITY.—The authority granted to any the Commission that such action is nec- power to make, or to modify or alter the pro- such organization in this section shall only essary for the protection of investors, or oth- cedures the Commission may follow in mak- apply to the actions of accountants related erwise in accordance with the purposes of ing, rules and regulations pursuant to any to the certification of financial statements this title. Any proposed rule change so put other authority under the securities laws. required by securities laws and not other ac- into effect shall be filed promptly thereafter (C) Any amendment to the rules of a recog- tions or actions for other clients of the ac- in accordance with the provisions of para- nized public regulatory organization made counting firm or any accountant that does graph (1) of this subsection. by the Commission pursuant to this sub- not certify financial statements for publicly (C) Any proposed rule change of a recog- section shall be considered for all purposes traded companies. nized public regulatory organization which to be part of the rules of such recognized (k) DEADLINE FOR RULEMAKING.—The Com- has taken effect pursuant to subparagraph public regulatory organization and shall not mission shall— (A) or (B) of this paragraph may be enforced be considered to be a rule of the Commission. (1) within 90 days after the date of enact- by such organization to the extent it is not (i) COMMISSION OVERSIGHT OF THE PRO.— ment of this Act, propose, and inconsistent with the provisions of this Act, (1) RECORDS AND EXAMINATIONS.—A public (2) within 270 days after such date, pre- the securities laws, the rules and regulations regulatory organization shall make and keep scribe, rules to implement this section. thereunder, and applicable Federal and State for prescribed periods such records, furnish (l) EFFECTIVE DATE; TRANSITION PROVI- law. At any time within 60 days of the date such copies thereof, and make and dissemi- SIONS.— of filing of such a proposed rule change in ac- nate such reports as the Commission, by (1) EFFECTIVE DATE.—Except as provided in cordance with the provisions of paragraph (1) rule, prescribes as necessary or appropriate in the public interest, for the protection of paragraph (2), subsection (a) of this section of this subsection, the Commission sum- shall be effective with respect to any cer- marily may abrogate the change in the rules investors, or otherwise in furtherance of the purposes of this Act or the securities laws. tified financial statement for any fiscal year of the recognized public regulatory organiza- that ends more than one year after the Com- tion made thereby and require that the pro- (2) ADDITIONAL DUTIES; SPECIAL REVIEWS.— A public regulatory organization shall per- mission recognizes a public regulatory orga- posed rule change be refiled in accordance nization pursuant to this section. with the provisions of paragraph (1) of this form such other duties or functions as the Commission, by rule or order, determines are (2) DELAY IN ESTABLISHMENT OF BOARD.—If subsection and reviewed in accordance with the Commission has failed to recognize any the provisions of paragraph (2) of this sub- necessary or appropriate in the public inter- est or for the protection of investors and to public regulatory organization pursuant to section, if it appears to the Commission that this section within one year after the date of such action is necessary or appropriate in carry out the purposes of this Act and the se- curities laws, including conducting a special enactment of this Act, the Commission shall the public interest, for the protection of in- perform the duties of such organization with vestors, or otherwise in furtherance of the review of a particular public accounting firm’s quality control system or a special re- respect to any certified financial statement purposes of this Act. Commission action pur- for any fiscal year that ends before one year suant to the preceding sentence shall not af- view of a particular aspect of some or all public accounting firms’ quality control sys- after any such board is recognized by the fect the validity or force of the rule change Commission. during the period it was in effect, shall not tems. (3) ANNUAL REPORT; PROPOSED BUDGET.— SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF be subject to court review, and shall not be AUDITS. deemed to be ‘‘final agency action’’ for pur- (A) SUBMISSION OF ANNUAL REPORT AND BUDGET.—A public regulatory organization (a) RULES TO PROHIBIT.—It shall be unlaw- poses of section 704 of title 5, United States ful in contravention of such rules or regula- Code. shall submit an annual report and its pro- posed budget to the Commission for review tions as the Commission shall prescribe as (h) COMMISSION ACTION TO CHANGE necessary and appropriate in the public in- RULES.—The Commission, by rule, may abro- and approval, by order, at such times and in such form as the Commission shall prescribe. terest or for the protection of investors for gate, add to, and delete from (hereinafter in any officer, director, or affiliated person of this subsection collectively referred to as (B) CONTENTS OF ANNUAL REPORT.—Each annual report required by subparagraph (A) an issuer of any security registered under ‘‘amend’’) the rules of a recognized public section 12 of the Securities Exchange Act of regulatory organization as the Commission shall include— (i) a detailed description of the activities 1934 (15 U.S.C. 78l) to take any action to deems necessary or appropriate to insure the fraudulently influence, coerce, manipulate, of the public regulatory organization; fair administration of the recognized public or mislead any independent public or cer- (ii) the audited financial statements of the regulatory organization, to conform its rules tified accountant engaged in the perform- public regulatory organization; to requirements of this Act, the securities ance of an audit of the financial statements (iii) a detailed explanation of the fees and laws, and the rules and regulations there- of such issuer for the purpose of rendering under applicable to such organization, or charges imposed by the public regulatory or- such financial statements materially mis- otherwise in furtherance of the purposes of ganization under subsection (b)(9); and leading. In any civil proceeding, the Com- this Act, in the following manner: (iv) such other matters as the public regu- mission shall have exclusive authority to en- (1) The Commission shall notify the recog- latory organization or the Commission force this section and any rule or regulation nized public regulatory organization and deems appropriate. hereunder. publish notice of the proposed rulemaking in (C) TRANSMITTAL OF ANNUAL REPORT TO (b) NO PREEMPTION OF OTHER LAW.—The the Federal Register. The notice shall in- CONGRESS.—The Commission shall transmit provisions of subsection (a) shall be in addi- clude the text of the proposed amendment to each approved annual report received under tion to, and shall not supersede or preempt, the rules of the recognized public regulatory subparagraph (A) to the Committee on Fi- any other provision of law or any rule or reg- organization and a statement of the Commis- nancial Services of the United States House ulation thereunder. sion’s reasons, including any pertinent facts, of Representatives and the Committee on (c) DEADLINE FOR RULEMAKING.—The Com- for commencing such proposed rulemaking. Banking, Housing, and Urban Affairs of the mission shall—

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(1) within 90 days after the date of enact- (3) OTHER FORMATS; FORMS.—In the rule (b) DEADLINE FOR RULEMAKING.—The Com- ment of this Act, propose, and prescribed under paragraph (1), the Commis- mission shall— (2) within 270 days after such date, pre- sion shall provide that electronic filing and (1) within 90 days after the date of enact- scribe, disclosure shall be in lieu of any other for- ment of this Act, propose, and the rules or regulations required by this sec- mat required for such disclosures on the day (2) within 270 days after such date, pre- tion. before the date of enactment of this sub- scribe, SEC. 4. REAL-TIME DISCLOSURE OF FINANCIAL section. The Commission shall revise such the revisions to its regulations required by INFORMATION. forms and schedules required to be filed with subsection (a). (a) REAL-TIME ISSUER DISCLOSURES RE- the Commission pursuant to paragraph (1) as (c) ANALYSIS REQUIRED.— QUIRED.— necessary to facilitate such electronic filing (1) TRANSPARENCY, COMPLETENESS, AND USE- (1) OBLIGATIONS.—Every issuer of a secu- and disclosure. FULNESS OF FINANCIAL STATEMENTS.—The rity registered under section 12 of the Secu- SEC. 5. INSIDER TRADES DURING PENSION FUND Commission shall conduct an analysis of the rities Exchange Act of 1934 (15 U.S.C. 78l) BLACKOUT PERIODS PROHIBITED. extent to which, consistent with the protec- shall file with the Commission and disclose (a) PROHIBITION.—It shall be unlawful for tion of investors and the public interest, dis- to the public, on a rapid and essentially con- any person who is directly or indirectly the closure of additional or reorganized informa- temporaneous basis, such information con- beneficial owner of more than 10 percent of tion may be required to improve the trans- cerning the financial condition or operations any class of any equity security (other than parency, completeness, or usefulness of fi- of such issuer as the Commission determines an exempted security) which is registered nancial statements and other corporate dis- by rule is necessary in the public interest under section 12 of the Securities Exchange closures filed under the securities laws. and for the protection of investors. Such rule Act of 1934 (15 U.S.C. 78l) or who is a director (2) ALTERNATIVES TO BE CONSIDERED.—In shall— or an officer of the issuer of such security, conducting the analysis required by para- (A) specify the events or circumstances directly or indirectly, to purchase (or other- graph (1), the Commission shall consider— giving rise to the obligation to disclose or wise acquire) or sell (or otherwise transfer) (A) requiring the identification of the key update a disclosure; any equity security of any issuer (other than accounting principles that are most impor- (B) establish requirements regarding the an exempted security), during any blackout tant to the issuer’s reported financial condi- rapidity and timeliness of such disclosure; period with respect to such equity security. tion and results of operation, and that re- (C) identify the means whereby the disclo- (b) REMEDY.—Any profit realized by such quire management’s most difficult, subjec- sure required shall be made, which shall en- beneficial owner, director, or officer from tive, or complex judgments; sure the broad, rapid, and accurate dissemi- any purchase (or other acquisition) or sale (B) requiring an explanation, where mate- nation of the information to the public via (or other transfer) in violation of this sec- rial, of how different available accounting electronic or other communications device; tion shall inure to and be recoverable by the principles applied, the judgments made in (D) identify the content of the information issuer irrespective of any intention on the their application, and the likelihood of ma- to be disclosed; and part of such beneficial owner, director, or of- terially different reported results if different (E) without limiting the Commission’s ficer in entering into the transaction. Suit assumptions or conditions were to prevail; general exemptive authority, specify any ex- to recover such profit may be instituted at (C) in the case of any issuer engaged in the emptions or exceptions from such require- law or in equity in any court of competent business of trading non-exchange traded con- ments. jurisdiction by the issuer, or by the owner of tracts, requiring an explanation of such trad- (2) ENFORCEMENT.—The Commission shall any security of the issuer in the name and in ing activities when such activities require have exclusive authority to enforce this sec- behalf of the issuer if the issuer shall fail or the issuer to account for contracts at fair tion and any rule or regulation hereunder in refuse to bring such suit within 60 days after value, but for which a lack of market price civil proceedings. request or shall fail diligently to prosecute quotations necessitates the use of fair value (b) ELECTRONIC DISCLOSURE OF INSIDER the same thereafter; but no such suit shall estimation techniques; TRANSACTIONS.— be brought more than 2 years after the date (D) establishing requirements relating to (1) DISCLOSURES OF TRADING.—The Commis- such profit was realized. This subsection the presentation of information in clear and sion shall, by rule, require— shall not be construed to cover any trans- understandable format and language; and (A) that a disclosure required by section 16 action where such beneficial owner was not (E) requiring such other disclosures, in- of the Securities Exchange Act of 1934 (15 such both at the time of the purchase and cluded in the financial statements or in U.S.C. 78p) of the sale of any securities of an sale, or the sale and purchase, of the security other disclosure by the issuer, as would in issuer, or any security futures product (as or security-based swap (as defined in section the Commission’s view improve the trans- defined in section 3(a)(56) of the Securities 206B of the Gramm-Leach-Bliley Act) in- parency of such issuer’s financial statements Exchange Act of 1934 (15 U.S.C. 78c(a)(56))) or volved, or any transaction or transactions and other required corporate disclosures. any security-based swap agreement (as de- which the Commission by rules and regula- (3) RULES REQUIRED.—If the Commission, fined in section 206B of the Gramm-Leach- tions may exempt as not comprehended on the basis of the analysis required by this Bliley Act) that is based in whole or in part within the purposes of this subsection. subsection, determines that it is necessary on the securities of such issuer, by an officer (c) RULEMAKING PERMITTED.—The Commis- in the public interest or for the protection of or director of the issuer of those securities, sion may issue rules to clarify the applica- investors and would improve the trans- or by a beneficial owner of such securities, tion of this subsection, to ensure adequate parency of issuer financial statements, the shall be made available electronically to the notice to all persons affected by this sub- Commission may prescribe rules reflecting Commission and to the issuer by such offi- section, and to prevent evasion thereof. the results of such analysis and the consider- cer, director, or beneficial owner before the (d) DEFINITION.—For purposes of this sec- ations required by paragraph (2). In pre- end of the next business day after the day on tion, the term ‘‘beneficial owner’’ has the scribing such rules, the Commission may which the transaction occurs; meaning provided such term in rules or regu- seek to minimize the paperwork and cost (B) that the information in such disclosure lations issued by the Securities and Ex- burden on the issuer consistent with achiev- be made available electronically to the pub- change Commission under section 16 of the ing the public interest and investor protec- lic by the Commission, to the extent per- Securities Exchange Act of 1934 (15 U.S.C. tion purposes of such rules. mitted under applicable law, upon receipt, 78p). SEC. 7. IMPROVEMENTS IN REPORTING ON IN- but in no case later than the end of the next SEC. 6. IMPROVED TRANSPARENCY OF COR- SIDER TRANSACTIONS AND RELA- business day after the day on which the dis- PORATE DISCLOSURES. TIONSHIPS. closure is received under subparagraph (A); (a) MODIFICATION OF REGULATIONS RE- (a) SPECIFIC OBJECTIVES.—The Commission and QUIRED.—The Commission shall revise its shall initiate a proceeding to propose (C) that, in any case in which the issuer regulations under the securities laws per- changes in its rules and regulations with re- maintains a corporate website, such informa- taining to the disclosures required in peri- spect to financial reporting to improve the tion shall be made available by such issuer odic financial reports and registration state- transparency and clarity of the information on that website, before the end of the next ments to require such reports to include ade- available to investors and to require in- business day after the day on which the dis- quate and appropriate disclosure of— creased financial disclosure with respect to closure is received by the Commission under (1) the issuer’s off-balance sheet trans- the following: subparagraph (A). actions and relationships with unconsoli- (1) INSIDER RELATIONSHIPS AND TRANS- (2) TRANSACTIONS INCLUDED.—The rule pre- dated entities or other persons, to the extent ACTIONS.—Relationships and transactions— scribed under paragraph (1) shall require the they are not disclosed in the financial state- (A) between the issuer, affiliates of the disclosure of the following transactions: ments and are reasonably likely to materi- issuer, and officers, directors, or employees (A) Direct or indirect sales or other trans- ally affect the liquidity or the availability of the issuer or such affiliates; and fers of securities of the issuer (or any inter- of, or requirements for, capital resources, or (B) between officers, directors, employees, est therein) to the issuer or an affiliate of the financial condition or results of oper- or affiliates of the issuer and entities that the issuer. ations of the issuer; and are not otherwise affiliated with the issuer, (B) Loans or other extensions of credit ex- (2) loans extended to officers, directors, or to the extent such arrangement or trans- tended to an officer, director, or other person other persons affiliated with the issuer on action creates a conflict of interest for such affiliated with the issuer on terms or condi- terms or conditions that are not otherwise persons. Such disclosure shall provide a de- tions not otherwise available to the public. available to the public. scription of such elements of the transaction

