II

104TH CONGRESS

1ST SESSION S. 667

To amend the Securities Exchange Act of 1934 in order to reform the

conduct of private securities litigation, to provide for financial fraud

detection and disclosure, and for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 4 (legislative day, MARCH 27), 1995

Mr. BRYAN (for himself and Mr. SHELBY) 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 in order

to reform the conduct of private securities litigation,

to provide for financial fraud detection and disclosure,

and for other purposes.

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

3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

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

5 ‘‘Private Securities Enforcement Improvements Act of

6 1995’’.

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

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

TITLE I—PRIVATE SECURITIES LITIGATION

Sec. 101. Elimination of certain abusive practices and procedural reforms.

Sec. 102. Special requirements for class action complaints; multiple securities

class actions; procedure for selecting lead counsel in class actions; early evaluation procedure.

Sec. 103. Requirements for securities fraud actions.

Sec. 104. Proportionate liability and contribution.

Sec. 105. Restoration of aiding and abetting liability.

Sec. 106. Limitations period for implied private rights of action.

Sec. 107. Safe harbor for forward-looking statements.

TITLE II—FINANCIAL FRAUD DETECTION AND DISCLOSURE

Sec. 201. Financial fraud detection and disclosure.

1 TITLE I—PRIVATE SECURITIES

2 LITIGATION

3 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES

4 AND PROCEDURAL REFORMS.

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

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

7 is amended by adding at the end the following new para8 graph:

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

10 or dealer, or person associated with a broker or deal11 er, may solicit or accept remuneration for assisting

12 an attorney in obtaining the representation of any

13 customer in any implied private action arising under

14 this title.’’.

15 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

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

17 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 solely as the result of an action brought by the Com7 mission, or of any Commission proceeding, shall not

8 be distributed as payment for attorneys’ fees or ex9 penses incurred by private parties seeking distribu10 tion 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, upon

9 motion by any party, make a determination of whether

10 such interest constitutes a conflict of interest sufficient to

11 disqualify the attorney from representing the party.

12 ‘‘(k) RESTRICTIONS ON SECRECY.—

13 ‘‘(1) RESTRICTIONS ON SETTLEMENTS UNDER

14 SEAL.—In an implied private action arising under

15 this title, the terms and provisions of any settlement

16 agreement between any of the parties shall not be

17 filed under seal, except that on motion of any of the

18 parties to the settlement, the court may order filing

19 under seal for those portions of a settlement agree20 ment as to which good cause is shown for such filing

21 under seal. Good cause shall only exist if publication

22 of a term or provision of a settlement agreement

23 would cause direct and substantial harm to any per24 son.
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1 ‘‘(2) RESTRICTIONS ON PROTECTIVE ORDERS

2 AND SEALING OF CASES.—In an implied private ac3 tion arising under this title, a court may enter an

4 order restricting the disclosure of information ob5 tained through discovery, or an order restricting ac6 cess after entry of final judgment to court records,

7 only after making particularized findings of fact that

8 such disclosure or access would cause direct and

9 substantial harm to the competitive or privacy inter10 ests of a person.

11 ‘‘(l) PAYMENT OF ATTORNEYS’ FEES FROM SETTLE12 MENT FUNDS.—In an implied private action arising under

13 this title that is certified as a class action pursuant to

14 the Federal Rules of Civil Procedure, attorneys’ fees

15 awarded by the court from a common fund for the class

16 to counsel for the class shall—

17 ‘‘(1) be determined based on—

18 ‘‘(A) a reasonable percentage of the

19 amount made available to class members from

20 the common fund; and

21 ‘‘(B) a reasonable percentage of the value

22 of any other benefits made available to the

23 class; and

24 ‘‘(2) include reasonable expenses incurred in the

25 prosecution of the action.
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1 ‘‘(m) DISCLOSURE OF SETTLEMENT TERMS TO

2 CLASS MEMBERS.—In an implied private action arising

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

4 to the Federal Rules of Civil Procedure, a proposed or

5 final settlement agreement that is published or otherwise

6 disseminated to the class shall include the following state7 ments, which shall not be admissible for purposes of any

8 Federal or State judicial action or administrative proceed9 ing, other than an action or proceeding arising out of such

10 statements:

11 ‘‘(1) STATEMENT OF THE BENEFITS OF SET12 TLEMENT.—A statement of the total amount of the

13 settlement, fully describing all proposed payments

14 and non-monetary benefits to the class, and a sched15 ule setting forth the reasonably anticipated pay16 ments to class members.

17 ‘‘(2) STATEMENT OF POTENTIAL OUTCOME OF

18 CASE.—

19 ‘‘(A) AGREEMENT ON AMOUNT OF DAM20 AGES AND LIKELIHOOD OF PREVAILING.—If the

21 settling parties agree on the amount of dam22 ages that would be recoverable if the plaintiff

23 prevailed on each claim alleged under this title

24 and the likelihood that the plaintiff would pre25 vail—
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1 ‘‘(i) a statement concerning the

2 amount of such potential damages; and

3 ‘‘(ii) a statement concerning the likeli4 hood that the plaintiff would prevail on the

5 claims alleged under this title and a brief

6 explanation of the reasons for that conclu7 sion.

