[104th Congress Public Law 67]
[From the U.S. Government Printing Office]
<DOC>
[DOCID: f:publ67.104]
[[Page 109 STAT. 737]]
Public Law 104-67
104th Congress
An Act
To reform Federal securities litigation, and for other
purposes. <<NOTE: Dec. 22, 1995 - [H.R. 1058]>>
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, <<NOTE: Private
Securities Litigation Reform Act of 1995.>>
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) <<NOTE: 15 USC 78a note.>> Short Title.--This Act may be cited
as the ``Private Securities Litigation Reform Act of 1995''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents.
TITLE I--REDUCTION OF ABUSIVE LITIGATION
Sec. 101. Private securities litigation reform.
Sec. 102. Safe harbor for forward-looking statements.
Sec. 103. Elimination of certain abusive practices.
Sec. 104. Authority of Commission to prosecute aiding and abetting.
Sec. 105. Loss causation.
Sec. 106. Study and report on protections for senior citizens and
qualified retirement plans.
Sec. 107. Amendment to Racketeer Influenced and Corrupt Organizations
Act.
Sec. 108. Applicability.
TITLE II--REDUCTION OF COERCIVE SETTLEMENTS
Sec. 201. Proportionate liability.
Sec. 202. Applicability.
Sec. 203. Rule of construction.
TITLE III--AUDITOR DISCLOSURE OF CORPORATE FRAUD
Sec. 301. Fraud detection and disclosure.
TITLE I--REDUCTION OF ABUSIVE LITIGATION
SEC. 101. PRIVATE SECURITIES LITIGATION REFORM.
(a) Securities Act of 1933.--Title I of the Securities Act of 1933
(15 U.S.C. 77a et seq.) is amended by adding at the end the following
new section:
``SEC. 27. <<NOTE: 15 USC 77z-1.>> PRIVATE SECURITIES LITIGATION.
``(a) Private Class Actions.--
``(1) In general.--The provisions of this subsection shall
apply to each private action arising under this title that is
brought as a plaintiff class action pursuant to the Federal
Rules of Civil Procedure.
``(2) Certification filed with complaint.--
[[Page 109 STAT. 738]]
``(A) In general.--Each plaintiff seeking to serve
as a representative party on behalf of a class shall
provide a sworn certification, which shall be personally
signed by such plaintiff and filed with the complaint,
that--
``(i) states that the plaintiff has reviewed
the complaint and authorized its filing;
``(ii) states that the plaintiff did not
purchase the security that is the subject of the
complaint at the direction of plaintiff's counsel
or in order to participate in any private action
arising under this title;
``(iii) states that the plaintiff is willing
to serve as a representative party on behalf of a
class, including providing testimony at deposition
and trial, if necessary;
``(iv) sets forth all of the transactions of
the plaintiff in the security that is the subject
of the complaint during the class period specified
in the complaint;
``(v) identifies any other action under this
title, filed during the 3-year period preceding
the date on which the certification is signed by
the plaintiff, in which the plaintiff has sought
to serve, or served, as a representative party on
behalf of a class; and
``(vi) states that the plaintiff will not
accept any payment for serving as a representative
party on behalf of a class beyond the plaintiff's
pro rata share of any recovery, except as ordered
or approved by the court in accordance with
paragraph (4).
``(B) Nonwaiver of attorney-client privilege.--The
certification filed pursuant to subparagraph (A) shall
not be construed to be a waiver of the attorney-client
privilege.
``(3) Appointment of lead plaintiff.--
``(A) Early notice to class members.--
<<NOTE: Publication.>>
``(i) In general.--Not later than 20 days
after the date on which the complaint is filed,
the plaintiff or plaintiffs shall cause to be
published, in a widely circulated national
business-oriented publication or wire service, a
notice advising members of the purported plaintiff
class--
``(I) of the pendency of the action,
the claims asserted therein, and the
purported class period; and
``(II) that, not later than 60 days
after the date on which the notice is
published, any member of the purported
class may move the court to serve as
lead plaintiff of the purported class.
``(ii) Multiple actions.--If more than one
action on behalf of a class asserting
substantially the same claim or claims arising
under this title is filed, only the plaintiff or
plaintiffs in the first filed action shall be
required to cause notice to be published in
accordance with clause (i).
``(iii) Additional notices may be required
under federal rules.--Notice required under clause
(i) shall be in addition to any notice required
pursuant to the Federal Rules of Civil Procedure.
``(B) Appointment of lead plaintiff.--
[[Page 109 STAT. 739]]
``(i) In general.--Not later than 90 days
after the date on which a notice is published
under subparagraph (A)(i), the court shall
consider any motion made by a purported class
member in response to the notice, including any
motion by a class member who is not individually
named as a plaintiff in the complaint or
complaints, and shall appoint as lead plaintiff
the member or members of the purported plaintiff
class that the court determines to be most capable
of adequately representing the interests of class
members (hereafter in this paragraph referred to
as the `most adequate plaintiff') in accordance
with this subparagraph.
``(ii) Consolidated actions.--If more than one
action on behalf of a class asserting
substantially the same claim or claims arising
under this title has been filed, and any party has
sought to consolidate those actions for pretrial
purposes or for trial, the court shall not make
the determination required by clause (i) until
after the decision on the motion to consolidate is
rendered. As soon as practicable after such
decision is rendered, the court shall appoint the
most adequate plaintiff as lead plaintiff for the
consolidated actions in accordance with this
subparagraph.
``(iii) Rebuttable presumption.--
``(I) In general.--Subject to
subclause (II), for purposes of clause
(i), the court shall adopt a presumption
that the most adequate plaintiff in any
private action arising under this title
is the person or group of persons that--
``(aa) has either filed the
complaint or made a motion in
response to a notice under
subparagraph (A)(i);
``(bb) in the determination
of the court, has the largest
financial interest in the relief
sought by the class; and
``(cc) otherwise satisfies
the requirements of Rule 23 of
the Federal Rules of Civil
Procedure.
``(II) Rebuttal evidence.--The
presumption described in subclause (I)
may be rebutted only upon proof by a
member of the purported plaintiff class
that the presumptively most adequate
plaintiff--
``(aa) will not fairly and
adequately protect the interests
of the class; or
``(bb) is subject to unique
defenses that render such
plaintiff incapable of
adequately representing the
class.
``(iv) Discovery.--For purposes of this
subparagraph, discovery relating to whether a
member or members of the purported plaintiff class
is the most adequate plaintiff may be conducted by
a plaintiff only if the plaintiff first
demonstrates a reasonable basis for a finding that
the presumptively most adequate plaintiff is
incapable of adequately representing the class.
[[Page 109 STAT. 740]]
``(v) Selection of lead counsel.--The most
adequate plaintiff shall, subject to the approval
of the court, select and retain counsel to
represent the class.
``(vi) Restrictions on professional
plaintiffs.--Except as the court may otherwise
permit, consistent with the purposes of this
section, a person may be a lead plaintiff, or an
officer, director, or fiduciary of a lead
plaintiff, in no more than 5 securities class
actions brought as plaintiff class actions
pursuant to the Federal Rules of Civil Procedure
during any 3-year period.
``(4) Recovery by plaintiffs.--The share of any final
judgment or of any settlement that is awarded to a
representative party serving on behalf of a class shall be
equal, on a per share basis, to the portion of the final
judgment or settlement awarded to all other members of the
class. Nothing in this paragraph shall be construed to limit the
award of reasonable costs and expenses (including lost wages)
directly relating to the representation of the class to any
representative party serving on behalf of the class.
``(5) Restrictions on settlements under seal.--The terms and
provisions of any settlement agreement of a class action shall
not be filed under seal, except that on motion of any party to
the settlement, the court may order filing under seal for those
portions of a settlement agreement as to which good cause is
shown for such filing under seal. For purposes of this
paragraph, good cause shall exist only if publication of a term
or provision of a settlement agreement would cause direct and
substantial harm to any party.
``(6) Restrictions on payment of attorneys' fees and
expenses.--Total attorneys' fees and expenses awarded by the
court to counsel for the plaintiff class shall not exceed a
reasonable percentage of the amount of any damages and
prejudgment interest actually paid to the class.
