.

Client Alert

REIT Alert: SEC Updates Financial Disclosures about Acquisitions and Dispositions of Businesses, Including Real Estate Operations

October 19, 2020

by Cam C. Hoang and John V. Chase

Download as a PDF

Share this page

 

Earlier this year, the Securities and Exchange Commission updated its requirements to provide financial information about acquisitions and dispositions of businesses and real estate operations, the first time that these requirements had been comprehensively addressed in over 30 years.  The amendments impact disclosure in current reports under Form 8-K, which are filed by reporting companies, as well as disclosure in certain transaction filings (registration statements, proxy statements and prospectuses).

In addition to changes to the content and presentation of financial disclosure under Regulation S-X, the amendments are intended to raise the threshold when determining whether acquisitions and dispositions are significant for purposes of triggering financial disclosure.  The amendments – of particular interest to real estate investment trusts (“REITs”) – clarify that the investment test under Rule 1-02(w) is to be used to measure the significance of transactions in real estate operations.  The amendments also more closely align the financial disclosure requirements for acquisitions of real estate operations under Rule 3-14 with those applicable to acquisitions of other businesses under Rule 3-05.

The amendments will be effective on January 1, 2021, but voluntary compliance is permitted in advance of the effective date as long the registrant complies with the amendments in their entirety.


Background

 As the Commission explains in the press release accompanying the final amendments, when a registrant acquires a significant business, other than a real estate operation, Rule 3-05 of Regulation S-X generally requires a registrant to provide separate audited annual and unaudited interim pre-acquisition financial statements of that business.  The number of years of financial information that must be provided depends on the relative significance of the acquisition to the registrant.

Rule 3-14 of Regulation S-X addresses the unique nature of real estate operations and requires a registrant that has acquired a significant real estate operation to file financial statements with respect to such acquired operation.

In addition to the historical financial statements required under Rule 3-05 or 3-14, Article 11 of Regulation S-X requires registrants to file unaudited pro forma financial information relating to the acquisition or disposition.  Pro forma financial information typically includes a pro forma balance sheet and pro forma income statements based on the historical financial statements of the registrant and the acquired or disposed business, including adjustments to show how the acquisition or disposition might have affected those financial statements.


Changes to Significance Tests for Acquisitions and Dispositions

 The significance of an acquisition or disposition is measured using the investment, asset  and income tests under the “significant subsidiary” definition in Rule 1-02(w) of Regulation S-X, Securities Act Rule 405 and Securities Exchange Act Rule 12b-2.  The amendments revise the investment test and the income test, but no substantive revisions were made to the asset test.  Furthermore, the amendments clarify that only the investment test should be used for real estate operations.

The amendments, among other things, update the significance tests by:

  • increasing the significance threshold for dispositions from 10% to 20%, so that it is equal to the threshold for acquisitions;
  • revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business or real estate operation to the registrant’s aggregate worldwide market value if available; in the absence of an aggregate worldwide market value, investments may continue to be compared to a registrant’s total assets;
  • revising the income test by adding a revenue component, so that a business is only significant if it exceeds an income threshold as well as a revenue threshold; and
  • expanding the use of pro forma financial information in measuring significance, if the registrant has previously completed a significant acquisition after its last fiscal year and has filed historical and pro forma financial statements on a current report on Form 8-K.

The amendments also modify and enhance the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by:

  • eliminating historical financial statements for insignificant businesses and real estate operations; and
  • expanding the pro forma financial information to depict the aggregate effect of the acquisitions in all material respects.

In terms of periods to be presented, the amendments require the financial statements of the acquired business to cover no more than the two most recent fiscal years, though three years of historical financial statements for a target company still could be required in a transaction subject to a shareholder vote.


Changes Specific to Real Estate Operations

Certain amendments that specifically affect real estate operations are summarized below.  Where they are referenced, “Rule 3-14 Financial Statements” refer to separate audited annual and unaudited interim abbreviated income statements with respect to such real estate operations.

Topic Old Rule New Rule
Definition of “Real Estate Operation” The Commission staff interpreted a “real estate operation” to refer to properties that generate revenues solely through leasing, but did not interpret this definition to preclude a property that included a limited amount of non-leasing revenues (like property management or other services related to the leasing).

