Notice Pleading Restoration Act of 2009

Mr. President, Senator McCain and I are introducing today a bill to eliminate Federal corporate tax breaks that give special tax treatment to corporations that pay their executives with stock options. It is called the Ending excessive Corporate Deductions for Stock Options Act, and it has been endorsed by OMB Watch, the Consumer Federation of America, the Tax Justice Network-USA, and the AFL-CIO.

We are in a financial crisis. We are spending hundreds of billions of taxpayer dollars to try to stop the housing bust and prop up Wall Street. Too many of the middle class are watching the American dream slip away, while executives are getting mutli-million dollar compensation packages.

At the same time, mismatched stock option accounting and tax rules are shortchanging the Treasury to the tune of billions of dollars each year, while fueling the growing chasm between executive pay and average worker pay. The mismatch is this: companies are allowed to report one set of stock option compensation expenses to investors and the public through their public financial statements, and a completely different set of expenses to the Internal Revenue Service, IRS, on their tax returns. Put simply, our precious tax dollars are being wasted by an outdated and unfair corporate tax loophole that encourages corporations to hand out massive stock option grants to their executives. It is time to put an end to the excessive tax deductions being reaped by corporations at taxpayers' expense.

J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. In the United States, in 1990, average pay for the chief executive officer of a large U.S. corporation was 100 times average worker pay. Recently, CEO pay was nearly 400 times that of the average worker.

The single biggest factor responsible for this massive pay gap is stock options. Stock options are a huge contributor to executive pay. A key factor encouraging companies to pay their executives with stock options is the misguided Federal tax system that favors stock options over other types of compensation. Stock options give employees the right to buy company stock at a set price for a specified period of time, often 5 or 10 years. Virtually every CEO in America is paid with stock options, which are a major contributor to sky-high executive pay. According to Forbes magazine, in 2008, the CEOs at the 500 largest U.S. companies took home a combined $5.7 billion, averaging $11.4 million each.

For example, according to an Equilar Inc. analysis of 2008 filings with the Securities and Exchange Commission, SEC, Oracle Corporation's CEO was granted options estimated in value at more than $71 million just last year. That grant was on top of the pay he received from vested and exercised stock options given to him by his company in the past. In 2008 alone, those stock options amounted to a personal gain of more than $543 million. That is $543 million in stock option gains in a single year. Stunningly, his company gets to deduct this outlandish ``compensation'' from its taxes--even though the company never paid him that amount, and even though the existing tax code generally limits corporate deductions for executive pay to $1 million per executive.

Oracle's CEO was not alone. Equilar has identified dozens of U.S. executives who obtained tens of millions or even hundreds of millions of dollars from stock options in 2008. For example, the CEO of Qualcomm Inc., had $209 million in stock options gains in 2008, while the CEO of Occidental Petroleum had gains of $184 million.

Between the repricing of some stock options and grants being made while stock prices are low, the recent stock market recovery will likely mean that many executives will continue to reap astronomical stock option-related compensation, and their companies will continue to reap unwarranted tax deductions from stock options gains.

Why do corporate executives have so many stock options to cash in? A key reason is that U.S. accounting rules allow companies to report their stock option expenses one way on the corporate books, while Federal tax rules require them to report the same stock options a completely different way on their tax returns. In most cases, the resulting book expense is far smaller than the resulting tax deduction. That means, under current U.S. accounting and tax rules, stock option tax deductions taken by corporations often far exceed the recorded stock option expenses shown on the companies' books. The result is a tax windfall.

Stock options are the only type of compensation where the Federal tax code permits companies to claim a bigger deduction on their tax returns than the corresponding expense on their books. For all other types of compensation--cash, stock, bonuses, and more--the tax return deduction equals the book expense. In fact, companies cannot deduct more than the compensation expense shown on their books, because that would be tax fraud. The sole exception to this rule is stock options. In the case of stock options, the tax code allows companies to claim a tax deduction that can be two, three, ten or one hundred times larger than the expense shown on their books.

When a company's compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it creates a temptation for the company to pay its executives with stock options instead of cash or stock. It is a classic case of U.S. tax policy creating an unintended incentive for corporations to act in a particular way.

This bill is particularly timely given the new administration's stated goals to close unfair corporate tax loopholes, strengthen tax fairness, and reign in excessive executive compensation. Given the current financial crisis, staggering health care costs, and ongoing defense needs, now more than ever, we cannot afford this multi-billion dollar loss to the Treasury.

To understand why this bill is needed it helps to understand how stock option accounting and tax rules got so out of kilter with each other in the first place.

Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board (FASB) in an all-out, knock-down battle over how companies should record stock option compensation expenses on their books.

