Calendar No. 128

104TH CONGRESS

1ST SESSION S. 240

[Report No. 104–98]

A BILL

To amend the Securities Exchange Act of 1934 to

action provisions of the Act.tors are well protected under the implied privatesafeguards to ensure that the interests of invesestablish a filing deadline and to provide certain

JUNE 19, 1995

Reported with an amendment
II

Calendar No. 128

104TH CONGRESS

1ST SESSION S. 240

[Report No. 104–98]

To amend the Securities Exchange Act of 1934 to establish a filing deadline

and to provide certain safeguards to ensure that the interests of investors

are well protected under the implied private action provisions of the

Act.

IN THE SENATE OF THE UNITED STATES

JANUARY 18 (legislative day, JANUARY 10), 1995

Mr. DOMENICI (for himself, Mr. DODD, Mr. HATCH, Ms. MIKULSKI, Mr. BENNETT, Ms. MOSELEY-BRAUN, Mr. LOTT, Mrs. MURRAY, Mr. MACK, Mr.

JOHNSTON, Mr. FAIRCLOTH, Mr. CONRAD, Mr. BURNS, Mr. CHAFEE,

Mr. GORTON, Mr. HELMS, Mr. KYL, Mr. THOMAS, Mrs. HUTCHISON, Mr.

SANTORUM, Mr. PELL, Mr. MCCONNELL, Mr. DEWINE, Mr. BROWN, Mr.

ROCKEFELLER, Mrs. KASSEBAUM, Mr. INHOFE, Mr. COCHRAN, Mr.

LUGAR, Mr. COATS, Mr. SIMPSON, Mr. NICKLES, Mr. THURMOND, Mr.

HATFIELD, Mr. KEMPTHORNE, Mr. SMITH, Mr. FRIST, Mr. GRAMS, Mr.

GREGG, Mr. WARNER, Mr. CRAIG, Mr. HARKIN, Mr. GRASSLEY, Mr.

MURKOWSKI, Mr. ABRAHAM, Mr. BINGAMAN, Mr. COHEN, Mr. BAUCUS,

Mr. KERRY, Mr. D’AMATO, and Mr. FORD) introduced the following bill;

which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs

JUNE 19, 1995

Reported by Mr. D’AMATO, with an amendment

[Strike out all after the enacting clause and insert the part printed in italic]

A BILL

To amend the Securities Exchange Act of 1934 to establish
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a filing deadline and to provide certain safeguards to

ensure that the interests of investors are well protected

under the implied private action provisions of the Act.

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 ‘‘Private Securities Litigation Reform Act of 1995’’.

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

7 this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—PRIVATE SECURITIES LITIGATION

Sec. 101. Elimination of certain abusive practices.

Sec. 102. Alternative dispute resolution procedure; time limitation on private

rights of action.

Sec. 103. Plaintiff steering committees.

Sec. 104. Requirements for securities fraud actions.

Sec. 105. Amendment to Racketeer Influenced and Corrupt Organizations Act.

TITLE II—FINANCIAL DISCLOSURE

Sec. 201. Safe harbor for forward-looking statements.

Sec. 202. Fraud detection and disclosure.

Sec. 203. Proportionate liability and joint and several liability.

Sec. 204. Public Auditing Self-Disciplinary Board.

8 TITLE I—PRIVATE SECURITIES

9 LITIGATION

10 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

11 (a) RECEIPT FOR REFERRAL FEES.—Section 15(c)

12 of the Securities Exchange Act of 1934 (15 U.S.C. 78o(c))

13 is amended by adding at the end the following new para14 graph:
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1 ‘‘(7) RECEIPT OF REFERRAL FEES.—No broker

2 or dealer, or person associated with a broker or deal3 er, may solicit or accept remuneration for assisting

4 an attorney in obtaining the representation of any

5 customer in any implied private action arising under

6 this title.’’.

7 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

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

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

10 is amended by adding at the end the following new para11 graph:

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

13 FROM COMMISSION DISGORGEMENT FUNDS.—Except

14 as otherwise ordered by the court, funds disgorged

15 as the result of an action brought by the Commis16 sion in Federal court, or of any Commission admin17 istrative action, shall not be distributed as payment

18 for attorneys’ fees or expenses incurred by private

19 parties seeking distribution of the disgorged funds.’’.

20 (c) ADDITIONAL PROVISIONS APPLICABLE TO CLASS

21 ACTIONS.—Section 21 of the Securities Exchange Act of

22 1934 (15 U.S.C. 78u) is amended by adding at the end

23 the following new subsections:

24 ‘‘(i) RECOVERY BY NAMED PLAINTIFFS IN CLASS

25 ACTIONS.—In an implied private action arising under this
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1 title that is certified as a class action pursuant to the Fed2 eral Rules of Civil Procedure, the share of any final judg3 ment or of any settlement that is awarded to class plain4 tiffs serving as the representative parties shall be cal5 culated in the same manner as the shares of the final judg6 ment or settlement awarded to all other members of the

7 class. Nothing in this subsection shall be construed to

8 limit the award to any representative parties of reasonable

9 compensation, costs, and expenses (including lost wages)

10 relating to the representation of the class.

11 ‘‘(j) CONFLICTS OF INTEREST.—In an implied pri12 vate action arising under this title that is certified as a

13 class action pursuant to the Federal Rules of Civil Proce14 dure, if a party is represented by an attorney who directly

15 owns or otherwise has a beneficial interest in the securities

16 that are the subject of the litigation, the court shall make

17 a determination of whether such interest constitutes a con18 flict of interest sufficient to disqualify the attorney from

19 representing the party.

20 ‘‘(k) RESTRICTIONS ON SETTLEMENTS UNDER

21 SEAL.—In an implied private action arising under this

22 title that is certified as a class action pursuant to the Fed23 eral Rules of Civil Procedure, the terms and provisions

24 of any settlement agreement between any of the parties

25 shall not be filed under seal, except that on motion of any
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1 of the parties to the settlement, the court may order filing

2 under seal for those portions of a settlement agreement

3 as to which good cause is shown for such filing under seal.

4 Good cause shall only exist if publication of a term or pro5 vision of a settlement agreement would cause direct and

6 substantial harm to any person.

7 ‘‘(l) RESTRICTIONS ON PAYMENT OF ATTORNEYS’

8 FEES FROM SETTLEMENT FUNDS.—In an implied private

9 action arising under this title that is certified as a class

10 action pursuant to the Federal Rules of Civil Procedure,

11 attorneys’ fees awarded by the court to counsel for the

12 class shall be determined as a percentage of the amount

13 of damages and prejudgment interest actually paid to the

14 class as a result of the attorneys’ efforts. In no event shall

15 the amount awarded to counsel for the class exceed a rea16 sonable percentage of the amount recovered by the class

17 plus reasonable expenses.

18 ‘‘(m) DISCLOSURE OF SETTLEMENT TERMS TO

19 CLASS MEMBERS.—In an implied private action arising

20 under this title that is certified as a class action pursuant

21 to the Federal Rules of Civil Procedure, a proposed settle22 ment agreement that is published or otherwise dissemi23 nated to the class shall include the following statements,

24 which shall not be admissible for purposes of any Federal

25 or State judicial or administrative proceeding:
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1 ‘‘(1) STATEMENT OF POTENTIAL OUTCOME OF

2 CASE.—

3 ‘‘(A) AGREEMENT ON AMOUNT OF DAM4 AGES AND LIKELIHOOD OF PREVAILING.—If the

5 settling parties agree on the amount of dam6 ages per share that would be recoverable if the

7 plaintiff prevailed on each claim alleged under

8 this title and the likelihood that the plaintiff

9 would prevail—

10 ‘‘(i) a statement concerning the

11 amount of such potential damages; and

12 ‘‘(ii) a statement concerning the prob13 ability that the plaintiff would prevail on

14 the claims alleged under this title and a

15 brief explanation of the reasons for that

16 conclusion.

17 ‘‘(B) DISAGREEMENT ON AMOUNT OF

18 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

19 the parties do not agree on the amount of dam20 ages per share that would be recoverable if the

21 plaintiff prevailed on each claim alleged under

22 this title or on the likelihood that the plaintiff

23 would prevail on those claims, or both, a state24 ment from each settling party concerning the

25 issue or issues on which the parties disagree.
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1 ‘‘(C) INADMISSIBILITY FOR CERTAIN PUR2 POSES.—Statements made in accordance with

3 subparagraphs (A) and (B) shall not be admis4 sible for purposes of any Federal or State judi5 cial or administrative proceeding.

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

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

8 their counsel intend to apply to the court for an

9 award of attorneys’ fees or costs from any fund es10 tablished as part of the settlement, a statement indi11 cating which parties or counsel intend to make such

12 an application, the amount of fees and costs that

13 will be sought, and a brief explanation of the basis

14 for the application.

15 ‘‘(3) IDENTIFICATION OF REPRESENTATIVES.—

16 The name, telephone number, and address of one or

17 more representatives of counsel for the plaintiff class

18 who will be reasonably available to answer questions

19 from class members concerning any matter con20 tained in any notice of settlement published or oth21 erwise disseminated to class members.

22 ‘‘(4) OTHER INFORMATION.—Such other infor23 mation as may be required by the court, or by any

24 guardian ad litem or plaintiff steering committee ap25 pointed by the court pursuant to section 38.
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1 ‘‘(n) SPECIAL VERDICTS.—In an implied private ac2 tion arising under this title in which the plaintiff may re3 cover money damages only on proof that a defendant acted

4 with a particular state of mind, the court shall, when re5 quested by a defendant, submit to the jury a written inter6 rogatory on the issue of each such defendant’s state of

7 mind at the time the alleged violation occurred.

8 ‘‘(o) NAMED PLAINTIFF THRESHOLD.—In an im9 plied private action arising under this title, in order for

10 a plaintiff or plaintiffs to obtain certification as represent11 atives of a class of investors pursuant to the Federal Rules

12 of Civil Procedure, the plaintiff or plaintiffs must show

13 that they owned, in the aggregate, during the time period

14 in which violations of this title are alleged to have oc15 curred, not less than the lesser of—

16 ‘‘(1) 1 percent of the securities which are the

17 subject of the litigation; or

18 ‘‘(2) $10,000 (in market value) of such securi19 ties.’’.

20 SEC. 102. ALTERNATIVE DISPUTE RESOLUTION PROCE21 DURE; TIME LIMITATION ON PRIVATE

22 RIGHTS OF ACTION.

23 (a) RECOVERY OF COSTS AND ATTORNEYS’ FEES.—

24 The Securities Exchange Act of 1934 (15 U.S.C. 78a et
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1 seq.) is amended by adding at the end the following new

2 section:

3 ‘‘SEC. 36. ALTERNATIVE DISPUTE RESOLUTION PROCE4 DURE.

5 ‘‘(a) IN GENERAL.—

6 ‘‘(1) OFFER TO PROCEED.—Except as provided

7 in paragraph (2), in an implied private action aris8 ing under this title, any party may, before the expi9 ration of the period permitted for answering the

10 complaint, deliver to all other parties an offer to

11 proceed pursuant to any voluntary, nonbinding alter12 native dispute resolution procedure established or

13 recognized under the rules of the court in which the

14 action is maintained.

15 ‘‘(2) PLAINTIFF CLASS ACTIONS.—In an im16 plied private action under this title which is brought

17 as a plaintiff class action, an offer under paragraph

18 (1) shall be made not later than 30 days after a

19 guardian ad litem or plaintiff steering committee is

20 appointed by the court in accordance with section

21 38.

22 ‘‘(3) RESPONSE.—The recipient of an offer

23 under paragraph (1) or (2) shall file a written notice

24 of acceptance or rejection of the offer with the court

25 not later than 10 days after receipt of the offer. The
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1 court may, upon motion by any party made prior to

2 the expiration of such period, extend the period for

3 not more than 90 additional days, during which time

4 discovery may be permitted by the court.

5 ‘‘(4) SELECTION OF TYPE OF ALTERNATIVE

6 DISPUTE RESOLUTION.—For purposes of paragraphs

7 (1) and (2), if the rules of the court establish or rec8 ognize more than 1 type of alternative dispute reso9 lution, the parties may stipulate as to the type of al10 ternative dispute resolution to be applied. If the par11 ties are unable to so stipulate, the court shall issue

12 an order not later than 20 days after the date on

13 which the parties agree to the use of alternative dis14 pute resolution, specifying the type of alternative

15 dispute resolution to be applied.

16 ‘‘(5) SANCTIONS FOR DILATORY OR OBSTRUC17 TIVE CONDUCT.—If the court finds that a party has

18 engaged in dilatory or obstructive conduct in taking

19 or opposing any discovery allowed during the re20 sponse period described in paragraph (3), the court

21 may—

22 ‘‘(A) extend the period to permit further

23 discovery from that party for a suitable period;

24 and
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1 ‘‘(B) deny that party the opportunity to

2 conduct further discovery prior to the expiration

3 of the period.

4 ‘‘(b) PENALTY FOR UNREASONABLE LITIGATION PO5 SITION.—

6 ‘‘(1) AWARD OF COSTS.—In an implied private

7 action arising under this title, upon motion of the

8 prevailing party made prior to final judgment, the

9 court shall award costs, including reasonable attor10 neys’ fees, against a party or parties or their attor11 neys, if—

12 ‘‘(A) the party unreasonably refuses to

13 proceed pursuant to an alternative dispute reso14 lution procedure, or refuses to accept the result

15 of an alternative dispute resolution procedure;

16 ‘‘(B) final judgment is entered against the

17 party; and

18 ‘‘(C) the party asserted a claim or defense

19 in the action which was not substantially justi20 fied.

21 ‘‘(2) DETERMINATION OF JUSTIFICATION.—For

22 purposes of paragraph (1)(C), whether a position is

23 ‘substantially justified’ shall be determined in the

24 same manner as under section 2412(d)(1)(B) of title

25 28, United States Code.
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1 ‘‘(3) LIMITED USE.—Fees and costs awarded

2 under this paragraph shall not be applied to any

3 named plaintiff in any action certified as a class ac4 tion under the Federal Rules of Civil Procedure if

5 such plaintiff has never owned more than

6 $1,000,000 of the securities which are the subject of

7 the litigation.’’.

8 (b) LIMITATIONS PERIOD FOR IMPLIED PRIVATE

9 RIGHTS OF ACTION.—The Securities Exchange Act of

10 1934 (15 U.S.C. 78a et seq.) is amended by adding at

11 the end the following new section:

12 ‘‘SEC. 37. LIMITATIONS PERIOD FOR IMPLIED PRIVATE

13 RIGHTS OF ACTION.

14 ‘‘(a) IN GENERAL.—Except as otherwise provided in

15 this title, an implied private right of action arising under

16 this title shall be brought not later than the earlier of—

17 ‘‘(1) 5 years after the date on which the alleged

18 violation occurred; or

19 ‘‘(2) 2 years after the date on which the alleged

20 violation was discovered or should have been discov21 ered through the exercise of reasonable diligence.

22 ‘‘(b) EFFECTIVE DATE.—The limitations period pro23 vided by this section shall apply to all proceedings pending

24 on or commenced after the date of enactment of this sec25 tion.’’.
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1 SEC. 103. PLAINTIFF STEERING COMMITTEES.

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

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

4 new section:

5 ‘‘SEC. 38. GUARDIAN AD LITEM AND CLASS ACTION STEER6 ING COMMITTEES.

7 ‘‘(a) GUARDIAN AD LITEM.—Except as provided in

8 subsection (b), not later than 10 days after certifying a

9 plaintiff class in an implied private action brought under

10 this title, the court shall appoint a guardian ad litem for

11 the plaintiff class from a list or lists provided by the par12 ties or their counsel. The guardian ad litem shall direct

13 counsel for the class and perform such other functions as

14 the court may specify. The court shall apportion the rea15 sonable fees and expenses of the guardian ad litem among

16 the parties. Court appointment of a guardian ad litem

17 shall not be subject to interlocutory review.

18 ‘‘(b) CLASS ACTION STEERING COMMITTEE.—Sub19 section (a) shall not apply if, not later than 10 days after

20 certifying a plaintiff class, on its own motion or on motion

21 of a member of the class, the court appoints a committee

22 of class members to direct counsel for the class (hereafter

23 in this section referred to as the ‘plaintiff steering commit24 tee’) and to perform such other functions as the court may

25 specify. Court appointment of a plaintiff steering commit26 tee shall not be subject to interlocutory review.
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1 ‘‘(c) MEMBERSHIP OF PLAINTIFF STEERING COM2 MITTEE.—

3 ‘‘(1) QUALIFICATIONS.—

4 ‘‘(A) NUMBER.—A plaintiff steering com5 mittee shall consist of not less than 5 class

6 members, willing to serve, who the court be7 lieves will fairly represent the class.

8 ‘‘(B) OWNERSHIP INTERESTS.—Members

9 of the plaintiff steering committee shall have

10 cumulatively held during the class period not

11 less than—

12 ‘‘(i) the lesser of 5 percent of the se13 curities which are the subject matter of the

14 litigation or securities which are the sub15 ject matter of the litigation with a market

16 value of $10,000,000; or

17 ‘‘(ii) such smaller percentage or dollar

18 amount as the court finds appropriate

19 under the circumstances.

20 ‘‘(2) NAMED PLAINTIFFS.—Class members who

21 are named plaintiffs in the litigation may serve on

22 the plaintiff steering committee, but shall not com23 prise a majority of the committee.

24 ‘‘(3) NONCOMPENSATION OF MEMBERS.—Mem25 bers of the plaintiff steering committee shall serve
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1 without compensation, except that any member may

2 apply to the court for reimbursement of reasonable

3 out-of-pocket expenses from any common fund es4 tablished for the class.

5 ‘‘(4) MEETINGS.—The plaintiff steering com6 mittee shall conduct its business at one or more pre7 viously scheduled meetings of the committee at

8 which a majority of its members are present in per9 son or by electronic communication. The plaintiff

10 steering committee shall decide all matters within its

11 authority by a majority vote of all members, except

12 that the committee may determine that decisions

13 other than to accept or reject a settlement offer or

14 to employ or dismiss counsel for the class may be

15 delegated to one or more members of the committee,

16 or may be voted upon by committee members seria17 tim, without a meeting.

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

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

20 steering committee may appear and be heard by the

21 court on any issue in the action, to the same extent

22 as any other party.

23 ‘‘(d) FUNCTIONS OF GUARDIAN AD LITEM AND

24 PLAINTIFF STEERING COMMITTEE.—
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1 ‘‘(1) DIRECT COUNSEL.—The authority of the

2 guardian ad litem or the plaintiff steering committee

3 to direct counsel for the class shall include all pow4 ers normally permitted to an attorney’s client in liti5 gation, including the authority to retain or dismiss

6 counsel and to reject offers of settlement, and the

7 preliminary authority to accept an offer of settle8 ment, subject to the restrictions specified in para9 graph (2). Dismissal of counsel other than for cause

10 shall not limit the ability of counsel to enforce any

11 contractual fee agreement or to apply to the court

12 for a fee award from any common fund established

13 for the class.

14 ‘‘(2) SETTLEMENT OFFERS.—If a guardian ad

15 litem or a plaintiff steering committee gives prelimi16 nary approval to an offer of settlement, the guardian

17 ad litem or the plaintiff steering committee may seek

18 approval of the offer by a majority of class members

19 if the committee determines that the benefit of seek20 ing such approval outweighs the cost of soliciting the

21 approval of class members.

