[Congressional Record Volume 141, Number 10 (Wednesday, January 18, 1995)]
[Senate]
[Pages S1070-S1096]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Mr. McCAIN:
S. 233. A bill to provide for the termination of reporting
requirements of certain executive reports submitted to the Congress,
and for other purposes; to the Committee on Governmental Affairs.
The Reporting Requirements Sunset Act
Mr. McCAIN. Mr. President, I introduce legislation that would
terminate the statutory requirement for all congressionally mandated
reports, except for those required under the Inspector Generals Act and
the Chief Financial Officers Act, 5 years after its enactment. The
Reporting Requirements Sunset Act of 1995 is almost identical to
legislation (S. 1971) that I introduced in the last Congress. This bill
would also require the President to identify which reports he feels are
unnecessary or wasteful in his next budget submission to Congress, a
measure which will hopefully spur the Congress to swiftly dispose of
those specific reports.
This proposal is intended to address the growing problem of the
thousands of reports the Congress is burdening the executive branch
with each year. Each year, Members of Congress add layer upon layer of
onerous paperwork requirements upon executive branch agencies by
mandating various reports. This problem has a very real and substantive
cost to taxpayers in terms of wasting hundreds of millions of dollars,
in addition to taking up untold number of work-hours by Federal
employees, and draining vast amounts of other agency resources that
could be far better utilized in more worthy endeavors.
The Vice President's National Performance Review determined that in
1993 alone the Congress mandated that the Office of the President and
executive branch agencies to prepare over 5,300 reports. This is a
problem that is reaching truly epic proportions of unnecessary and
wasteful papershuffling.
I have based this legislation upon the official list of
congressionally mandated reports which is published each Congress by
the Clerk of the House of Representatives. It is the most comprehensive
compilation available. Let me give just a few examples of the type of
reports I am talking about. Each year, the following are required to be
sent to the Congress from Federal agencies: a report on activities
involving electric and hybrid vehicle research; a report on the United
States-Japan Cooperative Medical Science
Program; another on the number of customs service undercover
operations commenced, pending, and closed; and finally, a report on the
transportation, sale, and handling of animals for research and pets.
Is the continued research, preparation, and production of these types
of reports--and thousands more, all at taxpayers' expense--really
necessary? I think the answer is likely no, Mr. President, and I am
confident most people determined to reduce the size and cost of
Government will agree.
This problem of foisting massive reporting requirements on Federal
agencies is extremely expensive. The Department of Agriculture alone
spent over $40 million in taxpayers money in 1993 to produce the 280
reports it was required to submit to the Congress. That is astounding,
Mr. President--$40 million in taxpayer dollars spent by a single
department on reports mandated by the Congress. At a time when our
country is struggling to alleviate the burdens of the middle class and
also address the urgent needs of our citizenry,
[[Page S1071]] this is an especially egregious waste of money.
Furthermore, this problem is getting worse with each passing year.
The GAO stated that in 1970, the Congress mandated only 750 recurring
reports from Federal agencies. Now we have spiraled well past 5,300,
and the GAO determined that ``Congress imposes about 300 new
requirements on Federal agencies each year.'' Clearly, Mr. President,
the wasteful blizzard of paperwork that Vice President Gore criticized
is becoming an avalanche, and it's time for the Senate to take decisive
action to remedy it.
This legislation would terminate the statutory requirement for all
congressionally mandated reports 5 years after it is signed into law,
with two specific exceptions. The reports to be exempted are those
required under the Inspector Generals Act of 1978 and the Chief
Financial Officers Act of 1990. The Inspector Generals Act requires the
Congress to be advised of activities regarding investigations into
waste, fraud, and abuse in Federal agencies; and the CFO Act requires
agencies to provide financial information about their short- and long-
term management of agency resources.
I believe the reports required by these two laws are very important
and merit continuation, and I also recognize that there are many other
reports that my colleagues feel have great value because of the
information they provide to the Congress. Such reports can simply be
reauthorized at any time in the 5 years before this amendment would
sunset them.
Mr. President, it's time we put an end to this cycle of waste and
misspent resources. The adoption of this legislation would be a strong
contribution toward downsizing Government as the American people are
calling on us to do. I urge my colleagues to support this legislation
and remove the millstone of unnecessary and costly paperwork that
Congress has hung around the neck of the Federal Government for too
long.
______
By Mr. CAMPBELL (for himself, Mr. Grassley, and Mr. Kohl):
S. 234. A bill to amend title 23, United States Code, to exempt a
State from certain penalties for failing to meet requirements relating
to motorcycle helmet laws if the State has in effect a motorcycle
safety program, and to delay the effective date of certain penalties
for States that fail to meet certain requirements for motorcycle safety
laws, and for other purposes; to the Committee on Environment and
Public Works.
MOTORCYCLE SAFETY LEGISLATION
Mr. CAMPBELL. Mr. President, today, I rise to introduce legislation
which will provide relief to 25 of those States that have been
penalized by one such mandate. The Intermodal Transportation Act of
1991 penalized States which did not pass laws mandating seatbelt and
helmet usage by October 1 of 1993. The penalties involve a required
transfer of scarce transportation and construction dollars to section
402 safety programs. The penalties are assessed regardless of whether
the State already has the funds dedicated to safety programs and
regardless of the State's individual safety record.
Like many of my colleagues, Mr. President, I am not opposed to safety
programs and I certainly support them. I am not opposed to the use of
helmets. On the contrary, I am opposed to the Federal Government
blackmailing States, as many other Senators are. It is not a good
policy to force States to channel funds from one transportation
activity to another, using threats of withholding Federal money for
these programs.
This bill would give States the option of implementing their own
safety programs, which they can tailor to the specific needs of their
individual States. If they choose to design a safety program or already
have such a program in place, it would not be subject to the section
153 penalties. They still would have the option of passing such laws if
they want it. In fact, it would not mandate that any States repeal
existing laws.
I believe encouraging and providing support to States and local
communities to establish training programs would be a much more
effective means of improving motorcycle safety on the roads and the
highways. The Federal Government should redirect their role to
establishing basic guidelines regarding the programs, rather than
forcing States to dip from one transportation fund to another.
Mr. President, as the Senate has been debating the issue of unfunded
mandates, I am introducing legislation that will provide options and
relief to the 25 States which have been financially penalized under the
Intermodal Surface Transportation Act of 1991 for not having passed
laws mandating helmet use by the deadline of October 1, 1993. This is
not only a burdensome Federal mandate placed on the backs of State
legislatures, but also an erosion of civil liberties and personal
freedom.
Twenty-five States face penalties in fiscal years 1995, 1996, and
1997. In accordance with ISTEA, they are required to transfer scarce
transportation and construction dollars to section 402 safety programs.
This shift will force States to spend 10 to 20 times the amount they
are currently spending on section 402 safety programs. These penalties
are assessed regardless of whether the State already has funds
dedicated to helmet safety programs and regardless of the State's
individual safety record.
Initially, these States are being forced to shift 1.5 percent of
their Federal highway dollars. This transfer effects three programs:
the National Highway System, the Surface Transportation Program, and
the Congestion Mitigation and Air Quality Improvement Program. Those
States which did not enact helmet laws by September 30, 1994, are
required to shift 3 percent of their Federal highway funds from these
important programs into safety programs.
My bill would repeal the section 153 penalties and, upon enactment of
this legislation, gives States until fiscal year 1996 to either pass
helmet laws, or establish motor safety programs, exempting those States
which already have safety programs in place.
Mr. President, let me be clear. I am not opposed to people wearing
helmets. Quite the contrary. What I am opposed to is the Federal
Government blackmailing States to pass laws. It simply is not good
policy to force States to funnel funds from one State transportation
activity to another. It should be pointed out that the money the
Federal Government wants to redirect, is tax revenue already paid by
State residents.
Safety education programs are desirable. That is the point of my
bill. I firmly believe, and I'm sure my colleagues would agree, that we
must do everything we can to make our roads and highways safer.
My bill would give States the option of implementing safety programs,
instead of mandating the use of helmets and remove the section 153
penalties.
My own State of Colorado has no helmet law. The Colorado Legislature
has repeatedly shot down any attempt to implement one.
Colorado, however, has a motorcycle fatality rate almost 30 percent
below the average for States with mandatory helmet laws. Of the top 12
States with the best motorcycle safety records, only one has a helmet
law. On the other hand, half of the 12 States with the worst safety
records have helmet laws.
Comparing States with and without mandatory helmet laws as a whole,
figures show that for the 14-year period between 1977 and 1990, States
with mandatory helmet laws had 12.5 percent more accidents and 2.3
percent more fatalities than States that did not mandate helmet usage.
In the past decade, motorcycle fatalities have decreased 38 percent
and accidents have plummeted 41 percent. These figures are particularly
impressive
because the Federal Highway Administration estimates that the average
vehicle miles traveled by motorcyclists has increased 85 percent since
1975. These statistics are unmatched by any other category of road
user--passenger or commercial.
What can account for this decrease in accidents and fatalities?
Evidence clearly indicates that the most effective way to reduce
motorcycle accidents and motorcycle fatalities is through comprehensive
education programs, as opposed to mandating helmet usage. Currently 42
States have established and funded some sort of safety program.
The national average of motorcycle fatalities per 100 accidents is
2.95.
[[Page S1072]] States with rider education programs and no helmet laws,
however, have the lowest average death rate, 2.56 fatalities per 100
accidents. States with mandatory helmet laws and no rider education
programs have a significantly higher rate of 3.09 fatalities per 100
accidents.
Police accident reports indicate that well over 45 percent of
motorcyclists involved in accidents did not have a motorcycle license,
92 percent did not have any rider training, and over 50 percent had
less than 6 months riding experience. Some 62 percent of the accidents
and 50 percent of the fatalities involved riders between the ages of 17
and 26. Clearly, mandating helmet use will not address the real problem
of rider inexperience and lack of training.
I believe that encouraging and providing support to States and local
communities to establish motorcycle training programs would be a much
more effective means of improving motorcycle safety on our roads and
highways. The Federal Government should redirect its role to providing
uniform national guidelines regarding these safety programs, rather
than mandating where the money to pay for them should come from.
I realize the motivations behind ISTEA and those who wish to force
States into passing helmet and seatbelt laws are doing so out of
concern for the safety of the traveling public, but I think their
efforts are misguided.
Forcing States to pass laws, or throwing money at safety programs is
not the answer. Throughout my career in politics, I have always strived
to protect the interest of States and communities by allowing them to
make the important decisions on how their affairs should be conducted.
When Congress blackmailed the States regarding highway speed limits, I
thought that was wrong. The same goes for helmet laws. I have stuck
with the philosophy that each State and each community should, to the
best of their abilities, be allowed to make its own policy decisions.
I own a motorcycle, that's no secret. Where helmets are required to
be worn, I wear them. Where they are not, I don't. I make no bones
about the fact that my dislike for the Federal mandate requiring States
to pass helmet laws is in part inspired by my interest in motorcycling.
But, I also think personal freedom is an issue. I am prochoice. I do
not think the Federal Government should dictate to the States, or its
citizens, on matters of individual liberty. The choice of wearing a
helmet, or not doing so, should be left up to the individual--not
forced by Government extortion. And those who contend that it is not
simply a personal responsibility because motorcyclists who choose not
to wear helmets can become a ``public burden,'' are using faulty logic.
It would then follow that we should mandate helmets for skiers,
horsemen, skateboarders, and automobile drivers.
Mr. President, in closing, I want to strongly encourage my colleagues
to reconsider the position Congress took in ISTEA in mandating that
States pass helmet and seatbelt laws. It is wrong to blackmail the
States into passing laws. And, if motorcycle safety programs are
desired, we should work toward establishing effective program
guidelines, rather than force States to dip from one transportation pot
to fill another.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 234
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. USE OF A MOTORCYCLE HELMET AND MOTORCYCLE SAFETY
PROGRAM.
Section 153(h) of title 23, United States Code, is
amended--
(1) by striking ``(1) Fiscal year 1994.--If,'' and
inserting the following:
``(2) Safety belts.--
``(A) Fiscal year 1994.--If,'';
(2) by striking ``(2) Thereafter.--If'' and inserting the
following:
``(B) Thereafter.--If,''; and
(3) in paragraph (2) (as amended by paragraphs (1) and
(2)), by striking ``subsection (a)(1) and a law described
in'' each place it appears;
(4) by inserting under the subsection heading the
following:
``(1) Motorcycle helmets.--
``(A) Fiscal year 1996.--If, at any time in fiscal year
1996, a State does not have in effect a law described in
subsection (a)(1) or a motorcycle safety program administered
or authorized by the State to reduce motorcycle accidents and
fatalities, the Secretary shall transfer 1\1/2\ percent of
the funds apportioned to the State for fiscal year 1997 under
each of subsections (b)(1), (b)(2), and (b)(3) of section 104
of this title to the apportionment of the State under section
402 of this title.
``(B) Thereafter.--If, at any time in a fiscal year
beginning after September 30, 1996, a State does not have in
effect a law described in subsection (a)(1) or a motorcycle
safety program administered by the State to reduce motorcycle
accidents and fatalities, the Secretary shall transfer 3
percent of the funds apportioned to the State for the
succeeding fiscal year under each of subsections (b)(1),
(b)(2), and (b)(3) of section 104 of this title to the
apportionment of the State under section 402 of this
title.''.
______
By Mr. HOLLINGS:
S. 237. A bill to amend the Internal Revenue Code of 1986 to impose a
value added tax and to use the receipts from the tax to reduce the
Federal budget deficit and Federal debt and to finance health care
reform; to the Committee on Finance.
THE DEFICIT AND DEBT REDUCTION AND HEALTH CARE FINANCING ACT OF 1995
Mr. HOLLINGS. Mr. President, I rise to introduce the Deficit
Reduction and Health Care Financing Act of 1995. This bill would create
a 5-percent national value-added tax, with all revenues set aside in a
trust fund to finance deficit reduction and health care reform. Let me
be clear, I offer this bill under duress. But it is the only way I
know--in tandem with deeper spending cuts--to deal with the fiscal
recklessness that has gotten out of hand in this city.
It's time we stopped running government based on the promise of
pollisters and started thinking about performing for the people. Today,
I propose a 5-percent national value-added tax without exemptions. The
VAT is essentially like a national sales tax. Traditionally, there have
been three principal objections to a VAT: First, it is regressive;
second, it is too complicated; third, it raises too much money and
would cause waste. Let me address each of these objections in turn.
First, the issue of regressivity. I agree, but all taxes are
inherently regressive. With a consumption tax, the more you consume,
the more you pay; the less you consume, the less you pay. The VAT does
fall disproportionately on lower income brackets. But the VAT is not
nearly as regressive as interest costs on the national debt. It is not
nearly as regressive as the debt's inflationary impact on the economy,
which disproportionately harms the poor.
Second, it is said that the VAT is too complicated. Well, it's
certainly not too complicated for the Japanese, the Koreans, and every
member of the European Economic Community. Moreover, we can draw on the
lessons of these other countries as well as the experiences of the
States with sales taxes in order to minimize such complications.
Third, some say that a VAT would raise too much money. This is a
dream. We will need ever dime raised by a 5- percent VAT, plus savings
from additional steep spending cuts, in order to eliminate the deficit.
Even then, it will take years to pay down the debt and to put
government back in the black.
A VAT will help us not only to eliminate the deficit but also to pay
cash on the barrelhead for health reform. Additionally, moving to
border-rebatable taxes will contribute to eliminating our other great
deficit--the trade deficit. At present, our overseas competitors rebate
to their manufacturers the VAT on all goods exported to the United
States; those manufacturers' other in-country taxes are relatively low.
In stark contrast, producers in the United States pay property taxes,
income taxes, excise taxes, Social Security taxes and much more; then,
when their goods are shipped overseas, the importing country slaps a
fat VAT tax on top of all those other taxes. This does tremendous harm
to the competitiveness of U.S. products abroad. It makes it financially
attractive to produce outside the United States, and represents at
least a 15-percent disadvantage in international trade. A U.S. VAT
would eliminate this disadvantage. With good reason, Lester Thurow of
MIT says that ``the rules of international trade make you stupid if you
don't have a VAT.''
I have no illusions as to the political trauma involved in enacting a
new tax.
[[Page S1073]] There is never a good time to raise a tax. But as we
continue to wait for a propitious moment, our financial crisis worsens
every day. It's time to put government back on track with difficult
belt-tightening and and honest taxes. I propose a single, ultra-simple
reform--a reform that would transform the reputation of Congress in the
eyes of the American people. That reform is to put the U.S. Government
on a pay-as-you-go basis.
______
By Mr. HOLLINGS:
S. 238. A bill to create a legislative line-item veto by requiring
separate enrollment of items in appropriations bills; to the Committee
on Rules and Administration.
THE LEGISLATIVE LINE-ITEM VETO SEPARATE ENROLLMENT AUTHORITY
Mr. HOLLINGS. Mr. President, I rise today to introduce legislation
which would provide Congress and the President with an additional
weapon to eliminate wasteful and unnecessary appropriations and thereby
reduce the Federal deficit. This bill, a statutory, separate enrollment
line-item veto, is identical to a measure previously considered by the
99th and reported favorably by a bipartisan vote out of the Senate
Budget Committee on July 25, 1990. During the 103d Congress, a similar
amendment offered by myself and Senator Bradley received the support of
52 Senators.
Today, 43 States have, in one form or another, a line-item veto
allowing the chief executive to limit legislative spending. As a former
Governor who inherited a budget deficit in a poor State, I can testify
that a line-item veto is invaluable in imposing fiscal restraints.
The fiscal problems of our Nation have been painfully documented. Our
Government continues on annual deficit binges that have pushed our
total deficit past $4.7 trillion. For years now, we have been toying
with freezes, asset sales, and sham summits, but the deficit and debt
continue to grow.
The American taxpayer, as well as the Congress, have grown weary of
the smoke and mirrors and are past ready for new measures that will
help to put our country back in the black. If every there was a problem
that needed to be attacked from every particular angle, it is this
deficit.
Mr. President, I welcome President Clinton's strong support for the
line-item veto initiative and his continuing resolve to attack the
burgeoning deficit monster. In order to hold him to that commitment, we
should send him into battle well armed. By restoring accountability and
responsibility throughout the appropriations process, the line-item
veto would force Members of Congress and the President to stop fixing
the blame and start fixing the problem.
In order to provide greater flexibility in the legislative process,
this legislation provides that each item shall be enrolled as a
separate bill and sent to the President for his approval. Therefore,
each item of an appropriations bill would be subject to veto or
approval, just like any other bill, and the override provisions found
in article I of the Constitution would apply in the case of a veto. An
item is defined as any numbered section and any unnumbered paragraph of
an appropriations bill. The enrolling clerk would merely break an
appropriations bill down into its component parts and send each
separately enrolled provision to the President.
Finally, this legislation also contains a 2-year sunset provision
allowing for a reasonable testing period and requiring an evaluation of
the line-item veto's success. I have no question but that it will be
demonstrated to be a modest, but effective, method of restraining
fiscal profligacy. I hope that Senators will join me in this effort,
and I ask unanimous consent the full text of the bill be printed in the
Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 238
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled, That (a)
the Impoundment Control Act of 1974 is amended by adding at
the end thereof the following new title:
``TITLE XI--SEPARATE ENROLLMENT AUTHORITY LEGISLATIVE LINE ITEM VETO
``Sec. 1101. (a)(1) Notwithstanding any other provision of
law, when any general or special appropriation bill or any
bill or joint resolution making supplemental, deficiency, or
continuing appropriations passes both Houses of the Congress
in the same form, the Secretary of the Senate (in the case of
a bill or joint resolution originating in the Senate) or the
Clerk of the House of Representatives (in the case of a bill
or joint resolution originating in the House of
Representatives) shall cause the enrolling clerk of such
House to enroll each item of such bill or joint resolution as
a separate bill or joint resolution, as the case may be.
``(2) A bill or joint resolution that is required to be
enrolled pursuant to paragraph (1)--
``(A) shall be enrolled without substantive revision;
``(B) shall conform in style and form to the applicable
provisions of chapter 2 of title 1, United States Code (as
such provisions are in effect on the date of the enactment of
this title); and
``(C) shall bear the designation of the measure of which it
was an item prior to such enrollment, together with such
other designation as may be necessary to distinguish such
bill or joint resolution from other bills or joint
resolutions enrolled pursuant to paragraph (1) with respect
to the same measure.
``(b) A bill or joint resolution enrolled pursuant to
subsection (a)(1) with respect to an item shall be deemed to
be a bill under clauses 2 and 3 of section 7 of article I of
the Constitution of the United States and shall be signed by
the presiding officers of both Houses of the Congress and
presented to the President for approval or disapproval (and
otherwise treated for all purposes) in the manner provided
for bills and joint resolutions generally.
``(c) For purposes of this concurrent resolution, the term
`item' means any numbered section and any unnumbered
paragraph of--
``(1) any general or special appropriation bill; and
``(2) any bill or joint resolution making supplemental,
deficiency, or continuing appropriations.''.
(b) The amendment made by subsection (a) shall apply to
bills and joint resolutions agreed to by the Congress during
the two-calendar-year period beginning with the date of the
enactment of this Act.
______
By Mr. SHELBY (for himself, Mr. Nickles, Mr. Burns, Mrs.
Hutchison, Mr. Lott, Mr. Packwood, Mr. Pressler, Mr. Inhofe,
Mr. Thomas, and Mr. Brown):
S. 239. A bill to require certain Federal agencies to protect the
right of private property owners, and for other purposes; to the
Committee on Governmental Affairs.
private property owners bill of rights
Mr. SHELBY. Mr. President, today I am introducing a bill to address
the continued deterioration of individual property rights.
Environmental regulations are increasingly interfering with the ability
of private property owners to use and develop their land. Contrary to
popular belief, protecting the property rights of individuals and
protecting our environment are not mutually exclusive principles.
All too often, I hear stories that landowners are being deprived of
the ability to build a house because the Corps of Engineers has
designated their property as a wetland; or the U.S. Fish and Wildlife
Service has prohibited cultivation of land for fear it might jeopardize
an endangered species. A landowner may even be required to pay
exorbitant mitigation fees or fines in order to regain the use of their
property. That is, of course, if they are lucky enough to regain the
right to use their property.
Not only does the enforcement of such land use statutes abuse the
rights of the property rights owners, but they impose the cost of
enforcing these public goods on individual owners rather than the
public at large. If the land is regulated in the name of a public good,
surely we can distribute the cost among the public as well.
The mounting cases regarding regulatory takings necessitate
Congressional action. The Domenigoni family experience is a good
example. Cindy and Andy Domenigoni are fifth generation farmers in
Riverside County, CA. First cultivated in 1879, their farm has
traditionally been home to the Stephen's kangaroo rat, which was listed
as an endangered species in 1988.
In 1990, Fish and Wildlife Service officials ordered them to stop
cultivating their 800 tillable acres and warned them that disking this
land would warrant their arrest. Punishment for disking land that had
been cultivated for the previous 100 years would now result in jail
time, a $50,000 fine, or both.
As a result, the Domenigonis' land lain idle, producing no crops for
4 years. They lost $75,000 in foregone
[[Page S1074]] crops each year and incurred another $100,000 loss in
biological consultation fees, legal fees, and other costs associated
with fighting this regulatory taking.
Ironically, on November 1, 1993, shortly after devastating southern
California fires destroyed thousands of acres of kangaroo rat habitat,
FWS biologist John Bradley determined that the rats had left the area
before the fire, because the years of leaving the fields fallow had
made the brush and weeds grow too thick for the rats.
I must say this kind of policy is reckless and haphazard. When
elected to the Senate, we had to take an oath to uphold the
Constitution of the United States. I do not believe confiscating the
economic value of ones property would be considered upholding the
Constitution. Indeed, I believe most would agree that such action is
nothing less than the taking of property without compensation.
In another case, Mr. and Mrs. Howard Heck were denied building on
their 25 acres of land because a federally threatened plant species was
``within 5 miles of the proposed project site.'' Mr. Heck has said,
``We were proud to be Americans in a land where * * * our children
were to have the opportunity to achieve any goal we wanted. Now we are
ashamed of our country and Government that allows the bureaucrats to
steal from its citizens * * *.''
I, too, am ashamed the Government in this Nation can effectively
steal the economic value of one's land and rob this elderly couple of
their dignity and peace during their remaining years on this Earth.
In still another instance, a Corps field agent to the regional chief
of enforcement signed a memo stating a particular family in Maine,
``would be a good one to squash and set an example * * *.''
The Government of the United States of America has no business
``squashing'' hard working Americans or plundering away their wealth.
The very reason the Constitution was established was to protect
individuals, not to harm them. The atrocities previously mentioned need
to be addressed with a clearly defined policy for Federal agencies in
order to stop the abuse of Government bureaucrats.
The two laws most responsible for imposing the heavy burden on
property ownership are the Endangered Species Act and section 404 of
the Clean Water Act.
