Today, in New York, President Bush is calling for a new ethic of
personal responsibility in America's business community. The President
wants to expose and punish acts of corruption, move corporate
accounting out of the shadows, and protect small investors and pension
holders.
The President is unveiling tough new criminal penalties and
enforcement provisions to punish those who refuse to play by the rules
and threaten to undermine the integrity of our financial markets.
The President calls on the nation's stock markets to require
listed companies to receive shareholder approval for all stock option
plans.
Enhanced Enforcement and Tougher Criminal Provisions
The vast majority of businessmen and women obey the laws and uphold
the rules. However, those that refuse to play by the rules, and
threaten to undermine the integrity of our financial markets in the
process, deserve tough penalties. In March, the President called on
the SEC to step up enforcement actions. Under the leadership of
Chairman Harvey Pitt, the SEC has responded with speed and
effectiveness. The Justice Department has also heeded the President's
call for enhanced enforcement. Today, the President is calling for
additional measures to ensure that our laws are vigorously enforced and
that business leaders who violate the law receive the punishment they
deserve.
Create New Corporate Fraud Task Force
President Bush will sign an Executive Order creating a new
Corporate Fraud Task Force. The Task Force will be headed by the
Deputy Attorney General, and will include the Assistant Attorney
General for the Criminal Division, the Assistant Attorney General for
the Tax Division, the Director of the FBI, and United States Attorneys
from districts representing major financial centers. The Task Force
will marshal the prosecutorial resources of the Justice Department to
provide direction for the investigation and prosecution of significant
cases of securities and accounting fraud, and related criminal
activity.
The Task Force will enhance civil and criminal investigative
efforts of the federal government by strengthening inter-agency
coordination. In addition, the Task Force will provide the necessary
information and expertise in order to enhance cooperation among
federal, state and local authorities responsible for the prosecution of
multi-jurisdictional cases involving corporate fraud. For these
purposes, the Task Force will include representatives of the Treasury
Department (including the Internal Revenue Service), the SEC, the
Commodity Futures Trading Commission, the Federal Energy Regulatory
Commission, and the Federal Communications Commission, as appropriate.
Increase Jail Time
Because the mail fraud and wire fraud statutes are often used in
criminal cases involving corporate wrongdoing, President Bush proposes
doubling the maximum prison term for these crimes from five years to
ten years.
President Bush also calls on the Sentencing Commission to adopt
quickly a new "aggravating factor" to provide stronger penalties for
fraud when the crime is committed by a corporate officer or director.
Because corporate leaders hold offices of high trust, they should face
stiffer penalties when they breach their duties.
Enact Stronger Laws against Document Shredding
President Bush is proposing to strengthen laws that criminalize
document shredding and other forms of obstruction of justice. Under
current law, 18 U.S.C. § 1512 prohibits individuals from persuading
others to engage in conduct designed to obstruct an official
proceeding, even if the proceeding is not yet pending. However, 18
U.S.C. § 1503, which prohibits obstruction of justice even if the
defendant acted alone, has been interpreted to apply only if the
proceeding is pending and a subpoena has been issued for the evidence
that was destroyed or altered. This new proposal would allow the
government to charge obstruction against individuals who acted alone,
even if the tampering took place prior to the issuance of a grand jury
subpoena.
Freeze Payments of Potential Wrongdoers
Corporate executives may attempt to enrich themselves while the
company is subject to an SEC investigation, but before the SEC has
gathered sufficient evidence to file formal charges. The President is
proposing that the SEC -- during an investigation -- be authorized to
seek an order in federal court freezing extraordinary payments (whether
compensation or otherwise) to corporate executives. This order, which
could last for 45 days, would require the payments to be escrowed,
ensuring that corporate assets are not improperly taken for an
executive's personal benefit. The order could be extended for another
45 days by the court upon a showing of good cause. If an executive is
charged with violations of the federal securities laws prior to
expiration of the court order, the escrow would continue until the
conclusion of legal proceedings, with court approval.
Increase SEC Funding
Over three months ago, the Administration requested an additional
$20 million for the SEC to immediately hire 100 new enforcement
officers. The President urges the Congress to take immediate action to
pass the FY 2002 Supplemental Appropriations bill, which includes this
funding, in an acceptable form so the SEC can immediately begin
hiring. In addition, four months into the implementation of the
President's call to action, Chairman Pitt has determined that the SEC
could effectively use an additional $100 million in FY 2003. The
President supports this increase, which would boost the SEC's budget by
more than 20 percent. Combined with the funding in the Supplemental,
this proposal would increase the budget of the SEC by $615 million over
the next five years. The additional funds would enable the SEC to hire
more enforcement officers, employ state-of-the-art technology, and
provide merit-based raises.
