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Wrestling with Reform: Financial Scandals and the Legislation They Inspired

Three Approaches, One Law: Foreign Corrupt Practices Act of 1977

Criminalization or Disclosure

- November 1977 SEC Advisory Committee on Corporate Disclosure (standing, left to right) Mary "Mickey" Beach, Philip A. Loomis, Jr., John R. Evans, Roberta Karmel and Harold Williams; (seated) Alan Levenson, (unknown), A.A. Sommer, Jr., (unknown) and John "Sandy" Burton

In early 1976, Congress reviewed three significant pieces of legislation. On March 11, Senator Proxmire warned that, if left unchecked, “it will be only a matter of time before these same corrupt practices inflict our domestic economic system.” His S. 3133 made it illegal to bribe foreign officials, required disclosure of foreign sales agents and their commissions, and mandated strict record-keeping.

On May 5, Senator Frank Church (D-Idaho) proposed S. 3379, requiring the SEC to collect information on payments and the State Department to review the practice. It also required corporations to maintain an independent audit committee, ensured shareholders the right of legal action in case of a payments scandal, and encouraged the President to forge international agreements regarding the bribes. ⁽²⁰⁾

These bills established two different approaches to solving the problem of corrupt payments: criminalization or disclosure. At the time, it was not illegal for U.S. citizens to bribe people abroad. Those who wanted to make it so supported Proxmire’s measure, arguing it would deter the practice. Others believed that this was unenforceable and that disclosure of the source and recipient of payments would be enough to deter companies from making them; Church spoke for these. In the Senate, criminalization prevailed and the Proxmire bill became the main vehicle for anti-bribery legislation.

The third major proposal came out of the SEC’s investigation. By 1976, the SEC was looking at thirty different companies and another fifteen had confessed to making questionable payments. ⁽²¹⁾ The SEC instituted a voluntary disclosure program, allowing companies to turn themselves in, self-investigate, accept tighter controls and usually escape prosecution. By May, the SEC had received information from approximately one hundred companies and concluded that there was no “inherent defect in our economic system.”

SEC Chairman Roderick Hills believed that the problem was best corrected “with the tools we now have” rather than new legislation, although he conceded that a law punishing false record-keeping might be in order. The SEC investigation, the results of which were submitted to the Senate Banking Committee on May 12 along with legislative recommendations, bore this out, finding an “almost universal” failure of the system of corporate accountability, with falsified records common knowledge to senior staff but “concealed from outside auditors and counsel and outside directors.”

The SEC’s legislative recommendations sought to bolster corporate governance. Rather than criminalize bribery abroad, the SEC proposed to prohibit falsifying corporate records, prevent corporate officials from misleading auditors and require internal accounting controls. Senator Proxmire worked with the SEC to propose S. 3418, combining the SEC’s proposals with his criminalization bill, which he believed would easily pass that session.

As the SEC and Congress refined their bills, the White House weighed in. President Ford placed Commerce Secretary Elliot Richardson at the head of the Task Force on Questionable Corporate Payments Abroad and directed him to “conduct a sweeping policy review…and to recommend such additional policy steps as may be warranted.”

The Task Force came down in favor of disclosure. Richardson believed that criminalization and disclosure would work at cross purposes, and because enforcing criminalization would be “very difficult if not impossible,” he considered systematic disclosure the best response. By August, the Task Force had prepared draft disclosure and corporate accountability legislation. It made the Executive branch responsible for disclosure and punished non-disclosed violations with a $100,000 fine, while imposing criminal penalties on willful violators. Congress could now choose between three distinct plans for confronting the payments scandal: those of the SEC, the Senate, and the Administration.

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Footnotes:

(20) Congressional Record, Vol. 122 p. 10, 94th Congress, 2nd Session, 12604-12607.

(21) New York Times, “30 Corporations Under SEC Study,” January 15, 1976.