Although the intention of these acts is commendable, they have
created perverse incentives for private property ownership. Individuals
are reluctant to develop or build on land for fear the Fish and
Wildlife Service, the Corps of Engineers or the EPA will soon visit. A
visit from the IRS is more welcome than a visit from these Federal
agencies.
The negative impact of these perverse incentives directly affect the
housing and agricultural industries as well as many others. Every house
that is not built and every farm that is not cultivated costs us jobs.
Not only do the present policies crush an individual's hopes and
dreams, but it hinders those still trying to achieve them.
As a result of the inequities in the current policies, Senator
Nickles and I are reintroducing legislation entitled the, ``Private
Property Owners Bill of Rights.'' This bill would insure that private
property owners are protected by the Federal Government, its employees,
agents, and representatives.
Our bill requires notice and consent from property owners before
Federal agencies and their agents can enter a private property owners
land for purposes of the Endangered Species Act or wetlands laws.
In addition, this legislation ensures that property owners rights are
considered and respected when agency decisions or actions are taken
pursuant to these two laws by providing an administrative appeals
process. The process calls for the owner to be given access to the
information collected, a description of the way the information was
collected, and an opportunity to discuss the accuracy of the
information.
Lastly, and most importantly, it requires the agency itself to
determine whether a taking has occurred and if so to compensate the
private property owner for the loss in fair market value of the
property. A property owner who is deprived of at least 20 percent or
more of the fair market value of $10,000 or more is entitled to receive
compensation. The agency would be required to pay the fair market value
of the property if purchased or the difference between the fair market
value of the property without the restrictions and the fair market
value of the property with restrictions.
I believe our legislation addresses the serious problem of property
rights abuse. It will enhance the foundation necessary for contracts
and commerce and in doing so, will foster an environment essential to
achieving the American Dream.
I strongly urge my colleagues to cosponsor this legislation and
support this cause on behalf of every property owner in America.
I ask unanimous consent that the following Senators be listed as
original cosponsors of this legislation: Senator Nickles, Senator
Burns, Senator Hutchison, Senator Lott, Senator Packwood, Senator
Pressler, Senator Inhofe, Senator Thomas, and Senator Brown.
Mr. NICKLES. Mr. President, of all the freedoms we enjoy in this
country, the ability to own, care for, and develop private property is
perhaps the most crucial to our free enterprise economy. In fact, our
economy would cease to function without the incentives provided by
private property. So sacred and important are these rights, that our
forefathers chose to specifically protect them in the fifth amendment
to the U.S. Constitution, which says in part, ``nor shall private
property be taken for public use, without just compensation.''
Unfortunately, Mr. President, some Federal environmental, safety, and
health laws are encouraging Government violation of private property
rights, and it is a problem which is increasing in severity and
frequency. we would all like to believe the Constitution will protect
our property rights if they are threatened, but today that is simply
not true. The only way for a person to protect their private property
rights is in the courts, and far too few people have the time or money
to take such action. Thus many citizens lose their fifth amendment
rights simply because no procedures have been established to prevent
Government takings.
Mr. President, many people in the Federal bureaucracy believe that
public protection of health, safety, and the environment is not
compatible with protection of private property rights. I disagree. In
fact, the terrible environmental conditions exposed in Eastern Europe
when the cold war ended lead me to believe that property ownership
enhances environmental protection. As the residents of East Berlin and
Prague know all too well, private owners are more effective caretakers
of the environment than communist governments.
Yet the question remains, how do we prevent overzealous bureaucrats
from using their authority in ways which threaten property rights?
Mr. President, today I rise to join my colleague Senator Richard
Shelby of Alabama in introducing legislation which will strengthen
every citizen's fifth amendment rights. Our bill, the Private Property
Owners Bill of Rights, targets two of the worst property rights
offenders, the Endangered Species Act and the wetlands permitting
program established by Section 404 of the Clean Water Act.
Mr. President, our bill requires Federal agents who enter private
property to gather information under either the Endangered Species Act
or the wetlands permitting program to first obtain the written consent
of the landowner. While it is difficult to believe that such a basic
right should need to be spelled out in law, overzealous bureaucrats and
environmental radicals too often mistake private resources as their
own. Property owners are also guaranteed the right of access to that
information, the right to dispute its accuracy, and the right of an
administrative appeal from decisions made under those laws.
Most importantly, the Private Property Owners Bill of Rights
guarantees compensation for a landowner whose property is devalued by
50 percent or more by a Federal action under the Endangered Species Act
or wetlands permitting program. An administrative process is
established to give property owners a simple and inexpensive way to
seek resolution of their takings
[[Page S1075]] claims. If we are to truly live up to the requirements
of our Constitution, Mr. President, we must make this commitment. I
believe this provision will work both to protect landowners from
uncompensated takings and to discourage Government actions which would
cause such takings.
Mr. President, the time has come for farmers, ranchers, and other
landowners to take a stand against violations of their private property
rights by the Federal bureaucracy. The Private Property Owners Bill of
Rights will help landowners take that stand.
Mr. BURNS. Mr. President, today I join my colleague from Alabama,
Senator Shelby in introducing a bill which would protect individual's
private property rights.
This bill, the Private Property Owners Bill of Rights, would provide
a consistent Federal policy to encourage, support, and promote the
private ownership of property and to ensure the constitutional and
legal rights of private property owners.
Private property rights are protected by the fifth amendment of the
Constitution. Yet, many laws have been encroaching further and further
on this right. The bill we are introducing today is very important to
Montana because it makes the Federal Government respect and protect
private property rights when enforcing the Endangered Species Act and
the Clean Water Act. Montana's private property owners have been
greatly impacted by these two laws.
In Montana a couple years ago, I saw a headline which read ``Judge
Says Grizzlies Have `People Rights'.'' This article ran in an
agriculture trade publication. The story was about John Shuler of
Choteau who shot a grizzly bear in 1989 after he found three of these
bears in his sheep pen. He originally fired the shot to scare the bears
away, but when one bear charged him, he was forced to shoot that bear.
For those who may not be aware, the grizzly is protected under the
Endangered Species Act.
The judge ruled that the Endangered Species Act's self-defense
exception must meet the same requirements used in criminal law for
humans. The judge then ruled that since this rancher had stepped off
his porch, to protect his investment, he ``Purposefully placed himself
in the zone of imminent danger of a bear attack''. According to this
judge, the rancher didn't have the right to protect his property.
Folks, that's wrong.
The Private Property Owners Bill of Rights would create an
administrative appeals process for affected property owners. And the
bill establishes a framework so private property holders can seek and
obtain compensation.
In addition, before a Government official can enter private land,
they must have consent from the land owner. If information is collected
on private property, this information cannot be used unless the private
individual has full access to the information and has the right to
dispute the accuracy of the information. The bill also establishes the
right to administratively appeal decisions regarding wetlands and
critical habitat of a listed species.
Montanans believe that protecting private property is of utmost
importance. And this bill reinforces the Government's responsibility to
protect property rights and will help get the Federal Government off
the backs of Montana's working men and women.
I believe strongly in every American's private property rights and
this bill should be signed into law.
______
By Mr. DOMENICI (for himself, Mr. Dodd, Mr. Hatch, Ms. Mikulski,
Mr. Bennett, Ms. Moseley-Braun, Mr. Lott, Mrs. Murray, Mr.
Mack, Mr. Johnston, Mr. Faircloth, Mr. Conrad, Mr. Burns, Mr.
Chafee, Mr. Gorton, Mr. Helms, Mr. Kyl, Mr. Craig Thomas, Mrs.
Hutchison, Mr. Santorum, and Mr. Pell):
S. 240. A bill to amend the Securities Exchange Act of 1934 to
establish a filing deadline and to provide certain safeguards to ensure
that the interests of investors are well protected under the implied
private action provisions of the Act; to the Committee on Banking,
Housing, and Urban Affairs.
the private securities litigation reform act of 1995
Mr. DOMENICI. Mr. President, I introduce a bill on behalf of
Senator Dodd, myself and 15 other Senators on both sides of the aisle
which will return some fairness and common sense to our broken
securities class action litigation system. The system as it currently
operates encourages the quick filing of frivolous complaints by
entrepreneurial class action attorneys, and costs businesses countless
amounts of time and money to defend against and settle these strike
suits. In cases of real fraud, the system often leaves injured
investors with pennies on the dollar for their losses, while
plaintiffs' lawyers take a substantial amount of the settlement. In
short, the current securities litigation system rarely benefits anyone
except for plaintiffs' attorneys, and victimizes innocent companies and
investors.
The list of companies that have been hit with frivolous securities
suits reads like the who's who of high growth, high-technology
businesses. In fact, 19 of the 30 largest companies in Silicon Valley
have been sued since 1988. They are the backbone of our economy and the
foundation of our ability to compete in the new global marketplace.
During 2 days of hearings on securities litigation conducted by Senator
Dodd back in 1993, we heard from CEO's who had been involved in
frivolous securities class actions first hand. Their testimony
indicated that:
Companies get sued when their stock price drops.
Companies also get sued by shareholders for settling securities
suits.
Frivolous litigation is time consuming and distracts CEO's and other
corporate officers from economically productive activity.
Defending a securities lawsuit often is as costly as starting up a
new product line.
The general counsel for the Intel Corp. testified that if Intel had
been sued when it was a start-up company, that such a suit probably
would have bankrupted the company before it invented the microchip. We
cannot afford to allow the current system to snuff out this sort of
innovation.
Frivolous litigation also adversely affects investors by drawing
scarce resources away from productive activity, which is then reflected
in a company's stock price. Arthur Levitt, Chairman of the Securities
and Exchange Commission, stated in testimony before the House in August
1994, that ``when issuers and others pay substantial sums to deal with
frivolous lawsuits, significant costs are imposed on the process of
capital-raising and on business, costs that ultimately will be borne by
all shareholders''.
Instead we must put a stop to the race-to-the-courthouse game played
by plaintiffs' class action attorneys, in which they file lawsuits
within hours of news that a company came up short on an earnings
projection or will be forced to delay the introduction of a new product
line. Information provided to the Senate Securities Subcommittee by the
National Association of Securities and Commercial Law Attorneys
[NASCAT] suggests that 56 percent of the class actions that they hand-
picked to provide to the subcommittee were filed within 30 days of a
triggering event, like a missed earnings projection. Twenty-one percent
of the cases were filed within 48 hours of the triggering. The stock
price drops and class action suits are filed quickly with little due
diligence done to
investigate each of the elements necessary for a successful 10b-5
case.
Many academics and those familiar with our securities class action
system also agree that the securities litigation system encourages the
filing of frivolous suits. Jonathan Macey, a law professor at Cornell
University believes that most securities class actions are frivolous.
``The facts show that every time a firm's share price drops by enough
that it's profitable for plaintiffs' lawyers to bring a lawsuit, they
do'', he said recently. Janet Cooper Alexander at Stanford University
has proven that most class actions are settled without regard to
whether the case has merit. Chairman Levitt has acknowledged that
``virtually all securities class actions are settled for some fraction
of the claimed damages, and some allege that settlements often fail to
reflect the underlying merits of the cases. If true, this means that
weak claims are overcompensated and strong claims are
undercompensated.''
[[Page S1076]] In case you don't believe that class action attorneys
are filing frivolous suits, take a look at the article the Wall Street
Journal ran last week on January 11th. It provides an excellent example
of the cookie-cutter complaints which often form the basis of these
million dollar lawsuits. It documents a case against Philip Morris
filed within 48 hours of the company's announcement of a price cut on
one of its brands of cigarettes. The case was dismissed after the judge
noticed that the plaintiffs' attorneys had filed two separate suits
which alleged that Philip Morris had engaged in fraud to create and
prolong the illusion of their success in the toy industry. As you might
well know, Philip Morris doesn't make toys.
But this is how the current system works. Plaintiffs' lawyers race to
the courthouse, file frivolous suits without any research into their
validity, and companies normally may pay something to make them go
away. Because usually, plaintiffs' lawyers don't make the glaring
mistake they made in the Philip Morris case and forget to delete the
word toy from their complaint. Judges rarely dismiss these cases
without such a blunder. Companies continue to get sued and are forced
to settle frivolous cases. Our bill will eliminate these poorly
researched, kitchen sink complaints.
Plaintiffs' lawyers often sue not only the issuer company, but their
officers and directors, accountants, lawyers, and underwriters. These
cases are brought under joint and severable liability, which means that
any one defendant could be made to pay the entire judgment even if he
or she was only marginally responsible. This increases the pressure to
settle even the most frivolous cases.
Our bill adopts the State law trend of imposing proportionate
liability, liability according to relative fault. Our bill retains
joint severable liability for the really bad actors, but provides
proportionate liability for those parties only incidentally involved.
However, our bill contains a provision which deals with the problem of
insolvent defendants and small investors. We believe that this
provision strikes the correct balance and returns fairness to the
system.
Our bill also allows for alternative dispute resolution as an
alternative to costly and time consuming litigation. One reason these
cases settle regardless of the merits is that it costs so much to get
through what lawyers call discovery, the process of exchanging
information before a trial. By allowing for ADR, we hope to reduce
those costs. Our bill also requires specificity in pleading securities
fraud, a requirement imposed on every other fraud action under rule
9(b) of the Federal rules. This provision will reduce the number of
fishing expedition lawsuits, like the one in the Philip Morris case.
Even in cases of real fraud, the current system allows investors to
recover on average about 6 cents on the dollar, while plaintiffs'
lawyers take on average between 30 and 33 percent of the settlement
fund. One plaintiffs' class action lawyer boasted in Forbes magazine
that securities class action cases are a great practice because there
are no clients. Yet these clientless lawyers claim to be acting in the
best interests of the class.
Once a settlement is reached, the entrepreneurial lawyer with no
clients becomes an adversary of the plaintiffs' class. The lawyers'
interest shifts to protecting the settlement. ``At its worst, the
settlement process may amount to a covert exchange of a cheap
settlement for a high award of attorney's fees'', according to John
Coffee of Columbia University. Professor Coffee also has noted that
plaintiffs' attorneys in many securities class actions appear to ``sell
out their clients in return for an overly generous fee award''.
Under our bill, plaintiffs' lawyers will no longer be able to sell
out their clients for huge fee awards. Our bill allows judges to
appoint a plaintiff steering committee or guardian ad litem at the
request of the class to ensure that the attorneys act in the best
interests of their clients. Clients, not lawyers, will be in charge of
the litigation, and will be able to make the important decisions like
when to settle, when to dismiss their attorneys or when to proceed to
trial.
Our bill also eliminates pet plaintiff fees, bonus awards plaintiffs'
attorneys pay to individuals to act as class representatives,
regardless of the number of shares they own or the amount of their
actual losses. These fees reduce the amount of recovery available to
the class as a whole and serve no purpose but to give attorneys an
available stable of plaintiffs willing to sue at a moment's notice in
exchange for a big payoff. This practice undermines the fairness of the
system and should be eliminated.
Out current securities class action system obviously is broken and
needs the types of reforms Senator Dodd and I have proposed in this
bill. Too many cases are pursued for the purpose of extracting
settlements from corporations and other parties without regard to their
merits. The business community is powerless to deal with these suits,
and companies settle rather than bet the company. These settlements
yield large fees for plaintiffs' lawyers but compensate investors only
for a fraction of their actual losses.
We reject the notion that stock price volatility is fraud.
Plaintiffs' lawyers must be made to stop, think, investigate, and
research before they file these potentially devastating suits. Truly
defrauded investors must have greater control over their litigation and
receive a greater share of the settlement fund.
The spirit motivating this bill is the obligation that Chairman
Levitt has identified: ``to make sure that current system operates in
the best interest of all investors. This means focusing not just on the
interests of those who happen to be aggrieved in a particular case, but
also on the interests of issuers and the markets as a whole''.
I would like to commend Senator Dodd for tackling the difficult
issue. Under his leadership in the last Congress, we developed a
substantial hearing record in the Securities Subcommittee and collected
as many facts and opinions as we could. This bill is the product of a
great deal of work and deliberation, and I want to express my gratitude
for the way he and his staff went about developing this legislation.
I ask unanimous consent that a copy of the Wall Street Journal
article I mentioned earlier be printed in the Record. I also ask
unanimous consent that a section-by-section description of the bill and
the bill text itself be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
S. 240
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 ``Private
Securities Litigation Reform Act of 1995''.
(b) Table of Contents.--The table of contents for this Act
is as follows:
Sec. 1. Short title; table of contents.
TITLE I--PRIVATE SECURITIES LITIGATION
Sec. 101. Elimination of certain abusive practices.
Sec. 102. Alternative dispute resolution procedure; time limitation on
private rights of action.
Sec. 103. Plaintiff steering committees.
Sec. 104. Requirements for securities fraud actions.
Sec. 105. Amendment to Racketeer Influenced and Corrupt Organizations
Act.
TITLE II--FINANCIAL DISCLOSURE
Sec. 201. Safe harbor for forward-looking statements.
Sec. 202. Fraud detection and disclosure.
Sec. 203. Proportionate liability and joint and several liability.
Sec. 204. Public Auditing Self-Disciplinary Board.
TITLE I--PRIVATE SECURITIES LITIGATION
SEC. 101. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.
(a) Receipt for Referral Fees.--Section 15(c) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended
by adding at the end the following new paragraph:
``(7) Receipt of referral fees.--No broker or dealer, or
person associated with a broker or dealer, may solicit or
accept remuneration for assisting an attorney in obtaining
the representation of any customer in any implied private
action arising under this title.''.
(b) Prohibition on Attorneys' Fees Paid From Commission
Disgorgement Funds.--Section 21(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78u(d)) is amended by adding at the
end the following new paragraph:
``(4) Prohibition on attorneys' fees paid from commission
disgorgement funds.--Except as otherwise ordered by the
court, funds disgorged as the result of an action brought
[[Page S1077]] by the Commission in Federal court, or of any
Commission administrative action, shall not be distributed as
payment for attorneys' fees or expenses incurred by private
parties seeking distribution of the disgorged funds.''.
(c) Additional Provisions Applicable to Class Actions.--
Section 21 of the Securities Exchange Act of 1934 (15 U.S.C.
78u) is amended by adding at the end the following new
subsections:
``(i) Recovery by Named Plaintiffs in Class Actions.--In an
implied private action arising under this title that is
certified as a class action pursuant to the Federal Rules of
Civil Procedure, the share of any final judgment or of any
settlement that is awarded to class plaintiffs serving as the
representative parties shall be calculated in the same manner
as the shares of the final judgment or settlement awarded to
all other members of the class. Nothing in this subsection
shall be construed to limit the award to any representative
parties of reasonable compensation, costs, and expenses
(including lost wages) relating to the representation of the
class.
``(j) Conflicts of Interest.--In an implied private action
arising under this title that is certified as a class action
pursuant to the Federal Rules of Civil Procedure, if a party
is represented by an attorney who directly owns or otherwise
has a beneficial interest in the securities that are the
subject of the litigation, the court shall make a
determination of whether such interest constitutes a conflict
of interest sufficient to disqualify the attorney from
representing the party.
``(k) Restrictions on Settlements Under Seal.--In an
implied private action arising under this title that is
certified as a class action pursuant to the Federal Rules of
Civil Procedure, the terms and provisions of any settlement
agreement between any of the parties shall not be filed under
seal, except that on motion of any of the parties to the
settlement, the court may order filing under seal for those
portions of a settlement agreement as to which good cause is
shown for such filing under seal. Good cause shall only exist
if publication of a term or provision of a settlement
agreement would cause direct and substantial harm to any
person.
``(l) Restrictions on Payment of Attorneys' Fees From
Settlement Funds.--In an implied private action arising under
this title that is certified as a class action pursuant to
the Federal Rules of Civil Procedure, attorneys' fees awarded
by the court to counsel for the class shall be determined as
a percentage of the amount of damages and prejudgment
interest actually paid to the class as a result of the
attorneys' efforts. In no event shall the amount awarded to
counsel for the class exceed a reasonable percentage of the
amount recovered by the class plus reasonable expenses.
``(m) Disclosure of Settlement Terms to Class Members.--In
an implied private action arising under this title that is
certified as a class action pursuant to the Federal Rules of
Civil Procedure, a proposed settlement agreement that is
published or otherwise disseminated to the class shall
include the following statements, which shall not be
admissible for purposes of any Federal or State judicial or
administrative proceeding:
``(1) Statement of potential outcome of case.--
``(A) Agreement on amount of damages and likelihood of
prevailing.--If the settling parties agree on the amount of
damages per share that would be recoverable if the plaintiff
prevailed on each claim alleged under this title and the
likelihood that the plaintiff would prevail--
``(i) a statement concerning the amount of such potential
damages; and
``(ii) a statement concerning the probability that the
plaintiff would prevail on the claims alleged under this
title and a brief explanation of the reasons for that
conclusion.
``(B) Disagreement on amount of damages or likelihood of
prevailing.--If the parties do not agree on the amount of
damages per share that would be recoverable if the plaintiff
prevailed on each claim alleged under this title or on the
likelihood that the plaintiff would prevail on those claims,
or both, a statement from each settling party concerning the
issue or issues on which the parties disagree.
``(C) Inadmissibility for certain purposes.--Statements
made in accordance with subparagraphs (A) and (B) shall not
be admissible for purposes of any Federal or State judicial
or administrative proceeding.
``(2) Statement of attorneys' fees or costs sought.--If any
of the settling parties or their counsel intend to apply to
the court for an award of attorneys' fees or costs from any
fund established as part of the settlement, a statement
indicating which parties or counsel intend to make such an
application, the amount of fees and costs that will be
sought, and a brief explanation of the basis for the
application.
``(3) Identification of representatives.--The name,
telephone number, and address of one or more representatives
of counsel for the plaintiff class who will be reasonably
available to answer questions from class members concerning
any matter contained in any notice of settlement published or
otherwise disseminated to class members.
``(4) Other information.--Such other information as may be
required by the court, or by any guardian ad litem or
plaintiff steering committee appointed by the court pursuant
to section 38.
``(n) Special Verdicts.--In an implied private action
arising under this title in which the plaintiff may recover
money damages only on proof that a defendant acted with a
particular state of mind, the court shall, when requested by
a defendant, submit to the jury a written interrogatory on
the issue of each such defendant's state of mind at the time
the alleged violation occurred.
``(o) Named Plaintiff Threshold.--In an implied private
action arising under this title, in order for a plaintiff or
plaintiffs to obtain certification as representatives of a
class of investors pursuant to the Federal Rules of Civil
Procedure, the plaintiff or plaintiffs must show that they
owned, in the aggregate, during the time period in which
violations of this title are alleged to have occurred, not
less than the lesser of--
``(1) 1 percent of the securities which are the subject of
the litigation; or
``(2) $10,000 (in market value) of such securities.''.
SEC. 102. ALTERNATIVE DISPUTE RESOLUTION PROCEDURE; TIME
LIMITATION ON PRIVATE RIGHTS OF ACTION.
(a) Recovery of Costs and Attorneys' Fees.--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. ALTERNATIVE DISPUTE RESOLUTION PROCEDURE.
``(a) In General.--
``(1) Offer to proceed.--Except as provided in paragraph
(2), in an implied private action arising under this title,
any party may, before the expiration of the period permitted
for answering the complaint, deliver to all other parties an
offer to proceed pursuant to any voluntary, nonbinding
alternative dispute resolution procedure established or
recognized under the rules of the court in which the action
is maintained.
``(2) Plaintiff class actions.--In an implied private
action under this title which is brought as a plaintiff class
action, an offer under paragraph (1) shall be made not later
than 30 days after a guardian ad litem or plaintiff steering
committee is appointed by the court in accordance with
section 38.
``(3) Response.--The recipient of an offer under paragraph
(1) or (2) shall file a written notice of acceptance or
rejection of the offer with the court not later than 10 days
after receipt of the offer. The court may, upon motion by any
party made prior to the expiration of such period, extend the
period for not more than 90 additional days, during which
time discovery may be permitted by the court.
``(4) Selection of type of alternative dispute
resolution.--For purposes of paragraphs (1) and (2), if the
rules of the court establish or recognize more than 1 type of
alternative dispute resolution, the parties may stipulate as
to the type of alternative dispute resolution to be applied.
If the parties are unable to so stipulate, the court shall
issue an order not later than 20 days after the date on which
the parties agree to the use of alternative dispute
resolution, specifying the type of alternative dispute
resolution to be applied.
``(5) Sanctions for dilatory or obstructive conduct.--If
the court finds that a party has engaged in dilatory or
obstructive conduct in taking or opposing any discovery
allowed during the response period described in paragraph
(3), the court may--
``(A) extend the period to permit further discovery from
that party for a suitable period; and
``(B) deny that party the opportunity to conduct further
discovery prior to the expiration of the period.
``(b) Penalty for Unreasonable Litigation Position.--
``(1) Award of costs.--In an implied private action arising
under this title, upon motion of the prevailing party made
prior to final judgment, the court shall award costs,
including reasonable attorneys' fees, against a party or
parties or their attorneys, if--
``(A) the party unreasonably refuses to proceed pursuant to
an alternative dispute resolution procedure, or refuses to
accept the result of an alternative dispute resolution
procedure;
``(B) final judgment is entered against the party; and
``(C) the party asserted a claim or defense in the action
which was not substantially justified.
