[Congressional Record Volume 144, Number 145 (Tuesday, October 13, 1998)]
[House]
[Pages H10771-H10787]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 CONFERENCE REPORT ON S. 1260, SECURITIES LITIGATION UNIFORM STANDARDS 
                              ACT OF 1998

  Mr. BLILEY. Mr. Speaker, I move to suspend the rules and agree to the 
conference report on the Senate bill (S. 1260) to amend the Securities 
Act of 1933 and the Securities Exchange Act of 1934 to limit the 
conduct of securities class actions under State law, and for other 
purposes.
  The Clerk read the title of the Senate bill.
  (For conference report and statement, see Proceedings of the House of 
Friday, October 9, 1998, at page H10266.)
  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from 
Virginia (Mr. Bliley) and the gentleman from Michigan (Mr. Dingell) 
each will control 20 minutes.
  The Chair recognizes the gentleman from Virginia (Mr. Bliley).
  Mr. BLILEY. Mr. Speaker, I yield myself 5 minutes.
  (Mr. Bliley asked and was given permission to revise and extend his 
remarks and include extraneous material.)
  Mr. BLILEY. Mr. Speaker, I rise in support of the conference report 
on the Senate bill, S. 1260, Securities Litigation Uniform Standards 
Act of 1998. This legislation we are considering today will eliminate 
State court as a venue for meritless securities litigation.
  This legislation has broad bipartisan support. We recognize that the 
trial bar should not make an end run around the work we did in 1995 in 
overriding the President's veto of litigation reform in State court. 
This legislation will protect investors from baseless securities class 
action lawsuits in the capital markets.
  The premise of this legislation is simple: lawsuits alleging 
violations that involve securities that are offered nationally belong 
in Federal court. This premise is consistent with the national nature 
of these markets that we recognize in the National Securities Market 
Improvement Act of 1995.
  The legislative history accompanying the legislation makes clear that 
we are not disturbing the heightened pleading standard established by 
the 1995 Act.
  The economic disruptions around the globe are reflected by the 
volatility that affects our markets. Stock prices are up one day, down 
the next. The prices are not falling due to fraudulent statements, 
which are the purported basis of many strike suits. The fall is due to 
economic conditions.
  If there is intentional fraud, there is nothing in this legislation 
or in the Reform Act to prevent those cases from proceeding. We do not 
need to exacerbate market downturns by allowing companies to be dragged 
into court every time their stock price falls. The 1995 Reform Act 
remedied that problem for Federal courts, and this legislation will 
remedy it for State courts.
  I would like to thank the gentleman from Ohio (Mr. Oxley), the 
chairman of the Subcommittee on Finance and Hazardous Materials, for 
his hard work and leadership. I thank the gentleman from Michigan (Mr. 
John Dingell), the ranking member of the committee, for his 
constructive participation as we move the bill through committee.
  I commend the gentleman from New York (Mr. Tom Manton), the ranking 
member of the subcommittee, not only for his work on this legislation, 
but his valued service on the committee. It has been a pleasure working 
with him, and he will be missed.
  I also commend the gentleman from Washington (Mr. Rick White), the 
original cosponsor of the legislation, for his tireless efforts and 
willingness to compromise that has kept this legislation on track to 
becoming law.
  Likewise, the gentlewoman from California (Ms. Anna Eshoo) has been a 
leading proponent of this legislation, and has worked to ensure its 
passage, and certainly the gentleman from California (Mr. Cox), the 
chairman of the Republican policy committee who has been working on 
this issue for many years.
  Finally, I also commend our colleagues in the other body for their 
work on this important legislation. Mr. Speaker, I urge my colleagues 
to join me and support S. 1260.
  Mr. Speaker, I ask unanimous consent to include for the Record a 
complete copy of the conference report on S. 1260.
  When the conference report was filed in the House, a page from the 
statement of managers was inadvertently omitted. That page was included 
in the copy filed in the Senate, reflecting the agreement of the 
managers. We are considering today the entire report and statement of 
managers as agreed to by conferees and inserted in the Record.
  The SPEAKER pro tempore. Since the Chair is aware that the papers 
filed in the Senate contain that matter as part of the joint statement, 
its omission from the joint statement filed in the House can be 
corrected by a unanimous consent request.
  Is there objection to the request of the gentleman from Virginia?
  There was no objection.
  The text of the Conference Report on S. 1260 is as follows:

                  Conference Report (H. Rept. 105-803)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the House to the bill (S. 
     1260), to amend the Securities Act of 1933 and the Securities 
     Exchange Act of 1934 to limit the conduct of securities class 
     actions under State law, and for other purposes, having met, 
     after full and free conference, have agreed to recommend and 
     do recommend to their respective Houses as follows:
       That the Senate recede from its disagreement to the 
     amendment of the House and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the House 
     amendment, insert the following:

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Securities Litigation 
     Uniform Standards Act of 1998''.

     SEC. 2. FINDINGS.

       The Congress finds that--
       (1) the Private Securities Litigation Reform Act of 1995 
     sought to prevent abuses in private securities fraud 
     lawsuits;
       (2) since enactment of that legislation, considerable 
     evidence has been presented to Congress that a number of 
     securities class action lawsuits have shifted from Federal to 
     State courts;
       (3) this shift has prevented that Act from fully achieving 
     its objectives;
       (4) State securities regulation is of continuing 
     importance, together with Federal regulation of securities, 
     to protect investors and promote strong financial markets; 
     and
       (5) in order to prevent certain State private securities 
     class action lawsuits alleging fraud from being used to 
     frustrate the objectives of the Private Securities Litigation 
     Reform Act of 1995, it is appropriate to enact national 
     standards for securities class action lawsuits involving 
     nationally traded securities, while preserving the 
     appropriate enforcement powers of State securities regulators 
     and not changing the current treatment of individual 
     lawsuits.

[[Page H10772]]

            TITLE I--SECURITIES LITIGATION UNIFORM STANDARDS

     SEC. 101. LIMITATION ON REMEDIES.

       (a) Amendments to the Securities Act of 1933.--
       (1) Amendment.--Section 16 of the Securities Act of 1933 
     (15 U.S.C. 77p) is amended to read as follows:

     ``SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON REMEDIES.

       ``(a) Remedies Additional.--Except as provided in 
     subsection (b), the rights and remedies provided by this 
     title shall be in addition to any and all other rights and 
     remedies that may exist at law or in equity.
       ``(b) Class Action Limitations.--No covered class action 
     based upon the statutory or common law of any State or 
     subdivision thereof may be maintained in any State or Federal 
     court by any private party alleging--
       ``(1) an untrue statement or omission of a material fact in 
     connection with the purchase or sale of a covered security; 
     or
       ``(2) that the defendant used or employed any manipulative 
     or deceptive device or contrivance in connection with the 
     purchase or sale of a covered security.
       ``(c) Removal of Covered Class Actions.--Any covered class 
     action brought in any State court involving a covered 
     security, as set forth in subsection (b), shall be removable 
     to the Federal district court for the district in which the 
     action is pending, and shall be subject to subsection (b).
       ``(d) Preservation of Certain Actions.--
       ``(1) Actions under state law of state of incorporation.--
       ``(A) Actions preserved.--Notwithstanding subsection (b) or 
     (c), a covered class action described in subparagraph (B) of 
     this paragraph that is based upon the statutory or common law 
     of the State in which the issuer is incorporated (in the case 
     of a corporation) or organized (in the case of any other 
     entity) may be maintained in a State or Federal court by a 
     private party.
       ``(B) Permissible actions.--A covered class action is 
     described in this subparagraph if it involves--
       ``(i) the purchase or sale of securities by the issuer or 
     an affiliate of the issuer exclusively from or to holders of 
     equity securities of the issuer; or
       ``(ii) any recommendation, position, or other communication 
     with respect to the sale of securities of the issuer that--

       ``(I) is made by or on behalf of the issuer or an affiliate 
     of the issuer to holders of equity securities of the issuer; 
     and
       ``(II) concerns decisions of those equity holders with 
     respect to voting their securities, acting in response to a 
     tender or exchange offer, or exercising dissenters' or 
     appraisal rights.

       ``(2) State actions.--
       ``(A) In general.--Notwithstanding any other provision of 
     this section, nothing in this section may be construed to 
     preclude a State or political subdivision thereof or a State 
     pension plan from bringing an action involving a covered 
     security on its own behalf, or as a member of a class 
     comprised solely of other States, political subdivisions, or 
     State pension plans that are named plaintiffs, and that have 
     authorized participation, in such action.
       ``(B) State pension plan defined.--For purposes of this 
     paragraph, the term `State pension plan' means a pension plan 
     established and maintained for its employees by the 
     government of the State or political subdivision thereof, or 
     by any agency or instrumentality thereof.
       ``(3) Actions under contractual agreements between issuers 
     and indenture trustees.--Notwithstanding subsection (b) or 
     (c), a covered class action that seeks to enforce a 
     contractual agreement between an issuer and an indenture 
     trustee may be maintained in a State or Federal court by a 
     party to the agreement or a successor to such party.
       ``(4) Remand of removed actions.--In an action that has 
     been removed from a State court pursuant to subsection (c), 
     if the Federal court determines that the action may be 
     maintained in State court pursuant to this subsection, the 
     Federal court shall remand such action to such State court.
       ``(e) Preservation of State Jurisdiction.--The securities 
     commission (or any agency or office performing like 
     functions) of any State shall retain jurisdiction under the 
     laws of such State to investigate and bring enforcement 
     actions.
       ``(f) Definitions.--For purposes of this section, the 
     following definitions shall apply:
       ``(1) Affiliate of the issuer.--The term `affiliate of the 
     issuer' means a person that directly or indirectly, through 
     one or more intermediaries, controls or is controlled by or 
     is under common control with, the issuer.
       ``(2) Covered class action.--
       ``(A) In general.--The term `covered class action' means--
       ``(i) any single lawsuit in which--

       ``(I) damages are sought on behalf of more than 50 persons 
     or prospective class members, and questions of law or fact 
     common to those persons or members of the prospective class, 
     without reference to issues of individualized reliance on an 
     alleged misstatement or omission, predominate over any 
     questions affecting only individual persons or members; or
       ``(II) one or more named parties seek to recover damages on 
     a representative basis on behalf of themselves and other 
     unnamed parties similarly situated, and questions of law or 
     fact common to those persons or members of the prospective 
     class predominate over any questions affecting only 
     individual persons or members; or

       ``(ii) any group of lawsuits filed in or pending in the 
     same court and involving common questions of law or fact, in 
     which--

       ``(I) damages are sought on behalf of more than 50 persons; 
     and
       ``(II) the lawsuits are joined, consolidated, or otherwise 
     proceed as a single action for any purpose.

       ``(B) Exception for derivative actions.--Notwithstanding 
     subparagraph (A), the term `covered class action' does not 
     include an exclusively derivative action brought by one or 
     more shareholders on behalf of a corporation.
       ``(C) Counting of certain class members.--For purposes of 
     this paragraph, a corporation, investment company, pension 
     plan, partnership, or other entity, shall be treated as one 
     person or prospective class member, but only if the entity is 
     not established for the purpose of participating in the 
     action.
       ``(D) Rule of construction.--Nothing in this paragraph 
     shall be construed to affect the discretion of a State court 
     in determining whether actions filed in such court should be 
     joined, consolidated, or otherwise allowed to proceed as a 
     single action.
       ``(3) Covered security.--The term `covered security' means 
     a security that satisfies the standards for a covered 
     security specified in paragraph (1) or (2) of section 18(b) 
     at the time during which it is alleged that the 
     misrepresentation, omission, or manipulative or deceptive 
     conduct occurred, except that such term shall not include any 
     debt security that is exempt from registration under this 
     title pursuant to rules issued by the Commission under 
     section 4(2).''.
       (2) Circumvention of stay of discovery.--Section 27(b) of 
     the Securities Act of 1933 (15 U.S.C. 77z-1(b)) is amended by 
     inserting after paragraph (3) the following new paragraph:
       ``(4) Circumvention of stay of discovery.--Upon a proper 
     showing, a court may stay discovery proceedings in any 
     private action in a State court as necessary in aid of its 
     jurisdiction, or to protect or effectuate its judgments, in 
     an action subject to a stay of discovery pursuant to this 
     subsection.''.
       (3) Conforming amendments.--Section 22(a) of the Securities 
     Act of 1933 (15 U.S.C. 77v(a)) is amended--
       (A) by inserting ``except as provided in section 16 with 
     respect to covered class actions,'' after ``Territorial 
     courts,''; and
       (B) by striking ``No case'' and inserting ``Except as 
     provided in section 16(c), no case''.
       (b) Amendments to the Securities Exchange Act of 1934.--
       (1) Amendment.--Section 28 of the Securities Exchange Act 
     of 1934 (15 U.S.C. 78bb) is amended--
       (A) in subsection (a), by striking ``The rights and 
     remedies'' and inserting ``Except as provided in subsection 
     (f), the rights and remedies''; and
       (B) by adding at the end the following new subsection:
       ``(f) Limitations on Remedies.--
       ``(1) Class action limitations.--No covered class action 
     based upon the statutory or common law of any State or 
     subdivision thereof may be maintained in any State or Federal 
     court by any private party alleging--
       ``(A) a misrepresentation or omission of a material fact in 
     connection with the purchase or sale of a covered security; 
     or
       ``(B) that the defendant used or employed any manipulative 
     or deceptive device or contrivance in connection with the 
     purchase or sale of a covered security.
       ``(2) Removal of covered class actions.--Any covered class 
     action brought in any State court involving a covered 
     security, as set forth in paragraph (1), shall be removable 
     to the Federal district court for the district in which the 
     action is pending, and shall be subject to paragraph (1).
       ``(3) Preservation of certain actions.--
       ``(A) Actions under state law of state of incorporation.--
       ``(i) Actions preserved.--Notwithstanding paragraph (1) or 
     (2), a covered class action described in clause (ii) of this 
     subparagraph that is based upon the statutory or common law 
     of the State in which the issuer is incorporated (in the case 
     of a corporation) or organized (in the case of any other 
     entity) may be maintained in a State or Federal court by a 
     private party.
       ``(ii) Permissible actions.--A covered class action is 
     described in this clause if it involves--

       ``(I) the purchase or sale of securities by the issuer or 
     an affiliate of the issuer exclusively from or to holders of 
     equity securities of the issuer; or
       ``(II) any recommendation, position, or other communication 
     with respect to the sale of securities of an issuer that--

       ``(aa) is made by or on behalf of the issuer or an 
     affiliate of the issuer to holders of equity securities of 
     the issuer; and
       ``(bb) concerns decisions of such equity holders with 
     respect to voting their securities, acting in response to a 
     tender or exchange offer, or exercising dissenters' or 
     appraisal rights.
       ``(B) State actions.--
       ``(i) In general.--Notwithstanding any other provision of 
     this subsection, nothing in this subsection may be construed 
     to preclude a State or political subdivision thereof or a 
     State pension plan from bringing an action involving a 
     covered security on its own behalf, or as a member of a class 
     comprised solely of other States, political subdivisions, or 
     State pension plans that are named plaintiffs, and that have 
     authorized participation, in such action.
       ``(ii) State pension plan defined.--For purposes of this 
     subparagraph, the term `State pension plan' means a pension 
     plan established and maintained for its employees by the 
     government of a State or political subdivision thereof, or by 
     any agency or instrumentality thereof.
       ``(C) Actions under contractual agreements between issuers 
     and indenture trustees.--Notwithstanding paragraph (1) or 
     (2), a covered class action that seeks to enforce a 
     contractual agreement between an issuer and an indenture 
     trustee may be maintained in a State or Federal court by a 
     party to the agreement or a successor to such party.

[[Page H10773]]

       ``(D) Remand of removed actions.--In an action that has 
     been removed from a State court pursuant to paragraph (2), if 
     the Federal court determines that the action may be 
     maintained in State court pursuant to this subsection, the 
     Federal court shall remand such action to such State court.
       ``(4) Preservation of state jurisdiction.--The securities 
     commission (or any agency or office performing like 
     functions) of any State shall retain jurisdiction under the 
     laws of such State to investigate and bring enforcement 
     actions.
       ``(5) Definitions.--For purposes of this subsection, the 
     following definitions shall apply:
       ``(A) Affiliate of the issuer.--The term `affiliate of the 
     issuer' means a person that directly or indirectly, through 
     one or more intermediaries, controls or is controlled by or 
     is under common control with, the issuer.
       ``(B) Covered class action.--The term `covered class 
     action' means--
       ``(i) any single lawsuit in which--

       ``(I) damages are sought on behalf of more than 50 persons 
     or prospective class members, and questions of law or fact 
     common to those persons or members of the prospective class, 
     without reference to issues of individualized reliance on an 
     alleged misstatement or omission, predominate over any 
     questions affecting only individual persons or members; or
       ``(II) one or more named parties seek to recover damages on 
     a representative basis on behalf of themselves and other 
     unnamed parties similarly situated, and questions of law or 
     fact common to those persons or members of the prospective 
     class predominate over any questions affecting only 
     individual persons or members; or

       ``(ii) any group of lawsuits filed in or pending in the 
     same court and involving common questions of law or fact, in 
     which--

       ``(I) damages are sought on behalf of more than 50 persons; 
     and
       ``(II) the lawsuits are joined, consolidated, or otherwise 
     proceed as a single action for any purpose.

