H. R. 3763—27
a particular class, as applicable) in an amount equal to the total
of such amount, multiplied by a fraction—
(1) the numerator of which is the average monthly equity
market capitalization of the issuer for the 12-month period
immediately preceding the beginning of the fiscal year to which
such budget relates; and
(2) the denominator of which is the average monthly equity
market capitalization of all such issuers for such 12-month
period.
(h) CONFORMING AMENDMENTS.—Section 13(b)(2) of the Securi-
ties Exchange Act of 1934 (15 U.S.C. 78m(b)(2)) is amended—
(1) in subparagraph (A), by striking ‘‘and’’ at the end;
and
(2) in subparagraph (B), by striking the period at the
end and inserting the following: ‘‘; and
‘‘(C) notwithstanding any other provision of law, pay the
allocable share of such issuer of a reasonable annual accounting
support fee or fees, determined in accordance with section 109
of the Sarbanes-Oxley Act of 2002.’’.
(i) RULE OF CONSTRUCTION.—Nothing in this section shall be
construed to render either the Board, the standard setting body
referred to in subsection (a), or both, subject to procedures in
Congress to authorize or appropriate public funds, or to prevent
such organization from utilizing additional sources of revenue for
its activities, such as earnings from publication sales, provided
that each additional source of revenue shall not jeopardize, in
the judgment of the Commission, the actual and perceived independ-
ence of such organization.
(j) START-UP EXPENSES OF THE BOARD.—From the unexpended
balances of the appropriations to the Commission for fiscal year
2003, the Secretary of the Treasury is authorized to advance to
the Board not to exceed the amount necessary to cover the expenses
of the Board during its first fiscal year (which may be a short
fiscal year).
TITLE II—AUDITOR INDEPENDENCE
SEC. 201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS.
(a) PROHIBITED ACTIVITIES.—Section 10A of the Securities
Exchange Act of 1934 (15 U.S.C. 78j–1) is amended by adding
at the end the following:
‘‘(g) PROHIBITED ACTIVITIES.—Except as provided in subsection
(h), it shall be unlawful for a registered public accounting firm
(and any associated person of that firm, to the extent determined
appropriate by the Commission) that performs for any issuer any
audit required by this title or the rules of the Commission under
this title or, beginning 180 days after the date of commencement
of the operations of the Public Company Accounting Oversight
Board established under section 101 of the Sarbanes-Oxley Act
of 2002 (in this section referred to as the ‘Board’), the rules of
the Board, to provide to that issuer, contemporaneously with the
audit, any non-audit service, including—
‘‘(1) bookkeeping or other services related to the accounting
records or financial statements of the audit client;
‘‘(2) financial information systems design and implementa-
tion;
H. R. 3763—28
‘‘(3) appraisal or valuation services, fairness opinions, or
contribution-in-kind reports;
‘‘(4) actuarial services;
‘‘(5) internal audit outsourcing services;
‘‘(6) management functions or human resources;
‘‘(7) broker or dealer, investment adviser, or investment
banking services;
‘‘(8) legal services and expert services unrelated to the
audit; and
‘‘(9) any other service that the Board determines, by regula-
tion, is impermissible.
‘‘(h) PREAPPROVAL REQUIRED FOR NON-AUDIT SERVICES.—A reg-
istered public accounting firm may engage in any non-audit service,
including tax services, that is not described in any of paragraphs
(1) through (9) of subsection (g) for an audit client, only if the
activity is approved in advance by the audit committee of the
issuer, in accordance with subsection (i).’’.
(b) EXEMPTION AUTHORITY.—The Board may, on a case by
case basis, exempt any person, issuer, public accounting firm, or
transaction from the prohibition on the provision of services under
section 10A(g) of the Securities Exchange Act of 1934 (as added
by this section), to the extent that such exemption is necessary
or appropriate in the public interest and is consistent with the
protection of investors, and subject to review by the Commission
in the same manner as for rules of the Board under section 107.
SEC. 202. PREAPPROVAL REQUIREMENTS.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j–1), as amended by this Act, is amended by adding at the
end the following:
‘‘(i) PREAPPROVAL REQUIREMENTS.—
‘‘(1) IN GENERAL.—
‘‘(A) AUDIT COMMITTEE ACTION.—All auditing services
(which may entail providing comfort letters in connection
with securities underwritings or statutory audits required
for insurance companies for purposes of State law) and
non-audit services, other than as provided in subparagraph
(B), provided to an issuer by the auditor of the issuer
shall be preapproved by the audit committee of the issuer.