“Real estate operation” is defined as “a business that generates substantially all of its revenues through the leasing of real property,” with the term “substantially” being dependent on the specific facts and circumstances.

The amendments clarify that a real estate operation is a “business” as that term is used in Article 11 for purposes of pro forma financial disclosure.
Significance Determination 

The significance threshold for individual acquisitions and dispositions is the 10 percent significance threshold in Rule 1-02(w).

Due to the nature of a real estate operation, staff interpretations have sought to focus registrants on the investment test in Rule 1-02(w), adapted to compare the registrant’s and its other subsidiaries’ “investments in” the real estate operation, including any debt secured by the real properties that is assumed by the registrant, to the registrant’s total assets at the last audited fiscal year end when determining “significance” under Rule 3-14.

The significance threshold for individual acquisitions and dispositions of real estate operations aligns with the 20 percent threshold for businesses in Rule 3-05.

New Rule 3-14(b)(2) requires the use of the investment test in Rule 1-02(w) to determine the significance of the acquisition or disposition of a real estate operation.  The new rule requires a registrant to compare its (and its other subsidiaries’) investments in and advances to the tested subsidiary to the aggregate worldwide market value of the registrant’s voting and non-voting common equity, when available.

If the registrant’s significance test is based on total assets (vs aggregate worldwide market value), consistent with the old rule, the test should be adapted to compare the registrant’s and its other subsidiaries’ “investments in” the real estate operation, including any debt secured by the real properties that is assumed by the registrant, to the registrant’s total assets as of the end of the most recently completed fiscal year.

The significance test for blind pool offerings by non-traded REITs is codified to compare the registrant’s and its other subsidiaries’ “investments in” the real estate operation to the sum of: (1) The registrant’s total assets as of the date of the acquisition, and (2) The proceeds (net of commissions) in good faith expected to be raised in the registered offering over the next 12 months.
Aggregate Effect of Insignificant Acquisitions Registrants must aggregate consummated and probable acquisitions since the date of the most recent audited balance sheet that are less than 10 percent significant, and if the significance of the aggregated group exceeds 10 percent, Rule 3-14 Financial Statements are provided for each acquisition that is 5 percent or more significant and for enough other acquisitions in order to cover the substantial majority of the group.

Registrants must aggregate consummated and probable acquisitions since the date of the most recent audited balance sheet that are less than 20 percent significant, and if the significance of the aggregated group exceeds 50 percent:

  • No historical financial information is required for any acquisitions that do not exceed the 20 percent significance threshold.
  • Pro forma financial information that depicts the aggregate impact of acquired or to be acquired real estate operations in all material respects is required.1
  • Financial statements covering at least the most recent fiscal year and the most recent interim period for any acquired or to be acquired real estate operation for which financial statements are not yet required based on Rule 3-14(b)(3)(i) for certain registration statements and proxy statements.
Related Party Acquisitions Registrants must provide three years of financial statements for significant acquisitions from related parties. The new Rule 3-14 eliminates the specific requirement to provide three years of financial statements for acquisitions from related parties. Like Rule 3-05, it does not differentiate the number of periods for which historical financial statements are required based on whether the seller is a related party or not.
Financial Statements Covering 9 to 12 months Existing Rule 3-06(b) provides that financial statements required under Rule 3-05 “covering a period of 9 to 12 months shall be deemed to satisfy a requirement for filing financial statements for a period of 1 year,” but it did not address acquired real estate operations under Rule 3-14. Rule 3-06(b) is revised explicitly to permit the filing of financial statements covering a period of 9 to 12 months to satisfy the requirement for filing financial statements for a period of 1 year for an acquired or to be acquired real estate operation.
Timing of Filings New Rule 3-14 includes the same period for the filing of Rule 3-14 Financial Statements in registration statements and proxy statements as exists under Rule 3-05.
Omission of Financial Statements New Rule 3-14 is aligned with new Rule 3-05 to no longer require Rule 3-14 Financial Statements in registration statements and proxy statements once the acquired real estate operation is reflected in filed post-acquisition registrant financial statements for nine months.
Interim Financial Statements Rule 3-14 does not include an express requirement for registrants to provide interim financial statements.  However, existing registrant practice is to provide interim financial statements for acquisitions of real estate operations. Rule 3-14 Financial Statements are specifically required for the most recent year-to-date interim period prior to the acquisition.
Auditor Independence Auditors of Rule 3-14 Financial Statements need not be independent.  Auditors of Rule 3-14 Financial Statements are subject to applicable independence standards.
Triple Net Leases In some circumstances, registrants acquire a real estate operation subject to a triple net lease with a single lessee. A triple net lease typically requires the lessee to pay costs normally associated with ownership of the property, such as property taxes, insurance, utilities, and maintenance costs. Under existing practice, registrants often provide audited financial statements of the lessee or guarantor of the lease, instead of the Rule 3-14 Financial Statements of the real estate operation, when the lessee is considered significant. The amendments do not differentiate this type of acquisition or specify alternatives to Rule 3-14 for this type of acquisition, because the activity depicted in the Rule 3-14 Financial Statements is consistent with how the triple net lease arrangement may affect the registrant’s results of operations.

