[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1058 Engrossed in House (EH)]
104th CONGRESS
1st Session
H. R. 1058
_______________________________________________________________________
AN ACT
To reform Federal securities litigation, and for other purposes.
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 Reform Act''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents.
Sec. 2. Prevention of lawyer-driven litigation.
(a) Plaintiff steering committees to ensure client control of
lawsuits.
``Sec. 36. Class action steering committees.
``(a) Class action steering committee.
``(b) Membership of plaintiff steering committee.
``(c) Functions of plaintiff steering committee.
``(d) Immunity from civil liability; removal.
``(e) Effect on other law.''
(b) Prohibition on attorneys' fees paid from Commission
disgorgement funds.
Sec. 3. Prevention of abusive practices that foment litigation.
(a) Additional provisions applicable to private actions.
``Sec. 20B. Procedures applicable to private actions.
``(a) Elimination of bonus payments to named plaintiffs
in class actions.
``(b) Restrictions on professional plaintiffs.
``(c) Awards of fees and expenses.
``(d) Prevention of abusive conflicts of interest.
``(e) Disclosure of settlement terms to class members.
``(f) Encouragement of finality in settlement
discharges.
``(g) Contribution from non-parties in interests of
fairness.
``(h) Defendant's right to written interrogatories
establishing scienter.''
(b) Prohibition of referral fees that foment litigation.
Sec. 4. Prevention of ``fishing expedition'' lawsuits.
``Sec. 10A. Requirements for securities fraud actions.
``(a) Scienter.
``(b) Requirement for explicit pleading of scienter.
``(c) Dismissal for failure to meet pleading
requirements; stay of discovery; summary
judgment.
``(d) Reliance and causation.
``(e) Allocation of liability.
``(f) Damages.''
Sec. 5. Establishment of ``safe harbor'' for predictive statements.
``Sec. 37. Application of safe harbor for forward-looking
statements.
``(a) Safe harbor in general.
``(b) Definition of forward-looking statement.
``(c) No duty to make continuing projections.
``(d) Automatic procedure for staying discovery;
expedited procedure for consideration of
motion on applicability of safe harbor.
``(e) Regulatory authority.''
Sec. 6. Amendment to Racketeer Influenced and Corrupt Organizations
Act.
Sec. 7. Financial fraud detection and disclosure.
``Sec. 13A. Fraud detection and disclosure.
``(a) Audit requirements.
``(b) Required response to audit discoveries.
``(c) Auditor liability limitation.
``(d) Civil penalties in cease-and-desist proceedings.
``(e) Preservation of existing authority.
``(f) Definitions.''
Sec. 8. Rule of construction.
Sec. 9. Effective date.
SEC. 2. PREVENTION OF LAWYER-DRIVEN LITIGATION.
(a) Plaintiff Steering Committees To Ensure Client Control of
Lawsuits.--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. CLASS ACTION STEERING COMMITTEES.
``(a) Class Action Steering Committee.--In any private action
arising under this title seeking to recover damages on behalf of a
class, the court shall, at the earliest practicable time, appoint 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.
``(b) Membership of Plaintiff Steering Committee.--
``(1) Qualifications.--
``(A) Number.--A plaintiff steering committee shall
consist of not fewer 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 $10,000,000 in market value of
the securities which are the subject matter of
the litigation; or
``(ii) such smaller percentage or dollar
amount as the court finds appropriate under the
circumstances.
``(2) Named plaintiffs.--Class plaintiffs serving as the
representative parties 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, of which prior notice shall have
been given and 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 relating to the
organization or actions of the plaintiff steering committee.
``(c) Functions of Plaintiff Steering Committee.--The authority of
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 authority to accept an offer of
settlement subject to final approval by the court. 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.
``(d) Immunity From Civil Liability; Removal.--Any person serving
as a member of a plaintiff steering committee shall be immune from any
civil liability for any negligence in performing such service, but
shall not be immune from liability for intentional misconduct or from
the assessment of costs pursuant to section 20B(c). The court may
remove a member of a plaintiff steering committee for good cause shown.
``(e) 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.''.
(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, or of
any Commission proceeding, shall not be distributed as payment for
attorneys' fees or expenses incurred by private parties seeking
distribution of the disgorged funds.''.
SEC. 3. PREVENTION OF ABUSIVE PRACTICES THAT FOMENT LITIGATION.
(a) Additional Provisions Applicable to Private Actions.--The
Securities Exchange Act of 1934 is amended by inserting after section
20A (15 U.S.C. 78t-1) the following new section:
``procedures applicable to private actions
``Sec. 20B. (a) Elimination of Bonus Payments to Named Plaintiffs
in Class Actions.--In any private action under this title that is
certified as a class action pursuant to the Federal Rules of Civil
Procedure, the portion of any final judgment or of any settlement that
is awarded to class plaintiffs serving as the representative parties
shall be equal, on a per share basis, to the portion 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 actual expenses (including lost wages)
relating to the representation of the class.