8 ‘‘(B) DISAGREEMENT ON AMOUNT OF

9 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

10 the settling parties do not agree on the amount

11 of damages that would be recoverable if the

12 plaintiff prevailed on each claim alleged under

13 this title or on the likelihood that the plaintiff

14 would prevail on those claims, or both, a state15 ment concerning the issue or issues on which

16 the parties disagree.

17 ‘‘(3) STATEMENT OF ATTORNEYS’ FEES OR

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

19 their counsel intend to apply to the court for an

20 award of attorneys’ fees or costs from any fund es21 tablished as part of the settlement, a statement indi22 cating which parties or counsel intend to make such

23 an application, the amount of fees and costs that

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

25 for the application.
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1 ‘‘(4) IDENTIFICATION OF REPRESENTATIVES.—

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

3 more representatives of counsel for the class who

4 will be reasonably available to answer questions from

5 class members concerning any matter contained in

6 any notice of settlement published or otherwise dis7 seminated to the class.

8 ‘‘(5) OTHER INFORMATION.—Such other infor9 mation as may be required by the court.’’.

10 SEC. 102. SPECIAL REQUIREMENTS FOR CLASS ACTION

11 COMPLAINTS; MULTIPLE SECURITIES CLASS

12 ACTIONS; PROCEDURE FOR SELECTING LEAD

13 COUNSEL IN CLASS ACTIONS; EARLY EVALUA14 TION PROCEDURE.

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

16 et seq.) is amended by inserting after section 27A the fol17 lowing new section:

18 ‘‘SEC. 27B. SPECIAL PROVISIONS FOR CLASS ACTIONS.

19 ‘‘(a) CERTIFICATION OF COMPLAINTS.—

20 ‘‘(1) IN GENERAL.—In an implied private ac21 tion arising under this title that is filed as a class

22 action pursuant to the Federal Rules of Civil Proce23 dure, each plaintiff seeking to serve as a class rep24 resentative shall provide a certification personally
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1 signed by the plaintiff to be filed with the complaint

2 that—

3 ‘‘(A) states that the plaintiff has reviewed

4 the complaint and authorized its filing;

5 ‘‘(B) states that the plaintiff did not pur6 chase the security that is the subject of the

7 complaint at the direction of plaintiff’s counsel;

8 ‘‘(C) states that the plaintiff is willing to

9 serve as a class representative, including provid10 ing testimony at deposition and trial, if nec11 essary;

12 ‘‘(D) sets forth all of the plaintiffs’ trans13 actions in the security that is the subject of the

14 complaint during the class period specified in

15 the complaint;

16 ‘‘(E) identifies all suits under this title

17 which the plaintiff has filed as a class action in

18 the prior 12 months; and

19 ‘‘(F) states that the plaintiff will not ac20 cept any payment for serving as class represent21 ative beyond the plaintiff’s pro rata share of

22 any recovery, except as ordered by the court.

23 ‘‘(2) NON-WAIVER OF ATTORNEY-CLIENT PRIVI24 LEGE.—The certification filed pursuant to para-
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1 graph (1) shall not be construed to be a waiver of

2 the attorney-client privilege.

3 ‘‘(b) MULTIPLE SECURITIES CLASS ACTIONS.—

4 ‘‘(1) IN GENERAL.—If more than one implied

5 private action arising under this title out of substan6 tially the same transaction or occurrence is filed in

7 one or more Federal courts, and any person or en8 tity is named as a defendant in more than one such

9 action, each such action shall be deemed a multiple

10 securities class action, and the actions shall be

11 deemed a group of multiple securities class actions.

12 ‘‘(2) CONSOLIDATION.—The parties shall

13 promptly call to the attention of each court in which

14 multiple securities class actions are filed the other

15 actions in the group of multiple securities class ac16 tions. All the actions in the group of multiple securi17 ties class actions shall be transferred or consolidated

18 (or both) in the most convenient forum before one

19 judge as promptly as possible. The Judicial Panel on

20 Multi-District Litigation shall give expedited treat21 ment to proceedings involving multiple securities

22 class actions to facilitate their transfer to one dis23 trict as promptly as possible.

24 ‘‘(3) SELECTION OF LEAD COUNSEL.—When

25 multiple securities class actions are filed, plaintiffs’
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1 counsel shall promptly organize themselves and se2 lect lead counsel to direct the prosecution of the ac3 tions, subject to the approval of the court. If plain4 tiffs’ counsel do not organize themselves, the court

5 shall promptly designate lead counsel, in no event

6 later than 45 days after the filing of the first mul7 tiple securities class action. In selecting or designat8 ing lead counsel, plaintiffs’ counsel and the court

9 shall not give undue weight to the order of filing the

10 multiple securities class actions.

11 ‘‘(4) LATER-FILED CASES.—Any multiple secu12 rities class action filed after the case organization

13 period shall be subject to the decisions taken during

14 the case organization period.

15 ‘‘(c) EARLY EVALUATION PROCEDURE.—

16 ‘‘(1) IN GENERAL.—In an implied private ac17 tion arising under this title that is filed as a class

18 action pursuant to the Federal Rules of Civil Proce19 dure, if the class representatives and each of the

20 other parties to the action agree and any party so

21 requests, or if the court upon motion of any party

22 so decides, not later than 60 days after the filing of

23 the class action, the court shall order an early eval24 uation procedure. The period of the early evaluation

25 procedure shall not extend beyond 150 days after
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1 the filing of the first complaint subject to the proce2 dure.

