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SEC. 4. PREVENTION OF ‘‘FISHING EXPEDITION’’ LAWSUITS.
The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) is amended by inserting after section 10 the fol-
lowing new section:
‘‘SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD AC-
TIONS.
‘‘(a) SCIENTER.—
‘‘(1) IN GENERAL.—In any private action aris-
ing under section 10(b) of this title based on a
fraudulent statement, liability may be established
only on proof that—
‘‘(A) the defendant directly or indirectly
made a fraudulent statement;
‘‘(B) the defendant possessed the intention
to deceive, manipulate, or defraud; and
‘‘(C) the defendant made such fraudulent
statement knowingly or recklessly.
‘‘(2) FRAUDULENT STATEMENT.—For purposes
of this section, a fraudulent statement is a state-
ment that contains an untrue statement of a mate-
rial fact, or omits 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.
‘‘(3) KNOWINGLY.—For purposes of paragraph
(1), a defendant makes a fraudulent statement
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knowingly if the defendant knew that the statement
of a material fact was untrue at the time it was
made, or knew that an omitted fact was necessary
in order to make the statements made, in the light
of the circumstances in which they were made, not
misleading.
‘‘(4) RECKLESSNESS.—For purposes of para-
graph (1), a defendant makes a fraudulent state-
ment recklessly if the defendant, in making such
statement, is guilty of highly unreasonable conduct
that (A) involves not merely simple or even gross
negligence, but an extreme departure from standards
of ordinary care, and (B) presents a danger of mis-
leading buyers, sellers, or security holders that was
either known to the defendant or so obvious that the
defendant must have been aware of it. Deliberately
refraining from taking steps to discover whether
one’s statements are false or misleading constitutes
recklessness, but if the failure to investigate was not
deliberate, such conduct shall not be considered to
be reckless.
‘‘(b) REQUIREMENT
FOR EXPLICIT PLEADING
OF
SCIENTER.—In any private action to which subsection (a)
applies, the complaint shall specify each statement or
omission alleged to have been misleading, and the reasons
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the statement or omission was misleading. The complaint
shall also make specific allegations which, if true, would
be sufficient to establish scienter as to each defendant at
the time the alleged violation occurred. It shall not be suf-
ficient for this purpose to plead the mere presence of facts
inconsistent with a statement or omission alleged to have
been misleading. If an allegation is made on information
and belief, the complaint shall set forth with specificity
all information on which that belief is formed.
‘‘(c) DISMISSAL FOR FAILURE TO MEET PLEADING
REQUIREMENTS; STAY OF DISCOVERY; SUMMARY JUDG-
MENT.—In any private action to which subsection (a) ap-
plies, the court shall, on the motion of any defendant, dis-
miss the complaint if the requirements of subsection (b)
are not met, except that the court may, in its discretion,
permit a single amended complaint to be filed. During the
pendency of any such motion to dismiss, all discovery and
other proceedings shall be stayed unless the court finds
upon the motion of any party that particularized discovery
is necessary to preserve evidence or to prevent undue prej-
udice to that party. If a complaint satisfies the require-
ments of subsection (b), the plaintiff shall be entitled to
conduct discovery limited to the facts concerning the alleg-
edly misleading statement or omission. Upon completion
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of such discovery, the parties may move for summary
judgment.
‘‘(d) RELIANCE AND CAUSATION.—
‘‘(1) IN GENERAL.—In any private action to
which subsection (a) applies, the plaintiff shall prove
that—
‘‘(A) he or she had knowledge of, and re-
lied (in connection with the purchase or sale of
a security) on, the statement that contained the
misstatement or omission described in sub-
section (a)(1); and
‘‘(B) that the statement containing such
misstatement or omission proximately caused
(through both transaction causation and loss
causation) any loss incurred by the plaintiff.
‘‘(2) FRAUD ON THE MARKET.—For purposes
of paragraph (1), knowledge and reliance may be
proven by establishing that the market as a whole
considered the fraudulent statement, that the price
at which the security was purchased or sold reflected
the market’s estimation of the fraudulent statement,
and that the plaintiff relied on that market price.
Proof that the market as a whole considered the
fraudulent statement may consist of evidence that
the statement—
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‘‘(A) was published in publicly available re-
search reports by analysts of such security;
‘‘(B) was the subject of news articles;
‘‘(C) was delivered orally at public meet-
ings by officers of the issuer, or its agents;
‘‘(D) was specifically considered by rating
agencies in their published reports; or
‘‘(E) was otherwise made publicly available
to the market in a manner that was likely to
bring it to the attention of, and to be consid-
ered as credible by, other active participants in
the market for such security.
