Rule 10b-5(b) Enforcement Actions in Light of Janus: Making the Case for Agency Deference

March 1, 2013

This Note addresses whether the Supreme Court’s recent decision in Janus Capital Group, Inc. v. First Derivative Traders applies to the Securities and Exchange Commission (SEC), and, if not, whether the SEC’s own interpretation of Rule 10b-5 should be entitled to deference in future SEC enforcement actions. Since its promulgation in 1942, Rule 10b-5 has been the subject of much debate, particularly regarding the scope of the private right of action that courts have interpreted the rule to imply. Having acknowledged that an implied right exists, the Supreme Court quickly began to limit Rule 10b-5 claims of private plaintiffs, citing concern over expanding a right of action not grounded in a statute or regulation. In contrast, the Court has instructed lower courts to construe Rule 10b-5 “not technically and restrictively, but flexibly to effectuate its remedial purposes” when dealing with SEC cases. In Janus—the latest curtailment of the private Rule 10b-5 action—the Court held that a defendant must have ultimate authority over a statement to make a misstatement with it that violates Rule 10b-5(b). Among other justifications, the Court reemphasized its concern over expanding the implied private right of action without congressional authorization. Today, confusion abounds in the lower courts about whether the Court’s narrow interpretation applies to all Rule 10b-5 actions (including those brought by the SEC) or merely to private civil suits (as in Janus).

This Note contends that the underlying rationale for the Court’s Janus decision is not applicable to SEC enforcement actions. While the Court’s decision may fit the particular circumstances of Janus, the policy considerations cited by the Court do not apply to the SEC, and, therefore, the Court’s narrow interpretation of Rule 10b-5 should not apply to actions brought by the SEC. Assuming Janus does not apply, this Note contends that the SEC’s pre-Janus interpretation would withstand Chevron-style analysis of an agency interpretation and is therefore entitled to substantial judicial deference in future enforcement actions.

March 2013

No. 4