Monday, June 24, 2013

House Panel Marks Up and Approves Legislation on Pay Ratios, Private Equity Fund Advisers, Uniform Fiduciary Standard and Mandatory Audit Firm Rotation

The House Financial Services Committee has marked up and approved four pieces of legislation dealing with mandatory audit firm rotation, exemption of private fund advisers, the Dodd-Frank pay ratio requirement, and the Department of Labor and SEC adoption of fiduciary standards for brokers and advisers.

The Committee approved by a vote of 52-0 legislation that would prohibit the mandatory rotation of independent outside audit firms and remove the threat of unnecessary compliance costs for public companies. Introduced by Rep. Robert Hurt (R-VA) and Rep. Gregory Meeks (D-NY), the Audit Integrity and Job Protection Act, H.R. 1564, would amend Section 103 of the Sarbanes-Oxley Act to expressly prohibit the PCAOB from requiring that the outside audits of a company’s financial statements be conducted by different audit firms on a rotating basis. The Act would also prohibit the Board from requiring that audits be conducted by specific auditors. This is bi-partisan legislation and is expected to be approved by the Committee after mark up and sent to the House floor.

The Committee’s Ranking Member, Rep. Maxine Waters (D-CA) has mixed feelings about H.R. 1564.  On the one hand, she does not believe that mandatory audit firm rotation would enhance auditor independence, but on the other hand she does not believe that Congress should micromanage the PCAOB.

Rep. Waters offered an amendment to H.R. 1564 that would sunset the prohibition on adopting mandatory audit firm rotation so as not to indefinitely constrain the PCAOB. The amendment would also require a study on the issue, updating the 2003 GAO study. Rep. Hurt opposed the amendment, stating that it would gut the bill and create uncertainty. Rep. Scott Garrett (R-NJ) proposed an amendment to the Waters Amendment that would eliminate the sunset provision, but retain the study. Rep. Hurt agreed to the compromise amendment as long as it specifically required the study to consider the costs of mandatory audit firm rotation. Rep. Waters agreed to the changes, indicating that cost considerations should be included in the amendment. The amendment requiring a study of mandatory audit firm rotation, updating the GAO 2003 study, was unanimously approved by voice vote.

The Committee also approved a bi-partisan bill, the Small Business Capital Access and Job Preservation Act, H.R. 1105, by a 38-18 vote, which would exempt advisers to certain private equity funds from the new SEC registration requirements imposed by Title IV of the Dodd-Frank Act. Specifically, H.R. 1105 exempts from SEC registration private equity fund advisers that have not borrowed and do not have outstanding a principal amount in excess of twice their funded capital commitments. The bill was introduced by Rep. Robert Hurt (R-VA), Jim Himes (D-CT), Scott Garrett (R-NJ), Chair of the Capital Markets Subcommittee.

The Committee also approved H.R. 1135, the Burdensome Data Collection Relief Act by a 36-21 vote. ponsored by Rep. Bill Huizenga (R-MI) and Chairman Garrett, the bill would repeal Section 953(b) of the Dodd-Frank Act. Section 953(b) requires public companies to calculate and disclose, in every filing with the SEC, (i) the median annual total compensation of all of its employees other than its chief executive officer, (ii) its chief executive officer’s annual total compensation, and (iii) the ratio of those two numbers. 

The Committee approved H.R. 2374, the Retail Investor Protection Act by a 44-13 vote. Sponsored by Rep. Ann Wagner (R-MO). The legislative prevents the Secretary of Labor from prescribing any regulation under the Employee Retirement Income Security Act of 1974 defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the SEC issues a final rule relating to standards of conduct for brokers and dealers pursuant Section 913 of the Dodd-Frank Act.  Rep. Wagner said that Congress must act because the SEC and DOL are headed towards two separate  and massive rulemakings and the impact of this on retail investors has not been properly considered. The legislation says that the DOL must wait until the SEC acts before moving ahead. 


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