Related Museum Resources

Papers

July 4, 1974: "Professional Responsibility and the Securities Laws," Address by SEC Chairman Ray Garrett, Jr. to the State Bar of Texas
transcript pdf (Courtesy of Harvey L. Pitt)
November 12, 1974: "Current Problems of Disclosure" - Address by SEC Commissioner A.A. Sommer, Jr. to National Association of Securities Dealers, Inc.
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
December 12, 1974: "Improving Disclosure for Investors" - Address by SEC Chairman Ray Garrett, Jr. to the Financial Executives Institute, Rocky Mountain Chapter
transcript pdf (Courtesy of Harvey L. Pitt)
January 16, 1975: "Disclosure Rules and New Concerns" - Address by SEC Chairman Ray Garrett, Jr. to the American Society of Corporate Secretaries, Inc., Southeastern Regional Group
transcript pdf (Courtesy of Harvey L. Pitt)
February 20, 1975: "The Disclosure Philosophy" - Address by SEC Chairman Ray Garrett, Jr. to the Union League Club
transcript pdf (Courtesy of Harvey L. Pitt)
April 14, 1975: "Disclosure and Corporate Management" - Address by SEC Chairman Ray Garrett, Jr. to the Wharton Graduate Business School Club and the Harvard Business School Club, New York
image pdf (Government Records)
April 26, 1975: John C. Burton - "Payments Outside the Corporate Accountability System: A Problem for Management, Auditors and Society"
document pdf (Government Records)
May 15, 1975: "Truth or Consequences," Address by SEC Commissioner John R. Evans to the Securities Cooperative Enforcement Conference
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 3, 1975: Memo from William Baroody to Philip Buchen on conversation with SEC Chairman Garrett
image pdf (Courtesy of the Gerald R. Ford Library)
June 17, 1975: Testimony of Commisssioner Philip A. Loomis, Jr., SEC, before the Subcommittee on International Economic Policy of the House Committee on International Relations
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 24, 1975: "The Limits of Disclosure" - Remarks by SEC Commissioner A.A. Sommer, Jr. to the Wharton-AICPA Advanced Management Program for CPA Firm Partners
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
July 21, 1975: "Crisis and the Corporate Community" - Address by SEC Commissioner A.A. Sommer, Jr. to the Midwest Securities Commissioners Association Conference
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 12, 1975: "Disclosure Through a Glass Darkly," Address by SEC Commissioner John R. Evans to American Bar Association Annual Meeting
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
January 30, 1976: Charter of the SEC Advisory Committee on Corporate Disclosure
transcript pdf (Courtesy of the National Archives and Records Administration)
February 2, 1976: SEC Release: Appointment of Advisory Committee on Corporate Disclosure
transcript pdf (Courtesy of the National Archives and Records Administration)
February 2, 1976: Welcome letter from A.A. Sommer, Jr. to members of Advisory Committee on Corporate Disclosure
transcript pdf (Courtesy of the National Archives and Records Administration)
February 10, 1976: Letter from SEC Chairman Roderick M. Hills to President Ford in support of government initiative against unlawful foreign payments
image pdf (Courtesy of the Gerald R. Ford Library)
February 24, 1976: Meeting agenda of Advisory Committee on Corporate Disclosure, with proposed questions to be addressed by study
transcript pdf (Courtesy of the National Archives and Records Administration)
February 24, 1976: Memo for the President from Edward Schmults on questionable foreign payments by U.S. companies
transcript pdf (Courtesy of the Gerald R. Ford Library)
March 4, 1976: Letter from Eugene Hardy, National Association of Manufacturers to U.S. Representative Mark Hannaford in support of legislation to eliminate unethical payments in international trade
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
March 12, 1976: Release from Senator William Proxmire on legislation outlawing bribes to foreign government officials
image pdf (Elliot Richardson Papers, courtesy of the Library of Congress)
March 15, 1976: Address by SEC Chairman Roderick M. Hills to the Association of the Bar, New York, New York
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
March 16, 1976: Memo for Brent Scowcroft from Robert Hormats on meeting with President Ford on questionable foreign payments by U.S. companies
transcript pdf (Courtesy of the Gerald R. Ford Library)
