II

104TH CONGRESS

1ST SESSION H. R. 1058

IN THE SENATE OF THE UNITED STATES

MARCH 10 (legislative day, MARCH 6), 1995

Received; read twice and referred to the Committee on Banking, Housing, and

Urban Affairs

AN ACT

To reform Federal securities litigation, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Securities Litigation Reform Act’’.

6 (b) TABLE OF CONTENTS.—The table of contents for

7 this Act is as follows:
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Sec. 1. Short title; table of contents.

Sec. 2. Prevention of lawyer-driven litigation.

(a) Plaintiff steering committees to ensure client control of lawsuits.

‘‘Sec. 36. Class action steering committees.

‘‘(a) Class action steering committee.

‘‘(b) Membership of plaintiff steering committee.

‘‘(c) Functions of plaintiff steering committee.

‘‘(d) Immunity from civil liability; removal.

‘‘(e) Effect on other law.’’

(b) Prohibition on attorneys’ fees paid from Commission disgorgement

funds.

Sec. 3. Prevention of abusive practices that foment litigation.

(a) Additional provisions applicable to private actions.

‘‘Sec. 20B. Procedures applicable to private actions.

‘‘(a) Elimination of bonus payments to named plaintiffs in class

actions.

‘‘(b) Restrictions on professional plaintiffs.

‘‘(c) Awards of fees and expenses.

‘‘(d) Prevention of abusive conflicts of interest.

‘‘(e) Disclosure of settlement terms to class members.

‘‘(f) Encouragement of finality in settlement discharges.

‘‘(g) Contribution from non-parties in interests of fairness.

‘‘(h) Defendant’s right to written interrogatories establishing

scienter.’’

(b) Prohibition of referral fees that foment litigation.

Sec. 4. Prevention of ‘‘fishing expedition’’ lawsuits.

‘‘Sec. 10A. Requirements for securities fraud actions.

‘‘(a) Scienter.

‘‘(b) Requirement for explicit pleading of scienter.

‘‘(c) Dismissal for failure to meet pleading requirements; stay of

discovery; summary judgment.

‘‘(d) Reliance and causation.

‘‘(e) Allocation of liability.

‘‘(f) Damages.’’

Sec. 5. Establishment of ‘‘safe harbor’’ for predictive statements.

‘‘Sec. 37. Application of safe harbor for forward-looking statements.

‘‘(a) Safe harbor in general.

‘‘(b) Definition of forward-looking statement.

‘‘(c) No duty to make continuing projections.

‘‘(d) Automatic procedure for staying discovery; expedited procedure for consideration of motion on applicability of safe

harbor.

‘‘(e) Regulatory authority.’’

Sec. 6. Amendment to Racketeer Influenced and Corrupt Organizations Act.

Sec. 7. Financial fraud detection and disclosure.

‘‘Sec. 13A. Fraud detection and disclosure.

‘‘(a) Audit requirements.

‘‘(b) Required response to audit discoveries.

‘‘(c) Auditor liability limitation.

‘‘(d) Civil penalties in cease-and-desist proceedings.

‘‘(e) Preservation of existing authority.

‘‘(f) Definitions.’’

Sec. 8. Rule of construction.

Sec. 9. Effective date.
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1 SEC. 2. PREVENTION OF LAWYER-DRIVEN LITIGATION.

2 (a) PLAINTIFF STEERING COMMITTEES TO ENSURE

3 CLIENT CONTROL OF LAWSUITS.—The Securities Ex4 change Act of 1934 (15 U.S.C. 78a et seq.) is amended

5 by adding at the end the following new section:

6 ‘‘SEC. 36. CLASS ACTION STEERING COMMITTEES.

7 ‘‘(a) CLASS ACTION STEERING COMMITTEE.—In any

8 private action arising under this title seeking to recover

9 damages on behalf of a class, the court shall, at the earli10 est practicable time, appoint a committee of class members

11 to direct counsel for the class (hereafter in this section

12 referred to as the ‘plaintiff steering committee’) and to

13 perform such other functions as the court may specify.

14 Court appointment of a plaintiff steering committee shall

15 not be subject to interlocutory review.

16 ‘‘(b) MEMBERSHIP OF PLAINTIFF STEERING COM17 MITTEE.—

18 ‘‘(1) QUALIFICATIONS.—

19 ‘‘(A) NUMBER.—A plaintiff steering com20 mittee shall consist of not fewer than 5 class

21 members, willing to serve, who the court be22 lieves will fairly represent the class.

23 ‘‘(B) OWNERSHIP INTERESTS.—Members

24 of the plaintiff steering committee shall have

25 cumulatively held during the class period not

26 less than—
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1 ‘‘(i) the lesser of 5 percent of the se2 curities which are the subject matter of the

3 litigation or $10,000,000 in market value

4 of the securities which are the subject mat5 ter of the litigation; or

6 ‘‘(ii) such smaller percentage or dollar

7 amount as the court finds appropriate

8 under the circumstances.

9 ‘‘(2) NAMED PLAINTIFFS.—Class plaintiffs

10 serving as the representative parties in the litigation

11 may serve on the plaintiff steering committee, but

12 shall not comprise a majority of the committee.