Disgorge Ill-Gotten Gains
In March, the President called for the disgorgement of CEO bonuses
and other incentive-based forms of compensation in cases involving
accounting restatements resulting from misconduct. Since the
President's call, the SEC has sought disgorgement in four cases, equal
to the entire number sought in the previous fiscal year. For the first
time, the SEC has also sought to disgorge improper gains from the
exercise of stock options.
Bar Corporate Officers and Directors Who Engage in Serious
Misconduct
In March, the President called on the SEC to ban CEOs and other
officers who clearly abuse their power from serving in any corporate
leadership position. Since the President's call, the SEC has sought to
bar 30 directors and officers from continued service, bringing the
total for the first eight months of the fiscal year to 54. This is 40
percent more than were sought in fiscal year 2000. Currently, these
bars require court approval. The President is pleased that the House
of Representatives passed legislation to give the SEC the
administrative authority to bar directors and officers without court
approval.
A Stronger, More Independent System of Accountability
The American system of corporate governance requires more than
government enforcement; it demands a rigorous system of accountability
where shareholders, board members, auditors, and corporate officers
take special care to ensure that corporations are run honestly and
effectively. President Bush supports a comprehensive set of reforms
that will strengthen the governance system.
Make Directors Truly Independent
The board of directors is charged with protecting the interests of
the shareholders, making it the most important watchdog of any
corporation. At the request of the SEC, the New York Stock Exchange
(NYSE) and the NASDAQ Stock Market have proposed, or are considering
proposing, rules to require that truly independent members comprise a
majority of a company's board. Under the NYSE proposal, an independent
director could not have any other material relationship with the listed
company.
The NYSE has also proposed that all members of audit committees,
nominating committees, and compensation committees be independent.
Independent compensation committees are the best way to ensure that
executives are not able to set their own compensation packages.
The President calls on the nation's stock markets to implement
these common-sense reforms as quickly as possible.
Make Auditors Independent
In March, the President called for a prohibition of any non-audit
service provided by a company's external auditor, if that service
compromises the integrity of the audit. The SEC is currently drafting
rules that would ban all non-audit services, unless approved in advance
by the independent audit committee of the board of directors. The
President calls on the SEC to adopt these rules as soon as
practicable.
Improve Oversight of the Accounting Profession
In March, the President called for a new, independent, private
regulatory body to monitor, investigate, and enforce the ethics and
competence of the accounting profession. On June 20, the SEC proposed
an unprecedented and comprehensive new oversight board to regulate the
accounting profession. This board will be:
-
Fully authorized to oversee all auditors of the financial
statements of SEC registrants;
- Funded involuntarily by those who
benefit from public audits;
- Run predominantly by public board
members not associated with the accounting profession;
- Operated
under the close supervision of the SEC; and
- Separate from, and
not under the control of, the American Institute of Certified Public
Accountants.
The accounting oversight board will:
- Set and oversee the establishment of professional audit,
quality control, and ethics standards;
- Direct reviews of
companies' quality controls over their accounting and auditing
practices;
- Discipline companies and individuals for violations;
and
- Issue public reports of its activities.
To strengthen investor confidence, the President calls on the SEC
to ensure that such a board is operational by the end of the year and
compliant with any parameters mandated by legislation.
Strengthen CEO Responsibility for Financial Statements
In March, the President called for CEOs to vouch personally for the
veracity, timeliness, and fairness of their companies' financial
statements. On June 12, the SEC proposed a rule that would require
CEOs and CFOs to personally certify that quarterly and annual reports
include all the information of which they are aware that is important
to a reasonable investor. On June 27, the SEC ordered the CEOs and
CFOs of nearly one thousand of the largest corporations to re-certify
personally their companies' financial results for 2001 and the first
quarter of 2002. This action should help speed the discovery of any
remaining accounting irregularities and bring any wrongdoing into the
open.
Require Prompt Disclosure of Insider Transactions
In March, the President called for prompt disclosure of significant
transactions involving officers' and directors' purchase and sale of
company stock. On April 11, the SEC proposed rules requiring a company
to report significant transactions by executive officers and directors
within 2 business days, including transactions with the company and
loans between the company and its officers and directors. Current law
allows for reporting delays of a year or more.
