SECURITIES AND EXCHANGE COMMISSION AUTHORIZATION ACT OF 2002
(House of Representatives - June 25, 2002)
(Mr. SHERMAN asked and was given permission to revise and extend his remarks, and include extraneous material.)
Mr. SHERMAN. Madam Speaker, I want to join the last speaker in his analysis, showing that the fees paid by individual investors is more than enough to provide for beefed-up SEC enforcement. But what the other party does is they use those fees collected from individual investors as a profit center to then fund tax cuts for the wealthiest 1 percent of Americans, and when we suggest that the fees paid by individual investors should be used to protect those investors, we are told that takes money away from the war against terrorism. Shame. We ought to be collecting adequate revenues to keep our country safe from terrorism, and the fees paid by individual investors are more than enough to provide every penny this bill authorizes and, frankly, more.
I come to the floor to bring to the Congress' attention one section of this bill, section 3, that says it is the sense of Congress that the SEC should conduct an annual review of the annual financial statements of the 500 largest issuers. Why is this provision necessary? The SEC has two approaches to reviewing financial statements.
If one is a small company trying for the first time to raise 10 or $20 million, then they file their red herring, their first draft. The SEC reviews it carefully; they issue a comment letter. If there is anything confusing, misleading or incomplete, they have to bring their filing up to specifications and only then do they go to the public; but if they are one of the biggest and richest companies in America, if they are already a publicly traded corporation, if they are raising or responsible on the market for 60 or 80 or $100 billion in capitalization, if they are Enron, then the SEC just does not read what they file, as they did not read Enron's financial statements for 1997, 1998, 1999. They did not read those statements until the collapse.
What would have happened if they read those statements? They would have seen a number of footnotes in the financial statements that are utter gobbledy gook. I know to the average layperson all of the footnotes are gobbledy gook, but these were incomprehensible to an analyst, the CPAs. If the SEC had bothered to read these footnotes, they would have demanded clarification. Instead, they did not read them at all.
The SEC, however, at least its chairman, is hostile, believe it or not, to the idea of reading the financial statements of the 500 largest companies. That is because there is an element at the SEC that believes that investors need to be protected from Joe Inventor who is trying to raise 5 or $10 million, but that we do not need any protection from Kenneth Lay because, after all, those in the tallest buildings of the biggest companies are inherently so honest that the SEC does not need to review what they file.
This approach to the SEC's work is wrong, and that is why I am glad that this section is in the bill; but when I asked the SEC to tell us what it would cost so that the appropriators could provide the resources, the response of Chairman Pitt was to say that he was going to refuse to provide that information because he disagreed with the proposal. Now the proposal will be included in legislation passed by the House. The Congress will adopt language saying that it is our sense that the SEC do this work.
The SEC will then probably continue to refuse to tell Congress what it would cost to actually read the most important documents filed with the SEC, to comment on them and to demand clarification.
I would like to enter into the RECORD the letter sent to me on May 21 by Chairman Pitt, in which he refuses to provide information as to what it would cost to read the financial statements of the 500 or 1,000 largest companies, and I would hope that this provision will remain in the bill in conference and that Congress will not allow an SEC chairman to refuse to provide us with even an estimate of what it would cost to do something that we in the House are about to declare ought to be done, but that instead we have an SEC that takes its responsibility to protect those who invest in the biggest companies, takes that responsibility as seriously as they do their responsibility to protect those who invest in the smallest.
The letter referred to follows:
U.S. SECURITIES AND EXCHANGE COMMISSION, Washington, DC, May 21, 2002.
Hon. BRAD SHERMAN,
Committee on Financial Services,
House of Representatives,
Longworth House Office Building,
Washington, DC.
DEAR CONGRESSMAN SHERMAN: During my testimony before the House Financial Services Committee on March 20, 2002, you requested that I submit for the record an estimate of the increase in reviews. You asked that a cost estimate be provided for annual reviews at three levels of effort covering the top 500, 1000 and 2000 firms. As I noted during the hearings, it is impractical for Congress to attempt to provide the Commission with sufficient resources to do a comprehensive review of the top 500, 1000 or 2000 companies. Apart from the enormous cost of such a process, there is ultimately no assurance that the additional expenditures would ensure the quality of audits or financial reporting.
As I noted in my testimony, the Administration's request for fiscal year 2002 supplemental funding includes $20 million to finance 100 new positions for the Commission. Our plan would be to allocate 30 positions to the Division of Corporation Finance to expand, improve and expedite our review of periodic filings. Our Division of Corporation Finance has undertaken to monitor the annual reports submitted by all Fortune 500 companies that file periodic reports with the Commission in 2002. This new initiative, which we announced in December, significantly expands the Division's review of financial and non-financial disclosures made by public companies. The additional funds would allow the Division to perform full reviews of more public companies' annual filings.
Thank you for your support of the Commission's programs. Should you have additional questions, I would be pleased to be of assistance.