``(7) Disclosure of settlement terms to class members.--Any
proposed or final settlement agreement that is published or
otherwise disseminated to the class shall include each of the
following statements, along with a cover page summarizing the
information contained in such statements:
``(A) Statement of plaintiff recovery.--The amount
of the settlement proposed to be distributed to the
parties to the action, determined in the aggregate and
on an average per share basis.
``(B) Statement of potential outcome of case.--
``(i) Agreement on amount of damages.--If the
settling parties agree on the average amount of
damages per share that would be recoverable if the
plaintiff prevailed on each claim alleged under
this title, a statement concerning the average
amount of such potential damages per share.
``(ii) Disagreement on amount of damages.--If
the parties do not agree on the average amount of
damages per share that would be recoverable if the
plaintiff prevailed on each claim alleged under
this title, a statement from each settling party
concerning the issue or issues on which the
parties disagree.
[[Page 109 STAT. 741]]
``(iii) Inadmissibility for certain
purposes.--A statement made in accordance with
clause (i) or (ii) concerning the amount of
damages shall not be admissible in any Federal or
State judicial action or administrative
proceeding, other than an action or proceeding
arising out of such statement.
``(C) Statement of attorneys' fees or costs
sought.--If any of the settling parties or their counsel
intend to apply to the court for an award of attorneys'
fees or costs from any fund established as part of the
settlement, a statement indicating which parties or
counsel intend to make such an application, the amount
of fees and costs that will be sought (including the
amount of such fees and costs determined on an average
per share basis), and a brief explanation supporting the
fees and costs sought.
``(D) Identification of lawyers' representatives.--
The name, telephone number, and address of one or more
representatives of counsel for the plaintiff class who
will be reasonably available to answer questions from
class members concerning any matter contained in any
notice of settlement published or otherwise disseminated
to the class.
``(E) Reasons for settlement.--A brief statement
explaining the reasons why the parties are proposing the
settlement.
``(F) Other information.--Such other information as
may be required by the court.
``(8) Attorney conflict of interest.--If a plaintiff class
is represented by an attorney who directly owns or otherwise has
a beneficial interest in the securities that are the subject of
the litigation, the court shall make a determination of whether
such ownership or other interest constitutes a conflict of
interest sufficient to disqualify the attorney from representing
the plaintiff class.
``(b) Stay of Discovery; Preservation of Evidence.--
``(1) In general.--In any private action arising under this
title, all discovery and other proceedings shall be stayed
during the pendency of any motion to dismiss, unless the court
finds, upon the motion of any party, that particularized
discovery is necessary to preserve evidence or to prevent undue
prejudice to that party.
``(2) Preservation of evidence.--During the pendency of any
stay of discovery pursuant to this subsection, unless otherwise
ordered by the court, any party to the action with actual notice
of the allegations contained in the complaint shall treat all
documents, data compilations (including electronically recorded
or stored data), and tangible objects that are in the custody or
control of such person and that are relevant to the allegations,
as if they were the subject of a continuing request for
production of documents from an opposing party under the Federal
Rules of Civil Procedure.
``(3) Sanction for willful violation.--A party aggrieved by
the willful failure of an opposing party to comply with
paragraph (2) may apply to the court for an order awarding
appropriate sanctions.
``(c) Sanctions for Abusive Litigation.--
[[Page 109 STAT. 742]]
``(1) Mandatory review by court. <<NOTE: Records.>> --In any
private action arising under this title, upon final adjudication
of the action, the court shall include in the record specific
findings regarding compliance by each party and each attorney
representing any party with each requirement of Rule 11(b) of
the Federal Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion.
``(2) Mandatory sanctions.--If the court makes a finding
under paragraph (1) that a party or attorney violated any
requirement of Rule 11(b) of the Federal Rules of Civil
Procedure as to any complaint, responsive pleading, or
dispositive motion, the court shall impose sanctions on such
party or attorney in accordance with Rule 11 of the Federal
Rules of Civil Procedure. Prior to making a finding that any
party or attorney has violated Rule 11 of the Federal Rules of
Civil Procedure, the court shall give such party or attorney
notice and an opportunity to respond.
``(3) Presumption in favor of attorneys' fees and costs.--
``(A) In general.--Subject to subparagraphs (B) and
(C), for purposes of paragraph (2), the court shall
adopt a presumption that the appropriate sanction--
``(i) for failure of any responsive pleading
or dispositive motion to comply with any
requirement of Rule 11(b) of the Federal Rules of
Civil Procedure is an award to the opposing party
of the reasonable attorneys' fees and other
expenses incurred as a direct result of the
violation; and
``(ii) for substantial failure of any
complaint to comply with any requirement of Rule
11(b) of the Federal Rules of Civil Procedure is
an award to the opposing party of the reasonable
attorneys' fees and other expenses incurred in the
action.
``(B) Rebuttal evidence.--The presumption described
in subparagraph (A) may be rebutted only upon proof by
the party or attorney against whom sanctions are to be
imposed that--
``(i) the award of attorneys' fees and other
expenses will impose an unreasonable burden on
that party or attorney and would be unjust, and
the failure to make such an award would not impose
a greater burden on the party in whose favor
sanctions are to be imposed; or
``(ii) the violation of Rule 11(b) of the
Federal Rules of Civil Procedure was de minimis.
``(C) Sanctions.--If the party or attorney against
whom sanctions are to be imposed meets its burden under
subparagraph (B), the court shall award the sanctions
that the court deems appropriate pursuant to Rule 11 of
the Federal Rules of Civil Procedure.
``(d) Defendant's Right to Written Interrogatories.--In any private
action arising under this title in which the plaintiff may recover money
damages only on proof that a defendant acted with a particular state of
mind, the court shall, when requested by a defendant, submit to the jury
a written interrogatory on the issue of each such defendant's state of
mind at the time the alleged violation occurred.''.
[[Page 109 STAT. 743]]
(b) Securities Exchange Act of 1934.--Title I of the Securities
Exchange Act of 1934 (78a et seq.) is amended by inserting after section
21C the following new section:
``SEC. 21D. <<NOTE: 15 USC 78u-4.>> PRIVATE SECURITIES LITIGATION.
``(a) Private Class Actions.--
``(1) In general.--The provisions of this subsection shall
apply in each private action arising under this title that is
brought as a plaintiff class action pursuant to the Federal
Rules of Civil Procedure.
``(2) Certification filed with complaint.--
``(A) In general.--Each plaintiff seeking to serve
as a representative party on behalf of a class shall
provide a sworn certification, which shall be personally
signed by such plaintiff and filed with the complaint,
that--
``(i) states that the plaintiff has reviewed
the complaint and authorized its filing;
``(ii) states that the plaintiff did not
purchase the security that is the subject of the
complaint at the direction of plaintiff's counsel
or in order to participate in any private action
arising under this title;
``(iii) states that the plaintiff is willing
to serve as a representative party on behalf of a
class, including providing testimony at deposition
and trial, if necessary;
``(iv) sets forth all of the transactions of
the plaintiff in the security that is the subject
of the complaint during the class period specified
in the complaint;
``(v) identifies any other action under this
title, filed during the 3-year period preceding
the date on which the certification is signed by
the plaintiff, in which the plaintiff has sought
to serve as a representative party on behalf of a
class; and
``(vi) states that the plaintiff will not
accept any payment for serving as a representative
party on behalf of a class beyond the plaintiff's
pro rata share of any recovery, except as ordered
or approved by the court in accordance with
paragraph (4).
``(B) Nonwaiver of attorney-client privilege.--The
certification filed pursuant to subparagraph (A) shall
not be construed to be a waiver of the attorney-client
privilege.
``(3) Appointment of lead plaintiff.--
``(A) Early notice to class members.--
<<NOTE: Publication.>>
``(i) In general.--Not later than 20 days
after the date on which the complaint is filed,
the plaintiff or plaintiffs shall cause to be
published, in a widely circulated national
business-oriented publication or wire service, a
notice advising members of the purported plaintiff
class--
``(I) of the pendency of the action,
the claims asserted therein, and the
purported class period; and
``(II) that, not later than 60 days
after the date on which the notice is
published, any member of the purported
class may move the court to serve as
lead plaintiff of the purported class.
[[Page 109 STAT. 744]]
``(ii) Multiple actions.--If more than one
action on behalf of a class asserting
substantially the same claim or claims arising
under this title is filed, only the plaintiff or
plaintiffs in the first filed action shall be
required to cause notice to be published in
accordance with clause (i).