The amendments also update current reports on Form 8-K, with more specific requirements on acquisitions and dispositions of real estate operations.  The amendments:

  • Clarify that Item 2.01 requires the disclosure of the acquisition or disposition of assets that constitute a significant real estate operation as defined in Rule 3-14;
  • Address the financial statement filing requirements in Item 9.01(a) consistently for all business acquisitions, including real estate operations; and
  • Revise Item 2.01 Instruction 4 to make clear that the aggregate impact of acquisitions of real estate operations is not required to be reported unless these acquisitions are related real estate operations and are significant in the aggregate.

We expect that the foregoing amendments will result in additional staff guidance as well as substantial revisions to the Commission’s Financial Reporting Manual, including sections of the Manual that address real estate operations.

1 The Commission notes that, in some circumstances, accountants might need to perform additional work to meet the “reasonable investigation” and “reasonable care” due diligence standards of the Securities Act in order to provide negative assurance to underwriters on the combined pro forma financial information.

 

Firm Highlights

The image shows classic stone columns and steps, which often represent government buildings, courthouses, or legal institutions.

Insights

The Supreme Court Update - October 14, 2026

Insights

Energy Law: Month in Review - September 2026

Welcome to Dorsey’s Energy Law: Month in Review. We provide this update to our clients to identify significant developments in the previous month. Please reach out to any of the authors, listed above, to discuss these issues. Regulatory Developments Massachusetts Ratchets Up State and Local Regulation of AI Data Centers In early September, Governor Maura Healey of Massachusetts signed an executive order requiring that artificial intelligence data centers secure the approval of local communities as a precondition to proceeding with a given project. According to the terms of the order, data center developers will need to secure a “community benefits agreement” as a precondition to receiving permits from numerous state agencies, including the Department of Environmental Protection, the Energy Facilities Siting Board, and the Massachusetts Environmental Policy Act Office. Beyond requiring community benefits agreements, the order also mandates that developers mitigate utility costs to consumers, prohibits the use of nondisclosure agreements, and requires various state agencies to develop measures to limit data center impacts on the environment. North Carolina Regulators Decline Approval of Duke Energy Gas Turbine On September 18, 2026, North Carolina Utilities Commission (NCUC) denied Duke Energy’s application for a certificate of public convenience and necessity required to construct a gas-fueled combustion turbine at its Smith Energy Complex in North Carolina. The NCUC objected strongly to the $584 million price tag and noted that Duke appeared to be constructing the facility “based on anticipated data center customer additions.” The NCUC rejected that anticipated growth as “insufficiently reliable for the Commission to act at this point.” In rejecting Duke’s application, the NCUC also noted that Duke had signed the White House Ratepayer Protection Pledge, in which it represented that it would not shift data center costs to consumers. The NCUC observed that the record did not demonstrate how Duke “intends to adhere to its commitments under the Ratepayer Protection Pledge with regard to the Proposed Facility.” Notably, commission staff had actually supported the construction of the turbine, citing concerns about Duke’s reserve margins. The NCUC noted that it “understands the Public Staff’s expressed concerns,” but those concerns were outweighed by the NCUC’s reservations, including questions of demand. Department of Energy Approves Funds for Grid Improvement The U.S. Department of Energy (DOE) recently announced that it would fund 31 grid-improvement projects in 26 states. The funding initiative is part of the DOE’s “SPARK” initiative. The funding will include $1.9 billion in federal funding from DOE and $3.35 billion in recipient cost-sharing funding. The funds will go to projects designed to improve grid reliability and lower electricity costs. Recipients plan to reconductor over 1,500 miles of transmission lines and will deploy grid-enhancing technologies across approximately 21,000 miles. DOE stated that this initiative will make available over 23 additional gigawatts of electricity. Texas Moderates Rules Governing Data Center Interconnection The Texas Public Utility Commission