Securities Law: Sarbanes-Oxley Act of 2002 and Selected 108th Congress Bills Concerning Corporate Accountability
Released: 2003-04-23T00:00:00

Title I: Public Company Accounting Oversight Board

Section 101 establishes the Public Company Accounting Oversight Board (Board), a new,independent regulatory body, to oversee the auditing of issuers (publiccompanies which are subject to the federal securities laws). The Board's oversight of auditors is for the purpose ofprotecting the interests of investors.

The Board shall not be an agency or establishment of the United States Government and shall be a nonprofit corporation subject to the District of ColumbiaNonprofit Corporation Act. No employee shall be deemed an officer, employee, or agent of the federal government.

The Board is subject to the oversight of the Securities and Exchange Commission, and subject to this oversight the Board shall register public accounting firmswhich prepare audit reports for issuers subject to SEC registration, establish standards concerning the preparationof audit reports, conduct inspections ofregistered public accounting firms, conduct investigations and disciplinary proceedings where justified uponregistered public accounting firms, perform otherduties as determined by the SEC, enforce compliance with the Act, and set the budget and manage the operationsof the Board and its staff.

The Board shall have five members, who shall be prominent individuals of integrity with a demonstrated commitment to the interests of investors and the public. They must understand the financial disclosures required of issuers under the securities laws and the obligations ofaccountants concerning the preparation andissuing of audit reports concerning these disclosures.

Only two members of the Board shall be or have been certified public accountants. If one of those persons is the chairperson, that person may not have been apracticing certified public accountant for at least five years before appointment to the Board. Each Board membermust serve on a full-time basis and may nothave other employment while serving on the Board. No Board member can share in the profits of or receivepayments from a public accounting firm, except forfixed continuing payments under standard retirement arrangements, subject to conditions imposed by the SEC.

Not later than ninety days after the Act's enactment, the SEC, after consulting with the Chairman of the Board of Governors of the Federal Reserve System andthe Secretary of the Treasury, shall appoint the chairperson of the Board and other initial members and shalldesignate each person's term of service.

The term of service of each Board member is five years, except that the terms of office of the initial Board members shall expire in annual increments. Any Boardmember appointed to fill a vacancy occurring before the expiration of the term of the predecessor shall be appointedonly for the remainder of that term.

No person may be a member or chairperson of the Board for more than two terms, whether or not consecutive. A member of the Board may be removed by theSEC for good cause.

The Board may issue rules concerning its operation and administration and other matters, subject to the approval of the SEC.

The Board must submit an annual report to the SEC; the SEC shall transmit a copy of that report to the Senate Committee on Banking, Housing, and UrbanAffairs and the House Committee on Financial Services.

Section 102 requires that, beginning 180 days after the Commission determines that the Board can fulfill its duties, it shall be unlawful for any person not aregistered public accounting firm to prepare or issue or participate in the preparation or issuing of any audit reportconcerning any issuer.

Each accounting firm must submit as part of its application for registration the names of all issuers for which it prepared or issued audit reports during thepreceding calendar year; the annual fees received from each issuer for audit services, other accounting services, andnon-audit services; other current financialinformation as requested by the Board; a statement of the firm's quality control practices; a list of all accountantsassociated with the firm who help to prepareaudit reports; information concerning civil, criminal, or administrative actions or disciplinary proceedings pendingagainst the firm or any person associated withthe firm in connection with any audit report; copies of any disclosures filed by an issuer with the Commissionconcerning accounting disagreements; and any otherspecified information.

The Board shall approve a completed application for registration not later than 45 days after the date of receipt unless the Board issues a notice of disapproval orrequests more information. Each registered public accounting firm shall submit an annual report to the Board andmay be required to update reports morefrequently. Registration applications and annual reports shall be made available for public inspection.

The Board shall assess and collect a registration fee and an annual fee from each registered public accounting firm to cover the costs of processing and reviewing.

Section 103 requires the Board to establish by rule such quality control standards to be used by registered public accounting firms in the preparation and issuing ofaudit reports, as required by the Act or the rules of the Commission or as necessary or appropriate in the publicinterest or for the protection of investors. TheBoard may consult with professional groups of accountants or advisory groups.

The Board's rules shall require that each registered public accounting firm must keep work papers for at least seven years, provide a concurring or second partnerreview of the audit report, and describe in each audit report the internal control structure and procedures of theissuer.

