99–008

107TH CONGRESS REPORT " HOUSE OF REPRESENTATIVES ! 2d Session 107–418

PROVIDING FOR CONSIDERATION OF H.R. 3763, CORPORATE 

AND AUDITING ACCOUNTABILITY, RESPONSIBILITY, AND 

TRANSPARENCY ACT OF 2002

APRIL 23, 2002.—Referred to the House Calendar and ordered to be printed 

Mr. SESSIONS, from the Committee on Rules, 

submitted the following 

R E P O R T 

[To accompany H. Res. 395]

The Committee on Rules, having had under consideration House 

Resolution 395, by a nonrecord vote, report the same to the House 

with the recommendation that the resolution be adopted. 

SUMMARY OF PROVISIONS OF THE RESOLUTION

The resolution provides for the consideration of H.R. 3763, the 

Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002, under a structured rule. The rule provides one 

hour of debate equally divided and controlled by the chairman and 

ranking minority member of the Committee on Financial Services. 

The rule waives all points of order against consideration of the bill. 

The rule provides that the amendment in the nature of a substitute recommended by the Committee on Financial Services now 

printed in the bill shall be considered as an original bill for the 

purpose of amendment and shall be considered as read. The rule 

waives all points of order against the bill, as amended. 

The rule makes in order only those amendments printed in this 

report. The rule provides that the amendments printed in this report shall be considered only in the order printed, may be offered 

only by a Member designated, shall be considered as read, shall be 

debatable for the time specified equally divided and controlled by 

the proponent and an opponent, shall not be subject to amendment, 

and shall not be subject to a demand for division of the question 

in the House or in the Committee of the Whole. The rule waives 

all points of order against the amendments printed in this report. 

Finally, the rule provides one motion to recommit with or without instructions. 

2

The waiver of all points of order includes a waiver of clause 3 of 

rule XIII (requiring the inclusion of certain information or statements in the committee report), because a CBO cost estimate was 

not yet available when the Financial Services Committee filed H. 

Rept. 107–414. The waiver of all points of order also includes a 

waiver of clause 4(a) of rule XIII (requiring a three-day layover of 

the committee report), because H. Rept. 107–414 was filed on Monday, April 22 and the House could consider the bill as early as 

Wednesday, April 24.

SUMMARY OF AMENDMENTS MADE IN ORDER UNDER THE RULE

Oxley—Manager’s Amendment. Makes various technical and conforming changes, strikes provisions requiring companies listed on 

the stock exchanges to a code of ethics for senior corporate officers 

due to workability issues, and retains provisions regarding disclosure of changes in issuer codes of conduct. (10 minutes) 

Capuano—Clarifies that two members of the public regulatory 

organization (PRO) must be individuals licensed to practice public 

accounting, two members may be individuals licensed to practice 

public accounting if they have not practiced within two years of 

being appointed, and one member must not be licensed to practice 

public accounting. Specifies that all members of the PRO board 

must meet a standard of financial literacy as determined by the 

SEC. (20 minutes) 

Sherman—Requires auditors of publicly-traded companies to 

meet a minimum net capital requirement of not less than one-half 

of the annual audit revenue received by the accountant from 

issuers registered with the SEC. (20 minutes) 

Kucinich—Substitute. Creates the Federal Bureau of Audits 

(FBA) to monitor corporate America’s books by auditing all publicly-traded companies. This new agency will be a part of the Securities and Exchange Commission (SEC), but maintain appropriate 

independence. The SEC will set the basic rules of auditing by incorporating the generally accepted auditing standards rules and making further refinements that are ‘‘necessary and appropriate in the 

public interest and for the protection of investors.’’ The FBA’s integrity will be ensured by several conflict of interest provisions to 

ensure that American taxpayers, investors, and employees get an 

accurate assessment of a corporation. (20 minutes) 

LaFalce—Substitute. Replaces the regulatory structure in the bill 

with one that requires establishment of a public regulator with 

specified duties and authority, modifies definitions of non-audit 

services to make the two bands on non-audit services included in 

the bill effective, provides for approval of non-audit services by the 

audit committee, replaces the executive responsibility provisions in 

the bill to require executive certification of financial statements, to 

improve the ability of the SEC to bar officers and directors from 

future service in public companies. Enables the SEC to obtain 

disgorgement of stock bonuses from executives who have falsified 

financial statements. Places limits on analyst conflicts of interest 

and improves corporate governance by giving audit committees 

oversight of auditors. Establishes an independent nominating committee for independent directors. (40 minutes) 

3

TEXT OF AMENDMENTS MADE IN ORDER UNDER THE RULE

1. AN AMENDMENT TO BE OFFERED BY REPRESENTATIVE OXLEY OF

OHIO, OR A DESIGNEE, DEBATABLE FOR 10 MINUTES

Page 9, line 24, strike ‘‘study’’ and insert ‘‘reviews’’. 

Page 11, line 10, insert ‘‘or’’ after ‘‘review’’. 

Page 11, line 17, strike ‘‘board’’ and insert ‘‘organization’’. 

Page 33, line 7, strike ‘‘DEFINITION’’ and insert ‘‘DEFINITIONS’’; on 

line 8, strike ‘‘term ‘beneficial owner’ has the meaning’’ and insert 

‘‘terms ‘officer’, ‘director’, and ‘beneficial owner’ have the meanings’’; and line 9, strike ‘‘term’’ and insert ‘‘terms’’. 

Page 39, strike line 5 and all that follows through page 40, line 

9; and on page 40, line 10, strike ‘‘(d) CHANGES IN CODES OF CONDUCT.—’’. 

Page 42, lines 9 and 11, strike ‘‘accountants report’’ and insert 

‘‘accountant’s report’’. 

Page 42, line 17, insert ‘‘or her’’ after ‘‘his’’, and beginning on line 

18, strike ‘‘an opinion cannot be expressed’’ and insert ‘‘he or she 

cannot express an opinion’’. 

Page 53, line 23, strike ‘‘the role played by’’ and insert ‘‘whether’’, 

and on line 24, strike ‘‘in assisting’’ and insert ‘‘assisted’’. 

Page 54, line 18, insert ‘‘which may have been’’ before ‘‘designed 

solely’’. 

Page 57, line 9, insert ‘‘7, 8,’’ after ‘‘6,’’. 

2. AN AMENDMENT TO BE OFFERED BY REPRESENTATIVE CAPUANO

OF MASSACHUSETTS, OR A DESIGNEE, DEBATABLE FOR 20 MINUTES

Page 3, beginning on line 21, strike paragraph (1) of section 2(b) 

through page 4, line 9, and insert the following: 

(1)(A) The board of such organization shall be comprised of 

five members—

(i) two of whom shall be persons who are licensed to 

practice public accounting and who have recent experience 

in auditing public companies; 

(ii) two of whom may be persons who are licensed to 

practice public accounting, if such person has not worked 

in the accounting profession for any of the last two years 

prior to the date of such person’s appointment to the 

board; and 

(iii) one of whom shall be a person who has never been 

licensed to practice public accounting. 

(B) Each member of the board of such organization shall be 

a person who meets such standards of financial literacy as are 

determined by the Commission. 

3. AN AMENDMENT TO BE OFFERED BY REPRESENTATIVE SHERMAN

OF CALIFORNIA, OR A DESIGNEE, DEBATABLE FOR 20 MINUTES

In section 21 strike ‘‘and 15’’ and insert ‘‘and 16’’ and after section 13, insert the following new section (and redesignate the succeeding sections and conform the table of contents accordingly): 

4

SEC. 14. AUDITOR MINIMUM CAPITAL. 

(a) REGULATION REQUIRED.—The Commission shall revise its regulations pertaining to auditor independence to require that an accountant shall not be considered independent unless such accountant complies with such capital adequacy standards as the Commission shall prescribe by regulation. 

(b) MINIMUM STANDARD.—The capital adequacy standards established by the Commission pursuant to this section shall require 

that the net capital of an accountant be equal to not less than onehalf of the annual audit revenue received by such accountant from 

issuers registered with the Commission. 

(c) TREATMENT OF CAPITAL AND REVENUE.—For purposes of this 

section—

(1) net capital shall include the sum of capital, reserves, and 

malpractice insurance available to the accountant for the performance of audit functions; and 

(2) annual audit revenue shall include the sum of all audit 

fees received by the accountant, but shall not include any fees 

for non-audit services, as such terms are defined in regulations 

of the Commission in effect on the date of enactment of this 

Act. 

4. AN AMENDMENT IN THE NATURE OF A SUBSTITUTE TO BE OFFERED BY REPRESENTATIVE KUCINICH OF OHIO, OR A DESIGNEE, 

DEBATABLE FOR 20 MINUTES

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Investor, Shareholder, and Employee Protection Act of 2002’’. 

SEC. 2. FINDINGS. 

The Congress finds the following: 

(1) The failure of accounting firms to provide accurate audits 

of its clients is not a new or isolated problem. 

(2) Accounting firms have been implicated in failed audits 

that have cost investors billions of dollars when earnings restatements sent stock prices tumbling. 

(3) Auditors have an inherent conflict of interest. They are 

hired, and fired, by their audit clients. 

(4) This conflict of interest pressures auditors to sign off on 

substandard financial statements rather than risk losing a 

large client. 

(5) Auditing a public company for the benefit of small as well 

as large investors requires independence. 

(6) Therefore the only truly independent audit is one by a 

governmental agency. 

(7) The Federal Bureau of Audits, closely regulated by the 

Commission, will provide honest audits of all publicly traded 

companies. 

SEC. 3. ESTABLISHMENT OF BUREAU. 

(a) ESTABLISHMENT.—There is hereby established within the 

Commission an independent regulatory agency to be known as the 

Federal Bureau of Audits. 

5

(b) FUNCTION OF THE BUREAU.—The Bureau shall conduct an annual audit of the financial statements that are required to be submitted by reporting issuers and to be certified under the securities 

laws or the rules or regulations thereunder. 

(c) OFFICERS.— (1) BUREAU HEAD.—The head of the Bureau shall be a Director, who shall be appointed by the President, by and with the 

advice and consent of the Senate. 

(2) ADDITIONAL OFFICERS.—There shall also be in the Bureau a Deputy Director and an Inspector General, each of 

whom shall be appointed by the President, by and with the advice and consent of the Senate. 

(3) TERMS.—The Director, Deputy Director, and Inspector 

General shall be appointed for terms of 12 years, except that— (A) the first term of office of the Deputy Director shall 

be eight years; and 

(B) the first term of office of the Inspector General shall 

be 4 years. 

(d) INDEPENDENCE.—Except as provided in sections 4 and 5, in 

the performance of their functions, the officers, employees, or other 

personnel of the Bureau shall not be responsible to or subject to the 

supervision or direction of any officer, employee, or agent of any 

other part of the Commission. 

(e) ADMINISTRATIVE SUPPORT.—The Commission shall provide to 

the Bureau such support and facilities as the Director determines 

it needs to carry out its functions. 

(f) RULES.—The Bureau is authorized to establish such procedural and administrative rules as are necessary to the exercise of 

its functions, but the Bureau may not establish any auditing standards within the jurisdiction of the Commission under sections 4 

and 5. 

(g) ADDITIONAL AUTHORITY.—In carrying out any of its functions, 

the Bureau shall have the power to hold hearings, sign and issue 

subpoenas, administer oaths, examine witnesses, and receive evidence at any place in the United States it may designate. The Bureau may, by one or more of its officers or by such agents as it may 

designate, conduct any hearing or other inquiry necessary or appropriate to its functions, except that nothing in this subsection shall 

be deemed to supersede the provisions of section 556 of title 5, 

United States Code relating to hearing examiners. 

