The accounting reform bill that sailed through Congress this week would increase the statute of limitations for private securities fraud cases, raise the maximum criminal prison sentences for wire and mail fraud, authorize $776 million for the SEC, and require the commission to conduct studies of the credit-rating agencies, as well as its own enforcement actions.
The final version of the legislation, which contains some broad-based provisions that affect the municipal market -- as well as other securities markets -- was quickly approved by the House yesterday morning on a 423-to-3 vote and by the Senate on a 99-to-0 vote later in the afternoon. The bill now goes to President Bush, who is expected to sign it.
In addition, Governmental Accounting Standards Board officials said yesterday that they are poring over the bill to see if it would indirectly impact the funding or operations of GASB, the nonprofit organization that sets accounting standards for state and local governments.
"This really is a significant piece of legislation, a significant moment in the history of securities regulation," said Paul Maco, a partner at Vinson & Elkins LLP and former director of the SEC's Office of Municipal Securities.
The legislation -- known as the Sarbanes-Oxley Act of 2002 -- would permit investors to bring securities fraud cases up to two years after the discovery of facts constituting violations or up to five years after such violations occurred. This would be an extension of current law enacted in the early 1990s after the Supreme Court's 1991 decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilberston, under which such cases can only be brought within one year of discovery and within three years of when the violation occurred.
The maximum criminal penalties for mail and wire fraud would be raised to 20 from five years imprisonment under the bill. Former municipal market investment adviser Mark Ferber was convicted of such criminal charges several years ago.
SEC funding for fiscal year 2003 would be authorized at $776 million -- a huge increase over the $467 million President Bush proposed earlier this year, even taking into account the $100 million increase to that amount he said earlier this month he would support. The commission's current budget is $438 million.
Of the total $776 million proposed: $102.7 million would be used to increase pay levels and benefits for SEC employees so that they are on a par with banking regulators; $108.4 million would be used for technology improvements and funding needs stemming from the Sept. 11 terrorist attacks that destroyed the commission's northeast regional office; and $98 million would be used to add 200 new professionals, mostly auditors and enforcement staff.
The bill also directs the SEC to complete a study of the role and function of the credit-rating agencies in the securities market. The study is to be sent to House and Senate committees within 180 days of the bill's enactment. In conducting the study, the SEC is to consider the roles that credit-rating agencies play in evaluating issuers, any impediments to their being able to accurately appraise the financial resources and risks of issuers, and whether there are any barriers preventing other entities from becoming credit-rating agencies that need to be removed. The commission is also directed to examine whether the credit rating agencies have any conflicts of interest.
The SEC is also required to study the violators and violations of the securities laws, as well as the sanctions imposed, and to complete the study within six months of the bill's enactment.
Meanwhile, GASB officials said yesterday that they are intensively studying the legislation to see if would impact their funding or operations.
"We will spend a lot of time going over it with a fine-tooth comb," David Bean, GASB's research director, said. "The first thing is to see how it affects the Financial Accounting Standards Board, and then we'll have to look at the ramifications for GASB. A lot will depend on how the Securities and Exchange Commission administers the legislation. We're are preparing to meet with the appropriate officials there."
The legislation does not appear to specifically mention GASB or FASB. But it does call for the creation of a new public accounting oversight board, which would have the authority to set corporate accounting standards and would be funded by "account support fees." It is not yet clear whether the funding mechanism will have ramifications for FASB and GASB, which are governed by the Financing Accounting Foundation and depend on "contributions" from accounting firms and other companies, as well as money from the sale of publications, for funding, Bean said.
Tom Allen, GASB's chairman, had publicly expressed concerns about the impact of accounting reform legislation on his organization in a speech he made at the Government Officers Finance Association's annual meeting in Denver in June. Allen was unavailable for comment yesterday.
