A Call for the SEC to Adopt More Safe Harbors that Limit the Reach of Rule 10b-5

72 Pages Posted: 25 May 2018 Last revised: 2 Jul 2018

Date Written: May 23, 2018


The Securities and Exchange Commission (“SEC”) has often adopted regulations that effectively exclude specified conduct from the scope of particular provisions of the securities laws or that describe conduct that is deemed not to violate the law. Some rules exclude conduct from the scope of the prohibition on deception imposed by SEC Rule 10b-5. This article examines the nature of and rationales for the provisions that have narrowed the reach of Rule 10b-5, and proposes that this approach be applied more broadly, further reducing the exposure of the issuers of securities and other persons to claims under Rule 10b-5 without impairing the SEC’s enforcement of the securities laws. This will also reduce uncertainty regarding the scope of Rule 10b-5, especially in the arena of private damage claims. Several specific proposals are made here. The intention is to focus attention on the utility of the safe harbor approach in today’s litigation landscape and generate discussion that might lead to broader application of this concept.

The proposals made here parallel actions the SEC has already taken to remove failures to file certain reports from the scope of Rule 10b-5, sometimes called pure omissions. This approach may seem to be of limited utility because claims based on so-called pure omissions that would be excluded as a result of the proposed additional safe harbors could be few and far between. However, because the SEC has seen fit to adopt rules that exclude disclosure failures from the scope of Rule 10b-5 based on its view that a complete failure to comply can give rise to a Rule 10b-5 claim, other mandatory disclosure regulations merit comparable protections. Unless and until the Supreme Court rules that a failure to file is outside the ever-narrowing bounds of Rule 10b-5, the proposals advanced here deserve serious consideration, if only to sweep away the chaff.

These proposals do not advocate that the SEC make a sweeping effort to decimate the Rule 10b-5 private cause of action in particular by fiat. Rather, it is a modest suggestion, consistent with rules the SEC has already adopted, to limit the reach of Rule 10b-5 in a narrow category, with the intent of focusing claims on established areas of liability.

Part II of this article explains what safe harbors are. Part III describes, in general terms, the scope of Rule 10b-5, in particular how the rule has been applied in private damage actions alleging a failure to make a required disclosure. Part IV describes the existing rules that have a direct impact on potential claims under Rule 10b-5, including the background of each rule. Part V presents specific suggestions for additional safe harbors vis-à-vis Rule 10b-5 with supporting analysis. Part VI is the conclusion.

Keywords: 10b-5, safe harbor, Exchange Act reporting

JEL Classification: K10, K30

Suggested Citation

Horwich, Allan, A Call for the SEC to Adopt More Safe Harbors that Limit the Reach of Rule 10b-5 (May 23, 2018). Business Lawyer, Forthcoming, Northwestern Law & Econ Research Paper No. 18-12, Available at SSRN: https://ssrn.com/abstract=3183832 or http://dx.doi.org/10.2139/ssrn.3183832

Allan Horwich (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

Schiff Hardin LLP ( email )

6600 Sears Tower
Chicago, IL 60606-6473
United States

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