Corporate Governance

How the Wall Street Reform Act Impacts Smaller Businesses: Expansion of the Anti-Fraud Rules and SEC Enforcement

By J Robert Brown Jr.

The Act also enhances the application of the anti-fraud provisions under the securities laws. Section 9(e) of the 1934 Act45 grants a civil remedy for damages to the plaintiff if he bought or sold stock during a time when the market for that stock on a national securities exchange was being manipulated in violation of §§ 9(a), (b), or (c).46 The Act removes the phrase 'registered on a national securities exchange' from §§ 9(a), (b), and (c), thus expanding the reach of Section 9(e) to the over-the-counter market for securities.47 The Act makes a similar change to § 10(a) (regulating short sales of securities) and § 15(c)(1)(A) (regulating brokerdealers).48

The Act makes it clear that the SEC has the right to prosecute persons who 'knowingly or recklessly' aid and abet securities law violations under the 1933 Act,49 the Investment Company Act of 1940 (the 'Company Act'),50 the Investment Advisers Act of 1940 (the 'Advisers Act'),51 and the 1934 Act.52 The Act also requires that the Comptroller General study the effect that authorizing private rights of action against persons aiding and abetting securities law violations may have on the market for securities. The Comptroller General must submit its report within one year.53

Section 8A of the 1933 Act gives the SEC the authority to act by cease and desist order, and in cease and desist proceedings to order an accounting, a disgorgement of profits, and a bar against a person serving as an officer or director of a company with securities registered under §12 of the 1934 Act. The Act expands the SEC's cease and desist authority by giving the SEC the right to impose civil penalties ranging from $7,500 for a natural person ($75,000 for any other person) to $150,000 for minor violations and up to $725,000 for more serious violations.54 Similar amendments were made to § 21B(a) of the 1934 Act,55 § 9(d)(1) of the Company Act,56 and § 203(i)(1) of the Advisers Act.57

In June 2010, the United States Supreme Court issued its much anticipated 'foreign cubed' decision, which limited the jurisdiction of U.S. courts to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.58 In that case, the foreign plaintiffs sued for violations of Rule 10b-5 in a United States federal court. In the decision, the Supreme Court noted that when a statute gives no clear indication of an extraterritorial application, it has none. In apparent anticipation of that decision, Congress specifically gave the SEC (but not private plaintiffs) extraterritorial jurisdiction in proceedings brought by the SEC alleging a violation of § 17(a) of the 1933 Act,59 or any violations of the 1934 Act60 or the Advisers Act61 by persons outside the United States for conduct within the United States that constitutes significant steps in furtherance of securities violations even where the transaction occurs outside the United States and involves only foreign investors. Jurisdiction also is available where conduct occurred outside the United States but which had a foreseeable substantial effect within the United States. The Act also requires the SEC to study whether these extraterritorial rights should extend to private rights of action.62

Frequent targets of SEC investigations are given an opportunity to make their case before the SEC institutes a formal proceeding in a process known as a 'Wells submission.'63 Many times, however, the SEC never advises the target whether or not any recommendation has been made to the SEC. Section 929U of the Act added a new § 4E to the 1934 Act which requires the SEC staff either to file an action against the enforcement target within 180 days of the date the staff provided the target with the written Wells notification, or provide notice of the staff's intent not to file any action. The Act does provide exceptions for certain complex actions.

The Act amends the 1933 Act, the 1934 Act, the Company Act, and the Advisers Act by
giving the SEC nationwide service of process for subpoenas issued in enforcement actions.64

Herrick K. Lidstone, Jr., Burns Figa & Will, PC

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45 Section 9(e) of the 1934 Act will become 9(f), as a result of amendments to § 9 of the 1934 Act included in § 929X(b) of the Act.
46 See general discussion in Lidstone, Securities Law Deskbook (Bradford Publishing Co.) at § 16.2.
47 Section 929L of the Act.
48 Section 929L of the Act.49 Section 929M of the Act amending § 15 of the 1933 Act (providing for control person liability).
50 Section 929M of the Act amending § 48 of the Company Act, 15 U.S.C. § 80b-1, et seq.
51 Section 929N of the Act adding § 209(f) to the Advisers Act, 15 U.S.C. § 80a-1, et seq.
52 Section 929O of the Act amending § 20(e) of the 1934 Act by adding 'recklessly' where the 1934 Act
already provided for 'knowingly.'
53 Section 929Z of the Act. The U.S. Supreme Court determined that there was no private right of action for aiding and abetting a violation of 1934 Act Rule 10b-5 (adopted under § 10(b) in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994). See general discussion of aiding and abetting liability under the federal securities laws in Lidstone, Securities Law Deskbook (Bradford Publishing Co.) at §§ 16.11.?

54 Section 929P(a)(1) of the Act.
55 Section 929P(a)(2) of the Act.
56 Section 929P(a)(3) of the Act.
57 Section 929P(a)(4) of the Act.
58 Morrison v. National Australia Bank, Ltd., ____ U.S. ____, Fed. Sec. L. Rep. (CCH) ¶ 95,776 (2010).
59 Section 929P(b)(1) of the Act, amending § 22 of the 1933 Act.
60 Section 929P(b)(2) of the Act, amending § 27 of the 1934 Act.
61 Section 929P(b)(3) of the Act, amending § 214 of the Advisers Act.
62 Section 929Y of the Act.
63 See general discussion in Lidstone, Securities Law Deskbook (Bradford Publishing Co.) at §§ 13.1.3.

64 Section 929E of the Act, amending § 22(a) of the 1933 Act, § 27 of the 1934 Act, § 44 of the Company
Act, and § 214 of the Advisers Act.

Full post as published by The Race to the Bottom on July 30, 2010 (boomark / email).