3 ‘‘(2) REQUIREMENTS.—During the early eval4 uation procedure described under paragraph (1)—

5 ‘‘(A) defendants shall not be required to

6 answer or otherwise respond to any complaint;

7 ‘‘(B) plaintiffs may file a consolidated or

8 amended complaint at any time and may dis9 miss the action or actions at any time without

10 sanction;

11 ‘‘(C) unless otherwise ordered by the court,

12 no formal discovery shall occur, except that par13 ties may propound discovery requests to third

14 parties to preserve evidence;

15 ‘‘(D) the parties shall evaluate the merits

16 of the action under the supervision of a person

17 (hereafter in this section referred to as the ‘me18 diator’) agreed upon by them or designated by

19 the court in the absence of agreement, which

20 person may be another district court judge, any

21 magistrate-judge or a special master, each side

22 having one peremptory challenge of a mediator

23 designated by the court by filing a written no24 tice of challenge not later than 5 days after re25 ceipt of an order designating the mediator;
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1 ‘‘(E) the parties shall promptly provide ac2 cess to or exchange all nonprivileged documents

3 relating to the allegations in the complaint or

4 complaints, and any documents withheld on the

5 grounds of privilege shall be sufficiently identi6 fied so as to permit the mediator to determine

7 if they are, in fact, privileged; and

8 ‘‘(F) the parties shall exchange damage

9 studies and such other expert reports as may be

10 helpful to an evaluation of the action on the

11 merits, which materials shall be treated as pre12 pared and used in the context of settlement ne13 gotiations.

14 ‘‘(3) FAILURE TO PRODUCE DOCUMENTS.—Any

15 party that fails to produce documents relevant to the

16 allegations of the complaint or complaints during the

17 early evaluation procedure described in paragraph

18 (1) may be sanctioned by the court pursuant to the

19 Federal Rules of Civil Procedure. Notwithstanding

20 paragraph (2), subject to review by the court, the

21 mediator may order the production of evidence by

22 any party and, to the extent necessary properly to

23 evaluate the case, may permit discovery of

24 nonparties and depositions of parties for good cause

25 shown.
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1 ‘‘(4) EVALUATION BY THE MEDIATOR.—

2 ‘‘(A) IN GENERAL.—If, at the end of the

3 early evaluation procedure described in para4 graph (1), the action has not been voluntarily

5 dismissed or settled, the mediator shall evaluate

6 the action as being—

7 ‘‘(i) clearly frivolous, such that it can

8 only be further maintained in bad faith; or

9 ‘‘(ii) clearly meritorious, such that it

10 can only be further defended in bad faith;

11 or

12 ‘‘(iii) described by neither clause (i)

13 nor clause (ii).

14 ‘‘(B) WRITTEN EVALUATION.—An evalua15 tion required by subparagraph (A) with respect

16 to the claims against and defenses of each de17 fendant shall be issued in writing not later than

18 10 days after the end of the early evaluation

19 procedure and provided to the parties. The eval20 uation shall not be admissible in the action, and

21 shall not be provided to the court until a motion

22 for sanctions under paragraph (5) is timely

23 filed.

24 ‘‘(5) MANDATORY SANCTIONS.—
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1 ‘‘(A) CLEARLY FRIVOLOUS ACTIONS.—In

2 an action that is evaluated under paragraph

3 (4)(A)(i) in which final judgment is entered

4 against the plaintiff, the plaintiff or plaintiff’s

5 counsel shall be liable to the defendant for

6 sanctions as awarded by the court, which may

7 include an order to pay reasonable attorneys’

8 fees and other expenses, if the court agrees,

9 based on the entire record, that the action was

10 clearly frivolous when filed and was maintained

11 in bad faith.

12 ‘‘(B) CLEARLY MERITORIOUS ACTIONS.—

13 In an action that is evaluated under paragraph

14 (4)(A)(ii) in which final judgment is entered

15 against the defendant, the defendant or defend16 ant’s counsel shall be liable to the plaintiff for

17 sanctions as awarded by the court, which may

18 include an order to pay reasonable attorneys’

19 fees and other expenses, if the court agrees,

20 based on the entire record, that the action was

21 clearly meritorious and was defended in bad

22 faith.

23 ‘‘(6) EXTENSION OF EARLY EVALUATION PE24 RIOD.—The period of the early evaluation procedure

25 described in paragraph (1) may be extended by stip-
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1 ulation of all parties. At the conclusion of the period,

2 the action shall proceed in accordance with Federal

3 Rules of Civil Procedure.

4 ‘‘(7) FEES.—In an implied private action de5 scribed in paragraph (1), each side shall bear equally

6 the reasonable fees and expenses of the mediator

7 agreed upon or designated under paragraph (2)(D),

8 if the mediator is not a judicial officer.’’.

9 SEC. 103. REQUIREMENTS FOR SECURITIES FRAUD AC10 TIONS.

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

12 et seq.) is amended by inserting after section 10 the fol13 lowing new section:

14 ‘‘SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD AC15 TIONS.