``(iii) Additional notices may be required
under federal rules.--Notice required under clause
(i) shall be in addition to any notice required
pursuant to the Federal Rules of Civil Procedure.
``(B) Appointment of lead plaintiff.--
``(i) In general.--Not later than 90 days
after the date on which a notice is published
under subparagraph (A)(i), the court shall
consider any motion made by a purported class
member in response to the notice, including any
motion by a class member who is not individually
named as a plaintiff in the complaint or
complaints, and shall appoint as lead plaintiff
the member or members of the purported plaintiff
class that the court determines to be most capable
of adequately representing the interests of class
members (hereafter in this paragraph referred to
as the `most adequate plaintiff') in accordance
with this subparagraph.
``(ii) Consolidated actions.--If more than one
action on behalf of a class asserting
substantially the same claim or claims arising
under this title has been filed, and any party has
sought to consolidate those actions for pretrial
purposes or for trial, the court shall not make
the determination required by clause (i) until
after the decision on the motion to consolidate is
rendered. As soon as practicable after such
decision is rendered, the court shall appoint the
most adequate plaintiff as lead plaintiff for the
consolidated actions in accordance with this
paragraph.
``(iii) Rebuttable presumption.--
``(I) In general.--Subject to
subclause (II), for purposes of clause
(i), the court shall adopt a presumption
that the most adequate plaintiff in any
private action arising under this title
is the person or group of persons that--
``(aa) has either filed the
complaint or made a motion in
response to a notice under
subparagraph (A)(i);
``(bb) in the determination
of the court, has the largest
financial interest in the relief
sought by the class; and
``(cc) otherwise satisfies
the requirements of Rule 23 of
the Federal Rules of Civil
Procedure.
``(II) Rebuttal evidence.--The
presumption described in subclause (I)
may be rebutted only upon proof by a
member of the purported plaintiff class
that the presumptively most adequate
plaintiff--
``(aa) will not fairly and
adequately protect the interests
of the class; or
[[Page 109 STAT. 745]]
``(bb) is subject to unique
defenses that render such
plaintiff incapable of
adequately representing the
class.
``(iv) Discovery.--For purposes of this
subparagraph, discovery relating to whether a
member or members of the purported plaintiff class
is the most adequate plaintiff may be conducted by
a plaintiff only if the plaintiff first
demonstrates a reasonable basis for a finding that
the presumptively most adequate plaintiff is
incapable of adequately representing the class.
``(v) Selection of lead counsel.--The most
adequate plaintiff shall, subject to the approval
of the court, select and retain counsel to
represent the class.
``(vi) Restrictions on professional
plaintiffs.--Except as the court may otherwise
permit, consistent with the purposes of this
section, a person may be a lead plaintiff, or an
officer, director, or fiduciary of a lead
plaintiff, in no more than 5 securities class
actions brought as plaintiff class actions
pursuant to the Federal Rules of Civil Procedure
during any 3-year period.
``(4) Recovery by plaintiffs.--The share of any final
judgment or of any settlement that is awarded to a
representative party serving on behalf of a class shall be
equal, on a per share basis, to the portion of the final
judgment or settlement awarded to all other members of the
class. Nothing in this paragraph shall be construed to limit the
award of reasonable costs and expenses (including lost wages)
directly relating to the representation of the class to any
representative party serving on behalf of a class.
``(5) Restrictions on settlements under seal.--The terms and
provisions of any settlement agreement of a class action shall
not be filed under seal, except that on motion of any party to
the settlement, the court may order filing under seal for those
portions of a settlement agreement as to which good cause is
shown for such filing under seal. For purposes of this
paragraph, good cause shall exist only if publication of a term
or provision of a settlement agreement would cause direct and
substantial harm to any party.
``(6) Restrictions on payment of attorneys' fees and
expenses.--Total attorneys' fees and expenses awarded by the
court to counsel for the plaintiff class shall not exceed a
reasonable percentage of the amount of any damages and
prejudgment interest actually paid to the class.
``(7) Disclosure of settlement terms to class members.--Any
proposed or final settlement agreement that is published or
otherwise disseminated to the class shall include each of the
following statements, along with a cover page summarizing the
information contained in such statements:
``(A) Statement of plaintiff recovery.--The amount
of the settlement proposed to be distributed to the
parties to the action, determined in the aggregate and
on an average per share basis.
``(B) Statement of potential outcome of case.--
``(i) Agreement on amount of damages.--If the
settling parties agree on the average amount of
dam
[[Page 109 STAT. 746]]
ages per share that would be recoverable if the
plaintiff prevailed on each claim alleged under
this title, a statement concerning the average
amount of such potential damages per share.
``(ii) Disagreement on amount of damages.--If
the parties do not agree on the average amount of
damages per share that would be recoverable if the
plaintiff prevailed on each claim alleged under
this title, a statement from each settling party
concerning the issue or issues on which the
parties disagree.
``(iii) Inadmissibility for certain
purposes.--A statement made in accordance with
clause (i) or (ii) concerning the amount of
damages shall not be admissible in any Federal or
State judicial action or administrative
proceeding, other than an action or proceeding
arising out of such statement.
``(C) Statement of attorneys' fees or costs
sought.--If any of the settling parties or their counsel
intend to apply to the court for an award of attorneys'
fees or costs from any fund established as part of the
settlement, a statement indicating which parties or
counsel intend to make such an application, the amount
of fees and costs that will be sought (including the
amount of such fees and costs determined on an average
per share basis), and a brief explanation supporting the
fees and costs sought. Such information shall be clearly
summarized on the cover page of any notice to a party of
any proposed or final settlement agreement.
``(D) Identification of lawyers' representatives.--
The name, telephone number, and address of one or more
representatives of counsel for the plaintiff class who
will be reasonably available to answer questions from
class members concerning any matter contained in any
notice of settlement published or otherwise disseminated
to the class.
``(E) Reasons for settlement.--A brief statement
explaining the reasons why the parties are proposing the
settlement.
``(F) Other information.--Such other information as
may be required by the court.
``(8) Security for payment of costs in class actions.--In
any private action arising under this title that is certified as
a class action pursuant to the Federal Rules of Civil Procedure,
the court may require an undertaking from the attorneys for the
plaintiff class, the plaintiff class, or both, or from the
attorneys for the defendant, the defendant, or both, in such
proportions and at such times as the court determines are just
and equitable, for the payment of fees and expenses that may be
awarded under this subsection.
``(9) Attorney conflict of interest.--If a plaintiff class
is represented by an attorney who directly owns or otherwise has
a beneficial interest in the securities that are the subject of
the litigation, the court shall make a determination of whether
such ownership or other interest constitutes a conflict of
interest sufficient to disqualify the attorney from representing
the plaintiff class.
``(b) Requirements for Securities Fraud Actions.--
[[Page 109 STAT. 747]]
``(1) Misleading statements and omissions.--In any private
action arising under this title in which the plaintiff alleges
that the defendant--
``(A) made an untrue statement of a material fact;
or
``(B) omitted to state a material fact necessary in
order to make the statements made, in the light of the
circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall
state with particularity all facts on which that belief is
formed.
``(2) Required state of mind.--In any private action arising
under this title in which the plaintiff may recover money
damages only on proof that the defendant acted with a particular
state of mind, the complaint shall, with respect to each act or
omission alleged to violate this title, state with particularity
facts giving rise to a strong inference that the defendant acted
with the required state of mind.
``(3) Motion to dismiss; stay of discovery.--
``(A) Dismissal for failure to meet pleading
requirements.--In any private action arising under this
title, the court shall, on the motion of any defendant,
dismiss the complaint if the requirements of paragraphs
(1) and (2) are not met.
``(B) Stay of discovery.--In any private action
arising under this title, all discovery and other
proceedings shall be stayed during the pendency of any
motion to dismiss, unless the court finds upon the
motion of any party that particularized discovery is
necessary to preserve evidence or to prevent undue
prejudice to that party.
