II

103D CONGRESS

2D SESSION S. 1976

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

MARCH 24 (legislative day, FEBRUARY 22), 1994

Mr. DODD (for himself, Mr. DOMENICI, Ms. MIKULSKI, Mr. JOHNSTON, and

Mr. FAIRCLOTH) 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 1994’’.

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

7 this Act is as follows:

Sec. 1. Short title; table of contents.
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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.

1 TITLE I—PRIVATE SECURITIES

2 LITIGATION

3 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

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

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

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

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

9 or dealer, or person associated with a broker or deal10 er, may solicit or accept remuneration for assisting

11 an attorney in obtaining the representation of any

12 customer in any implied private action arising under

13 this title.’’.

14 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

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

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

17 is amended by adding at the end the following new para18 graph:
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1 ‘‘(4) PROHIBITION ON ATTORNEYS’ FEES PAID

2 FROM COMMISSION DISGORGEMENT FUNDS.—Except

3 as otherwise ordered by the court, funds disgorged

4 as the result of an action brought by the Commis5 sion in Federal court, or of any Commission admin6 istrative action, shall not be distributed as payment

7 for attorneys’ fees or expenses incurred by private

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

9 (c) ADDITIONAL PROVISIONS APPLICABLE TO CLASS

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

11 1934 (15 U.S.C. 78u) is amended by adding at the end

12 the following new subsections:

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

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

15 title that is certified as a class action pursuant to the Fed16 eral Rules of Civil Procedure, the share of any final judg17 ment or of any settlement that is awarded to class plain18 tiffs serving as the representative parties shall be cal19 culated in the same manner as the shares of the final judg20 ment or settlement awarded to all other members of the

21 class. Nothing in this subsection shall be construed to

22 limit the award to any representative parties of reasonable

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

24 relating to the representation of the class.
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1 ‘‘(j) CONFLICTS OF INTEREST.—In an implied pri2 vate action arising under this title that is certified as a

3 class action pursuant to the Federal Rules of Civil Proce4 dure, if a party is represented by an attorney who directly

5 owns or otherwise has a beneficial interest in the securities

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

7 a determination of whether such interest constitutes a con8 flict of interest sufficient to disqualify the attorney from

9 representing the party.

10 ‘‘(k) RESTRICTIONS ON SETTLEMENTS UNDER

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

12 title that is certified as a class action pursuant to the Fed13 eral Rules of Civil Procedure, the terms and provisions

14 of any settlement agreement between any of the parties

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

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

17 under seal for those portions of a settlement agreement

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

19 Good cause shall only exist if publication of a term or pro20 vision of a settlement agreement would cause direct and

21 substantial harm to any person.

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

23 FEES FROM SETTLEMENT FUNDS.—In an implied private

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

25 action pursuant to the Federal Rules of Civil Procedure,
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1 attorneys’ fees awarded by the court to counsel for the

2 class shall be determined as a percentage of the amount

3 of damages and prejudgment interest actually paid to the

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

5 the amount awarded to counsel for the class exceed a rea6 sonable percentage of the amount recovered by the class

7 plus reasonable expenses.

8 ‘‘(m) DISCLOSURE OF SETTLEMENT TERMS TO

9 CLASS MEMBERS.—In an implied private action arising

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

11 to the Federal Rules of Civil Procedure, a proposed settle12 ment agreement that is published or otherwise dissemi13 nated to the class shall include the following statements,

14 which shall not be admissible for purposes of any Federal

15 or State judicial or administrative proceeding:

16 ‘‘(1) STATEMENT OF POTENTIAL OUTCOME OF

17 CASE.—

18 ‘‘(A) AGREEMENT ON AMOUNT OF DAM19 AGES AND LIKELIHOOD OF PREVAILING.—If the

20 settling parties agree on the amount of dam21 ages per share that would be recoverable if the

22 plaintiff prevailed on each claim alleged under

23 this title and the likelihood that the plaintiff

24 would prevail—
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1 ‘‘(i) a statement concerning the

2 amount of such potential damages; and

3 ‘‘(ii) a statement concerning the prob4 ability that the plaintiff would prevail on

5 the claims alleged under this title and a

6 brief explanation of the reasons for that

7 conclusion.

8 ‘‘(B) DISAGREEMENT ON AMOUNT OF

9 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

10 the parties do not agree on the amount of dam11 ages per share 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 from each settling party concerning the

16 issue or issues on which the parties disagree.

17 ‘‘(C) INADMISSIBILITY FOR CERTAIN PUR18 POSES.—Statements made in accordance with

19 subparagraphs (A) and (B) shall not be admis20 sible for purposes of any Federal or State judi21 cial or administrative proceeding.

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

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

24 their counsel intend to apply to the court for an

25 award of attorneys’ fees or costs from any fund es-
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1 tablished as part of the settlement, a statement indi2 cating which parties or counsel intend to make such

3 an application, the amount of fees and costs that

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

5 for the application.

6 ‘‘(3) IDENTIFICATION OF REPRESENTATIVES.—

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

8 more representatives of counsel for the plaintiff class

9 who will be reasonably available to answer questions

10 from class members concerning any matter con11 tained in any notice of settlement published or oth12 erwise disseminated to class members.

13 ‘‘(4) OTHER INFORMATION.—Such other infor14 mation as may be required by the court, or by any

15 guardian ad litem or plaintiff steering committee ap16 pointed by the court pursuant to section 38.

17 ‘‘(n) SPECIAL VERDICTS.—In an implied private ac18 tion arising under this title in which the plaintiff may re19 cover money damages only on proof that a defendant acted

20 with a particular state of mind, the court shall, when re21 quested by a defendant, submit to the jury a written inter22 rogatory on the issue of each such defendant’s state of

23 mind at the time the alleged violation occurred.

24 ‘‘(o) NAMED PLAINTIFF THRESHOLD.—In an im25 plied private action arising under this title, in order for
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1 a plaintiff or plaintiffs to obtain certification as represent2 atives of a class of investors pursuant to the Federal Rules

3 of Civil Procedure, the plaintiff or plaintiffs must show

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

5 in which violations of this title are alleged to have oc6 curred, not less than the lesser of—

7 ‘‘(1) 1 percent of the securities which are the

8 subject of the litigation; or

9 ‘‘(2) $10,000 (in market value) of such securi10 ties.’’.

11 SEC. 102. ALTERNATIVE DISPUTE RESOLUTION PROCE12 DURE; TIME LIMITATION ON PRIVATE

13 RIGHTS OF ACTION.

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

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

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

17 section:

18 ‘‘SEC. 36. ALTERNATIVE DISPUTE RESOLUTION PROCE19 DURE.

20 ‘‘(a) IN GENERAL.—

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

22 in paragraph (2), in an implied private action aris23 ing under this title, any party may, before the expi24 ration of the period permitted for answering the

25 complaint, deliver to all other parties an offer to
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1 proceed pursuant to any voluntary, nonbinding alter2 native dispute resolution procedure established or

3 recognized under the rules of the court in which the

4 action is maintained.

5 ‘‘(2) PLAINTIFF CLASS ACTIONS.—In an im6 plied private action under this title which is brought

7 as a plaintiff class action, an offer under paragraph

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

9 guardian ad litem or plaintiff steering committee is

10 appointed by the court in accordance with section

11 38.

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

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

14 of acceptance or rejection of the offer with the court

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

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

17 the expiration of such period, extend the period for

18 not more than 90 additional days, during which time

19 discovery may be permitted by the court.

20 ‘‘(4) SELECTION OF TYPE OF ALTERNATIVE

21 DISPUTE RESOLUTION.—For purposes of paragraphs

22 (1) and (2), if the rules of the court establish or rec23 ognize more than 1 type of alternative dispute reso24 lution, the parties may stipulate as to the type of al25 ternative dispute resolution to be applied. If the par-
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1 ties are unable to so stipulate, the court shall issue

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

3 which the parties agree to the use of alternative dis4 pute resolution, specifying the type of alternative

5 dispute resolution to be applied.

6 ‘‘(5) SANCTIONS FOR DILATORY OR OBSTRUC7 TIVE CONDUCT.—If the court finds that a party has

8 engaged in dilatory or obstructive conduct in taking

9 or opposing any discovery allowed during the re10 sponse period described in paragraph (3), the court

11 may—

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

13 discovery from that party for a suitable period;

14 and

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

16 conduct further discovery prior to the expiration

17 of the period.

18 ‘‘(b) PENALTY FOR UNREASONABLE LITIGATION PO19 SITION.—

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

21 action arising under this title, upon motion of the

22 prevailing party made prior to final judgment, the

23 court shall award costs, including reasonable attor24 neys’ fees, against a party or parties or their attor25 neys, if—
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1 ‘‘(A) the party unreasonably refuses to

2 proceed pursuant to an alternative dispute reso3 lution procedure, or refuses to accept the result

4 of an alternative dispute resolution procedure;

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

6 party; and

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

8 in the action which was not substantially justi9 fied.

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

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

12 ‘substantially justified’ shall be determined in the

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

14 28, United States Code.