13 ‘‘(3) NONCOMPENSATION OF MEMBERS.—Mem14 bers of the plaintiff steering committee shall serve

15 without compensation, except that any member may

16 apply to the court for reimbursement of reasonable

17 out-of-pocket expenses from any common fund es18 tablished for the class.

19 ‘‘(4) MEETINGS.—The plaintiff steering com20 mittee shall conduct its business at one or more pre21 viously scheduled meetings of the committee, of

22 which prior notice shall have been given and at

23 which a majority of its members are present in per24 son or by electronic communication. The plaintiff

25 steering committee shall decide all matters within its
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1 authority by a majority vote of all members, except

2 that the committee may determine that decisions

3 other than to accept or reject a settlement offer or

4 to employ or dismiss counsel for the class may be

5 delegated to one or more members of the committee,

6 or may be voted upon by committee members seria7 tim, without a meeting.

8 ‘‘(5) RIGHT OF NONMEMBERS TO BE HEARD.—

9 A class member who is not a member of the plaintiff

10 steering committee may appear and be heard by the

11 court on any issue relating to the organization or ac12 tions of the plaintiff steering committee.

13 ‘‘(c) FUNCTIONS OF PLAINTIFF STEERING COMMIT14 TEE.—The authority of the plaintiff steering committee

15 to direct counsel for the class shall include all powers nor16 mally permitted to an attorney’s client in litigation, includ17 ing the authority to retain or dismiss counsel and to reject

18 offers of settlement, and the authority to accept an offer

19 of settlement subject to final approval by the court. Dis20 missal of counsel other than for cause shall not limit the

21 ability of counsel to enforce any contractual fee agreement

22 or to apply to the court for a fee award from any common

23 fund established for the class.

24 ‘‘(d) IMMUNITY FROM CIVIL LIABILITY; REMOVAL.—

25 Any person serving as a member of a plaintiff steering
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1 committee shall be immune from any civil liability for any

2 negligence in performing such service, but shall not be im3 mune from liability for intentional misconduct or from the

4 assessment of costs pursuant to section 20B(c). The court

5 may remove a member of a plaintiff steering committee

6 for good cause shown.

7 ‘‘(e) EFFECT ON OTHER LAW.—This section does not

8 affect any other provision of law concerning class actions

9 or the authority of the court to give final approval to any

10 offer of settlement.’’.

11 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

12 COMMISSION DISGORGEMENT FUNDS.—Section 21(d) of

13 the Securities Exchange Act of 1934 (15 U.S.C. 78u(d))

14 is amended by adding at the end the following new para15 graph:

16 ‘‘(4) PROHIBITION ON ATTORNEYS’ FEES PAID

17 FROM COMMISSION DISGORGEMENT FUNDS.—Except as

18 otherwise ordered by the court, funds disgorged as the re19 sult of an action brought by the Commission, or of any

20 Commission proceeding, shall not be distributed as pay21 ment for attorneys’ fees or expenses incurred by private

22 parties seeking distribution of the disgorged funds.’’.
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1 SEC. 3. PREVENTION OF ABUSIVE PRACTICES THAT FO2 MENT LITIGATION.

3 (a) ADDITIONAL PROVISIONS APPLICABLE TO PRI4 VATE ACTIONS.—The Securities Exchange Act of 1934 is

5 amended by inserting after section 20A (15 U.S.C. 78t–

6 1) the following new section:

7 ‘‘PROCEDURES APPLICABLE TO PRIVATE ACTIONS

8 ‘‘SEC. 20B. (a) ELIMINATION OF BONUS PAYMENTS

9 TO NAMED PLAINTIFFS IN CLASS ACTIONS.—In any pri10 vate action under this title that is certified as a class ac11 tion pursuant to the Federal Rules of Civil Procedure, the

12 portion of any final judgment or of any settlement that

13 is awarded to class plaintiffs serving as the representative

14 parties shall be equal, on a per share basis, to the portion

15 of the final judgment or settlement awarded to all other

16 members of the class. Nothing in this subsection shall be

17 construed to limit the award to any representative parties

18 of actual expenses (including lost wages) relating to the

19 representation of the class.

20 ‘‘(b) RESTRICTIONS ON PROFESSIONAL PLAIN21 TIFFS.—Except as the court may otherwise permit for

22 good cause, a person may be a named plaintiff, or an offi23 cer, director, or fiduciary of a named plaintiff, in no more

24 than 5 class actions filed during any 3-year period.

25 ‘‘(c) AWARDS OF FEES AND EXPENSES.—
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1 ‘‘(1) AUTHORITY TO AWARD FEES AND EX2 PENSES.—If the court in any private action arising

3 under this title enters a final judgment against a

4 party litigant on the basis of a motion to dismiss,

5 motion for summary judgment, or a trial on the

6 merits, the court shall, upon motion by the prevail7 ing party, determine whether (A) the position of the

8 losing party was not substantially justified, (B) im9 posing fees and expenses on the losing party or the

10 losing party’s attorney would be just, and (C) the

11 cost of such fees and expenses to the prevailing

12 party is substantially burdensome or unjust. If the

13 court makes the determinations described in clauses

14 (A), (B), and (C), the court shall award the prevail15 ing party reasonable fees and other expenses in16 curred by that party. The determination of whether

17 the position of the losing party was substantially

18 justified shall be made on the basis of the record in

19 the action for which fees and other expenses are

20 sought, but the burden of persuasion shall be on the

21 prevailing party.

