I

104TH CONGRESS

1ST SESSION H. R. 675

To amend the Securities Exchange Act of 1934 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 HOUSE OF REPRESENTATIVES

JANUARY 25, 1995

Mr. MINETA (for himself and Ms. ESHOO) 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

A BILL

To amend the Securities Exchange Act of 1934 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 ‘‘Securities Litigation Equity Act of 1995’’.

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

7 this Act is as follows:
2

•HR 675 IH

Sec. 1. Short title; table of contents.

Sec. 2. Elimination of certain abusive practices.

Sec. 3. Time limitation on private rights of action.

Sec. 4. Plaintiff steering committees.

Sec. 5. Requirements for securities fraud actions.

Sec. 6. Proportionate liability and joint and several liability.

Sec. 7. Safe harbor for forward-looking statements.

Sec. 8. Fraud detection and disclosure.

Sec. 9. Amendment to Racketeer Influenced and Corrupt Organizations Act.

1 SEC. 2. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

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

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

4 is amended by adding at the end the following new para5 graph:

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

7 or dealer, or person associated with a broker or deal8 er, may solicit or accept remuneration for assisting

9 an attorney in obtaining the representation of any

10 customer in any implied private action arising under

11 this title.’’.

12 (b) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

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

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

15 is amended by adding at the end the following new para16 graph:

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

18 FROM COMMISSION DISGORGEMENT FUNDS.—Except

19 as otherwise ordered by the court, funds disgorged

20 as the result of an action brought by the Commis21 sion in Federal court, or of any Commission admin-
3

•HR 675 IH

1 istrative action, shall not be distributed as payment

2 for attorneys’ fees or expenses incurred by private

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

4 (c) ADDITIONAL PROVISIONS APPLICABLE TO CLASS

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

6 1934 (15 U.S.C. 78u) is amended by adding at the end

7 the following new subsections:

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

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

10 title that is certified as a class action pursuant to the Fed11 eral Rules of Civil Procedure, the share of any final judg12 ment or of any settlement that is awarded to class plain13 tiffs serving as the representative parties shall be cal14 culated in the same manner as the shares of the final judg15 ment or settlement awarded to all other members of the

16 class. Nothing in this subsection shall be construed to

17 limit the award to any representative parties of reasonable

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

19 relating to the representation of the class.

20 ‘‘(j) CONFLICTS OF INTEREST.—In an implied pri21 vate action arising under this title that is certified as a

22 class action pursuant to the Federal Rules of Civil Proce23 dure, if a party is represented by an attorney who directly

24 owns or otherwise has a beneficial interest in the securities

25 that are the subject of the litigation, the court shall make
4

•HR 675 IH

1 a determination of whether such interest constitutes a con2 flict of interest sufficient to disqualify the attorney from

3 representing the party.

4 ‘‘(k) RESTRICTIONS ON SETTLEMENTS UNDER

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

6 title that is certified as a class action pursuant to the Fed7 eral Rules of Civil Procedure, the terms and provisions

8 of any settlement agreement between any of the parties

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

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

11 under seal for those portions of a settlement agreement

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

13 Good cause shall only exist if publication of a term or pro14 vision of a settlement agreement would cause direct and

15 substantial harm to any person.

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

17 FEES FROM SETTLEMENT FUNDS.—In an implied private

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

19 action pursuant to the Federal Rules of Civil Procedure,

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

21 class shall be determined as a percentage of the amount

22 of damages and prejudgment interest actually paid to the

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

24 the amount awarded to counsel for the class exceed a rea-
5

•HR 675 IH

1 sonable percentage of the amount recovered by the class

2 plus reasonable expenses.

3 ‘‘(m) DISCLOSURE OF SETTLEMENT TERMS TO

4 CLASS MEMBERS.—In an implied private action arising

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

6 to the Federal Rules of Civil Procedure, a proposed settle7 ment agreement that is published or otherwise dissemi8 nated to the class shall include the following statements,

9 which shall not be admissible for purposes of any Federal

10 or State judicial or administrative proceeding:

11 ‘‘(1) STATEMENT OF POTENTIAL OUTCOME OF

12 CASE.—

13 ‘‘(A) AGREEMENT ON AMOUNT OF DAM14 AGES AND LIKELIHOOD OF PREVAILING.—If the

15 settling parties agree on the amount of dam16 ages per share that would be recoverable if the

17 plaintiff prevailed on each claim alleged under

18 this title and the likelihood that the plaintiff

19 would prevail—

20 ‘‘(i) a statement concerning the

21 amount of such potential damages; and

22 ‘‘(ii) a statement concerning the prob23 ability that the plaintiff would prevail on

24 the claims alleged under this title and a
6

•HR 675 IH

1 brief explanation of the reasons for that

2 conclusion.

