Securities Law: Sarbanes-Oxley Act of 2002 and Selected 108th Congress Bills Concerning Corporate Accountability
Report for Congress
Securities Law: Sarbanes-Oxley Act of 2002 and
Selected 108 Congress Bills Concerning
April 23, 2003
Michael V. Seitzinger and Elizabeth Bazan
American Law Division
Congressional Research Service ˜ The Library of Congress
Sarbanes-Oxley Act of 2002 and Selected 108
Congress Bills concerning Corporate Accountability
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002, P.L. 107-204. This law has been described by some as the most important and
far-reaching securities legislation since passage of the Securities Act of 1933, 15
U.S.C. §§ 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq.,
both of which were passed in the wake of the Stock Market Crash of 1929.
The Act establishes a new Public Company Accounting Oversight Board which
is to be supervised by the Securities and Exchange Commission. The Act restricts
accounting firms from performing a number of other services for the companies
which they audit. The Act also requires new disclosures for public companies and
the officers and directors of those companies. Among the other issues affected by the
new legislation are securities fraud, criminal and civil penalties for violating the
securities laws and other laws, blackouts for insider trades of pension fund shares,
and protections for corporate whistleblowers.
The 108th Congress is also concerned with corporate responsibility, and several
bills affecting such issues as SEC staffing, financial report certification, and
corporate expatriation have been introduced. These include H.R. 275, H.R. 657,
H.R. 658, H.R. 746, H.R. 1000, S. 183, S. 476, and S. 513.
Title I: Public Company Accounting Oversight Board.....................1
Title II: Auditor Independence........................................5
Title III: Corporate Responsibility.....................................6
Title IV: Enhanced Financial Disclosures...............................7
Title V: Analyst Conflicts of Interest...................................9
Title VI: Commission Resources and Authority..........................9
Title VII: Studies and Reports........................................9
Title VIII: Corporate and Criminal Fraud Accountability.................10
Title IX: White Collar Crime Penalty Enhancements.....................12
Title X: Corporate Tax Returns......................................14
Title XI: Corporate Fraud Accountability..............................14
Selected Bills Introduced in the 108th Congress..........................15
Securities Law: Sarbanes-Oxley Act of 2002
and Selected 108 Congress Bills
concerning Corporate Accountability
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002, P.L. 107-204. This law has been described by some as the most important and
far-reaching securities legislation since passage of the Securities Act of 19331 and the2
Securities Exchange Act of 1934, both of which were passed in the wake of the
Stock Market Crash of 1929.
Sarbanes-Oxley had its genesis early in 2002 after the declared bankruptcy of
the Enron Corporation, but for some time it appeared as though its impetus had
slowed. However, when the WorldCom scandal became known in late June, the
Congress showed renewed interest in enacting stiffer corporate responsibility
legislation, and Sarbanes-Oxley quickly became law.
The Act establishes a new Public Company Accounting Oversight Board, which
is to be supervised by the Securities and Exchange Commission (SEC or
Commission). The Act restricts accounting firms from performing a number of other
services for the companies which they audit. The Act also requires new disclosures
for public companies and the officers and directors of those companies. Among the
other issues affected by the new legislation are securities fraud, criminal and civil
penalties for violating the securities laws and other laws, blackouts for insider trades
of pension fund shares, and protections for corporate whistleblowers. This report
summarizes major provisions of this Act. Because the 108th Congress is alsoth
concerned with corporate responsibility, the report also mentions selected 108
Congress bills which would add to the requirements mandated by Sarbanes-Oxley.
Title I: Public Company Accounting Oversight
Section 101 establishes the Public Company Accounting Oversight Board
(Board), a new, independent regulatory body, to oversee the auditing of issuers
(public companies which are subject to the federal securities laws). The Board’s
oversight of auditors is for the purpose of protecting 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 Columbia
1 15 U.S.C. §§ 77a et seq.
2 15 U.S.C. §§ 78a et seq.