U.S. publicly traded corporations are required by law to follow Generally Accepted Accounting Principles, GAAP, issued by FASB, which is overseen by the SEC. For many years, GAAP allowed U.S. companies to issue stock options to employees and, unlike any other type of compensation, report a zero compensation expense on their books, so long as, on the grant date, the stock option's exercise price equaled the market price at which the stock could be sold.

Assigning a zero value to stock options that routinely produce huge amounts of executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they are granted to an employee, using mathematical valuation tools. FASB proposed further that companies include that amount as a compensation expense on their financial statements. A battle over stock option expensing followed, involving the accounting profession, corporate executives, FASB, the SEC, and Congress.

In the end, after years of fighting and negotiation, FASB issued a new accounting standard, Financial Accounting Standard, FAS, 123R, which was endorsed by the SEC and became mandatory for all publicly traded corporations in 2005. In essence, FAS 123R requires all companies to record a compensation expense equal to the fair value on grant date of all stock options provided to an employee in exchange for the employee's services.

The details of this accounting rule are complex, because they reflect an effort to accommodate varying viewpoints on the true cost of stock options. Companies are allowed to use a variety of mathematical models, for

example, to calculate a stock option's fair value. Option grants that vest over time are expensed over the specified period so that, for example, a stock option which vests over four years results in 25 percent of the cost being expensed each year. If a stock option grant never vests, the rule allows any previously booked expense to be recovered. On the other hand, stock options that do vest are required to be fully expensed, even if never exercised, because the compensation was actually awarded. These and other provisions of this hard-fought accounting rule reflect painstaking judgments on how to show a stock option's value.

Opponents of the new accounting rule had predicted that, if implemented, it would severely damage U.S. capital markets. They warned that stock option expensing would eliminate corporate profits, discourage investment, depress stock prices, and stifle innovation. 2006 was the first year in which all U.S. publicly traded companies were required to expense stock options. Instead of tumbling, both the New York Stock Exchange and Nasdaq turned in strong performances, as did initial public offerings by new companies. The dire predictions were wrong. Stock option expensing has been fully implemented without any detrimental impact to the markets.

During the years the battle raged over stock option accounting, relatively little attention was paid to the taxation of stock options. Section 83 of the tax code, first enacted in 1969 and still in place after four decades, is the key statutory provision. It essentially provides that, when an employee exercises compensatory stock options, the employee must report as income the difference between what the employee paid to exercise the options and the market value of the stock received. The corporation can then take a mirror deduction for whatever amount of income the employee realized.

For example, suppose a company gave an executive options to buy 1 million shares of the company stock at $10 per share. Suppose, 5 years later, the executive exercised the options when the stock was selling at $30 per share. The executive's income would be $20 per share for a total of $20 million. The executive would declare $20 million as ordinary income, and in the same year, the company would take a corresponding tax deduction for $20 million.

The two main problems with this approach are that: the deduction amount is significantly greater than the value of what the company gave away, often years earlier, and the $20 million in income obtained by the executive did not come out of the company's coffers. In most cases, the $20 million was paid by unrelated parties on the stock market. Yet the tax code allowed the corporation to declare the $20 million as a business expense and take it as a tax deduction. The reasoning was that the exercise date value was the only way to get a clear figure for stock option tax deduction purposes. That reasoning lost its persuasive character, however, once consensus was reached on how to calculate stock option expenses when granted.

Stock option accounting and tax rules have evolved separately over the years and are now at odds with each other. Accounting rules require companies to expense stock options on their books on the grant date. Tax rules provide that companies deduct stock option expenses on the exercise date. Companies have to report the grant date expense to investors on their financial statements, and the exercise date expense on their tax returns. The financial statements report on all stock options granted during the year, while the tax returns report on all stock options exercised during the year. In short, company financial statements and tax returns identify expenses for different groups of stock options, using different valuation methods, and resulting in widely divergent stock option expenses for the same year.

To examine the nature and consequences of the stock option book-tax differences, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing 2 years ago, in June 2007. Here is what we found.

To test just how far the book and tax figures for stock options diverge, the Subcommittee contacted a number of companies to compare the stock option expenses they reported for accounting and tax purposes. The Subcommittee asked each company to identify stock options that had been exercised by one or more of its executives from 2002 to 2006. The Subcommittee then asked each company to identify the compensation expense they reported on their financial statements versus the compensation expense on their tax returns. In addition, we asked the companies' help in estimating what effect the new accounting rule would have had on their book expense if it had been in place when their stock options were granted. At the hearing, we disclosed the resulting stock option data for 9 companies, including three companies that were asked to testify. The Subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with.

