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116th Congress }                                           { Report
                        HOUSE OF REPRESENTATIVES
 1st Session   }                                           { 116-337

======================================================================


 
            CORPORATE MANAGEMENT ACCOUNTABILITY ACT OF 2019

                                _______
                                

 December 11, 2019.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

  Ms. Waters, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 4320]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4320) to ensure that irresponsible corporate 
executives, rather than shareholders, pay fines and penalties, 
having considered the same, report favorably thereon with an 
amendment and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     2
Background and Need for Legislation..............................     2
Section-by-Section Analysis......................................     3
Hearings.........................................................     4
Committee Consideration..........................................     4
Committee Votes..................................................     4
Statement of Oversight Findings and Recommendations of the 
  Committee......................................................     7
Statement of Performance Goals and Objectives....................     7
New Budget Authority and CBO Cost Estimate.......................     7
Committee Cost Estimate..........................................     8
Unfunded Mandate Statement.......................................     9
Advisory Committee...............................................     9
Application of Law to the Legislative Branch.....................     9
Earmark Statement................................................     9
Duplication of Federal Programs..................................     9
Changes to Existing Law..........................................     9

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Corporate Management Accountability 
Act of 2019''.

SEC. 2. FINE, PENALTY, AND SETTLEMENT ACCOUNTABILITY.

  (a) Definitions.--In this section--
          (1) the term ``Commission'' means the Securities and Exchange 
        Commission;
          (2) the term ``covered fine or similar penalty''--
                  (A) means a fine or similar penalty, as that term is 
                defined in Treasury Regulation section 1.162-21(b); and
                  (B) includes any fine or similar penalty--
                          (i) that is paid by a reporting company; and
                          (ii) with respect to which the Commission 
                        determines disclosure under subsection (b)(1) 
                        is appropriate;
          (3) the term ``issuer'' has the meaning given the term in 
        section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 
        78c(a));
          (4) the term ``named executive officer''--
                  (A) means an individual for whom disclosure is 
                required under section 229.402(a)(3) of title 17, Code 
                of Federal Regulations; and
                  (B) includes any other employee of a reporting 
                company with respect to whom the Commission determines 
                disclosure under subsection (b)(1) is appropriate; and
          (5) the term ``reporting company'' means an issuer--
                  (A) the securities of which are registered under 
                section 12 of the Securities Exchange Act of 1934 (15 
                U.S.C. 78l); or
                  (B) that is required to file reports under section 
                15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 
                78o(d)).
  (b) Requirement To Issue Rules.--Not later than 360 days after the 
date of enactment of this Act, the Commission shall issue final rules 
to require each reporting company, in each annual report submitted 
under section 13 or section 15(d) of the Securities Exchange Act of 
1934 (15 U.S.C. 78m and 78o(d)), or in each proxy statement filed 
pursuant to section 14(a) of the Securities Exchange Act of 1934 (15 
U.S.C. 78n(a)) for an annual meeting of shareholders, to--
          (1) disclose whether the reporting company, in order to align 
        the incentives of those managing the reporting company with the 
        incentives of the shareholders of the reporting company, has 
        established procedures to recoup from compensation paid to, and 
        to withhold from future compensation paid to, any named 
        executive officer all or a portion of the cost of any covered 
        fine or similar penalty that has been paid by the reporting 
        company;
          (2) if the reporting company has established procedures 
        described in paragraph (1)--
                  (A) provide a description of those procedures; and
                  (B) disclose the amount that the reporting company 
                has recouped from each named executive officer under 
                those procedures during each of the 3 most recent 
                fiscal years; and
          (3) if the reporting company has not established procedures 
        described in paragraph (1), provide an explanation of why no 
        such procedures are necessary for the benefit of the 
        shareholders of the reporting company.

                          PURPOSE AND SUMMARY

    On September 12, 2019, Representative Katie Porter 
introduced H.R. 4320, the Corporate Management Accountability 
Act of 2019, which would require public companies to disclose 
their policies on whether senior executives or shareholders 
bear the costs of paying the company's fines and penalties.

