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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks before the American Bar Association Section of Business Law, General Counsel Forum


Giovanni P. Prezioso

General Counsel
U.S. Securities and Exchange Commission

Washington, D.C.
June 3, 2004

As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.

I. Introduction

Good evening and thank you for the kind introduction. It is a great pleasure to have the opportunity to speak at this meeting of the ABA's Business Law Section. Let me note at the outset that, as always, the views I express tonight are solely my own and do not necessarily represent those of the Commission or my colleagues on the staff.

A few weeks ago, the CEO of a large company announced a multi-billion dollar settlement of a private securities class action. At the time, he cited as one of his reasons for settling the case an amicus curiae brief filed by the Commission opposing his company's position in the court of appeals. While some news accounts suggested that the decision to file a brief was unusual, the Commission in fact has a long tradition of participating in private securities litigation as amicus curiae. We tend, however, not to publicize our amicus briefs and, based on some of the questions I have been hearing recently, it seems that many members of the legal community - particularly some of the lawyers at public companies directly affected by our filings - may not fully understand how the Commission determines when to offer its views as amicus.

With that in mind, my topic tonight is the Commission's amicus program - chosen with the hope that I can shed some light on this important component of the Commission's activities. I will briefly review the history of the program, describe the process and the criteria that we on the staff use in making amicus recommendations to the Commission, and identify developments that you may want to watch for in the future.

Amidst all the other legal and regulatory developments growing out of the recent scandals in our financial markets, why is this topic worthy of your attention?

First, private securities litigation has always formed a major - and essential - component of the enforcement of the federal securities laws.1 The Commission has long advocated private rights of action precisely because they supplement its own enforcement program in deterring misconduct. Further, as this audience well knows, the stakes in private securities litigation can be very great indeed - hundreds of millions, and sometimes billions, of dollars. Courts tend to read the Commission's briefs in these cases carefully, and our views can often have an important impact on the court's decision.

Second, the landscape of the securities laws is changing rapidly. The Sarbanes-Oxley Act of 2002 has given us the most sweeping new securities legislation since the 1930s. Further, the Commission is in the midst of implementing an unprecedented rulemaking agenda, addressing, among other issues, corporate governance, mutual funds and market structure. The corporate scandals of the past few years, moreover, have prompted increased, and frequently innovative, private securities litigation. All of this means new and difficult legal questions to be resolved in the courts - including questions in virtually every area that will be discussed on tomorrow's panels. Also, because of the pace at which litigation advances, many of the cases raising these issues are only now beginning to reach the appellate courts - with many more still to come.

Third, the Commission's ability to influence judicial decisions in private litigation - and thereby shape the development of the securities laws - is a critical adjunct to its overall regulatory activities. Chairman Donaldson recently launched a Commission-wide initiative to promote improved coordination among the Commission's Divisions and Offices, as well as more forward-looking approaches to assessing risk and carrying out the Commission's investor protection mandate. The Office of the General Counsel will be seeking to integrate the amicus program fully into that initiative, as well as into the SEC's mission more broadly.

Fourth, the success of the amicus program depends in large part on a continued dialogue with private litigants, judges, academics and other interested parties. We want to work hard to maintain and strengthen that dialogue, by better informing lawyers and litigants of the process that we use in making amicus recommendations to the Commission. We want a broad spectrum of litigants, both plaintiffs and defendants, to know about what we do and to present their views to us - and if we are not hearing from you, you should be wondering if we are hearing from the other side.

II. The Commission's Amicus Program in Historical Perspective

Let me start with some history, since it was not recent news clippings, but a panel discussion at Northwestern University with former SEC Chairman David Ruder about a month ago that prompted my decision to speak on this topic tonight. Chairman Ruder has long had an interest in the amicus program, and he kindly drew my attention to an article that he and members of the Commission staff had written on the topic some years ago.2 Doing a bit of digging after that conversation, I learned that neither the Commission nor the staff had issued any significant policy statements on the subject in the past fifteen years. Given how much has changed in our securities markets over that period, especially in the past few years, it struck me that the time was ripe to re-examine the program and its origins.

The Commission has been filing amicus briefs since shortly after the agency's creation in 1934 - with the first submitted in 1936. At various junctures, its briefs have had a significant impact on the direction in which our securities laws have developed.

