The Dodd-Frank Act (DFA) has reduced the scienter requirement from “knowingly” to “knowingly or recklessly” in any federal court action instituted by the SEC for providing substantial assistance (i.e., aiding and abetting) in connection with a violation under the Securities Exchange Act of 1934. DFA also added provisions to the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers Act of 1940 that, for the first time, explicitly authorize the SEC to bring actions for aiding and abetting violations under those statutes. As under the revised 1934 Act provision, the scienter standard for aiding and abetting actions under these other three statutes is “knowingly or recklessly.”

By way of example, a lawyer who assists in the preparation of a false press release could “knowingly” aid and abet a violation only if the lawyer knew of the falsity. In contrast, the lawyer could “recklessly” aid and abet the violation merely by failing to investigate the release’s accuracy.

Jorden Burt expects difficult questions to arise under the lower standard; in many cases it will be uncertain whether (and how much) investigation is required in order to avoid potential exposure as an aider and abettor. This quandary will not only affect lawyers, but also other “gatekeepers,” such as such as accountants and banks.

So far, this change is not applicable to private actions, because there is no private right of action for aiding and abetting federal securities law violations. DFA, however, directs the U.S. Comptroller General to study the potential impact of such a private right of action.