‘‘(B) DE MINIMUS EXCEPTION.—The preapproval require-
ment under subparagraph (A) is waived with respect to
the provision of non-audit services for an issuer, if—
‘‘(i) the aggregate amount of all such non-audit
services provided to the issuer constitutes not more
than 5 percent of the total amount of revenues paid
by the issuer to its auditor during the fiscal year
in which the nonaudit services are provided;
‘‘(ii) such services were not recognized by the issuer
at the time of the engagement to be non-audit services;
and
‘‘(iii) such services are promptly brought to the
attention of the audit committee of the issuer and
approved prior to the completion of the audit by the
audit committee or by 1 or more members of the audit
committee who are members of the board of directors
to whom authority to grant such approvals has been
delegated by the audit committee.
H. R. 3763—29
‘‘(2) DISCLOSURE TO INVESTORS.—Approval by an audit com-
mittee of an issuer under this subsection of a non-audit service
to be performed by the auditor of the issuer shall be disclosed
to investors in periodic reports required by section 13(a).
‘‘(3) DELEGATION AUTHORITY.—The audit committee of an
issuer may delegate to 1 or more designated members of the
audit committee who are independent directors of the board
of directors, the authority to grant preapprovals required by
this subsection. The decisions of any member to whom authority
is delegated under this paragraph to preapprove an activity
under this subsection shall be presented to the full audit com-
mittee at each of its scheduled meetings.
‘‘(4) APPROVAL OF AUDIT SERVICES FOR OTHER PURPOSES.—
In carrying out its duties under subsection (m)(2), if the audit
committee of an issuer approves an audit service within the
scope of the engagement of the auditor, such audit service
shall be deemed to have been preapproved for purposes of
this subsection.’’.
SEC. 203. AUDIT PARTNER ROTATION.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j–1), as amended by this Act, is amended by adding at the
end the following:
‘‘(j) AUDIT PARTNER ROTATION.—It shall be unlawful for a reg-
istered public accounting firm to provide audit services to an issuer
if the lead (or coordinating) audit partner (having primary responsi-
bility for the audit), or the audit partner responsible for reviewing
the audit, has performed audit services for that issuer in each
of the 5 previous fiscal years of that issuer.’’.
SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j–1), as amended by this Act, is amended by adding at the
end the following:
‘‘(k) REPORTS TO AUDIT COMMITTEES.—Each registered public
accounting firm that performs for any issuer any audit required
by this title shall timely report to the audit committee of the
issuer—
‘‘(1) all critical accounting policies and practices to be used;
‘‘(2) all alternative treatments of financial information
within generally accepted accounting principles that have been
discussed with management officials of the issuer, ramifications
of the use of such alternative disclosures and treatments, and
the treatment preferred by the registered public accounting
firm; and
‘‘(3) other material written communications between the
registered public accounting firm and the management of the
issuer, such as any management letter or schedule of
unadjusted differences.’’.
SEC. 205. CONFORMING AMENDMENTS.
(a) DEFINITIONS.—Section 3(a) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the
following:
‘‘(58) AUDIT
COMMITTEE.—The term ‘audit committee’
means—
‘‘(A) a committee (or equivalent body) established by
and amongst the board of directors of an issuer for the
H. R. 3763—30
purpose of overseeing the accounting and financial
reporting processes of the issuer and audits of the financial
statements of the issuer; and
‘‘(B) if no such committee exists with respect to an
issuer, the entire board of directors of the issuer.
‘‘(59) REGISTERED
PUBLIC
ACCOUNTING
FIRM.—The term
‘registered public accounting firm’ has the same meaning as
in section 2 of the Sarbanes-Oxley Act of 2002.’’.
(b) AUDITOR REQUIREMENTS.—Section 10A of the Securities
Exchange Act of 1934 (15 U.S.C. 78j–1) is amended—
(1) by striking ‘‘an independent public accountant’’ each
place that term appears and inserting ‘‘a registered public
accounting firm’’;
(2) by striking ‘‘the independent public accountant’’ each
place that term appears and inserting ‘‘the registered public
accounting firm’’;
(3) in subsection (c), by striking ‘‘No independent public
accountant’’ and inserting ‘‘No registered public accounting
firm’’; and
(4) in subsection (b)—
(A) by striking ‘‘the accountant’’ each place that term
appears and inserting ‘‘the firm’’;
(B) by striking ‘‘such accountant’’ each place that term
appears and inserting ‘‘such firm’’; and
(C) in paragraph (4), by striking ‘‘the accountant’s
report’’ and inserting ‘‘the report of the firm’’.
