Monday, April 28, 2014
Steven Thel has posted Taking Section 10(b) Seriously: Criminal Enforcement of SEC Rules on SSRN with the following abstract:
The Supreme Court has determined the scope of federal securities laws in a series of cases in which it has read section 10(b) of the Securities Exchange Act as either prohibiting certain misconduct or authorizing the SEC to regulate that conduct and only that conduct. Judging by the language, structure and history of the Exchange Act, the Court’s reading is wrong. Section 10(b) does not prohibit anything, and it neither grants the SEC rulemaking power nor limits the rulemaking power granted to the SEC elsewhere in the Exchange Act. Instead, section 10(b) simply triggers criminal sanctions for certain rule violations. This is an important function, but one very different from the one the Supreme Court has ascribed to section 10(b).
Contrary to conventional wisdom, not all SEC rules are subject to criminal enforcement. Instead, criminal sanctions apply to rules whose violation the statute makes “unlawful.” Section 10(b) triggers criminal sanctions by making it “unlawful” to use or employ manipulative or deceptive devices or contrivances in connection with a security trade in contravention of SEC rules. While this mechanism has long been ignored, it was well understood when the Exchange Act was enacted. By ignoring the language of section 10(b) and the history and structure of the Exchange Act, the Supreme Court has frustrated the will of Congress and needlessly complicated securities law. In the context of SEC enforcement actions, Congress has repeatedly rejected the Court’s approach to section 10(b), which cannot withstand extension to other well-established parts of the statutory regulatory scheme.
The Supreme Court should take responsibility for the private right of action for violations of rule 10b-5, and should consider substantially restricting the fraud on the market class action that it has itself created . On the other hand, inasmuch as section 10(b) has little to do with the SEC, the Court’s restrictive holdings in rule 10b-5 cases should not apply to enforcement actions brought by the Commission, but only to private and, sometimes, criminal actions. For the same reason, the Court’s consistent and insistent rejection of the SEC’s interpretation of section 10(b) turns out to be oddly principled.