Disimplying private rights of action under the federal securities laws: The commission's authority

Harvard Law Review

Volumn 107, Issue 5, 1994, Pages 963-1024

  Grundfest, Joseph A ^a,b  

^a STANFORD LAW SCHOOL   (United States)

^b United States Securities Exch C ^*

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0348205983     PISSN: 0017811X     EISSN: None     Source Type: Journal    
DOI: 10.2307/1341883     Document Type: Article

References (344)

1. The Securities and Exchange Commission ("Commission") has authority to pursue violations of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a (1988), through administrative or civil enforcement proceedings. See 15 U.S.C. §§ 77s-77v (1988). The Commission also has authority to pursue violations of the Securities & Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a (1988). See 15 U.S.C. §§ 78u to 78u-1, 78aa (1988). Section 24 of the Securities Act and § 32(a) of the Exchange Act provide for criminal penalties that the United States Department of Justice pursues. See 15 U.S.C. §§ 77x, 78ff(a) (1988). For a general account of enforcement options available to the government, see 1 THOMAS L. HAZEN, THE LAW OF SECURITIES REGULATION §$ 1.4, 9.5 (2d ed. 1990); RICHARD W. JENNINGS, HAROLD MARSH, JR. & JOHN C. COFFEE, JR., SECURITIES REGULATION 1404-1503 (7th ed. 1992); and, VII Louis Loss & JOEL SELIGMAN, SECURITIES REGULATION 3404-21 (3d ed. 1991).
2. The Securities and Exchange Commission ("Commission") has authority to pursue violations of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a (1988), through administrative or civil enforcement proceedings. See 15 U.S.C. §§ 77s-77v (1988). The Commission also has authority to pursue violations of the Securities & Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a (1988). See 15 U.S.C. §§ 78u to 78u-1, 78aa (1988). Section 24 of the Securities Act and § 32(a) of the Exchange Act provide for criminal penalties that the United States Department of Justice pursues. See 15 U.S.C. §§ 77x, 78ff(a) (1988). For a general account of enforcement options available to the government, see 1 THOMAS L. HAZEN, THE LAW OF SECURITIES REGULATION §$ 1.4, 9.5 (2d ed. 1990); RICHARD W. JENNINGS, HAROLD MARSH, JR. & JOHN C. COFFEE, JR., SECURITIES REGULATION 1404-1503 (7th ed. 1992); and, VII Louis Loss & JOEL SELIGMAN, SECURITIES REGULATION 3404-21 (3d ed. 1991).
3. The Securities and Exchange Commission ("Commission") has authority to pursue violations of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a (1988), through administrative or civil enforcement proceedings. See 15 U.S.C. §§ 77s-77v (1988). The Commission also has authority to pursue violations of the Securities & Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a (1988). See 15 U.S.C. §§ 78u to 78u-1, 78aa (1988). Section 24 of the Securities Act and § 32(a) of the Exchange Act provide for criminal penalties that the United States Department of Justice pursues. See 15 U.S.C. §§ 77x, 78ff(a) (1988). For a general account of enforcement options available to the government, see 1 THOMAS L. HAZEN, THE LAW OF SECURITIES REGULATION §$ 1.4, 9.5 (2d ed. 1990); RICHARD W. JENNINGS, HAROLD MARSH, JR. & JOHN C. COFFEE, JR., SECURITIES REGULATION 1404-1503 (7th ed. 1992); and, VII Louis Loss & JOEL SELIGMAN, SECURITIES REGULATION 3404-21 (3d ed. 1991).
4. The Supreme Court has recently enumerated eight express liability provisions in the Securities Act and the Exchange Act. See Musick, Peeler & Garrett v. Employers Ins., 113 S. Ct. 2085, 2090-91 (1993). They are: § 11 of the Securities Act, 15 U.S.C. § 77k (1988), which imposes liability for misstatements or omissions in registration statements; § 12 of the Securities Act, 15 U.S.C. § 77l (1988), which imposes liability for the sale of unregistered securities and for fraud in the sale of securities; § 15 of the Securities Act, 15 U.S.C. § 770 (1988), which imposes liability on controlling persons; § 9 of the Exchange Act, 15 U.S.C. § 78i (1988), which imposes liability for specified manipulations of exchange-traded securities; § 16 of the Exchange Act, 15 U.S.C. § 78p (1988), which imposes liability for "short-swing" profits; § 18 of the Exchange Act, 15 U.S.C. § 78r (1988), which imposes liability for misleading statements in periodic reports filed with the Commission; § 20 of the Exchange Act, 15 U.S.C. § 78t (1988), which imposes liability on controlling persons; and, § 20A of the Exchange Act, 15 U.S.C. § 78t-1 (1988), which imposes insider trading liability on contemporaneous traders.
5. Courts have, for example, implied private remedies under the following provisions of the Exchange Act: § 10(b), 15 U.S.C. § 78j (1988), and Rule 1ob-5 thereunder, 17 C.F.R. § 240, 1ob-5 (1993), which establishes the general antifraud provision under the federal securities laws; § 14(a), 15 U.S.C. § 78n(a) (1988), and Rule 143-9 thereunder, 17 C.F.R. § 24o.14a-9 (1993), which prohibits fraud in connection with the solicitation of proxies; § 14(e), 15 U.S.C. § 78n(e) (1988), and Rule 14e-3 thereunder, 17 C.F.R. § 240.14e-3 (1993), which prohibits fraud in connection with tender offers; and, § 13(e)(1), 15 U.S.C. § 78m(e)(1) (1988), which prohibits fraud in connection with an issuer's repurchase of its own shares. See generally JENNINGS, MARSH & COFFEE, supra note 1, at 784-848 (discussing implied private rights of action under the Securities Act and the Exchange Act); IX Loss & SELIGMAN, supra note 1, at 4312-66 (describing implied liabilities under the Exchange Act). The express and implied private rights found in the Securities Act and Exchange Act are cumulative. See Herman & MacLean v. Huddleston, 459 U.S. 375, 380-87 (1983).
6. 17 C.F.R. § 240.1ob-5 (1993). Rule 1ob-5 was adopted pursuant to the authority delegated to the Commission by § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) (1988). See infra pp. 979-80.
7. See infra pp. 972-74.
8. See infra pp. 991-97 (detailing the Supreme Court's decisions upholding the implied Rule 1ob-5 private right).
9. Such disimplication rulemakings are also possible under other provisions of the Exchange Act that give rise to implied rights of action. For example, because the implied rights that arise under § 13(e) of the Exchange Act, 15 U.S.C. § 78m(e) (1988), § 14(a), 15 U.S.C. § 78n(a) (1988), and § 14(e), 15 U.S.C. § 78n(e) (1988), see supra note 3, also depend on the Commission's exercise of delegated rulemaking authority, the logic described in Part II, below at pp. 976-98, also suggests that the Commission has authority to disimply or to condition private rights arising under those provisions of law. For present purposes, however, this Article focuses solely on disimplication of Rule 10b-5 private rights.
10. This Article takes no position on the merits of any proposed form of disimplication, but instead intends to draw the Commission into a central and active decisionmaking role.
11. Ideally, the Commission's modifications to Rule 10b-5 would reduce the incidence of frivolous private securities fraud complaints and strike suits that are filed in an effort to extract a settlement lower than the cost of the defense, assuming that such litigation exists. Economists have suggested a variety of techniques that can reduce the incidence of such "vexatious" litigation, including levying sanctions against plaintiffs found to have filed frivolous complaints, "decoupling" of certain damage and sanction awards, and implementation of the British "loser pays" system. For a review and application of this literature, including a discussion of sanctions available under Rule 11, see A. Mitchell Polinsky & Daniel L. Rubinfeld, Sanctioning Frivolous Suits: An Economic Analysis, 82 GEO. L.J. (forthcoming 1994). The disimplication approach discussed in this Article approaches the same question by suggesting that modifications to the definition of the elements of a Rule 10b-5 offense can have effects analogous to those that would result from sanctions, decoupling, or resort to a British "loser-pays" system.
12. Mistretta v. United States, 488 U.S. 361, 378 (1989).
13. Citing the working draft version of this Article, the current Chairman of the Commission, Arthur Levitt, for the first time endorsed legislative reform of the private securities litigation process and suggested a receptiveness to administrative reforms that could influence the private litigation process. See Arthur Levitt, Private Litigation Under the Federal Securities Laws, Remarks Before the Securities Regulation Institute, University of California, San Diego 2, 5-7 (Jan. 26, 1994) (on file at the Harvard Law School Library).
14. See infra pp. 1018-20.
15. Most recently and significantly, the Commission, acting in conjunction with state securities regulators, settled an enforcement action by requiring Prudential Securities to waive statute of limitations defenses against potential private party claimants, pay a minimum of $371 million in restitution and fines, and remain potentially liable for larger sums that can be recovered by private party claimants who decide not to file claims against the restitution fund. See SEC v. Prudential, Inc., [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,780 (D.D.C. Oct. 21, 1993); see also SEC v. Salomon, Inc., 92 Civ. No. 3691 (S.D.N.Y. May 20, 1992) (describing a $290 million settlement in a civil enforcement proceeding, $100 million of which was payable to the registry of the court as a fund for payment of civil claims for compensatory damages resulting from Salomon's wrongdoing).
16. Even the most cursory comparison of actions filed by the Commission, as documented in the Commission's Annual Reports, see, e.g., 58 SEC ANN. REP. 108 (1992), with a census of private securities fraud class action complaints, see 1991 Federal Court Class Action Statistics, 14 CLASS ACTION REP. 284, 284-85 (1991), reveals that the large majority of private securities fraud class action proceedings are not accompanied by Commission enforcement action. The converse, however, is not accurate because a significant percentage of Commission enforcement proceedings trigger "follow-on" private class action litigation, particularly when the Commission has already established a pool of assets available to private party claimants.
17. Even the most cursory comparison of actions filed by the Commission, as documented in the Commission's Annual Reports, see, e.g., 58 SEC ANN. REP. 108 (1992), with a census of private securities fraud class action complaints, see 1991 Federal Court Class Action Statistics, 14 CLASS ACTION REP. 284, 284-85 (1991), reveals that the large majority of private securities fraud class action proceedings are not accompanied by Commission enforcement action. The converse, however, is not accurate because a significant percentage of Commission enforcement proceedings trigger "follow-on" private class action litigation, particularly when the Commission has already established a pool of assets available to private party claimants.
18. Securities Fraud Hearings Before the Subcomm. of the Senate Comm. on Banking Housing & Urban Affairs 5 (June 17, 1993) [hereinafter Senate Securities Fraud Hearings] (statement of William R. McLucas) (on file at the Harvard Law School Library); see also Berner v. Lazzaro, 730 F.2d 1319, 1322-23 (9th Cir. 1984) ("The resources of the Securities Exchange Commission are adequate to prosecute only the most flagrant abuses. To this end, private actions brought by investors have long been viewed as a necessary supplement to SEC enforcement actions." (citation omitted)), aff'd sub nom. Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985); H.R. REP. No. 355, 98th Cong., 1st Sess. 6 (1983) ("In recent years, the securities markets have grown dramatically in size and complexity, while Commission enforcement resources have declined."). Government agencies are also generally strangers to the transactions that give rise to allegations of fraud. Private participants in allegedly fraudulent transactions thus have an informational advantage over governmental prosecutors and, because they stand to profit from any recovery, can have stronger incentives to prosecute certain alleged frauds.
19. See, e.g., Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773, 2789 (1991); Berner, 472 U.S. at 310.
20. Berner, 472 U.S. at 310 (quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)).
21. Brief for The Securities And Exchange Commission as Amicus Curiae in Support of Partial Affirmance at 6, Herman & MacLean v. Huddleston, 459 U.S. 375 (1983) (Nos. 81-680 & 81-1076).
22. See Lucian A. Bebchuk, Suing Solely to Extract a Settlement Offer, 17 J. LEGAL STUD. 437, 440 (1988); Avery Katz, The Effect of Frivolous Lawsuits on the Settlement of Litigation, 10 INT'L REV. L. & ECON. 3, 4-5 (1990).
23. See Lucian A. Bebchuk, Suing Solely to Extract a Settlement Offer, 17 J. LEGAL STUD. 437, 440 (1988); Avery Katz, The Effect of Frivolous Lawsuits on the Settlement of Litigation, 10 INT'L REV. L. & ECON. 3, 4-5 (1990).
24. The Commission would not, however, defer to parties who claimed financial inability to defend themselves against the agency's larger resources. Defendants in Commission enforcement proceedings, the large majority of which are settled, often claim that they have been victimized by a federal agency with a seemingly infinite litigation budget and that they have settled simply to avoid the expense of trial. Both perspectives can, however, be honestly held because the Commission can rationally believe that it would prevail at trial, although it could well be wrong, whereas the respondent can rationally believe that it would be vindicated, although it too could be wrong, but simply cannot bear the costs associated with a trial.
25. See, e.g., John C. Coffee, Jr., Rethinking the Class Action: A Policy Primer on Reform, 62 IND. L.J. 625, 628-34 (1987); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiff Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. CHI. L. REV. 1, 3-4 (1991).
26. See, e.g., John C. Coffee, Jr., Rethinking the Class Action: A Policy Primer on Reform, 62 IND. L.J. 625, 628-34 (1987); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiff Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. CHI. L. REV. 1, 3-4 (1991).
27. See supra notes 19-20 and accompanying text.
28. For example, private party class action plaintiffs have no incentive to pursue judgment-proof defendants regardless of how heinous their actions. Defendants of this sort must generally be subject to criminal sanction or to injunction because they are insensitive to financial penalties, and only government enforcement agencies have incentives to bring such suits. See generally Steven Shavell, The Social Versus the Private Incentive to Bring Suit in a Costly Legal System, 11 J. LEGAL STUD. 333 passim (1982) (contrasting incentives of private parties to bring suit with the general social value of the suit). Moreover, because of the joint and several liability that arises under the federal securities laws, private parties have an incentive to pursue relatively remote but solvent defendants with a vigor that the government might not share.
29. Although the Commission carefully documents its own enforcement activities for the public record, it makes no effort to analyze its enforcement program in the larger context of a litigation system that also permits private enforcement of the securities laws. See, e.g., 58 SEC ANN. REP. 1-19 (1992).
30. For general discussion of the problem of overdeterence, see RICHARD A. POSNEH, ECONOMIC ANALYSIS OF LAW 224-25, 236-39 (4th ed. 1992).
31. During the fiscal year that ended June 30, 1992, the Commission filed 393 civil and administrative enforcement proceedings. See 58 SEC ANN. REP. 1 (1992).
32. The Commission reports that criminal authorities obtained 90 criminal indictments or informations and 86 convictions during fiscal year 1992 in Commission-related cases. In addition, the Commission granted access to its files to domestic and foreign prosecutorial authorities in 280 cases. See id.