adopted new regulations governing large-load interconnections. The rules impose a flat study fee of $100,000 for all proposed interconnections, which departs from the initial proposal to impose study fees using a tiered system based on project size. Additionally, the final rule eliminates the PUC’s previous proposal to impose a non-refundable interconnection fee of $50,000 per MW of contracted peak demand. The final rule also moderates the initially proposed regulations governing Electric Reliability Council of Texas (ERCOT) notifications for large-load customers’ non-utilized capacity. The proposed rules would have required notifying ERCOT within 30 days of missing a scheduled energization milestone by six months. The final rules, however, do not require informing ERCOT unless a scheduled energization milestone is missed by 24 months. FERC Denies TransAlta 202(c) Cost-Recovery Plan The Federal Energy Regulatory Commission (FERC) recently rejected TransAlta’s plan to recover $19.9 million in expenses stemming from a DOE order in which DOE prohibited TransAlta from retiring its coal-powered Centralia power plant. TransAlta had previously intended to retire the facility at the end of 2025. TransAlta’s cost recovery plan proposed spending an additional $23 million on repairs to continue operating the unit. FERC’s main objection had to do with geographic scope. TransAlta’s recovery plan called for recovering costs from California Independent System Operator (CAISO) and the Southwest Power Pool (SPP), but the DOE’s order requiring operation of the plant was designed to ensure reliability in the Northwest assessment area (Montana, Oregon, Washington, and parts of northern California and northern Idaho). Accordingly, FERC was unwilling to allow cost recovery from CAISO and SPP when the order that precipitated the additional costs only related to the Northwest assessment area. FERC informed TransAlta that it would only approve cost recovery from load-serving entities in the Northwest assessment area. FERC’s decision comes amid a rush of DOE emergency orders requiring the continued operation of coal-fired generating units. Litigation Appeals Court Upholds Washington Hydropower Plant With Caveats In a September 21, 2026, opinion, the Washington Court of Appeals largely upheld a Clean Water Act water quality certification by the Washington Department of Ecology for the Goldendale Energy Storage Project, a proposed pumped-water storage hydropower system adjacent to, but off-stream from, the Columbia River. A nonprofit (Columbia Riverkeeper) and the Confederated Tribes and Bands of the Yakama Nation appealed the certification, contending that it failed to impose necessary conditions and monitoring requirements to protect the water quality of the Columbia River. Most saliently, the plaintiffs argued that the project had the potential to leak 100 acre-feet of water per year into tributaries of the Columbia River. The Court of Appeals broadly rejected plaintiffs’ challenge to the state’s conclusion that “the project was designed not to leak.” That said, the Court of Appeals did reverse on one narrow issue. Specifically, the court determined that the state’s conclusion that “leakage from the project’s tunnels would be monitored and reported” was not supported by the evidence because the certification “does not explicitly require monitoring and reporting to determine whether there is any leakage.” Accordingly, the court remanded the matter to the state to impose monitoring and reporting requirements but otherwise affirmed the certification. Legislative Developments California Legislates Restrictions on Data Center Energy Use and Grid Costs On September 21, 2026, California Governor Gavin Newsom signed seven bills broadly regulating data centers in the state. SB 1168 directed the California Public Utilities Commission to assess the energy used by data centers. It also requires the PUC to pass costs of transmission and distribution upgrades and load increases on to data centers, rather than customers. SB 886 and SB 887 compel data centers to pay for infrastructure upgrade and generation costs, and wildfire mitigation costs, in addition to imposing environmental review. The statutes additionally increase local oversight of data centers. AB 1577 imposes a monthly reporting requirement that requires data centers to supply energy consumption and efficiency data to the California Energy Commission. AB 2383 contains incentives for data centers to use onsite clean energy generation. Finally, AB 2469 and AB 2619 require data center developments to assess water supply and develop a water scarcity plan. The statutes also mandate statewide water reporting as a precondition to obtaining and renewing business licenses.