Perhaps the most important development, and one that proved a watershed for the growth of the amicus program, was the judicial recognition of a private right of action under Rule 10b-5. While neither the rule nor Section 10(b) of the Securities Exchange Act expressly provides for a private right of action, the Commission filed a series of briefs, beginning in the 1940s, in support of private claims under Rule 10b-5 - with the result that all of the federal circuit courts and the Supreme Court ultimately recognized a private right of action.3 This achievement created what is today the most widely used and powerful tool for private enforcement of the securities laws.4

With the recognition of more private rights of action and the dramatic expansion of private securities litigation over the years, the Commission has used its growing role as amicus to influence the substantive interpretation of the securities laws in important ways. In the 1988 case of Basic Inc. v. Levinson, for example, the Commission persuaded the Supreme Court to adopt its position on important questions relating to the materiality of preliminary merger discussions and the application of the "fraud on the market" theory.5 I will not attempt a comprehensive review of all the landmark cases in which the Commission filed amicus briefs - suffice it to say that the cases have been many and diverse, spanning virtually every substantive area of the securities laws that can be enforced through private litigation.

The complexity of cases and the nature of amicus briefs make it difficult to keep a scorecard or to quantify the impact of the Commission's participation in a particular case. In some periods, the courts have proven skeptical of the Commission's interpretations of the securities laws.6 On balance, though, I think it is fair to say that the courts have accorded the Commission's views significant weight, often formally acknowledging that they are adopting the Commission's position, or at least giving us a nod.7

One critical point I will underscore about the history of the amicus program is that, in general, the Commission has sought to focus its efforts on issues with a long-term impact on the effective operation of the securities laws. This is consistent, of course, with the more methodical and stately pace at which case law develops relative to some other types of regulatory action. But it also reflects, I believe, a recognition that the Commission's effectiveness in presenting its views to the judicial branch depends fundamentally on courts' willingness to accept that our arguments are motivated by truly professional and independent considerations - not partisanship or short-term expediency. In other words, courts will only view the Commission as a true "friend" if its positions do not zig and zag based on the latest election or newspaper headline.

From a policy perspective, moreover, it is essential to keep in mind that the Commission historically has not filed amicus briefs simply to support particular parties in litigation: it has focused instead on the potential precedential and policy ramifications of the court's decision. Indeed, for this reason, we typically are disappointed when cases settle before reaching a decision - having submitted our views, we hope to shape the court's decision and thereby advance the Commission's policy objectives. In that sense, we have no interest in which party wins or loses. In fact, our Solicitor Jacob Stillman reminded me yesterday that the Commission once filed a brief in support of a party that the Commission was separately suing in an enforcement action.

In light of our statutory mandate to protect investors, of course, the Commission frequently will find itself on the side of investor plaintiffs in private litigation. Many arguments offered by defendants in actions brought by investors also may be advanced in Commission enforcement actions. This should not be misunderstood to suggest, however, that the Commission will only take positions supporting plaintiffs. We have an interest in the effective and principled administration of the securities laws, and thus we will sometimes be called upon to oppose an inequitable or erroneous decision or doctrine that unduly expands the scope of private liability.

III. The Commission's Current Amicus Program

With that history and perspective in mind, how does the Commission's amicus program operate today? Responsibility for advising the Commission on amicus matters, as well as for preparing briefs, resides in the Office of the General Counsel. The Office's appellate group, headed by the Commission's Solicitor, generally handles amicus recommendations, although in some cases our general litigation group may take the lead. As longtime Commission observers know, each of these groups is staffed and led by committed career professionals - our Solicitor has over forty years of experience with the Commission, and the head of our general litigation group has over twenty-five.

In the past eighteen months, our Office assisted the Commission in making twenty-two amicus submissions, the large majority of which were briefs filed in federal courts of appeals.

How did we learn about these cases? We typically identify cases for possible amicus participation in one of three ways.

  • First, the plaintiffs or defendants in a particular case (and sometimes both) may ask us to participate in support of their position. I should point out that delays in making these requests - we often receive them late in the game after the parties have filed their briefs - can make it difficult for us to respond, and we would encourage litigants to come to us as early as possible. There is no assurance, however, that the staff will agree with the party who brings a case to our attention - and a few folks over the years have learned to their dismay after contacting us that we were filing a brief in support of the other side.
  • Second, courts frequently ask us for our participation, sometimes requesting a formal amicus brief and sometimes requesting a less formal submission of the Commission's views. We virtually always honor these requests.
  • Third, we keep our eyes and ears open. We monitor case law developments, and we often learn about cases in informal ways, through the media or conversations with colleagues on the Commission staff or members of the bar.

Once we identify a case of potential interest, our Office will consult with the staff in other Divisions and Offices within the Commission that have particular expertise in the relevant area of the law. In addition, we usually offer each of the parties an opportunity to meet with us to discuss the case, either telephonically or in person.

These meetings are not a mere formality. Our staff does its own research in preparation for the meetings, and we ordinarily have a number of questions on our minds. The discussions in these meetings reflect a commitment to open and rigorous legal analysis: we seek to be very candid about our perspectives and concerns, and ask the parties to do the same. In a significant number of cases, the staff's recommendation will be revised - or even reversed - in light of those usually lively conversations.