The Board shall cooperate with professional groups of accountants and advisory groups in the examination of the need for changes in accounting standards.

Section 104 requires the Board to conduct a continuing program of inspections to assess the degree of compliance of each registered public accounting firm. Inspections shall be conducted annually for each registered public accounting firm providing audit reports for morethan 100 issuers and at least once every threeyears for each firm providing audit reports for 100 or fewer issuers.

Section 105 requires the Board to issue rules concerning fair procedures for the investigation and disciplining of registered public accounting firms and associatedpersons of the firms. The Board may conduct an investigation of any act or practice by a registered publicaccounting firm which may be a violation of the Act,the Board's rules, or the securities laws concerning preparation and issuing of audit reports and liabilities ofaccountants.

If a registered public accounting firm or person associated with the firm refuses to cooperate with the investigation, the Board may impose such sanctions assuspending or revoking the registration of the public accounting firm.

The Board may refer an investigation to the Commission, any other federal functional regulator, the Attorney General of the United States, the attorney general ofone or more states, and the appropriate state regulatory authority.

For the most part information received by the Board concerning an investigation shall be privileged and confidential in any proceeding in federal court, state court,or administrative agency until presented in connection with a public proceeding.

If the Board finds that a registered public accounting firm has violated the Act, the rules of the Board, or the securities laws concerning audit reports andaccountants, it may impose appropriate sanctions, including temporary suspension or permanent revocation ofregistration; a civil penalty for each violation in anamount not more than $100,000 for a natural person or $2,000,000 for any other person; if in a case involvingintentional or other knowing conduct, a fine notmore than $750,000 for a natural person or $15,000,000 for any other person; censure; or any other appropriatesanction. Such sanctions as registrationsuspension and revocation and the larger monetary penalties shall apply only to intentional or knowing conduct,including reckless conduct, or in repeatedinstances of negligent conduct.

Section 106 states that any foreign accounting firm which prepares or furnishes an audit report concerning any issuer is subject to the Act and the rules of theBoard and the SEC issued under the Act to the same extent as a United States public accounting firm. Auditworkpapers of the foreign accounting firm shall beproduced if a United States public accounting firm relies upon the opinion of a foreign accounting firm in auditingan issuer.

The Commission and the Board may exempt any foreign public accounting firm from any provision of the Act or from rules of the Board or the Commission inthe public interest or for the protection of investors.

Section 107 provides that the Commission shall have oversight and enforcement authority over the Board. No rule of the Board shall become effective withoutprior approval by the Commission. The Board is to be treated as a registered securities association for purposes ofapproval of its rules by the Commission. TheCommission may modify a sanction imposed by the Board upon a registered public accounting firm if it finds thatthe sanction is not necessary or appropriate or isexcessive, oppressive, or inadequate.

Section 108 allows the Commission to recognize as "generally accepted" for purposes of the securities laws any accounting principles established by a standardsetting body that is a private entity, has a board of trustees the majority of whom are not and have not been for twoyears associated with a registered publicaccounting firm, is funded as required, has adopted procedures to ensure prompt changes to accounting principlesnecessary to reflect changing business practices,and considers the need to keep standards current. This standard setting body must have the capacity to assist theCommission. The standard setting body mustsubmit an annual report to the Commission and the public.

The SEC shall conduct a study on adoption by the United States financial reporting system of a principles-based accounting system to replace the rules-basedaccounting system.

Section 109 concerns funding of the Board and the standard setting body, known as the Financial Accounting Standards Board. The Board and the standardsetting body shall establish an annual budget, which is subject to approval by the SEC.

The budget of the Board shall be payable from annual accounting support fees assessed upon publicly traded companies.

Title II: Auditor Independence

Section 201 prohibits a registered public accounting firm which performs an audit for any issuerto provide to that issuer any non-audit service, such asbookkeeping, financial information systems design, actuarial services, management functions, investment bankingservice, and legal services. Accounting firmsmay provide certain other non-audit services, including tax services, for an audit client if the activity is approvedby the audit committee of the issuer.

Section 202 requires that all auditing services and non-audit services provided to an issuer by the auditor of the issuer be preapproved by the audit committee ofthe issuer (or, if no such committee exists, the entire board of directors of the issuer). Approval by an auditcommittee of a non-audit service to be approved bythe auditor shall be disclosed to investors in periodic reports.

