San Diego Securities Law Blog

The Dodd-Frank Wall Street Reform and Consumer Protection Act has as its goal to re-shape the United States regulatory landscape, reduce risk, and restore confidence in the United States financial system.  The Act contains more than 90 provisions that require the United States Securities and Exchange Commission (SEC) to adopt rules of implementation.

The Act has a number of provisions relating to corporate governance and executice compensation disclosures for securities issuers.

Section 951 of the Act requires the advisory votes of shareholders concerning executive compensation and golden parachute arrangements; requires specific disclosure of golden parachutes in merger proxies; and requires certain institutional investment managers to report at least annually how they voted in advisory shareholder votes concerning executive compensation and golden parachutes.

Section 952 of the Act requires disclosures concerning the role of compensation consultants, and their potential conflicts of interest; requires the SEC to direct that the securities exchanges adopt listing standards that include new independence requirements for members of securities issuers' compensation committees; and directs the SEC to establish competitively neutral independence factors for all persons who are retained to advise compensation committees.

Other sections of the Act require disclosures about pay-for-performance and the ratio between the CEO's total compensation and the median compensation of all other employees; require the SEC to direct securities exchanges to prohibit listing securities of issuers without compensation claw-back policies; and require disclosures about whether directors and employees are permitted to hedge any decrease in market value of the company's stock.

In implementation of these provisions, and to date, the SEC has proposed or adopted rules concerning shareholder approval votes; rules directing the national securities exchanges to adopt listing standards relating to an issuer's compensation committee and compensation advisors; and rules requiring institutional investment managers to report their votes on executive compensation and golden parachute arrangements.

In other areas, and to date, the SEC has adopted new rules revising the "accredited investor" standard--requiring that the value of an individual's personal residence be excluded from the calculation of the individual's net worth for purposes of determining whether the individual has sufficient net worth to be eligible to invest in certain unregistered securities (including private placement offerings).  Also adopted are rules requiring new disclosures by mining companies--requiring that mining companies include information about mine safety and health issues in their quarterly and annual reports filed with the SEC.  And there are new rules adjusting the threshold used to determine whether in individual is a "qualified client" of a registered investment advisor.

For more information on the SEC's role in implementing the provisions of Dodd-Frank visit the SEC's website at www.sec.gov.

Janus Capital Group v. First Derivative Traders (2011) 131 S. Ct. 2296.

First Derivative Traders, representing a class of stockholders in Janus Capital Group, Inc., alleged that Janus Capital Group, Inc. and its wholly owned subsidiary Janus Capital Management LLC made false statements in prospectuses prospectuses filed by the Janus Investment Fund.  Janus Capital Group, Inc. created the Janus Investment Fund, and its subsidiary Janus Capital Management LLC served as the Fund's advisor and administrator.  Nevertheless, the United States Supreme Court held that only the Janus Investment Fund made the false statements for purposes of Rule 10b-5 (securitis fraud) liability; and that neither the Janus Capital Group, Inc. nor its subsidiary Janus Capital Management LLC could be liable therefor.

The Court reasoned that the Janus Investment Fund is a separate legal entity, wholly owned by mutual fund investors.  Even though the Janus management LLC advised and administrated the Fund, and even though the Janus management LLC was significantly involved with preparing the prospectuses at issue, only the Fund had ultimate control over whether to use the prospectuses and make the false statements.  The Court stated it was following its decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994) 511 U.S. 164, in which the Court held that a private right of action under Rule 10b-5 does not extend to suits against aiders and abettors--individuals or entities that contribute substantial assistance in the making of a false statement, but do not actually make it.  The Court also rejected the plaintiff's argument that as investment advisor, the management LLC should be liable as a "control person" of the Fund actually making the statements.  The Court found that the Fund was a sufficiently separate legal entity, that the corporate formalities had been observed, and that the Fund alone had the ultimate authority over whether to use or to file with the SEC the contents of the prospectuses at issue.  Justice Thomas, who wrote the Court's majority opinion, analogized the Court's ruling on liability to the relationship between a speechwriter and a speech giver or speaker.

The Court acknowledged that Section 20(a) of the Securities and Exchange Act of 1934 provides for the liability of "[e]very person who, directly or indirectly, controls any person liable" for violations of the securities laws; and that the management LLC's significant influence over the Fund resembled the liability created by statute for control; but found, without explanation, that to adopt the plaintiff's theory of liability would read into Rule 10b-5 a theory of liability broader that that expressly created by statute.

In the dissenting opinion written by Justice Breyer, the dissenting minority of Justices rejected the majority's equation of the word "make" with regard to a statement with the concept of having "ultimate authority" over a statement's content and use; and argued that a management company, a board of trustees, company officers, and others might "make" statements contained in a firm's prospectus, even if a board of directors had ultimate responsibility for its use and content.  They further argued that Central Bank concerned the issue of secondary liability, and not the extent of a private right of action under Rule 10b-5; and that Central Bank is inapplicable in this case because this case concerns who all has primary liability for the making of a false statement.

Finally, the minority read the majority's footnote 10 as hinting that Section 20(a) could possibly provide a basis for control person liability here, and stated that the majority should have remanded the case for possible amendment of the complaint.

The essence of the Supreme Court's decision in the Janus case is to find that only those who have "ultimate authority" over issuing an allegedly false statement can be sued for securities fraud; and that those who may manage the issuing entity or those who even may have created or written the allegedly false statement cannot--thus severely limiting the sphere of liability for securities fraud under federal law.