```

[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 675 Introduced in House (IH)]

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.

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

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Securities 
Litigation Equity Act of 1995''.
    (b) Table of Contents.--The table of contents for this Act is as 
follows:

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.

SEC. 2. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.

    (a) Receipt for Referral Fees.--Section 15(c) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended by adding at the end 
the following new paragraph:
            ``(7) Receipt of referral fees.--No broker or dealer, or 
        person associated with a broker or dealer, may solicit or 
        accept remuneration for assisting an attorney in obtaining the 
        representation of any customer in any implied private action 
        arising under this title.''.
    (b) Prohibition on Attorneys' Fees Paid From Commission 
Disgorgement Funds.--Section 21(d) of the Securities Exchange Act of 
1934 (15 U.S.C. 78u(d)) is amended by adding at the end the following 
new paragraph:
            ``(4) Prohibition on attorneys' fees paid from commission 
        disgorgement funds.--Except as otherwise ordered by the court, 
        funds disgorged as the result of an action brought by the 
        Commission in Federal court, or of any Commission 
        administrative action, shall not be distributed as payment for 
        attorneys' fees or expenses incurred by private parties seeking 
        distribution of the disgorged funds.''.
    (c) Additional Provisions Applicable to Class Actions.--Section 21 
of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by 
adding at the end the following new subsections:
    ``(i) Recovery By Named Plaintiffs in Class Actions.--In an implied 
private action arising under this title that is certified as a class 
action pursuant to the Federal Rules of Civil Procedure, the share of 
any final judgment or of any settlement that is awarded to class 
plaintiffs serving as the representative parties shall be calculated in 
the same manner as the shares of the final judgment or settlement 
awarded to all other members of the class. Nothing in this subsection 
shall be construed to limit the award to any representative parties of 
reasonable compensation, costs, and expenses (including lost wages) 
relating to the representation of the class.
    ``(j) Conflicts of Interest.--In an implied private action arising 
under this title that is certified as a class action pursuant to the 
Federal Rules of Civil Procedure, if a party is represented by an 
attorney who directly owns or otherwise has a beneficial interest in 
the securities that are the subject of the litigation, the court shall 
make a determination of whether such interest constitutes a conflict of 
interest sufficient to disqualify the attorney from representing the 
party.
    ``(k) Restrictions on Settlements Under Seal.--In an implied 
private action arising under this title that is certified as a class 
action pursuant to the Federal Rules of Civil Procedure, the terms and 
provisions of any settlement agreement between any of the parties shall 
not be filed under seal, except that on motion of any of the parties to 
the settlement, the court may order filing under seal for those 
portions of a settlement agreement as to which good cause is shown for 
such filing under seal. Good cause shall only exist if publication of a 
term or provision of a settlement agreement would cause direct and 
substantial harm to any person.
    ``(l) Restrictions on Payment of Attorneys' Fees From Settlement 
Funds.--In an implied private action arising under this title that is 
certified as a class action pursuant to the Federal Rules of Civil 
Procedure, attorneys' fees awarded by the court to counsel for the 
class shall be determined as a percentage of the amount of damages and 
prejudgment interest actually paid to the class as a result of the 
attorneys' efforts. In no event shall the amount awarded to counsel for 
the class exceed a reasonable percentage of the amount recovered by the 
class plus reasonable expenses.
    ``(m) Disclosure of Settlement Terms to Class Members.--In an 
implied private action arising under this title that is certified as a 
class action pursuant to the Federal Rules of Civil Procedure, a 
proposed settlement agreement that is published or otherwise 
disseminated to the class shall include the following statements, which 
shall not be admissible for purposes of any Federal or State judicial 
or administrative proceeding:
            ``(1) Statement of potential outcome of case.--
                    ``(A) Agreement on amount of damages and likelihood 
                of prevailing.--If the settling parties agree on the 
                amount of damages per share that would be recoverable 
                if the plaintiff prevailed on each claim alleged under 
                this title and the likelihood that the plaintiff would 
                prevail--
                            ``(i) a statement concerning the amount of 
                        such potential damages; and
                            ``(ii) a statement concerning the 
                        probability that the plaintiff would prevail on 
                        the claims alleged under this title and a brief 
                        explanation of the reasons for that conclusion.
