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Senate Judiciary Chairman Leahy
Questions SEC Chairman Pitt
On Effects Of Budget Cuts
On Securities Fraud Enforcement
WASHINGTON (Thurs., Oct. 24) -- In a letter
Thursday to Securities and Exchange Chairman Harvey Pitt, Senate
Judiciary Committee Chairman Patrick Leahy (D-Vt.) said SEC budget
cuts contemplated by the White House add to “a disturbing trend of
weakened enforcement of corporate reforms” enacted last summer.
Leahy, author of several provisions of the
Sarbanes-Oxley Act, including new criminal penalties for securities
fraud and new document retention requirements, noted that the SEC has
yet to draw rules for the new law, let alone begin enforcing them. He
also detailed other steps the White House has taken since the
President signed the law to weaken its enforcement.
To handle the law’s new enforcement duties, the
Sarbanes-Oxley Act authorizes a 77 percent increase in SEC funding to
$776 million. But according to recent news reports, the White House
is ready to propose nearly a third less than that.
Leahy said the reports raise “urgent and
troubling questions that require immediate answers so that Congress,
in its oversight and appropriations roles, and the public can know the
implications of these trends.” He asks Pitt to reply to several
questions about what such cuts would mean to SEC’s enforcement of the
new law.
“When Congress completed action on these
corporate accountability reforms,” Leahy said, “the President said
many of the things that the American people wanted and needed to hear
in the way of assurances that the Administration and the SEC will take
these new laws seriously. But these promises will have little meaning
without vigorous enforcement. I am sure you agree about the dangers
and difficulties that would be needlessly risked by dashing the hopes
and expectations of the American people and of those who invest in our
markets that these reforms will be strongly enforced.”
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TEXT OF LETTER FOLLOWS --
October 24, 2002
The Honorable Harvey L. Pitt
Chairman
The Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549
Dear Chairman Pitt:
I am writing to express grave reservations about
the Administration’s efforts to enforce the Sarbanes-Oxley Act in
light of recent press reports indicating that the Administration is
requesting a 27 percent cut in SEC funding as authorized under that
Act. As the chairman of the Senate Judiciary Committee, which
oversees enforcement of criminal investigation and prosecution of
corporate fraud matters, I am concerned that this newest revelation
adds to a disturbing trend of weakened enforcement of corporate
reforms when the public and investors are depending on the SEC to
restore accountability to our public markets.
Last summer the Congress passed the
Sarbanes-Oxley Act (“Act”), the most sweeping corporate reform
legislation in decades. I authored many of the criminal and corporate
accountability provisions in the new law and served on the
House-Senate conference committee. As we crafted this legislation,
the Administration decided not to play an active role in the debate.
Against that backdrop, we forged a bipartisan consensus in Congress
and passed the Sarbanes-Oxley Act, which included strong new criminal
penalties for securities fraud and document destruction that I had
authored and which had been unanimously approved by the Senate
Judiciary Committee. Also included in the Act were requirements that
the SEC promulgate rules and regulations to implement its provisions.
Those of us present at the White House when the
Act was signed heard the President commend Congress for passing “a
strong set of reforms.” As the President noted that day, such new
laws are little help without “new funding for investigators and
technology at the Securities and Exchange Commission to uncover
wrongdoing.” The Sarbanes-Oxley Act anticipated the added resources
needed to implement the Act, authorizing a 77 percent increase in SEC
funding to $776 million. Of the tools provided in the new law, the
President vowed to “use them to the fullest.”
Since that signing ceremony, however, the
Administration has systematically acted to weaken the same provisions
of the Sarbanes-Oxley Act that the President signed with such
fanfare. Just hours after the bill signing, the White House issued
“interpretive” statements that would weaken the Act’s corporate
whistleblower provisions, which Senator Grassley and I authored,
despite the plain statutory language and legislative intent of those
provisions. Senator Grassley and I wrote twice to the President
seeking an explanation of the Administration’s actions regarding the
whistleblower protections of corporate employees in the Act. We have
yet to receive a complete response to our letters.
Then the Department of Justice issued “guidance”
to the FBI agents and prosecutors charged with enforcing the law that
also appeared to include either narrow or incomplete interpretations
of the new laws provided in the Act. I wrote to the Attorney General
expressing my concern about those issues and the Department has still
not, to my knowledge, issued new guidance providing prosecutors with a
better and more complete interpretation of these new laws.
Now, according to recent news reports, the
President in his budget proposes that the SEC be funded at almost a
third less than the levels called for under the Act. The last two SEC
chairmen, one a Democrat and one a Republican, strongly support
funding at least at the levels called for in the Act. I am
particularly concerned that such a cut would come at a crucial time in
the SEC’s efforts to implement the Sarbanes-Oxley Act. Key provisions
of the Act cannot be fully enforced until the SEC promulgates the
rules and regulations required under the Act. Many of these
regulations have not yet been issued, leaving the Act’s provisions
unenforceable.
For instance, Section 802 of the Act, which was
drawn from legislation that I authored and that was approved by the
Senate Judiciary Committee, imposes a new requirement that corporate
audit papers be maintained for five years to preserve evidence of
corporate fraud. The Act provides a ten-year felony for those who
willfully destroy these corporate audit papers, to prevent a
recurrence of the type of document shredding that was exposed in the
Arthur Andersen case. However, until the SEC issues the rules
required by the Act to define the corporate audit records that must be
maintained, most of this important new criminal provision lies
dormant.
In fact, only a small portion of the rules and
regulations that the Act requires the SEC to promulgate have been
issued. Therefore the SEC now is not even in a position to fully
begin enforcement of the Act’s new provisions. And once the Act
is fully implemented, it is reasonable to expect that the SEC’s
workload then will not decrease but increase, presuming that it
vigorously enforces each new corporate reform.
This situation, compounded by reports of the
funding levels the Administration has in mind for the SEC to conduct
its enforcement operations, raise urgent and troubling questions that
require immediate answers so that Congress, in its oversight and
appropriations roles, and the public can know the implications of
these trends. Accordingly, please provide the following information
at your earliest convenience:
1.) Will the President’s proposed funding levels
allow the SEC to carry out all its regulatory and enforcement duties
under the law?
2.) Will the funding levels called for under the
current Continuing Resolution allow the SEC to carry out all its
regulatory and enforcement duties under the law?
3.) What is the status of all rules and
regulations, including the rules required under Section 802 of the Act
regarding the preservation of corporate audit records, that the SEC is
required to promulgate under the Sarbanes-Oxley Act? When can final
rules under each provision be expected?
4.) What areas of enforcement or regulation that
would have been funded under the levels authorized under the
Sarbanes-Oxley Act will be eliminated or reduced if Congress adopts
the President’s proposed funding level for the SEC?
5.) What areas of enforcement or regulation that
would have been funded under the levels authorized under the
Sarbanes-Oxley Act will be eliminated or reduced if Congress continues
funding at the Continuing Resolution’s funding levels for the SEC?
When Congress completed action on these corporate
accountability reforms, the President said many of the things that the
American people wanted and needed to hear in the way of assurances
that the Administration and the SEC will take these news laws
seriously. But these promises will have little meaning without
vigorous enforcement. I am sure you agree about the dangers and
difficulties that would be needlessly risked by dashing the hopes and
expectations of the American people and of those who invest in our
markets that these reforms will be strongly enforced.
I appreciate your prompt response to these
questions.
Sincerely,
PATRICK LEAHY
Chairman
Committee on the Judiciary
United States Senate |