22 ‘‘(2) SECURITY FOR PAYMENT OF COSTS IN

23 CLASS ACTIONS.—In any private action arising

24 under this title that is certified as a class action pur25 suant to the Federal Rules of Civil Procedure, the
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1 court shall require an undertaking from the attor2 neys for the plaintiff class, the plaintiff class, or

3 both, in such proportions and at such times as the

4 court determines are just and equitable, for the pay5 ment of the fees and expenses that may be awarded

6 under paragraph (1).

7 ‘‘(3) APPLICATION FOR FEES.—A party seeking

8 an award of fees and other expenses shall, within 30

9 days of a final, nonappealable judgment in the ac10 tion, submit to the court an application for fees and

11 other expenses that certifies that the party is enti12 tled to such an award under paragraph (1) and the

13 amount sought, including an itemized statement

14 from any attorney or expert witness representing or

15 appearing on behalf of the party stating the actual

16 time expended and the rate at which fees and other

17 expenses are computed.

18 ‘‘(4) ALLOCATION AND SIZE OF AWARD.—The

19 court, in its discretion, may—

20 ‘‘(A) determine whether the amount to be

21 awarded pursuant to this section shall be

22 awarded against the losing party, its attorney,

23 or both; and

24 ‘‘(B) reduce the amount to be awarded

25 pursuant to this section, or deny an award, to
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1 the extent that the prevailing party during the

2 course of the proceedings engaged in conduct

3 that unduly and unreasonably protracted the

4 final resolution of the action.

5 ‘‘(5) AWARDS IN DISCOVERY PROCEEDINGS.—

6 In adjudicating any motion for an order compelling

7 discovery or any motion for a protective order made

8 in any private action arising under this title, the

9 court shall award the prevailing party reasonable

10 fees and other expenses incurred by the party in

11 bringing or defending against the motion, including

12 reasonable attorneys’ fees, unless the court finds

13 that special circumstances make an award unjust.

14 ‘‘(6) RULE OF CONSTRUCTION.—Nothing in

15 this subsection shall be construed to limit or impair

16 the discretion of the court to award costs pursuant

17 to other provisions of law.

18 ‘‘(7) PROTECTION AGAINST ABUSE OF PROC19 ESS.—In any action to which this subsection applies,

20 a court shall not permit a plaintiff to withdraw from

21 or voluntarily dismiss such action if the court deter22 mines that such withdrawal or dismissal is taken for

23 purposes of evasion of the requirements of this sub24 section.
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1 ‘‘(8) DEFINITIONS.—For purposes of this sub2 section—

3 ‘‘(A) The term ‘fees and other expenses’

4 includes the reasonable expenses of expert wit5 nesses, the reasonable cost of any study, analy6 sis, report, test, or project which is found by

7 the court to be necessary for the preparation of

8 the party’s case, and reasonable attorneys’ fees

9 and expenses. The amount of fees awarded

10 under this section shall be based upon prevail11 ing market rates for the kind and quality of

12 services furnished.

13 ‘‘(B) The term ‘substantially justified’

14 shall have the same meaning as in section

15 2412(d)(1) of title 28, United States Code.

16 ‘‘(d) PREVENTION OF ABUSIVE CONFLICTS OF IN17 TEREST.—In any private action under this title pursuant

18 to a complaint seeking damages on behalf of a class, if

19 the class is represented by an attorney who directly owns

20 or otherwise has a beneficial interest in the securities that

21 are the subject of the litigation, the court shall, on motion

22 by any party, make a determination of whether such inter23 est constitutes a conflict of interest sufficient to disqualify

24 the attorney from representing the class.
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1 ‘‘(e) DISCLOSURE OF SETTLEMENT TERMS TO CLASS

2 MEMBERS.—In any private action under this title that is

3 certified as a class action pursuant to the Federal Rules

4 of Civil Procedure, any proposed or final settlement agree5 ment that is published or otherwise disseminated to the

6 class shall include the following statements:

7 ‘‘(1) STATEMENT OF POTENTIAL OUTCOME OF

8 CASE.—

9 ‘‘(A) AGREEMENT ON AMOUNT OF DAM10 AGES AND LIKELIHOOD OF PREVAILING.—If the

11 settling parties agree on the amount of dam12 ages per share that would be recoverable if the

13 plaintiff prevailed on each claim alleged under

14 this title and the likelihood that the plaintiff

15 would prevail—

16 ‘‘(i) a statement concerning the

17 amount of such potential damages per

18 share; and

19 ‘‘(ii) a statement concerning the likeli20 hood that the plaintiff would prevail on the

21 claims alleged under this title and a brief

22 explanation of the reasons for that conclu23 sion.

24 ‘‘(B) DISAGREEMENT ON AMOUNT OF

25 DAMAGES OR LIKELIHOOD OF PREVAILING.—If
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1 the parties do not agree on the amount of dam2 ages per share that would be recoverable if the

3 plaintiff prevailed on each claim alleged under

4 this title or on the likelihood that the plaintiff

5 would prevail on those claims, or both, a state6 ment from each settling party concerning the

7 issue or issues on which the parties disagree.