16 ‘‘(a) IN GENERAL.—In any private action arising

17 under section 10(b) that is based on a fraudulent state18 ment or fraudulent omission, liability for that statement

19 or omission may be established only upon proof that—

20 ‘‘(1) the defendant directly or indirectly made

21 that fraudulent statement or omission; and

22 ‘‘(2) the defendant made that fraudulent state23 ment or fraudulent omission knowingly or recklessly.

24 ‘‘(b) APPLICATION.—Subsection (a) does not affect

25 any liability under section 10(b), other than as provided
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1 in subsection (a), based on the employment of any device,

2 scheme, or artiface to defraud or on the engagement in

3 any act, practice, or course of business which operates or

4 would operate as a fraud or deceit upon any person.

5 ‘‘(c) FRAUDULENT STATEMENT.—For purposes of

6 this section, a fraudulent statement is a statement that

7 contains an untrue statement of a material fact, or omits

8 to state a material fact necessary in order to make the

9 statements made, in light of the circumstances in which

10 they were made, not misleading.

11 ‘‘(d) KNOWINGLY.—For purposes of subsection (a),

12 a person makes a fraudulent statement knowingly if the

13 person knew that the statement of a material fact was un14 true at the time it was made, or knew that an omitted

15 fact was necessary in order to make the statements made,

16 in light of the circumstances in which they were made,

17 not misleading.

18 ‘‘(e) RECKLESSLY.—For purposes of subsection (a),

19 a person makes a fraudulent statement recklessly if the

20 person, in making the statement is guilty of highly unrea21 sonable conduct that—

22 ‘‘(1) involves not merely simple or even inexcus23 able negligence, but an extreme departure from

24 standards of ordinary care; and
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1 ‘‘(2) presents a danger of misleading securities

2 purchasers or sellers that was either known to the

3 defendant or so obvious that the defendant must

4 have been aware of it.

5 ‘‘(f) PLEADING REQUIREMENT.—In any private ac6 tion described in subsection (a), in which the plaintiff may

7 recover money damages only if it proves that the defend8 ant acted as described in subsection (a)(2), the plaintiff

9 shall allege in its complaint facts suggesting that the de10 fendant made a fraudulent statement or fraudulent omis11 sion knowingly or recklessly.

12 ‘‘(g) FRAUD ON THE MARKET.—The Commission

13 shall, by rule, define the circumstances in which it is and

14 is not appropriate for reliance to be presumed under the

15 fraud on the market theory in any action to which sub16 section (a) applies. In promulgating such rules, the Com17 mission shall consider—

18 ‘‘(1) whether the issuer and its securities are

19 regularly reviewed by 2 or more analysts;

20 ‘‘(2) the weekly trading volume of any class of

21 securities of the issuer of the security;

22 ‘‘(3) the existence of public reports by securities

23 analysts concerning any class of securities of the is24 suer of the security;
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1 ‘‘(4) the eligibility of the issuer of the security,

2 under the rules and regulations of the Commission,

3 to incorporate by reference its reports made pursu4 ant to section 13 in a registration statement filed

5 under the Securities Act of 1933 in connection with

6 the sale of equity securities;

7 ‘‘(5) a history of immediate movement of the

8 price of any class of securities of the issuer of the

9 security caused by the public dissemination of infor10 mation regarding unexpected corporate events or fi11 nancial releases; and

12 ‘‘(6) any other factors determined by the Com13 mission to be appropriate.’’.

14 SEC. 104. PROPORTIONATE LIABILITY AND CONTRIBUTION.

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

16 et seq.) is amended by inserting after section 10A (as

17 added by section 103 of this Act) the following new sec18 tion:

19 ‘‘SEC. 10B. PROPORTIONATE LIABILITY AND CONTRIBU20 TION.

21 ‘‘(a) PROPORTIONATE LIABILITY.—

22 ‘‘(1) SPECIAL FINDINGS.—In all implied private

23 actions arising under this title involving the fault of

24 more than one defendant, including third-party de25 fendants, the court, unless otherwise agreed by all
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1 parties, shall instruct the jury to answer special in2 terrogatories or, if there is no jury, shall make find3 ings, indicating whether such defendant—

4 ‘‘(A) acted with a degree of scienter great5 er than recklessness; or

6 ‘‘(B) at the time of the violation of this

7 title for which liability is claimed, directly or in8 directly controlled a defendant who acted with

9 a degree of scienter greater than recklessness.

10 ‘‘(2) ALLOCATION OF LIABILITY.—

11 ‘‘(A) IN GENERAL.—

12 ‘‘(i) RULES OF JOINT AND SEVERAL

13 LIABILITY.—In all private actions arising

14 under this title to which paragraph (1) ap15 plies, each liable defendant, including

16 third-party defendants, as to whom an af17 firmative finding under paragraph (1) has

18 been made shall be subject to the rules of

19 joint and several liability.

20 ‘‘(ii) PROPORTIONATE LIABILITY.—

21 Subject to subparagraph (C), each liable

22 defendant to which clause (i) does not

23 apply, including third-party defendants,

24 shall be proportionately liable for his or

25 her equitable share of the obligation, as de-
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1 termined in accordance with subsection

2 (c)(4).