Justify CEO Compensation
The SEC currently requires the annual disclosure of CEOs'
compensation, but that information is often buried in proxy statements,
and infrequently reviewed by shareholders. CEOs set an ethical tone
through their compensation packages. The President challenges CEOs to
comply with the spirit of existing SEC disclosure rules by including
prominently in their companies' annual reports every detail of their
compensation packages in plain English. The CEOs should explain how
these compensation packages are in the best interests of their
companies' shareholders.
Eliminate Company Loans
Some egregious acts occur when CEOs treat public companies as their
personal banks. Loans of any type to corporate officers are rarely
warranted. The President calls on compensation committees of public
companies to end the practice of allowing corporate officers to secure
loans from their companies.
Require Shareholder Approval of Stock Options
Stock options represent an important tool to align the incentives
of management and other employees with the success of a company. When
exercised, however, options dilute the ownership of the existing
shareholders by providing more claims against the same income and
assets. Accordingly, all stock options, as well as other forms of
equity-based compensation, should be approved by the shareholders in
advance. The President is pleased that the NYSE has made a similar
recommendation, and calls on all stock markets to implement this reform
promptly.
Better Protection for Investors
More than 80 million Americans own stock, and many of them are new
shareholders in the market. Stock ownership allows employees to build
wealth over the long term. President Bush is committed to encouraging
an ownership-based society and giving new investors the protections
they deserve.
Make Analysts Independent
Research analysts should be trustworthy advisors, not conflicted
salesmen with hidden agendas. Today, tough new SEC-approved rules take
effect that will ensure that analysts are independent. From now on,
analysts:
- Will not be able to engage in a quid pro quo with their
firms investment bankers by aggressively marketing new offerings in
exchange for compensation;
-
Will not be able to report directly to
investment bankers;
- Will not be allowed to comment on companies
underwritten by their brokerage firm within 40 days of an initial
public offering; and
- Must explain the meaning of their firms'
stock ratings and demonstrate that these definitions are consistent
with their plain-English understanding.
On September 9, additional SEC rules are expected to take effect
that will force brokerage firms to:
- Disclose the percentage of all ratings assigned to the "buy,"
"hold," and "sell" categories; and
- Provide historical graphs of
their ratings compared with actual stock price performance.
Make Disclosure of Information More Robust
In March, the President called on public companies to provide a
true and fair picture of themselves, and warned that GAAP compliance
did not prove sufficient disclosure. In April, the SEC took its first
enforcement action against a company for inadequate disclosure, even
though the company's financial statements arguably complied with GAAP.
The SEC continues to be investigating companies for inadequate and
misleading disclosure.
Require Prompt Disclosure of Critical Information
In March, the President urged the SEC to expand the list of
significant events requiring prompt disclosure between reporting
periods. On June 12, the SEC unveiled a proposal that will more than
triple the number of items that corporations must disclose between
periods. These new items include changes in credit ratings, departures
of executives, gains or losses of material customers, and insider stock
transactions.
Provide Better Access to Investment Advice and Information
In February, the President proposed allowing employers to make
investment advice available to employees through qualified retirement
plan administrators who act solely in the interests of plan
participants. This proposal would give employers a practical
opportunity to provide their employees with sound advice with respect
to investing and diversification of their 401(k) accounts. These
accounts hold approximately $2 trillion in assets, and the employees
whose retirement security depends on these funds deserve better access
to investment advice. The President also proposed a new requirement
that employers must provide their employees with quarterly retirement
benefit statements. The President is pleased that the House of
Representatives already acted on this important legislation.
Provide Greater Freedom to Diversify
In February, the President proposed that all employees be allowed
to sell company stock and diversify into other investment options after
they have participated in their 401(k) plans for three years. While
many companies already allow rapid diversification, others impose
holding periods that can last for decades. Greater diversification
will increase retirement security. The President is pleased that the
House of Representatives passed a similar provision in April.
Require Greater Parity between Corporate Executives and
Rank-and-File Employees
In February, the President proposed a prohibition on senior
executives from selling stock when employees' pensions are in
"blackout" periods. The President also proposed giving employees a
30-day notice period before any such blackout period begins. The
President is pleased that the House of Representatives passed these
provisions in April.
###