Regulatory Affairs Partner Randy Dann Joins Dorsey

News

Regulatory Affairs Partner Randy Dann Joins Dorsey

Insights

EPA Limits Title V Re-Litigation of NSR Permits

Overview On September 25, 2026, the U.S. Environmental Protection Agency (“EPA”) published a final rule that significantly limits the ability of third parties to use the Clean Air Act (“CAA”) Title V permitting process to revisit New Source Review (“NSR”) permitting decisions years after those decisions were made. The rule establishes that NSR permitting determinations generally must be challenged during the original permitting proceeding, thereby providing regulated sources with greater permitting certainty and finality for major capital projects. Published in the Federal Register titled Clarifying the Scope of “Applicable Requirements” Under State Operating Permit Programs and the Federal Operating Permit Program (Docket ID No. EPA-HQ-OAR-2023-0401), the rule amends 40 C.F.R. Parts 70 and 71 to codify EPA’s interpretation regarding when requirements established under other CAA programs may be reviewed, modified, or implemented through the Title V operating permit program. The rule becomes effective 30 days after publication. The rule addresses two principal issues: (1) the relationship between NSR preconstruction permitting and Title V operating permits, and (2) the treatment of the General Duty Clause under CAA section 112(r)(1). Most significantly, the rule provides greater certainty for sources navigating the NSR permitting process. EPA’s amendments are intended to ensure that NSR permitting decisions made through an approved public process are generally not revisited later through Title V permit proceedings. The rule responds to a circuit split between the U.S. Courts of Appeals for the Fifth and Tenth Circuits. In Environmental Integrity Project v. EPA, 969 F.3d 529 (5th Cir. 2020), the Fifth Circuit upheld EPA’s interpretation, concluding that it was consistent with the text, structure, and purpose of Title V. In contrast, the Tenth Circuit reached the opposite conclusion in Sierra Club v. EPA, 964 F.3d 882 (10th Cir. 2020), finding that the then-existing regulatory definition of “applicable requirement” did not support EPA’s position. By amending the regulatory language on which the Tenth Circuit relied and codifying the interpretation approved by the Fifth Circuit, EPA has established a nationwide framework governing the interaction between NSR and Title V. NSR and Title V: EPA Establishes a Uniform Nationwide Framework At the core of the rule is EPA’s effort to define the respective roles of NSR and Title V. The rule codifies the approach EPA has applied since 2017: once a source obtains an NSR permit under an EPA-approved permitting program, and that permit was issued following public notice with an opportunity for comment and judicial review, the permit establishes the NSR-related “applicable requirements” of the State Implementation Plan (“SIP”) or Federal Implementation Plan (“FIP”) for Title V purposes. Under this framework, Title V is not a vehicle for re-examining underlying NSR permitting decisions. EPA does not intend to use the Title V process to revisit applicability determinations, emissions calculations, control technology determinations, permit conditions, or other issues resolved through the NSR permitting process. This principle applies regardless of the stage of the Title V proceeding; whether the NSR permit was issued pursuant to a SIP or FIP; the type of NSR issue involved; or whether the NSR permit is incorporated into Title V sequentially or concurrently. Limited Exceptions EPA recognizes several circumstances in which NSR issues may still be reviewed through the Title V program: No NSR permit was issued at all; The permit was issued without public notice and an opportunity for comment and judicial review; or The issue involves substantive overlap between Title V and NSR requirements, such as the adequacy of monitoring provisions. As a result, the rule does not insulate unpermitted projects or foreclose review of matters that independently arise under Title V. Key Regulatory Amendments The rule revises the definition of “applicable requirement” in 40 C.F.R. §§ 70.2 and 71.2. Paragraph (1): Where an NSR permit is issued with public notice and an opportunity for comment and judicial review, the permit establishes and defines the applicable SIP or FIP requirements for Title V purposes. Paragraph (2): All NSR permit terms, including terms contained in minor