II

104TH CONGRESS

1ST SESSION S. 240

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, and Mr. PELL) introduced the following bill; which was read

twice and referred to the Committee on Banking, Housing, and Urban

Affairs

A BILL

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.

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

2 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.

3 TITLE I—PRIVATE SECURITIES

4 LITIGATION

5 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

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

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

8 is amended by adding at the end the following new para9 graph:

10 ‘‘(7) RECEIPT OF REFERRAL FEES.—No broker

11 or dealer, or person associated with a broker or deal12 er, may solicit or accept remuneration for assisting

13 an attorney in obtaining the representation of any

14 customer in any implied private action arising under

15 this title.’’.

16 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

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

18 the Securities Exchange Act of 1934 (15 U.S.C. 78u(d))
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1 is amended by adding at the end the following new para2 graph:

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

4 FROM COMMISSION DISGORGEMENT FUNDS.—Except

5 as otherwise ordered by the court, funds disgorged

6 as the result of an action brought by the Commis7 sion in Federal court, or of any Commission admin8 istrative action, shall not be distributed as payment

9 for attorneys’ fees or expenses incurred by private

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

11 (c) ADDITIONAL PROVISIONS APPLICABLE TO CLASS

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

13 1934 (15 U.S.C. 78u) is amended by adding at the end

14 the following new subsections:

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

16 ACTIONS.—In an implied private action arising under this

17 title that is certified as a class action pursuant to the Fed18 eral Rules of Civil Procedure, the share of any final judg19 ment or of any settlement that is awarded to class plain20 tiffs serving as the representative parties shall be cal21 culated in the same manner as the shares of the final judg22 ment or settlement awarded to all other members of the

23 class. Nothing in this subsection shall be construed to

24 limit the award to any representative parties of reasonable
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1 compensation, costs, and expenses (including lost wages)

2 relating to the representation of the class.

3 ‘‘(j) CONFLICTS OF INTEREST.—In an implied pri4 vate action arising under this title that is certified as a

5 class action pursuant to the Federal Rules of Civil Proce6 dure, if a party is represented by an attorney who directly

7 owns or otherwise has a beneficial interest in the securities

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

9 a determination of whether such interest constitutes a con10 flict of interest sufficient to disqualify the attorney from

11 representing the party.

12 ‘‘(k) RESTRICTIONS ON SETTLEMENTS UNDER

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

14 title that is certified as a class action pursuant to the Fed15 eral Rules of Civil Procedure, the terms and provisions

16 of any settlement agreement between any of the parties

17 shall not be filed under seal, except that on motion of any

18 of the parties to the settlement, the court may order filing

19 under seal for those portions of a settlement agreement

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

21 Good cause shall only exist if publication of a term or pro22 vision of a settlement agreement would cause direct and

23 substantial harm to any person.

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

25 FEES FROM SETTLEMENT FUNDS.—In an implied private
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1 action arising under this title that is certified as a class

2 action pursuant to the Federal Rules of Civil Procedure,

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

4 class shall be determined as a percentage of the amount

5 of damages and prejudgment interest actually paid to the

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

7 the amount awarded to counsel for the class exceed a rea8 sonable percentage of the amount recovered by the class

9 plus reasonable expenses.

10 ‘‘(m) DISCLOSURE OF SETTLEMENT TERMS TO

11 CLASS MEMBERS.—In an implied private action arising

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

13 to the Federal Rules of Civil Procedure, a proposed settle14 ment agreement that is published or otherwise dissemi15 nated to the class shall include the following statements,

16 which shall not be admissible for purposes of any Federal

17 or State judicial or administrative proceeding:

18 ‘‘(1) STATEMENT OF POTENTIAL OUTCOME OF

19 CASE.—

20 ‘‘(A) AGREEMENT ON AMOUNT OF DAM21 AGES AND LIKELIHOOD OF PREVAILING.—If the

22 settling parties agree on the amount of dam23 ages per share that would be recoverable if the

24 plaintiff prevailed on each claim alleged under
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1 this title and the likelihood that the plaintiff

2 would prevail—

3 ‘‘(i) a statement concerning the

4 amount of such potential damages; and

5 ‘‘(ii) a statement concerning the prob6 ability that the plaintiff would prevail on

7 the claims alleged under this title and a

8 brief explanation of the reasons for that

9 conclusion.

10 ‘‘(B) DISAGREEMENT ON AMOUNT OF

11 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

12 the parties do not agree on the amount of dam13 ages per share that would be recoverable if the

14 plaintiff prevailed on each claim alleged under

15 this title or on the likelihood that the plaintiff

16 would prevail on those claims, or both, a state17 ment from each settling party concerning the

18 issue or issues on which the parties disagree.

19 ‘‘(C) INADMISSIBILITY FOR CERTAIN PUR20 POSES.—Statements made in accordance with

21 subparagraphs (A) and (B) shall not be admis22 sible for purposes of any Federal or State judi23 cial or administrative proceeding.

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

25 COSTS SOUGHT.—If any of the settling parties or
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1 their counsel intend to apply to the court for an

2 award of attorneys’ fees or costs from any fund es3 tablished as part of the settlement, a statement indi4 cating which parties or counsel intend to make such

5 an application, the amount of fees and costs that

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

7 for the application.

8 ‘‘(3) IDENTIFICATION OF REPRESENTATIVES.—

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

10 more representatives of counsel for the plaintiff class

11 who will be reasonably available to answer questions

12 from class members concerning any matter con13 tained in any notice of settlement published or oth14 erwise disseminated to class members.

15 ‘‘(4) OTHER INFORMATION.—Such other infor16 mation as may be required by the court, or by any

17 guardian ad litem or plaintiff steering committee ap18 pointed by the court pursuant to section 38.

19 ‘‘(n) SPECIAL VERDICTS.—In an implied private ac20 tion arising under this title in which the plaintiff may re21 cover money damages only on proof that a defendant acted

22 with a particular state of mind, the court shall, when re23 quested by a defendant, submit to the jury a written inter24 rogatory on the issue of each such defendant’s state of

25 mind at the time the alleged violation occurred.
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1 ‘‘(o) NAMED PLAINTIFF THRESHOLD.—In an im2 plied private action arising under this title, in order for

3 a plaintiff or plaintiffs to obtain certification as represent4 atives of a class of investors pursuant to the Federal Rules

5 of Civil Procedure, the plaintiff or plaintiffs must show

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

7 in which violations of this title are alleged to have oc8 curred, not less than the lesser of—

9 ‘‘(1) 1 percent of the securities which are the

10 subject of the litigation; or

11 ‘‘(2) $10,000 (in market value) of such securi12 ties.’’.

13 SEC. 102. ALTERNATIVE DISPUTE RESOLUTION PROCE14 DURE; TIME LIMITATION ON PRIVATE

15 RIGHTS OF ACTION.

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

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

18 seq.) is amended by adding at the end the following new

19 section:

20 ‘‘SEC. 36. ALTERNATIVE DISPUTE RESOLUTION PROCE21 DURE.

22 ‘‘(a) IN GENERAL.—

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

24 in paragraph (2), in an implied private action aris25 ing under this title, any party may, before the expi-
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1 ration of the period permitted for answering the

2 complaint, deliver to all other parties an offer to

3 proceed pursuant to any voluntary, nonbinding alter4 native dispute resolution procedure established or

5 recognized under the rules of the court in which the

6 action is maintained.

7 ‘‘(2) PLAINTIFF CLASS ACTIONS.—In an im8 plied private action under this title which is brought

9 as a plaintiff class action, an offer under paragraph

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

11 guardian ad litem or plaintiff steering committee is

12 appointed by the court in accordance with section

13 38.

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

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

16 of acceptance or rejection of the offer with the court

17 not later than 10 days after receipt of the offer. The

18 court may, upon motion by any party made prior to

19 the expiration of such period, extend the period for

20 not more than 90 additional days, during which time

21 discovery may be permitted by the court.

22 ‘‘(4) SELECTION OF TYPE OF ALTERNATIVE

23 DISPUTE RESOLUTION.—For purposes of paragraphs

24 (1) and (2), if the rules of the court establish or rec25 ognize more than 1 type of alternative dispute reso-
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1 lution, the parties may stipulate as to the type of al2 ternative dispute resolution to be applied. If the par3 ties are unable to so stipulate, the court shall issue

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

5 which the parties agree to the use of alternative dis6 pute resolution, specifying the type of alternative

7 dispute resolution to be applied.

8 ‘‘(5) SANCTIONS FOR DILATORY OR OBSTRUC9 TIVE CONDUCT.—If the court finds that a party has

10 engaged in dilatory or obstructive conduct in taking

11 or opposing any discovery allowed during the re12 sponse period described in paragraph (3), the court

13 may—

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

15 discovery from that party for a suitable period;

16 and

17 ‘‘(B) deny that party the opportunity to

18 conduct further discovery prior to the expiration

19 of the period.

20 ‘‘(b) PENALTY FOR UNREASONABLE LITIGATION PO21 SITION.—

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

23 action arising under this title, upon motion of the

24 prevailing party made prior to final judgment, the

25 court shall award costs, including reasonable attor-
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1 neys’ fees, against a party or parties or their attor2 neys, if—

3 ‘‘(A) the party unreasonably refuses to

4 proceed pursuant to an alternative dispute reso5 lution procedure, or refuses to accept the result

6 of an alternative dispute resolution procedure;

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

8 party; and

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

10 in the action which was not substantially justi11 fied.