(c) OTHER REFERENCES.—The Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.) is amended—
(1) in section 12(b)(1) (15 U.S.C. 78l(b)(1)), by striking
‘‘independent public accountants’’ each place that term appears
and inserting ‘‘a registered public accounting firm’’; and
(2) in subsections (e) and (i) of section 17 (15 U.S.C. 78q),
by striking ‘‘an independent public accountant’’ each place that
term appears and inserting ‘‘a registered public accounting
firm’’.
(d) CONFORMING AMENDMENT.—Section 10A(f) of the Securities
Exchange Act of 1934 (15 U.S.C. 78k(f)) is amended—
(1) by striking ‘‘DEFINITION’’ and inserting ‘‘DEFINITIONS’’;
and
(2) by adding at the end the following: ‘‘As used in this
section, the term ‘issuer’ means an issuer (as defined in section
3), the securities of which are registered under section 12,
or that is required to file reports pursuant to section 15(d),
or that files or has filed a registration statement that has
not yet become effective under the Securities Act of 1933 (15
U.S.C. 77a et seq.), and that it has not withdrawn.’’.
SEC. 206. CONFLICTS OF INTEREST.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j–1), as amended by this Act, is amended by adding at the
end the following:
‘‘(l) CONFLICTS OF INTEREST.—It shall be unlawful for a reg-
istered public accounting firm to perform for an issuer any audit
service required by this title, if a chief executive officer, controller,
chief financial officer, chief accounting officer, or any person serving
in an equivalent position for the issuer, was employed by that
registered independent public accounting firm and participated in
H. R. 3763—31
any capacity in the audit of that issuer during the 1-year period
preceding the date of the initiation of the audit.’’.
SEC. 207. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC
ACCOUNTING FIRMS.
(a) STUDY AND REVIEW REQUIRED.—The Comptroller General
of the United States shall conduct a study and review of the
potential effects of requiring the mandatory rotation of registered
public accounting firms.
(b) REPORT REQUIRED.—Not later than 1 year after the date
of enactment of this Act, the Comptroller General shall submit
a report to the Committee on Banking, Housing, and Urban Affairs
of the Senate and the Committee on Financial Services of the
House of Representatives on the results of the study and review
required by this section.
(c) DEFINITION.—For purposes of this section, the term ‘‘manda-
tory rotation’’ refers to the imposition of a limit on the period
of years in which a particular registered public accounting firm
may be the auditor of record for a particular issuer.
SEC. 208. COMMISSION AUTHORITY.
(a) COMMISSION REGULATIONS.—Not later than 180 days after
the date of enactment of this Act, the Commission shall issue
final regulations to carry out each of subsections (g) through (l)
of section 10A of the Securities Exchange Act of 1934, as added
by this title.
(b) AUDITOR INDEPENDENCE.—It shall be unlawful for any reg-
istered public accounting firm (or an associated person thereof,
as applicable) to prepare or issue any audit report with respect
to any issuer, if the firm or associated person engages in any
activity with respect to that issuer prohibited by any of subsections
(g) through (l) of section 10A of the Securities Exchange Act of
1934, as added by this title, or any rule or regulation of the
Commission or of the Board issued thereunder.
SEC. 209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY
AUTHORITIES.
In supervising nonregistered public accounting firms and their
associated persons, appropriate State regulatory authorities should
make an independent determination of the proper standards
applicable, particularly taking into consideration the size and
nature of the business of the accounting firms they supervise and
the size and nature of the business of the clients of those firms.
The standards applied by the Board under this Act should not
be presumed to be applicable for purposes of this section for small
and medium sized nonregistered public accounting firms.
TITLE III—CORPORATE
RESPONSIBILITY
SEC. 301. PUBLIC COMPANY AUDIT COMMITTEES.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C.
78f) is amended by adding at the end the following:
‘‘(m) STANDARDS RELATING TO AUDIT COMMITTEES.—
‘‘(1) COMMISSION RULES.—
H. R. 3763—32
‘‘(A) IN GENERAL.—Effective not later than 270 days
after the date of enactment of this subsection, the Commis-
sion shall, by rule, direct the national securities exchanges
and national securities associations to prohibit the listing
of any security of an issuer that is not in compliance
with the requirements of any portion of paragraphs (2)
through (6).