Once the staff has reached a position in a case, we prepare a recommendation for the Commission's consideration. The Commission must authorize any amicus brief we file, and this authorization is generally obtained after a full discussion of the issues at a closed meeting. Unlike staff statements, interpretative guidance and no-action letters, amicus briefs reflect the views of the Commission: no disclaimers attached. So it is not surprising that Commissioners take a keen interest in the issues raised in these briefs, and actively participate in shaping the submissions we make.

In the case of amicus participation before the Supreme Court, the process has another dimension, which is our coordination with the Solicitor General's office. In Supreme Court amicus cases, the executive departments and independent agencies like the SEC are generally expected to speak with a single voice through the Solicitor General. In cases involving the securities laws, the Solicitor General will usually seek a recommendation from the Commission and ask us to prepare a draft brief. That draft will then be revised by the Solicitor General's office, in consultation with the Commission staff, before submission to the Court.8

IV. Considerations for Selecting Amicus Cases

Having described the Commission's decision-making process, let me turn now to the substantive considerations that shape the direction of our program. What factors do we consider when deciding to participate in a particular case? What are the issues that private parties should keep in mind when deciding whether to pick up the phone and call us? While we do not have any hard and fast rules, there are a few key questions that we ordinarily consider.9

1. Is the court's decision in the case likely to have a substantial precedential impact?

First, and perhaps most importantly, we consider whether the court's decision in the case is likely to have a substantial precedential impact. It is for this reason, and also because of our limited resources, that the Commission most often participates as amicus in cases at the circuit court or Supreme Court level and less frequently in district court, where cases are generally more fact-specific and carry less precedential weight. In fact, because of their precedential impact, we have tried to participate, through the Solicitor General's office, in nearly all Supreme Court cases involving the federal securities laws.10

Cases presenting broad legal issues, rather than purely fact-based ones, are usually the type that will trigger our interest. In other words, we are more interested in defining the standard of "materiality" than in the application of that standard to the facts of a particular case. For example, in a pending Fifth Circuit case under Section 11 of the Securities Act, Kapps v. Torch Offshore, Inc., we filed a brief arguing that information omitted from a prospectus could be actionable even if the information was publicly available, or was not specific to the firm.11

When the Commission does file briefs in district courts, it tends to be where the legal issue presented is unlikely to be raised in an appellate context, for procedural or other reasons. For example, the Commission filed a number of briefs concerning the lead plaintiff/lead counsel provisions of the Private Securities Litigation Reform Act that can be viewed as falling into this category.

2. Does the case raise issues important to the Commission's ability to carry out its statutory and policy objectives?

A second question that we consider is the potential importance of the legal issue in carrying out the Commission's statutory and policy objectives. Thus, the Commission has participated in numerous cases over the years involving the definition of the term "security," which plays a central role in defining its jurisdiction. Similarly, we monitor cases involving the definition of the term "materiality" under Rule 10b-5 and other provisions of the securities laws, in light of the potential impact of those cases on Commission enforcement actions. We also have an interest, of course, in criminal cases enforcing the securities laws, such as U.S. v. Kay, a recent case in the Fifth Circuit under the Foreign Corrupt Practices Act in which we filed a brief supporting the position of the Department of Justice.12

Important policy issues are frequently presented in cases involving interpretation of Commission rules and statements, as well as the language of the statutes that the Commission administers. Courts have traditionally given substantial weight to the Commission's views in analyzing these interpretive issues, particularly in the context of a Commission regulation.13 In recent years, for example, the Commission has submitted its views on interpretive issues arising under the proxy rules,14 Regulation S-K,15 Regulation D16 and Rule 10b-10.17

In some instances, cases may present legal issues that, while principally procedural or evidentiary, nonetheless have programmatic significance for the Commission. For example, our general litigation group has filed a series of amicus briefs in recent years arguing that the work product privilege is not waived by the delivery of documents to the Commission pursuant to a confidentiality agreement. This position, if upheld, would facilitate the Commission's ability to obtain certain types of documents during its own investigations.