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00043 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.032 pfrm15 PsN: H24PT1 H1580 CONGRESSIONAL RECORD — HOUSE April 24, 2002 as are necessary for an understanding of the sion of law, the Commission shall not dis- from securities transactions, and losses business purpose and economic substance of close the risk rating of any issuer described avoided through securities transactions ob- such transaction (including contingencies). in subsection (b). tained by an officer or director of an issuer The disclosure shall provide sufficient infor- SEC. 9. RETENTION OF RECORDS. during or for a fiscal year or other reporting mation to determine the effect on the (a) DUTY TO RETAIN RECORDS.—Any inde- period if such officer or director engaged in issuer’s financial statements and describe pendent public or certified accountant who misconduct resulting in, or made or caused compensation arrangements of interested certifies a financial statement as required by to be made in, the filing of a financial state- parties to such transactions. the securities laws or any rule or regulation ment for such fiscal year or reporting period (2) RELATIONSHIPS WITH PHILANTHROPIC OR- thereunder shall prepare and maintain for a which— GANIZATIONS.—Relationships between the period of no less than 7 years, final audit (1) was at the time, and in the light of the registrant or any executive officer of the reg- work papers and other information related circumstances under which it was made, istrant and any not-for-profit organization to any accountants report on such financial false or misleading with respect to any mate- on whose board a director or immediate fam- statements in sufficient detail to support the rial fact; or ily member serves or of which a director or opinion or assertion reached in such ac- (2) omitted to state a material fact nec- essary in order to make the statements immediate family member serves as an offi- countants report. The Commission may pre- made, in the light of the circumstances in cer or in a similar capacity. Relationships scribe rules specifying the application and which they were made, not misleading, that shall be disclosed include contributions requirements of this section. (b) JUDICIAL PROCEEDINGS.—Section 21(d) of to the organization in excess of $10,000 made (b) ACCOUNTANT’S REPORT.—For purposes of by the registrant or any executive officer in the Securities Exchange Act of 1934 (15 subsection (a), the term ‘‘accountant’s re- U.S.C. 78u(d)) is amended by adding at the the last five years and any other activity un- port’’ means a document in which an ac- end the following new paragraph: dertaken by the registrant or any executive countant identifies a financial statement ‘‘(5) ADDITIONAL DISGORGEMENT AUTHOR- officer that provides a material benefit to and sets forth his opinion regarding such fi- ITY.—In any action or proceeding brought or the organization. Material benefit includes nancial statement or an assertion that an instituted by the Commission under the se- lobbying. opinion cannot be expressed. curities laws against any person— (3) INSIDER-CONTROLLED AFFILIATES.—Rela- SEC. 10. REMOVAL OF UNFIT CORPORATE OFFI- ‘‘(A) for engaging in misconduct resulting tionships in which the registrant or any ex- CERS. in, or making or causing to be made in, the ecutive officer exercises significant control (a) REMOVAL IN JUDICIAL PROCEEDINGS.— filing of a financial statement which— over an entity in which a director or imme- (1) SECURITIES ACT OF 1933.—Section 20(e) of ‘‘(i) was at the time, and in the light of the diate family member owns an equity interest the Securities Act of 1933 (15 U.S.C. 77t(e)) is circumstances under which it was made, or to which a director or immediate family amended by striking ‘‘substantial unfitness’’ false or misleading with respect to any mate- member has extended credit. Significant and inserting ‘‘unfitness’’. rial fact; or control should be defined with reference to (2) SECURITIES EXCHANGE ACT OF 1934.—Sec- ‘‘(ii) omitted to state a material fact nec- the contractual and governance arrange- tion 21(d)(2) of the Securities Exchange Act essary in order to make the statements ments between the registrant or executive of 1934 (15 U.S.C. 78u(d)(2)) is amended by made, in the light of the circumstances in officer, as the case may be, and the entity. striking ‘‘substantial unfitness’’ and insert- which they were made, not misleading; or (4) JOINT OWNERSHIP.—Joint ownership by a ing ‘‘unfitness’’. ‘‘(B) for engaging in, causing, or aiding and registrant or executive officer and a director (b) REMOVAL IN ADMINISTRATIVE PRO- abetting any other violation of the securities or immediate family member of any real or CEEDINGS.— laws or the rules and regulations thereunder, personal property. (1) SECURITIES ACT OF 1933.—Section 8A of such person, in addition to being subject to (5) PROVISION OF SERVICES BY RELATED PER- the Securities Act of 1933 (15 U.S.C. 77h–1) is any other appropriate order, may be required SONS.—The provision of any professional amended by adding at the end the following services, including legal, financial advisory to disgorge any or all benefits received from new subsection: any source in connection with the conduct or medical services, by a director or imme- ‘‘(f) AUTHORITY TO PROHIBIT PERSONS FROM constituting, causing, or aiding and abetting diate family member to any executive officer SERVING AS OFFICERS OR DIRECTORS.—In any the violation, including (but not limited to) of the registrant in the last five years. cease-and-desist proceeding under subsection salary, commissions, fees, bonuses, options, (b) DEADLINES.—The Commission shall (a), the Commission may issue an order to profits from securities transactions, and complete the rulemaking required by this prohibit, conditionally or unconditionally, losses avoided through securities trans- section within 180 days after the date of en- and permanently or for such period of time actions.’’. actment of this Act. as it shall determine, any person who has SEC. 8. ENHANCED OVERSIGHT OF PERIODIC DIS- violated section 17(a)(1) of this title from SEC. 12. CEO AND CFO ACCOUNTABILITY FOR DISCLOSURE. CLOSURES BY ISSUERS. acting as an officer or director of any issuer (a) REGULATIONS REQUIRED.—The Securi- (a) REGULAR AND SYSTEMATIC REVIEW.—The that has a class of securities registered pur- Securities and Exchange Commission shall ties and Exchange Commission shall by rule suant to section 12 of the Securities Ex- require, for each company filing periodic re- review disclosures made by issuers pursuant change Act of 1934 or that is required to file to the Securities Exchange Act of 1934 (in- ports under section 13 or 15(d) of the Securi- reports pursuant to section 15(d) of that Act ties Exchange Act of 1934 (15 U.S.C. 78m, cluding reports filed on form 10–K) on a basis if the person’s conduct demonstrates that is more regular and systematic than 78o(d)), that the principal executive officer unfitness to serve as an officer or director of or officers and the principal financial officer that in practice on the date of enactment on any such issuer.’’. this Act. Such review shall include a review or officers, or persons performing similar (2) SECURITIES EXCHANGE ACT OF 1934.—Sec- functions, certify in each annual or quar- of an issuer’s financial statements. tion 21C of the Securities Exchange Act of (b) RISK RATING SYSTEM.—For purposes of terly report filed or submitted under either 1934 (15 U.S.C. 78u–3) is amended by adding at the reviews required by subsection (a), the such section of such Act that— the end the following new subsection: Commission shall establish a risk rating sys- (1) the signing officer has reviewed the re- ‘‘(f) AUTHORITY TO PROHIBIT PERSONS FROM tem whereby issuers receive a risk rating by port; SERVING AS OFFICERS OR DIRECTORS.—In any the Commission, which shall be used to de- (2) based on the officer’s knowledge, the re- cease-and-desist proceeding under subsection termine the frequency of such reviews. In de- port does not contain any untrue statement (a), the Commission may issue an order to signing such a risk rating system the Com- of a material fact or omit to state a material mission shall consider, among other factors prohibit, conditionally or unconditionally, fact necessary in order to make the state- the following: and permanently or for such period of time ments made, in light of the circumstances (1) Emerging companies with disparities in as it shall determine, any person who has under which such statements were made, not price to earning ratios. violated section 10(b) of this title or the misleading; (2) Issuers with the largest market capital- rules or regulations thereunder from acting (3) based on such officer’s knowledge, the ization. as an officer or director of any issuer that financial statements, and other financial in- (3) Issuers whose operations significantly has a class of securities registered pursuant formation included in the report, fairly impact any material sector of the economy. to section 12 of this title or that is required present in all material respects the financial (4) Systemic factors such as the effect on to file reports pursuant to section 15(d) of condition and results of operations of the niche markets or important subsectors of this title if the person’s conduct dem- issuer as of, and for, the periods presented in the economy. onstrates unfitness to serve as an officer or the report; (5) Issuers that experience significant vola- director of any such issuer.’’. (4) the signing officers— tility in their stock price as compared to SEC. 11. DISGORGEMENT REQUIRED. (A) are responsible for establishing and other issuers. (a) ADMINISTRATIVE ACTIONS.—Within 30 maintaining internal controls; (6) Any other factor the Commission may days after the date of enactment of this Act, (B) have designed such internal controls to consider relevant. the Securities and Exchange Commission ensure that material information relating to (c) MINIMUM REVIEW PERIOD.—In no event shall prescribe regulations to require the issuer and its consolidated subsidiaries is shall an issuer be reviewed less than once disgorgement, in a proceeding pursuant to made known to such officers by others with- every three years by the Commission. its authority under section 21A, 21B, or 21C in those entities, particularly during the pe- (d) PROHIBITION OF DISCLOSURE OF RISK (15 U.S.C. 78u–1, 78u–2, 78u–3), of salaries, riod in which the periodic reports are being RATING.—Notwithstanding any other provi- commissions, fees, bonuses, options, profits prepared;

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00044 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.032 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1581 (C) have evaluated the effectiveness of the withstanding section 21(d)(3)(C)(i) or Congress, including any recommendations issuer’s internal controls as of a date within 21A(d)(1) of the Securities Exchange Act of for additional self-regulatory organization 90 days prior to the report; and 1934, or any other provision of the securities rulemaking regarding matters involving eq- (D) have presented in the report their con- laws, be payable to the disgorgement fund. uity research analysts. The Commission clusions about the effectiveness of their in- (d) ACCEPTANCE OF ADDITIONAL DONA- shall annually submit an update on such re- ternal controls based on their evaluation as TIONS.—The Commission is authorized to ac- view. of that date; cept, hold, administer, and utilize gifts, be- (c) ADDITIONAL RULES REQUIRED.—Unless (5) the signing officers have disclosed to quests and devises of property, both real and the final rules reviewed by the Commission the issuer’s auditors and the audit com- personal, to the United States for the under subsections (a) and (b) contain the fol- mittee of the board of directors (or persons disgorgement fund. Gifts, bequests, and de- lowing provisions, the Commission shall, by fulfilling the equivalent function)— vises of money and proceeds from sales of rule— (A) all significant deficiencies in the de- other property received as gifts, bequests, or (1) prohibit equity research analysts sign or operation of internal controls which devises shall be deposited in the from— could adversely affect the issuer’s ability to disgorgement fund and shall be available for (A) holding any beneficial interest in any record, process, summarize, and report finan- allocation in accordance with subsection (b). equity security (as such term in defined in section 3(a)(11) of the Securities Exchange cial data and have identified for the issuer’s (e) DEFINITIONS.—As used in this section: Act of 1934 (15 U.S.C. 78c(a)(11)) in any issuer auditors any material weaknesses in internal (1) DISGORGEMENT FUND.—The term controls; and ‘‘disgorgement fund’’ means a disgorgement covered by such analyst; and (B) any fraud, whether or not material, fund established in any administrative or ju- (B) receiving compensation based on the investment banking revenues of the firm that involves management or other employ- dicial proceeding described in subsection (a). with which the analyst is associated, or on ees who have a significant role in the issuer’s (2) SUBSIDIARY OR AFFILIATE.—The term the investment banking revenues of such internal controls; and ‘‘subsidiary or affiliate’’ when used in rela- firm and its affiliates, except that this prohi- (6) the signing officers have indicated in tion to a person means any entity that con- bition shall not prohibit such an analyst the report whether or not there were signifi- trols, is controlled by, or is under common from receiving compensation based on the cant changes in internal controls or in other control with such person. overall revenues of such firm or of such firm factors that could significantly affect inter- (3) OFFICER, DIRECTOR, OR PRINCIPAL SHARE- and its affiliates; nal controls subsequent to the date of their HOLDER.—The term ‘‘officer, director, or (2) prohibit the investment banking de- evaluation, including any corrective actions principal shareholder’’ when used in relation partment of such firm from having any input to the Enron Corporation, or any subsidiary with regard to significant deficiencies and in the compensation, hiring, firing, or pro- material weaknesses. or affiliate of such Corporation, means any motion of analysts; and (b) DEADLINE.—The rules required by sub- person that is subject to the requirements of (3) require such self-regulatory organiza- section (a) shall be effective not later than 30 section 16 of the Securities Exchange Act of tions— days after the date of enactment of this Act. 1934 (15 U.S.C. 78p) in relation to the Enron (A) to establish criteria for evaluating ana- SEC. 13. SECURITIES AND EXCHANGE COMMIS- Corporation, or any subsidiary or affiliate of lyst research quality; and SION AUTHORITY TO PROVIDE RE- such Corporation. (B) to require analyst compensation to be LIEF. (4) NONFORFEITABLE; ACCRUED BENEFIT; IN- based principally on the quality of the eq- (a) PROCEEDS OF ENRON AND ANDERSEN EN- DIVIDUAL ACCOUNT PLAN.—The terms ‘‘non- uity research analyst’s research. FORCEMENT ACTIONS.—If in any administra- forfeitable’’, ‘‘accrued benefit’’, and ‘‘indi- SEC. 16. INDEPENDENT DIRECTORS. tive or judicial proceeding brought by the vidual account plan’’ have the meanings pro- (a) RULEMAKING REQUIRED.—The Commis- Securities and Exchange Commission vided such terms, respectively, in paragraphs sion shall adopt rules, effective no later than against— (19), (23), and (34) of section 3 of the Em- 6 months after the date of enactment of this (1) the Enron Corporation, any subsidiary ployee Retirement Income Security Act of Act, to require that the independent direc- or affiliate of such Corporation, or any offi- 1974 (29 U.S.C. 1002(19), (23), (34)). tors on the board of directors of any issuer of cer, director, or principal shareholder of such SEC. 14. AUTHORIZATION OF APPROPRIATIONS securities registered under section 12 of the Corporation, subsidiary, or affiliate for any OF THE SECURITIES AND EXCHANGE Securities Exchange Act of 1934 (15 U.S.C. violation of the securities laws; or COMMISSION. 78l) be nominated for election by a nomi- (2) Arthur Andersen L.L.C., any subsidiary In addition to any other funds authorized nating committee that is composed exclu- or affiliate of Arthur Andersen L.L.C., or any to be appropriated to the Securities and Ex- sively of other independent directors of such general or limited partner of Arthur Ander- change Commission, there are authorized to issuer. sen L.L.C., or such subsidiary or affiliate, for be appropriated to carry out the functions, (b) INDEPENDENCE.—The rules required by any violation of the securities laws with re- powers, and duties of the Commission, subsection (a) shall require the same degree spect to any services performed for or in re- $776,000,000 for fiscal year 2003, of which— of independence for service on the nomi- lation to the Enron Corporation, any sub- (1) not less that $134,000,000 shall be avail- nating committee of an issuer as is required sidiary or affiliate of such Corporation, or able for the Division of Corporate Finance for purposes of service on the audit com- any officer, director, or principal share- and for the Office of Chief Accountant; mittee of an issuer by the listing standards holder of such Corporation, subsidiary, or af- (2) not less than $326,000,000 shall be avail- concerning corporate governance of the ex- filiate; able for the Division of Enforcement; and change or association on which the securi- the Commission obtains an order providing (3) not less than $76,000,000 shall be avail- ties of such issuer are listed. for an accounting and disgorgement of funds, able to implement section 8 of the Investor SEC. 17. ENFORCEMENT OF AUDIT COMMITTEE GOVERNANCE PRACTICES. such disgorgement fund (including any addi- and Capital Markets Fee Relief Act, relating The Commission shall revise its regula- tion to such fund required or permitted to pay comparability. tions pertaining to auditor independence to under this section) shall be allocated in ac- SEC. 15. ANALYST CONFLICTS OF INTEREST. require that an accountant shall not be con- cordance with the requirements of this sec- (a) STUDY AND REVIEW REQUIRED.—The Se- sidered to be independent for purposes of cer- tion. curities and Exchange Commission shall con- tifying the financial statements or other (b) PRIORITY FOR FORMER ENRON EMPLOY- duct a study and review of any final rules by documents of an issuer required to be filed EES.—The Commission shall, by order, estab- any self-regulatory organization registered with the Commission under the securities lish an allocation system for the with the Commission pursuant to section 19 laws unless— disgorgement fund. Such system shall pro- of the Securities Exchange Act of 1934 (15 (1) an issuer’s auditor is appointed by and vide that, in allocating the disgorgement U.S.C. 78s) related to matters involving eq- reports directly to the audit committee of fund amount the victims of the securities uity research analysts conflicts of interest. the board of directors or, in the absence of laws violations described in subsection (a), Such study and report shall include a review an audit committee, the board committee the first priority shall be given to individ- of the effectiveness of such final rules in ad- performing equivalent functions or the en- uals who were employed by the Enron Cor- dressing matters relating to the objectivity tire board of directors; poration, or a subsidiary or affiliate of such and integrity of equity research analyst re- (2) the audit committee meets with the ac- Corporation, and who were participants in an ports and recommendations. countants engaged to perform such audit on individual account plan established by such (b) REPORT REQUIRED.—The Securities and a regular basis, at least quarterly; and Corporation, subsidiary, or affiliate. Such al- Exchange Commission shall submit a report (3) the audit committee is provided with locations among such individuals shall be in to the Committee on Financial Services of the opportunity to meet with such account- proportion to the extent to which the non- the House of Representatives and the Com- ants without the attendance at such meet- forfeitable accrued benefit of each such indi- mittee on Banking, Housing, and Urban Af- ings of any officer, director, or other member vidual under the plan was invested in the se- fairs of the Senate on such study and review of the issuer’s senior management. curities of such Corporation, subsidiary, or no later than 180 days after any such final SEC. 18. REVIEW OF CORPORATE GOVERNANCE affiliate. rules by any self-regulatory organization PRACTICES. (c) ADDITION OF CIVIL PENALTIES.—If, in registered with the Commission pursuant to (a) STUDY OF CORPORATE PRACTICES.—The any proceeding described in subsection (a), section 19 of the Securities Exchange Act of Commission shall conduct a study and re- the Commission assesses and collects any 1934 are approved by the Commission. Such view of current corporate governance stand- civil penalty, the Commission shall, not- report shall include recommendations to the ards and practices to determine whether