3 ‘‘(B) UNCOLLECTIBLE SHARES.—If, upon

4 motion made under subsection (c)(5), the court

5 determines that all or part of the equitable

6 share of a defendant of the obligation is

7 uncollectible from that defendant, the court

8 shall reallocate any uncollectible amount among

9 those defendants who are jointly and severally

10 liable under subparagraph (A)(i) according to

11 their respective percentages of fault, as deter12 mined in accordance with subsection (c)(1).

13 ‘‘(C) REALLOCATION.—If there are no de14 fendants who are jointly and severally liable

15 (other than defendants whose equitable shares

16 are uncollectible) or if, upon motion made not

17 later than 6 months after reallocation of an

18 uncollectible amount under subparagraph (B),

19 the court shall determine that all or part of

20 such uncollectible amount is uncollectible from

21 defendants who are jointly and severally liable,

22 the court shall reallocate any uncollectible

23 amount among the defendants who are propor24 tionately liable under subparagraph (A)(ii), ac25 cording to their respective percentages of fault
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1 as determined in accordance with subsection

2 (c)(1).

3 ‘‘(D) CONTRIBUTION AND CONTINUING LI4 ABILITY.—A defendant whose liability is reallo5 cated pursuant to subparagraph (B) and (C)

6 shall be subject to contribution under sub7 section (b) and to any continuing liability to the

8 plaintiff on the judgment.

9 ‘‘(b) RIGHT TO CONTRIBUTION.—Subject to sub10 section (f), in an implied private action arising under this

11 title, a right of contribution—

12 ‘‘(1) shall exist between or among 2 or more

13 persons who are liable upon the same indivisible

14 claim for the same damages, whether or not judg15 ment has been recovered against all or any of such

16 persons;

17 ‘‘(2) may be enforced either in the original ac18 tion or by a separate action brought for that pur19 pose; and

20 ‘‘(3) shall be based upon the equitable share of

21 each person of the obligation, as determined in ac22 cordance with subsection (c)(4), except that a de23 fendant who is jointly and severally liable under sub24 section (a)(2)(A)(i) shall not be entitled to contribu25 tion for the payment of any amount reallocated
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1 under subsection (a)(2)(B) from any party who is

2 proportionately liable under subsection (a)(2)(A)(ii),

3 other than the party whose liability was reallocated.

4 ‘‘(c) SPECIAL FINDINGS.—

5 ‘‘(1) FAULT OF MULTIPLE PARTIES.—In all im6 plied private actions arising under this title involving

7 the fault of more than 1 defendant, including third8 party defendants and persons who have been re9 leased under subsection (e), the court, unless other10 wise agreed by all parties, shall instruct the jury to

11 answer special interrogatories or, if there is no jury,

12 shall make findings indicating—

13 ‘‘(A) the amount of damages the plaintiff

14 is entitled to recover; and

15 ‘‘(B) the percentage of the total fault that

16 is allocated to each defendant, each third-party

17 defendant, and each person who has been re18 leased from liability under subsection (e).

19 ‘‘(2) SINGLE PARTY DETERMINATIONS.—For

20 purposes of paragraph (1), the court may determine

21 that 2 or more persons are to be treated as a single

22 party.

23 ‘‘(3) COURT CONSIDERATIONS.—In determining

24 the percentages of fault for purposes of this sub25 section, the trier of fact shall consider both the na-
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1 ture of the conduct of each party at fault and the

2 extent of the causal relation between the conduct

3 and the damages claimed.

4 ‘‘(4) DETERMINATION AND ALLOCATION OF

5 DAMAGES.—The court shall determine the award of

6 damages to the plaintiff in accordance with its find7 ings, subject to any reduction under subsection (e),

8 and shall enter judgment against each liable defend9 ant and third-party defendant on the basis of the

10 rules of joint and several liability or, if applicable, as

11 set forth in subsection (a). For purposes of alloca12 tion of liability under subsection (a)(2), and con13 tribution under subsections (b) and (d), the court

14 shall also determine and state in the judgment the

15 equitable share of each party of the obligation in ac16 cordance with the respective percentages of fault as17 signed to each party.

18 ‘‘(5) DETERMINATION OF COLLECTIBILITY.—

19 Upon motion made not later than 6 months after

20 judgment is entered in an action arising under this

21 title, the court shall determine whether all or part

22 of the equitable share of a party of the obligation is

23 uncollectible from that party and, except as other24 wise provided in subsection (a)(2), shall reallocate

25 any uncollectible amount among the other parties
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1 according to their respective percentages of fault. A

2 party whose liability is reallocated shall be subject to

3 contribution and to any continuing liability to the

4 plaintiff on the judgment.

5 ‘‘(d) ENFORCEMENT OF CONTRIBUTION.—

6 ‘‘(1) IN GENERAL.—In an implied private ac7 tion arising under this title, if the proportionate

8 fault of the parties to a claim for contribution—

9 ‘‘(A) has been established previously by the

10 court, as provided by subsection (c), a party

11 paying more than its equitable share of the obli12 gation, upon motion, may recover judgment for

13 contribution; or

14 ‘‘(B) has not been established by the court,

15 contribution may be enforced in a separate ac16 tion, whether or not a judgment has been ren17 dered against either the person seeking con18 tribution or the person from whom contribution

19 is being sought.

