Gephardt Statement on An Agenda to Restore People's Faith in Free Markets

7/8/2002

From: Erik Smith or Kori Bernards, 202-225-0100, both of the Office of House Democratic Leader Richard A. Gephardt; Web site: http://democraticleader.house.gov/

WASHINGTON, July 8 -- Following is a transcript of a statement by House Democratic Leader Richard A. Gephardt on the Investors' and Employees' Bill of Rights:

"Enclosed is an agenda to meet the crisis of confidence in corporate accountability and responsibility that has taken hold in recent months. Called The Investors' and Employees' Bill of Rights, this agenda includes key Democratic proposals to stamp out corporate malfeasance and restore people's faith in free markets. These initiatives have been blocked by the Republican majority in the House.

"As we've learned from Enron, WorldCom, Tyco, Global Crossing, Stanley Works and others, thousands of hard-working employees have suffered due to corporate mismanagement and abuse.

"The enclosed agenda makes it clear that Democrats are leading the charge to impose tough new criminal penalties on corrupt corporate executives; prevent corporations from expatriating to avoid paying US taxes; hold executives accountable for dishonest bookkeeping; limit golden parachutes for CEOs whose companies have gone belly-up; require greater disclosure of insider transactions; and give the Securities and Exchange Commission the resources it needs to enforce corporate accountability. We are also working to eliminate auditing industry conflicts of interest and to enhance employees' pension protections.

"It is our belief that this agenda is essential to restore trust and confidence in corporate America and protect investors, employees and corporate officials who play by the rules, thereby improving our nation's economic growth today and for the future."

------

INVESTORS' AND EMPLOYEES' BILL OF RIGHTS

Imposing Tough Criminal Penalties on Corrupt CEOs

Imposing Tough Criminal Penalties for Securities Fraud: Democrats have supported creating a new 10-year felony for defrauding shareholders of publicly traded companies. This provision would be more accessible to investigators and prosecutors and would provide needed enforcement flexibility and protection against all the types schemes and frauds which inventive criminals may devise in the future to defraud shareholders in publicly traded companies.

Imposing Criminal Penalties for Altering, Destroying, or Failing to Maintain Documents: Democrats have proposed providing two new criminal statutes which would clarify and plug holes in the current criminal laws relating to the destruction or fabrication of evidence, including the shredding of financial and audit records. First, this measure would create a new 5-year felony which could be effectively used in a wide array of cases where a person destroys evidence with the specific intent to obstruct a federal agency or a criminal investigation. Second, it also creates another 5-year felony which applies specifically to the willful failure to preserve audit papers of companies that issue securities.

Protecting Whistleblowers: Democrats would provide whistleblower protection to employees of publicly traded companies, similar to those currently available to many government employees. It specifically protects them when they take lawful acts to disclose information or otherwise assist criminal investigators, federal regulators, Congress, supervisors (or other proper people within a corporation), or parties in a judicial proceeding in detecting and stopping fraud.

Stopping Off-Shore Tax Havens

Ending Corporate Tax Havens: A growing number of American companies, encouraged by their financial advisers, are incorporating in Bermuda to lower their taxes sharply without giving up the benefits of doing business in the United States. For example, Stanley Works, for 159 years a Connecticut maker of hammers and wrenches, is planning to reincorporate in Bermuda, where there is no corporate income tax. The company estimates that it will cut its tax bill by $30 million a year. Tyco International, a diversified manufacturer with headquarters in Exeter, New Hampshire, says that being a Bermuda corporation saved it more than $400 million last year alone. Democrats have supported proposals to prevent corporations from evading the US income tax by reincorporating in a foreign country, like the Neal-Maloney bill. During a time of war, it is wrong for these companies to plant their flag overseas to avoid taxes.

Making Sure CEOs Pay Their Fair Share When Companies Reincorporate Overseas: This Democrats have proposed to make corporate executives of companies that reincorporate outside the United States pay their fair share in taxes. When a corporation incorporates overseas to avoid taxes, shareholders of such corporation are required to pay capital gains tax on the exchange of their stock of the old corporation for stock in the new corporation (even though they do not sell their stock); however, corporate executives are not required to recognize gains on their stock options. This proposal would require corporate executives to pay capital gains taxes on their stock options when the corporation moves overseas, just as other investors from Main Street are required to do.

Making Executives Accountable

Democrats support greater accountability for corporate executives to stop them from playing fast and loose with the law.

Holding CEOs Accountable for Honest Bookkeeping: One proposal would require CEOs to personally vouch for the integrity and accuracy of their firms' financial statements, and impose stiff criminal penalties for lying in these documents. In addition, CEO would lose their stock bonuses and incentive-based forms of compensation when they mislead in these financial statements or engage in similar misconduct.

Ensuring CEOs Don't Profit when Workers Lose: Under current law, corporate executives are able to protect their retirement benefits even in cases where the rank-and-file employees receive employer stock in their pension plan (such as 401(k)) that becomes worthless. Democrats in the House have proposed currently taxing the deferred compensation benefits of corporate executives if there are arrangements designed to protect these executive benefits in the case of bankruptcy or financial distress of the employer.

Helping Limit Golden Parachutes When Companies Fail: In cases where departing executives receive golden parachutes while leaving behind plummeting shareholder value or companies in bankruptcy proceedings, Democrats plan to impose an excise tax on the severance package. There have been several recent cases where executives of large corporations resigned and received large severance packages and retirement benefits even though the shareholders of the corporations were left holding stock that was virtually worthless.