       ``(C) Exception for derivative actions.--Notwithstanding 
     subparagraph (B), the term `covered class action' does not 
     include an exclusively derivative action brought by one or 
     more shareholders on behalf of a corporation.
       ``(D) Counting of certain class members.--For purposes of 
     this paragraph, a corporation, investment company, pension 
     plan, partnership, or other entity, shall be treated as one 
     person or prospective class member, but only if the entity is 
     not established for the purpose of participating in the 
     action.
       ``(E) Covered security.--The term `covered security' means 
     a security that satisfies the standards for a covered 
     security specified in paragraph (1) or (2) of section 18(b) 
     of the Securities Act of 1933, at the time during which it is 
     alleged that the misrepresentation, omission, or manipulative 
     or deceptive conduct occurred, except that such term shall 
     not include any debt security that is exempt from 
     registration under the Securities Act of 1933 pursuant to 
     rules issued by the Commission under section 4(2) of that 
     Act.
       ``(F) Rule of construction.--Nothing in this paragraph 
     shall be construed to affect the discretion of a State court 
     in determining whether actions filed in such court should be 
     joined, consolidated, or otherwise allowed to proceed as a 
     single action.''.
       (2) Circumvention of stay of discovery.--Section 21D(b)(3) 
     of the Securities Exchange Act of 1934 (15 U.S.C. 78u-
     4(b)(3)) is amended by adding at the end the following new 
     subparagraph:
       ``(D) Circumvention of stay of discovery.--Upon a proper 
     showing, a court may stay discovery proceedings in any 
     private action in a State court, as necessary in aid of its 
     jurisdiction, or to protect or effectuate its judgments, in 
     an action subject to a stay of discovery pursuant to this 
     paragraph.''.
       (c) Applicability.--The amendments made by this section 
     shall not affect or apply to any action commenced before and 
     pending on the date of enactment of this Act.

     SEC. 102. PROMOTION OF RECIPROCAL SUBPOENA ENFORCEMENT.

       (a) Commission Action.--The Securities and Exchange 
     Commission, in consultation with State securities commissions 
     (or any agencies or offices performing like functions), shall 
     seek to encourage the adoption of State laws providing for 
     reciprocal enforcement by State securities commissions of 
     subpoenas issued by another State securities commission 
     seeking to compel persons to attend, testify in, or produce 
     documents or records in connection with an action or 
     investigation by a State securities commission of an alleged 
     violation of State securities laws.
       (b) Report.--Not later than 24 months after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     (hereafter in this section referred to as the ``Commission'') 
     shall submit a report to the Congress--
       (1) identifying the States that have adopted laws described 
     in subsection (a);
       (2) describing the actions undertaken by the Commission and 
     State securities commissions to promote the adoption of such 
     laws; and
       (3) identifying any further actions that the Commission 
     recommends for such purposes.
  TITLE II--REAUTHORIZATION OF THE SECURITIES AND EXCHANGE COMMISSION

     SEC. 201. AUTHORIZATION OF APPROPRIATIONS.

       Section 35 of the Securities Exchange Act of 1934 (15 
     U.S.C. 78kk) is amended to read as follows:

     ``SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

       ``(a) In General.--In addition to any other funds 
     authorized to be appropriated to the Commission, there are 
     authorized to be appropriated to carry out the functions, 
     powers, and duties of the Commission, $351,280,000 for fiscal 
     year 1999.
       ``(b) Miscellaneous Expenses.--Funds appropriated pursuant 
     to this section are authorized to be expended--
       ``(1) not to exceed $3,000 per fiscal year, for official 
     reception and representation expenses;
       ``(2) not to exceed $10,000 per fiscal year, for funding a 
     permanent secretariat for the International Organization of 
     Securities Commissions; and
       ``(3) not to exceed $100,000 per fiscal year, for expenses 
     for consultations and meetings hosted by the Commission with 
     foreign governmental and other regulatory officials, members 
     of their delegations, appropriate representatives, and staff 
     to exchange views concerning developments relating to 
     securities matters, for development and implementation of 
     cooperation agreements concerning securities matters, and 
     provision of technical assistance for the development of 
     foreign securities markets, such expenses to include 
     necessary logistic and administrative expenses and the 
     expenses of Commission staff and foreign invitees in 
     attendance at such consultations and meetings, including--
       ``(A) such incidental expenses as meals taken in the course 
     of such attendance;
       ``(B) any travel or transportation to or from such 
     meetings; and
       ``(C) any other related lodging or subsistence.''.

     SEC. 202. REQUIREMENTS FOR THE EDGAR SYSTEM.

       Section 35A of the Securities Exchange Act of 1934 (15 
     U.S.C. 78ll) is amended--
       (1) by striking subsections (a), (b), (c), and (e); and
       (2) in subsection (d)--
       (A) by striking ``(d)'';
       (B) in paragraph (2), by striking ``; and'' at the end and 
     inserting a period; and
       (C) by striking paragraph (3).

     SEC. 203. COMMISSION PROFESSIONAL ECONOMISTS.

       Section 4(b) of the Securities Exchange Act of 1934 (15 
     U.S.C. 78d(b)) is amended--
       (1) by redesignating paragraph (2) as paragraph (3); and
       (2) by inserting after paragraph (1) the following:
       ``(2) Economists.--
       ``(A) Commission authority.--Notwithstanding the provisions 
     of chapter 51 of title 5, United States Code, the Commission 
     is authorized--
       ``(i) to establish its own criteria for the selection of 
     such professional economists as the Commission deems 
     necessary to carry out the work of the Commission;
       ``(ii) to appoint directly such professional economists as 
     the Commission deems qualified; and
       ``(iii) to fix and adjust the compensation of any 
     professional economist appointed under this paragraph, 
     without regard to the provisions of chapter 55 of title 5, 
     United States Code, or subchapters II, III, or VIII of 
     chapter 53, of title 5, United States Code.
       ``(B) Limitation on compensation.--No base compensation 
     fixed for an economist under this paragraph may exceed the 
     pay for Level IV of the Executive Schedule, and no payments 
     to an economist appointed under this paragraph shall exceed 
     the limitation on certain payments in section 5307 of title 
     5, United States Code.
       ``(C) Other benefits.--All professional economists 
     appointed under this paragraph shall be eligible for coverage 
     under the Federal Civil Service System with respect to 
     employee benefits.''.
              TITLE III--CLERICAL AND TECHNICAL AMENDMENTS

     SEC. 301. CLERICAL AND TECHNICAL AMENDMENTS.

       (a) Securities Act of 1933.--The Securities Act of 1933 (15 
     U.S.C. 77 et seq.) is amended as follows:
       (1) Section 2(a)(15)(i) (15 U.S.C. 77b(a)(15)(i)) is 
     amended--
       (A) by striking ``3(a)(2) of the Act'' and inserting 
     ``3(a)(2)''; and
       (B) by striking ``section 2(13) of the Act'' and inserting 
     ``paragraph (13) of this subsection''.
       (2) Section 11(f)(2)(A) (15 U.S.C. 77k(f)(2)(A)) is amended 
     by striking ``section 38'' and inserting ``section 21D(f)''.
       (3) Section 13 (15 U.S.C. 77m) is amended--
       (A) by striking ``section 12(2)'' each place it appears and 
     inserting ``section 12(a)(2)''; and
       (B) by striking ``section 12(1)'' each place it appears and 
     inserting ``section 12(a)(1)''.
       (4) Section 18 (15 U.S.C. 77r) is amended--
       (A) in subsection (b)(1)(A), by inserting ``, or authorized 
     for listing,'' after ``Exchange, or listed'';
       (B) in subsection (c)(2)(B)(i), by striking ``Capital 
     Markets Efficiency Act of 1996'' and inserting ``National 
     Securities Markets Improvement Act of 1996'';
       (C) in subsection (c)(2)(C)(i), by striking ``Market'' and 
     inserting ``Markets'';
       (D) in subsection (d)(1)(A)--
       (i) by striking ``section 2(10)'' and inserting ``section 
     2(a)(10)''; and
       (ii) by striking ``subparagraphs (A) and (B)'' and 
     inserting ``subparagraphs (a) and (b)'';
       (E) in subsection (d)(2), by striking ``Securities 
     Amendments Act of 1996'' and inserting ``National Securities 
     Markets Improvement Act of 1996''; and
       (F) in subsection (d)(4), by striking ``For purposes of 
     this paragraph, the'' and inserting ``The''.
       (5) Sections 27, 27A, and 28 (15 U.S.C. 77z-1, 77z-2, 77z-
     3) are transferred to appear after section 26, in that order.
       (6) Paragraph (28) of schedule A of such Act (15 U.S.C. 
     77aa(28)) is amended by striking ``identic'' and inserting 
     ``identical''.
       (b) Securities Exchange Act of 1934.--The Securities 
     Exchange Act of 1934 (15 U.S.C. 78 et seq.) is amended as 
     follows:
       (1) Section 3(a)(10) (15 U.S.C. 78c(a)(10)) is amended by 
     striking ``deposit, for'' and inserting ``deposit for''.
       (2) Section 3(a)(12)(A)(vi) (15 U.S.C. 78c(a)(12)(A)(vi)) 
     is amended by moving the margin 2 em spaces to the left.

[[Page H10774]]

       (3) Section 3(a)(22)(A) (15 U.S.C. 78c(a)(22)(A)) is 
     amended--
       (A) by striking ``section 3(h)'' and inserting ``section 
     3''; and
       (B) by striking ``section 3(t)'' and inserting ``section 
     3''.
       (4) Section 3(a)(39)(B)(i) (15 U.S.C. 78c(a)(39)(B)(i)) is 
     amended by striking ``an order to the Commission'' and 
     inserting ``an order of the Commission''.
       (5) The following sections are each amended by striking 
     ``Federal Reserve Board'' and inserting ``Board of Governors 
     of the Federal Reserve System'': subsections (a) and (b) of 
     section 7 (15 U.S.C. 78g(a), (b)); section 17(g) (15 U.S.C. 
     78q(g)); and section 26 (15 U.S.C. 78z).
       (6) The heading of subsection (d) of section 7 (15 U.S.C. 
     78g(d)) is amended by striking ``Exception'' and inserting 
     ``Exceptions''.
       (7) Section 14(g)(4) (15 U.S.C. 78n(g)(4)) is amended by 
     striking ``consolidation sale,'' and inserting 
     ``consolidation, sale,''.
       (8) Section 15 (15 U.S.C. 78o) is amended--
       (A) in subsection (c)(8), by moving the margin 2 em spaces 
     to the left;
       (B) in subsection (h)(2), by striking ``affecting'' and 
     inserting ``effecting'';
       (C) in subsection (h)(3)(A)(i)(II)(bb), by inserting ``or'' 
     after the semicolon;
       (D) in subsection (h)(3)(A)(ii)(I), by striking 
     ``maintains'' and inserting ``maintained'';
       (E) in subsection (h)(3)(B)(ii), by striking 
     ``association'' and inserting ``associated''.
       (9) Section 15B(c)(4) (15 U.S.C. 78o-4(c)(4)) is amended by 
     striking ``convicted by any offense'' and inserting 
     ``convicted of any offense''.
       (10) Section 15C(f)(5) (15 U.S.C. 78o-5(f)(5)) is amended 
     by striking ``any person or class or persons'' and inserting 
     ``any person or class of persons''.
       (11) Section 19(c)(5) (15 U.S.C. 78s(c)(5)) is amended by 
     moving the margin 2 em spaces to the right.
       (12) Section 20 (15 U.S.C. 78t) is amended by redesignating 
     subsection (f) as subsection (e).
       (13) Section 21D (15 U.S.C. 78u-4) is amended--
       (A) in subsection (g)(2)(B)(i), by striking ``paragraph 
     (1)'' and inserting ``subparagraph (A)''.
       (B) by redesignating subsection (g) as subsection (f); and
       (14) Section 31(a) (15 U.S.C. 78ee(a)) is amended by 
     striking ``this subsection'' and inserting ``this section''.
       (c) Investment Company Act of 1940.--The Investment Company 
     Act of 1940 (15 U.S.C. 80a-1 et seq.) is amended as follows:
       (1) Section 2(a)(8) (15 U.S.C. 80a-2(a)(8)) is amended by 
     striking ``Unitde'' and inserting ``United''.
       (2) Section 3(b) (15 U.S.C. 80a-3(b)) is amended by 
     striking ``paragraph (3) of subsection (a)'' and inserting 
     ``paragraph (1)(C) of subsection (a)''.
       (3) Section 12(d)(1)(G)(i)(III)(bb) (15 U.S.C. 80a-
     12(d)(1)(G)(i)(III)(bb)) is amended by striking ``the 
     acquired fund'' and inserting ``the acquired company''.
       (4) Section 18(e)(2) (15 U.S.C. 80a-18(e)(2)) is amended by 
     striking ``subsection (e)(2)'' and inserting ``paragraph (1) 
     of this subsection''.
       (5) Section 30 (15 U.S.C. 80a-29) is amended--
       (A) by inserting ``and'' after the semicolon at the end of 
     subsection (b)(1);
       (B) in subsection (e), by striking ``semi-annually'' and 
     inserting ``semiannually''; and
       (C) by redesignating subsections (g) and (h), as added by 
     section 508(g) of the National Securities Markets Improvement 
     Act of 1996, as subsections (i) and (j), respectively.
       (6) Section 31(f) (15 U.S.C. 80a-30(f)) is amended by 
     striking ``subsection (c)'' and inserting ``subsection (e)''.
       (d) Investment Advisers Act of 1940.--The Investment 
     Advisers Act of 1940 (15 U.S.C. 80b et seq.) is amended as 
     follows:
       (1) Section 203(e)(8)(B) (15 U.S.C. 80b-3(e)(8)(B)) is 
     amended by inserting ``or'' after the semicolon.
       (2) Section 222(b)(2) (15 U.S.C. 80b-18a(b)(2)) is amended 
     by striking ``principle'' and inserting ``principal''.
       (e) Trust Indenture Act of 1939.--The Trust Indenture Act 
     of 1939 (15 U.S.C. 77aaa et seq.) is amended as follows:
       (1) Section 303 (15 U.S.C. 77ccc) is amended by striking 
     ``section 2'' each place it appears in paragraphs (2) and (3) 
     and inserting ``section 2(a)''.
       (2) Section 304(a)(4)(A) (15 U.S.C. 77ddd(a)(4)(A)) is 
     amended by striking ``(14) of subsection'' and inserting 
     ``(13) of section''.
       (3) Section 313(a) (15 U.S.C. 77mmm(a)) is amended--
       (A) by inserting ``any change to'' after the paragraph 
     designation at the beginning of paragraph (4); and
       (B) by striking ``any change to'' in paragraph (6).
       (4) Section 319(b) (15 U.S.C. 77sss(b)) is amended by 
     striking ``the Federal Register Act'' and inserting ``chapter 
     15 of title 44, United States Code,''.

     SEC. 302. EXEMPTION OF SECURITIES ISSUED IN CONNECTION WITH 
                   CERTAIN STATE HEARINGS.

       Section 18(b)(4)(C) of the Securities Act of 1933 (15 
     U.S.C. 77r(b)(4)(C)) is amended by striking ``paragraph (4) 
     or (11)'' and inserting ``paragraph (4), (10), or (11)''.
       And the House agree to the same.
     Tom Bliley,
     M.G. Oxley,
     Billy Tauzin,
     Chris Cox,
     Rick White,
     Anna G. Eshoo,
                                Managers on the Part of the House.

     Alfonse D'Amato,
     Phil Gramm,
     Chris Dodd,
                               Managers on the Part of the Senate.

       Joint Explanatory Statement of the Committee of Conference

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the House to the bill (S. 1260) to amend the 
     Securities Act of 1933 and the Securities Exchange Act of 
     1934 to limit the conduct of securities class actions under 
     State law, and for other purposes, submit the following joint 
     statement to the House and the Senate in explanation of the 
     effect of the action agreed upon by the managers and 
     recommended in the accompanying conference report:

        The Securities Litigation Uniform Standards Act of 1998


                           Uniform Standards

       Title 1 of S. 1260, the Securities Litigation Uniform 
     Standards Act of 1998, makes Federal court the exclusive 
     venue for most securities class action lawsuits. The purpose 
     of this title is to prevent plaintiffs from seeking to evade 
     the protections that Federal law provides against abusive 
     litigation by filing suit in State, rather than in Federal, 
     court. The legislation is designed to protect the interests 
     of shareholders and employees of public companies that are 
     the target of meritless ``strike'' suits. The purpose of 
     these strike suits is to extract a sizeable settlement from 
     companies that are forced to settle, regardless of the lack 
     of merits of the suit, simply to avoid the potentially 
     bankrupting expense of litigating.
       Additionally, consistent with the determination that 
     Congress made in the National Securities Markets Improvement 
     Act \1\ (NSMIA), this legislation establishes uniform 
     national rules for securities class action litigation 
     involving our national capital markets. Under the 
     legislation, class actions relating to a ``covered security'' 
     (as defined by section 18(b) of the Securities Act of 1933, 
     which was added to that Act by NSMIA) alleging fraud or 
     manipulation must be maintained pursuant to the provisions of 
     Federal securities law, in Federal court (subject to certain 
     exceptions).
---------------------------------------------------------------------------
     \1\ Public law 104-290 (October 11, 1996).
---------------------------------------------------------------------------
       ``Class actions'' that the legislation bars from State 
     court include actions brought on behalf of more than 50 
     persons, actions brought on behalf of one or more unnamed 
     parties, and so-called ``mass actions,'' in which a group of 
     lawsuits filed in the same court are joined or otherwise 
     proceed as a single action.
       The legislation provides for certain exceptions for 
     specific types of actions. The legislation preserves State 
     jurisdiction over: (1) certain actions that are based upon 
     the law of the State in which the issuer of the security in 
     question is incorporated \2\; (2) actions brought by 
     States and political subdivisions, and State pension 
     plans, so long as the plaintiffs are named and have 
     authorized participation in the action; and (3) actions by 
     a party to a contractual agreement (such as an indenture 
     trustee) seeking to enforce provisions of the indenture.
---------------------------------------------------------------------------
     \2\ It is the intention of the managers that the suits under 
     this exception be limited to the state in which issuer of the 
     security is incorporated, in the case of a corporation, or 
     state of organization, in the case of any other entity.
---------------------------------------------------------------------------
       Additionally, the legislation provides for an exception 
     from the definition of ``class action'' for certain 
     shareholder derivative actions.
       Title II of the legislation reauthorizes the Securities and 
     Exchange Commission (SEC or Commission) for Fiscal Year 1999. 
     This title also includes authority for the SEC to pay 
     economists above the general services scale.
       Title III of the legislation provides for corrections to 
     certain clerical and technical errors in the Federal 
     securities laws arising from changes made by the Private 
     Securities Litigation Reform Act of 1995 \3\ (the ``Reform 
     Act'') and NSMIA.
---------------------------------------------------------------------------
     \3\ Public Law 104-67 (December 22, 1995).
---------------------------------------------------------------------------
       The managers note that a report and statistical analysis of 
     securities class actions lawsuits authored by Joseph A. 
     Grundfest and Michael A. Perino reached the following 
     conclusion:

