THE LAST DAYS OF THE somewhat sparse record means that IN THIS - - PDF document

Vol.1, No. 10, October 2002

THE LAST DAYS OF THE 107TH CONGRESS

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THE RISE OF SARBANES-OXLEY: A TALE OF TWO CITIES 2 WHITE HOUSE ANNOUNCES PROPOSED GENERIC DRUG RULE 7 BIRCH BAYH TESTIFIES ON TITLE 9 IX

JIM JATRAS JOINS LEGISLATIVE GROUP

10 NEWSLETTER ARCHIVES 10

THE LAST DAYS OF THE 107th CONGRESS

On Thursday, October 17, the Senate followed the House action taken on the previous day and left Washington for the campaign trail. Before leaving, both bodies adopted a Continuing Resolution (H.J. Res. 123) which would keep the government funded through November 22. Congress plans to return for a post-election lame duck session in November. In the seven weeks of legislative activity since returning from its Summer Recess, Congress adopted Resolutions authorizing the use of United States Armed Forces against Iraq (S.J. Res. 45, H.J.Res.114), passed the Help America Vote Act (H.R.3295) to assist states in improving and modernizing the administration of elections and took final action on the Medical Device User Fee and Modernization Act (H.R.5651) which reformed the FDA’s procedure for approving and regulating medical devices. This somewhat sparse record means that many significant issues remaining in this Congress will have to be resolved, if at all, in the November lame duck session or possibly in a second lame duck session in

• December. For example, when the

Congress left, only two of the 13 regular fiscal 2003 appropriations bills (H.R.5010, the Defense Appropriations bill and H.R.5011, the Military Construction Appropriations bill) have been approved by both Houses. The unfinished appropriations bills will have to be a priority for the lame duck session. In addition, Congress will have to decide how, or if, it will resolve major controversies such as energy reform, the homeland security department, terrorism insurance, and port

• security. Of these major issues,

terrorism insurance appears closest to achieving consensus. The likelihood of a productive lame duck session will be largely driven by the outcome of the November 5 elections. If either the

IN THIS ISSUE Capitol View is published by the Legislative Group of Venable, Baetjer, Howard & Civiletti. It is not intended to provide legal advice

• r opinion. Such advice may only be

given when related to specific fact situations. Editor: Kevin Faley Associate Editor: Lisa Baranello

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Democrats or Republicans gain control of both the Senate and House, they may see an advantage in delaying resolution of these issues to the 108th Congress convening in January 2003.

Kevin Faley is Editor of Capitol View and a Partner in Venable’s Legislative Group.

• Mr. Faley can be reached at

202.513.4706 or at kofaley@venable.com

THE RISE OF SARBANES- OXLEY: A TALE OF TWO CITIES

As Congress returned from its Summer Recess in the first week of September, a number of members expressed concern over some provisions in the Sarbanes-Oxley Act (PL 107-204) which was signed into law by President Bush just before Congress adjourned. Sarbanes-Oxley instituted a broad reform of Federal law to confront the corporate governance and accounting scandals that shook Wall Street over the spring and

• summer. However, some members

thought the new law may have gone too far. Rep. Richard Baker (R-LA), who helped draft the House version of the bill, noted, “There may be unintended

• consequences. We acted in a very

speedy manner.” One of the prime reasons for the quick action by Congress, and its increasing support for more stringent provisions as the bill moved through the legislative process, was the fear among members of the possibility of severe reprisals visited on Congress by investors for the carnage on Wall Street. At the beginning of 2002 the Dow Jones Industrial Average hovered around the 10,000 mark. Many Wall Street analysts were pleasantly surprised that the market had successfully weathered one of the largest bankruptcies in the history of the United States, that of the Enron Corporation in December of 2001. In mid-March the market reached its peak of the year at over 10,600. However, as the year wore on a series of corporate fraud scandals and irregularities in some accounting practices began to have a significant negative impact on Wall

• Street. By the end of July, the

market was trading around 8,000, a loss of about 25% since March. In addition, the rate of loss was rapidly accelerating and investor confidence in the market was