20 ‘‘(2) TIMING.—In an implied private action

21 arising under this title—

22 ‘‘(A) if a judgment has been rendered, an

23 action for contribution shall be commenced not

24 later than 1 year after the date on which the

25 judgment becomes final; or
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1 ‘‘(B) if no judgment has been rendered, a

2 person bringing an action for contribution

3 shall—

4 ‘‘(i) discharge by payment the com5 mon liability within the period of the stat6 ute of limitations applicable to the plain7 tiff’s right of action and commence the ac8 tion for contribution not later than 1 year

9 after the date on which such payment is

10 made; or

11 ‘‘(ii) agree while the action is pending,

12 to discharge the common liability and, not

13 later than 1 year after the date of the

14 agreement, pay the liability and commence

15 an action for contribution.

16 ‘‘(e) EFFECT OF RELEASE.—A release, covenant not

17 to sue, or similar agreement entered into by a plaintiff

18 and a person liable, shall discharge that person from all

19 liabilities for contribution, but shall not discharge any

20 other persons liable upon the same claim unless the agree21 ment so provides. Upon such release, covenant not to sue,

22 or similar agreement, the claim of the releasing person

23 against other persons shall be reduced by the amount paid

24 to the releasing person in consideration of such release,

25 covenant not to sue, or similar agreement.
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1 ‘‘(f) ENCOURAGEMENT OF FINALITY IN SETTLE2 MENT DISCHARGE.—

3 ‘‘(1) DISCHARGE.—A defendant who, in good

4 faith, settles any private action brought under this

5 title at any time before verdict or judgment is ren6 dered shall be discharged from all claims for con7 tribution brought by other persons. Upon entry of

8 the settlement by the court, the court shall enter a

9 bar order constituting the final discharge of all obli10 gations to the plaintiff of the settling defendant aris11 ing out of the action. The order shall bar all future

12 claims for contribution or indemnity arising out of

13 the action—

14 ‘‘(A) by nonsettling persons against the

15 settling defendant; and

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

17 nonsettling defendants.

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

19 settlement with the plaintiff prior to verdict or judg20 ment rendered in any private action brought under

21 this title, the verdict or judgment shall be reduced

22 by the amount paid to the plaintiff by that person.’’.
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1 SEC. 105. RESTORATION OF AIDING AND ABETTING LIABIL2 ITY.

3 (a) SECURITIES ACT OF 1933.—Section 20 of the Se4 curities Act of 1933 (15 U.S.C. 77t) is amended by adding

5 at the end the following new subsection:

6 ‘‘(f) PROSECUTION OF PERSONS WHO AID OR ABET

7 VIOLATIONS.—For purposes of subsections (b) and (d),

8 any person who knowingly or recklessly provides substan9 tial assistance to another person in the violation of a provi10 sion of this title, or of any rule or regulation promulgated

11 under this title, shall be deemed to violate such provision

12 to the same extent as the person to whom such assistance

13 is provided. No person shall be liable under this subsection

14 based on an omission or failure to act unless such omission

15 or failure constituted a breach of a duty owed by such

16 person.’’.

17 (b) SECURITIES EXCHANGE ACT OF 1934.—Section

18 20 of the Securities Exchange Act of 1934 (15 U.S.C. 78t)

19 is amended—

20 (1) by adding at the end the following new sub21 section:

22 ‘‘(e) PROSECUTION OF PERSONS WHO AID OR ABET

23 VIOLATIONS.—For purposes of subsections (d)(1) and

24 (d)(3) of section 21, or an action by a self-regulatory orga25 nization, or an express or implied private right of action

26 arising under this title, any person who knowingly or reck-
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1 lessly provides substantial assistance to another person in

2 the violation of a provision of this title, or of any rule or

3 regulation promulgated under this title, shall be deemed

4 to violate such provision and shall be liable to the same

5 extent as the person to whom such assistance is provided.

6 No person shall be liable under this subsection based on

7 an omission or failure to act unless such omission or fail8 ure constituted a breach of a duty owed by such person.’’;

9 and

10 (2) by striking the heading of such section and

11 inserting the following:

12 ‘‘SEC. 20. LIABILITY OF CONTROLLING PERSONS AND PER13 SONS WHO AID OR ABET VIOLATIONS.’’.

14 (c) INVESTMENT COMPANY ACT OF 1940.—Section

15 42 of the Investment Company Act of 1940 (15 U.S.C.

16 80a–41) is amended by adding at the end the following

17 new subsection:

18 ‘‘(f) PROSECUTION OF PERSONS WHO AID OR ABET

19 VIOLATIONS.—For purposes of subsections (d) and (e),

20 any person who knowingly or recklessly provides substan21 tial assistance to another person in the violation of a provi22 sion of this title, or of any rule, regulation, or order pro23 mulgated under this title, shall be deemed to violate such

24 provision to the same extent as the person to whom such

25 assistance is provided. No person shall be liable under this
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1 subsection based on an omission or failure to act unless

2 such omission or failure constituted a breach of a duty

3 owed by such person.’’.

4 (d) INVESTMENT ADVISERS ACT OF 1940.—Section

5 209(d) of the Investment Advisers Act of 1940 (15 U.S.C.