Nonprofit 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
firms which prepare audit reports for issuers subject to SEC registration, establish
standards concerning the preparation of audit reports, conduct inspections of
registered public accounting firms, conduct investigations and disciplinary
proceedings where justified upon registered public accounting firms, perform other
duties as determined by the SEC, enforce compliance with the Act, and set the budget
and manage the operations of 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 of accountants concerning the preparation and
issuing 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 a practicing certified public accountant for at least five years before
appointment to the Board. Each Board member must serve on a full-time basis and
may not have other employment while serving on the Board. No Board member can
share in the profits of or receive payments from a public accounting firm, except for
fixed 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 and the
Secretary of the Treasury, shall appoint the chairperson of the Board and other initial
members and shall designate 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 Board
member appointed to fill a vacancy occurring before the expiration of the term of the
predecessor shall be appointed only 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 the
SEC 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 Urban Affairs
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 a registered
public accounting firm to prepare or issue or participate in the preparation or issuing
of any audit report concerning 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 the preceding
calendar year; the annual fees received from each issuer for audit services, other
accounting services, and non-audit services; other current financial information as
requested by the Board; a statement of the firm’s quality control practices; a list of
all accountants associated with the firm who help to prepare audit reports;
information concerning civil, criminal, or administrative actions or disciplinary
proceedings pending against the firm or any person associated with the firm in
connection with any audit report; copies of any disclosures filed by an issuer with the
Commission concerning accounting disagreements; and any other specified
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 or
requests more information. Each registered public accounting firm shall submit an
annual report to the Board and may be required to update reports more frequently.
Registration applications and annual reports shall be made available for public
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 of
audit reports, as required by the Act or the rules of the Commission or as necessary
or appropriate in the public interest or for the protection of investors. The Board 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 partner
review of the audit report, and describe in each audit report the internal control
structure and procedures of the issuer.
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 more than 100 issuers and at least once every three years
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 associated
persons of the firms. The Board may conduct an investigation of any act or practice
by a registered public accounting 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 of accountants.
If a registered public accounting firm or person associated with the firm refuses
to cooperate with the investigation, the Board may impose such sanctions as
suspending 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
of one 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 and
accountants, it may impose appropriate sanctions, including temporary suspension
or permanent revocation of registration; a civil penalty for each violation in an
amount not more than $100,000 for a natural person or $2,000,000 for any other
person; if in a case involving intentional or other knowing conduct, a fine not more
than $750,000 for a natural person or $15,000,000 for any other person; censure; or
any other appropriate sanction. Such sanctions as registration suspension and
revocation and the larger monetary penalties shall apply only to intentional or
knowing conduct, including reckless conduct, or in repeated instances of negligent
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 the Board
and the SEC issued under the Act to the same extent as a United States public
accounting firm. Audit workpapers of the foreign accounting firm shall be produced
if a United States public accounting firm relies upon the opinion of a foreign
accounting firm in auditing an 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 in the
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 without prior
approval by the Commission. The Board is to be treated as a registered securities
association for purposes of approval of its rules by the Commission. The
Commission may modify a sanction imposed by the Board upon a registered public
accounting firm if it finds that the sanction is not necessary or appropriate or is
excessive, 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 standard
setting body that is a private entity, has a board of trustees the majority of whom are
not and have not been for two years associated with a registered public accounting
firm, is funded as required, has adopted procedures to ensure prompt changes to
accounting principles necessary to reflect changing business practices, and considers
the need to keep standards current. This standard setting body must have the capacity
to assist the Commission. The standard setting body must submit 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-based
Section 109 concerns funding of the Board and the standard setting body, known
as the Financial Accounting Standards Board. The Board and the standard setting
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 issuer to provide to that issuer any non-audit service, such as
bookkeeping, financial information systems design, actuarial services, management
functions, investment banking service, and legal services. Accounting firms may
provide certain other non-audit services, including tax services, for an audit client if
the activity is approved by 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 of the
issuer (or, if no such committee exists, the entire board of directors of the issuer).