3 ‘‘(B) DISAGREEMENT ON AMOUNT OF

4 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

5 the parties do not agree on the amount of dam6 ages per share that would be recoverable if the

7 plaintiff prevailed on each claim alleged under

8 this title or on the likelihood that the plaintiff

9 would prevail on those claims, or both, a state10 ment from each settling party concerning the

11 issue or issues on which the parties disagree.

12 ‘‘(C) INADMISSIBILITY FOR CERTAIN PUR13 POSES.—Statements made in accordance with

14 subparagraphs (A) and (B) shall not be admis15 sible for purposes of any Federal or State judi16 cial or administrative proceeding.

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

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

19 their counsel intend to apply to the court for an

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

23 an application, the amount of fees and costs that

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

25 for the application.
7

•HR 675 IH

1 ‘‘(3) IDENTIFICATION OF REPRESENTATIVES.—

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

3 more representatives of counsel for the plaintiff class

4 who will be reasonably available to answer questions

5 from class members concerning any matter con6 tained in any notice of settlement published or oth7 erwise disseminated to class members.

8 ‘‘(4) OTHER INFORMATION.—Such other infor9 mation as may be required by the court, or by any

10 guardian ad litem or plaintiff steering committee ap11 pointed by the court pursuant to section 38.

12 ‘‘(n) SPECIAL VERDICTS.—In an implied private ac13 tion arising under this title in which the plaintiff may re14 cover money damages only on proof that a defendant acted

15 with a particular state of mind, the court shall, when re16 quested by a defendant, submit to the jury a written inter17 rogatory on the issue of each such defendant’s state of

18 mind at the time the alleged violation occurred.’’.

19 SEC. 3. TIME LIMITATION ON PRIVATE RIGHTS OF ACTION.

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

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

22 new section:
8

•HR 675 IH

1 ‘‘SEC. 36. 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. 4. 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. 37. 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
9

•HR 675 IH

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—
10

•HR 675 IH

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
11

•HR 675 IH

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
12

•HR 675 IH

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. 5. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

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

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

24 new section:
13

•HR 675 IH

1 ‘‘SEC. 38. REQUIREMENTS FOR SECURITIES FRAUD AC2 TIONS.

3 ‘‘(a) PLEADING WITH RESPECT TO SCIENTER.—

4 ‘‘(1) IN GENERAL.—In an implied private ac5 tion arising under this title in which the plaintiff

6 may recover money damages from a defendant only

7 on proof that the defendant acted with some level of

8 intent, the plaintiff’s complaint shall allege specific

9 facts demonstrating the state of mind of each de10 fendant at the time the alleged violation occurred.

11 ‘‘(2) MISLEADING STATEMENTS AND OMIS12 SIONS.—In an implied action arising under this title

13 in which the plaintiff alleges that the defendant—

14 ‘‘(A) made an untrue statement of a mate15 rial fact; or

16 ‘‘(B) omitted to state a material fact nec17 essary in order to make the statements made,

18 in the light of the circumstances in which they

19 were made, not misleading;

20 the plaintiff shall specify each statement alleged to

21 have been misleading, the reason or reasons why the

22 statement is misleading, and, if an allegation regard23 ing the statement or omission is made on informa24 tion and belief, the plaintiff shall set forth all infor25 mation on which that belief is formed.

26 ‘‘(3) MOTIONS TO DISMISS; DISCOVERY.—
14

•HR 675 IH

1 ‘‘(A) Upon motion by a defendant to dis2 miss for failure to allege the facts required by

3 paragraph (1) or (2), the court shall stay dis4 covery until such motion is decided. In ruling

5 upon any such motion, the court may take judi6 cial notice of all information publicly available

7 in the market affecting the total mix of infor8 mation known to investors concerning the issuer

9 or the issuer’s securities.

10 ‘‘(B) If a complaint satisfies the require11 ments of paragraphs (1) and (2), the plaintiffs

12 shall be entitled to discovery limited to the facts

13 alleged concerning the misleading statement.

