forced sales of the premises. This, of course, would be highly undesirable from the standpoint of the trusts and the employee participants. The blanket delegation of exemption authority to the Secretary of Labor is no answer to these objections. Standards for exemption should be established by the law itself rather than by delegating exemption authority to the Secretary of Labor in such manner that individual, advance clearance might be required for lease and many other plan transactions with a party in interest. Section 14 (c) (4) of the Bill exempts, in general, from the prohibitions of Section 14 (b) (2) (A) and (B) a purchase of securities of an employer corporation if the purchase is for no more than an adequate consideration. It is strongly recommended that similar exemption be made applicable to fund transactions with parties in interest involving leases, sales and purchases of property other than securities. The interests of plan participants would be fully protected by an exemption of this nature, the general prudent man standard established by the Bill and the provisions of Section 503 of the Internal Revenue Code. Owens-Illinois further believes that in some areas the proposed Bill provides far more administrative reporting requirements and detail than is necessary from the standpoint of fully informing participants of their rights under a plan and protecting their interests. In particular, except where party in interest transactions are involved, Owens-Illinois objects to the provisions of 7(b) (2) and (3) of the Bill which require elaborate, detailed reports of fund assets and transactions and objects to Section 7(e) (7) which requires detailed information with respect to terminated participants. This unnecessary information increases the cost of plan administration without correlative advantage and rather than providing plan participants with meaningful information, would further complicate the report from the standpoint of understanding by the average employee. In this respect, although burdensome in some respects, the disclosure provisions of the Welfare and Pension Plan Protection Act of 1969, H.R. 1046, are in most respects more reasonable and from the standpoint of understanding of the information by the participants, more desirable, than those of H.R. 16462. INVESTMENT COUNSEL ASSOCIATION OF AMERICA, INC., Re H.R. 1046 ("Dent Bill") and H.R. 16462 ("Ayres Bill"). Committee on Education and Labor, Washington, D.C. DEAR SIRS: These general comments are submitted by this Association of some forty investment advisory firms registered under the Investment Company Act of 1940 and primarily engaged in "the giving of continuous advice as to the investment of funds on the basis of the individual needs of each client." Investment counsel, as conceived by members of this Association, should seek to avoid all identifiable conflicts of interest between themselves and their clients. The Association was formed in 1937 with this in mind for the purpose of promoting high standards of integrity and professional responsibility among its members. Members of our Association and other registered investment advisers will be directly affected by the adoption of either of the above bills. Investment counsel firms vary in size from single practitioners to large firms with many offices and hundreds of employees. Their practice varies from a strictly advisory role to one with discretionary authority over investments. Client's securities are not in the custody of members of this Association but are held by the client or his bank or broker. Bonding The Welfare and Pension Plans Disclosure Act ("WPPDA") and both bills would require the bonding of Administrators of welfare and pension plans. We read the Ayres Bill as excluding all investment counsel from the definition of Administrators and the Dent Bill as including them when they have discretionary powers over investments. We recommend that where the investment adviser has no power to acquire custody of client's investments it should not be considered an "Administrator" simply by reason of the power to direct investments. We also urge that the Secretary of Labor be granted power to exempt from current bonding requirements investment advisory firms with a blanket bond of a reasonable minimum size. This would eliminate the current discrimination between banks and registered investment advisers. Management Responsibility Increased specialization of functions has resulted in joint management responsibilities between investment counsel and bank trust departments. Under the trust agreement typically the former is expressly given investment responsibilities and the latter all other management responsibilities. We support Sec. 14 (e) and (g) of the Ayres Bill which makes clear that management responsibilities may be so divided. We urge that where separate management responsibilities are conferred by the governing instrument, there be no affirmative duties of supervision placed on a fiduciary with regard to such responsibilities given to somebody else. This "split power" relationship is to be distinguished from the case of joint fiduciaries charged with the same duties (See Sec. 14 (h) Dent Bill). Prudent Man Rule We have been concerned that a standard of "prudent-man-rule" investing might be imposed on managers of a trust which would override express powers in an instrument for investment, for example, in securities which are not currently producing income. We urge the subcommittee in approving any bill to avoid possible ambiguity in this area and permit the trust agreement to be dominant. CONCLUSIONS The Association is anxious to be of assistance in this area. We would appreciate the opportunity to comment further on these and any further bills in this area in writing or by way of testimony. DEAR MR. DENT: In view of our longstanding interest in qualifications of auditors, the American Institute of Certified Public Accountants wishes to comment on audit language contained in a bill which is being considered by your subcommittee. We believe that the proposal contained in the April 17, 