Approval by an audit committee of a non-audit service to be approved by the 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 the
issuer 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 and
practices, all alternative treatments of financial information, and other material
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, or
chief accounting officer was employed by that independent registered public
accounting firm and participated in any capacity in the audit of that issuer during the
one 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 board of directors of the issuer and to be independent otherwise. In
order to be considered independent, a member of an audit committee may not accept
any consulting, advisory or other compensatory fee from the issuer or be an affiliated
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 by employees
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 principal
executive officer and the principal financial officer certify in each annual or quarterly
report that the signing officer has reviewed the report and that, based on the officer’s
knowledge, the report does not contain untrue statements and does not omit
statements resulting in a misleading report and that the financial statements fairly
represent the financial condition of the company. The signing officers are
responsible for establishing and maintaining internal controls. The signing officers
must disclose to the issuer’s auditors and to the audit committee significant
deficiencies in the internal controls and any fraud which involves management or
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
Section 303 declares unlawful any officer’s or director’s taking any action
fraudulently to influence, coerce, manipulate, or mislead any independent public or
certified accountant engaged in auditing financial statements for the purpose of
making those financial statements materially 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 during the during the previous twelve month period
and any profits from the sale of securities of the issuer during that twelve month
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 conduct
demonstrated 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
the director 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 of
more than three consecutive business days during which the ability of not fewer than
50% of the participants or beneficiaries under all individual retirement account plans
maintained by the issuer to purchase or sell any equity of the issuer held in an
individual account plan is temporarily suspended by the issuer or by a fiduciary of the
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 exceptions to
the 30 day notice: 1. the deferral of the blackout period would violate ERISA
provisions requiring fiduciaries to act exclusively on behalf of participants and
ERISA provisions requiring trustees to act prudently in their decisions concerning
plan assets could not be complied with or 2. the inability to provide notice is because
of unforeseeable events or circumstances beyond the reasonable control of the plan
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 to
provide 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 conduct
for attorneys who practice before the Commission in representing issuers. The rules
must require an attorney to report evidence of a material violation of securities law
or breach of fiduciary duty by the company or its agent to the chief legal counsel or
to the chief executive officer of the company. If the counsel or officer does not
respond to the evidence, the attorney must report the evidence to the audit committee
or to the board of 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 the benefit
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 reflect all material correcting adjustments identified by a registered
public 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-balance
sheet transactions that may have a material current or future effect on financial
condition, changes in financial condition, or significant components of revenues or
The Commission must also issue rules providing that pro forma financial
information included in any report filed with the SEC shall not contain an untrue
statement of a material fact or omit to state a material fact necessary in order to make
the pro forma financial information 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 end of the second business day on which the trade occurred or at such other time
if the SEC determines that the two-day period is not feasible. Beginning within one
year after passage of this Act, the filing shall be done electronically and the
information shall be provided on an Internet 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 of
management for establishing and maintaining an adequate internal control structure
and procedures for financial reporting and an assessment of the effectiveness of 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 internal
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 senior
financial officers, such as the principal financial officer, comptroller, or principal
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 issuer
has at least one member who is a financial expert. A “financial expert” is a person
who: 1. has an understanding of generally accepted accounting principles and
financial statements; 2. experience in the preparation or auditing of financial
statements of generally comparable issuers; 3. experience in the application of these
principles in connection with the accounting for estimates, accruals, and reserves;
4. experience with internal accounting controls; and 5. an understanding of audit
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 the
financial condition and operations of the issuer.
Title V: Analyst Conflicts of Interest
Section 501 requires the Commission or a registered securities association or
national securities exchange within one year to adopt rules designed to address
conflicts of interest facing securities analysts. These rules must restrict the pre-
publication clearance of research or recommendations by investment bankers not
directly responsible for investment research, limit the supervision and compensatory
evaluation of research personnel to officials not engaged in investment activities, and
protect securities analysts from retaliation or threats of retaliation by investment
banking staff because of 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 income
from the company whose stock is being discussed, whether his employer has had any
business dealings within the past year with the company, and whether the analyst’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 fund
additional compensation, including salaries and benefits; $108,400,000 shall be
available for information technology, security enhancements, and recovery and
mitigation activities in light of the attacks on September 11, 2001; and $98,000,000
shall be available to add at least 200 qualified professionals to provide enhanced
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 the
Commission finds that person not to possess the qualifications to represent others,
to be lacking in character or integrity or to have engaged in unethical or improper
professional conduct, or to have willfully violated or willfully aided or abetted the
violation of the securities 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 insurance regulator
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 General is required to conduct a study concerning factors
leading to the consolidation of public accounting firms. The Commission is required
to conduct a study concerning the role and function of credit rating agencies in the
operation of the securities market. The Commission is also required to conduct a
study of securities professionals who have aided and abetted violations of the federal
securities laws. The Commission must review and analyze its enforcement actions
concerning violations of securities law reporting requirements and restatements of
financial statements over the past five years. The General Accounting Office is
required to conduct a study on the role of investment banks and financial advisers in
assisting public companies in manipulating their earnings and obscuring their true
financial condition. GAO is specifically directed to address the role of investment
banks in the bankruptcy of Enron and the failure of Global Crossing.