(h) CONFLICT OF INTEREST PROVISIONS.—A person previously employed by the Bureau may not accept employment or compensation 

from an issuer audited by the Bureau or an accountant that provides audit related services to an issuer audited by the Bureau for 

10 years after the last day of employment at the Bureau. Any current employee of the Bureau shall be required to place all investments in a blind trust, in accordance with regulations prescribed 

by the Commission. The employees of the Bureau who conduct the 

audits shall be exempt from the civil service pay system under section 4802 of title 5, United States Code, and shall be paid salaries 

that are competitive with similar private sector employment. 

(i) LEGAL REPRESENTATION.—Except as provided in section 518 of 

title 28, United States Code, relating to litigation before the Supreme Court, attorneys designated by the Director of the Bureau 

may appear for, and represent the Bureau in, any civil action 

6

brought in connection with any function carried out by the Bureau 

pursuant to this Act or as otherwise authorized by law. 

SEC. 4. ASSUMPTION OF AUTHORITY BY COMMISSION OVER AUDITING 

STANDARDS. 

(a) ASSUMPTION OF AUTHORITY.—Pursuant to its authority under 

the securities laws to require the certification, in accordance with 

the rules of the Commission, of financial statements and other documents of reporting issuers of securities, the Commission shall, by 

rule, establish and revise as necessary auditing standards for audits of such financial statements. 

(b) INCORPORATION OF CURRENT STANDARDS.—In adopting auditing standards under this section, the Commission shall incorporate 

generally accepted auditing standards in effect on the date of enactment of this Act, with such modifications as the Commission determines are necessary and appropriate in the public interest and 

for the protection of investors. 

(c) ADDITIONAL REQUIREMENTS FOR RULES.—The rules prescribed 

by the Commission under subsection (a)—

(1) shall be available for public comment for not less than 90 

days; 

(2) shall be prescribed not less than 180 days after the date 

of enactment of this Act; and 

(3) shall be effective on the first January 1 that occurs after 

the end of such 180 days. 

SEC. 5. FEES FOR THE RECOVERY OF COSTS OF OPERATIONS. 

(a) IN GENERAL.—The Commission shall in accordance with this 

section assess and collect a fee on each reporting issuer whose financial statements are audited by the Bureau. This section applies 

as of the first fiscal year that begins after the date of enactment 

of this Act (referred to in this section as the ‘‘first applicable fiscal 

year’’). 

(b) TOTAL FEE REVENUES; INDIVIDUAL FEE AMOUNTS.—The total 

fee revenues collected under subsection (a) for a fiscal year shall be 

the amounts appropriated under subsection (d)(2) for such fiscal 

year. Individual fees shall be assessed by the Commission on the 

basis of an estimate by the Commission of the amount necessary 

to ensure that the sum of the fees collected for such fiscal year 

equals the amount so appropriated. 

(c) FEE WAIVER OR REDUCTION.—The Commission shall grant a 

waiver from or a reduction of a fee assessed under subsection (a) 

if the Commission finds that the fee to be paid will exceed the anticipated present and future costs of the operations of the Bureau. 

(d) CREDITING AND AVAILABILITY OF FEES.— (1) IN GENERAL.—Fees collected for a fiscal year pursuant to 

subsection (a) shall be credited to the appropriation account for 

salaries and expenses of the Bureau and shall be available 

until expended without fiscal year limitation. 

(2) APPROPRIATIONS.—

(A) FIRST FISCAL YEAR.—For the first applicable fiscal 

year, there shall be available for the salaries and expenses 

of the Bureau $5,150,000,000. 

(B) SUBSEQUENT FISCAL YEARS.—For each of the four fiscal years following the first applicable fiscal year, there 

shall be available for the salaries and expenses of the BuVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
7

reau an amount equal to the amount made available by 

paragraph (1) for the first applicable fiscal year, multiplied 

by the adjustment factor for such fiscal year (as defined in 

subsection (f)). 

(e) COLLECTION OF UNPAID FEES.—In any case where the Commission does not receive payment of a fee assessed under subsection (a) within 30 days after it is due, such fee shall be treated 

as a claim of the United States Government subject to subchapter 

II of chapter 37 of title 31, United States Code. 

(f) DEFINITION OF ADJUSTMENT FACTOR.—For purposes of this 

section, the term ‘‘adjustment factor’’ applicable to a fiscal year is 

the lower of— (1) the Consumer Price Index for all urban consumers (all 

items; United States city average) for April of the preceding 

fiscal year divided by such Index for April of the first applicable fiscal year; or 

(2) the total of discretionary budget authority provided for 

programs in categories other than the defense category for the 

immediately preceding fiscal year (as reported in the Office of 

Management and Budget sequestration preview report, if 

available, required under section 254(c) of the Balanced Budget 

and Emergency Deficit Control Act of 1985) divided by such 

budget authority for the first applicable fiscal year (as reported 

in the Office of Management and Budget final sequestration report submitted for such year). 

For purposes of this subsection, the terms ‘‘budget authority’’ and ‘‘category’’ have the meaning given such terms in the Balanced 

Budget and Emergency Deficit Control Act of 1985. 

SEC. 6. DEFINITIONS. 

As used in this Act: 

(1) COMMISSION.—The term ‘‘Commission’’ means the Securities and Exchange Commission. 

(2) SECURITIES LAWS.—The term ‘‘securities laws’’ means the 

Securities Act of 1933 (15 U.S.C. 77a et seq.), the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et seq.), the Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 et seq.), the Investment 

Advisers Act of 1940 (15 U.S.C. 80b et seq.), and the Securities 

Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.). 

(3) REPORTING ISSUER.—The term ‘‘reporting issuer’’ means 

any registrant under section 12 of the Securities Exchange Act 

of 1934 (15 U.S.C. 78l) or any other issuer required to file periodic reports under section 13 or 15 of such Act (15 U.S.C. 78m, 

78o). 

5. AN AMENDMENT IN THE NATURE OF A SUBSTITUTE TO BE OF- FERED BY REPRESENTATIVE LAFALCE OF NEW YORK, OR A DESIGNEE, DEBATABLE FOR 40 MINUTES

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Corporate and 

Auditing Accountability, Responsibility, and Transparency Act of 

2002’’. 

8

(b) TABLE OF CONTENTS.—

Sec. 1. Short title; table of contents. 

Sec. 2. Auditor oversight. 

Sec. 3. Improper influence on conduct of audits. 

Sec. 4. Real-time disclosure of financial information. 

Sec. 5. Insider trades during pension fund blackout periods prohibited. 

Sec. 6. Improved transparency of corporate disclosures. 

Sec. 7. Improvements in reporting on insider transactions and relationships. 

Sec. 8. Enhanced oversight of periodic disclosures by issuers. 

Sec. 9. Retention of records. 

Sec. 10. Removal of unfit corporate officers. 

Sec. 11. Disgorgement required. 

Sec. 12. CEO and CFO accountability for disclosure. 

Sec. 13. Securities and Exchange Commission authority to provide relief. 

Sec. 14. Authorization of appropriations of the Securities and Exchange Commission. 

Sec. 15. Analyst conflicts of interest. 

Sec. 16. Independent directors. 

Sec. 17. Enforcement of audit committee governance practices. 

Sec. 18. Review of corporate governance practices. 

Sec. 19. Study of enforcement actions. 

Sec. 20. Study of credit rating agencies. 

Sec. 21. Study of investment banks 

Sec. 22. Study of model rules for attorneys of issuers. 

Sec. 23. Enforcement authority. 

Sec. 24. Exclusion for investment companies. 

Sec. 25. Definitions.

SEC. 2. AUDITOR OVERSIGHT. 

(a) CERTIFIED FINANCIAL STATEMENT REQUIREMENTS.—If a financial statement is required by the securities laws or any rule or regulation thereunder to be certified by an independent public or certified accountant, an accountant shall not be considered to be qualified to certify such financial statement, and the Securities and Exchange Commission shall not accept a financial statement certified 

by an accountant, unless such accountant—

(1) is subject to a system of review by a public regulatory organization that complies with the requirements of this section 

and the rules prescribed by the Commission under this section; 

and 

(2) has not been determined in the most recent review completed under such system to be not qualified to certify such a 

statement. 

(b) ESTABLISHMENT OF PRO.— (1) ESTABLISHMENT REQUIRED.—Not later than 90 days after 

the date of enactment of this section, the Commission shall establish a public regulatory organization to perform the duties 

set forth in this section. 

(2) CHAIRMAN.—The Chairman of the public regulatory organization shall be appointed by the Commission for a term of 5 

years. 

(3) APPOINTMENT OF PUBLIC REGULATORY ORGANIZATION

MEMBERS.—There shall be 6 additional public regulatory organization members, who shall be selected jointly by the Chairman of the public regulatory organization and the Chairman of 

the Commission. 

(4) ACCOUNTANT MEMBERS.—Up to 2 of the members may be 

present or former certified public accountants, provided such 

members— (A) are not currently in public practices; 

9

(B) have not been a person associated with a public accounting firm for a period of at least 3 years; and 

(C) agree to not be a person associated with a public accounting firm or to receive consulting fees from a public 

accounting firm for a period of 5 years after leaving the 

public regulatory organization. 

(5) NOMINATIONS.—In making appointments of members, the 

Chairman of the public regulatory organization and the Chairman of the Commission shall consult with, and make appointments from nominations received from—

(A) institutional investors; 

(B) public employee pension plans; 

(C) pension plans organized pursuant to the Employee 

Retirement Income Security Act of 1974; and 

(D) pension plans organized pursuant to the Taft-Hartley Act. 

(6) TERMS.—The members of the public regulatory organization shall have terms of 4 years, except that the Chairman of 

the public regulatory organization and the Chairman of the 

Commission shall adopt procedures for staggering the initial 

terms of the members first so appointed to provide for a reasonable overlapping of the terms of office of subsequently elected members. 

(7) FULL-TIME BASIS.—The members of the public regulatory 

organization shall serve on a full-time basis, severing all business ties with former firms or employers prior to beginning 

service on the public regulatory organization. 

(8) RULES.—Following selection of the initial members of the 

public regulatory organization, the public regulatory organization shall propose and adopt rules, which shall provide for—

(A) the operation and administration of the public regulatory organization, including the compensation of the 

members of the public regulatory organization, which shall 

be at a level comparable to similar professional positions 

in the private sector; 

(B) the appointment and compensation of such employees, attorneys, and consultants as may be necessary or appropriate to carry out the public regulatory organization’s 

functions under this section; 

(C) the registration of public accounting firms with the 

public regulatory organization pursuant to subsections (d); 

and 

(D) the matters described in subsections (e) and (f). 

(9) FUNDING OF THE PUBLIC REGULATORY ORGANIZATION.—

(A) SELF-FINANCING.—The public regulatory organization 

shall establish rules for the assessment and collection of 

fees sufficient to recover the costs and expenses of the public regulatory organization and to permit the public regulatory organization to operate on a self-financing basis. 

(B) ASSESSMENT AND COLLECTION.—The fees shall be assessed on issuers that file any financial statements, reports, or other documents with the Commission under the 

securities laws that must be certified by a public accounting firm. The fees shall be collected through the public acVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
10

counting firm that certifies such statement, report, or document. 

(C) PAYMENT A CONDITION OF REGISTRATION.—The public 

regulatory organization shall terminate or suspend the 

registration under subsection (d) of any public accounting 

firm that fails to collect and transmit a fee assessed under 

this subsection. 

(c) PROHIBITION ON THE OFFER OF BOTH AUDIT AND CONSULTING

SERVICES.—

(1) MODIFICATION OF REGULATIONS REQUIRED.—The Commission shall revise its regulations pertaining to auditor independence to require that an accountant shall not be considered 

independent with respect to an audit client if the accountant 

provides to the client the following nonaudit services, subject 

to such conditions and exemptions as the Commission shall 

prescribe: 

(A) financial information system design or implementation; or 

(B) internal audit services. 

