I

104TH CONGRESS

1ST SESSION H. R. 555

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

conduct of private securities litigation, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 18, 1995

Mr. MARKEY (for himself, Mr. CONYERS, Mr. NADLER, Mr. KENNEDY of Massachusetts, and Mrs. SCHROEDER) introduced the following bill; which

was referred to the Committee on Commerce, and in addition to the Committee on the Judiciary, for a period to be subsequently determined by

the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

MARCH 29, 1995

Additional sponsors: Mr. ENGEL, Mr. FILNER, Mr. MARTINEZ, Mr. FOLEY,

Mr. FOGLIETTA, and Mr. BERMAN

Deleted sponsor: Mr. DEUTSCH (added February 3, 1995; deleted February

13, 1995)

A BILL

To amend the Securities Exchange Act of 1934 in order

to reform the conduct of private securities litigation,

and for other purposes.

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

2 This Act may be cited as the ‘‘Private Securities Liti3 gation Reform Act of 1995’’.

4 TITLE I—PRIVATE SECURITIES

5 LITIGATION

6 SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES

7 AND PROCEDURAL REFORMS.

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

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

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

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

13 or dealer, or person associated with a broker or deal14 er, may solicit or accept remuneration for assisting

15 an attorney in obtaining the representation of any

16 customer in any implied private action arising under

17 this title.’’.

18 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

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

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

21 is amended by adding at the end the following new para22 graph:

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

24 FROM COMMISSION DISGORGEMENT FUNDS.—Except

25 as otherwise ordered by the court, funds disgorged

26 solely as the result of an action brought by the Com-
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1 mission in Federal court, or of any Commission ad2 ministrative action, shall not be distributed as pay3 ment for attorneys’ fees or expenses incurred by pri4 vate parties seeking distribution of the disgorged

5 funds.’’.

6 (c) ADDITIONAL PROVISIONS APPLICABLE TO CLASS

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

8 1934 (15 U.S.C. 78u) is amended by adding at the end

9 the following new subsections:

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

11 ACTIONS.—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 share of any final judg14 ment or of any settlement that is awarded to class plain15 tiffs serving as the representative parties shall be cal16 culated in the same manner as the shares of the final judg17 ment or settlement awarded to all other members of the

18 class. Nothing in this subsection shall be construed to

19 limit the award to any representative parties of reasonable

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

21 relating to the representation of the class.

22 ‘‘(j) CONFLICTS OF INTEREST.—In an implied pri23 vate action arising under this title that is certified as a

24 class action pursuant to the Federal Rules of Civil Proce25 dure, if a party is represented by an attorney who directly
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1 owns or otherwise has a beneficial interest in the securities

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

3 a determination of whether such interest constitutes a con4 flict of interest sufficient to disqualify the attorney from

5 representing the party.

6 ‘‘(k) RESTRICTIONS ON SECRECY.—

7 ‘‘(1) RESTRICTIONS ON SETTLEMENTS UNDER

8 SEAL.—In an implied private action arising under

9 this title, the terms and provisions of any settlement

10 agreement between any of the parties shall not be

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

12 parties to the settlement, the court may order filing

13 under seal for those portions of a settlement agree14 ment as to which good cause is shown for such filing

15 under seal. Good cause shall only exist if publication

16 of a term or provision of a settlement agreement

17 would cause direct and substantial harm to any per18 son.

19 ‘‘(2) RESTRICTIONS ON PROTECTIVE ORDERS

20 AND SEALING OF CASES.—In an implied private ac21 tion arising under this title, a court may enter an

22 order restricting the disclosure of information ob23 tained through discovery or an order restricting ac24 cess after entry of final judgment to court records

25 only after making particularized findings of fact that
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1 such disclosure or access would cause direct, imme2 diate, and substantial harm to the competitive or

3 privacy interests of a person.

4 ‘‘(3) BURDEN OF PROOF.—The party who is

5 the proponent for the entry of an order, as provided

6 under this subsection, shall have the burden of proof

7 in obtaining such an order.