                  BACKGROUND AND NEED FOR LEGISLATION

    Over the past year, the SEC has focused its efforts on 
individual accountability. According to the Securities and 
Exchange Commission (SEC), ``[i]nstitutions act only through 
their employees, and holding culpable individuals responsible 
for wrongdoing is essential to achieving our goals of general 
and specific deterrence and protecting investors by removing 
bad actors from our markets.''\1\ In FY 2018, the SEC charged 
individuals in more than 70% of the standalone enforcement 
actions it brought.\2\
---------------------------------------------------------------------------
    \1\2018 Annual Report, Division of Enforcement, Securities and 
Exchange Commission, available at https://www.sec.gov/files/
enforcement-annual-report-2018.pdf.
    \2\Id.
---------------------------------------------------------------------------
    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act also recognized the importance of holding individuals 
accountable by, among other things, requiring companies that 
are listed on a national securities exchange to adopt and 
disclose clawback policies to recover from current and former 
executives their incentive-based compensation received over the 
past three years before the date the companies are required to 
prepare an accounting restatement due to material noncompliance 
with any financial reporting requirements.\3\
---------------------------------------------------------------------------
    \3\See Section 954 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. Law 111-203.
---------------------------------------------------------------------------
    H.R. 4320 would build on the requirements of the Dodd-Frank 
Act and ensure that culpable individuals at all public 
companies are accountable for wrongdoing by requiring the SEC 
to, within 360 days of enactment of the Act, issue final rules 
requiring public reporting companies in their annual reports or 
in their proxy statements for an annual shareholder meeting to 
disclose whether the companies have clawback policies in place 
for executives and describe those policies, as well as, the 
amount that the companies have recouped from each executive 
under those policies in the three most recent fiscal years. If 
a company does not have such a clawback policy, the bill would 
require the company to explain why it is not necessary for the 
benefit of the company's shareholders.
    At a hearing before the Subcommittee on Investor 
Protection, Entrepreneurship, and Capital Markets, former SEC 
prosecutor Jordan Thomas stated that ``[f]ar too often, 
corporations violate the law and are required to pay fines or 
penalties, but the executives responsible for management of the 
corporate business suffer no consequences.'' According to Mr. 
Thomas, H.R. 4320 ``would provide greater transparency about 
corporate policies for recouping compensation from the 
executives on whose watch a corporate issuer engaged in 
misconduct warranting fines or penalties.'' He stated that the 
bill would ``have the effect of giving shareholders greater 
insight into issuer practices, and thereby may help them in 
promoting more aggressive use of claw-backs to hold management 
accountable.''
    This bill is supported by Public Citizen and the North 
American Securities Administrators Association (NASAA).

                      SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    This section states that the short title of the bill is the 
Corporate Management Accountability Act of 2019.

Section 2. Fine, penalty, and settlement accountability

    Subsection (a) defines the terms.
    Paragraph (1) of subsection (b) requires the Securities and 
Exchange Commission to issue final rules requiring each 
reporting company to disclose whether the reporting company has 
established procedures to recoup or withhold compensation paid 
to any named officer for the amount of all or a portion of the 
cost of any covered fine or penalty paid by the reporting 
company.
    Paragraph (2) of subsection (b) requires that if a 
reporting company has established such procedures described 
under paragraph (1), the reporting company must provide a 
description of these procedures and disclose the amount the 
reporting company has recouped from each named executive over 
the 3 most recent fiscal years.
    Paragraph (3) of subsection (b) requires that if a 
reporting company has not established such procedures described 
under subparagraph (1), it must provide an explanation as to 
why no such procedures are necessary for the benefit of the 
shareholders of the reporting company.

                                HEARINGS

    For the purposes of section 103(i) of H. Res. 6 for the 
116th Congress, the Committee on Financial Services' 
Subcommittee on Investor Protection, Entrepreneurship, and 
Capital Markets held a hearing to consider H.R. 4320 entitled, 
``Putting Investors First: Examining Proposals to Strengthen 
Enforcement Against Securities Law Violators,'' on June 19, 
2019. Testifying before the Committee was Jordan A. Thomas, 
Partner, Labaton Sucharow; Urksa Velikonja, Professor of Law, 
Georgetown University Law Center; Andrew N. Vollmer, Professor 
of Law, University of Virginia School of Law; and Stephen 
Crimmins, Partner, Murphy & McGonigle PC.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
September 18, 2019 and ordered H.R. 4320 to be reported 
favorably to the House 31-22.

