After its tumultuous 2024 term, the Supreme Court left investors with plenty to be concerned about for the future of securities regulation in the United States—but not for the reasons those investors may have expected. While the securities case Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. 257 (2024), had been touted as groundbreaking in some quarters, its real-world effects on shareholders are likely to be anticlimactic. On the other hand, Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), a decision arising from a dispute about fishing regulations, is more likely to have significant long-term impact on U.S. investors.
Item 303: Known Material Trends
Macquarie was a highly anticipated ruling, expected to resolve a long-standing split among circuits regarding federal securities fraud claims relating to “known material trends,” as set out in 17 C.F.R. § 229.303 (“Item 303”).1
Item 303 is a regulation issued by the U.S. Securities and Exchange Commission (SEC) that mandates that companies disclose within the Management’s Discussion and Analysis (MD&A) section of their financial statements those “known trends or uncertainties” that might significantly impact their financial condition and results of operations.
The dispute at the heart of the circuit split was simple. Logically, if a publicly traded company is privy to information regarding trends or uncertainties that are likely to impact its liquidity, capitalization, or business revenues so as to invoke the disclosure requirements in Item 303 and yet fails to make those disclosures, one might expect that failure to be the basis for arguing that investors had been deceived in a manner that violates the federal securities laws. However, the language of Item 303 seemingly requires affirmative statements (and not just pure omissions), making it unlawful “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. §240.10b–5(b) (emphasis added).
Thus, the split. The Third, Ninth, and Eleventh Circuits hewed closely to the regulation’s language, concluding that such a failure to disclose, in the absence of any affirmative misstatement by the Company, did not automatically support a securities fraud claim. The Second Circuit, on the other hand, held that the simple failure to disclose a known trend, even in the absence of any statement by the non-disclosing company, was a violation of Item 303 sufficient to support a claim under Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”).
The Macquarie case was an appeal to the Supreme Court from a Second Circuit decision supporting the actionability of a pure omission. There, the company did not disclose that a new regulation made a significant portion of the company’s inventoried fuel oil non-compliant with the law. The stock price thus plummeted by 41% in 2018 when the company announced a drop of its customers’ storage capacity to account for less availability of regulation-compliant oil.
In considering the matter, the Second Circuit concluded that such an omission was a violation of Item 303, meeting the requirements to claim securities fraud under Section 10(b). In a unanimous decision by Justice Sotomayor, the Supreme Court rejected the Second Circuit’s reach beyond the regulatory language of Item 303:
Rule 10b–5(b) does not proscribe pure omissions. The Rule prohibits omitting material facts necessary to make the “statements made … not misleading.” Put differently, it requires disclosure of information necessary to ensure that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake). This Rule therefore covers half-truths, not pure omissions.
Macquarie, 601 U.S. at 263 (alteration in original).
While this ruling certainly required an abrupt about-face by the Second Circuit, its practical effects are likely to be more measured. Cases alleging claims of “pure omissions” such as the omission explored in Macquarie are actually uncommon. Most cases that involve a failure to disclose known trends generally involve at least some affirmative misstatements. In the case of a company alleged to have failed to disclose the loss of a key contract, if it nevertheless assured investors that its demand expectations were unchanged or that it had little turnover in its customer base, then it arguably made statements rendered untrue by information that had not been disclosed to investors, providing the basis for a securities fraud claim even in the wake of Macquarie.
Chevron Deference to Federal Agencies
The 2024 Supreme Court decision that may have much more far-reaching implications for investors is, surprisingly, Loper Bright—a case that on its face has nothing to say about securities regulation.
Loper Bright, a decision supported by a six-justice majority of the Court falling along increasingly bright political and doctrinal divisions, reflects a broader shift away from deference to regulatory authority that will significantly impact nearly every federal agency.
At the heart of Loper Bright is the doctrine of “Chevron deference,” which refers to the 1984 Supreme Court decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Broadly, Chevron deference is the concept that judges should defer to federal agencies when they are faced with interpreting ambiguous parts of statutory provisions.
While the doctrine is simple, its breadth of its reach and impact are vast. Chevron deference effectively permits federal agencies to promulgate regulations that they are not specifically tasked by Congress with developing. In practice, this has given arms of the federal government (such as the U.S. Environmental Protection Agency and the SEC) the freedom to create and implement rules without fear of protracted legal battles.
In rejecting more than forty years of precedent emanating from its own 1984 Chevron opinion, the Court ended that sweeping deference. The majority in Loper Bright held that this doctrine of agency deference cannot be squared with the provisions of the Administrative Procedures Act (“APA”), a federal statute that governs how agencies make rules and adjudicate administrative litigation. 5 U.S.C. §§ 551–559. Specifically, the majority concluded that the APA “requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous.” Loper Bright, 144 S. Ct. at 2247.
This conclusion is likely to be profoundly destabilizing to the financial markets and other areas of commerce and life subject to agency authority. While agency interpretations reflected in rulemaking affects all actors subject to the purview of the agency, judicial interpretations of matters traditionally subject to agency authority will necessarily be extraordinarily diverse, and will be limited to the specific District and Circuit in which the court sits without guidance from the “expert” agencies, creating a patchwork of regulatory interpretations that will vary across the country.
Professor James Tierney of Chicago-Kent College of the Law points out that “[t]here are compelling reasons to believe that the financial industry ultimately might not like Loper Bright. Many firms have structured their operations around existing regulatory frameworks, valuing stability and predictability.” James Tierney, How Loper Bright and the End of Chevron Doctrine May Impact the SEC, Promarket (Sept. 9, 2024). Indeed, the decision may call into question agency interpretations that are already relied upon by investors and public companies in areas ranging from climate disclosures to proxy advisors to rules governing private funds. Id.
Only time will tell how varying and conflicting judicial interpretations of authority for rulemaking will be resolved, but the Supreme Court will likely be called upon to address many of these issues in the future. Given that bottleneck along with the current doctrinal makeup of the Court, investors and their advocates will surely have their hands full.
1 Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000); In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014); Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019); Moab Partners, L.P. v. Macquarie Infrastructure Corp., No. 21-2524, 2022 WL 17815767, at *1 (2d Cir. Dec. 20, 2022), cert. granted, 144 S. Ct. 479, 216 L. Ed. 2d 1312 (2023), vacated and remanded, 601 U.S. 257, 144 S. Ct. 885, 218 L. Ed. 2d 214 (2024).