Nonpublic information may not be used as proof
that the market as a whole considered the fraudu-
lent statement.
‘‘(3) PRESUMPTION OF RELIANCE.—Upon proof
that the market as a whole considered the fraudu-
lent statement pursuant to paragraph (2), the plain-
tiff is entitled to a rebuttable presumption that the
price at which the security was purchased or sold re-
flected the market’s estimation of the fraudulent
statement and that the plaintiff relied on such mar-
ket price. This presumption may be rebutted by evi-
dence that—
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‘‘(A) the market as a whole considered
other information that corrected the allegedly
fraudulent statement; or
‘‘(B) the plaintiff possessed such corrective
information prior to the purchase or sale of the
security.
‘‘(4) REASONABLE EXPECTATION OF INTEGRITY
OF MARKET PRICE.—A plaintiff who buys or sells a
security for which it is unreasonable to rely on mar-
ket price to reflect all current information may not
establish reliance pursuant to paragraph (2). For
purposes of paragraph (2), the following factors
shall be considered in determining whether it was
reasonable for a party to expect the market price of
the security to reflect substantially all publicly avail-
able information regarding the issuer of the security:
‘‘(A) The weekly trading volume of any
class of securities of the issuer of the security.
‘‘(B) The existence of public reports by se-
curities analysts concerning any class of securi-
ties of the issuer of the security.
‘‘(C) The eligibility of the issuer of the se-
curity, under the rules and regulations of the
Commission, to incorporate by reference its re-
ports made pursuant to section 13 of this title
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in a registration statement filed under the Se-
curities Act of 1933 in connection with the sale
of equity securities.
‘‘(D) A history of immediate movement of
the price of any class of securities of the issuer
of the security caused by the public dissemina-
tion of information regarding unexpected cor-
porate events or financial releases.
In no event shall it be considered reasonable for a
party to expect the market price of the security to
reflect substantially all publicly available information
regarding the issuer of the security unless the issuer
of the security has a class of securities listed and
registered on a national securities exchange or
quoted on the automated quotation system of a na-
tional securities association.
‘‘(e) ALLOCATION OF LIABILITY.—
‘‘(1) JOINT
AND
SEVERAL
LIABILITY
FOR
KNOWING FRAUD.—A defendant who is found liable
for damages in a private action to which subsection
(a) applies may be liable jointly and severally only
if the trier of fact specifically determines that the
defendant acted knowingly (as defined in subsection
(a)(3)).
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‘‘(2) PROPORTIONATE
LIABILITY
FOR
RECK-
LESSNESS.—If the trier of fact does not make the
findings required by paragraph (1) for joint and sev-
eral liability, a defendant’s liability in a private ac-
tion to which subsection (a) applies shall be deter-
mined under paragraph (3) of this subsection only
if the trier of fact specifically determines that the
defendant acted recklessly (as defined in subsection
(a)(4)).
‘‘(3) DETERMINATION OF PROPORTIONATE LI-
ABILITY.—If the trier of fact makes the findings re-
quired by paragraph (2), the defendant’s liability
shall be determined as follows:
‘‘(A) The trier of fact shall determine the
percentage of responsibility of the plaintiff, of
each of the defendants, and of each of the other
persons or entities alleged by the parties to
have caused or contributed to the harm alleged
by the plaintiff. In determining the percentages
of responsibility, the trier of fact shall consider
both the nature of the conduct of each person
and the nature and extent of the causal rela-
tionship between that conduct and the damage
claimed by the plaintiff.
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‘‘(B) For each defendant, the trier of fact
shall then multiply the defendant’s percentage
of responsibility by the total amount of damage
suffered by the plaintiff that was caused in
whole or in part by that defendant and the
court shall enter a verdict or judgment against
the defendant in that amount. No defendant
whose liability is determined under this sub-
section shall be jointly liable on any judgment
entered against any other party to the action.
‘‘(C) Except where contractual relationship
permits, no defendant whose liability is deter-
mined under this paragraph shall have a right
to recover any portion of the judgment entered
against such defendant from another defendant.
‘‘(4) EFFECT OF PROVISION.—This subsection
relates only to the allocation of damages among de-
fendants. Nothing in this subsection shall affect the
standards for liability under any private action aris-
ing under this title.