``(C) Preservation of evidence.--
``(i) In general.--During the pendency of any
stay of discovery pursuant to this paragraph,
unless otherwise ordered by the court, any party
to the action with actual notice of the
allegations contained in the complaint shall treat
all documents, data compilations (including
electronically recorded or stored data), and
tangible objects that are in the custody or
control of such person and that are relevant to
the allegations, as if they were the subject of a
continuing request for production of documents
from an opposing party under the Federal Rules of
Civil Procedure.
``(ii) Sanction for willful violation.--A
party aggrieved by the willful failure of an
opposing party to comply with clause (i) may apply
to the court for an order awarding appropriate
sanctions.
``(4) Loss causation.--In any private action arising under
this title, the plaintiff shall have the burden of proving that
the act or omission of the defendant alleged to violate this
title caused the loss for which the plaintiff seeks to recover
damages.
``(c) Sanctions for Abusive Litigation.--
``(1) Mandatory review by court. <<NOTE: Records.>> --In any
private action arising under this title, upon final adjudication
of the action,
[[Page 109 STAT. 748]]
the court shall include in the record specific findings
regarding compliance by each party and each attorney
representing any party with each requirement of Rule 11(b) of
the Federal Rules of Civil Procedure as to any complaint,
responsive pleading, or dispositive motion.
``(2) Mandatory sanctions.--If the court makes a finding
under paragraph (1) that a party or attorney violated any
requirement of Rule 11(b) of the Federal Rules of Civil
Procedure as to any complaint, responsive pleading, or
dispositive motion, the court shall impose sanctions on such
party or attorney in accordance with Rule 11 of the Federal
Rules of Civil Procedure. Prior to making a finding that any
party or attorney has violated Rule 11 of the Federal Rules of
Civil Procedure, the court shall give such party or attorney
notice and an opportunity to respond.
``(3) Presumption in favor of attorneys' fees and costs.--
``(A) In general.--Subject to subparagraphs (B) and
(C), for purposes of paragraph (2), the court shall
adopt a presumption that the appropriate sanction--
``(i) for failure of any responsive pleading
or dispositive motion to comply with any
requirement of Rule 11(b) of the Federal Rules of
Civil Procedure is an award to the opposing party
of the reasonable attorneys' fees and other
expenses incurred as a direct result of the
violation; and
``(ii) for substantial failure of any
complaint to comply with any requirement of Rule
11(b) of the Federal Rules of Civil Procedure is
an award to the opposing party of the reasonable
attorneys' fees and other expenses incurred in the
action.
``(B) Rebuttal evidence.--The presumption described
in subparagraph (A) may be rebutted only upon proof by
the party or attorney against whom sanctions are to be
imposed that--
``(i) the award of attorneys' fees and other
expenses will impose an unreasonable burden on
that party or attorney and would be unjust, and
the failure to make such an award would not impose
a greater burden on the party in whose favor
sanctions are to be imposed; or
``(ii) the violation of Rule 11(b) of the
Federal Rules of Civil Procedure was de minimis.
``(C) Sanctions.--If the party or attorney against
whom sanctions are to be imposed meets its burden under
subparagraph (B), the court shall award the sanctions
that the court deems appropriate pursuant to Rule 11 of
the Federal Rules of Civil Procedure.
``(d) Defendant's Right to Written Interrogatories.--In any private
action arising under this title in which the plaintiff may recover money
damages, the court shall, when requested by a defendant, submit to the
jury a written interrogatory on the issue of each such defendant's state
of mind at the time the alleged violation occurred.
``(e) Limitation on Damages.--
``(1) In general.--Except as provided in paragraph (2), in
any private action arising under this title in which the
[[Page 109 STAT. 749]]
plaintiff seeks to establish damages by reference to the market
price of a security, the award of damages to the plaintiff shall
not exceed the difference between the purchase or sale price
paid or received, as appropriate, by the plaintiff for the
subject security and the mean trading price of that security
during the 90-day period beginning on the date on which the
information correcting the misstatement or omission that is the
basis for the action is disseminated to the market.
``(2) Exception.--In any private action arising under this
title in which the plaintiff seeks to establish damages by
reference to the market price of a security, if the plaintiff
sells or repurchases the subject security prior to the
expiration of the 90-day period described in paragraph (1), the
plaintiff's damages shall not exceed the difference between the
purchase or sale price paid or received, as appropriate, by the
plaintiff for the security and the mean trading price of the
security during the period beginning immediately after
dissemination of information correcting the misstatement or
omission and ending on the date on which the plaintiff sells or
repurchases the security.
``(3) Definition.--For purposes of this subsection, the
`mean trading price' of a security shall be an average of the
daily trading price of that security, determined as of the close
of the market each day during the 90-day period referred to in
paragraph (1).''.
SEC. 102. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.
(a) Amendment to the Securities Act of 1933.--Title I of the
Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by inserting
after section 27 (as added by this Act) the following new section:
``SEC. 27A. <<NOTE: 15 USC 77z-2.>> APPLICATION OF SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS.
``(a) Applicability.--This section shall apply only to a forward-
looking statement made by--
``(1) an issuer that, at the time that the statement is
made, is subject to the reporting requirements of section 13(a)
or section 15(d) of the Securities Exchange Act of 1934;
``(2) a person acting on behalf of such issuer;
``(3) an outside reviewer retained by such issuer making a
statement on behalf of such issuer; or
``(4) an underwriter, with respect to information provided
by such issuer or information derived from information provided
by the issuer.
``(b) Exclusions.--Except to the extent otherwise specifically
provided by rule, regulation, or order of the Commission, this section
shall not apply to a forward-looking statement--
``(1) that is made with respect to the business or
operations of the issuer, if the issuer--
``(A) during the 3-year period preceding the date on
which the statement was first made--
``(i) was convicted of any felony or
misdemeanor described in clauses (i) through (iv)
of section 15(b)(4)(B) of the Securities Exchange
Act of 1934; or
[[Page 109 STAT. 750]]
``(ii) has been made the subject of a judicial
or administrative decree or order arising out of a
governmental action that--
``(I) prohibits future violations of
the antifraud provisions of the
securities laws;
``(II) requires that the issuer
cease and desist from violating the
antifraud provisions of the securities
laws; or
``(III) determines that the issuer
violated the antifraud provisions of the
securities laws;
``(B) makes the forward-looking statement in
connection with an offering of securities by a blank
check company;
``(C) issues penny stock;
``(D) makes the forward-looking statement in
connection with a rollup transaction; or
``(E) makes the forward-looking statement in
connection with a going private transaction; or
``(2) that is--
``(A) included in a financial statement prepared in
accordance with generally accepted accounting
principles;
``(B) contained in a registration statement of, or
otherwise issued by, an investment company;
``(C) made in connection with a tender offer;
``(D) made in connection with an initial public
offering;
``(E) made in connection with an offering by, or
relating to the operations of, a partnership, limited
liability company, or a direct participation investment
program; or
``(F) made in a disclosure of beneficial ownership
in a report required to be filed with the Commission
pursuant to section 13(d) of the Securities Exchange Act
of 1934.
``(c) Safe Harbor.--
``(1) In general.--Except as provided in subsection (b), in
any private action arising under this title that is based on an
untrue statement of a material fact or omission of a material
fact necessary to make the statement not misleading, a person
referred to in subsection (a) shall not be liable with respect
to any forward-looking statement, whether written or oral, if
and to the extent that--
``(A) the forward-looking statement is--
``(i) identified as a forward-looking
statement, and is accompanied by meaningful
cautionary statements identifying important
factors that could cause actual results to differ
materially from those in the forward-looking
statement; or
``(ii) immaterial; or
``(B) the plaintiff fails to prove that the forward-
looking statement--
``(i) if made by a natural person, was made
with actual knowledge by that person that the
statement was false or misleading; or
``(ii) if made by a business entity; was--
``(I) made by or with the approval
of an executive officer of that entity,
and
``(II) made or approved by such
officer with actual knowledge by that
officer that the statement was false or
misleading.