In light of the Commission's longstanding commitment to private enforcement of the securities laws, we do not limit our participation to cases that have a direct impact on the Commission's own litigation and regulatory programs. As I mentioned a moment ago, the Commission actively participated in the development of the "fraud on the market" theory to facilitate investors' ability to recover in private class actions. In April of this year, in a case brought against Citigroup and Jack Grubman arising out of the collapse of WorldCom (and now settled), we filed a brief arguing that the fraud on the market theory should not be limited to statements by issuers, but should also extend to statements by research analysts.18

Just this past week, the Solicitor General filed a brief with the Supreme Court, prepared with significant input from the Commission, supporting a petition for certiorari in the case of Dura Pharmaceuticals, Inc. v. Broudo.19 The case, coming out of the Ninth Circuit, raises a significant question regarding the definition of "loss causation" in securities class actions - a question that, while seemingly technical, can have a significant practical impact on how those cases are resolved.20

3. Is there a potential conflict between the securities laws and other federal or state law?

A third question that may make a case particularly interesting is whether it presents a potential conflict between the federal securities laws and other federal or state law. At a federal level, these cases most frequently concern the relationship between the securities laws and the antitrust laws. The Commission recently participated, for example, in a district court case alleging that underwriters violated antitrust laws by conspiring to inflate the aftermarket prices of IPO shares. The district court agreed with the Commission that the conduct alleged was impliedly immune from antitrust scrutiny because of the nature and extent of the Commission's regulation of the IPO process.21

In cases involving state-federal conflicts, as you might expect, the Commission has frequently taken the position that federal law should prevail. Over the past few years, the Commission has filed a series of amicus briefs urging that both the Exchange Act and the Federal Arbitration Act preempt California state standards governing arbitrators with respect to SRO arbitrations. In a currently pending matter, a federal district court has asked the Commission to submit its views regarding whether the federal securities laws preempt claims made by Nasdaq against the Pacific Exchange and the Archipelago Exchange arising out of trading in "QQQ" shares without a license from Nasdaq.22

4. Is the brief an opportunity to lead the court to a narrow or more moderate holding, instead of a broad and potentially damaging one?

A final consideration worth mentioning is whether a Commission brief may assist the court in reaching a narrow or more moderate holding, where there is a risk that a broader holding would be damaging to the Commission's interests.23 Recently, this consideration played a role in the Commission's brief in Dreiling v. Jain, a short-swing profits case under Section 16(b).24 In that case, the Commission was concerned that the Ninth Circuit, if it were to reverse a record-high $247 million judgment in the district court, would find that there was no "purchase" of securities for purposes of Section 16 because the defendants gave no consideration for the stock they received. A holding that consideration is required for a "purchase" would raise issues not only under Section 16, but also could inappropriately limit the scope of that term as used in other provisions of the Exchange Act, particularly Section 10(b). To avoid this result, the Commission's brief argued that there was no need to decide the purchase question because, regardless of whether there was a purchase, the defendants had "realized" no recoverable "profits" within the meaning of Section 16(b).

V. Pending Issues and Upcoming Developments

Having taken a fair bit of time to describe to you the history and operation of the Commission's amicus program, let me close with one or two thoughts about pending cases and developments that you should be looking for in the future.

The Commission's currently pending amicus cases cut across a wide range of substantive legal areas. They include not only those I have mentioned today, but also a remarkable array of other issues, such as the rights of customers of failed securities firms, the scope of SLUSA preemption of state law-based class actions, and the ability to seek judicial remedies in cases where SRO arbitration is not available.

Looking forward, consistent with the Sarbanes-Oxley Act and the Commission's rulemaking initiatives, key areas of concern are likely to include the obligations of accountants and auditors, fiduciary responsibilities of mutual fund advisers, the quality of public company financial disclosure, and the responsibilities of directors and officers.

In the accounting area, for example, we recently filed a brief supporting SIPC's standing to recover losses against a negligent accounting firm - seeking to establish a principle that could help protect investors from shoddy audits that all too often fail to detect fraudulent practices at broker-dealers.25 On the mutual fund front, the staff is considering whether to recommend participation in an appeal in a case involving conflicts of interest allegedly evidenced by inappropriate investments by a mutual fund in stocks underwritten by its investment banking affiliates. As to officers and directors, we are carefully monitoring cases involving indemnities and other payments that potentially conflict with the requirements of the securities laws, particularly in cases where restatements or other developments have brought to light fraudulent or erroneous financial reporting by public companies.

As we monitor new developments in the case law, we are also re-evaluating, as part of the Commission's broader review of its programs and operations, how we operate the amicus program. We are considering, among other things, some basic ways in which we can make the program more transparent, including by using the Commission's website to help parties understand how to seek our involvement as amicus curiae, as well as the criteria we use in deciding whether to become involved. Similarly, we have increasingly begun to post our briefs on the Commission's website so that they can be more widely available to the public. We are also trying to improve our ability to identify cases of potential interest to the Commission, including through increased input from the Commission's other Offices and Divisions.

Finally, the ongoing success of our program depends critically on input from the bar and from those most affected by our litigation efforts. That means we need, and want, the assistance of those in the room tonight in a continuing dialogue about how best to serve the objectives to which we have always been committed: the development of sound case law that protects investors and assures the effective functioning of our nation's capital markets.

Many thanks for giving me so much of your time this evening.



Modified: 06/09/2004