‘‘(1) ANALYST
PROTECTIONS.—The Commis-
sion, or upon the authorization and direction of the
Commission, a registered securities association or
national securities exchange, shall have adopted, not
later than 1 year after the date of enactment of this
subsection, rules reasonably designed to address con-
flicts of interest that can arise when research ana-
lysts recommend equity securities in research reports
and public appearances, in order to improve the ob-
jectivity of research and provide investors with more
useful and reliable information, including rules
designed—
‘‘(A) to foster greater public confidence in
securities research, and to protect the objec-
tivity and independence of securities analysts,
by—
‘‘(i) restricting the prepublication
clearance or approval of research reports
by persons employed by the broker or deal-
er who are engaged in investment banking
activities, or persons not directly respon-
sible for investment research, other than
legal or compliance staff;
‘‘(ii) limiting the supervision and com-
pensatory evaluation of securities analysts
100
to officials employed by the broker or deal-
er who are not engaged in investment
banking activities; and
‘‘(iii) requiring that a broker or dealer
and persons employed by a broker or deal-
er who are involved with investment bank-
ing activities may not, directly or indi-
rectly, retaliate against or threaten to re-
taliate against any securities analyst em-
ployed by that broker or dealer or its affili-
ates as a result of an adverse, negative, or
otherwise unfavorable research report that
may adversely affect the present or pro-
spective investment banking relationship of
the broker or dealer with the issuer that is
the subject of the research report, except
that such rules may not limit the authority
of a broker or dealer to discipline a securi-
ties analyst for causes other than such re-
search report in accordance with the poli-
cies and procedures of the firm;
‘‘(B) to define periods during which bro-
kers or dealers who have participated, or are to
participate, in a public offering of securities as
underwriters or dealers should not publish or
101
otherwise distribute research reports relating to
such securities or to the issuer of such securi-
ties;
‘‘(C) to establish structural and institu-
tional safeguards within registered brokers or
dealers to assure that securities analysts are
separated by appropriate informational parti-
tions within the firm from the review, pressure,
or oversight of those whose involvement in in-
vestment banking activities might potentially
bias their judgment or supervision; and
‘‘(D) to address such other issues as the
Commission, or such association or exchange,
determines appropriate.
‘‘(2) DISCLOSURE.—The Commission, or upon
the authorization and direction of the Commission,
a registered securities association or national securi-
ties exchange, shall have adopted, not later than 1
year after the date of enactment of this subsection,
rules reasonably designed to require each securities
analyst to disclose in public appearances, and each
registered broker or dealer to disclose in each re-
search report, as applicable, conflicts of interest that
are known or should have been known by the securi-
ties analyst or the broker or dealer, to exist at the
102
time of the appearance or the date of distribution
of the report, including—
‘‘(A) the extent to which the securities an-
alyst has debt or equity investments in the
issuer that is the subject of the appearance or
research report;
‘‘(B) whether any compensation has been
received by the registered broker or dealer, or
any affiliate thereof, including the securities an-
alyst, from the issuer that is the subject of the
appearance or research report, subject to such
exemptions as the Commission may determine
appropriate and necessary to prevent disclosure
by virtue of this subparagraph of material non-
public information regarding specific potential
future investment banking transactions of such
issuer, as is appropriate in the public interest
and consistent with the protection of investors;
‘‘(C) whether an issuer, the securities of
which are recommended in the appearance or
research report, currently is, or during the 1-
year period preceding the date of the appear-
ance or date of distribution of the report has
been, a client of the registered broker or dealer,
103
and if so, stating the types of services provided
to the issuer;
‘‘(D) whether the securities analyst re-
ceived compensation with respect to a research
report, based upon (among any other factors)
the investment banking revenues (either gen-
erally or specifically earned from the issuer
being analyzed) of the registered broker or deal-
er; and
‘‘(E) such other disclosures of conflicts of
interest that are material to investors, research
analysts, or the broker or dealer as the Com-
mission, or such association or exchange, deter-
mines appropriate.
‘‘(3) DEFINITIONS.—In this subsection—
‘‘(A) the term ‘securities analyst’ means
any associated person of a registered broker or
dealer that is principally responsible for, and
any associated person who reports directly or
indirectly to a securities analyst in connection
with, the preparation of the substance of a re-
search report, whether or not any such person
has the job title of ‘securities analyst’; and
‘‘(B) the term ‘research report’ means a
written or electronic communication that in-
104
cludes an analysis of equity securities of indi-
vidual companies or industries, and that pro-
vides information reasonably sufficient upon
which to base an investment decision.’’.
