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.

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