NSR permits, constitute applicable requirements that must be incorporated into Title V permits. Paragraph (4): CAA section 112(r)(1) (the General Duty Clause) is expressly excluded from the definition of “applicable requirement,” while section 112(r)(7) Risk Management Program requirements remain included. EPA also amended 40 C.F.R. §§ 70.8 and 70.12 to clarify that alleged defects in requirements established outside the Title V process generally do not provide a basis for EPA objection to a Title V permit or for a Title V citizen petition. General Duty Clause Exclusion The rule also codifies EPA’s longstanding position that the General Duty Clause in CAA section 112(r)(1) is not an “applicable requirement” for Title V purposes. EPA points to several considerations supporting that conclusion, including the distinction between the General Duty Clause and Title V permit terms, the provision’s origins in the Occupational Safety and Health Act’s general duty clause, and the different enforcement structures applicable to the General Duty Clause and Title V permit requirements. Importantly, excluding section 112(r)(1) from the definition of “applicable requirement” does not eliminate EPA’s authority to enforce the General Duty Clause independently of the Title V program. The final rule instead clarifies that the General Duty Clause need not—and should not—be incorporated into Title V permits as an applicable requirement. Practical Implications for Regulated Sources Greater Finality for NSR Permits  For projects requiring PSD, nonattainment NSR, or minor NSR permits, the permitting process becomes the primary forum for resolving disputes regarding applicability determinations, emissions calculations, control technology requirements, offsets, and permit conditions. Once an NSR permit is issued through a qualifying public process, regulated sources should face substantially reduced risk that those same issues will be challenged years later through Title V permit proceedings. Reduced Risk of Collateral Permit Challenges Stakeholders have sometimes sought to use Title V permit issuance, renewal, revision, or citizen-petition proceedings to challenge underlying NSR determinations. The final rule makes clear that Title V is not the appropriate vehicle for challenging whether an applicable requirement was correctly established in the first instance. This should reduce the risk of permit delays and uncertainty associated with collateral challenges to previously issued NSR permits. The rule does not, however, eliminate all Title V challenges relating to an NSR permit. Challenges concerning the Title V permit itself—including whether it appropriately incorporates applicable requirements or contains adequate compliance provisions—remain possible. Increased Importance of the Initial NSR Proceeding Because Title V generally will not provide a second opportunity to challenge the substantive validity of an NSR determination, the administrative record developed during the NSR process becomes increasingly important. Permit applicants should ensure that applicability analyses, emissions calculations, control technology evaluations, modeling demonstrations, and supporting technical documentation are thoroughly developed during the original permitting proceeding. For significant projects, applicants may therefore have an additional incentive to identify and resolve potential permitting issues before the NSR permit is issued rather than assuming that unresolved issues can be addressed during a subsequent Title V proceeding. Potential Incentive for Broader Public Participation EPA also notes that permitting authorities may choose to provide public notice and an opportunity for comment for a broader range of NSR permits because permits issued through a qualifying public process receive the benefit of the finality framework established by the rule. Some permitting authorities may conclude that greater public participation at the NSR stage is preferable to uncertainty during subsequent Title V proceedings. Conclusion The final rule is principally a permitting-certainty measure. For sources that obtain NSR permits through a public process, EPA has substantially limited the ability of third parties to revisit underlying NSR determinations through the Title V program. As a result, regulated entities should benefit from greater finality regarding key permitting decisions, reduced risk of collateral permit challenges, and increased certainty when planning and implementing capital projects.

