Could the SEC Save Basic Through Rulemaking?
17 Pages Posted: 9 Feb 2014 Last revised: 1 Jun 2014
Date Written: January 15, 2014
In Basic Inc. v. Levinson, the Supreme Court held that under certain circumstances, plaintiffs in securities fraud cases could use a rebuttable presumption to make the required showing that they had relied on the defendant's misrepresentations. Under Basic, a person transacting in a security traded on an efficient market is presumed to rely on the integrity of the market price, and thus is presumed to rely on any material misrepresentations that distort the market price. Basic facilitates class actions by replacing individualized inquiries into reliance with a common inquiry into the efficiency of the market and the materiality of the misstatement. As a result, it has become a central doctrine in America's securities law landscape. This Term, in Halliburton v. Erica P. John Fund, the Supreme Court is set to reexamine the validity of the Basic doctrine. With four Justices having recently announced that they were skeptical of the doctrine, it is clear that Basic is under serious threat.
The Securities and Exchange Commission ("SEC") is charged with the administration of the securities laws. This gives the SEC an interest in the outcome of Halliburton. Under various administrative deference doctrines, it also may give the SEC the ability to influence the outcome, or even to effectively undo an outcome that it dislikes. This Essay considers the SEC's capacity to defend Basic. It concludes that the SEC will not receive meaningful deference in the absence of rulemaking. Although several scholars have concluded that the SEC's rulemaking authority covers doctrines like Basic, the Essay identifies grounds for skepticism in the text of the statute. However, if the SEC can clear that hurdle, the Commission would have grounds for optimism that a rule codifying Basic would be respected by the courts.
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