8 ‘‘(4) DISCLOSURE TO CONGRESS OR GOVERN9 MENT AGENCIES.—

10 (A) No agreement between or among par11 ties in an implied private action arising under

12 this title may contain a provision that prohibits

13 or otherwise restricts a party from disclosing

14 any information relevant to such action to Con15 gress or to any Federal or State agency with

16 authority to enforce laws regulating an activity

17 relating to such information.

18 ‘‘(B) Any disclosure of information to Con19 gress or to a Federal or State agency as de20 scribed under subparagraph (A) shall be con21 fidential to the extent provided by law.

22 ‘‘(l) PRESERVATION OF EVIDENCE.—Upon receiving

23 actual notice of the filing of a complaint in an implied

24 private action arising under this title that names a person

25 as a defendant in such action and that contains allegations
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1 concerning the conduct of such person, such person shall

2 not willfully destroy any documents, data compilations (in3 cluding any electronically recorded or stored data), or tan4 gible objects that are in the custody or control of such

5 person and that a reasonable person would consider rel6 evant to the allegations in the complaint. Any defendant

7 that does not comply with this subsection shall be sanc8 tioned, which sanction may include having judgment en9 tered against it.

10 ‘‘(m) PAYMENT OF ATTORNEYS’ FEES FROM SET11 TLEMENT FUNDS.—In an implied private action arising

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

13 to the Federal Rules of Civil Procedure, attorneys’ fees

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

15 to counsel for the class shall be determined based on (1)

16 a reasonable percentage of amount actually paid to class

17 members from the common fund, and (ii) any other bene18 fits available to the class, plus reasonable expenses in19 curred in the prosecution of the action.

20 ‘‘(n) DISCLOSURE OF SETTLEMENT TERMS TO

21 CLASS MEMBERS.—In an implied private action arising

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

23 to the Federal Rules of Civil Procedure, a proposed settle24 ment agreement that is published or otherwise dissemi25 nated to the class shall include the following statements,
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1 which shall not be admissible for purposes of any Federal

2 or State judicial or administrative proceeding:

3 ‘‘(1) STATEMENT OF THE BENEFITS OF SET4 TLEMENT.—A statement of the total amount of the

5 settlement, fully describing all proposed payments

6 and non-monetary benefits to the class, and a sched7 ule setting forth the reasonably anticipated per

8 share payments to class members.

9 ‘‘(2) STATEMENT OF POTENTIAL OUTCOME OF

10 CASE.—

11 ‘‘(A) AGREEMENT ON AMOUNT OF DAM12 AGES AND LIKELIHOOD OF PREVAILING.—If the

13 settling parties agree on the amount of dam14 ages per share that would be recoverable if the

15 plaintiff prevailed on each claim alleged under

16 this title and the likelihood that the plaintiff

17 would prevail—

18 ‘‘(i) a statement concerning the

19 amount of such potential damages; and

20 ‘‘(ii) a statement concerning the likeli21 hood that the plaintiff would prevail on the

22 claims alleged under this title and a brief

23 explanation of the reasons for that conclu24 sion.
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1 ‘‘(B) DISAGREEMENT ON AMOUNT OF

2 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

3 the parties do not agree on the amount of dam4 ages per share that would be recoverable if the

5 plaintiff prevailed on each claim alleged under

6 this title or on the likelihood that the plaintiff

7 would prevail on those claims, or both, a state8 ment from each settling party concerning the

9 issue or issues on which the parties disagree.

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

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

12 their counsel intend to apply to the court for an

13 award of attorneys’ fees or costs from any fund es14 tablished as part of the settlement, a statement indi15 cating which parties or counsel intend to make such

16 an application, the amount of fees and costs that

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

18 for the application.

19 ‘‘(4) IDENTIFICATION OF REPRESENTATIVES.—

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

21 more representatives of counsel for the plaintiff class

22 who will be reasonably available to answer questions

23 from class members concerning any matter con24 tained in any notice of settlement published or oth25 erwise disseminated to class members.
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1 ‘‘(5) OTHER INFORMATION.—Such other infor2 mation as may be required by the court.

3 ‘‘(o) CONTRIBUTION IN ACTIONS BROUGHT UNDER

4 SECTION 10(b).—

5 ‘‘(1) RIGHT TO CONTRIBUTION.—Any person

6 who becomes jointly and severally liable for damages

7 under section 10(b) of this title may recover con8 tribution.