33. During the fiscal year ending June 30, 1992, 268 securities and commodities fraud class actions were filed in federal district courts. As of that date, 642 such cases were still pending. See ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS, ANNUAL REPORT OF THE DIRECTOR, tbls. X-4, X-5, at 365-66 (1992). However, plaintiffs' counsel suggest that the number of filings overstates the actual magnitude of securities fraud class action litigation because plaintiffs' class action law firms typically file multiple complaints that are subsequently consolidated into a single action. In support of this point, a recent survey found that in class action complaints were filed in the Northern District of California during 1983 and 1984 in connection with 35 unique fact patterns. See Janet C. Alexander, The Lawsuit Avoidance Theory of Why Initial Public Offerings Are Underpriced, 41 UCLA L. REV. 17, 33 n.59 (1993).
34. During the fiscal year ending June 30, 1992, 268 securities and commodities fraud class actions were filed in federal district courts. As of that date, 642 such cases were still pending. See ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS, ANNUAL REPORT OF THE DIRECTOR, tbls. X-4, X-5, at 365-66 (1992). However, plaintiffs' counsel suggest that the number of filings overstates the actual magnitude of securities fraud class action litigation because plaintiffs' class action law firms typically file multiple complaints that are subsequently consolidated into a single action. In support of this point, a recent survey found that in class action complaints were filed in the Northern District of California during 1983 and 1984 in connection with 35 unique fact patterns. See Janet C. Alexander, The Lawsuit Avoidance Theory of Why Initial Public Offerings Are Underpriced, 41 UCLA L. REV. 17, 33 n.59 (1993).
35. The leading plaintiffs' securities class action firm claims to have recovered more than $4 billion for plaintiffs. See Melvyn I. Weiss, Class-Action Suits Are Shields for Shareholders, WALL ST. J., Jan. 30, 1992, at A13. A study of 80 settlements reached between July, 1991 and June, 1992 found total recoveries for plaintiffs of $846.7 million, or an average of $10.58 million per case. See FREDERICK C. DUNBAR, NATIONAL ECONOMIC RESEARCH Assocs., INC., RECENT TRENDS IN SECURITIES CLASS ACTION SUITS, tbl. 1, at 7 (Aug. 1992). A second study found that, between April of 1988 and March of 1993, 342 companies paid an aggregate of $2.5 billion in settlements. See Senate Securities Fraud Hearings, supra note 15, at 2 (statement of Vincent O'Brien).
36. The leading plaintiffs' securities class action firm claims to have recovered more than $4 billion for plaintiffs. See Melvyn I. Weiss, Class-Action Suits Are Shields for Shareholders, WALL ST. J., Jan. 30, 1992, at A13. A study of 80 settlements reached between July, 1991 and June, 1992 found total recoveries for plaintiffs of $846.7 million, or an average of $10.58 million per case. See FREDERICK C. DUNBAR, NATIONAL ECONOMIC RESEARCH Assocs., INC., RECENT TRENDS IN SECURITIES CLASS ACTION SUITS, tbl. 1, at 7 (Aug. 1992). A second study found that, between April of 1988 and March of 1993, 342 companies paid an aggregate of $2.5 billion in settlements. See Senate Securities Fraud Hearings, supra note 15, at 2 (statement of Vincent O'Brien).
37. From July, 1991 through June, 1992, the plaintiffs' bar was awarded an aggregate of at least $252.5 million in the settlement of 77 class actions. See DUNBAR, supra note 29, tbl. 1, at 1. These fees average approximately 31% of aggregate settlements. See id.
38. Data describing plaintiffs' attorney fees and related expenses are readily available because this information must be publicly disclosed in order to obtain court approval for the award of fees and expenses. No such public disclosure is required of defendants or of their counsel.
39. See, e.g., Theodore A. Levine & W. Hardy Callcott, The SEC and Foreign Policy: The International Securities Enforcement Cooperation Act of 1988, 17 SEC. REG. L.J. 115, 146-47 (1989); William R. McLucas & John Polise, A Critical Examination of the SEC's Enforcement Process, INSIGHTS, Jan. 1994, at 3; Harvey L. Pitt, Michael H. Rauch & Audrey Strauss, A Constructive Appraisal of the SEC's Enforcement Program, INSIGHTS, Aug. 1993, at 2.
40. See, e.g., Theodore A. Levine & W. Hardy Callcott, The SEC and Foreign Policy: The International Securities Enforcement Cooperation Act of 1988, 17 SEC. REG. L.J. 115, 146-47 (1989); William R. McLucas & John Polise, A Critical Examination of the SEC's Enforcement Process, INSIGHTS, Jan. 1994, at 3; Harvey L. Pitt, Michael H. Rauch & Audrey Strauss, A Constructive Appraisal of the SEC's Enforcement Program, INSIGHTS, Aug. 1993, at 2.
41. See, e.g., Theodore A. Levine & W. Hardy Callcott, The SEC and Foreign Policy: The International Securities Enforcement Cooperation Act of 1988, 17 SEC. REG. L.J. 115, 146-47 (1989); William R. McLucas & John Polise, A Critical Examination of the SEC's Enforcement Process, INSIGHTS, Jan. 1994, at 3; Harvey L. Pitt, Michael H. Rauch & Audrey Strauss, A Constructive Appraisal of the SEC's Enforcement Program, INSIGHTS, Aug. 1993, at 2.
42. See, e.g., John C. Coffee, Jr., Paradigms Lost: The Blurring of the Criminal and Civil Law Models - And What Can Be Done About It, 101 YALE L.J. 1875, 1889 (1992); Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law, 101 YALE L.J. 1795, 1850-51 (1992).
43. See, e.g., John C. Coffee, Jr., Paradigms Lost: The Blurring of the Criminal and Civil Law Models - And What Can Be Done About It, 101 YALE L.J. 1875, 1889 (1992); Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law, 101 YALE L.J. 1795, 1850-51 (1992).
44. A group of approximately 300 corporations, accounting firms, and financial institutions have banded together to form the Coalition to Eliminate Abusive Securities Suits ("CEASS") to lobby, among other things, for reform of Rule 10b-5 litigation. See Securities Suits Reform Bill Lauded by Business Coalition, PR Newswire, Aug. 13, 1992, available in LEXIS, Nexis Library, Current File.
45. See Senate Securities Fraud Hearings, supra note 15 (statements of John G. Adler, Edward R. McCracken, Richard J. Egan & F. Thomas Dunlop, Jr.) (calling for improved "filters" that would reduce the incidence of meritless litigation and make it easier to dismiss baseless claims earlier in the litigation process). Evidence that at least some baseless lawsuits have been filed is apparent from the fact that a small number of class action complaints are voluntarily dismissed without any payments to plaintiffs. See, e.g., Rebecca Smith, Intel Shareholders Drop "Wrongful Conduct" Suit, SAN JOSE MERCURY NEWS, July 29, 1993, at 3E.
46. See Senate Panel Hears Views on Reducing Number of Frivolous Rule 10b-5 Actions, 25 Sec. Reg. & L. Rep. (BNA) 847, 847 (June 18, 1993) (noting that securities fraud complaints, according to corporate executives, "are often triggered by any 10 percent drop in the value of the company's stock, regardless of whether the stock price rebounds quickly or of other factors"); Janet C. Alexander, Do the Merits Matter? A Study of Settlement in Securities Class Actions, 43 STAN. L. REV. 497, 569 (1991) ("[W]hen there has been a sharp decline in the market price of a company's stock, the mere filing of a complaint appears to be a ticket to a guaranteed and substantial recovery."); John C. Coffee, Jr., The "New Learning" on Securities Litigation, N.Y. L.J., Mar. 25, 1993, at 5 (noting that recent empirical studies of securities fraud litigation suggest that class action complaints tend to be filed shortly after sharp price declines, and that "[t]he inference that skeptics might draw from such a finding is that stock volatility, more than fraud, produces securities litigation").
47. See Senate Panel Hears Views on Reducing Number of Frivolous Rule 10b-5 Actions, 25 Sec. Reg. & L. Rep. (BNA) 847, 847 (June 18, 1993) (noting that securities fraud complaints, according to corporate executives, "are often triggered by any 10 percent drop in the value of the company's stock, regardless of whether the stock price rebounds quickly or of other factors"); Janet C. Alexander, Do the Merits Matter? A Study of Settlement in Securities Class Actions, 43 STAN. L. REV. 497, 569 (1991) ("[W]hen there has been a sharp decline in the market price of a company's stock, the mere filing of a complaint appears to be a ticket to a guaranteed and substantial recovery."); John C. Coffee, Jr., The "New Learning" on Securities Litigation, N.Y. L.J., Mar. 25, 1993, at 5 (noting that recent empirical studies of securities fraud litigation suggest that class action complaints tend to be filed shortly after sharp price declines, and that "[t]he inference that skeptics might draw from such a finding is that stock volatility, more than fraud, produces securities litigation").
48. See Senate Panel Hears Views on Reducing Number of Frivolous Rule 10b-5 Actions, 25 Sec. Reg. & L. Rep. (BNA) 847, 847 (June 18, 1993) (noting that securities fraud complaints, according to corporate executives, "are often triggered by any 10 percent drop in the value of the company's stock, regardless of whether the stock price rebounds quickly or of other factors"); Janet C. Alexander, Do the Merits Matter? A Study of Settlement in Securities Class Actions, 43 STAN. L. REV. 497, 569 (1991) ("[W]hen there has been a sharp decline in the market price of a company's stock, the mere filing of a complaint appears to be a ticket to a guaranteed and substantial recovery."); John C. Coffee, Jr., The "New Learning" on Securities Litigation, N.Y. L.J., Mar. 25, 1993, at 5 (noting that recent empirical studies of securities fraud litigation suggest that class action complaints tend to be filed shortly after sharp price declines, and that "[t]he inference that skeptics might draw from such a finding is that stock volatility, more than fraud, produces securities litigation").
49. See, e.g., Jonathan Eisenberg, Enforcement Issues and Litigation: Liability for Faulty Earnings Projections and Optimistic Statements, 21 SEC. REG. L.J. 202, 202 & n.1 (1993); Douglas M. Schwab & Matthew Harris, A Litigation Perspective on Disclosure Issues Relating to Forward Looking Information passim (May 24, 1993) (unpublished manuscript, on file at the Harvard Law School Library).
50. See, e.g., Jonathan Eisenberg, Enforcement Issues and Litigation: Liability for Faulty Earnings Projections and Optimistic Statements, 21 SEC. REG. L.J. 202, 202 & n.1 (1993); Douglas M. Schwab & Matthew Harris, A Litigation Perspective on Disclosure Issues Relating to Forward Looking Information passim (May 24, 1993) (unpublished manuscript, on file at the Harvard Law School Library).
51. One-eighth of all firms listed on the New York Stock Exchange have been sued in the last five years, and virtually all have paid some amount in settlement of plaintiffs' claims. See Senate Securities Fraud Hearings, supra note 15, at 6 (statement of Vincent E. O'Brien). This fact leads some critics to observe that "[i]t seems most unlikely that American companies are engaging in fraud on such a massive scale (and that plaintiffs are able to pick their targets with such pinpoint accuracy). Rather, something is forcing innocent defendants to settle rather than fight meritless charges." Id. at 6-7. This sentiment is echoed by defense counsel who explain that, "from the defense standpoint, a company is under hydraulic pressure to settle" because a securities class action is often a "bet your company" litigation. "You find that paying five, 15 or 20 percent of the total claim out as a settlement is worth it to avoid the jury risk" and that "[s]ometimes the merits [of the case] don't mean very much." Nancy Rutter, Securities Class Action Scandal, UPSIDE, Apr. 1990, at 30 (quoting Edward Balabanian). For the most developed and controversial assertion that securities fraud settlements are divorced from the underlying merits, see Alexander, cited above in note 36, passim.
52. See Arthur Andersen & Co., Coopers & Lybrand, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, Price Waterhouse, The Liability Crisis in the United States: Impact on the Accounting Profession: A Statement of Position 1-2 (Aug. 6, 1992) [hereinafter Arthur Andersen] (on file at the Harvard Law School Library) (describing "unwarranted litigation and coerced settlements" that result from plaintiffs' incentives to pursue auditors as one of the few remaining "deep pockets" in cases involving failed business enterprises).
53. See DUNBAR, supra note 29, at i ("[A] disproportionately large number of securities class action settlements [are of] suits filed against high-technology firms."). Almost one-third of all publicly traded biotechnology companies have been sued in securities class actions, and settlements to date in those litigations, most of which are still pending, amount to at least $170 million. See Bruce Vanyo & Boris Feldman, Biotech Securities Litigation Is Running Rampant, 11 BIO/TECH. 664, 664 (1993).
54. There were fewer securities class action filings in 1991 or 1992 than in 1974, even though initial public offering (IPO) activity almost quadrupled from $10 billion to $39 billion between 1990 and 1992, and even though volume on the NYSE and NASDAQ increased by 50% over the same period. Since 1973, proceeds from IPOs increased by 2,700%, proceeds from all common stock offerings by more than 1,200%, and annual trading volume on the NVSE and NASDAQ by 1,400%. The measured volume of securities fraud litigation has not grown by comparable amounts during the same period, however. See Senate Securities Fraud Hearings, supra note 15, at 4-5 (Statement of William S. Lerach).
55. Ralph Nader, for example, suggested to members of Congress that, when a corporation settles, it generally has "something to hide" and is covering up "skeletons in the closet." Witnesses Dispute Whether Reform Needed to Stem Spurious Litigation, 25 Sec. Reg. & L. Rep. (BNA) 997, 998 (July 23, 1993) [hereinafter Witnesses]. Proponents of securities fraud class actions also argue that "settlements in class action securities suits are under strict management of federal judges quite familiar with the 'merits' of the entire case" and that the judiciary and defense counsel would not concur in "'meritless settlements.'" Lester B. Snyder & Jerry G. Gonick, The Interrelationship of Securities Class Action Litigation and Pension Plan Tax Policy: What's Really At Stake?, 21 SEC. REG. L.J. 123, 128 (1993).
56. Ralph Nader, for example, suggested to members of Congress that, when a corporation settles, it generally has "something to hide" and is covering up "skeletons in the closet." Witnesses Dispute Whether Reform Needed to Stem Spurious Litigation, 25 Sec. Reg. & L. Rep. (BNA) 997, 998 (July 23, 1993) [hereinafter Witnesses]. Proponents of securities fraud class actions also argue that "settlements in class action securities suits are under strict management of federal judges quite familiar with the 'merits' of the entire case" and that the judiciary and defense counsel would not concur in "'meritless settlements.'" Lester B. Snyder & Jerry G. Gonick, The Interrelationship of Securities Class Action Litigation and Pension Plan Tax Policy: What's Really At Stake?, 21 SEC. REG. L.J. 123, 128 (1993).