Title VIII: Corporate and Criminal Fraud
Section 801 indicates that Title VIII of the bill may be cited as the “Corporate
and Criminal Fraud Accountability Act of 2002.”
Section 802 creates two new federal crimes. 18 U.S.C. § 1519 imposes criminal
sanctions for destruction, alteration, or falsification of records in federal
investigations and bankruptcy. Under this section, anyone who “knowingly alters,
destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any
record, document, or tangible object with the intent to impede, obstruct, or influence
the investigation or proper administration of any department or agency of the United
States or any case filed under title 11 [of the United States Code, dealing with
bankruptcy], or in relation to or 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 States Code, or both. Under 18 U.S.C. § 3571, individuals convicted
of a felony may be fined the greater of either the amount set forth in the offense
statute or an amount not more than $250,000, while the maximum fine for an
organization convicted of a felony would be the greater of the amount set forth in the
offense statute 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 derived
pecuniary gain from the offense or if the offense results in pecuniary loss to any
person, the defendant may be fined not more than the greater of twice the gross gain
or twice the gross loss, unless the imposition of a fine under this subsection would
unduly complicate or prolong the sentencing process.
New 18 U.S.C. § 1520, in part, provides criminal sanctions for destruction of
corporate audit records. Under subsection 1520(a)(1), an accountant who conducts
an audit of an issuer of securities to which 15 U.S.C. § 78j-1(a) applies is required
to maintain all audit or review workpapers for 5 years after the end of the fiscal
period within which the audit or review was concluded. Subsection 1520(a)(2)
directs the SEC to promulgate rules and regulations within 180 days, after a notice
and comment period, regarding record retention relating to such an audit or review,
and authorizes the SEC to amend or supplement them. Anyone who knowingly and
willfully violates 18 U.S.C. § 1520(a)(1) or any rules or regulations promulgated
under 18 U.S.C. § 1520(b) is subject to a fine under title 18 of the U.S. Code,3
3 See discussion of possible fines for felony convictions under 18 U.S.C. § 3571, in text
regarding Section 802 of P.L. 107-204, above.
imprisonment of not more than 10 years, or both.4 The provisions of new 18 U.S.C.
§ 1520 do not alter any other obligations or duties imposed by federal 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.
§ 523(a) by adding a new subsection (19) providing that a discharge under 11 U.S.C.
§§ 727, 1141, 1228(a), 1228(b), or 1328(b) does not discharge an individual debtor
from a debt that meets two criteria: (1) the debt is for a violation of federal securities
laws; state securities laws; regulations under federal or state securities laws; 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, consent order, or decree
entered in a federal or state judicial or administrative proceeding; a settlement
agreement entered into by the debtor; or a court or administrative order for damages,
fine, penalty, citation, restitution, disgorgement, attorney fee, cost, or other payment
owed by the debtor.
While creating no new private rights of action, section 804 modifies 28 U.S.C.
§ 1658 to establish a statute of limitations for private rights of action involving a
claim of fraud, deceit, manipulation, or contrivance in violation of a securities
regulatory requirement committed on or after the effective date of the Act. The new
limitation period is the earlier of either 2 years after discovery of the facts
constituting the violation or 5 years after 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. §§ 1519
and 1520 to ensure that they are sufficient to deter and punish such offenses. In
addition, it directs the Commission to provide a specific offense characteristic
sentencing enhancement under Guideline 2B1.1 for a fraud offense endangering the
solvency or financial security of a substantial number of victims. Further, the
Commission is directed to make certain that the organizational sentencing guidelines
under Chapter 8 of the U.S. Sentencing Guidelines are sufficient to deter and punish
organizational criminal misconduct. The Commission must promulgate these
guidelines or amendments within 180 days of enactment of the Act.