1970 letter of Comptroller General Elmer B. Staats to you, to modify Section 7(h) of H.R. 1046, the Welfare and Pension Plan Protection Act of 1969, would be in the public interest. The proposal recognizes the desirability of ensuring that the audits required under the legislation be conducted by those with the highest qualifications. At the same time, the suggested language recognizes that a larger number of independent auditors may be needed to perform the required audits than is currently available among the ranks of certified public accountants. In reviewing the number of certified public accountants in the United States. it is fair to point out that only about 45,000 of the estimated total of 112,000 are engaged in the practice of public accounting. On the other hand, firms of certified public accountants employ substantial numbers of competent auditors who are not yet certified but who work under the close supervision of CPAS. In view of this fact and the continuing expansion in the numbers of CPAs, we believe it is entirely appropriate that the audits required under the legislation should be conducted only by independent certified public accountants after December 31, 1975. We believe, however, that the final clause of the suggested language, which reads "Provided, that if the Secretary deems it necessary in the public interest, he may prescribe by regulation higher standards than those required for the practice of public accountancy by the regulatory authorities of the States," should apply only to the non-licensed persons who would be permitted to conduct audits as an exception for a period ending December 31, 1975, and should not apply to certified public accountants. We continue to believe that licensure of professions is an appropriate function of the States. A separate federal qualifying process, even though calling for higher standards than those set by the States, might unnecessarily duplicate the machinery already provided by the States. Also, the separate process might weaken existing procedures of the States and confuse the public as to the significance of state certification and licensing. However, we strongly support the basic policy of the Comptroller General, which would require audits to be made only by independent accountants who are certified or licensed by a State, and after 1975 only by those who are certified. This is a sound policy which, in time, will provide assurance that those permitted to make audits have met the highest qualifications set by the States. While education and experience requirements of the States vary, all fifty States, the District of Columbia, Puerto Rico, the Virgin Islands and Guam use the American Institute's Uniform CPA Examination and Advisory Grading Service, thus providing a high degree of uniformity of qualifications throughout the country. We believe the public interest demands that audits be conducted by those who have demonstrated their competence by meeting the rigid requirements set for certified public accountants. Therefore, we endorse the standard audit language advocated by the Comptroller General, but with reservations as to the need to provide that the Secretary may prescribe higher standards than those set by the States. We shall be glad to discuss our views with you, if you wish. Sincerely yours, LEONARD M. SAVOIE, Executive Vice President. Hon. JOHN H. DENT, COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, General Subcommittee on Labor, House of Representatives DEAR MR. CHAIRMAN: This is in reference to your letter of December 8, 1969, requesting our comments on a proposal to change the language relating to the qualifications of auditors in Section 7(h) of H.R. 1046-the Welfare and Pension Plan Protection Act of 1969. This Office has been long concerned with standards involving the minimum qualifications of public accountants who conduct audits of organizations which are chartered by the Federal Government or which receive Federal grants, carry out federally insured programs, conduct activities regulated by the Federal Government, or receive other assistance from the Federal Government which would warrant such concern. The present language, which is reflected in Section 7(h) of H.R. 1046, was developed in 1960. This language reads as follows: "The accounts of the (enterprise) shall be audited annually in accordance with generally accepted auditing standards by independent certified public accountants or independent licensed public accountants, certified or licensed by a regulatory authority of a State or other political subdivision of the United States." "Generally accepted auditing standards" as used in the foregoing language are the standards which have been adopted by the accounting profession to apply to audits of the accounts, financial transactions, and financial statements of an organization. The effect of this language is to accept requirements established by the States when, through licensing or certification procedures, individuals or firms are qualified and made subject to regulations, discliplinary measures, or codes of ethics. While certification arrangements leading to the CPA certificate exist in all States, procedures for the continual licensing of public accountants have been established in only eleven States. These licensing requirements, varying considerably and not all of high quality, are shown in the attachment to this letter. In 1960, the number of those programs or organizations described above was relatively few and the public's concern was not as great as it is today. Since that time, the number and size of such programs have multiplied to the point where it is now estimated that public accountants are auditing 50,000 or more such organizations (not including those that would be subject to the provisions of H.R. 1046) and the amounts of money involved are in tens of billions of dollars. The public's interest has become increasingly great and has caused us to review the model audit language which our Office recommended in 1960 to set forth the minimum qualifications of public accountants whose audits, in many cases, are