57. For example, William S. Lerach, a prominent plaintiffs' attorney, has testified that he or his partners have acted "on behalf of the victims of the scandals involving many publicly-owned savings and loans, Executive Life Insurance, Drexel Burnham Lambert, and the Bank of Credit and Commerce International." Senate Securities Fraud Hearings, supra note 15, at 1 (statement of William S. Lerach). Reform proposals, according to Lerach, would "slam the courthouse door in the faces of these victims, while letting financial predators and their professional accomplices off the hook. Ivan Boesky, David Paul, Fred Carr and many savings and loan executives and their accountants, lawyers, and investment bankers would love these proposals. Their victims would not." ld. at 2.
58. As part of a bipartisan effort to reform private securities litigation, legislation seeking to amend § 10(b) was introduced in both houses of Congress in August, 1992. See H.R. 5828, 102d Cong., 2d Sess. (1992); S. 3181, 102d Cong., 2d Sess. (1992). Congress failed to act on these proposals before adjourning, and reform litigation was again introduced in the 103d Congress. See H.R. 417, 103d Cong., ist Sess. (1993). These reform proposals continue to generate sharp controversy on Capitol Hill. See Witnesses, supra note 42, at 997. Throughout the debate, plaintiffs' counsel have called for increased incentives for private party class actions, including treble damages against central participants who deliberately commit fraud, increased sanctions for discovery abuses, relaxation of pleading requirements, and a lengthening of the statute of limitations period. See, e.g., Senate Securities Fraud Hearings, supra note 15, at 25-27 (statement of William S. Lerach). In contrast, defendants and their counsel propose a shift from joint and several liability to proportionate liability, requirements that losers in litigation pay the prevailing party's legal fees, and requirements that plaintiffs prove their case by clear and convincing evidence, instead of by a preponderance of the evidence. See, e.g., Arthur Andersen, supra note 39, passim; Adam F. Ingber, Note, 10b-5 or No 10b-5?: Are the Current Efforts to Reform Securities Litigation Misguided?, 61 FORDHAM L. REV. S351 passim (1993).
59. See note 44 above for a description of recently introduced and pending legislation and note 34 above for a description of lobbying efforts. The "big six" accounting firms have reportedly contributed $2 million apiece to finance a litigation reform effort, a large part of which is aimed at lobbying for legislation that would reduce auditor exposure in securities fraud actions. See Milo Teyelin & Lee Berton, Accountants Assail Malpractice Suits - While Assisting Them, WALL ST. J., Aug. 12, 1993, at A1.
60. See, e.g., Briefs amicus curiae for National Association of Securities and Commercial Law Attorneys, First Boston Corp., et al., American Institute of Certified Public Accountants, and Securities Industry Association, Musick, Peeler & Garrett v. Employers Insurance of Wausau, 113 S. Ct. 2085 (1993), reprinted in 17 Securities Regulation Series 293-404, 445-82 (1992-93); Briefs amicus curiae of American Council of Life Insurance, Arthur Andersen & Co., et al., Bond Investors Association, National Association of Securities and Commercial Law Attorneys, and Securities Industry Assoc. in Lampf Pleva v. Gilbertson, 111 S. Ct. 2773, (90-333), reprinted in 15 Securities Regulation Series 271-437 (1990-91).
61. See David S. Ruder, The Development of Legal Doctrine Through Amicus Participation: The SEC Experience, 1989 WIS. L. REV. 1167, 1175-77 (1989).
62. See, e.g., Senate Securities Fraud Hearings, supra note 15 (statement of William R. McLucas).
63. See, for example, the cases cited above in note 13.
64. "As the law has developed, Rule 10b-5 is vastly more important in combatting fraud than are the express remedies provided in the 1933 and 1934 Acts. . . . Section 10(b) and Rule 10b-5 have come to embrace a diversity of claims which could not have been envisioned in 1934." Brief for the Securities and Exchange Commission as Amicus Curiae at 23, Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773 (1991) (No. 90-333). "The primary private remedy for fraud available under the Securities Exchange Act has been the one implied from SEC rule 10b-5." HAZEN, supra note 1, § 13.2.
65. As this nation's most venerable scholar of the federal securities laws observed when contemplating the growth of Rule 10b-5 litigation, "it is difficult to think of another instance in the entire corpus juris in which the interaction of the legislative, administrative rulemaking, and judicial processes have produced so much from so little." LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 726 (2d ed. 1988). Chief Justice Rehnquist echoed his amazement when he described Rule 10b-5 as "a judicial oak which has grown from little more than a legislative acorn." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).
66. Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983).
67. Supreme Court decisions explicitly or implicitly recognizing a private right of action under Rule 10b-5 include: Musick, Peeler & Garrett v. Employers Ins., 113 S. Ct. 2085, 2087-89 (1993); Basic Inc. v. Levinson, 485 U.S. 224, 230-31 (1988); Huddleston, 459 U.S. at 380; Aaron v. SEC, 446 U.S. 680, 689 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 725 (1975); Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-54 (1972); Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n.g (1971).
68. The Director of the Commission's Division of Enforcement has described the private right as one "critically important to the effective operation of the federal securities laws." Senate Securities Fraud Hearings, supra note 15, at 6 (statement of William R. McLucas); see supra notes 6, 15-18 and accompanying text.
69. Section 10(b) reads as follows: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange. . . (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b) (1988) (emphasis added).
70. VII Loss & SELIGMAN, supra note 1, at 3417. Several other provisions of the securities laws are also "nonself-operative" and therefore subject to disimplication as well. See supra note 3.
71. Rule 10b-5 reads as follows: RULE 10B-5. EMPLOYMENT OF MANIPULATIVE AND DECEPTIVE DEVICES. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240. 10b-5 (1993).
72. Steve Thel, The Original Conception of Section 10(b) of the Securities Exchange Act, 42 STAN. L. REV. 385, 463 (1990).
73. See Section II.D. 1 below at pp. 986-91 for a description of the Commission's early and consistent support for the implication of a private right.
74. Some commentators have recently suggested that Rule 10b-5 be repealed and replaced with a series of more precisely crafted antifraud rules. See, e.g., David Ratner, Appealing for the Repeal of Rule 10b-g, RECORDER, May 26, 1992, at 8 (criticizing Rule 10b-5 as "probably an unauthorized exercise of the SEC's rulemaking power in the first place"). There have also been suggestions and proposed legislation urging that insider trading, which is often prosecuted as a violation of Rule 10b-5, be defined with greater precision than is inherent in the current structure of the rule. See generally DONALD LANGEVOORT, INSIDER TRADING: REGULATION ENFORCEMENT & PREVENTION §§ 13.01-13.02 (1992) (discussing three legislative proposals designed to refine the prohibition on insider trading).
75. Some commentators have recently suggested that Rule 10b-5 be repealed and replaced with a series of more precisely crafted antifraud rules. See, e.g., David Ratner, Appealing for the Repeal of Rule 10b-g, RECORDER, May 26, 1992, at 8 (criticizing Rule 10b-5 as "probably an unauthorized exercise of the SEC's rulemaking power in the first place"). There have also been suggestions and proposed legislation urging that insider trading, which is often prosecuted as a violation of Rule 10b-5, be defined with greater precision than is inherent in the current structure of the rule. See generally DONALD LANGEVOORT, INSIDER TRADING: REGULATION ENFORCEMENT & PREVENTION §§ 13.01-13.02 (1992) (discussing three legislative proposals designed to refine the prohibition on insider trading).
76. Touche Ross & Co. v. Redington, 442 U.S. 560, 568 (1979); accord Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976) (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975) (Powell, J., concurring)).
77. "Congress did not itself proscribe any conduct in section 10(b); at most, it authorized the SEC to proscribe conduct. No conduct violates section 10(b) unless an SEC rule prohibits it." Thel, supra note 58, at 388-89 (footnote omitted); see also S. Rep. No. 792, 73d Cong., 2d Sess. 184 (1934) (stating that § 10(b) "authorizes the Commission by rules and regulations to prohibit or regulate the use of any other manipulative or deceptive practices which it finds detrimental to the interests of the investor").
78. Ernst & Ernst, 425 U.S. at 214.
79. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773, 2779 (1991); see also Santa Fe Indus, v. Green, 430 U.S. 462, 477 ("Congress did not expressly provide a private cause of action for violations of § 10(b)."); Blue Chip Stamps, 421 U.S. at 729 (noting that "section 100(b) of the 1934 Act does not by its terms provide an express civil remedy for its violation").
80. For example, the Supreme Court has rejected the Commission's attempts to: (1) weaken the purchaser-seller requirement, see Blue Chip Stamps, 421 U.S. at 746 n.10; (2) allow liability without a showing of scienter, see Ernst & Ernst, 425 U.S. at 193, 197-201; and, (3) apply a "parity of information" theory that would create liability for insider trading even absent a breach of duty, see Dirks v. SEC, 463 U.S. 646, 656-58 (1983); Chiarella v. United States, 445 U.S. 222, 232-34 (1980).
81. Ernst & Ernst, 425 U.S. at 201.
82. Lampf, 111 S. Ct. at 2780. The Court has also complained that "neither the legislative history nor the statute itself affords specific guidance for the resolution of" issues raised before the justices. Chiarella, 445 U.S. at 226. Prior to the Supreme Court's recognition of an implied private right of action, one influential commentator urged that "Congress did not intend to create an implied right of action for violation of a Rule promulgated under Section 10(b)" and that lower "courts which have been 'finding' civil liability in connection with the violation of Rule 10b-5 have in fact been 'creating' civil liability." David S. Ruder, Civil Liability Under Rule 10b-5: Judicial Revision of the Legislation Intent?, 57 Nw. U. L. REV. 627, 635 (1963). For a detailed analysis of § 10(b)'s legislative history, see Thel, cited above in note 58, at 424-61.
83. See note 57 above for the text of the rule.
84. VII Loss & SELIGMAN, supra note 1, at 3486-87.
85. As recounted by Milton V. Freeman, the member of the Commission's staff who actually drafted Rule 10b-5, the Commission had learned that the president of a Boston corporation was falsely telling shareholders that the company's performance would be poor and then purchasing shares at a bargain price. See Milton V. Freeman, Conference on Codification of the Federal Securities Laws, 22 Bus. LAW. 793, 922 (1967). At the time, however, the Commission was unable to attack such practices because the statutes and regulations then in place were addressed solely to fraud in the sale of securities, not in their purchase. This was a serious gap because an issuer itself, or an officer or director or principal stockholder, could buy in its securities by fraudulent practices without being touched by federal authority except for criminal prosecution under the mail or wire fraud statute or the entry of a mail fraud order. VII Loss & SELIGMAN, supra note 1, at 3417. As the Commission explained when it adopted Rule 10b-5, the "new rule closes a loophole in the protections against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase." Sec. Exch. Rel. No. 34-3230 (May 21, 1942). The Commission said nothing about creating or implying private rights of action.
86. Mr. Freeman recalls that, in drafting Rule 10b-5, he "looked at Section 10(b) and . . . at Section 17, and . . . put them together" with the only discussion being whether the phrase "'in connection with the purchase or sale'" should be at the beginning or end of the rule. The decision was to place it at the end. Freeman, supra note 70, at 922; see also HAZEN, supra note 1, § 13.2, at 669 (noting that Rule 10b-5 is "patterned directly upon Section 17(a) of the 1933 Act"); Thel, supra note 55, at 463 n.357 (noting that Rule 10b-5 "is in fact based on § 17 of the Securities Act . . . and largely tracks the language of that provision"). The language of Rule 10b-5 is reproduced below in a manner that illustrates its derivation from § 17. The first paragraph of the rule simply repeats the opening paragraph of § 10(b), see supra note 55, and the rule's operative provisions, Rules 10b-5(1), (2), and (3), are drawn directly from §§ 17(a)(1), (2), and (3), with additions to § 17's language shown in italics and deletions shown as strike-throughs: RULE 10B-5. EMPLOYMENT OF MANIPULATIVE AND DECEPTIVE DEVICES. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (1) To employ any device, scheme, or artifice to defraud, or (2) To make obtain money or property by means of any untrue statement of a material fact or to omit any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) To engage in any act transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser any person in connection with the purchase or sale of any security. Cf. supra note 57 (setting forth Rule 10b-5).
87. Freeman, supra note 70, at 922 (quoting Commissioner Sumner Pike). This description of the genesis and original intent of Rule 10b-5 is the accepted lore on the topic, and is widely cited as authoritative by courts and commentators alike. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 767 (1975) (Blackmun, J., dissenting); HAZEN, supra note 1, § 13.2, at 669 n.22; VII Loss & SELIGMAN, supra note 1, at 3487; Thel, supra note 58, at 462.
88. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773, 2780 (1991) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976)).
89. Blue Chip Stamps, 421 U.S. at 737. At risk of further emphasizing the obvious, the fact that eight years elapsed between passage of the Exchange Act in 1934 and adoption of Rule 10b-5 in 1942 also suggests that the language of the statute did not compel a sweeping antifraud proscription of Rule 10b-5's scope and Rule 10b-5's implied private rights. If a rule with such broad effect was so clearly contemplated or compelled by the statute, the Commission would not have waited eight years to act.
90. For example, the Supreme Court has held that no private right of action exists under § 17(a) of the Exchange Act, as amended, 15 U.S.C. § 78(a) (1988), which requires registered securities brokers to file audited financial statements with the Commission. See Touche Ross & Co. v. Redington, 442 U.S. 560, 576 (1979). The Court has also refused to allow a general private right of action under § 206 of the Investment Advisors Act of 1940, as amended, 15 U.S.C. § 80b-6 (1988) - that Act's general anti-fraud provision. See Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 24 (1979). Significantly, the language of § 206 parallels the language of Rule 10b-5, which indicates that the text of Rule 10b-5 does not in and of itself compel the implication of a private right. There is also no private right of action under § 13(3) of the Exchange Act, see In re Penn Cent. Sec. Litig., 494 F.2d 528, 540-41 (3d Cir. 1974); under § 14(c) and Rule 14C-6 of the Exchange Act, see Ciro Inc. v. Gold, 816 F. Supp. 253, 269-70 (D. Del. 1993); or, under § 6(b) of the Exchange Act, see Spicer v. Chicago Bd. Options Exch. Inc., 977 F. 2d 255, 256 (7th Cir. 1992).