Section 203 prohibits a registered public accounting firm from providing audit services to an issuer if the lead audit partner has performed audit services for theissuer in each of the five previous fiscal years.

Section 204 requires each registered public accounting firm performing an audit for an issuer to report to the audit committee all critical accounting policies andpractices, all alternative treatments of financial information, and other material written communications.

Section 206 makes it unlawful for a registered public accounting firm to perform any audit service if a chief executive officer, controller, chief financial officer, orchief accounting officer was employed by that independent registered public accounting firm and participated inany capacity in the audit of that issuer during theone year period preceding the date of the initiation of the audit.

Title III: Corporate Responsibility

Section 301 requires each member of the audit committee of the issuer to be a member of the boardof directors of the issuer and to be independent otherwise. Inorder to be considered independent, a member of an audit committee may not accept any consulting, advisory orother compensatory fee from the issuer or be anaffiliated person of the issuer or any subsidiary.

Each audit committee must establish procedures for the treatment of complaints concerning accounting or auditing matters and anonymous submissions byemployees of the issuer concerning questionable accounting or auditing matters.

Section 302 directs the Commission to issue a rule requiring for each company filing periodic reports under the Securities Exchange Act of 1934 that the principalexecutive officer and the principal financial officer certify in each annual or quarterly report that the signing officerhas reviewed the report and that, based on theofficer's knowledge, the report does not contain untrue statements and does not omit statements resulting in amisleading report and that the financial statementsfairly represent the financial condition of the company. The signing officers are responsible for establishing andmaintaining internal controls. The signingofficers must disclose to the issuer's auditors and to the audit committee significant deficiencies in the internalcontrols and any fraud which involves managementor employees who have a significant role in the issuer's internal controls.

The requirements of this provision shall not be diminished if an issuer reincorporates or transfers domicile or offices from inside the United States to a foreigncountry.

Section 303 declares unlawful any officer's or director's taking any action fraudulently to influence, coerce, manipulate, or mislead any independent public orcertified accountant engaged in auditing financial statements for the purpose of making those financial statementsmaterially misleading.

Section 304 provides that, if an issuer is required to prepare an accounting restatement because of material noncompliance of the issuer as a result of misconduct,the chief executive officer and the chief financial officer shall reimburse the issuer for any bonus received duringthe during the previous twelve month period andany profits from the sale of securities of the issuer during that twelve month period.

Section 305 gives the SEC the authority to bar a person from serving as an officer or director if that person committed a securities law violation and his conductdemonstrated unfitness to serve as an officer or director.

The Commission may also seek in federal court any equitable relief appropriate or necessary for the benefit of investors.

Section 306 prohibits directors or executive officers from engaging in transactions involving any equity security of the issuer during any blackout period if thedirector or officer acquires the equity security in connection with service or employment as a director or officer. A "blackout period" is defined as any period ofmore than three consecutive business days during which the ability of not fewer than 50% of the participants orbeneficiaries under all individual retirementaccount plans maintained by the issuer to purchase or sell any equity of the issuer held in an individual account planis temporarily suspended by the issuer or by afiduciary of the plan.

This section also requires that participants in retirement plans be provided with written notice at least 30 days before a blackout period. There are two exceptionsto the 30 day notice: 1. the deferral of the blackout period would violate ERISA provisions requiring fiduciaries toact exclusively on behalf of participants andERISA provisions requiring trustees to act prudently in their decisions concerning plan assets could not be compliedwith or 2. the inability to provide notice isbecause of unforeseeable events or circumstances beyond the reasonable control of the plan administrator.

The Secretary of Labor may assess a civil penalty against a plan administrator of up to $100 a day from the date of the plan administrator's failure or refusal toprovide notice to participants and beneficiaries.

Section 307 requires the Commission to issue rules in the public interest and for the protection of investors to set forth minimum standards of professional conductfor attorneys who practice before the Commission in representing issuers. The rules must require an attorney toreport evidence of a material violation ofsecurities law or breach of fiduciary duty by the company or its agent to the chief legal counsel or to the chiefexecutive officer of the company. If the counsel orofficer does not respond to the evidence, the attorney must report the evidence to the audit committee or to the boardof directors.

Section 308 allows civil penalties levied by the Commission as a result of any judicial or administrative action to be placed into a disgorgement fund for thebenefit of harmed investors. The SEC may also accept gifts and bequests for this fund.

