Reliance, Misplaced: Restoring the Text of the Antifraud Provisions of the Federal Securities Laws in SEC Enforcement Actions

The antifraud provisions of the federal securities laws are statutory sledgehammers. Those who violate them can face severe sanctions, including ruinous monetary penalties and others that can effectively bar firms and individuals from the securities industries. The Securities and Exchange Commission is authorized to enforce these provisions with the full weight of the federal government. And the SEC does so vigorously. Even though the antifraud provisions target fraud, for decades lower courts and the Commission have held that the Commission can establish violations of them without any evidence that anyone was misled. They have done so by concluding that, unlike common law fraud or fraud in equity, reliance is never an element in a Commission enforcement action. That position would have some purchase if the federal securities laws that Congress enacted said so. But they don’t. Instead, the idea traces back to snippets of dicta in a 1949 lower court opinion that was attempting to make a different point about a different topic, in a case where the Commission had in fact established reliance. The Supreme Court has never adopted that categorical view, for good reason. The position that reliance is never relevant conflicts with the statutory text, the background principles against which Congress legislated, the structure of the federal securities laws, the expressed purpose of the antifraud provisions, and Supreme Court precedent. Instead, as this article explains, a straightforward reading of the text and application of now settled interpretative principles and Supreme Court precedent shows that the Commission must prove reliance to establish a violation of some (but not all) of the antifraud provisions of the federal securities laws.