8 ‘‘(C) INADMISSIBILITY FOR CERTAIN PUR9 POSES.—Statements made in accordance with

10 subparagraphs (A) and (B) concerning the

11 amount of damages and the likelihood of pre12 vailing shall not be admissible for purposes of

13 any Federal or State judicial action or adminis14 trative proceeding.

15 ‘‘(2) STATEMENT OF ATTORNEYS’ FEES OR

16 COSTS SOUGHT.—If any of the settling parties or

17 their counsel intend to apply to the court for an

18 award of attorneys’ fees or costs from any fund es19 tablished as part of the settlement, a statement indi20 cating which parties or counsel intend to make such

21 an application, the amount of fees and costs that

22 will be sought (including the amount of such fees

23 and costs determined on a per-share basis, together

24 with the amount of the settlement proposed to be

25 distributed to the parties to suit, determined on a
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1 per-share basis), and a brief explanation of the basis

2 for the application. Such information shall be clearly

3 summarized on the cover page of any notice to a

4 party of any proposed or final settlement agreement.

5 ‘‘(3) IDENTIFICATION OF LAWYERS’ REP6 RESENTATIVES.—The name and address of one or

7 more representatives of counsel for the class who

8 will be reasonably available to answer written ques9 tions from class members concerning any matter

10 contained in any notice of settlement published or

11 otherwise disseminated to the class.

12 ‘‘(4) OTHER INFORMATION.—Such other infor13 mation as may be required by the court, or by any

14 plaintiff steering committee appointed by the court

15 pursuant to section 36.

16 ‘‘(f) ENCOURAGEMENT OF FINALITY IN SETTLE17 MENT DISCHARGES.—

18 ‘‘(1) DISCHARGE.—A defendant who settles any

19 private action arising under this title at any time be20 fore verdict or judgment shall be discharged from all

21 claims for contribution brought by other persons

22 with respect to the matters that are the subject of

23 such action. Upon entry of the settlement by the

24 court, the court shall enter a bar order constituting

25 the final discharge of all obligations to the plaintiff
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1 of the settling defendant arising out of the action.

2 The order shall bar all future claims for contribution

3 arising out of the action—

4 ‘‘(A) by any person against the settling de5 fendant; and

6 ‘‘(B) by the settling defendant against any

7 person other than a person whose liability has

8 been extinguished by the settling defendant’s

9 settlement.

10 ‘‘(2) REDUCTION.—If a person enters into a

11 settlement with the plaintiff prior to verdict or judg12 ment, the verdict or judgment shall be reduced by

13 the greater of—

14 ‘‘(A) an amount that corresponds to the

15 percentage of responsibility of that person; or

16 ‘‘(B) the amount paid to the plaintiff by

17 that person.

18 ‘‘(g) CONTRIBUTION FROM NON-PARTIES IN INTER19 ESTS OF FAIRNESS.—

20 ‘‘(1) RIGHT OF CONTRIBUTION.—A person who

21 becomes liable for damages in any private action

22 under this title (other than an action under section

23 9(e) or 18(a)) may recover contribution from any

24 other person who, if joined in the original suit,

25 would have been liable for the same damages.
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1 ‘‘(2) STATUTE OF LIMITATIONS FOR CONTRIBU2 TION.—Once judgment has been entered in any such

3 private action determining liability, an action for

4 contribution must be brought not later than 6

5 months after the entry of a final, nonappealable

6 judgment in the action.

7 ‘‘(h) DEFENDANT’S RIGHT TO WRITTEN INTERROG8 ATORIES ESTABLISHING SCIENTER.—In any private ac9 tion under this title in which the plaintiff may recover

10 money damages, the court shall, when requested by a de11 fendant, submit to the jury a written interrogatory on the

12 issue of each such defendant’s state of mind at the time

13 the alleged violation occurred.’’.

14 (b) PROHIBITION OF REFERRAL FEES THAT FO15 MENT LITIGATION.—Section 15(c) of the Securities Ex16 change Act of 1934 (15 U.S.C. 78o(c)) is amended by add17 ing at the end the following new paragraph:

18 ‘‘(8) RECEIPT OF REFERRAL FEES.—No broker or

19 dealer, or person associated with a broker or dealer, may

20 solicit or accept remuneration for assisting an attorney in

21 obtaining the representation of any customer in any pri22 vate action under this title.’’.
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1 SEC. 4. PREVENTION OF ‘‘FISHING EXPEDITION’’ LAWSUITS.

2 The Securities Exchange Act of 1934 (15 U.S.C. 78a

3 et seq.) is amended by inserting after section 10 the fol4 lowing new section:

5 ‘‘SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD AC6 TIONS.

7 ‘‘(a) SCIENTER.—

8 ‘‘(1) IN GENERAL.—In any private action aris9 ing under section 10(b) of this title based on a

10 fraudulent statement, liability may be established

11 only on proof that—

12 ‘‘(A) the defendant directly or indirectly

13 made a fraudulent statement;

14 ‘‘(B) the defendant possessed the intention

15 to deceive, manipulate, or defraud; and

16 ‘‘(C) the defendant made such fraudulent

17 statement knowingly or recklessly.

