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White House Opposes Stock Cap

By: Albert B. Crenshaw
The Washington Post, February 7, 2002

Labor Secretary Elaine L. Chao signaled yesterday that the Bush administration does not see anything fundamentally wrong with the nation's private retirement system and believes that caps on the amount of employer stock an employee may have in a 401(k) retirement account would be unduly restrictive.

"Washington should not be allowed to set arbitrary limits on how much company stock a worker can hold," Chao said.

The issue of concentration in company stock has received extensive attention since the collapse of Enron Corp., many of whose employees were heavily invested in the company's stock and lost their retirement savings.

A number of bills pending in Congress would cap the percentage of company stock allowable in 401(k) accounts. Three-quarters of the assets of some companies' plans are in employer stock. Supporters of a cap argue that allowing employees to invest so heavily in a single stock -- especially when their paychecks also come from that company -- is excessively risky and should be limited.

Chao, testifying before the House Committee on Education and the Workforce, said an administration task force on pension reform, of which she was a member, considered such a cap and rejected it. She said President Bush's reform proposals strike a balance between the needs of employees and employers and will restore safety and confidence to the nation's retirement savings system

"We need to remember: It's their money. They earned it, they sacrificed to save it, and they should have the right to decide how to invest it," she said.

During another Enron-related hearing yesterday, a Securities and Exchange Commission member defended the agency's 1997 decision to exempt Enron from supervision under the Public Utility Holding Company Act. Another witness told the same Senate panel that the act would have barred Enron from setting up the off-the-books partnerships that hid heavy losses and debts.

Also, expert witnesses urged the Senate Judiciary Committee to tighten laws governing 401(k) accounts, attorney and corporate director liability, bankruptcy law, energy deregulation and auditing standards.

Bush's pension reform proposals are expected to be introduced by the education and workforce committee's chairman, Rep. John A. Boehner (R-Ohio), and Rep. Sam Johnson (R-Tex.), chairman of the employer-employee relations subcommittee. They would require that workers be free after three years to sell stock contributed to their accounts by their employers. Enron barred employees from selling employer-contributed stock until they reached age 50. Many other companies have similar restrictions, and some even bar sales until an employee retires or otherwise leaves.

The Bush plan also would make employers responsible for losses by employees when their accounts are frozen for administrative reasons, such as a change of plan administrator. At Enron, employees were barred from any account transactions for several weeks last fall, when the company's share price was falling rapidly.

Democrats on the panel said the government needs to go further.

Rep. George Miller (D-Calif.), the ranking minority member of the workforce committee, argued that the deck is stacked against workers because the financial system is riddled with conflicts of interest.

"In the current system, they have no place to turn" for the kind of advice and information they need to make successful investment decisions, he said.

But some committee members noted that employees, rather than suffering great losses, sometimes do very well by betting large sums on company stock.

Boehner said he knows from his Ohio district that "generations of employees at Kroger [and] Procter & Gamble have done very well investing in company stock."

As of November, 94.7 percent of the 401(k) plan assets at Procter & Gamble Co. were in company stock, while the figure was 65.3 percent at Kroger Co., according to the Congressional Research Service.

A bill offered by Sens. Barbara Boxer (D-Calif.) and Jon S. Corzine (D-N.J.) would limit the amount of any one stock to 20 percent of a 401(k) plan and would cut the tax benefits for employers that contribute company stock to plans.

House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.) opened another hearing by saying the Enron debacle "is an old-fashioned example of theft by insiders." Tauzin said his committee found "substantial evidence of illegal activity by Enron and its management."

Similar themes were discussed at the Senate Judiciary Committee hearing. Susan P. Koniak, a professor at Boston University School of Law, said lawyers were as much to blame as accountants for what happened at Enron, by "aiding and abetting" potentially criminal activities. She urged the federal government to modify a 1995 law that shields lawyers from liability in some securities cases.

"To pull the wool over the eyes of the investing public, regulators and the media for any considerable period of time, a corporation needs more than malleable accountants -- it needs the help of lawyers," Koniak said.

Palo Alto, Calif., lawyer Steven M. Schatz, an expert on securities liability laws, said he was "simply appalled by the rampant fraud that reportedly took place at Enron" but urged legislators to move cautiously in changing the laws. He said that making it easier to file lawsuits would "unfairly punish the many honest companies and employees that make our economy flourish" by subjecting them to frivolous lawsuits.

Sen. Herb Kohl (D-Wis.) noted that former Enron chairman Kenneth L. Lay and his wife own a penthouse in Houston estimated to be worth $7 million, and that former executives Jeffrey K. Skilling and Andrew S. Fastow each owns a home worth $3 million or more. Under Texas law, which has what it calls a "homestead exemption," creditors cannot force the sale of homes to repay them.

Kohl said he said he will seek a $125,000 cap on the equity in the home that can be shielded. In Texas and a few other states, there is no cap.

"There's no justice in the system if it puts workers on the street but keeps [executives] in multimillion-dollar houses," Kohl said.

Testifying before the Senate Energy and Natural Resources Committee, Securities and Exchange Commission member Isaac C. Hunt Jr. said the decision to exempt the company from regulation did not cause "the tragic collapse of Enron."

Congress passed the Public Utility Holding Company Act in 1935 after a large energy company failed under circumstances that are similar to Enron's. The goal was to ensure that shareholders have the information they need to assess the financial health of their investments in utility companies.

But Scott Hempling, a lawyer who specializes in electricity regulation and who also testified before the energy committee, said that without an exemption, Enron could not have set up its ruinous partnerships.

"Proper application of [the act] would have identified and prevented Enron's ill-fated activities," Hempling told the committee, which is considering proposals to repeal or update portions of the act.

Tauzin's committee heard testimony from academics and other specialists that the nation's accounting and auditing system is deeply flawed.

Some called on Congress to charter an oversight body for auditors instead of allowing the SEC to create a new private-sector authority as SEC Chairman Harvey L. Pitt has proposed.

The accounting profession and its leaders "want the shield of apparent self-regulation . . . not anything close to the real thing," said former SEC member Bevis Longstreth, who worked on an accounting industry study of audit effectiveness. Longstreth urged Congress to prohibit accounting firms from providing other services to the companies they audit, because, he said, such relationships compromise auditors' independence.

James S. Chanos, an investment manager who spotted trouble at Enron long before the company collapsed, said accounting rules "can mislead far more than they inform" because they allow companies to base their numbers on highly subjective estimates and forecasts.

"In effect, 'earnings' could be created out of thin air if management was willing to push the envelope by using highly favorable assumptions," Chanos said.

For example, said Bala G. Dharan, a management professor at Rice University, Enron used a type of accounting that allowed it to estimate the amount of revenue a contract would bring in over years and then count the full value immediately -- even when the future revenue was unknowable.

Baruch Lev, a finance professor at New York University's Stern School of Business, urged Congress to require company insiders to make almost immediate public disclosures when they sell stock in their own company. Current rules allow more than three weeks to pass before the investing public learns that corporate executives have sold shares, he said.

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