9 ‘‘(2) SETTLEMENT DISCHARGE.—Any defend10 ant who, in good faith, settles an action brought

11 under section 10(b) of this title at any time before

12 verdict or judgment shall be discharged from all

13 claims for contribution brought by other persons.

14 Upon the determination by the court that the settle15 ment was entered into in good faith, the court shall

16 enter a bar order constituting the final discharge of

17 all obligations to the plaintiff of the settling defend18 ant arising out of the action. The order shall bar

19 both (A) future claims for contribution by

20 nonsettling persons against the settling defendant

21 and (B) future claims for contribution by the set22 tling defendant against any nonsettling defendants.

23 ‘‘(3) APPORTIONMENT OF LIABILITY.—Liability

24 shall be apportioned as follows:
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1 ‘‘(A) In addition to determining the total

2 dollar amount of damages, the trier of fact shall

3 determine the percentage of responsibility for

4 those damages of each defendant (including de5 fendants who have entered into settlements with

6 the plaintiff). Where the trier of fact is a jury,

7 the court shall instruct the jury, in accordance

8 with the Federal Rules of Civil Procedure, to

9 answer interrogatories and prepare the appro10 priate forms for a verdict, specifically indicating

11 each defendant’s percentage of responsibility for

12 the damages.

13 ‘‘(B) If one or more defendants has or

14 have settled an action prior to verdict or judg15 ment, the remaining defendants as a whole

16 shall be jointly and severally liable for the per17 centage of damages allocated to them under

18 subparagraph (A).

19 ‘‘(C) The amount of contribution to which

20 a nonsettling defendant is entitled shall be no

21 more than the excess paid over and above such

22 defendant’s share as allocated in subparagraph

23 (A); except that no nonsettling defendant shall

24 be required to contribute an amount greater

25 than the unpaid portion, if any, of such defend-
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1 ant’s share as allocated in subparagraph (A),

2 plus such defendant’s proportionate share of

3 any wholly uncollectible portion of another

4 nonsettling defendant’s share.

5 ‘‘(4) EFFECT ON PENDING ACTIONS.—This sub6 section shall apply to all actions pending on or com7 menced on or after the date of its enactment.

8 ‘‘(5) STATUTE OF LIMITATIONS.—Once judg9 ment has been rendered in an action determining li10 ability, no action for contribution may be brought

11 after one year after that judgment becomes final.’’.

12 SEC. 102. SPECIAL REQUIREMENTS FOR CLASS ACTION

13 COMPLAINTS; MULTIPLE SECURITIES CLASS

14 ACTIONS; PROCEDURE FOR SELECTING LEAD

15 COUNSEL IN CLASS ACTIONS; EARLY EVALUA16 TION PROCEDURE.

17 (a) SPECIAL REQUIREMENTS FOR CLASS ACTION

18 COMPLAINTS.—The Securities Exchange Act of 1934 is

19 amended by inserting after section 27A (15 U.S.C. 78aa–

20 1) the following new section:

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

22 ‘‘(a) CERTIFICATION OF COMPLAINTS.—

23 ‘‘(1) IN GENERAL.—In an implied private ac24 tion arising under this title that is filed as a class

25 action pursuant to the Federal Rules of Civil Proce-
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1 dure, each plaintiff seeking to serve as a class rep2 resentative shall provide a certification personally

3 signed by the plaintiff to be filed with the complaint

4 that—

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

6 the complaint and authorized its filing;

7 ‘‘(B) states that the plaintiff did not pur8 chase the security that is the subject of the

9 complaint with the intent of commencing litiga10 tion;

11 ‘‘(C) states that the plaintiff did not pur12 chase the security that is the subject of the

13 complaint at the direction of plaintiff’s counsel;

14 ‘‘(D) states that the plaintiff is willing to

15 serve as a class representative, including provid16 ing testimony at deposition and trial, if nec17 essary;

18 ‘‘(E) sets forth all the plaintiffs’ trans19 actions in the security that is the subject of the

20 complaint during the class period specified in

21 the complaint;

22 ‘‘(F) identifies all suits under this title

23 which the plaintiff has filed as a class action in

24 the prior 12 months; and
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1 ‘‘(G) states that the plaintiff will not ac2 cept any payment for serving as class represent3 ative beyond the plaintiff’s pro rata share of

4 any recovery, except as ordered by the court.