22 ‘‘(e) IMMUNITY FROM LIABILITY; REMOVAL.—Any

23 person serving as a guardian ad litem or as a member

24 of a plaintiff steering committee shall be immune from any

25 liability arising from such service. The court may remove
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1 a guardian ad litem or a member of a plaintiff steering

2 committee for good cause shown.

3 ‘‘(f) EFFECT ON OTHER LAW.—This section does not

4 affect any other provision of law concerning class actions

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

6 offer of settlement.’’.

7 SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD AC8 TIONS.

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

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

11 new section:

12 ‘‘SEC. 39. REQUIREMENTS FOR SECURITIES FRAUD AC13 TIONS.

14 ‘‘(a) INTENT.—In an implied private action arising

15 under this title in which the plaintiff may recover money

16 damages from a defendant only on proof that the defend17 ant acted with some level of intent, the plaintiff’s com18 plaint shall allege specific facts demonstrating the state

19 of mind of each defendant at the time the alleged violation

20 occurred.

21 ‘‘(b) MISLEADING STATEMENTS AND OMISSIONS.—

22 In an implied action arising under this title in which the

23 plaintiff alleges that the defendant—

24 ‘‘(1) made an untrue statement of a material

25 fact; or
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1 ‘‘(2) omitted to state a material fact necessary

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

3 of the circumstances in which they were made, not

4 misleading;

5 the plaintiff shall specify each statement alleged to have

6 been misleading, the reason or reasons why the statement

7 is misleading, and, if an allegation regarding the state8 ment or omission is made on information and belief, the

9 plaintiff shall set forth all information on which that belief

10 is formed.

11 ‘‘(c) BURDEN OF PROOF.—In an implied private ac12 tion arising under this title based on a material

13 misstatement or omission concerning a security, and in

14 which the plaintiff claims to have bought or sold the secu15 rity based on a reasonable belief that the market value

16 of the security reflected all publicly available information,

17 the plaintiff shall have the burden of proving that the

18 misstatement or omission caused any loss incurred by the

19 plaintiff.

20 ‘‘(d) DAMAGES.—In an implied private action arising

21 under this title based on a material misstatement or omis22 sion concerning a security, and in which the plaintiff

23 claims to have bought or sold the security based on a rea24 sonable belief that the market value of the security re-
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1 flected all publicly available information, the plaintiff’s

2 damages 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

7 misstatement or omission; 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 misstatement or omis12 sion.’’.

13 SEC. 105. AMENDMENT TO RACKETEER INFLUENCED AND

14 CORRUPT ORGANIZATIONS ACT.

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

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

17 an action under this provision if the racketeering activity,

18 as defined in section 1961(1)(D), involves fraud in the sale

19 of securities’’ before the period.

20 TITLE II—FINANCIAL

21 DISCLOSURE

22 SEC. 201. SAFE HARBOR FOR FORWARD-LOOKING STATE23 MENTS.

24 (a) CONSIDERATION OF REGULATORY OR LEGISLA25 TIVE CHANGES.—In consultation with investors and issu-
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1 ers of securities, the Securities and Exchange Commission

2 shall consider adopting or amending its rules and regula3 tions, or making legislative recommendations, concern4 ing—

5 (1) criteria that the Commission finds appro6 priate for the protection of investors by which for7 ward-looking statements concerning the future eco8 nomic performance of an issuer of securities reg9 istered under section 12 of the Securities Exchange

10 Act of 1934 will be deemed not to be in violation of

11 section 10(b) of that Act; and

12 (2) procedures by which courts shall timely dis13 miss claims against such issuers of securities based

14 on such forward-looking statements if such state15 ments are in accordance with any criteria under

16 paragraph (1).

17 (b) COMMISSION CONSIDERATIONS.—In developing

18 rules or legislative recommendations in accordance with

19 subsection (a), the Commission shall consider—

20 (1) appropriate limits to liability for forward21 looking statements;

22 (2) procedures for making a summary deter23 mination of the applicability of any Commission rule

24 for forward-looking statements early in a judicial
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1 proceeding to limit protracted litigation and expan2 sive discovery;

3 (3) incorporating and reflecting the scienter re4 quirements applicable to implied private actions

5 under section 10(b); and

6 (4) providing clear guidance to issuers of secu7 rities and the judiciary.

8 (c) SECURITIES ACT AMENDMENT.—The Securities

9 and Exchange Act of 1934 (15 U.S.C. 78a et seq.), is

10 amended by adding at the end the following new section:

11 ‘‘SEC. 40. APPLICATION OF SAFE HARBOR FOR FORWARD12 LOOKING STATEMENTS.

13 ‘‘(a) IN GENERAL.—In any implied private action

14 arising under this title that alleges that a forward-looking

15 statement concerning the future economic performance of

16 an issuer registered under section 12 was materially false

17 or misleading, if a party making a motion in accordance

18 with subsection (b) requests a stay of discovery concerning

19 the claims or defenses of that party, the court shall grant

20 such a stay until it has ruled on any such motion.

21 ‘‘(b) SUMMARY JUDGMENT MOTIONS.—Subsection

22 (a) shall apply to any motion for summary judgment made

23 by a defendant asserting that the forward-looking state24 ment was within the coverage of any rule which the Com25 mission may have adopted concerning such predictive
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1 statements, if such motion is made not less than 60 days

2 after the plaintiff commences discovery in the action.

3 ‘‘(c) DILATORY CONDUCT; DUPLICATIVE DISCOV4 ERY.—Notwithstanding subsection (a) or (b), the time

5 permitted for a plaintiff to conduct discovery under sub6 section (b) may be extended, or a stay of the proceedings

7 may be denied, if the court finds that—

8 ‘‘(1) the defendant making a motion described

9 in subsection (b) engaged in dilatory or obstructive

10 conduct in taking or opposing any discovery; or

11 ‘‘(2) a stay of discovery pending a ruling on a

12 motion under subsection (b) would be substantially

13 unfair to the plaintiff or other parties to the ac14 tion.’’.

15 SEC. 202. FRAUD DETECTION AND DISCLOSURE.

16 (a) IN GENERAL.—The Securities Exchange Act of

17 1934 (15 U.S.C. 78a et seq.) is amended by inserting im18 mediately after section 10 the following new section:

19 ‘‘SEC. 10A. AUDIT REQUIREMENTS.

20 ‘‘(a) IN GENERAL.—Each audit required pursuant to

21 this title of an issuer’s financial statements by an inde22 pendent public accountant shall include, in accordance

23 with generally accepted auditing standards, as may be

24 modified or supplemented from time to time by the Com25 mission—
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1 ‘‘(1) procedures designed to provide reasonable

2 assurance of detecting illegal acts that would have a

3 direct and material effect on the determination of fi4 nancial statement amounts;

5 ‘‘(2) procedures designed to identify related

6 party transactions which are material to the finan7 cial statements or otherwise require disclosure there8 in; and

9 ‘‘(3) an evaluation of whether there is substan10 tial doubt about the issuer’s ability to continue as a

11 going concern during the ensuing fiscal year.

12 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV13 ERIES.—

14 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE15 MENT.—If, in the course of conducting an audit pur16 suant to this title to which subsection (a) applies,

17 the independent public accountant detects or other18 wise becomes aware of information indicating that

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

20 material effect on the issuer’s financial statements)

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

22 accordance with generally accepted auditing stand23 ards, as may be modified or supplemented from time

24 to time by the Commission—
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1 ‘‘(A)(i) determine whether it is likely that

2 an illegal act has occurred; and

3 ‘‘(ii) if so, determine and consider the pos4 sible effect of the illegal act on the financial

5 statements of the issuer, including any contin6 gent monetary effects, such as fines, penalties,

7 and damages; and

8 ‘‘(B) as soon as practicable, inform the ap9 propriate level of the issuer’s management and

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

11 issuer’s board of directors in the absence of

12 such a committee, is adequately informed with

13 respect to illegal acts that have been detected or

14 have otherwise come to the attention of such

15 accountant in the course of the audit, unless

16 the illegal act is clearly inconsequential.

17 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME18 DIAL ACTION.—If, having first assured itself that

19 the audit committee of the board of directors of the

20 issuer or the board (in the absence of an audit com21 mittee) is adequately informed with respect to illegal

22 acts that have been detected or have otherwise come

23 to the accountant’s attention in the course of such

24 accountant’s audit, the independent public account25 ant concludes that—
25

•S 240 RS

1 ‘‘(A) the illegal act has a material effect on

2 the financial statements of the issuer;

3 ‘‘(B) the senior management has not

4 taken, and the board of directors has not

5 caused senior management to take, timely and

6 appropriate remedial actions with respect to the

7 illegal act; and

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

9 reasonably expected to warrant departure from

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

11 warrant resignation from the audit engagement;

12 the independent public accountant shall, as soon as

13 practicable, directly report its conclusions to the

14 board of directors.

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

16 FAILURE TO NOTIFY.—An issuer whose board of di17 rectors receives a report under paragraph (2) shall

18 inform the Commission by notice not later than 1

19 business day after the receipt of such report and

20 shall furnish the independent public accountant

21 making such report with a copy of the notice fur22 nished to the Commission. If the independent public

23 accountant fails to receive a copy of the notice be24 fore the expiration of the required 1-business-day pe25 riod, the independent public accountant shall—
26

•S 240 RS

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

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

3 its report (or the documentation of any oral re4 port given) not later than 1 business day follow5 ing such failure to receive notice.

6 ‘‘(4) REPORT AFTER RESIGNATION.—If an

7 independent public accountant resigns from an en8 gagement under paragraph (3)(A), the accountant

9 shall, not later than 1 business day following the

10 failure by the issuer to notify the Commission under

11 paragraph (3), furnish to the Commission a copy of

12 the accountant’s report (or the documentation of

13 any oral report given).

14 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde15 pendent public accountant shall be liable in a private ac16 tion for any finding, conclusion, or statement expressed

17 in a report made pursuant to paragraph (3) or (4) of sub18 section (b), including any rules promulgated pursuant

19 thereto.

20 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO21 CEEDINGS.—If the Commission finds, after notice and op22 portunity for hearing in a proceeding instituted pursuant

23 to section 21C, that an independent public accountant has

24 willfully violated paragraph (3) or (4) of subsection (b),

25 the Commission may, in addition to entering an order
27

•S 240 RS

1 under section 21C, impose a civil penalty against the inde2 pendent public accountant and any other person that the

3 Commission finds was a cause of such violation. The deter4 mination to impose a civil penalty and the amount of the

5 penalty shall be governed by the standards set forth in

6 section 21B.

7 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex8 cept as provided in subsection (d), nothing in this section

9 shall be held to limit or otherwise affect the authority of

10 the Commission under this title.

11 ‘‘(f) DEFINITION.—As used in this section, the term

12 ‘illegal act’ means an act or omission that violates any law,

13 or any rule or regulation having the force of law.’’.

14 (b) EFFECTIVE DATES.—With respect to any reg15 istrant that is required to file selected quarterly financial

16 data pursuant to item 302(a) of Regulation S–K of the

17 Securities and Exchange Commission (17 CFR

18 229.302(a)), the amendments made by subsection (a) shall

19 apply to any annual report for any period beginning on

20 or after January 1, 1994. With respect to any other reg21 istrant, the amendment shall apply for any period begin22 ning on or after January 1, 1995.
28

•S 240 RS

1 SEC. 203. PROPORTIONATE LIABILITY AND JOINT AND SEV2 ERAL LIABILITY.

3 (a) SECURITIES ACT AMENDMENT.—The Securities

4 and Exchange Act of 1934 (15 U.S.C. 78a et seq.) is

5 amended by adding at the end the following new section:

6 ‘‘SEC. 41. PROPORTIONATE LIABILITY AND JOINT AND SEV7 ERAL LIABILITY IN IMPLIED ACTIONS.

8 ‘‘(a) APPLICABILITY.—This section shall apply only

9 to the allocation of damages among persons who are, or

10 who may become, liable for damages in an implied private

11 action arising under this title. Nothing in this section shall

12 affect the standards for liability associated with an implied

13 private action arising under this title.

14 ‘‘(b) APPLICATION OF JOINT AND SEVERAL LIABIL15 ITY.—

16 ‘‘(1) IN GENERAL.—A person against whom a

17 judgment is entered in an implied private action

18 arising under this title shall be liable jointly and sev19 erally for any recoverable damages on such judg20 ment if the person is found to have—

21 ‘‘(A) been a primary wrongdoer;

22 ‘‘(B) committed knowing securities fraud;

23 or

24 ‘‘(C) controlled any primary wrongdoer or

25 person who committed knowing securities fraud.
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•S 240 RS

1 ‘‘(2) PRIMARY WRONGDOER.—As used in this

2 subsection—

3 ‘‘(A) the term ‘primary wrongdoer’

4 means—

5 ‘‘(i) any—

6 ‘‘(I) issuer, registrant, purchaser,

7 seller, or underwriter of securities;

8 ‘‘(II) marketmaker or specialist

9 in securities; or

10 ‘‘(III) clearing agency, securities

11 information processor, or government

12 securities dealer;

13 if such person breached a direct statutory

14 or regulatory obligation or if such person

15 otherwise had a principal role in the con16 duct that is the basis for the implied right

17 of action; or

18 ‘‘(ii) any person who intentionally ren19 dered substantial assistance to the fraudu20 lent conduct of any person described in

21 clause (i), with actual knowledge of such

22 person’s fraudulent conduct or fraudulent

23 purpose, and with knowledge that such

24 conduct was wrongful; and
30

•S 240 RS

1 ‘‘(B) a defendant engages in ‘knowing se2 curities fraud’ if such defendant—

3 ‘‘(i) makes a material representation

4 with actual knowledge that the representa5 tion is false, or omits to make a statement

6 with actual knowledge that, as a result of

7 the omission, one of the defendant’s mate8 rial representations is false and knows that

9 other persons are likely to rely on that

10 misrepresentation or omission, except that

11 reckless conduct by the defendant shall not

12 be construed to constitute ‘knowing securi13 ties fraud’; or

14 ‘‘(ii) intentionally rendered substantial

15 assistance to the fraudulent conduct of any

16 person described in clause (i), with actual

17 knowledge of such person’s fraudulent con18 duct or fraudulent purpose, and with

19 knowledge that such conduct was wrongful.

20 ‘‘(c) DETERMINATION OF RESPONSIBILITY.—In an

21 implied private action in which more than 1 person con22 tributed to a violation of this title, the court shall instruct

23 the jury to answer special interrogatories, or if there is

24 no jury, shall make findings, concerning the degree of re25 sponsibility of each person alleged to have caused or con-
31

•S 240 RS

1 tributed to the violation of this title, including persons who

2 have entered into settlements with the plaintiff. The inter3 rogatories or findings shall specify the amount of damages

4 the plaintiff is entitled to recover and the degree of respon5 sibility, measured as a percentage of the total fault of all

6 persons involved in the violation, of each person found to

7 have caused or contributed to the damages incurred by

8 the plaintiff or plaintiffs. In determining the degree of re9 sponsibility, the trier of fact shall consider—

10 ‘‘(1) the nature of the conduct of each person;

11 and

12 ‘‘(2) the nature and extent of the causal rela13 tionship between that conduct and the damage

14 claimed by the plaintiff.

15 ‘‘(d) APPLICATION OF PROPORTIONATE LIABILITY.—

16 Except as provided in subsection (b), the amount of liabil17 ity of a person who is, or may through right of contribu18 tion become, liable for damages based on an implied pri19 vate action arising under this title shall be determined as

20 follows:

21 ‘‘(1) DEGREE OF RESPONSIBILITY.—Except as

22 provided in paragraph (2), each liable party shall

23 only be liable for the portion of the judgment that

24 corresponds to that party’s degree of responsibility,

25 as determined under subsection (c).
32

•S 240 RS

1 ‘‘(2) UNCOLLECTIBLE SHARES.—If, upon mo2 tion made not later than 6 months after a final

3 judgment is entered, the court determines that all or

4 part of a defendant’s share of the obligation is

5 uncollectible—

6 ‘‘(A) the remaining defendants shall be

7 jointly and severally liable for the uncollectible

8 share if the plaintiff establishes that—

9 ‘‘(i) the plaintiff is an individual

10 whose recoverable damages under a final

11 judgment are equal to more than 10 per12 cent of the plaintiff’s net financial worth;

13 and

14 ‘‘(ii) the plaintiff’s net financial worth

15 is less than $200,000; and

16 ‘‘(B) the amount paid by each of the re17 maining defendants to all other plaintiffs shall

18 be, in total, not more than the greater of—

19 ‘‘(i) that remaining defendant’s per20 centage of fault for the uncollectible share;

21 or

22 ‘‘(ii) 5 times—

23 ‘‘(I) the amount which the de24 fendant gained from the conduct that

25 gave rise to its liability; or
33

•S 240 RS

1 ‘‘(II) if a defendant did not ob2 tain a direct financial gain from the

3 conduct that gave rise to the liability

4 and the conduct consisted of the pro5 vision of deficient services to an entity

6 involved in the violation, the defend7 ant’s gross revenues received for the

8 provision of all services to the other

9 entity involved in the violation during

10 the calendar years in which deficient

11 services were provided.

12 ‘‘(3) OVERALL LIMIT.—In no event shall the

13 total payments required pursuant to paragraph (2)

14 exceed the amount of the uncollectible share.

15 ‘‘(4) DEFENDANTS SUBJECT TO CONTRIBU16 TION.—A defendant whose liability is reallocated

17 pursuant to paragraph (2) shall be subject to con18 tribution and to any continuing liability to the plain19 tiff on the judgment.

20 ‘‘(5) RIGHT OF CONTRIBUTION.—To the extent

21 that a defendant is required to make an additional

22 payment pursuant to paragraph (2), that defendant

23 may recover contribution—

24 ‘‘(A) from the defendant originally liable to

25 make the payment;
34

•S 240 RS

1 ‘‘(B) from any defendant liable jointly and

2 severally pursuant to subsection (b)(1);

3 ‘‘(C) from any defendant held proportion4 ately liable pursuant to this subsection who is

5 liable to make the same payment and has paid

6 less than his or her proportionate share of that

7 payment; or

8 ‘‘(D) from any other person responsible for

9 the conduct giving rise to the payment who

10 would have been liable to make the same pay11 ment.

12 ‘‘(e) NONDISCLOSURE TO JURY.—The standard for

13 allocation of damages under subsections (b)(1) and (c)

14 and the procedure for reallocation of uncollectible shares

15 under subsection (d)(2) shall not be disclosed to members

16 of the jury.

17 ‘‘(f) SETTLEMENT DISCHARGE.—

18 ‘‘(1) IN GENERAL.—A defendant who settles an

19 implied private action brought under this title at any

20 time before verdict or judgment shall be discharged

21 from all claims for contribution brought by other

22 persons. Upon entry of the settlement by the court,

23 the court shall enter a bar order constituting the

24 final discharge of all obligations to the plaintiff of

25 the settling defendant arising out of the action. The
35

•S 240 RS

1 order shall bar all future claims for contribution or

2 indemnity arising out of the action—

3 ‘‘(A) by nonsettling persons against the

4 settling defendant; and

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

6 nonsettling defendants.