• deteriorating. At that point in the

year, the market had lost about $3.7 trillion in the value of all traded stock since January 1. In July alone about $2.1 trillion was lost and investors withdrew $49 billion from mutual funds, the largest one month withdrawal on record. This trend was not lost on Capitol Hill where it was also noted that about 50% of households in the United States currently own stock and two-thirds

• f all likely voters are invested in

the stock market. Lawmakers quickly swung into action to help ensure that angry investors in the summer of 2002 would not become angry voters in the fall. In a counter reaction to the market movement, the support among members of Congress for more stringent measures to confront the corporate and accounting scandals increased as the stock losses accelerated through the spring and summer. The Corporate and Auditing Accountability, Responsibility and Transparency Act of 2002 (H.R.3763) was reported by the House Financial Services Committee on April 16, 2002. The legislation, sponsored by the Chairman of the Committee, Michael Oxley (R-Ohio) instituted various reforms concerning corporate governance of public companies and regulation of the accounting industry. It passed the House on a vote of 334-90 on April

• 24. The Administration voiced its

support for H.R.3763. Most of the opposition to the bill came from Democratic

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members who complained it did not go far enough in addressing corporate and accounting abuses. Of the 12 members of the Financial Services Committee who voted against the bill at the Committee markup, 11 were Democrats who were joined by Representative Bernard Sanders (I-VT) in complaining that the bill did not mandate sufficiently stringent

• reforms. As the Ranking Democrat
• n the Financial Services

Committee, John LaFalce (D-NY) noted, during debate on the House Floor, “Mr. Chairman, we have an enormous, enormous problem on

• ur hands. Investors have lost

hundreds of billions of dollars, and sometimes it may have been due to bad investment decisions they made, but an awful lot of the time it was due to earnings manipulation

• r analyst hype or corporate or

accounting wrongdoing. We need to rise to the challenge. This bill just does not do that. We could say, well if we gave a test and somebody gets 50% of the answers right, we would say, well, pass

• them. I think we flunk them if that

is as good as they could do, especially if they do a poor job on all of the important issues. I think this main bill does a very poor job

• n all of the important issues.”

Cong.Rec. April 24, 2002 p.H.1553. The Public Company Accounting Reform and Investor Protection Act (S.2673), introduced by the Chairman of the Senate Banking, Housing and Urban Affairs Committee, Paul Sarbanes (D-MD), was approved by the Committee on June 18, 2002 by a vote of 17-4. It passed the Senate

• n July 15, 2002 by a unanimous

vote of 97-0. The Sarbanes bill was viewed as being considerably stronger on corporate governance and accounting issues than the House passed bill. It might be noted that the Dow Jones Industrial Average had lost about 2,000 points in the interim between passage of the House and Senate bills. In the Senate-House Conference to reconcile the two versions, the stronger Senate bill prevailed on virtually all the major provisions over the weaker House

• provisions. Some members of the

House had viewed the Conference as a last opportunity to insist on retaining some of the less stringent House provisions. However, the continuing meltdown on Wall Street led to ever-increasing pressures on members of Congress for significant reforms, and the House receded to the Senate on the major issues in the legislation. As Senator Sarbanes noted during the subsequent Senate floor debate on the Conference Report, “I say to my colleagues that in every one of its central provisions the Conference Report closely tracks or parallels the provisions in the Senate bill for which, as I indicated earlier, all Members present at the time, 97 of us, voted

• nly a short time ago.” Cong.Rec.

July 25, 2002, p. S.7354. On July 25, 2002, the Senate adopted the Conference Report by a vote of 99-0 and the House agreed by a vote of 423-3. President Bush signed the bill into law as the Sarbanes-Oxley Act of 2002 on July 30, 2002. The major provisions of the new law are:

Public Company Accounting Oversight Board

The Act establishes the Public Company Accounting Oversight Board with the authority to impose discipline or sanctions on registered public accounting firms who violate the Act or any securities laws relating to the preparation and issuance of audit

• reports. The Board would oversee

the audits of public companies subject to the securities laws, establish audit reporting standards and rules as well as investigate, inspect and enforce compliance with the Act relating to registered public accounting firms. It also requires public accounting firms to register with the Board and limits the number of certified public

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accountants on the Board to two of the five members. The SEC would have oversight authority over the Board and may review Board actions.