5 ‘‘(2) NON-WAIVER OF ATTORNEY-CLIENT PRIVI6 LEGE.—The certification filed pursuant to para7 graph (1) of this subsection shall not waive the at8 torney-client privilege.

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

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

11 private action arising under this title out of substan12 tially the same transaction or occurrence is filed in

13 one or more Federal courts, and any person or en14 tity is named as defendant in more than one such

15 action, each action shall be deemed a multiple secu16 rities class action, and the actions shall be deemed

17 a group of multiple securities class actions.

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

19 promptly call to the attention of each court in which

20 multiple securities class actions are filed the other

21 actions in the group of multiple securities class ac22 tions. All the actions in the group of multiple securi23 ties class actions shall be transferred or consolidated

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

25 judge as promptly as possible. The Judicial Panel on
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1 Multi-District Litigation shall give expedited treat2 ment to proceedings involving multiple securities

3 class actions to facilitate their transfer to one dis4 trict as promptly as possible.

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

6 multiple securities class actions are filed, plaintiffs’

7 counsel shall promptly organize themselves and se8 lect lead counsel to direct the prosecution of the ac9 tions, subject to the approval of the court. If plain10 tiffs’ counsel do not organize themselves, the court

11 shall promptly designate lead counsel, in no event

12 later than 45 days after the filing of the first mul13 tiple securities class action. In selecting or designat14 ing lead counsel, plaintiffs’ counsel and the court

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

16 multiple securities class actions.

17 ‘‘(4) LATER-FILED CASES.—Any multiple secu18 rities class action filed after the case organization

19 period shall be subject to the decisions taken during

20 the case organization period.

21 ‘‘(c) EARLY EVALUATION PROCEDURE.—

22 ‘‘(1) IN GENERAL.—In an implied private ac23 tion that is filed as a class action pursuant to the

24 Federal Rules of Civil Procedure, if the class rep25 resentatives and each of the other parties to the ac-
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1 tion agree, and any party so requests, within 60

2 days after the filing of the class action, the court

3 shall order an early evaluation procedure. The period

4 of the early evaluation procedure shall not extend

5 beyond 150 days after the filing of the first com6 plaint subject to the procedure.

7 ‘‘(2) REQUIREMENTS.—During the early eval8 uation procedure—

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

10 answer or otherwise respond to any complaint;

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

12 amended complaint at any time and may dis13 miss the action or actions at any time without

14 sanction;

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

16 no formal discovery shall occur, except that par17 ties may propound discovery requests to third

18 parties to preserve evidence, and upon receipt

19 of such a discovery request, a third party shall

20 not willfully destroy any documents, data com21 pilations (including any electronically stored

22 data) or tangible things that a reasonable per23 son would consider responsive to the discovery

24 request;
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1 ‘‘(D) the parties shall evaluate the merits

2 of the action under the supervision of a person

3 (the ‘mediator’) (i) agreed upon by them, or (ii)

4 designated by the court in the absence of agree5 ment, which person may be another district

6 court judge, any magistrate-judge or a special

7 master; and each side shall have one peremp8 tory challenge of a mediator designated by the

9 court by filing a written notice of challenge

10 within five days of receipt of an order designat11 ing the mediator;

12 ‘‘(E) the parties shall promptly provide ac13 cess to or exchange all nonprivileged documents

14 relating to the allegations in the complaint or

15 complaints; and any documents withheld on the

16 grounds of privilege shall be sufficiently identi17 fied so as to permit the mediator to determine

18 if they are, in fact, privileged; and

19 ‘‘(F) the parties shall exchange damage

20 studies and such other expert reports as may be

21 helpful to an evaluation of the action on the

22 merits, which materials shall be treated as pre23 pared and used in the context of settlement ne24 gotiations.
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1 ‘‘(3) FAILURE TO PRODUCE DOCUMENTS.—Any

2 party that fails to produce documents relevant to the

3 allegations of the complaint or complaints during the

4 early evaluation procedure may be sanctioned by the

5 court pursuant to the Federal Rules of Civil Proce6 dure. Notwithstanding paragraph (2) of this sub7 section, subject to review by the court, the mediator

8 shall have the authority to order the production of

9 evidence by any party and, to the extent necessary

10 properly to evaluate the case, may permit discovery

11 of nonparties and depositions of parties for good

12 cause shown.