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

8 settlement with the plaintiff prior to verdict or judg9 ment, the verdict or judgment shall be reduced by

10 the greater of—

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

12 degree of responsibility of that person; or

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

14 that person.

15 ‘‘(g) CONTRIBUTION.—A person who becomes liable

16 for damages in an implied private action arising under this

17 title may recover contribution from any other person who,

18 if joined in the original suit, would have been liable for

19 the same damages. A claim for contribution shall be deter20 mined based on the degree of responsibility of the claimant

21 and of each person against whom a claim for contribution

22 is made.

23 ‘‘(h) STATUTE OF LIMITATIONS FOR CONTRIBU24 TION.—Once judgment has been entered in an implied pri25 vate action arising under this title determining liability,
36

•S 240 RS

1 an action for contribution must be brought not later than

2 6 months after the entry of a final, nonappealable judg3 ment in the action, except that an action for contribution

4 brought by a defendant who was required to make an ad5 ditional payment pursuant to subsection (d)(2) may be

6 brought not later than 6 months after the date on which

7 such payment was made.’’.

8 (b) EFFECTIVE DATE.—Section 41 of the Securities

9 Exchange Act of 1934, as added by subsection (a), shall

10 only apply to implied private actions commenced after the

11 date of enactment of this Act.

12 SEC. 204. PUBLIC AUDITING SELF-DISCIPLINARY BOARD.

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

14 et seq.) is amended by inserting immediately after section

15 13 the following new section:

16 ‘‘SEC. 13A. PUBLIC AUDITING SELF-DISCIPLINARY BOARD.

17 ‘‘(a) DEFINITIONS.—For purposes of this section, the

18 following definitions shall apply:

19 ‘‘(1) PUBLIC ACCOUNTING FIRM.—The term

20 ‘public accounting firm’ means a sole proprietorship,

21 unincorporated association, partnership, corporation,

22 or other legal entity that is engaged in the practice

23 of public accounting.
37

•S 240 RS

1 ‘‘(2) BOARD.—The term ‘Board’ means the

2 Public Auditing Self-Disciplinary Board designated

3 by the Commission pursuant to subsection (b).

4 ‘‘(3) ACCOUNTANT’S REPORT.—The term ‘ac5 countant’s report’ means a document in which a

6 public accounting firm identifies a financial state7 ment, report, or other document and sets forth the

8 firm’s opinion regarding such financial statement,

9 report, or other document, or an assertion that an

10 opinion cannot be expressed.

11 ‘‘(4) PERSON ASSOCIATED WITH A PUBLIC AC12 COUNTING FIRM.—The term ‘person associated with

13 a public accounting firm’ means a natural person

14 who—

15 ‘‘(A) is a partner, shareholder, employee,

16 or individual proprietor of a public accounting

17 firm, or who shares in the profits of a public

18 accounting firm; and

19 ‘‘(B) engages in any conduct or practice in

20 connection with the preparation of an account21 ant’s report on any financial statement, report,

22 or other document required to be filed with the

23 Commission under any securities law.

24 ‘‘(5) PROFESSIONAL STANDARDS.—The term

25 ‘professional standards’ means generally accepted
38

•S 240 RS

1 auditing standards, generally accepted accounting

2 principles, generally accepted standards for attesta3 tion engagements, and any other standards related

4 to the preparation of financial statements or ac5 countant’s reports promulgated by the Commission

6 or a standard-setting body recognized by the Board.

7 ‘‘(b) ESTABLISHMENT OF BOARD.—

8 ‘‘(1) IN GENERAL.—Not later than 90 days

9 after the date of enactment of this section, the Com10 mission shall establish a Public Auditing Self-Dis11 ciplinary Board to perform the duties set forth in

12 this section. The Commission shall designate an en13 tity to serve as the Board if the Commission finds

14 that—

15 ‘‘(A) such entity is sponsored by an exist16 ing national organization of certified public ac17 countants that—

18 ‘‘(i) is most representative of certified

19 public accountants covered by this title;

20 and

21 ‘‘(ii) has demonstrated its commit22 ment to improving the quality of practice

23 before the Commission; and
39

•S 240 RS

1 ‘‘(B) control over such entity is vested in

2 the members of the Board selected pursuant to

3 subsection (c).

4 ‘‘(2) ALTERNATIVE ELECTION OF MEMBERS.—

5 If the Commission designates an entity to serve as

6 the Board pursuant to paragraph (1), the entity

7 shall conduct the election of initial Board members

8 in accordance with subsection (c)(1)(B)(i).

9 ‘‘(c) MEMBERSHIP OF BOARD.—

10 ‘‘(1) IN GENERAL.—The Board shall be com11 posed of 3 appointed members and 4 elected mem12 bers, as follows:

13 ‘‘(A) APPOINTED MEMBERS.—Three mem14 bers of the Board shall be appointed in accord15 ance with the following:

16 ‘‘(i) INITIAL APPOINTMENTS.—The

17 Chairman of the Commission shall make

18 the initial appointments, in consultation

19 with the other members of the Commis20 sion, not later than 90 days after the date

21 of enactment of this section.

22 ‘‘(ii) SUBSEQUENT APPOINTMENTS.—

23 After the initial appointments under clause

24 (i), members of the Board appointed to fill

25 vacancies of appointed members of the
40

•S 240 RS

1 Board shall be appointed in accordance

2 with the rules adopted pursuant to para3 graph (5). Such rules shall provide that

4 such members shall be appointed by the

5 Board, subject to the approval of the Com6 mission.

7 ‘‘(B) ELECTED MEMBERS.—Four mem8 bers, including the member who shall serve as

9 the chairperson of the Board, shall be elected in

10 accordance with the following:

11 ‘‘(i) INITIAL ELECTION.—Not later

12 than 120 days after the date on which the

13 Chairman of the Commission makes ap14 pointments under subparagraph (A)(i), an

15 entity designated by the Commission pur16 suant to subsection (b) shall conduct an

17 election of 4 initial elected members pursu18 ant to interim election rules proposed by

19 the entity and approved by the 3 interim

20 members of the Board and the Commis21 sion. If the Commission is unable to des22 ignate an entity meeting the criteria set

23 forth in subsection (b)(1), the members of

24 the Board appointed under subparagraph

25 (A)(i) shall adopt interim rules, subject to
41

•S 240 RS

1 approval by the Commission, providing for

2 the election of the 4 initial elected mem3 bers. Such rules shall provide that such

4 members of the Board shall be elected—

5 ‘‘(I) not later than 120 days

6 after the date on which members are

7 initially appointed under subpara8 graph (A)(i);

9 ‘‘(II) by persons who are associ10 ated with public accounting firms and

11 who are certified public accountants

12 under the laws of any State; and

13 ‘‘(III) subject to the approval of

14 the Commission.

15 ‘‘(ii) SUBSEQUENT ELECTIONS.—

16 After the initial elections under clause (i),

17 members of the Board elected to fill vacan18 cies of elected members of the Board shall

19 be elected in accordance with the rules

20 adopted pursuant to paragraph (5). Such

21 rules shall provide that such members of

22 the Board shall be elected—

23 ‘‘(I) by persons who are associ24 ated with public accounting firms and
42

•S 240 RS

1 who are certified public accountants

2 under the laws of any State; and

3 ‘‘(II) subject to the approval of

4 the Commission.

5 ‘‘(2) QUALIFICATION.—Four members of the

6 Board, including the chairperson of the Board, shall

7 be persons who have not been associated with a pub8 lic accounting firm during the 10-year period preced9 ing appointment or election to the Board under

10 paragraph (1). Three members of the Board who are

11 elected shall be persons associated with a public ac12 counting firm registered with the Board.

13 ‘‘(3) FULL-TIME BASIS.—The chairperson of

14 the Board shall serve on a full-time basis, severing

15 all business ties with his or her former firms or em16 ployers prior to beginning service on the Board.

17 ‘‘(4) TERMS.—

18 ‘‘(A) IN GENERAL.—Except as provided in

19 subparagraph (B), each member of the Board

20 shall hold office for a term of 4 years or until

21 a successor is appointed, whichever is later, ex22 cept that any member appointed to fill a va23 cancy occurring prior to the expiration of the

24 term for which such member’s predecessor was
43

•S 240 RS

1 appointed shall be appointed for the remainder

2 of such term.

3 ‘‘(B) INITIAL BOARD MEMBERS.—Begin4 ning on the date on which all members of the

5 Board have been selected in accordance with

6 this subsection, the terms of office of the initial

7 Board members shall expire, as determined by

8 the Board, by lottery—

9 ‘‘(i) for 1 member, 1 year after such

10 date;

11 ‘‘(ii) for 2 members, 2 years after

12 such date;

13 ‘‘(iii) for 2 members, 3 years after

14 such date; and

15 ‘‘(iv) for 2 members, 4 years after

16 such date.

17 ‘‘(5) RULES.—Following selection of the 7 ini18 tial members of the Board in accordance with sub19 paragraphs (A)(i) and (B)(i) of paragraph (1), the

20 Board shall propose and adopt rules, which shall

21 provide for—

22 ‘‘(A) the operation and administration of

23 the Board, including—

24 ‘‘(i) the appointment of members in

25 accordance with paragraph (1)(A)(ii);
44

•S 240 RS

1 ‘‘(ii) the election of members in ac2 cordance with paragraph (1)(B)(ii); and

3 ‘‘(iii) the compensation of the mem4 bers of the Board;

5 ‘‘(B) the appointment and compensation of

6 such employees, attorneys, and consultants as

7 may be necessary or appropriate to carry out

8 the Board’s functions under this title;

9 ‘‘(C) the registration of public accounting

10 firms with the Board pursuant to subsections

11 (d) and (e); and

12 ‘‘(D) the matters described in subsections

13 (f) and (g).

14 ‘‘(d) REGISTRATION AND ANNUAL FEES.—After the

15 date on which all initial members of the Board have been

16 selected in accordance with subsection (c), the Board shall

17 assess and collect a registration fee and annual dues from

18 each public accounting firm registered with the Board.

19 Such fees and dues shall be assessed at a level sufficient

20 to recover the costs and expenses of the Board and to per21 mit the Board to operate on a self-financing basis. The

22 amount of fees and dues for each public accounting firm

23 shall be based upon—

24 ‘‘(1) the annual revenues of such firm from ac25 counting and auditing services;
45

•S 240 RS

1 ‘‘(2) the number of persons associated with the

2 public accounting firm;

3 ‘‘(3) the number of clients for which such firm

4 furnishes accountant’s reports on financial state5 ments, reports, or other documents filed with the

6 Commission; and

7 ‘‘(4) such other criteria as the Board may es8 tablish.

9 ‘‘(e) REGISTRATION WITH BOARD.—

10 ‘‘(1) REGISTRATION REQUIRED.—Beginning 1

11 year after the date on which all initial members of

12 the Board have been selected in accordance with

13 subsection (c), it shall be unlawful for a public ac14 counting firm to furnish an accountant’s report on

15 any financial statement, report, or other document

16 required to be filed with the Commission under any

17 Federal securities law, unless such firm is registered

18 with the Board.

19 ‘‘(2) APPLICATION FOR REGISTRATION.—A

20 public accounting firm may be registered under this

21 subsection by filing with the Board an application

22 for registration in such form and containing such in23 formation as the Board, by rule, may prescribe.

24 Each application shall include—
46

•S 240 RS

1 ‘‘(A) the names of all clients of the public

2 accounting firm for which the firm furnishes ac3 countant’s reports on financial statements, re4 ports, or other documents filed with the Com5 mission;

6 ‘‘(B) financial information of the public ac7 counting firm for its most recent fiscal year, in8 cluding its annual revenues from accounting

9 and auditing services, its assets and its liabil10 ities;

11 ‘‘(C) a statement of the public accounting

12 firm’s policies and procedures with respect to

13 quality control of its accounting and auditing

14 practice;

15 ‘‘(D) information relating to criminal, civil,

16 or administrative actions or formal disciplinary

17 proceedings pending against such firm, or any

18 person associated with such firm, in connection

19 with an accountant’s report furnished by such

20 firm;

21 ‘‘(E) a list of persons associated with the

22 public accounting firm who are certified public

23 accountants, including any State professional li24 cense or certification number for each such per25 son; and
47

•S 240 RS

1 ‘‘(F) such other information that is reason2 ably related to the Board’s responsibilities as

3 the Board considers necessary or appropriate.

4 ‘‘(3) PERIODIC REPORTS.—Once in each year,

5 or more frequently as the Board, by rule, may pre6 scribe, each public accounting firm registered with

7 the Board shall submit reports to the Board updat8 ing the information contained in its application for

9 registration and containing such additional informa10 tion that is reasonably related to the Board’s re11 sponsibilities as the Board, by rule, may prescribe.

12 ‘‘(4) EXEMPTIONS.—The Commission, by rule

13 or order, upon its own motion or upon application,

14 may conditionally or unconditionally exempt any

15 public accounting firm or any accountant’s report,

16 or any class of public accounting firms or any class

17 of accountant’s reports, from any provisions of this

18 section or the rules or regulations issued hereunder,

19 if the Commission finds that such exemption is con20 sistent with the public interest, the protection of in21 vestors, and the purposes of this section.

22 ‘‘(5) CONFIDENTIALITY.—The Board may, by

23 rule, designate portions of the filings required pursu24 ant to paragraphs (2) and (3) as privileged and con25 fidential.
48

•S 240 RS

1 ‘‘(f) DUTIES OF BOARD.—After the date on which all

2 initial members of the Board have been selected in accord3 ance with subsection (c), the Board shall have the follow4 ing duties and powers:

5 ‘‘(1) INVESTIGATIONS AND DISCIPLINARY PRO6 CEEDINGS.—The Board shall establish fair proce7 dures for investigating and disciplining public ac8 counting firms registered with the Board, and per9 sons associated with such firms, for violations of the

10 Federal securities laws, the rules or regulations is11 sued thereunder, the rules adopted by the Board, or

12 professional standards in connection with the prepa13 ration of an accountant’s report on a financial state14 ment, report, or other document filed with the Com15 mission.

16 ‘‘(2) INVESTIGATION PROCEDURES.—

17 ‘‘(A) IN GENERAL.—The Board may con18 duct an investigation of any act, practice, or

19 omission by a public accounting firm registered

20 with the Board, or by any person associated

21 with such firm, in connection with the prepara22 tion of an accountant’s report on a financial

23 statement, report, or other document filed with

24 the Commission that may violate any applicable

25 provision of the Federal securities laws, the
49

•S 240 RS

1 rules and regulations issued thereunder, the

2 rules adopted by the Board, or professional

3 standards, whether such act, practice, or omis4 sion is the subject of a criminal, civil, or admin5 istrative action, or a disciplinary proceeding, or

6 otherwise is brought to the attention of the

7 Board.

8 ‘‘(B) POWERS OF BOARD.—For purposes

9 of an investigation under this paragraph, the

10 Board may, in addition to such other actions as

11 the Board determines to be necessary or appro12 priate—

13 ‘‘(i) require the testimony of any per14 son associated with a public accounting

15 firm registered with the Board, with re16 spect to any matter which the Board con17 siders relevant or material to the investiga18 tion;

19 ‘‘(ii) require the production of audit

20 workpapers and any other document or in21 formation in the possession of a public ac22 counting firm registered with the Board, or

23 any person associated with such firm,

24 wherever domiciled, that the Board consid25 ers relevant or material to the investiga-
50

•S 240 RS

1 tion, and may examine the books and

2 records of such firm to verify the accuracy

3 of any documents or information so sup4 plied; and

5 ‘‘(iii) request the testimony of any

6 person and the production of any docu7 ment in the possession of any person, in8 cluding a client of a public accounting firm

9 registered with the Board, that the Board

10 considers relevant or material to the inves11 tigation.

12 ‘‘(C) SUSPENSION OR REVOCATION OF

13 REGISTRATION FOR NONCOMPLIANCE.—The re14 fusal of any person associated with a public ac15 counting firm registered with the Board to tes16 tify, or the refusal of any such person to

17 produce documents or otherwise cooperate with

18 the Board, in connection with an investigation

19 under this section, shall be cause for suspend20 ing or barring such person from associating

21 with a public accounting firm registered with

22 the Board, or such other appropriate sanction

23 as the Board shall determine. The refusal of

24 any public accounting firm registered with the

25 Board to produce documents or otherwise co-
51

•S 240 RS

1 operate with the Board, in connection with an

2 investigation under this section, shall be cause

3 for the suspension or revocation of the registra4 tion of such firm, or such other appropriate

5 sanction as the Board shall determine.

6 ‘‘(D) REFERRAL TO COMMISSION.—

7 ‘‘(i) IN GENERAL.—If the Board is

8 unable to conduct or complete an inves9 tigation under this section because of the

10 refusal of any client of a public accounting

11 firm registered with the Board, or any

12 other person, to testify, produce docu13 ments, or otherwise cooperate with the

14 Board in connection with such investiga15 tion, the Board shall report such refusal to

16 the Commission.

17 ‘‘(ii) INVESTIGATION.—The Commis18 sion may designate the Board or one or

19 more officers of the Board who shall be

20 empowered, in accordance with such proce21 dures as the Commission may adopt, to

22 subpoena witnesses, compel their attend23 ance, and require the production of any

24 books, papers, correspondence, memo25 randa, or other records relevant to any in-
52

•S 240 RS

1 vestigation by the Board. Attendance of

2 witnesses and the production of any

3 records may be required from any place in

4 the United States or any State at any des5 ignated place of hearing. Enforcement of a

6 subpoena issued by the Board, or an offi7 cer of the Board, pursuant to this subpara8 graph shall occur in the manner provided

9 for in section 21(c). Examination of wit10 nesses subpoenaed pursuant to this sub11 paragraph shall be conducted before an of12 ficer authorized to administer oaths by the

13 laws of the United States or of the place

14 where the examination is held.

15 ‘‘(iii) REFERRALS TO COMMISSION.—

16 The Board may refer any investigation to

17 the Commission, as the Board deems ap18 propriate.

19 ‘‘(E) IMMUNITY FROM CIVIL LIABILITY.—

20 An employee of the Board engaged in carrying

21 out an investigation or disciplinary proceeding

22 under this section shall be immune from any

23 civil liability arising out of such investigation or

24 disciplinary proceeding in the same manner and
53

•S 240 RS

1 to the same extent as an employee of the Fed2 eral Government in similar circumstances.

3 ‘‘(3) DISCIPLINARY PROCEDURES.—

4 ‘‘(A) DECISION TO DISCIPLINE.—In a pro5 ceeding by the Board to determine whether a

6 public accounting firm, or a person associated

7 with such firm, should be disciplined, the Board

8 shall bring specific charges, notify such firm or

9 person of the charges, give such firm or person

10 an opportunity to defend against such charges,

11 and keep a record of such actions.

12 ‘‘(B) SANCTIONS.—If the Board finds that

13 a public accounting firm, or a person associated

14 with such firm, has engaged in any act, prac15 tice, or omission in violation of the Federal se16 curities laws, the rules or regulations issued

17 thereunder, the rules adopted by the Board, or

18 professional standards, the Board may impose

19 such disciplinary sanctions as it deems appro20 priate, including—

21 ‘‘(i) revocation or suspension of reg22 istration under this section;

23 ‘‘(ii) limitation of activities, functions,

24 and operations;

25 ‘‘(iii) fine;
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•S 240 RS

1 ‘‘(iv) censure;

2 ‘‘(v) in the case of a person associated

3 with a public accounting firm, suspension

4 or bar from being associated with a public

5 accounting firm registered with the Board;

6 and

7 ‘‘(vi) any other disciplinary sanction

8 that the Board determines to be appro9 priate.