Section 806 adds new 18 U.S.C. § 1514A, which creates a civil action to protect
employees of publicly traded companies against discrimination in the terms and
conditions of employment in retaliation for whistleblowing in securities fraud cases.
This section covers situations where such employees have engaged in any lawful act
to provide information, to cause information to be provided, or otherwise to assist
any investigation by a federal regulatory or law enforcement agency, a Member of
Congress or congressional committee, or a person having supervisory authority over
the employee or investigative authority for the employer, regarding any violation of
18 U.S.C. §§ 1341 (mail fraud), 1343 (wire fraud), 1344 ( bank fraud), 1348
(securities fraud against shareholders), or any SEC rule or regulation; or of any
federal law regarding fraud against shareholders. In addition, 18 U.S.C. § 1514A
4 18 U.S.C. § 1520(b).
5 18 U.S.C. § 1520(c).
authorizes an employee alleging such wrongful discharge or other discrimination to
seek relief by filing a complaint with the Secretary of Labor, using procedures set
forth in 49 U.S.C. § 42121(b)(1). In the absence of delay due to bad faith of the
employee, if the Secretary of Labor does not issue a final decision within 180 days,
the employee may bring an action in the appropriate U.S. District Court, seeking de
novo review.6 The section requires that an action brought pursuant to 18 U.S.C. §
1514A(b)(1) must be commenced within 90 days 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 necessary to make him or her whole, including
reinstatement with pre-discrimination seniority status, back pay with interest, and
compensation for any special damages incurred due to the discrimination, including
litigation costs, expert witness fees, and reasonable attorneys fees.8 Section
1514A(d) leaves the employee with all rights, 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 knowingly executes or
attempts to execute a scheme or artifice to defraud any person in connection with a
security of an issue with a class of securities registered under 15 U.S.C. § 78l or
required to file reports under 15 U.S.C. § 78o(d); or to obtain by false or fraudulent
pretenses, representations or promises, any money or property in connection with
purchase or sale of a class of securities registered under 15 U.S.C. § 78l or required
to file reports under 15 U.S.C. §78o(d). Upon conviction an offender 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 Act of 2002.”
Section 902 adds a new 18 U.S.C. § 1349 to the U.S. Code, which indicates that
any person who attempts or conspires to commit an offense under 18 U.S.C. § 1341-
1348 (dealing generally with fraudulent acts of various types) shall face the same
penalties as those provided for the offense that was the object of the attempt or the
Section 903 increases the potential maximum term of imprisonment available
upon conviction for mail fraud (18 U.S.C. § 1341) or wire fraud (18 U.S.C. § 1343),
other than mail fraud or wire fraud affecting a financial institution, from five years
to twenty years.
6 18 U.S.C. § 1514A(b)(1).
7 18 U.S.C. § 1514A(b)(2)(D).
8 18 U.S.C. § 1514(c).
9 For a discussion of the fines that may be imposed under 18 U.S.C. § 3571 upon conviction
of a felony, see discussion of section 802 of P.L. 107-204, above.
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 or
order issued thereunder. Heretofore, 29 U.S.C. § 1131 provided that individual
offenders faced a maximum fine of $5,000 (unless a larger fine was imposed under
18 U.S.C. § 3571),10 a maximum term of imprisonment of 1 year, or both. Section
904 of the Act increases the maximum fine for an individual defendant convicted
under 29 U.S.C. § 1131 to $100,000, and the maximum term of imprisonment to 10
years. Under the new language in this offense provision, organizational defendants
will face an increased fine level, raised from $100,000 to $500,000. It is noteworthy
that the increased maximum term of imprisonment changes 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 applicable
sentencing guidelines and related policy statements to implement the Act, thereby
ensuring, among other things, that the pertinent guidelines and policy statements
reflect the seriousness of the offenses, the growing incidence of such fraud offenses,
and the need to modify these guidelines and policy statements to deter, prevent, and
punish such offenses.