91. Implied private rights of action that permit both Commission and private litigation regarding the same underlying fact pattern have been recognized under § 10(b) and Rule 10b-5 of the Exchange Act, see infra Part II.D, at pp. 985-97; under § 14(3) and Rule 14a-9 of the Exchange Act, see J.I. Case Co. v. Borak, 377 U.S. 426, 430-31 (1964); § 14(e) and Rule 14e-3 of the Exchange Act, see HAZEN, supra note 1, § 11.15; and, under several other provisions of the federal securities laws. See JENNINGS, MARSH & COFFEE, supra note 1, at 784-848; see also supra note 3 (listing the major provisions for which the courts have implied a private right of action).
92. Section 16(b) of the Exchange Act, 15 U.S.C. § 78p(b) (1988), for example, creates a cause of action for certain shareholders to recover "short-swing profits" earned by corporate insiders. The Commission cannot bring an enforcement action to complain of "short-swing profits" because the statute merely gives rise to a corporate claim for disgorgement of those profits, and therefore, "[S]ection 16(b) violations do not give rise to criminal sanctions nor are they within the purview of SEC enforcement actions or proceedings." HAZEN, supra note 1, § 12.3, at 631.
93. See supra notes 70-72 and accompanying text.
94. The circuit courts of appeal "have uniformly held that no private right of action exists under Section 17(3)" of the Securities Act, although the Supreme Court has specifically reserved the question. Tower C. Snow, Susan S. Muck & Merle H. Weiner, Defending Securities Class Actions 64 (June 16-18, 1993) (unpublished manuscript presented at the conference "Tools for Executive Survival" held at Stanford Law School, on file at the Harvard Law School Library); accord Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 304 n.9 (1985).
95. 15 U.S.C. § 78j(b) (1988).
96. 467 U.S. 837 (1984).
97. For analyses of Chevron, see, for example, Thomas W. Merrill, Judicial Deference to Executive Precedent, 101 YALE L.J. 969 passim (1992); and Cass R. Sunstein, Law and Administration After Chevron, 90 COLUM. L. REV. 2071 (1990), which describes Chevron as the "counter-Marbury, for the administrative state," Sunstein, supra, at 2075.
98. For analyses of Chevron, see, for example, Thomas W. Merrill, Judicial Deference to Executive Precedent, 101 YALE L.J. 969 passim (1992); and Cass R. Sunstein, Law and Administration After Chevron, 90 COLUM. L. REV. 2071 (1990), which describes Chevron as the "counter-Marbury, for the administrative state," Sunstein, supra, at 2075.
99. Chevron, 467 U.S. at 843.
100. Id. at 843-44; accord Good Samaritan Hosp. v. Shalala, 113 S. Ct. 2151, 2159 (1993) ("Confronted with an ambiguous statutory provision, we generally will defer to a permissible interpretation espoused by the agency entrusted with its implementation."); Reiter v. Cooper, 113 S. Ct. 1213, 1221 (1993) (explaining that an administrative agency's reasonable interpretation of its organic statute is binding).
101. Immigration & Naturalization Serv. v. Cardoza-Fonseca, 480 U.S. 421, 454 (1987).
102. Antonin Scalia, Judicial Deference to Administrative Interpretations of Law, 1989 DUKE L.J. 511, 512 n.7 (1989).
103. See supra Part II.A, at pp. 978-81.
104. See BERNARD SCHWARTZ, ADMINISTRATIVE LAW 701-13 (3d ed. 1991); Stephen Breyer, Judicial Review of Questions of Law and Policy, 38 ADMIN. L. REV. 363, 372-82 (1986).
105. See BERNARD SCHWARTZ, ADMINISTRATIVE LAW 701-13 (3d ed. 1991); Stephen Breyer, Judicial Review of Questions of Law and Policy, 38 ADMIN. L. REV. 363, 372-82 (1986).
106. See Martin v. Occupational Safety & Health Review Comm'n, 111 S. Ct. 1171, 1178-79 (1991); see also Robert A. Anthony, Which Agency Interpretations Should Bind Citizens and the Courts?, 7 YALE J. ON REG. 1, 42-46 (1990) ("Chevron acceptance extends to all interpretations expressed in formats that Congress intended to be used to complement delegated lawmaking authority."). Ironically, because the Commission has not incorporated its own position supporting private rights into Rule 10b-5, and because the Commission has expressed its position solely through amicus briefs, Congressional testimony, and speeches by Commissioners, the "format" concerns associated with the current implication of private rights are far more substantial than the concerns that would be raised by a formal disimplication rulemaking.
107. Cf. Adams Fruit Co. v. Barrett, 494 U.S. 638, 649-50 (1990) (holding that Chevron deference applies only to agency decisions that exercise properly delegated authority; when an agency has no authority to regulate on a matter its pronouncements deserve no deference).
108. Cf. Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 574-78 (1988) (holding that, although agency interpretations are normally entitled to deference, when an otherwise acceptable construction would raise serious constitutional problems courts should construe the statute to avoid such problems unless such construction is plainly contrary to Congress's intent).
109. Immigration & Naturalization Serv. v. Cardoza-Fonseca, 480 U.S. 421, 446 (1987). For consideration of the argument that the Commission is constrained from changing its own position because of its prior support of implied Rule 10b-5 private rights, see below Parts II.E., at p, 998, and III.C., at pp. 1006-08.
110. Maislin Indus., U.S. v. Primary Steel, Inc., 110 S. Ct. 2759, 2768 (1990).
111. The fact that disimplication involves an administrative reversal of the Commission's own long-held position - a challenge to the Commission's regulatory stare decisis - will also not prevent the change in policy. See infra Part III.C., at pp. 1006-08.
112. Other commentators have described the Court as going through an "ebullient stage" followed by a "'back to orthodoxy' stage." IX Loss & SELIGMAN, supra note 1, at 4315, 4324.
113. 69 F. Supp. 512, 513-14 (E.D. Pa. 1946). 98 See infra notes 103-16 and accompanying text.
114. See infra notes 117-25 and accompanying text.
115. 404 U.S. 6 (1971).
116. See id. at 12-14.
117. 459 U.S. 375 (1983).
118. See id. at 380.
119. See supra Part II.A., at pp. 978-81.
120. See id.
121. See id.
122. See id.
123. 83 F. Supp. 613 (E.D. Pa. 1948) (findings of fact and law); 73 F. Supp. 798 (E.D. Pa. 1947) (decision on merits); 69 F. Supp. 512 (E.D. Pa. 1946) (ruling on motion to dismiss that establishes the private Rule 10b-5 cause of action).
124. JENNINGS, MARSH & COFFEE, supra note 1, at 788.
125. Kardon, 69 F. Supp. at 513.
126. Id. at 514.
127. Id. at 513 (quoting RESTATEMENT OF TORTS § 286 (1934) and noting that "[t]his rule is more than merely a canon of statutory interpretation. The disregard of the command of a statute is a wrongful act and a tort").
128. Section 29(b) of the Exchange Act, 15 U.S.C. § 78cc(b) (1988), provides that: Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract . . . made, the performance of which involves the violation of . . . any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule, or regulation . . . . Id.
129. See Kardon, 69 F. Supp. at 514.
130. JENNINGS, MARSH & COFFEE, supra note 1, at 789.
131. Kardon, 69 F. Supp. at 514.
132. Id.
133. See Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 15 (1979) ("The question whether a statute creates a cause of action, either expressly or by implication, is basically a matter of statutory construction.").
134. 442 U.S. 560 (1979).
135. Id. at 568.
136. See Kardon, 69 F. Supp. at 513 (stating that "where there is a right, there is a remedy").
137. Touche Ross, 442 U.S. at 568 (quoting Cannon v. University of Chicago, 441 U.S. 677, 688 (1979)).
138. 444 U.S. 11 (1979).
139. Id. at 11.
140. Id. at 19. In Transamerica, the Court interpreted § 215 of the Investment Advisers Act, 15 U.S.C. § 80b-15 (1988), a provision that it called "comparable" to § 29(b). Transamerica, 444 U.S. at 18-19.
141. Transamerica, 444 U.S. at 19.
142. JENNINGS, MARSH & COFFEE, supra note 1, at 823. By 1969, 10 of the 11 courts of appeals had recognized a private Rule 10b-5 cause of action. See IX Loss & SELIGMAN, supra note 1, at 4382-84 n.434 (collecting cases); see also Herman & MacLean v. Huddleston, 459 U.S. 375, 380-81 n.10 (1983) (summarizing the history of the implied private right of action under Rule 10b-5 in both Supreme Court and lower court cases). For a comprehensive list of cases recognizing and rejecting implied liabilities under the federal securities laws through 1978, see 2 AMERICAN LAW INST., FEDERAL SECURITIES CODE 775-79 (1980).
143. JENNINGS, MARSH & COFFEE, supra note 1, at 823. This lack of analysis arose "presumably because the defendants did not seriously argue to the contrary, and were solely concerned with defining the requirements for and limitations upon such an action." Id.
144. See supra Part II.A., at pp. 978-81.
145. See, e.g., Securities & Exch. Comm'n v. Chenery Corp., 318 U.S. 80, 94-95 (1943).
146. Memorandum of the Securities & Exchange Commission, Amicus Curiae, Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946) (No. 6203). The only reference to the Commission's amicus brief in the law review literature seems to be by Ruder, cited above in note 47, at 1173-74, which refers to the brief only in passing.
147. The Commission also filed amicus briefs in two cases decided prior to Kardon in which it relied on the same theories propounded in Kardon to argue for implication of private rights under § 6 and § 29(b) of the Exchange Act. See Baird v. Franklin, 141 F. 2d 238, 239 (2d Cir. 1944) (implying private rights of action under § 6(b) of the Exchange Act); Geismar v. Bond & Goodwin, Inc, 40 F. Supp. 876, 878 (S.D.N.Y. 1941) (permitting civil actions pursuant to § 29(b) of the Exchange Act); see also Ruder, supra note 47, at 1173 (noting generally the Commission's work in the 19405 in advocating a private right of investors to sue under provisions of the federal securities laws that did not contain express remedies).
148. In the 1940s, the Commission began to advocate the implication of a private right of investors to sue under provisions of the securities laws that did not contain express remedies. . . . After Kardon, the Commission sought to establish a judicial consensus recognizing the existence of implied rights of action under Rule 10b-5 and other provisions of the federal securities laws. It eventually obtained favorable rulings from every federal circuit court of appeals . . . and ultimately obtained the acquiescence of the Supreme Court with respect to Rule 10b-5 and Rule 143-9. . . . The Commission's success in urging implication of private rights of action has dramatically altered the balance between public and private litigation under the Acts . . . . Ruder, supra note 47, at 1173-74; see also Brief Amicus Curiae of the United States Securities & Exchange Commission, Roosevelt v. E. I. Du Pont de Nemours & Co., 958 F. 2d 416 (D.C. Cir. 1992) (No. 91-5087) (arguing for an implied private right under Rule 14a-8). The Commission's efforts have not, however, been uniformly successful. See, for example, Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979), in which the Court refused to imply private rights under § 206 of the Investment Advisors Act of 1940, 15 U.S.C. § 8-06-6 (1988), that were supported in an amicus brief filed by the Commission.
149. In J.I. Case Co. v. Borak, 377 U.S. 426 (1964), a decision rendered before the Court had occasion to consider the implied Rule 10b-5 private right, the Court recognized an implied private right under the proxy provisions of § 14(a). See id. at 430-33. The Court reasoned that § 27 of the Exchange Act, 15 U.S.C. § 78aa (1988), which grants federal courts "exclusive jurisdiction of violations" and jurisdiction of "all suits in equity and actions at law brought to enforce any liability or duty created" by the Act, also implies a private right of action as a remedy "necessary to make effective the congressional purpose" in adopting the statute. Borak, 377 U.S. at 433. This logic drew scathing criticism from commentators, see, e.g., IX Loss & SELIGMAN, supra note 1, at 4322-23, and was questioned in Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388, 402 n.4 (1971) (Harlan, J., concurring in the judgment). The Court ultimately repudiated this rationale, although it did not question "the actual holding of [Borak]." Touche Ross, 442 U.S. at 577. The implied right under the proxy rules is therefore in much the same position as the implied private right under Rule 10b-5: it continues to exist on the basis of repudiated rationales and for reasons the Court cannot satisfactorily explain, except by reference to stare decisis.
150. See IX Loss & SELIGMAN, supra note 1, at 4317-19, 4383 n.434; JENNINGS, MARSH & COFFEE, supra note 1, at 827 n.5.
151. Id. at 13 n.9 (citing III Louis Loss, SECURITIES REGULATION 1763 (2d ed. 1961)).
152. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 729-30 (1975); Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-54 (1972).
153. Blue Chip Stamps, 421 U.S. at 729. &Similarly there is no indication that the Commission in adopting Rule 10b-5 considered the question of private civil remedies under this provision." Id. at 730.
154. Cort v. Ash, 422 U.S. 66, 78 (1975).
155. 422 U.S. 66 (1975).
156. See id. Some earlier decisions reasoned that, because violations of the Exchange Act can give rise to criminal liability, private rights of action to recover money damages for that criminal conduct must also be inferred from the Act. See id. at 79 (citing cases showing that "a criminal penalty does not necessarily preclude implication of a private cause of action"). Cort effectively rejected this argument by explaining that, when "there was nothing more than a bare criminal statute, with absolutely no indication that civil enforcement of any kind was available to anyone," a private right of action need not be implied. Id. at 79-80.
157. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976) (footnotes omitted). As authority for judicial recognition of the private right, the Court cited its own unreasoned precedents in Blue Chip Stamps, 421 U.S. at 730; Affiliated Ute Citizens, 406 U.S. at 150-54; and, Superintendent, 404 U.S. at 13 n.9.
158. See Cannon v. University of Chicago, 441 U.S. 677, 717-18 (1979) (Rehnquist, J., concurring); id. at 718-24 (White, J., dissenting); id. at 730-31 (Powell, J., dissenting).
159. Cannon, 441 U.S. at 717 (Rehnquist, J., concurring).
160. Id. at 718.
161. See id. at 730, 731 (Powell, J., dissenting).
162. Id. at 741-42.
163. 442 U.S. at 576.
164. Id. at 578 (quoting S.E.C. v. Sloan, 436 U.S. 103, 116 (1978)). The Court also observed that its analysis differed from that used in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), its decision implying a private right under § 14(a), and commented that "it suffices to say that in a series of cases since Borak we have adhered to a stricter standard for the implication of private causes of action, and we follow that stricter standard today." Id.; see supra note 133.
165. JENNINGS, MARSH & COFFEE, supra note 1, at 825.
166. 15 U.S.C. § 80b-6 (1988).
167. JENNINGS, MARSH & COFFEE, supra note 1, at 825.
168. Transamerica Mortgage Advisers, Inc. v. Lewis, 444 U.S. 11, 15-16 (1979) (citation omitted) (citing Touche Ross & Co v. Redington, 442 U.S. 560, 568 (1979); Cannon v. University of Chicago, 441 U.S. 677, 689 (1979)).
