Corporate Governance

The Dodd-Frank Wall Street Reform Act and the SEC: Profound Bits and Pieces (Aiding and Abetting)(UNPUBLISHED)

By J Robert Brown Jr.

There was some attempt to add aiding and abetting liability for private actions under the securities laws.  The efforts, however, failed. 

Instead, Congress strengthened the SEC's authority to bring actions for aiding and abetting.  Section 20 of the Exchange Act allows the SEC to bring an aiding and abetting claim against "any person that knowingly provides substantial assistance" to a primary violator. The requirement of actual knowledge of the violation provides a serious limit on efforts to bring actions against lower level participants in the fraud.  They may have provided substantial assistance but did not actually know about the fraud. 

Congress has softened this requirement in the Dodd-Frank Act by allowing actions to be brought on the basis of reckless behavior.  The change will make it much easier for the Commission to bring actions against those who assist in the fraud without having actual knowledge of the scheme.  Think salespeople.  

Pressure for aiding and abetting liability in private actions may arise once the Supreme Court decides Janus Capital Group v. First Derivative Traders, another case that will plumb the destinction between primary and secondary liabilty.  The Court recently took cert on whether an investment adviser can be liable under the antifraud provisions for participating in the drafting of the allegedly false statement where the statement was not attributed directly to the adviser.  To the extent that the Supreme Court finds that those drafting false statements are not liable as primary violators, the attention will shift to Congress to address the gap in the securities laws. 

SEC. 929M. AIDING AND ABETTING AUTHORITY UNDER THE SECURITIES ACT AND THE INVESTMENT COMPANY ACT. (a) UNDER THE SECURITIES ACT OF 1933.-

Section 15 of the Securities Act of 1933 (15 U.S.C. 770) is amended-

(1) by striking "Every person who" and inserting "(a) CONTROLLING PERSONS.-Every person who" and (2) by adding at the end the following:

(b) PROSECUTION OF PERSONS WHO AID AND ABET VIOLATIONS.-For purposes of any action brought by the Commission under subparagraph (b) or (d) of section 20, any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this Act, or of any rule or regulation issued under this Act, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided."

(b) UNDER THE INVESTMENT COMPANY ACT OF 1940.-Section 48 of the Investment Company Act of
1940 (15 U.S.C. 80a-48) is amended by redesignating subsection (b) as subsection (c) and inserting after sub-section (a) the following:

(b) For purposes of any action brought by the Commission under subsection (d) or (e) of section 42, any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this Act, or of any rule or regulation issued under this Act, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.".

SEC. 929N. AUTHORITY TO IMPOSE PENALTmS FOR AIDING AND ABETTING VIOLATIONS OF THE INVESTMENT ADVISERS ACT.  Section 209 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-9) is amended by inserting at the end the following new subsection:

(f) AIDING AND ABETTING.-For purposes of any action brought by the Commission under subsection (e),
any person that knowingly or recklessly has aided, abetted, counseled, commanded, induced, or procured a violation of any provision of this Act, or of any rule, regulation, or order hereunder, shall be deemed to be in violation of such provision, rule, regulation, or order to the same extent as the person that committed such violation."

SEC. 9290. AIDING AND ABETTING STANDARD OF KNOWLEDGE SATISFIED BY RECKLESSNESS.
Section 20(e) of the Securities Exchange Act of 1934 (15 U.S.C. 78t(e)) is amended by inserting "or recklessly" after "knowingly"

Full post as published by The Race to the Bottom on August 03, 2010 (boomark / email).