Corporate Reform: Any Idea in a Storm?
Get ready for Act II of Law and Order: Corporate Crime Unit, the gritty drama that Washington lawmakers can't get enough of. Even as President Bush on July 30 signed a sweeping reform bill to shake up the accounting industry and corporate boards, Congress was weighing a fresh batch of cleanup legislation meant to appease angry voters. In store for the fall political season: new safeguards for 401(k) pension plans, protection for investors burned by the market meltdown, and a clampdown on corporate tax avoidance.
What exactly will be enacted is anyone's guess. Much depends on the earful constituents give lawmakers during summer recess. And if another corporate scandal erupts, lawmakers will be falling over themselves to act tough. But, in truth, some of the ideas being floated in Washington seem too half-baked to take seriously. Here, for better or worse, is a preview of the upcoming Second Wave of Reform:
PENSION REFORM. The House has passed a relatively weak bill that lets workers sell company shares in 401(k) plans three years after acquiring them and allows plan managers to offer investment advice to workers--a move that could open the door to conflicts of interest. The Senate is likely to combine competing proposals to permit speedier diversification and encourage companies to provide independent investment advice. Outlook: a modest compromise bill that hews more closely to the Senate version.
Republicans and some Democrats also want to loosen the rule that requires 401(k) participants to begin withdrawing money from their accounts at age 70 1/2. Trouble is, raising the age to say, 75, would cost the Treasury billions annually because the money would remain in nontaxable accounts longer. Besides, the change would only benefit the well-off, who don't need to draw on their funds. Outlook: Despite the problems, bipartisan support gives this a fighting chance.
TAX HAVENS. The Senate Finance Committee on June 18 approved a bill that would curb the ability of companies to move their headquarters to countries that levy few or no business taxes. In the wake of September 11, Democrats and Republicans have blasted as unpatriotic the efforts of Stanley Works (SWK ), Ingersoll-Rand (IR ), and Cooper Industries to relocate to Bermuda and other tax havens. The measure will likely face a vote this fall. In the House, though, a three-year moratorium is bogged down by opposition to a companion provision to end trade subsidies. Outlook: A once-reluctant Congress seems likely to at least temporarily cut off this corporate-tax escape route.
TAX BREAKS. To help investors who have suffered big market losses, House Republicans are mulling increasing the amount of capital losses that investors can use to reduce their income tax bill. They would raise the limit from $3,000 to as much as $20,000. That, too, would increase the deficit without helping the vast majority of stock-owning households, whose equity holdings are largely in pension plans, which don't incur capital-gains taxes. Even Senate Republicans are skeptical. Outlook: unlikely.
RESTITUTION. Representative Richard Baker (R-La.), wants to place all the money collected by the Securities & Exchange Commission or the Justice Dept. in civil and criminal penalties for securities fraud, as well as disgorgements by corporate execs of ill-gotten gains, into a fund for swindled investors. House Majority Whip Tom DeLay (R-Tex.) has embraced the idea. "We need to do more to strip corrupt kingpins of their ill-gotten gains," says DeLay. "We're taking the mansion. We're draining the accounts. And we're coming after the yacht." But key details haven't been worked out, such as the logistics of setting up such a fund, identifying eligible defrauded investors, and giving them their pro rata restitution. Outlook: A long shot, given the lack of time to settle details and build bipartisan support.
If you total it all up, what Congress is contemplating could be a costly wish list to appease angry investors. Adding to the growing budget deficit seems politically fraught. But if another big company melts down in a heap of accounting misdeeds, you can bet Congress will be showcasing the Second Wave.
By Amy Borrus in Washington