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

16 under this paragraph shall not be applied to any

17 named plaintiff in any action certified as a class ac18 tion under the Federal Rules of Civil Procedure if

19 such plaintiff has never owned more than

20 $1,000,000 of the securities which are the subject of

21 the litigation.’’.

22 (b) LIMITATIONS PERIOD FOR IMPLIED PRIVATE

23 RIGHTS OF ACTION.—The Securities Exchange Act of

24 1934 (15 U.S.C. 78a et seq.) is amended by adding at

25 the end the following new section:
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1 ‘‘SEC. 37. LIMITATIONS PERIOD FOR IMPLIED PRIVATE

2 RIGHTS OF ACTION.

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

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

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

6 ‘‘(1) 5 years after the date on which the alleged

7 violation occurred; or

8 ‘‘(2) 2 years after the date on which the alleged

9 violation was discovered or should have been discov10 ered through the exercise of reasonable diligence.

11 ‘‘(b) EFFECTIVE DATE.—The limitations period pro12 vided by this section shall apply to all proceedings pending

13 on or commenced after the date of enactment of this sec14 tion.’’.

15 SEC. 103. PLAINTIFF STEERING COMMITTEES.

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

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

18 new section:

19 ‘‘SEC. 38. GUARDIAN AD LITEM AND CLASS ACTION STEER20 ING COMMITTEES.

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

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

23 plaintiff class in an implied private action brought under

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

25 the plaintiff class from a list or lists provided by the par26 ties or their counsel. The guardian ad litem shall direct
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1 counsel for the class and perform such other functions as

2 the court may specify. The court shall apportion the rea3 sonable fees and expenses of the guardian ad litem among

4 the parties. Court appointment of a guardian ad litem

5 shall not be subject to interlocutory review.

6 ‘‘(b) CLASS ACTION STEERING COMMITTEE.—Sub7 section (a) shall not apply if, not later than 10 days after

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

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

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

11 in this section referred to as the ‘plaintiff steering commit12 tee’) and to perform such other functions as the court may

13 specify. Court appointment of a plaintiff steering commit14 tee shall not be subject to interlocutory review.

15 ‘‘(c) MEMBERSHIP OF PLAINTIFF STEERING COM16 MITTEE.—

17 ‘‘(1) QUALIFICATIONS.—

18 ‘‘(A) NUMBER.—A plaintiff steering com19 mittee shall consist of not less than 5 class

20 members, willing to serve, who the court be21 lieves will fairly represent the class.

22 ‘‘(B) OWNERSHIP INTERESTS.—Members

23 of the plaintiff steering committee shall have

24 cumulatively held during the class period not

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

3 litigation or securities which are the sub4 ject matter of the litigation with a market

5 value of $10,000,000; or

6 ‘‘(ii) such smaller percentage or dollar

7 amount as the court finds appropriate

8 under the circumstances.

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

10 are named plaintiffs in the litigation may serve on

11 the plaintiff steering committee, but shall not com12 prise a majority of the committee.

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

15 without compensation, except that any member may

16 apply to the court for reimbursement of reasonable

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

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

22 which a majority of its members are present in per23 son or by electronic communication. The plaintiff

24 steering committee shall decide all matters within its

25 authority by a majority vote of all members, except
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1 that the committee may determine that decisions

2 other than to accept or reject a settlement offer or

3 to employ or dismiss counsel for the class may be

4 delegated to one or more members of the committee,

5 or may be voted upon by committee members seria6 tim, without a meeting.

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

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

9 steering committee may appear and be heard by the

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

11 as any other party.

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

13 PLAINTIFF STEERING COMMITTEE.—

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

15 guardian ad litem or the plaintiff steering committee

16 to direct counsel for the class shall include all pow17 ers normally permitted to an attorney’s client in liti18 gation, including the authority to retain or dismiss

19 counsel and to reject offers of settlement, and the

20 preliminary authority to accept an offer of settle21 ment, subject to the restrictions specified in para22 graph (2). Dismissal of counsel other than for cause

23 shall not limit the ability of counsel to enforce any

24 contractual fee agreement or to apply to the court
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1 for a fee award from any common fund established

2 for the class.

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

4 litem or a plaintiff steering committee gives prelimi5 nary approval to an offer of settlement, the guardian

6 ad litem or the plaintiff steering committee may seek

7 approval of the offer by a majority of class members

8 if the committee determines that the benefit of seek9 ing such approval outweighs the cost of soliciting the

10 approval of class members.

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

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

13 of a plaintiff steering committee shall be immune from any

14 liability arising from such service. The court may remove

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

16 committee for good cause shown.

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

18 affect any other provision of law concerning class actions

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

20 offer of settlement.’’.

21 SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD AC22 TIONS.

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

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

25 new section:
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1 ‘‘SEC. 39. REQUIREMENTS FOR SECURITIES FRAUD AC2 TIONS.

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

4 under this title in which the plaintiff may recover money

5 damages from a defendant only on proof that the defend6 ant acted with some level of intent, the plaintiff’s com7 plaint shall allege specific facts demonstrating the state

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

9 occurred.

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

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

12 plaintiff alleges that the defendant—

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

14 fact; or

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

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

17 of the circumstances in which they were made, not

18 misleading;

19 the plaintiff shall specify each statement alleged to have

20 been misleading, the reason or reasons why the statement

21 is misleading, and, if an allegation regarding the state22 ment or omission is made on information and belief, the

23 plaintiff shall set forth all information on which that belief

24 is formed.

25 ‘‘(c) BURDEN OF PROOF.—In an implied private ac26 tion arising under this title based on a material
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1 misstatement or omission concerning a security, and in

2 which the plaintiff claims to have bought or sold the secu3 rity based on a reasonable belief that the market value

4 of the security reflected all publicly available information,

5 the plaintiff shall have the burden of proving that the

6 misstatement or omission caused any loss incurred by the

7 plaintiff.

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

9 under this title based on a material misstatement or omis10 sion concerning a security, and in which the plaintiff

11 claims to have bought or sold the security based on a rea12 sonable belief that the market value of the security re13 flected all publicly available information, the plaintiff’s

14 damages shall not exceed the lesser of—

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

16 the plaintiff for the security and the market value of

17 the security immediately after dissemination to the

18 market of information which corrects the

19 misstatement or omission; and

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

21 the plaintiff for the security and the price at which

22 the plaintiff sold the security after dissemination of

23 information correcting the misstatement or omis24 sion.’’.
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1 SEC. 105. AMENDMENT TO RACKETEER INFLUENCED AND

2 CORRUPT ORGANIZATIONS ACT.

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

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

5 an action under this provision if the racketeering activity,

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

7 of securities’’ before the period.

8 TITLE II—FINANCIAL

9 DISCLOSURE

10 SEC. 201. SAFE HARBOR FOR FORWARD-LOOKING STATE11 MENTS.

12 (a) CONSIDERATION OF REGULATORY OR LEGISLA13 TIVE CHANGES.—In consultation with investors and issu14 ers of securities, the Securities and Exchange Commission

15 shall consider adopting or amending its rules and regula16 tions, or making legislative recommendations, concern17 ing—

18 (1) criteria that the Commission finds appro19 priate for the protection of investors by which for20 ward-looking statements concerning the future eco21 nomic performance of an issuer of securities reg22 istered under section 12 of the Securities Exchange

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

24 section 10(b) of that Act; and

25 (2) procedures by which courts shall timely dis26 miss claims against such issuers of securities based
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1 on such forward-looking statements if such state2 ments are in accordance with any criteria under

3 paragraph (1).

4 (b) COMMISSION CONSIDERATIONS.—In developing

5 rules or legislative recommendations in accordance with

6 subsection (a), the Commission shall consider—

7 (1) appropriate limits to liability for forward8 looking statements;

9 (2) procedures for making a summary deter10 mination of the applicability of any Commission rule

11 for forward-looking statements early in a judicial

12 proceeding to limit protracted litigation and expan13 sive discovery;

14 (3) incorporating and reflecting the scienter re15 quirements applicable to implied private actions

16 under section 10(b); and

17 (4) providing clear guidance to issuers of secu18 rities and the judiciary.

19 (c) 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. 40. APPLICATION OF SAFE HARBOR FOR FORWARD23 LOOKING STATEMENTS.

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

25 arising under this title that alleges that a forward-looking
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1 statement concerning the future economic performance of

2 an issuer registered under section 12 was materially false

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

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

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

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

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

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

9 by a defendant asserting that the forward-looking state10 ment was within the coverage of any rule which the Com11 mission may have adopted concerning such predictive

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

13 after the plaintiff commences discovery in the action.

14 ‘‘(c) DILATORY CONDUCT; DUPLICATIVE DISCOV15 ERY.—Notwithstanding subsection (a) or (b), the time

16 permitted for a plaintiff to conduct discovery under sub17 section (b) may be extended, or a stay of the proceedings

18 may be denied, if the court finds that—

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

20 in subsection (b) engaged in dilatory or obstructive

21 conduct in taking or opposing any discovery; or

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

23 motion under subsection (b) would be substantially

24 unfair to the plaintiff or other parties to the ac25 tion.’’.
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1 SEC. 202. FRAUD DETECTION AND DISCLOSURE.