                    ``(B) Disagreement on amount of damages or 
                likelihood of prevailing.--If the parties do not agree 
                on the amount of damages per share that would be 
                recoverable if the plaintiff prevailed on each claim 
                alleged under this title or on the likelihood that the 
                plaintiff would prevail on those claims, or both, a 
                statement from each settling party concerning the issue 
                or issues on which the parties disagree.
                    ``(C) Inadmissibility for certain purposes.--
                Statements made in accordance with subparagraphs (A) 
                and (B) shall not be admissible for purposes of any 
                Federal or State judicial or administrative proceeding.
            ``(2) Statement of attorneys' fees or costs sought.--If any 
        of the settling parties or their counsel intend to apply to the 
        court for an award of attorneys' fees or costs from any fund 
        established as part of the settlement, a statement indicating 
        which parties or counsel intend to make such an application, 
        the amount of fees and costs that will be sought, and a brief 
        explanation of the basis for the application.
            ``(3) Identification of representatives.--The name, 
        telephone number, and address of one or more representatives of 
        counsel for the plaintiff class who will be reasonably 
        available to answer questions from class members concerning any 
        matter contained in any notice of settlement published or 
        otherwise disseminated to class members.
            ``(4) Other information.--Such other information as may be 
        required by the court, or by any guardian ad litem or plaintiff 
        steering committee appointed by the court pursuant to section 
        38.
    ``(n) Special Verdicts.--In an implied private action arising under 
this title in which the plaintiff may recover money damages only on 
proof that a defendant acted with a particular state of mind, the court 
shall, when requested by a defendant, submit to the jury a written 
interrogatory on the issue of each such defendant's state of mind at 
the time the alleged violation occurred.''.

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

    The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
amended by adding at the end the following new section:

``SEC. 36. LIMITATIONS PERIOD FOR IMPLIED PRIVATE RIGHTS OF ACTION.

    ``(a) In General.--Except as otherwise provided in this title, an 
implied private right of action arising under this title shall be 
brought not later than the earlier of--
            ``(1) 5 years after the date on which the alleged violation 
        occurred; or
            ``(2) 2 years after the date on which the alleged violation 
        was discovered or should have been discovered through the 
        exercise of reasonable diligence.
    ``(b) Effective Date.--The limitations period provided by this 
section shall apply to all proceedings pending on or commenced after 
the date of enactment of this section.''.

SEC. 4. PLAINTIFF STEERING COMMITTEES.

    The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
amended by adding at the end the following new section:

``SEC. 37. GUARDIAN AD LITEM AND CLASS ACTION STEERING COMMITTEES.

    ``(a) Guardian Ad Litem.--Except as provided in subsection (b), not 
later than 10 days after certifying a plaintiff class in an implied 
private action brought under this title, the court shall appoint a 
guardian ad litem for the plaintiff class from a list or lists provided 
by the parties or their counsel. The guardian ad litem shall direct 
counsel for the class and perform such other functions as the court may 
specify. The court shall apportion the reasonable fees and expenses of 
the guardian ad litem among the parties. Court appointment of a 
guardian ad litem shall not be subject to interlocutory review.
    ``(b) Class Action Steering Committee.--Subsection (a) shall not 
apply if, not later than 10 days after certifying a plaintiff class, on 
its own motion or on motion of a member of the class, the court 
appoints a committee of class members to direct counsel for the class 
(hereafter in this section referred to as the `plaintiff steering 
committee') and to perform such other functions as the court may 
specify. Court appointment of a plaintiff steering committee shall not 
be subject to interlocutory review.
    ``(c) Membership of Plaintiff Steering Committee.--
            ``(1) Qualifications.--
                    ``(A) Number.--A plaintiff steering committee shall 
                consist of not less than 5 class members, willing to 
                serve, who the court believes will fairly represent the 
                class.