Section 906 creates a new 18 U.S.C. § 1350, dealing with corporate
responsibility for financial reports. Subsections 1350(a) and (b) require the chief
executive officer and chief financial officer (or their equivalent) of an issuer to certify
the accuracy of periodic financial statements filed by the issuer with the SEC under
15 U.S.C. §§ 78m(a) or 78o(d) and the compliance of those reports with statutory
requirements in 18 U.S.C. § 1350. Anyone who makes such a certification knowing
that the report accompanying the certifying statement does not meet the statutory
requirements would, upon conviction, face up to $1 million in fine, up to 10 years in
10 Note that 18 U.S.C. § 3571 provides, for a Class A misdemeanor not resulting in death,
that a fine of the greater either of the amount set forth in the offense section or of not more
than $100,000 may be imposed upon an individual defendant, while a fine of the greater of
the amount set forth in the offense section or of not more than $200,000 may be imposed
upon an organization. This section also provides for an alternative fine based on pecuniary
gain or loss. If anyone has derived pecuniary gain from the offense or if the offense results
in pecuniary loss to any person, the defendant may be fined not more than the greater of
twice the gross gain or twice the gross loss, unless the imposition of a fine under this
subsection would unduly complicate or prolong the sentencing process. A Class A
misdemeanor is defined in 18 U.S.C. § 3559(a)(6) as an offense not specifically classified
by a letter grade in the section defining it, for which the maximum authorized term of
imprisonment is “one year or less but more than six months.”
11 Under 18 U.S.C. § 3571, individuals convicted of a felony may be fined the greater of
either the amount set forth in the offense statute or an amount not more than $250,000, while
the maximum fine for an organization convicted of a felony would be the greater of the
amount set forth in the offense statute or an amount not more than $500,000. This section
also provides for an alternative fine based on pecuniary gain or loss. If anyone has derived
pecuniary gain from the offense or if the offense results in pecuniary loss to any person, the
defendant may be fined not more than the greater of twice the gross gain or twice the gross
loss, unless the imposition of a fine under this subsection would unduly complicate or
prolong the sentencing process.
prison, or both. Anyone willfully certifying compliance knowing that the periodic
report accompanying the statement does not comport with the requirements of 18
U.S.C. § 1350 would face a fine of up to $5 million, imprisonment of not more than
Title X: Corporate Tax Returns
Section 1001 states that it is the sense of the Senate that the federal income tax
return of a corporation should be signed by the chief executive officer of the
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. § 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 or availability for use in an official proceeding or who
otherwise obstructs, influences, or impedes such a proceeding, or attempts to do any
of these things, faces a maximum of 20 years in prison, a fine under Title 18, U.S.
Code,13 or both.
Under Section 1103, 15 U.S.C. § 78u-3 is amended to afford the SEC the right,
during the course of a lawful investigation of possible securities law violations by an
issuer of publicly traded securities or its directors, officers, partners, controlling
partners, agents, or employees, the power, under specified circumstances, to petition
a U.S. district court for temporary freeze authority. This mechanism would become
available when the SEC deems it likely that the issuer will be making extraordinary
payments to any of those persons. In response to such a petition, the court may
require the issuer to escrow those payments in an interest-bearing account for 45 days
under court supervision. Unless impracticable or contrary to the public interest, the
court will give those affected notice and an opportunity to be heard. An order entered
under this provision may be extended for up to 45 additional days upon good cause
shown. If the issuer or any of those persons referenced is charged with a securities
law violation before the expiration of such an order, the order shall continue in effect,
subject to court approval, until the conclusion of pertinent legal proceedings.
Otherwise, the order will terminate and the payments will be returned to the affected
Section 1104 directs the U.S. Sentencing Commission to review sentencing
guidelines applicable to securities fraud, accounting fraud, and related offenses, to
consider sentencing enhancements for officers or directors of publicly traded
12 See the provisions of 18 U.S.C. § 3571(d) with respect to an alternative fine level
calculated based upon twice the gross pecuniary gain or loss resulting from the offense.
13 See the discussion of 18 U.S.C. § 3571 at fn. 11, supra.
corporations who commit such offenses, and to report thereon to Congress. The
section specifies considerations that should be taken into account by the Commission
in making its review. The U.S. Sentencing Commission is directed to promulgate
resulting new guidelines or amendments to existing guidelines within 180 days of the
date of enactment of the Act.
