Securities and Exchange Commission Historical Society

Fair To All People: The SEC and the Regulation of Insider Trading

Counterattack From the Supreme Court

The Influence of Justice Powell

After the 1909 decision in Strong v. Repide, the Supreme Court had stayed on the sidelines of the insider trading debate. But the SEC's aggressive approach to enforcement brought a significant increase in the number of insider trading cases coming to the federal courts, and the Supreme Court weighed in on the debate in a series of cases decided between 1980 and 1987. Those cases led to a retrenchment of SEC enforcement actions, and to the eventual development of a new theory of insider trading liability by the SEC to overcome the common law restrictions placed on their interpretation of Rule 10b-5.

Before Powell's confirmation, the SEC had won every case in which it was a party from 1941 to 1971.(30) As the Burger and Rehnquist courts considered numerous Rule 10b-5 cases, they began to challenge the SEC's interpretation of the extent of Congress's grant of authority, signaling some resistance to how broadly the SEC had interpreted the Securities Acts, while not rejecting outright the intellectual foundations of insider trading enforcement. As the SEC's legal successes piled up, it enforced its rules more aggressively, even requiring institutional investors to develop internal policy changes to guard against insider trading.(31)

Justice Lewis F. Powell Jr., who served on the Supreme Court from January 7, 1972 until June 26, 1987, headed the challenge to the SEC's expansive authority over insider trading regulation, which led to the restriction of SEC administrative authority. Those intellectual arguments against insider trading regulation and against the breadth of the SEC's assumed jurisdiction to enforce them rose in a series of cases that would eventually redound to the Supreme Court, whose decisions would force the SEC to retrench its enforcement efforts and redefine its legal strategy supporting the regulation of insider trading for nearly a decade.(32)

Powell came to the Supreme Court with a strong background in corporate law, and had more experience in securities law than many other members of the Court. As an attorney, Powell believed that the SEC had overstepped its power under the Securities Acts. While he was a proponent of the Securities Acts generally, he questioned the SEC's attempt to expand its reach, specifically citing his experience with the SEC's use of 10b-5.(33) He believed that the state common law of fraud should be the major enforcement theory, in general, for corporate and securities law. He also believed that Rule 10b-5 was part of the federal common law, and as such, he and the Court had an obligation to examine any underlying policy considerations, as well as the legitimacy of SEC enforcement actions.

Powell recognized that risk was inherent in the economic system. He argued that, too often, the SEC's rules were unrealistically intended to guarantee investors profits in their investments. "It was the SEC's effort to expand its authority - not its existence - that troubled Powell."(34) Powell's position ran directly counter to the efforts of the SEC to widen the legal applicability of insider trading laws and to strengthen the enforcement practices of the SEC. Once on the Supreme Court, Powell used his experience and philosophy to push for a policy to narrowly apply federal securities law.

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(30) Alfred F. Conard, Securities Regulation in the Burger Court, 56 U. Colorado Law Review 193 (1985), 195.

(31) Terry Robards, "S.E.C. Tightens Control Over Inside Information," The New York Times, November 10, 1972, 53.

(32) A. C. Pritchard, "Justice Lewis F. Powell, Jr. and the Counterrevolution in the Federal Securities Laws," 52 Duke Law Journal 841 (2003), 843-844.

(33) Pritchard, Powell and the Counterrevolution, 922-3.

(34) Ibid., 923.

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