                    ``(B) Ownership interests.--Members of the 
                plaintiff steering committee shall have cumulatively 
                held during the class period not less than--
                            ``(i) the lesser of 5 percent of the 
                        securities which are the subject matter of the 
                        litigation or securities which are the subject 
                        matter of the litigation with a market value of 
                        $10,000,000; or
                            ``(ii) such smaller percentage or dollar 
                        amount as the court finds appropriate under the 
                        circumstances.
            ``(2) Named plaintiffs.--Class members who are named 
        plaintiffs in the litigation may serve on the plaintiff 
        steering committee, but shall not comprise a majority of the 
        committee.
            ``(3) Noncompensation of members.--Members of the plaintiff 
        steering committee shall serve without compensation, except 
        that any member may apply to the court for reimbursement of 
        reasonable out-of-pocket expenses from any common fund 
        established for the class.
            ``(4) Meetings.--The plaintiff steering committee shall 
        conduct its business at one or more previously scheduled 
        meetings of the committee at which a majority of its members 
        are present in person or by electronic communication. The 
        plaintiff steering committee shall decide all matters within 
        its authority by a majority vote of all members, except that 
        the committee may determine that decisions other than to accept 
        or reject a settlement offer or to employ or dismiss counsel 
        for the class may be delegated to one or more members of the 
committee, or may be voted upon by committee members seriatim, without 
a meeting.
            ``(5) Right of nonmembers to be heard.--A class member who 
        is not a member of the plaintiff steering committee may appear 
        and be heard by the court on any issue in the action, to the 
        same extent as any other party.
    ``(d) Functions of Guardian Ad Litem and Plaintiff Steering 
Committee.--
            ``(1) Direct counsel.--The authority of the guardian ad 
        litem or the plaintiff steering committee to direct counsel for 
        the class shall include all powers normally permitted to an 
        attorney's client in litigation, including the authority to 
        retain or dismiss counsel and to reject offers of settlement, 
        and the preliminary authority to accept an offer of settlement, 
        subject to the restrictions specified in paragraph (2). 
        Dismissal of counsel other than for cause shall not limit the 
        ability of counsel to enforce any contractual fee agreement or 
        to apply to the court for a fee award from any common fund 
        established for the class.
            ``(2) Settlement offers.--If a guardian ad litem or a 
        plaintiff steering committee gives preliminary approval to an 
        offer of settlement, the guardian ad litem or the plaintiff 
        steering committee may seek approval of the offer by a majority 
        of class members if the committee determines that the benefit 
        of seeking such approval outweighs the cost of soliciting the 
        approval of class members.
    ``(e) Immunity From Liability; Removal.--Any person serving as a 
guardian ad litem or as a member of a plaintiff steering committee 
shall be immune from any liability arising from such service. The court 
may remove a guardian ad litem or a member of a plaintiff steering 
committee for good cause shown.
    ``(f) Effect on Other Law.--This section does not affect any other 
provision of law concerning class actions or the authority of the court 
to give final approval to any offer of settlement.''.

SEC. 5. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

    The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is 
amended by adding at the end the following new section:

``SEC. 38. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.

    ``(a) Pleading with Respect to Scienter.--
            ``(1) In general.--In an implied private action arising 
        under this title in which the plaintiff may recover money 
        damages from a defendant only on proof that the defendant acted 
        with some level of intent, the plaintiff's complaint shall 
        allege specific facts demonstrating the state of mind of each 
        defendant at the time the alleged violation occurred.
            ``(2) Misleading statements and omissions.--In an implied 
        action arising under this title in which the plaintiff alleges 
        that the defendant--
                    ``(A) made an untrue statement of a material fact; 
                or
                    ``(B) omitted to state a material fact necessary in 
                order to make the statements made, in the light of the 
                circumstances in which they were made, not misleading;
        the plaintiff shall specify each statement alleged to have been 
        misleading, the reason or reasons why the statement is 
        misleading, and, if an allegation regarding the statement or 
        omission is made on information and belief, the plaintiff shall 
        set forth all information on which that belief is formed.