(2) AUDIT COMMITTEE APPROVAL OF NONAUDIT SERVICES.—

The Commission shall revise its regulations pertaining to auditor independence to require that—

(A) an accountant shall not be considered to be independent for purposes of certifying the financial statements 

or other documents of an issuer required to be filed with 

the Commission under the securities laws for any fiscal 

year of the issuer if, during such fiscal year, the accountant provides any nonaudit services unless the provision of 

such nonaudit services was approved in advance by the 

audit committee or, in the absence of an audit committee, 

the equivalent board committee or the entire board of directors; and 

(B) in approving such services, the audit committee shall 

evaluate the impact of the provision of such services on the 

independence of the auditor. 

(3) REVIEW OF PROHIBITED NONAUDIT SERVICES.—The Commission is authorized to review the impact on the independence of auditors of the scope of services provided by auditors 

to issuers in order to determine whether the list of prohibited 

nonaudit services under paragraph (1) shall be modified. In 

conducting such review, the Commission shall consider the impact of the provision of a service on an auditor’s independence 

where provision of the service creates a conflict of interest with 

the audit client. 

(4) ADDITIONS BY RULE.—After conducting the review required by paragraph (3) and at any other time, the Commission may, by rule consistent with the protection of investors 

and the public interest, modify the list of prohibited nonaudit 

services under paragraph (1). 

(5) REPORT.—The Commission shall report to the Committee 

on Financial Services of the House of Representatives and the 

Committee on Banking, Housing, and Urban Affairs of the 

Senate on its conduct of any reviews as required by this section. The report shall include a discussion of regulatory or legVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
11

islative steps that are recommended or that may be necessary 

to address concerns identified in the study. 

(6) DEFINITIONS.—For purposes of this subsection: 

(A) FINANCIAL INFORMATION SYSTEM DESIGN OR IMPLE- MENTATION..—The term ‘‘financial information systems design or implementation’’ means designing or implementing 

a hardware or software system used to generate information that is significant to the audit client’s financial statements taken as a whole, not including services an accountant performs in connection with the assessment, design, 

and implementation of internal accounting controls and 

risk management controls. 

(B) INTERNAL AUDIT SERVICES.—The term ‘‘internal audit 

services’’ means internal audit services for an audit client 

or an affiliate of an audit client, not including nonrecurring evaluations of discrete items or programs and 

operational internal audits unrelated to the internal accounting controls, financial systems, or financial statements. 

(7) DEADLINE FOR RULEMAKING.—The Commission shall— (A) within 90 days after the date of enactment of this 

Act, propose, and 

(B) within 270 days after such date, prescribe, 

the revisions to its regulations required by this subsection. 

(d) REGISTRATION WITH PUBLIC REGULATORY ORGANIZATION.— (1) REGISTRATION REQUIRED.—Beginning 1 year after the 

date on which all initial members of the public regulatory organization have been selected in accordance with subsection (b), 

it shall be unlawful for a public accounting firm to furnish an 

accountant’s report on any financial statement, report, or other 

document required to be filed with the Commission under any 

Federal securities law, unless such firm is registered with the 

public regulatory organization. 

(2) APPLICATION FOR REGISTRATION.—A public accounting 

firm may be registered under this subsection by filing with the 

public regulatory organization an application for registration in 

such form and containing such information as the public regulatory organization, by rule, may prescribe. Each application 

shall include—

(A) the names of all clients of the public accounting firm 

for which the firm furnishes accountant’s reports on financial statements, reports, or other documents filed with the 

Commission; 

(B) financial information of the public accounting firm 

for its most recent fiscal year, including its annual revenues from accounting and auditing services, its assets, and 

its liabilities; 

(C) a statement of the public accounting firm’s policies 

and procedures with respect to quality control of its accounting and auditing practice; 

(D) information relating to criminal, civil, or administrative actions or formal disciplinary proceedings pending 

against such firm, or any person associated with such firm, 

in connection with an accountant’s report furnished by 

such firm; 

12

(E) a list of persons associated with the public accounting firm who are certified public accountants, including 

any State professional license or certification number for 

each such person; and 

(F) such other information that is reasonably related to 

the public regulatory organization’s responsibilities as the 

public regulatory organization considers necessary or appropriate. 

(3) PERIODIC REPORTS.—Once in each year, or more frequently as the public regulatory organization, by rule, may 

prescribe, each public accounting firm registered with the public regulatory organization shall submit reports to the public 

regulatory organization updating the information contained in 

its application for registration and containing such additional 

information that is reasonably related to the public regulatory 

organization’s responsibilities as the public regulatory organization, by rule, may prescribe. 

(4) EXEMPTIONS.—The Commission, by rule or order, upon its 

own motion or upon application, may conditionally or unconditionally exempt any public accounting firm or any accountant’s 

report, or any class of public accounting firms or any class of 

accountant’s reports, from any provisions of this section or the 

rules or regulations issued hereunder, if the Commission finds 

that such exemption is consistent with the public interest, the 

protection of investors, and the purposes of this section. 

(5) CONFIDENTIALITY.—The public regulatory organization 

may, by rule, designate portions of the filings required pursuant to paragraphs (2) and (3) as privileged and confidential. 

This paragraph shall be considered to be a statute described in 

section 552(b)(3)(B) of title 5, United States Code, for purposes 

of that section 552. 

(e) DUTIES REGARDING QUALITY CONTROL.—

(1) OBJECTIVES; ATTAINMENT.—The public regulatory organization shall seek to promote a high level of professional conduct among public accounting firms registered with the public 

regulatory organization, to improve the quality of audit services provided by such firms, and, in general, to protect investors and promote the public interest. The public regulatory organization shall attain these objectives—

(A) by establishing standards regarding the performance 

of financial audits in accordance with the requirements of 

paragraph (2); 

(B) by the direct performance of quality reviews and inspections of audits in accordance with the requirements of 

paragraphs (3) and (4); and 

(C) by the supervision and oversight of peer review organizations in accordance with the requirements of paragraph (5). 

(2) AUDIT QUALITY STANDARDS.— (A) IN GENERAL.—The public regulatory organization 

shall, by rule, establish quality standards applicable to the 

conduct of audit services provided by public accounting 

firms. Such standards shall include— (i) independence standards; 

(ii) quality control standards; 

13

(iii) professional and ethical standards; and 

(iv) such other standards as the public regulatory organization determines to be necessary to carry out the 

objectives specified in paragraph (1). 

(B) SPECIFIC CONTENTS OF STANDARDS.—In establishing 

the quality standards required by subparagraph (A), the 

public regulatory organization shall also establish— (i) procedures for the monitoring by public accounting firms of their compliance with professional ethical 

standards established by the public regulatory organization, including its independence from its audit clients; 

(ii) procedures for the assignment of personnel to 

audit engagements; 

(iii) procedures for consultation within a public accounting firm or with other accountants relating to accounting and auditing questions; 

(iv) procedures for the supervision of audit work; 

(v) procedures for the review of decisions to accept 

and retain audit clients; 

(vi) procedures for the internal inspection of the 

public accounting firms own compliance with such 

policies and procedures; 

(vii) requirements for public accounting firms to prepare and maintain for a period of no less than 7 years, 

audit work papers and other information related to 

any audit report, in sufficient detail to support the 

conclusions reached in an audit report issued by a 

public accounting firm; and 

(viii) procedures establishing ‘‘concurring’’ or ‘‘second’’ partner review systems for the evaluation and review of audit work by a partner that is not in charge 

of the conduct of the audit. 

(3) DIRECT REVIEWS OF PUBLIC ACCOUNTING FIRMS.—The 

public regulatory organization shall, by rule, establish procedures for the conduct of a continuing program of inspections of 

each public accounting firm registered with the public regulatory organization to assess compliance by such firm, and by 

persons associated with such firm, with applicable provisions of 

this Act, the securities laws, the rules and regulations thereunder, the rules adopted by the public regulatory organization, 

and professional standards. Except as provided in paragraph 

(5), the public regulatory organization shall annually inspect 

each public accounting firm that audits more than 100 issuers 

on an ongoing annual basis, to the extent practicable, and all 

other public accounting firms no less than at least once every 

3 years. In conducting such inspections, the public regulatory 

organization shall, among other things, inspect selected audit 

and review engagements. The review shall include evaluations 

of the firm’s quality control procedures and compliance with all 

legal and ethical requirements. In connection with each review, 

the public regulatory organization shall prepare a report of its 

findings and such report, accompanied by any letter of comments by the public regulatory organization or reviewer and 

any letter of response from the firm under review, shall be 

14

made available to the public. The public regulatory organization shall take any appropriate disciplinary or remedial action 

based on its findings after completion of such review and an 

opportunity for a hearing. 

(4) QUALITY REVIEW OF INDIVIDUAL AUDITS.—The public regulatory organization shall, by rule, establish procedures for the 

conduct of direct inspection and review of individual audits of 

issuers and standards under which it will evaluate audit service quality. A finding by the public regulatory organization that 

an individual audit of an issuer did or did not meet the standards of the public regulatory organization with respect to the 

quality of the audit shall not be construed in any action arising 

out of the securities laws as indicative of compliance or noncompliance with the securities laws or with any standard of liability arising thereunder. 

(5) USE OF PROFESSIONAL PEER REVIEW ORGANIZATIONS.— (A) OPTION TO UTILIZE PEER REVIEW ORGANIZATIONS.— The public regulatory organization may, by rule, establish 

requirements for the use of peer review organizations for 

the purposes of conducting the continuing program of inspections to assess compliance as required by paragraph 

(3) of each public accounting firm registered with the public regulatory organization. Such rule shall provide for appropriate oversight and supervision of such peer review organization by the public regulatory organization to ensure 

that such inspections meet the requirements of such paragraph. 

(B) PENALTIES.—If the public regulatory organization establishes requirements for the conduct of peer reviews 

under subparagraph (A), the violation by a public accounting firm or a person associated with such a firm of a rule 

of the peer review organization to which the firm belongs 

shall constitute grounds for— (i) the imposition of disciplinary sanctions by the 

public regulatory organization pursuant to subsection 

(g); and 

(ii) denial to the public accounting firm or person associated with such firm of the privilege of appearing or 

practicing before the Commission. 

(6) CONFIDENTIALITY.—Except as otherwise provided by this 

section, all reports, memoranda, and other information provided to the public regulatory organization solely for purposes 

of paragraph (3) or (4), or to a peer review organization certified by the public regulatory organization, shall be confidential, unless such confidentiality is expressly waived by the person or entity that created or provided the information. 

(f) DISCIPLINARY DUTIES OF PUBLIC REGULATORY ORGANIZA- TION.—The public regulatory organization shall have the following 

duties and powers: 

(1) INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.—The 

public regulatory organization shall establish fair procedures 

for investigating and disciplining public accounting firms registered with the public regulatory organization, and persons associated with such firms, for violations of the Federal securities 

laws, the rules or regulations issued thereunder, the rules 

15

adopted by the public regulatory organization, or professional 

standards in connection with the preparation of an accountant’s report on a financial statement, report, or other document 

filed with the Commission. 

(2) INVESTIGATION PROCEDURES.— (A) IN GENERAL.—The public regulatory organization 

may conduct an investigation of any act, practice, or omission by a public accounting firm registered with the public 

regulatory organization, or by any person associated with 

such firm, in connection with the preparation of an accountant’s report on a financial statement, report, or other 

document filed with the Commission that may violate any 

applicable provision of the Federal securities laws, the 

rules and regulations issued thereunder, the rules adopted 

by the public regulatory organization, or professional 

standards, whether such act, practice, or omission is the 

subject of a criminal, civil, or administrative action, or a 

disciplinary proceeding, or otherwise is brought to the attention of the public regulatory organization. 

