II

Calendar No. 355

105TH CONGRESS

2D SESSION S. 1260

[Report No. 105–182]

To amend the Securities Act of 1933 and the Securities Exchange Act

of 1934 to limit the conduct of securities class actions under State

law, and for other purposes.

IN THE SENATE OF THE UNITED STATES

OCTOBER 7, 1997

Mr. GRAMM (for himself, Mr. DODD, Mr. DOMENICI, Mrs. BOXER, Mr. FAIRCLOTH, Mrs. FEINSTEIN, Mr. HAGEL, Mr. REID, Mr. WYDEN, Mr. ALLARD, Ms. MOSELEY-BRAUN, Mrs. MURRAY, Mr. LIEBERMAN, Mr. BENNETT, Mr. GRAMS, Mr. SESSIONS, Mr. SANTORUM, Mr. ASHCROFT, Mr.

ABRAHAM, Mr. SMITH of Oregon, Mr. KERRY, Mr. MACK, Mr. NICKLES,

Mr. COCHRAN, Mr. THURMOND, Mr. INHOFE, Mr. HELMS, Mr. DEWINE,

Mr. ENZI, Mr. COVERDELL, Mr. GORTON, Mr. BROWNBACK, Mr. HUTCHINSON, Mr. WARNER, Mr. ROBB, Mr. FORD, Mr. BOND, Mr. FRIST, Mr.

KYL, and Mr. LUGAR) introduced the following bill; which was read twice

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

MAY 4, 1998

Reported by Mr. D’AMATO, with an amendment

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

A BILL

To amend the Securities Act of 1933 and the Securities

Exchange Act of 1934 to limit the conduct of securities

class actions under State law, and for other purposes.
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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.

4 This Act may be cited as the ‘‘Securities Litigation

5 Uniform Standards Act of 1997’’.

6 SEC. 2. LIMITATION ON REMEDIES.

7 (a) AMENDMENTS TO THE SECURITIES ACT OF

8 1933.—

9 (1) AMENDMENT.—Section 16 of the Securities

10 Act of 1933 (15 U.S.C. 77p) is amended to read as

11 follows:

12 ‘‘SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON REM13 EDIES.

14 ‘‘(a) REMEDIES ADDITIONAL.—Except as provided in

15 subsection (b), the rights and remedies provided by this

16 title shall be in addition to any and all other rights and

17 remedies that may exist at law or in equity.

18 ‘‘(b) CLASS ACTION LIMITATIONS.—No class action

19 based upon the statutory or common law of any State or

20 subdivision thereof may be maintained in any State or

21 Federal court by any private party alleging—

22 ‘‘(1) an untrue statement or omission of a ma23 terial fact in connection with the purchase or sale of

24 a covered security; or
3

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1 ‘‘(2) that the defendant used or employed any

2 manipulative or deceptive device or contrivance in

3 connection with the purchase or sale of a covered se4 curity.

5 ‘‘(c) REMOVAL OF CLASS ACTIONS.—Any class action

6 brought in any State court involving a covered security,

7 as set forth in subsection (b), shall be removable to the

8 Federal district court for the district in which the action

9 is pending, and shall be subject to subsection (b).

10 ‘‘(d) DEFINITIONS.—For purposes of this section the

11 following definitions shall apply:

12 ‘‘(1) CLASS ACTION.—The term ‘class action’

13 means any single lawsuit, or any group of lawsuits

14 filed in or pending in the same court involving com15 mon questions of law or fact, in which—

16 ‘‘(A) damages are sought on behalf of

17 more than 25 persons;

18 ‘‘(B) one or more named parties seek to

19 recover damages on a representative basis on

20 behalf of themselves and other unnamed parties

21 similarly situated; or

22 ‘‘(C) one or more of the parties seeking to

23 recover damages did not personally authorize

24 the filing of the lawsuit.
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1 ‘‘(2) COVERED SECURITY.—A security is a ‘cov2 ered security’ if it satisfies the standard for a cov3 ered security specified in paragraph (1) or (2) of

4 section 18(b) at the time during which it is alleged

5 that the misrepresentation, omission, or manipula6 tive or deceptive conduct occurred.’’.