``(2) Determination of justification.--For purposes of
paragraph (1)(C), whether a position is `substantially
justified' shall be determined in the same manner as under
section 2412(d)(1)(B) of title 28, United States Code.
``(3) Limited use.--Fees and costs awarded under this
paragraph shall not be applied to any named plaintiff in any
action certified as a class action under the Federal Rules of
Civil Procedure if such plaintiff has never owned more than
$1,000,000 of the securities which are the subject of the
litigation.''.
(b) Limitations Period for Implied Private Rights of
Action.--The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) is amended by adding at the end the following new
section:
``SEC. 37. LIMITATIONS PERIOD FOR IMPLIED PRIVATE RIGHTS OF
ACTION.
``(a) In General.--Except as otherwise provided in this
title, an implied private right of action arising under this
title shall be brought not later than the earlier of--
``(1) 5 years after the date on which the alleged violation
occurred; or
``(2) 2 years after the date on which the alleged violation
was discovered or should have been discovered through the
exercise of reasonable diligence.
[[Page S1078]] ``(b) Effective Date.--The limitations
period provided by this section shall apply to all
proceedings pending on or commenced after the date of
enactment of this section.''.
SEC. 103. PLAINTIFF STEERING COMMITTEES.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)
is amended by adding at the end the following new section:
``SEC. 38. GUARDIAN AD LITEM AND CLASS ACTION STEERING
COMMITTEES.
``(a) Guardian Ad Litem.--Except as provided in subsection
(b), not later than 10 days after certifying a plaintiff
class in an implied private action brought under this title,
the court shall appoint a guardian ad litem for the plaintiff
class from a list or lists provided by the parties or their
counsel. The guardian ad litem shall direct counsel for the
class and perform such other functions as the court may
specify. The court shall apportion the reasonable fees and
expenses of the guardian ad litem among the parties. Court
appointment of a guardian ad litem shall not be subject to
interlocutory review.
``(b) Class Action Steering Committee.--Subsection (a)
shall not apply if, not later than 10 days after certifying a
plaintiff class, on its own motion or on motion of a member
of the class, the court appoints a committee of class members
to direct counsel for the class (hereafter in this section
referred to as the `plaintiff steering committee') and to
perform such other functions as the court may specify. Court
appointment of a plaintiff steering committee shall not be
subject to interlocutory review.
``(c) Membership of Plaintiff Steering Committee.--
``(1) Qualifications.--
``(A) Number.--A plaintiff steering committee shall consist
of not less than 5 class members, willing to serve, who the
court believes will fairly represent the class.
``(B) Ownership interests.--Members of the plaintiff
steering committee shall have cumulatively held during the
class period not less than--
``(i) the lesser of 5 percent of the securities which are
the subject matter of the litigation or securities which are
the subject matter of the litigation with a market value of
$10,000,000; or
``(ii) such smaller percentage or dollar amount as the
court finds appropriate under the circumstances.
``(2) Named plaintiffs.--Class members who are named
plaintiffs in the litigation may serve on the plaintiff
steering committee, but shall not comprise a majority of the
committee.
``(3) Noncompensation of members.--Members of the plaintiff
steering committee shall serve without compensation, except
that any member may apply to the court for reimbursement of
reasonable out-of-pocket expenses from any common fund
established for the class.
``(4) Meetings.--The plaintiff steering committee shall
conduct its business at one or more previously scheduled
meetings of the committee at which a majority of its members
are present in person or by electronic communication. The
plaintiff steering committee shall decide all matters within
its authority by a majority vote of all members, except that
the committee may determine that decisions other than to
accept or reject a settlement offer or to employ or dismiss
counsel for the class may be delegated to one or more members
of the committee, or may be voted upon by committee members
seriatim, without a meeting.
``(5) Right of nonmembers to be heard.--A class member who
is not a member of the plaintiff steering committee may
appear and be heard by the court on any issue in the action,
to the same extent as any other party.
``(d) Functions of Guardian Ad Litem and Plaintiff Steering
Committee.--
``(1) Direct counsel.--The authority of the guardian ad
litem or the plaintiff steering committee to direct counsel
for the class shall include all powers normally permitted to
an attorney's client in litigation, including the authority
to retain or dismiss counsel and to reject offers of
settlement, and the preliminary authority to accept an offer
of settlement, subject to the restrictions specified in
paragraph (2). Dismissal of counsel other than for cause
shall not limit the ability of counsel to enforce any
contractual fee agreement or to apply to the court for a fee
award from any common fund established for the class.
``(2) Settlement offers.--If a guardian ad litem or a
plaintiff steering committee gives preliminary approval to an
offer of settlement, the guardian ad litem or the plaintiff
steering committee may seek approval of the offer by a
majority of class members if the committee determines that
the benefit of seeking such approval outweighs the cost of
soliciting the approval of class members.
``(e) Immunity From Liability; Removal.--Any person serving
as a guardian ad litem or as a member of a plaintiff steering
committee shall be immune from any liability arising from
such service. The court may remove a guardian ad litem or a
member of a plaintiff steering committee for good cause
shown.
``(f) Effect on Other Law.--This section does not affect
any other provision of law concerning class actions or the
authority of the court to give final approval to any offer of
settlement.''.
SEC. 104. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)
is amended by adding at the end the following new section:
``SEC. 39. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS.
``(a) Intent.--In an implied private action arising under
this title in which the plaintiff may recover money damages
from a defendant only on proof that the defendant acted with
some level of intent, the plaintiff's complaint shall allege
specific facts demonstrating the state of mind of each
defendant at the time the alleged violation occurred.
``(b) Misleading Statements and Omissions.--In an implied
action arising under this title in which the plaintiff
alleges that the defendant--
``(1) made an untrue statement of a material fact; or
``(2) omitted to state a material fact necessary in order
to make the statements made, in the light of the
circumstances in which they were made, not misleading;
the plaintiff shall specify each statement alleged to have
been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the plaintiff
shall set forth all information on which that belief is
formed.
``(c) Burden of Proof.--In an implied private action
arising under this title based on a material misstatement or
omission concerning a security, and in which the plaintiff
claims to have bought or sold the security based on a
reasonable belief that the market value of the security
reflected all publicly available information, the plaintiff
shall have the burden of proving that the misstatement or
omission caused any loss incurred by the plaintiff.
``(d) Damages.--In an implied private action arising under
this title based on a material misstatement or omission
concerning a security, and in which the plaintiff claims to
have bought or sold the security based on a reasonable belief
that the market value of the security reflected all publicly
available information, the plaintiff's damages shall not
exceed the lesser of--
``(1) the difference between the price paid by the
plaintiff for the security and the market value of the
security immediately after dissemination to the market of
information which corrects the misstatement or omission; and
``(2) the difference between the price paid by the
plaintiff for the security and the price at which the
plaintiff sold the security after dissemination of
information correcting the misstatement or omission.''.
SEC. 105. AMENDMENT TO RACKETEER INFLUENCED AND CORRUPT
ORGANIZATIONS ACT.
Section 1964(c) of title 18, United States Code, is amended
by inserting ``, except that no person may bring an action
under this provision if the racketeering activity, as defined
in section 1961(1)(D), involves fraud in the sale of
securities'' before the period.
TITLE II--FINANCIAL DISCLOSURE
SEC. 201. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.
(a) Consideration of Regulatory or Legislative Changes.--In
consultation with investors and issuers of securities, the
Securities and Exchange Commission shall consider adopting or
amending its rules and regulations, or making legislative
recommendations, concerning--
(1) criteria that the Commission finds appropriate for the
protection of investors by which forward-looking statements
concerning the future economic performance of an issuer of
securities registered under section 12 of the Securities
Exchange Act of 1934 will be deemed not to be in violation of
section 10(b) of that Act; and
(2) procedures by which courts shall timely dismiss claims
against such issuers of securities based on such forward-
looking statements if such statements are in accordance with
any criteria under paragraph (1).
(b) Commission Considerations.--In developing rules or
legislative recommendations in accordance with subsection
(a), the Commission shall consider--
(1) appropriate limits to liability for forward-looking
statements;
(2) procedures for making a summary determination of the
applicability of any Commission rule for forward-looking
statements early in a judicial proceeding to limit protracted
litigation and expansive discovery;
(3) incorporating and reflecting the scienter requirements
applicable to implied private actions under section 10(b);
and
(4) providing clear guidance to issuers of securities and
the judiciary.
(c) Securities Act Amendment.--The Securities and Exchange
Act of 1934 (15 U.S.C. 78a et seq.), is amended by adding at
the end the following new section:
``SEC. 40. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING
STATEMENTS.
``(a) In General.--In any implied private action arising
under this title that alleges that a forward-looking
statement concerning the future economic performance of an
issuer registered under section 12 was materially false or
misleading, if a party making a motion in accordance with
subsection (b) requests a stay of discovery concerning the
claims or defenses of that party, the court shall grant such
a stay until it has ruled on any such motion.
``(b) Summary Judgment Motions.--Subsection (a) shall apply
to any motion for summary judgment made by a defendant
asserting that the forward-looking statement was within the
coverage of any rule which
[[Page S1079]] the Commission may have adopted concerning
such predictive statements, if such motion is made not less
than 60 days after the plaintiff commences discovery in the
action.
``(c) Dilatory Conduct; Duplicative Discovery.--
Notwithstanding subsection (a) or (b), the time permitted for
a plaintiff to conduct discovery under subsection (b) may be
extended, or a stay of the proceedings may be denied, if the
court finds that--
``(1) the defendant making a motion described in subsection
(b) engaged in dilatory or obstructive conduct in taking or
opposing any discovery; or
``(2) a stay of discovery pending a ruling on a motion
under subsection (b) would be substantially unfair to the
plaintiff or other parties to the action.''.
SEC. 202. FRAUD DETECTION AND DISCLOSURE.
(a) In General.--The Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) is amended by inserting immediately after
section 10 the following new section:
``SEC. 10A. AUDIT REQUIREMENTS.
``(a) In General.--Each audit required pursuant to this
title of an issuer's financial statements by an independent
public accountant shall include, in accordance with generally
accepted auditing standards, as may be modified or
supplemented from time to time by the Commission--
``(1) procedures designed to provide reasonable assurance
of detecting illegal acts that would have a direct and
material effect on the determination of financial statement
amounts;
``(2) procedures designed to identify related party
transactions which are material to the financial statements
or otherwise require disclosure therein; and
``(3) an evaluation of whether there is substantial doubt
about the issuer's ability to continue as a going concern
during the ensuing fiscal year.
``(b) Required Response to Audit Discoveries.--
``(1) Investigation and report to management.--If, in the
course of conducting an audit pursuant to this title to which
subsection (a) applies, the independent public accountant
detects or otherwise becomes aware of information indicating
that an illegal act (whether or not perceived to have a
material effect on the issuer's financial statements) has or
may have occurred, the accountant shall, in accordance with
generally accepted auditing standards, as may be modified or
supplemented from time to time by the Commission--
``(A)(i) determine whether it is likely that an illegal act
has occurred; and
``(ii) if so, determine and consider the possible effect of
the illegal act on the financial statements of the issuer,
including any contingent monetary effects, such as fines,
penalties, and damages; and
``(B) as soon as practicable, inform the appropriate level
of the issuer's management and assure that the issuer's audit
committee, or the issuer's board of directors in the absence
of such a committee, is adequately informed with respect to
illegal acts that have been detected or have otherwise come
to the attention of such accountant in the course of the
audit, unless the illegal act is clearly inconsequential.
``(2) Response to failure to take remedial action.--If,
having first assured itself that the audit committee of the
board of directors of the issuer or the board (in the absence
of an audit committee) is adequately informed with respect to
illegal acts that have been detected or have otherwise come
to the accountant's attention in the course of such
accountant's audit, the independent public accountant
concludes that--
``(A) the illegal act has a material effect on the
financial statements of the issuer;
``(B) the senior management has not taken, and the board of
directors has not caused senior management to take, timely
and appropriate remedial actions with respect to the illegal
act; and
``(C) the failure to take remedial action is reasonably
expected to warrant departure from a standard auditor's
report, when made, or warrant resignation from the audit
engagement;
the independent public accountant shall, as soon as
practicable, directly report its conclusions to the board of
directors.
``(3) Notice to commission; response to failure to
notify.--An issuer whose board of directors receives a report
under paragraph (2) shall inform the Commission by notice not
later than 1 business day after the receipt of such report
and shall furnish the independent public accountant making
such report with a copy of the notice furnished to the
Commission. If the independent public accountant fails to
receive a copy of the notice before the expiration of the
required 1-business-day period, the independent public
accountant shall--
``(A) resign from the engagement; or
``(B) furnish to the Commission a copy of its report (or
the documentation of any oral report given) not later than 1
business day following such failure to receive notice.
``(4) Report after resignation.--If an independent public
accountant resigns from an engagement under paragraph (3)(A),
the accountant shall, not later than 1 business day following
the failure by the issuer to notify the Commission under
paragraph (3), furnish to the Commission a copy of the
accountant's report (or the documentation of any oral report
given).
``(c) Auditor Liability Limitation.--No independent public
accountant shall be liable in a private action for any
finding, conclusion, or statement expressed in a report made
pursuant to paragraph (3) or (4) of subsection (b), including
any rules promulgated pursuant thereto.
``(d) Civil Penalties in Cease-and-Desist Proceedings.--If
the Commission finds, after notice and opportunity for
hearing in a proceeding instituted pursuant to section 21C,
that an independent public accountant has willfully violated
paragraph (3) or (4) of subsection (b), the Commission may,
in addition to entering an order under section 21C, impose a
civil penalty against the independent public accountant and
any other person that the Commission finds was a cause of
such violation. The determination to impose a civil penalty
and the amount of the penalty shall be governed by the
standards set forth in section 21B.
``(e) Preservation of Existing Authority.--Except as
provided in subsection (d), nothing in this section shall be
held to limit or otherwise affect the authority of the
Commission under this title.
``(f) Definition.--As used in this section, the term
`illegal act' means an act or omission that violates any law,
or any rule or regulation having the force of law.''.
(b) Effective Dates.--With respect to any registrant that
is required to file selected quarterly financial data
pursuant to item 302(a) of Regulation S-K of the Securities
and Exchange Commission (17 CFR 229.302(a)), the amendments
made by subsection (a) shall apply to any annual report for
any period beginning on or after January 1, 1994. With
respect to any other registrant, the amendment shall apply
for any period beginning on or after January 1, 1995.
SEC. 203. PROPORTIONATE LIABILITY AND JOINT AND SEVERAL
LIABILITY.
(a) Securities Act Amendment.--The Securities and Exchange
Act of 1934 (15 U.S.C. 78a et seq.) is amended by adding at
the end the following new section:
``SEC. 41. PROPORTIONATE LIABILITY AND JOINT AND SEVERAL
LIABILITY IN IMPLIED ACTIONS.
``(a) Applicability.--This section shall apply only to the
allocation of damages among persons who are, or who may
become, liable for damages in an implied private action
arising under this title. Nothing in this section shall
affect the standards for liability associated with an implied
private action arising under this title.
``(b) Application of Joint and Several Liability.--
``(1) In general.--A person against whom a judgment is
entered in an implied private action arising under this title
shall be liable jointly and severally for any recoverable
damages on such judgment if the person is found to have--
``(A) been a primary wrongdoer;
``(B) committed knowing securities fraud; or
``(C) controlled any primary wrongdoer or person who
committed knowing securities fraud.
``(2) Primary wrongdoer.--As used in this subsection--
``(A) the term `primary wrongdoer' means--
``(i) any--
``(I) issuer, registrant, purchaser, seller, or underwriter
of securities;
``(II) marketmaker or specialist in securities; or
``(III) clearing agency, securities information processor,
or government securities dealer;
if such person breached a direct statutory or regulatory
obligation or if such person otherwise had a principal role
in the conduct that is the basis for the implied right of
action; or
``(ii) any person who intentionally rendered substantial
assistance to the fraudulent conduct of any person described
in clause (i), with actual knowledge of such person's
fraudulent conduct or fraudulent purpose, and with knowledge
that such conduct was wrongful; and
``(B) a defendant engages in `knowing securities fraud' if
such defendant--
``(i) makes a material representation with actual knowledge
that the representation is false, or omits to make a
statement with actual knowledge that, as a result of the
omission, one of the defendant's material representations is
false and knows that other persons are likely to rely on that
misrepresentation or omission, except that reckless conduct
by the defendant shall not be construed to constitute
`knowing securities fraud'; or
``(ii) intentionally rendered substantial assistance to the
fraudulent conduct of any person described in clause (i),
with actual knowledge of such person's fraudulent conduct or
fraudulent purpose, and with knowledge that such conduct was
wrongful.
``(c) Determination of Responsibility.--In an implied
private action in which more than 1 person contributed to a
violation of this title, the court shall instruct the jury to
answer special interrogatories, or if there is no jury, shall
make findings, concerning the degree of responsibility of
each person alleged to have caused or contributed to the
violation of this title, including persons who have entered
into settlements with the plaintiff. The interrogatories or
findings shall specify the amount of damages the plaintiff is
entitled to recover and the degree of responsibility,
measured as a percentage of the total fault of all persons
involved in the violation, of each person found to have
caused or contributed to the damages incurred by the
plaintiff or plaintiffs. In determining the degree of
responsibility, the trier of fact shall consider--
[[Page S1080]] ``(1) the nature of the conduct of each
person; and
``(2) the nature and extent of the causal relationship
between that conduct and the damage claimed by the plaintiff.
``(d) Application of Proportionate Liability.--Except as
provided in subsection (b), the amount of liability of a
person who is, or may through right of contribution become,
liable for damages based on an implied private action arising
under this title shall be determined as follows:
``(1) Degree of responsibility.--Except as provided in
paragraph (2), each liable party shall only be liable for the
portion of the judgment that corresponds to that party's
degree of responsibility, as determined under subsection (c).
``(2) Uncollectible shares.--If, upon motion made not later
than 6 months after a final judgment is entered, the court
determines that all or part of a defendant's share of the
obligation is uncollectible--
``(A) the remaining defendants shall be jointly and
severally liable for the uncollectible share if the plaintiff
establishes that--
``(i) the plaintiff is an individual whose recoverable
damages under a final judgment are equal to more than 10
percent of the plaintiff's net financial worth; and
``(ii) the plaintiff's net financial worth is less than
$200,000; and
``(B) the amount paid by each of the remaining defendants
to all other plaintiffs shall be, in total, not more than the
greater of--
``(i) that remaining defendant's percentage of fault for
the uncollectible share; or
``(ii) 5 times--
``(I) the amount which the defendant gained from the
conduct that gave rise to its liability; or
``(II) if a defendant did not obtain a direct financial
gain from the conduct that gave rise to the liability and the
conduct consisted of the provision of deficient services to
an entity involved in the violation, the defendant's gross
revenues received for the provision of all services to the
other entity involved in the violation during the calendar
years in which deficient services were provided.
``(3) Overall limit.--In no event shall the total payments
required pursuant to paragraph (2) exceed the amount of the
uncollectible share.
``(4) Defendants subject to contribution.--A defendant
whose liability is reallocated pursuant to paragraph (2)
shall be subject to contribution and to any continuing
liability to the plaintiff on the judgment.
``(5) Right of contribution.--To the extent that a
defendant is required to make an additional payment pursuant
to paragraph (2), that defendant may recover contribution--
``(A) from the defendant originally liable to make the
payment;
``(B) from any defendant liable jointly and severally
pursuant to subsection (b)(1);
``(C) from any defendant held proportionately liable
pursuant to this subsection who is liable to make the same
payment and has paid less than his or her proportionate share
of that payment; or
``(D) from any other person responsible for the conduct
giving rise to the payment who would have been liable to make
the same payment.
``(e) Nondisclosure to Jury.--The standard for allocation
of damages under subsections (b)(1) and (c) and the procedure
for reallocation of uncollectible shares under subsection
(d)(2) shall not be disclosed to members of the jury.
``(f) Settlement Discharge.--
``(1) In general.--A defendant who settles an implied
private action brought under this title at any time before
verdict or judgment shall be discharged from all claims for
contribution brought by other persons. Upon entry of the
settlement by the court, the court shall enter a bar order
constituting the final discharge of all obligations to the
plaintiff of the settling defendant arising out of the
action. The order shall bar all future claims for
contribution or indemnity arising out of the action--
``(A) by nonsettling persons against the settling
defendant; and
``(B) by the settling defendant against any nonsettling
defendants.
``(2) Reduction.--If a person enters into a settlement with
the plaintiff prior to verdict or judgment, the verdict or
judgment shall be reduced by the greater of--
``(A) an amount that corresponds to the degree of
responsibility of that person; or
``(B) the amount paid to the plaintiff by that person.
``(g) Contribution.--A person who becomes liable for
damages in an implied private action arising under this title
may recover contribution from any other person who, if joined
in the original suit, would have been liable for the same
damages. A claim for contribution shall be determined based
on the degree of responsibility of the claimant and of each
person against whom a claim for contribution is made.
``(h) Statute of Limitations for Contribution.--Once
judgment has been entered in an implied private action
arising under this title determining liability, an action for
contribution must be brought not later than 6 months after
the entry of a final, nonappealable judgment in the action,
except that an action for contribution brought by a defendant
who was required to make an additional payment pursuant to
subsection (d)(2) may be brought not later than 6 months
after the date on which such payment was made.''.
(b) Effective Date.--Section 41 of the Securities Exchange
Act of 1934, as added by subsection (a), shall only apply to
implied private actions commenced after the date of enactment
of this Act.
SEC. 204. PUBLIC AUDITING SELF-DISCIPLINARY BOARD.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)
is amended by inserting immediately after section 13 the
following new section:
``SEC. 13A. PUBLIC AUDITING SELF-DISCIPLINARY BOARD.
``(a) Definitions.--For purposes of this section, the
following definitions shall apply:
``(1) Public accounting firm.--The term `public accounting
firm' means a sole proprietorship, unincorporated
association, partnership, corporation, or other legal entity
that is engaged in the practice of public accounting.
``(2) Board.--The term `Board' means the Public Auditing
Self-Disciplinary Board designated by the Commission pursuant
to subsection (b).
``(3) Accountant's report.--The term `accountant's report'
means a document in which a public accounting firm identifies
a financial statement, report, or other document and sets
forth the firm's opinion regarding such financial statement,
report, or other document, or an assertion that an opinion
cannot be expressed.
``(4) Person associated with a public accounting firm.--The
term `person associated with a public accounting firm' means
a natural person who--
``(A) is a partner, shareholder, employee, or individual
proprietor of a public accounting firm, or who shares in the
profits of a public accounting firm; and
``(B) engages in any conduct or practice in connection with
the preparation of an accountant's report on any financial
statement, report, or other document required to be filed
with the Commission under any securities law.
``(5) Professional standards.--The term `professional
standards' means generally accepted auditing standards,
generally accepted accounting principles, generally accepted
standards for attestation engagements, and any other
standards related to the preparation of financial statements
or accountant's reports promulgated by the Commission or a
standard-setting body recognized by the Board.
``(b) Establishment of Board.--
``(1) In general.--Not later than 90 days after the date of
enactment of this section, the Commission shall establish a
Public Auditing Self-Disciplinary Board to perform the duties
set forth in this section. The Commission shall designate an
entity to serve as the Board if the Commission finds that--
``(A) such entity is sponsored by an existing national
organization of certified public accountants that--
``(i) is most representative of certified public
accountants covered by this title; and
``(ii) has demonstrated its commitment to improving the
quality of practice before the Commission; and
``(B) control over such entity is vested in the members of
the Board selected pursuant to subsection (c).
``(2) Alternative election of members.--If the Commission
designates an entity to serve as the Board pursuant to
paragraph (1), the entity shall conduct the election of
initial Board members in accordance with subsection
(c)(1)(B)(i).
``(c) Membership of Board.--
``(1) In general.--The Board shall be composed of 3
appointed members and 4 elected members, as follows:
``(A) Appointed members.--Three members of the Board shall
be appointed in accordance with the following:
``(i) Initial appointments.--The Chairman of the Commission
shall make the initial appointments, in consultation with the
other members of the Commission, not later than 90 days after
the date of enactment of this section.
``(ii) Subsequent appointments.--After the initial
appointments under clause (i), members of the Board appointed
to fill vacancies of appointed members of the Board shall be
appointed in accordance with the rules adopted pursuant to
paragraph (5). Such rules shall provide that such members
shall be appointed by the Board, subject to the approval of
the Commission.
