Disclosure is Speech: Imposing Meaningful First Amendment Constraints on Sec Regulatory Authority

Abstract:     
The idea that investors should be allowed to make their own decisions regarding the purchase and sale of securities is at the core of the federal system of securities regulation. This freedom depends on issuers of securities informing prospective investors of all material information about both the securities and the company issuing them. In other words, disclosure eliminates the need for substantive regulation. Corporate disclosure is no more than what non-lawyers call speech, and the protection of speech is at the heart of the First Amendment to the United States Constitution. However, no less an authority than the United States Supreme Court has declared that the regulation of securities does not fall within the protection of the First Amendment. This lack of recognition comes from the long-held principle that commercial speech is less worthy of protection than other forms of expression, and that the regulation of the purchase and sale of securities is a commercial activity that does not even deserve the limited protection afforded to commercial speech.

Two patterns have emerged over the last thirty years that warrant a reconsideration of this approach. First, the United States Supreme Court has significantly broadened the protections afforded to commercial speech. This increased protection includes a concern for the dissemination of truthful information, and a willingness to act to protect First Amendment values even if another regulatory regime is present. Second, economic research and related legal scholarship suggest that there is less need for the SEC to protect investors than exists in the case of normal consumer protection, where advertising enjoys full status as commercial speech. This article argues that, upon the convergence of these two trends, the Court should apply its newly-robust commercial speech protections to regulations issued by the SEC. If that were done, certain of these regulations would be struck down as an unconstitutional infringement on the First Amendment rights of corporations, and newly proposed regulations would be more carefully analyzed for their impact on corporate speech rights.

Number of Pages in PDF File: 33

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