Auditor Independence

The Act amends the Securities and Exchange Act of 1934 to prohibit a registered public accounting firm from performing non-audit services contemporaneously with a mandatory audit. It prohibits the lead audit partner from auditing the same company for more than five

• years. It mandates that the outside

auditor reports to the audit committee of the issuer.

Corporate Responsibility

The statute vests the audit committee of an issuer with the responsibility for the oversight and appointment of any registered public accounting firm employed to perform audit services. It requires the audit committee members to be members of the issuer’s Board of Directors. It requires the CEO and CFO of an issuer to certify financial statements to be correct in all material respects, and forfeit their bonuses following an issuer’s required accounting restatements.

Enhanced Financial Disclosure

The Act directs the SEC to issue rules requiring disclosures of all off-balance sheet transactions that may have material effect on a firm’s financial status. It directs the SEC to report to Congress on the extent and impact of off-balance sheet transactions and the use of special purpose entities. It prohibits corporations from making personal loans to its corporate executives. It also directs the SEC to issue a code

• f ethics for senior financial
• fficers of an issuer.

Analyst Conflict of Interest

It requires the SEC to adopt rules concerning securities analysts conflict of interest, including establishing safeguards to ensure that securities analysts within investment banking firms are separate from the review or

• versight of those involved with

investment banking.

SEC Resources and Authority

The Act increases the staff and compensation at the SEC. It establishes rules of professional responsibility for attorneys representing public companies before the SEC, including requiring the attorney to report violations of securities law or violation of fiduciary duties to the CEO, and if the CEO fails to respond, to the Board of Directors. Corporate Criminal Fraud Accounting The Act increases penalties for destroying or altering records with the intent to obstruct a federal

• investigation. It requires auditors to

maintain all audit and work papers for five years. It prohibits publicly traded companies from discriminating against employees who assist federal investigators or participate in proceedings related to fraud against shareholders.

White Collar Criminal Penalties Enhancement

It amends the federal criminal law to require senior corporate

• fficials to certify in writing that

financial statements fairly present in all material aspects the

• perations and financial conditions
• f the issuer. It directs the U.S.

Sentencing Commission to review sentencing guidelines for corporate and accounting offenses and authorizes the SEC to freeze extraordinary payments to persons

• r corporate staff under

investigations for violation of federal securities law. Obviously, compliance with Sarbanes-Oxley and its subsequent regulations will pose significant challenges and potential problems

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to corporate management teams and boards of directors. Assisting in meeting these challenges and avoiding potential problems have long been a specialty of the Venable law firm. Before the new corporate governance legislation ushered in increased corporate accountability, Venable was helping management teams ensure that their companies are run with the highest ethical and operational standards. Venable has conducted high- profile investigations for executive management teams in industries such as banking, retail, petroleum, consumer products and others. Led by Benjamin R. Civiletti, former Attorney General of the United States, the firm’s Corporate Governance and Investigations Special Business Unit (SBU) includes attorneys with SEC experience and more than a dozen former prosecutors and regulators, former senior United States Justice Department officials, Assistant United States Attorneys, former federal banking regulators, former Congressional staff members, as well as former Assistant States’ Attorneys and Public Defenders. With this interdisciplinary team, Venable can assist companies with the full range of issues brought about by Sarbanes-Oxley. The SBU has compiled the following

• utline of the key issues presented

by the new statute and a brief description of Venable’s approach in designing and implementing a comprehensive compliance program.

• I. New Certification and Reporting

Requirements

• A. Certification and Disclosure

Control Procedures

• Designing the required

“disclosure controls and procedures” to ensure that material information is made known to the certifying

• fficers, particularly during the

preparation of periodic financial statements

• Formation of a “Disclosure

Committee” pursuant to SEC recommendations to establish and monitor disclosure control procedures and to maintain “best practices” as these practices and procedures evolve

• Ensuring full and proper

content in the certifying

• fficers’ report presenting

conclusions about the effectiveness of the disclosure controls and procedures

• Communicating with external

auditors and the audit committee regarding internal controls

• B. Accelerated Reporting
• Evaluating and designing best

practices for compliance under Section 16 of the Securities and Exchange Act of 1934 regarding insider trading

• Analyzing and understanding

transactions covered under accelerated Form 4 reporting

requirements

• Developing procedures to

comply with forthcoming SEC rules regarding electronic filing requirements and web site disclosure of Forms 4 and 5.