13 ‘‘(4) EVALUATION BY THE MEDIATOR.—

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

15 early evaluation procedure, the action has not

16 been voluntarily dismissed or settled, the medi17 ator shall evaluate the action as being:

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

19 only be further maintained in bad faith; or

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

21 can only be further defended in bad faith;

22 or

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

24 nor clause (ii) of this subparagraph.
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1 ‘‘(B) WRITTEN EVALUATION.—A written

2 evaluation with respect to the claims against

3 and defenses of each defendant shall be issued

4 within 10 days after the end of the early eval5 uation procedure and provided to the parties.

6 The evaluation shall not be admissible in the

7 action.

8 ‘‘(5) SANCTIONS.—If the action is evaluated

9 under paragraph (4)(A)(i) of this subsection and

10 final judgment is entered against the plaintiff, plain11 tiff or plaintiff’s counsel shall be liable to defendant

12 for sanctions as awarded by the court, if the court

13 agrees, based on the entire record, that the action

14 was frivolous when filed and maintained in bad

15 faith. If the action is evaluated under paragraph

16 (4)(A)(ii) of this subsection and final judgment is

17 entered against the defendant, defendant or defend18 ant’s counsel shall be liable to plaintiff for sanctions

19 as awarded by the court, if the court agrees, based

20 on the entire record, that the action was meritorious

21 and defended in bad faith.

22 ‘‘(6) EXTENSION OF EARLY EVALUATION PE23 RIOD.—The period of the early evaluation procedure

24 may be extended by stipulation of all parties. At the
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1 conclusion of the period, the action shall proceed in

2 accordance with Federal Rules of Civil Procedure.

3 ‘‘(7) FEES.—Each side shall bear equally the

4 reasonable fees and expenses of the mediator if he

5 is not a judicial officer.’’.

6 SEC. 103. RESTORATION OF AIDING AND ABETTING LIABIL7 ITY.

8 (a) SECURITIES ACT OF 1933.—Section 20 of the Se9 curities Act of 1933 (15 U.S.C. 77t) is amended by adding

10 at the end the following new subsection:

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

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

13 any person who knowingly or recklessly provides substan14 tial assistance to another person in the violation of a provi15 sion of this title, or of any rule or regulation hereunder,

16 shall be deemed to violate such provision to the same ex17 tent as the person to whom such assistance is provided.

18 No person shall be liable under this subsection based on

19 an omission or failure to act unless such omission or fail20 ure constituted a breach of a duty owed by such person.’’.

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

22 20 of the Securities Exchange Act of 1934 (15 U.S.C. 78t)

23 is amended—

24 (1) by striking the heading of such section and

25 inserting the following:
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1 ‘‘LIABILITY OF CONTROLLING PERSONS AND PERSONS

2 WHO AID OR ABET VIOLATIONS’’; and

3 (2) by adding at the end the following new sub4 section:

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

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

7 (d)(3) of section 21, or an action by a self-regulatory orga8 nization, or an express or implied private right of action

9 under this title, any person who knowingly or recklessly

10 provides substantial assistance to another person in the

11 violation of a provision of this title, or of any rule or regu12 lation thereunder, shall be deemed to violate such provi13 sion and shall be liable to the same extent as the person

14 to whom such assistance is provided. No person shall be

15 liable under this subsection based on an omission or fail16 ure to act unless such omission or failure constituted a

17 breach of a duty owed by such person.’’.

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

19 42 of the Investment Company Act of 1940 (15 U.S.C.