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

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

14 ‘substantially justified’ shall be determined in the

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

16 28, United States Code.

17 ‘‘(3) LIMITED USE.—Fees and costs awarded

18 under this paragraph shall not be applied to any

19 named plaintiff in any action certified as a class ac20 tion under the Federal Rules of Civil Procedure if

21 such plaintiff has never owned more than

22 $1,000,000 of the securities which are the subject of

23 the litigation.’’.

24 (b) LIMITATIONS PERIOD FOR IMPLIED PRIVATE

25 RIGHTS OF ACTION.—The Securities Exchange Act of
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1 1934 (15 U.S.C. 78a et seq.) is amended by adding at

2 the end the following new section:

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

4 RIGHTS OF ACTION.

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

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

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

8 ‘‘(1) 5 years after the date on which the alleged

9 violation occurred; or

10 ‘‘(2) 2 years after the date on which the alleged

11 violation was discovered or should have been discov12 ered through the exercise of reasonable diligence.

13 ‘‘(b) EFFECTIVE DATE.—The limitations period pro14 vided by this section shall apply to all proceedings pending

15 on or commenced after the date of enactment of this sec16 tion.’’.

17 SEC. 103. PLAINTIFF STEERING COMMITTEES.

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

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

20 new section:

21 ‘‘SEC. 38. GUARDIAN AD LITEM AND CLASS ACTION STEER22 ING COMMITTEES.

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

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

25 plaintiff class in an implied private action brought under
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1 this title, the court shall appoint a guardian ad litem for

2 the plaintiff class from a list or lists provided by the par3 ties or their counsel. The guardian ad litem shall direct

4 counsel for the class and perform such other functions as

5 the court may specify. The court shall apportion the rea6 sonable fees and expenses of the guardian ad litem among

7 the parties. Court appointment of a guardian ad litem

8 shall not be subject to interlocutory review.

9 ‘‘(b) CLASS ACTION STEERING COMMITTEE.—Sub10 section (a) shall not apply if, not later than 10 days after

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

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

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

14 in this section referred to as the ‘plaintiff steering commit15 tee’) and to perform such other functions as the court may

16 specify. Court appointment of a plaintiff steering commit17 tee shall not be subject to interlocutory review.

18 ‘‘(c) MEMBERSHIP OF PLAINTIFF STEERING COM19 MITTEE.—

20 ‘‘(1) QUALIFICATIONS.—

21 ‘‘(A) NUMBER.—A plaintiff steering com22 mittee shall consist of not less than 5 class

23 members, willing to serve, who the court be24 lieves will fairly represent the class.
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1 ‘‘(B) OWNERSHIP INTERESTS.—Members

2 of the plaintiff steering committee shall have

3 cumulatively held during the class period not

4 less than—

5 ‘‘(i) the lesser of 5 percent of the se6 curities which are the subject matter of the

7 litigation or securities which are the sub8 ject matter of the litigation with a market

9 value of $10,000,000; or

10 ‘‘(ii) such smaller percentage or dollar

11 amount as the court finds appropriate

12 under the circumstances.

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

14 are named plaintiffs in the litigation may serve on

15 the plaintiff steering committee, but shall not com16 prise a majority of the committee.

17 ‘‘(3) NONCOMPENSATION OF MEMBERS.—Mem18 bers of the plaintiff steering committee shall serve

19 without compensation, except that any member may

20 apply to the court for reimbursement of reasonable

21 out-of-pocket expenses from any common fund es22 tablished for the class.

23 ‘‘(4) MEETINGS.—The plaintiff steering com24 mittee shall conduct its business at one or more pre25 viously scheduled meetings of the committee at
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1 which a majority of its members are present in per2 son or by electronic communication. The plaintiff

3 steering committee shall decide all matters within its

4 authority by a majority vote of all members, except

5 that the committee may determine that decisions

6 other than to accept or reject a settlement offer or

7 to employ or dismiss counsel for the class may be

8 delegated to one or more members of the committee,

9 or may be voted upon by committee members seria10 tim, without a meeting.

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

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

13 steering committee may appear and be heard by the

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

15 as any other party.

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

17 PLAINTIFF STEERING COMMITTEE.—

18 ‘‘(1) DIRECT COUNSEL.—The authority of the

19 guardian ad litem or the plaintiff steering committee

20 to direct counsel for the class shall include all pow21 ers normally permitted to an attorney’s client in liti22 gation, including the authority to retain or dismiss

23 counsel and to reject offers of settlement, and the

24 preliminary authority to accept an offer of settle25 ment, subject to the restrictions specified in para-
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1 graph (2). Dismissal of counsel other than for cause

2 shall not limit the ability of counsel to enforce any

3 contractual fee agreement or to apply to the court

4 for a fee award from any common fund established

5 for the class.

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

7 litem or a plaintiff steering committee gives prelimi8 nary approval to an offer of settlement, the guardian

9 ad litem or the plaintiff steering committee may seek

10 approval of the offer by a majority of class members

11 if the committee determines that the benefit of seek12 ing such approval outweighs the cost of soliciting the

13 approval of class members.

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

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

16 of a plaintiff steering committee shall be immune from any

17 liability arising from such service. The court may remove

18 a guardian ad litem or a member of a plaintiff steering

19 committee for good cause shown.

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

21 affect any other provision of law concerning class actions

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

23 offer of settlement.’’.
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1 SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD AC2 TIONS.

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

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

5 new section:

6 ‘‘SEC. 39. REQUIREMENTS FOR SECURITIES FRAUD AC7 TIONS.

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

9 under this title in which the plaintiff may recover money

10 damages from a defendant only on proof that the defend11 ant acted with some level of intent, the plaintiff’s com12 plaint shall allege specific facts demonstrating the state

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

14 occurred.

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

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

17 plaintiff alleges that the defendant—

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

19 fact; or

20 ‘‘(2) omitted to state a material fact necessary

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

22 of the circumstances in which they were made, not

23 misleading;

24 the plaintiff shall specify each statement alleged to have

25 been misleading, the reason or reasons why the statement

26 is misleading, and, if an allegation regarding the state-
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1 ment or omission is made on information and belief, the

2 plaintiff shall set forth all information on which that belief

3 is formed.

4 ‘‘(c) BURDEN OF PROOF.—In an implied private ac5 tion arising under this title based on a material

6 misstatement or omission concerning a security, and in

7 which the plaintiff claims to have bought or sold the secu8 rity based on a reasonable belief that the market value

9 of the security reflected all publicly available information,

10 the plaintiff shall have the burden of proving that the

11 misstatement or omission caused any loss incurred by the

12 plaintiff.

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

14 under this title based on a material misstatement or omis15 sion concerning a security, and in which the plaintiff

16 claims to have bought or sold the security based on a rea17 sonable belief that the market value of the security re18 flected all publicly available information, the plaintiff’s

19 damages shall not exceed the lesser of—

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

21 the plaintiff for the security and the market value of

22 the security immediately after dissemination to the

23 market of information which corrects the

24 misstatement or omission; and
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1 ‘‘(2) the difference between the price paid by

2 the plaintiff for the security and the price at which

3 the plaintiff sold the security after dissemination of

4 information correcting the misstatement or omis5 sion.’’.

6 SEC. 105. AMENDMENT TO RACKETEER INFLUENCED AND

7 CORRUPT ORGANIZATIONS ACT.

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

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

10 an action under this provision if the racketeering activity,

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

12 of securities’’ before the period.

13 TITLE II—FINANCIAL

14 DISCLOSURE

15 SEC. 201. SAFE HARBOR FOR FORWARD-LOOKING STATE16 MENTS.

17 (a) CONSIDERATION OF REGULATORY OR LEGISLA18 TIVE CHANGES.—In consultation with investors and issu19 ers of securities, the Securities and Exchange Commission

20 shall consider adopting or amending its rules and regula21 tions, or making legislative recommendations, concern22 ing—

23 (1) criteria that the Commission finds appro24 priate for the protection of investors by which for25 ward-looking statements concerning the future eco-
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1 nomic performance of an issuer of securities reg2 istered under section 12 of the Securities Exchange

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

4 section 10(b) of that Act; and

5 (2) procedures by which courts shall timely dis6 miss claims against such issuers of securities based

7 on such forward-looking statements if such state8 ments are in accordance with any criteria under

9 paragraph (1).

10 (b) COMMISSION CONSIDERATIONS.—In developing

11 rules or legislative recommendations in accordance with

12 subsection (a), the Commission shall consider—

13 (1) appropriate limits to liability for forward14 looking statements;

15 (2) procedures for making a summary deter16 mination of the applicability of any Commission rule

17 for forward-looking statements early in a judicial

18 proceeding to limit protracted litigation and expan19 sive discovery;

20 (3) incorporating and reflecting the scienter re21 quirements applicable to implied private actions

22 under section 10(b); and

23 (4) providing clear guidance to issuers of secu24 rities and the judiciary.
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1 (c) SECURITIES ACT AMENDMENT.—The Securities

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

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

4 ‘‘SEC. 40. APPLICATION OF SAFE HARBOR FOR FORWARD5 LOOKING STATEMENTS.