• Developing procedures to

comply with forthcoming SEC rules regarding accelerated disclosure requirements. These new rules, not yet proposed by the SEC, will be in addition to the recently adopted rules requiring certain companies to file quarterly and annual reports under shorter time frames, over a phased-in period.

• II. Strengthening Corporate

Governance

• A. Evaluation of Board

composition, committee structure and other governance policies to ensure compliance and increase investor confidence

• B. Creation of a truly independent

audit committee

• Audit Committee must be

shaped to meet its enhanced roles and responsibilities

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• Provide oversight of external

auditors and the approval of non-audit services

• Establish procedures for

receiving, reviewing and acting upon complaints or information about accounting

• r other improprieties
• Grant the audit committee the

authority and resources to retain independent counsel and accountants

• Enforce audit partner rotation

and conflict of interest policies

• C. Compliance with new NYSE and

NASDAQ corporate governance proposals and standards

• D. Rules of professional

responsibility for attorneys

• E. Establishing and monitoring a

code of ethics

• III. Executive Compensation

Issues

• A. Reviewing and evaluating

executive compensation, employee benefits programs and practices and policies of compensation committees in light of Sarbanes- Oxley and the current environment regarding executive compensation

• B. Reviewing executive

compensation arrangements and practices to assure compliance with the prohibition against loans to executive officers and directors

• C. Reviewing qualified retirement

plans holding employer stock and insider trading policies to assure compliance with the blackout provisions of Sarbanes-Oxley and

• ther requirements of ERISA
• D. Determining necessary changes

to stock option plans in light of Sarbanes-Oxley and current corporate practices

• E. Considering tax implications of

restructuring executive compensation packages, including stock option and other equity arrangements

• IV. Accountability and

Enforcement Issues

• A. New Criminal Provisions and

Enhanced Penalties Under the Sarbanes-Oxley Act

• Section 906 False

Certification: “knowing” or “willful” false certification that periodic report “fairly presents, in all material respects, the financial condition and results

• f operations of the issuer.”
• New securities fraud provision

and increased penalties for mail and wire fraud.

• B. The Document Destruction and

Retention Issue

• Sarbanes-Oxley creates a much

broader and more comprehensive scheme criminalizing the destruction of documents – and these provisions apply to everyone.

• Developing, communicating

and administering sound document management policies that reflect these new document destruction provisions.

• Developing effective email use

and email retention policies to manage risk

• C. Working with the SEC in the

New Environment

• Communicating with the SEC

in an era of real-time enforcement

• Being alert to the early

involvement of SEC enforcement personnel in the company’s discussions of financial reporting issues with the SEC’s Division of Corporation Finance or Office

• f Chief Accountant
• Understanding the benefits and

requirements of early cooperation in enforcement inquiries or investigations, as set out in the SEC’s Section 21(a) Report

• Developing a plan for

performing prompt internal investigations of financial or accounting issues

• Developing a plan, as part of a

general document retention policy, for document preservation when there is an enforcement inquiry threatened

• r pending

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V. V. V.

• V. Developing an Effective

Compliance Program to Reduce Liability Risk

• Developing an effective

compliance program that can help prevent illegal conduct, minimize the opportunity for widespread or illegal conduct and minimize risks to the company of any illegal acts of employees

• Ensuring that the corporation

has addressed or established all the elements of an effective compliance and risk management program, including:

• Strong ethics policies or codes
• f conduct
• A high-level official

designated as responsible for compliance

• Effective internal and external

audit programs

• Confidential telephone

“hotline” for employees

• Effective disciplinary system

for violations

• Appropriate training both in

ethics and in particular

• ccupational skills (e.g.,

accounting, healthcare claims processing)

• Up-to-date Statements of

Policy

• Effective and visible

management support

• Understanding how an

effective compliance program can reduce potential criminal sentences and prevent debarment or other adverse administrative actions If you have any questions concerning Venable’s Corporate Governance and Investigations SBU, please contact Mr. Geoff Garinther at 202.962.4919 or at

grgarinther@venable.com.