Title IV: Enhanced Financial Disclosures

Section 401 requires each financial report filed as part of periodic disclosures by an issuer to reflectall material correcting adjustments identified by a registeredpublic accounting firm.

The Commission is required to issue rules providing that annual and quarterly financial reports filed with the Commission shall disclose all material off-balancesheet transactions that may have a material current or future effect on financial condition, changes in financialcondition, or significant components of revenues orexpenses.

The Commission must also issue rules providing that pro forma financial information included in any report filed with the SEC shall not contain an untruestatement of a material fact or omit to state a material fact necessary in order to make the pro forma financialinformation not misleading.

The SEC is required to conduct a thorough study of special purpose entities, including the potential exposure faced by investors.

Section 402 prohibits personal loans of any kind by an issuer to a director or executive officer of the issuer.

Section 403 requires insiders, defined as officers, directors, and 10% shareholders, to file with the SEC reports of their trades of the issuer's stock before the endof the second business day on which the trade occurred or at such other time if the SEC determines that the two-dayperiod is not feasible. Beginning within oneyear after passage of this Act, the filing shall be done electronically and the information shall be provided on anInternet site within one day after filing.

Section 404 requires the Commission to prescribe rules requiring each annual report to contain an internal control report which shall state the responsibility ofmanagement for establishing and maintaining an adequate internal control structure and procedures for financialreporting and an assessment of the effectivenessof the internal control structure and procedures of the issuer for financial reporting.

Section 405 exempts registered investment companies from certain disclosure requirements, such as filing a statement assessing the effectiveness of internalcontrols.

Section 406 requires the SEC to issue rules to require each issuer to disclose whether or not, and, if not, the reason why, it has adopted a code of ethics for seniorfinancial officers, such as the principal financial officer, comptroller, or principal accounting officer.

Section 407 requires the Commission to issue rules to require each issuer to disclose whether or not, and, if not, the reason why, the audit committee of that issuerhas at least one member who is a financial expert. A "financial expert" is a person who: 1. has an understandingof generally accepted accounting principles andfinancial statements; 2. experience in the preparation or auditing of financial statements of generally comparableissuers; 3. experience in the application of theseprinciples in connection with the accounting for estimates, accruals, and reserves; 4. experience with internalaccounting controls; and 5. an understanding ofaudit committee functions.

Section 408 requires the Commission to review disclosures by issuers at least once every three years.

Section 409 requires each issuer to disclose in plain English to the public on a rapid and current basis additional information concerning material changes in thefinancial condition and operations of the issuer.

Title V: Analyst Conflicts of Interest

Section 501 requires the Commission or a registered securities association or national securitiesexchange within one year to adopt rules designed to addressconflicts of interest facing securities analysts. These rules must restrict the pre-publication clearance of researchor recommendations by investment bankers notdirectly responsible for investment research, limit the supervision and compensatory evaluation of researchpersonnel to officials not engaged in investmentactivities, and protect securities analysts from retaliation or threats of retaliation by investment banking staff becauseof unfavorable research reports.

The rules must also require a stock analyst to disclose the extent to which he owns stock being discussed, whether he or his employer has received any incomefrom the company whose stock is being discussed, whether his employer has had any business dealings within thepast year with the company, and whether theanalyst's compensation was tied to investment banking revenue.

Title VI: Commission Resources and Authority

Section 601 authorizes the appropriations of the SEC for fiscal year 2003. It shall receive$776,000,000, of which $102,700,000 shall be available to fundadditional compensation, including salaries and benefits; $108,400,000 shall be available for informationtechnology, security enhancements, and recovery andmitigation activities in light of the attacks on September 11, 2001; and $98,000,000 shall be available to add at least200 qualified professionals to provideenhanced oversight of auditors and audit services and support staff to strengthen full disclosure.

Section 602 authorizes the Commission to censure any person or deny to any person the privilege of appearing or practicing before the Commission if theCommission finds that person not to possess the qualifications to represent others, to be lacking in character orintegrity or to have engaged in unethical orimproper professional conduct, or to have willfully violated or willfully aided or abetted the violation of thesecurities laws or regulations.

Section 603 allows a court to prohibit a person from participating in an offering of penny stock.

Section 604 authorizes the SEC to bar from the securities industry persons who have been suspended or barred by a state securities, banking, or insuranceregulator because of fraudulent, manipulative, or deceptive conduct.