20 80a–41) is amended by adding at the end the following

21 new subsection:

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

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

24 any person who knowingly or recklessly provides substan25 tial assistance to another person in the violation of a provi-
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1 sion of this title, or of any rule, regulation, or order here2 under, shall be deemed to violate such provision to the

3 same extent as the person to whom such assistance is pro4 vided. No person shall be liable under this subsection

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

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

7 person.’’.

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

9 209(d) of the Investment Advisers Act of 1940 (15 U.S.C.

10 80b–9) is amended—

11 (1) in subsection (d)—

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

13 aided, abetted, counseled, commanded, induced,

14 or procured, is aiding, abetting, counseling,

15 commanding, inducing, or procuring, or is

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

17 or procure such a violation,’’; and

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

19 counseling, commanding, inducing, or procuring

20 any such act or practice’’; and

21 (2) by adding at the end the following new sub22 section:

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

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

25 any person who knowingly or recklessly provides substan-
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1 tial assistance to another person in the violation of a provi2 sion of this title, or of any rule, regulation, or order here3 under, shall be deemed to violate such provision to the

4 same extent as the person to whom such assistance is pro5 vided. No person shall be liable under this subsection

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

7 or failure constituted a breach of duty owed by such per8 son.’’.

9 SEC. 104. SAFE HARBOR FOR FORWARD-LOOKING STATE10 MENTS.

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

12 the enactment of this Act, the Commission shall adopt

13 rules with respect to forward-looking statements concern14 ing the future economic performance of an issuer of secu15 rities registered under section 12 of the Act. Such rules

16 shall specify—

17 (1) the criteria the Commission determines to

18 be necessary and appropriate in the public interest

19 and for the protection of investors by which forward20 looking statements concerning the future economic

21 performance of an issuer of securities registered

22 under section 12 of the Act will be deemed not to

23 be in violation of section 10(b) of the Act; and

24 (2) the limits to liability for forward-looking

25 statements, and how such rules shall incorporate
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1 and reflect the scienter requirements applicable to

2 implied private actions under section 10(b).

3 (b) REPORT.—Within 30 days following adoption of

4 the rules described in subsection (a), the Commission shall

5 submit a report to the House Committee on Commerce

6 and the Senate Committee on Banking describing the

7 rules the Commission has prescribed pursuant to sub8 section (a). Such report shall also—

9 (1) describe the procedures which shall be fol10 lowed for making a summary determination of the

11 applicability of any Commission rule for forward12 looking statements early in a judicial proceeding to

13 limit litigation and discovery and for promoting

14 timely dismissal of claims against such issuers of se15 curities based on such forward-looking statements if

16 such statements are in accordance with any rules

17 and regulations adopted by the Commission;

18 (2) what steps the Commission is undertaking

19 to provide clear guidance to issuers of securities and

20 the judiciary regarding the rules prescribed pursuant

21 to subsection (a); and

22 (3) any legislative recommendations relating to

23 forward-looking statements which the Commission

24 determines to be appropriate.
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1 (c) SECURITIES EXCHANGE ACT AMENDMENT.—The

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

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

4 section:

5 ‘‘SEC. 40. APPLICATION OF SAFE HARBOR FOR FORWARD6 LOOKING STATEMENTS.

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

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

9 statement concerning the future economic performance of

10 an issuer registered under section 12 was materially false

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

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

13 the claims or defenses related to such statement of that

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

15 on any such motion.

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

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

18 by a defendant asserting that the forward-looking state19 ment was within the coverage of any rule which the Com20 mission may have adopted concerning such predictive

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

22 after the plaintiff commences discovery in the action.

23 ‘‘(c) DILATORY CONDUCT; DUPLICATIVE DISCOV24 ERY.—Notwithstanding subsection (a) or (b), the time

25 permitted for a plaintiff to conduct discovery under sub-
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1 section (b) may be extended, or a stay of the proceedings

2 may be denied, if the court finds that—

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

4 in subsection (b) engaged in dilatory or obstructive

5 conduct in taking or opposing any discovery; or

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

7 motion under subsection (b) would be substantially

8 unfair to the plaintiff or other parties to the ac9 tion.’’.