7 (2) CONFORMING AMENDMENTS.—Section

8 22(a) of the Securities Act of 1933 (15 U.S.C.

9 77v(a)) is amended—

10 (A) by striking ‘‘and, concurrent with

11 State and Territorial courts,’’ and inserting

12 ‘‘and, concurrent with State and Territorial

13 courts, except as provided in section 16 with re14 spect to class actions,’’; and

15 (B) by striking ‘‘No case arising under this

16 title and brought in any State court of com17 petent jurisdiction shall be removed’’ and in18 serting ‘‘Except as provided in section 16(c), no

19 case arising under this title and brought in any

20 State court of competent jurisdiction shall be

21 removed’’.

22 (b) AMENDMENTS TO THE SECURITIES EXCHANGE

23 ACT OF 1934.—Section 28 of the Securities Exchange Act

24 of 1934 (15 U.S.C. 78bb) is amended—
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1 (1) in subsection (a), by striking ‘‘The rights

2 and remedies’’ and inserting ‘‘Except as provided in

3 subsection (f), the rights and remedies’’; and

4 (2) by adding at the end the following new sub5 section:

6 ‘‘(f) LIMITATIONS ON REMEDIES.—

7 ‘‘(1) CLASS ACTION LIMITATIONS.—No class ac8 tion based upon the statutory or common law of any

9 State or subdivision thereof may be maintained in

10 any State or Federal court by any private party

11 alleging—

12 ‘‘(A) a misrepresentation or omission of a

13 material fact in connection with the purchase or

14 sale of a covered security; or

15 ‘‘(B) that the defendant used or employed

16 any manipulative or deceptive device or contriv17 ance in connection with the purchase or sale of

18 a covered security.

19 ‘‘(2) REMOVAL OF CLASS ACTIONS.—Any class

20 action brought in any State court involving a cov21 ered security, as set forth in paragraph (1), shall be

22 removable to the Federal district court for the dis23 trict in which the action is pending, and shall be

24 subject to paragraph (1).
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1 ‘‘(3) DEFINITIONS.—For purposes of this sub2 section the following definitions shall apply:

3 ‘‘(A) CLASS ACTION.—The term ‘class ac4 tion’ means any single lawsuit, or any group of

5 lawsuits filed in or pending in the same court

6 involving common questions of law or fact, in

7 which—

8 ‘‘(i) damages are sought on behalf of

9 more than 25 persons;

10 ‘‘(ii) one or more named parties seek

11 to recover damages on a representative

12 basis on behalf of themselves and other

13 unnamed parties similarly situated; or

14 ‘‘(iii) one or more of the parties seek15 ing to recover damages did not personally

16 authorize the filing of the lawsuit.

17 ‘‘(B) COVERED SECURITY.—A security is a

18 ‘covered security’ if it satisfies the standard for

19 a covered security specified in paragraph (1) or

20 (2) of section 18(b) of the Securities Act of

21 1933, at the time during which it is alleged

22 that the misrepresentation, omission, or ma23 nipulative or deceptive conduct occurred.’’.
7

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1 (c) APPLICABILITY.—The amendments made by this

2 section shall not affect or apply to any action commenced

3 before and pending on the date of enactment of this Act.