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00045 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.032 pfrm15 PsN: H24PT1 H1582 CONGRESSIONAL RECORD — HOUSE April 24, 2002 such standards and practices are serving the concerning such resources and risks when (2) whether such rules provide sufficient best interests of shareholders. Such study credit rating agencies announce credit rat- protection to corporate shareholders, espe- and review shall include an analysis of— ings; cially with regards to conflicts of interest (1) whether current standards and prac- (5) any barriers to entry into the business between attorneys and their corporate cli- tices promote full disclosure of relevant in- of acting as a credit rating agency, and any ents. formation to shareholders; measures needed to remove such barriers; (b) REPORT REQUIRED.—The Comptroller (2) whether corporate codes of ethics are and General shall report to the Committee on Fi- adequate to protect shareholders, and to (6) any conflicts of interest in the oper- nancial Services of the House of Representa- what extent deviations from such codes are ation of credit rating agencies and measures tives and the Committee on Banking, Hous- tolerated; to prevent such conflicts or ameliorate the ing, and Urban Affairs of the Senate on the (3) to what extent conflicts of interests are consequences of such conflicts. results of the study required by this section. aggressively reviewed, and whether adequate (b) REPORT REQUIRED.—The Commission Such report shall include any recommenda- means for redressing such conflicts exist; shall submit a report on the analysis re- tions of the General Accounting Office with (4) to what extent sufficient legal protec- quired by subsection (a) to the President, the regards to— tions exist or should be adopted to ensure Committee on Financial Services of the (1) possible changes to the Model Rules and that any manager who attempts to manipu- House of Representatives, and the Com- the rules of professional conduct applicable late or unduly influence an audit will be sub- mittee on Banking, Housing, and Urban Af- to attorneys established by the Commission ject to appropriate sanction and liability, in- fairs of the Senate within 180 days after the to provide increased protection to share- cluding liability to investors or shareholders date of enactment of this Act. The report holders; pursuing a private cause of action for such shall include a discussion of regulatory or (2) whether restrictions should be imposed manipulation or undue influence; legislative steps that are recommended or to require that an attorney, having rep- (5) whether rules, standards, and practices that may be necessary to address concerns resented a corporation or having been em- relating to determining whether independent identified in the study. ployed by a firm which represented a cor- directors are in fact independent are ade- SEC. 21. STUDY OF INVESTMENT BANKS. poration, may not be employed as general quate; (a) GAO STUDY.—The Comptroller General counsel to that corporation until a certain (6) whether rules, standards, and practices shall conduct a study on whether investment period of time has expired; and relating to the independence of directors banks and financial advisors assisted public (3) regulatory or legislative steps that are serving on audit committees are uniformly companies in manipulating their earnings recommended or that may be necessary to applied and adequate to protect investor in- and obfuscating their true financial condi- address concerns identified in the study. terests; tion. The study should address the role of the SEC. 23. ENFORCEMENT AUTHORITY. (7) whether the duties and responsibilities investment banks— For the purposes of enforcing and carrying of audit committees should be established by (1) in the collapse of the Enron Corpora- out this Act, the Commission shall have all the Commission; and tion, including with respect to the design of the authorities granted to the Commission (8) what further or additional practices or and implementation of derivatives trans- under the securities laws. Actions of the standards might best protect investors and actions, transactions involving special pur- Commission under this Act, including ac- promote the interests of shareholders. pose vehicles, and other financing arrange- tions on rules or regulations, shall be subject (b) PARTICIPATION OF STATE REGULATORS.— ments that may have had the effect of alter- to review in the same manner as actions In conducting the study required under sub- ing the company’s reported financial state- under the securities laws. section (a), the Commission shall seek the ments in ways that obscured the true finan- SEC. 24. EXCLUSION FOR INVESTMENT COMPA- views of the securities and corporate regu- cial picture of the company; NIES. lators of the various States. (2) in the failure of Global Crossing, includ- Sections 4, 6, 9, and 15 of this Act shall not (c) REPORT REQUIRED.—The Commission ing with respect to transactions involving apply to an investment company registered shall submit a report on the analysis re- under section 8 of the Investment Company quired under subsection (a) as a part of the swaps of fiber optic cable capacity, in design- Act of 1940 (15 U.S.C. 80a–8). Commission’s next annual report submitted ing transactions that may have had the ef- after the date of enactment of this Act. fect of altering the company’s reported fi- SEC. 25. DEFINITIONS. nancial statements in ways that obscured SEC. 19. STUDY OF ENFORCEMENT ACTIONS. As used in this Act: the true financial picture of the company; (1) BLACKOUT PERIOD.—The term ‘‘blackout (a) STUDY REQUIRED.—The Commission shall review and analyze all enforcement ac- and period’’ with respect to the equity securities tions by the Commission involving viola- (3) generally, in creating and marketing of any issuer— tions of reporting requirements imposed transactions which may have been designed (A) means any period during which the under the securities laws, and restatements solely to enable companies to manipulate ability of at least fifty percent of the partici- of financial statements, over the last five revenue streams, obtain loans, or move li- pants or beneficiaries under all applicable in- years to identify areas of reporting that are abilities off balance sheets without altering dividual account plans maintained by the most susceptible to fraud, inappropriate ma- the economic and business risks faced by the issuer to purchase (or otherwise acquire) or nipulation, or inappropriate earnings man- companies or any other mechanism to ob- sell (or otherwise transfer) an interest in any agement, such as revenue recognition and scure a company’s financial picture. equity of such issuer is suspended by the the accounting treatment of off-balance (b) REPORT.—The General Accounting Of- issuer or a fiduciary of the plan; but sheet special purpose entities. fice shall report to the Congress within 180 (B) does not include— (b) REPORT REQUIRED.—The Commission days after the date of enactment of this Act (i) a period in which the employees of an shall report its findings to the Committee on on the results of the study required by this issuer may not allocate their interests in the Financial Services of the House of Rep- section. The report shall include a discussion individual account plan due to an express in- resentatives and the Committee on Banking, of regulatory or legislative steps that are vestment restriction— Housing, and Urban Affairs of the Senate recommended or that may be necessary to (I) incorporated into the individual ac- within 180 days of the date of enactment of address concerns identified in the study. count plan; and this Act and shall use such findings to revise SEC. 22. STUDY OF MODEL RULES FOR ATTOR- (II) timely disclosed to employees before its rules and regulations, as necessary. The NEYS OF ISSUERS. joining the individual account plan or as a report shall include a discussion of regu- (a) IN GENERAL.—The Comptroller General subsequent amendment to the plan; or latory or legislative steps that are rec- shall conduct a study of the Model Rules of (ii) any suspension described in subpara- ommended or that may be necessary to ad- Professional Conduct promulgated by the graph (A) that is imposed solely in connec- dress concerns identified in the study. American Bar Association and rules of pro- tion with persons becoming participants or SEC. 20. STUDY OF CREDIT RATING AGENCIES. fessional conduct applicable to attorneys es- beneficiaries, or ceasing to be participants or (a) STUDY REQUIRED.—The Commission tablished by the Commission to determine— beneficiaries, in an applicable individual ac- shall conduct a study of the role and func- (1) whether such rules provide sufficient count plan by reason of a corporate merger, tion of credit rating agencies in the oper- guidance to attorneys representing corporate acquisition, divestiture, or similar trans- ation of the securities market. Such study clients who are issuers required to file peri- action. shall examine— odic disclosures under section 13 or 15 of the (2) BOARDS OF ACCOUNTANCY OF THE (1) the role of the credit rating agencies in Securities Exchange Act of 1934 (15 U.S.C. STATES.—The term ‘‘boards of accountancy the evaluation of issuers of securities; 78m, 78o), as to the ethical responsibilities of of the States’’ means any organization or as- (2) the importance of that role to investors such attorneys to— sociation chartered or approved under the and the functioning of the securities mar- (A) warn clients of possible fraudulent or law of any State with responsibility for the kets; illegal activities of such clients and possible registration, supervision, or regulation of ac- (3) any impediments to the accurate ap- consequences of such activities; countants. praisal by credit rating agencies of the finan- (B) disclose such fraudulent or illegal ac- (3) COMMISSION.—The term ‘‘Commission’’ cial resources and risks of issuers of securi- tivities to appropriate regulatory or law en- means the Securities and Exchange Commis- ties; forcement authorities; and sion. (4) any measures which may be required to (C) manage potential conflicts of interests (4) INDIVIDUAL ACCOUNT PLAN.—The term improve the dissemination of information with clients; and ‘‘individual account plan’’ has the meaning

