Securities Newsroom

Act To End Abusive Federal Securities Class Action Lawsuits And To Increase The Flow Of Information To Investors

In 1995, Congress passed the Private Securities Litigation Reform Act [Pub. Law No. 104-67] (hereinafter called the "1995 Act") to end abusive federal securities class action lawsuits and to increase the flow of information to investors. The 1995 Act was the first bill enacted over President Clinton's veto. During a Committee hearing on implementation of the 1995 Act, testimony showed that federal reforms were being circumvented by class action lawsuits being brought in state courts. While the exact number of cases that have shifted from federal to state court is unknown, it is clear that prior to enactment of the 1995 Act, "state-court class actions involving nationally traded securities were virtually unknown prior to the [1995 Act]; they are brought with some frequency now" [Written testimony of John F. Olson, Hearing on S. 1260, 2/23/98, as quoted in the Committee Report, p. 4.]. To address these concerns, this bill would amend the 1933 Securities Act and the 1934 Securities Exchange Act to establish uniform standards governing private class actions involving companies issuing nationally traded securities. Some critics have attacked the legislation as being an affront on Federalism. Proponents of the legislation argue that securities are traded in national markets and that uniform standards are consistent with the federal government's role in promoting free trade and interstate commerce. The legislation does not interfere with the ability of state officials to file cases in state courts, nor with the ability of individual litigants to seek relief in state courts for actions involving 50 or fewer plaintiffs. The bill does, however, does provide a definition for "class action" [Section 2(f)(1)(A)(ii)] that is intended to prevent evasion of the bill through the use of so-called "mass actions" or other actions that might be used to circumvent the 1995 Act. On the other hand, the "Committee does not intend [with a stated exception] for the bill to prevent plaintiffs from bringing bona fide individual actions simply because more than fifty persons commence the actions in the same state court against a single defendant" [Committee Report, p. 7].