Title VII: Studies and Reports

This title requires that a number of studies and reports be conducted. For example, the Comptroller Generalis required to conduct a study concerning factorsleading to the consolidation of public accounting firms. The Commission is required to conduct a study concerningthe role and function of credit rating agenciesin the operation of the securities market. The Commission is also required to conduct a study of securitiesprofessionals who have aided and abetted violations of the federal securities laws. The Commission must review and analyze its enforcement actions concerning violationsof securities law reporting requirements andrestatements of financial statements over the past five years. The General Accounting Office is required to conducta study on the role of investment banks andfinancial advisers in assisting public companies in manipulating their earnings and obscuring their true financialcondition. GAO is specifically directed toaddress the role of investment banks in the bankruptcy of Enron and the failure of Global Crossing.

Title VIII: Corporate and Criminal Fraud Accountability

Section 801 indicates that Title VIII of the bill may be cited as the "Corporate and Criminal FraudAccountability Act of 2002."

Section 802 creates two new federal crimes. 18 U.S.C. ï¿½ 1519 imposes criminal sanctions for destruction, alteration, or falsification of records in federalinvestigations and bankruptcy. Under this section, anyone who "knowingly alters, destroys, mutilates, conceals,covers up, falsifies, or makes a false entry in anyrecord, document, or tangible object with the intent to impede, obstruct, or influence the investigation or properadministration of any department or agency of theUnited States or any case filed under title 11 [of the United States Code, dealing with bankruptcy], or in relation toor in contemplation of any such matter or case"would be subject, upon conviction, to imprisonment of up to 20 years, a fine under title 18 of the United StatesCode, or both. Under 18 U.S.C. ï¿½ 3571,individuals convicted of a felony may be fined the greater of either the amount set forth in the offense statute oran amount not more than $250,000, while themaximum fine for an organization convicted of a felony would be the greater of the amount set forth in the offensestatute or an amount of not more than$500,000. This section also provides for an alternative fine based on pecuniary gain or loss. If anyone has derivedpecuniary gain from the offense or if theoffense results in pecuniary loss to any person, the defendant may be fined not more than the greater of twice thegross gain or twice the gross loss, unless theimposition of a fine under this subsection would unduly complicate or prolong the sentencing process.

New 18 U.S.C. ï¿½ 1520, in part, provides criminal sanctions for destruction of corporate audit records. Under subsection 1520(a)(1), an accountant who conductsan audit of an issuer of securities to which 15 U.S.C. ï¿½ 78j-1(a) applies is required to maintain all audit or reviewworkpapers for 5 years after the end of the fiscalperiod within which the audit or review was concluded. Subsection 1520(a)(2) directs the SEC to promulgate rulesand regulations within 180 days, after a noticeand comment period, regarding record retention relating to such an audit or review, and authorizes the SEC toamend or supplement them. Anyone whoknowingly and willfully violates 18 U.S.C. ï¿½ 1520(a)(1) or any rules or regulations promulgated under 18 U.S.C.ï¿½ 1520(b) is subject to a fine under title 18 of theU.S. Code, (3) imprisonment of not more than 10 years,or both. (4) The provisions of new 18 U.S.C. ï¿½ 1520do not alter any other obligations or duties imposed byfederal or state laws or regulations regarding record retention. (5)

Section 803 renders debts incurred in violation of securities fraud laws nondischargeable in bankruptcy proceedings. More specifically, it amends 11 U.S.C. ï¿½523(a) by adding a new subsection (19) providing that a discharge under 11 U.S.C. ï¿½ï¿½ 727, 1141, 1228(a), 1228(b),or 1328(b) does not discharge an individualdebtor from a debt that meets two criteria: (1) the debt is for a violation of federal securities laws; state securitieslaws; regulations under federal or state securitieslaws; common law fraud, deceit or manipulation in connection with the purchase or sale of any security; and (2) the debt results from a judgment, order, consentorder, or decree entered in a federal or state judicial or administrative proceeding; a settlement agreement enteredinto by the debtor; or a court or administrativeorder for damages, fine, penalty, citation, restitution, disgorgement, attorney fee, cost, or other payment owed bythe debtor.

While creating no new private rights of action, section 804 modifies 28 U.S.C. ï¿½ 1658 to establish a statute of limitations for private rights of action involving aclaim of fraud, deceit, manipulation, or contrivance in violation of a securities regulatory requirement committedon or after the effective date of the Act. Thenew limitation period is the earlier of either 2 years after discovery of the facts constituting the violation or 5 yearsafter the commission of the violation.

