The Honorable Paul S. Sarbanes
Chairman
Committee on Banking, Housing and Urban Development
United States Senate
309 Senate Hart Office Building
Washington, DC  20510

Dear Chairman Sarbanes:

The Association for Financial Professionals (AFP) supports reforms to the accounting and auditing profession.  We believe, however, that before proposing sweeping legislation, the Senate should assess the effects of reforms, or planned reforms, that have been initiated or proposed by the Securities and Exchange Commission, Financial Accounting Standards Board, the New York Stock Exchange, and the National Association of Securities Dealers.  We also believe that the "Corporate and Auditing Accountability, Responsibility and Transparency Act" (H.R. 3763), which the House of Representatives passed by a 334 to 90 vote, provides balanced and fair reforms of the profession.  We do not believe that draconian changes to the system are necessary.

The membership of AFP includes approximately 14,000 financial executives employed by over 5,000 corporations and other organizations.  Our members represent a broad spectrum of financial disciplines, and their organizations are drawn generally from the Fortune 1000 and middle-market companies in a wide range of industries. 

AFP has adopted the following positions on reform proposals triggered by the Enron crisis.  These positions are discussed in greater detail in the attached documents.

Accounting and Audit Policy Issues
AFP supports:

• Forming a new independent oversight board to regulate the auditing profession. 
• Strengthening the independence, expertise and functions of corporate audit committees.
• Precluding external auditors from performing certain non-audit services for audit clients. 

AFP opposes:

• Requiring companies to change external auditors at specified intervals.
• Changing the current governance and funding structure of the Financial Accounting Standards Board. 

401(k) Plan Reforms
AFP supports:

• Allowing retirement plan participants to diversify company stock received as a match after three years.
• Disallowing employer stock as an option for elective deferrals if matching contributions are required to be in company stock, when the 401(k) plan is the primary retirement vehicle for participants.
• Providing enhanced benefit statements for plan participants, including information about the value of the participants' accounts, their right to diversify and the importance of diversification.
• Requiring adequate notice (30 days) prior to any "blackout" period.
• Clarifying that plan sponsors are liable only if there is a fiduciary breach in the design or implementation of the "blackout" period.
• Limiting the ability of senior executive to sell company stock during "blackout periods" when employees cannot sell company stock.
• Removing barriers to investment advice to participants.
• Ensuring adequate transition rules.

AFP opposes:

• Requiring participant representation on retirement plan boards.
• Capping the amount of employer stock allowed in individual accounts.
• Limiting tax deductions for company stock matching contributions.
• Expanding legal remedies against plan sponsors.
• Instituting rules that increase complexity and cost, while providing little additional value to participants.

Derivatives Issues

AFP supports:

• Immediate passage of bankruptcy reform legislation which includes important updates to the netting and payments risk reduction provisions of the bankruptcy code and banking law. 

AFP opposes:

• Premature revisions to the Commodity Futures Modernization Act of 2000. 

We welcome the opportunity to discuss these issues further with you.  If you have any questions, please call Gregory Fletcher, AFP Director of Financial Accounting and Reporting, at 301.961.8869.

Sincerely,

James A. Kaitz
President and Chief Executive Officer

CC:  Members of Banking, Housing and Urban Development Committee, U.S. Senate

Attachments

The Association for Financial Professionals (AFP) supports legislative and regulatory policy changes that will improve the quality of financial reporting by U.S. companies.  The collapse of Enron Corporation has shown the need for reforms that will enhance the integrity of the audit process and the oversight of the accounting profession.

AFP supports:

• Forming a new independent oversight board to regulate the auditing profession.  A majority of the new board members should not have currently active ties to the American Institute of Certified Public Accountants (AICPA) or to audit firms.  The board should be responsible for overseeing the quality control process for audits of public and private companies, investigating alleged audit deficiencies with full investigatory powers, taking disciplinary action against auditors and audit firms, and overseeing a national CPA licensing process.
   
• Strengthening the independence, expertise and functions of corporate audit committees.  Audit committee members should be barred from any business relationship with the company.  At least one member should have experience in auditing or preparing financial statements.  Audit committees should meet with the external audit firm and the internal auditors and be accessible to them at any time, without management present.  Members should receive training on company operations, finances, cash flows and critical accounting policies, and industry benchmarks for these elements.
   
• Precluding external auditors from performing certain non-audit services for audit clients.  External auditors should not perform internal audits, information system design and implementation services, and other services where the audit firm might rely on its own work.  Such services present a conflict of interest and create a perception that the auditor's independence has been impaired.

AFP opposes:

• Requiring companies to change external auditors at specified intervals. A number of industry and government groups have determined that the costs of mandated auditor rotation would exceed the benefits.  In addition, studies have shown that financial fraud and audit failures are more likely to occur in the initial years of an audit.
   
• Changing the current governance and funding structure of the Financial Accounting Standards Board.  The current structure provides adequate independence for the accounting standard setting process.  FASB receives only a third of revenues from contributions by companies, audit firms, and the AICPA.  The sources of these revenues are sufficiently diversified to prevent undue influence by any one party.  Placement of FASB within the Securities and Exchange Commission would potentially subject it to political influences that would impair its independence.

The membership of AFP includes approximately 15,000 financial executives employed by over 5,000 corporations and other organizations.  Our members represent a broad spectrum of financial disciplines and their organizations are drawn generally from the Fortune 1,000 and middle-market companies in a wide range of industries.  AFP has been an active participant in the accounting rulemaking process through testimony to the Congress, presentations at FASB, and comment letters filed with FASB and the AICPA. 

