[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1058 Referred in Senate (RFS)]







104th CONGRESS
  1st Session
                                H. R. 1058


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

               March 10 (legislative day, March 6), 1995

Received; read twice and referred to the Committee on Banking, Housing, 
                           and Urban Affairs

_______________________________________________________________________

                                 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:

                                                ROBIN H. CARLE,

                                                                 Clerk.

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