Section 805 directs the U.S. Sentencing Commission to review and amend the sentencing guidelines for obstruction of justice and violations of 18 U.S.C. ï¿½ï¿½ 1519and 1520 to ensure that they are sufficient to deter and punish such offenses. In addition, it directs the Commissionto provide a specific offense characteristicsentencing enhancement under Guideline 2B1.1 for a fraud offense endangering the solvency or financial securityof a substantial number of victims. Further, theCommission is directed to make certain that the organizational sentencing guidelines under Chapter 8 of the U.S.Sentencing Guidelines are sufficient to deter andpunish organizational criminal misconduct. The Commission must promulgate these guidelines or amendmentswithin 180 days of enactment of the Act.

Section 806 adds new 18 U.S.C. ï¿½ 1514A, which creates a civil action to protect employees of publicly traded companies against discrimination in the terms andconditions of employment in retaliation for whistleblowing in securities fraud cases. This section covers situationswhere such employees have engaged in anylawful act to provide information, to cause information to be provided, or otherwise to assist any investigation bya federal regulatory or law enforcement agency,a Member of Congress or congressional committee, or a person having supervisory authority over the employee orinvestigative authority for the employer, regarding any violation of 18 U.S.C. ï¿½ï¿½ 1341 (mail fraud), 1343 (wire fraud), 1344 ( bank fraud), 1348 (securitiesfraud against shareholders), or any SEC rule orregulation; or of any federal law regarding fraud against shareholders. In addition, 18 U.S.C. ï¿½ 1514A authorizesan employee alleging such wrongful discharge orother discrimination to seek relief by filing a complaint with the Secretary of Labor, using procedures set forth in49 U.S.C. ï¿½ 42121(b)(1). In the absence of delaydue to bad faith of the employee, if the Secretary of Labor does not issue a final decision within 180 days, theemployee may bring an action in the appropriateU.S. District Court, seeking de novo review. (6) Thesection requires that an action brought pursuant to 18 U.S.C. ï¿½ 1514A(b)(1) must be commenced within 90days after the date on which the violation occurs. (7) Remedies provided an employee prevailing in an action under section 1514A(b)(1) includes all relief necessaryto make him or her whole, including reinstatement with pre-discrimination seniority status, back pay with interest,and compensation for any special damagesincurred due to the discrimination, including litigation costs, expert witness fees, and reasonable attorneys fees. (8) Section 1514A(d) leaves the employee with allrights, privileges or remedies under federal or state law or any collective bargaining agreement.

Section 807 creates a new securities fraud crime with penalties including a fine under Title 18, U.S. Code. (9) The offense covers anyone who knowinglyexecutesor attempts to execute a scheme or artifice to defraud any person in connection with a security of an issue with aclass of securities registered under 15 U.S.C. ï¿½78l or required to file reports under 15 U.S.C. ï¿½ 78o(d); or to obtain by false or fraudulent pretenses, representationsor promises, any money or property inconnection with purchase or sale of a class of securities registered under 15 U.S.C. ï¿½ 78l or required to file reportsunder 15 U.S.C. ï¿½78o(d). Upon conviction anoffender would face up to 25 years in prison, a fine under Title 18, U.S.C., or both.

Title IX: White Collar Crime Penalty Enhancements

Section 901 designates this title of the Act as the "White-Collar Crime Penalty Enhancement Actof 2002."

Section 902 adds a new 18 U.S.C. ï¿½ 1349 to the U.S. Code, which indicates that any person who attempts or conspires to commit an offense under 18 U.S.C. ï¿½1341-1348 (dealing generally with fraudulent acts of various types) shall face the same penalties as those providedfor the offense that was the object of theattempt or the conspiracy.

Section 903 increases the potential maximum term of imprisonment available upon conviction for mail fraud (18 U.S.C. ï¿½ 1341) or wire fraud (18 U.S.C. ï¿½ 1343),other than mail fraud or wire fraud affecting a financial institution, from five years to twenty years.