10 ‘‘(C) STATEMENT REQUIRED.—A deter11 mination by the Board to impose a disciplinary

12 sanction shall be supported by a written state13 ment by the Board setting forth—

14 ‘‘(i) any act or practice in which the

15 public accounting firm or person associated

16 with such firm has been found to have en17 gaged, or which such firm or person has

18 been found to have omitted;

19 ‘‘(ii) the specific provision of the Fed20 eral securities laws, the rules or regula21 tions issued thereunder, the rules adopted

22 by the Board, or professional standards

23 which any such act, practice, or omission is

24 deemed to violate; and
55

•S 240 RS

1 ‘‘(iii) the sanction imposed and the

2 reasons therefor.

3 ‘‘(D) PROHIBITION ON ASSOCIATION.—It

4 shall be unlawful—

5 ‘‘(i) for any person as to whom a sus6 pension or bar is in effect willfully to be or

7 to become associated with a public ac8 counting firm registered with the Board, in

9 connection with the preparation of an ac10 countant’s report on any financial state11 ment, report, or other document filed with

12 the Commission, without the consent of the

13 Board or the Commission; and

14 ‘‘(ii) for any public accounting firm

15 registered with the Board to permit such a

16 person to become, or remain, associated

17 with such firm without the consent of the

18 Board or the Commission, if such firm

19 knew or, in the exercise of reasonable care

20 should have known, of such suspension or

21 bar.

22 ‘‘(4) REPORTING OF SANCTIONS.—If the Board

23 imposes a disciplinary sanction against a public ac24 counting firm, or a person associated with such firm,

25 the Board shall report such sanction to the Commis-
56

•S 240 RS

1 sion, to the appropriate State or foreign licensing

2 board or boards with which such firm or such person

3 is licensed or certified to practice public accounting,

4 and to the public. The information reported shall in5 clude—

6 ‘‘(A) the name of the public accounting

7 firm, or person associated with such firm,

8 against whom the sanction is imposed;

9 ‘‘(B) a description of the acts, practices, or

10 omissions upon which the sanction is based;

11 ‘‘(C) the nature of the sanction; and

12 ‘‘(D) such other information respecting the

13 circumstances of the disciplinary action (includ14 ing the name of any client of such firm affected

15 by such acts, practices, or omissions) as the

16 Board deems appropriate.

17 ‘‘(5) DISCOVERY AND ADMISSIBILITY OF BOARD

18 MATERIAL.—

19 ‘‘(A) DISCOVERABILITY.—

20 ‘‘(i) IN GENERAL.—Except as pro21 vided in subparagraph (C), all reports,

22 memoranda, and other information pre23 pared, collected, or received by the Board,

24 and the deliberations and other proceed25 ings of the Board and its employees and
57

•S 240 RS

1 agents in connection with an investigation

2 or disciplinary proceeding under this sec3 tion shall not be subject to any form of

4 civil discovery, including demands for pro5 duction of documents and for testimony of

6 individuals, in connection with any pro7 ceeding in any State or Federal court, or

8 before any State or Federal administrative

9 agency. This subparagraph shall not apply

10 to any information provided to the Board

11 that would have been subject to discovery

12 from the person or entity that provided it

13 to the Board, but is no longer available

14 from that person or entity.

15 ‘‘(ii) EXEMPTION.—Submissions to

16 the Board by or on behalf of a public ac17 counting firm or person associated with

18 such a firm or on behalf of any other par19 ticipant in a Board proceeding, including

20 documents generated by the Board itself,

21 shall be exempt from discovery to the same

22 extent as the material described in clause

23 (i), whether in the possession of the Board

24 or any other person, if such submission—
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•S 240 RS

1 ‘‘(I) is prepared specifically for

2 the purpose of the Board proceeding;

3 and

4 ‘‘(II) addresses the merits of the

5 issues under investigation by the

6 Board.

7 ‘‘(iii) CONSTRUCTION.—Nothing in

8 this subparagraph shall limit the authority

9 of the Board to provide appropriate public

10 access to disciplinary hearings of the

11 Board, or to reports or memoranda re12 ceived by the Board in connection with

13 such proceedings.

14 ‘‘(B) ADMISSIBILITY.—

15 ‘‘(i) IN GENERAL.—Except as pro16 vided in subparagraph (C), all reports,

17 memoranda, and other information pre18 pared, collected, or received by the Board,

19 the deliberations and other proceedings of

20 the Board and its employees and agents in

21 connection with an investigation or discipli22 nary proceeding under this section, the

23 fact that an investigation or disciplinary

24 proceeding has been commenced, and the

25 Board’s determination with respect to any
59

•S 240 RS

1 investigation or disciplinary proceeding

2 shall be inadmissible in any proceeding in

3 any State or Federal court or before any

4 State or Federal administrative agency.

5 ‘‘(ii) TREATMENT OF CERTAIN DOCU6 MENTS.—Submissions to the Board by or

7 on behalf of a public accounting firm or

8 person associated with such a firm or on

9 behalf of any other participant in a Board

10 proceeding, including documents generated

11 by the Board itself, shall be inadmissible to

12 the same extent as the material described

13 in clause (i), if such submission—

14 ‘‘(I) is prepared specifically for

15 the purpose of the Board proceedings;

16 and

17 ‘‘(II) addresses the merits of the

18 issues under investigation by the

19 Board.

20 ‘‘(C) AVAILABILITY AND ADMISSIBILITY OF

21 INFORMATION.—

22 ‘‘(i) IN GENERAL.—All information

23 referred to in subparagraphs (A) and (B)

24 shall be—
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•S 240 RS

1 ‘‘(I) available to the Commission

2 and to any other Federal department

3 or agency in connection with the exer4 cise of its regulatory authority to the

5 extent that such information would be

6 available to such agency from the

7 Commission as a result of a Commis8 sion enforcement investigation;

9 ‘‘(II) available to Federal and

10 State authorities in connection with

11 any criminal investigation or proceed12 ing;

13 ‘‘(III) admissible in any action

14 brought by the Commission or any

15 other Federal department or agency

16 pursuant to its regulatory authority,

17 to the extent that such information

18 would be available to such agency

19 from the Commission as a result of a

20 Commission enforcement investigation

21 and in any criminal action; and

22 ‘‘(IV) available to State licensing

23 boards to the extent authorized in

24 paragraph (6).
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•S 240 RS

1 ‘‘(ii) OTHER LIMITATIONS.—Any doc2 uments or other information provided to

3 the Commission or other authorities pursu4 ant to clause (i) shall be subject to the lim5 itations on discovery and admissibility set

6 forth in subparagraphs (A) and (B).

7 ‘‘(D) TITLE 5 TREATMENT.—This sub8 section shall be considered to be a statute de9 scribed in section 552(b)(3)(B) of title 5,

10 United States Code, for purposes of that sec11 tion 552.

12 ‘‘(6) PARTICIPATION BY STATE LICENSING

13 BOARDS.—

14 ‘‘(A) NOTICE.—When the Board institutes

15 an investigation pursuant to paragraph (2)(A),

16 it shall notify the State licensing boards in the

17 States in which the public accounting firm or

18 person associated with such firm engaged in the

19 act or failure to act alleged to have violated

20 professional standards, of the pendancy of the

21 investigation, and shall invite the State licens22 ing boards to participate in the investigation.

23 ‘‘(B) ACCEPTANCE BY STATE BOARD.—

24 ‘‘(i) PARTICIPATION.—If a State li25 censing board elects to join in the inves-
62

•S 240 RS

1 tigation, its representatives shall partici2 pate, pursuant to rules established by the

3 Board, in investigating the matter and in

4 presenting the evidence justifying the

5 charges in any hearing pursuant to para6 graph (3)(A).

7 ‘‘(ii) REVIEW.—In the event that the

8 State licensing board disagrees with the

9 Board’s determination with respect to the

10 matter under investigation, it may seek re11 view of that determination by the Commis12 sion pursuant to procedures that the Com13 mission shall specify by regulation.

14 ‘‘(C) PROHIBITION ON CONCURRENT IN15 VESTIGATIONS.—A State licensing board shall

16 not institute its own proceeding with respect to

17 a matter referred to in subparagraph (A) until

18 after the Board’s determination has become

19 final, including completion of all review by the

20 Commission and the courts.

21 ‘‘(D) STATE SANCTIONS PERMITTED.—If

22 the Board or the Commission imposes a sanc23 tion upon a public accounting firm or person

24 associated with such a firm, and that deter25 mination either is not subjected to judicial re-
63

•S 240 RS

1 view or is upheld on judicial review, a State li2 censing board may impose a sanction on the

3 basis of the Board’s report pursuant to para4 graph (4). Any sanction imposed by the State

5 licensing board under this clause shall be inad6 missible in any proceeding in any State or Fed7 eral court or before any State or Federal ad8 ministrative agency, except to the extent pro9 vided in paragraph (5)(D).

10 ‘‘(E) SANCTIONS NOT PERMITTED.—If a

11 sanction is not imposed on a public accounting

12 firm or person associated with such a firm,

13 and—

14 ‘‘(i) a State licensing board elected to

15 participate in an investigation referred to

16 in subparagraph (A), the State licensing

17 board may not impose a sanction with re18 spect to the matter; and

19 ‘‘(ii) a State licensing board elected

20 not to participate in an investigation re21 ferred to in subparagraph (A), subpara22 graphs (A) and (B) of paragraph (5) shall

23 apply with respect to any investigation or

24 proceeding subsequently instituted by the

25 State licensing board and, in particular,
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•S 240 RS

1 the State licensing board shall not have ac2 cess to the record of the proceeding before

3 the Board and that record shall be inad4 missible in any proceeding before the State

5 licensing board.

6 ‘‘(g) ADDITIONAL DUTIES REGARDING QUALITY

7 CONTROL.—After the date on which all initial members

8 of the Board have been selected in accordance with sub9 section (c), the Board shall have the following duties and

10 powers in addition to those set forth in subsection (f):

11 ‘‘(1) IN GENERAL.—The Board shall seek to

12 promote a high level of professional conduct among

13 public accounting firms registered with the Board,

14 to improve the quality of audit services provided by

15 such firms, and, in general, to protect investors and

16 promote the public interest.

17 ‘‘(2) PROFESSIONAL PEER REVIEW ORGANIZA18 TIONS.—

19 ‘‘(A) MEMBERSHIP REQUIREMENT.—The

20 Board shall require each public accounting firm

21 subject to the disciplinary authority of the

22 Board to be a member of a professional peer re23 view organization certified by the Board pursu24 ant to subparagraph (B).
65

•S 240 RS

1 ‘‘(B) CRITERIA FOR CERTIFICATION.—The

2 Board shall, by rule, establish general criteria

3 for the certification of peer review organizations

4 and shall certify organizations that satisfy those

5 criteria, or such amended criteria as the Board

6 may adopt. To be certified, a peer review orga7 nization shall, at a minimum—

8 ‘‘(i) require a member public account9 ing firm to undergo peer review not less

10 than once every 3 years and publish the re11 sults of the peer review; and

12 ‘‘(ii) adopt standards that are accept13 able to the Board relating to audit service

14 quality control.

15 ‘‘(C) PENALTIES.—Violation by a public

16 accounting firm or a person associated with

17 such a firm of a rule of the peer review organi18 zation to which the firm belongs shall constitute

19 grounds for—

20 ‘‘(i) the imposition of disciplinary

21 sanctions by the Board pursuant to sub22 section (f); and

23 ‘‘(ii) denial to the public accounting

24 firm or person associated with such firm of
66

•S 240 RS

1 the privilege of appearing or practicing be2 fore the Commission.

3 ‘‘(3) CONFIDENTIALITY.—Except as otherwise

4 provided by this section, all reports, memoranda,

5 and other information provided to the Board solely

6 for purposes of paragraph (2), or to a peer review

7 organization certified by the Board, shall be con8 fidential and privileged, unless such confidentiality

9 and privilege are expressly waived by the person or

10 entity that created or provided the information.

11 ‘‘(h) COMMISSION OVERSIGHT OF THE BOARD.—

12 ‘‘(1) PROPOSED RULE CHANGES.—

13 ‘‘(A) IN GENERAL.—The Board shall file

14 with the Commission, in accordance with such

15 rules as the Commission may prescribe, copies

16 of any proposed rule or any proposed change in,

17 addition to, or deletion from the rules of the

18 Board (hereafter in this subsection collectively

19 referred to as a ‘proposed rule change’) accom20 panied by a concise general statement of the

21 basis and purpose of such proposed rule

22 change. The Commission shall, upon the filing

23 of any proposed rule change, publish notice

24 thereof together with the terms of substance of

25 the proposed rule change or a description of the
67

•S 240 RS

1 subjects and issues involved. The Commission

2 shall give interested persons an opportunity to

3 submit written data, views, and arguments con4 cerning the proposed rule change. No proposed

5 rule change shall take effect unless approved by

6 the Commission or otherwise permitted in ac7 cordance with this subsection.

8 ‘‘(B) APPROVAL OR DISAPPROVAL.—

9 ‘‘(i) IN GENERAL.—Not later than 35

10 days after the date on which notice of the

11 filing of a proposed rule change is pub12 lished in accordance with subparagraph

13 (A), or such longer period as the Commis14 sion may designate (not to exceed 90 days

15 after such date, if it finds such longer pe16 riod to be appropriate and publishes its

17 reasons for such finding or as to which the

18 Board consents) the Commission shall—

19 ‘‘(I) by order approve such pro20 posed rule change; or

21 ‘‘(II) institute proceedings to de22 termine whether the proposed rule

23 change should be disapproved.

24 ‘‘(ii) DISAPPROVAL PROCEEDINGS.—

25 Proceedings for disapproval shall include
68

•S 240 RS

1 notice of the grounds for disapproval under

2 consideration and opportunity for hearing

3 and shall be concluded not later than 180

4 days after the date of publication of notice

5 of the filing of the proposed rule change.

6 At the conclusion of the proceedings for

7 disapproval, the Commission, by order,

8 shall approve or disapprove such proposed

9 rule change. The Commission may extend

10 the time for conclusion of such proceedings

11 for—

12 ‘‘(I) not more than 60 days, if

13 the Commission finds good cause for

14 such extension and publishes its rea15 sons for such finding; or

16 ‘‘(II) such longer period to which

17 the Board consents.

18 ‘‘(iii) APPROVAL.—The Commission

19 shall approve a proposed rule change if it

20 finds that such proposed rule change is

21 consistent with the requirements of the

22 Federal securities laws, and the rules and

23 regulations issued thereunder, applicable to

24 the Board. The Commission shall dis25 approve a proposed rule change if it does
69

•S 240 RS

1 not make such finding. The Commission

2 shall not approve any proposed rule change

3 prior to the expiration of the 30-day period

4 beginning on the date on which notice of

5 the filing of a proposed rule change is pub6 lished in accordance with this subpara7 graph, unless the Commission finds good

8 cause to do so and publishes its reasons

9 for such finding.

10 ‘‘(C) EFFECT OF PROPOSED RULE

11 CHANGE.—

12 ‘‘(i) EFFECTIVE DATE.—Notwith13 standing subparagraph (B), a proposed

14 rule change may take effect upon filing

15 with the Commission if designated by the

16 Board as—

17 ‘‘(I) constituting a stated policy,

18 practice, or interpretation with respect

19 to the meaning, administration, or en20 forcement of an existing rule of the

21 Board;

22 ‘‘(II) establishing or changing a

23 due, fee, or other charge imposed by

24 the Board; or
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•S 240 RS

1 ‘‘(III) concerned solely with the

2 administration of the Board or other

3 matters which the Commission, by

4 rule, consistent with the public inter5 est and the purposes of this sub6 section, may specify.

7 ‘‘(ii) SUMMARY EFFECT.—Notwith8 standing any other provision of this sub9 section, a proposed rule change may be put

10 into effect summarily if it appears to the

11 Commission that such action is necessary

12 for the protection of investors. Any pro13 posed rule change put into effect sum14 marily shall be filed promptly thereafter in

15 accordance with this paragraph.

16 ‘‘(iii) ENFORCEMENT.—Any proposed

17 rule change which has taken effect pursu18 ant to clause (i) or (ii) may be enforced by

19 the Board to the extent that it is not in20 consistent with the Federal securities laws,

21 the rules and regulations issued there22 under, and applicable Federal and State

23 law. During the 60-day period beginning

24 on the date on which notice of the filing of

25 a proposed rule change if filed in accord-
71

•S 240 RS

1 ance with this paragraph, the Commission

2 may summarily abrogate the change in the

3 rules of the Board made thereby and re4 quire that the proposed rule change be

5 refiled in accordance with subparagraph

6 (A) and reviewed in accordance with sub7 paragraph (B), if it appears to the Com8 mission that such action is necessary or

9 appropriate in the public interest, for the

10 protection of investors, or otherwise in fur11 therance of the purposes of the Federal se12 curities laws. Commission action pursuant

13 to the preceding sentence shall not affect

14 the validity or force of the rule change dur15 ing the period it was in effect and shall not

16 be reviewable under section 25 of this Act

17 nor deemed to be ‘final agency action’ for

18 purposes of section 704 of title 5, United

19 States Code.

20 ‘‘(2) AMENDMENT BY COMMISSION OF RULES

21 OF THE BOARD.—The Commission, by rule, may ab22 rogate, add to, and delete from (hereafter in this

23 subsection collectively referred to as ‘amend’) the

24 rules of the Board as the Commission deems nec25 essary or appropriate to ensure the fair administra-
72

•S 240 RS

1 tion of the Board, to conform its rules to require2 ments of the Federal securities laws, and the rules

3 and regulations issued thereunder applicable to the

4 Board, or otherwise in furtherance of the purposes

5 of the Federal securities laws, in the following

6 manner:

7 ‘‘(A) PUBLICATION OF NOTICE.—The

8 Commission shall notify the Board and publish

9 notice of the proposed rulemaking in the Fed10 eral Register. The notice shall include the text

11 of the proposed amendment to the rules of the

12 Board and a statement of the Commission’s

13 reasons, including any pertinent facts, for com14 mencing such proposed rulemaking.

15 ‘‘(B) COMMENTS.—The Commission shall

16 give interested persons an opportunity for the

17 oral presentation of data, views, and arguments,

18 in addition to an opportunity to make written

19 submissions. A transcript shall be kept of any

20 oral presentation.

21 ‘‘(C) INCORPORATION.—A rule adopted

22 pursuant to this subsection shall incorporate

23 the text of the amendment to the rules of the

24 Board and a statement of the Commission’s

25 basis for and purpose in so amending such
73

•S 240 RS

1 rules. Such statement shall include an identi2 fication of any facts on which the Commission

3 considers its determination to so amend the

4 rules of the Board to be based, including the

5 reasons for the Commission’s conclusions as to

6 any of the facts that were disputed in the rule7 making.

8 ‘‘(D) REGULATIONS.—

9 ‘‘(i) TITLE 5 APPLICABILITY.—Except

10 as otherwise provided in this paragraph,

11 rulemaking under this paragraph shall be

12 in accordance with the procedures specified

13 in section 553 of title 5, United States

14 Code, for rulemaking not on the record.

15 ‘‘(ii) CONSTRUCTION.—Nothing in

16 this subsection shall be construed to impair

17 or limit the Commission’s power to make,

18 modify, or alter the procedures the Com19 mission may follow in making rules and

20 regulations pursuant to any other author21 ity under the Federal securities laws.