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

3 1934 (15 U.S.C. 78a et seq.) is amended by inserting im4 mediately after section 10 the following new section:

5 ‘‘SEC. 10A. AUDIT REQUIREMENTS.

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

7 this title of an issuer’s financial statements by an inde8 pendent public accountant shall include, in accordance

9 with generally accepted auditing standards, as may be

10 modified or supplemented from time to time by the Com11 mission—

12 ‘‘(1) procedures designed to provide reasonable

13 assurance of detecting illegal acts that would have a

14 direct and material effect on the determination of fi15 nancial statement amounts;

16 ‘‘(2) procedures designed to identify related

17 party transactions which are material to the finan18 cial statements or otherwise require disclosure there19 in; and

20 ‘‘(3) an evaluation of whether there is substan21 tial doubt about the issuer’s ability to continue as a

22 going concern during the ensuing fiscal year.

23 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV24 ERIES.—

25 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE26 MENT.—If, in the course of conducting an audit pur-
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1 suant to this title to which subsection (a) applies,

2 the independent public accountant detects or other3 wise becomes aware of information indicating that

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

5 material effect on the issuer’s financial statements)

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

7 accordance with generally accepted auditing stand8 ards, as may be modified or supplemented from time

9 to time by the Commission—

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

11 an illegal act has occurred; and

12 ‘‘(ii) if so, determine and consider the pos13 sible effect of the illegal act on the financial

14 statements of the issuer, including any contin15 gent monetary effects, such as fines, penalties,

16 and damages; and

17 ‘‘(B) as soon as practicable, inform the ap18 propriate level of the issuer’s management and

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

20 issuer’s board of directors in the absence of

21 such a committee, is adequately informed with

22 respect to illegal acts that have been detected or

23 have otherwise come to the attention of such

24 accountant in the course of the audit, unless

25 the illegal act is clearly inconsequential.
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1 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME2 DIAL ACTION.—If, having first assured itself that

3 the audit committee of the board of directors of the

4 issuer or the board (in the absence of an audit com5 mittee) is adequately informed with respect to illegal

6 acts that have been detected or have otherwise come

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

8 accountant’s audit, the independent public account9 ant concludes that—

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

11 the financial statements of the issuer;

12 ‘‘(B) the senior management has not

13 taken, and the board of directors has not

14 caused senior management to take, timely and

15 appropriate remedial actions with respect to the

16 illegal act; and

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

18 reasonably expected to warrant departure from

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

20 warrant resignation from the audit engagement;

21 the independent public accountant shall, as soon as

22 practicable, directly report its conclusions to the

23 board of directors.

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

25 FAILURE TO NOTIFY.—An issuer whose board of di-
25

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1 rectors receives a report under paragraph (2) shall

2 inform the Commission by notice not later than 1

3 business day after the receipt of such report and

4 shall furnish the independent public accountant

5 making such report with a copy of the notice fur6 nished to the Commission. If the independent public

7 accountant fails to receive a copy of the notice be8 fore the expiration of the required 1-business-day pe9 riod, the independent public accountant shall—

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

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

12 its report (or the documentation of any oral re13 port given) not later than 1 business day follow14 ing such failure to receive notice.

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

16 independent public accountant resigns from an en17 gagement under paragraph (3)(A), the accountant

18 shall, not later than 1 business day following the

19 failure by the issuer to notify the Commission under

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

21 the accountant’s report (or the documentation of

22 any oral report given).

23 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde24 pendent public accountant shall be liable in a private ac25 tion for any finding, conclusion, or statement expressed
26

•S 1976 IS

1 in a report made pursuant to paragraph (3) or (4) of sub2 section (b), including any rules promulgated pursuant

3 thereto.

4 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO5 CEEDINGS.—If the Commission finds, after notice and op6 portunity for hearing in a proceeding instituted pursuant

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

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

9 the Commission may, in addition to entering an order

10 under section 21C, impose a civil penalty against the inde11 pendent public accountant and any other person that the

12 Commission finds was a cause of such violation. The deter13 mination to impose a civil penalty and the amount of the

14 penalty shall be governed by the standards set forth in

15 section 21B.

16 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex17 cept as provided in subsection (d), nothing in this section

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

19 the Commission under this title.

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

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

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

23 (b) EFFECTIVE DATES.—With respect to any reg24 istrant that is required to file selected quarterly financial

25 data pursuant to item 302(a) of Regulation S–K of the
27

•S 1976 IS

1 Securities and Exchange Commission (17 CFR

2 229.302(a)), the amendments made by subsection (a) shall

3 apply to any annual report for any period beginning on

4 or after January 1, 1994. With respect to any other reg5 istrant, the amendment shall apply for any period begin6 ning on or after January 1, 1995.

7 SEC. 203. PROPORTIONATE LIABILITY AND JOINT AND SEV8 ERAL LIABILITY.

9 (a) SECURITIES ACT AMENDMENT.—The Securities

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

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

12 ‘‘SEC. 41. PROPORTIONATE LIABILITY AND JOINT AND SEV13 ERAL LIABILITY IN IMPLIED ACTIONS.

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

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

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

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

18 affect the standards for liability associated with an implied

19 private action arising under this title.

20 ‘‘(b) APPLICATION OF JOINT AND SEVERAL LIABIL21 ITY.—

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

23 judgment is entered in an implied private action

24 arising under this title shall be liable jointly and sev-
28

•S 1976 IS

1 erally for any recoverable damages on such judg2 ment if the person is found to have—

3 ‘‘(A) been a primary wrongdoer;

4 ‘‘(B) committed knowing securities fraud;

5 or

6 ‘‘(C) controlled any primary wrongdoer or

7 person who committed knowing securities fraud.

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

9 subsection—

10 ‘‘(A) the term ‘primary wrongdoer’

11 means—

12 ‘‘(i) any—

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

14 seller, or underwriter of securities;

15 ‘‘(II) marketmaker or specialist

16 in securities; or

17 ‘‘(III) clearing agency, securities

18 information processor, or government

19 securities dealer;

20 if such person breached a direct statutory

21 or regulatory obligation or if such person

22 otherwise had a principal role in the con23 duct that is the basis for the implied right

24 of action; or
29

•S 1976 IS

1 ‘‘(ii) any person who intentionally ren2 dered substantial assistance to the fraudu3 lent conduct of any person described in

4 clause (i), with actual knowledge of such

5 person’s fraudulent conduct or fraudulent

6 purpose, and with knowledge that such

7 conduct was wrongful; and

8 ‘‘(B) a defendant engages in ‘knowing se9 curities fraud’ if such defendant—

10 ‘‘(i) makes a material representation

11 with actual knowledge that the representa12 tion is false, or omits to make a statement

13 with actual knowledge that, as a result of

14 the omission, one of the defendant’s mate15 rial representations is false and knows that

16 other persons are likely to rely on that

17 misrepresentation or omission, except that

18 reckless conduct by the defendant shall not

19 be construed to constitute ‘knowing securi20 ties fraud’; or

21 ‘‘(ii) intentionally rendered substantial

22 assistance to the fraudulent conduct of any

23 person described in clause (i), with actual

24 knowledge of such person’s fraudulent con-
30

•S 1976 IS

1 duct or fraudulent purpose, and with

2 knowledge that such conduct was wrongful.

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

4 implied private action in which more than 1 person con5 tributed to a violation of this title, the court shall instruct

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

7 no jury, shall make findings, concerning the degree of re8 sponsibility of each person alleged to have caused or con9 tributed to the violation of this title, including persons who

10 have entered into settlements with the plaintiff. The inter11 rogatories or findings shall specify the amount of damages

12 the plaintiff is entitled to recover and the degree of respon13 sibility, measured as a percentage of the total fault of all

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

15 have caused or contributed to the damages incurred by

16 the plaintiff or plaintiffs. In determining the degree of re17 sponsibility, the trier of fact shall consider—

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

19 and

20 ‘‘(2) the nature and extent of the causal rela21 tionship between that conduct and the damage

22 claimed by the plaintiff.

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

24 Except as provided in subsection (b), the amount of liabil25 ity of a person who is, or may through right of contribu-
31

•S 1976 IS

1 tion become, liable for damages based on an implied pri2 vate action arising under this title shall be determined as

3 follows:

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

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

6 only be liable for the portion of the judgment that

7 corresponds to that party’s degree of responsibility,

8 as determined under subsection (c).