(b) ENFORCEMENT.—Section 21B(a) of the Securi-
ties Exchange Act of 1934 (15 U.S.C. 78u–2(a)) is
amended by inserting ‘‘15A(n),’’ before ‘‘15B’’.
(c) COMMISSION AUTHORITY.—The Commission may
promulgate and amend its regulations, or direct a reg-
istered securities association or national securities ex-
change to promulgate and amend its rules, to carry out
section 15A(n) of the Securities Exchange Act of 1934,
as added by this section, as is necessary for the protection
of investors and in the public interest.
TITLE VI—COMMISSION
RESOURCES AND AUTHORITY
SEC. 601. AUTHORIZATION OF APPROPRIATIONS.
Section 35 of the Securities Exchange Act of 1934
(15 U.S.C. 78kk) is amended to read as follows:
‘‘SEC. 35. AUTHORIZATION OF APPROPRIATIONS.
‘‘In addition to any other funds authorized to be ap-
propriated to the Commission, there are authorized to be
appropriated to carry out the functions, powers, and du-
ties of the Commission, $776,000,000 for fiscal year 2003,
of which—
105
‘‘(1) $102,700,000 shall be available to fund
additional compensation, including salaries and ben-
efits, as authorized in the Investor and Capital Mar-
kets Fee Relief Act (Public Law 107–123; 115 Stat.
2390 et seq.);
‘‘(2) $108,400,000 shall be available for infor-
mation technology, security enhancements, and re-
covery and mitigation activities in light of the ter-
rorist attacks of September 11, 2001; and
‘‘(3) $98,000,000 shall be available to add not
fewer than an additional 200 qualified professionals
to provide enhanced oversight of auditors and audit
services required by the Federal securities laws, and
to improve Commission investigative and disciplinary
efforts with respect to such auditors and services, as
well as for additional professional support staff nec-
essary to strengthen the programs of the Commis-
sion involving Full Disclosure and Prevention and
Suppression of Fraud, risk management, industry
technology review, compliance, inspections, examina-
tions, market regulation, and investment manage-
ment.’’.
106
SEC. 602. APPEARANCE AND PRACTICE BEFORE THE COM-
MISSION.
The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) is amended by inserting after section 4B the fol-
lowing:
‘‘SEC. 4C. APPEARANCE AND PRACTICE BEFORE THE COM-
MISSION.
‘‘(a) AUTHORITY TO CENSURE.—The Commission
may censure any person, or deny, temporarily or perma-
nently, to any person the privilege of appearing or prac-
ticing before the Commission in any way, if that person
is found by the Commission, after notice and opportunity
for hearing in the matter—
‘‘(1) not to possess the requisite qualifications
to represent others;
‘‘(2) to be lacking in character or integrity, or
to have engaged in unethical or improper profes-
sional conduct; or
‘‘(3) to have willfully violated, or willfully aided
and abetted the violation of, any provision of the se-
curities laws or the rules and regulations issued
thereunder.
‘‘(b) DEFINITION.—With respect to any registered
public accounting firm, for purposes of this section, the
term ‘improper professional conduct’ means—
107
‘‘(1) intentional or knowing conduct, including
reckless conduct, that results in a violation of appli-
cable professional standards; and
‘‘(2) negligent conduct in the form of—
‘‘(A) a single instance of highly unreason-
able conduct that results in a violation of appli-
cable professional standards in circumstances in
which the registered public accounting firm
knows, or should know, that heightened scru-
tiny is warranted; or
‘‘(B) repeated instances of unreasonable
conduct, each resulting in a violation of applica-
ble professional standards, that indicate a lack
of competence to practice before the Commis-
sion.’’.
SEC. 603. FEDERAL COURT AUTHORITY TO IMPOSE PENNY
STOCK BARS.
(a) SECURITIES EXCHANGE ACT OF 1934.—Section
21(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78u(d)), as amended by this Act, is amended by adding
at the end the following:
‘‘(7) AUTHORITY OF A COURT TO PROHIBIT PERSONS
FROM
PARTICIPATING
IN
AN
OFFERING
OF
PENNY
STOCK.—
108
‘‘(A) IN GENERAL.—In any proceeding under
paragraph (1) against any person participating in,
or, at the time of the alleged misconduct who was
participating in, an offering of penny stock, the
court may prohibit that person from participating in
an offering of penny stock, conditionally or uncondi-
tionally, and permanently or for such period of time
as the court shall determine.