Section 904 raises the maximum criminal penalties available upon conviction of anyone willfully violating Title I, subtitle B, part 1 of ERISA, or any regulation ororder issued thereunder. Heretofore, 29 U.S.C. ï¿½ 1131 provided that individual offenders faced a maximum fineof $5,000 (unless a larger fine was imposedunder 18 U.S.C. ï¿½ 3571), (10) a maximum term ofimprisonment of 1 year, or both. Section 904 of the Act increases the maximum fine for an individual defendantconvicted under 29 U.S.C. ï¿½ 1131 to $100,000, and the maximum term of imprisonment to 10 years. Under the newlanguage in this offense provision,organizational defendants will face an increased fine level, raised from $100,000 to $500,000. It is noteworthy thatthe increased maximum term of imprisonmentchanges this offense from a misdemeanor to a felony. (11)

Section 905 directs the U.S. Sentencing Commission, within 180 days of the date of enactment of the Act, to review, and, as appropriate, to amend the applicablesentencing guidelines and related policy statements to implement the Act, thereby ensuring, among other things,that the pertinent guidelines and policy statementsreflect the seriousness of the offenses, the growing incidence of such fraud offenses, and the need to modify theseguidelines and policy statements to deter,prevent, and punish such offenses.

Section 906 creates a new 18 U.S.C. ï¿½ 1350, dealing with corporate responsibility for financial reports. Subsections 1350(a) and (b) require the chief executiveofficer and chief financial officer (or their equivalent) of an issuer to certify the accuracy of periodic financialstatements filed by the issuer with the SEC under 15U.S.C. ï¿½ï¿½ 78m(a) or 78o(d) and the compliance of those reports with statutory requirements in 18 U.S.C. ï¿½ 1350. Anyone who makes such a certificationknowing that the report accompanying the certifying statement does not meet the statutory requirements would, uponconviction, face up to $1 million in fine, upto 10 years in prison, or both. Anyone willfully certifying compliance knowing that the periodic reportaccompanying the statement does not comport with therequirements of 18 U.S.C. ï¿½ 1350 would face a fine of up to $5 million, imprisonment of not more than 20 years,or both. (12)

Title X: Corporate Tax Returns

Section 1001 states that it is the sense of the Senate that the federal income tax return of acorporation should be signed by the chief executive officer of thecorporation.

Title XI: Corporate Fraud Accountability

Section 1101 designates this title of the Act as the "Corporate Fraud Accountability Act of 2002."

Section 1102 amends 18 U.S.C. ï¿½ 1512 to add a new subsection (c) which defines a new crime. Under this new subsection, anyone who corruptly alters, destroys,mutilates, or conceals a record, document, or other object with the intent to impair the object's integrity oravailability for use in an official proceeding or whootherwise obstructs, influences, or impedes such a proceeding, or attempts to do any of these things, faces amaximum of 20 years in prison, a fine under Title 18,U.S. Code, (13) or both.

Under Section 1103 , 15 U.S.C. ï¿½ 78u-3 is amended to afford the SEC the right, during the course of a lawful investigation of possible securities law violations byan issuer of publicly traded securities or its directors, officers, partners, controlling partners, agents, or employees,the power, under specified circumstances, topetition a U.S. district court for temporary freeze authority. This mechanism would become available when the SECdeems it likely that the issuer will be makingextraordinary payments to any of those persons. In response to such a petition, the court may require the issuer toescrow those payments in an interest-bearingaccount for 45 days under court supervision. Unless impracticable or contrary to the public interest, the court willgive those affected notice and an opportunity tobe heard. An order entered under this provision may be extended for up to 45 additional days upon good causeshown. If the issuer or any of those personsreferenced is charged with a securities law violation before the expiration of such an order, the order shall continuein effect, subject to court approval, until theconclusion of pertinent legal proceedings. Otherwise, the order will terminate and the payments will be returnedto the affected recipients.

Section 1104 directs the U.S. Sentencing Commission to review sentencing guidelines applicable to securities fraud, accounting fraud, and related offenses, toconsider sentencing enhancements for officers or directors of publicly traded corporations who commit suchoffenses, and to report thereon to Congress. Thesection specifies considerations that should be taken into account by the Commission in making its review. TheU.S. Sentencing Commission is directed topromulgate resulting new guidelines or amendments to existing guidelines within 180 days of the date of enactmentof the Act.

