Supreme Court Rules DOMA Unconstitutional – Securities Law And Corporate Finance Implications


On June 26, 2013, the U.S. Supreme Court, in U.S. v. Windsor, ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional because it violates the Fifth Amendment’s equal protection guaranty for persons of the same sex who are legally married under the laws of their state of residence.

Prior to the Windsor ruling, Section 3 of DOMA provided that only persons of the opposite sex are recognized as “spouses” or “married” for purposes of federal law. Section 3 of DOMA applied to over 1,000 federal laws, rules and regulations, including the federal securities laws. As a result of the Windsor ruling, same-sex couples who are legally married in the state of their residence1 are required to be recognized as “spouses” or “married” for purposes of federal law. The Windsor ruling has immediate implications for public companies and compliance with certain securities laws, rules and regulations. In addition, the ruling may also impact self-regulatory organizations, such as the Financial Industry Regulatory Authority, Inc. (FINRA).

Below is a high-level overview of some of the most significant effects the Windsor ruling is expected to have on various types of securities compliance:

Definition of Accredited Investor – Regulation D

Certain exemptions, notably Rules 505 and 506 of Regulation D under the Securities Act of 1933, as amended (Securities Act), to registration of an offer or sale of a Company’s securities limit the number of investors who are not “Accredited Investors.” Federal securities laws define an Accredited Investor, in the context of an individual, to include:

  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person, or
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

Previously, the determination of joint net worth and joint income excluded same-sex couples. As a result of Windsor and specifically its impact on the definition of a “spouse,” a same-sex married couple who previously did not meet the Accredited Investor test as individuals will now meet the test as a recognized married couple. In addition, issuers seeking to raise capital from exempt offerings under Regulation D will be entitled to consider a potential investor’s same-sex spouse for whether such individual meets the definition of Accredited Investor under the net worth and income tests.

Other Definitional Considerations

Additional areas of changes where references to “spouse” within a definitional section of a rule or regulation now includes same-sex spouses include:

  • Rule 144, Persons deemed not to be engaged in a distribution and therefore not underwriters. The term “person” when used with reference to a person for whose account securities are to be sold in reliance upon the Rule 144 safe harbor now includes any same-sex spouse of such person.
  • Regulations 14A, Solicitation of Proxies. Within Rule 14a-1(a), the definition of “associate,” used to indicate a relationship with any person, means, among other things, “[a]ny relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the registrant or any of its parents or subsidiaries.”
  • Regulations 14C, Distribution of Information Pursuant to Section 14(c). Within Rule 14c-1(a), the definition of “associate,” used to indicate a relationship with any person, means, among other things, “[a]ny relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the registrant or any of its parents or subsidiaries.”
  • Section 16 Filing and Short-Swing Profit Liability. Same-sex spouses are now subject to joint filing and liability under Section 16 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Rule 16a-1of the Exchange Act defines “beneficial interest” to mean, among others, an “indirect pecuniary interest,” which is defined to mean, among other things, the interests of any “immediate family members” (including spouses) sharing the same household.
  • Rule 203(b)(3)-1, Definition of “Client” of an Investment Adviser. Same-sex spouses may now be deemed to be a single client for purposes of Section 203(b)(3) of the Securities Act.

Expanded Disclosure Requirements – Item 404 of Regulation S-K

Publicly traded companies subject to disclosure requirements must now, following Windsor, consider and publicly disclose certain transactions with same-sex spouses as related person transactions under Item 404 of Regulation S-K. In accordance with the instructions to Item 404(a), related persons include now include the same-sex spouse of a public company director, executive officer or nominee for director and the same-sex spouse of certain beneficial owners.

Restricted Persons in Syndicate or New Issue Offerings – FINRA Corporate Finance Rules

  • FINRA Rule 5110 restricts the compensation FINRA member firms can be paid in the context of underwritten public offerings. Immediate family members of associated persons of members are included in the definition of “Participating Members” when computing and reporting all compensation received by the member.
  • FINRA Rule 5130 prohibits “restricted persons” from participating in syndicate or new issue offerings (generally understood to mean IPOs). In addition to including officers, directors, general partners, associated persons or employees of FINRA member firms or any other broker dealer and any agents of a member firm or any other broker/dealer that is engaged in the investment banking or securities business, Rule 5130 also defines “restricted persons” to include any immediate family member of a person specified above. Following Windsor, same-sex spouses now face similar IPO investment restrictions as opposite-sex spouses if they are married to a broker dealer employee or any of its agents, subject to certain exceptions.

Pepper Points

The SEC and other federal regulators may issue guidance pertaining to the implications of the Windsor ruling. In the meantime:

  • The Accredited Investor standard is a cornerstone of private placements and private capital raising. The “accredited-only” crowdfunding industry is booming in the wake of the recent FundersClub Inc. (March 26, 2013) and AngelList LLC (March 28, 2013) SEC no-action letters.
  • Public company boards of directors should review their system of controls and disclosure with their audit, compensation, nomination and other committees to identify any additional disclosure required, or controls to be implemented, for their directors, named executive officers, certain beneficial owners and nominees for directors to determine whether any changes are needed in response to the Windsor ruling.
  • Section 16 reporting persons with same-sex spouses sharing a household will now need to include the spouse’s holdings in the reporting person’s Section 16 reports.
  • Entities engaged in syndicate or new issue offerings should review all individuals participating in such to ensure that no persons are the same-sex spouses, and therefore restricted persons under FINRA Rule 5130, of officers, directors, general partners, associated persons or employees of member firms or other broker dealers, or any agents of a member firm or any other broker/dealer.
  • For a review of the impact of the Windsor case on employee benefit plans, please see "Supreme Court Rules DOMA Unconstitutional – Employee Benefit Plan Implications," Client Alert, June 27, 2013.  


1 Delaware (effective July 1, 2013), the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington. As used in this Client Alert, the term “married” refers to a marriage which is legal and appropriately licensed under the laws of the jurisdiction in which it was performed, and the term “spouse” has a correlative meaning.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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