18 ‘‘(2) FRAUDULENT STATEMENT.—For purposes

19 of this section, a fraudulent statement is a state20 ment that contains an untrue statement of a mate21 rial fact, or omits to state a material fact necessary

22 in order to make the statements made, in the light

23 of the circumstances in which they were made, not

24 misleading.

25 ‘‘(3) KNOWINGLY.—For purposes of paragraph

26 (1), a defendant makes a fraudulent statement
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1 knowingly if the defendant knew that the statement

2 of a material fact was untrue at the time it was

3 made, or knew that an omitted fact was necessary

4 in order to make the statements made, in the light

5 of the circumstances in which they were made, not

6 misleading.

7 ‘‘(4) RECKLESSNESS.—For purposes of para8 graph (1), a defendant makes a fraudulent state9 ment recklessly if the defendant, in making such

10 statement, is guilty of highly unreasonable conduct

11 that (A) involves not merely simple or even gross

12 negligence, but an extreme departure from standards

13 of ordinary care, and (B) presents a danger of mis14 leading buyers, sellers, or security holders that was

15 either known to the defendant or so obvious that the

16 defendant must have been aware of it. Deliberately

17 refraining from taking steps to discover whether

18 one’s statements are false or misleading constitutes

19 recklessness, but if the failure to investigate was not

20 deliberate, such conduct shall not be considered to

21 be reckless.

22 ‘‘(b) REQUIREMENT FOR EXPLICIT PLEADING OF

23 SCIENTER.—In any private action to which subsection (a)

24 applies, the complaint shall specify each statement or

25 omission alleged to have been misleading, and the reasons
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1 the statement or omission was misleading. The complaint

2 shall also make specific allegations which, if true, would

3 be sufficient to establish scienter as to each defendant at

4 the time the alleged violation occurred. It shall not be suf5 ficient for this purpose to plead the mere presence of facts

6 inconsistent with a statement or omission alleged to have

7 been misleading. If an allegation is made on information

8 and belief, the complaint shall set forth with specificity

9 all information on which that belief is formed.

10 ‘‘(c) DISMISSAL FOR FAILURE TO MEET PLEADING

11 REQUIREMENTS; STAY OF DISCOVERY; SUMMARY JUDG12 MENT.—In any private action to which subsection (a) ap13 plies, the court shall, on the motion of any defendant, dis14 miss the complaint if the requirements of subsection (b)

15 are not met, except that the court may, in its discretion,

16 permit a single amended complaint to be filed. During the

17 pendency of any such motion to dismiss, all discovery and

18 other proceedings shall be stayed unless the court finds

19 upon the motion of any party that particularized discovery

20 is necessary to preserve evidence or to prevent undue prej21 udice to that party. If a complaint satisfies the require22 ments of subsection (b), the plaintiff shall be entitled to

23 conduct discovery limited to the facts concerning the alleg24 edly misleading statement or omission. Upon completion
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1 of such discovery, the parties may move for summary

2 judgment.

3 ‘‘(d) RELIANCE AND CAUSATION.—

4 ‘‘(1) IN GENERAL.—In any private action to

5 which subsection (a) applies, the plaintiff shall prove

6 that—

7 ‘‘(A) he or she had knowledge of, and re8 lied (in connection with the purchase or sale of

9 a security) on, the statement that contained the

10 misstatement or omission described in sub11 section (a)(1); and

12 ‘‘(B) that the statement containing such

13 misstatement or omission proximately caused

14 (through both transaction causation and loss

15 causation) any loss incurred by the plaintiff.

16 ‘‘(2) FRAUD ON THE MARKET.—For purposes

17 of paragraph (1), knowledge and reliance may be

18 proven by establishing that the market as a whole

19 considered the fraudulent statement, that the price

20 at which the security was purchased or sold reflected

21 the market’s estimation of the fraudulent statement,

22 and that the plaintiff relied on that market price.

23 Proof that the market as a whole considered the

24 fraudulent statement may consist of evidence that

25 the statement—
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1 ‘‘(A) was published in publicly available re2 search reports by analysts of such security;

3 ‘‘(B) was the subject of news articles;

4 ‘‘(C) was delivered orally at public meet5 ings by officers of the issuer, or its agents;

6 ‘‘(D) was specifically considered by rating

7 agencies in their published reports; or

8 ‘‘(E) was otherwise made publicly available

9 to the market in a manner that was likely to

10 bring it to the attention of, and to be consid11 ered as credible by, other active participants in

12 the market for such security.

13 Nonpublic information may not be used as proof

14 that the market as a whole considered the fraudu15 lent statement.

16 ‘‘(3) PRESUMPTION OF RELIANCE.—Upon proof

17 that the market as a whole considered the fraudu18 lent statement pursuant to paragraph (2), the plain19 tiff is entitled to a rebuttable presumption that the

20 price at which the security was purchased or sold re21 flected the market’s estimation of the fraudulent

22 statement and that the plaintiff relied on such mar23 ket price. This presumption may be rebutted by evi24 dence that—
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1 ‘‘(A) the market as a whole considered

2 other information that corrected the allegedly

3 fraudulent statement; or

4 ‘‘(B) the plaintiff possessed such corrective

5 information prior to the purchase or sale of the

6 security.