6 80b–9) is amended—

7 (1) in subsection (d)—

8 (A) by striking ‘‘or that any person has

9 aided, abetted, counseled, commanded, induced,

10 or procured, is aiding, abetting, counseling,

11 commanding, inducing, or procuring, or is

12 about to aid, abet, counsel, command, induce,

13 or procure such a violation,’’; and

14 (B) by striking ‘‘or in aiding, abetting,

15 counseling, commanding, inducing, or procuring

16 any such act or practice’’; and

17 (2) by adding at the end the following new sub18 section:

19 ‘‘(f) PROSECUTION OF PERSONS WHO AID OR ABET

20 VIOLATIONS.—For purposes of subsections (d) and (e),

21 any person who knowingly or recklessly provides substan22 tial assistance to another person in the violation of a provi23 sion of this title, or of any rule, regulation, or order pro24 mulgated under this title, shall be deemed to violate such

25 provision to the same extent as the person to whom such
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1 assistance is provided. No person shall be liable under this

2 subsection based on an omission or failure to act unless

3 such omission or failure constituted a breach of duty owed

4 by such person.’’.

5 SEC. 106. LIMITATIONS PERIOD FOR IMPLIED PRIVATE

6 RIGHTS OF ACTION.

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

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

9 new section:

10 ‘‘SEC. 36. LIMITATIONS PERIOD FOR IMPLIED PRIVATE

11 RIGHTS OF ACTION.

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

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

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

15 ‘‘(1) 5 years after the date on which the alleged

16 violation occurred; or

17 ‘‘(2) 2 years after the date on which the alleged

18 violation was discovered.

19 ‘‘(b) EFFECTIVE DATE.—The limitations period pro20 vided by this section shall apply to all proceedings com21 menced after the date of enactment of this section.’’.

22 SEC. 107. SAFE HARBOR FOR FORWARD-LOOKING STATE23 MENTS.

24 (a) RULEMAKING.—Not later than 12 months after

25 the date of enactment of this Act, the Commission shall
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1 adopt rules or regulations (or amend the rules or regula2 tions in effect on the date of enactment of this Act), to

3 provide one or more safe harbors for such forward-looking

4 information, as that term is defined by the Commission,

5 as the Commission may designate, having due regard for

6 the public interest and the protection of investors.

7 (b) CRITERIA.—Rules or regulations adopted (or

8 amended) pursuant to subsection (a) shall specify with re9 spect to a safe harbor—

10 (1) the forward-looking information or classes

11 of forward-looking information to be covered by the

12 safe harbor;

13 (2) the securities or classes of securities to be

14 covered by the safe harbor;

15 (3) the issuers of or classes of issuers of securi16 ties or other persons to whom the safe harbor shall

17 apply, as appropriate;

18 (4) the criteria the Commission determines to

19 be necessary and appropriate in the public interest

20 and for the protection of investors by which such

21 forward-looking information may be included in the

22 safe harbor; and

23 (5) the provisions of the Securities Act of 1933

24 and the Securities Exchange Act of 1934 to which

25 the safe harbor shall apply.
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1 (c) REPORT.—

2 (1) SUBMISSION.—Not later than 30 days after

3 the date of adoption of the rules described in sub4 section (a), the Commission shall submit a report to

5 the Committee on Commerce of the House of Rep6 resentatives and the Committee on Banking, Hous7 ing, and Urban Affairs of the Senate describing such

8 rules.

9 (2) CONTENTS.—The report required by para10 graph (1) shall include a description of—

11 (A) the procedures to be followed by the

12 court for making a summary determination

13 early in a judicial proceeding of the applicability

14 of any rule of the Commission to forward-look15 ing statements in order—

16 (i) to limit litigation and discovery;

17 and

18 (ii) to promote timely dismissal of

19 claims against issuers of securities based

20 on such forward-looking statements if such

21 statements are in accordance with the

22 rules and regulations of the Commission;

23 (B) the steps that the Commission is un24 dertaking to provide clear guidance to issuers of
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1 securities and the judiciary regarding the rules

2 prescribed pursuant to subsection (a); and

3 (C) any legislative recommendations relat4 ing to forward-looking statements that the

5 Commission determines to be appropriate.

6 (d) SECURITIES EXCHANGE ACT AMENDMENT.—The

7 Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

8 is amended by adding at the end the following new section:

9 ‘‘SEC. 37. APPLICATION OF SAFE HARBOR FOR FORWARD10 LOOKING STATEMENTS.

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

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

13 statement concerning the future economic performance of

14 an issuer registered under section 12 was materially false

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

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

17 the claims or defenses related to such statement of that

18 party, the court shall grant such a stay until it has ruled

19 on any such motion.

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

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

22 by a defendant asserting that the forward-looking state23 ment was within the coverage of any rule which the Com24 mission may have adopted concerning such predictive
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1 statements, if such motion is made not later than 60 days

2 after the plaintiff commences discovery in the action.