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00046 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.032 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1583 provided such term in section 3(34) of the And, third, we spell out the nature of tain redress from those officers and di- Employee Retirement Income Security Act the composition of this PRO. We do not rectors. The substitute does something of 1974 (29 U.S.C. 1002(34)). want all accountants, and now through about it, as President Bush wants. The (5) ISSUER.—The term ‘‘issuer’’ shall have an amendment it will not be all ac- main bill, the Republican bill, does the meaning set forth in section 2(a)(4) of the nothing. Securities Act of 1933 (15 U.S.C. 77b(a)(4)). countants, but we do not want the Ken Our substitute also empowers the (6) PERSON ASSOCIATED WITH AN ACCOUNT- Lays of this world on that review au- ANT.—The term ‘‘person associated with an thority, either. And so we spell out SEC in an enforcement proceeding to accountant’’ means any partner, officer, di- that it shall consist of representatives bar officers and directors from serving rector, or manager of such accountant (or of groups such as pension plans of pri- as an officer or director of a public any person occupying a similar status or per- vate employees, pension plans of public company if they are found guilty of forming similar functions), any person di- employees, et cetera. So what it shall wrongdoing and determined to be unfit. rectly or indirectly controlling, controlled do and who shall be on it are extremely This too was proposed by the Presi- by, or under common control with such ac- important and there is a fundamental dent. The SEC said that existing case countant, or any employee of such account- difference between the gentleman from law makes it virtually impossible for ant who performs a supervisory role in the them to do this, to bar unfit officers auditing process. Ohio’s approach which the Washington and directors. And what have the Re- (7) PUBLIC REGULATORY ORGANIZATION.—The Post this morning says punts on the term ‘‘public regulatory organization’’ issue and the approach that we would publicans done? They have taken that means the public regulatory organization es- take. bad case law and codified it. In that re- tablished by the Commission under sub- Secondly, who shall hire and who spect the Republican bill is worse than section (b) of section 2. shall fire the auditors? We think that the status quo. (8) SECURITIES LAWS.—The term ‘‘securities is an important issue. There has been Finally, with respect to securities laws’’ means the Securities Act of 1933 (15 too close of a relation between the analysts, the research analysts, most U.S.C. 77a et seq.), the Securities Exchange individuals rely most heavily on the Act of 1934 (15 U.S.C. 78a et seq.), the Trust CEOs, the CFOs, and the auditors. It has been an incestuous relationship. recommendations of Wall Street. Yet Indenture Act of 1939 (15 U.S.C. 77aaa et we regrettably have learned that there seq.), the Investment Company Act of 1940 We specify what virtually all good cor- (15 U.S.C. 80a–1 et seq.), the Investment Ad- porate governance individuals have has been a terrible relationship be- visers Act of 1940 (15 U.S.C. 80b et seq.), and been calling for now, a delineation of tween research analysts and the invest- the Securities Investor Protection Act of the rights and responsibilities of the ment banking arms of the securities 1970 (15 U.S.C. 78aaa et seq.), notwith- boards of directors and most especially firms. Research analysts have been standing any contrary provision of any such compensated in large part by the reve- Act. the audit committee. We say that the hiring and the firing of the auditors nues they have been able to generate The CHAIRMAN. Pursuant to House shall not be by the officers but by the for the investment banking arm of the firm because there are no fire walls Resolution 395, the gentleman from audit committee of the board of direc- within those firms between the re- New York (Mr. LAFALCE) and the gen- tors. That is a very important provi- search analyst and the investment tleman from Ohio (Mr. OXLEY) each sion. We also think that there should will control 20 minutes. banking. be a reasonable, but real, distinction The Republican bill has no fire walls The Chair recognizes the gentleman between auditing and nonauditing from New York (Mr. LAFALCE). whatsoever. Our substitute creates fire functions. walls. That is what has been called for Mr. LAFALCE. Mr. Chairman, I yield And so what we have done is taken by the Attorney General of the State of myself such time as I may consume. the Republican version, not the version New York, by the President of the Mr. Chairman, Members can vote that I offered in committee that the AFL-CIO, et cetera. Our bill says that against the substitute, and they can gentleman from Alabama (Mr. BACHUS) the research analysts’ compensation vote for final passage of the bill if they was referring to, and cleaned it up, want. This will enable them to put a shall in no way have any bearing to took out the language that made it revenues that are generated by the in- press release out to the public telling meaningless so that with the deletion them that they have done something vestment banking portion of the secu- of about one sentence, it can be mean- rities firm. This is extremely impor- meaningful about the problem. This ingful; and that is all we have done on will also enable them to go to cor- tant. What do the Republicans do? The that score. Except, of course, saying Republicans say, Gee, that’s an issue porate America, to the accounting pro- that the board of directors, too, is the fession, to Wall Street and receive at we ought to think about. one that should be hiring and firing the If Members want to please corporate the very least a pat on the back and auditors. America, the officers, if they want to they will tell them a job well done be- President Bush has also called for a please the accounting firms, if they cause they will be very pleased that an certain type of action. The Republican want to please Wall Street and be able opportunity to enact meaningful re- bill does nothing to effectuate what to put out a piece of paper that says form has been passed and eluded and President Bush called for. Our sub- they have done something about it, it avoided by passage of the Republican stitute, as President Bush called for, will be a wrong piece of paper, it will bill. I hope we will not let this oppor- requires CEOs and CFOs to certify the be a misleading piece of paper. They tunity pass without meaningful re- accuracy of their firm’s financial state- will be able to get a pat on the back form. ments. The Republican bill says noth- from all those special interests, but My substitute is the barest minimum ing on it and, therefore, leaves it to the they will not really be helping inves- of what is necessary to have meaning- voluntary discretion of corporate tors. Vote for the substitute. If the sub- ful reform. I say the barest minimum, America. That will not work. stitute passes, vote for final passage. If because I wanted to try to attract as The substitute also requires cor- the substitute should go down, oppose many votes as I possibly could. What porate officers who falsify their finan- this cosmetic approach that is being do we do? First of all, with respect to cial statements to disgorge their com- advanced to the floor today. auditing, we do a number of things. pensation, including stock bonuses and Mr. Chairman, I rise to offer a substitute for First of all, we say there shall be a other incentive pay for any period in H.R. 3763. As I described in detail earlier, the PRO, a professional review organiza- which they falsified statements. The bill before us does virtually nothing to correct tion. We do not make it permissive. We Republican bill does nothing on that the systemic flaws in our financial reporting do not say it is something the SEC score. It is absolutely outrageous that system. The substitute I offer will provide real may do, whatever they want to, if they corporate officers are able to walk reform to restore integrity to our financial mar- want to. Secondly, we spell out what away with tens of millions of dollars or kets and protect the savings and pensions its powers and responsibilities are. We more in the past 2- or 3-year period plans of millions of Americans that remain make it a real organization with pow- that they have been engaging in fraud- threatened by future Enrons. My substitute will ers and responsibilities in the legisla- ulent activity and misleading manipu- provide improvement and reform in several tion. We do not leave it totally to the lation of their earnings statement at major areas. discretion of the SEC, which may or the expense of investors. The investors First, the substitute would create a powerful may not do something. should be able to go after that and ob- new regulatory board with the authority and

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00047 Fmt 4634 Sfmt 9920 E:\CR\FM\A24AP7.032 pfrm15 PsN: H24PT1 H1584 CONGRESSIONAL RECORD — HOUSE April 24, 2002 responsibility to ensure that auditors will be publicly is almost impossible to meet. We b 1345 truly independent and objective. My substitute must not codify a standard that makes it hard- I commend the ranking member, the provides for a regulator that: Sets audit and er than ever for the SEC to obtain officer and gentleman from New York (Mr. LA- quality standards for auditors of public compa- director bars at a time when accounting fraud FALCE) for his efforts throughout this nies; possesses sweeping investigative and and earnings manipulation by corporate exec- process. In fact, many of his ideas were disciplinary powers over audit firms; and is utive is at an all time high. adopted by the committee. But his sub- controlled by a board comprised of public Finally, my substitute seeks to ensure that stitute amendment represents an hon- members and not the accounting history. This stock analysts are truly independent and ob- est difference of opinion between us. is a decidedly different approach from H.R. jective. The substitute achieves this by: Bar- I do not believe we should micro- 3763, which punts decisions on almost all of ring analysts from holding stock in the compa- manage the tough, new accountant reg- the functions and powers of the regulator to nies they cover; prohibiting analysts’ pay from ulatory body that we create. I do not the SEC. Only a regulator with explicit powers being based on their firms’ investment banking believe we should preempt the laws of and duties, and a defined composition, such revenue; and barring their firm’s investment the States with regard to how corpora- as the one I propose, will ensure that the banking department from having any input in tions are governed, and I do not believe abuses we witnessed in the Enron debacle will to analysts’ pay or promotion. The revelations we should overturn the will of the com- not be repeated. brought to light by Eliot Spitzer, the NY State mittee when it adopted this legislation. Second, while the Republican bill purports attorney general, in his investigations of major The President supports H.R. 3763. to prohibit auditors from providing their audit Wall street firms’ analysts, confirm the need to This legislation represents the ideas he clients with two nonaudit services—financial address analysts’ conflicts of interest. In urg- presented in his 10-point plan on cor- reporting systems design and internal audit- ing the Financial Services Committee to adopt porate responsibility. Where the Presi- ing—in reality, it prohibits nothing, merely reforms, Attorney General Spitzer stated, dent requests legislation, we legislate. codifying the limited restrictions in existing ‘‘[o]nly if the pernicious link between invest- Where the plan urges that the regu- SEC rules. In contrast, my amendment modi- ment banking and research compensation is lators be given the freedom to act, we fies the definitions of these two services to ac- severed will the public receive the unbiased give them that freedom. tually ban these consulting services, which research it deserves and the public market’s Mr. Chairman, I urge my colleagues create significant conflicts of interest for audi- integrity be preserved.’’ Unfortunately, as with to support the President’s plan. I urge tors. other important topics in this legislation, the my colleagues to support the bipar- Third, the substitute includes important cor- Republican bill requires only a study. tisan approach that the committee porate governance reforms that will ensure The Democratic substitute is a strong reform took in passing CARTA. I ask all of my that the audit committees of public companies bill that mandates tough corporate responsi- colleagues to reject the LaFalce have the authority they need to better protect bility and strict accounting industry reforms. I amendment and to pass H.R. 3763. shareholder interests. The substitute ensures urge Members to vote for the real reforms my Mr. Chairman, I reserve the balance that audit committees, not management, are substitute offers. of my time. Mr. LAFALCE. Mr. Chairman, I yield responsible for hiring and firing the auditors. It Mr. Chairman, I reserve the balance 2 minutes to the gentleman from Penn- requires that audit committees approve any of my time. consulting services that auditors provide to an sylvania (Mr. KANJORSKI), the distin- Mr. OXLEY. Mr. Chairman, I yield audit client. These provisions will ensure that guished ranking member of the Sub- myself 3 minutes. Mr. Chairman, as we auditors give their allegiance to shareholders, committee on Capital Markets, who have heard throughout this debate, not to corporate management. has done an outstanding job in this en- Fourth, in a bipartisan spirit, we have taken H.R. 3763 is a tough bill which imposes tire area and has shown tremendous three meritorious elements of President Bush’s much-needed reforms in the areas of leadership. proposals on corporate responsibility and ex- auditor and corporate responsibility Mr. KANJORSKI. Mr. Chairman, I ecutive accountability and given them legisla- and accountability. The legislation en- thank the gentleman from New York tive substance and real teeth,unlike the provi- sures that investors in America’s cap- for yielding me this time. sions contained in H.R. 3763. Our substitute ital markets will know that they have Mr. Chairman, I rise in favor of the requires CEOs and CFOs to certify the accu- access to accurate and understandable substitute amendment. I heard the racy of their firms’ financial statements. Viola- information regarding publicly traded chairman of the committee say that tion of this provision would carry with it the companies. this is the embodiment of the Presi- civil penalties provided for under the securities In the committee’s hearings and de- dent’s plan. If it is, then it is an exam- laws, and potentially criminal penalties for will- bate on H.R. 3763, we had an oppor- ple of the President having spoken on ful violations. The Republican bill contains no tunity to hear from a broad group of one occasion as to what is necessary, similar provision. It is essential that Congress regulators, investors, and corporate and then seeing it reduced to legisla- require officers of public companies to stand employees. We were told by some that tion that does not comport with what behind their public disclosures. It is the min- our proposal went too far. Others, not the President indicated in his public imum we should require. far enough. At the end of the day we appearances as to what he wanted us to The substitute requires corporate officers decided to strike a balance, create a do. who falsify their financial statements to dis- bill that is tough but fair, which pun- This is opting out. When we have an gorge their compensation, including stock bo- ishes those who do wrong, while en- opportunity to do something well, the nuses and other incentive pay, for any period couraging the vast number of Amer- underlying bill ignores or virtually sets in which they falsified statements. Our amend- ica’s honest and ethical companies to aside any of the real reform and just ment would empower the Securities and Ex- keep up the good work. plasters over the defects within the change Commission, SEC, to seek such a During the debate on the bill, the system. The substitute bill, although disgorgement in an administrative proceeding, committee had the opportunity to con- in my own opinion is maybe premature or in court. H.R. 3763 requires only a study of sider a similar substitute amendment in itself but we are stuck with the this issue, and limits the scope of any to the one Ranking Member LAFALCE rules of having to come here, I support disgorgement actions by the SEC to 6 months is offering today. After a fair debate, the substitute because it at least puts prior to a restatement. the committee rejected the amendment meat on the bones. It says something The amendment would also empower the by voice vote. The committee then to corporate America, that we are SEC in an enforcement proceeding to bar offi- adopted H.R. 3763 along bipartisan lines going to hold you responsible. We are cers and directors from serving as an officer with a vote of 49 to 12 with more Mem- going to hold corporate executives re- or director of a public company if they found bers of the minority voting for the bill sponsible when they put out state- guilty of wrongdoing and determined to be than against it. We should not overturn ments that are fraudulent or grossly unfit. It would also remove judicial hurdles to the bipartisan consensus reached by overstated. We are going to tell the ac- seeking such a bar in court. H.R. 3763, how- our committee. We should not reject counting industry that they cannot ever, makes obtaining director and officer bars the balanced approach taken by the have conflicts of interest and, if they more difficult, codifying the most restrictive ju- members of the committee, both Re- do, there is a penalty to be had, and dicial standard, a standard that the head of publican and Democrat, which will perhaps a loss of their business. We are the SEC’s Enforcement Division has stated make our markets stronger. going to say to Main Street America