(B) POWERS OF PUBLIC REGULATORY ORGANIZATION.—For 

purposes of an investigation under this paragraph, the 

public regulatory organization may, in addition to such 

other actions as the public regulatory organization determines to be necessary or appropriate— (i) require the testimony of any person associated 

with a public accounting firm registered with the public regulatory organization, with respect to any matter 

which the public regulatory organization considers relevant or material to the investigation; 

(ii) require the production of audit workpapers and 

any other document or information in the possession 

of a public accounting firm registered with the public 

regulatory organization, or any person associated with 

such firm, wherever domiciled, that the public regulatory organization considers relevant or material to 

the investigation, and may examine the books and 

records of such firm to verify the accuracy of any documents or information so supplied; and 

(iii) request the testimony of any person and the 

production of any document in the possession of any 

person, including a client of a public accounting firm 

registered with the public regulatory organization, 

that the public regulatory organization considers relevant or material to the investigation. 

(C) SUSPENSION OR REVOCATION OF REGISTRATION FOR

NONCOMPLIANCE.—The refusal of any person associated 

with a public accounting firm registered with the public 

regulatory organization to testify, or the refusal of any 

such person to produce documents or otherwise cooperate 

with the public regulatory organization, in connection with 

an investigation or hearing under this section, shall be 

cause for suspending or barring such person from associating with a public accounting firm registered with the 

public regulatory organization, or such other appropriate 

sanction authorized by paragraph (3)(B) as the public regVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00015 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
16

ulatory organization shall determine. The refusal of any 

public accounting firm registered with the public regulatory organization to produce documents or otherwise cooperate with the public regulatory organization, in connection with an investigation or hearing under this section, 

shall be cause for the suspension or revocation of the registration of such firm, or such other appropriate sanction 

authorized by paragraph (3)(B) as the public regulatory organization shall determine. 

(D) REFERRAL TO COMMISSION.— (i) IN GENERAL.—If the public regulatory organization is unable to conduct or complete an investigation 

or hearing under this section because of the refusal of 

any client of a public accounting firm registered with 

the public regulatory organization, or any other person, to testify, produce documents, or otherwise cooperate with the public regulatory organization in connection with such investigation, the public regulatory 

organization shall report such refusal to the Commission. 

(ii) INVESTIGATION.—The Commission may designate 

the public regulatory organization or one or more officers of the public regulatory organization who shall be 

empowered, in accordance with such procedures as the 

Commission may adopt, to subpoena witnesses, compel 

their attendance, and require the production of any 

books, papers, correspondence, memoranda, or other 

records relevant to any investigation by the public regulatory organization. Attendance of witnesses and the 

production of any records may be required from any 

place in the United States or any State at any designated place of hearing. Enforcement of a subpoena 

issued by the public regulatory organization, or an officer of the public regulatory organization, pursuant to 

this subparagraph shall occur in the manner provided 

for in section 21(c). Examination of witnesses subpoenaed pursuant to this subparagraph shall be conducted before an officer authorized to administer oaths 

by the laws of the United States or of the place where 

the examination is held. 

(iii) REFERRALS TO COMMISSION.—The public regulatory organization may refer any investigation to the 

Commission, as the public regulatory organization 

deems appropriate. 

(E) IMMUNITY FROM CIVIL LIABILITY.—An employee of the 

public regulatory organization engaged in carrying out an 

investigation or disciplinary proceeding under this section 

shall be immune from any civil liability arising out of such 

investigation or disciplinary proceeding in the same manner and to the same extent as an employee of the Federal 

Government in similar circumstances. 

(3) DISCIPLINARY PROCEDURES.— (A) DECISION TO DISCIPLINE.—In a proceeding by the 

public regulatory organization to determine whether a 

public accounting firm, or a person associated with such 

17

firm, should be disciplined, the public regulatory organization shall bring specific charges, notify such firm or person 

of the charges, give such firm or person an opportunity to 

defend against such charges, and keep a record of such actions. 

(B) SANCTIONS.—If the public regulatory organization, 

after conducting a review and providing an opportunity for 

a hearing, finds that a public accounting firm, or a person 

associated with such firm, has engaged in any act, practice, or omission in violation of the Federal securities laws, 

the rules or regulations issued thereunder, the rules adopted by the public regulatory organization, or professional 

standards, the public regulatory organization may impose 

such disciplinary sanctions as it deems appropriate, including—

(i) temporary or permanent revocation or suspension 

of registration under this section; 

(ii) limitation of activities, functions, and operations; 

(iii) fine; 

(iv) censure; 

(v) in the case of a person associated with a public 

accounting firm, suspension or bar from being associated with a public accounting firm registered with the 

public regulatory organization; and 

(vi) any such other disciplinary sanction or remedial 

action as the public regulatory organization has established by rule that the public regulatory organization 

determines to be appropriate to prevent the recurrence 

of the violation. 

(C) STATEMENT REQUIRED.—A determination by the public regulatory organization to impose a disciplinary sanction shall be supported by a written statement by the public regulatory organization that shall be made available to 

the public and that sets forth—

(i) any act or practice in which the public accounting 

firm or person associated with such firm has been 

found to have engaged, or which such firm or person 

has been found to have omitted; 

(ii) the specific provision of the Federal securities 

laws, the rules or regulations issued thereunder, the 

rules adopted by the public regulatory organization, or 

professional standards which any such act, practice, or 

omission is deemed to violate; and 

(iii) the sanction imposed and the reasons therefor. 

(D) PROHIBITION ON ASSOCIATION.—It shall be unlawful—

(i) for any person as to whom a suspension or bar 

is in effect willfully to be or to become associated with 

a public accounting firm registered with the public 

regulatory organization, in connection with the preparation of an accountant’s report on any financial statement, report, or other document filed with the Commission, without the consent of the public regulatory 

organization or the Commission; and 

18

(ii) for any public accounting firm registered with 

the public regulatory organization to permit such a 

person to become, or remain, associated with such firm 

without the consent of the public regulatory organization or the Commission, if such firm knew or, in the 

exercise of reasonable care should have known, of such 

suspension or bar. 

(4) REPORTING OF SANCTIONS.—If the public regulatory organization imposes a disciplinary sanction against a public accounting firm, or a person associated with such firm, the public 

regulatory organization shall report such sanction to the Commission, to the appropriate State or foreign licensing public 

regulatory organization or public regulatory organizations with 

which such firm or such person is licensed or certified to practice public accounting, and to the public. The information reported shall include— (A) the name of the public accounting firm, or person associated with such firm, against whom the sanction is imposed; 

(B) a description of the acts, practices, or omissions upon 

which the sanction is based; 

(C) the nature of the sanction; and 

(D) such other information respecting the circumstances 

of the disciplinary action (including the name of any client 

of such firm affected by such acts, practices, or omissions) 

as the public regulatory organization deems appropriate. 

(5) DISCOVERY AND ADMISSIBILITY OF PUBLIC REGULATORY OR- GANIZATION MATERIAL.— (A) DISCOVERABILITY.— (i) IN GENERAL.—Except as provided in subparagraph (C), all reports, memoranda, and other information prepared, collected, or received by the public regulatory organization, and the deliberations and other 

proceedings of the public regulatory organization and 

its employees and agents in connection with an investigation or disciplinary proceeding under this section 

shall not be subject to any form of civil discovery, including demands for production of documents and for 

testimony of individuals, in connection with any proceeding in any State or Federal court, or before any 

State or Federal administrative agency. This subparagraph shall not apply to any information provided to 

the public regulatory organization that would have 

been subject to discovery from the person or entity 

that provided it to the public regulatory organization, 

but is no longer available from that person or entity. 

(ii) EXEMPTION.—Submissions to the public regulatory organization by or on behalf of a public accounting firm or person associated with such a firm or on 

behalf of any other participant in a public regulatory 

organization proceeding (other than a public hearing), 

including documents generated by the public regulatory organization itself, shall be exempt from discovery to the same extent as the material described in 

clause (i), whether in the possession of the public reguVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00018 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
19

latory organization or any other person, if such submission—

(I) is prepared specifically for the purpose of the 

public regulatory organization proceeding; and 

(II) addresses the merits of the issues under investigation by the public regulatory organization. 

(iii) HEARINGS PUBLIC.—Except as otherwise ordered 

by the public regulatory organization on its own motion or on the motion of a party, all hearings under 

this paragraph shall be open to the public. 

(B) ADMISSIBILITY.— (i) IN GENERAL.—Except as provided in subparagraph (C), all reports, memoranda, and other information prepared, collected, or received by the public regulatory organization, the deliberations and other proceedings of the public regulatory organization and its 

employees and agents in connection with an investigation or disciplinary proceeding under this section, the 

fact that an investigation or disciplinary proceeding 

has been commenced, and the public regulatory organization’s determination with respect to any investigation or disciplinary proceeding shall be inadmissible in 

any proceeding in any State or Federal court or before 

any State or Federal administrative agency. 

(ii) TREATMENT OF CERTAIN DOCUMENTS.—Submissions to the public regulatory organization by or on behalf of a public accounting firm or person associated 

with such a firm or on behalf of any other participant 

in a public regulatory organization proceeding, including documents generated by the public regulatory organization itself, shall be inadmissible to the same extent as the material described in clause (i), if such 

submission— (I) is prepared specifically for the purpose of the 

public regulatory organization proceedings; and 

(II) addresses the merits of the issues under investigation by the public regulatory organization. 

(C) AVAILABILITY AND ADMISSIBILITY OF INFORMATION.— (i) IN GENERAL.—All information referred to in subparagraphs (A) and (B) shall be— (I) available to the Commission; 

(II) available to any other Federal department 

or agency in connection with the exercise of its 

regulatory authority to the extent that such information would be available to such agency from 

the Commission as a result of a Commission enforcement investigation; 

(III) available to Federal and State authorities 

in connection with any criminal investigation or 

proceeding; 

(IV) admissible in any action brought by the 

Commission or any other Federal department or 

agency pursuant to its regulatory authority, to the 

extent that such information would be available to 

such agency from the Commission as a result of a 

20

Commission enforcement investigation and in any 

criminal action; and 

(V) available to State licensing public regulatory 

organizations to the extent authorized in paragraph (6). 

(ii) OTHER LIMITATIONS.—Any documents or other 

information provided to the Commission or other authorities pursuant to clause (i) shall be subject to the 

limitations on discovery and admissibility set forth in 

subparagraphs (A) and (B). 

(6) PARTICIPATION BY STATE LICENSING PUBLIC REGULATORY

ORGANIZATIONS.— (A) NOTICE.—When the public regulatory organization 

institutes an investigation pursuant to paragraph (2)(A), it 

shall notify the State licensing public regulatory organizations in the States in which the public accounting firm or 

person associated with such firm engaged in the act or failure to act alleged to have violated professional standards, 

of the pendency of the investigation, and shall invite the 

State licensing public regulatory organizations to participate in the investigation. 

(B) ACCEPTANCE BY STATE PUBLIC REGULATORY ORGANI- ZATION.—If a State licensing public regulatory organization 

elects to join in the investigation, its representatives shall 

participate, pursuant to rules established by the public 

regulatory organization, in investigating the matter and in 

presenting the evidence justifying the charges in any hearing pursuant to paragraph (3)(A). 

(C) STATE SANCTIONS PERMITTED.—If the public regulatory organization or the Commission imposes a sanction 

upon a public accounting firm or person associated with 

such a firm, and that determination either is not subjected 

to judicial review or is upheld on judicial review, a State 

licensing public regulatory organization may impose a 

sanction on the basis of the public regulatory organization’s report pursuant to paragraph (4). Any sanction imposed by the State licensing public regulatory organization 

under this clause shall be inadmissible in any proceeding 

in any State or Federal court or before any State or Federal administrative agency. 