[[Page 109 STAT. 751]]
``(2) Oral forward-looking statements.--In the case of an
oral forward-looking statement made by an issuer that is subject
to the reporting requirements of section 13(a) or section 15(d)
of the Securities Exchange Act of 1934, or by a person acting on
behalf of such issuer, the requirement set forth in paragraph
(1)(A) shall be deemed to be satisfied--
``(A) if the oral forward-looking statement is
accompanied by a cautionary statement--
``(i) that the particular oral statement is a
forward-looking statement; and
``(ii) that the actual results could differ
materially from those projected in the forward-
looking statement; and
``(B) if--
``(i) the oral forward-looking statement is
accompanied by an oral statement that additional
information concerning factors that could cause
actual results to differ materially from those in
the forward-looking statement is contained in a
readily available written document, or portion
thereof;
``(ii) the accompanying oral statement
referred to in clause (i) identifies the document,
or portion thereof, that contains the additional
information about those factors relating to the
forward-looking statement; and
``(iii) the information contained in that
written document is a cautionary statement that
satisfies the standard established in paragraph
(1)(A).
``(3) Availability.--Any document filed with the Commission
or generally disseminated shall be deemed to be readily
available for purposes of paragraph (2).
``(4) Effect on other safe harbors.--The exemption provided
for in paragraph (1) shall be in addition to any exemption that
the Commission may establish by rule or regulation under
subsection (g).
``(d) Duty To Update.--Nothing in this section shall impose upon any
person a duty to update a forward-looking statement.
``(e) Dispositive Motion.--On any motion to dismiss based upon
subsection (c)(1), the court shall consider any statement cited in the
complaint and cautionary statement accompanying the forward-looking
statement, which are not subject to material dispute, cited by the
defendant.
``(f) Stay Pending Decision on Motion.--In any private action
arising under this title, the court shall stay discovery (other than
discovery that is specifically directed to the applicability of the
exemption provided for in this section) during the pendency of any
motion by a defendant for summary judgment that is based on the grounds
that--
``(1) the statement or omission upon which the complaint is
based is a forward-looking statement within the meaning of this
section; and
``(2) the exemption provided for in this section precludes a
claim for relief.
``(g) Exemption Authority.--In addition to the exemptions provided
for in this section, the Commission may, by rule or regulation, provide
exemptions from or under any provision of this title, including with
respect to liability that is based on a statement or that is based on
projections or other forward-looking information,
[[Page 109 STAT. 752]]
if and to the extent that any such exemption is consistent with the
public interest and the protection of investors, as determined by the
Commission.
``(h) Effect on Other Authority of Commission.--Nothing in this
section limits, either expressly or by implication, the authority of the
Commission to exercise similar authority or to adopt similar rules and
regulations with respect to forward-looking statements under any other
statute under which the Commission exercises rulemaking authority.
``(i) Definitions.--For purposes of this section, the following
definitions shall apply:
``(1) Forward-looking statement.--The term `forward-looking
statement' means--
``(A) a statement containing a projection of
revenues, income (including income loss), earnings
(including earnings loss) per share, capital
expenditures, dividends, capital structure, or other
financial items;
``(B) a statement of the plans and objectives of
management for future operations, including plans or
objectives relating to the products or services of the
issuer;
``(C) a statement of future economic performance,
including any such statement contained in a discussion
and analysis of financial condition by the management or
in the results of operations included pursuant to the
rules and regulations of the Commission;
``(D) any statement of the assumptions underlying or
relating to any statement described in subparagraph (A),
(B), or (C);
``(E) any report issued by an outside reviewer
retained by an issuer, to the extent that the report
assesses a forward-looking statement made by the issuer;
or
``(F) a statement containing a projection or
estimate of such other items as may be specified by rule
or regulation of the Commission.
``(2) Investment company.--The term `investment company' has
the same meaning as in section 3(a) of the Investment Company
Act of 1940.
``(3) Penny stock.--The term `penny stock' has the same
meaning as in section 3(a)(51) of the Securities Exchange Act of
1934, and the rules and regulations, or orders issued pursuant
to that section.
``(4) Going private transaction.--The term `going private
transaction' has the meaning given that term under the rules or
regulations of the Commission issued pursuant to section 13(e)
of the Securities Exchange Act of 1934.
``(5) Securities laws.--The term `securities laws' has the
same meaning as in section 3 of the Securities Exchange Act of
1934.
``(6) Person acting on behalf of an issuer.--The term
`person acting on behalf of an issuer' means an officer,
director, or employee of the issuer.
``(7) Other terms.--The terms `blank check company', `rollup
transaction', `partnership', `limited liability company',
`executive officer of an entity' and `direct participation
investment program', have the meanings given those terms by rule
or regulation of the Commission.''.
[[Page 109 STAT. 753]]
(b) Amendment to the Securities Exchange Act of 1934.--The
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by
inserting after section 21D (as added by this Act) the following new
section:
``SEC. 21E. <<NOTE: 15 USC 78u-5.>> APPLICATION OF SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS.
``(a) Applicability.--This section shall apply only to a forward-
looking statement made by--
``(1) an issuer that, at the time that the statement is
made, is subject to the reporting requirements of section 13(a)
or section 15(d);
``(2) a person acting on behalf of such issuer;
``(3) an outside reviewer retained by such issuer making a
statement on behalf of such issuer; or
``(4) an underwriter, with respect to information provided
by such issuer or information derived from information provided
by such issuer.
``(b) Exclusions.--Except to the extent otherwise specifically
provided by rule, regulation, or order of the Commission, this section
shall not apply to a forward-looking statement--
``(1) that is made with respect to the business or
operations of the issuer, if the issuer--
``(A) during the 3-year period preceding the date on
which the statement was first made--
``(i) was convicted of any felony or
misdemeanor described in clauses (i) through (iv)
of section 15(b)(4)(B); or
``(ii) has been made the subject of a judicial
or administrative decree or order arising out of a
governmental action that--
``(I) prohibits future violations of
the antifraud provisions of the
securities laws;
``(II) requires that the issuer
cease and desist from violating the
antifraud provisions of the securities
laws; or
``(III) determines that the issuer
violated the antifraud provisions of the
securities laws;
``(B) makes the forward-looking statement in
connection with an offering of securities by a blank
check company;
``(C) issues penny stock;
``(D) makes the forward-looking statement in
connection with a rollup transaction; or
``(E) makes the forward-looking statement in
connection with a going private transaction; or
``(2) that is--
``(A) included in a financial statement prepared in
accordance with generally accepted accounting
principles;
``(B) contained in a registration statement of, or
otherwise issued by, an investment company;
``(C) made in connection with a tender offer;
``(D) made in connection with an initial public
offering;
``(E) made in connection with an offering by, or
relating to the operations of, a partnership, limited
liability company, or a direct participation investment
program; or
[[Page 109 STAT. 754]]
``(F) made in a disclosure of beneficial ownership
in a report required to be filed with the Commission
pursuant to section 13(d).
``(c) Safe Harbor.--
``(1) In general.--Except as provided in subsection (b), in
any private action arising under this title that is based on an
untrue statement of a material fact or omission of a material
fact necessary to make the statement not misleading, a person
referred to in subsection (a) shall not be liable with respect
to any forward-looking statement, whether written or oral, if
and to the extent that--
``(A) the forward-looking statement is--
``(i) identified as a forward-looking
statement, and is accompanied by meaningful
cautionary statements identifying important
factors that could cause actual results to differ
materially from those in the forward-looking
statement; or
``(ii) immaterial; or
``(B) the plaintiff fails to prove that the forward-
looking statement--
``(i) if made by a natural person, was made
with actual knowledge by that person that the
statement was false or misleading; or
``(ii) if made by a business entity; was--
``(I) made by or with the approval
of an executive officer of that entity;
and
``(II) made or approved by such
officer with actual knowledge by that
officer that the statement was false or
misleading.
``(2) Oral forward-looking statements.--In the case of an
oral forward-looking statement made by an issuer that is subject
to the reporting requirements of section 13(a) or section 15(d),
or by a person acting on behalf of such issuer, the requirement
set forth in paragraph (1)(A) shall be deemed to be satisfied--
``(A) if the oral forward-looking statement is
accompanied by a cautionary statement--
``(i) that the particular oral statement is a
forward-looking statement; and
``(ii) that the actual results might differ
materially from those projected in the forward-
looking statement; and
``(B) if--
``(i) the oral forward-looking statement is
accompanied by an oral statement that additional
information concerning factors that could cause
actual results to materially differ from those in
the forward-looking statement is contained in a
readily available written document, or portion
thereof;
``(ii) the accompanying oral statement
referred to in clause (i) identifies the document,
or portion thereof, that contains the additional
information about those factors relating to the
forward-looking statement; and
``(iii) the information contained in that
written document is a cautionary statement that
satisfies the standard established in paragraph
(1)(A).