Section 1105 amends 15 U.S.C. ï¿½ 78u-3 to provide the Commission authority, in any cease-and-desist proceeding under Section 78u-3(a), to issue an orderprohibiting anyone who has violated Section 10(b) (15 U.S.C. ï¿½ 78j(b)) or related rules or regulations from actingas an officer or director of any issuer of a classregistered under Section 12 (15 U.S.C. ï¿½ 78l) or required to file reports pursuant to section 15(d) (15 U.S.C. ï¿½78o(d)), if the person's conduct demonstratesunfitness to serve in such capacity. In addition, it amends 15 U.S.C. ï¿½ 77h-1 to authorize the SEC, in such acease-and-desist proceeding, to issue an orderprohibiting any person who has violated section 17(a)(1) (15 U.S.C. ï¿½ 78q(a)) or related rules or regulations fromacting as an officer or director of such an issuerif the person's conduct demonstrates unfitness to serve in such a capacity. In either of these types of ordersprohibiting service as an officer or director of such anissuer, the prohibition may be conditional or unconditional and may be permanent or for such time as the SEC maydetermine.

Under Section 1106 of the Act, the criminal penalties available under 15 U.S.C. ï¿½ 78ff(a) for individual defendants are increased from a maximum fine of $1million to $5 million and a maximum term of imprisonment from 10 years to 20 years, or both, while the maximumfine for organizational defendants isincreased from $2.5 million to $25 million. (14)

Finally, Section 1107 amends 18 U.S.C. ï¿½ 1513 to add a new subsection which provides, upon conviction, for imposition of a sentence including a fine under Title18, U.S. Code; imprisonment for up to 10 years; or both; upon anyone who knowingly takes harmful action,including interference with the lawful employment orlivelihood of any person, with intent to retaliate for providing truthful information to a law enforcement officerregarding the commission or possible commissionof any federal offense.

Selected Bills Introduced in the 108th Congress

H.R. 275 , referred to the Committee on Financial Services, would require covered corporations todisclose charitable contributions whose valueexceeded the designated amount (determined by the Commission) made by the issuer the previous year to anorganization of which a director, officer, orcontrolling person (or spouse of one of these persons) of the issuer was a director or trustee. Annual statements ofthe total value of charitable contributions madeby the issuer must be filed with the Commission.

H.R. 657 was reported by the Committee on Financial Services ( H.Rept. 108-19 ) on February 25, 2003, agreed to by voice vote in the House onFebruary 26, 2003, and referred to the Senate Committee on Banking, Housing, and Urban Affairs on February 27,2003. This bill would grant the SEC theauthority in an emergency to reduce, eliminate, or prevent the substantial disruption of the securities markets or thetransmission or processing of securitiestransactions.

H.R. 658 , reported by the Committee on Financial Services ( H.Rept. 108-63 , Part I), would streamline the hiring process at the SEC for certainpositions by excepting from the competitive service all accountant, economist, and securities compliance examinerpositions.

H.R. 746 , referred to the Committee on Government Reform and to the Committee on Financial Services, would prohibit the federal governmentfrom entering into contracts with companies that have not certified under section 302(a) of Sarbanes-Oxley thetruthfulness of certain financial statements.

H.R. 1000 , reported by the Committee on Education and the Workforce on March 18, 2003 ( H.Rept. 108-43 , Part I), is a complex bill which wouldamend Title I of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 toprovide additional protections, such as portfoliodiversification, to participants and beneficiaries in individual retirement account plans. The bill would also promoteproviding retirement investment advice toworkers about managing their retirement income assets.

S. 183 , referred to the Committee on Banking, Housing, and Urban Affairs, would amend the Securities Act of 1933, the Securities Exchange Act of1934, the Investment Company Act of 1940, and the Investment Advisers' Act of 1940 to allow the SEC to imposea civil monetary penalty (increased penaltyamounts specified in the bill) if it finds that a person is violating, has violated, or is or was a cause of the violationof the statute or any rule or regulation and thatthe penalty is in the public interest. The bill would also allow the SEC to subpoena financial records from afinancial institution and transfer them to anothergovernment authority without notice that a records request has been made.

S. 476 , passed by the Senate on April 9, 2003, incorporates in section 723 the provisions of S. 183 . It has been reported that thisprovision would make it easier for the SEC to punish attorneys, accountants, and corporate officers and directorsby allowing the agency to impose large fines onwrongdoers without first obtaining approval by a federal judge. Investigators would also be able to subpoena moreeasily financial records without first notifyingthe subject of the inquiry. (15)

S. 513 , referred to the Committee on Finance, would prevent the avoidance of United States income tax to United States corporations which areacquired by a nominally foreign corporation. The bill would also require disclosure to shareholders of the effectsof a corporate expatriation transaction.