Securities Exchange Act of 1934 (15 U.S.C. §§ 78a–78pp)
Citation: 15 U.S.C. §§ 78a–78pp
Overview
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and established the framework for ongoing regulation of securities markets. Where the Securities Act of 1933 (15 U.S.C. §§ 77a–77aa) governs primary offerings, the Exchange Act provides broader, continuing regulation covering: secondary market trading, periodic corporate disclosure, securities fraud (most prominently through Rule 10b-5), insider trading, short-swing profit recovery, proxy regulation, and broker-dealer oversight.
§ 10(b) and Rule 10b-5 — Securities Fraud
Statutory Basis
Section 10(b) makes it unlawful, “in connection with the purchase or sale of any security,” to “use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.”
Rule 10b-5
Promulgated under § 10(b), Rule 10b-5 makes it unlawful for any person, in connection with the purchase or sale of any security:
- (a) To employ any device, scheme, or artifice to defraud;
- (b) To make any untrue statement of a material fact, or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances, not misleading;
- (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
The Supreme Court implied a private right of action in Kardon v. National Gypsum Co. (1946), confirmed but restricted in subsequent decisions.
Elements of a Private 10b-5 Claim
- Material misrepresentation or omission — half-truths and omissions that make statements misleading are covered.
- In connection with the purchase or sale of a security — standing limited to actual purchasers and sellers (Blue Chip Stamps v. Manor Drug Stores — no standing for persons who decided not to purchase or sell).
- Scienter — intent to deceive, manipulate, or defraud; recklessness may suffice; negligence is not enough (Ernst & Ernst v. Hochfelder).
- Reliance — plaintiff must show actual reliance, or invoke the fraud-on-the-market presumption (Basic Inc. v. Levinson — in efficient markets, the market price reflects publicly available information, so investors are presumed to rely on the integrity of the price). Rebuttable; defendant may show market was not efficient, or that price was not distorted.
- Loss causation — Dura Pharmaceuticals — plaintiff must allege that the defendant’s fraud caused the economic loss; revelation of fraud must proximately cause the decline.
- Damages — out-of-pocket; not benefit of the bargain.
Materiality
A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision (TSC Industries, Inc. v. Northway, Inc.). For contingent events (Basic v. Levinson merger negotiations): balancing test — probability of occurrence × magnitude of impact.
PSLRA Requirements (Private Securities Litigation Reform Act of 1995)
- Heightened pleading: Complaint must specify each alleged misleading statement; state with particularity facts giving rise to a strong inference of scienter (not merely plausible — Tellabs, Inc. v. Makor Issues & Rights).
- Automatic discovery stay: Discovery stayed during any motion to dismiss.
- Lead plaintiff: Court appoints the plaintiff with the largest financial interest in the relief sought (typically an institutional investor) as lead plaintiff.
- Safe harbor for forward-looking statements: Cautionary language may protect forward-looking projections.
Insider Trading
Insider trading is not explicitly defined in the Exchange Act — liability has been developed judicially under § 10(b) and Rule 10b-5.
Classical Theory (Chiarella v. United States, 1980)
An insider who trades on material nonpublic information breaches a duty of trust and confidence owed to shareholders of the issuer. Corporate insiders (officers, directors, controlling shareholders) are classic insiders. Constructive insiders (lawyers, accountants, consultants) also owe a duty when they receive confidential information.
Duty: Insider must either disclose the material nonpublic information or abstain from trading.
Misappropriation Theory (United States v. O’Hagan, 1997)
A person who misappropriates material nonpublic information for securities trading in breach of a duty owed to the source of the information is liable under § 10(b), even if the trader owes no duty to the issuer or its shareholders. Extends liability to outsiders (e.g., a lawyer trading on client confidences).
Tipper-Tippee Liability (Dirks v. SEC, 1983; Salman v. United States, 2016)
A tippee who receives material nonpublic information from an insider is liable only if:
- The tipper breached a fiduciary duty in disclosing the information.
- The tipper received a personal benefit from the disclosure (financial gain, reputational benefit, or a gift to a trading relative or friend — Salman confirms that a gift to a trading relative is a personal benefit even without a quid pro quo).
- The tippee knew or should have known the tipper breached a duty.
§ 13 and § 15(d) — Periodic Reporting Obligations
Forms
| Form | Filing Requirement |
|---|---|
| Form 10-K | Annual report; audited financial statements; MD&A; risk factors; filed within 60–90 days of fiscal year end (depending on filer status) |
| Form 10-Q | Quarterly report; unaudited; filed within 40–45 days of quarter end |
| Form 8-K | Current report for material events (mergers, CEO changes, bankruptcy, material agreements); filed within 4 business days |
| Form 4 | Insider transaction reports (§ 16(a)); filed within 2 business days |
| Schedule 13D / 13G | Beneficial ownership reports for 5%+ shareholders; 13D for active investors (10 days); 13G for passive investors (45 days) |
§ 16(b) — Short-Swing Profits
Scope
Officers, directors, and beneficial owners of more than 10% of a registered equity security must disgorge to the company any profits realized from any matching purchase and sale (or sale and purchase) within any period of less than six months.
Key Features
- Strict liability — no proof of actual misuse of inside information required; no scienter.
- Mechanical matching — transactions within the 6-month window are matched to maximize profits disgorgeable.
- Insider status at time of transaction — 10% threshold must exist at both the time of purchase and the time of sale to trigger liability for 10% shareholders (not so for officers and directors).
- Exemptions: Certain transactions exempt by SEC rules (e.g., transactions pursuant to employee benefit plans, mergers).
- Enforcement: Private action by the issuer, or by a shareholder suing derivatively on behalf of the issuer if the issuer fails to sue.
§ 20(a) — Control Person Liability
Every person who, directly or indirectly, controls any person liable under the Exchange Act is jointly and severally liable with and to the same extent as the controlled person, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation.
Culpable participation standard applied in many circuits — some form of participation or knowing enablement required; mere control insufficient in circuits applying this standard.
§ 14(a) and Proxy Rules
The SEC has authority under § 14(a) to regulate proxy solicitations by reporting companies. Proxy materials (including proxy statements and annual meeting materials) must be filed with the SEC and are subject to disclosure requirements.
Implied private right: J.I. Case Co. v. Borak recognized an implied private right of action for false or misleading proxy statements. Plaintiff must show: (1) material misstatement or omission in proxy; (2) essential link between the solicitation and the challenged corporate action (Mills v. Electric Auto-Lite — causation established where solicitation was necessary to authorize the merger).