                  COMMITTEE VOTES AND ROLL CALL VOTES

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
following roll call votes occurred during the Committee's 
consideration of H.R. 4320.


  STATEMENT OF OVERSIGHT FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE

    In compliance with clause 3(c)(1) of rule XIII and clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
the Committee's oversight findings and recommendations are 
reflected in the descriptive portions of this report.

             STATEMENT OF PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause (3)(c) of rule XIII of the Rules of the 
House of Representatives, the goals of H.R. 4320 are to require 
public companies to disclose their policies on whether senior 
executives or shareholders bear the costs of paying the 
company's fines and penalties.

               NEW BUDGET AUTHORITY AND CBO COST ESTIMATE

    Pursuant to clause 3(c)(2) of rule XIII of the Rules of the 
House of Representatives and section 308(a) of the 
Congressional Budget Act of 1974, and pursuant to clause 
3(c)(3) of rule XIII of the Rules of the House of 
Representatives and section 402 of the Congressional Budget Act 
of 1974, the Committee has received the following estimate for 
H.R. 4320 from the Director of the Congressional Budget Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, November 6, 2019.
Hon. Maxine Waters,
Chairwoman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Madam Chairwoman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4320, the 
Corporate Management Accountability Act of 2019.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is David Hughes.
            Sincerely,
                                         Phillip L. Swagel,
                                                          Director.

    Enclosure.
    
    

    H.R. 4320 would require publicly traded companies to 
annually disclose to the Securities and Exchange Commission 
(SEC) or to shareholders, in proxy statements, whether they 
have policies that require their executive officers to help pay 
fines or penalties levied against the company and to disclose 
any amounts collected from those officers.
    Using information from the SEC, CBO estimates that it would 
cost the agency less than $500,000 in 2020 to issue rules to 
implement the bill's requirements. CBO expects that issuing the 
rules would require the work of two employees, at a cost of 
$260,000 each, for less than one year. Because the SEC is 
authorized to collect fees sufficient to offset its annual 
appropriation, CBO expects that the net effect on discretionary 
spending would be negligible, assuming appropriation actions 
consistent with that authority.
    H.R. 4320 contains private-sector mandates as defined in 
the Unfunded Mandates Reform Act (UMRA) that CBO estimates 
would be well below the threshold established in UMRA ($164 
million in 2019, adjusted annually for inflation).
    The disclosure requirement would impose a mandate as 
defined in UMRA but the incremental cost of the mandate would 
be small because the mandated entities generally already 
possess the information to be reported under the bill. The bill 
also would increase the cost of an existing private-sector 
mandate if the SEC increased its fees to offset the cost of 
implementing the bill. CBO estimates that the incremental cost 
of that mandate would be very small.
    H.R. 4320 contains no intergovernmental mandates as defined 
in UMRA.
    The CBO staff contacts for this estimate are David Hughes 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                        COMMITTEE COST ESTIMATE

    Clause 3(d)(1) of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison of the 
costs that would be incurred in carrying out H.R. 4320. 
However, clause 3(d)(2)(B) of that rule provides that this 
requirement does not apply when the committee has included in 
its report a timely submitted cost estimate of the bill 
prepared by the Director of the Congressional Budget Office 
under section 402 of the Congressional Budget Act.

                       UNFUNDED MANDATE STATEMENT

    Pursuant to Section 423 of the Congressional Budget and 
Impoundment Control Act (as amended by Section 101(a)(2) of the 
Unfunded Mandates Reform Act, Pub. L. 104-4), the Committee 
adopts as its own the estimate of federal mandates regarding 
H.R. 4320, as amended, prepared by the Director of the 
Congressional Budget Office.

                           ADVISORY COMMITTEE

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

              APPLICATION OF LAW TO THE LEGISLATIVE BRANCH

    Pursuant to section 102(b)(3) of the Congressional 
Accountability Act, Pub. L. No. 104-1, H.R. 4320, as amended, 
does not apply to terms and conditions of employment or to 
access to public services or accommodations within the 
legislative branch.

                           EARMARK STATEMENT

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 4320 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as described in clauses 9(e), 9(f), and 9(g) of rule 
XXI.