4 SECTION 1. SHORT TITLE.

5 This Act may be cited as the ‘‘Securities Litigation

6 Uniform Standards Act of 1998’’.

7 SEC. 2. FINDINGS.

8 The Congress finds that—

9 (1) the Private Securities Litigation Reform Act

10 of 1995 sought to prevent abuses in private securities

11 fraud lawsuits;

12 (2) since enactment of that legislation, consider13 able evidence has been presented to Congress that a

14 number of securities class action lawsuits have shifted

15 from Federal to State courts;

16 (3) this shift has prevented that Act from fully

17 achieving its objectives;

18 (4) State securities regulation is of continuing

19 importance, together with Federal regulation of secu20 rities, to protect investors and promote strong finan21 cial markets; and

22 (5) in order to prevent certain State private se23 curities class action lawsuits alleging fraud from

24 being used to frustrate the objectives of the Private Se25 curities Litigation Reform Act of 1995, it is appro-
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1 priate to enact national standards for securities class

2 action lawsuits involving nationally traded securities,

3 while preserving the appropriate enforcement powers

4 of State securities regulators and not changing the

5 current treatment of individual lawsuits.

6 SEC. 3. LIMITATION ON REMEDIES.

7 (a) AMENDMENTS TO THE SECURITIES ACT OF

8 1933.—

9 (1) AMENDMENT.—Section 16 of the Securities

10 Act of 1933 (15 U.S.C. 77p) is amended to read as

11 follows:

12 ‘‘SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON REM13 EDIES.

14 ‘‘(a) REMEDIES ADDITIONAL.—Except as provided in

15 subsection (b), the rights and remedies provided by this title

16 shall be in addition to any and all other rights and rem17 edies that may exist at law or in equity.

18 ‘‘(b) CLASS ACTION LIMITATIONS.—No class action

19 based upon the statutory or common law of any State or

20 subdivision thereof may be maintained in any State or Fed21 eral court by any private party alleging—

22 ‘‘(1) an untrue statement or omission of a mate23 rial fact in connection with the purchase or sale of a

24 covered security; or
9

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1 ‘‘(2) that the defendant used or employed any

2 manipulative or deceptive device or contrivance in

3 connection with the purchase or sale of a covered secu4 rity.

5 ‘‘(c) REMOVAL OF CLASS ACTIONS.—Any class action

6 brought in any State court involving a covered security,

7 as set forth in subsection (b), shall be removable to the Fed8 eral district court for the district in which the action is

9 pending, and shall be subject to subsection (b).

10 ‘‘(d) PRESERVATION OF CERTAIN ACTIONS.—

11 ‘‘(1) IN GENERAL.—Notwithstanding subsection

12 (b), a class action described in paragraph (2) of this

13 subsection that is based upon the statutory or com14 mon law of the State in which the issuer is incor15 porated (in the case of a corporation) or organized

16 (in the case of any other entity) may be maintained

17 in a State or Federal court by a private party.

18 ‘‘(2) PERMISSIBLE ACTIONS.—A class action is

19 described in this paragraph if it involves—

20 ‘‘(A) the purchase or sale of securities by the

21 issuer or an affiliate of the issuer exclusively

22 from or to holders of equity securities of the

23 issuer; or
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1 ‘‘(B) any recommendation, position, or

2 other communication with respect to the sale of

3 securities of the issuer that—

4 ‘‘(i) is made by or on behalf of the

5 issuer or an affiliate of the issuer to holders

6 of equity securities of the issuer; and

7 ‘‘(ii) concerns decisions of those equity

8 holders with respect to voting their securi9 ties, acting in response to a tender or ex10 change offer, or exercising dissenters’ or ap11 praisal rights.

12 ‘‘(e) PRESERVATION OF STATE JURISDICTION.—The

13 securities commission (or any agency or office performing

14 like functions) of any State shall retain jurisdiction under

15 the laws of such State to investigate and bring enforcement

16 actions.

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

18 following definitions shall apply:

19 ‘‘(1) AFFILIATE OF THE ISSUER.—The term ‘af20 filiate of the issuer’ means a person that directly or

21 indirectly, through 1 or more intermediaries, controls

22 or is controlled by or is under common control with,

23 the issuer.