10 SEC. 105. LIMITATIONS PERIOD FOR IMPLIED PRIVATE

11 RIGHTS OF ACTION.

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

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

14 new section:

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

16 RIGHTS OF ACTION.

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

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

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

20 ‘‘(1) 5 years after the date on which the alleged

21 violation occurred; or

22 ‘‘(2) 3 years after the date on which the alleged

23 violation was discovered.

24 ‘‘(b) EFFECTIVE DATE.—The limitations period pro25 vided by this section shall apply to all proceedings pending
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1 on or commenced after the date of enactment of this sec2 tion.’’.

3 SEC. 106. FINANCIAL FRAUD DETECTION AND DISCLOSURE.

4 (a) AMENDMENTS TO THE SECURITIES EXCHANGE

5 ACT OF 1934.—The Securities Exchange Act of 1934 is

6 amended by inserting after section 13 (15 U.S.C. 78m)

7 the following new section:

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

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

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

11 by an independent public accountant shall include, in ac12 cordance with generally accepted auditing standards, as

13 may be modified or supplemented from time to time by

14 the Commission, the following:

15 ‘‘(1) procedures designed to provide reasonable

16 assurance of detecting illegal acts that would have a

17 direct and material effect on the determination of fi18 nancial statement amounts;

19 ‘‘(2) procedures designed to identify related

20 party transactions which are material to the finan21 cial statements or otherwise require disclosure there22 in; and

23 ‘‘(3) an evaluation of whether there is substan24 tial doubt about the issuer’s ability to continue as a

25 going concern over the ensuing fiscal year.
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1 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV2 ERIES.—

3 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE4 MENT.—If, in the course of conducting any audit

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

6 the independent public accountant detects or other7 wise becomes aware of information indicating that

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

9 material effect on the issuer’s financial statements)

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

11 accordance with generally accepted auditing stand12 ards, as may be modified or supplemented from time

13 to time by the Commission—

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

15 an illegal act has occurred, and (ii) if so, deter16 mine and consider the possible effect of the ille17 gal act on the financial statements of the is18 suer, including any contingent monetary effects,

19 such as fines, penalties, and damages; and

20 ‘‘(B) as soon as practicable inform the ap21 propriate level of the issuer’s management and

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

23 issuer’s board of directors in the absence of

24 such a committee, is adequately informed with

25 respect to illegal acts that have been detected or
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1 otherwise come to the attention of such ac2 countant in the course of the audit, unless the

3 illegal act is clearly inconsequential.

4 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME5 DIAL ACTION.—If, having first assured itself that

6 the audit committee of the board of directors of the

7 issuer or the board (in the absence of an audit com8 mittee) is adequately informed with respect to illegal

9 acts that have been detected or otherwise come to

10 the accountant’s attention in the course of such ac11 countant’s audit, the independent public accountant

12 concludes that—

13 ‘‘(A) any such illegal act has a material ef14 fect on the financial statements of the issuer,

15 ‘‘(B) senior management has not taken,

16 and the board of directors has not caused sen17 ior management to take, timely and appropriate

18 remedial actions with respect to such illegal act,

19 and

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

21 reasonably expected to warrant departure from

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

23 warrant resignation from the audit engagement,
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1 the independent public accountant shall, as soon as

2 practicable, directly report its conclusions to the

3 board of directors.

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

5 FAILURE TO NOTIFY.—An issuer whose board of di6 rectors has received a report pursuant to paragraph

7 (2) shall inform the Commission by notice within

8 one business day of receipt of such report and shall

9 furnish the independent public accountant making

10 such report with a copy of the notice furnished the

11 Commission. If the independent public accountant

12 making such report shall fail to receive a copy of

13 such notice within the required one-business-day pe14 riod, the independent public accountant shall—

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

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

17 its report (or the documentation of any oral re18 port given) within the next business day follow19 ing such failure to receive notice.

20 ‘‘(4) REPORT AFTER RESIGNATION.—An inde21 pendent public accountant electing resignation shall,

22 within the one business day following a failure by an

23 issuer to notify the Commission under paragraph

24 (3), furnish to the Commission a copy of the ac-
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1 countant’s report (or the documentation of any oral

2 report given).

3 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde4 pendent public accountant shall be liable in a private ac5 tion for any finding, conclusion, or statement expressed

6 in a report made pursuant to paragraph (3) or (4) of sub7 section (b), including any rules promulgated pursuant

8 thereto.