            ``(3) Motions To Dismiss; Discovery.--
                    ``(A) Upon motion by a defendant to dismiss for 
                failure to allege the facts required by paragraph (1) 
                or (2), the court shall stay discovery until such 
                motion is decided. In ruling upon any such motion, the 
court may take judicial notice of all information publicly available in 
the market affecting the total mix of information known to investors 
concerning the issuer or the issuer's securities.
                    ``(B) If a complaint satisfies the requirements of 
                paragraphs (1) and (2), the plaintiffs shall be 
                entitled to discovery limited to the facts alleged 
                concerning the misleading statement. Upon completion of 
                such discovery, that parties may move for summary 
                judgment.
                    ``(C) If a complaint fails to satisfy the 
                requirements of paragraph (1) or (2), the court in its 
                discretion may permit a single amended complaint to be 
                filed, subject to the right of any defendant thereafter 
                to move to dismiss such amended complaint without leave 
                to amend.
    ``(b) Proof of Scienter.--
            ``(1) In general.--In an action to which subsection (a)(2) 
        applies, a defendant may not be held liable for money damages 
        unless the plaintiff proves--
                    ``(A) that the defendant directly or indirectly 
                made an untrue statement of a material fact, or omitted 
                to state a material fact necessary in order to make the 
                statements made, in light of the circumstances in which 
                they were made, not misleading; and
                    ``(B) that the defendant--
                            ``(i) knew the statement was misleading at 
                        the time it was made, or intentionally omitted 
                        to state a fact knowing that such fact was 
                        necessary in order to make the statements made, 
                        in light of the circumstances in which they 
                        were made, not misleading; or
                            ``(ii) in making such statement or omitting 
                        such fact, acted recklessly.
            ``(2) Proof for indirect statements.--In any such action, a 
        defendant shall not be held to have indirectly made a statement 
        made by any person that is not the issuer or an officer, 
        director, or employee of the issuer in a publicly disseminated 
        document, unless the plaintiff pleads and proves that the facts 
        or omissions alleged to have been misleading were attributed to 
        such issuer, officer, director, or employee.
    ``(c) Burden of Proof of Causation.--In an implied private action 
arising under this title based on a material misstatement or omission 
concerning a security, and in which the plaintiff claims to have bought 
or sold the security based on a reasonable belief that the market value 
of the security reflected all publicly available information, the 
plaintiff shall have the burden of proving that the misstatement or 
omission caused any loss incurred by the plaintiff.
    ``(d) Damages.--In an implied private action arising under this 
title based on a material misstatement or omission concerning a 
security, and in which the plaintiff claims to have bought or sold the 
security based on a reasonable belief that the market value of the 
security reflected all publicly available information, the plaintiff's 
damages shall not exceed the lesser of--
            ``(1) the difference between the price paid by the 
        plaintiff for the security and the market value of the security 
        immediately after dissemination to the market of information 
        which corrects the misstatement or omission; and
            ``(2) the difference between the price paid by the 
        plaintiff for the security and the price at which the plaintiff 
        sold the security after dissemination of information correcting 
        the misstatement or omission.''.

SEC. 6. PROPORTIONATE LIABILITY AND JOINT AND SEVERAL LIABILITY.

    (a) Securities Act Amendment.--The Securities and Exchange Act of 
1934 (15 U.S.C. 78a et seq.) is amended by adding at the end the 
following new section:

``SEC. 40. PROPORTIONATE LIABILITY AND JOINT AND SEVERAL LIABILITY IN 
              IMPLIED ACTIONS.

    ``(a) Applicability.--This section shall apply only to the 
allocation of damages among persons who are, or who may become, liable 
for damages in an implied private action arising under this title. 
Nothing in this section shall affect the standards for liability 
associated with an implied private action arising under this title.
