(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Congress Considers Bills Prompted by Enron Case

In the wake of the collapse of the Enron Corp., bills have been introduced in Congress to provide real-time insider transaction reporting, to diversify 401(k) investing, to increase analyst disclosure, to eliminate the RICO exception for securities fraud and also to roll back the accountants' liability provisions of the Private Securities Litigation Reform Act.

Real-Time Insider Reporting

A bill requiring the prompt electronic disclosure of insider stock sales has been introduced by Sen. Jean Carnahan. The Fully Informed Investor Act (S.1897) would mandate that information about sales of company stock by executives of publicly traded corporations be filed electronically and made available instantly to the public via the Internet. The measure is designed to prevent senior executives from quietly divesting themselves from their own company and dramatically level the playing field between insiders and ordinary investors. It is intended to cure the situation under which senior executives are able to dump large amounts of company stock without facing immediate scrutiny about the firm's financial health.

Currently, according to Sen. Carnahan, 95 percent of insider transaction reporting forms are filed on paper, rather than electronically. The paper disclosure forms are not easily accessible to the public, she noted, since the disclosure forms can be viewed only by visiting the SEC's public reference room in Washington or by requesting in writing that the SEC mail copies of the disclosure forms to them. Requests submitted in writing may take weeks to process, she decried, and this is "unacceptable and unnecessary in the electronic age."

The bill requires that individuals defined by the SEC as "affiliates" of a company file disclosure forms electronically when they sell their shares of the company's stock. The forms would be due at the SEC by the end of the day of the transaction. The SEC would then make the forms available to the public via the Internet no later than the end of the day they are received. In addition, any company maintaining a Web site would be required to post these disclosure forms on that Web site on the day of the transaction.

Analyst Disclosure

Amid concerns about the reliability of Wall Street stock ratings in the wake of the Enron collapse, Sen. Peter G. Fitzgerald has proposed legislation requiring analysts to disclose the business relationships they or their firms have with the companies they rate. The Independent Investment Advisers Act (S.1895) is designed to cure a serious systemic problem, which is that investors rely on analysts because they consider them to be independent researchers when in fact they are often employed by large investment banks and brokerage firms that do business with the companies they rate. Many analysts also own stock in the companies they cover.

The bill would accomplish its purposes by adding new Section 204B to the Advisers Act, providing that an investment adviser publishing any analysis or report regarding a company or its securities must prominently disclose the following information in plain English:

• the amount of any fees that the adviser has received from that company during the three-year period preceding the date of publication;

• any merger or acquisition transaction handled by the adviser during the five-year period preceding the date of publication that involves any debt or equity instruments of that company, and;

• any personal debt or equity holdings that the adviser has in the company and the extent of such holdings.

Sen. Fitzgerald said the circumstances surrounding Enron's collapse underscore the need for public disclosure by analysts. Sixteen of seventeen analysts continued to rate Enron stock as strong buy or buy as late as September 2001, he noted, even after Enron's CEO had abruptly resigned and the company's stock had lost more than half its value.

Accountants' Fraud Liability

Rep. Ed Markey has introduced legislation aimed at reforming a 1995 law that made it more difficult for defrauded investors to recover their losses from accounting firms who knowingly or recklessly aid and abet securities fraud. The bill was introduced in response to the recent revelations regarding Arthur Anderson's role in the dramatic collapse of Enron Corporation. The Accountability for Accountants Act (H.R.3617) responds to several problems that the Enron collapse has raised about fairness of the securities litigation regime created by the Private Securities Litigation Reform Act of 1995.

Specifically, the bill would reform current law by:

Restoring the ability to seek discovery against accounting firms so that plaintiffs may gather the information needed to meet the heightened pleading standards created by the 1995 Act. Presently, the law creates what Mr. Markey calls a "Catch 22 situation" in which plaintiffs must plead with particularity the facts giving rise to a strong inference of fraud but are stayed from getting the evidence needed to meet this standard.

• Restoring joint and several liability in cases where: 1) an accounting firm provides both auditing and non-auditing services to an issuer, 2) the defendant knowingly committed a violation of the securities laws, 3) an accounting firm failed to comply with the financial fraud reporting provisions of the securities laws and 4) the issuer of the securities that are the subject of the fraud has become insolvent. Prior to enactment of the Private Securities Litigation Reform Act, accountants could be held jointly and severally liable for securities fraud.

• Overturning the Supreme Court's 1994 decision in Central Bank v. First Interstate Bank of Denver (1993-94 CCH Dec. ¶98,178 ). The Supreme Court held that a private plaintiff may not maintain an aiding and abetting suit under Rule 10b-5. For decades prior to the Court's decision, noted Mr. Markey, aiders and abettors had been held liable for their role in enabling a securities fraud, and accounting firms had periodically been found culpable as aiders and abettors, rather than as primary violators.

• Establishing specific statutory requirements that accounting firms retain all documents relating to their audits for a four year period, with a criminal penalty of up to ten years imprisonment for knowingly or willfully destroying documents. The bill would also require the issuer of the securities that is the subject of any shareholder litigation to preserve all records during the pendency of the litigation.

• Requiring each accounting firm to formally consider divestiture of any interests in non-auditing businesses or ceasing providing non-audit services to audit clients, and to report to the SEC on what they have decided to do. The SEC, in turn, would be required to submit a report to Congress summarizing what actions the accounting industry has taken to address the inherent potential conflicts of interest in performing audit and non-audit functions for the same clients.

RICO Exception

A bill to end the RICO exception for private civil securities fraud has been introduced by Rep. John Conyers, Jr., ranking member of the Judiciary Committee. The Securities Fraud Prevention Act (H.R.3644) would make it easier for investors to bring RICO actions involving securities fraud by closing what Mr. Conyers calls a "legal loophole" for securities fraud enacted as part of the Private Securities Litigation Reform Act. The PSLRA ended the use of the private civil RICO statute as a means of seeking treble damages and attorneys fees in securities fraud cases, unless preceded by a criminal conviction.

Pension Diversification

A bill has been introduced by Senators Barbara Boxer and Jon Corzine to ensure that individual account plans protect workers by limiting the amount of employer stock each worker may hold and encouraging diversification of investment of plan assets. The proposed legislation would amend federal tax and pension laws in an effort to prevent the types of financial losses recently suffered by thousands of Enron employees.

The Boxer-Corzine Pension Protection and Diversification Act of 2001, (S.1838), promotes the diversification of retirement and investment plans by:

• Limiting to 20 percent the investment an employee can have in any one stock in their individual account plans;

• Limiting to 90 days the time that an employer can force an employee to hold a matching employer stock contribution in the employee's individual account plan;

• Reducing to 50 percent (from 100 percent) the tax deduction that an employer can take on a matching contribution to an individual if that contribution is made in stock; and

• Lowering to 35 years of age and 5 years of service the triggers that allow an employee to diversify his or her investments in an employee stock ownership plan.