[[Page 109 STAT. 755]]
``(3) Availability.--Any document filed with the Commission
or generally disseminated shall be deemed to be readily
available for purposes of paragraph (2).
``(4) Effect on other safe harbors.--The exemption provided
for in paragraph (1) shall be in addition to any exemption that
the Commission may establish by rule or regulation under
subsection (g).
``(d) Duty To Update.--Nothing in this section shall impose upon any
person a duty to update a forward-looking statement.
``(e) Dispositive Motion.--On any motion to dismiss based upon
subsection (c)(1), the court shall consider any statement cited in the
complaint and any cautionary statement accompanying the forward-looking
statement, which are not subject to material dispute, cited by the
defendant.
``(f) Stay Pending Decision on Motion.--In any private action
arising under this title, the court shall stay discovery (other than
discovery that is specifically directed to the applicability of the
exemption provided for in this section) during the pendency of any
motion by a defendant for summary judgment that is based on the grounds
that--
``(1) the statement or omission upon which the complaint is
based is a forward-looking statement within the meaning of this
section; and
``(2) the exemption provided for in this section precludes a
claim for relief.
``(g) Exemption Authority.--In addition to the exemptions provided
for in this section, the Commission may, by rule or regulation, provide
exemptions from or under any provision of this title, including with
respect to liability that is based on a statement or that is based on
projections or other forward-looking information, if and to the extent
that any such exemption is consistent with the public interest and the
protection of investors, as determined by the Commission.
``(h) Effect on Other Authority of Commission.--Nothing in this
section limits, either expressly or by implication, the authority of the
Commission to exercise similar authority or to adopt similar rules and
regulations with respect to forward-looking statements under any other
statute under which the Commission exercises rulemaking authority.
``(i) Definitions.--For purposes of this section, the following
definitions shall apply:
``(1) Forward-looking statement.--The term `forward-looking
statement' means--
``(A) a statement containing a projection of
revenues, income (including income loss), earnings
(including earnings loss) per share, capital
expenditures, dividends, capital structure, or other
financial items;
``(B) a statement of the plans and objectives of
management for future operations, including plans or
objectives relating to the products or services of the
issuer;
``(C) a statement of future economic performance,
including any such statement contained in a discussion
and analysis of financial condition by the management or
in the results of operations included pursuant to the
rules and regulations of the Commission;
[[Page 109 STAT. 756]]
``(D) any statement of the assumptions underlying or
relating to any statement described in subparagraph (A),
(B), or (C);
``(E) any report issued by an outside reviewer
retained by an issuer, to the extent that the report
assesses a forward-looking statement made by the issuer;
or
``(F) a statement containing a projection or
estimate of such other items as may be specified by rule
or regulation of the Commission.
``(2) Investment company.--The term `investment company' has
the same meaning as in section 3(a) of the Investment Company
Act of 1940.
``(3) Going private transaction.--The term `going private
transaction' has the meaning given that term under the rules or
regulations of the Commission issued pursuant to section 13(e).
``(4) Person acting on behalf of an issuer.--The term
`person acting on behalf of an issuer' means any officer,
director, or employee of such issuer.
``(5) Other terms.--The terms `blank check company', `rollup
transaction', `partnership', `limited liability company',
`executive officer of an entity' and `direct participation
investment program', have the meanings given those terms by rule
or regulation of the Commission.''.
SEC. 103. ELIMINATION OF CERTAIN ABUSIVE PRACTICES.
(a) Prohibition of Referral Fees.--Section 15(c) of the Securities
Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended by adding at the end
the following new paragraph:
``(8) Prohibition of referral fees.--No broker or dealer, or
person associated with a broker or dealer, may solicit or
accept, directly or indirectly, remuneration for assisting an
attorney in obtaining the representation of any person in any
private action arising under this title or under the Securities
Act of 1933.''.
(b) Prohibition of Attorneys' Fees Paid From Commission Disgorgement
Funds.--
(1) Securities act of 1933.--Section 20 of the Securities
Act of 1933 (15 U.S.C. 77t) is amended by adding at the end the
following new subsection:
``(f) Prohibition of Attorneys' Fees Paid From Commission
Disgorgement Funds.--Except as otherwise ordered by the court upon
motion by the Commission, or, in the case of an administrative action,
as otherwise ordered by the Commission, funds disgorged as the result of
an action brought by the Commission in Federal court, or as a result of
any Commission administrative action, shall not be distributed as
payment for attorneys' fees or expenses incurred by private parties
seeking distribution of the disgorged funds.''.
(2) Securities exchange act of 1934.--Section 21(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by
adding at the end the following new paragraph:
``(4) Prohibition of attorneys' fees paid from commission
disgorgement funds.--Except as otherwise ordered by the court
upon motion by the Commission, or, in the case of an
administrative action, as otherwise ordered by the Commission,
funds disgorged as the result of an action brought
[[Page 109 STAT. 757]]
by the Commission in Federal court, or as a result of any
Commission administrative action, shall not be distributed as
payment for attorneys' fees or expenses incurred by private
parties seeking distribution of the disgorged funds.''.
SEC. 104. AUTHORITY OF COMMISSION TO PROSECUTE AIDING AND ABETTING.
Section 20 of the Securities Exchange Act of 1934 (15 U.S.C. 78t) is
amended--
(1) by striking the section heading and inserting the
following:
``liability of controlling persons and persons who aid and abet
violations'';
and
(2) by adding at the end the following new subsection:
``(f) Prosecution of Persons Who Aid and Abet Violations.--For
purposes of any action brought by the Commission under paragraph (1) or
(3) of section 21(d), any person that knowingly provides substantial
assistance to another person in violation of a provision of this title,
or of any rule or regulation issued under this title, shall be deemed to
be in violation of such provision to the same extent as the person to
whom such assistance is provided.''.
SEC. 105. LOSS CAUSATION.
Section 12 of the Securities Act of 1933 (15 U.S.C. 77l) is
amended--
(1) by inserting ``(a) In General.--'' before ``Any
person'';
(2) by inserting ``, subject to subsection (b),'' after
``shall be liable''; and
(3) by adding at the end the following:
``(b) Loss Causation.--In an action described in subsection (a)(2),
if the person who offered or sold such security proves that any portion
or all of the amount recoverable under subsection (a)(2) represents
other than the depreciation in value of the subject security resulting
from such part of the prospectus or oral communication, with respect to
which the liability of that person is asserted, not being true or
omitting to state a material fact required to be stated therein or
necessary to make the statement not misleading, then such portion or
amount, as the case may be, shall not be recoverable.''.
SEC. 106. STUDY AND REPORT ON PROTECTIONS FOR SENIOR CITIZENS AND
QUALIFIED RETIREMENT PLANS.
(a) In General.--Not later than 180 days after the date of enactment
of this Act, the Securities and Exchange Commission shall--
(1) determine whether investors that are senior citizens or
qualified retirement plans require greater protection against
securities fraud than is provided in this Act and the amendments
made by this Act;
(2) determine whether investors that are senior citizens or
qualified retirement plans have been adversely impacted by
abusive or unnecessary securities fraud litigation, and whether
the provisions in this Act or amendments made by
[[Page 109 STAT. 758]]
this Act are sufficient to protect their investments from such
litigation; and
(3) <<NOTE: Reports.>> if so, submit to the Congress a
report containing recommendations on protections from securities
fraud and abusive or unnecessary securities fraud litigation
that the Commission determines to be appropriate to thoroughly
protect such investors.
(b) Definitions.--For purposes of this section--
(1) the term ``qualified retirement plan'' has the same
meaning as in section 4974(c) of the Internal Revenue Code of
1986; and
(2) the term ``senior citizen'' means an individual who is
62 years of age or older as of the date of the securities
transaction at issue.
SEC. 107. AMENDMENT TO RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS
ACT.
Section 1964(c) of title 18, United States Code, is amended by
inserting before the period ``, except that no person may rely upon any
conduct that would have been actionable as fraud in the purchase or sale
of securities to establish a violation of section 1962. The exception
contained in the preceding sentence does not apply to an action against
any person that is criminally convicted in connection with the fraud, in
which case the statute of limitations shall start to run on the date on
which the conviction becomes final''.
