Brief of Law and Business Professors as Amici Curiae in Support of Respondents

Authors

James D. Cox, Duke Law SchoolFollow
Sarah C. Haan
Faith Stevelman
J. Robert Brown Jr.
Joan MacLeod Heminway

Document Type

Brief

Publication Date

2023

Keywords

federal securities laws, fraud, duty to disclose, rule 10b-5, Section 11, Securities Act of 1933, Securities Exchange Act of 1934, public company, Regulation S-K, Item 303, trends, management's discussion and analysis, periodic reports, integrated disclosure

Abstract

Omissions of disclosure required by the Securities and Exchange Commission (SEC or Commission) in Item 303 of Regulation S-K can be a basis for an action under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act). Disclosures mandated by the SEC in periodic reports are not optional. That these obligations can create a “duty” to disclose under Rule 10b-5(b) is consistent with congressional intent, state court opinions, the common law, and with the longstanding understanding of the federal securities laws (including those of legal scholars and the SEC). This case does not, therefore, seek to “impermissibly expand” the private right of action for securities fraud, but instead to reaffirm the availability of an action that has long existed. Petitioners mostly seek to avoid this result by pointing to language in Section 11 of the 1933 Act.

The Supreme Court’s reasoning in Omnicare Inc., v. Laborers District Council Construction Industry Pension Fund, et al., further compels a finding that actions for such omissions can be maintained under Rule 10b-5(b). There is no reason to believe that reaffirming claims under Rule 10b-5 based on omissions of trends and uncertainties will result in “information overload” or otherwise inundate investors with excessive disclosure. This assertion rests on a mistaken view of the equity markets and the methods used by investors to access and absorb information provided by public companies. With these markets increasingly dominated by large institutional investors, analysis of disclosure by public companies is commonly driven by technology, with periodic reports accessed electronically and, increasingly, data filed in a machine-readable format. In this environment, there is no realistic likelihood that additional disclosure of trends will overwhelm with excessive detail the sizable group of informed investors who are critical to price formation.

Regardless, an increase in responsive disclosure of the sort mandated by Item 303 will benefit investors. MD&A has been viewed as particularly significant to investors. Item 303 was promulgated to enhance the utility of information to investors by moving disclosures beyond historical performance. Trend information assists investors in engaging in appropriate risk assessment. Additional disclosure of this type of information provides greater insight into the future direction of a company’s finances or operations and alerts investors to conditions and trends that management believes have a reasonable likelihood of a material impact on operations or finances that would not be discerned merely from disclosure of historical performance.

We believe that the failure to reaffirm that the disclosure requirements contained in Item 303 can give rise to an action under Rule 10b-5, a provision adopted by SEC rulemaking under explicit congressional authorization, will weaken investor confidence in the system of periodic reporting.

Citation

James D. Cox et al., Brief of Law and Business Professors as Amici Curiae in Support of Respondents, Macquarie Infrastructure Corp. v. Moab Partners, L.P., et al., No. 22-1165 (U.S. Dec. 20, 2023)