22 ‘‘(iii) INCORPORATION OF AMEND23 MENTS.—Any amendment to the rules of

24 the Board made by the Commission pursu25 ant to this subsection shall be considered
74

•S 240 RS

1 for purposes of the Federal securities laws

2 to be part of the rules of the Board and

3 shall not be considered to be a rule of the

4 Commission.

5 ‘‘(3) NOTICE OF DISCIPLINARY ACTION TAKEN

6 BY THE BOARD; REVIEW OF ACTION BY THE COM7 MISSION.—

8 ‘‘(A) NOTICE REQUIRED.—If the Board

9 imposes a final disciplinary sanction on a public

10 accounting firm registered with the Board or on

11 any person associated with such a firm, the

12 Board shall promptly file notice thereof with

13 the Commission. The notice shall be in such

14 form and contain such information as the Com15 mission, by rule, may prescribe as necessary or

16 appropriate in furtherance of the purposes of

17 the Federal securities laws.

18 ‘‘(B) REVIEW.—An action with respect to

19 which the Board is required by subparagraph

20 (A) to file notice shall be subject to review by

21 the Commission, on its own motion, or upon ap22 plication by any person aggrieved thereby, filed

23 not later than 30 days after the date on which

24 such notice is filed with the Commission and re25 ceived by such aggrieved person, or within such
75

•S 240 RS

1 longer period as the Commission may deter2 mine. Application to the Commission for review,

3 or the institution of review by the Commission

4 on its own motion, shall not operate as a stay

5 of such action unless the Commission otherwise

6 orders, summarily or after notice and oppor7 tunity for hearing on the question of a stay

8 (which hearing may consist solely of the sub9 mission of affidavits or presentation of oral ar10 guments). The Commission shall establish for

11 appropriate cases an expedited procedure for

12 consideration and determination of the question

13 of a stay.

14 ‘‘(4) DISPOSITION OF REVIEW; CANCELLATION,

15 REDUCTION, OR REMISSION OF SANCTION.—

16 ‘‘(A) IN GENERAL.—In any proceeding to

17 review a final disciplinary sanction imposed by

18 the Board on a public accounting firm reg19 istered with the Board or a person associated

20 with such a firm, after notice and opportunity

21 for hearing (which hearing may consist solely of

22 consideration of the record before the Board

23 and opportunity for the presentation of sup24 porting reasons to affirm, modify, or set aside

25 the sanction)—
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1 ‘‘(i) if the Commission finds that—

2 ‘‘(I) such firm or person associ3 ated with such a firm has engaged in

4 such acts or practices, or has omitted

5 such acts, as the Board has found

6 them to have engaged in or omitted;

7 ‘‘(II) such acts, practices, or

8 omissions, are in violation of such

9 provisions of the Federal securities

10 laws, the rules or regulations issued

11 thereunder, the rules adopted by the

12 Board, or professional standards as

13 have been specified in the determina14 tion of the Board; and

15 ‘‘(III) such provisions were ap16 plied in a manner consistent with the

17 purposes of the Federal securities

18 laws;

19 the Commission, by order, shall so declare

20 and, as appropriate, affirm the sanction

21 imposed by the Board, modify the sanction

22 in accordance with paragraph (2), or re23 mand to the Board for further proceed24 ings; or
77

•S 240 RS

1 ‘‘(ii) if the Commission does not make

2 the findings under clause (i), it shall, by

3 order, set aside the sanction imposed by

4 the Board and, if appropriate, remand to

5 the Board for further proceedings.

6 ‘‘(B) CANCELLATION, REDUCTION, OR RE7 MISSION OF SANCTION.—If the Commission,

8 having due regard for the public interest and

9 the protection of investors, finds after a pro10 ceeding in accordance with subparagraph (A)

11 that a sanction imposed by the Board upon a

12 firm or person associated with a firm imposes

13 any burden on competition not necessary or ap14 propriate in furtherance of the purposes of the

15 Federal securities laws or is excessive or op16 pressive, the Commission may cancel, reduce, or

17 require the remission of such sanction.

18 ‘‘(5) COMPLIANCE WITH RULES AND REGULA19 TIONS.—

20 ‘‘(A) DUTIES OF BOARD.—The Board

21 shall—

22 ‘‘(i) comply with the Federal securi23 ties laws, the rules and regulations issued

24 thereunder, and its own rules; and
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•S 240 RS

1 ‘‘(ii) subject to subparagraph (B) and

2 the rules thereunder, absent reasonable

3 justification or excuse, enforce compliance

4 with such provisions and with professional

5 standards by public accounting firms reg6 istered with the Board and persons associ7 ated with such firms.

8 ‘‘(B) RELIEF BY COMMISSION.—The Com9 mission, by rule, consistent with the public in10 terest, the protection of investors, and the other

11 purposes of the Federal securities laws, may re12 lieve the Board of any responsibility under this

13 section to enforce compliance with any specified

14 provision of the Federal securities laws, the

15 rules or regulations issued thereunder, or pro16 fessional standards by any public accounting

17 firm registered with the Board or person associ18 ated with such a firm, or any class of such

19 firms or persons associated with such a firm.

20 ‘‘(6) CENSURE; OTHER SANCTIONS.—

21 ‘‘(A) IN GENERAL.—The Commission is

22 authorized, by order, if in its opinion such ac23 tion is necessary or appropriate in the public in24 terest, for the protection of investors, or other25 wise in furtherance of the purposes of the Fed-
79

•S 240 RS

1 eral securities laws, to censure or impose limita2 tions upon the activities, functions, and oper3 ations of the Board, if the Commission finds,

4 on the record after notice and opportunity for

5 hearing, that the Board has—

6 ‘‘(i) violated or is unable to comply

7 with any provision of the Federal securities

8 laws, the rules or regulations issued there9 under, or its own rules; or

10 ‘‘(ii) without reasonable justification

11 or excuse, has failed to enforce compliance

12 with any such provision or any professional

13 standard by a public accounting firm reg14 istered with the Board or a person associ15 ated with such a firm.

16 ‘‘(B) REMOVAL FROM OFFICE.—The Com17 mission is authorized, by order, if in its opinion

18 such action is necessary or appropriate, in the

19 public interest for the protection of investors, or

20 otherwise in furtherance of the purposes of the

21 Federal securities laws, to remove from office or

22 censure any member of the Board, if the Com23 mission finds, on the record after notice and op24 portunity for hearing, that such member has—
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1 ‘‘(i) willfully violated any provision of

2 the Federal securities laws, the rules or

3 regulations issued thereunder, or the rules

4 of the Board;

5 ‘‘(ii) willfully abused such member’s

6 authority; or

7 ‘‘(iii) without reasonable justification

8 or excuse, failed to enforce compliance with

9 any such provision or any professional

10 standard by any public accounting firm

11 registered with the Board or any person

12 associated with such a firm.

13 ‘‘(i) FOREIGN ACCOUNTING FIRMS.—A foreign public

14 accounting firm that furnishes accountant’s reports on

15 any financial statement, report, or other document re16 quired to be filed with the Commission under any Federal

17 securities law shall, with respect to those reports, be sub18 ject to the provisions of this section in the same manner

19 and to the same extent as a domestic public accounting

20 firm. The Commission may, by rule, regulation, or order

21 and as it deems consistent with the public interest and

22 the protection of investors, either unconditionally or upon

23 specified terms and conditions, exempt from one or more

24 provisions of this section any foreign public accounting

25 firm. Registration pursuant to this subsection shall not,
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1 by itself, provide a basis for subjecting foreign accounting

2 firms to the jurisdiction of the Federal or State courts.

3 ‘‘(j) RELATIONSHIP WITH ANTITRUST LAWS.—

4 ‘‘(1) TREATMENT UNDER ANTITRUST LAWS.—

5 In no case shall the Board, any member thereof, any

6 public accounting firm registered with the Board, or

7 any person associated with such a firm be subject to

8 liability under any antitrust law for any act of the

9 Board or any failure to act by the Board.

10 ‘‘(2) DEFINITION.—For purposes of this sub11 section, the term ‘antitrust law’ means the Federal

12 Trade Commission Act and each statute defined by

13 section 4 thereof as ‘Antitrust Acts’ and all amend14 ments to such Act and such statutes and any other

15 Federal Acts or State laws in pari materia.

16 ‘‘(k) APPLICABILITY OF AUDITING PRINCIPLES.—

17 Each audit required pursuant to this title of an issuer’s

18 financial statements by an independent public accountant

19 shall be conducted in accordance with generally accepted

20 auditing standards, as may be modified or supplemented

21 from time-to-time by the Commission. The Commission

22 may defer to professional standards promulgated by pri23 vate organizations that are generally accepted by the ac24 counting or auditing profession.
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1 ‘‘(l) COMMISSION AUTHORITY NOT IMPAIRED.—

2 Nothing in this section shall be construed to impair or

3 limit the Commission’s authority—

4 ‘‘(1) over the accounting profession, accounting

5 firms, or any persons associated with such firms;

6 ‘‘(2) to set standards for accounting practices,

7 derived from other provisions of the Federal securi8 ties laws or the rules or regulations issued there9 under; or

10 ‘‘(3) to take, on its own initiative, legal, admin11 istrative, or disciplinary action against any public

12 accounting firm registered with the Board or any

13 person associated with such a firm.’’.

14 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

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

16 ‘‘Private Securities Litigation Reform Act of 1995’’.

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

18 this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—REDUCTION OF ABUSIVE LITIGATION

Sec. 101. Elimination of certain abusive practices.

Sec. 102. Securities class action reform.

Sec. 103. Sanctions for abusive litigation.

Sec. 104. Requirements for securities fraud actions.

Sec. 105. Safe harbor for forward-looking statements.

Sec. 106. Written interrogatories.

Sec. 107. Amendment to Racketeer Influenced and Corrupt Organizations Act.

Sec. 108. Authority of Commission to prosecute aiding and abetting.

Sec. 109. Loss causation.

Sec. 110. Applicability.
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TITLE II—REDUCTION OF COERCIVE SETTLEMENTS

Sec. 201. Limitation on damages.

Sec. 202. Proportionate liability.

Sec. 203. Applicability.

TITLE III—AUDITOR DISCLOSURE OF CORPORATE FRAUD

Sec. 301. Fraud detection and disclosure.

1 TITLE I—REDUCTION OF

2 ABUSIVE LITIGATION

3 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

4 (a) PROHIBITION OF REFERRAL FEES.—Section 15(c)

5 of the Securities Exchange Act of 1934 (15 U.S.C. 78o(c))

6 is amended by adding at the end the following new para7 graph:

8 ‘‘(8) PROHIBITION OF REFERRAL FEES.—No

9 broker or dealer, or person associated with a broker

10 or dealer, may solicit or accept, directly or indirectly,

11 remuneration for assisting an attorney in obtaining

12 the representation of any person in any private ac13 tion arising under this title or under the Securities

14 Act of 1933.’’.

15 (b) ATTORNEY CONFLICT OF INTEREST.—

16 (1) SECURITIES ACT OF 1933.—Section 20 of the

17 Securities Act of 1933 (15 U.S.C. 77t) is amended by

18 adding at the end the following new subsection:

19 ‘‘(f) ATTORNEY CONFLICT OF INTEREST.—In any pri20 vate action arising under this title, if a plaintiff is rep21 resented by an attorney who directly owns or otherwise has
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1 a beneficial interest in the securities that are the subject

2 of the litigation, the court shall make a determination of

3 whether such ownership or other interest constitutes a con4 flict of interest sufficient to disqualify the attorney from

5 representing the party.’’.

6 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec7 tion 21 of the Securities Exchange Act of 1934 (15

8 U.S.C. 78u) is amended by adding at the end the fol9 lowing new subsection:

10 ‘‘(i) ATTORNEY CONFLICT OF INTEREST.—In any pri11 vate action arising under this title, if a plaintiff is rep12 resented by an attorney who directly owns or otherwise has

13 a beneficial interest in the securities that are the subject

14 of the litigation, the court shall make a determination of

15 whether such ownership or other interest constitutes a con16 flict of interest sufficient to disqualify the attorney from

17 representing the party.’’.

18 (c) PROHIBITION OF ATTORNEYS’ FEES PAID FROM

19 COMMISSION DISGORGEMENT FUNDS.—

20 (1) SECURITIES ACT OF 1933.—Section 20 of the

21 Securities Act of 1933 (15 U.S.C. 77t) is amended by

22 adding at the end the following new subsection:

23 ‘‘(g) PROHIBITION OF ATTORNEYS’ FEES PAID FROM

24 COMMISSION DISGORGEMENT FUNDS.—Except as otherwise

25 ordered by the court upon motion by the Commission, or,
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1 in the case of an administrative action, as otherwise ordered

2 by the Commission, funds disgorged as the result of an ac3 tion brought by the Commission in Federal court, or as a

4 result of any Commission administrative action, shall not

5 be distributed as payment for attorneys’ fees or expenses

6 incurred by private parties seeking distribution of the dis7 gorged funds.’’.

8 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec9 tion 21(d) of the Securities Exchange Act of 1934 (15

10 U.S.C. 78u(d)) is amended by adding at the end the

11 following new paragraph:

12 ‘‘(4) PROHIBITION OF ATTORNEYS’ FEES PAID

13 FROM COMMISSION DISGORGEMENT FUNDS.—Except

14 as otherwise ordered by the court upon motion by the

15 Commission, or, in the case of an administrative ac16 tion, as otherwise ordered by the Commission, funds

17 disgorged as the result of an action brought by the

18 Commission in Federal court, or as a result of any

19 Commission administrative action, shall not be dis20 tributed as payment for attorneys’ fees or expenses in21 curred by private parties seeking distribution of the

22 disgorged funds.’’.

23 SEC. 102. SECURITIES CLASS ACTION REFORM.

24 (a) RECOVERY RULES.—
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1 (1) SECURITIES ACT OF 1933.—Section 20 of the

2 Securities Act of 1933 (15 U.S.C. 77t) is amended by

3 adding at the end the following new subsection:

4 ‘‘(h) RECOVERY RULES FOR PRIVATE CLASS AC5 TIONS.—

6 ‘‘(1) IN GENERAL.—The rules contained in this

7 subsection shall apply in each private action arising

8 under this title that is brought as a plaintiff class ac9 tion pursuant to the Federal Rules of Civil Procedure.

10 ‘‘(2) CERTIFICATION FILED WITH COMPLAINTS.—

11 ‘‘(A) IN GENERAL.—Each plaintiff seeking

12 to serve as a representative party on behalf of a

13 class shall provide a sworn certification, which

14 shall be personally signed by such plaintiff and

15 filed with the complaint, that—

16 ‘‘(i) states that the plaintiff has re17 viewed the complaint and authorized its fil18 ing;

19 ‘‘(ii) states that the plaintiff did not

20 purchase the security that is the subject of

21 the complaint at the direction of plaintiff’s

22 counsel or in order to participate in any

23 private action arising under this title;

24 ‘‘(iii) states that the plaintiff is willing

25 to serve as a representative party on behalf
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1 of a class, including providing testimony at

2 deposition and trial, if necessary;

3 ‘‘(iv) sets forth all of the transactions

4 of the plaintiff in the security that is the

5 subject of the complaint during the class pe6 riod specified in the complaint;

7 ‘‘(v) identifies any action under this

8 title, filed during the 3-year period preced9 ing the date on which the certification is

10 signed by the plaintiff, in which the plain11 tiff has sought to serve as a representative

12 party on behalf of a class; and

13 ‘‘(vi) states that the plaintiff will not

14 accept any payment for serving as a rep15 resentative party on behalf of a class beyond

16 the plaintiff’s pro rata share of any recov17 ery, except as ordered or approved by the

18 court in accordance with paragraph (3).

19 ‘‘(B) NONWAIVER OF ATTORNEY-CLIENT

20 PRIVILEGE.—The certification filed pursuant to

21 subparagraph (A) shall not be construed to be a

22 waiver of the attorney-client privilege.

23 ‘‘(3) RECOVERY BY PLAINTIFFS.—The share of

24 any final judgment or of any settlement that is

25 awarded to a representative party serving on behalf
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1 of a class shall be calculated in the same manner as

2 the shares of the final judgment or settlement awarded

3 to all other members of the class. Nothing in this

4 paragraph shall be construed to limit the award of

5 reasonable costs and expenses (including lost wages)

6 directly relating to the representation of the class to

7 any representative party serving on behalf of the

8 class.

9 ‘‘(4) RESTRICTIONS ON SETTLEMENTS UNDER

10 SEAL.—The terms and provisions of any settlement

11 agreement of a class action shall not be filed under

12 seal, except that on motion of any party to the settle13 ment, the court may order filing under seal for those

14 portions of a settlement agreement as to which good

15 cause is shown for such filing under seal. For pur16 poses of this paragraph, good cause shall exist only if

17 publication of a term or provision of a settlement

18 agreement would cause direct and substantial harm to

19 any party.

20 ‘‘(5) RESTRICTIONS ON PAYMENT OF ATTORNEYS’

21 FEES AND EXPENSES.—Total attorneys’ fees and ex22 penses awarded by the court to counsel for the plain23 tiff class shall not exceed a reasonable percentage of

24 the amount of damages and prejudgment interest

25 awarded to the class.
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1 ‘‘(6) DISCLOSURE OF SETTLEMENT TERMS TO

2 CLASS MEMBERS.—Any proposed or final settlement

3 agreement that is published or otherwise disseminated

4 to the class shall include each of the following state5 ments, along with a cover page summarizing the in6 formation contained in such statements:

7 ‘‘(A) STATEMENT OF PLAINTIFF RECOV8 ERY.—The amount of the settlement proposed to

9 be distributed to the parties to the action, deter10 mined in the aggregate and on an average per

11 share basis.

12 ‘‘(B) STATEMENT OF POTENTIAL OUTCOME

13 OF CASE.—

14 ‘‘(i) AGREEMENT ON AMOUNT OF DAM15 AGES.—If the settling parties agree on the

16 average amount of damages per share that

17 would be recoverable if the plaintiff pre18 vailed on each claim alleged under this title,

19 a statement concerning the average amount

20 of such potential damages per share.

21 ‘‘(ii) DISAGREEMENT ON AMOUNT OF

22 DAMAGES.—If the parties do not agree on

23 the average amount of damages per share

24 that would be recoverable if the plaintiff

25 prevailed on each claim alleged under this
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1 title, a statement from each settling party

2 concerning the issue or issues on which the

3 parties disagree.

4 ‘‘(iii) INADMISSIBILITY FOR CERTAIN

5 PURPOSES.—A statement made in accord6 ance with clause (i) or (ii) concerning the

7 amount of damages shall not be admissible

8 in any Federal or State judicial action or

9 administrative proceeding, other than an

10 action or proceeding arising out of such

11 statement.

12 ‘‘(C) STATEMENT OF ATTORNEYS’ FEES OR

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

14 their counsel intend to apply to the court for an

15 award of attorneys’ fees or costs from any fund

16 established as part of the settlement, a statement

17 indicating which parties or counsel intend to

18 make such an application, the amount of fees

19 and costs that will be sought (including the

20 amount of such fees and costs determined on an

21 average per share basis), and a brief explanation

22 supporting the fees and costs sought.