``(B) Elected members.--Four members, including the member
who shall serve as the chairperson of the Board, shall be
elected in accordance with the following:
``(i) Initial election.--Not later than 120 days after the
date on which the Chairman of the Commission makes
appointments under subparagraph (A)(i), an entity designated
by the Commission pursuant to subsection (b) shall conduct an
election of 4 initial elected members pursuant to interim
election rules proposed by the entity and approved by the 3
interim members of the Board and the Commission. If the
Commission is unable to designate an entity meeting the
criteria set forth in subsection (b)(1), the members of the
Board appointed under subparagraph (A)(i) shall adopt interim
rules, subject to approval by the Commission, providing for
the election of the 4 initial elected members. Such rules
shall provide that such members of the Board shall be
elected--
``(I) not later than 120 days after the date on which
members are initially appointed under subparagraph (A)(i);
[[Page S1081]] ``(II) by persons who are associated with
public accounting firms and who are certified public
accountants under the laws of any State; and
``(III) subject to the approval of the Commission.
``(ii) Subsequent elections.--After the initial elections
under clause (i), members of the Board elected to fill
vacancies of elected members of the Board shall be elected in
accordance with the rules adopted pursuant to paragraph (5).
Such rules shall provide that such members of the Board shall
be elected--
``(I) by persons who are associated with public accounting
firms and who are certified public accountants under the laws
of any State; and
``(II) subject to the approval of the Commission.
``(2) Qualification.--Four members of the Board, including
the chairperson of the Board, shall be persons who have not
been associated with a public accounting firm during the 10-
year period preceding appointment or election to the Board
under paragraph (1). Three members of the Board who are
elected shall be persons associated with a public accounting
firm registered with the Board.
``(3) Full-time basis.--The chairperson of the Board shall
serve on a full-time basis, severing all business ties with
his or her former firms or employers prior to beginning
service on the Board.
``(4) Terms.--
``(A) In general.--Except as provided in subparagraph (B),
each member of the Board shall hold office for a term of 4
years or until a successor is appointed, whichever is later,
except that any member appointed to fill a vacancy occurring
prior to the expiration of the term for which such member's
predecessor was appointed shall be appointed for the
remainder of such term.
``(B) Initial board members.--Beginning on the date on
which all members of the Board have been selected in
accordance with this subsection, the terms of office of the
initial Board members shall expire, as determined by the
Board, by lottery--
``(i) for 1 member, 1 year after such date;
``(ii) for 2 members, 2 years after such date;
``(iii) for 2 members, 3 years after such date; and
``(iv) for 2 members, 4 years after such date.
``(5) Rules.--Following selection of the 7 initial members
of the Board in accordance with subparagraphs (A)(i) and
(B)(i) of paragraph (1), the Board shall propose and adopt
rules, which shall provide for--
``(A) the operation and administration of the Board,
including--
``(i) the appointment of members in accordance with
paragraph (1)(A)(ii);
``(ii) the election of members in accordance with paragraph
(1)(B)(ii); and
``(iii) the compensation of the members of the Board;
``(B) the appointment and compensation of such employees,
attorneys, and consultants as may be necessary or appropriate
to carry out the Board's functions under this title;
``(C) the registration of public accounting firms with the
Board pursuant to subsections (d) and (e); and
``(D) the matters described in subsections (f) and (g).
``(d) Registration and Annual Fees.--After the date on
which all initial members of the Board have been selected in
accordance with subsection (c), the Board shall assess and
collect a registration fee and annual dues from each public
accounting firm registered with the Board. Such fees and dues
shall be assessed at a level sufficient to recover the costs
and expenses of the Board and to permit the Board to operate
on a self-financing basis. The amount of fees and dues for
each public accounting firm shall be based upon--
``(1) the annual revenues of such firm from accounting and
auditing services;
``(2) the number of persons associated with the public
accounting firm;
``(3) the number of clients for which such firm furnishes
accountant's reports on financial statements, reports, or
other documents filed with the Commission; and
``(4) such other criteria as the Board may establish.
``(e) Registration With Board.--
``(1) Registration required.--Beginning 1 year after the
date on which all initial members of the Board have been
selected in accordance with subsection (c), it shall be
unlawful for a public accounting firm to furnish an
accountant's report on any financial statement, report, or
other document required to be filed with the Commission under
any Federal securities law, unless such firm is registered
with the Board.
``(2) Application for registration.--A public accounting
firm may be registered under this subsection by filing with
the Board an application for registration in such form and
containing such information as the Board, by rule, may
prescribe. Each application shall include--
``(A) the names of all clients of the public accounting
firm for which the firm furnishes accountant's reports on
financial statements, reports, or other documents filed with
the Commission;
``(B) financial information of the public accounting firm
for its most recent fiscal year, including its annual
revenues from accounting and auditing services, its assets
and its liabilities;
``(C) a statement of the public accounting firm's policies
and procedures with respect to quality control of its
accounting and auditing practice;
``(D) information relating to criminal, civil, or
administrative actions or formal disciplinary proceedings
pending against such firm, or any person associated with such
firm, in connection with an accountant's report furnished by
such firm;
``(E) a list of persons associated with the public
accounting firm who are certified public accountants,
including any State professional license or certification
number for each such person; and
``(F) such other information that is reasonably related to
the Board's responsibilities as the Board considers necessary
or appropriate.
``(3) Periodic reports.--Once in each year, or more
frequently as the Board, by rule, may prescribe, each public
accounting firm registered with the Board shall submit
reports to the Board updating the information contained in
its application for registration and containing such
additional information that is reasonably related to the
Board's responsibilities as the Board, by rule, may
prescribe.
``(4) Exemptions.--The Commission, by rule or order, upon
its own motion or upon application, may conditionally or
unconditionally exempt any public accounting firm or any
accountant's report, or any class of public accounting firms
or any class of accountant's reports, from any provisions of
this section or the rules or regulations issued hereunder, if
the Commission finds that such exemption is consistent with
the public interest, the protection of investors, and the
purposes of this section.
``(5) Confidentiality.--The Board may, by rule, designate
portions of the filings required pursuant to paragraphs (2)
and (3) as privileged and confidential.
``(f) Duties of Board.--After the date on which all initial
members of the Board have been selected in accordance with
subsection (c), the Board shall have the following duties and
powers:
``(1) Investigations and disciplinary proceedings.--The
Board shall establish fair procedures for investigating and
disciplining public accounting firms registered with the
Board, and persons associated with such firms, for violations
of the Federal securities laws, the rules or regulations
issued thereunder, the rules adopted by the Board, or
professional standards in connection with the preparation of
an accountant's report on a financial statement, report, or
other document filed with the Commission.
``(2) Investigation procedures.--
``(A) In general.--The Board may conduct an investigation
of any act, practice, or omission by a public accounting firm
registered with the Board, or by any person associated with
such firm, in connection with the preparation of an
accountant's report on a financial statement, report, or
other document filed with the Commission that may violate any
applicable provision of the Federal securities laws, the
rules and regulations issued thereunder, the rules adopted by
the Board, or professional standards, whether such act,
practice, or omission is the subject of a criminal, civil, or
administrative action, or a disciplinary proceeding, or
otherwise is brought to the attention of the Board.
``(B) Powers of board.--For purposes of an investigation
under this paragraph, the Board may, in addition to such
other actions as the Board determines to be necessary or
appropriate--
``(i) require the testimony of any person associated with a
public accounting firm registered with the Board, with
respect to any matter which the Board considers relevant or
material to the investigation;
``(ii) require the production of audit workpapers and any
other document or information in the possession of a public
accounting firm registered with the Board, or any person
associated with such firm, wherever domiciled, that the Board
considers relevant or material to the investigation, and may
examine the books and records of such firm to verify the
accuracy of any documents or information so supplied; and
``(iii) request the testimony of any person and the
production of any document in the possession of any person,
including a client of a public accounting firm registered
with the Board, that the Board considers relevant or material
to the investigation.
``(C) Suspension or revocation of registration for
noncompliance.--The refusal of any person associated with a
public accounting firm registered with the Board to testify,
or the refusal of any such person to produce documents or
otherwise cooperate with the Board, in connection with an
investigation under this section, shall be cause for
suspending or barring such person from associating with a
public accounting firm registered with the Board, or such
other appropriate sanction as the Board shall determine. The
refusal of any public accounting firm registered with the
Board to produce documents or otherwise cooperate with the
Board, in connection with an investigation under this
section, shall be cause for the suspension or revocation of
the registration of such firm, or such other appropriate
sanction as the Board shall determine.
``(D) Referral to commission.--
``(i) In general.--If the Board is unable to conduct or
complete an investigation under this section because of the
refusal of any client of a public accounting firm registered
with the Board, or any other person, to testify, produce
documents, or otherwise cooperate with the Board in
connection with
[[Page S1082]] such investigation, the Board shall report
such refusal to the Commission.
``(ii) Investigation.--The Commission may designate the
Board or one or more officers of the Board who shall be
empowered, in accordance with such procedures as the
Commission may adopt, to subpoena witnesses, compel their
attendance, and require the production of any books, papers,
correspondence, memoranda, or other records relevant to any
investigation by the Board. Attendance of witnesses and the
production of any records may be required from any place in
the United States or any State at any designated place of
hearing. Enforcement of a subpoena issued by the Board, or an
officer of the Board, pursuant to this subparagraph shall
occur in the manner provided for in section 21(c).
Examination of witnesses subpoenaed pursuant to this
subparagraph shall be conducted before an officer authorized
to administer oaths by the laws of the United States or of
the place where the examination is held.
``(iii) Referrals to commission.--The Board may refer any
investigation to the Commission, as the Board deems
appropriate.
``(E) Immunity from civil liability.--An employee of the
Board engaged in carrying out an investigation or
disciplinary proceeding under this section shall be immune
from any civil liability arising out of such investigation or
disciplinary proceeding in the same manner and to the same
extent as an employee of the Federal Government in similar
circumstances.
``(3) Disciplinary procedures.--
``(A) Decision to discipline.--In a proceeding by the Board
to determine whether a public accounting firm, or a person
associated with such firm, should be disciplined, the Board
shall bring specific charges, notify such firm or person of
the charges, give such firm or person an opportunity to
defend against such charges, and keep a record of such
actions.
``(B) Sanctions.--If the Board finds that a public
accounting firm, or a person associated with such firm, has
engaged in any act, practice, or omission in violation of the
Federal securities laws, the rules or regulations issued
thereunder, the rules adopted by the Board, or professional
standards, the Board may impose such disciplinary sanctions
as it deems appropriate, including--
``(i) revocation or suspension of registration under this
section;
``(ii) limitation of activities, functions, and operations;
``(iii) fine;
``(iv) censure;
``(v) in the case of a person associated with a public
accounting firm, suspension or bar from being associated with
a public accounting firm registered with the Board; and
``(vi) any other disciplinary sanction that the Board
determines to be appropriate.
``(C) Statement required.--A determination by the Board to
impose a disciplinary sanction shall be supported by a
written statement by the Board setting forth--
``(i) any act or practice in which the public accounting
firm or person associated with such firm has been found to
have engaged, or which such firm or person has been found to
have omitted;
``(ii) the specific provision of the Federal securities
laws, the rules or regulations issued thereunder, the rules
adopted by the Board, or professional standards which any
such act, practice, or omission is deemed to violate; and
``(iii) the sanction imposed and the reasons therefor.
``(D) Prohibition on association.--It shall be unlawful--
``(i) for any person as to whom a suspension or bar is in
effect willfully to be or to become associated with a public
accounting firm registered with the Board, in connection with
the preparation of an accountant's report on any financial
statement, report, or other document filed with the
Commission, without the consent of the Board or the
Commission; and
``(ii) for any public accounting firm registered with the
Board to permit such a person to become, or remain,
associated with such firm without the consent of the Board or
the Commission, if such firm knew or, in the exercise of
reasonable care should have known, of such suspension or bar.
``(4) Reporting of sanctions.--If the Board imposes a
disciplinary sanction against a public accounting firm, or a
person associated with such firm, the Board shall report such
sanction to the Commission, to the appropriate State or
foreign licensing board or boards with which such firm or
such person is licensed or certified to practice public
accounting, and to the public. The information reported shall
include--
``(A) the name of the public accounting firm, or person
associated with such firm, against whom the sanction is
imposed;
``(B) a description of the acts, practices, or omissions
upon which the sanction is based;
``(C) the nature of the sanction; and
``(D) such other information respecting the circumstances
of the disciplinary action (including the name of any client
of such firm affected by such acts, practices, or omissions)
as the Board deems appropriate.
``(5) Discovery and admissibility of board material.--
``(A) Discoverability.--
``(i) In general.--Except as provided in subparagraph (C),
all reports, memoranda, and other information prepared,
collected, or received by the Board, and the deliberations
and other proceedings of the Board and its employees and
agents in connection with an investigation or disciplinary
proceeding under this section shall not be subject to any
form of civil discovery, including demands for production of
documents and for testimony of individuals, in connection
with any proceeding in any State or Federal court, or before
any State or Federal administrative agency. This subparagraph
shall not apply to any information provided to the Board that
would have been subject to discovery from the person or
entity that provided it to the Board, but is no longer
available from that person or entity.
``(ii) Exemption.--Submissions to the Board by or on behalf
of a public accounting firm or person associated with such a
firm or on behalf of any other participant in a Board
proceeding, including documents generated by the Board
itself, shall be exempt from discovery to the same extent as
the material described in clause (i), whether in the
possession of the Board or any other person, if such
submission--
``(I) is prepared specifically for the purpose of the Board
proceeding; and
``(II) addresses the merits of the issues under
investigation by the Board.
``(iii) Construction.--Nothing in this subparagraph shall
limit the authority of the Board to provide appropriate
public access to disciplinary hearings of the Board, or to
reports or memoranda received by the Board in connection with
such proceedings.
``(B) Admissibility.--
``(i) In general.--Except as provided in subparagraph (C),
all reports, memoranda, and other information prepared,
collected, or received by the Board, the deliberations and
other proceedings of the Board and its employees and agents
in connection with an investigation or disciplinary
proceeding under this section, the fact that an investigation
or disciplinary proceeding has been commenced, and the
Board's determination with respect to any investigation or
disciplinary proceeding shall be inadmissible in any
proceeding in any State or Federal court or before any State
or Federal administrative agency.
``(ii) Treatment of certain documents.--Submissions to the
Board by or on behalf of a public accounting firm or person
associated with such a firm or on behalf of any other
participant in a Board proceeding, including documents
generated by the Board itself, shall be inadmissible to the
same extent as the material described in clause (i), if such
submission--
``(I) is prepared specifically for the purpose of the Board
proceedings; and
``(II) addresses the merits of the issues under
investigation by the Board.
``(C) Availability and admissibility of information.--
``(i) In general.--All information referred to in
subparagraphs (A) and (B) shall be--
``(I) available to the Commission and to any other Federal
department or agency in connection with the exercise of its
regulatory authority to the extent that such information
would be available to such agency from the Commission as a
result of a Commission enforcement investigation;
``(II) available to Federal and State authorities in
connection with any criminal investigation or proceeding;
``(III) admissible in any action brought by the Commission
or any other Federal department or agency pursuant to its
regulatory authority, to the extent that such information
would be available to such agency from the Commission as a
result of a Commission enforcement investigation and in any
criminal action; and
``(IV) available to State licensing boards to the extent
authorized in paragraph (6).
``(ii) Other limitations.--Any documents or other
information provided to the Commission or other authorities
pursuant to clause (i) shall be subject to the limitations on
discovery and admissibility set forth in subparagraphs (A)
and (B).
``(D) Title 5 treatment.--This subsection shall be
considered to be a statute described in section 552(b)(3)(B)
of title 5, United States Code, for purposes of that section
552.
``(6) Participation by state licensing boards.--
``(A) Notice.--When the Board institutes an investigation
pursuant to paragraph (2)(A), it shall notify the State
licensing boards in the States in which the public accounting
firm or person associated with such firm engaged in the act
or failure to act alleged to have violated professional
standards, of the pendancy of the investigation, and shall
invite the State licensing boards to participate in the
investigation.
``(B) Acceptance by state board.--
``(i) Participation.--If a State licensing board elects to
join in the investigation, its representatives shall
participate, pursuant to rules established by the Board, in
investigating the matter and in presenting the evidence
justifying the charges in any hearing pursuant to paragraph
(3)(A).
``(ii) Review.--In the event that the State licensing board
disagrees with the Board's determination with respect to the
matter under investigation, it may seek review of that
determination by the Commission pursuant to procedures that
the Commission shall specify by regulation.
``(C) Prohibition on concurrent investigations.--A State
licensing board shall not institute its own proceeding with
respect to a matter referred to in subparagraph (A) until
after the Board's determination has become final, including
completion of all review by the Commission and the courts.
[[Page S1083]] ``(D) State sanctions permitted.--If the
Board or the Commission imposes a sanction upon a public
accounting firm or person associated with such a firm, and
that determination either is not subjected to judicial review
or is upheld on judicial review, a State licensing board may
impose a sanction on the basis of the Board's report pursuant
to paragraph (4). Any sanction imposed by the State licensing
board under this clause shall be inadmissible in any
proceeding in any State or Federal court or before any State
or Federal administrative agency, except to the extent
provided in paragraph (5)(D).
``(E) Sanctions not permitted.--If a sanction is not
imposed on a public accounting firm or person associated with
such a firm, and--
``(i) a State licensing board elected to participate in an
investigation referred to in subparagraph (A), the State
licensing board may not impose a sanction with respect to the
matter; and
``(ii) a State licensing board elected not to participate
in an investigation referred to in subparagraph (A),
subparagraphs (A) and (B) of paragraph (5) shall apply with
respect to any investigation or proceeding subsequently
instituted by the State licensing board and, in particular,
the State licensing board shall not have access to the record
of the proceeding before the Board and that record shall be
inadmissible in any proceeding before the State licensing
board.
``(g) Additional Duties Regarding Quality Control.--After
the date on which all initial members of the Board have been
selected in accordance with subsection (c), the Board shall
have the following duties and powers in addition to those set
forth in subsection (f):
``(1) In general.--The Board shall seek to promote a high
level of professional conduct among public accounting firms
registered with the Board, to improve the quality of audit
services provided by such firms, and, in general, to protect
investors and promote the public interest.
``(2) Professional peer review organizations.--
``(A) Membership requirement.--The Board shall require each
public accounting firm subject to the disciplinary authority
of the Board to be a member of a professional peer review
organization certified by the Board pursuant to subparagraph
(B).
``(B) Criteria for certification.--The Board shall, by
rule, establish general criteria for the certification of
peer review organizations and shall certify organizations
that satisfy those criteria, or such amended criteria as the
Board may adopt. To be certified, a peer review organization
shall, at a minimum--
``(i) require a member public accounting firm to undergo
peer review not less than once every 3 years and publish the
results of the peer review; and
``(ii) adopt standards that are acceptable to the Board
relating to audit service quality control.
``(C) Penalties.--Violation by a public accounting firm or
a person associated with such a firm of a rule of the peer
review organization to which the firm belongs shall
constitute grounds for--
``(i) the imposition of disciplinary sanctions by the Board
pursuant to subsection (f); and
``(ii) denial to the public accounting firm or person
associated with such firm of the privilege of appearing or
practicing before the Commission.
``(3) Confidentiality.--Except as otherwise provided by
this section, all reports, memoranda, and other information
provided to the Board solely for purposes of paragraph (2),
or to a peer review organization certified by the Board,
shall be confidential and privileged, unless such
confidentiality and privilege are expressly waived by the
person or entity that created or provided the information.
``(h) Commission Oversight of the Board.--
``(1) Proposed rule changes.--
``(A) In general.--The Board shall file with the
Commission, in accordance with such rules as the Commission
may prescribe, copies of any proposed rule or any proposed
change in, addition to, or deletion from the rules of the
Board (hereafter in this subsection collectively referred to
as a `proposed rule change') accompanied by a concise general
statement of the basis and purpose of such proposed rule
change. The Commission shall, upon the filing of any proposed
rule change, publish notice thereof together with the terms
of substance of the proposed rule change or a description of
the subjects and issues involved. The Commission shall give
interested persons an opportunity to submit written data,
views, and arguments concerning the proposed rule change. No
proposed rule change shall take effect unless approved by the
Commission or otherwise permitted in accordance with this
subsection.
``(B) Approval or disapproval.--
``(i) In general.--Not later than 35 days after the date on
which notice of the filing of a proposed rule change is
published in accordance with subparagraph (A), or such longer
period as the Commission may designate (not to exceed 90 days
after such date, if it finds such longer period to be
appropriate and publishes its reasons for such finding or as
to which the Board consents) the Commission shall--
``(I) by order approve such proposed rule change; or
``(II) institute proceedings to determine whether the
proposed rule change should be disapproved.
``(ii) Disapproval proceedings.--Proceedings for
disapproval shall include notice of the grounds for
disapproval under consideration and opportunity for hearing
and shall be concluded not later than 180 days after the date
of publication of notice of the filing of the proposed rule
change. At the conclusion of the proceedings for disapproval,
the Commission, by order, shall approve or disapprove such
proposed rule change. The Commission may extend the time for
conclusion of such proceedings for--
``(I) not more than 60 days, if the Commission finds good
cause for such extension and publishes its reasons for such
finding; or
``(II) such longer period to which the Board consents.
``(iii) Approval.--The Commission shall approve a proposed
rule change if it finds that such proposed rule change is
consistent with the requirements of the Federal securities
laws, and the rules and regulations issued thereunder,
applicable to the Board. The Commission shall disapprove a
proposed rule change if it does not make such finding. The
Commission shall not approve any proposed rule change prior
to the expiration of the 30-day period beginning on the date
on which notice of the filing of a proposed rule change is
published in accordance with this subparagraph, unless the
Commission finds good cause to do so and publishes its
reasons for such finding.
``(C) Effect of proposed rule change.--
``(i) Effective date.--Notwithstanding subparagraph (B), a
proposed rule change may take effect upon filing with the
Commission if designated by the Board as--
``(I) constituting a stated policy, practice, or
interpretation with respect to the meaning, administration,
or enforcement of an existing rule of the Board;
``(II) establishing or changing a due, fee, or other charge
imposed by the Board; or
``(III) concerned solely with the administration of the
Board or other matters which the Commission, by rule,
consistent with the public interest and the purposes of this
subsection, may specify.
``(ii) Summary effect.--Notwithstanding any other provision
of this subsection, a proposed rule change may be put into
effect summarily if it appears to the Commission that such
action is necessary for the protection of investors. Any
proposed rule change put into effect summarily shall be filed
promptly thereafter in accordance with this paragraph.
``(iii) Enforcement.--Any proposed rule change which has
taken effect pursuant to clause (i) or (ii) may be enforced
by the Board to the extent that it is not inconsistent with
the Federal securities laws, the rules and regulations issued
thereunder, and applicable Federal and State law. During the
60-day period beginning on the date on which notice of the
filing of a proposed rule change if filed in accordance with
this paragraph, the Commission may summarily abrogate the
change in the rules of the Board made thereby and require
that the proposed rule change be refiled in accordance with
subparagraph (A) and reviewed in accordance with subparagraph
(B), if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the
purposes of the Federal securities laws. Commission action
pursuant to the preceding sentence shall not affect the
validity or force of the rule change during the period it was
in effect and shall not be reviewable under section 25 of
this Act nor deemed to be `final agency action' for purposes
of section 704 of title 5, United States Code.
``(2) Amendment by commission of rules of the board.--The
Commission, by rule, may abrogate, add to, and delete from
(hereafter in this subsection collectively referred to as
`amend') the rules of the Board as the Commission deems
necessary or appropriate to ensure the fair administration of
the Board, to conform its rules to requirements of the
Federal securities laws, and the rules and regulations issued
thereunder applicable to the Board, or otherwise in
furtherance of the purposes of the Federal securities laws,
in the following manner:
``(A) Publication of notice.--The Commission shall notify
the Board and publish notice of the proposed rulemaking in
the Federal Register. The notice shall include the text of
the proposed amendment to the rules of the Board and a
statement of the Commission's reasons, including any
pertinent facts, for commencing such proposed rulemaking.
``(B) Comments.--The Commission shall give interested
persons an opportunity for the oral presentation of data,
views, and arguments, in addition to an opportunity to make
written submissions. A transcript shall be kept of any oral
presentation.
``(C) Incorporation.--A rule adopted pursuant to this
subsection shall incorporate the text of the amendment to the
rules of the Board and a statement of the Commission's basis
for and purpose in so amending such rules. Such statement
shall include an identification of any facts on which the
Commission considers its determination to so amend the rules
of the Board to be based, including the reasons for the
Commission's conclusions as to any of the facts that were
disputed in the rulemaking.
``(D) Regulations.--
[[Page S1084]] ``(i) Title 5 applicability.--Except as
otherwise provided in this paragraph, rulemaking under this
paragraph shall be in accordance with the procedures
specified in section 553 of title 5, United States Code, for
rulemaking not on the record.
``(ii) Construction.--Nothing in this subsection shall be
construed to impair or limit the Commission's power to make,
modify, or alter the procedures the Commission may follow in
making rules and regulations pursuant to any other authority
under the Federal securities laws.