(g) REVIEW AND APPROVAL OF RULES.—

(1) SUBMISSION, PUBLICATION, AND COMMENT.—Each recognized public regulatory organization shall file with the Commission, in accordance with such rules as the Commission may 

prescribe, copies of any proposed rule or any proposed change 

in, addition to, or deletion from the rules of such recognized 

public regulatory organization (hereinafter in this subsection 

collectively referred to as a ‘‘proposed rule change’’) accompanied by a concise general statement of the basis and purpose 

of such proposed rule change. The Commission shall, upon the 

filing of any proposed rule change, publish notice thereof together with the terms of substance of the proposed rule change 

or a description of the subjects and issues involved. The Commission shall give interested persons an opportunity to submit 

written data, views, and arguments concerning such proposed 

21

rule change. No proposed rule change shall take effect unless 

approved by the Commission or otherwise permitted in accordance with the provisions of this subsection. 

(2) APPROVAL OR PROCEEDINGS.—Within 35 days of the date 

of publication of notice of the filing of a proposed rule change 

in accordance with paragraph (1) of this subsection, or within 

such longer period as the Commission may designate up to 90 

days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which 

the recognized public regulatory organization consents, the 

Commission shall— (A) by order approve such proposed rule change; or 

(B) institute proceedings to determine whether the proposed rule change should be disapproved. Such proceedings shall include notice of the grounds for disapproval 

under consideration and opportunity for hearing and be 

concluded within 180 days of the date of publication of notice of the filing of the proposed rule change. At the conclusion of such proceedings the Commission, by order, shall 

approve or disapprove such proposed rule change. The 

Commission may extend the time for conclusion of such 

proceedings for up to 60 days if it finds good cause for such 

extension and publishes its reasons for so finding or for 

such longer period as to which the recognized public regulatory organization consents. 

(3) BASIS FOR APPROVAL OR DISAPPROVAL.—The Commission 

shall approve a proposed rule change of a recognized public 

regulatory organization if it finds that such proposed rule 

change is consistent with the requirements of this Act and the 

rules and regulations thereunder applicable to such organization. The Commission shall disapprove a proposed rule change 

of a recognized public regulatory organization if it does not 

make such finding. The Commission shall not approve any proposed rule change prior to the 30th day after the date of publication of notice of the filing thereof, unless the Commission 

finds good cause for so doing and publishes its reasons for so 

finding. 

(4) RULES EFFECTIVE UPON FILING.— (A) Notwithstanding the provisions of paragraph (2) of 

this subsection, a proposed rule change may take effect 

upon filing with the Commission if designated by the recognized public regulatory organization as (i) constituting a 

stated policy, practice, or interpretation with respect to the 

meaning, administration, or enforcement of an existing 

rule of the recognized public regulatory organization, (ii) 

establishing or changing a due, fee, or other charge imposed by the recognized public regulatory organization, or 

(iii) concerned solely with the administration of the recognized public regulatory organization or other matters 

which the Commission, by rule, consistent with the public 

interest and the purposes of this subsection, may specify 

as outside the provisions of such paragraph (2). 

(B) Notwithstanding any other provision of this subsection, a proposed rule change may be put into effect 

summarily if it appears to the Commission that such acVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
22

tion is necessary for the protection of investors, or otherwise in accordance with the purposes of this title. Any proposed rule change so put into effect shall be filed promptly 

thereafter in accordance with the provisions of paragraph 

(1) of this subsection. 

(C) Any proposed rule change of a recognized public regulatory organization which has taken effect pursuant to 

subparagraph (A) or (B) of this paragraph may be enforced 

by such organization to the extent it is not inconsistent 

with the provisions of this Act, the securities laws, the 

rules and regulations thereunder, and applicable Federal 

and State law. At any time within 60 days of the date of 

filing of such a proposed rule change in accordance with 

the provisions of paragraph (1) of this subsection, the Commission summarily may abrogate the change in the rules 

of the recognized public regulatory organization made 

thereby and require that the proposed rule change be 

refiled in accordance with the provisions of paragraph (1) 

of this subsection and reviewed in accordance with the provisions of paragraph (2) of this subsection, if it appears to 

the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, 

or otherwise in furtherance of the purposes of this Act. 

Commission action pursuant to the preceding sentence 

shall not affect the validity or force of the rule change during the period it was in effect, shall not be subject to court 

review, and shall not be deemed to be ‘‘final agency action’’ for purposes of section 704 of title 5, United States Code. 

(h) COMMISSION ACTION TO CHANGE RULES.—The Commission, 

by rule, may abrogate, add to, and delete from (hereinafter in this 

subsection collectively referred to as ‘‘amend’’) the rules of a recognized public regulatory organization as the Commission deems necessary or appropriate to insure the fair administration of the recognized public regulatory organization, to conform its rules to requirements of this Act, the securities laws, and the rules and regulations thereunder applicable to such organization, or otherwise in 

furtherance of the purposes of this Act, in the following manner: 

(1) The Commission shall notify the recognized public regulatory organization and publish notice of the proposed rulemaking in the Federal Register. The notice shall include the 

text of the proposed amendment to the rules of the recognized 

public regulatory organization and a statement of the Commission’s reasons, including any pertinent facts, for commencing 

such proposed rulemaking. 

(2) The Commission shall give interested persons an opportunity for the oral presentation of data, views, and arguments, 

in addition to an opportunity to make written submissions. A 

transcript shall be kept of any oral presentation. 

(3) A rule adopted pursuant to this subsection shall incorporate the text of the amendment to the rules of the recognized 

public regulatory organization and a statement of the Commission’s basis for and purpose in so amending such rules. This 

statement shall include an identification of any facts on which 

the Commission considers its determination so to amend the 

rules of the recognized public regulatory agency to be based, 

23

including the reasons for the Commission’s conclusions as to 

any of such facts which were disputed in the rulemaking. 

(4)(A) Except as provided in paragraphs (1) through (3) of 

this subsection, rulemaking under this subsection shall be in 

accordance with the procedures specified in section 553 of title 

5, United States Code, for rulemaking not on the record. 

(B) Nothing in this subsection shall be construed to impair 

or limit the Commission’s power to make, or to modify or alter 

the procedures the Commission may follow in making, rules 

and regulations pursuant to any other authority under the securities laws. 

(C) Any amendment to the rules of a recognized public regulatory organization made by the Commission pursuant to this 

subsection shall be considered for all purposes to be part of the 

rules of such recognized public regulatory organization and 

shall not be considered to be a rule of the Commission. 

(i) COMMISSION OVERSIGHT OF THE PRO.— (1) RECORDS AND EXAMINATIONS.—A public regulatory organization shall make and keep for prescribed periods such 

records, furnish such copies thereof, and make and disseminate 

such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection 

of investors, or otherwise in furtherance of the purposes of this 

Act or the securities laws. 

(2) ADDITIONAL DUTIES; SPECIAL REVIEWS.—A public regulatory organization shall perform such other duties or functions 

as the Commission, by rule or order, determines are necessary 

or appropriate in the public interest or for the protection of investors and to carry out the purposes of this Act and the securities laws, including conducting a special review of a particular public accounting firm’s quality control system or a special review of a particular aspect of some or all public accounting firms’ quality control systems. 

(3) ANNUAL REPORT; PROPOSED BUDGET.—

(A) SUBMISSION OF ANNUAL REPORT AND BUDGET.—A 

public regulatory organization shall submit an annual report and its proposed budget to the Commission for review 

and approval, by order, at such times and in such form as 

the Commission shall prescribe. 

(B) CONTENTS OF ANNUAL REPORT.—Each annual report 

required by subparagraph (A) shall include—

(i) a detailed description of the activities of the public regulatory organization; 

(ii) the audited financial statements of the public 

regulatory organization; 

(iii) a detailed explanation of the fees and charges 

imposed by the public regulatory organization under 

subsection (b)(9); and 

(iv) such other matters as the public regulatory organization or the Commission deems appropriate. 

(C) TRANSMITTAL OF ANNUAL REPORT TO CONGRESS.—The 

Commission shall transmit each approved annual report 

received under subparagraph (A) to the Committee on Financial Services of the United States House of Representatives and the Committee on Banking, Housing, and Urban 

24

Affairs of the United States Senate. At the same time it 

transmits a public regulatory organization’s annual report 

under this subparagraph, the Commission shall include a 

written statement of its views of the functioning and operations of the public regulatory organization. 

(D) PUBLIC AVAILABILITY.—Following transmittal of each 

approved annual report under subparagraph (C), the Commission and the public regulatory organization shall make 

the approved annual report publicly available. 

(4) DISAPPROVAL OF ELECTION OF PRO MEMBER.—The Commission is authorized, by order, if in its opinion such action is 

necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes 

of this Act or the securities laws, to disapprove the election of 

any member of a public regulatory organization if the Commission determines, after notice and opportunity for hearing, that 

the person elected is unfit to serve on the public regulatory organization. 

(j) CLARIFICATION OF APPLICATION OF PRO AUTHORITY.—The authority granted to any such organization in this section shall only 

apply to the actions of accountants related to the certification of financial statements required by securities laws and not other actions or actions for other clients of the accounting firm or any accountant that does not certify financial statements for publicly 

traded companies. 

(k) DEADLINE FOR RULEMAKING.—The Commission shall—

(1) within 90 days after the date of enactment of this Act, 

propose, and 

(2) within 270 days after such date, prescribe, 

rules to implement this section. 

(l) EFFECTIVE DATE; TRANSITION PROVISIONS.—

(1) EFFECTIVE DATE.—Except as provided in paragraph (2), 

subsection (a) of this section shall be effective with respect to 

any certified financial statement for any fiscal year that ends 

more than one year after the Commission recognizes a public 

regulatory organization pursuant to this section. 

(2) DELAY IN ESTABLISHMENT OF BOARD.—If the Commission 

has failed to recognize any public regulatory organization pursuant to this section within one year after the date of enactment of this Act, the Commission shall perform the duties of 

such organization with respect to any certified financial statement for any fiscal year that ends before one year after any 

such board is recognized by the Commission. 

SEC. 3. IMPROPER INFLUENCE ON CONDUCT OF AUDITS. 

(a) RULES TO PROHIBIT.—It shall be unlawful in contravention of 

such rules or regulations as the Commission shall prescribe as necessary and appropriate in the public interest or for the protection 

of investors for any officer, director, or affiliated person of an issuer 

of any security registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) to take any action to fraudulently influence, coerce, manipulate, or mislead any independent 

public or certified accountant engaged in the performance of an 

audit of the financial statements of such issuer for the purpose of 

rendering such financial statements materially misleading. In any 

25

civil proceeding, the Commission shall have exclusive authority to 

enforce this section and any rule or regulation hereunder. 

(b) NO PREEMPTION OF OTHER LAW.—The provisions of subsection (a) shall be in addition to, and shall not supersede or preempt, any other provision of law or any rule or regulation thereunder. 

(c) DEADLINE FOR RULEMAKING.—The Commission shall— (1) within 90 days after the date of enactment of this Act, 

propose, and 

(2) within 270 days after such date, prescribe, 

the rules or regulations required by this section. 

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

(a) REAL-TIME ISSUER DISCLOSURES REQUIRED.— (1) OBLIGATIONS.—Every issuer of a security registered 

under section 12 of the Securities Exchange Act of 1934 (15 

U.S.C. 78l) shall file with the Commission and disclose to the 

public, on a rapid and essentially contemporaneous basis, such 

information concerning the financial condition or operations of 

such issuer as the Commission determines by rule is necessary 

in the public interest and for the protection of investors. Such 

rule shall— (A) specify the events or circumstances giving rise to the 

obligation to disclose or update a disclosure; 

(B) establish requirements regarding the rapidity and 

timeliness of such disclosure; 

(C) identify the means whereby the disclosure required 

shall be made, which shall ensure the broad, rapid, and accurate dissemination of the information to the public via 

electronic or other communications device; 

(D) identify the content of the information to be disclosed; and 

(E) without limiting the Commission’s general exemptive 

authority, specify any exemptions or exceptions from such 

requirements. 