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

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

8 statement concerning the future economic performance of

9 an issuer registered under section 12 was materially false

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

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

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

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

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

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

16 by a defendant asserting that the forward-looking state17 ment was within the coverage of any rule which the Com18 mission may have adopted concerning such predictive

19 statements, if such motion is made not less than 60 days

20 after the plaintiff commences discovery in the action.

21 ‘‘(c) DILATORY CONDUCT; DUPLICATIVE DISCOV22 ERY.—Notwithstanding subsection (a) or (b), the time

23 permitted for a plaintiff to conduct discovery under sub24 section (b) may be extended, or a stay of the proceedings

25 may be denied, if the court finds that—
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1 ‘‘(1) the defendant making a motion described

2 in subsection (b) engaged in dilatory or obstructive

3 conduct in taking or opposing any discovery; or

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

5 motion under subsection (b) would be substantially

6 unfair to the plaintiff or other parties to the ac7 tion.’’.

8 SEC. 202. FRAUD DETECTION AND DISCLOSURE.

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

10 1934 (15 U.S.C. 78a et seq.) is amended by inserting im11 mediately after section 10 the following new section:

12 ‘‘SEC. 10A. AUDIT REQUIREMENTS.

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

14 this title of an issuer’s financial statements by an inde15 pendent public accountant shall include, in accordance

16 with generally accepted auditing standards, as may be

17 modified or supplemented from time to time by the Com18 mission—

19 ‘‘(1) procedures designed to provide reasonable

20 assurance of detecting illegal acts that would have a

21 direct and material effect on the determination of fi22 nancial statement amounts;

23 ‘‘(2) procedures designed to identify related

24 party transactions which are material to the finan-
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1 cial statements or otherwise require disclosure there2 in; and

3 ‘‘(3) an evaluation of whether there is substan4 tial doubt about the issuer’s ability to continue as a

5 going concern during the ensuing fiscal year.

6 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV7 ERIES.—

8 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE9 MENT.—If, in the course of conducting an audit pur10 suant to this title to which subsection (a) applies,

11 the independent public accountant detects or other12 wise becomes aware of information indicating that

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

14 material effect on the issuer’s financial statements)

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

16 accordance with generally accepted auditing stand17 ards, as may be modified or supplemented from time

18 to time by the Commission—

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

20 an illegal act has occurred; and

21 ‘‘(ii) if so, determine and consider the pos22 sible effect of the illegal act on the financial

23 statements of the issuer, including any contin24 gent monetary effects, such as fines, penalties,

25 and damages; and
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1 ‘‘(B) as soon as practicable, inform the ap2 propriate level of the issuer’s management and

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

4 issuer’s board of directors in the absence of

5 such a committee, is adequately informed with

6 respect to illegal acts that have been detected or

7 have otherwise come to the attention of such

8 accountant in the course of the audit, unless

9 the illegal act is clearly inconsequential.

10 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME11 DIAL ACTION.—If, having first assured itself that

12 the audit committee of the board of directors of the

13 issuer or the board (in the absence of an audit com14 mittee) is adequately informed with respect to illegal

15 acts that have been detected or have otherwise come

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

17 accountant’s audit, the independent public account18 ant concludes that—

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

20 the financial statements of the issuer;

21 ‘‘(B) the senior management has not

22 taken, and the board of directors has not

23 caused senior management to take, timely and

24 appropriate remedial actions with respect to the

25 illegal act; and
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1 ‘‘(C) the failure to take remedial action is

2 reasonably expected to warrant departure from

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

4 warrant resignation from the audit engagement;

5 the independent public accountant shall, as soon as

6 practicable, directly report its conclusions to the

7 board of directors.

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

9 FAILURE TO NOTIFY.—An issuer whose board of di10 rectors receives a report under paragraph (2) shall

11 inform the Commission by notice not later than 1

12 business day after the receipt of such report and

13 shall furnish the independent public accountant

14 making such report with a copy of the notice fur15 nished to the Commission. If the independent public

16 accountant fails to receive a copy of the notice be17 fore the expiration of the required 1-business-day pe18 riod, the independent public accountant shall—

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

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

21 its report (or the documentation of any oral re22 port given) not later than 1 business day follow23 ing such failure to receive notice.

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

25 independent public accountant resigns from an en-
26

•S 240 IS

1 gagement under paragraph (3)(A), the accountant

2 shall, not later than 1 business day following the

3 failure by the issuer to notify the Commission under

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

5 the accountant’s report (or the documentation of

6 any oral report given).

7 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde8 pendent public accountant shall be liable in a private ac9 tion for any finding, conclusion, or statement expressed

10 in a report made pursuant to paragraph (3) or (4) of sub11 section (b), including any rules promulgated pursuant

12 thereto.

13 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO14 CEEDINGS.—If the Commission finds, after notice and op15 portunity for hearing in a proceeding instituted pursuant

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

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

18 the Commission may, in addition to entering an order

19 under section 21C, impose a civil penalty against the inde20 pendent public accountant and any other person that the

21 Commission finds was a cause of such violation. The deter22 mination to impose a civil penalty and the amount of the

23 penalty shall be governed by the standards set forth in

24 section 21B.
27

•S 240 IS

1 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex2 cept as provided in subsection (d), nothing in this section

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

4 the Commission under this title.

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

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

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

8 (b) EFFECTIVE DATES.—With respect to any reg9 istrant that is required to file selected quarterly financial

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

11 Securities and Exchange Commission (17 CFR

12 229.302(a)), the amendments made by subsection (a) shall

13 apply to any annual report for any period beginning on

14 or after January 1, 1994. With respect to any other reg15 istrant, the amendment shall apply for any period begin16 ning on or after January 1, 1995.

17 SEC. 203. PROPORTIONATE LIABILITY AND JOINT AND SEV18 ERAL LIABILITY.

19 (a) SECURITIES ACT AMENDMENT.—The Securities

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

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

22 ‘‘SEC. 41. PROPORTIONATE LIABILITY AND JOINT AND SEV23 ERAL LIABILITY IN IMPLIED ACTIONS.

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

25 to the allocation of damages among persons who are, or
28

•S 240 IS

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

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

3 affect the standards for liability associated with an implied

4 private action arising under this title.

5 ‘‘(b) APPLICATION OF JOINT AND SEVERAL LIABIL6 ITY.—

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

8 judgment is entered in an implied private action

9 arising under this title shall be liable jointly and sev10 erally for any recoverable damages on such judg11 ment if the person is found to have—

12 ‘‘(A) been a primary wrongdoer;

13 ‘‘(B) committed knowing securities fraud;

14 or

15 ‘‘(C) controlled any primary wrongdoer or

16 person who committed knowing securities fraud.

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

18 subsection—

19 ‘‘(A) the term ‘primary wrongdoer’

20 means—

21 ‘‘(i) any—

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

23 seller, or underwriter of securities;

24 ‘‘(II) marketmaker or specialist

25 in securities; or
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•S 240 IS

1 ‘‘(III) clearing agency, securities

2 information processor, or government

3 securities dealer;

4 if such person breached a direct statutory

5 or regulatory obligation or if such person

6 otherwise had a principal role in the con7 duct that is the basis for the implied right

8 of action; or

9 ‘‘(ii) any person who intentionally ren10 dered substantial assistance to the fraudu11 lent conduct of any person described in

12 clause (i), with actual knowledge of such

13 person’s fraudulent conduct or fraudulent

14 purpose, and with knowledge that such

15 conduct was wrongful; and

16 ‘‘(B) a defendant engages in ‘knowing se17 curities fraud’ if such defendant—

18 ‘‘(i) makes a material representation

19 with actual knowledge that the representa20 tion is false, or omits to make a statement

21 with actual knowledge that, as a result of

22 the omission, one of the defendant’s mate23 rial representations is false and knows that

24 other persons are likely to rely on that

25 misrepresentation or omission, except that
30

•S 240 IS

1 reckless conduct by the defendant shall not

2 be construed to constitute ‘knowing securi3 ties fraud’; or

4 ‘‘(ii) intentionally rendered substantial

5 assistance to the fraudulent conduct of any

6 person described in clause (i), with actual

7 knowledge of such person’s fraudulent con8 duct or fraudulent purpose, and with

9 knowledge that such conduct was wrongful.

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

11 implied private action in which more than 1 person con12 tributed to a violation of this title, the court shall instruct

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

14 no jury, shall make findings, concerning the degree of re15 sponsibility of each person alleged to have caused or con16 tributed to the violation of this title, including persons who

17 have entered into settlements with the plaintiff. The inter18 rogatories or findings shall specify the amount of damages

19 the plaintiff is entitled to recover and the degree of respon20 sibility, measured as a percentage of the total fault of all

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

22 have caused or contributed to the damages incurred by

23 the plaintiff or plaintiffs. In determining the degree of re24 sponsibility, the trier of fact shall consider—
31

•S 240 IS

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

2 and

3 ‘‘(2) the nature and extent of the causal rela4 tionship between that conduct and the damage

5 claimed by the plaintiff.