VerDate Apr 18 2002 02:58 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00048 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.041 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1585 and the investors, that you can under- zation needs to address. That is why in- ticed and has not taken the pre- stand that corporate America plays by stead of specifying in great detail cautions to demand certain greater dis- the same rules you do, and that they every rule that we want them to pro- closures and more transparency in fi- are fair and they are honest and they mulgate, what we ought to do instead nancial reports and to punish compa- are straightforward; that they are not is set the broad parameters, and then nies that have engaged in perhaps dubi- swindlers, that they are not tellers of give them the authority to carry this ous accounting principles, and that untruth in order to encourage 50 per- out, together with the regulators like same kind of discipline is going to con- cent of the American people to make the SEC, and that is what the under- tinue; it is going to continue with re- investments in equities in our market lying bill does. spect to analysts and other matters be- today who are getting information that My main criticism of the substitute tween the market’s discipline. they cannot rely on. Not in all in- amendment is that it goes too far in In this bill, the underlying bill that stances, not all corporations by a long trying to micromanage this process in the majority is proposing, we take shot, but enough that we see a need for spelling out in great detail rules that some unprecedented measures. I am remedial legislation. ought to be left to the SEC and to oth- very confident we are going to encour- Instead, the underlying bill is an at- ers. age a greater degree of honesty and tempt to cover and do little or nothing. Mr Chairman, the ranking member transparency in financial statements. But in the substitute bill, we have sub- does an outstanding job and does a lot It is going to be extremely helpful. I stance, we have material that will cor- of great work in our committee. To- would suggest to my colleagues that rect some of the Enron problems, will day’s substitute differs from the sub- we reject the substitute, reject the give some form of integrity back to stitute he offered in the committee; it micromanagement of what should be Wall Street and some sort of support to is more similar to ours than the sub- done by regulators who have the exper- Main Street investors. stitute offered in committee. Maybe in tise in this area, and support the un- Mr. Chairman, I urge my colleagues another few weeks we would see some- derlying bill. to support the substitute amendment thing quite similar to our bill. In fact, Mr. LAFALCE. Mr. Chairman, I yield and, if that fails, to vote ‘‘no’’ on the it is not enormously different. I do not 2 minutes to the gentlewoman from underlying bill. think that the differences are that New York City (Mrs. MALONEY), the Mr. OXLEY. Mr. Chairman, I am huge, but they are important, and they distinguished ranking minority mem- pleased to yield 5 minutes to the gen- differ in the sense that I think the ber of the Subcommittee on Domestic tleman from Pennsylvania (Mr. ranking member has gone too far in Monetary Policy. TOOMEY). trying to specify details that ought to Mrs. MALONEY of New York. Mr. Mr. TOOMEY. Mr. Chairman, I thank be left to others. Chairman, I thank the gentleman for the gentleman for yielding me this Several have mentioned the Presi- yielding me this time, and I rise in time. I would start by observing that dent’s principles that have been dis- strong support of the LaFalce sub- the Enron debacle is obviously dev- cussed. Let there be no question about stitute. astating in many ways to many people. it: The President supports this bill. The implosion of Enron is a scandal One of the most devastating ways is The administration has issued a state- on a massive scale that demands a real the way that collapse has shaken pub- ment of their policy, and it clearly sup- response. Enron’s failure has shaken lic confidence and really raised the ports this bill. the accounting industry, once again ex- question about financial reporting, Let me look at a couple of the spe- posed the conflicts Wall Street ana- even in the accounting profession, and cifics in which the ranking member lysts face in rating stocks, and ruined the stability of our financial markets. gets very specific. Disgorgement is one. the lives of thousands of innocent em- This underlying bill is going to have But look at what we do with ployees and retirees. several very significant and very posi- disgorgement. We take a very tough For financial markets to work, inves- tive effects. It is going to help inves- approach. It is unprecedented, the ap- tors must be able to trust the informa- tors make better informed investment proach we take in this bill. If an officer tion on which they base decisions. decisions; there is no question about or director sells stock in a company 6 Auditors must not be under pressure to that. It is going to require greater dis- months prior to a restatement, then cook the books because their firm is closure. It is going to enhance audit the SEC can require the disgorgement chasing a consulting contract, and ana- quality and the quality of financial re- of any profits that were earned or lysts must not have their compensa- porting. By doing those things, it is avoided losses. That is probably all we tion tied to investment banking deals. going to increase the confidence in our need to say about this. Let us let the The LaFalce substitute best address- capital markets, our financial report- specifics be developed by the SEC. In- es each of these areas with concrete, ing system, and those effects can only stead, in the substitute, basically, the real reforms. The Enron scandal has be beneficial for our financial system SEC’s rule is written for them. I do not done serious, lasting damage to the and our economy and our economic think that is a good idea. reputation of the accounting industry. growth. With regard to analyst conflicts, The majority of accountants, many of I would remind my colleagues that again, this bill tries to micromanage whom live in my district, are honest this bill passed our committee by a how analyst conflicts should be ad- and hard-working, but this scandal has vote of 49 to 12. It was obviously sup- dressed. But we have entities, the revealed serious weaknesses in the in- ported by a bipartisan effort, and it NASD, the New York Stock Exchange, dustry’s oversight structure, and only takes some unprecedented measures. they are already in the process of pro- the substitute, the LaFalce substitute, We take some very dramatic steps, one ducing rules on how this is going to be directly spells out standards for a new of which is the creation of the Public governed. I think the ranking member, accounting oversight board. Regulatory Organization. This is going as well as other members on this com- We need a new accounting oversight to be an organization that is going to mittee, have had input on that rule- board because the current structure be able, for the first time, to really dis- making process. It is still under re- has failed dramatically. There are cipline accountants that violate stand- view. It is they who should be doing 17,000 public companies in the United ards of ethics, competency, or inde- this job, not us. States, and we may be down to just 4 pendence, and it includes even disbar- I think part of the problem with the major accounting firms to audit finan- ment. This is a major step in the regu- substitute is an underlying failure to cial statements. Therefore, we need lation of the accounting profession, a appreciate the ability of the market- stronger regulation. dramatic departure from the tradi- place to impose some discipline as well. It is not enough for Congress to dele- tional model in which this profession But we have already seen how severely gate regulation of the industry to the was entirely self-regulated. and appropriately investors have re- SEC. We owe it to the public to do the But I think that it is impossible for sponded to companies who have even job ourselves and support the LaFalce us to know today, here in this Cham- questionable accounting practices after substitute. ber, all of the answers to all of the this Enron debacle. It is not as though Long after the con men of Enron fade questions that that regulatory organi- the investment community has not no- from memory, the conflicts faced by

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00049 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.067 pfrm15 PsN: H24PT1 H1586 CONGRESSIONAL RECORD — HOUSE April 24, 2002 accountants and analysts will still be accounting industry and those who we are going to find that the economy in place unless Congress acts now. would steal from the American invest- of this country is going to hurt. Mr. OXLEY. Mr. Chairman, I am ing public. I say vote for the LaFalce amend- pleased to yield 2 minutes to the gen- Look at the history: Enron, Global ment, vote against the committee bill. tlewoman from New York (Mrs. Crossing, Baptist Foundation of Ari- The committee bill is a sad, sorry, and KELLY). zona, Waste Management, Sunbeam, repugnant joke. Vote for a piece of leg- Mrs. KELLY. Mr. Chairman, I rise in Xerox, Rite Aid, Microstrategy. Ac- islation that protects the American opposition to the substitute amend- countants and fat cat officers of cor- public. Vote for a piece of legislation ment offered by the gentleman from porations stole billions and lied to the that protects the investors of this Na- New York (Mr. LAFALCE). American investing public. That is tion. Let us give confidence to the mar- The substitute makes clear the dif- what happened, and that is what needs kets, instead of passing a sorry, silly ferent philosophical positions from to be corrected, and that is not what is charade like this. which we seek to address the problems addressed here. Mr. OXLEY. Mr. Chairman, I yield of the accounting industry. While The watchdogs in those cases and myself 30 seconds. CARTA gives broad authority to the many others were asleep, or benefiting Mr. Chairman, at least my friend, the SEC to set up the new public regu- from their wrongdoing, or just plain gentleman from Michigan, has been latory organization, this substitute blind. What is the response of the legis- consistent in his strong support for big stipulates exactly how it is going to be lation to this outrage? The bill passes government and lack of respect and set up, to what extent the powers will the buck to the SEC on every major recognition of the free market. So I be, regardless of what the experts may issue, and avoids addressing important congratulate him on his consistency, if think, especially the experts at the issues altogether by requiring that the nothing else. SEC. Unfortunately, I do not believe SEC conduct studies. Mr. Chairman, I yield 3 minutes to that most of these provisions would ac- If Members like studies and they the gentleman from Louisiana (Mr. tually do anything to prevent future want to waste money, that is a fine BAKER), the chairman of the Sub- Enrons and Global Crossings. So I am way to do it. If they want to hurt the committee on Capital Markets, Insur- thinking about what the American in- investing public, that is a fine way. ance, and Government Sponsored En- vestors do. I think the American inves- Enron would have loved this legisla- terprises. tors will only risk their savings based tion. Anderson would have found it to Mr. BAKER. Mr. Chairman, I thank on truth and transparency in the mar- be splendid. the gentleman for yielding time to me. ket. No smart investor should be re- I would be embarrassed to put a piece I would join him in recognizing the quired to buy a ‘‘pig in a poke.’’ of legislation of this kind on the House importance of the preceding speaker’s This bill provides control without floor. The LaFalce substitute ends the remarks in characterizing the legisla- choking the free market. The reason farcical self-regulation by the account- tion now pending before the House, as the people put their money in the mar- ing industry which is encouraged and in free enterprise, as buyer beware. We ket is to make a good return on their fostered by the committee bill. It cre- should carefully evaluate and analyze money. Many Americans have saved for ates a strong regulatory board that any representation made by some their retirement through pension funds sets strict standards for auditor inde- salesman as to his product. and 401(k)s. This money is often in- pendence and auditor quality, and it is I think it is also an advisable warn- vested in the markets, so the markets a shame if the House does not accom- ing to those listening to speeches by must function with transparency and plish this important reform today. Members of Congress. truth if we expect our citizens to invest The LaFalce substitute also requires Mr. Chairman, let me turn for a mo- their future in the stock of American executives to surrender ill-gotten gains ment to the criticism of the bill with corporations and other investment ve- made as a result of financial frauds, regard to analysts’ conduct. Some hicles that are offered in the markets. and empowers the SEC to bar officers would have us believe that this Con- The CARTA act will ensure trans- guilty of wrongdoing from serving with gress has turned its back, protecting parency and truth responsibly and ap- other companies so that they may the Wall Street interests, walking propriately. This substitute was de- steal again. I think that that is nec- away from the working families of feated during committee consideration essary. It also imposes strong penalties America, letting the pillaging continue and does not enjoy the broad bipartisan for lying, including criminal penalties. without restraint. support that the underlying bill enjoys. The committee bill actually makes it They seem to fail to remember just So I urge my colleagues on both sides harder for the SEC to bar crooked ex- last year this committee, with bipar- of the aisle to join us in opposition to ecutives from serving in other compa- tisan help, spent hours in evaluating this amendment. nies. On whose side are the authors of the approach to take in resolving inap- Mr. LAFALCE. Mr. Chairman, I yield this legislation? propriate conduct by analysts on Wall myself 10 seconds to advise the gentle- Mr. Chairman, our financial markets Street. woman that this substitute was never run on confidence. Those on this side Let me explain. When a company offered in committee, and what was of- apparently do not know that. If the wants to raise money on Wall Street, fered was defeated on a voice vote, not people have confidence, everybody they have to hire a firm to go sell their a recorded vote. makes lots of money. They do not run stock. In order to sell that stock, they Mr. Chairman, I yield 3 minutes to on money, and no confidence will exist, need to have a research department the gentleman from Michigan (Mr. DIN- where there is stealing, dishonesty, that says, is this a good investment or GELL), the distinguished dean of the false accounting, and the kinds of not? And investors rely on that re- House of Representatives, and the things which we have seen going on in search, understanding that the invest- ranking member of the Committee on the accounting industry. ment bank is separate from the re- Energy and Commerce, who for so I would note that it is time that we search. many years had jurisdiction over the deal with these things, and deal vigor- Well, unfortunately, that has not al- field of securities. ously. The American public wants ac- ways been the case. Apparently, in (Mr. DINGELL asked and was given tion. They do not trust the accounting, some limited instances, the research permission to revise and extend his re- they do not trust the financial mar- was held out by the investment bank marks.) kets, and they want to see something sort of as a marketing tool, to say, if in which they can have faith. you give us a good research product, b 1400 Unless and until Members do some- the investment bank gets the business, Mr. DINGELL. Mr. Chairman, I rise thing about the situation that the and huge profits were made. in strong support of the amendment American public sees, again with the Here is the change: Research integ- and in opposition to the bill. I say to Enrons and the other corporations rity is restored by having analyst inde- the sponsors of the legislation, shame. where this is going on, and about the pendence from investment bankers. This is a piece of drivel. It is not a Andersens, we are going to see no con- The investment banker cannot talk to piece of legislation, it is a gift to the fidence in the securities markets, and the research analyst anymore. They

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00050 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.069 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1587 have to be maintained in separate divi- Mr. LAFALCE. Mr. Chairman, I yield investigative and enforcement powers sions of the business, and there are 1 minute to the distinguished gen- needed to be an effective regulatory consequences if they do collude. tleman from Texas (Mr. BENTSEN), a agency. The SEC is not given the pow- It restricts the ties between analysts’ member of the Committee. ers needed to properly oversee its oper- compensation and investment banking (Mr. BENTSEN asked and was given ation. transactions. If there is any connec- permission to revise and extend his re- There is not a proper separation be- tion, if there is, it must be stated pub- marks.) tween the auditing and the consulting licly in a report for all to see, or else Mr. BENTSEN. Mr. Chairman, the functions that led to the very core of there is a violation of the law. underlying bill is not perfect, and I do the problems that were created that It prohibits promising favorable re- not think the substitute is necessarily have defrauded millions of Americans search for the investment bank to get perfect, but there are certain pieces of out of their hard-won savings. the work in compensation for the firm. the substitute that I think would make Mr. OXLEY. Mr. Chairman, I yield 1 So they cannot go out and use the re- the underlying bill better. minute to the gentlewoman from Illi- search department information for the Number one, the substitute is strong- nois (Mrs. BIGGERT). investment bank to go make the deal er on the issue of scope of services for Mrs. BIGGERT. Mr. Chairman, I rise with the corporation. That is illegal. auditing firms. Originally, I thought today in opposition to the amendment They cannot do it anymore. the gentleman from New York (Mr. LA- offered by the gentleman from New It limits analysts’ own purchasing FALCE) went too far in the committee. York (Mr. LAFALCE), who earlier and trading of stocks on which they The language he has adopted would claimed that the underlying bill would issue research, and prohibits trading bolster the language that the gen- make it harder for the SEC to ban offi- against their recommendations. It tleman from North Carolina (Mr. cers and directors from serving on cor- would be wrong if I were an analyst to WATT) and I put in the bill that was ac- porate boards. say, go buy, gobble it up, America, this cepted by the chairman, and I think Quite the contrary. For the first time is a great stock, and privately I was in that is very good in ensuring that the in history, H.R. 3763 will allow, through the back room selling my own interest SEC is on the job and doing what it is the administrative process, the SEC to to protect my financial position. This supposed to do. provide greater oversight of corporate prohibits such conduct, and there are Second of all, as the gentleman from officers. Currently, the SEC must go to penalties, including up to disbarment Michigan (Mr. DINGELL) pointed out, court to obtain such a ban. This change from the profession. the substitute is much stronger on giv- makes it easier, not harder, for the We require potential conflicts of in- ing authority to the SEC to remove of- SEC to go after malfeasance. H.R. 3763 terest to be disclosed clearly. If we ficers and directors who engage in mis- does not allow such a ban to be im- have missed something, if there is conduct in public companies, and I posed without providing at least min- something inappropriate that an inves- think that needs to be done. imum standards for the SEC to con- tor should know, they have a profes- I have some concerns, as the gen- sider. sional obligation to disclose it, and if tleman from Louisiana (Mr. BAKER) What we do in this bill is to provide they do not, there are penalties for pointed out, about the analyst provi- the SEC with the tools it needs to that inappropriate conduct. sions. I think they go too far. But I We have taken action. We have stood tighten corporate oversight without up to Wall Street. We are protecting think what the gentleman from New giving the SEC carte blanche author- working families across this country. York (Mr. LAFALCE) has put together ity. We cannot, as someone suggests, To vote against this bill would be in in the substitute would add greatly to grant the SEC unwarranted powers their disinterest. where we want this bill to go when it that would alter its appropriate role in Mr. LAFALCE. Mr. Chairman, I yield finally gets to the President’s desk. maintaining the integrity of the cap- 1 minute to the gentleman from Wash- For those reasons, I think I will sup- ital markets, but we should give the ington (Mr. INSLEE), a member of the port the substitute. SEC the ability to efficiently remove Committee. Mr. LAFALCE. Mr. Chairman, I yield those who have no business serving as (Mr. INSLEE asked and was given 1 minute and 15 seconds to the distin- corporate officers. permission to revise and extend his re- guished gentleman from Massachusetts Mr. LAFALCE. Mr. Chairman, I yield marks.) (Mr. MARKEY). 1 minute to the distinguished gen- Mr. INSLEE. Mr. Chairman, I speak Mr. MARKEY. Mr. Chairman, I rise tleman from the State of Washington in favor of the substitute and against in support of the LaFalce substitute (Mr. BAIRD). the bill. This Enron collapse really did and in opposition to the underlying Mr. BAIRD. Mr. Chairman, I thank rock underlying confidence in the bill. the ranking member for yielding time American people, and I think all of us Mr. Chairman, accounting is a boring to me. know that the American people want profession. It is easier to watch grass Mr. Chairman, thousands of workers and expect a real guard dog around grow than be an accountant, unless of Portland General Electric lost their their life’s savings, a bulldog, someone people want to engage in financial entire life’s savings when Enron col- with teeth, vigilance. fraud. Then it is a fascinating subject, lapsed. I praise the gentleman from This bill, charitably, has all the at- because it affects thousands or millions New York (Mr. LAFALCE) for intro- tributes of a Chihuahua. It fails. It of people, and that is what happened in ducing legislation that would have pre- fails to do even what the President of this country: Auditors decided they vented that tragedy. the United States has suggested to re- were going to be financiers at the same I am particularly concerned about a quire CEO accountability. time. They were going to play both provision in the Republican majority It fails in dealing with board inde- roles. bill which does not allow State boards pendence, to make sure that the board They cannot do that, and this bill of accountancy to know if there have answers to stockholders and not man- does not correct the fundamental, un- been irregularities and penalties im- agement by preventing payments to derlying problem that caused the posed. Let me refer Members to a letter the directors by management. Enron-Arthur Andersen scandal. It from James Caley, a CPA from Van- It fails to address the separation of does not go nearly far enough to deal couver, Washington, who called for pre- accounting services that even account- with the causes of the financial chica- cisely such notification. ing companies have adopted on their nery that have turned, overnight, peo- Mr. Caley wrote, ‘‘A system which own initiative. ple who thought they had their life’s encourages cooperation between State It fails and it is disappointing. It is savings protected into those who are and Federal regulatory agencies in- going to disappoint the American peo- wondering about the future. creases the overall effectiveness of ple, but it will not surprise the Amer- Specifically, the public regulatory both entities, ensuring maximum pro- ican people that the Republican Party, organization created by the bill is a tection to the public.’’ State agencies who gave us an energy policy based on joke. It is set up in such a way that it need to know if there have been irreg- Enron, is giving us an accounting pol- will be dominated and controlled by ularities recognized by Federal enti- icy based on Arthur Andersen. the accounting profession. It lacks the ties. The Republican bill, the majority