(2) ENFORCEMENT.—The Commission shall have exclusive 

authority to enforce this section and any rule or regulation 

hereunder in civil proceedings. 

(b) ELECTRONIC DISCLOSURE OF INSIDER TRANSACTIONS.— (1) DISCLOSURES OF TRADING.—The Commission shall, by 

rule, require— (A) that a disclosure required by section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) of the sale of 

any securities of an issuer, or any security futures product 

(as defined in section 3(a)(56) of the Securities Exchange 

Act of 1934 (15 U.S.C. 78c(a)(56))) or any security-based 

swap agreement (as defined in section 206B of the GrammLeach-Bliley Act) that is based in whole or in part on the 

securities of such issuer, by an officer or director of the 

issuer of those securities, or by a beneficial owner of such 

securities, shall be made available electronically to the 

Commission and to the issuer by such officer, director, or 

beneficial owner before the end of the next business day 

after the day on which the transaction occurs; 

(B) that the information in such disclosure be made 

available electronically to the public by the Commission, to 

26

the extent permitted under applicable law, upon receipt, 

but in no case later than the end of the next business day 

after the day on which the disclosure is received under 

subparagraph (A); and 

(C) that, in any case in which the issuer maintains a corporate website, such information shall be made available 

by such issuer on that website, before the end of the next 

business day after the day on which the disclosure is received by the Commission under subparagraph (A). 

(2) TRANSACTIONS INCLUDED.—The rule prescribed under 

paragraph (1) shall require the disclosure of the following 

transactions: 

(A) Direct or indirect sales or other transfers of securities of the issuer (or any interest therein) to the issuer or 

an affiliate of the issuer. 

(B) Loans or other extensions of credit extended to an officer, director, or other person affiliated with the issuer on 

terms or conditions not otherwise available to the public. 

(3) OTHER FORMATS; FORMS.—In the rule prescribed under 

paragraph (1), the Commission shall provide that electronic filing and disclosure shall be in lieu of any other format required 

for such disclosures on the day before the date of enactment of 

this subsection. The Commission shall revise such forms and 

schedules required to be filed with the Commission pursuant 

to paragraph (1) as necessary to facilitate such electronic filing 

and disclosure. 

SEC. 5. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS 

PROHIBITED. 

(a) PROHIBITION.—It shall be unlawful for any person who is directly or indirectly the beneficial owner of more than 10 percent of 

any class of any equity security (other than an exempted security) 

which is registered under section 12 of the Securities Exchange Act 

of 1934 (15 U.S.C. 78l) or who is a director or an officer of the 

issuer of such security, directly or indirectly, to purchase (or otherwise acquire) or sell (or otherwise transfer) any equity security of 

any issuer (other than an exempted security), during any blackout 

period with respect to such equity security. 

(b) REMEDY.—Any profit realized by such beneficial owner, director, or officer from any purchase (or other acquisition) or sale (or 

other transfer) in violation of this section shall inure to and be recoverable by the issuer irrespective of any intention on the part of 

such beneficial owner, director, or officer in entering into the transaction. Suit to recover such profit may be instituted at law or in 

equity in any court of competent jurisdiction by the issuer, or by 

the owner of any security of the issuer in the name and in behalf 

of the issuer if the issuer shall fail or refuse to bring such suit 

within 60 days after request or shall fail diligently to prosecute the 

same thereafter; but no such suit shall be brought more than 2 

years after the date such profit was realized. This subsection shall 

not be construed to cover any transaction where such beneficial 

owner was not such both at the time of the purchase and sale, or 

the sale and purchase, of the security or security-based swap (as 

defined in section 206B of the Gramm-Leach-Bliley Act) involved, 

or any transaction or transactions which the Commission by rules 

27

and regulations may exempt as not comprehended within the purposes of this subsection. 

(c) RULEMAKING PERMITTED.—The Commission may issue rules 

to clarify the application of this subsection, to ensure adequate notice to all persons affected by this subsection, and to prevent evasion thereof. 

(d) DEFINITION.—For purposes of this section, the term ‘‘beneficial owner’’ has the meaning provided such term in rules or regulations issued by the Securities and Exchange Commission under 

section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p). 

SEC. 6. IMPROVED TRANSPARENCY OF CORPORATE DISCLOSURES. 

(a) MODIFICATION OF REGULATIONS REQUIRED.—The Commission 

shall revise its regulations under the securities laws pertaining to 

the disclosures required in periodic financial reports and registration statements to require such reports to include adequate and appropriate disclosure of— (1) the issuer’s off-balance sheet transactions and relationships with unconsolidated entities or other persons, to the extent they are not disclosed in the financial statements and are 

reasonably likely to materially affect the liquidity or the availability of, or requirements for, capital resources, or the financial condition or results of operations of the issuer; and 

(2) loans extended to officers, directors, or other persons affiliated with the issuer on terms or conditions that are not otherwise available to the public. 

(b) DEADLINE FOR RULEMAKING.—The Commission shall— (1) within 90 days after the date of enactment of this Act, 

propose, and 

(2) within 270 days after such date, prescribe, 

the revisions to its regulations required by subsection (a). 

(c) ANALYSIS REQUIRED.— (1) TRANSPARENCY, COMPLETENESS, AND USEFULNESS OF FI- NANCIAL STATEMENTS.—The Commission shall conduct an analysis of the extent to which, consistent with the protection of investors and the public interest, disclosure of additional or reorganized information may be required to improve the transparency, completeness, or usefulness of financial statements 

and other corporate disclosures filed under the securities laws. 

(2) ALTERNATIVES TO BE CONSIDERED.—In conducting the 

analysis required by paragraph (1), the Commission shall consider—

(A) requiring the identification of the key accounting 

principles that are most important to the issuer’s reported 

financial condition and results of operation, and that require management’s most difficult, subjective, or complex 

judgments; 

(B) requiring an explanation, where material, of how different available accounting principles applied, the judgments made in their application, and the likelihood of materially different reported results if different assumptions 

or conditions were to prevail; 

(C) in the case of any issuer engaged in the business of 

trading non-exchange traded contracts, requiring an explanation of such trading activities when such activities require the issuer to account for contracts at fair value, but 

28

for which a lack of market price quotations necessitates 

the use of fair value estimation techniques; 

(D) establishing requirements relating to the presentation of information in clear and understandable format 

and language; and 

(E) requiring such other disclosures, included in the financial statements or in other disclosure by the issuer, as 

would in the Commission’s view improve the transparency 

of such issuer’s financial statements and other required 

corporate disclosures. 

(3) RULES REQUIRED.—If the Commission, on the basis of the 

analysis required by this subsection, determines that it is necessary in the public interest or for the protection of investors 

and would improve the transparency of issuer financial statements, the Commission may prescribe rules reflecting the results of such analysis and the considerations required by paragraph (2). In prescribing such rules, the Commission may seek 

to minimize the paperwork and cost burden on the issuer consistent with achieving the public interest and investor protection purposes of such rules. 

SEC. 7. IMPROVEMENTS IN REPORTING ON INSIDER TRANSACTIONS 

AND RELATIONSHIPS. 

(a) SPECIFIC OBJECTIVES.—The Commission shall initiate a proceeding to propose changes in its rules and regulations with respect 

to financial reporting to improve the transparency and clarity of 

the information available to investors and to require increased financial disclosure with respect to the following: 

(1) INSIDER RELATIONSHIPS AND TRANSACTIONS.—Relationships and transactions— (A) between the issuer, affiliates of the issuer, and officers, directors, or employees of the issuer or such affiliates; 

and 

(B) between officers, directors, employees, or affiliates of 

the issuer and entities that are not otherwise affiliated 

with the issuer, 

to the extent such arrangement or transaction creates a conflict of interest for such persons. Such disclosure shall provide 

a description of such elements of the transaction as are necessary for an understanding of the business purpose and economic substance of such transaction (including contingencies). 

The disclosure shall provide sufficient information to determine the effect on the issuer’s financial statements and describe compensation arrangements of interested parties to such 

transactions. 

(2) RELATIONSHIPS WITH PHILANTHROPIC ORGANIZATIONS.—

Relationships between the registrant or any executive officer of 

the registrant and any not-for-profit organization on whose 

board a director or immediate family member serves or of 

which a director or immediate family member serves as an officer or in a similar capacity. Relationships that shall be disclosed include contributions to the organization in excess of 

$10,000 made by the registrant or any executive officer in the 

last five years and any other activity undertaken by the registrant or any executive officer that provides a material benefit 

to the organization. Material benefit includes lobbying. 

29

(3) INSIDER-CONTROLLED AFFILIATES.—Relationships in which 

the registrant or any executive officer exercises significant control over an entity in which a director or immediate family 

member owns an equity interest or to which a director or immediate family member has extended credit. Significant control 

should be defined with reference to the contractual and governance arrangements between the registrant or executive officer, 

as the case may be, and the entity. 

(4) JOINT OWNERSHIP.—Joint ownership by a registrant or 

executive officer and a director or immediate family member of 

any real or personal property. 

(5) PROVISION OF SERVICES BY RELATED PERSONS.—The provision of any professional services, including legal, financial advisory or medical services, by a director or immediate family 

member to any executive officer of the registrant in the last 

five years. 

(b) DEADLINES.—The Commission shall complete the rulemaking 

required by this section within 180 days after the date of enactment of this Act. 

SEC. 8. ENHANCED OVERSIGHT OF PERIODIC DISCLOSURES BY 

ISSUERS. 

(a) REGULAR AND SYSTEMATIC REVIEW.—The Securities and Exchange Commission shall review disclosures made by issuers pursuant to the Securities Exchange Act of 1934 (including reports 

filed on form 10–K) on a basis that is more regular and systematic 

than that in practice on the date of enactment on this Act. Such 

review shall include a review of an issuer’s financial statements. 

(b) RISK RATING SYSTEM.—For purposes of the reviews required 

by subsection (a), the Commission shall establish a risk rating system whereby issuers receive a risk rating by the Commission, 

which shall be used to determine the frequency of such reviews. In 

designing such a risk rating system the Commission shall consider, 

among other factors the following: 

(1) Emerging companies with disparities in price to earning 

ratios. 

(2) Issuers with the largest market capitalization. 

(3) Issuers whose operations significantly impact any material sector of the economy. 

(4) Systemic factors such as the effect on niche markets or 

important subsectors of the economy. 

(5) Issuers that experience significant volatility in their stock 

price as compared to other issuers. 

(6) Any other factor the Commission may consider relevant. 

(c) MINIMUM REVIEW PERIOD.—In no event shall an issuer be reviewed less than once every three years by the Commission. 

(d) PROHIBITION OF DISCLOSURE OF RISK RATING.—Notwithstanding any other provision of law, the Commission shall not disclose the risk rating of any issuer described in subsection (b). 

SEC. 9. RETENTION OF RECORDS. 

(a) DUTY TO RETAIN RECORDS.—Any independent public or certified accountant who certifies a financial statement as required by 

the securities laws or any rule or regulation thereunder shall prepare and maintain for a period of no less than 7 years, final audit 

work papers and other information related to any accountants reVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00029 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
30

port on such financial statements in sufficient detail to support the 

opinion or assertion reached in such accountants report. The Commission may prescribe rules specifying the application and requirements of this section. 

(b) ACCOUNTANT’S REPORT.—For purposes of subsection (a), the 

term ‘‘accountant’s report’’ means a document in which an accountant identifies a financial statement and sets forth his opinion regarding such financial statement or an assertion that an opinion 

cannot be expressed. 

SEC. 10. REMOVAL OF UNFIT CORPORATE OFFICERS. 

(a) REMOVAL IN JUDICIAL PROCEEDINGS.—

(1) SECURITIES ACT OF 1933.—Section 20(e) of the Securities 

Act of 1933 (15 U.S.C. 77t(e)) is amended by striking ‘‘substantial unfitness’’ and inserting ‘‘unfitness’’. 