    ``(b) Application of Joint and Several Liability.--
            ``(1) In general.--A person against whom a judgment is 
        entered in an implied private action arising under this title 
        shall be liable jointly and severally for any recoverable 
        damages on such judgment if the person is found to have--
                    ``(A) been a primary wrongdoer;
                    ``(B) committed knowing securities fraud; or
                    ``(C) controlled any primary wrongdoer or person 
                who committed knowing securities fraud.
            ``(2) Primary wrongdoer.--As used in this subsection--
                    ``(A) the term `primary wrongdoer' means--
                            ``(i) any--
                                    ``(I) issuer, registrant, 
                                purchaser, seller, or underwriter of 
                                securities;
                                    ``(II) marketmaker or specialist in 
                                securities; or
                                    ``(III) clearing agency, securities 
                                information processor, or government 
                                securities dealer;
                        if such person breached a direct statutory or 
                        regulatory obligation or if such person 
                        otherwise had a principal role in the conduct 
                        that is the basis for the implied right of 
                        action; or
                            ``(ii) any person who intentionally 
                        rendered substantial assistance to the 
                        fraudulent conduct of any person described in 
                        clause (i), with actual knowledge of such 
                        person's fraudulent conduct or fraudulent 
                        purpose, and with knowledge that such conduct 
                        was wrongful; and
                    ``(B) a defendant engages in `knowing securities 
                fraud' if such defendant--
                            ``(i) makes a material representation with 
                        actual knowledge that the representation is 
                        false, or omits to make a statement with actual 
                        knowledge that, as a result of the omission, 
                        one of the defendant's material representations 
                        is false and knows that other persons are 
                        likely to rely on that misrepresentation or 
                        omission, except that reckless conduct by the 
                        defendant shall not be construed to constitute 
                        `knowing securities fraud'; or
                            ``(ii) intentionally rendered substantial 
                        assistance to the fraudulent conduct of any 
                        person described in clause (i), with actual 
                        knowledge of such person's fraudulent conduct 
                        or fraudulent purpose, and with knowledge that 
                        such conduct was wrongful.
    ``(c) Determination of Responsibility.--In an implied private 
action in which more than 1 person contributed to a violation of this 
title, the court shall instruct the jury to answer special 
interrogatories, or if there is no jury, shall make findings, 
concerning the degree of responsibility of each person alleged to have 
caused or contributed to the violation of this title, including persons 
who have entered into settlements with the plaintiff. The 
interrogatories or findings shall specify the amount of damages the 
plaintiff is entitled to recover and the degree of responsibility, 
measured as a percentage of the total fault of all persons involved in 
the violation, of each person found to have caused or contributed to 
the damages incurred by the plaintiff or plaintiffs. In determining the 
degree of responsibility, the trier of fact shall consider--
            ``(1) the nature of the conduct of each person; and
            ``(2) the nature and extent of the causal relationship 
        between that conduct and the damage claimed by the plaintiff.
    ``(d) Application of Proportionate Liability.--Except as provided 
in subsection (b), the amount of liability of a person who is, or may 
through right of contribution become, liable for damages based on an 
implied private action arising under this title shall be determined as 
follows:
            ``(1) Degree of responsibility.--Except as provided in 
        paragraph (2), each liable party shall only be liable for the 
        portion of the judgment that corresponds to that party's degree 
        of responsibility, as determined under subsection (c).
            ``(2) Uncollectible shares.--If, upon motion made not later 
        than 6 months after a final judgment is entered, the court 
        determines that all or part of a defendant's share of the 
        obligation is uncollectible--
                    ``(A) the remaining defendants shall be jointly and 
                severally liable for the uncollectible share if the 
                plaintiff establishes that--
                            ``(i) the plaintiff is an individual whose 
                        recoverable damages under a final judgment are 
                        equal to more than 10 percent of the 
                        plaintiff's net financial worth; and
                            ``(ii) the plaintiff's net financial worth 
                        is less than $200,000; and
                    ``(B) the amount paid by each of the remaining 
                defendants to all other plaintiffs shall be, in total, 
                not more than the greater of--
                            ``(i) that remaining defendant's percentage 
                        of fault for the uncollectible share; or
                            ``(ii) 5 times--
                                    ``(I) the amount which the 
                                defendant gained from the conduct that 
                                gave rise to its liability; or
                                    ``(II) if a defendant did not 
                                obtain a direct financial gain from the 
                                conduct that gave rise to the liability 
                                and the conduct consisted of the 
                                provision of deficient services to an 
                                entity involved in the violation, the 
                                defendant's gross revenues received for 
                                the provision of all services to the 
                                other entity involved in the violation 
                                during the calendar years in which 
                                deficient services were provided.