       The evidence presented in this report suggests that the 
     level of class action securities fraud litigation has 
     declined by about a third in federal courts, but that there 
     has been an almost equal increase in the level of state court 
     activity, largely as a result of a ``substition effect'' 
     whereby plaintiffs resort to state court to avoid the new, 
     more stringent requirements of federal cases. There has also 
     been an increase in parallel litigation between state and 
     federal courts in an apparent effort to avoid the federal 
     discovery stay or other provisions of the Act. This increase 
     in state activity has the potential not only to undermine the 
     intent of the Act, but to increase the overall cost of 
     litigation to the extent that the Act encourages the filing 
     of parallel claims.\4\

     \4\ Grundfest, Joseph A. & Perino, Michael A., Securities 
     Litigation Reform: The First Year's Experience: A Statistical 
     and Legal Analysis of Class Action Securities Fraud 
     Litigation under the Private Securities Litigation Reform Act 
     of 1995, Stanford Law School (February 27, 1997).
---------------------------------------------------------------------------
       Prior to the passage of the Reform Act, there was 
     essentially no significant securities class action litigation 
     brought in State court.\5\ In its Report to the President and 
     the Congress on the First Year of Practice Under the Private 
     Securities Litigation Reform

[[Page H10775]]

     Act of 1995, the SEC called the shift of securities fraud 
     cases from Federal to State court ``potentially the most 
     significant development in securities litigation'' since 
     passage of the Reform Act.\6\
---------------------------------------------------------------------------
     \5\ Id. n. 18.
     \6\ Report to the President and the Congress on the First 
     Year of Practice Under the Private Securities Litigation 
     Reform Act of 1995, U.S. Securities and Exchange Commission, 
     Office of the General Counsel, April 1997 at 61.
---------------------------------------------------------------------------
       The managers also determined that, since passage of the 
     Reform Act, plaintiffs' lawyers have sought to circumvent the 
     Act's provisions by exploiting differences between Federal 
     and State laws by filing frivolous and speculative lawsuits 
     in State court, where essentially none of the Reform Act's 
     procedural or substantive protections against abusive suits 
     are available.\7\ In California, State securities class 
     action filings in the first six months of 1996 went up 
     roughly five-fold compared to the first six months of 1995, 
     prior to passage of the Reform Act.\8\ Furthermore, as a 
     state securities commissioner has observed:

     \7\ Testimony of Mr. Jack G. Levin before the Subcommittee on 
     Finance and Hazardous Materials of the Committee on Commerce, 
     House of Representatives, Serial No. 105-85, at 41-45 (May 
     19, 1998).
     \8\ Id. at 4.
---------------------------------------------------------------------------
       It is important to note that companies can not control 
     where their securities are traded after an initial public 
     offering. * * * As a result, companies with publicly-traded 
     securities can not choose to avoid jurisdictions which 
     present unreasonable litigation costs. Thus, a single state 
     can impose the risks and costs of its pecular litigation 
     system on all national issuers.\9\

     \9\ Written statement of Hon. Keith Paul Bishop, 
     Commissioner, California Department of Corporations, 
     submitted to the Senate Committee on Banking, Housing and 
     Urban Affairs' Subcommittee on Securities'' ``Oversight 
     Hearing on the Private Securities Litigation Reform Act of 
     1995,'' Serial No. 105-182, at 3 (July 27, 1998).
---------------------------------------------------------------------------
       The solution to this problem is to make Federal court the 
     exclusive venue for most securities fraud class action 
     litigation involving nationally traded securities.


                                Scienter

       It is the clear understanding of the managers that Congress 
     did not, in adopting the Reform Act, intend to alter the 
     standards of liability under the Exchange Act.
       The managers understand, however, that certain Federal 
     district courts have interpreted the Reform Act as having 
     altered the scienter requirement. In that regard, the 
     managers again emphasize that the clear intent in 1995 and 
     our continuing intent in this legislation is that neither the 
     Reform Act nor S. 1260 in any way alters the scienter 
     standard in Federal securities fraud suits.
       Additionally, it was the intent of Congress, as was 
     expressly stated during the legislative debate on the Reform 
     Act, and particularly during the debate on overriding the 
     President's veto, that the Reform Act establish a heightened 
     uniform Federal standard on pleading requirements based upon 
     the pleading standard applied by the Second Circuit Court of 
     Appeals. Indeed, the express language of the Reform Act 
     itself carefully provides that plaintiffs must ``state with 
     particularity facts giving rise to a strong inference that 
     the defendant acted with the required state of mind.'' The 
     Managers emphasize that neither the Reform Act nor S. 1260 
     makes any attempt to define that state of mind.
       The managers note that in Ernst and Ernst v. Hochfelder 
     \10\, the Supreme Court left open the question of whether 
     conduct that was not intentional was sufficient for liability 
     under the Federal securities laws. The Supreme Court has 
     never answered that question. The Court expressly reserved 
     the question of whether reckless behavior is sufficient for 
     civil liability under section 10(b) and Rule 10b-5 in a 
     subsequent case, Herman & Maclean v. Huddleston \11\, where 
     it stated, ``We have explicitly left open the question of 
     whether recklessness satisfies the scienter requirement.''
---------------------------------------------------------------------------
     \10\ 425 U.S. 185 (1976).
     \11\ 459 U.S. 375 (1983).
---------------------------------------------------------------------------
       The managers note that since the passage of the Reform Act, 
     a data base containing many of the complaints, responses and 
     judicial decisions on securities class actions since 
     enactment of the Reform Act has been established on the 
     Internet. This data base, the Securities Class Action 
     Clearinghouse, is an extremely useful source of information 
     on securities class actions. It can be accessed on the world 
     wide web at http://securities.stanford.edu. The managers urge 
     other Federal courts to adopt rules, similar to those in 
     effect in the Northern District of California, to facilitate 
     maintenance of this and similar data bases.
     Tom Bliley,
     M.G. Oxley,
     Billy Tauzin,
     Chris Cox,
     Rick White,
     Anna G. Eshoo,

                                Managers on the Part of the House.

     Alfonse D'Amato,
     Phil Gramm,
     Chris Dodd,
                               Managers on the Part of the Senate.
       In 1995, during the consideration of the Private Securities 
     Litigation Reform Act and the override of the President's 
     veto of that Act, Congress noted that in Ernst and Ernst v. 
     Hochfelder,\1\ the Supreme court expressly left open the 
     question of whether conduct that was not intentional was 
     sufficient for liability under section 10(b) of the 
     Securities Exchange Act of 1934. The Supreme Court has never 
     answered that question. The Court specifically reserved the 
     question of whether reckless behavior is sufficient for civil 
     liability under section 10(b) and Rule 105-5 \2\ in a 
     subsequent case, Herman & Maclean v. Huddleston,\3\ where it 
     stated, ``We have explicitly left open the question of 
     whether recklessness satisfies the scienter requirement.''
     Footnotes at end of article.
       The Reform Act did not alter statutory standards of 
     liability under the securities laws (except in the safe 
     harbor for forward-looking statements). As Chairman of the 
     Conference Committee that considered the Reform Act and as 
     the bill's author, respectively, it is our view that non-
     intentional conduct can never be sufficient for liability 
     under section 10(b) of the Exchange Act. We believe that the 
     structure and history of the securities laws indicates no 
     basis for liability under this section for non-intentional 
     conduct. The following is a discussion of the legal reasons 
     supporting our view that non-intentional conduct is 
     insufficient for liability under section 10(b) of the 
     Exchange Act.\4\
       In Ernst & Ernst v. Hochfelder, the Supreme Court held that 
     scienter is a necessary element of an action for damages 
     under Section 10(b) and Rule 10b-5. The Supreme Court defined 
     scienter as ``a mental state embracing intent to deceive, 
     manipulate, or defraud.'' Hochfelder, 425 U.S. at 194 n. 12.


   a. neither the text nor the legislative history of section 10(b) 
                support liability for reckless behavior

       ``The starting point in every case involving construction 
     of a statute is the language itself.'' \5\ Because Congress 
     ``did not create a private Sec. 10(b) cause of action and had 
     no occasion to provide guidance about the elements of a 
     private liability scheme,'' the Supreme Court has been forced 
     ``to infer how the 1934 Congress would have addressed the 
     issue[s] had the 10b-5 action been included as an express 
     provision in the 1934 Act.'' \6\
       The inference from the language of the statute is clear: 
     Congress would not have created Section 10(b) liability for 
     reckless behavior. Section 10(b) prohibits ``any manipulative 
     or deceptive device or contrivance'' in contravention of 
     rules adopted by the Commission pursuant to Section 10(b)'s 
     delegated authority. The terms ``manipulative,'' ``device,'' 
     and ``contrivance'' ``make unmistakable a congressional 
     intent to proscribe a type of conduct quite different from 
     negligence.'' Hochfelder, 425 U.S. at 199. The intent was to 
     ``proscribe knowing or intentional misconduct.'' Id. 
     (emphasis supplied). In addition, the use of the word 
     manipulative is ``especially significant'' because ``[i]t is 
     and was virtually a term of art when used in connection with 
     securities markets. It connotes intentional or willful 
     conduct designed to deceive or defraud investors by 
     controlling or artificially affecting the price of 
     securities.'' Id. (footnote omitted).
       Section 10(b) of the Exchange Act cannot be violated 
     through inadvertence or with lack of subjective 
     consciousness. Nor can one construct a device or contrivance 
     without willing to do so. The words ``manipulate,'' 
     ``device,'' or ``contrivance,'' by their very nature, require 
     conscious intent and connote purposive activity.\7\ The 
     mental state consistent with the statute can be achieved only 
     if a defendant acts with a state of mind ``embracing''--an 
     active verb--``intent''--requiring a conscious state of 
     mind--``to deceive, manipulate or defraud.'' \8\
       The legislative history compels the same conclusion. 
     ``[T]here is no indication that Sec. 10(b) was intended to 
     proscribe conduct not involving scienter.'' Hochfelder, 425 
     U.S. at 202; see also Aaron v. SEC, 446 U.S. 680, 691 (1980) 
     (same). Indeed, ``[i]n considering specific manipulative 
     practices left to Commission regulation . . . the 
     [Congressional] reports indicate that liability would not 
     attach absent scienter, supporting the conclusion that 
     Congress intended no lesser standard under Sec. 10(b). 
     ``Hochfelder, 425 U.S. at 204. Congress thus ``evidenced a 
     purpose to proscribe only knowing and intentional 
     misconduct.'' Aaron, 446 U.S. at 690 (emphasis supplied).


   B. The Structure of the Statute Underscores That There can be No 
                Section 10(b) Liability for Recklessness

       In drafting the federal securities laws, Congress knew how 
     to use specific language to impose liability for reckless or 
     negligent behavior and how to create strict liability for 
     violations of the federal securities laws.\8\ But Congress 
     did not use such language to impose Section 10(b) liability 
     on reckless behavior. Therefore, just as there is no 
     liability for aiding and abetting a violation of Section 
     10(b) because Congress knew how to create such liability but 
     did not,\10\ and just as there is no liability under Section 
     12(l) of the Securities Act, 17 U.S.C. Sec. 771(l), for 
     participants who are merely collateral to an offer or sale 
     because Congress knew how to create such liability but did 
     not,\11\ and just as there is no remedy under Section 10(b) 
     for those who neither purchase nor sell securities because 
     Congress knew how to create such a remedy but did not,\12\ 
     there can be no liability for reckless conduct under Section 
     10(b) because Congress clearly knew how to impose liability 
     for reckless behavior but did not.
       The Supreme Court has, moreover, emphasized that the 
     securities laws ``should not be read as a series of unrelated 
     and isolated provisions.'' \13\ The federal securities laws 
     are to be interpreted consistently and as part of an 
     interrelated whole.'' \14\ In Virginia

[[Page H10776]]

     Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), the Court 
     reserved ``the question whether scienter was necessary for 
     liability under Sec. 14(a).'' \15\ The Court nonetheless held 
     that statements of ``reasons, opinions or belief'' are 
     actionable under Sec. 14(a), 15 U.S.C. 78n(a), and Rule 14a-
     9, 17 C.F.R. Sec. 240.14a-9, as false or misleading only if 
     there is proof of (1) subjective ``disbelief or undisclosed 
     motivation,'' and (2) objective falsity. 501 U.S. at 1095-96. 
     Justice Scalia explained the Court's holding as follows:
       As I understand the Court's opinion, the statement ``In the 
     opinion of the Directors, this is a high value for the 
     shares'' would produce liability if in fact it was not a high 
     value and the Directors knew that. It would not produce 
     liability if in fact it was not a high value but the 
     Directors honestly believed otherwise. The statement ``The 
     Directors voted to accept the proposal because they believe 
     it offers a high value'' would not produce liability if in 
     fact the Directors' genuine motive was quite different--
     except that it would produce liability if the proposal in 
     fact did not offer a high value and the Directors knew 
     that.\16\
       If follows that, if: (A) a statement must be subjectively 
     disbelieved in order to be actionable under Section 14(a), a 
     provision that may or may not required scienter, then: (B) a 
     fortiori, under Section 10(b), a provision that clearly 
     requires scienter, plaintiffs must show subjective awareness 
     of a scheme or device.
       Any other result would lead to the anomalous conclusion 
     that statements actionable under Section 10(b), the more 
     restrictive ``catchall'' provision of the federal securities 
     laws, Hochfelder, 425 U.S. at 203, would not be actionable 
     under Section 14(a). Indeed, ``[t]here is no indication that 
     Congress intended anyone to be made liable [under Sec. 10(b)] 
     unless he acted other than in good faith [and] [t]he catchall 
     provision of Sec. 10(b) should be interpreted no more 
     broadly.'' Id. at 206 \17\
       The language of the text, the legislative history, and the 
     structure of the statute therefore each compel the conclusion 
     that intentional conduct is a prerequisite for liability 
     under Section 10(b).
       Additionally, the Reform Act established a heightened 
     pleading standard for private securities fraud lawsuits. The 
     Conference Report accompanying the Reform Act stated in 
     relevant part:
       The Conference Committee language is based in part on the 
     pleading standard of the Second Circuit. The standard also is 
     specifically written to conform the language to rule 9(b)'s 
     notion of pleading with ``particularity.''
       Regarded as the most stringent pleading standard, the 
     Second Circuit requirement is that the plaintiff state facts 
     with particularity, and that these facts intern must give 
     rise a strong inference of the defendant's fraudulent intent. 
     Because the Conference Committee intends to strengthen 
     existing pleading requirements, it does not intend to codify 
     the Second Circuit's case law interpreting this pleading 
     standard. Footnote: For this reason, the conference Report 
     chose not to include in the pleading standard certain 
     language relating to motive, opportunity, or 
     recklessness.\18\
       The Conference Report accompanying S. 1260 is consistent 
     with that heightened pleading standard articulated in 1995.
     \1\ 425 U.S. 185 (1976).
     \2\ 17 C.F.R. Sec. 240.10b-5.
     \3\ 459 U.S. 375 (1983).
     \4\ We are grateful to Professor Joe Grundfest and Ms. Susan 
     French of Stanford University for guidance to us on these 
     questions.
     \5\ Hochfelder, 425 U.S. at 197 (quoting Blue Chip Stamps v. 
     Manor Drug Stores, 421 U.S. 723, 756 (1975) (Powell, J., 
     concurring). See also Gustafson v. Alloyd Co., 115 S. Ct. 
     1061, 1074 (1995) (Thomas, J., Dissenting). Central Bank, 114 
     S. Ct. at 1446; Landreth Timber Co. v. Landreth, 471 U.S. 
     681, 685 (1985); Santa Fe Indus., Inc. v. Green, 430 U.S. 
     462, 472 (1977).
     \6\ Central Bank, 114 S. Ct. at 1441-42 (quoting Musick, 
     Peeler 113 S. Ct. at 2089-90).
     \7\ See Hochfelder, 425 U.S. at 199 n. 20 (``device'' means 
     `` `that which is devised, or formed by design; a 
     contrivance; an invention; project; scheme; often a scheme to 
     deceive; a strategem; an artifice' '') (quoting Webster's 
     International Dictionary (2d ed. 1934)); id (defining 
     ``contrivance'' as `` `[a] thing contrived or used in 
     contrivance; a scheme . . . .'').
     \8\ Hochfelder, 425 U.S. at 193 n. 12. Cf. Santa Fe 
     Industries, 430 U.S. at 478; Schreiber v. Burlington Northern 
     Inc., 472 U.S. 1, 5-8 (1985).
     \9\ Section 11 of the Securities Act of 1933, 15 U.S.C. 
     Sec. 77k. for example, imposes strict liability on the issuer 
     for material misstatements or omissions in a registration 
     statement and a ``sliding scale'' negligence standard on 
     other participants in the offering process. See Hochfelder, 
     425 U.S. at 208. Sections 17 (a)(2) and (3) of the Securities 
     Act, 15 U.S.C. Sec. 77q(a) (2),(3), impose liability for 
     negligent or reckless conduct in the sale of securities. 
     Aaron, 446 U.S. at 697.
     \10\ Central Bank, 114 S. Ct. at 1448 (``Congress knew how to 
     impose aiding and abetting liability when it chose to do 
     so.'') (citing statutes).
     \11\ Pinter v. Dahl,486 U.S. 622, 650 & n.26 (1988) (Congress 
     knew how to provide liability for collateral participants in 
     securities offerings when it chose to do so).
     \12\ Blue Chip, 421 U.S. at 734 (``When Congress wished to 
     provide a remedy for those who neither purchase nor sell 
     securities, it has little trouble doing so expressly.'').
     \13\ Gustafson v. Alloyd Co., 115 S. Ct. 1061, 1067 (1995).
     \14\ See, e.g, Hochfelder, 425 U.S. at 206 (citing Blue Chip, 
     421 U.S. at 727-30; SEC v. National Sec., Inc., 393 U.S. 453, 
     466 (1969)).
     \15\ 501 U.S. at 1090 n. 5 (citing TSC Indus. Inc. v. 
     Northway, Inc., 426 U.S. 438, 444 n. 7 (1976) (reserving the 
     same question).
     \16\ 501 U.S. at 1108-09 (Scalia, J., concurring in part and 
     concurring in the judgment).
     \17\ The Supreme Court has previously extended holdings from 
     Sec. 14(a)'s proxy antifraud provisions to Sec. 10(b)'s 
     general antifraud provision. See, e.g., Basic, Inc. v. 
     Levinson, 485 U.S. 224, 231-32 (1988) (adopting for purposes 
     of Sec. 10(b) liability the standard for materiality 
     initially defined under Sec. 14(a) by TSC, 426 U.S. at 445).
     \18\ Conference Report accompanying the Private Securities 
     Litigation Reform Act of 1995, p. 41, 48.
  Mr. BLILEY. Mr. Speaker, I reserve the balance of my time.
  Mr. DINGELL. Mr. Speaker, I yield myself 7 minutes.
  Mr. Speaker, I begin by expressing a great respect and affection for 
my dear friend, the gentleman from Virginia (Mr. Bliley), the chairman 
of the committee. I do, however, rise in opposition to the conference 
report, and very frankly, I rise in opposition to the rather sorry 
process by which this document has been presented to this body.
  Last month the House appointed 5 Members from the other side of the 
aisle and three Democrats as its conferees on this legislation.
  There have been no meetings by the conferees. The staff of the 
Republican conferees have had extensive conversations with their Senate 
counterparts. No Democratic staff members were included or informed; 
not even the staff of the gentlewoman from California (Ms. Eshoo), the 
chief Democratic sponsor of the House bill.
  To add insult to this injury, Republican staff informed us the day 
before this report was filed that the only Democratic amendment adopted 
by the conference committee, the DeGette amendment, which required the 
SEC to monitor and report to the Congress on the consequences of this 
legislation, had been unceremoniously dropped, without any 
justification that I can discern.
  Moreover, the original conference report included, at the behest of 
the Senate, a rather curious nongermane study of the U.S. sheep and 
wool industry. While that might be appropriate, it does not seem to 
belong here.
  I have also been told that the provision was taken out, but that is 
quite beside the point. The process here was exclusionary, unfair and 
outrageous. For that reason, I intend to vote against this conference 
report, and I will be urging my colleagues to do likewise.
  The substance of this legislation clearly merits a no vote. We are 
not shearing sheep with this legislation. We are, very frankly, 
shamelessly, fleecing investors.
  A year or so ago, the Congress passed legislation which changed 
startlingly the way in which ordinary investors may sue to protect 
their rights, and it largely stripped them of rights to protect 
themselves against corporate wrongdoings in the courts of the Federal 
Government.
  We were told at the time that legislation was passed that the 
investors would still have access to State courts to protect their 
rights as owners of the corporations and to protect their rights as 
shareholders, and to assure that there was no wrongdoing which 
adversely affected either the well-being of the corporation or their 
interests therein.
  This legislation very curiously terminates those rights. No longer 
can a citizen form a class action in a State court. For some strange 
reason, my colleagues on the other side of the aisle, great advocates 
of States' rights, are now saying citizens cannot go into State courts. 
They are changing State jurisprudence as well as Federal jurisprudence.
  One of the remarkable things they do, if 50 citizens will go into 
court and sue, under the requirements of this legislation those suits 
must be combined into a class action, which is immediately then removed 
to the Federal courts and then subject to all of the hostile and 
constrictive constraints on the right of a citizen to sue to protect 
his interests and his property; the corporation which he as a 
shareholder happens to be the owner of.
  This conference report nails the State courthouse door shut to little 
investors then, who have to band together in class action lawsuits in 
order to recover the money they have lost to securities fraud. By 
making Federal courts the exclusive venue for most of the securities 
class action lawsuits, the conference report imposes the standards of 
the Private Securities Litigation Reform Act of 1955, to which I 
referred earlier, on all securities class action lawsuits, except those 
narrow instances specifically excluded by that report.
  The 1995 act imposed heightened pleading standards on defrauded 
investors, a stay of discovery so that the