The data provided by the companies showed that, under then existing rules, the nine companies showed a zero expense on their books for that stock options that had been awarded to their executives, but claimed millions of dollars in tax deductions for the same compensation. The one exception was Occidential Petroleum which, in 2005, began voluntarily expensing its stock options, but even this company reported significantly greater tax deductions than the stock option expenses shown on its books. When the Subcommittee asked the companies what their book expense would have been if the new FASB rule had been in effect, all nine calculated book expenses that remained dramatically lower than their tax deductions. Altogether the 9 companies calculated that they would have claimed $1 billion more in stock option tax deductions than they would have shown as book expenses, even using the tougher new accounting rule. Let me repeat that--just nine companies produced a stock option book-tax difference of more than $1 billion.

KB Home, for example, is a company that builds residential homes. Its stock price had more than quadrupled over the past 10 years. Over the same time period, it had repeatedly granted stock options to its then CEO. Company records show that, over five years, KB Home gave him 5.5 million stock options of which, by 2006, he had exercised more than 3 million.

With respect to those 3 million stock options, KB Home recorded a zero expense on its books. Had the new accounting rule been in effect, KB Home calculated that it would have reported on its books a compensation expense of about $11.5 million. KB Home also disclosed that the same 3 million stock options enabled it to claim compensation expenses on its tax returns totaling about $143.7 million. In other words, KB Home claimed a $143 million tax deduction for expenses that on its books, under current accounting rules, would have totaled $11.5 million. That's a tax deduction 12 times bigger than the book expense.

Occidental Petroleum disclosed a similar book-tax discrepancy. This company's stock price had also skyrocketed, dramatically increasing the value of the 16 million stock options granted to its CEO since 1993. Of the 12 million stock options the CEO actually exercised over a five- year period, Occidental Petroleum claimed a $353 million tax deduction for a book expense that, under current accounting rules, would have totaled just $29 million. That's a book-tax difference of more than 1200 percent.

Similar book-tax discrepancies applied to the other companies we examined. Cisco System's CEO exercised nearly 19 million stock options over 5 years, and provided the company with a $169 million tax deduction for a book expense which, under current accounting rules, would have totaled about $21 million. UnitedHealth's former CEO exercised over 9 million stock options in 5 years, providing the company with a $318 million tax deduction for a book expense which would have totaled about $46 million. Safeway's CEO exercised over 2 million stock options, providing the company with a $39 million tax deduction for a book expense which would have totaled about $6.5 million.

Altogether, these nine companies took stock option tax deductions totaling $1.2 billion, a figure 5 times larger than the $217 million that their combined stock option book expenses would have been. The resulting $1 billion in excess tax deductions represents

a tax windfall for these companies simply because they issued lots of stock options to their CEOs.

Tax rules that produce huge tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue massive stock option grants, because they know the stock options will produce a relatively small hit to the profits shown on their books, while also knowing that they are likely to get a much larger tax deduction that can dramatically lower their taxes.

The data we gathered for nine companies alone disclosed stock option tax deductions that were five times larger than their book expenses, generating over $1 billion in excess tax deductions. To gauge whether the same tax gap applied to stock options across the country as a whole, the Subcommittee asked the IRS to perform an analysis of some newly obtained stock option data.

For the first time in 2004, large corporations were required to file a new tax Schedule M-3 with their tax returns. The M-3 Schedule asks companies to identify differences in how they report corporate income to investors versus what they report to Uncle Sam, so that the IRS can track and analyze significant book-tax differences.

This data shows that, for corporate tax returns filed form July 1, 2005 to June 30, 2006, the first full year in which it was available, companies' stock option tax deductions totaled about $61 billion more than their stock options expenses on their books. Similar data for July 1, 2006 to June 30, 2007, showed that the excess stock option tax deductions totaled about $48 billion. In addition, the IRS data shows that nearly 60 percent of the excess tax deductions in 2007 were attributable to only 100 corporations; 75 percent were attributable to only 250 corporations. The IRS also determined that stock options were one of the most important factors why corporations reported different income on their books compared to their tax returns.

Claiming these massive stock option tax deductions enabled U.S. corporations, as a whole, to legally reduce payment of their taxes by billions of dollars, perhaps as much as $10 billion, $15 billion, even $20 billion per year.

There were other surprises in the data as well. One set of issues disclosed by the data involves what happens to unexercised stock options. Under the current mismatched set of accounting and tax rules, stock options which are granted, vested, but never exercised by the option holder turn out to produce a corporate book expense but no tax deduction.