``(iii) Incorporation of amendments.--Any amendment to the
rules of the Board made by the Commission pursuant to this
subsection shall be considered for purposes of the Federal
securities laws to be part of the rules of the Board and
shall not be considered to be a rule of the Commission.
``(3) Notice of disciplinary action taken by the board;
review of action by the commission.--
``(A) Notice required.--If the Board imposes a final
disciplinary sanction on a public accounting firm registered
with the Board or on any person associated with such a firm,
the Board shall promptly file notice thereof with the
Commission. The notice shall be in such form and contain such
information as the Commission, by rule, may prescribe as
necessary or appropriate in furtherance of the purposes of
the Federal securities laws.
``(B) Review.--An action with respect to which the Board is
required by subparagraph (A) to file notice shall be subject
to review by the Commission, on its own motion, or upon
application by any person aggrieved thereby, filed not later
than 30 days after the date on which such notice is filed
with the Commission and received by such aggrieved person, or
within such longer period as the Commission may determine.
Application to the Commission for review, or the institution
of review by the Commission on its own motion, shall not
operate as a stay of such action unless the Commission
otherwise orders, summarily or after notice and opportunity
for hearing on the question of a stay (which hearing may
consist solely of the submission of affidavits or
presentation of oral arguments). The Commission shall
establish for appropriate cases an expedited procedure for
consideration and determination of the question of a stay.
``(4) Disposition of review; cancellation, reduction, or
remission of sanction.--
``(A) In general.--In any proceeding to review a final
disciplinary sanction imposed by the Board on a public
accounting firm registered with the Board or a person
associated with such a firm, after notice and opportunity for
hearing (which hearing may consist solely of consideration of
the record before the Board and opportunity for the
presentation of supporting reasons to affirm, modify, or set
aside the sanction)--
``(i) if the Commission finds that--
``(I) such firm or person associated with such a firm has
engaged in such acts or practices, or has omitted such acts,
as the Board has found them to have engaged in or omitted;
``(II) such acts, practices, or omissions, are in violation
of such provisions of the Federal securities laws, the rules
or regulations issued thereunder, the rules adopted by the
Board, or professional standards as have been specified in
the determination of the Board; and
``(III) such provisions were applied in a manner consistent
with the purposes of the Federal securities laws;
the Commission, by order, shall so declare and, as
appropriate, affirm the sanction imposed by the Board, modify
the sanction in accordance with paragraph (2), or remand to
the Board for further proceedings; or
``(ii) if the Commission does not make the findings under
clause (i), it shall, by order, set aside the sanction
imposed by the Board and, if appropriate, remand to the Board
for further proceedings.
``(B) Cancellation, reduction, or remission of sanction.--
If the Commission, having due regard for the public interest
and the protection of investors, finds after a proceeding in
accordance with subparagraph (A) that a sanction imposed by
the Board upon a firm or person associated with a firm
imposes any burden on competition not necessary or
appropriate in furtherance of the purposes of the Federal
securities laws or is excessive or oppressive, the Commission
may cancel, reduce, or require the remission of such
sanction.
``(5) Compliance with rules and regulations.--
``(A) Duties of board.--The Board shall--
``(i) comply with the Federal securities laws, the rules
and regulations issued thereunder, and its own rules; and
``(ii) subject to subparagraph (B) and the rules
thereunder, absent reasonable justification or excuse,
enforce compliance with such provisions and with professional
standards by public accounting firms registered with the
Board and persons associated with such firms.
``(B) Relief by commission.--The Commission, by rule,
consistent with the public interest, the protection of
investors, and the other purposes of the Federal securities
laws, may relieve the Board of any responsibility under this
section to enforce compliance with any specified provision of
the Federal securities laws, the rules or regulations issued
thereunder, or professional standards by any public
accounting firm registered with the Board or person
associated with such a firm, or any class of such firms or
persons associated with such a firm.
``(6) Censure; other sanctions.--
``(A) In general.--The Commission is authorized, by order,
if in its opinion such action is necessary or appropriate in
the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Federal
securities laws, to censure or impose limitations upon the
activities, functions, and operations of the Board, if the
Commission finds, on the record after notice and opportunity
for hearing, that the Board has--
``(i) violated or is unable to comply with any provision of
the Federal securities laws, the rules or regulations issued
thereunder, or its own rules; or
``(ii) without reasonable justification or excuse, has
failed to enforce compliance with any such provision or any
professional standard by a public accounting firm registered
with the Board or a person associated with such a firm.
``(B) Removal from office.--The Commission is authorized,
by order, if in its opinion such action is necessary or
appropriate, in the public interest for the protection of
investors, or otherwise in furtherance of the purposes of the
Federal securities laws, to remove from office or censure any
member of the Board, if the Commission finds, on the record
after notice and opportunity for hearing, that such member
has--
``(i) willfully violated any provision of the Federal
securities laws, the rules or regulations issued thereunder,
or the rules of the Board;
``(ii) willfully abused such member's authority; or
``(iii) without reasonable justification or excuse, failed
to enforce compliance with any such provision or any
professional standard by any public accounting firm
registered with the Board or any person associated with such
a firm.
``(i) Foreign Accounting Firms.--A foreign public
accounting firm that furnishes accountant's reports on any
financial statement, report, or other document required to be
filed with the Commission under any Federal securities law
shall, with respect to those reports, be subject to the
provisions of this section in the same manner and to the same
extent as a domestic public accounting firm. The Commission
may, by rule, regulation, or order and as it deems consistent
with the public interest and the protection of investors,
either unconditionally or upon specified terms and
conditions, exempt from one or more provisions of this
section any foreign public accounting firm. Registration
pursuant to this subsection shall not, by itself, provide a
basis for subjecting foreign accounting firms to the
jurisdiction of the Federal or State courts.
``(j) Relationship With Antitrust Laws.--
``(1) Treatment under antitrust laws.--In no case shall the
Board, any member thereof, any public accounting firm
registered with the Board, or any person associated with such
a firm be subject to liability under any antitrust law for
any act of the Board or any failure to act by the Board.
``(2) Definition.--For purposes of this subsection, the
term `antitrust law' means the Federal Trade Commission Act
and each statute defined by section 4 thereof as `Antitrust
Acts' and all amendments to such Act and such statutes and
any other Federal Acts or State laws in pari materia.
``(k) Applicability of Auditing Principles.--Each audit
required pursuant to this title of an issuer's financial
statements by an independent public accountant shall be
conducted in accordance with generally accepted auditing
standards, as may be modified or supplemented from time-to-
time by the Commission. The Commission may defer to
professional standards promulgated by private organizations
that are generally accepted by the accounting or auditing
profession.
``(l) Commission Authority Not Impaired.--Nothing in this
section shall be construed to impair or limit the
Commission's authority--
``(1) over the accounting profession, accounting firms, or
any persons associated with such firms;
``(2) to set standards for accounting practices, derived
from other provisions of the Federal securities laws or the
rules or regulations issued thereunder; or
``(3) to take, on its own initiative, legal,
administrative, or disciplinary action against any public
accounting firm registered with the Board or any person
associated with such a firm.''.
____
Summary of Domenici-Dodd Private Securities Litigation Reform Act of
1995
The ``Private Securities Litigation Reform Act of 1995'' is
designed to address several broad areas of concern about
private securities litigation: plaintiffs' ability to control
their cases and recover damages; abuses of securities
litigation by some lawyers; the impact of private securities
litigation on financial disclosure by companies; and better
methods for deterring fraud.
1. Litigation Abuses and Investor Control
Plaintiffs' lawyers often race each other to the courthouse
in order to be the first to file a case and win control over
the case and any resulting legal fees. In some instances
plaintiffs' lawyers and defendants tacitly agree to settle a
case for a small amount with little regard to whether the
case is strong or weak, in order to assure payment to
plaintiffs'
[[Page S1085]] counsel. In addition, lawyers have filed
securities cases without having a real client, or have sued
based simply based on a price drop, without bothering to
investigate whether any wrongdoing might have occurred.
The bill addresses these abuses by ensuring that investors,
not lawyers, decide whether to bring a case, whether to
settle, and how much the lawyers should receive. It also
contains provisions intended to ensure that lawyers look at
the facts before they sue:
The bill requires courts to appoint a plaintiff steering
committee or a guardian to directly control lawyers for the
class.
The bill requires that notices of settlement agreements
sent to investors spell out clearly important facts such as
how much investors are giving up by settling, and how much
their lawyers will receive in the settlement.
The bill requires that courts tie awards of lawyers' fees
directly to how much is recovered by investors, rather than
simply how many hours the lawyers billed or how many pages of
briefs they filed.
The bill establishes an alternative dispute resolution
procedure to make it easier to prosecute a case without the
necessity of slow and expensive federal court proceedings.
The bill requires that in order to bring a securities case
as a class action, the plaintiffs in whose name the case is
brought must have held either 1 per cent of the securities
which are the subject of the litigation or $10,000 worth of
securities. This should help stop a problem pointed to by
several courts, in which ``professional
plaintiffs'' who own small amounts of stock in many
companies try to bring class action lawsuits whenever one
of their investments goes down.
The bill clarifies how a lawyer should plead a securities
fraud claim. Plaintiffs' lawyers should have no trouble
meeting these standards if they have legitimate cases and
have looked at the facts.
These provisions should ensure that defrauded investors can
recover damages more quickly, with less of their recovery
drained off in lawyers' fees.
2. securities litigation and financial reporting
Certain professional, like accountants, are singled out
under the current litigation system simply because they are a
deep pocket. Their liability exposure under the current
system could drive them away from providing auditing services
to many companies, especially new companies and ``high tech''
companies. The bill establishes a liability system for less
culpable defendants that is more fair and is linked to degree
of fault. Defendants who have acted egregiously would still
be fully liable. Plaintiffs who have a net worth of less than
$200,000 and lose more than 10 percent of their net worth.
At the same time, the bill establishes a self-disciplinary
organization for accountants under the direct supervision of
the SEC. This entity would be somewhat like self-regulatory
organizations such as the New York Stock Exchange or the
National Association of Securities Dealers. The net effect
should be a more direct and rational way of dealing with
``bad apples'' in the accounting profession without punishing
the entire profession.
The bill also contains a provision which gives companies
more freedom to make forward-looking statements in good
faith. This responds to concerns expressed by many companies
that litigation ``chills'' voluntary predictive statements
about a company's future economic performance, even though
that is exactly the sort of information that is good for
investors and the market.
3. enhancing deterrence of fraud
The bill extends the statute of limitations for implied
actions to five years from the date of the violation, or two
years after the violation was discovered or should have been
discovered through the exercise of reasonable diligence. The
bill also incorporates pending legislation concerning the
responsibility of auditors to search for and report fraud. A
similar bill in the House is supported by the SEC and the
AICPA.
____
Section-by-Section Analysis of the Private Securities Litigation Reform
Act of 1995
title i--private securities litigation
Section 1. Short Title
Section 1 provides that the title of this Act shall be the
``Private Securities Litigation Reform Act of 1995 (the
``Act'').
Section 101--Elimination of Certain Abusive Practices
Section 101 amends the Securities and Exchange Act of 1934
(the ``Exchange Act'') by adding new paragraphs to Sections
15(c) and 21 of the Exchange Act. Section 101 eliminates
certain litigation practices.
Subsection 101(a) amends Section 15(c) of the Exchange Act.
Subsection 101(a) prohibits brokers or dealers from
soliciting or accepting compensation from attorneys for
assisting them in obtaining the representation of any
customer of the broker or dealer in an implied action.
Subsection 101(b) amends Section 21(d) of the Exchange Act
to prevent distribution of funds disgorged pursuant to an
action by the Securities and Exchange Commission
(``Commission'' or ``SEC'') as attorneys' fees or expenses
unless otherwise ordered by the court.
Subsection 101(c) amends Section 21 of the Exchange Act and
adds seven new subsections. New subparagraph (i) of Section
21 requires that the named plaintiffs of the class action be
compensated in the same manner as other members of the class.
This provision is not intended to bar reasonable compensation
of such plaintiffs out of any common fund established for the
class for costs and expenses relating to representation of
the class, such as lost wages or out-of-pocket expenses
incurred due to deposition or trial testimony.
New subparagraph (j) requires a court to determine whether
an attorney who owns or has a beneficial interest in the
securities that are the subject of the litigation may
represent the class or whether such ownership or interest
constitutes a conflict of interest which would disqualify the
attorney.
New subparagraph (k) prohibits settlements under seal
except by motion of one or more of the settling parties if
those parties can show good cause why the court should file
under seal. ``Good cause'' exists only if publication of a
term or provision of the settlement would cause direct and
substantial harm to any person. This subparagraph is
necessary because it is not always possible to
determine the outcome of class action cases. Since class
action litigation is imbued with a public purpose,
information concerning the terms on which such cases are
settled should be publicly available in most instances.
New subparagraph (l) requires courts to determine
attorneys' fees as a percentage of the amount of damages and
prejudgment interest actually recovered by the class as a
result of the attorneys' efforts. The amount awarded to class
counsel cannot exceed a reasonable percentage of the amount
recovered by the class plus reasonable expenses. This
provision is intended to encourage courts to link the amount
of attorneys' fee awarded to the result achieved for the
class and the degree of skill and effort required to achieve
that result.
New subparagraph (m) requires proposed settlement
agreements distributed to the class to contain certain
information. Subpart (1)(A) requires that if the settling
parties agree on the amount of damages which the plaintiff
class would recover if the class prevailed in litigation, and
if they agree on the likelihood that the class could prevail,
the notice should contain a brief statement about the
potential damages per share, a statement concerning the
probability that the plaintiff would prevail on the claims
alleged, and a brief explanation of the reasons for that
conclusion. Subpart (B) requires that if the settling parties
do not agree on the amount of damages that would be
recoverable by the plaintiff on each alleged claim, or on the
probability that the plaintiff would prevail on the claims
alleged, the notice must contain a brief statement by each
party containing the elements specified in subparagraph (A),
concerning the issues on which the parties disagree. If any
of the settling parties or their counsel intend to apply to
the court for attorneys' fees or costs from any fund to be
established under the settlement, subpart (2) requires a
statement concerning the amount of fees and costs to be
sought by each such party or attorney, and a brief
explanation of the reasons for the application. Subpart (3)
requires the settlement agreement to contain the name,
address and telephone number of a representative of counsel
for the plaintiff class who will be reasonably available to
answer class members' questions on any matter contained in
the notice of settlement distributed to class members.
Subpart (4) permits the court, or a guardian ad litem or
plaintiff steering committee apointed by the court in
accordance with new Section 38 of the Exchange Act, to
require additional information in the notice sent to class
members.
New subparagraph (n) requires the court to submit to the
jury a written interrogatory on the issue of each defendant's
state of mind at the time of the alleged violation. This
provision applies only in actions in which the plaintiff, in
order to recover money damages, must prove that the defendant
acted with some degree of intent.
New subparagraph (o) requires that any plaintiffs who wish
to obtain certification as representatives of a class of
investors must collectively have owned during the period in
which the violations occurred the lesser of 1 percent or
$10,000 market value of the securities which are the subject
matter of the litigation. This requirement is comparable to a
rule of the SEC concerning the minimum holding required in
order to seek to place a shareholder proposal on an issuer's
proxy statement.\1\ However, that rule differs in that it
applies to shareholders who own the lesser of 1 percent of
the securities or $1,000 market value of the securities, and
it also contains minimum holding period requirements which
are not included in this bill.
Footnotes at end of article.
---------------------------------------------------------------------------
Class certification is a significant step in many
securities cases, because it places a small group of
investors in charge of claims asserted on behalf of a much
larger group. This may create an incentive for plaintiffs
with nominal claims to seek class certification as a means of
coercing other parties into settlement. Moreover, some cases
have called attention to investors who appear to buy small
amounts of stock in a number of companies with the apparent
intent of using those investments to mount class action
lawsuits.\2\
The purpose of this provision is to create a minimum
``standing'' requirement for securities class actions in
order to ensure that
[[Page S1086]] the representatives of investor class members
are not individuals who have only a nominal interest in the
outcome of the litigation. This provision does not create any
obstacle to filing a lawsuit as a class action, but simply
addresses the standard for certifying a particular group of
plaintiffs as investor class representatives.
Section 102--Alternative Dispute Resolution Procedure; Time Limitation
on Private Rights of Action
Subsection 102(a) amends the Exchange Act by adding a new
Section 36, which creates an alternative dispute resolution
procedure for securities litigation under Rule 10(b) of the
Exchange Act. The section allows any party to offer to
proceed pursuant to any voluntary nonbinding ADR procedure
established or recognized by the courts within the time
period for answering the complaint, or, in cases certified as
class actions, within 30 days after a guardian ad litem or
plaintiff steering committee is appointed. The court may
extend the period for responding to an ADR offer for up to 90
days to permit discovery.
If the courts recognize more than one type of ADR, the
parties may stipulate to the type of ADR to be used. If the
parties cannot agree, the court must decide within 20 days
which method of ADR the parties will use. If any party
engages in dilatory or obstructive conduct during the
response period, the court may extend the discovery period,
deny the party further discovery or impose reasonable fees
and costs upon the party.
Should any party reject an offer to proceed via ADR, or
refuse to abide by the result of an ADR proceeding, that
party can exercise its right to litigate the case in federal
court. However, the subsection requires the court to award
fees and costs against that party if the court enters
judgment against the party and the party asserted a claim or
defense which was not substantially justified. As with
Section 36(a), this fee-shifting provision would not apply to
a named plaintiff in a class action case if he or she had
never owned more than $1,000,000 of the securities that are
the subject of the dispute.
The purpose of this section is to create a stronger
incentive to use ADR in multi-party securities litigation.
Greater use of ADR should result in faster recoveries for
defrauded investors, and should also result in smaller
attorneys' fees for all parties.\3\
Subsection 102(b) adds a new Section 37 to the Exchange
Act. Section 37(a) creates a new limitations period for
implied private rights of action under the Exchange Act. The
subsection requires implied private rights of action to be
brought not later than the earlier of five years after the
violation occurred or two years after the violation was
discovered or should have been discovered through the
exercise of reasonable diligence. Subsection 38(b) requires
the new limitations
period to apply to all proceedings pending on or commenced
after the date its enactment.
Section 103--Guardians Ad Litem and Plaintiff Steering Committees
Section 103 adds a new Section 38 to the Exchange Act.
Section 38 requires courts to ensure that a plaintiff class
has adequate control over its attorneys by either appointing
a guardian ad litem when a plaintiff class is certified, or
creating a plaintiff steering committee in securities class
actions to give the class greater control over the lawsuit.
Section 38(a) requires courts to appoint a guardian ad
litem within 10 days of certifying a plaintiff class. The
guardian ad litem is to direct counsel for the plaintiff
class or perform such other functions as the court may
specify. The guardian ad litem is to be selected from one or
more lists submitted by the parties or their counsel. The
guardian's reasonable fees and expenses are to be apportioned
by the court among the parties. In doing so, the Court may
permit the guardian to recover his or her reasonable fees and
expenses from any fund established for the benefit of the
class, but the guardian is to recover reasonable fees and
expenses whether or not such a fund is established. This
should prevent any possibility that the guardian might have a
financial interest in supporting or opposing a settlement
offer. This provision also states that appointment of a
guardian shall not be subject to interlocutory review.
Section 38(b) permits the Court, as an alternative to
appointing a guardian ad litem, appoints a steering committee
of class members within 10 days after class certification,
with the same powers as a guardian. Appointment of the
committee is also not subject to interlocutory review.
Section 38(c) provides that the plaintiff steering
committee shall consist of at least 5 willing class members
who the court believes will fairly represent the class.
Committee members must have cumulatively held the lesser of 5
per cent of the securities which are the subject of the
litigation, or securities which are the subject of the
litigation with a market value of $10,000,000. ``Securities
which are the subject matter of the litigation'' means
securities which were held during any time period when the
class alleges that fraud was committed against any class
members. The $10,000,000 market value can be measured at any
time between the time when the class alleges that violations
first occurred until the date the class is certified. If the
court determines that appointment of a committee which meets
these requirements is impractical, the court may appoint a
committee which meets a smaller percentage test or dollar
amount test which the court believes is reasonable.
Under subsection 38(c)(2), named plaintiffs may serve on
the committee, but may not comprise a majority of the
committee. Under subsection 38(c)(3), committee members shall
serve without compensation, but may apply to the court for
reimbursement of reasonable out-of-pocket expenses from any
common fund established for the class. This differs from the
compensation scheme for guardians, who can receive
compensation for their services. The reason for this
distinction from guardians is two-fold: Committee members
should be sufficiently motivated to serve on the Committee by
their economic interest in the litigation and by their desire
to obtain justice for themselves and other class members.
Second, since the Committee involves a larger number of
people than a single guardian, compensating the Committee
would be substantially more burdensome on the class and on
other parties than would compensating a guardian.
Under subsection 38(c)(4), the committee would conduct
previously scheduled meetings with at least a majority of
committee members present in person or by electronic
communication. All matters must be decided by majority vote
of all members, except decisions on matters other than
whether to accept or reject a settlement offer or to hire or
fire counsel. Those decisions may be delegated to one or more
members of the committee or voted upon by members seriatim,
without a meeting. Subsection 38(5) allows any class member
who is not a member of the committee to appear and be heard
by the court on any issue in the case.
Section 38(d) enumerates the functions of guardians ad
litem and plaintiff steering committees. Guardians and
Committees have the same powers permitted to clients in other
litigation, including the power to hire and fire counsel,
reject settlement offers and accept settlement offers,
pursuant to some restrictions. However, counsel dismissed
other than for cause would be able to enforce any contractual
fee agreement or to apply to the Court for a fee award from
any common fund established for the class. Section 38(d)(2)
allows the committee to give preliminary approval to
settlement offers and to seek approval of the settlement by a
majority of the class if the benefit of seeking such approval
outweighs the cost of soliciting approval from class members.
Section 38(e) provides that any person who is appointed as
a guardian ad litem or member of a plaintiff steering
committee shall be immune from any liability as a result of
such service. This immunity includes liability for breach of
fiduciary duty, liability under any provision of the Exchange
Act or any other federal statute or rule imposing sanctions
for conduct in the course of litigation, or any other action
taken in the course of acting as a fiduciary. This immunity
would not apply to any action taken by the former guardian or
committee member following resignation or removal by the
court.
Section 38(f) clarifies that this section does not override
any other provision relating to class actions or the
authority of the court to approve final settlements, such as
under Rule 23 of the Federal Rules of Civil Procedure.
Section 104--Requirements for Securities Fraud Actions
Section 104 adds a new Section 39 to the Exchange Act.
Section 39 specifies certain pleading requirements for
implied actions, as well as damage calculations to be
utilized in securities fraud suits. The overall purpose of
this section is to provide a filter at the pleading stage to
screen out allegations that have no factual basis, to provide
a clearer statement of the plaintiff's claims, and to provide
greater clarity about the scope of the case. This section
should not provide any barrier to meritorious cases, although
in some instances it may require attorneys for plaintiffs to
exercise greater care in drafting their complaint. By
requiring more specificity in pleading, the amount of motions
to dismiss and the amount of discovery should be reduced. For
plaintiffs with strong cases, this should encourage faster
recoveries with less expenditure for attorneys' fees.
Section 39(a), which applies to implied actions in which
the plaintiff may recover money damages only on proof that
the defendant acted with some degree of intent, requires the
plaintiff to allege in its complaint specific facts
demonstrating why the plaintiff believes that each such
defendant had such an intent. Blanket assertions of intent
unconnected to any facts would be insufficient.
Section 39(b) requires that a plaintiff who alleges that
the defendant made an untrue statement of a material fact or
omitted to state a material fact necessary to make statements
made not misleading must specify in the complaint each
statement alleged to have been misleading, the reason or
reasons why the plaintiff believes the statement was
misleading, and, if an allegation regarding such statements
is made on information and belief, the plaintiff must state
all information on which his or her belief is formed.
Section 39(c) clarifies that in implied actions based on
the ``fraud in the market'' theory, while the plaintiff need
not show that he or she specifically relied on any alleged
misstatement or omission, plaintiff has the burden of showing
that the misstatement or omission caused the loss. This means
that plaintiff must establish that it was the defendant's
misstatement or omission, rather than some intervening
factor, which established the market price at
[[Page S1087]] which the plaintiff purchased or sold the
securities in question.
Subsection 39(d) sets out an upper limit for damage
calculations to be used in cases of material misstatements or
omissions where the plaintiff claims to have bought or sold
based upon the ``fraud on the market'' theory. Plaintiff's
damages in these cases may not exceed the lesser of (i) the
difference between the price paid by the plaintiff for the
security and the market value immediately after dissemination
to the market of information which corrects the misstatement
or omission, or (ii) 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 correcting
information. The purpose of this provision is to provide
greater certainty about the upper limit of damage exposure
for cases in which the range of possible damage calculations
tends to be substantial, leading to complex battles between
expert witnesses over damage estimates. This provision also
takes into account the fact that plaintiffs' damages are
sometimes mitigated when the stock price recovers soon after
an adverse announcement.