[[Page H10777]]

special facts necessary to meet those heightened pleading standards 
could not be reached. As a matter of fact, one of the interesting 
things is that neither a discovery proceeding nor a lawyer would 
protect an investor under the law as it is now written under the 
statute I am referring to.
  It would probably be in the interest of the investor to be 
represented by a psychiatrist because he literally must examine the 
mind of the person who has defrauded him in order to prevail in a 
lawsuit of that sort.
  These are extraordinarily high pleading standards, far higher than 
necessary, and that legislation also imposed an unreasonably short 
statute of limitations or time limit for filing a fraud claim. It 
included no ability under the law to fully recover from professionals, 
such as accountants and lawyers, who had aided and abetted in stealing 
funds from innocent investors.
  Those same standards and shortcomings are now extended across the 
board by fiat of the Federal Government so that a citizen who now finds 
the Federal court doors nailed shut to him cannot go to the State to 
seek redress in a State court from wrongdoing.
  Why? I do not know, but one can suspect that the scoundrels, rogues, 
rascals and thieves that infest our capital markets have now dressed 
themselves up in sheep's clothing and convinced many of the Members of 
this body that they are not wolves but, rather, are hapless and 
helpless victims of a litigation explosion. I would note that that 
litigation explosion does not exist.
  There is no litigation explosion, particularly given the amount of 
securities fraud that the bull market has engendered.
  There has also been a covered attempt on the part of some Members 
here to obliterate the ability of the SEC and defrauded investors to 
sue on the basis of recklessness. This is like eliminating manslaughter 
from the criminal laws. It would be like saying that one has to prove 
intentional murder or the defendant gets off scott-free. If we were to 
lose the reckless standard, we would leave substantial numbers of the 
investing public naked to attacks by schemers.
  That is the remarks of Chairman Leavitt, who testified before us, 
speaking as chairman of the SEC last October.
  Mr. Speaker, I am willing to support responsible reform. I do not 
think that this constitutes responsible reform. This is the active 
sheltering of wrongdoing. It is going to support those who would skin 
the American investing public. It is going to raise great questions of 
the trust that Americans can put in the securities market, because we 
have provided now a blanket of protection for wrongdoing and for 
wrongdoers who are engaged, on a continuing basis of taking advantage, 
of those who cannot protect themselves. This is a bad bill. I urge a no 
vote.
  Mr. Speaker, I submit the dissenting views on this legislation for 
inclusion in the Record, to expand and provide data on these points.
  Mr. Speaker, I rise in opposition to this conference report and the 
sordid process by which it was conceived.
  Last month, the House appointed its conferees on this legislation, 5 
Members from the other side of the aisle and 3 Democrats. There have 
been no meetings of the conferees. The staff of the Republican 
conferees have had extensive conversations with their Senate 
counterparts. No Democratic staff were informed or included, not even 
the staff of Representative Eshoo, the chief Democratic sponsor of the 
House bill. To add insult to injury, Republican staff informed us the 
day before this report was filed that the only Democratic amendment 
adopted by the Commerce Committee--the DeGette amendment to require the 
SEC to monitor and report to Congress on the consequences of this 
legislation--has been unceremoniously dropped without justification. 
However, the original conference agreement included, at the behest of 
the Senate, a nongermane study of the U.S. sheep and wool industry. I 
have been told that provision has been taken out, but that is beside 
the point. This process was unfair and outrageous. For that reason, I 
am voting against this conference report and urging my colleagues to do 
likewise.
  The substance of this legislation also merits a ``no'' vote. We are 
not shearing sheep with this legislation. We are shamelessly fleecing 
investors.
  This conference report nails the State courthouse door shut to little 
investors who have to band together in class action lawsuits in order 
to recover the monies they have lost to securities fraud.
  By making Federal courts the exclusive venue for most securities 
class action lawsuits, the conference report imposes the standards of 
the Private Securities Litigation Reform Act of 1995 on all securities 
class action lawsuits except those narrow instances specifically 
excluded by the report. The 1995 Act imposed heightened pleading 
standards on defrauded investors, a stay of discovery so that the 
special facts necessary to meet those heightened pleading standards 
could not be reached, and an unreasonably short statute of limitations 
or time limit for filing a fraud claim. It included no ability under 
that law to fully recover from professionals such as accountants and 
lawyers who aided and abetted in stealing funds from innocent 
investors. Those same standards and shortcomings are now extended 
across the board by fiat of the Federal Government.
  Why? Because the scoundrels, rogues, rascals, and thieves that infest 
our capital markets dressed themselves up in sheep's clothing and 
convinced too many Members that they were not wolves but rather 
helpless and helpless victims of a litigation explosion.
  My colleagues, there is no litigation explosion, particularly given 
the amount of securities fraud that the bull market has engendered. I 
ask unanimous consent that the Dissenting Views on this legislation be 
included in the Record following my remarks to expand and provide data 
on these points.
  There also has been a covert attempt on the other side of the aisle 
to obliterate the ability of the SEC and defrauded investors to sue on 
the basis of recklessness. Shame on my Republican colleagues. Shame, 
shame. As SEC chairman Levitt testified before us in October last year: 
``[E]liminating recklessness * * * would be tantamount to eliminating 
manslaughter from the criminal laws. It would be like saying you have 
to prove intentional murder or the defendant gets off scot free * * * 
If we were to lose the reckless standard * * * we would leave 
substantial numbers of the investing public naked to attacks by * * * 
schemers.'' I ask unanimous consent to include a letter from Senator 
Reed to the conferees on this point at the conclusion of my remarks.
  Mr. Speaker, I want to support responsible reform. This is not reform 
and it is not responsible. I urge a ``no'' vote.


                                                  U.S. Senate,

                                  Washington, DC, October 2, 1998.
     Ranking Member John D. Dingell,
     Committee on Commerce, Rayburn House Office Building, 
         Washington, DC.
       Dear Ranking Member Dingell: I write to you as a conferee 
     on the Securities Litigation Uniform Standards Act of 1998, 
     S. 1260. As you know, I supported Senate passage of this 
     legislation, and voted to override the President's veto of 
     the Private Securities Litigation Reform Act of 1995. While 
     class action suits are frequently the only financially 
     feasible means for small investors to recover damages, such 
     lawsuits have been subject to abuse. By creating national 
     standards, such as those in S. 1260, we recognize the 
     national nature of our markets and encourage capital 
     formation.
       However, it is essential to recognize that preemption marks 
     a significant change concerning the obligations of Congress. 
     When federal legislation was enacted to combat securities 
     fraud in 1933 and 1934, federal law augmented existing state 
     statutes. States were free to provide greater protections, 
     and many have. Many of our colleagues voted for the 1995 
     legislation knowing that if federal standards failed to 
     provide adequate investor protections, state law would 
     provide a necessary backup.
       With passage of this legislation, Congress accepts full and 
     sole responsibility to ensure that fraud standards allow 
     truly victimized investors to recoup lost funds. Only a 
     meaningful right of action against those who defraud can 
     guarantee investor confidence in our national markets. 
     Recently, on the international stage, we have seen all too 
     clearly the problem of markets which fail to ensure that 
     consumers receive truthful, complete information.
       Therefore, my support for this bill rests on the 
     presumption that the recklessness standard was not altered by 
     either the 1995 Act or this legislation. I strongly endorsed 
     the Senate Report which accompanies this legislation because 
     it stated clearly that nothing in the 1995 legislation 
     changed either the scienter standard or the most stringent 
     pleading standard, that of the Second Circuit. This language 
     was central to the legislation receiving the support of 
     Chairman Levitt of the Securities and Exchange Commission. It 
     was also central to my support.
       As the Senate Banking Committee recognized at his second 
     confirmation hearing, Chairman Levitt has a lifetime of 
     experience as both an investor and regulator of markets. That 
     experience has led him to be the most articulate advocate of 
     the need for a recklessness standard concerning the scienter 
     requirement. In October 21, 1997 testimony before a 
     Subcommittee in the House of Representatives, Chairman Levitt 
     said, ``[E]liminating recklessness . . . would be

[[Page H10778]]

     tantamount to eliminating manslaughter from the criminal 
     laws. It would be like saying you have to prove intentional 
     murder or the defendants gets off scot free. . . . If we were 
     to lose the reckless standard . . . we would leave 
     substantial numbers of the investing public naked to attacks 
     by . . . schemers.''
       In testimony before a Senate Banking Subcommittee, on 
     October 20, 1997, Chairman Levitt further articulated his 
     position regarding the impact of a loss of the recklessness 
     standard. He said, ``A higher scienter standard (than 
     recklessness) would lessen the incentives for corporations to 
     conduct a full inquiry into potentially troublesome or 
     embarrassing areas, and thus would threaten the disclosure 
     process that has made our markets a model for nations around 
     the world.''
       The danger posed by a loss of recklessness to our citizens 
     and markets is clear. We should not overrule the judgement of 
     the SEC Chair, not to mention every single Circuit Court of 
     Appeals that has adjudicated the issue. I would assume that 
     the motives which led the SEC and the Administration to 
     insist on the Senate Report language concerning recklessness 
     would also apply to their views of the Conference Report.
       With regard to the pleading standard, some Members of 
     Congress, and, unfortunately, a minority of federal district 
     courts, have made much of the President's veto measure of the 
     1995 legislation. Specifically, some have pointed out that 
     the President vetoed the 1995 bill due to concerns that the 
     Conference Report adopted a pleading standard higher than 
     that of the Second Circuit, the most stringent standard at 
     that time. As I, and indeed a bipartisan group of Senators 
     and Representatives, made clear in the veto override vote, 
     the President overreached on this point. The pleading 
     standard was raised to the highest bar available, that of the 
     Second Circuit, but no further. In spite of the 
     Administration's 1995 veto, this preemption gained the 
     support of Chairman Levitt. It is, therefore, difficult to 
     understand how some can argue that the 1995 legislation 
     changed the pleading standard of the Second Circuit.
       The reason for allowing a plaintiff to establish scienter 
     through a pleading of motive and opportunity or recklessness 
     is clear. As one New York Federal District Court has stated, 
     ``a plaintiff realistically cannot be expected to plead a 
     defendant's actual state of mind.'' Since the 1995 Act allows 
     for a stay of discovery pending a defendant's motion to 
     dismiss, requiring a plaintiff to establish actual knowledge 
     of fraud or an intent to defraud in a complaint raises the 
     bar far higher than most legitimately defrauded investors can 
     meet.
       Firms which advocate for S. 1260 do so based on the need to 
     eliminate the circumvention of federal standards and federal 
     stays of discovery through state court filings. They do not 
     argue for lessening of the obligations owed investors. I am 
     concerned that should the conference committee include 
     language which could be interpreted to eviscerate the ability 
     of plaintiffs to satisfy the scienter standard by proof of 
     recklessness or to require plaintiffs, barred from discovery, 
     to adhere to a pleading standard requiring conscious 
     behavior, the bill will loose the support of Chairman Levitt 
     and many Members of Congress. I urge the Conference to 
     support language included in the Senate Report and move 
     forward with a bill that a bipartisan group in Congress can 
     support and the President can sign.
           Sincerely,
                                                        Jack Reed,
     U.S. Senator.
                                  ____