            ``(3) Overall limit.--In no event shall the total payments 
        required pursuant to paragraph (2) exceed the amount of the 
        uncollectible share.
            ``(4) Defendants subject to contribution.--A defendant 
        whose liability is reallocated pursuant to paragraph (2) shall 
        be subject to contribution and to any continuing liability to 
        the plaintiff on the judgment.
            ``(5) Right of contribution.--To the extent that a 
        defendant is required to make an additional payment pursuant to 
        paragraph (2), that defendant may recover contribution--
                    ``(A) from the defendant originally liable to make 
                the payment;
                    ``(B) from any defendant liable jointly and 
                severally pursuant to subsection (b)(1);
                    ``(C) from any defendant held proportionately 
                liable pursuant to this subsection who is liable to 
                make the same payment and has paid less than his or her 
                proportionate share of that payment; or
                    ``(D) from any other person responsible for the 
                conduct giving rise to the payment who would have been 
                liable to make the same payment.
    ``(e) Nondisclosure to Jury.--The standard for allocation of 
damages under subsections (b)(1) and (c) and the procedure for 
reallocation of uncollectible shares under subsection (d)(2) shall not 
be disclosed to members of the jury.
    ``(f) Settlement Discharge.--
            ``(1) In general.--A defendant who settles an implied 
        private action brought under this title at any time before 
        verdict or judgment shall be discharged from all claims for 
        contribution brought by other persons. Upon entry of the 
        settlement by the court, the court shall enter a bar order 
        constituting the final discharge of all obligations to the 
        plaintiff of the settling defendant arising out of the action. 
        The order shall bar all future claims for contribution or 
        indemnity arising out of the action--
                    ``(A) by nonsettling persons against the settling 
                defendant; and
                    ``(B) by the settling defendant against any 
                nonsettling defendants.
            ``(2) Reduction.--If a person enters into a settlement with 
        the plaintiff prior to verdict or judgment, the verdict or 
        judgment shall be reduced by the greater of--
                    ``(A) an amount that corresponds to the degree of 
                responsibility of that person; or
                    ``(B) the amount paid to the plaintiff by that 
                person.
    ``(g) Contribution.--A person who becomes liable for damages in an 
implied private action arising under this title may recover 
contribution from any other person who, if joined in the original suit, 
would have been liable for the same damages. A claim for contribution 
shall be determined based on the degree of responsibility of the 
claimant and of each person against whom a claim for contribution is 
made.
    ``(h) Statute of Limitations for Contribution.--Once judgment has 
been entered in an implied private action arising under this title 
determining liability, an action for contribution must be brought not 
later than 6 months after the entry of a final, nonappealable judgment 
in the action, except that an action for contribution brought by a 
defendant who was required to make an additional payment pursuant to 
subsection (d)(2) may be brought not later than 6 months after the date 
on which such payment was made.''.
    (b) Effective Date.--Section 41 of the Securities Exchange Act of 
1934, as added by subsection (a), shall only apply to implied private 
actions commenced after the date of enactment of this Act.

SEC. 7. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

    (a) Consideration of Regulatory or Legislative Changes.--In 
consultation with investors and issuers of securities, the Securities 
and Exchange Commission shall consider adopting or amending its rules 
and regulations, or making legislative recommendations, concerning--
            (1) criteria that the Commission finds appropriate for the 
        protection of investors by which forward-looking statements 
        concerning the future economic performance of an issuer of 
        securities registered under section 12 of the Securities 
        Exchange Act of 1934 will be deemed not to be in violation of 
        section 10(b) of that Act; and
            (2) procedures by which courts shall timely dismiss claims 
        against such issuers of securities based on such forward-
        looking statements if such statements are in accordance with 
        any criteria under paragraph (1).