169. See id. at 17.
170. See id. at 19-24.
171. See, e.g., Aaron v. S.E.C., 446 U.S. 680, 689 (1980) (stating that the private cause of action for money damages "is not expressly authorized by statute, but rather has been judicially implied").
172. 459 U.S. 375, 380 (1983).
173. Id.
174. See supra notes 142-54 and accompanying text.
175. Pub. L. No. 94-29, 89 Stat. 97 (codified as amended in scattered sections of 15 U.S.C.).
176. Huddlesto, 459 U.S. at 384-85 (quoting Securities Acts Amendments of 1975, Hearings on S. 249 Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. 1 (1975) (statement of Senator Harrison A. Williams, Jr.)).
177. Id. at 385.
178. Id. at 385-86.
179. After all, cumulative private rights under § 11 of the Securities Act, which provides for an express remedy, and § 10(b) of the Exchange Act cannot arise unless private rights under § 10(b) are first implied.
180. Sutherland Stat. Const. § 49.10 (5th ed. 1992) (quoting T.I.M.E. Inc. v. United States, 359 U.S. 464 (1959)). "Traditionally, scholars have been skeptical of the Court's inconsistent use of legislative inaction and have argued that 'almost no reliable inference of [legislative] intent could be drawn' from the legislature's silence or inaction." William N. Eskridge, Jr., Interpreting Legislative Inaction, 87 MICH. L. REV. 67, 68 (1988) (quoting R. DICKERSON, THE INTERPRETATION AND APPLICATION OF STATUTES 181 (1975)).
181. Sutherland Stat. Const. § 49.10 (5th ed. 1992) (quoting T.I.M.E. Inc. v. United States, 359 U.S. 464 (1959)). "Traditionally, scholars have been skeptical of the Court's inconsistent use of legislative inaction and have argued that 'almost no reliable inference of [legislative] intent could be drawn' from the legislature's silence or inaction." William N. Eskridge, Jr., Interpreting Legislative Inaction, 87 MICH. L. REV. 67, 68 (1988) (quoting R. DICKERSON, THE INTERPRETATION AND APPLICATION OF STATUTES 181 (1975)).
182. DICKERSON, supra note 164, at 181.
183. Letter from David Ratner to Joseph A. Grundfest 1 (Nov. 3, 1993) (on file at the Harvard Law School Library).
184. See supra notes 139-48 and accompanying text.
185. Basic Inc. v. Levinson, 485 U.S. 224, 230-31 (1988) (emphasis added) (citations omitted).
186. Pub. L. No. 100-704, 102 Stat. 4677 (codified in scattered sections of 15 U.S.C.).
187. 15 U.S.C. § 78aa-1 (Supp. IV 1992).
188. See ITSFEA § 5, 15 U.S.C. § 78t-l(a) (1988).
189. See, e.g., Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 94 (2d Cir. 1981); Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F. 2d 228, 236 (2d Cir. 1974); see also Neubronner v. Milken, 6 F. 3d 666, 669 n.5 (9th Cir. 1993) (quoting a House Report that showed congressional reliance on prior case law).
190. Section 2 of ITSFEA states that the Commission's rules and regulations governing insider trading are "necessary and appropriate in the public interest and for the protection of investors," repeating the language of § 10(b) pursuant to which Rule 10b-5 was initially adopted, and states that the Commission has enforced these rules "vigorously, effectively, and fairly." 15 U.S.C. § 78u-1 (1988).
191. See note 292 below and accompanying text for a discussion of Congressional deadlock on the issue.
192. 15 U.S.C. § 78aa-1 (Supp. IV 1992). Section 27A operates by declaring that the limitations period for any private implied § 10(b) civil action pending as of the date of the Lampf decision shall be the limitations period that would have applied but for the Lampf decision. Section 27A thereby limits Lampf's retroactive effect without affecting its prospective application. See Musick, Peeler & Garrett v. Employers Ins. of Wausau, 113 S. Ct. 2085, 2089 (1993).
193. 111 S. Ct. 2773 (1991).
194. See Congress Approves Bank Fund Bill Barring Retroactive Use of Lampf, 23 Sec. Reg. & L. Rep. (BNA) 1697 (Dec. 6, 1991) ("The compromise - barring retroactive application of Lampf - means that over $4 billion in lawsuits against former junk bond king Michael Milken, among others, will be able to proceed.").
195. Proposed reforms included provisions limiting discovery requests and imposing a proportionate liability system. See White House Says Lampf Proposal Must be Combined with Curbs on Litigation Abuses, 23 Sec. Reg. & L. Rep. (BNA) 1643 (Nov. 15, 1991). Ultimately none of these reform provisions were enacted.
196. See Pacific Mut. Life Ins. Co. v. First RepublicBank Corp., 997 F. 2d 39, 44 (5th Cir. 1993) ("Congress wrote § 27A(b) to prevent courts from applying Lampf to cases that plaintiffs filed before the court rendered Lampf. . . . What little legislative history exists for § 27A confirms that Congress intended to obliterate Lampf . . . for all cases filed before the court rendered Lampf."), cert. granted sub nom. Morgan Stanley & Co. v. Pacific Mut. Life Ins. Co., 114 S. Ct. 680 (1994).
197. Musick, Peeler & Garrett v. Employers Ins., 113 S. Ct. 2085, 2089 (1993).
198. Id.
199. See id. at 2092-93 (Thomas, J., joined by Blackmun and O'Connor, JJ., dissenting); Lampf, 111 S. Ct. at 2783 (Scalia, J., concurring in part and concurring in the judgment) ("Raising up causes of action where a statute has not created them may be a proper function for common-law courts, but not for federal tribunals.").
200. See Virginia Bankshares, Inc. v. Sandberg, 111 S. Ct. 2749, 2763-64 (1991) (describing Touche Ross's emphasis on the primacy of legislative intent as "heightened concern"). But see Roosevelt v. E. I. Du Pont de Nemours & Co., 958 F. 2d 416, 419-25 (D.C. Cir. 1992) (implying a private right of action under Rule 143-8).
201. Akin v. Q-L Invs., Inc., 959 F. 2d 521, 525 (5th Cir. 1992) ("[J]udicial acceptance of private enforcement of Rule 10b-5 by an implied right of action came when the courts were far more hospitable to such ventures.").
202. Thompson v. Thompson, 484 U.S. 174, 192 (1988) (Scalia, J., concurring in the judgment).
203. For example, the Commission need not establish reliance by any investor or demonstrate a causal connection to any loss in order to prevail in a civil enforcement proceeding. See, e.g., S.E.C. v. Blavin, 760 F.zd 706, 711 (6th Cir. 1985); IX Loss & SELIGMAN, supra note 1, at 4383-4408. Nor is the Commission required to identify any defrauded purchaser or seller for the purposes of a claim for injunctive relief under § 10(b) and Rule 10b-5. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 751 n.14 (1975); S.E.C. v. National Sec., 393 U.S. 453, 464-68 (1969).
204. For examples of cases in which defendants have unsuccessfully sought to raise the statute of limitations as a defense against Commission enforcement proceedings, see S.E.C. v. Rind, 991 F. 2d 1486 (9th Cir. 1993); and S.E.C. v. Keating, [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,906 (C.D. Cal., July 23, 1992).
205. Brief of the United States Securities & Exchange Commission at 2, S.E.C. v. Rind, 991 F. 2d 1486 (9th Cir. 1993) (No. 91-55972).
206. Id. at 4.
207. Id. at 22.
208. The cases cited above in note 187 all refuse to adopt a statute of limitations for Commission Rule 10b-5 civil enforcement proceedings, and no court has imposed such a limitation on the agency. See Appellee's Brief at 12, Rind (No. 91-55972) ("Every court that has addressed the question has found that no statute of limitations applies to Commission enforcement actions seeking equitable relief.").
209. 991 F. 2d 1486 (9th Cir. 1993).
210. See id. at 1492, 1489 ("At the outset of its [Lampf] opinion, the Court stressed that the only issue before it was 'which statute of limitations is applicable to a private suit brought pursuant to' section 10(b) and Rule 10b-5." (quoting Lampf, 111 S. Ct. 2773, 2776 (1991) (emphasis added))); accord S.E.C. v. Keating [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,906, at 93,753 (C.D. Cal. July 23, 1992).
211. Rind, 991 F. 2d at 1490.
212. Id.
213. See id. The courts have also drawn distinctions between the application of the equitable defense of laches when the agency is "seeking to vindicate purely private rights," in which case the defense might apply, and situations in which the agency is "acting in the public interest," in which case, "that defense has been held inapplicable." S.E.C. v. Willis, 777 F. Supp. 1165, 1175 (S.D.N.Y. 1991); S.E.C. v. Sanders, [1986-1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,042, at 95,197 (D. Colo. Nov. 5, 1986). This distinction between private rights and public interest provides further policy support for disimplication under Rule 10b-5.
214. 17 C.F.R. § 230.508(b) (1993).
215. Simply put, § 5 of the Securities Act, 15 U.S.C. § 77e (1988), makes it unlawful to sell unregistered securities in the United States unless an exemption from registration is available. See JENNINGS, MARSH & COFFEE, supra note 1, at 103-50; CHARLES J. JOHNSON, JR., CORPORATE FINANCE AND THE SECURITIES LAWS 7-8 (1990). Section 12(1) of the Securities Act, 15 U.S.C. § 77l(1) (1988), provides for rescission in favor of the purchaser of unregistered securities sold in violation of § 5. See HAZEN, supra note 1, § 7.2. Liability under this provision is strict and plaintiffs need not demonstrate fraud of any sort. See JENNINGS, MARSH & COFFEE, supra note 1, at 103-50; JOHNSON, supra, at 7-14. Section 12(1) is self-enforcing and does not require rulemaking by the Commission, nor does it delegate rulemaking authority to the agency. Regulation D, a series of eight rules codified as 17 C.F.R. §§ 230.501-230.508 (1992), of which Rule 508 is part, defines a series of exemptions from the statute's registration requirement that, if fully complied with, shelter the seller of securities both from Commission enforcement action and from private actions seeking rescission. See JENNINGS, MARSH & COFFEE, supra note 1, at 346-75; JOHNSON, supra, at 336-48.
216. Adoption of Amendments to Accredited Investor and Filing Requirements, Securities Act Release No. 33-6825, 54 Fed. Reg. 11,369 (Mar. 20, 1989).
217. For a description of the problems that can arise as a result of such innocent and inadvertent failures, see, for example, Carl W. Schneider & Charles C. Zall, Section 12(1) and the Imperfect Exempt Transaction: The Proposed I&I Defense, 28 Bus. LAW. 1011, 1012-13 (1973).
218. See Adoption of Amendments to Accredited Investor and Filing Requirements, Securities Act Release No. 33-6825, 54 Fed. Reg. 11, 369 (Mar. 20, 1989); Securities Act Release No. 33-6811, 59 Fed. Reg. 308 (Dec. 20, 1988); Regulation D Revisions, Securities Act Release No. 33-6759, 53 Fed. Reg. 7,870 (Mar. 10, 1988). As a technical matter, Rule 508(a) operates by deeming certain failures to comply with Regulation D as not causing a violation of § 5. Without a violation of § 5 there can be no cause of action for rescission under § 12(1).
219. See Adoption of Amendments to Accredited Investor and Filing Requirements, Securities Act Release No. 33-6825, 54 Fed. Reg. 11,369, 11,370 (Mar. 20, 1989).
220. See id.; JOHNSON, supra note 198, at 348. Rule 508(b) provides in relevant part that, "[w]here an exception is established only through reliance upon paragraph (a) of this rule [that is, an innocent and immaterial failure to comply], the failure to comply shall nonetheless be actionable by the Commission under Section 20 of the [Securities] Act," the Act's general enforcement provision. 17 C.F.R. § 230.508(b) (1993).
221. See 17 C.F.R. § 230.175 (1993). When Rule 175 was adopted under the Securities Act, essentially identical provisions were simultaneously adopted under the Exchange Act as Rule 3b-6, 17 C.F.R. § 240.3b-6 (1993), under the Public Utilities Holding Company Act as Rule 103A, 17 C.F.R. § 250.103A (1993), and under the Trust Indenture Act as Rule 0-11, 17 C.F.R. § 260.0-11 (1993). See Adoption of Safe Harbor Rule for Projections: Final Rule, Securities Act Release No. 33-6084, 44 Fed. Reg. 38,810, 38,814 (July 2, 1979).
222. See Kristine M. Elkind, The Safe-Harbor Rule for Projections: Caveat Projector, 11 LOY. U. CHI. L.J. 345, 345-49 (1980); Kimberly Till, Comment, The SEC Safe Harbor for Forecasts - A Step in the Right Direction?, 1980 DUKE L.J. 607, 608.
223. See Kristine M. Elkind, The Safe-Harbor Rule for Projections: Caveat Projector, 11 LOY. U. CHI. L.J. 345, 345-49 (1980); Kimberly Till, Comment, The SEC Safe Harbor for Forecasts - A Step in the Right Direction?, 1980 DUKE L.J. 607, 608.
224. See Adoption of Safe Harbor Rule for Projections: Final Rule, Securities Act Release No. 33-6084, 44 Fed. Reg. 38,810, 38,811-14 (July 2, 1979).
225. 17 C.F.R. § 230.175 (1993). Significantly, Rule 175 was adopted pursuant to the Commission's general rulemaking authority under § 19(a) of the Securities Act, 15 U.S.C. § 77s(a) (1988), and §§ 3(b) and 23(a)(1) of the Exchange Act, 15 U.S.C. §§ 78c(b), 78w(a)(1) (1988), to define terms and to make "such rules and regulations as may be necessary to implement the provisions" of the Acts. 15 U.S.C. § 78w(a)(1) (1988). By contrast, § 10(b) was adopted pursuant to the legislative form of delegation that some cases and commentators argue commands the greatest degree of judicial deference. See e.g., SCHWARTZ, supra note 88, ch. 2. Thus, even if some commentators have questioned the Commission's basis of authority for adopting Rule 175, see, e.g., Elkind, supra note 205, at 356-59, the foundation underlying a disimplication of Rule 10b-5 would be less open to debate.
226. See, e.g., Wielgos v. Commonwealth Edison Co., 892 F. 2d 509, 512-16 (7th Cir. 1989) (applying the Rule 175 defense in an action asserting an express private right of action under § 11).