Section 105--Amendment to the Racketeer Influenced and Corrupt
Organizations Act
Section 105 amends Section 1964(c) of Title 18 of the
United States Code (the ``Racketeer Influenced and Corrupt
Organization Act'' or ``RICO''). Section 106 eliminates
private actions for securities fraud under the ``civil RICO''
provisions of Title 18.
title II--financial disclosure
Section 201--Safe Harbor for Forward-Looking Statements
Subsection 201(a) requires the SEC, in consultation with
investors and issuers of securities, to consider adopting or
amending rules, or making legislative recommendations,
concerning criteria which the Commission finds are
appropriate for the protection of investors, and which
issuers may rely upon to ensure that their forward-looking
statements concerning their future economic performance will
be deemed not to violate the Exchange Act. This provision
also requires the Commission to consider rule-making or
legislative recommendations for procedures by which courts
shall timely dismiss claims based on forward-looking
statements of issuers of such statements meet any criteria
set by the Commission pursuant to this subsection.
Subsection 201(b) amends the Exchange Act by adding a new
Section 40. Under new Section 40(a), an implied private
action under the Exchange Act alleging that a forward-looking
statement concerning the future economic performance of an
issuer was materially false or misleading, the court would be
required to grant a stay of discovery concerning the claims
or defenses of a party if that party made a motion for such a
stay in accordance with Section 40(b). Section 40(a) also
sets out certain matters to be considered by the Commission
in developing any such rules or legislative recommendations.
Section 40(b) states that such a stay shall apply in
connection with any motion for summary judgment made by a
defendant asserting that the forward-looking statement was
within the coverage of any rule of the Commission concerning
such statements. However, Section 40(b) requires that
plaintiff have at least 60 days to conduct discovery before
such a summary judgment motion is made. Section 40(c) permits
the court to extend the time for plaintiff to conduct
discovery, or to deny a stay of proceedings, if the party
making the motion engaged in dilatory or obstructive conduct,
or if a stay of discovery would be substantially unfair to
the plaintiff or any other party.
Section 202--Fraud Detection and Disclosure
Section 202(a) amends the Exchange Act to create a new
Section 10A. Section 10A would codify certain auditing
standards for the detection of financial fraud by auditors,
and would require auditors to report directly to the
Commission any financial fraud discovered during an audit
engagement. This provision also would shield auditors from
private liability for the contents of such a report. This
provision is substantially similar to H.R. 574 and S. 630,
both titled the ``Financial Fraud Detection and Disclosure
Act.''
Section 203. Proportionate Liability and Joint and Several Liability
Section 203(a) amends the Exchange Act to create a new
Section 41. Section 41(a) specifies that this provision only
applies to the allocation of damages among persons who are or
may become liable in an implied right of action under the
Exchange Act.
Section 41(b) applies joint and several liability against
primary wrongdoers, persons who commit knowing securities
fraud, and those who control any primary wrongdoer or person
who commits knowing securities fraud. Section 41(b)(2)
defines the terms ``primary wrongdoer'' and ``knowing
securities fraud.''
In cases where more than one person is found to have
contributed to an act of securities fraud, subsection 41(c)
requires the finder of fact to determine the degree of
responsibility of each party. The finder of fact must specify
the plaintiff's total amount of damages, and the degree of
responsibility of each defendant, measured as a percentage of
the total fault of all those liable for the violation. In
determining the degree of responsibility, the subsection
requires the finder of fact to consider the nature and
conduct of each person and the causal relationship between
the conduct and the plaintiff's damages.
Subsection 41(d) creates a system of proportionate
liability for those who are not jointly and severally liable
under section 41(b). Section 41(d) holds such defendants
liable for their proportionate share of damages. If a
plaintiff is unable to collect the proportionate share of any
defendant's liability within six months after the final
judgment, subsection 41(d) reallocates the uncollectible
share. If the plaintiff is an individual with a net worth of
under $200,000, and his or her recoverable damages are more
than 10 per cent of that net worth, all of the remaining
defendants are jointly and severally liable for all of the
plaintiff's damages.
Otherwise, where damages are uncollectible from one or more
defendants, the defendants as to whom proportionate liability
applies will be liable for their proportionate share of
plaintiff's damages, plus the greater of (i) their
proportionate share of the uncollectible damages, or (ii)
five times the amount which that defendant gained from the
conduct which gave rise to the liability. If the defendant
did not obtain a direct financial gain from its conduct, and
the conduct giving rise to its liability consisted of
deficient services, the latter measurement would be five
times the defendant's gross revenues from its entire economic
relationship with any other entity involved in the violation
during the calendar years in which the defendant provided
deficient services. Under Section 41(d)(4) and (5),
defendants who become liable for another defendant's
uncollectible share would have a right of contribution
against the defendant
originally liable for the payment or any other person
responsible for the fraudulent conduct.
Subsection 41(e) prevents disclosure of the formula for
allocation of damages and the procedure for reallocation of
uncollectible shares to the jury.
Subsection 41(f) provides that a defendant who enters into
a settlement of an implied right to action is discharged from
any claim for contribution by any other potential defendants.
This subsection also clarifies that a settlement prior to a
verdict or judgment shall reduce the verdict or judgment
against other defendants by the greater of (i) the amount
that corresponds to the settling person's degree of
responsibility, and (ii) the amount paid to the plaintiff by
that person.
Section 41(g) clarifies that contribution shall be
determined based on the degree of responsibility of the
claimant and each person against whom a right of contribution
is asserted. Subsection 41(h) requires liable defendants to
bring contribution actions within six months after the date
that the judgment against the defendant becomes final unless
the defendant made additional payments of uncollectible
liability under subsection 41(d). In cases where the
defendant made additional payments, the defendant must bring
the contribution action within six months after the
additional payment was made.
Section 203(b) provides that Section 41 shall only apply to
actions commenced after the enactment date of this Act.
Section 204--Public Auditing Self-Disciplinary Board
Section 204 amends the Exchange Act and adds a new Section
13A. Section 13A creates a self-disciplinary board for public
auditors.
Section 13A(a) supplies definitions for key terms to be
used throughout the section.
Subsection 13A(b) requires the SEC to establish a Public
Auditing Self-Disciplinary Board (``Board'') within 90 days
after the date of the enactment of section 13A. The
Commission shall designate an entity to serve as the Board if
control of such entity is vested in members of the Board
selected under Section 13A(c) and if the entity meets other
enumerated criteria.
Subsection 13A(c) specifies that the Board will be composed
of three SEC-appointed members and four elected members. For
the appointed members, the Chairman of the SEC shall make the
initial appointments in consultation with other members of
the Commission within ninety days after enactment. After
initial appointments, the Board will appoint members to fill
vacancies in these three slots, subject to SEC approval.
For elected members, subsection 13A(c)(1), paragraph (B)
requires that within 120 days after the 3 initial Board
members are appointed, if an entity has been designated as
the Board under Section 13A(b), that entity shall conduct an
election of 4 initial Board members. The election shall be
conducted under interim election rules proposed by the entity
and approved by the 3 appointed members and the Commission.
If no entity has been designated by the Commission under
Section 13A(b), the 3 appointed members shall adopt interim
rules providing for the election of the 4 initial elected
members. In either event, the election of the 4 elected
members shall occur within 120 days after the appointment of
the 3 initial members, the initial election shall be by
persons who are certified public accountants and who are
associated with public accounting firms, and the persons
elected shall be subject to approval by the Commission. After
the initial elections, elections for the 4 elected member
slots must be by persons associated with public accounting
firms who are certified public accountants, and the persons
elected are subject to SEC approval.
[[Page S1088]] Subsection 13A(c)(2) requires that four
members of the Board, including the Chairman, must not have
been associated with a public accounting firm during the 10-
year period preceding their appointment. Three of the elected
members are required to be associated with a public
accounting firm registered with the Board.
Subsection 13A(c)(3) requires the Chairman of the Board to
serve on a full-time basis, unless the SEC otherwise
authorizes, and to sever all business ties with his or her
former firms prior to serving on the Board.
Subsection 13A(c)(4) requires that each member of the Board
will serve a four-year term or until a successor is
appointed, whichever is later. However, those members
appointed to fill a vacancy created by a member's departure
prior to the expiration of her term will only be appointed
for the remainder of the term. Pursuant to section 13A(c)(4),
initially selected Board members' terms will expire on a
staggered basis until all initial members have been replaced
by members appointed according to the terms of the section.
Section 13A(c)(5) requires the Board to propose and adopt
rules providing for the administration and operation of the
Board, including appointment and election of members, the
selection of a chairperson, and compensation of Board
members. The Board also must adopt rules concerning the
appointment and compensation of other employees, attorneys
and consultants deemed necessary and appropriate to carry out
the board's functions. The Board must create rules for the
registration of public accounting firms, and rules governing
the Board's duties.
Subsection 13A(d) provides the Board with power to assess
and collect registration fees and annual dues from each
public accounting firm registered with the Board. These fees
must be sufficient to cover the costs and expenses of the
Board and permit the Board to operate on a self-financed
basis, and will be based upon the annual revenues of each
firm from accounting and auditing services, the number of
persons associated with the firm, the number of clients the
firm furnishes with accountant's reports, and other criteria
the Board establishes.
Subsection 13A(e) requires all public accounting firms
which furnish accountants reports with respect to documents
filed with the SEC to register with the Board within one year
after all members of the Board have been selected.
Each public accounting firm that performs such services
must apply for registration with the Board. Each application
must contain the names of all clients of the firm for which
the firm provides accountant's reports.
The application must also list financial information of the
firm for the most recent fiscal year, including assets,
liabilities and annual revenues from accounting and auditing
services, a statement of the firm's policies and procedures
with respect to quality control of its accounting and
auditing practice, information relating to criminal, civil or
administrative actions or disciplinary proceedings pending
against the firm or any of its members and any other
information the Board deems necessary or appropriate that is
reasonably related to the Board's responsibilities.
The registered firms must update their application
information annually. Finally, the subsection allows the
Board or SEC to exempt any firm or class of firms,
accountant's report or class of reports from any provision of
the section, if the SEC finds the exemption consistent with
the public interest, the protection of investors and the
purposes of the section. The Board may designate portions of
the filings as confidential and privileged.
Section 13A(f) sets out the duties of the Board. The Board
must establish fair procedures for investigating and
disciplining registered firms and persons associated with
them for violations of the Federal securities laws, their
rules and regulations, the Board's rules or professional
standards in connection with the preparation of an
accountant's report on a financial statement, report or other
document filed with the SEC.
Section 13A(f)(2) allows the Board to conduct an
investigation of any illegal act, practice or omission by a
registered firm or an associated person in connection with
the preparation of documents filed with the SEC.
Section 13A(f)(2), paragraph (B) empowers the Board to
require the testimony of any person associated with a firm
with respect to any matter the Board considers material or
relevant. The Board also can require the production of audit
workpapers or any other document possessed by a registered
firm or any associated person that the Board considers
relevant or material, including the books and records of the
firm to verify the accuracy of any document supplied. The
Board also has the power to request the testimony of any
person, including a firm's client, and the production of any
documents they possess that the Board deems material or
relevant.
Section 13A(f)(2), paragraph (C) provides that if any
person associated with a public accounting firm refuses to
produce documents or otherwise comply with a Board request,
the Board may suspend or bar the person from associating with
any registered firm or hand down any other sanction the Board
deems appropriate. The refusal of any registered public
accounting firm to produce documents or otherwise cooperate
with the Board also is cause for suspension or revocation of
the registration.
If the Board cannot complete or conduct its investigation
because of the refusal of any client to comply, Section
13A(f)(2), paragraph (D) requires the Board to report the
refusal to the SEC. The SEC then may designate one or more
officers of the Board to be granted nationwide subpoena
power. This Section also authorizes the Board to refer any
investigation to the SEC.
Section 13A(f)(2), paragraph (E) grants immunity to any
Board member who carries out an investigation or disciplinary
proceeding under this Section from civil liability arising
out of the investigation or disciplinary proceeding in the
same manner as any other federal Government employee in
similar circumstances.
Section 13A(f)(3) allows the Board to implement procedures
to determine if disciplinary measures should be taken against
a firm or its associated persons. In determining whether a
person or firm should be disciplined, the Board must bring
specific charges, notify the firm or associated persons of
the charges, give the parties an opportunity to defend
against the charges, and keep a record of such actions. Upon
a finding of a violation, the Board may impose any
disciplinary sanctions as it deems appropriate, including
those enumerated in subsection 13A(f)(3), part (B).
Section 13A(f)(3), paragraph (C) requires the Board to file
a written statement in support of a determination to impose
sanctions. The statement must set forth the illegal act or
practice, the specific law, regulation, Board rules or
professional standards violated, the sanction imposed, and
the reasons therefor.
Section 13A(f)(3), paragraph (D) prohibits any person
suspended or barred by the Board from willfully associating
with a registered firm without Board or SEC permission. Firms
may not knowingly permit suspended or barred persons to
become or remain associated with the firm without Board or
SEC approval.
Section 13A(f)(4) requires the Board to report sanctions to
the SEC, the appropriate foreign or state licensing boards or
any boards with which the firm or person is licensed or
certified to practice public accounting, and to the public.
The report must include the name of the firm or associated
person, a description of the acts, practice or omissions, the
nature of the sanctions, and any other information on the
circumstances of the disciplinary action as the Board deems
appropriate.
Section 13A(f)(5) concerns the discoverability and
admissibility of material related to the Board's disciplinary
process in civil litigation. It is intended to ensure that
the Board's disciplinary process does not interfere with
private actions for damages relating to conduct within the
Board's jurisdiction and, at the same time, that private
damages actions do not interfere with the Board's
disciplinary process. The intention of this section is that
plaintiffs should not be deprived of access to any material
that they can obtain from public accounting firms under
current law. Similarly, the Board itself, and materials
specifically created by others in connection with the Board's
disciplinary procedure, would be kept separate from the civil
liability system.
Section 13A(f)(5)(A) provides that except as provided in
subparagraph (B), all documents prepared, collected or
received by the Board and the deliberations of the Board in
connection with an investigation or disciplinary proceeding
are not subject to any form of compulsory discovery. This
subparagraph does not apply to information provided to the
Board that would have been subject to discovery from the
person or entity that provided it to the Board, but is no
longer available from that person or entity. This does not
limit the Board's authority to provide public access to
disciplinary proceedings.
Section 13A(f)(5)(B) provides that all documents prepared,
collected or received by the Board and the deliberations and
other proceedings of the Board in connection with an
investigation or disciplinary proceeding shall be
inadmissible in any state or federal court or any
administrative agency.
Section 13A(f)(5)(C) creates an exception to subparagraphs
(A) and (B) so that all information referred to in those
subparagraphs is available to the SEC and any other Federal
agency and admissible in any action brought by the Commission
or other Federal agency to the same extent it would be
available and admissible under current law. This information
shall also be available to state licensing boards under
certain circumstances.
Section 13A(f)(6) allows state licensing boards limited
participation in Board actions. When the Board institutes an
investigation it shall notify the State licensing board in
the States in which the public accounting firm or auditor
engaged in the act or failure to act that is the subject
matter of the investigation and invite the state licensing
boards to participate. If the state licensing board elects to
participate, it shall do so pursuant to rules established by
the Board.
If the State board disagrees with the Board's
determination, it may seek review of that determination by
the Commission pursuant to procedures that the Commission
shall specify by regulation. However, this Section prohibits
state licensing boards from instituting its own proceeding
until after the Board's determination has become final.
Section 13A(f)(6), paragraph (C) provides that if the State
board elects not to participate in the Board's investigation,
it shall not institute its own investigation or proceeding
[[Page S1089]] in the matter until after the Board's
determination has become final.
Section 13A(f)(6), paragraph (D) provides that if the Board
or Commission imposes a sanction upon a public accounting
firm or auditor, and that determination either is not
subjected to judicial review or is upheld on judicial review,
the state licensing board may impose a sanction on the basis
of the Board's report. Any sanction imposed by the state
licensing board on this basis shall be inadmissible in any
proceeding in any State or Federal court or administrative
agency except to extent provided in paragraph (5)(D).
Section 13A(f)(6), paragraph (E) provides that if no
sanction is imposed by the Board or the SEC, the state
licensing board may not impose a sanction if it chose to
participate in the investigation. If the State board chose
not to participate in the investigation, paragraph (5)'s
rules on discovery and admissibility apply to subsequent
State board proceedings. The Section also denies State boards
access to the record of the proceeding before the Board, and
that record is inadmissible in any State board proceeding.
Section 13A(g) requires the Board to promote a high level
of professional conduct among registered public accounting
firms, to improve the quality of audit services those firms
provide, and to protect investors and promote the public
interest.
Section 13A(g)(2) mandates that the Board require public
accounting firms subject to its disciplinary authority to be
members of a Board-certified professional peer review
organization. To qualify the peer review organization must
require a public accounting firm to undergo peer review at
least once every three years and publish the results of the
peer review. It must have standards relating to audit
service quality control that are acceptable to the Board.
Violation by a public accounting firm or auditor of a rule
of the peer review organization shall constitute grounds
for imposition of disciplinary sanctions and denial to the
public accounting firm or auditor the privilege of
appearing before the SEC.
Section 13A(g)(3) provides that all reports, memoranda and
other information provided to the Board for the purpose of
creating the procedures are confidential unless
confidentiality and privilege are expressly waived by the
proper parties.
Section 13A(h) gives the SEC oversight of the Board.
Section 13A(h), paragraph (1) requires the Board to file
copies of proposed Board rule changes or deletions with the
SEC pursuant to rules to be promulgated by the SEC, along
with a concise statement of the basis and purpose of the
proposed change. The SEC then must publish notice of the
change and give interested persons an opportunity to submit
comments. The Board cannot make changes without Commission
approval.
Not later than 35 days after the SEC publishes notice of
the change, or within 90 days if the SEC so designates, the
SEC must approve the change or institute proceedings to
determine whether the change should be disapproved.
Disapproval proceedings must include notice of the grounds
for disapproval under consideration and an opportunity for a
hearing. The proceedings must be concluded not later than 180
days after the publication of notice and filing of the
proposed change. At the end of the proceedings, the SEC must
approve or disapprove the change or extend the time for
conclusion of the proceedings pursuant to subsection 13A(h),
paragraphs (1)(B)(ii) (I) and (II).
Section 13A(h)(1), paragraph (B)(iii) requires the SEC to
approve the change if it finds that it is consistent with the
Federal securities laws and disapprove it if it does not make
such a finding. The SEC may not approve a rule change until
the 30-day period after the notice of the proposed change is
filed, unless the SEC finds good cause to do so and publishes
its reasons.
Section 13A(h)(1), paragraph (C) allows a proposed rule
change to take effect upon filing with the SEC if the Board
designates it as constituting a stated policy, practice or
interpretation of an existing Board rule, establishing or
changing a due, fee or other Board-imposed charge, or
concerned solely with the administration of the Board. The
SEC may put a change into effect summarily if such action is
necessary to protect investors. The Board may enforce such
changes to the extent they are not inconsistent with the
Federal securities laws, their rules and regulations, and
applicable State and Federal law. The SEC may summarily
abrogate changes in the rules by the Board if it appears to
the SEC that such
action is necessary to the public interest, for the
protection of investors, or in furtherance of federal or
state laws.
Section 13A(h)(2) also allows the SEC to amend the Board's
rules if the SEC deems the action necessary or appropriate to
the fair administration of the Board, to conform its rules to
requirements of the Federal securities laws by following
certain procedures adopted from the Administrative Procedure
Act. The SEC must publish notice of the proposed rulemaking
in the Federal Register, give interested persons an
opportunity to comment, and incorporate the text of its
amendment to the rules of the Board with a statement of the
basis and purpose of the amendment.
The SEC also may adopt regulations pursuant to section 553
of title 5 of the United States Code for rulemaking not on
the record. Amendments to the Board's rules by the SEC are
deemed Board rules and not rules of the SEC.
Section 13A(h)(3) requires the Board to promptly notify the
SEC if the Board imposes a final disciplinary sanction on a
registered firm or associated person. The Commission may
review the action on its own motion or the motion of any
aggrieved party filed within 30 days after the Board's notice
is filed with the SEC and received by the aggrieved party.
Section 13A(h)(4) requires the Commission to affirm the
Board's sanction, modify it or remand to the Board for
further proceedings if upon review of the sanctions, the SEC
determines that the firm or person engaged in the acts,
practices or omissions that the Board alleges, that such
acts, practices or omissions violated the Federal securities
laws, the Board's rules or professional standards, and such
laws are consistent with the purposes of the Federal
securities laws. If the SEC does not make such findings, it
must set aside the sanctions and remand to the Board if
appropriate. If the SEC finds that a sanction imposed by the
Board burdens competition unnecessary or inappropriate in
furtherance to the purposes of the Federal securities laws or
is excessive or oppressive, the SEC may cancel, reduce or
require the remission of the sanctions.
Section 13A(h)(5) requires the Board to comply with Federal
securities laws and its own rules and enforce compliance with
those laws and with professional standards. The SEC may
relieve the Board of any responsibility under Section 13A to
enforce compliance with the above laws or standards.
Section 13A(h)(6) allows the SEC to censure or limit the
activities, functions or operations of the Board if the SEC
finds that the Board violated or is unable to comply or has
failed to enforce compliance by a registered firm or
associated persons with any provision of the Federal
securities laws, the Board's rules or professional standards
of conduct. The SEC also may remove a Board member
from office if, after notice and opportunity for hearing,
the SEC determines that the member willfully violated any
provision of the Federal securities laws or the Board's
rules, abused the member's authority or failed to enforce
compliance with any professional standard of conduct by
any firm or associated person without reasonable
justification or excuse.
Section 13A(i) requires foreign accounting firms to
register with the Board if they furnish the same types of
services as domestic firms required to register under Section
13A. The SEC may exempt foreign firms from the provisions of
this section if exemption is deemed consistent with the
public interest and the protection of investors.
Registration pursuant to this subsection shall not be
itself provide a basis for subjecting foreign accounting
firms to the jurisdiction of the federal or state courts.
Under Section 13A(j), neither the Board, any member of the
Board nor any person associated with a public accounting firm
shall be subject to suit under any antitrust law for any act
of the Board of any failure to act by the Board. ``Antitrust
law'' means the Federal Trade Commission Act and each statute
defined by Section 4 thereof as ``Antitrust Acts'' and all
amendments to such act and such statutes and any other
federal Acts or state laws in pari materia.
Section 13A(k) provides that all audits of an issuer's
financial statements required under the Exchange Act shall be
in accordance with generally accepted auditing standards. It
also clarifies that the Commission can modify or supplement
such standards, and that the Commission may defer to
professional standards promulgated by private-sector
organizations that are generally accepted by the accounting
or auditing profession.
Section 13A(l) declares that nothing in Section 13A impairs
or limits the SEC's authority over accountants, to set
standards for accounting or auditing standards or to take
action against any firm or associated person.
footnotes
\1\See 17 C.F.R. Sec. 240.14a-8.
\2\For example, in one such case the Court found that due to
a ``consistent pattern of purchasing a few shares in troubled
companies [and] Plaintiff's involvement in over two dozen
lawsuits,'' ``the Court finds clear evidence that Plaintiff's
purchasing stock in troubled companies to possibly pursue
litigation is a serious defense likely to become the focus of
the litigation to the detriment of the class.'' Shields v.
Smith, [1991-92 Transfer binder] Fed. Sec. L. Rep. (CCH)
para.97,007, at 91,967-68 (N.D. Cal. Nov. 4, 1991). See also
Cooperman v. Fairfield Communities, Inc., No. LR-C-90-164,
slip op. at 9 n.1 (E.D. Ark., filed June 26, 1991); Hoexter
v. Simmons, 140 F.R.D. 416, 422-23 (D. Ariz. 1991).
\3\The Committee on Commerce, Science, and Transportation
recently voted out of Committee a comparable measure
concerning alternative dispute resolution procedures. See the
``Product Liability Fairness Act,'' S. 687 [Report No. 103-
203], November 20, 1993. The report accompanying S. 687
stated that its provision on Alternative Dispute Resolution
was intended to reduce delay and undercompensation of
victims. See Product Liability Reform Act, Report of the
Senate Committee on Commerce and Transportation, [Report No.
103-203], November 20, 1993, at 6-7.
____
[From the Wall Street Journal, Jan. 11, 1995]
Judges Show Growing Skepticism in Class-Action Securities Cases
(By Junda Woo)
The dismissal last week of a shareholder suit against
Philip Morris Cos. is the latest sign that some judges are
growing impatient with securities class action litigation.
In dismissing allegations that Philip Morris misled
shareholders in the months before announcing its 1993
Marlboro price cut, U.S.
[[Page S1090]] District Judge Richard Owen in Manhattan
criticized the plaintiffs' attorneys. Two separate suits,
later consolidated with eight others, ``contained identical
allegations, apparently lodged in counsel's computer memory
of `fraud' from complaints that the defendants here engaged
in conduct ``to create and prolong the illusion of (Philip
Morris') success in the toy industry,'' he said.