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

7 Except as provided in subsection (b), the amount of liabil8 ity of a person who is, or may through right of contribu9 tion become, liable for damages based on an implied pri10 vate action arising under this title shall be determined as

11 follows:

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

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

14 only be liable for the portion of the judgment that

15 corresponds to that party’s degree of responsibility,

16 as determined under subsection (c).

17 ‘‘(2) UNCOLLECTIBLE SHARES.—If, upon mo18 tion made not later than 6 months after a final

19 judgment is entered, the court determines that all or

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

21 uncollectible—

22 ‘‘(A) the remaining defendants shall be

23 jointly and severally liable for the uncollectible

24 share if the plaintiff establishes that—
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•S 240 IS

1 ‘‘(i) the plaintiff is an individual

2 whose recoverable damages under a final

3 judgment are equal to more than 10 per4 cent of the plaintiff’s net financial worth;

5 and

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

7 is less than $200,000; and

8 ‘‘(B) the amount paid by each of the re9 maining defendants to all other plaintiffs shall

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

11 ‘‘(i) that remaining defendant’s per12 centage of fault for the uncollectible share;

13 or

14 ‘‘(ii) 5 times—

15 ‘‘(I) the amount which the de16 fendant gained from the conduct that

17 gave rise to its liability; or

18 ‘‘(II) if a defendant did not ob19 tain a direct financial gain from the

20 conduct that gave rise to the liability

21 and the conduct consisted of the pro22 vision of deficient services to an entity

23 involved in the violation, the defend24 ant’s gross revenues received for the

25 provision of all services to the other
33

•S 240 IS

1 entity involved in the violation during

2 the calendar years in which deficient

3 services were provided.

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

5 total payments required pursuant to paragraph (2)

6 exceed the amount of the uncollectible share.

7 ‘‘(4) DEFENDANTS SUBJECT TO CONTRIBU8 TION.—A defendant whose liability is reallocated

9 pursuant to paragraph (2) shall be subject to con10 tribution and to any continuing liability to the plain11 tiff on the judgment.

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

13 that a defendant is required to make an additional

14 payment pursuant to paragraph (2), that defendant

15 may recover contribution—

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

17 make the payment;

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

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

20 ‘‘(C) from any defendant held proportion21 ately liable pursuant to this subsection who is

22 liable to make the same payment and has paid

23 less than his or her proportionate share of that

24 payment; or
34

•S 240 IS

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

2 the conduct giving rise to the payment who

3 would have been liable to make the same pay4 ment.

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

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

7 and the procedure for reallocation of uncollectible shares

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

9 of the jury.

10 ‘‘(f) SETTLEMENT DISCHARGE.—

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

12 implied private action brought under this title at any

13 time before verdict or judgment shall be discharged

14 from all claims for contribution brought by other

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

16 the court shall enter a bar order constituting the

17 final discharge of all obligations to the plaintiff of

18 the settling defendant arising out of the action. The

19 order shall bar all future claims for contribution or

20 indemnity arising out of the action—

21 ‘‘(A) by nonsettling persons against the

22 settling defendant; and

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

24 nonsettling defendants.
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•S 240 IS

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

2 settlement with the plaintiff prior to verdict or judg3 ment, the verdict or judgment shall be reduced by

4 the greater of—

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

6 degree of responsibility of that person; or

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

8 that person.

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

10 for damages in an implied private action arising under this

11 title may recover contribution from any other person who,

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

13 the same damages. A claim for contribution shall be deter14 mined based on the degree of responsibility of the claimant

15 and of each person against whom a claim for contribution

16 is made.

17 ‘‘(h) STATUTE OF LIMITATIONS FOR CONTRIBU18 TION.—Once judgment has been entered in an implied pri19 vate action arising under this title determining liability,

20 an action for contribution must be brought not later than

21 6 months after the entry of a final, nonappealable judg22 ment in the action, except that an action for contribution

23 brought by a defendant who was required to make an ad24 ditional payment pursuant to subsection (d)(2) may be
36

•S 240 IS

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

2 such payment was made.’’.

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

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

5 only apply to implied private actions commenced after the

6 date of enactment of this Act.

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

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

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

10 13 the following new section:

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

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

13 following definitions shall apply:

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

15 ‘public accounting firm’ means a sole proprietorship,

16 unincorporated association, partnership, corporation,

17 or other legal entity that is engaged in the practice

18 of public accounting.

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

20 Public Auditing Self-Disciplinary Board designated

21 by the Commission pursuant to subsection (b).

22 ‘‘(3) ACCOUNTANT’S REPORT.—The term ‘ac23 countant’s report’ means a document in which a

24 public accounting firm identifies a financial state25 ment, report, or other document and sets forth the
37

•S 240 IS

1 firm’s opinion regarding such financial statement,

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

3 opinion cannot be expressed.

4 ‘‘(4) PERSON ASSOCIATED WITH A PUBLIC AC5 COUNTING FIRM.—The term ‘person associated with

6 a public accounting firm’ means a natural person

7 who—

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

9 or individual proprietor of a public accounting

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

11 accounting firm; and

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

13 connection with the preparation of an account14 ant’s report on any financial statement, report,

15 or other document required to be filed with the

16 Commission under any securities law.

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

18 ‘professional standards’ means generally accepted

19 auditing standards, generally accepted accounting

20 principles, generally accepted standards for attesta21 tion engagements, and any other standards related

22 to the preparation of financial statements or ac23 countant’s reports promulgated by the Commission

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

25 ‘‘(b) ESTABLISHMENT OF BOARD.—
38

•S 240 IS

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

2 after the date of enactment of this section, the Com3 mission shall establish a Public Auditing Self-Dis4 ciplinary Board to perform the duties set forth in

5 this section. The Commission shall designate an en6 tity to serve as the Board if the Commission finds

7 that—

8 ‘‘(A) such entity is sponsored by an exist9 ing national organization of certified public ac10 countants that—

11 ‘‘(i) is most representative of certified

12 public accountants covered by this title;

13 and

14 ‘‘(ii) has demonstrated its commit15 ment to improving the quality of practice

16 before the Commission; and

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

18 the members of the Board selected pursuant to

19 subsection (c).

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

21 If the Commission designates an entity to serve as

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

23 shall conduct the election of initial Board members

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

25 ‘‘(c) MEMBERSHIP OF BOARD.—
39

•S 240 IS

1 ‘‘(1) IN GENERAL.—The Board shall be com2 posed of 3 appointed members and 4 elected mem3 bers, as follows:

4 ‘‘(A) APPOINTED MEMBERS.—Three mem5 bers of the Board shall be appointed in accord6 ance with the following:

7 ‘‘(i) INITIAL APPOINTMENTS.—The

8 Chairman of the Commission shall make

9 the initial appointments, in consultation

10 with the other members of the Commis11 sion, not later than 90 days after the date

12 of enactment of this section.

13 ‘‘(ii) SUBSEQUENT APPOINTMENTS.—

14 After the initial appointments under clause

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

16 vacancies of appointed members of the

17 Board shall be appointed in accordance

18 with the rules adopted pursuant to para19 graph (5). Such rules shall provide that

20 such members shall be appointed by the

21 Board, subject to the approval of the Com22 mission.

23 ‘‘(B) ELECTED MEMBERS.—Four mem24 bers, including the member who shall serve as
40

•S 240 IS

1 the chairperson of the Board, shall be elected in

2 accordance with the following:

3 ‘‘(i) INITIAL ELECTION.—Not later

4 than 120 days after the date on which the

5 Chairman of the Commission makes ap6 pointments under subparagraph (A)(i), an

7 entity designated by the Commission pur8 suant to subsection (b) shall conduct an

9 election of 4 initial elected members pursu10 ant to interim election rules proposed by

11 the entity and approved by the 3 interim

12 members of the Board and the Commis13 sion. If the Commission is unable to des14 ignate an entity meeting the criteria set

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

16 the Board appointed under subparagraph

17 (A)(i) shall adopt interim rules, subject to

18 approval by the Commission, providing for

19 the election of the 4 initial elected mem20 bers. Such rules shall provide that such

21 members of the Board shall be elected—

22 ‘‘(I) not later than 120 days

23 after the date on which members are

24 initially appointed under subpara25 graph (A)(i);
41

•S 240 IS

1 ‘‘(II) by persons who are associ2 ated with public accounting firms and

3 who are certified public accountants

4 under the laws of any State; and

5 ‘‘(III) subject to the approval of

6 the Commission.

7 ‘‘(ii) SUBSEQUENT ELECTIONS.—

8 After the initial elections under clause (i),

9 members of the Board elected to fill vacan10 cies of elected members of the Board shall

11 be elected in accordance with the rules

12 adopted pursuant to paragraph (5). Such

13 rules shall provide that such members of

14 the Board shall be elected—

15 ‘‘(I) by persons who are associ16 ated with public accounting firms and

17 who are certified public accountants

18 under the laws of any State; and

19 ‘‘(II) subject to the approval of

20 the Commission.

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

22 Board, including the chairperson of the Board, shall

23 be persons who have not been associated with a pub24 lic accounting firm during the 10-year period preced25 ing appointment or election to the Board under
42

•S 240 IS

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

2 elected shall be persons associated with a public ac3 counting firm registered with the Board.

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

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

6 all business ties with his or her former firms or em7 ployers prior to beginning service on the Board.

