The United States Securities and Exchange Commission (SEC) was established to protect investors and support fair and efficient financial markets. To combat bribery of foreign officials in the practice of business, the Foreign Corrupt Practices Act enacted Section 13(b) of the Securities Exchange Act of 1934. Generally, Section 13(b) establishes requirements for the financial records, internal controls, and accounting of public companies. Section 13(b) maintains stricter requirements for financial records for the public and SEC to easily detect illegal activity as well as to deter the companies from participating in these activities. Following the Sarbanes-Oxley Act of 2002, the SEC enacted Rule 13b2-2 to clarify and strengthen the requirements of Section 13(b).

Currently, there is a circuit split concerning whether scienter is requisite to finding liability under Rule 13b2-2. Only four federal circuits have ruled on this issue, and the majority of ruling appellate courts currently hold that there is not a scienter requirement in Rule 13b2-2. This holding has been established by the Second Circuit in SEC v. McNulty, the Seventh Circuit in McConville v. SEC, and the Eighth Circuit in SEC v. Das. Additionally, the courts find that the SEC upholds this view as well.

The Ninth Circuit in SEC v. Todd held that there is a stricter standard for imposing liability under Rule 13b2-2. This standard is the scienter requirement, which requires the individual to knowingly make misrepresentations to an external financial statement auditor. The crux of the Ninth Circuit’s reasoning is that to not impose a scienter requirement would be to open liability on a wider class of individuals than intended by Congress in the enactment of the rule. With correct intentions, the Ninth Circuit successfully blurred the lines between whether there is a scienter requirement to find liability under Rule 13b2-2.

It is important to clarify that Rule 13b2-2 does not explicitly state a scienter requirement to find liability, but should require the individual to have knowledge of the misrepresentation. The policy argument of the Ninth Circuit in Todd should not be ignored, but it also should not be used to create a requisite mental component to the rule that Congress did not intend. Rule 13b2-2 should have a knowledge requirement, but this requirement should be separate and distinct from a scienter requirement.