Regulatory Affairs Partner Jeff Beelaert Joins Dorsey in Boise

News

Regulatory Affairs Partner Jeff Beelaert Joins Dorsey in Boise

Attorney John Cooney Returns to Dorsey in the Finance & Restructuring Group in Minneapolis

News

Attorney John Cooney Returns to Dorsey in the Finance & Restructuring Group in Minneapolis

Insights

The Supreme Court Update - October 8, 2026

On September 29, 2026, the Supreme Court granted certiorari in one case: Department of Homeland Security v. D.V.D., No. 26-426: This case concerns the Trump Administration’s “third-country removal” procedures, where immigrants are deported to countries not listed in the removal orders. In granting certiorari, the Court granted the Government’s application to stay a lower court decision halting the practice, which will allow third-country removals to continue pending resolution of the case. The issues presented are: (1) Whether the district court had jurisdiction over respondents’ claims; (2) whether the district court had authority to enter class-wide declaratory relief and APA vacatur under 8 U.S.C. § 1252(f)(1); (3) whether the Government’s guidance on third-country removals is unlawful under 8 U.S.C. § 1231(b), the due process clause, or FARRA/CAT and its implementing regulations; and (4) such other questions that the Government determines are appropriate for the proper disposition of the case. On October 1, 2026, the Court granted certiorari in three additional cases: Rhoney v. Barbosa da Cunha, No. 26-104: Immigration officials detained Ricardo Aparecido Barbosa da Cunha—a Brazilian citizen who had lived in the United States for approximately twenty years after entering without inspection—and denied him a bond hearing under 8 U.S.C. § 1225(b)(2)(A). The Second Circuit held that his detention was instead governed by § 1226(a), which permits release on bond, because § 1225(b)(2)(A)’s mandatory-detention requirement applies only to noncitizens apprehended while entering the country or shortly thereafter. The question presented is: Whether 8 U.S.C. § 1225(b)(2)(A) mandates the detention pending removal proceedings of aliens who, like Barbosa da Cunha, are present in the United States without having been admitted. Missionaries of St. John the Baptist, Inc. v. Frederic, No. 25-113: A Catholic religious organization sought to build a shrine to the Virgin Mary on land the organization owned adjacent to its church in Park Hills, Kentucky. Local zoning restrictions prohibited the proposed construction. The question presented is: Whether a land-use regulation that prohibits a religious institution from building a religious structure on its own property constitutes a “substantial burden” on religious exercise under the Substantial Burden Provision of the Religious Land Use and Institutionalized Persons Act, 42 U.S.C. § 2000cc(a). Marschner v. Marschner, No. 25-1349: Under the Uniformed Services Former Spouses’ Protection Act (“USFSPA”), a veteran’s longevity-based retirement pay can be divided in a divorce, but retirement pay based on disability and retirement pay that was waived to receive disability pay are indivisible. The question presented is: Does the USFSPA require state courts to refuse enforcement of indemnification provisions in a divorce settlement agreement?

Dorsey Recognized in Chambers UK 2027

News

Dorsey’s London Corporate Practice and Partners Earn Chambers UK 2027 Rankings

News

Dorsey Recognized in Inaugural 2026 IAM/WTR Copyright 1000

Dorsey & Whitney LLP is pleased to announce its recognition in the inaugural edition of the Copyright 1000: The World’s Leading Copyright Professionals, published by IAM and World Trademark Review (WTR). Nine Dorsey attorneys were individually recognized, and the Firm’s Denver, Minneapolis, New York, Salt Lake City, and Seattle offices were recognized in the firm rankings. The following Dorsey attorneys were recognized in the inaugural guide: Lindsey Sadler Gregory Tamkin Charlene Krogh Evan Everist Jeffrey Cadwell Fara Sunderji Bruce Ewing Catherine Parrish Lake J. Michael Keyes The Copyright 1000 is the first dedicated ranking focused solely on the world’s leading copyright practitioners. The guide identifies leading copyright firms and practitioners across key jurisdictions worldwide. Dorsey’s intellectual property attorneys advise clients on a wide range of copyright matters, including protection, enforcement, licensing, litigation, transactions, and issues involving emerging technologies and digital content. The inaugural Copyright 1000 rankings are published by IAM and WTR.