8 ‘‘(4) TERMS.—

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

10 subparagraph (B), each member of the Board

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

12 a successor is appointed, whichever is later, ex13 cept that any member appointed to fill a va14 cancy occurring prior to the expiration of the

15 term for which such member’s predecessor was

16 appointed shall be appointed for the remainder

17 of such term.

18 ‘‘(B) INITIAL BOARD MEMBERS.—Begin19 ning on the date on which all members of the

20 Board have been selected in accordance with

21 this subsection, the terms of office of the initial

22 Board members shall expire, as determined by

23 the Board, by lottery—

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

25 date;
43

•S 240 IS

1 ‘‘(ii) for 2 members, 2 years after

2 such date;

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

4 such date; and

5 ‘‘(iv) for 2 members, 4 years after

6 such date.

7 ‘‘(5) RULES.—Following selection of the 7 ini8 tial members of the Board in accordance with sub9 paragraphs (A)(i) and (B)(i) of paragraph (1), the

10 Board shall propose and adopt rules, which shall

11 provide for—

12 ‘‘(A) the operation and administration of

13 the Board, including—

14 ‘‘(i) the appointment of members in

15 accordance with paragraph (1)(A)(ii);

16 ‘‘(ii) the election of members in ac17 cordance with paragraph (1)(B)(ii); and

18 ‘‘(iii) the compensation of the mem19 bers of the Board;

20 ‘‘(B) the appointment and compensation of

21 such employees, attorneys, and consultants as

22 may be necessary or appropriate to carry out

23 the Board’s functions under this title;
44

•S 240 IS

1 ‘‘(C) the registration of public accounting

2 firms with the Board pursuant to subsections

3 (d) and (e); and

4 ‘‘(D) the matters described in subsections

5 (f) and (g).

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

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

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

9 assess and collect a registration fee and annual dues from

10 each public accounting firm registered with the Board.

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

12 to recover the costs and expenses of the Board and to per13 mit the Board to operate on a self-financing basis. The

14 amount of fees and dues for each public accounting firm

15 shall be based upon—

16 ‘‘(1) the annual revenues of such firm from ac17 counting and auditing services;

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

19 public accounting firm;

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

21 furnishes accountant’s reports on financial state22 ments, reports, or other documents filed with the

23 Commission; and

24 ‘‘(4) such other criteria as the Board may es25 tablish.
45

•S 240 IS

1 ‘‘(e) REGISTRATION WITH BOARD.—

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

3 year after the date on which all initial members of

4 the Board have been selected in accordance with

5 subsection (c), it shall be unlawful for a public ac6 counting firm to furnish an accountant’s report on

7 any financial statement, report, or other document

8 required to be filed with the Commission under any

9 Federal securities law, unless such firm is registered

10 with the Board.

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

12 public accounting firm may be registered under this

13 subsection by filing with the Board an application

14 for registration in such form and containing such in15 formation as the Board, by rule, may prescribe.

16 Each application shall include—

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

18 accounting firm for which the firm furnishes ac19 countant’s reports on financial statements, re20 ports, or other documents filed with the Com21 mission;

22 ‘‘(B) financial information of the public ac23 counting firm for its most recent fiscal year, in24 cluding its annual revenues from accounting
46

•S 240 IS

1 and auditing services, its assets and its liabil2 ities;

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

4 firm’s policies and procedures with respect to

5 quality control of its accounting and auditing

6 practice;

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

8 or administrative actions or formal disciplinary

9 proceedings pending against such firm, or any

10 person associated with such firm, in connection

11 with an accountant’s report furnished by such

12 firm;

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

14 public accounting firm who are certified public

15 accountants, including any State professional li16 cense or certification number for each such per17 son; and

18 ‘‘(F) such other information that is reason19 ably related to the Board’s responsibilities as

20 the Board considers necessary or appropriate.

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

22 or more frequently as the Board, by rule, may pre23 scribe, each public accounting firm registered with

24 the Board shall submit reports to the Board updat25 ing the information contained in its application for
47

•S 240 IS

1 registration and containing such additional informa2 tion that is reasonably related to the Board’s re3 sponsibilities as the Board, by rule, may prescribe.

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

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

6 may conditionally or unconditionally exempt any

7 public accounting firm or any accountant’s report,

8 or any class of public accounting firms or any class

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

10 section or the rules or regulations issued hereunder,

11 if the Commission finds that such exemption is con12 sistent with the public interest, the protection of in13 vestors, and the purposes of this section.

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

15 rule, designate portions of the filings required pursu16 ant to paragraphs (2) and (3) as privileged and con17 fidential.

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

19 initial members of the Board have been selected in accord20 ance with subsection (c), the Board shall have the follow21 ing duties and powers:

22 ‘‘(1) INVESTIGATIONS AND DISCIPLINARY PRO23 CEEDINGS.—The Board shall establish fair proce24 dures for investigating and disciplining public ac25 counting firms registered with the Board, and per-
48

•S 240 IS

1 sons associated with such firms, for violations of the

2 Federal securities laws, the rules or regulations is3 sued thereunder, the rules adopted by the Board, or

4 professional standards in connection with the prepa5 ration of an accountant’s report on a financial state6 ment, report, or other document filed with the Com7 mission.

8 ‘‘(2) INVESTIGATION PROCEDURES.—

9 ‘‘(A) IN GENERAL.—The Board may con10 duct an investigation of any act, practice, or

11 omission by a public accounting firm registered

12 with the Board, or by any person associated

13 with such firm, in connection with the prepara14 tion of an accountant’s report on a financial

15 statement, report, or other document filed with

16 the Commission that may violate any applicable

17 provision of the Federal securities laws, the

18 rules and regulations issued thereunder, the

19 rules adopted by the Board, or professional

20 standards, whether such act, practice, or omis21 sion is the subject of a criminal, civil, or admin22 istrative action, or a disciplinary proceeding, or

23 otherwise is brought to the attention of the

24 Board.
49

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1 ‘‘(B) POWERS OF BOARD.—For purposes

2 of an investigation under this paragraph, the

3 Board may, in addition to such other actions as

4 the Board determines to be necessary or appro5 priate—

6 ‘‘(i) require the testimony of any per7 son associated with a public accounting

8 firm registered with the Board, with re9 spect to any matter which the Board con10 siders relevant or material to the investiga11 tion;

12 ‘‘(ii) require the production of audit

13 workpapers and any other document or in14 formation in the possession of a public ac15 counting firm registered with the Board, or

16 any person associated with such firm,

17 wherever domiciled, that the Board consid18 ers relevant or material to the investiga19 tion, and may examine the books and

20 records of such firm to verify the accuracy

21 of any documents or information so sup22 plied; and

23 ‘‘(iii) request the testimony of any

24 person and the production of any docu25 ment in the possession of any person, in-
50

•S 240 IS

1 cluding a client of a public accounting firm

2 registered with the Board, that the Board

3 considers relevant or material to the inves4 tigation.

5 ‘‘(C) SUSPENSION OR REVOCATION OF

6 REGISTRATION FOR NONCOMPLIANCE.—The re7 fusal of any person associated with a public ac8 counting firm registered with the Board to tes9 tify, or the refusal of any such person to

10 produce documents or otherwise cooperate with

11 the Board, in connection with an investigation

12 under this section, shall be cause for suspend13 ing or barring such person from associating

14 with a public accounting firm registered with

15 the Board, or such other appropriate sanction

16 as the Board shall determine. The refusal of

17 any public accounting firm registered with the

18 Board to produce documents or otherwise co19 operate with the Board, in connection with an

20 investigation under this section, shall be cause

21 for the suspension or revocation of the registra22 tion of such firm, or such other appropriate

23 sanction as the Board shall determine.

24 ‘‘(D) REFERRAL TO COMMISSION.—
51

•S 240 IS

1 ‘‘(i) IN GENERAL.—If the Board is

2 unable to conduct or complete an inves3 tigation under this section because of the

4 refusal of any client of a public accounting

5 firm registered with the Board, or any

6 other person, to testify, produce docu7 ments, or otherwise cooperate with the

8 Board in connection with such investiga9 tion, the Board shall report such refusal to

10 the Commission.

11 ‘‘(ii) INVESTIGATION.—The Commis12 sion may designate the Board or one or

13 more officers of the Board who shall be

14 empowered, in accordance with such proce15 dures as the Commission may adopt, to

16 subpoena witnesses, compel their attend17 ance, and require the production of any

18 books, papers, correspondence, memo19 randa, or other records relevant to any in20 vestigation by the Board. Attendance of

21 witnesses and the production of any

22 records may be required from any place in

23 the United States or any State at any des24 ignated place of hearing. Enforcement of a

25 subpoena issued by the Board, or an offi-
52

•S 240 IS

1 cer of the Board, pursuant to this subpara2 graph shall occur in the manner provided

3 for in section 21(c). Examination of wit4 nesses subpoenaed pursuant to this sub5 paragraph shall be conducted before an of6 ficer authorized to administer oaths by the

7 laws of the United States or of the place

8 where the examination is held.

9 ‘‘(iii) REFERRALS TO COMMISSION.—

10 The Board may refer any investigation to

11 the Commission, as the Board deems ap12 propriate.