``(b) Restrictions on Professional Plaintiffs.--Except as the court
may otherwise permit for good cause, a person may be a named plaintiff,
or an officer, director, or fiduciary of a named plaintiff, in no more
than 5 class actions filed during any 3-year period.
``(c) Awards of Fees and Expenses.--
``(1) Authority to award fees and expenses.--If the court
in any private action arising under this title enters a final
judgment against a party litigant on the basis of a motion to
dismiss, motion for summary judgment, or a trial on the merits,
the court shall, upon motion by the prevailing party, determine
whether (A) the position of the losing party was not
substantially justified, (B) imposing fees and expenses on the
losing party or the losing party's attorney would be just, and
(C) the cost of such fees and expenses to the prevailing party
is substantially burdensome or unjust. If the court makes the
determinations described in clauses (A), (B), and (C), the
court shall award the prevailing party reasonable fees and
other expenses incurred by that party. The determination of
whether the position of the losing party was substantially
justified shall be made on the basis of the record in the
action for which fees and other expenses are sought, but the
burden of persuasion shall be on the prevailing party.
``(2) Security for payment of costs in class actions.--In
any private action arising under this title that is certified
as a class action pursuant to the Federal Rules of Civil
Procedure, the court shall require an undertaking from the
attorneys for the plaintiff class, the plaintiff class, or
both, in such proportions and at such times as the court
determines are just and equitable, for the payment of the fees
and expenses that may be awarded under paragraph (1).
``(3) Application for fees.--A party seeking an award of
fees and other expenses shall, within 30 days of a final,
nonappealable judgment in the action, submit to the court an
application for fees and other expenses that certifies that the
party is entitled to such an award under paragraph (1) and the
amount sought, including an itemized statement from any
attorney or expert witness representing or appearing on behalf
of the party stating the actual time expended and the rate at
which fees and other expenses are computed.
``(4) Allocation and size of award.--The court, in its
discretion, may--
``(A) determine whether the amount to be awarded
pursuant to this section shall be awarded against the
losing party, its attorney, or both; and
``(B) reduce the amount to be awarded pursuant to
this section, or deny an award, to the extent that the
prevailing party during the course of the proceedings
engaged in conduct that unduly and unreasonably
protracted the final resolution of the action.
``(5) Awards in discovery proceedings.--In adjudicating any
motion for an order compelling discovery or any motion for a
protective order made in any private action arising under this
title, the court shall award the prevailing party reasonable
fees and other expenses incurred by the party in bringing or
defending against the motion, including reasonable attorneys'
fees, unless the court finds that special circumstances make an
award unjust.
``(6) Rule of construction.--Nothing in this subsection
shall be construed to limit or impair the discretion of the
court to award costs pursuant to other provisions of law.
``(7) Protection against abuse of process.--In any action
to which this subsection applies, a court shall not permit a
plaintiff to withdraw from or voluntarily dismiss such action
if the court determines that such withdrawal or dismissal is
taken for purposes of evasion of the requirements of this
subsection.
``(8) Definitions.--For purposes of this subsection--
``(A) The term `fees and other expenses' includes
the reasonable expenses of expert witnesses, the
reasonable cost of any study, analysis, report, test,
or project which is found by the court to be necessary
for the preparation of the party's case, and reasonable
attorneys' fees and expenses. The amount of fees
awarded under this section shall be based upon
prevailing market rates for the kind and quality of
services furnished.
``(B) The term `substantially justified' shall have
the same meaning as in section 2412(d)(1) of title 28,
United States Code.
``(d) Prevention of Abusive Conflicts of Interest.--In any private
action under this title pursuant to a complaint seeking damages on
behalf of a class, if the class 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, on motion by
any party, make a determination of whether such interest constitutes a
conflict of interest sufficient to disqualify the attorney from
representing the class.
``(e) Disclosure of Settlement Terms to Class Members.--In any
private action under this title that is certified as a class action
pursuant to the Federal Rules of Civil Procedure, any proposed or final
settlement agreement that is published or otherwise disseminated to the
class shall include the following statements:
``(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 per share; and
``(ii) a statement concerning the
likelihood 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) concerning the amount of damages and the
likelihood of prevailing shall not be admissible for
purposes of any Federal or State judicial action 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 (including the
amount of such fees and costs determined on a per-share basis,
together with the amount of the settlement proposed to be
distributed to the parties to suit, determined on a per-share
basis), and a brief explanation of the basis for the
application. Such information shall be clearly summarized on
the cover page of any notice to a party of any proposed or
final settlement agreement.
``(3) Identification of lawyers' representatives.--The name
and address of one or more representatives of counsel for the
class who will be reasonably available to answer written
questions from class members concerning any matter contained in
any notice of settlement published or otherwise disseminated to
the class.
``(4) Other information.--Such other information as may be
required by the court, or by any plaintiff steering committee
appointed by the court pursuant to section 36.