Judge Owen also noted with disapproval that the original
suits, in which plaintiffs had sought class-action status,
were filed either on the day of Philip Morris's announcement,
known as Marlboro Friday, or the following Monday. He
expressed disbelief that shareholders of the tobacco, food
and beer giant would have landed on attorney's doorsteps so
quickly.
And he quoted from similar rulings by other judges,
including a 1991 ruling dismissing a complaint against
Citicorp that said, ``The complaint creates the strong
impression that when Citicorp announced a cut in dividends,
plaintiff's counsel simply stepped to the nearest computer
console, conducted a global Nexis search, pressed the `Print'
button, and filed the product as their complaint.'' Judge
Owen couldn't be reached for comment.
But Melvyn L. Weiss, a partner at one of the firms that
filed the Philip Morris suit, said the plaintiffs plan an
appeal. ``The law is very clear that an investor is entitled
to know all facts that they would want to know in making
their decision,'' he said. ``You can remain silent, but when
you speak, you have to tell the whole truth.'' The plaintiffs
had contended that New York-based Philip Morris led analysts
to believe that it wouldn't cut the price of its flagship
Marlboro brand.
``I have enough of a reputation without going around filing
suits that I don't believe in,'' Mr. Weiss added. ``I would
never pursue a case like this, especially against a worthy
adversary, without a profound belief in the integrity of the
case.''
In addition to Mr. Weiss's firm, Milberg Weiss Bershad
Hynes & Lerach, other law firms representing the plaintiffs
were Abbey & Ellis and Barrack, Rodos & Bacine.
Nevertheless, Judge Owen isn't the only one worried about
class-action securities suits. Sens. Pete Domenici, a New
Mexico Republican, and Christopher Dodd, a Connecticut
Democrat, are expected to reintroduce a bill that would put
the brakes on some alleged abuses in securities litigation.
Its provisions include a higher legal standard for claiming
securities fraud and a nonbinding arbitration mechanism for
securities litigation.
``In my opinion, it's most of them that are frivolous--not
just a lot, but most,'' said Jonathan R. Macey, a Cornell
University law professor who advocates having plaintiffs'
lawyers bid to work on such cases, with the money going to
the plaintiffs. ``The facts show that every time a firm's
share price drops by enough that it's profitable for
plaintiffs lawyers to bring a lawsuit, they do.''
John L. Coffee, Jr., a Columbia University law professor,
says ``some of the judges are very skeptical of particular
law firms'' because some of them bring so many shareholder
suits. He adds that ``about nine firms'' bring more than half
of the suits that are filed.
Federal judges sometimes try to dismiss shareholder suits
early on because they are so time-consuming, Prof. Coffee
said, but appellate courts have reined in any attempts to
broadly throw out securities suits.
Mr. DODD. Mr. President, I introduce the Private Securities
Litigation Reform Act of 1995. This bipartisan proposal is identical to
the legislation I introduced in the 103d Congress with my good friend
Senator Domenici. eighteen of our colleagues are joining us as original
cosponsors.
In the year since we last introduced this legislation, the process by
which private individuals bring securities lawsuits has received
enormous scrutiny. I am happy to say that as a result of this increased
focus in the media and in the investor and business community, the
debate has shifted. We are no longer arguing about whether the current
system is in need of repair. The discussion is now centered on how best
to fix it.
Even those who 1 year ago were unwilling to admit that the system
needed to be reformed, now concede that substantial changes are needed.
In my view, the fact that there is finally consensus about the need for
securities litigation reform is enormously significant. Because this
consensus now exists, I believe we will see comprehensive legislation
enacted this Congress. With the introduction of this bill, we begin the
process to develop the best legislative solutions.
This bill is by no means the final word on the matter. In the last
year, hearings have been held in both Houses of Congress. Numerous
studies of have been completed, including a comprehensive report by my
securities Subcommittee staff. Every word of the legislation has
received in-depth analysis. In addition, there have been a number of
judicial decisions which have altered the private securities litigation
landscape. The most significant of these was the U.S. Supreme Court
Decision last year in Central Bank of Denver versus First Intereststate
Bank of Denver, which eliminated private liability for those who aid
and abet securities fraud.
Many constructive suggestions have been made about ways to improves
the legislation. The fact that we have not incorporated these changes
to last years proposal should not be taken as a sign that we are
unwilling to modify our bill. We simply preferred to begin this year
where we left off last year so as not to create additional controversy
or confusion. I am eager to work with my colleagues to refine and
perfect the proposal as it moves through the process. As I have stated
before, I would be willing to address the Bank of Denver decision as
part of our deliberations.
I cannot overstate how critical securities lawsuits brought by
private individuals are to ensuring the integrity of our capital
markets. As an important back-up to Government enforcement actions,
these private actions help deter wrongdoing. When the system is working
well, it helps to ensure that corporate officers, auditors, directors,
lawyers and others properly perform their jobs. Private litigation is
an indispensable tool with which defrauded investors can recover their
losses without having to rely on Government action.
Private securities litigation has evolved over the years mainly as a
result of court decisions rather than legislative action. The most
important private right of action for defrauded investors has long been
section 10(b) of the Securities Exchange Act. Private actions under
that provision were never expressly set out by Congress, but have been
construed and refined by courts, with the tacit consent of Congress.
This lack of congressional involvement in shaping the contours of
private litigation has created uncertainty about legal standards and
unwarranted opportunities for abuse of investors and companies. Last
Congress, my Securities Subcommittee held several days of hearing on
securities litigation. These hearings documented a number of glaring
problems with the current system.
First, securities class action cases are vulnerable to abuses by
``entrepreneurial'' lawyers who put their own interests ahead of their
clients. Many critics charge that plaintiffs' attorneys appear to
control the settlement of the case with little or no influence from
either the named plaintiffs or the larger class of investors.
For example, in one case which was cited to the subcommittee by a
lawyer as a showcase of how the system works, the case was settled
before trial for $33 million. The lawyers asked the court for more than
$20 million of that amount in fees and costs. The court awarded the
plaintiffs' lawyers over $11 million and lawyers for the company $3
million. Investors recovered only 6.5 percent of their recoverable
damages.
A second area of abuse is frivolous litigation. We have heard
complaints from companies, especially in the high-technology sectors,
that they face groundless securities litigation days or even hours
after adverse earnings announcements. Courts have echoed this concern.
As the Supreme Court pointed out in Blue Chip Stamps versus Manor Drug
Store:
[I]n the field of federal securities laws governing
disclosure of information, even a complaint which by
objective standards may have very little success at trial has
a settlement value to the plaintiff out of any proportion to
its prospect of success at trial so long as he may prevent
the suit from being resolved against him by dismissal or
summary judgment. The very pendency of the lawsuit may
frustrate or delay normal business activity of the defendant
which is totally unrelated to the lawsuit.
The net effect of private litigation under the Federal securities
laws has been to weaken the financial disclosure system on which our
capital markets depend. The accounting profession, which is at the
heart of the Financial Disclosure System, has warned that because of
the doctrine of joint and several liability, accountants face potential
liability which could destroy the ability of independent auditors to
review financial disclosure by companies.
We need to rationalize the current framework for assessing liability
so it
[[Page S1091]] is fairer and doesn't simply create an incentive to sue
those with the deepest pockets. Unlimited liability is simply not the
most effective deterrent of wrongdoing. We need to more directly police
the conduct of professionals like accountants and do so in a more
effective manner.
LEGISLATIVE SOLUTIONS
The bill contains three major initiatives to deal with these
problems:
First, it empowers investors so that they--not their lawyers--have
greater control over class action cases.
Second, it limits opportunities for frivolous litigation.
Third, it rationalizes the professional liability of accountants in
exchange for stronger regulation.
In addition, the bill incorporates measures previously proposed in
Congress to strengthen the obligation of auditors to search for fraud
and to lengthen the statute of limitations for fraud actions.
1. EMPOWERING INVESTORS
The bill addresses abuses of investors by their lawyers by ensuring
that investors, not lawyers, decide whether to bring a case, whether to
settle, and how much the lawyers should receive.
The bill requires courts to appoint a plaintiff steering committee or
a guardian to directly control lawyers for the class.
The bill requires that notices of settlement agreements sent to
investors spell out clearly important facts such as how much investors
are giving up by settling, and how much their lawyers will receive in
the settlement.
The bill requires that courts tie awards of lawyers' fees directly to
how much is recovered by investors, rather than simply how many hours
the lawyers billed or how many pages of briefs they filed.
The bill establishes an alternative dispute resolution procedure to
make it easier to prosecute a case without the necessity of slow and
expensive Federal court proceedings. This idea is very similar to a
provision in the products liability bill passed by the Commerce
Committee last fall, and like that bill it is intended to speed up the
recovery process for plaintiffs who have strong cases.
These provisions should ensure that defrauded investors are not
cheated a second time by their lawyers. It also should help victims of
fraud to recover damages more quickly, with less of their recovery
drained off in lawyers' fees.
2. FRIVOLOUS LITIGATION
The bill requires that in order to bring a securities case as a class
action, the plaintiffs in whose name the case is brought must have held
either 1 percent of the securities which are the subject of the
litigation or $10,000 worth of securities. This should help stop a
problem pointed to by several courts, in which professional plaintiffs
who own small amounts of stock in many companies try to bring class
action lawsuits whenever one of their investments goes down.
The bill clarifies how a lawyer should plead a securities fraud
claim. Plaintiffs' lawyers should have no trouble meeting these
standards if they have legitimate cases and have looked at the facts.
These and other reforms should end the race to the courthouse by
lawyers eager to file a case without investigating the facts or finding
a real client.
3. securities litigation and financial reporting
The accounting profession has argued that accounting firms are
unfairly singled out under the current litigation system simply because
they are a deep pocket. They claim that their liability exposure under
the current system could drive them away from providing auditing
services to many companies, especially new companies and high-
technology companies.
The bill establishes a liability system for less culpable defendants
that is linked to degree of fault. At the same time, the bill
establishes a self-disciplinary organization for accountants under the
direct supervision of the SEC. This entity would be somewhat like self-
regulatory organizations such as the New York Stock Exchange or the
National Association of Securities Dealers. The net effect should be a
more direct and rational way of dealing with bad apples in the
accounting profession without punishing the entire profession.
3. enhancing deterrence of fraud
The bill would extend the statute of limitations for implied actions
to 5 years from the date of the violation, or 2 years after the
violation was discovered or should have been discovered through the
exercise of reasonable diligence. The bill also incorporates pending
legislation concerning the responsibility of auditors to search for and
report fraud. A similar bill in past Congresses has been supported by
the SEC and the AICPA.
There is tremendous support for this legislation within Congress and
from a large variety of private organizations. I look forward to
working with my colleagues to enact comprehensive reform as soon as
possible.
Ms. MIKULSKI. Mr. President, I am pleased to work on a
bipartisan basis with my colleagues Senator Dodd and Senator Domenici
to cosponsor and renew my commitment to reforming securities
litigation.
This bill addresses the problem of bounty hunters racing to the
courthouse to be the first to file a lawsuit based on nothing more than
a change in stock price--and then coerce innocent businesses to settle
these lawsuits.
This bill eliminates the payment of bonus awards or bounties to
representative plaintiffs in class actions. It gives people who are
harmed extra time to consider who really harmed them before they have
to file their case at the courthouse, by extending the statute of
limitations to 2 years after the violation was or should have been
discovered, and 5 years after the violation occurred. It also puts the
investor in the driver's seat to control the litigation and recover
more of their damages.
My constituents have told me that some attorneys are paying stock
brokers and others a bounty in return for identifying who they should
sue. High-technology companies, their accountants, and others are being
lumped into these securities lawsuits that are filed at the courthouse
just hours after a change in the stock price.
I am opposed to the race-to-the courthouse mentality that ends up in
needless lawsuits that have huge litigation costs for firms that should
be focused on creating jobs.
I want to see the courthouse door kept open for the little guy, but
let's get this bounty hunter law under control.
These needless lawsuits hit these firms through: expensive liability
insurance premiums; disruption to the lives of those people who have
been drawn into the suit--and is a tremendous distraction from the
company's achieving its mission, contributing to the economy, and
creating jobs.
I am concerned about these costs to the private sector, and to
communities across America--and especially the costs to the high-
technology community who are our hope for jobs in the 21st century.
I am hearing loud and clear that the current bounty hunter mentality
is putting these jobs at risk.
Rather than creating jobs, these high-technology jobs are having to
put their efforts and their dollars into expensive litigation and
insurance.
I know how the system works with these lawsuits. It doesn't matter
who's right or who's wrong. Both the guilty and the innocent end up
settling at some big cost, even if just to avoid the risk and to get on
with life.
So, the good guys cut their losses and the bad guys get off the hook.
I am pleased to work on a bipartisan basis with Senators Domenici and
Dodd and support this legislation that helps take care of the good
guys.
______
By Mr. D'AMATO:
S. 241. A bill to increase the penalties for sexual exploitation of
children, and for other purposes; to the Committee on the Judiciary.
THE PREVENTION OF SEXUAL EXPLOITATION OF CHILDREN ACT
Mr. D'AMATO. Mr. President, I rise today to introduce the
Prevention of the Sexual Exploitation of Children's Act. There is a
large and growing threat to the welfare and safety of our children
being caused by the advent of the computer age. The ``information
superhighway,'' while a boon to our standard of living and economic
growth, also contains hidden dangers which must be addressed to protect
our children from debauched sexual predators. The ``information
superhighway''
[[Page S1092]] has become a safe haven for pedophiles to entice
children into acts of sexual depravity with little chance of exposure.
Pedophiles and other sexual miscreants historically would position
themselves outside of schools, playgrounds, and other public areas
where children would congregate in order to satisfy their own depraved
appetites. Now through the use of bulletin boards, major on-line
services such as Prodigy, America Online, Compuserve, Internet, and a
host of other computer conduits, these individuals can ply their trade
with much less exposure to parental supervision or law enforcement.
While many State and local authorities are addressing this problem, the
use of the ``information superhighway'' makes the role of the Federal
Government even more critical. The use of the computer conduits allow
for the defendants to cross State, local and even international
boundaries with impunity. These miscreants can be extremely violent and
cause irreparable harm to the children they come into contact with.
This violence must be answered with stiff judicial penalties.
In addition to the physical depravity that is a direct result of the
computer age, there has been a noted increase in pornographic material
involving children being distributed and sold over computer lines. This
pornographic material not only acts as a stimulus to the pedophiles but
the simple possession of this material by people creates a demand for
it, and these people should share in the responsibility of the
exploitation of children by the pornography producers. This circular
motion of supply and demand fuels the proliferation of more and more
pornographic material.
My legislation will raise the judicial penalties which would deter
the proliferation of pornographic material available and remove the
defendants from society. By enacting harsher judicial penalties,
Congress will be sending a strong message that our society will not
tolerate these forms of criminal behavior.
I ask my fellow colleagues to join me in support of this legislation.
These violations are a growing concern both within the law enforcement
community and the family structure, and we must deal with them now.
Mr. President, I ask for unanimous consent that the text of this
legislation and additional material be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
S. 241
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Prevention of Sexual
Exploitation of Children Act''.
SEC. 2. PENALTIES.
(a) Sexual Exploitation of Children.--Section 2251(d) of
title 18, United States Code, is amended--
(1) by striking ``10 years'' and inserting ``15 years'';
and
(2) by striking ``more than 15 years'' and inserting ``more
than 20 years''.
(b) Certain Activities Relating to Material Involving the
Sexual Exploitation of Minors.--Section 2252(b)(1) of title
18, United States Code, is amended--
(1) by striking ``ten years'' and inserting ``15 years'';
and
(2) by striking ``more than fifteen'' and inserting ``more
than 20 years''.
____
U.S. Senate,
Washington, DC, January 18, 1995.
Dear Colleague: I am writing to invite you to join me as a
cosponsor of ``The Prevention of Sexual Exploitation of
Children's Act''.
Technological advances, while a boon to our standard of
living and our economic growth, contain hidden dangers that
directly effect the welfare of our children. Computer
conduits, or the ``information superhighway'', is being used
extensively to entice children into acts of sexual depravity
by pedofiles and other deviants. These sexual predators will
often depict themselves as children and arrange a meeting
with their victims, with the child being sexually abused as
the ultimate outcome. In addition to the luring of children
through the ``information superhighway'', these conduits are
also being used to transport child pornography. The influx
and availability of the child pornography only prompt these
sexual deviants into further preying on our children.
Pedofiles and other sexual miscreants historically would
position themselves outside of schools, playgrounds and other
public areas where children would congregate in order to
satisfy their own depraved appetites. Now through the use of
bulletin boards, major on-line services, such as Prodigy,
America Online, Compuserve, Internet, and a host of other
computer conduits, these individuals can ply their trade with
much less exposure to parental supervision or law
enforcement. These deviants are often very violent and cause
the children irreparable harm.
This legislation will raise the judicial penalties which
would deter the proliferation of pornographic material
available and remove the defendants from society. By enacting
harsher judicial penalties, Congress will be sending a strong
message that our society will not tolerate these forms of
criminal behavior.
If you would like to help me stem this burgeoning problem
by cosponsoring the ``Prevention of Sexual Exploitation of
Children's Act'', please contact Greg Regan of my office at
4-8349.
Sincerely,
Alfonse M. D'Amato,
Senator
____
[From the New York Post, Jan. 9, 1995]
Molesters With a Modem--Kiddie-Sex Perverts Using Computers To Lure
Victims
(By Lou Lumenick and Kieran Crowley)
City cops are about to start patrolling the information
superhighway to hunt down child pornographers and pedophiles
who are luring kids through high-tech computer bulletin
boards, The Post has learned.
``The bulletin boards are a total haven for pedophiles,''
said Sgt. Richard Perrine, who's forming a new computer
investigation unit.
``There are no names and faces, and a 33-year-old man can
pass himself off as a 10-year-old kid.''
Perrine said the new unit, in the NYPD's Organized Crime
Control Bureau, plans to include computer child-pornographers
and pedophiles among its targets.
``We haven't really solidified our strategy yet,'' he told
The Post.
``This is something that's so new, law enforcement is not
quite ready for it.''
Law-enforcement officials say pedophiles are lurking on the
nation's three major on-line services, America Online,
Prodigy and Compuserve--as well as on the worldwide Internet,
smaller on-line services, and locally-operated computer
bulletin boards.
On-line services are an easy way for pedophiles to meet
children anonymously, noted Dyanne Greer, a senior lawyer
with the National Center for the Prosecution of Child Abuse.
``Many cases are not reported, so I'm not sure anybody is
really aware how much this is going on,'' she said.
A Post probe uncovered these on-line horror stories:
Westchester computer expert George Telesha pretended to be
a 14-year-old girl on America Online and was quickly besieged
by perverts sending dirty pictures.
A Manhattan computer expert allegedly got a 13-year-old New
Jersey boy he met on-line to go skating with him.
Cops said the man lured the youth into the woods near the
boy's home and sexually abused him six times between last
July and September.
An unemployed Brooklyn computer programmer tried to
sodomize a Nevada teen-ager he met on a computer bulletin
board.
A 27-year-old computer engineer in Cupertino, Calif.,
allegedly met a 14-year-old boy through America Online.
He is charged with handcuffing, shackling and blindfolding
the boy and then taking him to his apartment, where he
whipped him with a belt, shaved his pubic hair and had sex
with him.
A California man sent pornographic photos via computer to a
teen-ager, then sought to have the teen killed to silence
him.
Such crimes are not easy to investigate or prosecute,
officials note.
``It's a bigger problem than most people realize,'' said
Mike Brick, director of the Orlando bureau of the Florida
State Office of Law Enforcement.
``There's a lot of people out there who want to have sex
with children. If they hang out at a real playground, a
teacher or someone might see them. In the computer
playground, they can more or less hide in the bushes.''
A handful of agencies have staffers pose as youngsters to
solicit dirty pictures and come-ons, but many don't have the
manpower, equipment or inclination to do so on a regular
basis.
And even if they did, experts say there's probably no way
to completely stop on-line perverts--who constitute a tiny
fraction of overall on-line communicators--short of shutting
down the services.
And that is not only unlikely, but would rob children and
others of a valuable educational resource.
The service say they're concerned--but in no position to
play the role of police.
AOL spokeswoman Pam McGraw said computer-privacy laws keep
her company's hands tied when it comes to the person-to-
person type of communication in which porn can be exchanged
in electronic ``private chat rooms.''
``Federal law prevents us from monitoring E-mail,'' McGraw
said. ``We do our best to prevent misuse of our service.''
She urged AOL customers to report offensive communications
which are prohibited under company rules so the company can
warn offenders or eject them from the system.
Law enforcement officials say on-line companies are quick
to cut off perverts and help
[[Page S1093]] track down and prosecute pedophiles and
pornographers.
But the crimes still flourish because computers make life
simpler for the perverts.
Pedophilies can easily pretend to be a child on-line, or
even someone of the opposite sex, to help draw a child into a
trap. And they can elude detection by using false names and
post office boxes.
``Offenders can say they're other kids, then arrange for
face-to-face meetings.'' Greer said ``It's pretty scary when
you find out you're dealing with a 47-year-old man instead of
the 14-year-old you expected.
______
By Mr. DASCHLE (for himself, Mr. Breaux, Mr. Kennedy, Mr. Reid,
Mr. Rockefeller, Ms. Mikulski, Mr. Ford, Mr. Dodd, and Mr.
Kerry):
S. 242. A bill to amend the Internal Revenue Code of 1986 to allow a
deduction for the payment of tuition for higher education and interest
on student loans; to the Committee on Finance.
higher education tax relief act
Mr. DASCHLE. Mr. President, earlier today, several of my
distinguished colleagues and I announced our intention to introduce
another important element of our Democratic plan to help middle-class
Americans who are squeezed between prices that are rising and incomes
that are not.
Today Senators Breaux, Kennedy, Reid, Rockefeller, Mikulski, Ford,
Dodd, Kerry, and I are introducing the Higher Education Tax Relief Act
of 1995. This legislation will provide tax relief for middle-income
families who are trying to send their children to college or vocational
or professional school, as well as to individuals who seek such
educational opportunities.
As I have noted on many occasions, our highest priority in the 104th
Congress is to strengthen the financial security of working middle-
income families. One of our greatest concerns is the increasing
inability of many families to afford to send their children to college
or vocational school.
Pressures on State budgets are forcing public colleges and
universities to increase the tuition and fees they charge to new
students. Many private institutions are trying to fill the student aid
gap by taking on the task themselves, but they are finding it more and
more costly to do so.
Our legislation will provide a tax deduction of up to $10,000 for
tuition and fees associated with attending public and non-profit
colleges and universities or vocational and professional schools. This
aspect of the proposal is identical to the tuition deduction advanced
by President Clinton in his middle-class bill of rights package. We
think the President was right to focus on education in that package
because it is one of the highest priorities--and biggest expenses--of
middle-income families.
In addition, our tax deduction would be available up to the same
amount for interest incurred on student loans. Ever since the deduction
for student loan interest was eliminated in the Tax Reform Act of 1986,
we have heard an ever-louder cry from middle-income Americans that they
want it back. And for good reason. As more and more forms of direct
student aid are eliminated, these families are having to incur debt in
order to finance the costs of higher education, especially since their
incomes simply are not rising commensurate with the cost of living.
The deduction we are proposing, whether taken for tuition and fees or
for student loan interest, is available to families with incomes of up
to $100,000 per year or individuals with incomes of up to $70,000 per
year. Moreover, the deduction may be taken whether or not the taxpayer
is in a position to itemize on his or her return, providing greater
assurance that those at the lower end of the middle-income range will
benefit.
Our proposal provides a choice to middle-income Americans and
complements the various forms of student aid currently available to
those with the lowest incomes. Middle-income taxpayers, most of whom no
longer qualify for other forms of student aid, may deduct amounts they
are able to pay for tuition and fees at the time they or their children
are attending an institution of higher education. If, however, they
must finance their own or their children's education, they may deduct
the interest on student loans later when they begin paying back the
loans.
Mr. President, the Higher Education Tax Relief Act of 1995, along
with the President's tuition deduction proposal, identifies a major
difference between the Republican and Democratic views of middle-income
tax relief. The Republican Contract With America does not contain tax
relief directed at helping middle-income families pay for education. In
fact, it contains numerous measures that will further harm the ability
of middle-income Americans to obtain the education they seek.
For example, one of the spending cuts contemplated by Republicans is
the repeal of the in-school interest subsidy for student loans. Right
now, the interest clock on many student loans does not start ticking
until a student has finished college. The Republicans want to start
charging interest immediately. We believe that's an attack on middle-
income families who cannot afford to send their children to college
without borrowing the money.
College already is too expensive for many families, and we shouldn't
limit the number who can afford it by raising the costs even more.
Democrats believe opportunities should be open to everyone willing to
earn them with hard work. We believe education is necessary and should
be affordable to anyone who wants it--that we should not tax the income
necessary for middle-income families to send their children to college
or vocational and professional schools.