9 ‘‘(2) UNCOLLECTIBLE SHARES.—If, upon mo10 tion made not later than 6 months after a final

11 judgment is entered, the court determines that all or

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

13 uncollectible—

14 ‘‘(A) the remaining defendants shall be

15 jointly and severally liable for the uncollectible

16 share if the plaintiff establishes that—

17 ‘‘(i) the plaintiff is an individual

18 whose recoverable damages under a final

19 judgment are equal to more than 10 per20 cent of the plaintiff’s net financial worth;

21 and

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

23 is less than $200,000; and
32

•S 1976 IS

1 ‘‘(B) the amount paid by each of the re2 maining defendants to all other plaintiffs shall

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

4 ‘‘(i) that remaining defendant’s per5 centage of fault for the uncollectible share;

6 or

7 ‘‘(ii) 5 times—

8 ‘‘(I) the amount which the de9 fendant gained from the conduct that

10 gave rise to its liability; or

11 ‘‘(II) if a defendant did not ob12 tain a direct financial gain from the

13 conduct that gave rise to the liability

14 and the conduct consisted of the pro15 vision of deficient services to an entity

16 involved in the violation, the defend17 ant’s gross revenues received for the

18 provision of all services to the other

19 entity involved in the violation during

20 the calendar years in which deficient

21 services were provided.

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

23 total payments required pursuant to paragraph (2)

24 exceed the amount of the uncollectible share.
33

•S 1976 IS

1 ‘‘(4) DEFENDANTS SUBJECT TO CONTRIBU2 TION.—A defendant whose liability is reallocated

3 pursuant to paragraph (2) shall be subject to con4 tribution and to any continuing liability to the plain5 tiff on the judgment.

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

7 that a defendant is required to make an additional

8 payment pursuant to paragraph (2), that defendant

9 may recover contribution—

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

11 make the payment;

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

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

14 ‘‘(C) from any defendant held proportion15 ately liable pursuant to this subsection who is

16 liable to make the same payment and has paid

17 less than his or her proportionate share of that

18 payment; or

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

20 the conduct giving rise to the payment who

21 would have been liable to make the same pay22 ment.

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

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

25 and the procedure for reallocation of uncollectible shares
34

•S 1976 IS

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

2 of the jury.

3 ‘‘(f) SETTLEMENT DISCHARGE.—

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

5 implied private action brought under this title at any

6 time before verdict or judgment shall be discharged

7 from all claims for contribution brought by other

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

9 the court shall enter a bar order constituting the

10 final discharge of all obligations to the plaintiff of

11 the settling defendant arising out of the action. The

12 order shall bar all future claims for contribution or

13 indemnity arising out of 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, the verdict or judgment shall be reduced by

21 the greater of—

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

23 degree of responsibility of that person; or

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

25 that person.
35

•S 1976 IS

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

2 for damages in an implied private action arising under this

3 title may recover contribution from any other person who,

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

5 the same damages. A claim for contribution shall be deter6 mined based on the degree of responsibility of the claimant

7 and of each person against whom a claim for contribution

8 is made.

9 ‘‘(h) STATUTE OF LIMITATIONS FOR CONTRIBU10 TION.—Once judgment has been entered in an implied pri11 vate action arising under this title determining liability,

12 an action for contribution must be brought not later than

13 6 months after the entry of a final, nonappealable judg14 ment in the action, except that an action for contribution

15 brought by a defendant who was required to make an ad16 ditional payment pursuant to subsection (d)(2) may be

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

18 such payment was made.’’.

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

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

21 only apply to implied private actions commenced after the

22 date of enactment of this Act.
36

•S 1976 IS

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

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

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

4 13 the following new section:

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

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

7 following definitions shall apply:

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

9 ‘public accounting firm’ means a sole proprietorship,

10 unincorporated association, partnership, corporation,

11 or other legal entity that is engaged in the practice

12 of public accounting.

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

14 Public Auditing Self-Disciplinary Board designated

15 by the Commission pursuant to subsection (b).

16 ‘‘(3) ACCOUNTANT’S REPORT.—The term ‘ac17 countant’s report’ means a document in which a

18 public accounting firm identifies a financial state19 ment, report, or other document and sets forth the

20 firm’s opinion regarding such financial statement,

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

22 opinion cannot be expressed.

23 ‘‘(4) PERSON ASSOCIATED WITH A PUBLIC AC24 COUNTING FIRM.—The term ‘person associated with

25 a public accounting firm’ means a natural person

26 who—
37

•S 1976 IS

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

2 or individual proprietor of a public accounting

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

4 accounting firm; and

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

6 connection with the preparation of an account7 ant’s report on any financial statement, report,

8 or other document required to be filed with the

9 Commission under any securities law.

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

11 ‘professional standards’ means generally accepted

12 auditing standards, generally accepted accounting

13 principles, generally accepted standards for attesta14 tion engagements, and any other standards related

15 to the preparation of financial statements or ac16 countant’s reports promulgated by the Commission

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

18 ‘‘(b) ESTABLISHMENT OF BOARD.—

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

20 after the date of enactment of this section, the Com21 mission shall establish a Public Auditing Self-Dis22 ciplinary Board to perform the duties set forth in

23 this section. The Commission shall designate an en24 tity to serve as the Board if the Commission finds

25 that—
38

•S 1976 IS

1 ‘‘(A) such entity is sponsored by an exist2 ing national organization of certified public ac3 countants that—

4 ‘‘(i) is most representative of certified

5 public accountants covered by this title;

6 and

7 ‘‘(ii) has demonstrated its commit8 ment to improving the quality of practice

9 before the Commission; and

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

11 the members of the Board selected pursuant to

12 subsection (c).

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

14 If the Commission designates an entity to serve as

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

16 shall conduct the election of initial Board members

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

18 ‘‘(c) MEMBERSHIP OF BOARD.—

19 ‘‘(1) IN GENERAL.—The Board shall be com20 posed of 3 appointed members and 4 elected mem21 bers, as follows:

22 ‘‘(A) APPOINTED MEMBERS.—Three mem23 bers of the Board shall be appointed in accord24 ance with the following:
39

•S 1976 IS

1 ‘‘(i) INITIAL APPOINTMENTS.—The

2 Chairman of the Commission shall make

3 the initial appointments, in consultation

4 with the other members of the Commis5 sion, not later than 90 days after the date

6 of enactment of this section.

7 ‘‘(ii) SUBSEQUENT APPOINTMENTS.—

8 After the initial appointments under clause

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

10 vacancies of appointed members of the

11 Board shall be appointed in accordance

12 with the rules adopted pursuant to para13 graph (5). Such rules shall provide that

14 such members shall be appointed by the

15 Board, subject to the approval of the Com16 mission.

17 ‘‘(B) ELECTED MEMBERS.—Four mem18 bers, including the member who shall serve as

19 the chairperson of the Board, shall be elected in

20 accordance with the following:

21 ‘‘(i) INITIAL ELECTION.—Not later

22 than 120 days after the date on which the

23 Chairman of the Commission makes ap24 pointments under subparagraph (A)(i), an

25 entity designated by the Commission pur-
40

•S 1976 IS

1 suant to subsection (b) shall conduct an

2 election of 4 initial elected members pursu3 ant to interim election rules proposed by

4 the entity and approved by the 3 interim

5 members of the Board and the Commis6 sion. If the Commission is unable to des7 ignate an entity meeting the criteria set

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

9 the Board appointed under subparagraph

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

11 approval by the Commission, providing for

12 the election of the 4 initial elected mem13 bers. Such rules shall provide that such

14 members of the Board shall be elected—

15 ‘‘(I) not later than 120 days

16 after the date on which members are

17 initially appointed under subpara18 graph (A)(i);

19 ‘‘(II) by persons who are associ20 ated with public accounting firms and

21 who are certified public accountants

22 under the laws of any State; and

23 ‘‘(III) subject to the approval of

24 the Commission.
41

•S 1976 IS

1 ‘‘(ii) SUBSEQUENT ELECTIONS.—

2 After the initial elections under clause (i),

3 members of the Board elected to fill vacan4 cies of elected members of the Board shall

5 be elected in accordance with the rules

6 adopted pursuant to paragraph (5). Such

7 rules shall provide that such members of

8 the Board shall be elected—

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

11 who are certified public accountants

12 under the laws of any State; and

13 ‘‘(II) subject to the approval of

14 the Commission.

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

16 Board, including the chairperson of the Board, shall

17 be persons who have not been associated with a pub18 lic accounting firm during the 10-year period preced19 ing appointment or election to the Board under

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

21 elected shall be persons associated with a public ac22 counting firm registered with the Board.

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

24 the Board shall serve on a full-time basis, severing
42

•S 1976 IS

1 all business ties with his or her former firms or em2 ployers prior to beginning service on the Board.

3 ‘‘(4) TERMS.—

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

5 subparagraph (B), each member of the Board

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

7 a successor is appointed, whichever is later, ex8 cept that any member appointed to fill a va9 cancy occurring prior to the expiration of the

10 term for which such member’s predecessor was

11 appointed shall be appointed for the remainder

12 of such term.

13 ‘‘(B) INITIAL BOARD MEMBERS.—Begin14 ning on the date on which all members of the

15 Board have been selected in accordance with

16 this subsection, the terms of office of the initial

17 Board members shall expire, as determined by

18 the Board, by lottery—

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

20 date;

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

22 such date;

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

24 such date; and
43

•S 1976 IS

1 ‘‘(iv) for 2 members, 4 years after

2 such date.