227. Some commentators view Rule 175 as a non-event and contend that the rule "arguably did little more than codify existing case law. As such, Rule 175 provides companies with little additional comfort or encouragement to use projections." J. ROBERT BROWN, JR., THE REGULATION OF CORPORATE DISCLOSURE 204 n.84 (1993 Supp.) If this view is correct - a perspective that the recent Wielgos decision and its progeny challenge - then the safe harbor provided by Rule 175 is a sham and the rule has little practical import. Rule 175 also articulates a standard for allocating the burden of proof. Whenever a defendant claims to be within the safe harbor's confines, the plaintiff must show that the defendant's projection was made "without a reasonable basis or was disclosed other than in good faith." 17 C.F.R. 230.175 (1993). For other applications of Rule 175, see, for example, Roots Partnership v. Lands' End, Inc., 965 F. 2d 1411, 1417-19 (7th Cir. 1992); and In re Verifone Sees. Litig., 784 F. Supp. 1471, 1482-83 (N.D. Cal. 1992). Although the scope of the Commission's authority to disimply private rights of action may, in some circumstances, be a subject for legitimate debate, see supra Part IV.A., at pp. 1008-11, there are many forms of disimplication that address only the substantive elements of a violation and that do not purport to alter burdens of proof or other procedural aspects of private claims arising under the federal securities laws. See id. Because the Commission's authority to define the substantive elements of a violation is more secure than its authority to influence related procedure, it follows, again a fortiori, that, if the Commission believes it has authority to allocate burdens of proof under Rule 175, then it must have authority to define the substantive elements of violations that defendants must demonstrate in private proceedings filed under Rule 10b-5.
228. See 15 U.S.C. § 77k (1988).
229. See J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). For a discussion of liability under § 14(a) and Rule 14a-9, see HAZEN, cited above in note 1, at 659-60; JENNINGS, MARSH & COFFEE, cited above in note 1, at 832; and, IX Loss & SELIGMAN, cited above in note 1, at 4339-75.
230. See 2 HAZEN, supra note 1, § 13.4, at 683-89.
231. 15 U.S.C. § 78r(a) (1988).
232. See id. Plaintiffs must, however, establish that they actually read or otherwise directly relied upon the filing that gave rise to their complaint, a requirement that precludes most plaintiffs from prevailing under § 18.
233. See Executive Compensation Disclosure, Securities Act Release No. 33-6962, at 50, 57 Fed. Reg. 48,126 (Oct. 21, 1992).
234. Id. at 48,127. Registrants also voiced litigation concerns generated by a newly-mandated requirement that registrants present a performance graph that compares each registrant's stock price to a broad market index as well as to a "peer group" index pursuant to Item 402(l) of Regulation S-K. See id. at 48,158.
235. See id. at 48,157-58 (discussing Item 402(k) of Regulation S-K).
236. Id. at 48,151 (discussing Item 402(a)(9) of Regulation S-K).
237. Id. (discussing Item 402(a)(8) of Regulation S-K). There is an exception "to the extent that the registrant specifically incorporates" a disclosure by reference into such filing. Id.
238. Similar exemptions are provided in Rule 14a-3(c), 17 C.F.R. § 240.143-3(c) (1993), which provides that certain reports to security holders are "not deemed to be 'soliciting material' or to be 'filed' with the Commission."
239. See Herman & MscLean v. Huddleston, 459 U.S. 375, 382-87 (1983).
240. Private parties may also be able to state clsims under § 12(2) of the Securities Act, 15 U.S.C. § 77 l(2) (1988). See infra Part IV.A., at pp. 1008-11.
241. For a discussion of the elements of a Rule 10b-5 action, see HAZEN, cited above in note 1, § 13.2; JENNINGS, MARSH & COFFEE, cited above in note 1, at 827-32; and, IX Loss & SELIGMAN, cited above in note 1, at 4383-4439.
242. See I.N.S. v. Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987) (quoting Watt v. Alaska, 451 U.S. 259, 273 (1981)); see also United States v. National Ass'n. of Sec. Dealers, Inc., 422 U.S. 694, 719 (1975) (stating that the Commission's "consistent and longstanding interpretation" of a statute charged to its administration, "while not controlling, is entitled to considerable weight").
243. See supra Parts III.A., at pp. 999-1001, and III.B., at pp. 1001-06.
244. For example, the agency has used its authority to define terms, see, e.g., 15 U.S.C. §§ 77s(a), 78c(b) (1988), and its general authority to adopt such rules and regulations as may be necessary or appropriate to implement the securities laws, see 15 U.S.C. §§ 77s(a), 77sss(a), 78w(a)(1), 80a-37(a), 80b-11(a) (1988), to adopt "definitions that are . . . extremely complex," Roberta S. Karmel, Limitations on SEC Rule-Making, N.Y. L.J., Aug. 16, 1990, at 3, 3, and that have been described as being "at virtual odds with statutory language," id. (citing "the various definitions of the terms 'prospectus' and Offer for sale' in the Securities Act," and pointing to 17 C.F.R. §§ 230.134, 230.134a, 230.138, 230.139 (1993)).
245. See, e.g., Business Roundtable v. S.E.C., 905 F.2d 406, 408-09 (D.C. Cir. 1990) (invalidating Rule 19C-4 as reaching beyond the disclosure authority granted in the Exchange Act and impinging on the states' right to control corporate governance); American Bankers Ass'n v. S.E.C., 804 F. 2d 739, 740 (D.C. Cir. 1986) (vacating the Commission's decision to adopt Rule 3b-9, which required banks engaged in the securities business to register as broker-dealers).
246. See, for example, the statement of William R. McLucas in Senate Securities Fraud Hearings, cited above in note 15; and the SEC briefs cited above in note 46.
247. As already explained, neither the language of the rule nor the intent of the Commission as of the date of the rule's adoption contemplate the implication of private rights. See supra Part 11.A., at pp. 978-81.
248. In Motor Vehicle Manufacturers Ass'n of the United States, Inc. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983), the Court explained that, before an agency can rescind a regulation adopted as a result of full notice and comment rulemaking, the agency "is obligated to supply a reasoned analysis for the change beyond that which may be required when an agency does not act in the first instance." Id. at 42. Agencies are not, however, precluded from changing their rules, and "[a]n agency's view of what is in the public interest may change, either with or without a change in circumstances." Id. at 57 (quoting Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (1970) (footnote omitted), cert, denied, 403 U.S. 923 (1971)). A change in a properly adopted rule must therefore be "justified by the rulemaking record," id. at 42, and cannot be "arbitrary and capricious," id. at 42-44. State Farm raises no difficulty for this Article's disimplication analysis because, as noted above, the Commission has never engaged in any rulemaking that would support the implication of private rights under Rule 10b-5. Thus, there is no rulemaking record to rebut. This Article also suggests that the Commission should engage in full notice and comment rulemaking before disimplying any private rights, if it is to disimply at all. Accordingly, even if a State Farmtype rule were on the books, the procedures urged herein would ideally result in a "reasoned analysis" sufficient to overcome an "arbitrary and capricious" challenge to any conclusion reached. Further, the Supreme Court has allowed administrative agencies to engage in rulemakings that resolve certain classes of otherwise litigated issues "even where an agency's enabling statute expressly requires it to hold a hearing." Heckler v. Campbell, 461 U.S. 458, 467 (1983) (citing FPC v. Texaco Inc., 377 U.S. 33, 41-44 (1964); United States v. Storer Broadcasting Co., 351 U.S. 192, 205 (1956)). Case-by-case adjudication is therefore unnecessary, and standards set through rulemaking can help the agency avoid the need "continually to relitigate issues that may be established fairly and efficiently in a single rulemaking proceeding." Heckler, 461 U.S. at 467. The same logic would also support the Commission's decision to restrict through rulemaking the right of private parties to pursue claims now implied under Rule 10b-5. Indeed, the legal support for such restrictions would be even stronger than in Heckler and its predecessors because, in those cases, the statutes established express private rights to hearings or to review, whereas in the case of Rule 10b-5, the relevant statutory authorization provides no such express right.
249. Good Samaritan Hosp. v. Shalala, 113 S. Ct. 2151, 2161 (1993) (citing Automobile Club of Mich. v. Commissioner, 353 U.S. 180, 180-83 (1957)).
250. Id.
251. See id. at 2161.
252. See supra Part II.D., at pp. 985-98.
253. See 15 U.S.C. §§ 77r, 78bb (1988).
254. See generally JENNINGS, MARSH & COFFEE, supra note 1, at 1655-57 (discussing civil liability under state blue sky laws); 12 JOSEPH C. LONG, BLUE SKY LAW § 1.04, at 1-8 to 1-19 (1993 rev. Loose Leaf) (discussing state securities acts); I Loss & SELIGMAN, supra note 1, at 62-79 (discussing antifraud provisions under state blue sky laws).
255. For example, the Williams Act, 15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) (1988), with its detailed regulation of large portions of the tender offer process, has been held not to bar state regulation of the takeover process. See, e.g., CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 86-87 (1987); Amanda Acquisition Corp. v. Universal Foods Corp., 877 F. 2d 496, 502-05 (7th Cir.), cert, denied, 493 U.S. 955 (1989). For recent reform legislation, see H. R. 417, 103d Cong., ist Sess. (1993); S. 3181, 102d Cong., 2d Sess. (1992); H.R. 5828, 102d Cong., 2d Sess. (1992). None of these measures seeks to pre-empt state or common law private securities fraud actions.
256. See Herman & Maclean v. Huddleston, 459 U.S. 375, 383-87 (1983).
257. For example, plaintiffs alleging fraud pursuant to the express remedy of § 12(2) of the Securities Act, 15 U.S.C. § 771(2), need not allege or prove that a defendant acted with scienter as required in Rule 10b-5 actions. See HAZEN, supra note 1, at 315. The Supreme Court has recently agreed to hear a case that raises the question of whether § 12(2) applies to fraud in aftermarket trading of the sort traditionally attacked under Rule 10b-5, or whether § 12(2) is limited to initial offerings. See Pacific Dunlop Holdings, Inc. v. Allen & Co., Inc., 993 F.2d 578 (7th Cir. 1993), petition for cert, granted, 114 S. Ct. 907 (1994). The Court, however, recently dismissed the case because the parties had settled. See Allen & Co., Inc. v. Pacific Dunlop Holdings, Inc., No. 93-201, R46-26, 1994 U.S. LEXIS 2041, at *1 (Feb. 24, 1994).
258. SCHWARTZ, supra note 88, at 171 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 302 (1979)).
259. Id. at 172.
260. See supra note 227.
261. Chiarella v. United States, 445 U.S. 222, 232 (1980) (citing Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 474-77 (1977)).
262. Id. at 234-35.
263. 15 U.S.C. § 78j(b) (1988).
264. The task of defining the procedures by which disputes under the federal securities laws are to be resolved is for Congress or the courts. See, e.g., Steadman v. SEC, 450 U.S. 91, 95 (1981) ("Where Congress has not prescribed the degree of proof which must be adduced . . . in an administrative proceeding, this Court has felt at liberty to prescribe the standard, for '[i]t is the kind of question which has traditionally been left to the judiciary to resolve.'" (quoting Woodby v. INS, 385 U.S. 276, 284 (1966))).
265. See, e.g., H.R. 417, 103d Cong., 1st Sess. 5 (1993) (proposing the addition of § 20B(b)(1) to the Exchange Act that would provide courts with authority to award to a prevailing party reasonable attorney's fees "unless the court determines that the position of the losing party was substantially justified").
266. The "American Rule," under which each party bears its own attorney's fees, governs litigation in the United States unless a contrary result is specifically authorized by statute, or unless a small number of common law exceptions to the rule are satisfied. See Alyeska Pipeline Serv. Co. v. Wilderness Society, 421 U.S. 240, 251-59, 269-71 (1975); M. Brinkley Morse, Note, Attorney's Fees - Nemeroff v. Abelson and the Bad Faith Exception to the American Rule, 58 TUL. L. REV. 1519, 1520-21 (1984). Although several provisions of the federal securities laws permit judges to require that plaintiffs pay their opponents' attorneys' fees - see, for example, § 11(e) of the Securities Act, 15 U.S.C. § 77k(e) (1988), and § 9(e) of the Exchange Act, 15 U.S.C. § 78i(e) (1988) - the courts interpret these provisions to require that plaintiffs' actions be ¥"frivolous, unreasonable, or without foundation." Nemezoff v. Abelson, 620 F. 2d 339, 349 (2d Cir. 1980) (citing Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421 (1978)); see also Healey v. Chelsea Resources Ltd., 947 F. 2d 611, 622 (2d Cir. 1991) (interpreting § 11(e)'s fee-shifting provision as requiring that plaintiffs' claims be brought in bad faith or border on the frivolous). Section 10(b) does not, however, explicitly provide for fee-shifting under any circumstances, and its legislative history is silent on the subject. Under these circumstances, the Commission appears to lack authority to adopt a fee-shifting rule under its delegated § 10(b) authority. See Turner v. FCC, 514 F. 2d 1354, 1356 (D.C. Cir. 1975) (holding that the FCC has no authority to order reimbursement of legal expenses absent clear statutory authority).
267. Description of these various forms of disimplication does not necessarily constitute endorsement. The purpose of the present analysis is to demonstrate that the Commission already has the authority to disimply private Rule 10b-5 rights of action and to describe the various legal and practical limitations on that authority.
268. See SCHWARTZ, supra note 88, at 170-71.
269. See notes 261-66 and accompanying text below for a description of the requisite elements in addition to scienter. See also HAZEN, cited above in note 1, which discusses materiality, reliance, and causation in Rule 10(b)(5) actions, see id. at 689-712.
270. See Aaron v. SEC, 446 U.S. 680, 701-02 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976).
271. See Ernst & Ernst, 425 U.S. at 194 n.12.
272. See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 & n.6 (9th Cir. 1990), cert, denied, 111 S. Ct. 1621 (1991). The Supreme Court has recently granted certiorari in a case raising the question of whether recklessness satisfies the scienter requirement for Rule 10b-5 aiding and abetting liability and whether there is an implied private right of action for aiding and abetting violations at all under § 10(b). See Central Bank v. First Interstate Bank, 113 S. Ct. 2927 (1993), granting cert, in part in First Interstate Bank v. Pring, 969 F. 2d 891 (10th Cir. 1992).
273. See supra note 37.
274. See Ron Kasznik & Baruch Lev, The Characteristics and Consequences of Corporate Discretionary Disclosures (Univ. of Cal. at Berkeley, May 1993) (unpublished manuscript, on file at the Harvard Law School Library); supra note 37.
275. See infra Part IV.C., at pp. 1015-17.
276. This language tracks the actual knowledge standard proposed in S. 3181, 102d Cong., 2d Sess. § 4 (1992), proposing a new § 37(d)(1)(A) of the Exchange Act.