(2) SECURITIES EXCHANGE ACT OF 1934.—Section 21(d)(2) of 

the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(2)) is 

amended by striking ‘‘substantial unfitness’’ and inserting 

‘‘unfitness’’. 

(b) REMOVAL IN ADMINISTRATIVE PROCEEDINGS.—

(1) SECURITIES ACT OF 1933.—Section 8A of the Securities Act 

of 1933 (15 U.S.C. 77h–1) is amended by adding at the end the 

following new subsection: 

‘‘(f) AUTHORITY TO PROHIBIT PERSONS FROM SERVING AS OFFI- CERS OR DIRECTORS.—In any cease-and-desist proceeding under 

subsection (a), the Commission may issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of 

time as it shall determine, any person who has violated section 

17(a)(1) of this title from acting as an officer or director of any 

issuer that has a class of securities registered pursuant to section 

12 of the Securities Exchange Act of 1934 or that is required to file 

reports pursuant to section 15(d) of that Act if the person’s conduct 

demonstrates unfitness to serve as an officer or director of any 

such issuer.’’. 

(2) SECURITIES EXCHANGE ACT OF 1934.—Section 21C of the 

Securities Exchange Act of 1934 (15 U.S.C. 78u–3) is amended 

by adding at the end the following new subsection: 

‘‘(f) AUTHORITY TO PROHIBIT PERSONS FROM SERVING AS OFFICERS OR DIRECTORS.—In any cease-and-desist proceeding under 

subsection (a), the Commission may issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of 

time as it shall determine, any person who has violated section 

10(b) of this title or the rules or regulations thereunder from acting 

as an officer or director of any issuer that has a class of securities 

registered pursuant to section 12 of this title or that is required to 

file reports pursuant to section 15(d) of this title if the person’s conduct demonstrates unfitness to serve as an officer or director of any 

such issuer.’’. 

SEC. 11. DISGORGEMENT REQUIRED. 

(a) ADMINISTRATIVE ACTIONS.—Within 30 days after the date of 

enactment of this Act, the Securities and Exchange Commission 

shall prescribe regulations to require disgorgement, in a proceeding 

pursuant to its authority under section 21A, 21B, or 21C (15 U.S.C. 

78u–1, 78u–2, 78u–3), of salaries, commissions, fees, bonuses, options, profits from securities transactions, and losses avoided 

31

through securities transactions obtained by an officer or director of 

an issuer during or for a fiscal year or other reporting period if 

such officer or director engaged in misconduct resulting in, or made 

or caused to be made in, the filing of a financial statement for such 

fiscal year or reporting period which—

(1) was at the time, and in the light of the circumstances 

under which it was made, false or misleading with respect to 

any material fact; or 

(2) omitted to state a material fact necessary in order to 

make the statements made, in the light of the circumstances 

in which they were made, not misleading, 

(b) JUDICIAL PROCEEDINGS.—Section 21(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by adding at the 

end the following new paragraph: 

‘‘(5) ADDITIONAL DISGORGEMENT AUTHORITY.—In any action 

or proceeding brought or instituted by the Commission under 

the securities laws against any person—

‘‘(A) for engaging in misconduct resulting in, or making 

or causing to be made in, the filing of a financial statement which—

‘‘(i) was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact; or 

‘‘(ii) omitted to state a material fact necessary in 

order to make the statements made, in the light of the 

circumstances in which they were made, not misleading; or 

‘‘(B) for engaging in, causing, or aiding and abetting any 

other violation of the securities laws or the rules and regulations thereunder, 

such person, in addition to being subject to any other appropriate order, may be required to disgorge any or all benefits received from any source in connection with the conduct constituting, causing, or aiding and abetting the violation, including 

(but not limited to) salary, commissions, fees, bonuses, options, 

profits from securities transactions, and losses avoided through 

securities transactions.’’. 

SEC. 12. CEO AND CFO ACCOUNTABILITY FOR DISCLOSURE. 

(a) REGULATIONS REQUIRED.—The Securities and Exchange Commission shall by rule require, for each company filing periodic reports under section 13 or 15(d) of the Securities Exchange Act of 

1934 (15 U.S.C. 78m, 78o(d)), that the principal executive officer or 

officers and the principal financial officer or officers, or persons 

performing similar functions, certify in each annual or quarterly report filed or submitted under either such section of such Act that—

(1) the signing officer has reviewed the report; 

(2) based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state 

a material fact necessary in order to make the statements 

made, in light of the circumstances under which such statements were made, not misleading; 

(3) based on such officer’s knowledge, the financial statements, and other financial information included in the report, 

fairly present in all material respects the financial condition 

32

and results of operations of the issuer as of, and for, the periods presented in the report; 

(4) the signing officers— (A) are responsible for establishing and maintaining internal controls; 

(B) have designed such internal controls to ensure that 

material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in 

which the periodic reports are being prepared; 

(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; 

and 

(D) have presented in the report their conclusions about 

the effectiveness of their internal controls based on their 

evaluation as of that date; 

(5) the signing officers have disclosed to the issuer’s auditors 

and the audit committee of the board of directors (or persons 

fulfilling the equivalent function)— (A) all significant deficiencies in the design or operation 

of internal controls which could adversely affect the 

issuer’s ability to record, process, summarize, and report 

financial data and have identified for the issuer’s auditors 

any material weaknesses in internal controls; and 

(B) any fraud, whether or not material, that involves 

management or other employees who have a significant 

role in the issuer’s internal controls; and 

(6) the signing officers have indicated in the report whether 

or not there were significant changes in internal controls or in 

other factors that could significantly affect internal controls 

subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

(b) DEADLINE.—The rules required by subsection (a) shall be effective not later than 30 days after the date of enactment of this 

Act. 

SEC. 13. SECURITIES AND EXCHANGE COMMISSION AUTHORITY TO 

PROVIDE RELIEF. 

(a) PROCEEDS OF ENRON AND ANDERSEN ENFORCEMENT ACTIONS.—If in any administrative or judicial proceeding brought by 

the Securities and Exchange Commission against—

(1) the Enron Corporation, any subsidiary or affiliate of such 

Corporation, or any officer, director, or principal shareholder of 

such Corporation, subsidiary, or affiliate for any violation of 

the securities laws; or 

(2) Arthur Andersen L.L.C., any subsidiary or affiliate of Arthur Andersen L.L.C., or any general or limited partner of Arthur Andersen L.L.C., or such subsidiary or affiliate, for any 

violation of the securities laws with respect to any services performed for or in relation to the Enron Corporation, any subsidiary or affiliate of such Corporation, or any officer, director, 

or principal shareholder of such Corporation, subsidiary, or affiliate; 

the Commission obtains an order providing for an accounting and 

disgorgement of funds, such disgorgement fund (including any adVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00032 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
33

dition to such fund required or permitted under this section) shall 

be allocated in accordance with the requirements of this section. 

(b) PRIORITY FOR FORMER ENRON EMPLOYEES.—The Commission 

shall, by order, establish an allocation system for the disgorgement 

fund. Such system shall provide that, in allocating the 

disgorgement fund amount the victims of the securities laws violations described in subsection (a), the first priority shall be given to 

individuals who were employed by the Enron Corporation, or a subsidiary or affiliate of such Corporation, and who were participants 

in an individual account plan established by such Corporation, subsidiary, or affiliate. Such allocations among such individuals shall 

be in proportion to the extent to which the nonforfeitable accrued 

benefit of each such individual under the plan was invested in the 

securities of such Corporation, subsidiary, or affiliate. 

(c) ADDITION OF CIVIL PENALTIES.—If, in any proceeding described in subsection (a), the Commission assesses and collects any 

civil penalty, the Commission shall, notwithstanding section 

21(d)(3)(C)(i) or 21A(d)(1) of the Securities Exchange Act of 1934, 

or any other provision of the securities laws, be payable to the 

disgorgement fund. 

(d) ACCEPTANCE OF ADDITIONAL DONATIONS.—The Commission is 

authorized to accept, hold, administer, and utilize gifts, bequests 

and devises of property, both real and personal, to the United 

States for the disgorgement fund. Gifts, bequests, and devises of 

money and proceeds from sales of other property received as gifts, 

bequests, or devises shall be deposited in the disgorgement fund 

and shall be available for allocation in accordance with subsection 

(b). 

(e) DEFINITIONS.—As used in this section: 

(1) DISGORGEMENT FUND.—The term ‘‘disgorgement fund’’

means a disgorgement fund established in any administrative 

or judicial proceeding described in subsection (a). 

(2) SUBSIDIARY OR AFFILIATE.—The term ‘‘subsidiary or affiliate’’ when used in relation to a person means any entity that 

controls, is controlled by, or is under common control with such 

person. 

(3) OFFICER, DIRECTOR, OR PRINCIPAL SHAREHOLDER.—The 

term ‘‘officer, director, or principal shareholder’’ when used in 

relation to the Enron Corporation, or any subsidiary or affiliate 

of such Corporation, means any person that is subject to the 

requirements of section 16 of the Securities Exchange Act of 

1934 (15 U.S.C. 78p) in relation to the Enron Corporation, or 

any subsidiary or affiliate of such Corporation. 

(4) NONFORFEITABLE; ACCRUED BENEFIT; INDIVIDUAL AC- COUNT PLAN.—The terms ‘‘nonforfeitable’’, ‘‘accrued benefit’’, and ‘‘individual account plan’’ have the meanings provided 

such terms, respectively, in paragraphs (19), (23), and (34) of 

section 3 of the Employee Retirement Income Security Act of 

1974 (29 U.S.C. 1002(19), (23), (34)). 

SEC. 14. AUTHORIZATION OF APPROPRIATIONS OF THE SECURITIES 

AND EXCHANGE COMMISSION. 

In addition to any other funds authorized to be appropriated to 

the Securities and Exchange Commission, there are authorized to 

be appropriated to carry out the functions, powers, and duties of 

the Commission, $776,000,000 for fiscal year 2003, of which—

34

(1) not less that $134,000,000 shall be available for the Division of Corporate Finance and for the Office of Chief Accountant; 

(2) not less than $326,000,000 shall be available for the Division of Enforcement; and 

(3) not less than $76,000,000 shall be available to implement 

section 8 of the Investor and Capital Markets Fee Relief Act, 

relating to pay comparability. 

SEC. 15. ANALYST CONFLICTS OF INTEREST. 

(a) STUDY AND REVIEW REQUIRED.—The Securities and Exchange 

Commission shall conduct a study and review of any final rules by 

any self-regulatory organization registered with the Commission 

pursuant to section 19 of the Securities Exchange Act of 1934 (15 

U.S.C. 78s) related to matters involving equity research analysts 

conflicts of interest. Such study and report shall include a review 

of the effectiveness of such final rules in addressing matters relating to the objectivity and integrity of equity research analyst reports and recommendations. 

(b) REPORT REQUIRED.—The Securities and Exchange Commission shall submit a report to the Committee on Financial Services 

of the House of Representatives and the Committee on Banking, 

Housing, and Urban Affairs of the Senate on such study and review no later than 180 days after any such final rules by any selfregulatory organization registered with the Commission pursuant 

to section 19 of the Securities Exchange Act of 1934 are approved 

by the Commission. Such report shall include recommendations to 

the Congress, including any recommendations for additional selfregulatory organization rulemaking regarding matters involving 

equity research analysts. The Commission shall annually submit 

an update on such review. 