7 ‘‘(4) REASONABLE EXPECTATION OF INTEGRITY

8 OF MARKET PRICE.—A plaintiff who buys or sells a

9 security for which it is unreasonable to rely on mar10 ket price to reflect all current information may not

11 establish reliance pursuant to paragraph (2). For

12 purposes of paragraph (2), the following factors

13 shall be considered in determining whether it was

14 reasonable for a party to expect the market price of

15 the security to reflect substantially all publicly avail16 able information regarding the issuer of the security:

17 ‘‘(A) The weekly trading volume of any

18 class of securities of the issuer of the security.

19 ‘‘(B) The existence of public reports by se20 curities analysts concerning any class of securi21 ties of the issuer of the security.

22 ‘‘(C) The eligibility of the issuer of the se23 curity, under the rules and regulations of the

24 Commission, to incorporate by reference its re25 ports made pursuant to section 13 of this title
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1 in a registration statement filed under the Se2 curities Act of 1933 in connection with the sale

3 of equity securities.

4 ‘‘(D) A history of immediate movement of

5 the price of any class of securities of the issuer

6 of the security caused by the public dissemina7 tion of information regarding unexpected cor8 porate events or financial releases.

9 In no event shall it be considered reasonable for a

10 party to expect the market price of the security to

11 reflect substantially all publicly available information

12 regarding the issuer of the security unless the issuer

13 of the security has a class of securities listed and

14 registered on a national securities exchange or

15 quoted on the automated quotation system of a na16 tional securities association.

17 ‘‘(e) ALLOCATION OF LIABILITY.—

18 ‘‘(1) JOINT AND SEVERAL LIABILITY FOR

19 KNOWING FRAUD.—A defendant who is found liable

20 for damages in a private action to which subsection

21 (a) applies may be liable jointly and severally only

22 if the trier of fact specifically determines that the

23 defendant acted knowingly (as defined in subsection

24 (a)(3)).
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1 ‘‘(2) PROPORTIONATE LIABILITY FOR RECK2 LESSNESS.—If the trier of fact does not make the

3 findings required by paragraph (1) for joint and sev4 eral liability, a defendant’s liability in a private ac5 tion to which subsection (a) applies shall be deter6 mined under paragraph (3) of this subsection only

7 if the trier of fact specifically determines that the

8 defendant acted recklessly (as defined in subsection

9 (a)(4)).

10 ‘‘(3) DETERMINATION OF PROPORTIONATE LI11 ABILITY.—If the trier of fact makes the findings re12 quired by paragraph (2), the defendant’s liability

13 shall be determined as follows:

14 ‘‘(A) The trier of fact shall determine the

15 percentage of responsibility of the plaintiff, of

16 each of the defendants, and of each of the other

17 persons or entities alleged by the parties to

18 have caused or contributed to the harm alleged

19 by the plaintiff. In determining the percentages

20 of responsibility, the trier of fact shall consider

21 both the nature of the conduct of each person

22 and the nature and extent of the causal rela23 tionship between that conduct and the damage

24 claimed by the plaintiff.
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1 ‘‘(B) For each defendant, the trier of fact

2 shall then multiply the defendant’s percentage

3 of responsibility by the total amount of damage

4 suffered by the plaintiff that was caused in

5 whole or in part by that defendant and the

6 court shall enter a verdict or judgment against

7 the defendant in that amount. No defendant

8 whose liability is determined under this sub9 section shall be jointly liable on any judgment

10 entered against any other party to the action.

11 ‘‘(C) Except where contractual relationship

12 permits, no defendant whose liability is deter13 mined under this paragraph shall have a right

14 to recover any portion of the judgment entered

15 against such defendant from another defendant.

16 ‘‘(4) EFFECT OF PROVISION.—This subsection

17 relates only to the allocation of damages among de18 fendants. Nothing in this subsection shall affect the

19 standards for liability under any private action aris20 ing under this title.

21 ‘‘(f) DAMAGES.—In any private action to which sub22 section (a) applies, and in which the plaintiff claims to

23 have bought or sold the security based on a reasonable

24 belief that the market value of the security reflected all
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1 publicly available information, the plaintiff’s damages

2 shall not exceed the lesser of—

3 ‘‘(1) the difference between the price paid by

4 the plaintiff for the security and the market value of

5 the security immediately after dissemination to the

6 market of information which corrects the fraudulent

7 statement; and

8 ‘‘(2) the difference between the price paid by

9 the plaintiff for the security and the price at which

10 the plaintiff sold the security after dissemination of

11 information correcting the fraudulent statement.’’.

12 SEC. 5. ESTABLISHMENT OF ‘‘SAFE HARBOR’’ FOR PRE13 DICTIVE STATEMENTS.

14 The Securities Exchange Act of 1934 (15 U.S.C. 78a

15 et seq.) is amended by adding at the end the following

16 new section:

17 ‘‘SEC. 37. APPLICATION OF SAFE HARBOR FOR FORWARD18 LOOKING STATEMENTS.

19 ‘‘(a) SAFE HARBOR IN GENERAL.—In any private ac20 tion arising under this title based on a fraudulent state21 ment (as defined in section 10A), a person shall not be

22 liable with respect to any forward-looking statement if and

23 to the extent that the statement—

24 ‘‘(1) contains a projection, estimate, or descrip25 tion of future events; and
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1 ‘‘(2) refers clearly (or is understood by the re2 cipient to refer) to—

3 ‘‘(A) such projections, estimates, or de4 scriptions as forward-looking statements; and

5 ‘‘(B) the risk that such projections, esti6 mates, or descriptions may not be realized.