Cisco Systems told the Subcommittee, for example, that in addition to the 19 million exercised stock options previously mentioned, their CEO held about 8 million options that, due to a stock price drop, would likely expire without being exercised. Cisco calculated that, had FAS 123R been in effect a the time those options were granted, the company would have had to show a $139 million book expense, but would never be able to claim a tax deduction for this expense since the options would never be exercised. Apple made a similar point. It told the Subcommittee that, in 2003, it allowed its CEO to trade 17.5 million in underwater stock options for 5 million shares of restricted stock. That trade meant the stock options would never be exercised and, under current rules, would produce a book expense without ever producing a tax deduction.

In both of these cases, under FAS 123R, it is possible that the stock options given to a corporate executive would have produced a reported book expense greater than the company's tax deduction. While the M-3 data indicates that, overall, accounting expenses lag far behind claimed tax deductions, the possible financial impact on an individual company of a large number of unexercised stock options is additional evidence that existing stock option accounting and tax rules are out of kilter and should be brought into alignment. Under our bill, if a company incurred a stock option expense, it would always be able to claim a tax deduction for that expense.

Another set of issues brought to light by theIRS data focuses on the fact that the current stock option tax deduction is typically claimed years later than the initial book expense. Normally, a corporation dispenses compensation to an employee and takes a tax deduction in the same year for the expense. The company controls the timing and amount of the compensation expense and the corresponding tax deduction. With respect to stock options, however, corporations may have to wait years to see if, when, and how much of a deduction can be taken. That is because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options.

Our bill would require that, when the company gives away something of value, it reflects that expense on its books and claims that same expense on its tax return. The company, and the government, should not have to wait to see whether the stock options given to executives later increased in value and were exercised. As with any other form of compensation, the company should determine the value of what it is giving away, and take the appropriate tax deduction at that time.

UnitedHealth, for example, told the Subcommittee that it gave its former CEO 8 million stock options in 1999, of which, by 2006, only about 730,000 had been exercised. It did not know if or when its former CEO would exercise the remaining 7 million options, and so could not calculate when or how much of a tax deduction it would be able to claim for this compensation expense.

If the rules for stock option tax deductions were changed as suggested in our bill, companies would typically be able to take the deduction years earlier than they do now, without waiting to see if and when particular options are exercised. Companies would also be allowed to deduct stock options that are vested but never exercised. In addition, by requiring stock option expenses to be deducted in the same year they appear on the company books, stock options would become consistent with how other forms of compensation are treated in the tax code.

Right now, U.S. stock option accounting and tax rules are mismatched, misaligned, and out of kilter. They allow companies collectively to deduct billions of dollars in stock option expenses in excess of the expenses that actually appear on the company books. They disallow tax deductions for stock options that are given as compensation but never exercised. They often force companies to wait years to claim a tax deduction for a compensation expense that could and should be claimed in the same year it appears on the company books.

The Levin-McCain bill we are introducing today would cure these problems. It would bring stock option accounting and tax rules into alignment, so that the two sets of rules would apply in a consistent manner. It would accomplish that goal simply by requiring the corporate stock option tax deduction to be no greater than the stock option expenses shown on the corporate books each year.

Specifically, the bill would end use of the current stock option deduction under Section 83 of the tax code, which allows corporations to deduct stock option expenses when exercised in an amount equal to the income declared by the individual exercising the option, replacing it with a new Section 162(q), which would require companies to deduct the stock option expenses shown on their books each year.

The bill would apply only to corporate stock option deductions; it would make no changes to the rules that apply to individuals who have been given stock options as part of their compensation. Individuals would still report their compensation on the day they exercised their stock options. They would still report as income the difference between what they paid to exercise the options and the fair market value of the stock they received upon exercise. The gain would continue to be treated as ordinary income rather than a capital gain, since the option holder did not invest any capital in the stock prior to exercising the stock option and the only reason the person obtained the stock was because of the services they performed for the corporation.

The amount of income declared by the individual after exercising a stock option will likely often be greater than the stock option expense booked and deducted by the corporation who employed that individual. That's in part because the individual's gain often comes years later than the original

stock option grant, and the underlying stock will usually have gained in value. In addition, the individual's gain is typically provided, not by the corporation that supplied the stock options years earlier, but by third parties active in the stock market.

Consider the same example discussed earlier of an executive who exercises options to buy 1 million shares of stock at $10 per share, obtains the shares from the corporation, and then immediately sells them on the open market for $30 per share, making a toal profit of $20 million. The individual's corporation didn't supply the $20 million. Just the opposite. Rather than paying cash to its executive, the corporation received a $10 million payment from the executive in exchange for the 1 million shares. The $20 million profit from selling the shares was paid, not by the corporation, but by third parties in the marketplace who purchased the stock. That is why it makes no sense for the company to declare as an expense the amount of profit that an employee--or former employee--obtained from unrelated parties in the marketplace.