CIEBA Of AFP Supports 401(K) Plan Reforms

CIEBA of AFP supports policy changes that will strengthen the private sector retirement system and enhance confidence in retirement plans. The Committee on Investment of Employee Benefit Assets, better known as CIEBA, is the voice of the Association for Financial Professionals (AFP) on employee benefit plan asset management and investment issues. CIEBA represents more than 110 of the country's largest pension funds with members managing $1.6 trillion in retirement plan assets on behalf of more than 16 million participants and beneficiaries.

As fiduciaries for many of the nation's largest pension funds, CIEBA members have first-hand knowledge of the issues related to the use of employer stock in 401(k) plans, and how employees and plan sponsors may be affected by proposed changes.  CIEBA supports changes which are administratively feasible, do not create a whole new regulatory regime nor impose significant new costs on plans or participants.

Policy changes should promote adequate diversification as a means of assuring retirement security for participants.  In promoting this goal, policy-makers should recognize the entire retirement benefit provided by a plan sponsor.  Many companies, including virtually all CIEBA members, provide a significant portion of employee's retirement income through defined benefit plans, and 401(k) and other contributory plans are used as a complement to these benefits.

CIEBA supports:

• Allowing retirement plan participants to diversify company stock received as a match after three years.
   
• Disallowing employer stock as an option for elective deferrals if matching contributions are required to be in company stock, when the 401(k) plan is the primary retirement vehicle for participants.
   
• Providing enhanced benefit statements for plan participants, including information about the value of the participants' accounts, their right to diversify and the importance of diversification.
   
• Requiring adequate notice (30 days) prior to any "blackout" period.
   
• Clarifying that plan sponsors are liable only if there is a fiduciary breach in the design or implementation of the "blackout" period.
   
• Limiting the ability of senior executive to sell company stock during "blackout periods" when employees cannot sell company stock.
   
• Removing barriers to investment advice to participants.
   
• Ensuring adequate transition rules. Plan sponsors need sufficient time to implement changes responsibly and to inform and educate plan participants.  Similarly, participants need time to understand the impact of any new rules and how those rules may affect their retirement planning.

CIEBA opposes:

• Requiring participant representation on retirement plan boards.
   
• Capping the amount of employer stock allowed in individual accounts.
   
• Limiting tax deductions for company stock matching contributions.
   
• Expanding legal remedies against plan sponsors.
   
• Instituting rules that increase complexity and cost, while providing little additional value to participants.
   

AFP's Recommendations on Derivatives Issues

The End-Users of Derivatives Council (EUDC) is the voice of the Association for Financial Professionals on issues related to the trading of derivatives.  EUDC has addressed two key derivatives-related issues triggered by the Enron crisis:

• Bankruptcy reform legislation with respect to the termination and netting of financial contracts,
   
• Proposed revisions of the Commodity Futures Modernization Act of 2000.

AFP supports immediate passage of bankruptcy reform legislation which includes important updates to the netting and payments risk reduction provisions of the bankruptcy code and banking law.  This legislation is now pending in a House and Senate Conference.  These provisions will reduce systemic risk in the financial markets by clarifying the treatment of certain financial products in cases of bankruptcy or insolvency.

The House and Senate have previously approved similar bankruptcy and bank insolvency legislation.  The netting bill is the product of recommendations by the President's Working Group on Financial Markets that have been pending for four years.  Key financial regulators, including Federal Reserve Chairman Alan Greenspan, Secretary of the Treasury Paul O'Neill, and former Treasury Secretaries Robert Rubin and Larry Summers have specifically emphasized the importance of enacting these netting reforms.  Unfortunately, bankruptcy reform legislation and these updates to the netting rules have yet to become law.  Over the years, Congress has periodically updated these laws to meet the demands of evolving financial market conditions.  The events of the past six months emphasize the need for Congress to revise these laws once again by passing bankruptcy reform legislation.

AFP opposes premature revisions to the Commodity Futures Modernization Act of 2000.  We have supported initiatives that foster the growth and expansion of over-the-counter (OTC) markets for derivatives and related products.  We have also advocated safeguards that enhance customer protections and promote the responsible use of derivatives and related products.

AFP supported the Commodity Futures Modernization Act of 2000.  A key objective of the Act was to give greater legal certainty to the enforceability of privately-negotiated derivatives transactions between eligible counterparties.  The Act was also intended to help ensure the competitiveness of U.S. financial markets by, among other things, permitting market participants to develop and trade single stock futures in the U.S.  AFP representatives testified at House and Senate Committee hearings on several occasions, largely in support of that Act. 

With the sudden and unexpected collapse of Enron, legislation is being proposed that would "re-evaluate" OTC derivatives markets.  AFP recommends that Congress defer consideration of such legislation at this time, especially that which might undermine the critical legal certainty introduced by the Commodity Futures Modernization Act of 2000.  Action would be premature until a factual case has been made to justify legislation.  In its absence, any such legislation is likely to have adverse unintended consequences that could jeopardize the competitiveness of U.S. financial markets while providing no meaningful benefits. 

The membership of AFP includes approximately 15,000 financial executives employed by over 5,000 corporations and other organizations.  Our members represent a broad spectrum of financial disciplines and their organizations are drawn generally from the Fortune 1,000 and middle-market companies in a wide range of industries.  AFP has been an active participant in the accounting rulemaking process through testimony to the Congress, presentations at FASB, and comment letters filed with FASB and the AICPA.