Taking Section 10(b) Seriously: Criminal Enforcement of SEC Rules

This Article examines the role of section 10(b) of the Securities Exchange Act and Rule 10b-5 in public and private enforcement actions. The Securities and Exchange Commission (“SEC”) promulgated Rule 10b-5 with little fanfare. Although Rule 10b-5 was intended to be a limited expansion of the Exchange Act, it now dominates securities litigation, both public and private. The Supreme Court has reflexively used section 10(b) to determine the contours of private action under Rule 10b-5. The Court has interpreted section 10(b) as either prohibiting certain conduct or authorizing the SEC to regulate a limited scope of conduct. This Article argues that this interpretation is not consistent with the language, structure, or legislative history of the Exchange Act. By interpreting section 10(b) in this manner, the Court has created causes of action that have no basis in the Exchange Act, including the fraud on the market class action. Congress has often rejected the Court’s approach to section 10(b), or at least failed to ratify its decisions, as it has done with the fraud on the market class action. This Article argues that the Court should revisit its decisions under section 10(b) and Rule 10b-5 and eliminate the fraud on the market class action.