‘‘(B) DEFINITION.—For purposes of this para-
graph, the term ‘person participating in an offering
of penny stock’ includes any person engaging in ac-
tivities with a broker, dealer, or issuer for purposes
of issuing, trading, or inducing or attempting to in-
duce the purchase or sale of, any penny stock. The
Commission may, by rule or regulation, define such
term to include other activities, and may, by rule,
regulation, or order, exempt any person or class of
persons, in whole or in part, conditionally or uncon-
ditionally, from inclusion in such term.
(b) SECURITIES ACT OF 1933.—Section 20 of the Se-
curities Act of 1933 (15 U.S.C. 77t) is amended by adding
at the end the following:
‘‘(g) AUTHORITY OF A COURT TO PROHIBIT PER-
SONS FROM PARTICIPATING IN AN OFFERING OF PENNY
STOCK.—
109
‘‘(1) IN GENERAL.—In any proceeding under
subsection (a) against any person participating in,
or, at the time of the alleged misconduct, who was
participating in, an offering of penny stock, the
court may prohibit that person from participating in
an offering of penny stock, conditionally or uncondi-
tionally, and permanently or for such period of time
as the court shall determine.
‘‘(2) DEFINITION.—For purposes of this sub-
section, the term ‘person participating in an offering
of penny stock’ includes any person engaging in ac-
tivities with a broker, dealer, or issuer for purposes
of issuing, trading, or inducing or attempting to in-
duce the purchase or sale of, any penny stock. The
Commission may, by rule or regulation, define such
term to include other activities, and may, by rule,
regulation, or order, exempt any person or class of
persons, in whole or in part, conditionally or uncon-
ditionally, from inclusion in such term.’’.
SEC. 604. QUALIFICATIONS OF ASSOCIATED PERSONS OF
BROKERS AND DEALERS.
(a) BROKERS AND DEALERS.—Section 15(b)(4) of
the Securities Exchange Act of 1934 (15 U.S.C. 78o) is
amended—
110
(1) by striking subparagraph (F) and inserting
the following:
‘‘(F) is subject to any order of the Commission
barring or suspending the right of the person to be
associated with a broker or dealer;’’; and
(2) in subparagraph (G), by striking the period
at the end and inserting the following: ‘‘; or
‘‘(H) is subject to any final order of a State se-
curities commission (or any agency or officer per-
forming like functions), State authority that super-
vises or examines banks, savings associations, or
credit unions, State insurance commission (or any
agency or office performing like functions), an ap-
propriate Federal banking agency (as defined in sec-
tion 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813(q))), or the National Credit Union Ad-
ministration, that—
‘‘(i) bars such person from association with
an entity regulated by such commission, author-
ity, agency, or officer, or from engaging in the
business of securities, insurance, banking, sav-
ings association activities, or credit union activi-
ties; or
‘‘(ii) constitutes a final order based on vio-
lations of any laws or regulations that prohibit
111
fraudulent, manipulative, or deceptive con-
duct.’’.
(b) INVESTMENT ADVISERS.—Section 203(e) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b–3(e)) is
amended by striking paragraphs (7) and (8) and inserting
the following:
‘‘(7) is subject to any order of the Commission
barring or suspending the right of the person to be
associated with an investment adviser; or
‘‘(8) is subject to any final order of a State se-
curities commission (or any agency or officer per-
forming like functions), State authority that super-
vises or examines banks, savings associations, or
credit unions, State insurance commission (or any
agency or office performing like functions), an ap-
propriate Federal banking agency (as defined in sec-
tion 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813(q))), or the National Credit Union Ad-
ministration, that—
‘‘(A) bars such person from association
with an entity regulated by such commission,
authority, agency, or officer, or from engaging
in the business of securities, insurance, bank-
ing, savings association activities, or credit
union activities; or
112
‘‘(B) constitutes a final order based on vio-
lations of any laws or regulations that prohibit
fraudulent, manipulative, or deceptive con-
duct.’’.
(c) CONFORMING AMENDMENTS.—
(1) SECURITIES EXCHANGE ACT OF 1934.—The
Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.) is amended—
(A) in section 3(a)(39)(F) (15 U.S.C.