14 Upon completion of such discovery, that parties

15 may move for summary judgment.

16 ‘‘(C) If a complaint fails to satisfy the re17 quirements of paragraph (1) or (2), the court

18 in its discretion may permit a single amended

19 complaint to be filed, subject to the right of any

20 defendant thereafter to move to dismiss such

21 amended complaint without leave to amend.

22 ‘‘(b) PROOF OF SCIENTER.—

23 ‘‘(1) IN GENERAL.—In an action to which sub24 section (a)(2) applies, a defendant may not be held
15

•HR 675 IH

1 liable for money damages unless the plaintiff

2 proves—

3 ‘‘(A) that the defendant directly or indi4 rectly made an untrue statement of a material

5 fact, or omitted to state a material fact nec6 essary in order to make the statements made,

7 in light of the circumstances in which they were

8 made, not misleading; and

9 ‘‘(B) that the defendant—

10 ‘‘(i) knew the statement was mislead11 ing at the time it was made, or inten12 tionally omitted to state a fact knowing

13 that such fact was necessary in order to

14 make the statements made, in light of the

15 circumstances in which they were made,

16 not misleading; or

17 ‘‘(ii) in making such statement or

18 omitting such fact, acted recklessly.

19 ‘‘(2) PROOF FOR INDIRECT STATEMENTS.—In

20 any such action, a defendant shall not be held to

21 have indirectly made a statement made by any per22 son that is not the issuer or an officer, director, or

23 employee of the issuer in a publicly disseminated

24 document, unless the plaintiff pleads and proves that

25 the facts or omissions alleged to have been mislead-
16

•HR 675 IH

1 ing were attributed to such issuer, officer, director,

2 or employee.

3 ‘‘(c) BURDEN OF PROOF OF CAUSATION.—In an im4 plied private action arising under this title based on a ma5 terial misstatement or omission concerning a security, and

6 in which the plaintiff claims to have bought or sold the

7 security based on a reasonable belief that the market value

8 of the security reflected all publicly available information,

9 the plaintiff shall have the burden of proving that the

10 misstatement or omission caused any loss incurred by the

11 plaintiff.

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

13 under this title based on a material misstatement or omis14 sion concerning a security, and in which the plaintiff

15 claims to have bought or sold the security based on a rea16 sonable belief that the market value of the security re17 flected all publicly available information, the plaintiff’s

18 damages shall not exceed the lesser of—

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

20 the plaintiff for the security and the market value of

21 the security immediately after dissemination to the

22 market of information which corrects the

23 misstatement or omission; and

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

25 the plaintiff for the security and the price at which
17

•HR 675 IH

1 the plaintiff sold the security after dissemination of

2 information correcting the misstatement or omis3 sion.’’.

4 SEC. 6. PROPORTIONATE LIABILITY AND JOINT AND SEV5 ERAL LIABILITY.

6 (a) SECURITIES ACT AMENDMENT.—The Securities

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

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

9 ‘‘SEC. 40. PROPORTIONATE LIABILITY AND JOINT AND SEV10 ERAL LIABILITY IN IMPLIED ACTIONS.

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

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

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

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

15 affect the standards for liability associated with an implied

16 private action arising under this title.

17 ‘‘(b) APPLICATION OF JOINT AND SEVERAL LIABIL18 ITY.—

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

20 judgment is entered in an implied private action

21 arising under this title shall be liable jointly and sev22 erally for any recoverable damages on such judg23 ment if the person is found to have—

24 ‘‘(A) been a primary wrongdoer;
18

•HR 675 IH

1 ‘‘(B) committed knowing securities fraud;

2 or

3 ‘‘(C) controlled any primary wrongdoer or

4 person who committed knowing securities fraud.