    (b) Commission Considerations.--In developing rules or legislative 
recommendations in accordance with subsection (a), the Commission shall 
consider--
            (1) appropriate limits to liability for forward-looking 
        statements;
            (2) procedures for making a summary determination of the 
        applicability of any Commission rule for forward-looking 
        statements early in a judicial proceeding to limit protracted 
        litigation and expansive discovery;
            (3) incorporating and reflecting the scienter requirements 
        applicable to implied private actions under section 10(b); and
            (4) providing clear guidance to issuers of securities and 
        the judiciary.
    (c) Securities Act Amendment.--The Securities and Exchange Act of 
1934 (15 U.S.C. 78a et seq.), is amended by adding at the end the 
following new section:

``SEC. 39. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

    ``(a) In General.--In any implied private action arising under this 
title that alleges that a forward-looking statement concerning the 
future economic performance of an issuer registered under section 12 
was materially false or misleading, if a party making a motion in 
accordance with subsection (b) requests a stay of discovery concerning 
the claims or defenses of that party, the court shall grant such a stay 
until it has ruled on any such motion.
    ``(b) Summary Judgment Motions.--Subsection (a) shall apply to any 
motion for summary judgment made by a defendant asserting that the 
forward-looking statement was within the coverage of any rule which the 
Commission may have adopted concerning such predictive statements, if 
such motion is made not less than 60 days after the plaintiff commences 
discovery in the action.
    ``(c) Dilatory Conduct; Duplicative Discovery.--Notwithstanding 
subsection (a) or (b), the time permitted for a plaintiff to conduct 
discovery under subsection (b) may be extended, or a stay of the 
proceedings may be denied, if the court finds that--
            ``(1) the defendant making a motion described in subsection 
        (b) engaged in dilatory or obstructive conduct in taking or 
        opposing any discovery; or
            ``(2) a stay of discovery pending a ruling on a motion 
        under subsection (b) would be substantially unfair to the 
        plaintiff or other parties to the action.''.

SEC. 8. FRAUD DETECTION AND DISCLOSURE.

    (a) In General.--The Securities Exchange Act of 1934 (15 U.S.C. 78a 
et seq.) is amended by inserting immediately after section 10 the 
following new section:

``SEC. 10A. AUDIT REQUIREMENTS.

    ``(a) In General.--Each audit required pursuant to this title of an 
issuer's financial statements by an independent public accountant shall 
include, in accordance with generally accepted auditing standards, as 
may be modified or supplemented from time to time by the Commission--
            ``(1) procedures designed to provide reasonable assurance 
        of detecting illegal acts that would have a direct and material 
        effect on the determination of financial statement amounts;
            ``(2) procedures designed to identify related party 
        transactions which are material to the financial statements or 
        otherwise require disclosure therein; and
            ``(3) an evaluation of whether there is substantial doubt 
        about the issuer's ability to continue as a going concern 
        during the ensuing fiscal year.
    ``(b) Required Response to Audit Discoveries.--
            ``(1) Investigation and report to management.--If, in the 
        course of conducting an audit pursuant to this title to which 
        subsection (a) applies, the independent public accountant 
        detects or otherwise becomes aware of information indicating 
        that an illegal act (whether or not perceived to have a 
        material effect on the issuer's financial statements) has or 
        may have occurred, the accountant shall, in accordance with 
        generally accepted auditing standards, as may be modified or 
        supplemented from time to time by the Commission--
                    ``(A)(i) determine whether it is likely that an 
                illegal act has occurred; and
                    ``(ii) if so, determine and consider the possible 
                effect of the illegal act on the financial statements 
                of the issuer, including any contingent monetary 
                effects, such as fines, penalties, and damages; and
                    ``(B) as soon as practicable, inform the 
                appropriate level of the issuer's management and assure 
                that the issuer's audit committee, or the issuer's 
                board of directors in the absence of such a committee, 
                is adequately informed with respect to illegal acts 
                that have been detected or have otherwise come to the 
                attention of such accountant in the course of the 
                audit, unless the illegal act is clearly 
                inconsequential.