VerDate Apr 18 2002 01:31 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00051 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.072 pfrm15 PsN: H24PT1 H1588 CONGRESSIONAL RECORD — HOUSE April 24, 2002 bill, does not provide that notification. oversight organization, while strength- of this cosmetic excuse for a bill. I am dis- The substitute of the gentleman from ening the Securities and Exchange mayed to report that Republicans on the com- New York (Mr. LAFALCE) does. I com- Commission. mittee refused to even pass an amendment mend the gentleman for including that. We will ensure that the new rules for that called for CEO’s and CFO’s to certify fi- analysts are working as they are in- b 1415 nancial statements. I think most Americans tended, to provide higher-quality infor- would be surprised to learn that this is not a Mr. LAFALCE. Mr. Chairman, I yield mation for investors. We are going to requirement that already exists. myself the balance of my time. review corporate governance practices Employees and pension managers must be Mr. Chairman, I do not want individ- to ensure that they adequately protect involved in corporate decision making. Boards uals to kid themselves. If Members shareholders and employees. We will that are dominated by corporate executives vote against this substitute or even if look at the credit reporting agencies to are inherently flawed, a lesson we learned Members vote for the substitute, it ensure they are free of conflicts of in- from Enron’s collapse. goes down and then Members vote for terest and provide accurate reports. Enron’s collapse had a major impact on final passage of this bill, Members are CARTA really gets to the heart of working families—many lost their life savings voting for basically a cover-up because what went wrong. CEOs and other cor- while Enron’s executives gained millions. It is we are not dealing in a fundamental porate insiders will have to publicly re- estimated that Illinois’ state pension fund lost way with the fundamental problems. veal in 2 days when they sell their com- $25 million. That means that hard working We are not dealing with the problems pany stock, as compared with 60 days teachers, police officers, and firefighters who of officers who either knowingly or now. It will be a crime to try to inter- worked for the public good may not be able to through negligence engage in wrong- fere with an audit. And never again enjoy their hard-earned retirement. Back home doing. We are not dealing with the will employees be locked into owning in my home Chicago thousands of Andersen problems of directors. We are not deal- company stock while the executives employees have, through no fault of their own, are selling. ing with the problems of auditors. We lost their jobs. For this reason, as well as Mr. Chairman, today we have the are not dealing adequately with the many others, it is important that we do act in problems of research of the securities chance to offer more than just talk. Today we have a chance to take a scan- order to prevent those kinds of layoffs and to firms. protect investors and pension holders from un- You are relying on two things basi- dal and offer a real solution. Today, Mr. Chairman, we have an opportunity fettered corporate greed. I hope that the final cally in your bill, the SROs, the Self bill that is sent to the President’s desk will Regulatory Organizations. So let the to pass a bipartisan product that came out of the Committee on Financial make real reforms that will help prevent this officers and directors take care of from occurring, again. themselves. Let the securities individ- Services. Oppose the LaFalce sub- stitute and pass CARTA. A real reform bill will: uals take care of themselves. Let the Make sure that our auditors are inde- accountants take care of themselves. Ms. SCHAKOWSKY. Mr. Chairman, I am dismayed that the Republican leadership of pendent. And the magic of the marketplace, you Create a strong public regulatory body that say the marketplace will punish. The this body has not responded to the wide- spread corruption in our financial markets. The does not have conflict of interest or financial marketplace punishes investors. It does ties to the industry being regulated. not punish the wrongdoers. You have Republican so called ‘‘reforms’’ bill will not protect investors and pension holders from Ensure that investors have at least the got it wrong. same rights and receive the same treatment Mr. OXLEY. Mr. Chairman, I yield conflicts of interest and corporate greed. By failing to enact meaningful reform we are fail- as corporate executives. myself the balance of my time. Ensure those employees, investors and Mr. Chairman, we have had a good ing the American people. pension holders have access to pertinent in- debate here today about competing We all know that if not for Enron’s collapse formation and participate in corporate decision ideas. We made some decisions about we would not consider these important matters making. our direction and now it comes time to today. I am concerned that some want to Ensure that Enron executives cannot keep cast our vote. characterize the Enron collapse as just a case the money they stole from their employees Today we are acting for America’s of one bad actor in the market place. I dis- and investors. employees, retirees and investors. At agree with that interpretation. Enron’s collapse Our ranking member, JOHN LAFALCE, has the same time, we recognize that every has systemic causes. Corporate board of di- rectors, Wall Street analysts, and the big five crafted an alternative that will accomplish company in America is not an Enron, accounting firms all have an economic incen- these goals. Please join me in voting for his every company is not a Global Cross- tive to provide biased analysis of large, profit- substitute. ing. The vast majority of American able companies. Mr. OXLEY. Mr. Chairman, I yield companies are led and managed by Enron used its political ties to persuade the back the balance of my time. good, hard-working citizens. They want government to carry out its business plan. Just The CHAIRMAN. The question is on to provide benefits and a good living take a look at California, President Bush, his the amendment in the nature of a sub- for their employees and they want regulators, and congressional Republicans op- stitute offered by the gentleman from their companies to prosper and grow. posed price caps for consumers while Enron New York (Mr. LAFALCE). Similarly, the vast majority of ac- manipulated the market, causing the California The question was taken; and the countants are honest and trustworthy energy crisis. Enron had incredible access to Chairman announced that the noes ap- individuals who make an invaluable the White House. President Bush received peared to have it. contribution to our financial systems. over $736,000 throughout his career as an RECORDED VOTE If we have learned anything in recent elected official. Vice President CHENEY had at months, we have learned that we need Mr. LAFALCE. Mr. Chairman, I de- least six meetings with Enron officials while mand a recorded vote. a strong and vibrant accounting com- drafting the Administration’s energy plan. munity to give us that objective view A recorded vote was ordered. Enron’s economic and political power effec- The vote was taken by electronic de- of companies’ financial conditions. tively muted people who were skeptical of the We understand to overreact would vice, and there were—ayes 202, noes 219, company’s economic stability. Enron is not an not voting 13, as follows: make things worse, not better as isolated case and this is not only a business [Roll No. 108] Chairman Greenspan and Chairman scandal it is also a political scandal. Pitt both admonished in testimony be- The fact of the matter is we do not have the AYES—202 fore our committee. So we are not laws and procedures in place to protect com- Abercrombie Bentsen Brady (PA) going to make life even more difficult mon investors. I have little doubt that cor- Ackerman Berkley Brown (FL) Allen Berman Brown (OH) for every American company that is porate executives’ greed and deception will Andrews Berry Capps just trying to come out of a slump. We victimize more people. We in Congress cannot Baca Bishop Capuano will ask them to provide more and bet- simply rely on free market dogma. The Amer- Baird Blumenauer Cardin ter information. We will ask them to Baldacci Bonior Carson (IN) ican people deserve better than this sham of Baldwin Borski Carson (OK) take on some more corporate responsi- a reform bill. Barcia Boswell Clay bility, and we will support the account- I am a member of the Financial Services Barrett Boucher Clayton ing industry with a solid and effective Committee and I voted against final passage Becerra Boyd Clement