‘‘(f) DAMAGES.—In any private action to which sub-
section (a) applies, 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
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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 fraudulent
statement; 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 fraudulent statement.’’.
SEC. 5. ESTABLISHMENT OF ‘‘SAFE HARBOR’’ FOR PRE-
DICTIVE STATEMENTS.
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. APPLICATION OF SAFE HARBOR FOR FORWARD-
LOOKING STATEMENTS.
‘‘(a) SAFE HARBOR IN GENERAL.—In any private ac-
tion arising under this title based on a fraudulent state-
ment (as defined in section 10A), a person shall not be
liable with respect to any forward-looking statement if and
to the extent that the statement—
‘‘(1) contains a projection, estimate, or descrip-
tion of future events; and
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‘‘(2) refers clearly (or is understood by the re-
cipient to refer) to—
‘‘(A) such projections, estimates, or de-
scriptions as forward-looking statements; and
‘‘(B) the risk that such projections, esti-
mates, or descriptions may not be realized.
The safe harbor for forward-looking statements estab-
lished under this subsection shall be in addition to any
safe harbor the Commission may establish by rule or regu-
lation.
‘‘(b) DEFINITION
OF FORWARD-LOOKING STATE-
MENT.—For the purpose of this section, the term ‘for-
ward-looking statement’ shall include (but not be limited
to) projections, estimates, and descriptions of future
events, whether made orally or in writing, voluntarily or
otherwise.
‘‘(c) NO DUTY TO MAKE CONTINUING PROJEC-
TIONS.—In any private action arising under this title, no
person shall be deemed to have any obligation to update
a forward-looking statement made by such person unless
such person has expressly and substantially contempora-
neously undertaken to update such statement.
‘‘(d) AUTOMATIC PROCEDURE FOR STAYING DISCOV-
ERY; EXPEDITED PROCEDURE FOR CONSIDERATION OF
MOTION ON APPLICABILITY OF SAFE HARBOR.—
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‘‘(1) STAY PENDING DECISION ON MOTION.—
Upon motion by a defendant to dismiss on the
ground that the statement or omission upon which
the complaint is based is a forward-looking state-
ment within the meaning of this section and that the
safe harbor provisions of this section preclude a
claim for relief, the court shall stay discovery until
such motion is decided.
‘‘(2) PROTECTIVE ORDERS.—If the court denies
a motion to dismiss to which paragraph (1) is appli-
cable, or if no such motion is made and a party
makes a motion for a protective order, at any time
beginning after the filing of the complaint and end-
ing 10 days after the filing of such party’s answer
to the complaint, asserting that the safe harbor pro-
visions of this section apply to the action, a protec-
tive order shall issue forthwith to stay all discovery
as to any party to whom the safe harbor provisions
of this section may apply, except that which is di-
rected to the specific issue of the applicability of the
safe harbor. A hearing on the applicability of the
safe harbor shall be conducted within 45 days of the
issuance of the protective order. At the conclusion of
the hearing, the court shall either dismiss the por-
tion of the action based upon the use of the forward-
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looking information or determine that the safe har-
bor is unavailable in the circumstances.
‘‘(e) REGULATORY AUTHORITY.—The Commission
shall exercise its authority to describe conduct with respect
to the making of forward-looking statements that will be
deemed not to provide a basis for liability in private ac-
tions under this title. Such rules and regulations shall—
‘‘(1) include clear and objective guidance that
the Commission finds sufficient for the protection of
investors;
‘‘(2) prescribe such guidance with sufficient
particularity that compliance shall be readily ascer-
tainable by issuers prior to issuance of securities;
and
‘‘(3) provide that forward-looking statements
that are in compliance with such guidance and that
concern the future economic performance of an is-
suer of securities registered under section 12 of this
title will be deemed not to be in violation of this
title.
Nothing in this section shall be deemed to limit, either
expressly or by implication, the authority of the Commis-
sion to exercise similar authority or to adopt similar rules
and regulations with respect to forward-looking state-
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ments under other statutes under which the Commission
exercises rulemaking authority.’’.
SEC. 6. 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 conduct action-
able as fraud in the purchase or sale of securities’’ before
the period.
SEC. 7. FINANCIAL FRAUD DETECTION AND DISCLOSURE.
(a) AMENDMENTS TO THE SECURITIES EXCHANGE
ACT OF 1934.—The Securities Exchange Act of 1934 is
amended by inserting after section 13 (15 U.S.C. 78m)
the following new section:
‘‘SEC. 13A. FRAUD DETECTION AND DISCLOSURE.