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

6 subsection—

7 ‘‘(A) the term ‘primary wrongdoer’

8 means—

9 ‘‘(i) any—

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

11 seller, or underwriter of securities;

12 ‘‘(II) marketmaker or specialist

13 in securities; or

14 ‘‘(III) clearing agency, securities

15 information processor, or government

16 securities dealer;

17 if such person breached a direct statutory

18 or regulatory obligation or if such person

19 otherwise had a principal role in the con20 duct that is the basis for the implied right

21 of action; or

22 ‘‘(ii) any person who intentionally ren23 dered substantial assistance to the fraudu24 lent conduct of any person described in

25 clause (i), with actual knowledge of such
19

•HR 675 IH

1 person’s fraudulent conduct or fraudulent

2 purpose, and with knowledge that such

3 conduct was wrongful; and

4 ‘‘(B) a defendant engages in ‘knowing se5 curities fraud’ if such defendant—

6 ‘‘(i) makes a material representation

7 with actual knowledge that the representa8 tion is false, or omits to make a statement

9 with actual knowledge that, as a result of

10 the omission, one of the defendant’s mate11 rial representations is false and knows that

12 other persons are likely to rely on that

13 misrepresentation or omission, except that

14 reckless conduct by the defendant shall not

15 be construed to constitute ‘knowing securi16 ties fraud’; or

17 ‘‘(ii) intentionally rendered substantial

18 assistance to the fraudulent conduct of any

19 person described in clause (i), with actual

20 knowledge of such person’s fraudulent con21 duct or fraudulent purpose, and with

22 knowledge that such conduct was wrongful.

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

24 implied private action in which more than 1 person con25 tributed to a violation of this title, the court shall instruct
20

•HR 675 IH

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

2 no jury, shall make findings, concerning the degree of re3 sponsibility of each person alleged to have caused or con4 tributed to the violation of this title, including persons who

5 have entered into settlements with the plaintiff. The inter6 rogatories or findings shall specify the amount of damages

7 the plaintiff is entitled to recover and the degree of respon8 sibility, measured as a percentage of the total fault of all

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

10 have caused or contributed to the damages incurred by

11 the plaintiff or plaintiffs. In determining the degree of re12 sponsibility, the trier of fact shall consider—

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

14 and

15 ‘‘(2) the nature and extent of the causal rela16 tionship between that conduct and the damage

17 claimed by the plaintiff.

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

19 Except as provided in subsection (b), the amount of liabil20 ity of a person who is, or may through right of contribu21 tion become, liable for damages based on an implied pri22 vate action arising under this title shall be determined as

23 follows:

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

25 provided in paragraph (2), each liable party shall
21

•HR 675 IH

1 only be liable for the portion of the judgment that

2 corresponds to that party’s degree of responsibility,

3 as determined under subsection (c).

4 ‘‘(2) UNCOLLECTIBLE SHARES.—If, upon mo5 tion made not later than 6 months after a final

6 judgment is entered, the court determines that all or

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

8 uncollectible—

9 ‘‘(A) the remaining defendants shall be

10 jointly and severally liable for the uncollectible

11 share if the plaintiff establishes that—

12 ‘‘(i) the plaintiff is an individual

13 whose recoverable damages under a final

14 judgment are equal to more than 10 per15 cent of the plaintiff’s net financial worth;

16 and

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

18 is less than $200,000; and

19 ‘‘(B) the amount paid by each of the re20 maining defendants to all other plaintiffs shall

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

22 ‘‘(i) that remaining defendant’s per23 centage of fault for the uncollectible share;

24 or

25 ‘‘(ii) 5 times—
22

•HR 675 IH

1 ‘‘(I) the amount which the de2 fendant gained from the conduct that

3 gave rise to its liability; or

4 ‘‘(II) if a defendant did not ob5 tain a direct financial gain from the

6 conduct that gave rise to the liability

7 and the conduct consisted of the pro8 vision of deficient services to an entity

9 involved in the violation, the defend10 ant’s gross revenues received for the

11 provision of all services to the other

12 entity involved in the violation during

13 the calendar years in which deficient

14 services were provided.

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

16 total payments required pursuant to paragraph (2)

17 exceed the amount of the uncollectible share.

18 ‘‘(4) DEFENDANTS SUBJECT TO CONTRIBU19 TION.—A defendant whose liability is reallocated

20 pursuant to paragraph (2) shall be subject to con21 tribution and to any continuing liability to the plain22 tiff on the judgment.

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

24 that a defendant is required to make an additional
23

•HR 675 IH

1 payment pursuant to paragraph (2), that defendant

2 may recover contribution—

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

4 make the payment;

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

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

7 ‘‘(C) from any defendant held proportion8 ately liable pursuant to this subsection who is

9 liable to make the same payment and has paid

10 less than his or her proportionate share of that

11 payment; or

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

13 the conduct giving rise to the payment who

14 would have been liable to make the same pay15 ment.