March 17, 1976: Letter from Richard Thornburgh, Department of Justice to SEC Chairman Roderick Hills requesting identification of companies under investigation for questionable corporate payments abroad
image pdf (Courtesy of the National Archives and Records Administration)
March 18, 1976: Letter from SEC Chairman Roderick M. Hills to Senator William Proxmire on questionable foreign payments by U.S. companies
transcript pdf (Courtesy of the Gerald R. Ford Library)
March 23, 1976: U.S. Government Agency actions regarding illicit foreign payments
transcript pdf (Courtesy of the Gerald R. Ford Library)
March 26, 1976: Reply letter from SEC Commissioner Philip A. Loomis, Jr. to Richard Thornburgh, Department of Justice on SEC investigations of improper payments
transcript pdf (Courtesy of the National Archives and Records Administration)
March 31, 1976: Memo from Horace Webb on Secretary of Commerce Richardson's appointment to head task force on questionable corporate payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
March 1976: Memo from John Garson to General Counsel, Department of Commerce on adequacy of existing law in regards to questionable corporate payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
March 31, 1976: Memo from President Ford on formation of Task Force on Questionable Corporate Payments Abroad
transcript pdf (Courtesy of the Gerald R. Ford Library)
April 2, 1976: "A Parting Look at Foreign Payments," Address by SEC Commissioner A. A. Sommer, Jr. to the Ohio Legal Center Institute - Securities Law Seminar
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
April 8, 1976: What is the Department of State's position on the new reporting requirements of the Security Assistance Act? - Testimony before Senator William Proxmire
image pdf (Elliot Richardson Papers, courtesy of the Library of Congress)
April 20, 1976: President's Task Force on Foreign Payments - Outline for Roderick Hills
transcript pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
May 12, 1976: Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices to the Senate Banking, Housing and Urban Affairs Committee
image pdf (Reproduced with permission from Securities Regulation and Law Report, Number 353 May 19, 1976, Special Supplement, p. 1-45. Copyright 1975 by The Bureau of National Affairs, Inc. 800-372-1033; http://www.bna.com)
May 21, 1976: Letter from SEC Chairman Roderick M. Hills to U.S. Representative John E. Moss on the House study on voluntary corporate disclosure of foreign payments and practices
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 1, 1976: Memo from Charles Robinson to L. William Seidman with recommendation to the President regarding questionable corporate payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
June 3, 1976: Memo from Secretary of Commerce Elliott Richardson to the President with recommended initiative on questionable payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
June 4, 1976: Memo from Ed Schmults to Bill Seidman on decision memorandum to the President on questionable corporate payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
June 8, 1976: Memo from Elliott Richardson to L. William Seidman and Brent Scowcroft on questionable corporate payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
June 11, 1976: Letter from Secretary of Commerce Elliot Richardson to Senator William Proxmire on proposed legislation concerning questionable corporate payments abroad
image pdf (Elliot Richardson Papers, courtesy of the Library of Congress)
June 14, 1976: White House Release: Statement by the President on questionable corporate payments abroad
transcript pdf (Elliott Richardson Papers, courtesy Library of Congress)
June 16, 1976: Letter from SEC Chairman Roderick M. Hills to Elliott L. Richardson, Secretary of Commerce, questioning White House criticism of SEC on questionable corporate payments
transcript pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
June 17, 1976: Letter from Secretary of Commerce Elliot Richardson to SEC Chairman Roderick Hills on SEC enforcement in regards to questionable foreign payments
image pdf (Elliot Richardson Papers, courtesy of the Library of Congress)
June 21, 1976: Address by SEC Chairman Roderick M. Hills to the American Enterprise Institute
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 29, 1976: Letter from SEC Chairman Roderick M. Hills to U.S. Representative John E. Moss requesting House-SEC cooperation in assessing voluntary corporate disclosure of foreign payments and practices