‘‘(a) AUDIT REQUIREMENTS.—Each audit required
pursuant to this title of an issuer’s financial statements
by an independent public accountant shall include, in ac-
cordance with generally accepted auditing standards, as
may be modified or supplemented from time to time by
the Commission, the following:
‘‘(1) procedures designed to provide reasonable
assurance of detecting illegal acts that would have a
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direct and material effect on the determination of fi-
nancial statement amounts;
‘‘(2) procedures designed to identify related
party transactions which are material to the finan-
cial statements or otherwise require disclosure there-
in; and
‘‘(3) an evaluation of whether there is substan-
tial doubt about the issuer’s ability to continue as a
going concern over the ensuing fiscal year.
‘‘(b) REQUIRED
RESPONSE
TO
AUDIT
DISCOV-
ERIES.—
‘‘(1) INVESTIGATION AND REPORT TO MANAGE-
MENT.—If, in the course of conducting any audit
pursuant to this title to which subsection (a) applies,
the independent public accountant detects or other-
wise 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 stand-
ards, 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, deter-
mine and consider the possible effect of the ille-
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gal act on the financial statements of the is-
suer, including any contingent monetary effects,
such as fines, penalties, and damages; and
‘‘(B) as soon as practicable inform the ap-
propriate 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
otherwise come to the attention of such ac-
countant in the course of the audit, unless the
illegal act is clearly inconsequential.
‘‘(2) RESPONSE TO FAILURE TO TAKE REME-
DIAL 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 com-
mittee) is adequately informed with respect to illegal
acts that have been detected or otherwise come to
the accountant’s attention in the course of such ac-
countant’s audit, the independent public accountant
concludes that—
‘‘(A) any such illegal act has a material ef-
fect on the financial statements of the issuer,
‘‘(B) senior management has not taken,
and the board of directors has not caused sen-
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ior management to take, timely and appropriate
remedial actions with respect to such 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 di-
rectors has received a report pursuant to paragraph
(2) shall inform the Commission by notice within
one business day of receipt of such report and shall
furnish the independent public accountant making
such report with a copy of the notice furnished the
Commission. If the independent public accountant
making such report shall fail to receive a copy of
such notice within the required one-business-day pe-
riod, 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 re-
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port given) within the next business day follow-
ing such failure to receive notice.
‘‘(4) REPORT AFTER RESIGNATION.—An inde-
pendent public accountant electing resignation shall,
within the one business day following a failure by an
issuer to notify the Commission under paragraph
(3), furnish to the Commission a copy of the ac-
countant’s report (or the documentation of any oral
report given).
‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde-
pendent public accountant shall be liable in a private ac-
tion for any finding, conclusion, or statement expressed
in a report made pursuant to paragraph (3) or (4) of sub-
section (b), including any rules promulgated pursuant
thereto.
‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO-
CEEDINGS.—If the Commission finds, after notice and op-
portunity for hearing in a proceeding instituted pursuant
to section 21C of this title, that an independent public
accountant has willfully violated paragraph (3) or (4) of
subsection (b) of this section, then 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 whether to im-
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pose a civil penalty, and the amount of any such penalty,
shall be governed by the standards set forth in section 21B
of this title.
‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex-
cept for subsection (d), nothing in this section limits or
otherwise affects the authority of the Commission under
this title.
‘‘(f) DEFINITIONS.—As used in this section, the term
‘illegal act’ means any action or omission to act that vio-
lates any law, or any rule or regulation having the force
of law.’’.
(b) EFFECTIVE DATES.—As to any registrant that
is required to file selected quarterly financial data pursu-
ant to item 302(a) of Regulation S–K (17 CFR
229.302(a)) of the Securities and Exchange Commission,
the amendments made by subsection (a) of this section
shall apply to any annual report for any period beginning
on or after January 1, 1996. As to any other registrant,
such amendment shall apply for any period beginning on
or after January 1, 1997.
SEC. 8. RULE OF CONSTRUCTION.
Nothing in the amendments made by this Act shall
be deemed to create or ratify any implied private right
of action, or to prevent the Commission by rule from re-
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stricting or otherwise regulating private actions under the
Securities Exchange Act of 1934.
SEC. 9. EFFECTIVE DATE.
This Act and the amendments made by this Act are
effective on the date of enactment of this Act and shall
apply to cases commenced after such date of enactment.
Passed the House of Representatives March 8,
1995.
Attest:
ROBIN H. CARLE,
Clerk.
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