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

14 An employee of the Board engaged in carrying

15 out an investigation or disciplinary proceeding

16 under this section shall be immune from any

17 civil liability arising out of such investigation or

18 disciplinary proceeding in the same manner and

19 to the same extent as an employee of the Fed20 eral Government in similar circumstances.

21 ‘‘(3) DISCIPLINARY PROCEDURES.—

22 ‘‘(A) DECISION TO DISCIPLINE.—In a pro23 ceeding by the Board to determine whether a

24 public accounting firm, or a person associated

25 with such firm, should be disciplined, the Board
53

•S 240 IS

1 shall bring specific charges, notify such firm or

2 person of the charges, give such firm or person

3 an opportunity to defend against such charges,

4 and keep a record of such actions.

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

6 a public accounting firm, or a person associated

7 with such firm, has engaged in any act, prac8 tice, or omission in violation of the Federal se9 curities laws, the rules or regulations issued

10 thereunder, the rules adopted by the Board, or

11 professional standards, the Board may impose

12 such disciplinary sanctions as it deems appro13 priate, including—

14 ‘‘(i) revocation or suspension of reg15 istration under this section;

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

17 and operations;

18 ‘‘(iii) fine;

19 ‘‘(iv) censure;

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

21 with a public accounting firm, suspension

22 or bar from being associated with a public

23 accounting firm registered with the Board;

24 and
54

•S 240 IS

1 ‘‘(vi) any other disciplinary sanction

2 that the Board determines to be appro3 priate.

4 ‘‘(C) STATEMENT REQUIRED.—A deter5 mination by the Board to impose a disciplinary

6 sanction shall be supported by a written state7 ment by the Board setting forth—

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

9 public accounting firm or person associated

10 with such firm has been found to have en11 gaged, or which such firm or person has

12 been found to have omitted;

13 ‘‘(ii) the specific provision of the Fed14 eral securities laws, the rules or regula15 tions issued thereunder, the rules adopted

16 by the Board, or professional standards

17 which any such act, practice, or omission is

18 deemed to violate; and

19 ‘‘(iii) the sanction imposed and the

20 reasons therefor.

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

22 shall be unlawful—

23 ‘‘(i) for any person as to whom a sus24 pension or bar is in effect willfully to be or

25 to become associated with a public ac-
55

•S 240 IS

1 counting firm registered with the Board, in

2 connection with the preparation of an ac3 countant’s report on any financial state4 ment, report, or other document filed with

5 the Commission, without the consent of the

6 Board or the Commission; and

7 ‘‘(ii) for any public accounting firm

8 registered with the Board to permit such a

9 person to become, or remain, associated

10 with such firm without the consent of the

11 Board or the Commission, if such firm

12 knew or, in the exercise of reasonable care

13 should have known, of such suspension or

14 bar.

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

16 imposes a disciplinary sanction against a public ac17 counting firm, or a person associated with such firm,

18 the Board shall report such sanction to the Commis19 sion, to the appropriate State or foreign licensing

20 board or boards with which such firm or such person

21 is licensed or certified to practice public accounting,

22 and to the public. The information reported shall in23 clude—
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•S 240 IS

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

2 firm, or person associated with such firm,

3 against whom the sanction is imposed;

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

5 omissions upon which the sanction is based;

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

7 ‘‘(D) such other information respecting the

8 circumstances of the disciplinary action (includ9 ing the name of any client of such firm affected

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

11 Board deems appropriate.

12 ‘‘(5) DISCOVERY AND ADMISSIBILITY OF BOARD

13 MATERIAL.—

14 ‘‘(A) DISCOVERABILITY.—

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 and the deliberations and other proceed20 ings of the Board and its employees and

21 agents in connection with an investigation

22 or disciplinary proceeding under this sec23 tion shall not be subject to any form of

24 civil discovery, including demands for pro25 duction of documents and for testimony of
57

•S 240 IS

1 individuals, in connection with any pro2 ceeding in any State or Federal court, or

3 before any State or Federal administrative

4 agency. This subparagraph shall not apply

5 to any information provided to the Board

6 that would have been subject to discovery

7 from the person or entity that provided it

8 to the Board, but is no longer available

9 from that person or entity.

10 ‘‘(ii) EXEMPTION.—Submissions to

11 the Board by or on behalf of a public ac12 counting firm or person associated with

13 such a firm or on behalf of any other par14 ticipant in a Board proceeding, including

15 documents generated by the Board itself,

16 shall be exempt from discovery to the same

17 extent as the material described in clause

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

19 or any other person, if such submission—

20 ‘‘(I) is prepared specifically for

21 the purpose of the Board proceeding;

22 and

23 ‘‘(II) addresses the merits of the

24 issues under investigation by the

25 Board.
58

•S 240 IS

1 ‘‘(iii) CONSTRUCTION.—Nothing in

2 this subparagraph shall limit the authority

3 of the Board to provide appropriate public

4 access to disciplinary hearings of the

5 Board, or to reports or memoranda re6 ceived by the Board in connection with

7 such proceedings.

8 ‘‘(B) ADMISSIBILITY.—

9 ‘‘(i) IN GENERAL.—Except as pro10 vided in subparagraph (C), all reports,

11 memoranda, and other information pre12 pared, collected, or received by the Board,

13 the deliberations and other proceedings of

14 the Board and its employees and agents in

15 connection with an investigation or discipli16 nary proceeding under this section, the

17 fact that an investigation or disciplinary

18 proceeding has been commenced, and the

19 Board’s determination with respect to any

20 investigation or disciplinary proceeding

21 shall be inadmissible in any proceeding in

22 any State or Federal court or before any

23 State or Federal administrative agency.

24 ‘‘(ii) TREATMENT OF CERTAIN DOCU25 MENTS.—Submissions to the Board by or
59

•S 240 IS

1 on behalf of a public accounting firm or

2 person associated with such a firm or on

3 behalf of any other participant in a Board

4 proceeding, including documents generated

5 by the Board itself, shall be inadmissible to

6 the same extent as the material described

7 in clause (i), if such submission—

8 ‘‘(I) is prepared specifically for

9 the purpose of the Board proceedings;

10 and

11 ‘‘(II) addresses the merits of the

12 issues under investigation by the

13 Board.

14 ‘‘(C) AVAILABILITY AND ADMISSIBILITY OF

15 INFORMATION.—

16 ‘‘(i) IN GENERAL.—All information

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

18 shall be—

19 ‘‘(I) available to the Commission

20 and to any other Federal department

21 or agency in connection with the exer22 cise of its regulatory authority to the

23 extent that such information would be

24 available to such agency from the
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•S 240 IS

1 Commission as a result of a Commis2 sion enforcement investigation;

3 ‘‘(II) available to Federal and

4 State authorities in connection with

5 any criminal investigation or proceed6 ing;

7 ‘‘(III) admissible in any action

8 brought by the Commission or any

9 other Federal department or agency

10 pursuant to its regulatory authority,

11 to the extent that such information

12 would be available to such agency

13 from the Commission as a result of a

14 Commission enforcement investigation

15 and in any criminal action; and

16 ‘‘(IV) available to State licensing

17 boards to the extent authorized in

18 paragraph (6).

19 ‘‘(ii) OTHER LIMITATIONS.—Any doc20 uments or other information provided to

21 the Commission or other authorities pursu22 ant to clause (i) shall be subject to the lim23 itations on discovery and admissibility set

24 forth in subparagraphs (A) and (B).
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1 ‘‘(D) TITLE 5 TREATMENT.—This sub2 section shall be considered to be a statute de3 scribed in section 552(b)(3)(B) of title 5,

4 United States Code, for purposes of that sec5 tion 552.

6 ‘‘(6) PARTICIPATION BY STATE LICENSING

7 BOARDS.—

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

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

10 it shall notify the State licensing boards in the

11 States in which the public accounting firm or

12 person associated with such firm engaged in the

13 act or failure to act alleged to have violated

14 professional standards, of the pendancy of the

15 investigation, and shall invite the State licens16 ing boards to participate in the investigation.

17 ‘‘(B) ACCEPTANCE BY STATE BOARD.—

18 ‘‘(i) PARTICIPATION.—If a State li19 censing board elects to join in the inves20 tigation, its representatives shall partici21 pate, pursuant to rules established by the

22 Board, in investigating the matter and in

23 presenting the evidence justifying the

24 charges in any hearing pursuant to para25 graph (3)(A).
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•S 240 IS

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

2 State licensing board disagrees with the

3 Board’s determination with respect to the

4 matter under investigation, it may seek re5 view of that determination by the Commis6 sion pursuant to procedures that the Com7 mission shall specify by regulation.

8 ‘‘(C) PROHIBITION ON CONCURRENT IN9 VESTIGATIONS.—A State licensing board shall

10 not institute its own proceeding with respect to

11 a matter referred to in subparagraph (A) until

12 after the Board’s determination has become

13 final, including completion of all review by the

14 Commission and the courts.

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

16 the Board or the Commission imposes a sanc17 tion upon a public accounting firm or person

18 associated with such a firm, and that deter19 mination either is not subjected to judicial re20 view or is upheld on judicial review, a State li21 censing board may impose a sanction on the

22 basis of the Board’s report pursuant to para23 graph (4). Any sanction imposed by the State

24 licensing board under this clause shall be inad25 missible in any proceeding in any State or Fed-
63

•S 240 IS

1 eral court or before any State or Federal ad2 ministrative agency, except to the extent pro3 vided in paragraph (5)(D).

