The Two Faces of Janus: The Jurisprudential Past and New Beginning of Rule 10b-5

Section 10(b) of the Securities Exchange Act and its implementing Rule 10b-5 are the primary antifraud provisions for both private and public enforcement of the federal securities laws. Neither the statute nor the rule expressly provides for a private right of action, but federal courts have long recognized such an implied right, and the Securities and Exchange Commission has supported the implied private right of action as a “necessary supplement” to its own efforts. However, after a decade of applying an expansive interpretation to Section 10(b), in the early 1970s the U.S. Supreme Court began to narrowly interpret this implied private right of action, citing concerns about the costs that frivolous litigation may impose on capital markets. Most recently, in Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court constricted the ambit of Rule 10b-5(b) — which imposes liability for fraudulent misstatements — by narrowly interpreting the word “make” in a way that effectively removes entire categories of plaintiffs from liability under Rule 10b-5(b). While Janus involved private plaintiffs, the Court’s interpretation cannot easily be distinguished on the basis of the plaintiff’s identity. Therefore, Janus appears to limit the Commission to the same extent that it does private plaintiffs, even if such a limitation was not the Court’s intent. This Note offers a solution to the Commission’s Janus problem, whereby the Commission could use its rulemaking authority to implement a “New Rule 10b-5.” This New Rule 10b-5 would be drafted so that only the Commission could use it to prosecute fraud, addressing the Court’s concern about the potential costs of expanding private litigation. Additionally, the New Rule 10b-5 could substitute different language for the word “make” so that the Commission could sidestep the Court’s restrictive interpretation of that word’s meaning. Going forward, this bifurcated approach to Section 10(b) — with separate rules for private and public enforcement — would allow the courts to interpret the contours of each cause of action without inadvertently restricting or expanding the scope of the other.