9 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO10 CEEDINGS.—If the Commission finds, after notice and op11 portunity for hearing in a proceeding instituted pursuant

12 to section 21C of this title, that an independent public

13 accountant has willfully violated paragraph (3) or (4) of

14 subsection (b) of this section, then the Commission may,

15 in addition to entering an order under section 21C, impose

16 a civil penalty against the independent public accountant

17 and any other person that the Commission finds was a

18 cause of such violation. The determination whether to im19 pose a civil penalty, and the amount of any such penalty,

20 shall be governed by the standards set forth in section 21B

21 of this title.

22 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex23 cept for subsection (d), nothing in this section limits or

24 otherwise affects the authority of the Commission under

25 this title.
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1 ‘‘(f) DEFINITIONS.—As used in this section, the term

2 ‘illegal act’ means any action or omission to act that vio3 lates any law, or any rule or regulation having the force

4 of law.’’.

5 (b) EFFECTIVE DATES.—As to any registrant that

6 is required to file selected quarterly financial data pursu7 ant to item 302(a) of Regulation S–K (17 CFR

8 229.302(a)) of the Securities and Exchange Commission,

9 the amendments made by subsection (a) of this section

10 shall apply to any annual report for any period beginning

11 on or after January 1, 1996. As to any other registrant,

12 such amendment shall apply for any period beginning on

13 or after January 1, 1997.

14 TITLE II—COMMISSION PRIVATE

15 ENFORCEMENT STUDY

16 SEC. 201. FILING OF MATERIALS WITH THE COMMISSION.

17 (a) COMMISSION NOTIFICATION.—Section 21 of the

18 Securities Exchange Act of 1934 (15 U.S.C. ) is further

19 amended by adding at the end the following new sub20 section:

21 ‘‘(p) COMMISSION NOTIFICATION.—

22 ‘‘(1) An attorney filing a complaint or an

23 amended complaint in an implied private action aris24 ing under this title that is filed as a class action

25 pursuant to the Federal Rules of Civil Procedure
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1 shall promptly provide the Commission with a copy

2 of such complaint. Any party filing a dispositive mo3 tion or an opposition to a dispositive motion in such

4 an action shall promptly provide the Commission

5 with a copy of the motion or opposition together

6 with any supporting declaratory affidavits, exhibits

7 or similar materials. Counsel for the plaintiff shall

8 provide the Commission with copies of all orders on

9 dispositive motions.

10 ‘‘(2) No confidentiality order issued pursuant to

11 section 21(k) of this title shall limit the information

12 required to be filed with the Commission pursuant

13 to paragraph (1).

14 ‘‘(3) The Commission may file an enforcement

15 action or take such other action as it deems appro16 priate based upon the submissions that it receives

17 pursuant to this paragraph.’’.

18 SEC. 202. COMMISSION PRIVATE ENFORCEMENT STUDY.

19 (a) COMMISSION PRIVATE ENFORCEMENT STUDY.—

20 Not later than five years after the date of enactment of

21 this section, the Commission shall submit to Congress a

22 report:

23 (1) listing each implied private action arising

24 under this title that has been filed as a class action

25 pursuant to the Federal Rules of Civil Procedure for
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1 which the Commission has received notification pur2 suant to section 201 of this Act;

3 (2) identifying which actions were consolidated,

4 dismissed, tried, settled, or remain pending;

5 (3) identifying such causes of action and mo6 tions that were found by the court to be clearly un7 warranted, if any;

8 (4) in actions that were tried or settled, describ9 ing the participation of each defendant in the judg10 ment or settlement;

11 (5) describing the extent to which accountants,

12 attorneys, and other professionals participated in the

13 conduct underlying the claims asserted;

14 (6) identifying which actions were based solely

15 on forward-looking statements;

16 (7) identifying which actions alleged significant

17 transactions in the issuer’s securities by corporate

18 officers, directors, or controlling shareholders during

19 the period of alleged deception; and

20 (8) proposing such legislative, administrative

21 and budgetary recommendations as may be nec22 essary to effectuate the purposes of this title.

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