4 ‘‘(E) SANCTIONS NOT PERMITTED.—If a

5 sanction is not imposed on a public accounting

6 firm or person associated with such a firm,

7 and—

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

9 participate in an investigation referred to

10 in subparagraph (A), the State licensing

11 board may not impose a sanction with re12 spect to the matter; and

13 ‘‘(ii) a State licensing board elected

14 not to participate in an investigation re15 ferred to in subparagraph (A), subpara16 graphs (A) and (B) of paragraph (5) shall

17 apply with respect to any investigation or

18 proceeding subsequently instituted by the

19 State licensing board and, in particular,

20 the State licensing board shall not have ac21 cess to the record of the proceeding before

22 the Board and that record shall be inad23 missible in any proceeding before the State

24 licensing board.
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•S 240 IS

1 ‘‘(g) ADDITIONAL DUTIES REGARDING QUALITY

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

3 of the Board have been selected in accordance with sub4 section (c), the Board shall have the following duties and

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

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

7 promote a high level of professional conduct among

8 public accounting firms registered with the Board,

9 to improve the quality of audit services provided by

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

11 promote the public interest.

12 ‘‘(2) PROFESSIONAL PEER REVIEW ORGANIZA13 TIONS.—

14 ‘‘(A) MEMBERSHIP REQUIREMENT.—The

15 Board shall require each public accounting firm

16 subject to the disciplinary authority of the

17 Board to be a member of a professional peer re18 view organization certified by the Board pursu19 ant to subparagraph (B).

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

21 Board shall, by rule, establish general criteria

22 for the certification of peer review organizations

23 and shall certify organizations that satisfy those

24 criteria, or such amended criteria as the Board
65

•S 240 IS

1 may adopt. To be certified, a peer review orga2 nization shall, at a minimum—

3 ‘‘(i) require a member public account4 ing firm to undergo peer review not less

5 than once every 3 years and publish the re6 sults of the peer review; and

7 ‘‘(ii) adopt standards that are accept8 able to the Board relating to audit service

9 quality control.

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

11 accounting firm or a person associated with

12 such a firm of a rule of the peer review organi13 zation to which the firm belongs shall constitute

14 grounds for—

15 ‘‘(i) the imposition of disciplinary

16 sanctions by the Board pursuant to sub17 section (f); and

18 ‘‘(ii) denial to the public accounting

19 firm or person associated with such firm of

20 the privilege of appearing or practicing be21 fore the Commission.

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

23 provided by this section, all reports, memoranda,

24 and other information provided to the Board solely

25 for purposes of paragraph (2), or to a peer review
66

•S 240 IS

1 organization certified by the Board, shall be con2 fidential and privileged, unless such confidentiality

3 and privilege are expressly waived by the person or

4 entity that created or provided the information.

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

6 ‘‘(1) PROPOSED RULE CHANGES.—

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

8 with the Commission, in accordance with such

9 rules as the Commission may prescribe, copies

10 of any proposed rule or any proposed change in,

11 addition to, or deletion from the rules of the

12 Board (hereafter in this subsection collectively

13 referred to as a ‘proposed rule change’) accom14 panied by a concise general statement of the

15 basis and purpose of such proposed rule

16 change. The Commission shall, upon the filing

17 of any proposed rule change, publish notice

18 thereof together with the terms of substance of

19 the proposed rule change or a description of the

20 subjects and issues involved. The Commission

21 shall give interested persons an opportunity to

22 submit written data, views, and arguments con23 cerning the proposed rule change. No proposed

24 rule change shall take effect unless approved by
67

•S 240 IS

1 the Commission or otherwise permitted in ac2 cordance with this subsection.

3 ‘‘(B) APPROVAL OR DISAPPROVAL.—

4 ‘‘(i) IN GENERAL.—Not later than 35

5 days after the date on which notice of the

6 filing of a proposed rule change is pub7 lished in accordance with subparagraph

8 (A), or such longer period as the Commis9 sion may designate (not to exceed 90 days

10 after such date, if it finds such longer pe11 riod to be appropriate and publishes its

12 reasons for such finding or as to which the

13 Board consents) the Commission shall—

14 ‘‘(I) by order approve such pro15 posed rule change; or

16 ‘‘(II) institute proceedings to de17 termine whether the proposed rule

18 change should be disapproved.

19 ‘‘(ii) DISAPPROVAL PROCEEDINGS.—

20 Proceedings for disapproval shall include

21 notice of the grounds for disapproval under

22 consideration and opportunity for hearing

23 and shall be concluded not later than 180

24 days after the date of publication of notice

25 of the filing of the proposed rule change.
68

•S 240 IS

1 At the conclusion of the proceedings for

2 disapproval, the Commission, by order,

3 shall approve or disapprove such proposed

4 rule change. The Commission may extend

5 the time for conclusion of such proceedings

6 for—

7 ‘‘(I) not more than 60 days, if

8 the Commission finds good cause for

9 such extension and publishes its rea10 sons for such finding; or

11 ‘‘(II) such longer period to which

12 the Board consents.

13 ‘‘(iii) APPROVAL.—The Commission

14 shall approve a proposed rule change if it

15 finds that such proposed rule change is

16 consistent with the requirements of the

17 Federal securities laws, and the rules and

18 regulations issued thereunder, applicable to

19 the Board. The Commission shall dis20 approve a proposed rule change if it does

21 not make such finding. The Commission

22 shall not approve any proposed rule change

23 prior to the expiration of the 30-day period

24 beginning on the date on which notice of

25 the filing of a proposed rule change is pub-
69

•S 240 IS

1 lished in accordance with this subpara2 graph, unless the Commission finds good

3 cause to do so and publishes its reasons

4 for such finding.

5 ‘‘(C) EFFECT OF PROPOSED RULE

6 CHANGE.—

7 ‘‘(i) EFFECTIVE DATE.—Notwith8 standing subparagraph (B), a proposed

9 rule change may take effect upon filing

10 with the Commission if designated by the

11 Board as—

12 ‘‘(I) constituting a stated policy,

13 practice, or interpretation with respect

14 to the meaning, administration, or en15 forcement of an existing rule of the

16 Board;

17 ‘‘(II) establishing or changing a

18 due, fee, or other charge imposed by

19 the Board; or

20 ‘‘(III) concerned solely with the

21 administration of the Board or other

22 matters which the Commission, by

23 rule, consistent with the public inter24 est and the purposes of this sub25 section, may specify.
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1 ‘‘(ii) SUMMARY EFFECT.—Notwith2 standing any other provision of this sub3 section, a proposed rule change may be put

4 into effect summarily if it appears to the

5 Commission that such action is necessary

6 for the protection of investors. Any pro7 posed rule change put into effect sum8 marily shall be filed promptly thereafter in

9 accordance with this paragraph.

10 ‘‘(iii) ENFORCEMENT.—Any proposed

11 rule change which has taken effect pursu12 ant to clause (i) or (ii) may be enforced by

13 the Board to the extent that it is not in14 consistent with the Federal securities laws,

15 the rules and regulations issued there16 under, and applicable Federal and State

17 law. During the 60-day period beginning

18 on the date on which notice of the filing of

19 a proposed rule change if filed in accord20 ance with this paragraph, the Commission

21 may summarily abrogate the change in the

22 rules of the Board made thereby and re23 quire that the proposed rule change be

24 refiled in accordance with subparagraph

25 (A) and reviewed in accordance with sub-
71

•S 240 IS

1 paragraph (B), if it appears to the Com2 mission that such action is necessary or

3 appropriate in the public interest, for the

4 protection of investors, or otherwise in fur5 therance of the purposes of the Federal se6 curities laws. Commission action pursuant

7 to the preceding sentence shall not affect

8 the validity or force of the rule change dur9 ing the period it was in effect and shall not

10 be reviewable under section 25 of this Act

11 nor deemed to be ‘final agency action’ for

12 purposes of section 704 of title 5, United

13 States Code.

14 ‘‘(2) AMENDMENT BY COMMISSION OF RULES

15 OF THE BOARD.—The Commission, by rule, may ab16 rogate, add to, and delete from (hereafter in this

17 subsection collectively referred to as ‘amend’) the

18 rules of the Board as the Commission deems nec19 essary or appropriate to ensure the fair administra20 tion of the Board, to conform its rules to require21 ments of the Federal securities laws, and the rules

22 and regulations issued thereunder applicable to the

23 Board, or otherwise in furtherance of the purposes

24 of the Federal securities laws, in the following

25 manner:
72

•S 240 IS

1 ‘‘(A) PUBLICATION OF NOTICE.—The

2 Commission shall notify the Board and publish

3 notice of the proposed rulemaking in the Fed4 eral Register. The notice shall include the text

5 of the proposed amendment to the rules of the

6 Board and a statement of the Commission’s

7 reasons, including any pertinent facts, for com8 mencing such proposed rulemaking.

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

10 give interested persons an opportunity for the

11 oral presentation of data, views, and arguments,

12 in addition to an opportunity to make written

13 submissions. A transcript shall be kept of any

14 oral presentation.

