For many years, the Securities and Exchange Commission (SEC) led a charmed existence in the federal courts, rarely losing cases or having its rules invalidated. Further, the U.S. Supreme Court and the lower courts encouraged broad interpretations of the securities laws on the ground that these laws were remedial statutes. During the last quarter of the 20th century, the attitude of the federal courts changed. Substantive provisions of the federal securities laws, and particularly the anti-fraud provisions, were interpreted narrowly. In addition, the SEC was sometimes rebuffed in its rulemaking efforts. More recently, some federal judges have rebelled against rubber-stamping SEC settlements. This column will discuss D.C. Circuit cases overturning SEC rulemaking initiatives as well as cases in which district court judges have questioned SEC settlements. The U.S. Court of Appeals for the Second Circuit recently overturned one of these cases while formulating a new rule for judicial review of SEC settlements.
Developments Over Time
In the mid-1980s, when the wall separating investment banking and commercial banking was crumbling, the SEC redefined the term “bank” in the Securities Exchange Act of 1934 (Exchange Act) to exclude banks engaged in a “public securities business.” The purpose of this revised definition was to compel such financial institutions to register as broker-dealers.1