23 ‘‘(D) IDENTIFICATION OF LAWYERS’ REP24 RESENTATIVES.—The name, telephone number,

25 and address of one or more representatives of
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1 counsel for the plaintiff class who will be reason2 ably available to answer questions from class

3 members concerning any matter contained in

4 any notice of settlement published or otherwise

5 disseminated to the class.

6 ‘‘(E) REASONS FOR SETTLEMENT.—A brief

7 statement explaining the reasons why the parties

8 are proposing the settlement.

9 ‘‘(F) OTHER INFORMATION.—Such other in10 formation as may be required by the court.’’.

11 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec12 tion 21 of the Securities Exchange Act of 1934 (15

13 U.S.C. 78u) is amended by adding at the end the fol14 lowing new subsection:

15 ‘‘(j) RECOVERY RULES FOR PRIVATE CLASS AC16 TIONS.—

17 ‘‘(1) IN GENERAL.—The rules contained in this

18 subsection shall apply in each private action arising

19 under this title that is brought as a plaintiff class ac20 tion pursuant to the Federal Rules of Civil Procedure.

21 ‘‘(2) CERTIFICATION FILED WITH COMPLAINTS.—

22 ‘‘(A) IN GENERAL.—Each plaintiff seeking

23 to serve as a representative party on behalf of a

24 class shall provide a sworn certification, which
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1 shall be personally signed by such plaintiff and

2 filed with the complaint, that—

3 ‘‘(i) states that the plaintiff has re4 viewed the complaint and authorized its fil5 ing;

6 ‘‘(ii) states that the plaintiff did not

7 purchase the security that is the subject of

8 the complaint at the direction of plaintiff’s

9 counsel or in order to participate in any

10 private action arising under this title;

11 ‘‘(iii) states that the plaintiff is willing

12 to serve as a representative party on behalf

13 of a class, including providing testimony at

14 deposition and trial, if necessary;

15 ‘‘(iv) sets forth all of the transactions

16 of the plaintiff in the security that is the

17 subject of the complaint during the class pe18 riod specified in the complaint;

19 ‘‘(v) identifies any action under this

20 title, filed during the 3-year period preced21 ing the date on which the certification is

22 signed by the plaintiff, in which the plain23 tiff has sought to serve as a representative

24 party on behalf of a class; and
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1 ‘‘(vi) states that the plaintiff will not

2 accept any payment for serving as a rep3 resentative party on behalf of a class beyond

4 the plaintiff’s pro rata share of any recov5 ery, except as ordered or approved by the

6 court in accordance with paragraph (3).

7 ‘‘(B) NONWAIVER OF ATTORNEY-CLIENT

8 PRIVILEGE.—The certification filed pursuant to

9 subparagraph (A) shall not be construed to be a

10 waiver of the attorney-client privilege.

11 ‘‘(3) RECOVERY BY PLAINTIFFS.—The share of

12 any final judgment or of any settlement that is

13 awarded to a representative party serving on behalf

14 of a class shall be calculated in the same manner as

15 the shares of the final judgment or settlement awarded

16 to all other members of the class. Nothing in this

17 paragraph shall be construed to limit the award to

18 any representative party serving on behalf of a class

19 of reasonable costs and expenses (including lost

20 wages) directly relating to the representation of the

21 class.

22 ‘‘(4) RESTRICTIONS ON SETTLEMENTS UNDER

23 SEAL.—The terms and provisions of any settlement

24 agreement of a class action shall not be filed under

25 seal, except that on motion of any party to the settle-
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1 ment, the court may order filing under seal for those

2 portions of a settlement agreement as to which good

3 cause is shown for such filing under seal. For pur4 poses of this paragraph, good cause shall exist only if

5 publication of a term or provision of a settlement

6 agreement would cause direct and substantial harm to

7 any party.

8 ‘‘(5) RESTRICTIONS ON PAYMENT OF ATTORNEYS’

9 FEES AND EXPENSES.—Total attorneys’ fees and ex10 penses awarded by the court to counsel for the plain11 tiff class shall not exceed a reasonable percentage of

12 the amount of damages and prejudgment interest

13 awarded to the class.

14 ‘‘(6) DISCLOSURE OF SETTLEMENT TERMS TO

15 CLASS MEMBERS.—Any proposed or final settlement

16 agreement that is published or otherwise disseminated

17 to the class shall include each of the following state18 ments, along with a cover page summarizing the in19 formation contained in such statements:

20 ‘‘(A) STATEMENT OF PLAINTIFF RECOV21 ERY.—The amount of the settlement proposed to

22 be distributed to the parties to the action, deter23 mined in the aggregate and on an average per

24 share basis.
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1 ‘‘(B) STATEMENT OF POTENTIAL OUTCOME

2 OF CASE.—

3 ‘‘(i) AGREEMENT ON AMOUNT OF DAM4 AGES.—If the settling parties agree on the

5 average amount of damages per share that

6 would be recoverable if the plaintiff pre7 vailed on each claim alleged under this title,

8 a statement concerning the average amount

9 of such potential damages per share.

10 ‘‘(ii) DISAGREEMENT ON AMOUNT OF

11 DAMAGES.—If the parties do not agree on

12 the average amount of damages per share

13 that would be recoverable if the plaintiff

14 prevailed on each claim alleged under this

15 title, a statement from each settling party

16 concerning the issue or issues on which the

17 parties disagree.

18 ‘‘(iii) INADMISSIBILITY FOR CERTAIN

19 PURPOSES.—A statement made in accord20 ance with clause (i) or (ii) concerning the

21 amount of damages shall not be admissible

22 in any Federal or State judicial action or

23 administrative proceeding, other than an

24 action or proceeding arising out of such

25 statement.
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1 ‘‘(C) STATEMENT OF ATTORNEYS’ FEES OR

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

3 their counsel intend to apply to the court for an

4 award of attorneys’ fees or costs from any fund

5 established as part of the settlement, a statement

6 indicating which parties or counsel intend to

7 make such an application, the amount of fees

8 and costs that will be sought (including the

9 amount of such fees and costs determined on an

10 average per share basis), and a brief explanation

11 supporting the fees and costs sought.

12 ‘‘(D) IDENTIFICATION OF LAWYERS’ REP13 RESENTATIVES.—The name, telephone number,

14 and address of one or more representatives of

15 counsel for the plaintiff class who will be reason16 ably available to answer questions from class

17 members concerning any matter contained in

18 any notice of settlement published or otherwise

19 disseminated to the class.

20 ‘‘(E) REASONS FOR SETTLEMENT.—A brief

21 statement explaining the reasons why the parties

22 are proposing the settlement.

23 ‘‘(F) OTHER INFORMATION.—Such other in24 formation as may be required by the court.’’.

25 (b) APPOINTMENT OF LEAD PLAINTIFF.—
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1 (1) SECURITIES ACT OF 1933.—Section 20 of the

2 Securities Act of 1933 (15 U.S.C. 77t) is amended by

3 adding at the end the following new subsection:

4 ‘‘(i) PROCEDURES GOVERNING APPOINTMENT OF LEAD

5 PLAINTIFF IN CLASS ACTIONS.—

6 ‘‘(1) EARLY NOTICE TO CLASS MEMBERS.—

7 ‘‘(A) IN GENERAL.—In any private action

8 arising under this title that is brought on behalf

9 of a class, not later than 20 days after the date

10 on which the complaint is filed, the plaintiff or

11 plaintiffs shall cause to be published, in a widely

12 circulated national business-oriented publication

13 or wire service, a notice advising members of the

14 purported plaintiff class—

15 ‘‘(i) of the pendency of the action, the

16 claims asserted therein, and the purported

17 class period; and

18 ‘‘(ii) that, not later than 60 days after

19 the date on which the notice is published,

20 any member of the purported class may

21 move the court to serve as lead plaintiff of

22 the purported class.

23 ‘‘(B) ADDITIONAL NOTICES MAY BE RE24 QUIRED UNDER FEDERAL RULES.—Notice re25 quired under subparagraph (A) shall be in addi-
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1 tion to any notice required pursuant to the Fed2 eral Rules of Civil Procedure.

3 ‘‘(2) APPOINTMENT OF LEAD PLAINTIFF.—

4 ‘‘(A) IN GENERAL.—Not later than 90 days

5 after the date on which a notice is published

6 under paragraph (1)(A), the court shall consider

7 any motion made by a purported class member

8 in response to the notice, and shall appoint as

9 lead plaintiff the member or members of the pur10 ported plaintiff class that the court determines to

11 be most capable of adequately representing the

12 interests of class members (hereafter in this sub13 section referred to as the ‘most adequate plain14 tiff’) in accordance with this paragraph.

15 ‘‘(B) CONSOLIDATED ACTIONS.—If more

16 than one action on behalf of a class asserting

17 substantially the same claim or claims arising

18 under this title has been filed, and any party has

19 sought to consolidate those actions for pretrial

20 purposes or for trial, the court shall not make the

21 determination required by subparagraph (A)

22 until after the decision on the motion to consoli23 date is rendered. As soon as practicable after

24 such decision is rendered, the court shall appoint

25 the most adequate plaintiff as lead plaintiff for
99

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1 the consolidated actions in accordance with this

2 paragraph.

3 ‘‘(C) REBUTTABLE PRESUMPTION.—

4 ‘‘(i) IN GENERAL.—Subject to clause

5 (ii), for purposes of subparagraph (A), the

6 court shall adopt a presumption that the

7 most adequate plaintiff in any private ac8 tion arising under this title is the person or

9 group of persons that—

10 ‘‘(I) has either filed the complaint

11 or made a motion in response to a no12 tice under paragraph (1)(A);

13 ‘‘(II) in the determination of the

14 court, has the largest financial interest

15 in the relief sought by the class; and

16 ‘‘(III) otherwise satisfies the re17 quirements of Rule 23 of the Federal

18 Rules of Civil Procedure.

19 ‘‘(ii) REBUTTAL EVIDENCE.—The pre20 sumption described in clause (i) may be re21 butted only upon proof by a member of the

22 purported plaintiff class that the presump23 tively most adequate plaintiff—
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1 ‘‘(I) will not fairly and ade2 quately protect the interests of the

3 class; or

4 ‘‘(II) is subject to unique defenses

5 that render such plaintiff incapable of

6 adequately representing the class.

7 ‘‘(iii) DISCOVERY.—For purposes of

8 clause (ii), discovery relating to whether a

9 member or members of the purported plain10 tiff class is the most adequate plaintiff—

11 ‘‘(I) may not be conducted by any

12 defendant; and

13 ‘‘(II) may be conducted by a

14 plaintiff only if the plaintiff first dem15 onstrates a reasonable basis for a find16 ing that the presumptively most ade17 quate plaintiff is incapable of ade18 quately representing the class.

19 ‘‘(D) SELECTION OF LEAD COUNSEL.—The

20 most adequate plaintiff shall, subject to the ap21 proval of the court, select and retain counsel to

22 represent the class.’’.

23 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec24 tion 21 of the Securities Exchange Act of 1934 (15
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1 U.S.C. 78a et seq.) is amended by adding at the end

2 the following new subsection:

3 ‘‘(k) PROCEDURES GOVERNING APPOINTMENT OF

4 LEAD PLAINTIFF IN CLASS ACTIONS.—

5 ‘‘(1) EARLY NOTICE TO CLASS MEMBERS.—

6 ‘‘(A) IN GENERAL.—In any private action

7 arising under this title that is brought on behalf

8 of a class, not later than 20 days after the date

9 on which the complaint is filed, the plaintiff or

10 plaintiffs shall cause to be published, in a widely

11 circulated national business-oriented publication

12 or wire service, a notice advising members of the

13 purported plaintiff class—

14 ‘‘(i) of the pendency of the action, the

15 claims asserted therein, and the purported

16 class period; and

17 ‘‘(ii) that, not later than 60 days after

18 the date on which the notice is published,

19 any member of the purported class may

20 move the court to serve as lead plaintiff of

21 the purported class.

22 ‘‘(B) ADDITIONAL NOTICES MAY BE RE23 QUIRED UNDER FEDERAL RULES.—Notice re24 quired under subparagraph (A) shall be in addi-
102

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1 tion to any notice required pursuant to the Fed2 eral Rules of Civil Procedure.

3 ‘‘(2) APPOINTMENT OF LEAD PLAINTIFF.—

4 ‘‘(A) IN GENERAL.—Not later than 90 days

5 after the date on which a notice is published

6 under paragraph (1)(A), the court shall consider

7 any motion made by a purported class member

8 in response to the notice, and shall appoint as

9 lead plaintiff the member or members of the pur10 ported plaintiff class that the court determines to

11 be most capable of adequately representing the

12 interests of class members (hereafter in this sub13 section referred to as the ‘most adequate plain14 tiff’) in accordance with this paragraph.

15 ‘‘(B) CONSOLIDATED ACTIONS.—If more

16 than one action on behalf of a class asserting

17 substantially the same claim or claims arising

18 under this title has been filed, and any party has

19 sought to consolidate those actions for pretrial

20 purposes or for trial, the court shall not make the

21 determination required by subparagraph (A)

22 until after the decision on the motion to consoli23 date is rendered. As soon as practicable after

24 such decision is rendered, the court shall appoint

25 the most adequate plaintiff as lead plaintiff for
103

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1 the consolidated actions in accordance with this

2 paragraph.

3 ‘‘(C) REBUTTABLE PRESUMPTION.—

4 ‘‘(i) IN GENERAL.—Subject to clause

5 (ii), for purposes of subparagraph (A), the

6 court shall adopt a presumption that the

7 most adequate plaintiff in any private ac8 tion arising under this title is the person or

9 group of persons that—

10 ‘‘(I) has either filed the complaint

11 or made a motion in response to a no12 tice under paragraph (1)(A);

13 ‘‘(II) in the determination of the

14 court, has the largest financial interest

15 in the relief sought by the class; and

16 ‘‘(III) otherwise satisfies the re17 quirements of Rule 23 of the Federal

18 Rules of Civil Procedure.

19 ‘‘(ii) REBUTTAL EVIDENCE.—The pre20 sumption described in clause (i) may be re21 butted only upon proof by a member of the

22 purported plaintiff class that the presump23 tively most adequate plaintiff—
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1 ‘‘(I) will not fairly and ade2 quately protect the interests of the

3 class; or

4 ‘‘(II) is subject to unique defenses

5 that render such plaintiff incapable of

6 adequately representing the class.

7 ‘‘(iii) DISCOVERY.—For purposes of

8 clause (ii), discovery relating to whether a

9 member or members of the purported plain10 tiff class is the most adequate plaintiff—

11 ‘‘(I) may not be conducted by any

12 defendant; and

13 ‘‘(II) may be conducted by a

14 plaintiff only if the plaintiff first dem15 onstrates a reasonable basis for a find16 ing that the presumptively most ade17 quate plaintiff is incapable of ade18 quately representing the class.

19 ‘‘(D) SELECTION OF LEAD COUNSEL.—The

20 most adequate plaintiff shall, subject to the ap21 proval of the court, select and retain counsel to

22 represent the class.’’.
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1 SEC. 103. SANCTIONS FOR ABUSIVE LITIGATION.

2 (a) SECURITIES ACT OF 1933.—Section 20 of the Se3 curities Act of 1933 (15 U.S.C. 77t) is amended by adding

4 at the end the following new subsection:

5 ‘‘(j) SANCTIONS FOR ABUSIVE LITIGATION.—

6 ‘‘(1) MANDATORY REVIEW BY COURT.—In any

7 private action arising under this title, upon final ad8 judication of the action, the court shall include in the

9 record specific findings regarding compliance by each

10 party and each attorney representing any party with

11 each requirement of Rule 11(b) of the Federal Rules

12 of Civil Procedure.

13 ‘‘(2) MANDATORY SANCTIONS.—If the court

14 makes a finding under paragraph (1) that a party or

15 attorney violated any requirement of Rule 11(b) of the

16 Federal Rules of Civil Procedure, the court shall im17 pose sanctions on such party or attorney in accord18 ance with Rule 11 of the Federal Rules of Civil Proce19 dure.

20 ‘‘(3) PRESUMPTION IN FAVOR OF ATTORNEYS’

21 FEES AND COSTS.—

22 ‘‘(A) IN GENERAL.—Subject to subpara23 graphs (B) and (C), for purposes of paragraph

24 (2), the court shall adopt a presumption that the

25 appropriate sanction for failure of the complaint

26 to comply with any requirement of Rule 11(b) of
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1 the Federal Rules of Civil Procedure is an award

2 to the opposing party of all of the reasonable at3 torneys’ fees and other expenses incurred as a di4 rect result of the violation.

5 ‘‘(B) REBUTTAL EVIDENCE.—The presump6 tion described in subparagraph (A) may be re7 butted only upon proof by the party or attorney

8 against whom sanctions are to be imposed

9 that—

10 ‘‘(i) the award of attorneys’ fees and

11 other expenses will impose an undue burden

12 on that party or attorney; or

13 ‘‘(ii) the violation of Rule 11(b) of the

14 Federal Rules of Civil Procedure was de

15 minimis.

16 ‘‘(C) SANCTIONS.—If the party or attorney

17 against whom sanctions are to be imposed meets

18 its burden under subparagraph (B), the court

19 shall award the sanctions that the court deems

20 appropriate pursuant to Rule 11 of the Federal

21 Rules of Civil Procedure.’’.

22 (b) SECURITIES EXCHANGE ACT OF 1934.—Section 21

23 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is

24 amended by adding at the end the following new subsection:

25 ‘‘(l) SANCTIONS FOR ABUSIVE LITIGATION.—
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1 ‘‘(1) MANDATORY REVIEW BY COURT.—In any

2 private action arising under this title, upon final ad3 judication of the action, the court shall include in the

4 record specific findings regarding compliance by each

5 party and each attorney representing any party with

6 each requirement of Rule 11(b) of the Federal Rules

7 of Civil Procedure.

8 ‘‘(2) MANDATORY SANCTIONS.—If the court

9 makes a finding under paragraph (1) that a party or

10 attorney violated any requirement of Rule 11(b) of the

11 Federal Rules of Civil Procedure, the court shall im12 pose sanctions in accordance with Rule 11 of the Fed13 eral Rules of Civil Procedure on such party or attor14 ney.

15 ‘‘(3) PRESUMPTION IN FAVOR OF ATTORNEYS’

16 FEES AND COSTS.—

17 ‘‘(A) IN GENERAL.—Subject to subpara18 graphs (B) and (C), for purposes of paragraph

19 (2), the court shall adopt a presumption that the

20 appropriate sanction for failure of the complaint

21 to comply with any requirement of Rule 11(b) of

22 the Federal Rules of Civil Procedure is an award

23 to the opposing party of all of the reasonable at24 torneys’ fees and other expenses incurred as a di25 rect result of the violation.
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1 ‘‘(B) REBUTTAL EVIDENCE.—The presump2 tion described in subparagraph (A) may be re3 butted only upon proof by the party or attorney

4 against whom sanctions are to be imposed

5 that—

6 ‘‘(i) the award of attorneys’ fees and

7 other expenses will impose an undue burden

8 on that party or attorney; or

9 ‘‘(ii) the violation of Rule 11(b) of the

10 Federal Rules of Civil Procedure was de

11 minimis.

