The Common Law and SEC Rule 10B-5(B): Narrowing the Securities "Fraud" Exception to the First Amendment

Courts have read Section 10(b) of the Securities Exchange Act of 1934 and regulations promulgated thereunder as requiring less than every element of common law fraud. In particular, the Securities and Exchange Commission (SEC) Rule 10b-5(b), which prohibits merely false or misleading statements about securities, often proscribes and deters speech that does not constitute common law fraud. Namely, in prosecuting a Rule 10b-5(b) claim, the SEC currently does not need to prove reliance, causation, and harm—three essential elements of common law fraud. Though the First Amendment generally protects false speech, it does not shield fraud. Upon adopting the First Amendment, the Framers preserved the already existing common law action for fraud. Given these historical origins, this Note argues that courts should apply the First Amendment’s fraud exception only to statutes and rules requiring proof of every element of common law fraud. Limiting the fraud exception in this way would significantly impact the SEC, which regulates more speech than perhaps any other federal agency. This Note contends that without proof of the common law elements of reliance, causation, and harm, courts should not apply the fraud exception to SEC-prosecuted Rule 10b-5(b) actions. Instead, courts should subject these actions to full First Amendment scrutiny.