VerDate Apr 18 2002 04:01 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00052 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.074 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1589 Clyburn Johnson, E. B. Owens Lucas (KY) Putnam Smith (NJ) ment in the nature of a substitute Condit Jones (OH) Pallone Lucas (OK) Quinn Smith (TX) Conyers Kanjorski Pascrell Manzullo Radanovich Souder adopted by the Committee of the Costello Kaptur Pastor McCrery Ramstad Stearns Whole? If not, the question is on the Coyne Kennedy (RI) Payne McHugh Regula Stump amendment. Cramer Kildee Pelosi McKeon Rehberg Sullivan The amendment was agreed to. Crowley Kilpatrick Phelps Mica Reynolds Sununu Cummings Kind (WI) Pomeroy Miller, Dan Riley Sweeney The SPEAKER pro tempore. The Davis (CA) Kleczka Price (NC) Miller, Gary Roemer Tancredo question is on engrossment and third Davis (FL) Kucinich Rahall Miller, Jeff Rogers (KY) Tauzin reading of the bill. Davis (IL) LaFalce Rangel Moran (KS) Rogers (MI) Taylor (NC) The bill was ordered to be engrossed DeFazio Lampson Reyes Morella Rohrabacher Terry Delahunt Langevin Rivers Myrick Ros-Lehtinen Thomas and read a third time, and was read the DeLauro Lantos Ross Nethercutt Roukema Thornberry third time. Deutsch Larsen (WA) Rothman Ney Royce Tiahrt MOTION TO RECOMMIT OFFERED BY MR. LAFALCE Dicks Larson (CT) Roybal-Allard Northup Ryan (WI) Tiberi Dingell Lee Rush Norwood Ryun (KS) Toomey Mr. LAFALCE. Mr. Speaker, I offer a Doggett Levin Sabo Nussle Saxton Upton motion to recommit. Dooley Lewis (GA) Sanchez Osborne Schaffer Vitter The SPEAKER pro tempore. Is the Doyle Lipinski Sanders Ose Schrock Walden gentleman opposed to the bill? Edwards Lofgren Sandlin Otter Sensenbrenner Walsh Engel Lowey Sawyer Oxley Sessions Wamp Mr. LAFALCE. I am, Mr. Speaker. Eshoo Luther Schakowsky Paul Shadegg Watkins (OK) The SPEAKER pro tempore. The Etheridge Lynch Schiff Pence Shaw Weldon (FL) Clerk will report the motion to recom- Evans Maloney (CT) Scott Peterson (MN) Shays Weldon (PA) mit. Farr Maloney (NY) Serrano Peterson (PA) Sherwood Weller Fattah Markey Sherman Petri Shimkus Whitfield The Clerk read as follows: Filner Mascara Skelton Pickering Shows Wicker Mr. LAFALCE moves to recommit the bill Ford Matheson Slaughter Pitts Shuster Wilson (NM) H.R. 3763 to the Committee on Financial Frank Matsui Snyder Platts Simmons Wilson (SC) Services with instructions to report the Frost McCarthy (MO) Solis Pombo Simpson Wolf same back to the House forthwith with the Gephardt McCarthy (NY) Spratt Portman Skeen Young (AK) following amendment: Gonzalez McCollum Stenholm Pryce (OH) Smith (MI) Young (FL) AMENDMENT TO H.R. 3763, AS REPORTED Gordon McDermott Strickland NOT VOTING—13 Green (TX) McGovern Stupak OFFERED BY MR. LAFALCE OF NEW YORK Gutierrez McInnis Tanner Blagojevich Houghton Thune (executive responsibility) Hall (OH) McIntyre Tauscher Davis, Tom Obey Traficant Hall (TX) McKinney Taylor (MS) DeGette Rodriguez Watts (OK) Strike sections 11 and 12 and insert the fol- Harman McNulty Thompson (CA) Ferguson Smith (WA) lowing (and redesignate the succeeding sec- Hastings (FL) Meehan Thompson (MS) Gilchrest Stark tions and conform the table of contents ac- Hill Meek (FL) Thurman cordingly): Hilliard Meeks (NY) Tierney b 1440 Hinchey Menendez Towns Mr. JOHNSON of Illinois and Mr. SEC. 11. REMOVAL OF UNFIT CORPORATE OFFI- Hinojosa Millender- Turner CERS. Hoeffel McDonald Udall (CO) YOUNG of Alaska changed their vote (a) REMOVAL IN JUDICIAL PROCEEDINGS.— Holden Miller, George Udall (NM) from ‘‘aye’’ to ‘‘no.’’ (1) SECURITIES ACT OF 1933.—Section 20(e) of Holt Mink Velazquez Messrs. UDALL of Colorado, the Securities Act of 1933 (15 U.S.C. 77t(e)) is Honda Mollohan Visclosky MCINNIS and BARCIA changed their amended by striking ‘‘substantial unfitness’’ Hooley Moore Waters and inserting ‘‘unfitness’’. Hoyer Moran (VA) Watson (CA) vote from ‘‘no’’ to ‘‘aye.’’ Inslee Murtha Watt (NC) So the amendment in the nature of a (2) SECURITIES EXCHANGE ACT OF 1934.—Sec- Israel Nadler Waxman substitute was rejected. tion 21(d)(2) of the Securities Exchange Act Jackson (IL) Napolitano Weiner The result of the vote was announced of 1934 (15 U.S.C. 78u(d)(2)) is amended by Jackson-Lee Neal Wexler as above recorded. striking ‘‘substantial unfitness’’ and insert- (TX) Oberstar Woolsey Stated against: ing ‘‘unfitness’’. Jefferson Olver Wu (b) REMOVAL IN ADMINISTRATIVE PRO- John Ortiz Wynn Mr. WATTS of Oklahoma. Mr. Chairman, on CEEDINGS.— rollcall No. 108, I was inadvertently detained. (1) SECURITIES ACT OF 1933.—Section 8A of NOES—219 Had I been present, I would have voted ‘‘no.’’ the Securities Act of 1933 (15 U.S.C. 77h–1) is Aderholt Crenshaw Hansen Mr. FERGUSON. Mr. Chairman, on rollcall amended by adding at the end the following Akin Cubin Hart No. 108, I was unavoidably detained. Had I new subsection: Armey Culberson Hastings (WA) been present, I would have voted ‘‘no.’’ ‘‘(f) AUTHORITY TO PROHIBIT PERSONS FROM Bachus Cunningham Hayes Baker Davis, Jo Ann Hayworth The CHAIRMAN. There being no fur- SERVING AS OFFICERS OR DIRECTORS.—In any Ballenger Deal Hefley ther amendments permitted under the cease-and-desist proceeding under subsection Barr DeLay Herger rule, the question is on the committee (a), the Commission may issue an order to Bartlett DeMint Hilleary amendment in the nature of a sub- prohibit, conditionally or unconditionally, Barton Diaz-Balart Hobson and permanently or for such period of time Bass Doolittle Hoekstra stitute, as amended. The amendment in the nature of a as it shall determine, any person who has Bereuter Dreier Horn violated section 17(a)(1) of this title from Biggert Duncan Hostettler substitute, as amended, was agreed to. acting as an officer or director of any issuer Bilirakis Dunn Hulshof The CHAIRMAN. Under the rule, the Blunt Ehlers Hunter that has a class of securities registered pur- Boehlert Ehrlich Hyde Committee rises. suant to section 12 of the Securities Ex- Boehner Emerson Isakson Accordingly, the Committee rose; change Act of 1934 or that is required to file Bonilla English Issa and the Speaker pro tempore (Mr. reports pursuant to section 15(d) of that Act Bono Everett Istook LAHOOD) having assumed the chair, Mr. if the person’s conduct demonstrates Boozman Flake Jenkins unfitness to serve as an officer or director of Brady (TX) Fletcher Johnson (CT) SWEENEY, Chairman of the Committee Brown (SC) Foley Johnson (IL) of the Whole House on the State of the any such issuer.’’. Bryant Forbes Johnson, Sam Union, reported that that Committee, (2) SECURITIES EXCHANGE ACT OF 1934.—Sec- Burr Fossella Jones (NC) having had under consideration the bill tion 21C of the Securities Exchange Act of Burton Frelinghuysen Keller 1934 (15 U.S.C. 78u–3) is amended by adding at Buyer Gallegly Kelly (H.R. 3763) to protect investors by im- the end the following new subsection: Callahan Ganske Kennedy (MN) proving the accuracy and reliability of ‘‘(f) AUTHORITY TO PROHIBIT PERSONS FROM Calvert Gekas Kerns corporate disclosures made pursuant to SERVING AS OFFICERS OR DIRECTORS.—In any Camp Gibbons King (NY) Cannon Gillmor Kingston the securities laws, and for other pur- cease-and-desist proceeding under subsection Cantor Gilman Kirk poses, pursuant to House Resolution (a), the Commission may issue an order to Capito Goode Knollenberg 395, he reported the bill back to the prohibit, conditionally or unconditionally, Castle Goodlatte Kolbe House with an amendment adopted by and permanently or for such period of time Chabot Goss LaHood as it shall determine, any person who has Chambliss Graham Latham the Committee of the Whole. violated section 10(b) of this title or the Coble Granger LaTourette The SPEAKER pro tempore. Under rules or regulations thereunder from acting Collins Graves Leach the rule, the previous question is or- Combest Green (WI) Lewis (CA) as an officer or director of any issuer that Cooksey Greenwood Lewis (KY) dered. has a class of securities registered pursuant Cox Grucci Linder Is a separate vote demanded on any to section 12 of this title or that is required Crane Gutknecht LoBiondo amendment to the committee amend- to file reports pursuant to section 15(d) of

VerDate Apr 18 2002 04:01 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00053 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.058 pfrm15 PsN: H24PT1 H1590 CONGRESSIONAL RECORD — HOUSE April 24, 2002 this title if the person’s conduct dem- present in all material respects the financial their company’s public disclosures, in- onstrates unfitness to serve as an officer or condition and results of operations of the cluding their financial statements. director of any such issuer.’’. issuer as of, and for, the periods presented in CEOs would personally attest each SEC. 12. DISGORGEMENT REQUIRED. the report; quarter that the financial statements (4) the signing officers— (a) ADMINISTRATIVE ACTIONS.—Within 30 and company disclosures accurately days after the date of enactment of this Act, (A) are responsible for establishing and the Securities and Exchange Commission maintaining internal controls; and fairly disclose the information of shall prescribe regulations to require (B) have designed such internal controls to which the CEO is aware that a reason- disgorgement, in a proceeding pursuant to ensure that material information relating to able investor should have to make an its authority under section 21A, 21B, or 21C the issuer and its consolidated subsidiaries is informed investment decision. The Re- of the Securities Exchange Act of 1934 (15 made known to such officers by others with- publican version leaves it up to cor- U.S.C. 78u–1, 78u–2, 78u–3), of salaries, com- in those entities, particularly during the pe- porate America to do this or not do missions, fees, bonuses, options, profits from riod in which the periodic reports are being this. The motion to recommit legisla- securities transactions, and losses avoided prepared; tively codifies this Presidential rec- through securities transactions obtained by (C) have evaluated the effectiveness of the issuer’s internal controls as of a date within ommendation. an officer or director of an issuer during or Secondly, the President said, CEOs or for a fiscal year or other reporting period if 90 days prior to the report; and such officer or director engaged in mis- (D) have presented in the report their con- other officers should not be allowed to conduct resulting in, or made or caused to be clusions about the effectiveness of their in- profit from erroneous financial state- made in, the filing of a financial statement ternal controls based on their evaluation as ments. We codify that, too, and they for such fiscal year or reporting period of that date; say cannot profit from it and we could which— (5) the signing officers have disclosed to obtain their moneys back. (1) was at the time, and in the light of the the issuer’s auditors and the audit com- circumstances under which it was made, mittee of the board of directors (or persons b 1445 false or misleading with respect to any mate- fulfilling the equivalent function)— The motion to recommit also deals in rial fact; or (A) all significant deficiencies in the de- a markedly different way from the Re- (2) omitted to state a material fact nec- sign or operation of internal controls which publican bill with respect to the sur- essary in order to make the statements could adversely affect the issuer’s ability to rendering of officer compensation, in- record, process, summarize, and report finan- made, in the light of the circumstances in cluding stock bonuses and other incen- which they were made, not misleading. cial data and have identified for the issuer’s (b) JUDICIAL PROCEEDINGS.—Section 21(d) of auditors any material weaknesses in internal tive pay. The motion to recommit em- the Securities Exchange Act of 1934 (15 controls; and powers the SEC, in either an adminis- U.S.C. 78u(d)) is amended by adding at the (B) any fraud, whether or not material, trative proceeding or in court, to seek end the following new paragraph: that involves management or other employ- such disgorgement. ‘‘(5) ADDITIONAL DISGORGEMENT AUTHOR- ees who have a significant role in the issuer’s The Republican bill says that the ITY.—In any action or proceeding brought or internal controls; and SEC shall study the issue and then, if instituted by the Commission under the se- (6) the signing officers have indicated in they make a determination that it is curities laws against any person— the report whether or not there were signifi- warranted, they can go back and seek ‘‘(A) for engaging in misconduct resulting cant changes in internal controls or in other disgorgement, but only for what took in, or making or causing to be made in, the factors that could significantly affect inter- filing of a financial statement which— nal controls subsequent to the date of their place in the past 6 months; and if some- ‘‘(i) was at the time, and in the light of the evaluation, including any corrective actions thing took place 7 months or so ago, circumstances under which it was made, with regard to significant deficiencies and they made $10 million, $20 million, and false or misleading with respect to any mate- material weaknesses. they are home free under the Repub- rial fact; or (b) DEADLINE.—The rules required by sub- lican bill. That is an absurdity. ‘‘(ii) omitted to state a material fact nec- section (a) shall be effective not later than 30 Vote for the motion to recommit. essary in order to make the statements days after the date of enactment of this Act. And then, third, I want to read to my made, in the light of the circumstances in In section 21, strike ‘‘and 15’’ and insert colleagues from a speech given by the which they were made, not misleading; or ‘‘and 16’’. head of enforcement of President ‘‘(B) for engaging in, causing, or aiding and Mr. LAFALCE (during the reading). Bush’s SEC just about a month or so abetting any other violation of the securities Mr. Speaker, I ask unanimous consent ago. He is referring to judicially de- laws or the rules and regulations thereunder, that the motion be considered as read creed tests that you have to adhere to such person, in addition to being subject to and printed in the RECORD. before you can declare an officer or di- any other appropriate order, may be required The SPEAKER pro tempore. Is there to disgorge any or all benefits received from rector unfit to serve at a future firm. any source in connection with the conduct objection to the request of the gen- And he says, ‘‘These tests, which re- constituting, causing, or aiding and abetting tleman from New York? quire, amongst other things, a showing the violation, including (but not limited to) There was no objection. that the misconduct at issue is likely salary, commissions, fees, bonuses, options, The SPEAKER pro tempore. The gen- to recur, has created an unreasonably profits from securities transactions, and tleman from New York is recognized high standard for obtaining a bar. The losses avoided through securities trans- for 5 minutes on his motion to recom- result has been, unbelievably, that in actions.’’. mit. some cases courts have refused to im- SEC. 13. CEO AND CFO ACCOUNTABILITY FOR Mr. LAFALCE. Mr. Speaker, I am pose permanent officer and director DISCLOSURE. trying to make the motion to recom- (a) REGULATIONS REQUIRED.—The Securi- bars on individuals who have engaged ties and Exchange Commission shall by rule mit easy to vote for and very difficult in egregious, even criminal mis- require, for each company filing periodic re- to vote against, and how am I doing conduct.’’ ports under section 13 or 15(d) of the Securi- this? What do the Republicans do? They ties Exchange Act of 1934 (15 U.S.C. 78m, First of all, I am taking the Repub- codify that test that the SEC de- 78o(d)), that the principal executive officer lican bill that has been passed in its nounces. We give the SEC the author- or officers and the principal financial officer entirety with three exceptions, and the ity they have said they need in order to or officers, or persons performing similar exceptions were all called for by Presi- bar such individuals who are unfit from functions, certify in each annual or quar- terly report filed or submitted under either dent George Bush who offered a 10- serving as future officers and directors. such section of such Act that— point plan. Three of those points re- The only reason to vote against the (1) the signing officer has reviewed the re- quire, in my judgment, legislation. motion to recommit is partisanship. port; The Republican bill does nothing We ought to transcend that, because (2) based on the officer’s knowledge, the re- about it. The motion to recommit we are taking the Republican bill and port does not contain any untrue statement would report out the bill that the floor President Bush’s recommendations of a material fact or omit to state a material has just reported, but with the three which we have codified. Do not go fact necessary in order to make the state- separate addition. What are they? First home and say that you have passed ments made, in light of the circumstances of all, let me read from the President’s something that is meaningful when under which such statements were made, not misleading; proposal. corporate America and the accounting (3) based on such officer’s knowledge, the The President in proposal Number 3 firms and Wall Street are going to give financial statements, and other financial in- says, CEOs should personally vouch for you a pat on the back for letting them formation included in the report, fairly the veracity, timeliness and fairness of escape once again.