277. See supra note 39.
278. See Kevin R. Johnson, Liability for Reckless Misrepresentations and Omissions Under Section 10(b) of the Securities Exchange Act of 1934, 59 U. CIN. L. REV. 667, 694, 725-30 (1991) (noting that auditors have little motive to commit fraud purely for the sake of their clients); see also Lawrence R. Bard, Note, A Distinct-Responsibility Approach to Accountants' Primary Liability Under Rule 10b-5, 61 GEO. WASH. L. REV. 193, 212-18 (1992) (proposing a "distinct-responsibility" approach to determine whether an auditor's actions should be judged by primary responsibility standards).
279. See Kevin R. Johnson, Liability for Reckless Misrepresentations and Omissions Under Section 10(b) of the Securities Exchange Act of 1934, 59 U. CIN. L. REV. 667, 694, 725-30 (1991) (noting that auditors have little motive to commit fraud purely for the sake of their clients); see also Lawrence R. Bard, Note, A Distinct-Responsibility Approach to Accountants' Primary Liability Under Rule 10b-5, 61 GEO. WASH. L. REV. 193, 212-18 (1992) (proposing a "distinct-responsibility" approach to determine whether an auditor's actions should be judged by primary responsibility standards).
280. For cases in which courts have narrowed the class of those who can sue under Rule 10(b)(5), see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), which establishes the purchaser-seller requirement, see id. at 737-38, 754-55; and Davidson v. Belcor, Inc., 933 F. 2d 603 (7th Cir. 1991), which holds that a former spouse who had only a beneficial interest in the proceeds of a stock sale had no standing under § 10(b), see id. at 607-08.
281. For the standard definition of materiality, see Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Industries, Inc. v. Northway, Inc, 426 U.S. 438, 445-49 (1976).
282. For cases concerning the "in connection with" requirement, see Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 9-10 (1971); and Bloor v. Dansker (In re Investors Funding Corp. of N.Y. Sec. Litig.), 523 F. Supp. 533, 537-39 (S.D.N.Y. 1980).
283. There are many interpretations of the transaction and loss causation requirements of Rule 10b-5. See McGonigle v. Combs, 968 F. 2d 810, 820-22 (9th Cir. 1992) (interpreting causal connection between acts of fraud and plaintiffs' losses); Citibank N.A. v. K-H Corp., 968 F. 2d 1489, 1495 (2d Cir. 1992); Bastian v. Petren Resources Corp., 892 F. 2d 680, 683-86 (7th Cir.) (describing
284. See Basic Inc. v. Levinson, 485 U.S. 224, 241-49 (1988); In re Apple Computer Sec. Litig., 886 F. 2d 1109, 1113-14 (9th Cir. 1989) (finding that the plaintiff has the benefit of presumption of reliance when bringing claims on the "fraud on the market" theory); In re Jenny Craig Sec. Litig., [Current] Fed. Sec. L. Rep. (CCH) ¶ 97,337, 95,720, at 95,725 (S.D. Cal. Dec. 19, 1992) (finding that the fraud on the market reliance presumption does not apply to public offerings),
285. Absent a breach of duty to disclose, there can be no violation of Rule 10b-5. See Basic, 485 U.S. at 239 n.17; Dirks v. SEC, 463 U.S. 646, 653-54 (1983); Chiarella v. United States, 445 U.S. 222, 228 (1980).
286. 15 U.S.C. § 78bb(a) (1988).
287. See Pelletier v. Stuart-James Co., Inc., 863 F. 2d 1550, 1557 (11th Cir. 1989); Green v. Wolf Corp., 406 F. 2d 291, 302-03 (2d Cir. 1968), cert, denied, 395 U.S. 977 (1969).
288. For a recent complaint about this lack of guidance and a call for rulemaking addressing the issue, see John C. Coffee, Jr., The 'New Learning' on Securities Litigation, N.Y. L.J., Mar. 25, 1993, at 5, 7.
289. See Parts II.B., at pp. 981-82, and III.B., at pp. 1001-06, above for a description of this definitional and general rulemaking authority.
290. See 15 U.S.C. § 78t-1(b)(1) (1988) (limiting damage awards against inside traders to the profit gained or loss avoided as a result of the illegal trading); 15 U.S.C. §§ 78u(d)(2)(A), 78ff(a) (providing for civil penalties of up to treble the profit gained or loss avoided as a result of the insider trading); see also Elkind v. Liggett & Myers Inc., 635 F. 2d 156, 168-73 (2d Cir. 1981) (ruling that plaintiffs' recovery should not exceed inside traders' profits).
291. Letter from the American Business Council, et al., to the Honorable Christopher J. Dodd and the Honorable Pete V. Domenici 2 (Dec. 20, 1993) (on file at the Harvard Law School Library).
292. See id. at 3.
293. Id. at 2.
294. Commission proceedings that seek disgorgement do so as an equitable remedy designed to promote deterrence; the rules for calculating disgorgeable profits earned or losses avoided thus need not be affected by the standards used to calculate private party damages.
295. See supra Part III.B.1., at pp. 1001-02.
296. See 17 C.F.R. §§ 228.402, 229.402 (1993).
297. See Executive Compensation Disclosure, Securities Act Release No. 33-7009, 58 Fed. Reg. 42,882, 42,883-87 (Aug. 6, 1993) (reviewing compliance and interpretation difficulties that arose in connection with the initial 1992 adoption of the Commission's executive compensation disclosure rules); Kathleen A. Weiegand, American Bar Association, Compilation of Comment Letters Issued by the Staff of the Securities and Exchange Commission Regarding Executive Compensation Disclosures passim (Aug. 8, 1993) (on file at the Harvard Law School Library) (reviewing more than 120 comment letters received by the SEC staff within the first 10 months of operation of the new executive compensation disclosure rules).
298. See, e.g., Estimates, Forecasts, or Projections of Economic Performance, Securities Exchange, Securities Act Release No. 34-9844, 37 Fed. Reg. 23,850 (1972); Marshall M. Taylor, Comment, The SEC Policy for Projections: New Problems in Disclosure, 21 UCLA L. REV. 242, 270-76 (1973) (urging the expansion of Commission policy for projections by requiring the disclosure of forecasts); Note, Disclosure of Future-Oriented Information Under the Securities Laws, 88 YALE L.J. 338, 338, 360-62 (1978) ("To implement the goals of securities regulation, the SEC should require formal disclosure of financial forecasts by management."). But see Gary F. Goldring, Note, Mandatory Disclosure of Corporate Projections and the Goals of Securities Regulation, 81 COLUM. L. REV. 1525, 1529-42 (1981) (arguing that "[t]he proponents of mandatory forecasting have overestimated the benefits and underestimated the costs of their proposals").
299. See, e.g., Estimates, Forecasts, or Projections of Economic Performance, Securities Exchange, Securities Act Release No. 34-9844, 37 Fed. Reg. 23,850 (1972); Marshall M. Taylor, Comment, The SEC Policy for Projections: New Problems in Disclosure, 21 UCLA L. REV. 242, 270-76 (1973) (urging the expansion of Commission policy for projections by requiring the disclosure of forecasts); Note, Disclosure of Future-Oriented Information Under the Securities Laws, 88 YALE L.J. 338, 338, 360-62 (1978) ("To implement the goals of securities regulation, the SEC should require formal disclosure of financial forecasts by management."). But see Gary F. Goldring, Note, Mandatory Disclosure of Corporate Projections and the Goals of Securities Regulation, 81 COLUM. L. REV. 1525, 1529-42 (1981) (arguing that "[t]he proponents of mandatory forecasting have overestimated the benefits and underestimated the costs of their proposals").
300. See, e.g., Estimates, Forecasts, or Projections of Economic Performance, Securities Exchange, Securities Act Release No. 34-9844, 37 Fed. Reg. 23,850 (1972); Marshall M. Taylor, Comment, The SEC Policy for Projections: New Problems in Disclosure, 21 UCLA L. REV. 242, 270-76 (1973) (urging the expansion of Commission policy for projections by requiring the disclosure of forecasts); Note, Disclosure of Future-Oriented Information Under the Securities Laws, 88 YALE L.J. 338, 338, 360-62 (1978) ("To implement the goals of securities regulation, the SEC should require formal disclosure of financial forecasts by management."). But see Gary F. Goldring, Note, Mandatory Disclosure of Corporate Projections and the Goals of Securities Regulation, 81 COLUM. L. REV. 1525, 1529-42 (1981) (arguing that "[t]he proponents of mandatory forecasting have overestimated the benefits and underestimated the costs of their proposals").
301. See RICHARD A. BREALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 243-55 (4th ed. 1991); Homer Kripke, A Search For a Meaningful Securities Disclosure Policy, 31 Bus. LAW. 293, 314-16 (1975); Note, Disclosure of Future-Oriented Information, supra note 279, at 343-53.
302. See RICHARD A. BREALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 243-55 (4th ed. 1991); Homer Kripke, A Search For a Meaningful Securities Disclosure Policy, 31 Bus. LAW. 293, 314-16 (1975); Note, Disclosure of Future-Oriented Information, supra note 279, at 343-53.
303. See RICHARD A. BREALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 243-55 (4th ed. 1991); Homer Kripke, A Search For a Meaningful Securities Disclosure Policy, 31 Bus. LAW. 293, 314-16 (1975); Note, Disclosure of Future-Oriented Information, supra note 279, at 343-53.
304. See II Loss & SELIGMAN, supra note 1, at 629-32; David R. Herwitz, The Risk of Liability for Forecasting, in 2 OBJECTIVES OF FINANCIAL STATEMENTS 247, 253-55 (Joe J. Cramer, Jr. & George H. Sorter eds., 1974).
305. See supra note 37 and accompanying text.
306. See Projections: Proposed Guidelines for Disclosure of Projections of Future Economic Performance, Exchange Act Release No. 33-5699, 41 Fed. Reg. 19,986, 19,986-87 (1976); see also STAFF OF HOUSE COMM. ON INTERSTATE AND FOREIGN COMMERCE, 95TH CONG., 1ST SESS., REPORT OF THE ADVISORY COMM. ON CORP. DISCLOSURE TO THE SEC 353-54 (Comm. Print 1977) (identifying the risk of liability attendant upon inaccurate projections as one reason not to require the mandatory disclosure of projections).
307. The American Institute of Certified Public Accountants ("AICPA") has recently called for a substantial expansion of financial reporting requirements to include, among other things, more detailed segment reporting provided on a quarterly basis, and greater disclosure of the estimates and assumptions used to calculate material asset and liability amounts. See Special Committee on Financial Reporting, American Institute of Certified Public Accountants, The Information Needs of Investors and Creditors 4 (Nov. 1993) (unpublished manuscript, on file at the Harvard Law School Library). These new disclosure requirements, if adopted, would again create litigation exposure that the Commission could address by providing appropriate "safe harbors" under Rule 10b-5.
308. See supra notes 15, 44-45 and accompanying text.
309. See supra notes 47-49 and accompanying text. Just recently, the Commission chairman has for the first time signalled a willingness to become actively involved in this fray. See supra note 11.
310. Congress initially intended to delegate authority over the nation's securities markets to the Federal Trade Commission, but ultimately decided to create the Commission as a new, independent entity so that "individuals . . . whose single concern was the problem of securities regulation" could be "in charge." JAMES M. LANDIS, THE ADMINISTRATIVE PROCESS 27 (1938). The Commission's status as an agency with expertise in matters of securities regulation has been frequently affirmed by the courts, see, e.g., SEC v. Chenery Corp., 332 U.S. 194, 207, 209 (1947); Board of Trade v. SEC, 923 F. 2d 1270, 1273 (7th Cir. 1991), and by scholars, see, e.g., ANNE M. KHADEMIAN, THE SEC AND CAPITAL MARKET REGULATION: THE POLITICS OF EXPERTISE 11-13 (1992). It should also be recognized, however, that Wall Street believed that it could exert greater influence over an agency devoted solely to the governance of its affairs than over the FTC, and that a new and specialized agency's understanding of capital market processes would likely be more sympathetic to business interests. See KHADEMIAN, supra, at 34-36; JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 97 (1982). For just this strategic reason, key members of the Roosevelt administration initially opposed shifting jurisdiction from the then well-respected FTC to an unknown agency that was potentially susceptible to Wall Street's influence. See SELIGMAN, supra, at 98-99. In rapid order, however, even these critics came to support the creation of a new, specialized agency because of its "advantages in providing administrative expertise that an agency with a broader jurisdiction, like the FTC, lacked." Id. at 97.
311. Congress initially intended to delegate authority over the nation's securities markets to the Federal Trade Commission, but ultimately decided to create the Commission as a new, independent entity so that "individuals . . . whose single concern was the problem of securities regulation" could be "in charge." JAMES M. LANDIS, THE ADMINISTRATIVE PROCESS 27 (1938). The Commission's status as an agency with expertise in matters of securities regulation has been frequently affirmed by the courts, see, e.g., SEC v. Chenery Corp., 332 U.S. 194, 207, 209 (1947); Board of Trade v. SEC, 923 F. 2d 1270, 1273 (7th Cir. 1991), and by scholars, see, e.g., ANNE M. KHADEMIAN, THE SEC AND CAPITAL MARKET REGULATION: THE POLITICS OF EXPERTISE 11-13 (1992). It should also be recognized, however, that Wall Street believed that it could exert greater influence over an agency devoted solely to the governance of its affairs than over the FTC, and that a new and specialized agency's understanding of capital market processes would likely be more sympathetic to business interests. See KHADEMIAN, supra, at 34-36; JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 97 (1982). For just this strategic reason, key members of the Roosevelt administration initially opposed shifting jurisdiction from the then well-respected FTC to an unknown agency that was potentially susceptible to Wall Street's influence. See SELIGMAN, supra, at 98-99. In rapid order, however, even these critics came to support the creation of a new, specialized agency because of its "advantages in providing administrative expertise that an agency with a broader jurisdiction, like the FTC, lacked." Id. at 97.
312. Congress initially intended to delegate authority over the nation's securities markets to the Federal Trade Commission, but ultimately decided to create the Commission as a new, independent entity so that "individuals . . . whose single concern was the problem of securities regulation" could be "in charge." JAMES M. LANDIS, THE ADMINISTRATIVE PROCESS 27 (1938). The Commission's status as an agency with expertise in matters of securities regulation has been frequently affirmed by the courts, see, e.g., SEC v. Chenery Corp., 332 U.S. 194, 207, 209 (1947); Board of Trade v. SEC, 923 F. 2d 1270, 1273 (7th Cir. 1991), and by scholars, see, e.g., ANNE M. KHADEMIAN, THE SEC AND CAPITAL MARKET REGULATION: THE POLITICS OF EXPERTISE 11-13 (1992). It should also be recognized, however, that Wall Street believed that it could exert greater influence over an agency devoted solely to the governance of its affairs than over the FTC, and that a new and specialized agency's understanding of capital market processes would likely be more sympathetic to business interests. See KHADEMIAN, supra, at 34-36; JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 97 (1982). For just this strategic reason, key members of the Roosevelt administration initially opposed shifting jurisdiction from the then well-respected FTC to an unknown agency that was potentially susceptible to Wall Street's influence. See SELIGMAN, supra, at 98-99. In rapid order, however, even these critics came to support the creation of a new, specialized agency because of its "advantages in providing administrative expertise that an agency with a broader jurisdiction, like the FTC, lacked." Id. at 97.