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

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

7 may be denied, if the court finds that—

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

9 in subsection (b) engaged in dilatory or obstructive

10 conduct in taking or opposing any discovery; or

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

12 motion under subsection (b) would be substantially

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

15 TITLE II—FINANCIAL FRAUD

16 DETECTION AND DISCLOSURE

17 SEC. 201. FINANCIAL FRAUD DETECTION AND DISCLOSURE.

18 (a) AMENDMENTS TO THE SECURITIES EXCHANGE

19 ACT OF 1934.—The Securities Exchange Act of 1934 (15

20 U.S.C. 78a et seq.) is amended by inserting after section

21 13 the following new section:

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

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

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

25 by an independent public accountant shall include, in ac-
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1 cordance with generally accepted auditing standards, as

2 may be modified or supplemented by the Commission—

3 ‘‘(1) procedures designed to provide reasonable

4 assurance of detecting illegal acts that would have a

5 direct and material effect on the determination of fi6 nancial statement amounts;

7 ‘‘(2) procedures designed to identify related

8 party transactions that are material to the financial

9 statements or otherwise require disclosure therein;

10 and

11 ‘‘(3) an evaluation of whether there is substan12 tial doubt about the issuer’s ability to continue as a

13 going concern during the ensuing fiscal year.

14 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV15 ERIES.—

16 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE17 MENT.—If, in the course of conducting any audit

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

19 the independent public accountant detects or other20 wise becomes aware of information indicating that

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

22 material effect on the issuer’s financial statements)

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

24 accordance with generally accepted auditing stand-
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1 ards, as may be modified or supplemented by the

2 Commission—

3 ‘‘(A) determine whether it is likely that an

4 illegal act has occurred, and if so, determine

5 and consider the possible effect of the illegal act

6 on the financial statements of the issuer, in7 cluding any contingent monetary effects, such

8 as fines, penalties, and damages; and

9 ‘‘(B) as soon as practicable, inform the ap10 propriate level of the issuer’s management and

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

12 issuer’s board of directors in the absence of

13 such a committee, is adequately informed with

14 respect to illegal acts that have been detected or

15 have otherwise come to the attention of such

16 accountant in the course of the audit, unless

17 the illegal act is clearly inconsequential.

18 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME19 DIAL ACTION.—If, having first assured itself that

20 the audit committee of the board of directors of the

21 issuer or the board of directors (in the absence of

22 an audit committee) is adequately informed with re23 spect to illegal acts that have been detected or have

24 otherwise come to the attention of the independent

25 public accountant in the course of such accountant’s
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1 audit, the independent public accountant concludes

2 that—

3 ‘‘(A) any such illegal act has a material ef4 fect on the financial statements of the issuer;

5 ‘‘(B) senior management of the issuer have

6 not taken, and the board of directors has not

7 caused senior management to take, timely and

8 appropriate remedial actions with respect to

9 such illegal act; and

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

11 reasonably expected to warrant departure from

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

13 warrant resignation from the audit engagement,

14 the independent public accountant shall, as soon as

15 practicable, directly report its conclusions to the

16 board of directors of the issuer.

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

18 FAILURE TO NOTIFY.—An issuer whose board of di19 rectors has received a report pursuant to paragraph

20 (2) shall inform the Commission by notice not later

21 than 1 business day after receipt of such report, and

22 shall furnish the independent public accountant

23 making such report with a copy of the notice fur24 nished to the Commission. If the independent public

25 accountant making such report does not receive a
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1 copy of such notice within the required one-business2 day period, the independent public accountant

3 shall—

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

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

6 its report (or the documentation of any oral re7 port given) not later than 1 business day after

8 such failure to receive notice.

9 ‘‘(4) REPORT AFTER RESIGNATION.—An inde10 pendent public accountant electing resignation under

11 paragraph (3)(A) shall, not later than 1 business

12 day after a failure by an issuer to notify the Com13 mission under paragraph (3), furnish to the Com14 mission a copy of the accountant’s report (or the

15 documentation of any oral report given).

16 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde17 pendent public accountant shall be liable in a private ac18 tion for any finding, conclusion, or statement expressed

19 in a report made pursuant to paragraph (3) or (4) of sub20 section (b), including any rules promulgated pursuant to

21 those provisions.

22 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO23 CEEDINGS.—If the Commission finds, after notice and op24 portunity for hearing in a proceeding instituted pursuant

25 to section 21C, that an independent public accountant has
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1 willfully violated paragraph (3) or (4) of subsection (b),

2 the Commission may, in addition to entering an order

3 under section 21C, impose a civil penalty against the inde4 pendent public accountant and any other person that the

5 Commission finds was a cause of such violation. The deter6 mination whether to impose a civil penalty, and the

7 amount of any such penalty, shall be governed by the

8 standards set forth in section 21B.

9 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex10 cept as provided in subsection (d), nothing in this section

11 limits or otherwise affects the authority of the Commission

12 under this title.

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

14 ‘illegal act’ means any action or omission that violates any

15 law, or any rule or regulation having the force of law.’’.

16 (b) EFFECTIVE DATES.—Section 13A of the Securi17 ties Exchange Act of 1934, as added by subsection (a)

18 of this section, shall apply to any person registered under

19 that Act that is required to file selected quarterly financial

20 data pursuant to the rules of the Commission for all such

21 reports for any period beginning on or after January 1,

22 1996. Such section shall apply to such reports filed by any

23 other person registered under that Act for any period be24 ginning on or after January 1, 1997.

Æ
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