SEC. 108. <<NOTE: 15 USC 77l note.>> APPLICABILITY.
The amendments made by this title shall not affect or apply to any
private action arising under title I of the Securities Exchange Act of
1934 or title I of the Securities Act of 1933, commenced before and
pending on the date of enactment of this Act.
TITLE II--REDUCTION OF COERCIVE SETTLEMENTS
SEC. 201. PROPORTIONATE LIABILITY.
(a) Amendment to Securities and Exchange Act of 1934.--Section 21D
of the Securities Exchange Act of 1934 (as added by this Act) <<NOTE: 15
USC 78u-4.>> is amended by adding at the end the following new
subsection:
``(g) Proportionate Liability.--
``(1) Applicability.--Nothing in this subsection shall be
construed to create, affect, or in any manner modify, the
standard for liability associated with any action arising under
the securities laws.
``(2) Liability for damages.--
``(A) Joint and several liability.--Any covered
person against whom a final judgment is entered in a
private action shall be liable for damages jointly and
severally only if the trier of fact specifically
determines that such covered person knowingly committed
a violation of the securities laws.
``(B) Proportionate liability.--
``(i) In general.--Except as provided in
paragraph (1), a covered person against whom a
final judgment
[[Page 109 STAT. 759]]
is entered in a private action shall be liable
solely for the portion of the judgment that
corresponds to the percentage of responsibility of
that covered person, as determined under paragraph
(3).
``(ii) Recovery by and costs of covered
person.--In any case in which a contractual
relationship permits, a covered person that
prevails in any private action may recover the
attorney's fees and costs of that covered person
in connection with the action.
``(3) Determination of responsibility.--
``(A) In general.--In any private action, the court
shall instruct the jury to answer special
interrogatories, or if there is no jury, shall make
findings, with respect to each covered person and each
of the other persons claimed by any of the parties to
have caused or contributed to the loss incurred by the
plaintiff, including persons who have entered into
settlements with the plaintiff or plaintiffs,
concerning--
``(i) whether such person violated the
securities laws;
``(ii) the percentage of responsibility of
such person, measured as a percentage of the total
fault of all persons who caused or contributed to
the loss incurred by the plaintiff; and
``(iii) whether such person knowingly
committed a violation of the securities laws.
``(B) Contents of special interrogatories or
findings.--The responses to interrogatories, or
findings, as appropriate, under subparagraph (A) shall
specify the total amount of damages that the plaintiff
is entitled to recover and the percentage of
responsibility of each covered person found to have
caused or contributed to the loss incurred by the
plaintiff or plaintiffs.
``(C) Factors for consideration.--In determining the
percentage of responsibility under this paragraph, the
trier of fact shall consider--
``(i) the nature of the conduct of each
covered person found to have caused or contributed
to the loss incurred by the plaintiff or
plaintiffs; and
``(ii) the nature and extent of the causal
relationship between the conduct of each such
person and the damages incurred by the plaintiff
or plaintiffs.
``(4) Uncollectible share.--
``(A) In general.--Notwithstanding paragraph (2)(B),
upon motion made not later than 6 months after a final
judgment is entered in any private action, the court
determines that all or part of the share of the judgment
of the covered person is not collectible against that
covered person, and is also not collectible against a
covered person described in paragraph (2)(A), each
covered person described in paragraph (2)(B) shall be
liable for the uncollectible share as follows:
``(i) Percentage of net worth.--Each covered
person shall be jointly and severally liable for
the uncollectible share if the plaintiff
establishes that--
``(I) the plaintiff is an individual
whose recoverable damages under the
final judgment are
[[Page 109 STAT. 760]]
equal to more than 10 percent of the net
worth of the plaintiff; and
``(II) the net worth of the
plaintiff is equal to less than
$200,000.
``(ii) Other plaintiffs.--With respect to any
plaintiff not described in subclauses (I) and (II)
of clause (i), each covered person shall be liable
for the uncollectible share in proportion to the
percentage of responsibility of that covered
person, except that the total liability of a
covered person under this clause may not exceed 50
percent of the proportionate share of that covered
person, as determined under paragraph (3)(B).
``(iii) Net worth.--For purposes of this
subparagraph, net worth shall be determined as of
the date immediately preceding the date of the
purchase or sale (as applicable) by the plaintiff
of the security that is the subject of the action,
and shall be equal to the fair market value of
assets, minus liabilities, including the net value
of the investments of the plaintiff in real and
personal property (including personal residences).
``(B) Overall limit.--In no case shall the total
payments required pursuant to subparagraph (A) exceed
the amount of the uncollectible share.
``(C) Covered persons subject to contribution.--A
covered person against whom judgment is not collectible
shall be subject to contribution and to any continuing
liability to the plaintiff on the judgment.
``(5) Right of contribution.--To the extent that a covered
person is required to make an additional payment pursuant to
paragraph (4), that covered person may recover contribution--
``(A) from the covered person originally liable to
make the payment;
``(B) from any covered person liable jointly and
severally pursuant to paragraph (2)(A);
``(C) from any covered person held proportionately
liable pursuant to this paragraph who is liable to make
the same payment and has paid less than his or her
proportionate share of that payment; or
``(D) from any other person responsible for the
conduct giving rise to the payment that would have been
liable to make the same payment.
``(6) Nondisclosure to jury.--The standard for allocation of
damages under paragraphs (2) and (3) and the procedure for
reallocation of uncollectible shares under paragraph (4) shall
not be disclosed to members of the jury.
``(7) Settlement discharge.--
``(A) In general.--A covered person who settles any
private action at any time before final verdict or
judgment shall be discharged from all claims for
contribution brought by other persons. Upon entry of the
settlement by the court, the court shall enter a bar
order constituting the final discharge of all
obligations to the plaintiff of the settling covered
person arising out of the action. The order
[[Page 109 STAT. 761]]
shall bar all future claims for contribution arising out
of the action--
``(i) by any person against the settling
covered person; and
``(ii) by the settling covered person against
any person, other than a person whose liability
has been extinguished by the settlement of the
settling covered person.
``(B) Reduction.--If a covered person enters into a
settlement with the plaintiff prior to final verdict or
judgment, the verdict or judgment shall be reduced by
the greater of--
``(i) an amount that corresponds to the
percentage of responsibility of that covered
person; or
``(ii) the amount paid to the plaintiff by
that covered person.
``(8) Contribution.--A covered person who becomes jointly
and severally liable for damages in any private action may
recover contribution from any other person who, if joined in the
original action, would have been liable for the same damages. A
claim for contribution shall be determined based on the
percentage of responsibility of the claimant and of each person
against whom a claim for contribution is made.
``(9) Statute of limitations for contribution.--In any
private action determining liability, an action for contribution
shall be brought not later than 6 months after the entry of a
final, nonappealable judgment in the action, except that an
action for contribution brought by a covered person who was
required to make an additional payment pursuant to paragraph (4)
may be brought not later than 6 months after the date on which
such payment was made.
``(10) Definitions.--For purposes of this subsection--
``(A) a covered person `knowingly commits a
violation of the securities laws'--
``(i) with respect to an action that is based
on an untrue statement of material fact or
omission of a material fact necessary to make the
statement not misleading, if--
``(I) that covered person makes an
untrue statement of a material fact,
with actual knowledge that the
representation is false, or omits to
state a fact necessary in order to make
the statement made not misleading, with
actual knowledge that, as a result of
the omission, one of the material
representations of the covered person is
false; and
``(II) persons are likely to
reasonably rely on that
misrepresentation or omission; and
``(ii) with respect to an action that is based
on any conduct that is not described in clause
(i), if that covered person engages in that
conduct with actual knowledge of the facts and
circumstances that make the conduct of that
covered person a violation of the securities laws;
``(B) reckless conduct by a covered person shall not
be construed to constitute a knowing commission of a
violation of the securities laws by that covered person;
[[Page 109 STAT. 762]]
``(C) the term `covered person' means--
``(i) a defendant in any private action
arising under this title; or
``(ii) a defendant in any private action
arising under section 11 of the Securities Act of
1933, who is an outside director of the issuer of
the securities that are the subject of the action;
and
``(D) the term `outside director' shall have the
meaning given such term by rule or regulation of the
Commission.''.