(c) ADDITIONAL RULES REQUIRED.—Unless the final rules reviewed by the Commission under subsections (a) and (b) contain 

the following provisions, the Commission shall, by rule—

(1) prohibit equity research analysts from—

(A) holding any beneficial interest in any equity security 

(as such term in defined in section 3(a)(11) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) in any 

issuer covered by such analyst; and 

(B) receiving compensation based on the investment 

banking revenues of the firm with which the analyst is associated, or on the investment banking revenues of such 

firm and its affiliates, except that this prohibition shall not 

prohibit such an analyst from receiving compensation 

based on the overall revenues of such firm or of such firm 

and its affiliates; 

(2) prohibit the investment banking department of such firm 

from having any input in the compensation, hiring, firing, or 

promotion of analysts; and 

(3) require such self-regulatory organizations—

(A) to establish criteria for evaluating analyst research 

quality; and 

(B) to require analyst compensation to be based principally on the quality of the equity research analyst’s research. 

35

SEC. 16. INDEPENDENT DIRECTORS. 

(a) RULEMAKING REQUIRED.—The Commission shall adopt rules, 

effective no later than 6 months after the date of enactment of this 

Act, to require that the independent directors on the board of directors of any issuer of securities registered under section 12 of the 

Securities Exchange Act of 1934 (15 U.S.C. 78l) be nominated for 

election by a nominating committee that is composed exclusively of 

other independent directors of such issuer. 

(b) INDEPENDENCE.—The rules required by subsection (a) shall 

require the same degree of independence for service on the nominating committee of an issuer as is required for purposes of service 

on the audit committee of an issuer by the listing standards concerning corporate governance of the exchange or association on 

which the securities of such issuer are listed. 

SEC. 17. ENFORCEMENT OF AUDIT COMMITTEE GOVERNANCE PRACTICES. 

The Commission shall revise its regulations pertaining to auditor 

independence to require that an accountant shall not be considered 

to be independent for purposes of certifying the financial statements or other documents of an issuer required to be filed with the 

Commission under the securities laws unless— (1) an issuer’s auditor is appointed by and reports directly to 

the audit committee of the board of directors or, in the absence 

of an audit committee, the board committee performing equivalent functions or the entire board of directors; 

(2) the audit committee meets with the accountants engaged 

to perform such audit on a regular basis, at least quarterly; 

and 

(3) the audit committee is provided with the opportunity to 

meet with such accountants without the attendance at such 

meetings of any officer, director, or other member of the 

issuer’s senior management. 

SEC. 18. REVIEW OF CORPORATE GOVERNANCE PRACTICES. 

(a) STUDY OF CORPORATE PRACTICES.—The Commission shall 

conduct a study and review of current corporate governance standards and practices to determine whether such standards and practices are serving the best interests of shareholders. Such study and 

review shall include an analysis of— (1) whether current standards and practices promote full disclosure of relevant information to shareholders; 

(2) whether corporate codes of ethics are adequate to protect 

shareholders, and to what extent deviations from such codes 

are tolerated; 

(3) to what extent conflicts of interests are aggressively reviewed, and whether adequate means for redressing such conflicts exist; 

(4) to what extent sufficient legal protections exist or should 

be adopted to ensure that any manager who attempts to manipulate or unduly influence an audit will be subject to appropriate sanction and liability, including liability to investors or 

shareholders pursuing a private cause of action for such manipulation or undue influence; 

(5) whether rules, standards, and practices relating to determining whether independent directors are in fact independent 

are adequate; 

36

(6) whether rules, standards, and practices relating to the 

independence of directors serving on audit committees are uniformly applied and adequate to protect investor interests; 

(7) whether the duties and responsibilities of audit committees should be established by the Commission; and 

(8) what further or additional practices or standards might 

best protect investors and promote the interests of shareholders. 

(b) PARTICIPATION OF STATE REGULATORS.—In conducting the 

study required under subsection (a), the Commission shall seek the 

views of the securities and corporate regulators of the various 

States. 

(c) REPORT REQUIRED.—The Commission shall submit a report on 

the analysis required under subsection (a) as a part of the Commission’s next annual report submitted after the date of enactment of 

this Act. 

SEC. 19. STUDY OF ENFORCEMENT ACTIONS. 

(a) STUDY REQUIRED.—The Commission shall review and analyze 

all enforcement actions by the Commission involving violations of 

reporting requirements imposed under the securities laws, and restatements of financial statements, over the last five years to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such 

as revenue recognition and the accounting treatment of off-balance 

sheet special purpose entities. 

(b) REPORT REQUIRED.—The Commission shall report its findings 

to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs 

of the Senate within 180 days of the date of enactment of this Act 

and shall use such findings to revise its rules and regulations, as 

necessary. The report shall include a discussion of regulatory or 

legislative steps that are recommended or that may be necessary 

to address concerns identified in the study. 

SEC. 20. STUDY OF CREDIT RATING AGENCIES. 

(a) STUDY REQUIRED.—The Commission shall conduct a study of 

the role and function of credit rating agencies in the operation of 

the securities market. Such study shall examine—

(1) the role of the credit rating agencies in the evaluation of 

issuers of securities; 

(2) the importance of that role to investors and the functioning of the securities markets; 

(3) any impediments to the accurate appraisal by credit rating agencies of the financial resources and risks of issuers of 

securities; 

(4) any measures which may be required to improve the dissemination of information concerning such resources and risks 

when credit rating agencies announce credit ratings; 

(5) any barriers to entry into the business of acting as a 

credit rating agency, and any measures needed to remove such 

barriers; and 

(6) any conflicts of interest in the operation of credit rating 

agencies and measures to prevent such conflicts or ameliorate 

the consequences of such conflicts. 

37

(b) REPORT REQUIRED.—The Commission shall submit a report 

on the analysis required by subsection (a) to the President, the 

Committee on Financial Services of the House of Representatives, 

and the Committee on Banking, Housing, and Urban Affairs of the 

Senate within 180 days after the date of enactment of this Act. The 

report shall include a discussion of regulatory or legislative steps 

that are recommended or that may be necessary to address concerns identified in the study. 

SEC. 21. STUDY OF INVESTMENT BANKS 

(a) GAO STUDY.—The Comptroller General shall conduct a study 

on whether investment banks and financial advisors assisted public 

companies in manipulating their earnings and obfuscating their 

true financial condition. The study should address the role of the 

investment banks—

(1) in the collapse of the Enron Corporation, including with 

respect to the design and implementation of derivatives transactions, transactions involving special purpose vehicles, and 

other financing arrangements that may have had the effect of 

altering the company’s reported financial statements in ways 

that obscured the true financial picture of the company; 

(2) in the failure of Global Crossing, including with respect 

to transactions involving swaps of fiber optic cable capacity, in 

designing transactions that may have had the effect of altering 

the company’s reported financial statements in ways that obscured the true financial picture of the company; and 

(3) generally, in creating and marketing transactions which 

may have been designed solely to enable companies to manipulate revenue streams, obtain loans, or move liabilities off balance sheets without altering the economic and business risks 

faced by the companies or any other mechanism to obscure a 

company’s financial picture. 

(b) REPORT.—The General Accounting Office shall report to the 

Congress within 180 days after the date of enactment of this Act 

on the results of the study required by this section. The report 

shall include a discussion of regulatory or legislative steps that are 

recommended or that may be necessary to address concerns identified in the study. 

SEC. 22. STUDY OF MODEL RULES FOR ATTORNEYS OF ISSUERS. 

(a) IN GENERAL.—The Comptroller General shall conduct a study 

of the Model Rules of Professional Conduct promulgated by the 

American Bar Association and rules of professional conduct applicable to attorneys established by the Commission to determine—

(1) whether such rules provide sufficient guidance to attorneys representing corporate clients who are issuers required to 

file periodic disclosures under section 13 or 15 of the Securities 

Exchange Act of 1934 (15 U.S.C. 78m, 78o), as to the ethical 

responsibilities of such attorneys to—

(A) warn clients of possible fraudulent or illegal activities of such clients and possible consequences of such activities; 

(B) disclose such fraudulent or illegal activities to appropriate regulatory or law enforcement authorities; and 

(C) manage potential conflicts of interests with clients; 

and 

38

(2) whether such rules provide sufficient protection to corporate shareholders, especially with regards to conflicts of interest between attorneys and their corporate clients. 

(b) REPORT REQUIRED.—The Comptroller General shall report to 

the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs 

of the Senate on the results of the study required by this section. 

Such report shall include any recommendations of the General Accounting Office with regards to—

(1) possible changes to the Model Rules and the rules of professional conduct applicable to attorneys established by the 

Commission to provide increased protection to shareholders; 

(2) whether restrictions should be imposed to require that an 

attorney, having represented a corporation or having been employed by a firm which represented a corporation, may not be 

employed as general counsel to that corporation until a certain 

period of time has expired; and 

(3) regulatory or legislative steps that are recommended or 

that may be necessary to address concerns identified in the 

study. 

SEC. 23. ENFORCEMENT AUTHORITY. 

For the purposes of enforcing and carrying out this Act, the Commission shall have all of the authorities granted to the Commission 

under the securities laws. Actions of the Commission under this 

Act, including actions on rules or regulations, shall be subject to review in the same manner as actions under the securities laws. 

SEC. 24. EXCLUSION FOR INVESTMENT COMPANIES. 

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

SEC. 25. DEFINITIONS. 

As used in this Act: 

(1) BLACKOUT PERIOD.—The term ‘‘blackout period’’ with respect to the equity securities of any issuer—

(A) means any period during which the ability of at least 

fifty percent of the participants or beneficiaries under all 

applicable individual account plans maintained by the 

issuer to purchase (or otherwise acquire) or sell (or otherwise transfer) an interest in any equity of such issuer is 

suspended by the issuer or a fiduciary of the plan; but 

(B) does not include—

(i) a period in which the employees of an issuer may 

not allocate their interests in the individual account 

plan due to an express investment restriction—

(I) incorporated into the individual account 

plan; and 

(II) timely disclosed to employees before joining 

the individual account plan or as a subsequent 

amendment to the plan; or 

(ii) any suspension described in subparagraph (A) 

that is imposed solely in connection with persons becoming participants or beneficiaries, or ceasing to be 

participants or beneficiaries, in an applicable indiVerDate Feb 1 2002 02:32 Apr 24, 2002 Jkt 005300 PO 00000 Frm 00038 Fmt 6659 Sfmt 6602 E:\HR\OC\HR418.XXX pfrm17 PsN: HR418
39

vidual account plan by reason of a corporate merger, 

acquisition, divestiture, or similar transaction. 

(2) BOARDS OF ACCOUNTANCY OF THE STATES.—The term ‘‘boards of accountancy of the States’’ means any organization 

or association chartered or approved under the law of any 

State with responsibility for the registration, supervision, or 

regulation of accountants. 

(3) COMMISSION.—The term ‘‘Commission’’ means the Securities and Exchange Commission. 

(4) INDIVIDUAL ACCOUNT PLAN.—The term ‘‘individual account plan’’ has the meaning provided such term in section 

3(34) of the Employee Retirement Income Security Act of 1974 

(29 U.S.C. 1002(34)). 

(5) ISSUER.—The term ‘‘issuer’’ shall have the meaning set 

forth in section 2(a)(4) of the Securities Act of 1933 (15 U.S.C. 

77b(a)(4)). 

(6) PERSON ASSOCIATED WITH AN ACCOUNTANT.—The term ‘‘person associated with an accountant’’ means any partner, officer, director, or manager of such accountant (or any person 

occupying a similar status or performing similar functions), 

any person directly or indirectly controlling, controlled by, or 

under common control with such accountant, or any employee 

of such accountant who performs a supervisory role in the auditing process. 

(7) PUBLIC REGULATORY ORGANIZATION.—The term ‘‘public 

regulatory organization’’ means the public regulatory organization established by the Commission under subsection (b) of section 2. 

(8) SECURITIES LAWS.—The term ‘‘securities laws’’ means the 

Securities Act of 1933 (15 U.S.C. 77a et seq.), the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et seq.), the Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 et seq.), the Investment 

Advisers Act of 1940 (15 U.S.C. 80b et seq.), and the Securities 

Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.), notwithstanding any contrary provision of any such Act.

Æ