Dissenting Views for H.R. 1689 on States Rights and Investor Protection

       We abhor strike suits and frivolous litigation of any 
     stripe. We would enthusiastically support responsible and 
     balanced legislation narrowly targeted at ameliorating those 
     abuses. H.R. 1689 does not meet that standard. We dissent 
     from this bill.
       As introduced, H.R. 1689 was an industry wish list devoid 
     of proper safeguards to protect the essential rights of 
     injured investors to pursue meritorious claims. The sponsors 
     and proponents of H.R. 1689 adopted several amendments during 
     Subcommittee and Full Committee markup to temper some of the 
     bill's harshest elements. We commend our colleagues. The 
     bill, nonetheless, is still flawed.
       H.R. 1689 creates a national standard governing securities 
     fraud class actions involving ``covered securities'' which 
     are nationally traded securities and some that are not. The 
     bill requires these class actions to be brought in federal 
     court pursuant to federal law, where they would be subject to 
     the more stringent terms of the Private Securities Litigation 
     Reform Act of 1995. These terms include the double whammy of 
     heightened pleading standards along with a stay of discovery 
     pending a motion to dismiss, blocking the ability of 
     defrauded investors to gain the special facts needed to meet 
     the heightened pleading standards.
       First, the bill is premature. The Securities and Exchange 
     Commission (SEC) concluded in its April 1997 report to the 
     President and Congress that: ``it is too early to assess with 
     confidence many important effects of the Reform Act and 
     therefore, on this basis, it is premature to propose 
     legislative changes. The one-year time frame has not allowed 
     for sufficient practical experience with the Reform Act's key 
     provisions, or for many court decisions (particularly 
     appellate court decisions) interpreting those provisions.'' 
     The Chairman of the SEC testified before our finance 
     subcommittee on October 21, 1997, that his agency had ``not 
     had enough practical experience with the Act to produce the 
     data necessary for us to measure its success.'' That is still 
     the case.
       Second, there is no national problem in need of a national 
     solution. Data compiled by unbiased sources shows that the 
     number of state securities class actions has declined during 
     the last year to pre-Reform Act levels. In 1997, there were a 
     total of 44 state class action securities cases, out of a 
     total of 15 million civil filings. By comparison, 67 state 
     class actions were filed in 1994, the year before the Reform 
     Act became law, and 66 cases were filed in 1996, the year 
     after the Reform Act was enacted. We note in passing that we 
     have been shown no convincing proof that any of these 
     lawsuits was without merit and was allowed to proceed 
     notwithstanding its lack of merit. Moreover, as the attached 
     map shows, the overwhelming majority of those cases were 
     filed in California, with most states having zero filings. 
     That being the case, shouldn't this ``problem'' be solved in 
     the California legislature? We believe that state 
     legislatures should be given time to consider laws of their 
     own to address the issues raised in this debate.
       We find it curious indeed that the Republican-led Congress 
     that campaigns on returning power to the states and 
     protecting individual choice, would champion a federal 
     mandate abolishing important state prerogatives along with 
     protections and rights. Forty-nine states, as well as the 
     District of Columbia, allow for some form of aiding-and-
     abetting liability. There is no aiding-and-abetting liability 
     in private actions for most federal securities fraud claims. 
     In addition, private actions under the federal securities 
     laws are subject to a short statute of limitations. 
     Specifically, private actions under Section 10(b) of the 
     Exchange Act must be brought within one year after discovery 
     of the alleged violation, and no more than three years after 
     the violation occurred. In contrast, 33 states allow for 
     longer limitations periods. These investor protection laws 
     available at the state level, as the attached list shows, 
     will no longer be available to class action plaintiffs upon 
     passage of H.R. 1689. The public should clearly understand 
     the investor protections being wiped out by the elected 
     representatives who vote yes on this bill.
       Moreover, under H.R. 1689's unusual ``grouping'' provision, 
     any time more than 50 individuals file state court complaints 
     ``in the same court and involving common questions of law or 
     fact,'' they will be deemed to be part of a ``class action'' 
     subject to this bill, if ``the lawsuits are joined, 
     consolidated, or otherwise proceed as a single action for any 
     purpose.'' Individuals who bring suits in state court in 
     their own name may find, if others have brought similar 
     suits, that their claims are preempted. For instance, if an 
     investment adviser churns the accounts of or recommends 
     unsuitable securities to clients in a single state and more 
     than 50 of them seek to recover in the same court, each 
     filing their own individual action, they may be forced to 
     constitute a class action and have to pursue their claims--if 
     possible--in federal court. These investors may be left 
     without a remedy. This is broader preemption than we believe 
     is necessary or appropriate. There has been no showing that 
     these kinds of suits, either individually or in the 
     aggregate, present the kinds of potential abuses that have 
     been attributed to traditional class actions and strike 
     suits.
       The debate on this legislation has been polar. It has 
     tarred all private securities fraud litigation as meritless 
     strike suits, and all defendant companies, accountants, and 
     broker-dealers as innocent victims of large-sum-settlement 
     highjackings. Through this lens, unintended harm to 
     legitimate lawsuits is viewed as a reasonable tradeoff. We 
     disagree on both counts.
       The record shows that securities fraud is up. Many of those 
     cases involve accounting frauds. The SEC has always taken the 
     view that private lawsuits are a crucial adjunct to the SEC's 
     own enforcement program. They are the principle means by 
     which investors have recovered losses caused by fraud. 
     Proponents of H.R. 1689 argue that investors recover only 
     ``10 cents on the dollar'' in these cases. We agree that we 
     need to put investors first. But nothing in this bill 
     addresses the recovery issue in any way.
       For these reasons, we oppose this bill and urge the House 
     to do the same.
     John D. Dingell.
     Edward J. Markey.
     Bart Stupak.
     Diana DeGette.

   STATE BY STATE COMPARISON OF STATUTE OF LIMITATIONS AND AIDING AND
                           ABETTING LIABILITY
------------------------------------------------------------------------
                                                          Aiding  and
        Locality            Statute of limitations         abetting
------------------------------------------------------------------------
Federal.................  1 year after discovery/3    No.
                           years from sale.
Alabama.................  2 years after discovery of  Yes.
                           the facts.
Alaska..................  3 years from the contract   Yes.
                           of sale.
Arizona.................  2 years after discovery of  Yes.
                           the facts.
Arkansas................  5 years after discovery...  Yes.
California..............  1 year after discovery/4    Yes.
                           years from sale.
Colorado................  3 years after discovery/5   Yes.
                           years from sale.
Conneciticut............  1 year after discovery/3    Yes.
                           years from sale.
Delaware................  3 years form the contract   Yes.
                           for sale.
D.C.....................  2 years from the            Yes.
                           transaction upon which it
                           is based.
Florida.................  2 years after discovery/5   Yes.
                           years from sale.
Georgia.................  2 years from the            Yes.
                           transaction upon which it
                           is based.
Hawaii..................  2 years after discovery/5   Yes.
                           years from sale.

[[Page H10779]]

Idaho...................  3 years from the contract   Yes.
                           of sale.
Illinois................  3 years after discovery/5   Yes.
                           years from sale.
Indiana.................  3 years after discovery of  Yes.
                           the facts.
Iowa....................  2 years after discovery/5   Yes.
                           years from sale.
Kansas..................  3 years after discovery of  Yes.
                           the facts.
Kentucky................  3 years from the contract   Yes.
                           for sale.
Louisiana...............  2 years from the            Yes.
                           transaction upon which it
                           is based.
Maine...................  2 years after discovery of  Yes.
                           the facts.
Maryland................  1 year after discovery/3    Yes.
                           years from sale.
Massachusetts...........  4 years after discovery...  Yes.
Michigan................  2 years after discovery/4   Yes.
                           years from sale.
Minnesota...............  3 years from the contract   Yes.
                           for sale.
Mississippi.............  2 years after discovery of  Yes.
                           the facts.
Missouri................  3 years from the contract   Yes.
                           for sale.
Montana.................  2 years after discovery/5   Yes.
                           years from sale.
Nebraska................  3 years from the contract   Yes.
                           for sale.
Nevada..................  1 year after discovery/5    Yes.
                           years from sale.
New Hampshire...........  6 years from the contract   Yes.
                           for sale.
New Jersey..............  2 years after discovery of  Yes.
                           the facts.
New Mexico..............  2 years after discovery/5   Yes.
                           years from sale.
New York................  6 years after sale........  N/A.
North Carolina..........  2 years after discovery of  Yes.
                           the facts.
North Dakota............  5 years after discovery of  Yes.
                           the facts.
Ohio....................  2 years after discovery/4   Yes.
                           years from sale.
Oklahoma................  2 years after discovery/3   Yes.
                           years from sale.
Oregon..................  2 years after discovery/3   Yes.
                           years from sale.
Pennsylvania............  1 year after discovery/4    Yes.
                           years from sale.
Rhode Island............  1 year after discovery/3    Yes.
                           years from sale.
South Carolina..........  3 years from the contract   Yes.
                           for sale.
South Dakota............  2 years after discovery/3   Yes.
                           years from sale.
Tennessee...............  1 year after discovery/2    Yes.
                           years from sale.
Texas...................  3 years from discovery/5    Yes.
                           years from sale.
Utah....................  2 years after discovery/4   Yes.
                           years from sale.
Vermont.................  6 years from the contract   Yes.
                           for sale.
Virginia................  2 years from the            Yes.
                           transaction upon which it
                           is based.
Washington..............  3 years after discovery of  Yes.
                           the facts.
West Virginia...........  3 years from the contract   Yes.
                           for sale.
Wisconsin...............  3 years after discovery of  Yes.
                           the facts.
Wyoming.................  2 years from the            Yes.
                           transaction.
------------------------------------------------------------------------

  Additional Dissenting Views of Congressman Ron Klink on H.R. 1689, 
              Securities Litigation Uniform Standards Act

       H.R. 1689 is a solution in search of a problem.
       In 1995, the Commerce Committee developed and Congress 
     approved, over a presidential veto, the Private Securities 
     Litigation Reform Act, which put strict limits on federal 
     investor class action lawsuits. I opposed that legislation 
     because I was concerned about preventing defrauded investors 
     from being made whole again. But my side lost, and we all 
     moved on.
       One of the arguments when we debated the 1995 Act was that 
     truly victimized investors could still seek redress in state 
     court. So there was some comfort in that; retirees who lost 
     their life savings to securities fraud could still pursue 
     legal action.
       Now, however, I fear that the Committee is moving to cut 
     off the state avenue for class action securities suits. That 
     could mean that investors would have no ability to seek 
     relief from securities wrongdoers, and that is unacceptable 
     to me.
       There appears to be no explosion of state securities class 
     actions, so I see no real need for this bill. Last year there 
     were only 44 throughout the entire country, the lowest number 
     in five years.
       Furthermore, at a time when there are more investors than 
     at any time in history, many of them unsophisticated 
     investors, we should not be making it easier to get away with 
     securities fraud. We owe that to our investor constituents 
     and we owe that to the capital markets in this country, which 
     remain the strongest in the world.
       Additionally, though the bill contains a provision similar 
     to the Sarbanes amendment in the Senate bill, which provides 
     for an exemption from the bill for state and local entities, 
     this provision goes beyond Sarbanes to require those entities 
     to be named plaintiffs in and authorize participation in 
     state securities class actions. This assumes a level of 
     sophistication that may be lacking in these investors.
       I will provide an example. Last year, the SEC alleged that 
     Devon Capital Management had defrauded 100 municipal clients 
     in Pennsylvania and elsewhere. Those clients included 75 
     school districts, mostly in Western and Central Pennsylvania. 
     Devon and the SEC reached a settlement, and those school 
     districts are expected to recover a little over half of the 
     $71 million that Devon lost.
       Now how can we say that these same school districts and 
     local governments that were unsophisticated enough to have 
     invested with Devon in the first place and lost all this 
     money, are, at the same time, sophisticated enough to 
     recognize the steps they need to take to preserve their 
     rights to bring a state securities class action under this 
     bill?
       I would prefer that, at the very least, the Sarbanes 
     amendment exempting state and local governments and pension 
     plans be maintained as it passed the Senate.
       Finally, I am disturbed by the trend I am seeing in the 
     Committee and Congress as a whole in our attitude toward 
     investors, especially the mom and pop investors we all 
     represent. As I said, I opposed the 1995 Securities 
     Litigation Reform Act. That was followed closely by the 
     Fields Securities Reform bill, which threatened to severely 
     limit the ability of state securities regulators, the local 
     cops on the beat in the securities world, to protect 
     investors. In Committee and in conference, we were able to 
     temper this legislation so that investors would not be left 
     vulnerable.
       We are at a point in time when Members of Congress and 
     others are talking about privatizing Social Security. That 
     will lead to even more unsophisticated investors and hundreds 
     of billions of dollars going into the marketplace. And yet we 
     continue to talk about reducing investor protections.
       Another question I have is, are we now saying to the states 
     that we in Washington, DC, know better than the states what 
     cases should go through state courts and which should not. 
     Are we next going to tell the states that they can't hear 
     real estate cases? Are we going to tell them they can't hear 
     tobacco cases? What comes next?
       I never thought I would see the day when my Republican 
     colleagues would want to dictate from on high in Washington, 
     DC, what state law should be.

                              {time}  1515

  Mr. BLILEY. Mr. Speaker, I yield 3 minutes to the gentleman from Ohio 
(Mr. Oxley), chairman of the subcommittee.
  (Mr. OXLEY asked and was given permission to revise and extend his 
remarks.)
  Mr. OXLEY. Mr. Speaker, I obviously rise in strong support of the 
conference report. If fraud were the only reasons that stock prices 
dropped, then today's volatile markets would suggest that there is not 
an honest company out there. That is simply not the case.
  Publicly traded companies, their shareholders, and their employees 
lose every time a company has to pay off and their lawyers have to 
settle a lawsuit that is based on one fact only, that the company stock 
dropped in value.
  In 1995, the Congress approved, with an overwhelmingly bipartisan 
majority that overrode a presidential veto, legislation to stop these 
``blackmail settlements.'' The Private Securities Litigation Reform Act 
of 1995 was designed to put an end to frivolous lawsuits that drain 
values from public companies and wastefully diverted their resources. 
This conference report closes a loophole that has enabled plaintiffs' 
lawyers to continue to extract settlements from companies that have 
done absolutely nothing wrong.
  The conference report prevents lawyers from evading the protections 
of the Reform Act by filing their lawsuit in State court. The 
conference report creates a national standard under which securities 
class actions must be filed and that standard is the one that Congress 
resoundingly approved back in 1995.
  The conference report preserves the ability of individual investors 
to file suits that are appropriately brought in State courts, while 
preventing lawyers from using securities class actions filed in State 
court for their personal gains.
  This legislation represents a bipartisan effort to work through our 
political differences and reach compromises that are responsible public 
policy. In fact, over the last 4 years, the Committee on Commerce has 
produced a number of bills which have made a significant improvement to 
the laws governing our financial institutions and that have enjoyed 
support from both sides of the aisle. I am very proud of these 
accomplishments. This legislation should be added to that list.
  There are many who deserve credit for bringing this legislation to 
the floor today. Several Committee on Commerce members, including the 
gentleman from Washington (Mr. White), the original cosponsor of the 
House bill, and the gentlewoman from California (Ms. Eshoo), the other 
original cosponsor. They not only started the ball rolling, but have 
worked incessantly to keep this legislation on track and have driven us 
crazy at the same time.
  I commend our counterparticipants in the Senate for their fine work 
improving upon the bill as originally introduced by the gentleman from 
Washington (Mr. White) and the gentlewoman from California (Ms. Eshoo), 
and for their cooperation during the conference.
  I thank our full committee chair, the gentleman from Virginia (Mr. 
Bliley), whose leadership and perseverance has ensured that this 
conference report is a strong win for American investors and American 
businesses and, therefore, American jobs. Thanks to his hard work, as 
well as that of the other conferees supporting this measure, the 
conference report ratifies the heightened pleading standard that was 
adopted in the 1995 Reform Act.
  While we may disagree on this particular initiative, I appreciate the 
constructive work done by the gentleman from Michigan (Mr. Dingell), 
who, as always, has been a true legislative craftsman in this area.
  Finally, on a personal note, I would like to thank the gentleman from 
New York (Mr. Manton), our retiring ranking minority member of my 
subcommittee, not only for his work and

[[Page H10780]]