(b) Amendments to the Securities Act of 1933.--Section 11(f) of the
Securities Act of 1933 (12 U.S.C. 77k(f)) <<NOTE: 15 USC 77k.>> is
amended--
(1) by striking ``All'' and inserting ``(1) Except as
provided in paragraph (2), all''; and
(2) by adding at the end the following new paragraph:
``(2)(A) The liability of an outside director under subsection (e)
shall be determined in accordance with section 38 of the Securities
Exchange Act of 1934.
``(B) For purposes of this paragraph, the term `outside director'
shall have the meaning given such term by rule or regulation of the
Commission .''.
SEC. 202. <<NOTE: 15 USC 77k note.>> APPLICABILITY.
The amendments made by this title shall not affect or apply to any
private action arising under the securities laws commenced before and
pending on the date of enactment of this Act.
SEC. 203. <<NOTE: 15 USC 78j-1 note.>> RULE OF CONSTRUCTION.
Nothing in this Act or the amendments made by this Act shall be
deemed to create or ratify any implied private right of action, or to
prevent the Commission, by rule or regulation, from restricting or
otherwise regulating private actions under the Securities Exchange Act
of 1934.
TITLE III--AUDITOR DISCLOSURE OF CORPORATE FRAUD
SEC. 301. FRAUD DETECTION AND DISCLOSURE.
(a) In General.--The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) is amended by inserting immediately after section 10 the
following new section:
``SEC. 10A. <<NOTE: 15 USC 78j-1.>> AUDIT REQUIREMENTS.
``(a) In General.--Each audit required pursuant to this title of the
financial statements of an issuer by an independent public accountant
shall include, in accordance with generally accepted auditing standards,
as may be modified or supplemented from time to time by the Commission--
``(1) procedures designed to provide reasonable assurance of
detecting illegal acts that would have a direct and material
effect on the determination of financial statement amounts;
``(2) procedures designed to identify related party
transactions that are material to the financial statements or
otherwise require disclosure therein; and
``(3) an evaluation of whether there is substantial doubt
about the ability of the issuer to continue as a going concern
during the ensuing fiscal year.
[[Page 109 STAT. 763]]
``(b) Required Response To Audit Discoveries.--
``(1) Investigation and report to management.--If, in the
course of conducting an audit pursuant to this title to which
subsection (a) applies, the independent public accountant
detects or otherwise becomes aware of information indicating
that an illegal act (whether or not perceived to have a material
effect on the financial statements of the issuer) has or may
have occurred, the accountant shall, in accordance with
generally accepted auditing standards, as may be modified or
supplemented from time to time by the Commission--
``(A)(i) determine whether it is likely that an
illegal act has occurred; and
``(ii) if so, determine and consider the possible
effect of the illegal act on the financial statements of
the issuer, including any contingent monetary effects,
such as fines, penalties, and damages; and
``(B) as soon as practicable, inform the appropriate
level of the management of the issuer and assure that
the audit committee of the issuer, or the board of
directors of the issuer in the absence of such a
committee, is adequately informed with respect to
illegal acts that have been detected or have otherwise
come to the attention of such accountant in the course
of the audit, unless the illegal act is clearly
inconsequential.
``(2) Response to failure to take remedial action.--If,
after determining that the audit committee of the board of
directors of the issuer, or the board of directors of the issuer
in the absence of an audit committee, is adequately informed
with respect to illegal acts that have been detected or have
otherwise come to the attention of the accountant in the course
of the audit of such accountant, the independent public
accountant concludes that--
``(A) the illegal act has a material effect on the
financial statements of the issuer;
``(B) the senior management has not taken, and the
board of directors has not caused senior management to
take, timely and appropriate remedial actions with
respect to the illegal act; and
``(C) the failure to take remedial action is
reasonably expected to warrant departure from a standard
report of the auditor, when made, or warrant resignation
from the audit engagement;
the independent public accountant shall, as soon as practicable,
directly report its conclusions to the board of directors.
``(3) Notice to commission; response to failure to notify.--
An issuer whose board of directors receives a report under
paragraph (2) shall inform the Commission by notice not later
than 1 business day after the receipt of such report and shall
furnish the independent public accountant making such report
with a copy of the notice furnished to the Commission. If the
independent public accountant fails to receive a copy of the
notice before the expiration of the required 1-business-day
period, the independent public accountant shall--
``(A) resign from the engagement; or
``(B) furnish to the Commission a copy of its report
(or the documentation of any oral report given) not
later than 1 business day following such failure to
receive notice.
[[Page 109 STAT. 764]]
``(4) Report after resignation.--If an independent public
accountant resigns from an engagement under paragraph (3)(A),
the accountant shall, not later than 1 business day following
the failure by the issuer to notify the Commission under
paragraph (3), furnish to the Commission a copy of the
accountant's report (or the documentation of any oral report
given).
``(c) Auditor Liability Limitation.--No independent public
accountant shall be liable in a private action for any finding,
conclusion, or statement expressed in a report made pursuant to
paragraph (3) or (4) of subsection (b), including any rule promulgated
pursuant thereto.
``(d) Civil Penalties in Cease-and-Desist Proceedings.--If the
Commission finds, after notice and opportunity for hearing in a
proceeding instituted pursuant to section 21C, that an independent
public accountant has willfully violated paragraph (3) or (4) of
subsection (b), the Commission may, in addition to entering an order
under section 21C, impose a civil penalty against the independent public
accountant and any other person that the Commission finds was a cause of
such violation. The determination to impose a civil penalty and the
amount of the penalty shall be governed by the standards set forth in
section 21B.
``(e) Preservation of Existing Authority.--Except as provided in
subsection (d), nothing in this section shall be held to limit or
otherwise affect the authority of the Commission under this title.
``(f) Definition.--As used in this section, the term `illegal act'
means an act or omission that violates any law, or any rule or
regulation having the force of law.''.
(b) <<NOTE: 15 USC 78j-1 note.>> Effective Dates.--The amendment
made by subsection (a) shall apply to each annual report--
(1) for any period beginning on or after January 1, 1996,
with respect to any registrant that is required to file selected
quarterly financial data pursuant to the rules or regulations of
the Securities and Exchange Commission; and
(2) for any period beginning on or after January 1, 1997,
with respect to any other registrant.
Newt Gingrich
Speaker of the House of Representatives.
Strom Thurmond
President of the Senate pro tempore.
IN THE HOUSE OF REPRESENTATIVES, U.S.
December 20, 1995.
The House of Representatives having proceeded to reconsider the bill
(H.R. 1058) entitled ``An Act to reform Federal securities litigation,
and for other purposes'', returned by the President of the United States
with his objections, to the House of Representatives, in which it
originated, it was
[[Page 109 STAT. 765]]
Resolved, That the said bill pass, two-thirds of the House of
Representatives agreeing to pass the same.
Robin H. Carle
Clerk.
I certify that this Act originated in the House of Representatives.
Robin H. Carle
Clerk.
IN THE SENATE OF THE UNITED STATES,
December 22, 1995.
The Senate having proceeded to reconsider the bill (H.R. 1058)
entitled ``An Act to reform Federal securities litigation, and for other
purposes'', returned by the President of the United States with his
objections, to the House of Representatives, in which it originated, and
passed by the House of Representatives on reconsideration of the same,
it was
Resolved, That the said bill pass, two-thirds of the Senators present
having voted in the affirmative.
Attest:
Kelly P. Johnston
Secretary.
LEGISLATIVE HISTORY--H.R. 1058 (S. 240):
---------------------------------------------------------------------------
HOUSE REPORTS: No. 104-369 (Comm. of Conference).
SENATE REPORTS: No. 104-98 accompanying S. 240 (Comm. on Banking,
Housing, and Urban Affairs).
CONGRESSIONAL RECORD, Vol. 141 (1995):
Mar. 7, 8, considered and passed House.
June 22, 23, 26-28, considered and passed Senate, amended,
in lieu of S. 240.
Dec. 5, Senate agreed to conference report.
Dec. 6, House agreed to conference report.
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 31 (1995):
Dec. 19, Presidential veto message.
CONGRESSIONAL RECORD, Vol. 141 (1995):
Dec. 20, House overrode veto.
Dec. 22, Senate overrode veto.
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