313. Thel, supra note 58, at 458-59 & n.342 (cataloguing compromises that led to the enhanced delegation of authority to the Commission). Consistent with this account of the adoption of the Exchange Act, many scholars view large portions of the administrative process as a substitute for legislative action that is best described by an interest-representation model. Thus, Professor Stewart observed that "[i]ncreasingly, the function of administrative law is not the protection of private autonomy but the provision of a surrogate political process to ensure the fair representation of a wide range of affected interests in the process of administrative decision." Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1667, 1670 (1975); see Peter H. Aronson, Ernest Gellhorn & Glen O. Robinson, A Theory of Legislative Delegation, 68 CORNELL L. REV. 1, 24-26 (1982); see also THEODORE J. LOWI, THE END OF LIBERALISM 128-46 (1969) (describing the development of the adminstrative process toward broader delegation and more general standards).
314. Thel, supra note 58, at 458-59 & n.342 (cataloguing compromises that led to the enhanced delegation of authority to the Commission). Consistent with this account of the adoption of the Exchange Act, many scholars view large portions of the administrative process as a substitute for legislative action that is best described by an interest-representation model. Thus, Professor Stewart observed that "[i]ncreasingly, the function of administrative law is not the protection of private autonomy but the provision of a surrogate political process to ensure the fair representation of a wide range of affected interests in the process of administrative decision." Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1667, 1670 (1975); see Peter H. Aronson, Ernest Gellhorn & Glen O. Robinson, A Theory of Legislative Delegation, 68 CORNELL L. REV. 1, 24-26 (1982); see also THEODORE J. LOWI, THE END OF LIBERALISM 128-46 (1969) (describing the development of the adminstrative process toward broader delegation and more general standards).
315. Thel, supra note 58, at 458-59 & n.342 (cataloguing compromises that led to the enhanced delegation of authority to the Commission). Consistent with this account of the adoption of the Exchange Act, many scholars view large portions of the administrative process as a substitute for legislative action that is best described by an interest-representation model. Thus, Professor Stewart observed that "[i]ncreasingly, the function of administrative law is not the protection of private autonomy but the provision of a surrogate political process to ensure the fair representation of a wide range of affected interests in the process of administrative decision." Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1667, 1670 (1975); see Peter H. Aronson, Ernest Gellhorn & Glen O. Robinson, A Theory of Legislative Delegation, 68 CORNELL L. REV. 1, 24-26 (1982); see also THEODORE J. LOWI, THE END OF LIBERALISM 128-46 (1969) (describing the development of the adminstrative process toward broader delegation and more general standards).
316. SELIGMAN, supra note 287, at 99.
317. Thel, supra note 58, at 459.
318. See AMERICAN LAW INST., supra note 126, § 1704(c) (describing plaintiff's right of action in suits concerning false registration statements). For a discussion of the Code's evolution and of its ultimate political demise, see I Loss & SELIGMAN, cited above in note 1, at 278-85.
319. H.R. Rep. No. 100-910, 100th Cong., 2d Sess. 11 (1988). For a description of Congress's failed efforts to define the elements of the insider trading violation, see LANGEVOORT, cited above in note 60, § 13.01.
320. See Senate May Tie Support for Lampf Bill to Proposals to Curb Litigation Abuses, 23 Sec. Reg & L. Rep. (BNA) 1647 (Nov. 15, 1991); supra notes 175-79 and accompanying text.
321. Congress has time and again enacted statutory provisions containing broad delegations of rulemaking authority. For example, the Williams Act, Pub. L. No. 90-439, 82 Stat. 454 (codified as amended in scattered sections of 15 U.S.C.), adopted in 1968, relies on extensive delegations to the agency. Section 13(e) delegates to the Commission authority to "define acts and practices which are fraudulent, deceptive or manipulative," when an issuer seeks to repurchase its own shares and "to prescribe means reasonably designed to prevent such practices." 15 U.S.C. § 78m(e) (1988). Section 14(e) similarly delegates the Commission authority to adopt rules and regulations that would prescribe means reasonably designed to prevent fraudulent Practices in connection with tender offers. See 15 U.S.C. § 78n(e) (1988). The 1975 Amendments, Pub. L. No. 94-29, 89 Stat. 97, again delegate authority to the Commission. Section 11(a), for example, gives the Commission broad authority to regulate national securities exchanges "as it deems necessary or appropriate in the public interest and for the protection of investors." 15 U.S.C § 78k(a) (1988). Section 11A(a)(2) directs the SEC to facilitate the establishment of a national market system for securities, but offers little guidance to the Commission about how it should set about this task. See 15 U.S.C § 78k-i(a)(2) (1988); see also 15 U.S.C. § 78q(d) (granting the Commission broad discretion to regulate self-regulatory organizations in order to promote a national market system). The Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. 100-704, 98 Stat. 1264 (codified as amended in scattered sections of 15 U.S.C.), also delegates to the agency authority to exempt persons or classes of transactions from statutory penalty provisions established by Congress in order to curb insider trading. See 15 U.S.C. 78u-1(c) (1988). Evidently, Congress has not lost its devotion to delegation.
322. See Witnesses Dispute Whether Reform Needed to Stem Spurious Litigation, 25 Sec. Reg. & L. Rep. (BNA) 997 (July 23, 1993) (quoting Senator Christopher Dodd, Chairman of the Senate Securities Subcommittee, as saying that "he ha[d] never seen such disagreement 'over basic facts'" as in the securities litigation debate).
323. For a discussion of the mechanisms that Congress can use to assert control over administrative agencies to which substantial control has ostensibly been delegated, see generally Mathew D. McCubbins, Roger G. Noll & Barry R. Weingast, Administrative Procedures as Instruments of Political Control, 3 J.L. ECON. & ORGANIZATION 243 (1987), which describes and evaluates the political and procedural constraints imposed on administrative agencies, see id. at 246-64, 271-73; and Mathew D. McCubbins, Roger G. Noll & Barry R. Weingast, Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies, 75 VA. L. REV. 431 (1989), which explores various uses of structure and process to assert control over administrative decisionmaking in the context of air pollution regulation, see id, at 468-81.
324. For a discussion of the mechanisms that Congress can use to assert control over administrative agencies to which substantial control has ostensibly been delegated, see generally Mathew D. McCubbins, Roger G. Noll & Barry R. Weingast, Administrative Procedures as Instruments of Political Control, 3 J.L. ECON. & ORGANIZATION 243 (1987), which describes and evaluates the political and procedural constraints imposed on administrative agencies, see id. at 246-64, 271-73; and Mathew D. McCubbins, Roger G. Noll & Barry R. Weingast, Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies, 75 VA. L. REV. 431 (1989), which explores various uses of structure and process to assert control over administrative decisionmaking in the context of air pollution regulation, see id, at 468-81.
325. For an example of interest group models of this sort applied directly to the Commission's internal decisionmaking process, see David D. Haddock & Jonathan R. Macey, Regulation on Demand: A Private Interest Model, With An Application to Insider Trading Regulation, 30 J.L. & ECON. 311, 316-38 (1987).
326. See supra notes 249-83 and accompanying text.
327. See William N. Eskridge, Jr. & John Ferejohn, The Article 1, Section 7 Game, 80 GEO. L.J. 523, 556-64 (1992) (applying to the modern administrative state a theory of legislation as a dynamic interplay of the legislative and executive branches); John A. Ferejohn & Barry R. Weingast, A Positive Theory of Statutory Interpretation, 12 INT'L REV. L. & ECON. 263, 274-76 (1992) (applying to the administrative state a theory of statutory interpretation as a dynamic Political process involving courts and Congresses both past and present); John Ferejohn & Barry Weingast, Limitation of Statutes: Strategic Statutory Interpretation, 80 GEO. L.J. 565, 566, 574-79 (1992) (setting forth a model of the dynamic interplay of "legislature, executives, and courts . . . within an interconnected system").
328. See William N. Eskridge, Jr. & John Ferejohn, The Article 1, Section 7 Game, 80 GEO. L.J. 523, 556-64 (1992) (applying to the modern administrative state a theory of legislation as a dynamic interplay of the legislative and executive branches); John A. Ferejohn & Barry R. Weingast, A Positive Theory of Statutory Interpretation, 12 INT'L REV. L. & ECON. 263, 274-76 (1992) (applying to the administrative state a theory of statutory interpretation as a dynamic Political process involving courts and Congresses both past and present); John Ferejohn & Barry Weingast, Limitation of Statutes: Strategic Statutory Interpretation, 80 GEO. L.J. 565, 566, 574-79 (1992) (setting forth a model of the dynamic interplay of "legislature, executives, and courts . . . within an interconnected system").
329. See William N. Eskridge, Jr. & John Ferejohn, The Article 1, Section 7 Game, 80 GEO. L.J. 523, 556-64 (1992) (applying to the modern administrative state a theory of legislation as a dynamic interplay of the legislative and executive branches); John A. Ferejohn & Barry R. Weingast, A Positive Theory of Statutory Interpretation, 12 INT'L REV. L. & ECON. 263, 274-76 (1992) (applying to the administrative state a theory of statutory interpretation as a dynamic Political process involving courts and Congresses both past and present); John Ferejohn & Barry Weingast, Limitation of Statutes: Strategic Statutory Interpretation, 80 GEO. L.J. 565, 566, 574-79 (1992) (setting forth a model of the dynamic interplay of "legislature, executives, and courts . . . within an interconnected system").
330. Nominations of: Richard Scott Carnell, Susan Gaffney, Edward DeServe, Arthur Levitt, Jr., Alan S. Blinder and Joseph E. Stiglitz: Hearings Before the Senate Comm. on Banking, Housing, and Urban Affairs, 103d Cong., 1st Sess. 143 (1993) [hereinafter Levitt Hearings], Indeed, Chairman Levitt explained that, as founder of the American Business Conference, a group of 100 CEOs of high-growth companies, he saw "firsthand the impact of frivolous, costly, spurious litigation," and was "very concerned about it." Id. at 86. As Commission Chairman, Levitt pledged to "devote a great deal of effort to . . . trying to find what are reasonable solutions which will still allow us to protect the interests of our American investors." Id. at 87.
331. Levitt Hearings, supra note 300, at 3; see supra note 11. With the Chairman's recent statements regarding private securities litigation, a majority of the sitting Commission has stated that private securities fraud litigation poses a problem that should be addressed. See J. Carter Beese, Jr., Stock Option Accounting and Securities Litigation Reform, Remarks Before the Association of Publicly Traded Companies 8-14 (Nov. 15, 1993) (transcript on file at the Harvard Law School Library) (expressing support for measures that "stem the tide of frivolous suits" without "eliminat[ing] shareholder suits altogether"); Richard Y. Roberts, Remarks at the Fall Meeting of the National Association of Manufacturers, 1993 Government Relations Committee 5-8 (Sept. 20, 1993) (transcript on file at the Harvard Law School Library) (expressing belief that "meritless securities litigation" is a problem, opposing litigation pending on Capitol Hill, and expressing willingness to consider other reforms).
332. Levitt Hearings, supra note 300, at 3; see supra note 11. With the Chairman's recent statements regarding private securities litigation, a majority of the sitting Commission has stated that private securities fraud litigation poses a problem that should be addressed. See J. Carter Beese, Jr., Stock Option Accounting and Securities Litigation Reform, Remarks Before the Association of Publicly Traded Companies 8-14 (Nov. 15, 1993) (transcript on file at the Harvard Law School Library) (expressing support for measures that "stem the tide of frivolous suits" without "eliminat[ing] shareholder suits altogether"); Richard Y. Roberts, Remarks at the Fall Meeting of the National Association of Manufacturers, 1993 Government Relations Committee 5-8 (Sept. 20, 1993) (transcript on file at the Harvard Law School Library) (expressing belief that "meritless securities litigation" is a problem, opposing litigation pending on Capitol Hill, and expressing willingness to consider other reforms).
333. SELIGMAN, supra note 287, at 100.
334. See Tower C. Snow, Jr., Stock Crash Needn't Lead to Legal Hassle, WALL ST. J., Nov. 8, 1993, at A14; see also supra note 38 (noting that one-eighth of firms listed on the New York Stock Exchange have been sued).
335. In Fiscal Year 1992, the Commission brought a total of 32 civil actions and administrative proceedings alleging insider trading. See 58 SEC ANN. REP. 108 (1992).
336. See supra note 29.
337. Levitt Hearings, supra note 300, at 44.
338. See supra note 44.
339. See supra notes 26-44 and accompanying text.
340. For a summary of plaintiffs' position in the debate, see above notes 41-43 and accompanying text.
341. See supra note 42.
342. For other examples of the Commission's recent reliance on such advance notice, see Net Capital Rule, Exchange Act Release No. 34-32,256, 58 Fed. Reg. 27,486 (1993), which solicits comment on a broad range of questions regarding the application of the net capital rule to broker-dealer participation in the derivative products market, see id. at 27,486, 27,491-95; and Alternative Dispute Resolution Policy, Securities Act Release No. 33-6974, 58 Fed. Reg. 6531 (1993), which solicits comment on how alternative dispute resolution might be used in Commission proceedings, see id. at 6531-32.
343. 15 U.S.C. § 78j(b) (1988).
344. Such an approach would also fulfill the Commission's obligation to consider the costs and benefits of its rulemaking positions. See Exec. Order No. 12, 291, 3 C.F.R. 127 (1982), reprinted in 5 U.S.C. § 601 (1988). Section 1(b) of Executive Order 12, 291 defines a major rule as one that is likely to result in an annual effect on the economy of $100 million or more, and Executive Order 12, 291, which remains in force under the Clinton Administration, requires a Regulatory Impact Analysis, (for example, a cost-benefit analysis), of such rules. The implied 10b-5 private right has an annual effect well in excess of $100 million. See supra notes 13-29 and accompanying text. To the extent that the agency has authority to control the implication of private rights that give rise to litigation of such magnitude, an analysis of the costs and benefits of those implied rights would seem appropriate under the Executive Order. The rulemaking would also obviate the potential need to respond to petitions for rulemaking asking the agency to become involved in the litigation debate. See 17 C.F.R. § 201.4(a) (1993) (establishing a procedure for public petitions proposing rulemaking action).