support for this legislation, but for his years of friendship to me and 
dedication to the Committee on Commerce and the House. I wish him the 
best. We will all miss him.
  Mr. DINGELL. Mr. Speaker, I yield 3 minutes to the distinguished 
gentlewoman from California (Ms. Eshoo).
  (Ms. ESHOO asked and was given permission to revise and extend her 
remarks.)
  Ms. ESHOO. Mr. Speaker, I rise today in support of the conference 
report on the Securities Litigation Uniform Standards Act. I am very 
proud to have been the chief Democratic sponsor of this legislation 
which is narrowly focused and a bipartisan bill that closes a loophole 
in the 1995 Private Securities Litigation Reform Act.
  With the overwhelming support, which was bipartisan in the last 
Congress, we passed that act. That bill significantly curbed the filing 
in Federal courts of costly and meritless suits against fast-growing 
companies. ``Strike suits'' forced companies to settle, and they did so 
rather than face drawn out expensive court proceedings.
  These frivolous suits, traditionally filed in Federal courts, are now 
being filed in State courts circumventing the intent of the Congress in 
the 1995 legislation. Studies have shown that over a quarter of these 
cases were filed in State courts where the Federal reforms do not 
apply. The Securities Litigation Uniform Standards Act closes this 
loophole by assuring that lawsuits involving nationally traded 
securities remain in Federal courts where they have always been heard.
  This legislation is limited in scope and only affects class action 
lawsuits involving nationally traded securities. Lawsuits traditionally 
heard in the Federal courts will continue to be heard there under the 
Federal law. State regulators would continue to have the ability to 
enforce State laws and bring civil actions.
  The Securities Litigation Uniform Standards Act is supported by the 
Securities and Exchange Commission, the Clinton administration, and 231 
House cosponsors. I urge the passage of this legislation.
  Mr. Speaker, let me just say in closing that I would like to offer my 
thanks to the gentleman from Virginia (Mr. Bliley), chairman of the 
full committee, who has been a wonderful partner. And I also have to 
acknowledge and thank him for putting up with my constant cajoling and 
prodding and partnering on this.
  Certainly to a worthy opponent, the gentleman from Michigan (Mr. 
Dingell), ranking member of the Committee on Commerce, and to my 
cosponsor, worthy cosponsor on the other side of the aisle, the 
gentleman from Washington (Mr. White), to the gentleman from Louisiana 
(Chairman Tauzin) of the subcommittee and the gentleman from Ohio (Mr. 
Oxley), thanks for their help and accepting my prodding.
  I have to say that I think all of us are ready to leave town. I am 
beginning to start to pack my bag this evening. I know we have some 
other things on the agenda. This, Mr. Speaker, has been the daily work 
not only of my office and staff, but also from the other side of the 
aisle. I want to acknowledge all that have been involved in this. I 
think that this Congress is distinguishing itself by the passage of 
this bill, and I urge passage and I thank all that have been involved 
in it.
  Mr. Speaker, I want to add to today's debate my voice on a particular 
section of the Conference Report regarding scienter.
  The Statement of the Managers indicates that ``it was the intent of 
Congress, as was expressly stated during the legislative debate on the 
Reform Act, and particularly during the debate on overriding the 
President's veto, that the Reform Act establish a heightened uniform 
Federal standard on pleading requirements based upon the pleading 
standard applied by the Second Circuit Court of Appeals. Indeed, the 
express language of the Reform Act itself carefully provides that 
plaintiffs must `state with particularity facts giving rise to a strong 
inference that the defendant acted with the required state of mind.' 
The Managers emphasize that neither the Reform Act nor S. 1260 makes 
any attempt to define that state of mind.''
  As the chief Democratic sponsor of the Securities Litigation Uniform 
Standards Act and of the PSLRA of 1995, and a signatory of the 
conference report on S. 1260, the pleading standards referred to in the 
Report state with great clarity the intent of Congress with respect to 
scienter and are ones which I wholeheartedly support.
  Mr. BLILEY. Mr. Speaker, I yield 5 minutes to the gentleman from 
California (Mr. Cox), the chairman of the Republican Policy Committee.
  Mr. COX of California. Mr. Speaker, I thank the gentleman from 
Virginia (Mr. Bliley) for yielding me this time.
  Mr. Speaker, if the gentleman from Virginia will entertain one, I 
would like to engage him in a colloquy.
  As the gentleman knows, I was the principal author of the 1995 
Securities Litigation Reform Act. During consideration of the 
Securities Litigation Uniform Standards Act, which will extend the 1995 
act to State courts, some questions have been raised about the pleading 
standard that we adopted in 1995. Specifically, some have argued post 
facto that we adopted the pleading standard of the Second Circuit Court 
of Appeals rather than a higher standard derived from it, but without 
the Second Circuit caselaw.
  The same questions have been raised in a different way concerning the 
so-called Specter amendment to the 1995 act, which would have added 
language related to motive, opportunity, and recklessness. The House 
strongly disagreed with the Specter amendment and insisted that it be 
dropped before we would agree to the conference report.
  Since we were both conferees in 1995, I would ask the gentleman his 
views on both points. Specifically, I would ask the gentleman whether 
he agrees that in 1995 we adopted a pleading standard higher than any 
in existing law. Although it was based on the standard from the Second 
Circuit, it was significantly higher because our hearings showed that 
even in the Second Circuit the existing standards were failing to 
screen out abusive cases.
  As the 1995 Statement of Managers stated, ``the House and Senate 
hearings on securities litigation reform included testimony on the need 
to establish uniform and more stringent pleading requirements to 
curtail the filing of meritless lawsuits.'' For that reason, the 1995 
Managers' Statement explained that the act incorporated a pleading 
standard derived from, but higher than, the highest standard in 
existing law, the Second Circuit standard.
  Mr. Speaker, let me quote from the 1995 Managers' Statement, the most 
authoritative construction of the 1995 act: ``The Conference Committee 
language is based in part on the pleading standard of the Second 
Circuit . . . Because the Conference Committee intends to strengthen 
existing pleading requirements, it does not intend to codify the Second 
Circuit's caselaw interpreting this pleading standard.''
  The 1995 Managers' Statement went on to explain that this was the 
very reason the conferees dropped the so-called Specter amendment on 
motive, opportunity, and recklessness, because we wanted the standard 
higher than the Second Circuit's, not because the Specter language 
authorizing shortcuts to pleading rigor was somehow implicit in the 
act's language. The House prevailed on this point.
  Again, I quote, ``For this reason, the Conference Report chose not to 
include in the pleading standard certain language relating to motive, 
opportunity, and recklessness.''
  So, the record in 1995 is clear: we adopted a higher standard than 
the Second Circuit and in particular we rejected the Second Circuit 
caselaw embodied in the Specter amendment regarding motive, 
opportunity, and recklessness. Indeed, the President's veto, according 
to his own veto message, was based on the fact that the 1995 act 
adopted a higher pleading standard than the Second Circuit standard, 
and rejected existing Second Circuit caselaw embodied in the Specter 
amendment. Both bodies of Congress overrode that veto.
  In the conference report Managers' Statement for the bill that is 
before us today, the House expressly rejected Senate report language 
that would have rewritten the 1995 legislative history on the pleading 
standard. That language is not in this conference report Managers' 
Statement.
  Mr. BLILEY. Mr. Speaker, will the gentleman yield?
  Mr. COX of California. I yield to the gentleman from Virginia.
  Mr. BLILEY. Mr. Speaker, I thank the gentleman from California. His 
recollection of both points is the same

[[Page H10781]]

as mine. I view the legislative history accompanying S. 1260 as 
consistent with that understanding.
  Mr. COX of California. Mr. Speaker, reclaiming my time, I thank the 
gentleman. I agree with the gentleman's understanding of S. 1260's 
legislative history. I also note that courts correctly treat so-called 
post-enactment legislative history as virtually worthless. But to the 
extent that courts have any interest in what the 105th Congress thinks 
the 104th Congress did in 1995, I trust they will compare this year's 
Senate Banking Committee report language with what both Houses 
ultimately agreed to in this conference committee Managers' Statement. 
Where the Senate report on S. 1260 states that the 1995 act 
``establish[ed] a uniform Federal standard on pleading requirements by 
adopting the pleading standard adopted by the Second Circuit Court of 
Appeals'', the more authoritative Managers' Statement states that in 
1995 we ``establish[ed] a heightened uniform Federal standard based 
upon the pleading standard applied by the Second Circuit Court of 
Appeals.''
  The House managers insisted on these changes to reaffirm what the 
conferees said in 1995: We adopted a pleading standard higher than the 
then-existing Second Circuit standard.
  Mr. Speaker, once more, Congress is making huge strides toward 
protecting investors and workers in public companies. I'm pleased that 
the House will today complete work on S. 1260, the Securities 
Litigation Uniform Standards Act of 1998. I want to congratulate my 
colleagues, Mr. White and Ms. Eshoo, for their leadership in 
introducing this legislation, as well as Chairmen Mike Oxley and Tom 
Bliley for their tireless efforts on behalf of this issue.
  S. 1260 builds on two landmark achievements of the 104th Congress: 
the 1995 Private Securities Litigation Reform Act, a key element of the 
Contract With America, and the 1996 National Securities Markets 
Improvement Act. In the 1995 Reform Act, we acted to stop the egregious 
perversion of federal securities laws into weapons to injure investors 
and companies rather than safeguards to protect investors from 
securities fraud. Trial lawyers, using professional plaintiffs, were 
filing class action lawsuits against publicly traded companies alleging 
fraud, often with no more evidence than a drop in the price of these 
companies' stock--something quite common in the highly volatile high-
technology markets. Indeed, over half of the top 150 companies in 
California's Silicon Valley were hit by such suits. Due to the 
considerable cost involved in fighting such a lawsuit, innocent 
employers were routinely forced to pay investors' money as tribute to 
the trial bar. Yet the enormous price they had to pay--according to one 
study, on average nearly $9 million for each settlement--did little for 
defrauded investors. The plaintiffs, the supposed beneficiaries of this 
system, on average received between 6 and 14 cents on the dollar.
  A strong bipartisan majority of the House and Senate acted in 1995 to 
reorient federal securities litigation to encourage investors to bring 
meritorious claims while protecting innocent employers from meritless 
extortion suits. We acted to protect the millions of innocent investors 
who were bearing the cost of abusive lawsuits while gaining little or 
no recompense for genuine fraud.
  In 1996, strong bipartisan majorities of the House and Senate again 
turned to the issue of securities law, this time addressing the 
appropriate division of labor between state and federal securities 
regulators. In that historic bill we determined that ``covered 
securities''--basically, those traded on national exchanges--would be 
subject to federal regulation, while non-covered securities would be 
regulated by the states.
  Today we are going to continue our work in this field of law by 
protecting the gains we made in the 1995 Reform Act from circumvention 
by entrepreneurial trial lawyers, and by harmonizing the 1995 Reform 
Act and the 1996 National Markets legislation.
  Trial lawyers have sought to get around our 1995 reforms by bringing 
their suits in state courts, where those reforms do not apply. Yet as 
our capital markets are national, and thus investors may live in any of 
the 50 states, bringing a suit in one state unfairly imposes a 
financial burden on residents of another state. To address this 
inequity and assert that national markets require nationally applied 
rules, this legislation will make federal courts the exclusive venue 
for large-scale securities fraud lawsuits involving securities subject 
to federal regulation under the 1996 National Markets Act.
  Like the 1995 and 1996 enactments, Representative White's bill enjoys 
wide bipartisan support. Throughout the process leading up to 
enactment, we have sought to address the concerns of majority and 
minority members in the legislation. Our success in so doing is 
reflected in the wide bipartisan support this legislation received in 
the House and Senate.
  In addition, I want to particularly thank Chairman Bliley and 
Chairman Oxley for including in the bill a technical correction to the 
1996 Fields national markets legislation. This correction restores the 
viability of Section 3(a)(10) of the Securities Act of 1933, which 
provides a voluntary state-law alternative to federal securities 
registration. This provision--which has been an unamended part of the 
1933 Act since the enactment of that legislation, exempts from federal 
registration securities issued in exchange for other securities, 
claims, or property interests, if the terms and conditions of the 
issuance and exchange have been approved as fair by state authorities. 
It is purely voluntary; issuers may still seek federal registration if 
they wish. Although the 1996 Act does not amend Section 3(a)(10), it 
inadvertently impeded its operation. I appreciate the Chairmen's 
consideration in including in the bill a curative technical amendment 
endorsed by the California Department of Corporations.
  I look forward to final passage of this conference report, and I 
thank the Chairmen and my colleagues, Rick White and Anna Eshoo, for 
their tireless efforts on behalf of this legislation.
  Mr. DINGELL. Mr. Speaker, I yield 6 minutes to the distinguished 
gentleman from Massachusetts (Mr. Markey).
  Mr. MARKEY. Mr. Speaker, one of the most shameful things that has 
occurred during the course of the debate on this bill was the covert 
attempt that was made to eviscerate the ability of the SEC and 
defrauded investors to sue reckless wrongdoers.
  In the Silicon Graphics case, a Federal District Court in California 
actually ruled that the act had eliminated recklessness as a standard 
for liability under the Federal securities laws, subsequently 
concluding that only deliberate recklessness, a legal oxymoron, would 
meet the Reform Act's pleading standards.
  Now, while I oppose this bill, I also feel quite strongly that if 
this bill is to become law, we needed to make it absolutely clear that 
we had not changed the scienter requirements in either the Reform Act 
or in this legislation.
  During floor consideration of the House version of this bill, my 
colleague from California articulated his view that the standard did 
not include recklessness. I strongly disagree, and believe that this 
mischaracterized the intent of Congress in both the Securities and 
Exchange Act of 1934, and the Reform Act of 1995, for which I was a 
conferee, along with the gentleman from Michigan (Mr. Dingell), and the 
currently pending legislation.
  I am pleased to see that the Statement of Managers, which was 
provided to my office by the Committee on Commerce majority staff and 
which bears the signatures of the conferees to this act, has recognized 
that neither the Reform Act nor S. 1260 alters the scienter standard of 
the Exchange Act.
  I must note with some dismay, however, that the Statement of Managers 
on this bill, which was filed in the Congressional Record on October 9, 
does not contain essential legislative history from the original 
Statement of Managers provided to my office. I am informed that this 
was due to a clerical error, which resulted in the inadvertent deletion 
on page 4 of the Joint Statement. While some Members on this side, 
including myself, find it rather curious that this particular page 
mysteriously turned up missing, given how much time and effort was 
given to working this language out, I will accept this explanation at 
face value and I am pleased that the gentleman has made it clear that 
the version has been corrected and will be filed in the Record in 
connection with today's debate.

                              {time}  1530

  There should be absolutely no ambiguity with respect to the intent of 
the Congress with respect to the fact that recklessness is and always 
has been a part of the scienter standard.
  The Federal courts have long recognized that recklessness satisfies 
the scienter requirement of section 10(b) and rule 10b-5, the principal 
antifraud provisions of the securities laws. It is true, as the 
statement of managers notes, that in Ernst & Ernst v. Hochfelder, the 
Supreme Court left open the question of whether the recklessness could 
satisfy the scienter requirement of section 10(b) and rule 10b-5. 
However, the statement of managers

[[Page H10782]]

failed to note that the court explicitly recognized that in certain 
areas of the law recklessness is considered to be a form of intentional 
conduct for purposes of imposing liability for some act. So I agree 
with the statement of the managers that the 1995 Private Securities 
Litigation Reform Act, that the gentleman from Michigan (Mr. Dingell) 
and I were conferees on, did not change the scienter requirement for 
liability.
  I am deeply troubled, however, by attempts which were made, some late 
in the course of the debate on S. 1260, to suggest that the reform act 
had in fact raised the pleading standard beyond that of the Second 
Circuit which at the time the reform act was passed was the strictest 
pleading standard in the Nation. That clearly was not my understanding 
in 1995, nor the gentleman from Michigan (Mr. Dingell).
  I am pleased to that this erroneous interpretation has been rejected 
today. To have done otherwise would have created an illogical result. 
Because the antifraud provisions allow liability for reckless 
misconduct, it follows that plaintiffs must be allowed to plead that 
the defendants acted recklessly. To say that defauded investors can 
recover for reckless misconduct but that they must plead something more 
than reckless misconduct would have defied logic.
  During the course of the debate on this bill, it has been suggested 
by some that a footnote in the statement of managers from the 1995 
reform act proves that Congress had adopted in 1995 a pleading standard 
different from the Second Circuit court standard. This footnote, which 
was inserted at the last minute without our knowledge, the gentleman 
from Michigan (Mr. Dingell) or I, stated that the committee chose not 
to include in the pleading standard certain language relating to 
motive, opportunity or recklessness. This footnote, and make no mistake 
about it, that is all it is, merely a footnote in a statement of 
managers drafted by a staffer without the full consideration of all the 
House and Senate Members appointed as conferees at that time to the 
1995 act, including myself, does not mean that recklessness has been 
eliminated either as a basis for liability or as a pleading standard.
  Existence of this footnote in no way mandated the courts not follow 
the second circuit approach to pleading. The conference committee and 
the Congress that passed the reform act also chose not to expressly 
include conscious behavior in the pleading standard.
  Yet surely no one would suggest that in so doing the conference 
committee and Congress intended to eliminate liability for conscious 
misconduct. As the statement of managers for S. 1260 clearly indicates, 
it was the intent of Congress when it passed the reform act back in 
1995 to adopt the Second Circuit standard.
  Mr. Speaker, I insert this and additional material to clarify any 
misinterpretation or misunderstanding that might exist on this issue, 
and I must conclude in saying that I find the colloquy that just took 
place between the gentleman from California (Mr. Cox) and the gentleman 
from Virginia (Mr. Bliley) does not comport with the facts as we 
understand them on our side and is not in fact the intent of the law.
  Mr. BLILEY. Mr. Speaker, I yield 3 minutes to the gentleman from 
Washington (Mr. White), one of the chief sponsors of this legislation.
  Mr. WHITE. Mr. Speaker, I thank the gentleman for yielding me the 
time.
  In the 18 months or so since the gentlewoman from California and I 
introduced this bill, I believe it was in May of 1997, we have had lots 
and lots of debate on the merits of this bill. Suffice it to say, it is 
a very good bill. It fixes a loophole that we left in the 1995 act, and 
I think we have had a lot of discussion today about why that is a good 
thing.
  Admittedly there are some Members who did not like the 1995 act. They 
do not like this bill either. I think the gentleman from Massachusetts 
and the gentleman from Michigan fall into that category. But there were 
300 some plus of us who did like the 1995 act, who do like this act, 
who passed it before, and I think it is time for us to go forward.
  Rather than spending any more time talking about the merits, I think 
this is a time for thanks. I would like to thank some Members who have 
been very important in passing this bill. First and foremost, the 
gentlewoman from California who has been an absolutely diligent and 
persuasive and persevering advocate for this bill. I never minded it. I 
thought that was our job, and I think she did a really good job. 
Second, the chairman of our committee, the gentleman from Virginia (Mr. 
Bliley), who always took up our case with the leadership, always made 
sure we had time to debate this, always was a good supporter and helper 
on this bill. Thirdly, the gentleman from Ohio (Mr. Oxley) who listened 
to our pleas that he schedule in our committee plenty of time for 
hearings and was very supportive once the hearings got going, a very 
good supporter of this bill. I thank them all for getting this done.
  I should also make sure that some of the people who did the real 
work, the staff, are also recognized. Here I cannot say enough about 
David Cavicke and Linda Rich on our side of of the aisle. I know there 
were many members on the minority side who also worked hard on this. I 
could not leave the floor without thanking Leslie Dunlap on my staff 
and Josh Mathis who worked very hard on this.
  Mr. Speaker, I am very pleased we are at this point. It has been a 
long, hard road, but I think we have done something good for our 
country.
  Mr. DINGELL. Mr. Speaker, I yield such time as he may consume to the 
gentleman from Michigan (Mr. Stupak).
  (Mr. STUPAK asked and was given permission to revise and extend his 
remarks and to include extraneous material.)
  Mr. STUPAK. Mr. Speaker, I rise in strong opposition to the bill 
before us today.
  Two years ago, Congress passed the Private Securities Litigation 
Reform Act--that changed all the rules for investors, like people who 
invest in today's stock market. Now, proponents want to extend an 
untested federal system that will supersede state law. If we pass this 
bill, Congress--will place all investors into a largely untested new 
federal system, that will make it very difficult for investors to prove 
fraud.
  Many of the proponents of this bill claim that it corrects an 
oversight from the Private Securities Litigation Reform Act of last 
Congress. This claim is disingenuous and false. These same members 
claimed during the 1995 debate over the Private Securities Litigation 
Reform Act that investors would continue to have protection through the 
state courts. The prime sponsor of the legislation explicitly stated 
that state courts would continue to be an avenue for defrauded 
investors. Now, these members are seeking to pre-empt these laws.
  If this legislation passes, it will over-rule, do away, with the 
aiding and abetting liability in 49 states. It will do away with 33 
state statute of limitation provisions--we are now telling the states 
they have to protect their citizens with an untried, untested federal 
system--the federal government will now tell you what protections, 
states can afford their citizens.
  It is important to remember that the state ``blue sky laws'' predate 
the existent of federal securities law. When Congress wrote the 
Securities Act of 1933 and the Securities Exchange Act of 1934, they 
did not impose liability and aiders and abettors or insert an adequate 
statute of limitations. Congress declined to take these steps because 
Congress felt it was necessary to allow the states to decide these 
state issues. Today, if you vote for this bill you will take away from 
investors protections they have enjoyed under state law.
  Chairman Levitt of the Securities Exchange Commission, consumer 
groups, municipal officers all supported maintaining these provisions, 
but they were denied by the supporters of this bill.
  Record numbers of small investors are entrusting their life savings 
to the stock market. There are a number of proposals to allow the 
Social Security Trust Fund to be invested in the stock market. Now more 
than ever, these small investors need to be protected from fraudulent 
securities transactions. 28 million Americans over the age of 65 depend 
on investment income to meet part of their expenses.
  In fact, a number of articles that recently appeared in newspapers 
across the country have highlighted continuing concerns with the 
``gimmicks,'' ``hocus pocus'' and ``illusions'' that companies use in 
their accounting practices. I am inserting into the Record three 
articles describing this problem at the end of my statement.
  Proponents of this bill claim its passage will benefit investors. I 
am amazed/bemused by this statement because consumer groups, 
institutional investors, state pension boards and retirement plan 
administrators, county officials and many other groups oppose this 
bill.