Section 1105 amends 15 U.S.C. § 78u-3 to provide the Commission authority,
in any cease-and-desist proceeding under Section 78u-3(a), to issue an order
prohibiting anyone who has violated Section 10(b) (15 U.S.C. § 78j(b)) or related
rules or regulations from acting as an officer or director of any issuer of a class
registered under Section 12 (15 U.S.C. § 78l) or required to file reports pursuant to
section 15(d) (15 U.S.C. § 78o(d)), if the person’s conduct demonstrates unfitness
to serve in such capacity. In addition, it amends 15 U.S.C. § 77h-1 to authorize the
SEC, in such a cease-and-desist proceeding, to issue an order prohibiting any person
who has violated section 17(a)(1) (15 U.S.C. § 78q(a)) or related rules or regulations
from acting as an officer or director of such an issuer if the person’s conduct
demonstrates unfitness to serve in such a capacity. In either of these types of orders
prohibiting service as an officer or director of such an issuer, the prohibition may be
conditional or unconditional and may be permanent or for such time as the SEC may
Under Section 1106 of the Act, the criminal penalties available under 15 U.S.C.
§ 78ff(a) for individual defendants are increased from a maximum fine of $1 million
to $5 million and a maximum term of imprisonment from 10 years to 20 years, or
both, while the maximum fine for organizational defendants is increased from $2.5
million to $25 million.14
Finally, Section 1107 amends 18 U.S.C. § 1513 to add a new subsection which
provides, upon conviction, for imposition of a sentence including a fine under Title
18, U.S. Code; imprisonment for up to 10 years; or both; upon anyone who
knowingly takes harmful action, including interference with the lawful employment
or livelihood of any person, with intent to retaliate for providing truthful information
to a law enforcement officer regarding the commission or possible commission of
any federal offense.
Selected Bills Introduced in the 108th Congress
H.R. 275, referred to the Committee on Financial Services, would require
covered corporations to disclose charitable contributions whose value exceeded the
designated amount (determined by the Commission) made by the issuer the previous
year to an organization of which a director, officer, or controlling person (or spouse
of one of these persons) of the issuer was a director or trustee. Annual statements of
the total value of charitable contributions made by the issuer must be filed with the
14 For a discussion of an alternative method of calculating fines based upon twice the gross
pecuniary gain or twice the gross pecuniary loss to any person resulting from the
commission of the offense, see 18 U.S.C. § 3571(d).
H.R. 657 was reported by the Committee on Financial Services (H.Rept. 108-
and referred to the Senate Committee on Banking, Housing, and Urban Affairs on
February 27, 2003. This bill would grant the SEC the authority in an emergency to
reduce, eliminate, or prevent the substantial disruption of the securities markets or
the transmission or processing of securities transactions.
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 certain positions by
excepting from the competitive service all accountant, economist, and securities
compliance examiner positions.
H.R. 746, referred to the Committee on Government Reform and to the
Committee on Financial Services, would prohibit the federal government from
entering into contracts with companies that have not certified under section 302(a)
of Sarbanes-Oxley the truthfulness 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 would amend Title
I of the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code of 1986 to provide additional protections, such as portfolio diversification, to
participants and beneficiaries in individual retirement account plans. The bill would
also promote providing retirement investment advice to workers 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 of 1934, the
Investment Company Act of 1940, and the Investment Advisers’ Act of 1940 to allow
the SEC to impose a civil monetary penalty (increased penalty amounts specified in
the bill) if it finds that a person is violating, has violated, or is or was a cause of the
violation of the statute or any rule or regulation and that the penalty is in the public
interest. The bill would also allow the SEC to subpoena financial records from a
financial institution and transfer them to another government 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 this provision would make it easier for
the SEC to punish attorneys, accountants, and corporate officers and directors by
allowing the agency to impose large fines on wrongdoers without first obtaining
approval by a federal judge. Investigators would also be able to subpoena more
easily financial records without first notifying the 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 are acquired by a
nominally foreign corporation. The bill would also require disclosure to shareholders
of the effects of a corporate expatriation transaction.
15 Senate Votes to Strengthen S.E.C.’s Hand, N.Y. TIMES, April 10, 2003, at C1.