The bill we are introducing today would put an end to the current approach of using the stock option income declared by an individual as the tax deduction claimed by the corporation that supplied the stock options. It would break that old artificial symmetry and replace it with a new symmetry--one in which the corporation's stock option tax deduction would match its book expense.

I describe the current approach to corporate stock option deductions as artificial, because it uses a construct in the tax code that, when first implemented 40 years ago, enabled corporations to calculate their stock option expense on the exercise date, when there was no consensus on how to calculate stock option expenses on the grant date. The artificiality of the approach is demonstrated by the fact that it allows companies to claim a deductible expense for money that comes not from company coffers, but from third parties in the stock market. Now that U.S. accounting rules require the calculation of stock option expenses on the grant date, however, there is no longer any need to rely on an artificial construct that calculated corporate stock option expenses on the exercise date using third party funds.

It is also important to note that the bill would not affect in any way current tax provisions that provide favored tax treatment to so- called Incentive Stock Options under Sections 421 and 422 of the tax code. Under those sections, in certain circumstances, corporations can surrender their stock option deductions in favor of allowing their employees with stock option gains to be taxed at a capital gains rate instead of ordinary income tax rates. Many start-up companies use these types of stock options, because they don't yet have taxable profits and don't need a stock option tax deduction. So they forfeit their stock option corporate deduction in favor of giving their employees more favorable treatment of their stock option income. Incentive Stock Options would not be affected by our legislation and would remain available to any corporation providing stock options to its employees.

The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. In 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so taxpayers would not be forced to subsidize excessive executive pay. However, the cap was not applied to stock options, allowing companies to deduct any amount of stock option compensation, without limit.

By not applying the $1 million cap to stock option compensation, the tax code created a significant incentive for corporations to pay their executives with stock options. Indeed, it is very common for executives to have salaries of $1 million, while simultaneously receiving millions of dollars more in stock options. It is effectively meaningless to cap deductions for executive salary compensation but not also for stock options.

Further, while corporate directors may be comfortable diluting their shareholders' interests and doling out massive amounts of stock options, that does not mean that the taxpayers should subsidize it. This bill would eliminate this favored treatment of executive stock options by making deductions for this type of compensation subject to the same $1 million cap that applies to other forms of compensation covered by Section 162(m).

The bill also contains several technical provisions. First, it would make a conforming change to the research tax credit so that stock option expenses claimed under that credit would match the stock option deductions taken under the new tax code section 162(q). Second, the bill would authorize the Secretary of the Treasury to adopt regulations governing how to calculate the deduction for stock options issued by a parent corporation to the employees of a subsidiary.

Finally, the bill contains a transition rule for applying the new Section 162(q) stock option tax deduction to existing and future stock option grants. This transition rule would make it clear that the new tax deduction would not apply to any stock option exercised prior to the date of enactment of the bill.

The bill would also allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of Financial Accounting Standard, FAS, 123R, and exercised after the date of enactment of the bill. The effective date of FAS 123R is June 15, 2005 for most corporations, and December 31, 2005 for most small businesses. Prior to the effective date of FAS 123R, most corporations would have shown a zero expense on their books for the stock options issued to their executives and, thus, would be unable to claim a tax deduction under the new Section 162(q). For that reason, the bill would allow these corporations to continue to use Section 83 to claim stock option deductions on their tax returns.

For stock options that vested after the effective date of FAS 123R and were exercised after the date of enactment, the bill takes another tack. Under FAS 123R, these corporations would have had to show the appropriate stock option expense on their books, but would have been unable to take a tax deduction until the executive actually exercised the option. For these options, the bill would allow corporations to take an immediate tax deduction--in the first year that the bill is in effect--for all of the expenses shown on their books with respect to these options. This ``catch-up deduction'' in the first year after enactment would enable corporations, in the following years, to begin with a clean slate so that their tax returns the next year would reflect their actual stock option book expenses for that same year.

After that catch-up year, all stock option expenses incurred by a company each year would be reflected in their annual tax deductions under the new Section 162(q).

The current differences between accounting and tax rules for stock options make no sense.

The current book-tax difference is the historical product of accounting and tax policies that have not been coordinated or integrated. The resulting mismatch has allowed companies to take tax deductions that are usually many times larger than the actual stock option expenses shown on their books, at the expense of the Treasury (i.e., other taxpayers). Companies are incentivized to dole out excessive options packages, producing outsized executive pay, while being allowed to reflect much smaller ``expenses'' on their books. They get to avoid paying their fair share to Uncle Sam by simply giving their executives the rights to huge sums of money from the financial markets.

Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their book expenses. In the last year for which the data is available, companies used the existing book-tax disparity to claim $48 billion more in stock option tax deductions than the expenses shown on their books. In these times of financial crisis, we cannot afford this multi-billion dollar loss to the Treasury, not only because of the need to finance the mounting costs of rescuing the economy, but also because this stock option book- tax difference contributes to the anger and social disruption caused by the ever deepening chasm between the pay of executives and the pay of average workers.

The Obama administration has pledged itself to closing unfair corporate tax loopholes and to returning sanity to executive pay. It should start with supporting the ending of excessive stock option corporate deductions. I urge my colleagues to join Senator McCain and me in enacting this bill into law this year.

Mr. President, I ask unanimous consent that the text of the bill and a bill summary be printed in the Record.

Mr. President, last year I introduced the Notice Pleading Restoration Act of 2009, H.R. 1504. As I explained in my accompanying floor statement, my objective was to restore the pleading standard that had governed federal civil practice if not since the Federal Rules of Procedure originally took effect in 1938, then at very least since the Supreme Court decided Conley v. Gibson in 1957. Several months earlier the Supreme Court had issued the second of two controversial decisions--Bell Atlantic Corp. v. Twombly, 2007, and Iqbal v. Ashcroft, 2009--in which it had replaced that standard with a heightened pleading standard that, not least among its several flaws, was plainly inconsistent with the original meaning of the Federal Rules. My concern was not only that the Court had closed the courthouse doors to plaintiffs with meritorious claims and limited the private enforcement of public law, but also that, in yet another of its recent incursions on Congress's lawmaking powers, it had end-run the process for amending the Rules established by the Rules Enabling Act of 1934. That process includes, as its last step, Congressional approval of any amendment.

While there was widespread agreement among the country's leading academic proceduralists on the need for legislation overruling the Court's decisions, there was much less agreement among them as to what, exactly, the

legislation should say. I chose in S. 1504 to incorporate the pleading standard set forth in Conley. A companion House bill introduced after S. 1504, H.R. 4115, took a somewhat different approach. Various commentators proposed yet other approaches.

After a hearing on the legislation before the Judiciary Committee, I consulted through my general counsel, Matthew L. Wiener, with leading academic proceduralists and several distinguished practicing lawyers with an eye toward offering a possible substitute amendment. The conclusion I soon drew was that Congress must indeed overrule Twombly and Iqbal but without (as the Court had done) prescribing a pleading standard outside the rulemaking process established by the Enabling Act. The best way to do so, I concluded, was simply to draft legislation requiring adherence to the Supreme Court's pre-Twombly decisions interpreting the applicable federal rules unless and until they are amended in accordance with the Enabling Act. The bill I have introduced today, the Notice Pleading Restoration Act of 2010, takes just that approach. I urge the next Congress to take up this bill when it convenes in January.

For their wise counsel in helping me work through the issues presented by the legislation, I would like to acknowledge and thank the following lawyers, most of them professors of civil procedure: Allen D. Black, a partner at Fine, Kaplan & Black, R.P.C.; John S. Beckerman, Professor of Law, Rutgers University School of Law-Camden; Stephen B. Burbank, the David Berger Professor for the Administration of Justice at the University of Pennsylvania Law School; Sean Carter, a shareholder of Cozen O'Connor; Jonathan W. Cuneo, a partner at Cuneo Gilbert & LaDuca LLP and a former counsel to the House Judiciary Committee; Michael C. Dorf, the Robert S. Stevens Professor of Law at Cornell University School of Law; William N. Eskridge, Jr., the John A. Garver Professor of Jurisprudence at Yale Law School; Suzette M. Malveaux, Associate Professor of Law, Columbus School of Law, Catholic University of America; Arthur R. Miller, University Professor at the New York University School of Law; John Payton, President and Director- Counsel, NAACP Legal Defense Fund; Alexander Reinert, an Associate Professor of Law at the Benjamin Cardozo School of Law; David L. Shapiro, the William Nelson Cromwell Professor of Law, Emeritus, at Harvard Law School; Stephen N. Subrin, Professor of Law, Northeastern University School of Law; and Tobias Barrington Wolff, a Professor of Law at the University of Pennsylvania Law School.

Professor Burbank deserves special acknowledgment for first suggesting and explaining the general approach underlying my bill during his testimony before the Senate Judiciary Committee on December 2, 2009, and special thanks for lending my staff so much of his valuable time during the last year-and-a-half. I commend his unimpeachable testimony to my colleagues and their staffs.

Not all of these lawyers, I must emphasize in closing, endorse my legislation, and none of them of course is responsible for its particulars. Most of them submitted prepared statements for the record of the December 2 hearing, and their individual views can be found there.