3 ‘‘(5) RULES.—Following selection of the 7 ini4 tial members of the Board in accordance with sub5 paragraphs (A)(i) and (B)(i) of paragraph (1), the

6 Board shall propose and adopt rules, which shall

7 provide for—

8 ‘‘(A) the operation and administration of

9 the Board, including—

10 ‘‘(i) the appointment of members in

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

12 ‘‘(ii) the election of members in ac13 cordance with paragraph (1)(B)(ii); and

14 ‘‘(iii) the compensation of the mem15 bers of the Board;

16 ‘‘(B) the appointment and compensation of

17 such employees, attorneys, and consultants as

18 may be necessary or appropriate to carry out

19 the Board’s functions under this title;

20 ‘‘(C) the registration of public accounting

21 firms with the Board pursuant to subsections

22 (d) and (e); and

23 ‘‘(D) the matters described in subsections

24 (f) and (g).
44

•S 1976 IS

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

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

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

4 assess and collect a registration fee and annual dues from

5 each public accounting firm registered with the Board.

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

7 to recover the costs and expenses of the Board and to per8 mit the Board to operate on a self-financing basis. The

9 amount of fees and dues for each public accounting firm

10 shall be based upon—

11 ‘‘(1) the annual revenues of such firm from ac12 counting and auditing services;

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

14 public accounting firm;

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

16 furnishes accountant’s reports on financial state17 ments, reports, or other documents filed with the

18 Commission; and

19 ‘‘(4) such other criteria as the Board may es20 tablish.

21 ‘‘(e) REGISTRATION WITH BOARD.—

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

23 year after the date on which all initial members of

24 the Board have been selected in accordance with

25 subsection (c), it shall be unlawful for a public ac-
45

•S 1976 IS

1 counting firm to furnish an accountant’s report on

2 any financial statement, report, or other document

3 required to be filed with the Commission under any

4 Federal securities law, unless such firm is registered

5 with the Board.

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

7 public accounting firm may be registered under this

8 subsection by filing with the Board an application

9 for registration in such form and containing such in10 formation as the Board, by rule, may prescribe.

11 Each application shall include—

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

13 accounting firm for which the firm furnishes ac14 countant’s reports on financial statements, re15 ports, or other documents filed with the Com16 mission;

17 ‘‘(B) financial information of the public ac18 counting firm for its most recent fiscal year, in19 cluding its annual revenues from accounting

20 and auditing services, its assets and its liabil21 ities;

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

23 firm’s policies and procedures with respect to

24 quality control of its accounting and auditing

25 practice;
46

•S 1976 IS

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

2 or administrative actions or formal disciplinary

3 proceedings pending against such firm, or any

4 person associated with such firm, in connection

5 with an accountant’s report furnished by such

6 firm;

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

8 public accounting firm who are certified public

9 accountants, including any State professional li10 cense or certification number for each such per11 son; and

12 ‘‘(F) such other information that is reason13 ably related to the Board’s responsibilities as

14 the Board considers necessary or appropriate.

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

16 or more frequently as the Board, by rule, may pre17 scribe, each public accounting firm registered with

18 the Board shall submit reports to the Board updat19 ing the information contained in its application for

20 registration and containing such additional informa21 tion that is reasonably related to the Board’s re22 sponsibilities as the Board, by rule, may prescribe.

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

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

25 may conditionally or unconditionally exempt any
47

•S 1976 IS

1 public accounting firm or any accountant’s report,

2 or any class of public accounting firms or any class

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

4 section or the rules or regulations issued hereunder,

5 if the Commission finds that such exemption is con6 sistent with the public interest, the protection of in7 vestors, and the purposes of this section.

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

9 rule, designate portions of the filings required pursu10 ant to paragraphs (2) and (3) as privileged and con11 fidential.

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

13 initial members of the Board have been selected in accord14 ance with subsection (c), the Board shall have the follow15 ing duties and powers:

16 ‘‘(1) INVESTIGATIONS AND DISCIPLINARY PRO17 CEEDINGS.—The Board shall establish fair proce18 dures for investigating and disciplining public ac19 counting firms registered with the Board, and per20 sons associated with such firms, for violations of the

21 Federal securities laws, the rules or regulations is22 sued thereunder, the rules adopted by the Board, or

23 professional standards in connection with the prepa24 ration of an accountant’s report on a financial state-
48

•S 1976 IS

1 ment, report, or other document filed with the Com2 mission.

3 ‘‘(2) INVESTIGATION PROCEDURES.—

4 ‘‘(A) IN GENERAL.—The Board may con5 duct an investigation of any act, practice, or

6 omission by a public accounting firm registered

7 with the Board, or by any person associated

8 with such firm, in connection with the prepara9 tion of an accountant’s report on a financial

10 statement, report, or other document filed with

11 the Commission that may violate any applicable

12 provision of the Federal securities laws, the

13 rules and regulations issued thereunder, the

14 rules adopted by the Board, or professional

15 standards, whether such act, practice, or omis16 sion is the subject of a criminal, civil, or admin17 istrative action, or a disciplinary proceeding, or

18 otherwise is brought to the attention of the

19 Board.

20 ‘‘(B) POWERS OF BOARD.—For purposes

21 of an investigation under this paragraph, the

22 Board may, in addition to such other actions as

23 the Board determines to be necessary or appro24 priate—
49

•S 1976 IS

1 ‘‘(i) require the testimony of any per2 son associated with a public accounting

3 firm registered with the Board, with re4 spect to any matter which the Board con5 siders relevant or material to the investiga6 tion;

7 ‘‘(ii) require the production of audit

8 workpapers and any other document or in9 formation in the possession of a public ac10 counting firm registered with the Board, or

11 any person associated with such firm,

12 wherever domiciled, that the Board consid13 ers relevant or material to the investiga14 tion, and may examine the books and

15 records of such firm to verify the accuracy

16 of any documents or information so sup17 plied; and

18 ‘‘(iii) request the testimony of any

19 person and the production of any docu20 ment in the possession of any person, in21 cluding a client of a public accounting firm

22 registered with the Board, that the Board

23 considers relevant or material to the inves24 tigation.
50

•S 1976 IS

1 ‘‘(C) SUSPENSION OR REVOCATION OF

2 REGISTRATION FOR NONCOMPLIANCE.—The re3 fusal of any person associated with a public ac4 counting firm registered with the Board to tes5 tify, or the refusal of any such person to

6 produce documents or otherwise cooperate with

7 the Board, in connection with an investigation

8 under this section, shall be cause for suspend9 ing or barring such person from associating

10 with a public accounting firm registered with

11 the Board, or such other appropriate sanction

12 as the Board shall determine. The refusal of

13 any public accounting firm registered with the

14 Board to produce documents or otherwise co15 operate with the Board, in connection with an

16 investigation under this section, shall be cause

17 for the suspension or revocation of the registra18 tion of such firm, or such other appropriate

19 sanction as the Board shall determine.

20 ‘‘(D) REFERRAL TO COMMISSION.—

21 ‘‘(i) IN GENERAL.—If the Board is

22 unable to conduct or complete an inves23 tigation under this section because of the

24 refusal of any client of a public accounting

25 firm registered with the Board, or any
51

•S 1976 IS

1 other person, to testify, produce docu2 ments, or otherwise cooperate with the

3 Board in connection with such investiga4 tion, the Board shall report such refusal to

5 the Commission.

6 ‘‘(ii) INVESTIGATION.—The Commis7 sion may designate the Board or one or

8 more officers of the Board who shall be

9 empowered, in accordance with such proce10 dures as the Commission may adopt, to

11 subpoena witnesses, compel their attend12 ance, and require the production of any

13 books, papers, correspondence, memo14 randa, or other records relevant to any in15 vestigation by the Board. Attendance of

16 witnesses and the production of any

17 records may be required from any place in

18 the United States or any State at any des19 ignated place of hearing. Enforcement of a

20 subpoena issued by the Board, or an offi21 cer of the Board, pursuant to this subpara22 graph shall occur in the manner provided

23 for in section 21(c). Examination of wit24 nesses subpoenaed pursuant to this sub25 paragraph shall be conducted before an of-
52

•S 1976 IS

1 ficer authorized to administer oaths by the

2 laws of the United States or of the place

3 where the examination is held.

4 ‘‘(iii) REFERRALS TO COMMISSION.—

5 The Board may refer any investigation to

6 the Commission, as the Board deems ap7 propriate.

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

9 An employee of the Board engaged in carrying

10 out an investigation or disciplinary proceeding

11 under this section shall be immune from any

12 civil liability arising out of such investigation or

13 disciplinary proceeding in the same manner and

14 to the same extent as an employee of the Fed15 eral Government in similar circumstances.