``(f) Encouragement of Finality in Settlement Discharges.--
``(1) Discharge.--A defendant who settles any private
action arising under this title at any time before verdict or
judgment shall be discharged from all claims for contribution
brought by other persons with respect to the matters that are
the subject of such action. 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 arising out of the action--
``(A) by any person against the settling defendant;
and
``(B) by the settling defendant against any person
other than a person whose liability has been
extinguished by the settling defendant's settlement.
``(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 percentage
of responsibility of that person; or
``(B) the amount paid to the plaintiff by that
person.
``(g) Contribution From Non-Parties in Interests of Fairness.--
``(1) Right of contribution.--A person who becomes liable
for damages in any private action under this title (other than
an action under section 9(e) or 18(a)) may recover contribution
from any other person who, if joined in the original suit,
would have been liable for the same damages.
``(2) Statute of limitations for contribution.--Once
judgment has been entered in any such private action
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.
``(h) Defendant's Right to Written Interrogatories Establishing
Scienter.--In any private action under this title in which the
plaintiff may recover money damages, 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.''.
(b) Prohibition of Referral Fees That Foment Litigation.--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:
``(8) 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 private action under this title.''.
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 following new section:
``SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.
``(a) Scienter.--
``(1) In general.--In any private action arising 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 statement that contains an untrue
statement of a material 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 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 paragraph (1), a
defendant makes a fraudulent statement 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 misleading
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 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 sufficient 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 Judgment.--In any private action to which subsection
(a) applies, the court shall, on the motion of any defendant, dismiss
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 prejudice to that
party. If a complaint satisfies the requirements of subsection (b), the
plaintiff shall be entitled to conduct discovery limited to the facts
concerning the allegedly misleading statement or omission. Upon
completion 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 relied (in
connection with the purchase or sale of a security) on,
the statement that contained the misstatement or
omission described in subsection (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--
``(A) was published in publicly available research
reports by analysts of such security;
``(B) was the subject of news articles;
``(C) was delivered orally at public meetings 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 considered 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 fraudulent statement.
``(3) Presumption of reliance.--Upon proof that the market
as a whole considered the fraudulent statement pursuant to
paragraph (2), the plaintiff is entitled to a rebuttable
presumption 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 such market price.
This presumption may be rebutted by evidence that--
``(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 market 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 available 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 securities
analysts concerning any class of securities of the
issuer of the security.
``(C) The eligibility of the issuer of the
security, under the rules and regulations of the
Commission, to incorporate by reference its reports
made pursuant to section 13 of this title in a
registration statement filed under the Securities 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 dissemination of
information regarding unexpected corporate 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 national 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)).
``(2) Proportionate liability for recklessness.--If the
trier of fact does not make the findings required by paragraph
(1) for joint and several liability, a defendant's liability in
a private action to which subsection (a) applies shall be
determined 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 liability.--If the
trier of fact makes the findings required 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 relationship between that conduct and the damage
claimed by the plaintiff.
``(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
subsection 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 determined
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 defendants. Nothing in this
subsection shall affect the standards for liability under any
private action arising under this title.
``(f) Damages.--In any private action to which subsection (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 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 PREDICTIVE 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 action arising under
this title based on a fraudulent statement (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 description of
future events; and
``(2) refers clearly (or is understood by the recipient to
refer) to--
``(A) such projections, estimates, or descriptions
as forward-looking statements; and
``(B) the risk that such projections, estimates, or
descriptions may not be realized.
The safe harbor for forward-looking statements established under this
subsection shall be in addition to any safe harbor the Commission may
establish by rule or regulation.
``(b) Definition of Forward-Looking Statement.--For the purpose of
this section, the term `forward-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 Projections.--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 contemporaneously
undertaken to update such statement.
``(d) Automatic Procedure for Staying Discovery; Expedited
Procedure for Consideration of Motion on Applicability of Safe
Harbor.--
``(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
statement 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 applicable, 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 ending 10 days after the filing of such party's answer to
the complaint, asserting that the safe harbor provisions of
this section apply to the action, a protective 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 directed 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 portion of
the action based upon the use of the forward-looking
information or determine that the safe harbor 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 actions 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 ascertainable 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 issuer 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 Commission to exercise similar
authority or to adopt similar rules and regulations with respect to
forward-looking statements 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 actionable 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 accordance 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 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 over
the ensuing fiscal year.
``(b) Required Response to Audit Discoveries.--
``(1) Investigation and report to management.--If, in the
course of conducting any 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 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 otherwise come to the
accountant's attention in the course of such accountant's
audit, the independent public accountant concludes that--
``(A) any such illegal act has a material effect on
the financial statements of the issuer,
``(B) 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 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 directors 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 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)
within the next business day following such failure to
receive notice.
``(4) Report after resignation.--An independent 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
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 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 impose 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.--Except 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 violates 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 pursuant 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 restricting 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:
Clerk.
104th CONGRESS
1st Session
H. R. 1058
_______________________________________________________________________
AN ACT
To reform Federal securities litigation, and for other purposes.