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
June 30, 1976: Address by SEC Chairman Roderick M. Hills to the New York Law Journal
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 27, 1976: Letter from Alan Walls, Department of Treasury to Stanley Sporkin, SEC Director of Enforcement on disclosure of currency law violations
image pdf (Courtesy of the National Archives and Records Administration)
September 14, 1976: Letter from Stanley Sporkin, SEC to Alan Walls, Department of the Treasury designating Stuart Allen as liaison on currency cases
transcript pdf (Courtesy of the National Archives and Records Administration)
September 16, 1976: Memo from SEC Office of Public Affairs to the Commission on Proxmire Foreign Payments Bill
image pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
September 21, 1976: Statement of the Honorable Roderick M. Hills, SEC Chairman, before the Subcommittee on Consumer Protection and Finance of the House of Representatives Committee on Interstate and Foreign Commerce
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 22, 1976: Testimony of the American Institute of Certified Public Accountants on H.R. 15481 before the Subcommittee on Consumer Protection and Finance of the Committee on Interstate and Foreign Commerce, U.S. House of Representatives
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 5, 1976: "Of Boycotts and Bribery, and Corporate Responsibility," Address by SEC Commissioner John R. Evans to Seminar on Regulation of U.S. International Companies, International Management and Development Institute
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
January 5, 1977: Minutes of public meeting of the working group on illicit payments
transcript pdf (Courtesy of the National Archives and Records Administration)
January 7, 1977: Memo to the SEC Commission from the Division of Enforcement concerning the voluntary disclosure program
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
January 19, 1977: Memo from Secretary of Commerce Elliot Richardson for the President on questionable corporate payments abroad
image pdf (Elliot Richardson Papers, courtesy of the Library of Congress)
February 1, 1977: Reply letter from Stanley Sporkin, SEC to Richard Thornburgh, Department of Justice on investigations of misuse of corporate funds
transcript pdf (Courtesy of the National Archives and Records Administration)
February 28, 1977: Memo to the SEC Commission from the Division of Corporation Finance with recommendations from Advisory Committee on Corporate Disclosure
image pdf (Courtesy of the National Archives and Records Administration)
March 1977: "The Administration's Views and Status of U.S. Congressional Legislation" - Statement of Robert Mundheim, Department of Treasury, at Irregular Payments and Efforts Being Made to Control Them seminar
image pdf (Courtesy of the National Archives and Records Administration)
November 3, 1977: Report of the Advisory Committee on Corporate Disclosure to the SEC
image pdf (Courtesy of the Library of Congress)
November 9, 1977: Letter from Donald Alexander to SEC Chairman Harold Williams on disclosure of illegal payments and corporate perquisites
image pdf (Courtesy of the National Archives and Records Administration)
December 15, 1977: Reply letter from SEC Chairman Harold Williams to Donald Alexander on recommendations of the Advisory Committee on Corporate Disclosure
transcript pdf (Courtesy of the National Archives and Records Administration)
June 2, 2004: Reflections of a Chairman by Roderick M. Hills
document pdf (prepared for the museum by Roderick M. Hills)

Oral Histories

09 May 2012 Richard Beckler With Dr. James Stocker

edited transcript (pdf)

12 July 2006 Paul Gonson - Part I With Dr. Kenneth Durr

edited transcript (pdf)

Paul Gonson began working at the SEC in 1961 and held a number of positions during his 37-year career at the agency. He started out in the Division of Corporate Regulation, then transferred in 1967 to the Office of General Counsel where he became primarily an appellate attorney. When David Ferber retired from his post as the Solicitor in 1979, Gonson was appointed to take his place. During the next 20 years, he worked on a number of enforcement cases, primarily insider trading, many of which he argued before the Supreme Court. In 1998, he retired from the SEC and joined the firm of Kirpatrick & Lockhart.

20 December 2002 Roderick Hills With Ralph Ferrara