16 ‘‘(3) DISCIPLINARY PROCEDURES.—

17 ‘‘(A) DECISION TO DISCIPLINE.—In a pro18 ceeding by the Board to determine whether a

19 public accounting firm, or a person associated

20 with such firm, should be disciplined, the Board

21 shall bring specific charges, notify such firm or

22 person of the charges, give such firm or person

23 an opportunity to defend against such charges,

24 and keep a record of such actions.
53

•S 1976 IS

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

2 a public accounting firm, or a person associated

3 with such firm, has engaged in any act, prac4 tice, or omission in violation of the Federal se5 curities laws, the rules or regulations issued

6 thereunder, the rules adopted by the Board, or

7 professional standards, the Board may impose

8 such disciplinary sanctions as it deems appro9 priate, including—

10 ‘‘(i) revocation or suspension of reg11 istration under this section;

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

13 and operations;

14 ‘‘(iii) fine;

15 ‘‘(iv) censure;

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

17 with a public accounting firm, suspension

18 or bar from being associated with a public

19 accounting firm registered with the Board;

20 and

21 ‘‘(vi) any other disciplinary sanction

22 that the Board determines to be appro23 priate.

24 ‘‘(C) STATEMENT REQUIRED.—A deter25 mination by the Board to impose a disciplinary
54

•S 1976 IS

1 sanction shall be supported by a written state2 ment by the Board setting forth—

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

4 public accounting firm or person associated

5 with such firm has been found to have en6 gaged, or which such firm or person has

7 been found to have omitted;

8 ‘‘(ii) the specific provision of the Fed9 eral securities laws, the rules or regula10 tions issued thereunder, the rules adopted

11 by the Board, or professional standards

12 which any such act, practice, or omission is

13 deemed to violate; and

14 ‘‘(iii) the sanction imposed and the

15 reasons therefor.

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

17 shall be unlawful—

18 ‘‘(i) for any person as to whom a sus19 pension or bar is in effect willfully to be or

20 to become associated with a public ac21 counting firm registered with the Board, in

22 connection with the preparation of an ac23 countant’s report on any financial state24 ment, report, or other document filed with
55

•S 1976 IS

1 the Commission, without the consent of the

2 Board or the Commission; and

3 ‘‘(ii) for any public accounting firm

4 registered with the Board to permit such a

5 person to become, or remain, associated

6 with such firm without the consent of the

7 Board or the Commission, if such firm

8 knew or, in the exercise of reasonable care

9 should have known, of such suspension or

10 bar.

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

12 imposes a disciplinary sanction against a public ac13 counting firm, or a person associated with such firm,

14 the Board shall report such sanction to the Commis15 sion, to the appropriate State or foreign licensing

16 board or boards with which such firm or such person

17 is licensed or certified to practice public accounting,

18 and to the public. The information reported shall in19 clude—

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

21 firm, or person associated with such firm,

22 against whom the sanction is imposed;

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

24 omissions upon which the sanction is based;

25 ‘‘(C) the nature of the sanction; and
56

•S 1976 IS

1 ‘‘(D) such other information respecting the

2 circumstances of the disciplinary action (includ3 ing the name of any client of such firm affected

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

5 Board deems appropriate.

6 ‘‘(5) DISCOVERY AND ADMISSIBILITY OF BOARD

7 MATERIAL.—

8 ‘‘(A) DISCOVERABILITY.—

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 and the deliberations and other proceed14 ings of the Board and its employees and

15 agents in connection with an investigation

16 or disciplinary proceeding under this sec17 tion shall not be subject to any form of

18 civil discovery, including demands for pro19 duction of documents and for testimony of

20 individuals, in connection with any pro21 ceeding in any State or Federal court, or

22 before any State or Federal administrative

23 agency. This subparagraph shall not apply

24 to any information provided to the Board

25 that would have been subject to discovery
57

•S 1976 IS

1 from the person or entity that provided it

2 to the Board, but is no longer available

3 from that person or entity.

4 ‘‘(ii) EXEMPTION.—Submissions to

5 the Board by or on behalf of a public ac6 counting firm or person associated with

7 such a firm or on behalf of any other par8 ticipant in a Board proceeding, including

9 documents generated by the Board itself,

10 shall be exempt from discovery to the same

11 extent as the material described in clause

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

13 or any other person, if such submission—

14 ‘‘(I) is prepared specifically for

15 the purpose of the Board proceeding;

16 and

17 ‘‘(II) addresses the merits of the

18 issues under investigation by the

19 Board.

20 ‘‘(iii) CONSTRUCTION.—Nothing in

21 this subparagraph shall limit the authority

22 of the Board to provide appropriate public

23 access to disciplinary hearings of the

24 Board, or to reports or memoranda re-
58

•S 1976 IS

1 ceived by the Board in connection with

2 such proceedings.

3 ‘‘(B) ADMISSIBILITY.—

4 ‘‘(i) IN GENERAL.—Except as pro5 vided in subparagraph (C), all reports,

6 memoranda, and other information pre7 pared, collected, or received by the Board,

8 the deliberations and other proceedings of

9 the Board and its employees and agents in

10 connection with an investigation or discipli11 nary proceeding under this section, the

12 fact that an investigation or disciplinary

13 proceeding has been commenced, and the

14 Board’s determination with respect to any

15 investigation or disciplinary proceeding

16 shall be inadmissible in any proceeding in

17 any State or Federal court or before any

18 State or Federal administrative agency.

19 ‘‘(ii) TREATMENT OF CERTAIN DOCU20 MENTS.—Submissions to the Board by or

21 on behalf of a public accounting firm or

22 person associated with such a firm or on

23 behalf of any other participant in a Board

24 proceeding, including documents generated

25 by the Board itself, shall be inadmissible to
59

•S 1976 IS

1 the same extent as the material described

2 in clause (i), if such submission—

3 ‘‘(I) is prepared specifically for

4 the purpose of the Board proceedings;

5 and

6 ‘‘(II) addresses the merits of the

7 issues under investigation by the

8 Board.

9 ‘‘(C) AVAILABILITY AND ADMISSIBILITY OF

10 INFORMATION.—

11 ‘‘(i) IN GENERAL.—All information

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

13 shall be—

14 ‘‘(I) available to the Commission

15 and to any other Federal department

16 or agency in connection with the exer17 cise of its regulatory authority to the

18 extent that such information would be

19 available to such agency from the

20 Commission as a result of a Commis21 sion enforcement investigation;

22 ‘‘(II) available to Federal and

23 State authorities in connection with

24 any criminal investigation or proceed25 ing;
60

•S 1976 IS

1 ‘‘(III) admissible in any action

2 brought by the Commission or any

3 other Federal department or agency

4 pursuant to its regulatory authority,

5 to the extent that such information

6 would be available to such agency

7 from the Commission as a result of a

8 Commission enforcement investigation

9 and in any criminal action; and

10 ‘‘(IV) available to State licensing

11 boards to the extent authorized in

12 paragraph (6).

13 ‘‘(ii) OTHER LIMITATIONS.—Any doc14 uments or other information provided to

15 the Commission or other authorities pursu16 ant to clause (i) shall be subject to the lim17 itations on discovery and admissibility set

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

19 ‘‘(D) TITLE 5 TREATMENT.—This sub20 section shall be considered to be a statute de21 scribed in section 552(b)(3)(B) of title 5,

22 United States Code, for purposes of that sec23 tion 552.

24 ‘‘(6) PARTICIPATION BY STATE LICENSING

25 BOARDS.—
61

•S 1976 IS

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

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

3 it shall notify the State licensing boards in the

4 States in which the public accounting firm or

5 person associated with such firm engaged in the

6 act or failure to act alleged to have violated

7 professional standards, of the pendancy of the

8 investigation, and shall invite the State licens9 ing boards to participate in the investigation.

10 ‘‘(B) ACCEPTANCE BY STATE BOARD.—

11 ‘‘(i) PARTICIPATION.—If a State li12 censing board elects to join in the inves13 tigation, its representatives shall partici14 pate, pursuant to rules established by the

15 Board, in investigating the matter and in

16 presenting the evidence justifying the

17 charges in any hearing pursuant to para18 graph (3)(A).

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

20 State licensing board disagrees with the

21 Board’s determination with respect to the

22 matter under investigation, it may seek re23 view of that determination by the Commis24 sion pursuant to procedures that the Com25 mission shall specify by regulation.
62

•S 1976 IS

1 ‘‘(C) PROHIBITION ON CONCURRENT IN2 VESTIGATIONS.—A State licensing board shall

3 not institute its own proceeding with respect to

4 a matter referred to in subparagraph (A) until

5 after the Board’s determination has become

6 final, including completion of all review by the

7 Commission and the courts.

8 ‘‘(D) STATE SANCTIONS PERMITTED.—If

9 the Board or the Commission imposes a sanc10 tion upon a public accounting firm or person

11 associated with such a firm, and that deter12 mination either is not subjected to judicial re13 view or is upheld on judicial review, a State li14 censing board may impose a sanction on the

15 basis of the Board’s report pursuant to para16 graph (4). Any sanction imposed by the State

17 licensing board under this clause shall be inad18 missible in any proceeding in any State or Fed19 eral court or before any State or Federal ad20 ministrative agency, except to the extent pro21 vided in paragraph (5)(D).