WHITE HOUSE ANNOUNCES FDA GENERIC DRUG PROPOSED RULE AFTER LEGISLATION STALLS IN THE HOUSE

On October 21, 2002, President Bush announced the release of a Food and Drug Administration (“FDA”) proposed rule intended to decrease brand-name pharmaceutical companies’ ability to use frivolous patents to delay market entry of generic drugs (the “Generic Drug Proposed Rule”). The Generic Drug Proposed Rule, which would clarify the existing law and revise FDA regulations, seeks to restore the balance between the need for affordable medicine and expensive research for new cures by brand-name

• companies. President Bush stated

that he “is taking immediate action to ensure that lower cost, effective generic drugs become available without any improper delays,” but that “innovators must be financially rewarded for their creativity and hard work so they will continue investing and researching, putting new resources and talents in the creation of new drugs.” Bush Administration

• fficials stated that the Generic

Drug Proposed Rule would yield cost savings of more than $3 billion a year to employee health plans, state Medicaid programs, and consumers. According to Administration officials, these proposed changes could take effect within the next several months. The President’s announcement cites a July 2002 study by the Federal Trade Commission (“FTC”) entitled Generic Drug Entry Prior to Patent Expiration. The FTC study examined current problems with the Hatch-Waxman law, which struck an important balance by allowing generic drugs to come to market more easily while also ensuring patent protection for brand-name

• companies. One of the most

egregious abuses found in the FTC study was that that some brand- name companies obtained multiple 30-month stays of generic approval by listing frivolous patents with FDA.

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The Generic Drug Proposed Rule was announced the first business day after the Congress recessed for the midterm elections and after a broader generic bill, S.812, passed the Senate, but stalled in the House. S.812, known as the Greater Access to Affordable Pharmaceuticals Act of 2001, passed the Senate by a vote of 78- 21 on July 30, 2002, but such legislation failed to even be considered by the House Committee on Energy and Commerce or the full House prior to the election recess.

• I. Highlights of the Generic Drug

Proposed Rule The Generic Drug Proposed Rule seeks to amend current patent listing requirements for New Drug Applications (“NDAs”). According to its preamble, the Generic Drug Proposed Rule is designed to make the patent listing process with FDA more efficient and to enhance generic drug approval by:

• Limiting brand companies to
• nly one opportunity for a 30-

month stay in the approval date

• f each generic application;
• Clarifying the types of patents

that must be listed, and those that must not be listed; and

• Revising the declaration that

NDA applicants must provide regarding their patents to help ensure that such applicants list

• nly appropriate patents.
• II. The Stalled Legislation Contains

Additional Provisions Not Included in the Generic Drug Proposed Rule Although both eliminate automatic, multiple 30-month stays and require a more stringent patent declaration, S.812 is much broader and contains the following major additional provisions not found in the Generic Drug Proposed Rule. S.812 would:

• Provide generic applications

with a private right of action to challenge improper patent listings;

• Require a generic company

that challenges a drug patent to provide the brand-name company with more detailed information regarding its claim that the patent is invalid or not infringed;

• Restrict the rights of both the

NDA holder and the patent holder to sue a generic applicant for infringement after approval if the NDA holder does not file the patent information required by the

• NDA. In addition, if the patent

information is filed and no infringement suit is brought within a 45-day period, the NDA holder and patent holder are barred from subsequently bringing an infringement lawsuit; and

• Allow “rollover” of generic

market exclusivity. Generic applicants who are granted 180-day marketing exclusivity would forfeit this exclusivity to the next approved generic if the first generic company settles with the brand-name company or, in certain circumstances, delays in getting the first generic product to the market.

