Securities and Exchange Act Rule 10b
In 1948, the Securities and Exchange Commission (SEC) began to enact rules against fraud in securities trading under the authority granted to it by the Securities and Exchange Act of 1934. Read below for more information about Rule 10b of the Act, its history and purpose, and how the SEC has used its provisions to combat securities fraud.
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Background and Purpose of Rule 10b
The Securities and Exchange Act of 1934 created the SEC, and Section 10b of the Act gave the SEC the power to enact rules against "manipulative and deceptive practices" in securities trading. The Act was passed in large part as a response to the stock market crash of 1929, to provide more transparency in the secondary securities market.
Congress gave the SEC the authority and flexibility to create and revise rules, in the hope that it could effectively deter and punish manipulative and deceptive practices (termed "fraud" here for simplicity's sake). The anti-fraud regulations that the SEC created are listed in subsections of Rule 10b. Note that these regulations continue to evolve; the first one was created in 1948, the most recent was enacted in 2000, and amendments were made in 2014.
What Sorts of Activities Does Rule 10b Cover?
Rule 10b is broad and complex. Rule 10b-5 is the most well known and is discussed in more detail below. Other notable regulations of Rule 10b include:
- Rule 10b-1 - This provision makes clear that SEC rules against fraud apply to transactions of securities that are exempt from registration. For example, a security issued by a state or local government is exempt from registration; however, SEC rules against fraud apply.
- Rule 10b-3 - This rule prohibits securities brokers and dealers from directly or indirectly engaging in securities fraud. Along with Rule 10b-5, this is one of the SEC's most important tools against fraud.
- Rule 10b-10 - Rule 10b-10 requires brokers and dealers to disclose certain information, in writing, to customers before completing a securities transaction. For example, a broker must list the date and time of the transaction, the company name, share price, and number of shares that the customer is buying or selling, and who the broker is working for.
- Rule 10b-21 - This rule prohibits a seller of securities from deceiving buyers as to the date of sale.
Rule 10b-5 is a catch-all provision that is perhaps the most important and widely used anti-fraud securities rule. For example, the SEC typically uses this rule to charge a person with illegal insider trading, as the rule applies to "any person" who "defrauds" another person in "the purchase or sale of any security." In 2000, new regulations known as Rule 10b-5(1) and Rule 10b-5(2) were created to clarify the scope of Rule 10b-5.
Before Rule 10b-5(1), there was disagreement among courts whether a person could be guilty of illegal insider trading by merely possessing material, confidential information when making a trade, or whether the person had to actually use that information in making the trade. Rule 10b-5(1) broadened the scope of Rule 10b-5 by prohibiting trades if a person is "aware of" material, confidential information. This rule essentially adopted the language from a 1997 Supreme Court case (US v. O'Hagan).
However, Rule 10b-5(1) also contains some built-in defenses that a person can assert against a charge of illegal insider trading. In plain terms, if a person can show that he or she had planned to make a trade before coming across the material, confidential information, he or she may be exempt from a charge of illegal insider trading.
Rule 10b-5(2) clarifies when someone has a duty to maintain the confidentiality of material information. This rule basically states that if a person knows, or should know, that information he or she is receiving is material and confidential, then he or she has a duty to maintain its confidentiality.
Rule 10b of the Securities and Exchange Act is broad and contains many provisions. Rule 10b-5 alone is the basis for many SEC charges, and some law firms have entire sections focused on this one rule.
If you have questions about Rule 10b such as its scope, requirements, and exceptions, you should contact a lawyer who specializes in securities law through FindLaw.
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