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

23 sanction is not imposed on a public accounting

24 firm or person associated with such a firm,

25 and—
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•S 1976 IS

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

2 participate in an investigation referred to

3 in subparagraph (A), the State licensing

4 board may not impose a sanction with re5 spect to the matter; and

6 ‘‘(ii) a State licensing board elected

7 not to participate in an investigation re8 ferred to in subparagraph (A), subpara9 graphs (A) and (B) of paragraph (5) shall

10 apply with respect to any investigation or

11 proceeding subsequently instituted by the

12 State licensing board and, in particular,

13 the State licensing board shall not have ac14 cess to the record of the proceeding before

15 the Board and that record shall be inad16 missible in any proceeding before the State

17 licensing board.

18 ‘‘(g) ADDITIONAL DUTIES REGARDING QUALITY

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

20 of the Board have been selected in accordance with sub21 section (c), the Board shall have the following duties and

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

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

24 promote a high level of professional conduct among

25 public accounting firms registered with the Board,
64

•S 1976 IS

1 to improve the quality of audit services provided by

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

3 promote the public interest.

4 ‘‘(2) PROFESSIONAL PEER REVIEW ORGANIZA5 TIONS.—

6 ‘‘(A) MEMBERSHIP REQUIREMENT.—The

7 Board shall require each public accounting firm

8 subject to the disciplinary authority of the

9 Board to be a member of a professional peer re10 view organization certified by the Board pursu11 ant to subparagraph (B).

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

13 Board shall, by rule, establish general criteria

14 for the certification of peer review organizations

15 and shall certify organizations that satisfy those

16 criteria, or such amended criteria as the Board

17 may adopt. To be certified, a peer review orga18 nization shall, at a minimum—

19 ‘‘(i) require a member public account20 ing firm to undergo peer review not less

21 than once every 3 years and publish the re22 sults of the peer review; and

23 ‘‘(ii) adopt standards that are accept24 able to the Board relating to audit service

25 quality control.
65

•S 1976 IS

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

2 accounting firm or a person associated with

3 such a firm of a rule of the peer review organi4 zation to which the firm belongs shall constitute

5 grounds for—

6 ‘‘(i) the imposition of disciplinary

7 sanctions by the Board pursuant to sub8 section (f); and

9 ‘‘(ii) denial to the public accounting

10 firm or person associated with such firm of

11 the privilege of appearing or practicing be12 fore the Commission.

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

14 provided by this section, all reports, memoranda,

15 and other information provided to the Board solely

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

17 organization certified by the Board, shall be con18 fidential and privileged, unless such confidentiality

19 and privilege are expressly waived by the person or

20 entity that created or provided the information.

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

22 ‘‘(1) PROPOSED RULE CHANGES.—

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

24 with the Commission, in accordance with such

25 rules as the Commission may prescribe, copies
66

•S 1976 IS

1 of any proposed rule or any proposed change in,

2 addition to, or deletion from the rules of the

3 Board (hereafter in this subsection collectively

4 referred to as a ‘proposed rule change’) accom5 panied by a concise general statement of the

6 basis and purpose of such proposed rule

7 change. The Commission shall, upon the filing

8 of any proposed rule change, publish notice

9 thereof together with the terms of substance of

10 the proposed rule change or a description of the

11 subjects and issues involved. The Commission

12 shall give interested persons an opportunity to

13 submit written data, views, and arguments con14 cerning the proposed rule change. No proposed

15 rule change shall take effect unless approved by

16 the Commission or otherwise permitted in ac17 cordance with this subsection.

18 ‘‘(B) APPROVAL OR DISAPPROVAL.—

19 ‘‘(i) IN GENERAL.—Not later than 35

20 days after the date on which notice of the

21 filing of a proposed rule change is pub22 lished in accordance with subparagraph

23 (A), or such longer period as the Commis24 sion may designate (not to exceed 90 days

25 after such date, if it finds such longer pe-
67

•S 1976 IS

1 riod to be appropriate and publishes its

2 reasons for such finding or as to which the

3 Board consents) the Commission shall—

4 ‘‘(I) by order approve such pro5 posed rule change; or

6 ‘‘(II) institute proceedings to de7 termine whether the proposed rule

8 change should be disapproved.

9 ‘‘(ii) DISAPPROVAL PROCEEDINGS.—

10 Proceedings for disapproval shall include

11 notice of the grounds for disapproval under

12 consideration and opportunity for hearing

13 and shall be concluded not later than 180

14 days after the date of publication of notice

15 of the filing of the proposed rule change.

16 At the conclusion of the proceedings for

17 disapproval, the Commission, by order,

18 shall approve or disapprove such proposed

19 rule change. The Commission may extend

20 the time for conclusion of such proceedings

21 for—

22 ‘‘(I) not more than 60 days, if

23 the Commission finds good cause for

24 such extension and publishes its rea25 sons for such finding; or
68

•S 1976 IS

1 ‘‘(II) such longer period to which

2 the Board consents.

3 ‘‘(iii) APPROVAL.—The Commission

4 shall approve a proposed rule change if it

5 finds that such proposed rule change is

6 consistent with the requirements of the

7 Federal securities laws, and the rules and

8 regulations issued thereunder, applicable to

9 the Board. The Commission shall dis10 approve a proposed rule change if it does

11 not make such finding. The Commission

12 shall not approve any proposed rule change

13 prior to the expiration of the 30-day period

14 beginning on the date on which notice of

15 the filing of a proposed rule change is pub16 lished in accordance with this subpara17 graph, unless the Commission finds good

18 cause to do so and publishes its reasons

19 for such finding.

20 ‘‘(C) EFFECT OF PROPOSED RULE

21 CHANGE.—

22 ‘‘(i) EFFECTIVE DATE.—Notwith23 standing subparagraph (B), a proposed

24 rule change may take effect upon filing
69

•S 1976 IS

1 with the Commission if designated by the

2 Board as—

3 ‘‘(I) constituting a stated policy,

4 practice, or interpretation with respect

5 to the meaning, administration, or en6 forcement of an existing rule of the

7 Board;

8 ‘‘(II) establishing or changing a

9 due, fee, or other charge imposed by

10 the Board; or

11 ‘‘(III) concerned solely with the

12 administration of the Board or other

13 matters which the Commission, by

14 rule, consistent with the public inter15 est and the purposes of this sub16 section, may specify.

17 ‘‘(ii) SUMMARY EFFECT.—Notwith18 standing any other provision of this sub19 section, a proposed rule change may be put

20 into effect summarily if it appears to the

21 Commission that such action is necessary

22 for the protection of investors. Any pro23 posed rule change put into effect sum24 marily shall be filed promptly thereafter in

25 accordance with this paragraph.
70

•S 1976 IS

1 ‘‘(iii) ENFORCEMENT.—Any proposed

2 rule change which has taken effect pursu3 ant to clause (i) or (ii) may be enforced by

4 the Board to the extent that it is not in5 consistent with the Federal securities laws,

6 the rules and regulations issued there7 under, and applicable Federal and State

8 law. During the 60-day period beginning

9 on the date on which notice of the filing of

10 a proposed rule change if filed in accord11 ance with this paragraph, the Commission

12 may summarily abrogate the change in the

13 rules of the Board made thereby and re14 quire that the proposed rule change be

15 refiled in accordance with subparagraph

16 (A) and reviewed in accordance with sub17 paragraph (B), if it appears to the Com18 mission that such action is necessary or

19 appropriate in the public interest, for the

20 protection of investors, or otherwise in fur21 therance of the purposes of the Federal se22 curities laws. Commission action pursuant

23 to the preceding sentence shall not affect

24 the validity or force of the rule change dur25 ing the period it was in effect and shall not
71

•S 1976 IS

1 be reviewable under section 25 of this Act

2 nor deemed to be ‘final agency action’ for

3 purposes of section 704 of title 5, United

4 States Code.

5 ‘‘(2) AMENDMENT BY COMMISSION OF RULES

6 OF THE BOARD.—The Commission, by rule, may ab7 rogate, add to, and delete from (hereafter in this

8 subsection collectively referred to as ‘amend’) the

9 rules of the Board as the Commission deems nec10 essary or appropriate to ensure the fair administra11 tion of the Board, to conform its rules to require12 ments of the Federal securities laws, and the rules

13 and regulations issued thereunder applicable to the

14 Board, or otherwise in furtherance of the purposes

15 of the Federal securities laws, in the following

16 manner:

17 ‘‘(A) PUBLICATION OF NOTICE.—The

18 Commission shall notify the Board and publish

19 notice of the proposed rulemaking in the Fed20 eral Register. The notice shall include the text

21 of the proposed amendment to the rules of the

22 Board and a statement of the Commission’s

23 reasons, including any pertinent facts, for com24 mencing such proposed rulemaking.
72

•S 1976 IS

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

2 give interested persons an opportunity for the

3 oral presentation of data, views, and arguments,

4 in addition to an opportunity to make written

5 submissions. A transcript shall be kept of any

6 oral presentation.

