Cross-posted by Forbes.com at WLF’s contributor site
Distinguished First Amendment scholar Frederick Schaeur once wrote in the Harvard Law Review, “It might be hyperbole to describe the Securities and Exchange Commission as the Content Regulation Commission, but such a description would not be wholly inaccurate.” SEC has yet to heed a suggestion from one of its own advisory committees to relax prohibitions on general solicitations and advertising, and has ignored a letter from the New York City Bar noting that New York and 30 other states take a more respectful approach to securities speech regulation.
The Commonwealth of Massachusetts is not one of those 31 states, as hedge fund Bulldog Investors learned in 2006. The enforcement action taken by the state against Bulldog, and Bulldog’s constitutional challenge of that action, has resulted in a cert petition filed with the U.S. Supreme Court that could shock SEC and securities speech-averse states into the 21st Century.
Facts & state court proceedings. Bulldog’s website allowed visitors to seek more information about their funds by filling out a form and confirming that visitors who seek information are not purchasing Bulldog products or services. The fund responded to a Massachusetts resident’s request for information with a brief email that included basic information about Bulldog. The email recipient shared the message with Massachusetts regulators, who filed an administrative complaint against Bulldog for “offering” unregistered securities.
Bulldog hired noted civil liberties attorney Andrew Good and sued the state under § 1983, contending that the enforcement action violated its First Amendment rights. In Bulldog v. Sec. of Commonwealth, a state trial court and the Massachusetts Supreme Judicial Court (SJC) both ruled the state action was constitutional, with the SJC applying a very low level of First Amendment scrutiny because, in its view, the speech prohibition was “incorporated into a disclosure regime” that protected investors that couldn’t get involved with hedge funds (i.e. people who aren’t “rich”).
Supreme Court cert petition. Bulldog’s counsels Jonathan Massey and Professor Laurence Tribe make a very compelling case that the Court should grant cert and reverse the SJC’s miscarriage of justice. The SJC applied the Supreme Court’s highly deferential “reasonable relationship” test created in Zauderer for government disclosure requirements to prevent deception. The Bulldog Court thoroughly misapplied Zauderer. First, the Massachusetts securities speech rule was a ban on speech, i.e. you can’t speak, not a disclosure, i.e. you must speak. Second, Bulldog’s speech was not deceptive or misleading; in fact, at trial the state stipulated that the speech was truthful and not misleading. The Supreme Court, as the petition states, “has never applied Zauderer in such circumstances.”
The SJC also upheld the Massachusetts ban under the less deferential Central Hudson standard for commercial speech. Under that standard, a state must show, through actual evidence, and not “mere speculation or conjecture,” that the speech restriction directly advances a substantial interest. In Bulldog, the SJC relied on the statements of a law professor (which, the SJC admitted were not “based . . . on empirical research”) that the speech ban would encourage companies to register their securities. The SJC’s application of Central Hudson, where it relied upon the speculative testimony of a scholar, is deeply lacking and the U.S. Supreme Court must correct it.
Bulldog’s petition also points out how the Massachusetts speech ban unlawfully discriminates against speech based on its intended audience. Only “rich readers” should, in the opinion of the state, be allowed to access Bulldog’s information, not researchers, journalists, students, or other non-market participants.
Final thoughts. When the market fails to protect the investing public from false and misleading information or the predations of fraudsters, government has a legitimate role to play through regulation. None of that was occurring in the case of Bulldog v. Sec. of Commonwealth. Instead, truthful information is being censored. Bulldog’s current website doesn’t resemble the one that was described in the Bulldog Supreme Court petition. It is now the virtual black-box, bare bones type of site that securities regulators like those in Massachusetts seemingly prefer. Such restrictions, as the SEC Advisory Company on Smaller Public Companies noted above wrote, “prohibits issuers from taking advantage of the tremendous efficiencies and reach of the Internet to communicate with potential investors,” which is a “significant impediment to the efficient formation of capital.”
Isn’t that the last thing we need in today’s economic environment?