78c(a)(39)(F)), by inserting ‘‘, or is subject to
an order or finding,’’ before ‘‘enumerated’’;
(B) in each of sections 15(b)(6)(A)(i) (15
U.S.C. 78o(b)(6)(A)(i)), paragraphs (2) and (4)
of section 15B(c) (15 U.S.C. 78o–4(c)), and
subparagraphs (A) and (C) of section 15C(c)(1)
(15 U.S.C. 78o–5(c)(1)) by striking ‘‘or omis-
sion’’ each place that term appears, and insert-
ing ‘‘, or is subject to an order or finding,’’; and
(C) in each of paragraphs (3)(A) and
(4)(C) of section 17A(c) (15 U.S.C. 78q–1(c)),
by inserting ‘‘, or is subject to an order or find-
ing,’’ before ‘‘enumerated’’ each place that term
appears.
(2) INVESTMENT ADVISERS ACT OF 1940.—Sec-
tion 203(f) of the Investment Advisers Act of 1940
113
(15 U.S.C. 80b–3(f)) is amended, by inserting ‘‘or
(3)’’ after ‘‘paragraph (2)’’.
TITLE VII—STUDIES AND
REPORTS
SEC. 701. GAO STUDY AND REPORT REGARDING CONSOLI-
DATION OF PUBLIC ACCOUNTING FIRMS.
(a) STUDY REQUIRED.—The Comptroller General of
the United States shall conduct a study—
(1) to identify—
(A) the factors that have led to the consoli-
dation of public accounting firms since 1989
and the consequent reduction in the number of
firms capable of providing audit services to
large national and multi-national business orga-
nizations that are subject to the securities laws;
(B) the present and future impact of the
condition described in subparagraph (A) on
capital formation and securities markets, both
domestic and international; and
(C) solutions to any problems identified
under subparagraph (B), including ways to in-
crease competition and the number of firms ca-
pable of providing audit services to large na-
tional and multinational business organizations
that are subject to the securities laws;
114
(2) of the problems, if any, faced by business
organizations that have resulted from limited com-
petition among public accounting firms, including—
(A) higher costs;
(B) lower quality of services;
(C) impairment of auditor independence;
or
(D) lack of choice; and
(3) whether and to what extent Federal or
State regulations impede competition among public
accounting firms.
(b) CONSULTATION.—In planning and conducting the
study under this section, the Comptroller General shall
consult with—
(1) the Commission;
(2) the regulatory agencies that perform func-
tions similar to the Commission within the other
member countries of the Group of Seven Industri-
alized Nations;
(3) the Department of Justice; and
(4) any other public or private sector organiza-
tion that the Comptroller General considers appro-
priate.
(c) REPORT REQUIRED.—Not later than 1 year after
the date of enactment of this Act, the Comptroller General
115
shall submit a report on the results of the study required
by this section to the Committee on Banking, Housing,
and Urban Affairs of the Senate and the Committee on
Financial Services of the House of Representatives.
SEC. 702. COMMISSION STUDY AND REPORT REGARDING
CREDIT RATING AGENCIES.
(a) STUDY REQUIRED.—
(1) IN GENERAL.—The Commission shall con-
duct a study of the role and function of credit rating
agencies in the operation of the securities market.
(2) AREAS OF CONSIDERATION.—The study re-
quired by this subsection shall examine—
(A) the role of credit rating agencies in the
evaluation of issuers of securities;
(B) the importance of that role to investors
and the functioning of the securities markets;
(C) any impediments to the accurate ap-
praisal by credit rating agencies of the financial
resources and risks of issuers of securities;
(D) any barriers to entry into the business
of acting as a credit rating agency, and any
measures needed to remove such barriers;
(E) any measures which may be required
to improve the dissemination of information
116
concerning such resources and risks when credit
rating agencies announce credit ratings; and
(F) any conflicts of interest in the oper-
ation of credit rating agencies and measures to
prevent such conflicts or ameliorate the con-
sequences of such conflicts.
(b) REPORT REQUIRED.—The Commission shall sub-
mit a report on the study required by subsection (a) to
the President, the Committee on Financial Services of the
House of Representatives, and the Committee on Banking,
Housing, and Urban Affairs of the Senate not later than
180 days after the date of enactment of this Act.
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