‘‘(B) OPPORTUNITY TO CURE DEFECTS.—The rules of the
Commission under subparagraph (A) shall provide for
appropriate procedures for an issuer to have an opportunity
to cure any defects that would be the basis for a prohibition
under subparagraph (A), before the imposition of such
prohibition.
‘‘(2) RESPONSIBILITIES
RELATING
TO
REGISTERED
PUBLIC
ACCOUNTING FIRMS.—The audit committee of each issuer, in
its capacity as a committee of the board of directors, shall
be directly responsible for the appointment, compensation, and
oversight of the work of any registered public accounting firm
employed by that issuer (including resolution of disagreements
between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit
report or related work, and each such registered public
accounting firm shall report directly to the audit committee.
‘‘(3) INDEPENDENCE.—
‘‘(A) IN
GENERAL.—Each member of the audit com-
mittee of the issuer shall be a member of the board of
directors of the issuer, and shall otherwise be independent.
‘‘(B) CRITERIA.—In order to be considered to be inde-
pendent for purposes of this paragraph, a member of an
audit committee of an issuer may not, other than in his
or her capacity as a member of the audit committee, the
board of directors, or any other board committee—
‘‘(i) accept any consulting, advisory, or other
compensatory fee from the issuer; or
‘‘(ii) be an affiliated person of the issuer or any
subsidiary thereof.
‘‘(C) EXEMPTION
AUTHORITY.—The Commission may
exempt from the requirements of subparagraph (B) a par-
ticular relationship with respect to audit committee mem-
bers, as the Commission determines appropriate in light
of the circumstances.
‘‘(4) COMPLAINTS.—Each audit committee shall establish
procedures for—
‘‘(A) the receipt, retention, and treatment of complaints
received by the issuer regarding accounting, internal
accounting controls, or auditing matters; and
‘‘(B) the confidential, anonymous submission by
employees of the issuer of concerns regarding questionable
accounting or auditing matters.
‘‘(5) AUTHORITY TO ENGAGE ADVISERS.—Each audit com-
mittee shall have the authority to engage independent counsel
and other advisers, as it determines necessary to carry out
its duties.
‘‘(6) FUNDING.—Each issuer shall provide for appropriate
funding, as determined by the audit committee, in its capacity
as a committee of the board of directors, for payment of
compensation—
H. R. 3763—33
‘‘(A) to the registered public accounting firm employed
by the issuer for the purpose of rendering or issuing an
audit report; and
‘‘(B) to any advisers employed by the audit committee
under paragraph (5).’’.
SEC. 302. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) REGULATIONS REQUIRED.—The Commission shall, by rule,
require, for each company filing periodic reports under section 13(a)
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 prin-
cipal financial officer or officers, or persons performing similar
functions, certify in each annual or quarterly report filed or sub-
mitted 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 state-
ments were made, not misleading;
(3) based on such officer’s knowledge, the financial state-
ments, and other financial information included in the report,
fairly present in all material respects the financial condition
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 audi-
tors 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 mate-
rial 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 correc-
tive actions with regard to significant deficiencies and material
weaknesses.
H. R. 3763—34
(b) FOREIGN REINCORPORATIONS HAVE NO EFFECT.—Nothing
in this section 302 shall be interpreted or applied in any way
to allow any issuer to lessen the legal force of the statement
required under this section 302, by an issuer having reincorporated
or having engaged in any other transaction that resulted in the
transfer of the corporate domicile or offices of the issuer from
inside the United States to outside of the United States.
(c) DEADLINE.—The rules required by subsection (a) shall be
effective not later than 30 days after the date of enactment of
this Act.
SEC. 303. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.
(a) RULES TO PROHIBIT.—It shall be unlawful, in contravention
of such rules or regulations as the Commission shall prescribe
as necessary and appropriate in the public interest or for the
protection of investors, for any officer or director of an issuer,
or any other person acting under the direction thereof, to take
any action to fraudulently influence, coerce, manipulate, or mislead
any independent public or certified accountant engaged in the
performance of an audit of the financial statements of that issuer
for the purpose of rendering such financial statements materially
misleading.