Mr. President, I rise today on behalf of myself and my colleague Senator Enzi of Wyoming to introduce the Carbon Storage Stewardship Trust Fund Act of 2009. This bill will encourage the commercial deployment of technology that will allow for the continued use of our Nation's vast coal resources to produce economical and reliable power while at the same time mitigating the impact of climate change.

The capture and storage of carbon dioxide from power generation facilities and large industrial sources is a critical component of both U.S. and international policy to reduce global emissions of greenhouse gases. The criticality of this technology has been driven home by the Pew Center on Global Climate Change which has pointed out that ``carbon capture and storage, CCS, is the key enabling technology for a future in which we can continue to use our vast coal resources and protect the climate.'' And former British Prime Minister Tony Blair stated in November, 2008, that ``the vast majority of new power stations in China and India will be coal fired; not ``may be coal fired''- will be. So developing carbon capture and storage technology is not optional, it is literally the essence.''

The commercial deployment of CCS will require further large-scale development and demonstration of the technology. Just as important, however, it will also require a well thought out approach to address the risk and liability of injecting large volumes of CO2 into geological formations, such as saline aquifers, depleted oil and gas fields, and unminable coal seams, where it will be permanently stored.

The risk of geological CO2 storage, also commonly known as carbon sequestration, is considered small. In fact, CO2 has been safely injected into oil and gas fields to enhance the recovery of these hydrocarbons for decades without incident. While the potential for CO2 to leak to the surface and cause human or ecological harm in a well designed and operated carbon sequestration project is minimal, the financial liability associated with this risk is uncertain given the huge disparity between the typical lifetime of a firm operating a storage facility and the need to ensure the safe storage of CO2 in perpetuity. This uncertainty can cause a chilling effect on private sector investment in CCS.

The purpose of this act is to create a program for managing the financial risk, or liability, of the long-term storage of CO2 . This program will offer the private sector with a framework for how legal and financial responsibilities for commercial carbon storage operations will be addressed. Moreover, it will provide a strong incentive to industry to manage and reduce risk by deploying carbon sequestration in the safest possible manner.

Specifically, the act will require the owner or operator of a commercial CO2 storage facility to self insure or obtain private insurance or other types of financial assurance to cover liability claims during the CO2 injection phase of the project and for an extended period of time after injection has stopped. After the operator has received a site closure certificate from the appropriate regulatory agency, the act would then convey stewardship for the long-term management of the site to the U.S. Department of Energy. The State where the storage facility is located may request to take on stewardship for the site from the Department of Energy. The act will also create a trust fund from fees paid by storage facility operators on a per ton of CO2 injected basis that will be used to pay for

claims for damages made after storage facility stewardship is transferred to the Federal government.

In summary, this act will give the private sector the certainty they need regarding the longterm stewardship of CO2 storage facilities. Just as important, it will strongly encourage the safe and responsible operation of these facilities while ensuring the prompt and orderly compensation for damages or harm to humans, to the environment, and to natural resources, should they occur, from the injection and storage of CO2 in geological formations.

I urge all of my colleagues to join Senator Enzi and me in support of this act so that a clear signal is given about our commitment to the development, demonstration, and ultimately, the widespread commercial deployment of CCS technology as a key component of the Nation's strategy to reduce emissions of CO2.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.

Mr. President, today, I am pleased to reintroduce the Personal Data Privacy and Security Act. The recent and troubling cyber attack on U.S. Government computers is clear evidence that developing a comprehensive national strategy for data privacy and cybersecurity is one of the most challenging and important issues facing our nation. The Personal Data Privacy and Security Act will help to meet this challenge, by better protecting Americans from the growing threats of data breaches and identity theft.

When Senator Specter and I first introduced this bill 4 years ago, we had high hopes of bringing urgently needed data privacy reforms to the American people. Although the Judiciary Committee favorably reported this bill twice, in 2005 and again in 2007, the legislation languished on the Senate calendar and the Senate adjourned without passing comprehensive data privacy legislation.

While the Congress has waited to act, the dangers to our privacy, economic prosperity and national security posed by data breaches have not gone away. Just this week, the Government Accountability Office released a report finding that almost all of our major federal agencies have systemic weaknesses in the information security controls. According to the Privacy Rights Clearinghouse, more than 250 million records containing sensitive personal information have been involved in data security breaches since 2005.

This loss of privacy is not just a grave concern for American consumers; it is also a serious threat to the economic security of American businesses. The President's recent report on Cyberspace Policy Review noted that industry estimates of losses from intellectual property to data theft in 2008 range as high as $1 trillion.

The FBI's Internet Fraud Complaint Center also recently reported that

complaints of Internet fraud increased by 33 percent in 2008. These troubling reports are all compelling examples of why we need to promptly pass the Personal Data Privacy and Security Act.