12 ‘‘(C) SANCTIONS.—If the party or attorney

13 against whom sanctions are to be imposed meets

14 its burden under subparagraph (B), the court

15 shall award the sanctions that the court deems

16 appropriate pursuant to Rule 11 of the Federal

17 Rules of Civil Procedure.’’.

18 SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD AC19 TIONS.

20 (a) SECURITIES ACT OF 1933.—

21 (1) STAY OF DISCOVERY.—Section 20 of the Se22 curities Act of 1933 (15 U.S.C. 77t) is amended by

23 adding at the end the following new subsection:

24 ‘‘(k) STAY OF DISCOVERY.—In any private action

25 arising under this title, during the pendency of any motion
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1 to dismiss, all discovery and other proceedings shall be

2 stayed unless the court finds, upon the motion of any party,

3 that particularized discovery is necessary to preserve evi4 dence or to prevent undue prejudice to that party.’’.

5 (2) PRESERVATION OF EVIDENCE.—Section 20 of

6 the Securities Act of 1933 (15 U.S.C. 77t) is amended

7 by adding at the end the following new subsection:

8 ‘‘(l) PRESERVATION OF EVIDENCE.—It shall be unlaw9 ful for any person, upon receiving actual notice that a com10 plaint has been filed in a private action arising under this

11 title naming that person as a defendant and that describes

12 the allegations contained in the complaint, to willfully de13 stroy or otherwise alter any document, data compilation

14 (including any electronically recorded or stored data), or

15 tangible object that is in the custody or control of that per16 son and that is relevant to the allegations.’’.

17 (b) SECURITIES EXCHANGE ACT OF 1934.—Title I of

18 the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

19 is amended by adding at the end the following new section:

20 ‘‘SEC. 36. REQUIREMENTS FOR SECURITIES FRAUD AC21 TIONS.

22 ‘‘(a) MISLEADING STATEMENTS AND OMISSIONS.—In

23 any private action arising under this title in which the

24 plaintiff alleges that the defendant—
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1 ‘‘(1) made an untrue statement of a material

2 fact; or

3 ‘‘(2) omitted to state a material fact necessary in

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

5 circumstances in which they were made, not mislead6 ing;

7 the complaint shall specify each statement alleged to have

8 been misleading, the reason or reasons why the statement

9 is misleading, and, if an allegation regarding the statement

10 or omission is made on information and belief, the plaintiff

11 shall set forth all information on which that belief is formed.

12 ‘‘(b) REQUIRED STATE OF MIND.—In any private ac13 tion arising under this title in which the plaintiff may re14 cover money damages only on proof that the defendant acted

15 with a particular state of mind, the plaintiff’s complaint

16 shall, with respect to each act or omission alleged to violate

17 this title, specifically allege facts giving rise to a strong in18 ference that the defendant acted with the required state of

19 mind.

20 ‘‘(c) MOTION TO DISMISS; STAY OF DISCOVERY.—

21 ‘‘(1) DISMISSAL FOR FAILURE TO MEET PLEAD22 ING REQUIREMENTS.—In any private action arising

23 under this title, the court shall, on the motion of any

24 defendant, dismiss the complaint if the requirements

25 of subsections (a) and (b) are not met.
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1 ‘‘(2) STAY OF DISCOVERY.—In any private ac2 tion arising under this title, during the pendency of

3 any motion to dismiss, all discovery and other pro4 ceedings shall be stayed unless the court finds upon

5 the motion of any party that particularized discovery

6 is necessary to preserve evidence or to prevent undue

7 prejudice to that party.

8 ‘‘(3) PRESERVATION OF EVIDENCE.—It shall be

9 unlawful for any person, upon receiving actual notice

10 that a complaint has been filed in a private action

11 arising under this title naming that person as a de12 fendant and that describes the allegations contained

13 in the complaint, to willfully destroy or otherwise

14 alter any document, data compilation (including any

15 electronically recorded or stored data), or tangible ob16 ject that is in the custody or control of that person

17 and that is relevant to the allegations.

18 ‘‘(d) LOSS CAUSATION.—In any private action arising

19 under this title, the plaintiff shall have the burden of prov20 ing that the act or omission alleged to violate this title

21 caused any loss incurred by the plaintiff. Damages arising

22 from such loss may be mitigated upon a showing by the

23 defendant that factors unrelated to such act or omission

24 contributed to the loss.’’.
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1 SEC. 105. SAFE HARBOR FOR FORWARD-LOOKING STATE2 MENTS.

3 (a) SECURITIES ACT OF 1933.—Title I of the Securi4 ties Act of 1933 (15 U.S.C. 77a et seq.) is amended by in5 serting after section 13 the following new section:

6 ‘‘SEC. 13A. APPLICATION OF SAFE HARBOR FOR FORWARD7 LOOKING STATEMENTS.

8 ‘‘(a) SAFE HARBOR.—

9 ‘‘(1) IN GENERAL.—In any private action aris10 ing under this title that is based on a fraudulent

11 statement, an issuer that is subject to the reporting

12 requirements of section 13(a) or section 15(d) of the

13 Securities Exchange Act of 1934, a person acting on

14 behalf of such issuer, or an outside reviewer retained

15 by such issuer, shall not be liable with respect to any

16 forward-looking statement, whether written or oral, if

17 and to the extent that the statement—

18 ‘‘(A) projects, estimates, or describes future

19 events; and

20 ‘‘(B) refers clearly (and, except as otherwise

21 provided by rule or regulation, proximately)

22 to—

23 ‘‘(i) such projections, estimates, or de24 scriptions as forward-looking statements;

25 and
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1 ‘‘(ii) the risk that actual results may

2 differ materially from such projections, esti3 mates, or descriptions.

4 ‘‘(2) EFFECT ON OTHER SAFE HARBORS.—The

5 exemption from liability provided for in paragraph

6 (1) shall be in addition to any exemption that the

7 Commission may establish by rule or regulation

8 under subsection (e).

9 ‘‘(b) DEFINITION OF FORWARD-LOOKING STATE10 MENT.—For purposes of this section, the term ‘forward-look11 ing statement’ means—

12 ‘‘(1) a statement containing a projection of reve13 nues, income (including income loss), earnings (in14 cluding earnings loss) per share, capital expenditures,

15 dividends, capital structure, or other financial items;

16 ‘‘(2) a statement of the plans and objectives of

17 management for future operations;

18 ‘‘(3) a statement of future economic performance

19 contained in a discussion and analysis of financial

20 condition by the management or in the results of op21 erations included pursuant to the rules and regula22 tions of the Commission;

23 ‘‘(4) any disclosed statement of the assumptions

24 underlying or relating to any statement described in

25 paragraph (1), (2), or (3); or
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1 ‘‘(5) a statement containing a projection or esti2 mate of such other items as may be specified by rule

3 or regulation of the Commission.

4 ‘‘(c) EXCLUSIONS.—The exemption from liability pro5 vided for in subsection (a) does not apply to a forward6 looking statement that is—

7 ‘‘(1) knowingly made with the expectation, pur8 pose, and actual intent of misleading investors;

9 ‘‘(2) except to the extent otherwise specifically

10 provided by rule, regulation, or order of the Commis11 sion, made with respect to the business or operations

12 of the issuer, if the issuer—

13 ‘‘(A) has been, during the 3-year period pre14 ceding the date on which the statement was first

15 made, convicted of any felony or misdemeanor

16 described in clauses (i) through (iv) of section

17 15(b)(4)(B), or has been made the subject of a ju18 dicial or administrative decree or order arising

19 out of a governmental action that—

20 ‘‘(i) prohibits future violations of the

21 anti-fraud provisions of the securities laws,

22 as that term is defined in section 3 of the

23 Securities Exchange Act of 1934;
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1 ‘‘(ii) requires that the issuer cease and

2 desist from violating the anti-fraud provi3 sions of the securities laws; or

4 ‘‘(iii) determines that the issuer vio5 lated the anti-fraud provisions of the securi6 ties laws;

7 ‘‘(B) makes the forward-looking statement

8 in connection with an offering of securities by a

9 blank check company, as that term is defined

10 under the rules or regulations of the Commission;

11 ‘‘(C) issues penny stock, as that term is de12 fined in section 3(a)(51) of the Securities Ex13 change Act of 1934, and the rules, regulations, or

14 orders issued pursuant to that section;

15 ‘‘(D) makes the forward-looking statement

16 in connection with a rollup transaction, as that

17 term is defined under the rules or regulations of

18 the Commission; or

19 ‘‘(E) makes the forward-looking statement

20 in connection with a going private transaction,

21 as that term is defined under the rules or regula22 tions of the Commission issued pursuant to sec23 tion 13(e) of the Securities Exchange Act of

24 1934; or
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1 ‘‘(3) except to the extent otherwise specifically

2 provided by rule or regulation of the Commission—

3 ‘‘(A) included in a financial statement pre4 pared in accordance with generally accepted ac5 counting principles;

6 ‘‘(B) contained in a registration statement

7 of, or otherwise issued by, an investment com8 pany, as that term is defined in section 3(a) of

9 the Investment Company Act of 1940;

10 ‘‘(C) made in connection with a tender

11 offer;

12 ‘‘(D) made by or in connection with an of13 fering by a partnership, limited liability cor14 poration, or a direct participation investment

15 program, as those terms are defined by rule or

16 regulation of the Commission; or

17 ‘‘(E) made in a disclosure of beneficial own18 ership in a report required to be filed with the

19 Commission pursuant to section 13(d) of the Se20 curities Exchange Act of 1934.

21 ‘‘(d) STAY PENDING DECISION ON MOTION.—In any

22 private action arising under this title, the court shall stay

23 discovery during the pendency of any motion by a defend24 ant (other than discovery that is specifically directed to the
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1 applicability of the exemption provided for in this section)

2 for summary judgment that is based on the grounds that—

3 ‘‘(1) the statement or omission upon which the

4 complaint is based is a forward-looking statement

5 within the meaning of this section; and

6 ‘‘(2) the exemption provided for in this section

7 precludes a claim for relief.

8 ‘‘(e) AUTHORITY.—In addition to the exemption pro9 vided for in this section, the Commission may, by rule or

10 regulation, provide exemptions from liability under any

11 provision of this title, or of any rule or regulation issued

12 under this title, that is based on a statement that includes

13 or that is based on projections or other forward-looking in14 formation, if and to the extent that any such exemption

15 is, as determined by the Commission, consistent with the

16 public interest and the protection of investors.

17 ‘‘(f) COMMISSION DISGORGEMENT ACTIONS.—

18 ‘‘(1) IN GENERAL.—If the Commission, in any

19 proceeding, orders or obtains (by settlement, court

20 order, or otherwise) a payment of funds from a per21 son who has violated this title through means that in22 cluded the utilization of a forward-looking statement,

23 and if any portion of such funds is set aside or other24 wise held for or available to persons who suffered

25 losses in connection with such violation, no person
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1 shall be precluded from participating in the distribu2 tion of, or otherwise receiving, a portion of such funds

3 by reason of the application of this section.

4 ‘‘(2) JUDGMENT FOR LOSSES SUFFERED.—In

5 any action by the Commission alleging a violation of

6 this title in which the defendant or respondent is al7 leged to have utilized a forward-looking statement in

8 furtherance of such violation, the Commission may,

9 upon a sufficient showing, in addition to all other

10 remedies available to the Commission, obtain a judg11 ment for the payment of an amount equal to all losses

12 suffered by reason of the utilization of the forward13 looking statement.

14 ‘‘(g) EFFECT ON OTHER AUTHORITY OF COMMIS15 SION.—Nothing in this section limits, either expressly or

16 by implication, the authority of the Commission to exercise

17 similar authority or to adopt similar rules and regulations

18 with respect to forward-looking statements under any other

19 statute under which the Commission exercises rulemaking

20 authority.’’.

21 (b) SECURITIES EXCHANGE ACT OF 1934.—Title I of

22 the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

23 is amended by adding at the end the following new section:
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1 ‘‘SEC. 37. APPLICATION OF SAFE HARBOR FOR FORWARD2 LOOKING STATEMENTS.

3 ‘‘(a) SAFE HARBOR.—

4 ‘‘(1) IN GENERAL.—In any private action aris5 ing under this title that is based on a fraudulent

6 statement, an issuer that is subject to the reporting

7 requirements of section 13(a) or section 15(d) of the

8 Securities Exchange Act of 1934, a person acting on

9 behalf of such issuer, or an outside reviewer retained

10 by such issuer, shall not be liable with respect to any

11 forward-looking statement, whether written or oral, if

12 and to the extent that the statement—

13 ‘‘(A) projects, estimates, or describes future

14 events; and

15 ‘‘(B) refers clearly (and, except as otherwise

16 provided by rule or regulation, proximately)

17 to—

18 ‘‘(i) such projections, estimates, or de19 scriptions as forward-looking statements;

20 and

21 ‘‘(ii) the risk that actual results may

22 differ materially from such projections, esti23 mates, or descriptions.

24 ‘‘(2) EFFECT ON OTHER SAFE HARBORS.—The

25 exemption from liability provided for in paragraph

26 (1) shall be in addition to any exemption that the
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1 Commission may establish by rule or regulation

2 under subsection (e).

3 ‘‘(b) DEFINITION OF FORWARD-LOOKING STATE4 MENT.—For purposes of this section, the term ‘forward-look5 ing statement’ means—

6 ‘‘(1) a statement containing a projection of reve7 nues, income (including income loss), earnings (in8 cluding earnings loss) per share, capital expenditures,

9 dividends, capital structure, or other financial items;

10 ‘‘(2) a statement of the plans and objectives of

11 management for future operations;

12 ‘‘(3) a statement of future economic performance

13 contained in a discussion and analysis of financial

14 condition by the management or in the results of op15 erations included pursuant to the rules and regula16 tions of the Commission;

17 ‘‘(4) any disclosed statement of the assumptions

18 underlying or relating to any statement described in

19 paragraph (1), (2), or (3); or

20 ‘‘(5) a statement containing a projection or esti21 mate of such other items as may be specified by rule

22 or regulation of the Commission.

23 ‘‘(c) EXCLUSIONS.—The exemption from liability pro24 vided for in subsection (a) does not apply to a forward25 looking statement that is—
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1 ‘‘(1) knowingly made with the expectation, pur2 pose, and actual intent of misleading investors;

3 ‘‘(2) except to the extent otherwise specifically

4 provided by rule, regulation, or order of the Commis5 sion, made with respect to the business or operations

6 of the issuer, if the issuer—

7 ‘‘(A) has been, during the 3-year period pre8 ceding the date on which the statement was first

9 made, convicted of any felony or misdemeanor

10 described in clauses (i) through (iv) of section

11 15(b)(4)(B), or has been made the subject of a ju12 dicial or administrative decree or order arising

13 out of a governmental action that—

14 ‘‘(i) prohibits future violations of the

15 anti-fraud provisions of the securities laws;

16 ‘‘(ii) requires that the issuer cease and

17 desist from violating the anti-fraud provi18 sions of the securities laws; or

19 ‘‘(iii) determines that the issuer vio20 lated the anti-fraud provisions of the securi21 ties laws;

22 ‘‘(B) makes the forward-looking statement

23 in connection with an offering of securities by a

24 blank check company, as that term is defined

25 under the rules or regulations of the Commission;
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1 ‘‘(C) issues penny stock;

2 ‘‘(D) makes the forward-looking statement

3 in connection with a rollup transaction, as that

4 term is defined under the rules or regulations of

5 the Commission; or

6 ‘‘(E) makes the forward-looking statement

7 in connection with a going private transaction,

8 as that term is defined under the rules or regula9 tions of the Commission issued pursuant to sec10 tion 13(e); or

11 ‘‘(3) except to the extent otherwise specifically

12 provided by rule or regulation of the Commission—

13 ‘‘(A) included in financial statements pre14 pared in accordance with generally accepted ac15 counting principles;

16 ‘‘(B) contained in a registration statement

17 of, or otherwise issued by, an investment com18 pany;

19 ‘‘(C) made in connection with a tender

20 offer;

21 ‘‘(D) made by or in connection with an of22 fering by a partnership, limited liability cor23 poration, or a direct participation investment

24 program, as those terms are defined by rule or

25 regulation of the Commission; or
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1 ‘‘(E) made in a disclosure of beneficial own2 ership in a report required to be filed with the

3 Commission pursuant to section 13(d).

4 ‘‘(d) STAY PENDING DECISION ON MOTION.—In any

5 private action arising under this title, the court shall stay

6 discovery during the pendency of any motion by a defend7 ant (other than discovery that is specifically directed to the

8 applicability of the exemption provided for in this section)

9 for summary judgment that is based on the grounds that—

10 ‘‘(1) the statement or omission upon which the

11 complaint is based is a forward-looking statement

12 within the meaning of this section; and

13 ‘‘(2) the exemption provided for in this section

14 precludes a claim for relief.

15 ‘‘(e) AUTHORITY.—In addition to the exemption pro16 vided for in this section, the Commission may, by rule or

17 regulation, provide exemptions from liability under any

18 provision of this title, or of any rule or regulation issued

19 under this title, that is based on a statement that includes

20 or that is based on projections or other forward-looking in21 formation, if and to the extent that any such exemption

22 is, as determined by the Commission, consistent with the

23 public interest and the protection of investors.

24 ‘‘(f) COMMISSION DISGORGEMENT ACTIONS.—
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1 ‘‘(1) IN GENERAL.—If the Commission, in any

2 proceeding, orders or obtains (by settlement, court

3 order, or otherwise) a payment of funds from a per4 son who has violated this title through means that in5 cluded the utilization of a forward-looking statement,

6 and if any portion of such funds is set aside or other7 wise held for or available to persons who suffered

8 losses in connection with such violation, no person

9 shall be precluded from participating in the distribu10 tion of, or otherwise receiving, a portion of such funds

11 by reason of the application of this section.

12 ‘‘(2) JUDGMENT FOR LOSSES SUFFERED.—In

13 any action by the Commission alleging a violation of

14 this title in which the defendant or respondent is al15 leged to have utilized a forward-looking statement in

16 furtherance of such violation, the Commission may,

17 upon a sufficient showing, in addition to all other

18 remedies available to the Commission, obtain a judg19 ment for the payment of an amount equal to all losses

20 suffered by reason of the utilization of the forward21 looking statement.

22 ‘‘(g) EFFECT ON OTHER AUTHORITY OF COMMIS23 SION.—Nothing in this section limits, either expressly or

24 by implication, the authority of the Commission to exercise

25 similar authority or to adopt similar rules and regulations
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1 with respect to forward-looking statements under any other

2 statute under which the Commission exercises rulemaking

3 authority.’’.

4 (c) INVESTMENT COMPANY ACT OF 1940.—Section 24

5 of the Investment Company Act of 1940 (15 U.S.C. 80a–

6 24) is amended by adding at the end the following new sub7 section:

8 ‘‘(g) REGULATORY AUTHORITY FOR FORWARD-LOOK9 ING STATEMENTS.—

10 ‘‘(1) IN GENERAL.—The Commission shall review

11 and, if necessary to carry out the purposes of this

12 title, promulgate such rules and regulations as may

13 be necessary to describe conduct with respect to the

14 making of forward-looking statements that the Com15 mission deems does not provide a basis for liability

16 in any private action arising under this title.

