Securities and Exchange Commission (SEC) Rule 10b‐5 forbids material misstatements or omissions in connection with the purchase or sale of a security. The federal courts have held that this rule implies a cause of action that permits private plaintiffs to recover damages where they can show that a misrepresentation or omission caused them to suffer a loss because they traded in reliance on it.
In Basic Inc. v. Levinson, the Supreme Court held that under certain circumstances, investor‐plaintiffs could satisfy the reliance requirement by invoking a rebuttable presumption. Under Basic‘s fraud‐on‐the‐market theory, anyone who purchases or sells a security traded on a market that efficiently incorporates information implicitly relies on the integrity of the security’s market price. Thus, if the market price of such a security is affected by a misrepresentation, persons transacting in the security are presumed to have relied on that misrepresentation. The Basic presumption facilitates class actions, since it replaces individualized inquiries into whether each plaintiff was aware of and relied upon a misrepresentation with a common inquiry into the efficiency of the market and the nature of the misrepresentation. Because of the importance of class actions to the nation’s securities regime, Basic has become a foundational securities law doctrine.
But Basic has also faced substantial criticism. This criticism bubbled over in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, where four Justices signaled their willingness to reconsider Basic. Soon after, the Supreme Court granted certiorari in Halliburton Co. v. Erica P. John Fund, Inc., and is set to decide the continuing validity of Basic this Term. The existing regime for enforcement of the securities laws is thus under serious threat, and the question for the SEC is whether the agency can do anything about it. The SEC has signed on to an amicus brief urging the Court to reaffirm Basic, but the agency’s Section 10(b) rulemaking authority suggests that it may have a more powerful tool at its disposal.
This Essay considers the SEC’s capacity to defend Basic. Although the question is close, there are substantial grounds for skepticism of the SEC’s power in this area. Absent a rulemaking, it seems unlikely that the SEC’s position will command material deference from the Supreme Court. Rulemaking may not change this outcome. Although several scholars have concluded that the SEC has rulemaking authority over the private right of action inferred from Rule 10b‐5, the terms of Congress’s grant of rulemaking authority to the SEC suggest that it has not been delegated such authority. However, if the SEC can clear that hurdle, it may succeed in obtaining its favored result.