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

16 pursuant to this subsection shall incorporate

17 the text of the amendment to the rules of the

18 Board and a statement of the Commission’s

19 basis for and purpose in so amending such

20 rules. Such statement shall include an identi21 fication of any facts on which the Commission

22 considers its determination to so amend the

23 rules of the Board to be based, including the

24 reasons for the Commission’s conclusions as to
73

•S 240 IS

1 any of the facts that were disputed in the rule2 making.

3 ‘‘(D) REGULATIONS.—

4 ‘‘(i) TITLE 5 APPLICABILITY.—Except

5 as otherwise provided in this paragraph,

6 rulemaking under this paragraph shall be

7 in accordance with the procedures specified

8 in section 553 of title 5, United States

9 Code, for rulemaking not on the record.

10 ‘‘(ii) CONSTRUCTION.—Nothing in

11 this subsection shall be construed to impair

12 or limit the Commission’s power to make,

13 modify, or alter the procedures the Com14 mission may follow in making rules and

15 regulations pursuant to any other author16 ity under the Federal securities laws.

17 ‘‘(iii) INCORPORATION OF AMEND18 MENTS.—Any amendment to the rules of

19 the Board made by the Commission pursu20 ant to this subsection shall be considered

21 for purposes of the Federal securities laws

22 to be part of the rules of the Board and

23 shall not be considered to be a rule of the

24 Commission.
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•S 240 IS

1 ‘‘(3) NOTICE OF DISCIPLINARY ACTION TAKEN

2 BY THE BOARD; REVIEW OF ACTION BY THE COM3 MISSION.—

4 ‘‘(A) NOTICE REQUIRED.—If the Board

5 imposes a final disciplinary sanction on a public

6 accounting firm registered with the Board or on

7 any person associated with such a firm, the

8 Board shall promptly file notice thereof with

9 the Commission. The notice shall be in such

10 form and contain such information as the Com11 mission, by rule, may prescribe as necessary or

12 appropriate in furtherance of the purposes of

13 the Federal securities laws.

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

15 which the Board is required by subparagraph

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

17 the Commission, on its own motion, or upon ap18 plication by any person aggrieved thereby, filed

19 not later than 30 days after the date on which

20 such notice is filed with the Commission and re21 ceived by such aggrieved person, or within such

22 longer period as the Commission may deter23 mine. Application to the Commission for review,

24 or the institution of review by the Commission

25 on its own motion, shall not operate as a stay
75

•S 240 IS

1 of such action unless the Commission otherwise

2 orders, summarily or after notice and oppor3 tunity for hearing on the question of a stay

4 (which hearing may consist solely of the sub5 mission of affidavits or presentation of oral ar6 guments). The Commission shall establish for

7 appropriate cases an expedited procedure for

8 consideration and determination of the question

9 of a stay.

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

11 REDUCTION, OR REMISSION OF SANCTION.—

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

13 review a final disciplinary sanction imposed by

14 the Board on a public accounting firm reg15 istered with the Board or a person associated

16 with such a firm, after notice and opportunity

17 for hearing (which hearing may consist solely of

18 consideration of the record before the Board

19 and opportunity for the presentation of sup20 porting reasons to affirm, modify, or set aside

21 the sanction)—

22 ‘‘(i) if the Commission finds that—

23 ‘‘(I) such firm or person associ24 ated with such a firm has engaged in

25 such acts or practices, or has omitted
76

•S 240 IS

1 such acts, as the Board has found

2 them to have engaged in or omitted;

3 ‘‘(II) such acts, practices, or

4 omissions, are in violation of such

5 provisions of the Federal securities

6 laws, the rules or regulations issued

7 thereunder, the rules adopted by the

8 Board, or professional standards as

9 have been specified in the determina10 tion of the Board; and

11 ‘‘(III) such provisions were ap12 plied in a manner consistent with the

13 purposes of the Federal securities

14 laws;

15 the Commission, by order, shall so declare

16 and, as appropriate, affirm the sanction

17 imposed by the Board, modify the sanction

18 in accordance with paragraph (2), or re19 mand to the Board for further proceed20 ings; or

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

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

23 order, set aside the sanction imposed by

24 the Board and, if appropriate, remand to

25 the Board for further proceedings.
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•S 240 IS

1 ‘‘(B) CANCELLATION, REDUCTION, OR RE2 MISSION OF SANCTION.—If the Commission,

3 having due regard for the public interest and

4 the protection of investors, finds after a pro5 ceeding in accordance with subparagraph (A)

6 that a sanction imposed by the Board upon a

7 firm or person associated with a firm imposes

8 any burden on competition not necessary or ap9 propriate in furtherance of the purposes of the

10 Federal securities laws or is excessive or op11 pressive, the Commission may cancel, reduce, or

12 require the remission of such sanction.

13 ‘‘(5) COMPLIANCE WITH RULES AND REGULA14 TIONS.—

15 ‘‘(A) DUTIES OF BOARD.—The Board

16 shall—

17 ‘‘(i) comply with the Federal securi18 ties laws, the rules and regulations issued

19 thereunder, and its own rules; and

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

21 the rules thereunder, absent reasonable

22 justification or excuse, enforce compliance

23 with such provisions and with professional

24 standards by public accounting firms reg-
78

•S 240 IS

1 istered with the Board and persons associ2 ated with such firms.

3 ‘‘(B) RELIEF BY COMMISSION.—The Com4 mission, by rule, consistent with the public in5 terest, the protection of investors, and the other

6 purposes of the Federal securities laws, may re7 lieve the Board of any responsibility under this

8 section to enforce compliance with any specified

9 provision of the Federal securities laws, the

10 rules or regulations issued thereunder, or pro11 fessional standards by any public accounting

12 firm registered with the Board or person associ13 ated with such a firm, or any class of such

14 firms or persons associated with such a firm.

15 ‘‘(6) CENSURE; OTHER SANCTIONS.—

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

17 authorized, by order, if in its opinion such ac18 tion is necessary or appropriate in the public in19 terest, for the protection of investors, or other20 wise in furtherance of the purposes of the Fed21 eral securities laws, to censure or impose limita22 tions upon the activities, functions, and oper23 ations of the Board, if the Commission finds,

24 on the record after notice and opportunity for

25 hearing, that the Board has—
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•S 240 IS

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

2 with any provision of the Federal securities

3 laws, the rules or regulations issued there4 under, or its own rules; or

5 ‘‘(ii) without reasonable justification

6 or excuse, has failed to enforce compliance

7 with any such provision or any professional

8 standard by a public accounting firm reg9 istered with the Board or a person associ10 ated with such a firm.

11 ‘‘(B) REMOVAL FROM OFFICE.—The Com12 mission is authorized, by order, if in its opinion

13 such action is necessary or appropriate, in the

14 public interest for the protection of investors, or

15 otherwise in furtherance of the purposes of the

16 Federal securities laws, to remove from office or

17 censure any member of the Board, if the Com18 mission finds, on the record after notice and op19 portunity for hearing, that such member has—

20 ‘‘(i) willfully violated any provision of

21 the Federal securities laws, the rules or

22 regulations issued thereunder, or the rules

23 of the Board;

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

25 authority; or
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•S 240 IS

1 ‘‘(iii) without reasonable justification

2 or excuse, failed to enforce compliance with

3 any such provision or any professional

4 standard by any public accounting firm

5 registered with the Board or any person

6 associated with such a firm.

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

8 accounting firm that furnishes accountant’s reports on

9 any financial statement, report, or other document re10 quired to be filed with the Commission under any Federal

11 securities law shall, with respect to those reports, be sub12 ject to the provisions of this section in the same manner

13 and to the same extent as a domestic public accounting

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

15 and as it deems consistent with the public interest and

16 the protection of investors, either unconditionally or upon

17 specified terms and conditions, exempt from one or more

18 provisions of this section any foreign public accounting

19 firm. Registration pursuant to this subsection shall not,

20 by itself, provide a basis for subjecting foreign accounting

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

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

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

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

25 public accounting firm registered with the Board, or
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•S 240 IS

1 any person associated with such a firm be subject to

2 liability under any antitrust law for any act of the

3 Board or any failure to act by the Board.

4 ‘‘(2) DEFINITION.—For purposes of this sub5 section, the term ‘antitrust law’ means the Federal

6 Trade Commission Act and each statute defined by

7 section 4 thereof as ‘Antitrust Acts’ and all amend8 ments to such Act and such statutes and any other

9 Federal Acts or State laws in pari materia.

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

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

12 financial statements by an independent public accountant

13 shall be conducted in accordance with generally accepted

14 auditing standards, as may be modified or supplemented

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

16 may defer to professional standards promulgated by pri17 vate organizations that are generally accepted by the ac18 counting or auditing profession.

19 ‘‘(l) COMMISSION AUTHORITY NOT IMPAIRED.—

20 Nothing in this section shall be construed to impair or

21 limit the Commission’s authority—

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

23 firms, or any persons associated with such firms;

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

25 derived from other provisions of the Federal securi-
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1 ties laws or the rules or regulations issued there2 under; or

3 ‘‘(3) to take, on its own initiative, legal, admin4 istrative, or disciplinary action against any public

5 accounting firm registered with the Board or any

6 person associated with such a firm.’’.

Æ

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