VerDate Apr 18 2002 01:51 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00054 Fmt 4634 Sfmt 0634 E:\CR\FM\A24AP7.059 pfrm15 PsN: H24PT1 April 24, 2002 CONGRESSIONAL RECORD — HOUSE H1591 Mr. OXLEY. Mr. Speaker, I rise in amendment which deals with removal Barrett Hilliard Nadler strong opposition to the motion to re- Becerra Hinchey Napolitano of unfit corporate officers is more ap- Bentsen Hinojosa Neal commit. propriately addressed in the underlying Berkley Hoeffel Oberstar Mr. BAKER. Mr. Speaker, will the bill. CARTA, the bill before us, gives Berman Holden Obey gentleman yield? the SEC the authority to administra- Berry Holt Olver Mr. OXLEY. I yield to the gentleman Bishop Honda Ortiz tively bar directors and officers from Blumenauer Hooley Owens from Louisiana, the chairman of the serving in public companies. Under our Bonior Hoyer Pallone Subcommittee on Capital Markets, In- legislation, the commission no longer Borski Inslee Pascrell surance, and Government Sponsored would have to go to Federal Court to Boswell Israel Pastor Enterprises. Boucher Jackson (IL) Payne do this. The SEC must consider a num- Boyd Jackson-Lee Pelosi Mr. BAKER. Mr. Speaker, I thank ber of factors, longstanding standards Brady (PA) (TX) Phelps the gentleman for yielding to me. used by the courts, in order to make Brown (FL) Jefferson Pomeroy It was 1896, and the Dow Jones indus- Brown (OH) John Price (NC) that determination. Our language is trial average was constructed. Today, Capps Johnson, E. B. Rahall endorsed by the White House. 106 years later, only one United States Capuano Jones (OH) Rangel CARTA also prevents corporate offi- Cardin Kanjorski Reyes corporation remains in existence that cers from profiting from erroneous fi- Carson (IN) Kaptur Rivers was included in that publication of Carson (OK) Kennedy (RI) Roemer nancial statements. Our legislation that first Dow Jones average. Clay Kildee Ross Capital markets, free markets, are was carefully crafted with the focus on Clayton Kilpatrick Rothman bad actors. This language is also en- Clement Kind (WI) Roybal-Allard difficult because of the enormous com- Clyburn Kleczka Rush petition that exists to succeed, but it dorsed by the White House. Condit Kucinich Sabo yields tremendous benefit for us all. On the issue of CEO certification, we Conyers LaFalce Sanchez are sympathetic to this well-inten- Costello Lampson Sanders Today, we are about a debate in how to Coyne Langevin Sandlin best regulate those aberrant actors in tioned legislative provision, but it is Cramer Lantos Sawyer the marketplace. important to note that the President Crowley Larsen (WA) Schakowsky Let it be understood, the vast major- never requested legislation to accom- Cummings Larson (CT) Schiff plish this objective. The SEC already Davis (CA) Lee Scott ity of professionals who conduct their Davis (FL) Levin Serrano business in all sectors of the market- has the authority to require certifi- Davis (IL) Lewis (GA) Sherman place today, are that, professional. We cation and is currently considering DeFazio Lipinski Skelton are acting today to identify those few whether to do so. The SEC is in the DeGette Lofgren Slaughter Delahunt Lowey Snyder aberrant actors who have brought best position to decide whether and DeLauro Luther Solis about great harms to innocent third how such a requirement would operate. Deutsch Lynch Spratt parties. And act we shall. It would do more harm than good to Dicks Maloney (CT) Stark It is important to recognize that in legislatively mandate what such a rule Dingell Maloney (NY) Stenholm Doggett Markey Strickland constructing this regulatory or legisla- would look like, and that is exactly Dooley Mascara Stupak tive oversight that we not go too far. what we were told by Chairman Green- Doyle Matheson Tanner In evidence of the point, this bill came span and Chairman Pitt. Edwards Matsui Tauscher Engel McCarthy (MO) Taylor (MS) out of our committee by a 16-to-12 vote Proponents say this is the Presi- Eshoo McCarthy (NY) Thompson (CA) by Democrat Members. They see it as dent’s plan. The fact is, nothing could Etheridge McCollum Thompson (MS) reasonable. They see it as an appro- be further from the truth. Let us be Evans McDermott Thurman priate first step. clear. The President endorses the un- Farr McGovern Tierney Fattah McIntyre Towns We have a higher obligation. All derlying legislation, the CARTA legis- Filner McKinney Turner those working families today who lation. If my friends want to advance Ford McNulty Udall (CO) struggle to make ends meet and invest the President’s agenda, they should Frank Meehan Udall (NM) either in their 401(k) by payroll deduc- Frost Meek (FL) Velazquez support the underlying bill and reject Gephardt Meeks (NY) Visclosky tion or by putting that $200 online in- the motion. Gonzalez Menendez Waters vestment through their computer at Oppose the motion to recommit. Pass Gordon Millender- Watson (CA) home expect fairness. That is what this Green (TX) McDonald Watt (NC) this CARTA legislation, this historic Gutierrez Miller, George Waxman bill is about: honest, transparent dis- legislation. It is in the best interest of Hall (OH) Mink Weiner closure, so you can make informed de- the investing public and the United Hall (TX) Mollohan Wexler cisions for your family to buy that States. Harman Moore Woolsey first home, invest for your children’s Hastings (FL) Moran (VA) Wu The SPEAKER pro tempore (Mr. Hill Murtha Wynn education, or for your own retirement. SWEENEY). Without objection, the pre- Inscribed on this wall behind us is an vious question is ordered on the motion NOES—222 admonition to Members of the House to recommit. Aderholt Castle Foley that I read every day. ‘‘Let us develop There was no objection. Akin Chabot Forbes the resources of the land, call forth its Armey Chambliss Fossella The SPEAKER pro tempore. The Bachus Coble Frelinghuysen powers, build up its institutions, pro- question is on the motion to recommit. mote all its great interests, and see Baker Collins Gallegly The question was taken; and the Ballenger Combest Ganske whether we also in this hour, day, and Speaker pro tempore announced that Barr Cooksey Gekas generation may perform something Bartlett Cox Gibbons the noes appeared to have it. worthy to be remembered.’’ Barton Crane Gillmor RECORDED VOTE Bass Crenshaw Gilman Daniel Webster is telling us what our Bereuter Cubin Goode job is. Let us make a difference. Let us Mr. LAFALCE. Mr. Speaker, I de- Biggert Culberson Goodlatte stand for the working people of Amer- mand a recorded vote. Bilirakis Cunningham Goss ica today. Let us not let the Wall A recorded vote was ordered. Blunt Davis, Jo Ann Graham Boehlert Davis, Tom Granger Street interests take away people’s fu- The SPEAKER pro tempore. Pursu- Boehner Deal Graves ture by disclosing inappropriate infor- ant to clause 9 of rule XX, the Chair Bonilla DeLay Green (WI) mation. That is what this bill is about. will reduce to 5 minutes the minimum Bono DeMint Greenwood time for any electronic vote on the Boozman Diaz-Balart Grucci It is about standing in the face of those Brady (TX) Doolittle Gutknecht who have abused their corporate and question of passage. Brown (SC) Dreier Hansen business opportunities to the disin- The vote was taken by electronic de- Bryant Duncan Hart terest of their employees and their in- vice, and there were—ayes 205, noes 222, Burr Dunn Hastings (WA) Burton Ehlers Hayes vestors. not voting 7, as follows: Buyer Ehrlich Hayworth We can make a difference. Vote down [Roll No. 109] Callahan Emerson Hefley the motion to recommit and pass this Calvert English Herger AYES—205 Camp Everett Hilleary bill. Abercrombie Andrews Baldacci Cannon Ferguson Hobson Mr. OXLEY. Mr. Speaker, reclaiming Ackerman Baca Baldwin Cantor Flake Hoekstra my time, the first provision in the Allen Baird Barcia Capito Fletcher Horn

VerDate Apr 18 2002 01:51 Apr 25, 2002 Jkt 099060 PO 00000 Frm 00055 Fmt 4634 Sfmt 0634 E:\CR\FM\K24AP7.080 pfrm15 PsN: H24PT1 H1592 CONGRESSIONAL RECORD — HOUSE April 24, 2002 Hostettler Nethercutt Shays Crane Jefferson Radanovich Delahunt Lee Pelosi Hulshof Ney Sherwood Crenshaw Jenkins Ramstad DeLauro Levin Rahall Hunter Northup Shimkus Crowley John Regula Dingell Lewis (GA) Rangel Hyde Norwood Shows Cubin Johnson (CT) Rehberg Doggett Lowey Rivers Isakson Nussle Shuster Culberson Johnson (IL) Reyes Engel Lynch Roybal-Allard Issa Osborne Simmons Cummings Johnson, E. B. Reynolds Evans Maloney (NY) Rush Istook Ose Simpson Cunningham Johnson, Sam Riley Fattah Markey Sabo Jenkins Otter Skeen Davis (CA) Jones (NC) Roemer Filner McDermott Sanders Johnson (CT) Oxley Smith (MI) Flake McGovern Davis (FL) Keller Rogers (KY) Sawyer Johnson (IL) Paul Smith (NJ) Davis, Jo Ann Kelly Frank McKinney Rogers (MI) Schakowsky Johnson, Sam Pence Smith (TX) Davis, Tom Kennedy (MN) Gephardt McNulty Rohrabacher Scott Jones (NC) Peterson (MN) Souder Deal Kennedy (RI) Ros-Lehtinen Hastings (FL) Meehan Serrano Keller Peterson (PA) Stearns DeLay Kerns Ross Hinchey Meek (FL) Slaughter Kelly Petri Stump DeMint Kind (WI) Rothman Honda Miller, George Solis Kennedy (MN) Pickering Sullivan Deutsch King (NY) Roukema Jackson (IL) Mink Kerns Pitts Sununu Diaz-Balart Kingston Royce Jackson-Lee Mollohan Stark King (NY) Platts Sweeney Dicks Kirk Ryan (WI) (TX) Murtha Tierney Kingston Pombo Tancredo Dooley Kleczka Ryun (KS) Jones (OH) Nadler Udall (NM) Kirk Portman Tauzin Doolittle Knollenberg Sanchez Kanjorski Neal Visclosky Knollenberg Pryce (OH) Taylor (NC) Doyle LaHood Sandlin Kaptur Oberstar Waters Kolbe Putnam Terry Dreier Lampson Saxton Kildee Obey Watson (CA) LaHood Quinn Thomas Duncan Langevin Schaffer Kilpatrick Olver Waxman Latham Radanovich Thornberry Dunn Lantos Schiff Kucinich Owens Wexler LaTourette Ramstad Tiahrt Edwards Larsen (WA) Schrock LaFalce Paul Woolsey Leach Regula Tiberi Ehlers Latham Sensenbrenner Larson (CT) Payne Lewis (CA) Rehberg Toomey Ehrlich LaTourette Sessions NOT VOTING—10 Lewis (KY) Reynolds Upton Emerson Leach Shadegg Linder Riley Vitter English Lewis (CA) Shaw Blagojevich Rodriguez Thune LoBiondo Rogers (KY) Walden Eshoo Lewis (KY) Shays Gilchrest Shows Traficant Lucas (KY) Rogers (MI) Walsh Etheridge Linder Sherman Houghton Smith (MI) Lucas (OK) Rohrabacher Wamp Everett Lipinski Sherwood Kolbe Smith (WA) Manzullo Ros-Lehtinen Watkins (OK) Farr LoBiondo Shimkus McCrery Roukema Watts (OK) Ferguson Lofgren Shuster b 1524 McHugh Royce Weldon (FL) Fletcher Lucas (KY) Simmons McInnis Ryan (WI) Weldon (PA) Foley Lucas (OK) Mr. NEAL of Massachusetts and Mr. Simpson McKeon Ryun (KS) Weller Forbes Luther Skeen RUSH changed their vote from ‘‘aye’’ Mica Saxton Whitfield Ford Maloney (CT) Skelton to ‘‘no.’’ Miller, Dan Schaffer Wicker Fossella Manzullo Smith (NJ) Miller, Gary Schrock Wilson (NM) Frelinghuysen Mascara So the bill was passed. Smith (TX) Miller, Jeff Sensenbrenner Wilson (SC) Frost Matheson The result of the vote was announced Snyder Moran (KS) Sessions Wolf Gallegly Matsui Souder as above recorded. Morella Shadegg Young (AK) Ganske McCarthy (MO) Spratt A motion to reconsider was laid on Myrick Shaw Young (FL) Gekas McCarthy (NY) Stearns Gibbons McCollum the table. Stenholm NOT VOTING—7 Gillmor McCrery Strickland f Blagojevich Rodriguez Traficant Gilman McHugh Stump Gilchrest Smith (WA) Gonzalez McInnis Stupak GENERAL LEAVE Houghton Thune Goode McIntyre Goodlatte McKeon Sullivan Mr. OXLEY. Mr. Speaker, I ask unan- Sununu b 1513 Gordon Meeks (NY) imous consent that all Members may Goss Menendez Sweeney So the motion to recommit was re- Graham Mica Tancredo have 5 legislative days to revise and ex- jected. Granger Millender- Tanner tend their remarks and include extra- Graves McDonald Tauscher The result of the vote was announced Tauzin neous material on H.R. 3763, the bill Green (TX) Miller, Dan just passed. as above recorded. Green (WI) Miller, Gary Taylor (MS) The SPEAKER pro tempore (Mr. Greenwood Miller, Jeff Taylor (NC) The SPEAKER pro tempore (Mr. Terry SWEENEY). The question is on the pas- Grucci Moore HASTINGS of Washington). Is there ob- Gutierrez Moran (KS) Thomas jection to the request of the gentleman sage of the bill. Gutknecht Moran (VA) Thompson (CA) The question was taken; and the Hall (OH) Morella Thompson (MS) from Ohio? Speaker pro tempore announced that Hall (TX) Myrick Thornberry There was no objection. Thurman the ayes appeared to have it. Hansen Napolitano Harman Nethercutt Tiahrt f RECORDED VOTE Tiberi Hart Ney AUTHORIZING THE CLERK TO Mr. OXLEY. Mr. Speaker, I demand a Hastings (WA) Northup Toomey Hayes Norwood Towns MAKE CORRECTIONS IN EN- recorded vote. Hayworth Nussle Turner GROSSMENT OF H.R. 3763, COR- A recorded vote was ordered. Hefley Ortiz Udall (CO) PORATE AND AUDITING AC- Herger Osborne Upton The SPEAKER pro tempore. This COUNTABILITY, RESPONSI- will be a 5-minute vote. Hill Ose Velazquez Hilleary Otter Vitter BILITY, AND TRANSPARENCY The vote was taken by electronic de- Hilliard Oxley Walden ACT OF 2002 vice, and there were—ayes 334, noes 90, Hinojosa Pallone Walsh not voting 10, as follows: Hobson Pascrell Wamp Mr. OXLEY. Mr. Speaker, I ask unan- Hoeffel Pastor Watkins (OK) [Roll No. 110] imous consent that in the engrossment Hoekstra Pence Watt (NC) of the bill, H.R. 3763, the Clerk be au- AYES—334 Holden Peterson (MN) Watts (OK) Holt Peterson (PA) Weiner thorized to correct section numbers, Aderholt Bilirakis Camp Hooley Petri Weldon (FL) punctuation, and cross references and Akin Bishop Cannon Horn Phelps Weldon (PA) to make such other technical and con- Allen Blumenauer Cantor Hostettler Pickering Weller Andrews Blunt Capito Hoyer Pitts Whitfield forming changes as may be necessary Armey Boehlert Capps Hulshof Platts Wicker to reflect the actions of the House. Baca Boehner Capuano Hunter Pombo Wilson (NM) The SPEAKER pro tempore. Is there Bachus Bonilla Cardin Hyde Pomeroy Wilson (SC) Baird Bono Carson (OK) Inslee Portman Wolf objection to the request of the gen- Baker Boozman Castle Isakson Price (NC) Wu tleman from Ohio? Baldacci Boswell Chabot Israel Pryce (OH) Wynn There was no objection. Ballenger Boucher Chambliss Issa Putnam Young (AK) Barcia Boyd Clay Istook Quinn Young (FL) f Barr Brady (TX) Clement Bartlett Brown (FL) Coble NOES—90 PERSONAL EXPLANATION Barton Brown (SC) Collins Bass Bryant Combest Abercrombie Bonior Clyburn Mr. HASTINGS of Florida. Mr. Bentsen Burr Condit Ackerman Borski Conyers Speaker, from April 16, 2002, through Bereuter Burton Cooksey Baldwin Brady (PA) Coyne April 18, 2002, I was absent from the Berkley Buyer Costello Barrett Brown (OH) Davis (IL) Berry Callahan Cox Becerra Carson (IN) DeFazio House of Representatives proceedings Biggert Calvert Cramer Berman Clayton DeGette because I was fulfilling my duties as a

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