Securities Law and the Constitution

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Following the 1929 stockmarket crash and the ensuing economic depression, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 to restore investor confidence and provide for more efficient securities markets. Although both disclosure and regulatory provisions of the two statutes were challenged during the 1930s on constitutional grounds, the lower federal courts consistently held that both statutes were within Congress's power to regulate interstate commerce and did not violate any other constitutional guarantees. In Electric Bond & Share Co. v. Securities and Exchange Commission (1937) the Supreme Court rejected constitutional attacks on certain provisions of the public utility holding company act similar to the disclosure and registration requirements of the 1933 and 1934 acts, although the Court did not discuss the general validity of federal securities regulation.

Because both the states and the federal government regulate the securities markets, the Supreme Court has periodically undertaken to define the relationship between federal and state regulatory schemes by interpreting federal securities statutes. The first such case to raise constitutional questions of federalism grew out of the dramatic increase in hostile corporate takeover attempts in the late 1960s. In 1968 and 1970 Congress amended the 1934 act by adding certain provisions, known as the Williams Act, to regulate tender offers. A number of states immediately adopted takeover statutes of their own, presumably in order to protect local businesses from hostile takeovers. Because the state statutes gave more protection to target companies than did the Williams Act, tender offerors immediately challenged the state statutes as either invalid under the commerce clause or preempted by the Williams Act.

In Edgar v. Mite Corporation (1982) the Supreme Court held that the Illinois takeover statute impermissibly burdened interstate commerce because the statute's nationwide reach significantly interfered with the economic benefits of tender offers while providing few benefits to Illinois. The Court's opinion was limited to the commerce clause holding, although three Justices also argued that the Williams Act preempted the Illinois regulatory scheme. A number of similar state takeover laws have subsequently been invalidated by lower federal courts on either commerce clause or preemption grounds.

Recent constitutional developments have suggested the possibility of first amendment restraints on the disclosure aspects of securities regulation. Both the 1933 and 1934 acts regulate extensively the speech of corporate issuers and securities professionals by mandating some disclosures, prohibiting others, and by policing the content of various disclosure documents, all in the interest of preventing securities fraud, facilitating corporate suffrage, and providing investors with full and accurate information about securities and the securities markets. In virginia state board of pharmacy v. virginia citizens consumercouncil (1976) the Court extended First Amendment protection to commercial speech, and in first national bank of boston v. bellotti (1978) the Court confirmed that corporate speakers could claim the benefits of the First Amendment. In central hudson gas & electric corp. v. public service commission (1980) the Court indicated that while misleading commercial speech may be regulated, remedies must be "no broader than reasonably necessary to prevent the deception."

In 1985, the Supreme Court confronted the question of First Amendment constraints on federal securities regulation. In Lowe v. Securities and Exchange Commission the petitioner argued that First Amendment notions of prior restraint barred the SEC from enjoining publication of petitioner's securities newsletter under the Investment Advisers Act of 1940 after petitioner's investment adviser registration was revoked because of his illegal conduct. The Court avoided the First Amendment issue by holding that the petitioner was the publisher of a "bona fide newspaper" and thus statutorily exempt from regulation under the 1940 act. Justices byron r. white and william h. rehnquist and Chief Justice warren e. burger concurred in the result but argued that the First Amendment question should have been reached and decided. They indicated that the total bar on publication required by the 1940 act was too drastic a remedy for possibly deceptive speech, whether that speech was fully protected or merely commercial speech.

Although many of the disclosure provisions of the 1933 and 1934 acts presumably satisfy the Central Hudson tests, those aspects of both statutes requiring prepublication clearance of disclosure by the SEC or limiting informational activities by securities professionals may be regarded as sweeping too broadly to meet First Amendment requirements. In some areas, moreover, as in the application of the proxy rules to corporate and shareholder speech concerning issues of social and political significance, corporate speech may be entitled to full First Amendment protection. All these issues remain to be raised in the courts.

Alison Grey Anderson

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Securities Law and the Constitution

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