            ``(2) Response to failure to take remedial action.--If, 
        having first assured itself that the audit committee of the 
        board of directors of the issuer or the board (in the absence 
        of an audit committee) is adequately informed with respect to 
        illegal acts that have been detected or have otherwise come to 
        the accountant's attention in the course of such accountant's 
        audit, the independent public accountant concludes that--
                    ``(A) the illegal act has a material effect on the 
                financial statements of the issuer;
                    ``(B) the senior management has not taken, and the 
                board of directors has not caused senior management to 
                take, timely and appropriate remedial actions with 
                respect to the illegal act; and
                    ``(C) the failure to take remedial action is 
                reasonably expected to warrant departure from a 
                standard auditor's report, when made, or warrant 
                resignation from the audit engagement;
        the independent public accountant shall, as soon as 
        practicable, directly report its conclusions to the board of 
        directors.
            ``(3) Notice to commission; response to failure to 
        notify.--An issuer whose board of directors receives a report 
        under paragraph (2) shall inform the Commission by notice not 
        later than 1 business day after the receipt of such report and 
        shall furnish the independent public accountant making such 
        report with a copy of the notice furnished to the Commission. 
        If the independent public accountant fails to receive a copy of 
        the notice before the expiration of the required 1-business-day 
        period, the independent public accountant shall--
                    ``(A) resign from the engagement; or
                    ``(B) furnish to the Commission a copy of its 
                report (or the documentation of any oral report given) 
                not later than 1 business day following such failure to 
                receive notice.
            ``(4) Report after resignation.--If an independent public 
        accountant resigns from an engagement under paragraph (3)(A), 
        the accountant shall, not later than 1 business day following 
        the failure by the issuer to notify the Commission under 
        paragraph (3), furnish to the Commission a copy of the 
        accountant's report (or the documentation of any oral report 
        given).
    ``(c) Auditor Liability Limitation.--No independent public 
accountant shall be liable in a private action for any finding, 
conclusion, or statement expressed in a report made pursuant to 
paragraph (3) or (4) of subsection (b), including any rules promulgated 
pursuant thereto.
    ``(d) Civil Penalties in Cease-and-Desist Proceedings.--If the 
Commission finds, after notice and opportunity for hearing in a 
proceeding instituted pursuant to section 21C, that an independent 
public accountant has willfully violated paragraph (3) or (4) of 
subsection (b), the Commission may, in addition to entering an order 
under section 21C, impose a civil penalty against the independent 
public accountant and any other person that the Commission finds was a 
cause of such violation. The determination to impose a civil penalty 
and the amount of the penalty shall be governed by the standards set 
forth in section 21B.
    ``(e) Preservation of Existing Authority.--Except as provided in 
subsection (d), nothing in this section shall be held to limit or 
otherwise affect the authority of the Commission under this title.
    ``(f) Definition.--As used in this section, the term `illegal act' 
means an act or omission that violates any law, or any rule or 
regulation having the force of law.''.
    (b) Effective Dates.--With respect to any registrant that is 
required to file selected quarterly financial data pursuant to item 
302(a) of Regulation S-K of the Securities and Exchange Commission (17 
CFR 229.302(a)), the amendments made by subsection (a) shall apply to 
any annual report for any period beginning on or after January 1, 1995. 
With respect to any other registrant, the amendment shall apply for any 
period beginning on or after January 1, 1996.

SEC. 9. AMENDMENT TO RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS 
              ACT.

    Section 1964(c) of title 18, United States Code, is amended by 
inserting ``, except that no person may bring an action under this 
provision if the racketeering activity, as defined in section 
1961(1)(D), involves fraud in the sale of securities'' before the 
period.
                                 <all>
HR 675 IH----2
HR 675 IH----3
```