24 ‘‘(2) CLASS ACTION.—
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1 ‘‘(A) IN GENERAL.—The term ‘class action’

2 means—

3 ‘‘(i) any single lawsuit (other than a

4 derivative action brought by 1 or more

5 shareholders on behalf of a corporation) in

6 which—

7 ‘‘(I) damages are sought on behalf

8 of more than 50 persons or prospective

9 class members, and questions of law or

10 fact common to those persons or mem11 bers of the prospective class, without

12 reference to issues of individualized re13 liance on an alleged misstatement or

14 omission, predominate over any ques15 tions affecting only individual persons

16 or members; or

17 ‘‘(II) 1 or more named parties

18 seek to recover damages on a represent19 ative basis on behalf of themselves and

20 other unnamed parties similarly situ21 ated, and questions of law or fact com22 mon to those persons or members of the

23 prospective class predominate over any

24 questions affecting only individual per25 sons or members; or
12

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1 ‘‘(ii) any group of lawsuits (other than

2 derivative suits brought by 1 or more share3 holders on behalf of a corporation) filed in

4 or pending in the same court and involving

5 common questions of law or fact, in

6 which—

7 ‘‘(I) damages are sought on behalf

8 of more than 50 persons; and

9 ‘‘(II) the lawsuits are joined, con10 solidated, or otherwise proceed as a

11 single action for any purpose.

12 ‘‘(B) COUNTING OF CERTAIN CLASS MEM13 BERS.—For purposes of this paragraph, a cor14 poration, investment company, pension plan,

15 partnership, or other entity, shall be treated as

16 1 person or prospective class member, but only if

17 the entity is not established for the purpose of

18 participating in the action.

19 ‘‘(3) COVERED SECURITY.—The term ‘covered se20 curity’ means a security that satisfies the standards

21 for a covered security specified in paragraph (1) or

22 (2) of section 18(b) at the time during which it is al23 leged that the misrepresentation, omission, or ma24 nipulative or deceptive conduct occurred.’’.
13

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1 (2) CONFORMING AMENDMENTS.—Section 22(a)

2 of the Securities Act of 1933 (15 U.S.C. 77v(a)) is

3 amended—

4 (A) by inserting ‘‘except as provided in sec5 tion 16 with respect to class actions,’’ after ‘‘Ter6 ritorial courts,’’; and

7 (B) by striking ‘‘No case’’ and inserting

8 ‘‘Except as provided in section 16(c), no case’’.

9 (b) AMENDMENTS TO THE SECURITIES EXCHANGE

10 ACT OF 1934.—Section 28 of the Securities Exchange Act

11 of 1934 (15 U.S.C. 78bb) is amended—

12 (1) in subsection (a), by striking ‘‘The rights and

13 remedies’’ and inserting ‘‘Except as provided in sub14 section (f), the rights and remedies’’; and

15 (2) by adding at the end the following new sub16 section:

17 ‘‘(f) LIMITATIONS ON REMEDIES.—

18 ‘‘(1) CLASS ACTION LIMITATIONS.—No class ac19 tion based upon the statutory or common law of any

20 State or subdivision thereof may be maintained in

21 any State or Federal court by any private party

22 alleging—

23 ‘‘(A) a misrepresentation or omission of a

24 material fact in connection with the purchase or

25 sale of a covered security; or
14

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1 ‘‘(B) that the defendant used or employed

2 any manipulative or deceptive device or contriv3 ance in connection with the purchase or sale of

4 a covered security.

5 ‘‘(2) REMOVAL OF CLASS ACTIONS.—Any class

6 action brought in any State court involving a covered

7 security, as set forth in paragraph (1), shall be re8 movable to the Federal district court for the district

9 in which the action is pending, and shall be subject

10 to paragraph (1).