                    DUPLICATION OF FEDERAL PROGRAMS

    Pursuant to clause 3(c)(5) of rule XIII of the Rules of the 
House of Representatives, the Committee states that no 
provision of H.R. 4320 establishes or reauthorizes a program of 
the Federal Government known to be duplicative of another 
federal program, a program that was included in any report from 
the Government Accountability Office to Congress pursuant to 
section 21 of Public Law 111-139, or a program related to a 
program identified in the most recent Catalog of Federal 
Domestic Assistance.

                        CHANGES TO EXISTING LAW

    H.R. 4320 does not make any changes in existing law, so it 
is not necessary to show changes in order to be in compliance 
with clause 3(e) of rule XIII of the Rules of the House of 
Representatives.

                             MINORITY VIEWS

    Financial Services Committee Republicans believe that 
corporate executives should be accountable to their 
shareholders and boards of directors, and that public markets 
should be protected from bad actors. Moreover, Committee 
Republicans believe that corporations should be transparent 
with respect to corporate bad actors.
    Unfortunately, Committee Democrats have failed to 
articulate the problem that H.R. 4320, the so-called 
``Corporate Management Accountability Act of 2019'', is 
intended to address. H.R. 4320 would require public companies 
to disclose in annual reports and proxy statements whether the 
company has established procedures to recoup and/or withhold 
compensation from certain executive officers in the event the 
company is subject to a ``fine or similar penalty.''\1\ The 
bill also requires companies with compensation withholding or 
recoupment procedures to disclose any clawed back or withheld 
compensation. Companies without such procedures must disclose 
the reason for failing to adopt the procedures.
---------------------------------------------------------------------------
    \1\H.R. 4320 specifies penalties and fines as set out in Treasury 
Reg section 1.162-21(b) and additional fines or penalties the SEC 
determines disclosure may be appropriate.
---------------------------------------------------------------------------
    Like previous mandatory disclosure bills that Democrats 
have moved during the 116th Congress, this bill does not 
accomplish the important goal of informing investors of 
material information--information that will help investors make 
better decisions to save for retirement, buy a home, or a 
child's education. Instead, this bill only accomplishes the 
goal of naming and shaming public companies.
    For example, the bill requires: (1) companies to disclosure 
each named executive officer for the last three fiscal years; 
and (2) whether the named executive officer was required to pay 
back any fines or had compensation withheld regardless of 
whether the company was subject to a fine or penalty. For the 
vast majority of law-abiding companies, there will be a long 
list of executives with ``$0'' next to their names in a column. 
That information is simply not necessary or helpful for 
investors.
    H.R. 4320 would also lead to higher compliance cost for 
public companies in the U.S. markets. In fact, the increased 
cost associated with the bill, as well as the intentional and 
unnecessary infliction of reputational damage stemming from 
disclosures required under the bill, would deter companies from 
going public--and would encourage public companies to go 
private. We should foster and support robust capital markets to 
support opportunity for all investors.
    Committee Republicans worked diligently to improve the 
bill. In particular, Mr. Loudermilk offered an amendment that 
would limit the bill's disclosure requirements only to 
companies that have actually clawed back or withheld 
compensation from executives because of a fine or similar 
penalty. The amendment also removed the mandate that companies 
disclose whether they have a clawback policy. Unfortunately, 
Committee Democrats rejected this commonsense amendment, 
revealing the bill's real purpose: to name and shame companies.
    Committee Republicans continue to support efforts to 
provide useful information to investors as well as grow vibrant 
public markets. However, this burdensome bill does not 
accomplish these goals.

                                   Bill Huizenga.
                                   David Kustoff.
                                   Tom Emmer.
                                   Scott Tipton.
                                   William R. Timmons IV.
                                   Trey Hollingsworth.
                                   Bryan Steil.
                                   Warren Davidson (OH).
                                   Andy Barr.
                                   Frank D. Lucas.
                                   Alexander X. Mooney (WV).
                                   Steve Stivers.
                                   Patrick T. McHenry.
                                   Blaine Luetkemeyer.
                                   Barry Loudermilk.
                                   Peter T. King (NY).
                                   Ted Budd.
                                   Roger Williams.
                                   J. French Hill (AR).
                                   John W. Rose (TN).
                                   Denver Riggleman.
                                   Anthony Gonzalez (OH).
                                   Lee M. Zeldin.
                                   Ann Wagner.
                                   Bill Posey.
                                   Lance Gooden.