Rule 10b-5

Rule 10-5 is a Securities and Exchange Commission (SEC) regulation that prohibits securities fraud .

Overview

The SEC promulgated Rule 10b-5 under Section 10(b) of the Exchange Act , which authorizes the SEC to regulate securities fraud. The text of the regulation, formally 17 CFR § 240.10b-5 , states that “it shall be unlawful for any person . . . (a) [t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a material fact or to omit to state a material fact . . . or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

Standing

While not explicit in the language, courts have interpreted Rule 10b-5 to create a private civil cause of action and additionally allow the SEC to bring criminal enforcement actions. In order to bring a private right of action under Rule 10b-5, the plaintiff must have standing . In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) , the U.S. Supreme Court ruled that a plaintiff must have actually purchased or sold a security to have standing under Rule 10b-5. That is, claiming that a fraudulent misrepresentation caused the plaintiff to forego purchasing or selling a security does not allow them to bring a cause of action under Rule 10b-5. Unlike Section 11, however, Rule 10b-5 applies to both public offerings and private placements .

Elements

For a private plaintiff or the SEC to prove a violation of Rule 10b-5, they must prove the following elements :

In addition to a private suit , if the SEC establishes those elements, then the individual may be criminally liable .

[Last reviewed in January of 2022 by the Wex Definitions Team ]

Wex