SEC Revanchism and the Expansion of Primary Liability Under Section 17(a) and Rule 10b-5

Abstract

An important issue in many enforcement cases brought by the Securities and Exchange Commission is the scope of primary liability under the two main anti-fraud provisions, Section 17(a) of the Securities Act and Rule 10b-5 of the Exchange Act. In Flannery, which was an administrative enforcement case, a bare majority of SEC Commissioners adopted broad positions on primary liability under Rule 10b-5(a) and (c) and Section 17(a)(1), (2), and (3). The Commission not only advanced expansive legal conclusions, but it also insisted that the courts accept the agency’s legal interpretations as controlling.This article discusses two issues that Flannery raises, both of them related to the role of administrative agencies in the development, enforcement, and adjudication of federal law. First, the article compares the Commission’s interpretations of the parts of Section 17(a) and Rule 10b-5 with the reasoning and analysis of a series of prominent Supreme Court decisions that imposed meaningful boundaries around aspects of primary liability under Rule 10b-5. That comparison shows that much about Flannery is not consistent with, and is antagonistic to, the Supreme Court’s decisions in Central Bank, Stoneridge, and Janus.Second, the article evaluates Flannery’s explicit demand for Chevron deference and concludes that a reviewing court would have doctrinal and precedential grounds for refusing to accept the Flannery positions as controlling. The reasons start with the text of the provision of the Administrative Procedure Act governing judicial review of agency actions and also cover the actual practice of the Supreme Court and courts of appeals when they review a legal conclusion in an agency adjudication. The precedents identify good reasons for not granting Chevron deference to Flannery. Giving controlling effect to the SEC’s decision would allow the agency both to avoid the teachings of leading Supreme Court authorities and to trump the Supreme Court and other federal courts on significant matters of statutory interpretation.