[[Page H10783]]

  This federal pre-emption is not necessary. Proponents will also argue 
that this bill is necessary because there has been an increase in the 
number of suits in state courts since the passage of the Private 
Securities Litigation Reform Act. Yet in 1997 there was a decrease in 
private securities as compared to levels before the passage of the 
PSLRA.
  Nationwide, private security litigation state filings account for 
less than (100th of 1) percent of state civil filings nationwide. I 
believe that it is irresponsible and unnecessary to supersede the law 
of 50 states. The joint system of state and federal causes of action 
have existed for over 60 years, I do not believe we need to pre-empt 50 
state laws with an untried, untested federal system.
  Mr. Speaker, the process surrounding this so called ``conference'' 
has been nothing short of appalling. We held no conference meetings, 
neither my staff nor Mr. Dingell's staff were consulted on the 
substance of the Conference Report. Even at this point, I have not been 
asked whether I would like to sign the Conference Report. It is 
unfortunate that relations have sunk so low in this Congress, that the 
majority would not extend the courtesy and professional respect that we 
always extended them.
  I want to make one final, important point this bill does not change 
the see-enter standard in the Securities Act as the Statement of 
Managers points out. In fact, Senate bill managers have made clear 
their view that the see-enter is the appropriate standard. I am 
inserting into the Record an exchange of letters between a number of 
the Banking Committee Senators, Chairman Levitt and the White House 
clarifying this point.
  Mr. Speaker, I believe this bill will make it easier for charlatans 
and ``rip off'' artists to defraud investors, especially senior 
citizens. I hope I am wrong. But before we pass this bill, I ask all 
members to contemplate whether or not they want to make it easier for 
their constituents to become victims of fraud. I urge you to vote 
against this bill and protect investors.

               [From the Washington Post, Sept. 29, 1998]

                   Levitt Targets Profit Distortions

       New York, Sept. 28.--Securities and Exchange Commission 
     Chairman Arthur Levitt Jr. complained today of widespread 
     company manipulation of financial reports and outlined a 
     series of steps to halt ``earnings management.''
       ``Increasingly, I have become concerned that the motivation 
     to meet Wall Street earnings expectations may be overriding 
     common sense business practices,'' Levitt said in a speech 
     prepared for delivery here this evening.
       Corporate executives, auditors, and Wall Street analysts 
     are increasingly part of ``a game of nods and winks'' in 
     which financial reports are ``distorted'' to meet analysts' 
     projections, Levitt said.
       In his broadest criticism of accounting problems, the top 
     U.S. securities regulator said these misleading results 
     jeopardize ``the credibility of our markets.''
       Levitt said the SEC soon will issue new rules and provide 
     better guidance on existing rules to offer clear ``do's and 
     don'ts'' on revenue recognition, restructuring reserves, 
     materiality and disclosure.
       In addition, the New York Stock Exchange and the National 
     Association of Securities Dealers will form a panel to issue 
     a report on improving the performance of the audit committees 
     of corporate boards and formulating ``best practices'' in the 
     accounting and auditing area. The panel, headed by John C. 
     Whitehead, former co-chairman of Goldman Sachs & Co., and 
     corporate governance expert Ira Millstein, will make its 
     recommendations within 90 days.
       For accounting practices that aren't acceptable, Levitt 
     promised the SEC's enforcement staff will ``aggressively act 
     on abuses'' at public companies that appear to be managing 
     earnings through major write-offs, restructuring reserves or 
     other questionable practices.
       Levitt described an array of accounting ``gimmicks,'' 
     ``hocus-pocus'' and ``illusions'' companies use to manipulate 
     earning reports. Specifically, he cited misuse of so-called 
     ``big baths,'' which are large, one-time restructuring write-
     offs companies use to disguise operating expenses.
       Levitt conceded the problem isn't new, but he said 
     accounting gimmickry is on the rise, fueled by the bull 
     market.
                                  ____


                [From the San Jose News, Sept. 29, 1998]

                          SEC Dings Tech Firms

       It is upgrade time at America Online.
       The Securities and Exchange Commission has ordered the 
     online service and the rest of the technology industry to 
     improve the way they account for mergers and acquisitions.
       The issue is how technology companies have seized on a 
     footnote in the accounting rules related to research expenses 
     to write off most of the purchase price of companies as soon 
     as they acquire them. This prevents a continuing drag on 
     profits that would result from writing off the purchase price 
     over several years.
       The SEC's move comes as it is cracking down on a number of 
     accounting practices it finds abusive. In comments at New 
     York University, commission Chairman Arthur Levitt Jr. said 
     his staff would immediately increase its scrutiny of 
     companies that use certain aggressive accounting techniques 
     to inflate their quarterly earnings.
       In choosing to make an example of America Online, the 
     biggest Internet company, the commission took the extreme 
     step of blocking it from publishing its fiscal fourth-quarter 
     earnings for nearly two months.
       America Online finally reached an agreement with the SEC 
     and published its earnings Monday. It wrote off $70.5 million 
     related to research at two companies it acquired, 
     representing 22 percent of the $316 million it had paid for 
     them. Previously the company had said it planned to write off 
     the vast majority of the purchase price, though it gave no 
     specific figures.
       Separately, Lynn Turner, the SEC's chief accountant, called 
     on the accounting industry to tighten its rules related to 
     writing off the cost of research. In a letter to the American 
     Institute of Certified Public Accountants, he said that a 
     study by the SEC had found ``significant problems in the 
     recognition and valuation'' of the research write-offs.
       The letter outlined a proposed standard for such write-offs 
     that is much stricter than accountants have been using. And 
     the commission threatened to make companies take the 
     embarrassing step of restating their published earnings 
     reports in cases where it deems their research write-offs to 
     be ``materially misleading.''
       Analysts said the change could inhibit acquisitions, 
     especially by smaller technology companies.
       ``It has more significance for other companies besides 
     AOL,'' said Keith Benjamin, an analyst at Banc-Boston 
     Robertson Stephens Inc. ``You will see more young Internet 
     companies forced to take lower write-offs.'' America Online 
     is less affected, he said, because it has become big enough 
     to absorb the additional charges.
       At issue is how companies account for the value of ``in-
     process research and development''--research that has yet to 
     be turned into a marketable product--at companies they buy. 
     In an acquisition, companies estimate the value of all of the 
     assets they are buying, both tangible ones like buildings and 
     intangible assets like brand names and customer lists. If the 
     purchase price is higher than the value of all of these 
     assets--and it usually is--the remainder is added to a catch-
     all item known as good will.
       Companies are forced to write off the value of all of these 
     assets over a period of from three to 40 years, depending on 
     the useful life of the asset. The one exception is in-process 
     research, which is written off immediately.
       Since technology companies are especially interested in 
     showing investors accelerating earnings growth, many have 
     started attributing the bulk of their acquisition costs to 
     in-process research.
       The SEC letter listed a number of what it described as 
     ``abuses'' in this practice. In one case, for example, a 
     company that the commission did not name wrote off nearly all 
     the purchase price of an acquisition as in-process research, 
     even though the target company had not spent a significant 
     amount of money on research or development.
       ``If a company didn't spend significant amounts on R&D, it 
     would raise questions in my mind,'' said Baruch Lev, a 
     professor of accounting at New York University. He conducted 
     a study of 400 acquisitions, mostly of technology companies, 
     and found that the buyers wrote off 75 percent of the 
     purchase price as in-process research.
       Shares of America Online increased $2.38 Monday, to 
     $117.13.
       Jonathan Cohen, an analyst with Merrill Lynch, said the 
     market was not concerned with the deductions from profits.
       ``Reported earnings is one small piece of a larger picture 
     at technology companies that includes revenue growth, market 
     position, audience size and brand equity,'' he said.
                                  ____


               [From the New York Times, Sept. 29, 1998]

              ``Trick'' Accounting Draws Levitt Criticism

                          (By Melody Petersen)

       Scolding America's companies and their accountants for 
     using ``accounting hocus-pocus,'' Arthur Levitt, the chairman 
     of the Securities and Exchange Commission, said yesterday 
     that his staff would crack down on businesses that used 
     certain controversial accounting methods to manipulate the 
     numbers reported to shareholders.
       Mr. Levitt's surprisingly harsh criticism and his far-
     reaching plan to stop the accounting abuses came after a 
     string of companies have announced that the profits they 
     previously reported were wrong. Among the companies where 
     such announcements have led to large declines in stock prices 
     are Cendant, Sunbeam, Livent and Oxford Health Plans.
       ``We see greater evidence of these illusions or tricks,'' 
     Mr. Levitt said at a news conference at New York University. 
     ``We intend to step in now and turn around some of these 
     practices.''
       Although he did not name any corporations, Mr. Levitt said 
     his staff would immediately increase its scrutiny of 
     companies that used certain aggressive accounting techniques 
     to inflate their quarterly earnings and would soon issue new 
     accounting rules and guidelines intended to halt the abuses.
       He also called for a review of how the nation's public 
     accounting firms audit financial statements, saying he feared 
     that auditors might not be doing enough to find their 
     clients' accounting shenanigans.

[[Page H10784]]

       ``We rely on auditors to put something like the Good 
     Housekeeping Seal of Approval on the information investors 
     receive,'' Mr. Levitt said in a speech prepared to be 
     delivered later at the university's new Center for Law and 
     Business. ``As I look at some of the failures today, I can't 
     help but wonder if the staff in the trenches of the 
     profession have the training and supervision they need to 
     insure that audits are being done right.''
       The American Institute of Certified Public Accountants and 
     several large accounting firms praised Mr. Levitt's plan, 
     saying they shared his concerns and were eager to work with 
     the commission on the issue.
       Mr. Levitt said that the commission's enforcement division 
     would focus on companies that use certain accounting methods 
     that allow them to ``manage earnings'' so that profits can be 
     increased or decreased at will in such a way that the bottom 
     line does not reflect actual operations.
       He specifically said that the commission was frustrated 
     with companies that used a factory closing or a work force 
     reduction as an opportunity to take millions of dollars of 
     one-time charges for ``restructuring.'' By inflating those 
     write-offs, companies get the bad news out of the way at once 
     and can clear their balance sheets of expensive assets that 
     would otherwise reduce the bottom line for years to come. For 
     example, Motorola announced recently that it would cut 15,000 
     jobs and take a restructuring charge of $1.95 billion.
       The commission has also been critical of companies that 
     acquire other companies and then write off much of the 
     purchase price by calling it ``research and development.''
       For example, the commission had blocked America Online, the 
     biggest Internet company, from reporting its fiscal fourth-
     quarter earnings for nearly two months because of 
     disagreements over how much the company should write off in 
     its acquisitions of Mirabilis and Net Channel. America Online 
     finally reached an agreement with the commission and 
     published its results yesterday, greatly scaling back the 
     size of the research write-off.
       Mr. Levitt said that other companies were trying to bolster 
     their earnings by manipulating revenue numbers. For instance, 
     many of the companies forced to restate their financial 
     statements this year had reported revenues that later turned 
     out to be fictional or included sales transactions that were 
     not yet completed. In other cases, executives had inflated 
     earnings by manipulating the amounts set aside for future 
     costs like loan losses, sales returns or warranty costs.
       To stop the accounting abuses, Mr. Levitt said that the 
     commission would write new accounting guidelines on the ``dos 
     and don'ts of revenue recognition.'' The commission will also 
     begin requiring detailed disclosures about how management 
     estimates the value of various write-offs or reserves and the 
     other assumptions made in preparing financial statements.
       Mr. Levitt called on the Financial Accounting Standards 
     Board to pass new accounting rules quickly, including one 
     that would clarify when a company can record a liability. The 
     commission has already pressed the accounting board to change 
     the rule that allows companies to write off large amounts of 
     an acquisition as research and development.
       And, he asked both the A.I.C.P.A. and the Public Oversight 
     Board to review whether auditors should change the procedures 
     they use in performing an annual audit.
       A blue-ribbon panel--led by John C. Whitehead, a former 
     Deputy Secretary of State and a retired senior partner at 
     Goldman, Sachs & Company, and Ira M. Millstein, a corporate 
     governance expert at the law firm of Weil, Gotshal & Manges--
     will also develop recommendations for audit committees to 
     follow so that investors are better protected.
       ``The motivation to meet Wall Street earnings expectations 
     may be overriding common sense business practices,'' Mr. 
     Levitt said. ``Too many corporate managers, auditors and 
     analysts are participants in a game of nods and winks.''


                                                  U.S. Senate,

                                   Washington, DC, March 24, 1998.
     Hon. Archer Levitt,
     Chairman, Securities and Exchange Commission, Washington, DC.
       Dear Chairman Levitt and Members of the Commission: We are 
     writing to request your views on S. 1260, the Securities 
     Litigation Uniform Standards Act of 1997. As you know, our 
     staff has been working closely with the Commission to resolve 
     a number of technical issues that more properly focus the 
     scope of the legislation as introduced. We attach for your 
     review the amendments to the legislation that we intend to 
     incorporate into the bill at the Banking Committee mark-up.
       On a separate but related issue, we are aware of the 
     Commission's long-standing concern with respect to the 
     potential scienter requirements under a national standard for 
     litigation. We understand that this concern arises out of 
     certain district courts' interpretation of the Private 
     Securities Litigation Reform Act of 1995. In that regard, we 
     emphasize that our clear intent in 1995--and our 
     understanding today--was that the PSLRA did not in any way 
     alter the scienter standard in federal securities fraud 
     suits. It was our intent, as we expressly stated during the 
     legislative debate in 1995, particularly during the debate on 
     overriding the President's veto, that the PSLRA adopt the 
     pleading standard applied in the Second Circuit. Indeed, the 
     express language of the statute itself carefully provides 
     that plaintiffs must ``state with particularity facts giving 
     rise to a strong inference that the defendant acted with the 
     required state of mind'': the law makes no attempt to define 
     that state of mind. We intend to restate these facts about 
     the '95 Act in both the legislative history and the floor 
     debate that will accompany S.1260, should it be favorably 
     reported by the Banking Committee.
           Sincerely,
     Alfonse M. D'Amato,
       Chairman, Committee on Banking, Housing and Urban Affairs.
     Phil Gramm,
       Chairman, Subcommittee on Securities.
     Christopher J. Dodd,
       Ranking Member, Subcommittee on Securities.
                                  ____



                           Securities and Exchange Commission.

