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"Reforming Securities Litigation Reform: A Proposal for Restructuring the Relationship Between Public and Private Enforcement of Rule 10b-5"

Via Roberts and Black, Vanderbilt's Amanda Rose has an interesting working paper on SSRN arguing for an intermediate reform of Rule 10b-5 by requiring private class actions to have the imprimatur of the SEC.

Interesting, but, in my mind, ultimately unpersuasive. First, the best arguments Rose makes in support of her proposal are even better arguments for abolishing (or, at least, permitting publicly-traded corporations to have shareholder votes to amend by-laws to opt out from) private 10b-5 actions, the natural conclusion of her analysis, which she shies away from on the grounds that it is "politically infeasible." Second, adding an additional bureaucratic layer to the 10b-5 process would only reduce social costs if the SEC exercises its veto power frequently: if the SEC rubber-stamps the vast majority of class actions, all that will be accomplished is adding an expensive layer of litigation, perhaps more if the SEC's decision is reviewable. Third, the SEC will be diverting resources away from public enforcement to oversight of private enforcement. Fourth, and perhaps most importantly, it is hard to imagine that the SEC would be an efficient gatekeeper: giving the SEC veto power over the billions of dollars earned by the powerful lobby of the securities plaintiffs' bar would only serve to politicize the SEC further. Witness the Congressional pressure (coordinated in large part by Bill Lerach and the trial bar) put on the SEC to intervene on the wrong side in Stoneridge, and multiply that by every class action filed in a given year when the SEC is a mandatory, rather than occasional, intervenor. Such politicization may compromise the SEC's role in other regulatory activity moreso than it already is.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.