Insights

SEC Proposes Expansion of Investment Adviser Performance-Based Compensation Rule

On September 30, 2026, the Securities and Exchange Commission (the “SEC”) proposed amendments to Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which provides an exemption from the general prohibition under Section 205(a)(1) of the Advisers Act on registered investment advisers receiving performance-based compensation (the “Proposal”) so long as performance-based compensation is limited to “qualified clients”.1 Most notably for private fund sponsors, the Proposal would expand the definition of “qualified client” to include any investors that satisfy the “accredited investor” definition under Regulation D. The Proposal may also have implications for private fund managers that rely on exemptions from investment adviser registration under state law because certain state-level investment adviser registration exemptions incorporate or otherwise reference the federal qualified client definition. Expansion of the Qualified Client Definition Under the current Rule 205-3, an investor generally may qualify as a qualified client if, among other alternatives, the investor has at least $1.4 million under management with the adviser or has a net worth exceeding $2.7 million. These thresholds are higher than the financial thresholds applicable to many accredited investors under Regulation D. As a result, an investor may currently qualify as an accredited investor for purposes of investing in a private offering without qualifying as a qualified client for purposes of paying performance-based compensation. The Proposal would expand the qualified client definition to include any natural person or legal entity investor that satisfies the accredited investor definition under Regulation D. The Proposal would also remove the assets under management and net worth thresholds under the current Rule 205-3 qualified client test. For private funds relying on Section 3(c)(1) of the Investment Company Act of 1940, this change could reduce the need to apply a separate qualified client standard to investors that already qualify as accredited investors. Dorsey Observations and Next Steps If adopted as proposed, the expanded qualified client definition could be particularly significant for private fund managers. Most private fund offerings are already limited to accredited investors under Regulation D. However, the Proposal could expand the pool of prospective investors available to emerging private fund managers while reducing the regulatory burden associated with complying with Rule 205-3. The Proposal could also benefit advisers operating below the SEC registration threshold that rely on a state private fund adviser exemption. A number of states have adopted exemptions modeled on the North American Securities Administrators Association (“NASAA”) private fund adviser exemption, which may condition relief for advisers to certain funds relying on Section 3(c)(1) on each beneficial owner satisfying the federal qualified client definition. However, state requirements vary, and any effect of the Proposal would depend on the text of the applicable state exemption and how it incorporates Rule 205-3. Many emerging private fund managers may have a larger network of accredited investor relationships than qualified client relationships during the early stages of their investment advisory business. Currently, under Rule 205-3, private fund managers may receive performance-based compensation from investors who do not satisfy the qualified client definition if those investors were admitted to their private funds prior to registration with the SEC. Following registration with the SEC, however, managers may continue to permit investors that are not qualified clients to invest in future private funds but may not receive performance-based compensation from those investors with respect to such investments. In addition, because the net worth and assets under management thresholds for qualified client status are adjusted for inflation every five years, the pool of qualified client investors may diminish over time as previously eligible investors no longer satisfy the applicable thresholds. The Proposal could provide the dual benefit of greater flexibility for private fund managers to establish and maintain relationships with accredited investors as their businesses scale and they become registered with the SEC, and greater flexibility for certain accredited investors to participate in investment strategies that historically have been restricted to much larger institutional investors. Unless and until the Proposal is adopted, investment advisers should continue to comply with the existing qualified client requirements. If the Proposal is adopted, private fund sponsors should consider whether corresponding changes are appropriate for their subscription documents, investor questionnaires, and other offering materials. Advisers that are state-registered or rely on a state-level exemption should also consult the laws and regulations of each relevant jurisdiction before changing investor eligibility standards or performance-based compensation practices, because adoption of the federal amendments may not automatically modify state requirements. Comments on the Proposal will be due 60 days after publication in the Federal Register. 1 Investment Adviser Performance-Based Compensation Modernization, Investment Advisers Act Release No. IA-7022 (Sept. 30, 2026), available at https://www.sec.gov/rules-regulations/2026/09/s7-2026-28#33-11443proposed.