7 The safe harbor for forward-looking statements estab8 lished under this subsection shall be in addition to any

9 safe harbor the Commission may establish by rule or regu10 lation.

11 ‘‘(b) DEFINITION OF FORWARD-LOOKING STATE12 MENT.—For the purpose of this section, the term ‘for13 ward-looking statement’ shall include (but not be limited

14 to) projections, estimates, and descriptions of future

15 events, whether made orally or in writing, voluntarily or

16 otherwise.

17 ‘‘(c) NO DUTY TO MAKE CONTINUING PROJEC18 TIONS.—In any private action arising under this title, no

19 person shall be deemed to have any obligation to update

20 a forward-looking statement made by such person unless

21 such person has expressly and substantially contempora22 neously undertaken to update such statement.

23 ‘‘(d) AUTOMATIC PROCEDURE FOR STAYING DISCOV24 ERY; EXPEDITED PROCEDURE FOR CONSIDERATION OF

25 MOTION ON APPLICABILITY OF SAFE HARBOR.—
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1 ‘‘(1) STAY PENDING DECISION ON MOTION.—

2 Upon motion by a defendant to dismiss on the

3 ground that the statement or omission upon which

4 the complaint is based is a forward-looking state5 ment within the meaning of this section and that the

6 safe harbor provisions of this section preclude a

7 claim for relief, the court shall stay discovery until

8 such motion is decided.

9 ‘‘(2) PROTECTIVE ORDERS.—If the court denies

10 a motion to dismiss to which paragraph (1) is appli11 cable, or if no such motion is made and a party

12 makes a motion for a protective order, at any time

13 beginning after the filing of the complaint and end14 ing 10 days after the filing of such party’s answer

15 to the complaint, asserting that the safe harbor pro16 visions of this section apply to the action, a protec17 tive order shall issue forthwith to stay all discovery

18 as to any party to whom the safe harbor provisions

19 of this section may apply, except that which is di20 rected to the specific issue of the applicability of the

21 safe harbor. A hearing on the applicability of the

22 safe harbor shall be conducted within 45 days of the

23 issuance of the protective order. At the conclusion of

24 the hearing, the court shall either dismiss the por25 tion of the action based upon the use of the forward-
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1 looking information or determine that the safe har2 bor is unavailable in the circumstances.

3 ‘‘(e) REGULATORY AUTHORITY.—The Commission

4 shall exercise its authority to describe conduct with respect

5 to the making of forward-looking statements that will be

6 deemed not to provide a basis for liability in private ac7 tions under this title. Such rules and regulations shall—

8 ‘‘(1) include clear and objective guidance that

9 the Commission finds sufficient for the protection of

10 investors;

11 ‘‘(2) prescribe such guidance with sufficient

12 particularity that compliance shall be readily ascer13 tainable by issuers prior to issuance of securities;

14 and

15 ‘‘(3) provide that forward-looking statements

16 that are in compliance with such guidance and that

17 concern the future economic performance of an is18 suer of securities registered under section 12 of this

19 title will be deemed not to be in violation of this

20 title.

21 Nothing in this section shall be deemed to limit, either

22 expressly or by implication, the authority of the Commis23 sion to exercise similar authority or to adopt similar rules

24 and regulations with respect to forward-looking state-
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1 ments under other statutes under which the Commission

2 exercises rulemaking authority.’’.

3 SEC. 6. AMENDMENT TO RACKETEER INFLUENCED AND

4 CORRUPT ORGANIZATIONS ACT.

5 Section 1964(c) of title 18, United States Code, is

6 amended by inserting ‘‘, except that no person may bring

7 an action under this provision if the racketeering activity,

8 as defined in section 1961(1)(D), involves conduct action9 able as fraud in the purchase or sale of securities’’ before

10 the period.

11 SEC. 7. FINANCIAL FRAUD DETECTION AND DISCLOSURE.

12 (a) AMENDMENTS TO THE SECURITIES EXCHANGE

13 ACT OF 1934.—The Securities Exchange Act of 1934 is

14 amended by inserting after section 13 (15 U.S.C. 78m)

15 the following new section:

16 ‘‘SEC. 13A. FRAUD DETECTION AND DISCLOSURE.

17 ‘‘(a) AUDIT REQUIREMENTS.—Each audit required

18 pursuant to this title of an issuer’s financial statements

19 by an independent public accountant shall include, in ac20 cordance with generally accepted auditing standards, as

21 may be modified or supplemented from time to time by

22 the Commission, the following:

23 ‘‘(1) procedures designed to provide reasonable

24 assurance of detecting illegal acts that would have a
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1 direct and material effect on the determination of fi2 nancial statement amounts;

3 ‘‘(2) procedures designed to identify related

4 party transactions which are material to the finan5 cial statements or otherwise require disclosure there6 in; and

7 ‘‘(3) an evaluation of whether there is substan8 tial doubt about the issuer’s ability to continue as a

9 going concern over the ensuing fiscal year.