7 ‘‘(C) INCORPORATION.—A rule adopted

8 pursuant to this subsection shall incorporate

9 the text of the amendment to the rules of the

10 Board and a statement of the Commission’s

11 basis for and purpose in so amending such

12 rules. Such statement shall include an identi13 fication of any facts on which the Commission

14 considers its determination to so amend the

15 rules of the Board to be based, including the

16 reasons for the Commission’s conclusions as to

17 any of the facts that were disputed in the rule18 making.

19 ‘‘(D) REGULATIONS.—

20 ‘‘(i) TITLE 5 APPLICABILITY.—Except

21 as otherwise provided in this paragraph,

22 rulemaking under this paragraph shall be

23 in accordance with the procedures specified

24 in section 553 of title 5, United States

25 Code, for rulemaking not on the record.
73

•S 1976 IS

1 ‘‘(ii) CONSTRUCTION.—Nothing in

2 this subsection shall be construed to impair

3 or limit the Commission’s power to make,

4 modify, or alter the procedures the Com5 mission may follow in making rules and

6 regulations pursuant to any other author7 ity under the Federal securities laws.

8 ‘‘(iii) INCORPORATION OF AMEND9 MENTS.—Any amendment to the rules of

10 the Board made by the Commission pursu11 ant to this subsection shall be considered

12 for purposes of the Federal securities laws

13 to be part of the rules of the Board and

14 shall not be considered to be a rule of the

15 Commission.

16 ‘‘(3) NOTICE OF DISCIPLINARY ACTION TAKEN

17 BY THE BOARD; REVIEW OF ACTION BY THE COM18 MISSION.—

19 ‘‘(A) NOTICE REQUIRED.—If the Board

20 imposes a final disciplinary sanction on a public

21 accounting firm registered with the Board or on

22 any person associated with such a firm, the

23 Board shall promptly file notice thereof with

24 the Commission. The notice shall be in such

25 form and contain such information as the Com-
74

•S 1976 IS

1 mission, by rule, may prescribe as necessary or

2 appropriate in furtherance of the purposes of

3 the Federal securities laws.

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

5 which the Board is required by subparagraph

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

7 the Commission, on its own motion, or upon ap8 plication by any person aggrieved thereby, filed

9 not later than 30 days after the date on which

10 such notice is filed with the Commission and re11 ceived by such aggrieved person, or within such

12 longer period as the Commission may deter13 mine. Application to the Commission for review,

14 or the institution of review by the Commission

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

16 of such action unless the Commission otherwise

17 orders, summarily or after notice and oppor18 tunity for hearing on the question of a stay

19 (which hearing may consist solely of the sub20 mission of affidavits or presentation of oral ar21 guments). The Commission shall establish for

22 appropriate cases an expedited procedure for

23 consideration and determination of the question

24 of a stay.
75

•S 1976 IS

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

2 REDUCTION, OR REMISSION OF SANCTION.—

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

4 review a final disciplinary sanction imposed by

5 the Board on a public accounting firm reg6 istered with the Board or a person associated

7 with such a firm, after notice and opportunity

8 for hearing (which hearing may consist solely of

9 consideration of the record before the Board

10 and opportunity for the presentation of sup11 porting reasons to affirm, modify, or set aside

12 the sanction)—

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

14 ‘‘(I) such firm or person associ15 ated with such a firm has engaged in

16 such acts or practices, or has omitted

17 such acts, as the Board has found

18 them to have engaged in or omitted;

19 ‘‘(II) such acts, practices, or

20 omissions, are in violation of such

21 provisions of the Federal securities

22 laws, the rules or regulations issued

23 thereunder, the rules adopted by the

24 Board, or professional standards as
76

•S 1976 IS

1 have been specified in the determina2 tion of the Board; and

3 ‘‘(III) such provisions were ap4 plied in a manner consistent with the

5 purposes of the Federal securities

6 laws;

7 the Commission, by order, shall so declare

8 and, as appropriate, affirm the sanction

9 imposed by the Board, modify the sanction

10 in accordance with paragraph (2), or re11 mand to the Board for further proceed12 ings; or

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

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

15 order, set aside the sanction imposed by

16 the Board and, if appropriate, remand to

17 the Board for further proceedings.

18 ‘‘(B) CANCELLATION, REDUCTION, OR RE19 MISSION OF SANCTION.—If the Commission,

20 having due regard for the public interest and

21 the protection of investors, finds after a pro22 ceeding in accordance with subparagraph (A)

23 that a sanction imposed by the Board upon a

24 firm or person associated with a firm imposes

25 any burden on competition not necessary or ap-
77

•S 1976 IS

1 propriate in furtherance of the purposes of the

2 Federal securities laws or is excessive or op3 pressive, the Commission may cancel, reduce, or

4 require the remission of such sanction.

5 ‘‘(5) COMPLIANCE WITH RULES AND REGULA6 TIONS.—

7 ‘‘(A) DUTIES OF BOARD.—The Board

8 shall—

9 ‘‘(i) comply with the Federal securi10 ties laws, the rules and regulations issued

11 thereunder, and its own rules; and

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

13 the rules thereunder, absent reasonable

14 justification or excuse, enforce compliance

15 with such provisions and with professional

16 standards by public accounting firms reg17 istered with the Board and persons associ18 ated with such firms.

19 ‘‘(B) RELIEF BY COMMISSION.—The Com20 mission, by rule, consistent with the public in21 terest, the protection of investors, and the other

22 purposes of the Federal securities laws, may re23 lieve the Board of any responsibility under this

24 section to enforce compliance with any specified

25 provision of the Federal securities laws, the
78

•S 1976 IS

1 rules or regulations issued thereunder, or pro2 fessional standards by any public accounting

3 firm registered with the Board or person associ4 ated with such a firm, or any class of such

5 firms or persons associated with such a firm.

6 ‘‘(6) CENSURE; OTHER SANCTIONS.—

7 ‘‘(A) IN GENERAL.—The Commission is

8 authorized, by order, if in its opinion such ac9 tion is necessary or appropriate in the public in10 terest, for the protection of investors, or other11 wise in furtherance of the purposes of the Fed12 eral securities laws, to censure or impose limita13 tions upon the activities, functions, and oper14 ations of the Board, if the Commission finds,

15 on the record after notice and opportunity for

16 hearing, that the Board has—

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

18 with any provision of the Federal securities

19 laws, the rules or regulations issued there20 under, or its own rules; or

21 ‘‘(ii) without reasonable justification

22 or excuse, has failed to enforce compliance

23 with any such provision or any professional

24 standard by a public accounting firm reg-
79

•S 1976 IS

1 istered with the Board or a person associ2 ated with such a firm.

3 ‘‘(B) REMOVAL FROM OFFICE.—The Com4 mission is authorized, by order, if in its opinion

5 such action is necessary or appropriate, in the

6 public interest for the protection of investors, or

7 otherwise in furtherance of the purposes of the

8 Federal securities laws, to remove from office or

9 censure any member of the Board, if the Com10 mission finds, on the record after notice and op11 portunity for hearing, that such member has—

12 ‘‘(i) willfully violated any provision of

13 the Federal securities laws, the rules or

14 regulations issued thereunder, or the rules

15 of the Board;

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

17 authority; or

18 ‘‘(iii) without reasonable justification

19 or excuse, failed to enforce compliance with

20 any such provision or any professional

21 standard by any public accounting firm

22 registered with the Board or any person

23 associated with such a firm.

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

25 accounting firm that furnishes accountant’s reports on
80

•S 1976 IS

1 any financial statement, report, or other document re2 quired to be filed with the Commission under any Federal

3 securities law shall, with respect to those reports, be sub4 ject to the provisions of this section in the same manner

5 and to the same extent as a domestic public accounting

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

7 and as it deems consistent with the public interest and

8 the protection of investors, either unconditionally or upon

9 specified terms and conditions, exempt from one or more

10 provisions of this section any foreign public accounting

11 firm. Registration pursuant to this subsection shall not,

12 by itself, provide a basis for subjecting foreign accounting

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

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

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

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

17 public accounting firm registered with the Board, or

18 any person associated with such a firm be subject to

19 liability under any antitrust law for any act of the

20 Board or any failure to act by the Board.

21 ‘‘(2) DEFINITION.—For purposes of this sub22 section, the term ‘antitrust law’ means the Federal

23 Trade Commission Act and each statute defined by

24 section 4 thereof as ‘Antitrust Acts’ and all amend-
81

•S 1976 IS

1 ments to such Act and such statutes and any other

2 Federal Acts or State laws in pari materia.

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

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

5 financial statements by an independent public accountant

6 shall be conducted in accordance with generally accepted

7 auditing standards, as may be modified or supplemented

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

9 may defer to professional standards promulgated by pri10 vate organizations that are generally accepted by the ac11 counting or auditing profession.

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

13 Nothing in this section shall be construed to impair or

14 limit the Commission’s authority—

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

16 firms, or any persons associated with such firms;

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

18 derived from other provisions of the Federal securi19 ties laws or the rules or regulations issued there20 under; or

21 ‘‘(3) to take, on its own initiative, legal, admin22 istrative, or disciplinary action against any public

23 accounting firm registered with the Board or any

24 person associated with such a firm.’’.
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