the sole means by which the public interest is protected. The number of certified public accountants has increased rapidly, doubling approximately every twelve years. The estimated growth since 1960-from about 70,000 then to about 112,000 in 1969-is reflected in the following table: This increase is certainly as large as, if not larger than, that of the population, of the national economy, and of governmental expenditures-Federal, State, and local-during this period. There is every indication that the number of certified public accountants will continue to grow at an accelerated rate over the foreseeable future. Information with respect to the total number of certified public accountants who are currently engaged in public accounting practice is not available. In addition, data is not available on the distribution of certified public accountants in public accounting practice by States. In spite of the lack of these data, the growth in the number of certified public accountants and the growing importance of auditing as it relates to the increasing number and size of programs makes it essential, we believe, that the 1960 language be reconsidered. The audit of welfare and pension plans, for which H.R. 1046 will provide new standards and regulations, is of major importance if the confidence of the public and the individuals who are directly affected by these plans is to be preserved. For this reason, we believe that, as soon as practicable, only independent public accountants who have demonstrated their competence through meeting the rigid requirements for becoming certified public accountants should be selected to audit these plans. At the same time, we believe that the noncertified public accountants now making such audits should not summarily be deprived of this kind of work, but should have a reasonable period of time in which to qualify themselves as certified public accountants. A reasonable period, in our opinion, is five years. During this period, the Secretary of Labor should have the authority to establish standards equivalent to the highest of those prescribed by the States which license public accountants. These standards could be applied in States where program requirements may indicate a need for larger numbers of public accountants to carry out plan audits than are currently available. He should also have authority to require, when deemed necessary to better protect the public interest, licensed or certified public accountants to meet higher standards than those required by the public accountancy regulatory authorities of the States. In lieu of the language contained in Section 7(h), we therefore suggest the following: On page 18, lines 12 through 16, delete the clause beginning with "Such" and ending with "States" and insert the following: "Such audit shall be conducted in accordance with generally accepted auditing standards by independent Certified Public Accountants who are certified by a regulatory authority of a State: Except that for a period ending December 31, 1975, such audits may also be conducted by (1) independent public accountants who are not certified but who are licensed to practice by a regulatory authority of a State, or (2) by independent public accountants who, although not so licensed or certified, meet, in the opinion of the Secretary, standards of education and experience representative of the highest prescribed by the licensing authorities of the several States which provide for the continuing licensing of public accountants and which are prescribed by the Secretary in appropriate regulations: Provided, that if the Secretary deems it necessary in the public interest, he may prescribe by regulation higher standards than those required for the practice of public accountancy by the regulatory authorities of the States." If you desire any further explanation or information concerning this proposal, we will be glad to hear from you. Sincerely yours, ELMER B. STAATS, Comptroller General of the United States. Appendix I EDUCATIONAL, PERSONAL AND EXPERIENCE REQUIREMENTS FOR REGISTRATION OF PUBLIC ACCOUNTANTS IN THOSE STATES WHICH HAVE CONTINUING REGISTRATION (States' Requirements for Registration as a Public Accountant) I. General Requirements ALASKA Any person is qualified to apply for a license who is: 1. A citizen of the United States or declared his intention of becoming a citizen, 2. A resident of this state or has a place of business in this state or is an employee, regularly employed in this state, 3. At least 19 years of age and 4. Of good moral character. II. Education and Experience Requirements Shall be: 1. Graduation from high school or the substantial equivalent and 2. Four years of accounting experience, which is, satisfactory to the board. III. Examination Requirements Applicant shall pass a written examination on subjects the board deems appropriate. I. General Requirements ARIZONA 1. The applicant must be twenty-one years of age, 2. Of good moral character, 3. Have had continuous residence for one year in this state and 4. Be a citizen of the United States or has filed a declaration of his intention of becoming a citizen thereof. 5. Also, the person must not have been convicted of a violation of this chapter. II. Education and Experience Requirements 1. Present satisfactory evidence that he has successfully completed in Arizona or another state or country, a course of studies and instruetion equivalent to the requirements for graduation from the highest grade offered by the high schools in this state. 2. Also the applicant must present an academic transcript showing the successful completion of 60 semester hours of credit of which 12 must be in accounting and 12 in related business subjects and other courses the board deems satisfactory. The 60 semester hours must meet the standards of the university or state colleges of this state. 3. The applicant must have had two years of public accounting experience acquired in the employ of a CPA or four years of public accounting experience in the employ of a Public Accountant or the equivalent experience acceptable to the board. |