(b) ENFORCEMENT.—In any civil proceeding, the Commission
shall have exclusive authority to enforce this section and any rule
or regulation issued under this section.
(c) NO PREEMPTION OF OTHER LAW.—The provisions of sub-
section (a) shall be in addition to, and shall not supersede or
preempt, any other provision of law or any rule or regulation
issued thereunder.
(d) DEADLINE FOR RULEMAKING.—The Commission shall—
(1) propose the rules or regulations required by this section,
not later than 90 days after the date of enactment of this
Act; and
(2) issue final rules or regulations required by this section,
not later than 270 days after that date of enactment.
SEC. 304. FORFEITURE OF CERTAIN BONUSES AND PROFITS.
(a) ADDITIONAL COMPENSATION PRIOR TO NONCOMPLIANCE WITH
COMMISSION FINANCIAL REPORTING REQUIREMENTS.—If an issuer
is required to prepare an accounting restatement due to the material
noncompliance of the issuer, as a result of misconduct, with any
financial reporting requirement under the securities laws, the chief
executive officer and chief financial officer of the issuer shall
reimburse the issuer for—
(1) any bonus or other incentive-based or equity-based com-
pensation received by that person from the issuer during the
12-month period following the first public issuance or filing
with the Commission (whichever first occurs) of the financial
document embodying such financial reporting requirement; and
(2) any profits realized from the sale of securities of the
issuer during that 12-month period.
(b) COMMISSION EXEMPTION AUTHORITY.—The Commission may
exempt any person from the application of subsection (a), as it
deems necessary and appropriate.
SEC. 305. OFFICER AND DIRECTOR BARS AND PENALTIES.
(a) UNFITNESS STANDARD.—
H. R. 3763—35
(1) SECURITIES EXCHANGE ACT OF 1934.—Section 21(d)(2)
of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(2))
is amended by striking ‘‘substantial unfitness’’ and inserting
‘‘unfitness’’.
(2) SECURITIES ACT OF 1933.—Section 20(e) of the Securities
Act of 1933 (15 U.S.C. 77t(e)) is amended by striking ‘‘substan-
tial unfitness’’ and inserting ‘‘unfitness’’.
(b) EQUITABLE
RELIEF.—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:
‘‘(5) EQUITABLE RELIEF.—In any action or proceeding brought
or instituted by the Commission under any provision of the securi-
ties laws, the Commission may seek, and any Federal court may
grant, any equitable relief that may be appropriate or necessary
for the benefit of investors.’’.
SEC. 306. INSIDER TRADES DURING PENSION FUND BLACKOUT
PERIODS.
(a) PROHIBITION OF INSIDER TRADING DURING PENSION FUND
BLACKOUT PERIODS.—
(1) IN GENERAL.—Except to the extent otherwise provided
by rule of the Commission pursuant to paragraph (3), it shall
be unlawful for any director or executive officer of an issuer
of any equity security (other than an exempted security),
directly or indirectly, to purchase, sell, or otherwise acquire
or transfer any equity security of the issuer (other than an
exempted security) during any blackout period with respect
to such equity security if such director or officer acquires such
equity security in connection with his or her service or employ-
ment as a director or executive officer.
(2) REMEDY.—
(A) IN
GENERAL.—Any profit realized by a director
or executive officer referred to in paragraph (1) from any
purchase, sale, or other acquisition or transfer in violation
of this subsection shall inure to and be recoverable by
the issuer, irrespective of any intention on the part of
such director or executive officer in entering into the trans-
action.
(B) ACTIONS
TO
RECOVER
PROFITS.—An action to
recover profits in accordance with this subsection may be
instituted at law or in equity in any court of competent
jurisdiction by the issuer, or by the owner of any security
of the issuer in the name and in behalf of the issuer
if the issuer fails or refuses to bring such action within
60 days after the date of request, or fails diligently to
prosecute the action thereafter, except that no such suit
shall be brought more than 2 years after the date on
which such profit was realized.
(3) RULEMAKING AUTHORIZED.—The Commission shall, in
consultation with the Secretary of Labor, issue rules to clarify
the application of this subsection and to prevent evasion thereof.
Such rules shall provide for the application of the requirements
of paragraph (1) with respect to entities treated as a single
employer with respect to an issuer under section 414(b), (c),
(m), or (o) of the Internal Revenue Code of 1986 to the extent
necessary to clarify the application of such requirements and
to prevent evasion thereof. Such rules may also provide for