Stopping the Subsidy for Greedy CEOs. Corporations should only be able to deduct CEO bonuses for real improvement of business operations - not fictitious improvements. Democrats in the House have voted for a proposal that modifies the current tax deduction for executive compensation in excess of $1 million. This proposal prevents firms from deducting more than $1 million in executive compensation if it is obtained through manipulation of the company pension funds. Corporate executives should not be rewarded for cutting employee's pension benefits (through converting the pension plan to a less costly plan), or from using unrealistic rates of return under the pension plan.

Banning CEOs who Commit Wrongdoing from Moving Company to Company. Democrats support empowering the Securities and Exchange Commission (SEC) to bar corporate CEOs and directors who are guilty of wrongdoing from serving as corporate officers or directors at other companies.

Restoring Pension Fairness Between Rank and File Workers and Management. Democrats propose to modify the pension rules to ensure a minimum benefit for rank and file employees participating in a top-heavy pension plan. This change would ensure that workers are entitled to a minimum benefit equal to at least 3 percent of compensation in a qualified pension plan where key employees (generally executives and owners) get more than 60 percent of the benefits.

The pension bill that the House Republicans passed this Spring would actually lead companies to seek to reduce the number of employees covered by pensions and give proportionately larger pension benefits to the most highly paid executives, according to experts. (New York Times, 4/10/2002) The House Republican bill would scale back current rules requiring pension plans to meet very specific tests for the balance between benefits for lower paid and higher paid workers to get favorable tax treatment. Democrats want to overturn this provision to ensure fairness between workers and management.

Banning CEOs from Receiving Insider Company Loans: Democrats support legislation to prohibit executives and members of corporate Board of Directors from receiving insider company loans. These transactions are nothing less than corporate giveaways masquerading as loans, and harm the corporation, its employees and investors by draining valuable assets. WorldCom, which hid an astonishing $3.8 billion in corporate expenses from investors and employees, gave chief executive, Bernard Ebbers, insider company loans of more than $340 million.

Assuring the Integrity of Wall Street and Restoring Faith in the Markets

Requiring Corporation to Provide Investors with Honest Information: Democrats propose to protect and inform investors and employees by requiring companies to promptly disclose reliable financial data, known earnings trends, emerging factors that may change prior earnings forecasts. Democrats have championed this proposal that is designed to reassure investors by requiring they receive timely, accurate information on profits be disclosed to shareholders.

Disclosing Insider Relationships: Democrats have supported legislation that would require that the SEC ensure disclosure of relationships between the firm or its executives with any non-profit on whose board a director or family member serves, including disclosure of any contributions between corporate officers and non-profits involving more than $10,000.

Disclosing Insider Transactions: This proposal requires stock and derivatives sales by CEOs and other corporate officers to be promptly reported on same day.

Strengthening Auditor Independence and Industry Oversight

Democrats have voted to strengthen the regulatory and enforcement functions of the SEC and to put an end to the self-policing of the accounting industry.

Ensuring that Audits are Independent: To ensure that audits are objective in certifying companies' financial reports, Democrats propose to prohibit auditors from performing other non-audit services for its client that create conflicts of interest, including consulting, or financial reporting systems. It is difficult to ensure that accounting firms are providing objective audits for the public if they are making millions in consulting fees from the same companies they are auditing.

Expanding SEC Resources: Democrats support doubling funding and staff for enforcement, accounting, and corporate finance divisions of the SEC, and fully funding pay parity for SEC staff. This proposal would double the agency's authorization to $876 million in FY 2003.

Establishing Public Auditing Regulatory Board: This proposal ends self-policing of accounting profession by creating a regulatory board with sweeping investigative and disciplinary powers over audit firms, subject to SEC review. Public Board members would be nominated by groups representing share-holders, institutional investors, and pension fund beneficiaries and future retirees, and appointed by SEC.

Requiring Better Corporate Governance: Democrats seek to put into law the proposals of the New York Stock Exchange Blue Ribbon Panel to reform corporate governance procedures and demand greater accountability from officers and independent directors as there is an urgent need for an overhaul in the ways audit committees and boards of directors operate as a check on management. The NYSE Committee recommendations would enhance the authority of independent directors and audit committees, strengthen the definition for independent directors, and require shareholder approval of all equity-based compensation.

Ending Stock Analysts' Conflicts of Interest: Democrats also support legislation to ensure stock analysts are independent and objective - by severing of the link between compensation for analysts and investment banking. Democrats support a prohibition of investment banking input into stock analysts' compensation; a prohibition of analysts from holding stock in the companies that they cover; the disclosure in research reports of whether securities firms have received or are entitled to receive any compensation from a covered company over the past year; enhanced disclosure requirements on potential conflicts; and the creation of a new compensation regime for analysts in which they will be rewarded based on the quality of their research. It is clear that in a number of cases Wall Street investment advice was fundamentally compromised by conflicts of interest, in which securities analysts touted stocks that they did not believe in, often in exchange for lucrative investment banking fees and rich compensation packages.

Enhancing Pension Protection for Employees

Giving Employee Controls over Pensions: Democrats support giving employees the information and control they need to protect their pensions. Specifically, Democrats propose to permit employees to sell company stock after 3 years of participating in the plan, and provide worker representation on boards of pension plans.

Ensuring Better Information for Employees about Pensions: Democrats have voted to prohibit employers or plan administrator from making any misleading statements on the value of employer stock or other pension investment plans. Further in light of the plight of the employees at Enron, Democrats require immediate information about executives selling company stock, and advanced notification of employee "lock-out" periods.