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

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

18 and the procedure for reallocation of uncollectible shares

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

20 of the jury.

21 ‘‘(f) SETTLEMENT DISCHARGE.—

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

23 implied private action brought under this title at any

24 time before verdict or judgment shall be discharged

25 from all claims for contribution brought by other
24

•HR 675 IH

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

2 the court shall enter a bar order constituting the

3 final discharge of all obligations to the plaintiff of

4 the settling defendant arising out of the action. The

5 order shall bar all future claims for contribution or

6 indemnity arising out of the action—

7 ‘‘(A) by nonsettling persons against the

8 settling defendant; and

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

10 nonsettling defendants.

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

12 settlement with the plaintiff prior to verdict or judg13 ment, the verdict or judgment shall be reduced by

14 the greater of—

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

16 degree of responsibility of that person; or

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

18 that person.

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

20 for damages in an implied private action arising under this

21 title may recover contribution from any other person who,

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

23 the same damages. A claim for contribution shall be deter24 mined based on the degree of responsibility of the claimant
25

•HR 675 IH

1 and of each person against whom a claim for contribution

2 is made.

3 ‘‘(h) STATUTE OF LIMITATIONS FOR CONTRIBU4 TION.—Once judgment has been entered in an implied pri5 vate action arising under this title determining liability,

6 an action for contribution must be brought not later than

7 6 months after the entry of a final, nonappealable judg8 ment in the action, except that an action for contribution

9 brought by a defendant who was required to make an ad10 ditional payment pursuant to subsection (d)(2) may be

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

12 such payment was made.’’.

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

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

15 only apply to implied private actions commenced after the

16 date of enactment of this Act.

17 SEC. 7. SAFE HARBOR FOR FORWARD-LOOKING STATE18 MENTS.

19 (a) CONSIDERATION OF REGULATORY OR LEGISLA20 TIVE CHANGES.—In consultation with investors and issu21 ers of securities, the Securities and Exchange Commission

22 shall consider adopting or amending its rules and regula23 tions, or making legislative recommendations, concern24 ing—
26

•HR 675 IH

1 (1) criteria that the Commission finds appro2 priate for the protection of investors by which for3 ward-looking statements concerning the future eco4 nomic performance of an issuer of securities reg5 istered under section 12 of the Securities Exchange

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

7 section 10(b) of that Act; and

8 (2) procedures by which courts shall timely dis9 miss claims against such issuers of securities based

10 on such forward-looking statements if such state11 ments are in accordance with any criteria under

12 paragraph (1).

13 (b) COMMISSION CONSIDERATIONS.—In developing

14 rules or legislative recommendations in accordance with

15 subsection (a), the Commission shall consider—

16 (1) appropriate limits to liability for forward17 looking statements;

18 (2) procedures for making a summary deter19 mination of the applicability of any Commission rule

20 for forward-looking statements early in a judicial

21 proceeding to limit protracted litigation and expan22 sive discovery;

23 (3) incorporating and reflecting the scienter re24 quirements applicable to implied private actions

25 under section 10(b); and
27

•HR 675 IH

1 (4) providing clear guidance to issuers of secu2 rities and the judiciary.

3 (c) SECURITIES ACT AMENDMENT.—The Securities

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

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

6 ‘‘SEC. 39. APPLICATION OF SAFE HARBOR FOR FORWARD7 LOOKING STATEMENTS.

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

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

10 statement concerning the future economic performance of

11 an issuer registered under section 12 was materially false

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

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

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

15 such a stay until it has ruled 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-
28

•HR 675 IH

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. 8. FRAUD DETECTION AND DISCLOSURE.

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

12 1934 (15 U.S.C. 78a et seq.) is amended by inserting im13 mediately after section 10 the following new section:

14 ‘‘SEC. 10A. AUDIT REQUIREMENTS.

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

16 this title of an issuer’s financial statements by an inde17 pendent public accountant shall include, in accordance

18 with generally accepted auditing standards, as may be

19 modified or supplemented from time to time by the Com20 mission—

21 ‘‘(1) procedures designed to provide reasonable

22 assurance of detecting illegal acts that would have a

23 direct and material effect on the determination of fi24 nancial statement amounts;
29

•HR 675 IH

1 ‘‘(2) procedures designed to identify related

2 party transactions which are material to the finan3 cial statements or otherwise require disclosure there4 in; and

5 ‘‘(3) an evaluation of whether there is substan6 tial doubt about the issuer’s ability to continue as a

7 going concern during the ensuing fiscal year.