These are Democratic values.
Let me point out that none of us introducing this legislation today
have any intention of increasing the deficit as a result of this
proposal. We have asked the Joint Committee on Taxation to estimate the
cost of this proposal and, at the appropriate time, we intend to offer
ways to pay for it.
Mr. President, I ask that a copy of our legislation be printed in the
Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 242
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Higher Education Tax Relief
Act of 1995''.
SEC. 2. DEDUCTION FOR HIGHER EDUCATION EXPENSES.
(a) Deduction Allowed.--Part VII of subchapter B of chapter
1 of the Internal Revenue Code of 1986 (relating to
additional itemized deductions for individuals) is amended by
redesignating section 220 as section 221 and by inserting
after section 219 the following new section:
``SEC. 220. HIGHER EDUCATION TUITION AND FEES; INTEREST ON
STUDENT LOANS.
``(a) Allowance of Deduction.--In the case of an
individual, there shall be allowed as a deduction an amount
equal to the sum of--
``(1) the qualified higher education expenses, plus
``(2) interest on qualified higher education loans,
paid by the taxpayer during the taxable year.
``(b) Qualified Higher Education Expenses.--For purposes of
this section--
``(1) Qualified higher education expenses.--
``(A) In general.--The term `qualified higher education
expenses' means tuition and fees required for the enrollment
or attendance of--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any dependent of the taxpayer with respect to whom
the taxpayer is allowed a deduction under section 151,
as an eligible student at an institution of higher education.
``(B) Exception for education involving sports, etc.--Such
term does not include expenses with respect to any course or
other education involving sports, games, or hobbies unless
such expenses--
``(i) are part of a degree program, or
``(ii) are deductible under this chapter without regard to
this section.
``(C) Exception for nonacademic fees.--Such term does not
include any student activity fees, athletic fees, insurance
expenses, or other expenses unrelated to a student's academic
course of instruction.
``(D) Eligible student.--For purposes of subparagraph (A),
the term `eligible student' means a student who meets the
requirements of section 484(a)(1) of the Higher Education Act
of 1965 (20 U.S.C. 1091(a)(1)).
``(2) Dollar limitation.--
``(A) In general.--The amount taken into account under
paragraph (1) for any taxable year shall not exceed $10,000.
``(B) Phase-in.--In the case of taxable years beginning in
1996, 1997, 1998, and 1999, the following amounts shall be
substituted for `$10,000' in subparagraph (A):
[[Page S1094]] ``For taxable years The substitute
beginning in: amount is:
1996.......................................................$2,000....
1997....................................................... 4,000....
1998....................................................... 6,000....
1999...................................................... 8,000.....
``(3) Limitation based on modified adjusted gross income.--
``(A) In general.--If the modified adjusted gross income of
the taxpayer for the taxable year exceeds $70,000 ($100,000
in the case of a joint return), the amount which would (but
for this paragraph) be taken into account under paragraph (1)
shall be reduced (but not below zero) by the amount which
bears the same ratio to the amount which would be taken into
account as such excess bears to $20,000.
``(B) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 1996, the $70,000 and
$100,000 amounts contained in subparagraph (A) shall be
increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment under section 1(f)(3)
for the calendar year in which the taxable year begins,
except that section 1(f)(3)(B) shall be applied by
substituting `1995' for `1992'.
``(C) Rounding.--If any amount as adjusted under
subparagraph (B) is not a multiple of $50, such amount shall
be rounded to the nearest multiple of $50 (or if such amount
is a multiple of $25, such amount shall be rounded to the
next highest multiple of $50).
``(D) Modified adjusted gross income.--The term `modified
adjusted gross income' means the adjusted gross income of the
taxpayer for the taxable year determined--
``(i) without regard to this section and sections 911, 931,
and 933, and
``(ii) after the application of sections 86, 135, 219, and
469.
``(4) Institution of higher education.--The term
`institution of higher education' means an institution
which--
``(A) is described in section 481 of the Higher Education
Act of 1965 (20 U.S.C. 1088), and
``(B) is eligible to participate in programs under title IV
of such Act.
``(c) Qualified Higher Education Loan.--For purposes of
this section--
``(1) In general.--The term `qualified higher education
loan' means a loan to a student which is--
``(A) made, insured, or guaranteed by the Federal
Government,
``(B) made by a State or a political subdivision of a
State,
``(C) made from the proceeds of a qualified student loan
bond under section 144(b), or
``(D) made by an institution of higher education (as
defined in section 1201(a) of the Higher Education Act of
1965 (20 U.S.C. 1141(a))).
``(2) Limitation.--
``(A) In general.--The amount of interest on a qualified
higher education loan which is taken into account under
subsection (a)(2) shall be reduced by the amount which bears
the same ratio to such amount of interest as--
``(i) the proceeds from such loan used for qualified higher
education expenses, bears to
``(ii) the total proceeds from such loan.
``(B) Qualified higher education expenses.--For purposes of
subparagraph (A), the term `qualified higher education
expenses' has the meaning given such term by subsection (b),
except that--
``(i) such term shall include reasonable living expenses
while away from home, and
``(ii) the limitations of paragraphs (2) and (3) of
subsection (b) shall not apply.
``(d) Coordination With Other Provisions.--
``(1) No double benefit.--
``(A) In general.--No deduction shall be allowed under
subsection (a) for qualified higher education expenses or
interest on qualified higher education loans with respect to
which a deduction is allowed under any other provision of
this chapter.
``(B) Savings bond exclusion.--A deduction shall be allowed
under subsection (a)(1) for qualified higher education
expenses only to the extent the amount of such expenses
exceeds the amount excludable under section 135 for the
taxable year.
``(2) Qualified residence interest.--If a deduction is
allowed under subsection (a)(2) for interest which is also
qualified residence interest under section 163(h), such
interest shall not be taken into account under section
163(h).
``(e) Special Rules.--
``(1) Election.--If a deduction is allowable under more
than one provision of this chapter with respect to qualified
higher education expenses, the taxpayer may elect the
provision under which the deduction is allowed.
``(2) Limitation on taxable year of deduction.--
``(A) In general.--A deduction shall be allowed under
subsection (a)(1) for any taxable year only to the extent the
qualified higher education expenses are in connection with
attendance at an institution of higher education during the
taxable year.
``(B) Certain prepayments allowed.--Subparagraph (A) shall
not apply to qualified higher education expenses paid during
a taxable year which are in connection with attendance at an
institution of higher education which begins during the first
2 months of the following taxable year.
``(3) Adjustment for certain scholarships and veterans
benefits.--The amount of qualified higher education expenses
otherwise taken into account under subsection (a)(1) with
respect to the education of an individual shall be reduced
(before the application of subsection (b)) by the sum of the
amounts received with respect to such individual for the
taxable year as--
``(A) a qualified scholarship which under section 117 is
not includable in gross income,
``(B) an educational assistance allowance under chapter 30,
31, 32, 34, or 35 of title 38, United States Code, or
``(C) a payment (other than a gift, bequest, devise, or
inheritance within the meaning of section 102(a)) for
educational expenses, or attributable to attendance at an
eligible educational institution, which is exempt from income
taxation by any law of the United States.
``(4) No deduction for married individuals filing separate
returns.--If the taxpayer is a married individual (within the
meaning of section 7703), this section shall apply only if
the taxpayer and his spouse file a joint return for the
taxable year.
``(5) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry out
this section, including regulations requiring recordkeeping
and information reporting.''
(b) Deduction Allowed in Computing Adjusted Gross Income.--
Section 62(a) of such Code is amended by inserting after
paragraph (15) the following new paragraph:
``(16) Higher education tuition and fees.--The deduction
allowed by section 219.''
(c) Conforming Amendment.--The table of sections for part
VII of subchapter B of chapter 1 of such Code is amended by
striking the item relating to section 220 and inserting:
``Sec. 220. Higher education tuition and fees.
``Sec. 221. Cross reference.''
(d) Effective Dates.--The amendments made by this section
shall apply to taxable years beginning after December 31,
1995.
Mr. KENNEDY. Mr. President, a college education is a building block
of the American dream. But with college costs rising, higher education
is increasingly out of reach for many families.
President Clinton deserves credit for acting on this problem, and the
legislation we are introducing today will carry out the President's
proposal to make college education more affordable for working
families. The bill provides a tax deduction of up to $10,000 a year for
college tuition costs, and it restores the deduction for interest on
student loans.
The deduction for tuition will be available for families earning up
to $100,000 a year and individuals earning up to $70,000. It will be
available for tuition at traditional 4-year colleges and universities,
community colleges, and vocational and professional schools offering
job training in a variety of fields.
The deduction for interest on student loans is equally important, and
will offer significant help to students who must borrow to go to
college and who are struggling to pay off their loans and establish
themselves in the working world.
By contrast, the Republican contract proposes to cut over $10 billion
in Federal financial aid for students over the next 5 years. In
Massachusetts alone, that would mean a loss of over $100 million a
year. In reality, when you read the fine print, the Contract With
America is a contract against college education.
Families across the country know that education is the best
investment they can make in their children's future. We must do more to
ease the burden of that investment, not make it harder for families to
obtain it.
I look forward to working with my colleagues on both side of the
aisle to ensure that this important legislation becomes law.
______
By Mr. SARBANES (for himself, Mr. Byrd, Mr. Rockefeller, and Ms.
Mikulski):
S.J. Res. 20. A joint resolution granting the consent of Congress to
a compact to provide for joint natural resource management and
enforcement of laws and regulations pertaining to natural resources and
boating at the Jennings Randolph Lake Project lying in Garrett County,
MD and Mineral County, WV, entered into between the States of West
Virginia and Maryland; to the Committee on the Judiciary.
the jennings randolph lake project compact
Mr. SARBANES. Mr. President, today I am reintroducing legislation
together with my colleagues Senators Byrd, Rockefeller, and Mikulski to
grant congressional consent to a compact entered into between the
States of
[[Page S1095]] West Virginia and Maryland, with concurrence of the U.S.
Army Corps of Engineers, to provide for joint management and
enforcement of laws and regulations pertaining to natural resources and
boating at Jennings Randolph Lake. This legislation was approved by the
Senate in the closing days of the 103d Congress, but was not considered
in the House.
Jennings Randolph Lake is located on the north branch of the Potomac
River in Garrett County, MD and Mineral County, WV. Construction of the
dam, which created the lake, was authorized by the Flood Control Act of
1962 and the project was specifically designed to improve the water
quality of the Potomac River, reduce flood damage, provide water
supply, and opportunities for recreation. Completed in 1982, the dam is
one of the largest dams east of the Mississippi--approximately 6.6
miles long, with a surface area of 952 acres and a drainage area of 263
square miles. Originally named Bloomington Lake, the project was
rededicated in May 1987 in honor of former West Virginia Senator
Jennings Randolph.
The lake and surrounding area are extraordinarily beautiful and
include some of the most picturesque countryside in the Nation. The
lake and the north branch of the Potomac River below the dam support a
recreational trout fishery that is regarded as one of the best in
America. Other recreational opportunities including boating, downstream
whitewater rafting, hiking, and picnicing are drawing increasing
numbers of visitors to the lake. The Army Corps of Engineers currently
operates and maintains five recreation sites at the project and the
State of Maryland, in cooperation with the corps, is in the process of
developing a boat launch and support facilities on the Maryland side of
the project.
Unfortunately, the creation of the lake removed the natural boundary
between West Virginia and Maryland and the meandering nature of the
former river and the depth of the lake have made it virtually
impossible to reestablish the precise location of the boundary. As a
consequence, enforcement of natural resources and boating laws and
regulations on the lake has been tentative at best and at worst,
nonexistent. As recreational uses of the lake continue to increase, it
is anticipated that enforcement problems will become increasingly
difficult.
The compact legislation I am introducing today provides the State of
West Virginia and Maryland with concurrent jurisdiction over the
project area to enable them to jointly enforce natural resource and
boating laws and regulations. This approach eliminates the need to
redefine the boundary between the two States for law enforcement
purposes. As required before congressional action can be taken, the
compact was approved by the respective legislatures of Maryland and
West Virginia in their 1993 legislative sessions.
Mr. President, this legislation will address the ongoing problems
associated with the management and enforcement of laws and regulations
relating to natural resources and boating at the Jennings Randolph Lake
Project. It has been long awaited by both States and I urge its swift
enactment.
I ask unanimous consent that the legislation be printed in the
Record.
There being no objection, the joint resolution was ordered to be
printed in the Record, as follows:
S.J. Res. 20
Resolved by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. CONGRESSIONAL CONSENT.
The Congress hereby consents to the Jennings Randolph Lake
Project Compact entered into between the States of West
Virginia and Maryland which compact is substantially as
follows:
``COMPACT
``Whereas the State of Maryland and the State of West
Virginia, with the concurrence of the United States
Department of the Army, Corps of Engineers, have approved and
desire to enter into a compact to provide for joint natural
resource management and enforcement of laws and regulations
pertaining to natural resources and boating at the Jennings
Randolph Lake Project lying in Garrett County, Maryland and
Mineral County, West Virginia, for which they seek the
approval of Congress, and which compact is as follows:
``Whereas the signatory parties hereto desire to provide
for joint natural resource management and enforcement of laws
and regulations pertaining to natural resources and boating
at the Jennings Randolph Lake Project lying in Garrett
County, Maryland and Mineral County, West Virginia, for which
they have a joint responsibility; and they declare as
follows:
``1. The Congress, under Public Law 87-874, authorized the
development of the Jennings Randolph Lake Project for the
North Branch of the Potomac River substantially in accordance
with House Document Number 469, 87th Congress, 2nd Session
for flood control, water supply, water quality, and
recreation; and
``2. Section 4 of the Flood Control Act of 1944 (Ch 665, 58
Stat. 534) provides that the Chief of Engineers, under the
supervision of the Secretary of War (now Secretary of the
Army), is authorized to construct, maintain and operate
public park and recreational facilities in reservoir areas
under control of such Secretary for the purpose of boating,
swimming, bathing, fishing, and other recreational purposes,
so long as the same is not inconsistent with the laws for the
protection of fish and wildlife of the State(s) in which such
area is situated; and
``3. Pursuant to the authorities cited above, the U.S. Army
Engineer District (Baltimore), hereinafter `District', did
construct and now maintains and operates the Jennings
Randolph Lake Project; and
``4. The National Environmental Policy Act of 1969 (P.L.
91-190) encourages productive and enjoyable harmony between
man and his environment, promotes efforts which will
stimulate the health and welfare of man, and encourages
cooperation with State and local governments to achieve these
ends; and
``5. The Fish and Wildlife Coordination Act (16 U.S.C. 661-
666c) provides for the consideration and coordination with
other features of water-resource development programs through
the effectual and harmonious planning, development,
maintenance, and coordination of wildlife conservation and
rehabilitation; and
``6. The District has Fisheries and Wildlife Plans as part
of the District's project Operational Management Plan; and
``7. In the respective States, the Maryland Department of
Natural Resources (hereinafter referred to as `Maryland DNR')
and the West Virginia Division of Natural Resources
(hereinafter referred to as `West Virginia DNR') are
responsible for providing a system of control, propagation,
management, protection, and regulation of natural resources
and boating in Maryland and West Virginia and the enforcement
of laws and regulations pertaining to those resources as
provided in Annotated Code of Maryland Natural Resources
Article and West Virginia Chapter 20, respectively, and the
successors thereof; and
``8. The District, the Maryland DNR, and the West Virginia
DNR are desirous of conserving, perpetuating and improving
fish and wildlife resources and recreational benefits of the
Jennings Randolph Lake Project; and
``9. The District and the States of Maryland and West
Virginia wish to implement the aforesaid acts and
responsibilities through this Compact and they each recognize
that consistent enforcement of the natural resources and
boating laws and regulations can best be achieved by entering
this Compact:
``Now, therefore, be it Resolved, That the States of
Maryland and West Virginia, with the concurrence of the
United States Department of the Army, Corps of Engineers,
hereby solemnly covenant and agree with each other, upon
enactment of concurrent legislation by The Congress of the
United States and by the respective state legislatures, to
the Jennings Randolph Lake Project Compact, which consists of
this preamble and the articles that follow:
``Article I--Name, Findings, and Purpose
``1.1 This compact shall be known and may be cited as the
Jennings Randolph Lake Project Compact.
``1.2 The legislative bodies of the respective signatory
parties, with the concurrence of the U.S. Army Corps of
Engineers, hereby find and declare:
``1. The water resources and project lands of the Jennings
Randolph Lake Project are affected with local, state,
regional, and national interest, and the planning,
conservation, utilization, protection and management of these
resources, under appropriate arrangements for inter-
governmental cooperation, are public purposes of the
respective signatory parties.
``2. The lands and waters of the Jennings Randolph Lake
Project are subject to the sovereign rights and
responsibilities of the signatory parties, and it is the
purpose of this compact that, notwithstanding any boundary
between Maryland and West Virginia that preexisted the
creation of Jennings Randolph Lake, the parties will have and
exercise concurrent jurisdiction over any lands and waters of
the Jennings Randolph Lake Project concerning natural
resources and boating laws and regulations in the common
interest of the people of the region.
``Article II--District Responsibilities
``The District, within the Jennings Randolph Lake Project,
``2.1 Acknowledges that the Maryland DNR and West Virginia
DNR have authorities and responsibilities in the
establishment, administration and enforcement of the natural
resources and boating laws and regulations applicable to this
project, provided that the laws and regulations promulgated
by the
[[Page S1096]] States support and implement, where
applicable, the intent of the Rules and Regulations Governing
Public Use of Water Resources Development Projects
administered by the Chief of Engineers in Title 36, Chapter
RI, Part 327, Code of Federal Regulations,
``2.2 Agrees to practice those forms of resource management
as determined jointly by the District, Maryland DNR and West
Virginia DNR to be beneficial to natural resources and which
will enhance public recreational opportunities compatible
with other authorized purposes of the project,
``2.3 Agrees to consult with the Maryland DNR and West
Virginia DNR prior to the issuance of any permits for
activities or special events which would include, but not
necessarily be limited to: fishing tournaments, training
exercises, regattas, marine parades, placement of ski ramps,
slalom water ski courses and the establishment of private
markers and/or lighting. All such permits issued by the
District will require the permittee to comply with all State
laws and regulations,
``2.4 Agrees to consult with the Maryland DNR and West
Virginia DNR regarding any recommendations for regulations
affecting natural resources, including, but not limited to,
hunting, trapping, fishing or boating at the Jennings
Randolph Lake Project which the District believes might be
desirable for reasons of public safety, administration of
public use and enjoyment,
``2.5 Agrees to consult with the Maryland DNR and West
Virginia DNR relative to the marking of the lake with buoys,
aids to navigation, regulatory markers and establishing and
posting of speed limits, no wake zones, restricted or other
control areas and to provide, install and maintain such
buoys, aids to navigation and regulatory markers as are
necessary for the implementation of the District's
Operational Management Plan. All buoys, aids to navigation
and regulatory markers to be used shall be marked in
conformance with the Uniform State Waterway Marking System,
``2.6 Agrees to allow hunting, trapping, boating and
fishing by the public in accordance with the laws and
regulations relating to the Jennings Randolph Lake Project,
``2.7 Agrees to provide, install and maintain public ramps,
parking areas, courtesy docks, etc., as provided for by the
approved Corps of Engineers Master Plan, and
``2.8 Agrees to notify the Maryland DNR and the West
Virginia DNR of each reservoir drawdown prior thereto
excepting drawdown for the reestablishment of normal lake
levels following flood control operations and drawdown
resulting from routine water control management operations
described in the reservoir regulation manual including
releases requested by water supply owners and normal water
quality releases. In case of emergency releases or emergency
flow curtailments, telephone or oral notification will be
provided. The District reserves the right, following issuance
of the above notice, to make operational and other tests
which may be necessary to insure the safe and efficient
operation of the dam, for inspection and maintenance
purposes, and for the gathering of water quality data both
within the impoundment and in the Potomac River downstream
from the dam.
``Article III--State Responsibilities
``The State of Maryland and the State of West Virginia
agree:
``3.1 That each State will have and exercise concurrent
jurisdiction with the District and the other State for the
purpose of enforcing the civil and criminal laws of the
respective States pertaining to natural resources and boating
laws and regulations over any lands and waters of the
Jennings Randolph Lake Project;
``3.2 That existing natural resources and boating laws and
regulations already in effect in each State shall remain in
force on the Jennings Randolph Lake Project until either
State amends, modifies or rescinds its laws and regulations;
``3.3 That the Agreement for Fishing Privileges dated June
24, 1985 between the State of Maryland and the State of West
Virginia, as amended, remains in full force and effect;
``3.4 To enforce the natural resources and boating laws and
regulations applicable to the Jennings Randolph Lake Project;
``3.5 To supply the District with the name, address and
telephone number of the person(s) to be contacted when any
drawdown except those resulting from normal regulation
procedures occurs;
``3.6 To inform the Reservoir Manager of all emergencies or
unusual activities occurring on the Jennings Randolph Lake
Project;
``3.7 To provide training to District employees in order to
familiarize them with natural resources and boating laws and
regulations as they apply to the Jennings Randolph Lake
Project; and
``3.8 To recognize that the District and other Federal
Agencies have the right and responsibility to enforce, within
the boundaries of the Jennings Randolph Lake Project, all
applicable Federal laws, rules and regulations so as to
provide the public with safe and healthful recreational
opportunities and to provide protection to all federal
property within the project.
``Article IV--Mutual Cooperation
``4.1 Pursuant to the aims and purposes of this Compact,
the State of Maryland, the State of West Virginia and the
District mutually agree that representatives of their natural
resource management and enforcement agencies will cooperate
to further the purposes of this Compact. This cooperation
includes, but is not limited to, the following:
``4.2 Meeting jointly at least once annually, and providing
for other meetings as deemed necessary for discussion of
matters relating to the management of natural resources and
visitor use on lands and waters within the Jennings Randolph
Lake Project;
``4.3 Evaluating natural resources and boating, to develop
natural resources and boating management plans and to
initiate and carry out management programs;
``4.4 Encouraging the dissemination of joint publications,
press releases or other public information and the
interchange between parties of all pertinent agency policies
and objectives for the use and perpetuation of natural
resources of the Jennings Randolph Lake Project; and
``4.5 Entering into working arrangements as occasion
demands for the use of lands, waters, construction and use of
buildings and other facilities at the project.
``Article V--General Provisions
``5.1 Each and every provision of this Compact is subject
to the laws of the States of Maryland and West Virginia and
the laws of the United States, and the delegated authority in
each instance.
``5.2 The enforcement and applicability of natural
resources and boating laws and regulations referenced in this
Compact shall be limited to the lands and waters of the
Jennings Randolph Lake Project, including but not limited to
the prevailing reciprocal fishing laws and regulations
between the States of Maryland and West Virginia.
``5.3 Nothing in this Compact shall be construed as
obligating any party hereto to the expenditure of funds or
the future payment of money in excess of appropriations
authorized by law.
``5.4 The provisions of this Compact shall be severable,
and if any phrase, clause, sentence or provision of the
Jennings Randolph Lake Project Compact is declared to be
unconstitutional or inapplicable to any signatory party or
agency of any party, the constitutionality and applicability
of the Compact shall not be otherwise affected as to any
provision, party, or agency. It is the legislative intent
that the provisions of the Compact be reasonably and
liberally construed to effectuate the stated purposes of the
Compact.
``5.5 No member of or delegate to Congress, or signatory
shall be admitted to any share or part of this Compact, or to
any benefit that may arise therefrom; but this provision
shall not be construed to extend to this agreement if made
with a corporation for its general benefit.
``5.6 When this Compact has been ratified by the
legislature of each respective State, when the Governor of
West Virginia and the Governor of Maryland have executed this
Compact on behalf of their respective States and have caused
a verified copy thereof to be filed with the Secretary of
State of each respective State, when the Baltimore District
of the U.S. Army Corps of Engineers has executed its
concurrence with this Compact, and when this Compact has been
consented to by the Congress of the United States, then this
Compact shall become operative and effective.
``5.7 Either State may, by legislative act, after one
year's written notice to the other, withdraw from this
Compact. The U.S. Army Corps of Engineers may withdraw its
concurrence with this Compact upon one year's written notice
from the Baltimore District Engineer to the Governor of each
State.
``5.8 This Compact may be amended from time to time. Each
proposed amendment shall be presented in resolution form to
the Governor of each State and the Baltimore District
Engineer of the U.S. Army Corps of Engineers. An amendment to
this Compact shall become effective only after it has been
ratified by the legislatures of both signatory States and
concurred in by the U.S. Army Corps of Engineers, Baltimore
District. Amendments shall become effective thirty days after
the date of the last concurrence or ratification.''.
Sec. 2. The right to alter, amend or repeal this joint
resolution is hereby expressly reserved. The consent granted
by this joint resolution shall not be construed as impairing
or in any manner affecting any right or jurisdiction of the
United States in and over the region which forms the subject
of the compact.
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