11 ‘‘(3) PRESERVATION OF CERTAIN ACTIONS.—

12 ‘‘(A) IN GENERAL.—Notwithstanding para13 graph (1), a class action described in subpara14 graph (B) of this paragraph that is based upon

15 the statutory or common law of the State in

16 which the issuer is incorporated (in the case of

17 a corporation) or organized (in the case of any

18 other entity) may be maintained in a State or

19 Federal court by a private party.

20 ‘‘(B) PERMISSIBLE ACTIONS.—A class ac21 tion is described in this subparagraph if it in22 volves—

23 ‘‘(i) the purchase or sale of securities

24 by the issuer or an affiliate of the issuer ex-
15

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1 clusively from or to holders of equity securi2 ties of the issuer; or

3 ‘‘(ii) any recommendation, position, or

4 other communication with respect to the

5 sale of securities of an issuer that—

6 ‘‘(I) is made by or on behalf of the

7 issuer or an affiliate of the issuer to

8 holders of equity securities of the

9 issuer; and

10 ‘‘(II) concerns decisions of such

11 equity holders with respect to voting

12 their securities, acting in response to a

13 tender or exchange offer, or exercising

14 dissenters’ or appraisal rights.

15 ‘‘(4) PRESERVATION OF STATE JURISDICTION.—

16 The securities commission (or any agency or office

17 performing like functions) of any State shall retain

18 jurisdiction under the laws of such State to inves19 tigate and bring enforcement actions.

20 ‘‘(5) DEFINITIONS.—For purposes of this sub21 section the following definitions shall apply:

22 ‘‘(A) AFFILIATE OF THE ISSUER.—The term

23 ‘affiliate of the issuer’ means a person that di24 rectly or indirectly, through 1 or more inter-
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1 mediaries, controls or is controlled by or is

2 under common control with, the issuer.

3 ‘‘(B) CLASS ACTION.—The term ‘class ac4 tion’ means—

5 ‘‘(i) any single lawsuit (other than a

6 derivative action brought by 1 or more

7 shareholders on behalf of a corporation) in

8 which—

9 ‘‘(I) damages are sought on behalf

10 of more than 50 persons or prospective

11 class members, and questions of law or

12 fact common to those persons or mem13 bers of the prospective class, without

14 reference to issues of individualized re15 liance on an alleged misstatement or

16 omission, predominate over any ques17 tions affecting only individual persons

18 or members; or

19 ‘‘(II) 1 or more named parties

20 seek to recover damages on a represent21 ative basis on behalf of themselves and

22 other unnamed parties similarly situ23 ated, and questions of law or fact com24 mon to those persons or members of the

25 prospective class predominate over any
17

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1 questions affecting only individual per2 sons or members; or

3 ‘‘(ii) any group of lawsuits (other than

4 derivative suits brought by 1 or more share5 holders on behalf of a corporation) filed in

6 or pending in the same court and involving

7 common questions of law or fact, in

8 which—

9 ‘‘(I) damages are sought on behalf

10 of more than 50 persons; and

11 ‘‘(II) the lawsuits are joined, con12 solidated, or otherwise proceed as a

13 single action for any purpose.

14 ‘‘(C) COUNTING OF CERTAIN CLASS MEM15 BERS.—For purposes of this paragraph, a cor16 poration, investment company, pension plan,

17 partnership, or other entity, shall be treated as

18 1 person or prospective class member, but only if

19 the entity is not established for the purpose of

20 participating in the action.

21 ‘‘(D) COVERED SECURITY.—The term ‘cov22 ered security’ means a security that satisfies the

23 standards for a covered security specified in

24 paragraph (1) or (2) of section 18(b) of the Secu25 rities Act of 1933, at the time during which it
18

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1 is alleged that the misrepresentation, omission,

2 or manipulative or deceptive conduct occurred.’’.

3 SEC. 4. APPLICABILITY.

4 The amendments made by this Act shall not affect or

5 apply to any action commenced before and pending on the

6 date of enactment of this Act.

Calendar No. 355

105TH CONGRESS

2D SESSION S. 1260

[Report No. 105–182]

A BILL

To amend the Securities Act of 1933 and the Secufor other purposes. of securities class actions under State law, and rities Exchange Act of 1934 to limit the conduct

MAY 4, 1998

Reported with an amendment