10 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV11 ERIES.—

12 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE13 MENT.—If, in the course of conducting any audit

14 pursuant to this title to which subsection (a) applies,

15 the independent public accountant detects or other16 wise becomes aware of information indicating that

17 an illegal act (whether or not perceived to have a

18 material effect on the issuer’s financial statements)

19 has or may have occurred, the accountant shall, in

20 accordance with generally accepted auditing stand21 ards, as may be modified or supplemented from time

22 to time by the Commission—

23 ‘‘(A)(i) determine whether it is likely that

24 an illegal act has occurred, and (ii) if so, deter25 mine and consider the possible effect of the ille-
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1 gal act on the financial statements of the is2 suer, including any contingent monetary effects,

3 such as fines, penalties, and damages; and

4 ‘‘(B) as soon as practicable inform the ap5 propriate level of the issuer’s management and

6 assure that the issuer’s audit committee, or the

7 issuer’s board of directors in the absence of

8 such a committee, is adequately informed with

9 respect to illegal acts that have been detected or

10 otherwise come to the attention of such ac11 countant in the course of the audit, unless the

12 illegal act is clearly inconsequential.

13 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME14 DIAL ACTION.—If, having first assured itself that

15 the audit committee of the board of directors of the

16 issuer or the board (in the absence of an audit com17 mittee) is adequately informed with respect to illegal

18 acts that have been detected or otherwise come to

19 the accountant’s attention in the course of such ac20 countant’s audit, the independent public accountant

21 concludes that—

22 ‘‘(A) any such illegal act has a material ef23 fect on the financial statements of the issuer,

24 ‘‘(B) senior management has not taken,

25 and the board of directors has not caused sen-
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1 ior management to take, timely and appropriate

2 remedial actions with respect to such illegal act,

3 and

4 ‘‘(C) the failure to take remedial action is

5 reasonably expected to warrant departure from

6 a standard auditor’s report, when made, or

7 warrant resignation from the audit engagement,

8 the independent public accountant shall, as soon as

9 practicable, directly report its conclusions to the

10 board of directors.

11 ‘‘(3) NOTICE TO COMMISSION; RESPONSE TO

12 FAILURE TO NOTIFY.—An issuer whose board of di13 rectors has received a report pursuant to paragraph

14 (2) shall inform the Commission by notice within

15 one business day of receipt of such report and shall

16 furnish the independent public accountant making

17 such report with a copy of the notice furnished the

18 Commission. If the independent public accountant

19 making such report shall fail to receive a copy of

20 such notice within the required one-business-day pe21 riod, the independent public accountant shall—

22 ‘‘(A) resign from the engagement; or

23 ‘‘(B) furnish to the Commission a copy of

24 its report (or the documentation of any oral re-
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1 port given) within the next business day follow2 ing such failure to receive notice.

3 ‘‘(4) REPORT AFTER RESIGNATION.—An inde4 pendent public accountant electing resignation shall,

5 within the one business day following a failure by an

6 issuer to notify the Commission under paragraph

7 (3), furnish to the Commission a copy of the ac8 countant’s report (or the documentation of any oral

9 report given).

10 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde11 pendent public accountant shall be liable in a private ac12 tion for any finding, conclusion, or statement expressed

13 in a report made pursuant to paragraph (3) or (4) of sub14 section (b), including any rules promulgated pursuant

15 thereto.

16 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO17 CEEDINGS.—If the Commission finds, after notice and op18 portunity for hearing in a proceeding instituted pursuant

19 to section 21C of this title, that an independent public

20 accountant has willfully violated paragraph (3) or (4) of

21 subsection (b) of this section, then the Commission may,

22 in addition to entering an order under section 21C, impose

23 a civil penalty against the independent public accountant

24 and any other person that the Commission finds was a

25 cause of such violation. The determination whether to im-
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1 pose a civil penalty, and the amount of any such penalty,

2 shall be governed by the standards set forth in section 21B

3 of this title.

4 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex5 cept for subsection (d), nothing in this section limits or

6 otherwise affects the authority of the Commission under

7 this title.

8 ‘‘(f) DEFINITIONS.—As used in this section, the term

9 ‘illegal act’ means any action or omission to act that vio10 lates any law, or any rule or regulation having the force

11 of law.’’.

12 (b) EFFECTIVE DATES.—As to any registrant that

13 is required to file selected quarterly financial data pursu14 ant to item 302(a) of Regulation S–K (17 CFR

15 229.302(a)) of the Securities and Exchange Commission,

16 the amendments made by subsection (a) of this section

17 shall apply to any annual report for any period beginning

18 on or after January 1, 1996. As to any other registrant,

19 such amendment shall apply for any period beginning on

20 or after January 1, 1997.

21 SEC. 8. RULE OF CONSTRUCTION.

22 Nothing in the amendments made by this Act shall

23 be deemed to create or ratify any implied private right

24 of action, or to prevent the Commission by rule from re-
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1 stricting or otherwise regulating private actions under the

2 Securities Exchange Act of 1934.

3 SEC. 9. EFFECTIVE DATE.

4 This Act and the amendments made by this Act are

5 effective on the date of enactment of this Act and shall

6 apply to cases commenced after such date of enactment.

Passed the House of Representatives March 8,

1995.

Attest: ROBIN H. CARLE,

Clerk.

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