Earlier this year, the Judiciary Committee held an important hearing on the privacy risks associated with electronic health records as the Nation moves towards a national health IT system. I am pleased that many of the privacy principles developed during that hearing have been enacted as part of the President's economic recovery package.

The Personal Data Privacy and Security Act requires that data brokers let consumers know what sensitive personal information they have about them, and to allow individuals to correct inaccurate information. The bill also requires that companies that have databases with sensitive personal information on Americans establish and implement data privacy and security programs.

In addition, the bill requires notice when sensitive personal information has been compromised. This bill also provides for tough criminal penalties for anyone who would intentionally and willfully conceal the fact that a data breach has occurred when the breach causes economic damage to consumers. Finally, the bill addresses the important issue of the government's use of personal data by requiring that federal agencies notify affected individuals when government data breaches occur, and placing privacy and security front and center when federal agencies evaluate whether data brokers can be trusted with government contracts that involve sensitive information about the American people.

Of course, Senator Specter and I have no monopoly on good ideas to solve the serious problems of identity theft and lax cybersecurity. But, we have put forth some meaningful solutions to this problem in this bill.

We have drafted this bill after long and thoughtful consultation with many of the stakeholders on this issue, including the privacy, consumer protection and business communities. We have also worked closely with other Senators, including Senators Feinstein, Feingold, and Schumer.

This is a comprehensive bill that not only deals with the need to provide Americans with notice when they have been victims of a data breach, but that also deals with the underlying problem of lax security and lack of accountability to help prevent data breaches from occurring in the first place. Passing this comprehensive data privacy legislation is one of my highest legislative priorities as Chairman of the Judiciary Committee, and I hope all Senators will support this measure.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.

Mr. President, I rise to introduce legislation that will remove an unintended obstacle in the tax-exempt bond rules so that states can use these bonds to finance the purchase of fixed-wing air ambulances in the same way they can now use them to finance the purchase of medical helicopters.

The difference between a medical helicopter and a fixed wing air ambulance

may seem minor to some, but if you live in a remote area the difference can be as big as life or death.

Air medical services, AMS, are an essential component of the health care system. When appropriately used, air critical care transport saves lives and reduces the cost of health care by minimizing the time the critically injured and ill spend out of a hospital, by bringing more medical capabilities to the patient than are normally provided by ground emergency medical services, and by quickly getting the patient to the right specialty care. Dedicated medical helicopters and fixed wing aircraft are mobile flying emergency intensive care units deployed at a moment's notice to patients whose lives depend on rapid care and transport.

In remote rural areas, the use of helicopters often is impractical and unsafe because of the long distances that patients must be transported, sometimes during poor weather conditions. In these situations, the better alternative is a fixed-wing aircraft.

Both helicopters and fixed wing aircraft cost millions of dollars to purchase or lease, operate, house and maintain. But under the way that the tax-exempt bond rules currently work, states are prohibited from using these bonds to finance air ambulance services in rural areas, even though they can use these bonds for helicopters. This result was not what Congress intended, and our bill would make that clear.

Under current law, tax-exempt bonds can not be issued for the purchase of any ``airplane, skybox or other privacy luxury box, health club facility, facility primarily used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises.'' The restrictions were enacted in order to prevent tax-exmpt bonds to be used for frivolous or extravagant purposes. Unfortunately, the law has been interpreted to exclude the purchase of new fixed-wing planes to provide air ambulance services, but the purchase of helicopters--which are not airplanes--is permitted.

This result is not what was intended by the restrictions and our bill would simply make it clear that the general restriction against the use of tax-exempt bonds for purchasing an airplane does not apply in the case of planes that are equipped for and exclusively dedicated to emergency medical services.

There is supporting precedent in distinguishing planes for air ambulance services different than other airplanes. The air transportation excise tax provides an exemption for air transportation that is used to provide ``emergency medical services . . . by a fixed- wing aircraft equipped for and exclusively dedicated on that flight to acute care emergency medical services.''

This issue hits close to home for me and my colleagues who are joining me on this legislation, but we are certainly not alone with respect to the need to ensure that folks in our rural and remote areas have access to needed medical services.

Inland Northwest Health Services, INHS, is a non-profit organization that provides critical health care support services in the Inland Northwest, including air ambulance services through Northwest MedStar. INHS is based in Spokane, Washington, and provides health care services in Eastern Washington, Eastern Oregon, Northern Idaho, and Western Montana. Unfortunately, this unintended restriction in the tax code is preventing INHS from asking the appropriate state authorities to issue tax-exempt bonds to finance the purchase of new fixed-wing planes for air ambulance service.

The legislation that I am introducing with Senator Murray is a common-sense fix to this problem, and I hope we can address it quickly.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.