Statement of Administration Policy: S. 240 - Private Securities Litigation Reform Act of 1995

(Senate)
(Domenici (R) NM and 51 cosponsors)

The Administration supports appropriate reforms of the federal securities laws. The goal should be to end litigation abuses and to clarify the law, without improperly limiting the rights of investors to pursue civil actions against financial fraud.

As reported by the Senate Banking Committee, S. 240 contains a number of provisions designed to end litigation abuses which the Administration endorses. A number of its original provisions that had been the-focus of committee discussions have been modified appropriately or deleted. S. 240 is now a substantial improvement on H.R. 1058, which the Administration could not support. For instance, S. 240 rejects certain of H.R. 1058's egregious provisions, such as its "loser-pays" approach and its too-stringent definition of recklessness. At the same time, S. 240 adopts several sensible provisions, including a workable pleading standard taken from the Second Circuit, and appropriate class action reform provisions.

The Administration recommends the following modifications to two provisions in the bill:

• Safe Harbor — The Administration supports the Committee's attempt to craft a statutory safe harbor that would encourage the dissemination of forward-looking statements without protecting statements made with an intent to mislead. The Administration does not believe a safe harbor should protect statements known to be materially false or misleading when made. The Senate should clarify whether the safe harbor's current language would protect such statements.
  
  
• Proportionate Liability — The Administration opposes the bill's provision that would establish proportionate liability for reckless defendants because in cases involving insolvent defendants, the provision would leave investors unable to recover their full damages. Culpable solvent defendants, rather than defrauded investors, should at least bear a substantial portion of this noncollection risk. Accordingly, the Administration supports an amendment that would require culpable solvent defendants to pay up to twice their proportionate share of damages (rather than 150 percent as in the Committee bill), when other defendants have gone bankrupt or fled.

The Administration, recommends that the Senate adopt the following measures, which are not included in S. 240:

• Private Aiding-and-Abetting — The Committee bill explicitly retains the SEC's authority to take action against those who knowingly aid and abet securities fraud. Congress should also restore this action for the SEC against reckless aiders and abetters, as well as for private actions that follow a successful SEC action.
  
  
• Statute of Limitations — The Administration recommends extending the statute of limitations for private securities fraud actions to five years after a violation occurs. Although S. 240 as originally introduced addressed this issue, the Committee deleted it from the bill.

It should be noted that the Securities and Exchange Commission has expressed many of the same concerns with respect to this legislation. The Administration encourages the Senate to continue to work with the Securities and Exchange Commission to ensure that S. 240 redresses litigation abuses while preserving the ability of investors to bring class-action lawsuits against financial fraud, a legal device that is critical to the maintenance and integrity of our financial markets.

Pay-As-You-Go Scoring

S. 240 could affect receipts; therefore, it is subject to the pay- as-you-go (PAYGO) requirement of the Omnibus Budget Reconciliation Act of 1990. The preliminary OMB PAYGO estimate is zero. Final scoring of this legislation may deviate from this estimate.