                                   Washington, DC, March 24, 1998.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing and Urban Affairs, 
         U.S. Senate, Washington, DC.
     Hon. Phil Gramm,
     Chairman, Subcommittee on Securities, U.S. Senate, 
         Washington, DC.
     Hon. Christopher J. Dodd,
     Ranking Member, Subcommittee on Securities, U.S. Senate, 
         Washington, DC.
       Dear Chairman D'Amato, Chairman, Gramm, and Senator Dodd: 
     You have requested our views on S. 1260, the Securities 
     Litigation Uniform Standards Act of 1997, and amendments to 
     the legislation which you intend to offer when the bill is 
     marked-up by the Banking Committee. This letter will present 
     the Commission's position on the bill and proposed 
     amendments.\1\
---------------------------------------------------------------------------
     \1\ We understand that Commissioner Johnson will write 
     separately to express his differing views. Commissioner Carey 
     is not participating.
---------------------------------------------------------------------------
       The purpose of the bill is to help ensure that securities 
     fraud class actions involving certain securities traded on 
     national markets are governed by a single set of uniform 
     standards. While preserving the right of individual investors 
     to bring securities lawsuits wherever they choose, the bill 
     generally provides that class actions can be brought only in 
     federal court where they will be governed by federal law.
       As you know, when the Commission testified before the 
     Securities Subcommittee of the Senate Banking Committee in 
     October 1997, we identified several concerns about S. 1260. 
     In particular, we stated that a uniform standard for 
     securities fraud class actions that did not permit investors 
     to recover losses attributable to reckless misconduct would 
     jeopardize the integrity of the securities markets. In light 
     of this profound concern, we were gratified by the language 
     in your letter of today agreeing to restate in S. 1260's 
     legislative history, and in the expected debate on the Senate 
     floor, that the Private Securities Litigation Reform Act of 
     1995 did not, and was not intended to, alter the well-
     recognized and critically important scienter standard.
       Our October 1997 testimony also pointed out that S. 1260 
     could be interpreted to preempt certain state corporate 
     governance claims, a consequence that we believed was neither 
     intended nor desirable. In addition, we expressed concern 
     that S. 1260's definition of class action appeared to be 
     unnecessarily broad. We are grateful for your responsiveness 
     to these concerns and believe that the amendments you propose 
     to offer at the Banking Committee mark-up, as attached to 
     your letter, will successfully resolve these issues.
       The ongoing dialogue between our staffs has been 
     constructive. The result of this dialogue, we believe, is an 
     improved bill with legislative history that makes clear, by 
     reference to the legislative debate in 1995, that Congress 
     did not alter in any way the recklessness standard when it 
     enacted the Reform Act. This will help to diminish confusion 
     in the courts about the proper interpretation of that Act and 
     add important assurances that the uniform standards provided 
     by S. 1260 will contain this vital investor protection.
       We support enactment of S. 1260 with these changes and with 
     this important legislative history.
       We appreciate the opportunity to comment on the 
     legislation, and of course remain committed to working with 
     the Committee as S. 1260 moves through the legislative 
     process.
           Sincerely,
     Arthur Levitt,
       Chairman.
     Isaac C. Hunt, Jr.,
       Commissioner.
     Laura S. Unger,
       Commissioner.
                                  ____



                                              The White House,

                                       Washington, April 28, 1998.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing and Urban Affairs, 
         U.S. Senate, Washington, DC.
     Hon. Phil Gramm,
     Chairman, Subcommittee on Securities, U.S. Senate, 
         Washington, DC.
     Hon. Christopher J. Dodd,
     Ranking Member, Subcommittee on Securities, U.S. Senate, 
         Washington, DC.
       Dear Chairman D'Amato, Chairman Gramm, and Senator Dodd: We 
     understand

[[Page H10785]]

     that you have had productive discussions with the Securities 
     and Exchange Commission (SEC) about S. 1260, the Securities 
     Litigation Uniform Standards Act of 1997. The Administration 
     applauds the constructive approach that you have taken to 
     resolve the SEC's concerns.
       We support the amendments to clarify that the bill will not 
     preempt certain corporate governance claims and to narrow the 
     definition of class action. More importantly, we are pleased 
     to see your commitment, by letter dated March 24, 1998, to 
     Chairman Levitt and members of the Commission, to restate in 
     S. 1260's legislative history, and in the expected debate on 
     the Senate floor, that the Private Securities Litigation 
     Reform Act of 1995 did not, and was not intended to, alter 
     the scienter standard for securities fraud actions.
       As you know, uncertainty about the impact of the Reform Act 
     on the scienter standard was one of the President's greatest 
     concerns. The legislative history and floor statements that 
     you have promised the SEC and will accompany S. 1260 should 
     reduce confusion in the courts about the proper 
     interpretation of the Reform Act. Since the uniform standards 
     provided by S. 1260 will provide that class actions generally 
     can be brought only in federal court, where they will be 
     governed by federal law, it is particularly important to the 
     President that you be clear that the federal law to be 
     applied includes recklessness as a basis for pleading and 
     liability in securities fraud class actions.
       So long as the amendments designed to address the SEC's 
     concerns are added to the legislation and the appropriate 
     legislative history and floor statements on the subject of 
     legislative intent are included in the legislative record, 
     the Administration would support enactment of S. 1260.
           Sincerely,
     Bruce Lindsey,
       Assistant to the President and Deputy Counsel.
     Gene Sperling,
       Assistant to the President for Economic Policy.
                                  ____



                           Securities and Exchange Commission,

                                  Washington, DC, October 9, 1998.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing and Urban Affairs, 
         U.S. Senate, Washington, DC.
     Hon. Paul S. Sarbanes,
     Ranking Minority Member, Committee on Banking, Housing and 
         Urban Affairs, U.S. Senate, Washington, DC.
       Dear Chairman D'Amato and Senator Sarbanes: You have 
     requested our views on S. 1260, the Securities Litigation 
     Uniform Standards Act of 1998. We support this bill based on 
     important assurances in the Statement of Managers that 
     investors will be protected.\1\
---------------------------------------------------------------------------
     \1\ Commissioner Norman S. Johnson continues to believe that 
     this legislation is premature, at the least, for the reasons 
     stated in his May 1998 prepared statement before the House 
     Subcommittee on Finance and Hazardous Materials.
---------------------------------------------------------------------------
       The purpose of the bill is to help ensure that securities 
     fraud class actions involving certain securities traded on 
     national markets are governed by a single set of uniform 
     standards. While preserving the right of individual investors 
     to bring securities lawsuits wherever they choose, the bill 
     generally provides that class actions can be brought only in 
     federal court where they will be governed by federal law. In 
     addition, the bill contains important legislative history 
     that will eliminate confusion in the courts about the proper 
     interpretation of the pleading standard found in the Private 
     Securities Litigation Reform Act of 1995 and make clear that 
     the uniform national standards contained in this bill will 
     permit investors to continue to recover losses attributable 
     to reckless misconduct.
       We commend the Committee for its careful efforts to strike 
     an appropriate balance between the rights of injured 
     investors to bring class action lawsuits and those of our 
     capital market participants who must defend against such 
     suits.
       As you know, we expressed various concerns over earlier 
     drafts of the legislation. In particular, we stated that a 
     uniform standard for securities fraud class actions that did 
     not permit investors to recover losses for reckless 
     misconduct would jeopardize the integrity of the securities 
     markets. We appreciate your receptivity to our concerns and 
     believe that as a result of our mutual efforts and 
     constructive dialogue, this bill and the Statement of 
     Managers address our concerns. The strong statement in the 
     Statement of Managers that neither this bill nor the Reform 
     Act was intended to alter existing liability standards under 
     the Securities Exchange Act of 1934 will provide important 
     assurances for investors that the uniform national standards 
     created by this bill will continue to allow them to recover 
     losses caused by reckless misconduct. The additional 
     statement clarifying that the uniform pleading requirement in 
     the Reform Act is the standard applied by the Second Circuit 
     Court of Appeals will likewise benefit investors by helping 
     to end confusion in the courts about the proper 
     interpretation of that Act. Together, these statements will 
     operate to assure that investors' rights will not be 
     compromised in the pursuit of uniformity.
       We are grateful to you and your staffs, as well as the 
     other Members and their staffs, for working with us to 
     improve this legislation and safeguard vital investor 
     protections. We believe this bill and its Statement of 
     Managers fairly address the concerns we have raised with you 
     and will contribute to responsible and balanced reform of 
     securities class action litigation.
           Sincerely,
     Arthur Levitt,
       Chairman.
     Issac C. Hunt, Jr.,
       Commissioner.
     Paul R. Carey,
       Commissioner.
     Laura S. Unger,
       Commissioner.

  Mr. DINGELL. Mr. Speaker, I yield 4 minutes to the distinguished 
gentlewoman from Colorado (Ms. DeGette).
  Ms. DeGETTE. Mr. Speaker, I rise in opposition to this legislation, 
the Securities Litigation Uniform Standards Act.
  I have opposed this bill in committee and on the floor because I 
think that it takes a Federal meat axe to a problem that States ought 
to be able to solve with a State solution scalpel. I oppose this bill 
today not only to protect investors and to give States time to deal 
with this problem themselves but because along with many other 
problems, the conference committee stripped out important language that 
improved this bill.
  One of the things that was stripped out, a noncontroversial or sort 
of noncontroversial bipartisan amendment I passed in committee that 
would direct the Securities and Exchange Commission to conduct an 
analysis of the whole issue, including the extent to which the 
preemption of State securities laws affects the protection of 
securities investors of the public interest.
  This study was important to determine both what the effect is on 
securities investors and also to determine what the true effect is on 
these lawsuits going into State courts. I am concerned just like 
everybody else that many of these lawsuits are being pursued by a very 
small number of attorneys who are only looking to make money for 
themselves at the expense of newly emerging high tech firms.
  These lawsuits can cost the company millions of dollars while they 
are being settled and the result is the diversion of resources away 
from designing of new products and the creation of jobs.
  The trend is disturbing but the trend is not overwhelming. The issue 
needs to be addressed but it needs to be addressed at the State level.
  The alleged mass migration of securities fraud class action cases to 
State court has actually been quite limited and as often happens in a 
body like Congress, when I asked for statistics about this huge mass of 
lawsuits going from Federal court to State courts, the evidence was 
either nonexistent or surprisingly small.
  The numbers of suits and the number of plaintiffs in the State courts 
are actually quite small. Both the proponents and opponents of this 
bill agreed that the numbers of suits have actually gone down at the 
State level in the past year. I believe we would be setting a dangerous 
precedent by blatantly preempting State securities laws, many of which 
were enacted before the 1933 Federal Securities Act in order to address 
a very discrete, small problem that exists in basically one State, 
California.
  Those who consider themselves supportive of State rights and those 
who consider themselves to be Federalists should consider the very 
dangerous precedent we would set if we pass this legislation.
  If the industry is so concerned about the effect of going into State 
court, I would suggest that they go to the State legislatures in these 
very few States and ask the legislatures to change the law.
  S. 1260 raises significant Federalism concerns and I think that it is 
quite clear that more time is needed to assess the effects of 
securities litigation reform before we willy-nilly eliminate all of the 
State blue sky laws. Eliminating State remedies for fraud before 
knowing whether the courts will end up consistently interpreting the 
1995 act in a way that provides victims with a viable means to recover 
their losses, this bill risks not only harming innocent investors but 
also undermines public confidence in our securities markets. This is an 
issue that needs to be addressed but it needs to be addressed on a 
State-by-State level.
  I urge my colleagues to vote against this legislation.

[[Page H10786]]

  The SPEAKER pro tempore (Mr. Barrett of Nebraska). The gentleman from 
Virginia (Mr. Bliley) has 6 minutes remaining.
  Mr. BLILEY. Mr. Speaker, I yield the balance of my time to the 
gentleman from Louisiana (Mr. Tauzin).
  Mr. TAUZIN. Mr. Speaker, I thank the gentleman from Virginia (Mr. 
Bliley) for literally being the shepherd who has brought not only this 
legislation forward but the primary legislation on securities 
litigation reform that became law several years ago.
  I think it is important to put this issue in historical perspective. 
I was the author of the first securities litigation reform bill in 
1992. Interestingly enough, I was then a Democrat. Also interestingly 
enough, the lead sponsor on the Senate side was Christopher Dodd, who 
was then chairman of the Democratic Senate Campaign Committee. And 
Christopher Dodd and I secured the cosponsorship not only of a majority 
of Members of both the House and the Senate but a huge bipartisan 
majority of Members on both sides. Unfortunately, we were never able to 
work out our differences with my good friend, the gentleman from 
Michigan (Mr. Dingell), or my good friend, the ranking minority member 
of the subcommittee I now chair, the gentleman from Massachusetts (Mr. 
Markey) but nevertheless, we literally have had interesting hearings 
and interesting discussions as the years passed.
  So popular was this issue of putting an end to these strike suits 
every time the stock market prices changed on some company, so popular 
both in the House and the Senate on the Democratic and Republican side 
was this issue, that when it was finally passed in 1995, and the 
President surprisingly vetoed it, this bill became the only issue that 
this Congress overrode a presidential veto, two-thirds of the Members 
of this House, two-thirds of the Senate concurring in an override to 
make securities litigation reform the law of the land.
  Why are we back here today? We are back here today because in spite 
of the fact that we put an end to these strike lawsuits, these 
shakedown lawsuits which were settled 94 percent of the time at 10 
cents on the dollar, no grandmother ever got a dime out of this, just 
the unscrupulous trial lawyers who brought these kinds of lawsuits, 
even though we put an end to these lawsuits in Federal district court, 
we learned that the unscrupulous members of the trial board who were 
pressing these cases before simply did an end around. They went to 
State court and increasingly used the authority of the State court to 
do exactly what they used to do in Federal court, to shake down 
companies, to shake down boards of directors, to shake down the 
accountants, anybody else associated with a company whenever stock 
market prices changed, alleging fraud and then suddenly, quickly, at 10 
cents on the dollar.
  In short, this bill puts an end to the end around. It says that the 
law we passed in 1995, with over two-thirds support of Democrats and 
Republicans, overriding the presidential veto, that law will have 
effect in this land, that strike lawsuits should come to an end whether 
they are brought in Federal court or in State court when they affect 
nationally traded firms. And secondly, the bill is carefully designed 
to make sure that other actions, indeed, can still be brought in State 
courts and that States themselves and our own Securities Exchange 
Commission can still exercise its authority to prevent abuses of fraud 
in securities trading in America.

                              {time}  1534

  In short, this is carefully tailored now to stop the end runs, to 
make sure that the law we so successfully passed in 1995, with the 
enormous help of the gentlewoman from California (Ms. Eshoo), the great 
sponsorship of the gentleman from California (Mr. Cox), they did such a 
good job in 1995 to make sure that that law now has real effect out 
there; that people who trade and who invest their pension funds are not 
going to lose those assets to strike lawsuits that shake down the value 
of those companies and shake down the people who are trying to run them 
successfully for this economy.
  This bill will send the strongest message to those unscrupulous 
lawyers, start behaving yourself, stop shaking people down, stop 
bringing these frivolous lawsuits because they will not be permitted in 
Federal court, and they will not be permitted now in State court.
  Mr. Speaker, this bill deserves the same kind of support that the 
original bill got in 1995. It deserves, as the gentlewoman from 
California (Ms. Eshoo) said the bipartisan vocal support of Members on 
both sides of this aisle so that we present it quickly to the President 
who has said in California that, if we would do this, he would sign it 
into law.
  Let us send it to the President and let him have the chance to sign 
this bill into law and to put an end to the end around that 
unfortunately has tainted the great effort we made in 1995.
  To all who made this bill possible today, I personally want to thank 
you. As I said, when I authored this bill in 1992, I did not think it 
was going to take this long for us to complete the journey.
  But here we are today, this perhaps making the most important step in 
that journey to end these frivolous lawsuits and to give the securities 
trading of these high-tech firms which are bringing so much job and 
opportunity to America to give them all the sense of security and to 
protect them against these strike lawsuits.
  Mr. KLINK. Mr. Speaker, I think this bill is a solution in search of 
a problem.
  In 1995, the Commerce Committee developed and Congress approved, over 
a Presidential veto, the Private Securities Litigation Reform Act, 
which put strict limits on Federal investor class action lawsuits. I 
opposed that legislation because I was concerned about preventing 
defrauded investors from being made whole again. But my side lost, and 
we all moved on.
  One of the arguments when we debated the 1995 act was that truly 
victimized investors could still seek redress in State court. So there 
was some comfort in that; retirees who lost their life savings to 
securities fraud could still pursue legal action.
  Now, however, I fear that Congress is moving to cut off the State 
avenue for class action securities suits. That could mean that 
investors would have no ability to seek relief from securities 
wrongdoers, and that is unacceptable to me.
  There appears to be no explosion of State securities class actions, 
so I see no real need for this bill. Last year there were only 44 
throughout the entire country, the lowest number in five years.
  Furthermore, Mr. Speaker, at a time when there are more investors 
than at any time in history, many of them unsophisticated investors, we 
should not be making it easier to get away with securities fraud. We 
owe that to our investor constituents and we owe that to the capital 
markets in this country, which remain the strongest in the world.
  Additionally, Mr. Chairman, though the conference report contains a 
provision similar to the Sarbanes amendment in the Senate bill, which 
provides for an exemption from the bill for State and local entities, 
the provision before us goes beyond Sarbanes to require those entities 
to be named plaintiffs in and authorize participation in State 
securities class actions. This assumes a level of sophistication that 
may be lacking.
  I will provide an example. Last year, the SEC alleged that Devon 
Capital management had defrauded 100 municipal clients in Pennsylvania 
and elsewhere. Those clients included 75 school districts, mostly in 
western and central Pennsylvania. Devon and the SEC reached a 
settlement, and those school districts are expected to recover a little 
over half of the $71 million that Devon lost.
  Now, how can we say that these same school districts and local 
governments that were unsophisticated enough to have invested with 
Devon in the first place and lost all this money, are, at the same 
time, sophisticated enough to recognize the steps they need to take to 
preserve their rights to bring a State securities class action under 
this bill?
  I would have preferred that, at the very least, the Sarbanes 
amendment exempting State and local governments and pension plans were 
maintained as it passed the Senate.
  Finally, Mr. Speaker, I am disturbed by the trend I am seeing in this 
committee and Congress as a whole in our attitude toward investors, 
especially the mom and pop investors we all represent. As I said, I 
opposed the 1995 Securities Litigation Reform Act.
  That was followed closely by the Fields securities reform bill, which 
threatened to severely limit the ability of State securities 
regulators, the local cops on the beat in the securities world, to 
protect investors. In committee and in conference, we were able to 
temper this legislation so that investors would not be left vulnerable.

[[Page H10787]]

  Now however, comes this legislation. I really worry that we are going 
down the road to where the small investor is the last thing we think 
about, when they should be among the first.
  We are at a point in time when Members of Congress and others are 
talking about privatizing Social Security. That will lead to even more 
unsophisticated investors and hundreds of billions of dollars going 
into the marketplace. And yet we continue to talk about reducing 
investor protections.
  Another question I have is, are we now saying to the States that we 
in Washington, DC, know better than the States what cases should go 
through State courts and which should not. Are we next going to tell 
the States that they can't hear real estate cases? Are we going to tell 
them they can't hear tobacco cases? What comes next?
  I never thought I would see the day when my Republican colleagues 
would want to dictate from on high in Washington, DC, what State law 
should be.
  The conference report on S. 1260 is a solution in search of a 
problem, and I strongly oppose it.
  Mr. DINGELL. Mr. Speaker, I have no further requests for time, and I 
yield back the balance of my time.
  Mr. BLILEY. Mr. Speaker, I yield back the balance of my time.
  The SPEAKER pro tempore. The question is on the motion offered by the 
gentleman from Virginia (Mr. Bliley) that the House suspend the rules 
and agree to the conference report on the Senate bill, S. 1260.
  The question was taken.
  Mr. KANJORSKI. Mr. Speaker, I object to the vote on the ground that a 
quorum is not present and make the point of order that a quorum is not 
present.
  The SPEAKER pro tempore. Pursuant to clause 5, rule I, and the 
Chair's prior announcement, further proceedings on this motion will be 
postponed.
  The point of no quorum is considered withdrawn.

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