17 ‘‘(2) REQUIREMENTS.—A rule or regulation pro18 mulgated under paragraph (1) shall—

19 ‘‘(A) include clear and objective guidance

20 that the Commission finds sufficient for the pro21 tection of investors;

22 ‘‘(B) prescribe such guidance with sufficient

23 particularity that compliance shall be readily

24 ascertainable by issuers prior to issuance of secu25 rities; and
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1 ‘‘(C) provide that forward-looking state2 ments that are in compliance with such guidance

3 and that concern the future economic perform4 ance of an issuer of securities registered under

5 section 12 shall be deemed not to be in violation

6 of this title.

7 ‘‘(3) EFFECT ON OTHER AUTHORITY OF COMMIS8 SION.—Nothing in this subsection limits, either ex9 pressly or by implication, the authority of the Com10 mission to exercise similar authority or to adopt

11 similar rules and regulations with respect to forward12 looking statements under any other statute under

13 which the Commission exercises rulemaking author14 ity.’’.

15 SEC. 106. WRITTEN INTERROGATORIES.

16 (a) SECURITIES ACT OF 1933.—Section 20 of the Se17 curities Act of 1933 (15 U.S.C. 77t) is amended by adding

18 at the end the following new subsection:

19 ‘‘(m) DEFENDANT’S RIGHT TO WRITTEN INTERROG20 ATORIES.—In any private action arising under this title

21 in which the plaintiff may recover money damages only on

22 proof that a defendant acted with a particular state of

23 mind, the court shall, when requested by a defendant, sub24 mit to the jury a written interrogatory on the issue of each
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1 such defendant’s state of mind at the time the alleged viola2 tion occurred.’’.

3 (b) SECURITIES EXCHANGE ACT OF 1934.—Section 21

4 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is

5 amended by adding at the end the following new subsection:

6 ‘‘(m) DEFENDANT’S RIGHT TO WRITTEN INTERROG7 ATORIES.—In any private action arising under this title

8 in which the plaintiff may recover money damages, the

9 court shall, when requested by a defendant, submit to the

10 jury a written interrogatory on the issue of each such de11 fendant’s state of mind at the time the alleged violation oc12 curred.’’.

13 SEC. 107. AMENDMENT TO RACKETEER INFLUENCED AND

14 CORRUPT ORGANIZATIONS ACT.

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

16 amended by inserting before the period ‘‘, except that no

17 person may rely upon conduct that would have been action18 able as fraud in the purchase or sale of securities to estab19 lish a violation of section 1962’’.

20 SEC. 108. AUTHORITY OF COMMISSION TO PROSECUTE AID21 ING AND ABETTING.

22 Section 20 of the Securities Exchange Act of 1934 (15

23 U.S.C. 78t) is amended—

24 (1) by striking the section heading and inserting

25 the following:
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1 ‘‘LIABILITY OF CONTROLLING PERSONS AND PERSONS WHO

2 AID AND ABET VIOLATIONS’’; AND

3 (2) by adding at the end the following new sub4 section:

5 ‘‘(e) PROSECUTION OF PERSONS WHO AID AND ABET

6 VIOLATIONS.—For purposes of any action brought by the

7 Commission under paragraph (1) or (3) of section 21(d),

8 any person that knowingly provides substantial assistance

9 to another person in the violation of a provision of this

10 title, or of any rule or regulation issued under this title,

11 shall be—

12 ‘‘(1) deemed to be in violation of such provision;

13 and

14 ‘‘(2) liable to the same extent as the person to

15 whom such assistance is provided.’’.

16 SEC. 109. LOSS CAUSATION.

17 Section 12 of the Securities Act of 1933 (15 U.S.C.

18 77l) is amended—

19 (1) by inserting ‘‘(a) IN GENERAL.—’’ before

20 ‘‘Any person’’;

21 (2) by inserting ‘‘, subject to subsection (b),’’

22 after ‘‘shall be liable’’; and

23 (3) by adding at the end the following:

24 ‘‘(b) LOSS CAUSATION.—In an action described in sub25 section (a)(2), the liability of the person who offers or sells
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1 such security shall be limited to damages if that person

2 proves that any portion or all of the amount recoverable

3 under subsection (a)(2) represents other than the deprecia4 tion in value of the subject security resulting from such part

5 of the prospectus or oral communication, with respect to

6 which the liability of that person is asserted, not being true

7 or omitting to state a material fact required to be stated

8 therein or necessary to make the statement not misleading,

9 and such portion or all of such amount shall not be recover10 able.’’.

11 SEC. 110. APPLICABILITY.

12 The amendments made by this title shall not affect or

13 apply to any private action arising under title I of the Se14 curities Exchange Act of 1934 or title I of the Securities

15 Act of 1933 commenced before the date of enactment of this

16 Act.

17 TITLE II—REDUCTION OF

18 COERCIVE SETTLEMENTS

19 SEC. 201. LIMITATION ON DAMAGES.

20 Section 36 of the Securities Exchange Act of 1934, as

21 added by section 104 of this Act, is amended by adding

22 at the end the following new subsection:

23 ‘‘(e) LIMITATION ON DAMAGES.—

24 ‘‘(1) IN GENERAL.—Except as provided in para25 graph (2), in any private action arising under this
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1 title, the plaintiff’s damages shall not exceed the dif2 ference between the purchase or sale price paid or re3 ceived, as appropriate, by the plaintiff for the subject

4 security and the value of that security, as measured

5 by the median trading price of that security, during

6 the 90-day period beginning on the date on which the

7 information correcting the misstatement or omission

8 is disseminated to the market.

9 ‘‘(2) EXCEPTION.—In any private action arising

10 under this title in which damages are sought, if the

11 plaintiff sells or repurchases the subject security prior

12 to the expiration of the 90-day period described in

13 paragraph (1), the plaintiff’s damages shall not ex14 ceed the difference between the purchase or sale price

15 paid or received, as appropriate, by the plaintiff for

16 the security and the median market value of the secu17 rity during the period beginning immediately after

18 dissemination of information correcting the

19 misstatement or omission and ending on the date on

20 which the plaintiff sells or repurchases the security.’’.

21 SEC. 202. PROPORTIONATE LIABILITY.

22 Title I of the Securities and Exchange Act of 1934 (15

23 U.S.C. 78a et seq.) is amended by adding at the end the

24 following new section:
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1 ‘‘SEC. 38. PROPORTIONATE LIABILITY.

2 ‘‘(a) APPLICABILITY.—This section shall apply only to

3 the allocation of damages among persons who are, or who

4 may become, liable for damages in any private action aris5 ing under this title. Nothing in this section shall affect the

6 standards for liability associated with any private action

7 arising under this title.

8 ‘‘(b) LIABILITY FOR DAMAGES.—

9 ‘‘(1) JOINT AND SEVERAL LIABILITY.—A person

10 against whom a judgment is entered in any private

11 action arising under this title shall be liable for dam12 ages jointly and severally only if the trier of fact spe13 cifically determines that such person committed know14 ing securities fraud.

15 ‘‘(2) PROPORTIONATE LIABILITY.—Except as

16 provided in paragraph (1), a person against whom a

17 judgment is entered in any private action arising

18 under this title shall be liable solely for the portion

19 of the judgment that corresponds to that person’s de20 gree of responsibility, as determined under subsection

21 (c).

22 ‘‘(3) KNOWING SECURITIES FRAUD.—For pur23 poses of this section—

24 ‘‘(A) a defendant engages in ‘knowing secu25 rities fraud’ if that defendant—
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1 ‘‘(i) makes a material representation

2 with actual knowledge that the representa3 tion is false, or omits to make a statement

4 with actual knowledge that, as a result of

5 the omission, one of the material representa6 tions of the defendant is false; and

7 ‘‘(ii) actually knows that persons are

8 likely to rely on that misrepresentation or

9 omission; and

10 ‘‘(B) reckless conduct by the defendant shall

11 not be construed to constitute knowing securities

12 fraud.

13 ‘‘(c) DETERMINATION OF RESPONSIBILITY.—

14 ‘‘(1) IN GENERAL.—In any private action aris15 ing under this title in which more than 1 person is

16 alleged to have violated a provision of this title, the

17 court shall instruct the jury to answer special inter18 rogatories, or if there is no jury, shall make findings,

19 concerning—

20 ‘‘(A) the percentage of responsibility of each

21 of the defendants and of each of the other persons

22 alleged by any of the parties to have caused or

23 contributed to the violation, including persons

24 who have entered into settlements with the plain25 tiff or plaintiffs, measured as a percentage of the
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1 total fault of all persons who caused or contrib2 uted to the violation; and

3 ‘‘(B) whether such defendant committed

4 knowing securities fraud.

5 ‘‘(2) CONTENTS OF SPECIAL INTERROGATORIES

6 OR FINDINGS.—The responses to interrogatories, or

7 findings, as appropriate, under paragraph (1) shall

8 specify the total amount of damages that the plaintiff

9 is entitled to recover and the percentage of respon10 sibility of each person found to have caused or con11 tributed to the damages sustained by the plaintiff or

12 plaintiffs.

13 ‘‘(3) FACTORS FOR CONSIDERATION.—In deter14 mining the percentage of responsibility under this

15 subsection, the trier of fact shall consider—

16 ‘‘(A) the nature of the conduct of each per17 son; and

18 ‘‘(B) the nature and extent of the causal re19 lationship between that conduct and the damages

20 incurred by the plaintiff or plaintiffs.

21 ‘‘(d) UNCOLLECTIBLE SHARE.—

22 ‘‘(1) IN GENERAL.—Notwithstanding subsection

23 (b)(2), in any private action arising under this title,

24 if, upon motion made not later than 6 months after

25 a final judgment is entered, the court determines that
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1 all or part of a defendant’s share of the judgment is

2 not collectible against that defendant or against a de3 fendant described in subsection (b)(1), each defendant

4 described in subsection (b)(2) shall be liable for the

5 uncollectible share as follows:

6 ‘‘(A) PERCENTAGE OF NET WORTH.—Each

7 defendant shall be jointly and severally liable for

8 the uncollectible share if the plaintiff establishes

9 that—

10 ‘‘(i) the plaintiff is an individual

11 whose recoverable damages under the final

12 judgment are equal to more than 10 percent

13 of the net financial worth of the plaintiff;

14 and

15 ‘‘(ii) the net financial worth of the

16 plaintiff is equal to less than $200,000.

17 ‘‘(B) OTHER PLAINTIFFS.—With respect to

18 any plaintiff not described in subparagraph (A),

19 each defendant shall be liable for the uncollectible

20 share in proportion to the percentage of respon21 sibility of that defendant, except that the total li22 ability under this subparagraph may not exceed

23 50 percent of the proportionate share of that de24 fendant, as determined under subsection (c)(2).
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1 ‘‘(2) OVERALL LIMIT.—In no case shall the total

2 payments required pursuant to paragraph (1) exceed

3 the amount of the uncollectible share.

4 ‘‘(3) DEFENDANTS SUBJECT TO CONTRIBU5 TION.—A defendant against whom judgment is not

6 collectible shall be subject to contribution and to any

7 continuing liability to the plaintiff on the judgment.

8 ‘‘(e) RIGHT OF CONTRIBUTION.—To the extent that a

9 defendant is required to make an additional payment pur10 suant to subsection (d), that defendant may recover con11 tribution—

12 ‘‘(1) from the defendant originally liable to make

13 the payment;

14 ‘‘(2) from any defendant liable jointly and sever15 ally pursuant to subsection (b)(1);

16 ‘‘(3) from any defendant held proportionately

17 liable pursuant to this subsection who is liable to

18 make the same payment and has paid less than his

19 or her proportionate share of that payment; or

20 ‘‘(4) from any other person responsible for the

21 conduct giving rise to the payment that would have

22 been liable to make the same payment.

23 ‘‘(f) NONDISCLOSURE TO JURY.—The standard for al24 location of damages under subsections (b) and (c) and the
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1 procedure for reallocation of uncollectible shares under sub2 section (d) shall not be disclosed to members of the jury.

3 ‘‘(g) SETTLEMENT DISCHARGE.—

4 ‘‘(1) IN GENERAL.—A defendant who settles any

5 private action arising under this title at any time be6 fore final verdict or judgment shall be discharged

7 from all claims for contribution brought by other per8 sons. Upon entry of the settlement by the court, the

9 court shall enter a bar order constituting the final

10 discharge of all obligations to the plaintiff of the set11 tling defendant arising out of the action. The order

12 shall bar all future claims for contribution arising

13 out of the action—

14 ‘‘(A) by any person against the settling de15 fendant; and

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

17 person, other than a person whose liability has

18 been extinguished by the settlement of the settling

19 defendant.

20 ‘‘(2) REDUCTION.—If a person enters into a set21 tlement with the plaintiff prior to final verdict or

22 judgment, the verdict or judgment shall be reduced by

23 the greater of—

24 ‘‘(A) an amount that corresponds to the per25 centage of responsibility of that person; or
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1 ‘‘(B) the amount paid to the plaintiff by

2 that person.

3 ‘‘(h) CONTRIBUTION.—A person who becomes liable for

4 damages in any private action arising under this title may

5 recover contribution from any other person who, if joined

6 in the original action, would have been liable for the same

7 damages. A claim for contribution shall be determined

8 based on the percentage of responsibility of the claimant

9 and of each person against whom a claim for contribution

10 is made.

11 ‘‘(i) STATUTE OF LIMITATIONS FOR CONTRIBUTION.—

12 Once judgment has been entered in any private action aris13 ing under this title determining liability, an action for con14 tribution shall be brought not later than 6 months after the

15 entry of a final, nonappealable judgment in the action, ex16 cept that an action for contribution brought by a defendant

17 who was required to make an additional payment pursuant

18 to subsection (d) may be brought not later than 6 months

19 after the date on which such payment was made.’’.

20 SEC. 203. APPLICABILITY.

21 The amendments made by this title shall not affect or

22 apply to any private action arising under title I of the Se23 curities Exchange Act of 1934 commenced before the date

24 of enactment of this Act.
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1 TITLE III—AUDITOR DISCLO2 SURE OF CORPORATE FRAUD

3 SEC. 301. FRAUD DETECTION AND DISCLOSURE.

4 (a) IN GENERAL.—The Securities Exchange Act of

5 1934 (15 U.S.C. 78a et seq.) is amended by inserting imme6 diately after section 10 the following new section:

7 ‘‘SEC. 10A. AUDIT REQUIREMENTS.

8 ‘‘(a) IN GENERAL.—Each audit required pursuant to

9 this title of the financial statements of an issuer by an inde10 pendent public accountant shall include, in accordance with

11 generally accepted auditing standards, as may be modified

12 or supplemented from time to time by the Commission—

13 ‘‘(1) procedures designed to provide reasonable

14 assurance of detecting illegal acts that would have a

15 direct and material effect on the determination of fi16 nancial statement amounts;

17 ‘‘(2) procedures designed to identify related

18 party transactions that are material to the financial

19 statements or otherwise require disclosure therein; and

20 ‘‘(3) an evaluation of whether there is substan21 tial doubt about the ability of the issuer to continue

22 as a going concern during the ensuing fiscal year.

23 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOVERIES.—

24 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE25 MENT.—If, in the course of conducting an audit pur-
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1 suant to this title to which subsection (a) applies, the

2 independent public accountant detects or otherwise be3 comes aware of information indicating that an illegal

4 act (whether or not perceived to have a material effect

5 on the financial statements of the issuer) has or may

6 have occurred, the accountant shall, in accordance

7 with generally accepted auditing standards, as may

8 be modified or supplemented from time to time by the

9 Commission—

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

11 an illegal act has occurred; and

12 ‘‘(ii) if so, determine and consider the pos13 sible effect of the illegal act on the financial

14 statements of the issuer, including any contin15 gent monetary effects, such as fines, penalties,

16 and damages; and

17 ‘‘(B) as soon as practicable, inform the ap18 propriate level of the management of the issuer

19 and assure that the audit committee of the is20 suer, or the board of directors of the issuer in the

21 absence of such a committee, is adequately in22 formed with respect to illegal acts that have been

23 detected or have otherwise come to the attention

24 of such accountant in the course of the audit, un25 less the illegal act is clearly inconsequential.
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1 ‘‘(2) RESPONSE TO FAILURE TO TAKE REMEDIAL

2 ACTION.—If, after determining that the audit commit3 tee of the board of directors of the issuer, or the board

4 of directors of the issuer in the absence of an audit

5 committee, is adequately informed with respect to ille6 gal acts that have been detected or have otherwise

7 come to the attention of the accountant in the course

8 of the audit of such accountant, the independent pub9 lic accountant concludes that—

10 ‘‘(A) the illegal act has a material effect on

11 the financial statements of the issuer;

12 ‘‘(B) the senior management has not taken,

13 and the board of directors has not caused senior

14 management to take, timely and appropriate re15 medial actions with respect to the illegal act;

16 and

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

18 reasonably expected to warrant departure from a

19 standard report of the auditor, when made, or

20 warrant resignation from the audit engagement;

21 the independent public accountant shall, as soon as

22 practicable, directly report its conclusions to the

23 board of directors.

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

25 FAILURE TO NOTIFY.—An issuer whose board of direc-
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1 tors receives a report under paragraph (2) shall in2 form the Commission by notice not later than 1 busi3 ness day after the receipt of such report and shall fur4 nish the independent public accountant making such

5 report with a copy of the notice furnished to the Com6 mission. If the independent public accountant fails to

7 receive a copy of the notice before the expiration of the

8 required 1-business-day period, the independent pub9 lic accountant shall—

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

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

12 its report (or the documentation of any oral re13 port given) not later than 1 business day follow14 ing such failure to receive notice.

15 ‘‘(4) REPORT AFTER RESIGNATION.—If an inde16 pendent public accountant resigns from an engage17 ment under paragraph (3)(A), the accountant shall,

18 not later than 1 business day following the failure by

19 the issuer to notify the Commission under paragraph

20 (3), furnish to the Commission a copy of the account21 ant’s report (or the documentation of any oral report

22 given).

23 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No independ24 ent public accountant shall be liable in a private action

25 for any finding, conclusion, or statement expressed in a re-
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1 port made pursuant to paragraph (3) or (4) of subsection

2 (b), including any rule promulgated pursuant thereto.

3 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO4 CEEDINGS.—If the Commission finds, after notice and op5 portunity for hearing in a proceeding instituted pursuant

6 to section 21C, that an independent public accountant has

7 willfully violated paragraph (3) or (4) of subsection (b), the

8 Commission may, in addition to entering an order under

9 section 21C, impose a civil penalty against the independent

10 public accountant and any other person that the Commis11 sion finds was a cause of such violation. The determination

12 to impose a civil penalty and the amount of the penalty

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

14 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex15 cept as provided in subsection (d), nothing in this section

16 shall be held to limit or otherwise affect the authority of

17 the Commission under this title.

18 ‘‘(f) DEFINITION.—As used in this section, the term ‘il19 legal act’ means an act or omission that violates any law,

20 or any rule or regulation having the force of law.’’.

21 (b) EFFECTIVE DATES.—The amendment made by

22 subsection (a) shall apply to each annual report—

23 (1) for any period beginning on or after Janu24 ary 1, 1996, with respect to any registrant that is re25 quired to file selected quarterly financial data pursu-
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1 ant to the rules or regulations of the Securities and

2 Exchange Commission; and

3 (2) for any period beginning on or after Janu4 ary 1, 1997, with respect to any other registrant.

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