8 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV9 ERIES.—

10 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE11 MENT.—If, in the course of conducting an audit pur12 suant to this title to which subsection (a) applies,

13 the independent public accountant detects or other14 wise becomes aware of information indicating that

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

16 material effect on the issuer’s financial statements)

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

18 accordance with generally accepted auditing stand19 ards, as may be modified or supplemented from time

20 to time by the Commission—

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

22 an illegal act has occurred; and

23 ‘‘(ii) if so, determine and consider the pos24 sible effect of the illegal act on the financial

25 statements of the issuer, including any contin-
30

•HR 675 IH

1 gent monetary effects, such as fines, penalties,

2 and damages; and

3 ‘‘(B) as soon as practicable, inform the ap4 propriate level of the issuer’s management and

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

6 issuer’s board of directors in the absence of

7 such a committee, is adequately informed with

8 respect to illegal acts that have been detected or

9 have otherwise come to the attention of such

10 accountant in the course of the audit, unless

11 the illegal act is clearly inconsequential.

12 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME13 DIAL ACTION.—If, having first assured itself that

14 the audit committee of the board of directors of the

15 issuer or the board (in the absence of an audit com16 mittee) is adequately informed with respect to illegal

17 acts that have been detected or have otherwise come

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

19 accountant’s audit, the independent public account20 ant concludes that—

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

22 the financial statements of the issuer;

23 ‘‘(B) the senior management has not

24 taken, and the board of directors has not

25 caused senior management to take, timely and
31

•HR 675 IH

1 appropriate remedial actions with respect to the

2 illegal act; and

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

4 reasonably expected to warrant departure from

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

6 warrant resignation from the audit engagement;

7 the independent public accountant shall, as soon as

8 practicable, directly report its conclusions to the

9 board of directors.

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

11 FAILURE TO NOTIFY.—An issuer whose board of di12 rectors receives a report under paragraph (2) shall

13 inform the Commission by notice not later than 1

14 business day after the receipt of such report and

15 shall furnish the independent public accountant

16 making such report with a copy of the notice fur17 nished to the Commission. If the independent public

18 accountant fails to receive a copy of the notice be19 fore the expiration of the required 1-business-day pe20 riod, the independent public accountant shall—

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

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

23 its report (or the documentation of any oral re24 port given) not later than 1 business day follow25 ing such failure to receive notice.
32

•HR 675 IH

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

2 independent public accountant resigns from an en3 gagement under paragraph (3)(A), the accountant

4 shall, not later than 1 business day following the

5 failure by the issuer to notify the Commission under

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

7 the accountant’s report (or the documentation of

8 any oral report given).

9 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde10 pendent public accountant shall be liable in a private ac11 tion for any finding, conclusion, or statement expressed

12 in a report made pursuant to paragraph (3) or (4) of sub13 section (b), including any rules promulgated pursuant

14 thereto.

15 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO16 CEEDINGS.—If the Commission finds, after notice and op17 portunity for hearing in a proceeding instituted pursuant

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

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

20 the Commission may, in addition to entering an order

21 under section 21C, impose a civil penalty against the inde22 pendent public accountant and any other person that the

23 Commission finds was a cause of such violation. The deter24 mination to impose a civil penalty and the amount of the
33

•HR 675 IH

1 penalty shall be governed by the standards set forth in

2 section 21B.

3 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex4 cept as provided in subsection (d), nothing in this section

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

6 the Commission under this title.

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

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

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

10 (b) EFFECTIVE DATES.—With respect to any reg11 istrant that is required to file selected quarterly financial

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

13 Securities and Exchange Commission (17 CFR

14 229.302(a)), the amendments made by subsection (a) shall

15 apply to any annual report for any period beginning on

16 or after January 1, 1995. With respect to any other reg17 istrant, the amendment shall apply for any period begin18 ning on or after January 1, 1996.

19 SEC. 9. AMENDMENT TO RACKETEER INFLUENCED AND

20 CORRUPT ORGANIZATIONS ACT.

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

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

23 an action under this provision if the racketeering activity,
34

•HR 675 IH

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

2 of securities’’ before the period.

Æ

HR 675 IH——2

HR 675 IH——3