• III. Generic Drug Legislation

Questioned Stalled in the House; Skeptics find Generic Drug Proposed Rule Inadequate Prior to the announcement of the Generic Drug Proposed Rule, the House Energy and Commerce Health subcommittee held a hearing on October 9, 2002, regarding generic drug access and the need for changes to the Hatch- Waxman amendments. The hearings featured testimony by FTC Chairman Timothy Muris and FDA Acting Deputy Commissioner Lester Crawford. Chairman Muris distinguished the limited reforms called for in the Commission’s report from the broader approaches included in S.812. Deputy Commissioner Crawford testified that although FDA would not oppose a single thirty-month stay, FDA opposed S.812. Dr. Crawford argued that S.812 would directly curtail patent rights, may lead to more litigation

• ver patent listings, and might

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actually increase drug prices with its generic 180-day rollover

• provisions. The Chairman of the

Energy and Commerce full committee, Billy Tauzin (R-LA), did not to hold a mark-up session

• r otherwise advance generic drug

legislation prior to the election recess. Skeptics of the Bush proposal emerged quickly after the announcement stating the proposed rule, announced just 3 weeks shy of election day, was politically charged; undermines S.812, which better provides for generic entry; and will likely take years to implement because of possible legal challenge from the brand- name industry. Rep. Sherrod Brown (D-OH), a co-sponsor of generic drug legislation in the House, stated, “Frankly, the proposal . . . is an insult to the American consumers . . . Three weeks before the election, the administration suddenly has a change of heart and issues a proposed regulation.” Rep. Brown also criticized assertions that the proposed rule could take effect in several months time, noting that “new regulations typically take at least two years to implement.” The authority of FDA to re- interpret the Hatch-Waxman law was called into question as well.

• Sen. Orin Hatch (R-UT) noted

that “it may be preferable for Congress to enact legislation in this area” as the courts have found that FDA has overstepped its authority in several recent cases.

• IV. When is the Generic Drug

Proposed Rule Effective? The Generic Drug Proposed Rule is not immediately effective and is unlikely to be finalized for some months and perhaps a few

• years. FDA is accepting public

comment on the proposed Generic Drug Proposed Rule. Comments are due December 23, 2002. After the comment period is over, FDA would issue a final rule and provide at least 30 days, and probably a longer period, before the final rule takes effect. The Generic Drug Proposed Rule reflects the Bush Administration position of seeking to address the most egregious alleged abuse in the process while not restricting legitimate patent

• protections. While critics may have

a valid point that the Generic Drug Proposed Rule may be delayed by a legal challenge, this criticism is somewhat unfair. S.812 was almost certain to be challenged in court on grounds that it was an unconstitutional taking of private property because it would have severely curtailed certain patent

• protections. The timing of the

President’s announcement, just before the midterm elections, was in part politics. However, the Bush Administration can plausibly argue that it waited to act until after the Congress failed to pass legislation. Venable attorneys are closely involved in these food and drug rulemaking and legislative

• developments. If you would like a

copy of the Generic Drug Proposed Rule or S.812 or related legislation, would like assistance filing comments, or have any questions, please contact Bill Waller at (202) 513-4652 or at wcwaller@venable.com. Bill Waller is a member of Venable’s Food and Drug Practice

• Group. Mr. Waller formerly served

as Majority Counsel to the House Government Reform Committee’s Food and Drug Oversight Committee.

BIRCH BAYH TESTIFIES ON TITLE IX

On August 27, 2002 our partner and former United States Senator Birch Bayh was the lead witness at the inaugural hearing of the Secretary’s Commission on Opportunities in Athletics, held in Atlanta, Georgia. The Commission was established by the Secretary of Education, Roderick Paige, to study the enforcement and impact

• f Title IX, which prohibits

discrimination in education based

• n sex. Mr. Bayh was the chief

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sponsor of Title IX which was enacted over 30 years ago. The commission intends to hold a series of hearings across the

• country. It will submit a report and

any recommendations for improving the enforcement of Title IX early next year.

JAMES JATRAS JOINS LEGISLATIVE PRACTICE

James Jatras, who served as a Senior Policy Analyst for the U.S. Senate Republican Policy Committee since 1985, has joined Venable as a partner in its Legislative Practice Group. Mr. Jatras, 47, is an expert in international affairs, with particular concentrations in trade, immigration, international terrorism and social issues. Before his tenure as a Republican analyst, Mr. Jatras was a Foreign Service Officer for the State Department in the early 1980s where he specialized in Soviet affairs.

VENERABLE ASSEMBLY

To meet the members of our

• utstanding legislative team, visit

Venable’s web site at:

http://www.venable.com/about/ leg.html

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