Securities law has long regulated speech with little (if any) First Amendment controversy. Yet the contemporary antiregulatory turn in the Supreme Court’s Free Speech Clause doctrine has inspired increasingly successful efforts to resist regulation in various settings—settings that now include securities law. Among other things, the Court now scrutinizes the government’s compelled informational disclosures with increasing suspicion. And the Court now purports to apply strict scrutiny whenever the government regulates based on expression’s content or based on a speaker’s identity, even absent any indications of the government’s illicit motive and even when those distinctions make good sense. This antiregulatory turn empowers courts, if they so choose, to dismantle the securities regulation framework in place since the Great Depression. At stake are not only recent government proposals to require companies to disclose accurate information about their vulnerabilities and contributions to climate change (among other emerging risks) but also longstanding governmental efforts to inform and protect investors.
In What 21st-Century Free Speech Law Means for Securities Regulation (forthcoming later this year in the Notre Dame Law Review), I take this threat seriously and defend the constitutionality of securities law in the wake of the Court’s antiregulatory turn. I describe why and how securities law regulates speech to inform listeners’ (i.e., investors’) decisions about buying, selling, and holding securities, along with their decisions about electing directors and otherwise exercising their corporate governance functions. These listener-centered functions, in turn, also serve public-regarding goals by facilitating stable and efficient markets, encouraging corporate accountability, and ameliorating the systemic risks of market collapse. I then map this securities law framework onto First Amendment law, demonstrating why and how this regulatory framework aligns with Free Speech Clause theory and doctrine. Key to this alignment, as we will see, are securities law’s listener-centered functions. These functions explain the value—indeed, the necessity—of content- and speaker-specific complexity for securities law, as securities regulation requires focusing on specific speakers and content to achieve its multiple objectives.
How and Why Securities Law Regulates Speech
Securities law regulates speech by prohibiting those selling securities from making false or misleading statements (anti-fraud rules) and by requiring companies to make certain accurate disclosures (mandatory disclosures) to inform and protect investors in their decisions to buy, sell, or hold securities and in their exercise of corporate governance responsibilities. Several key differences between securities and other goods and services intensify the value of accurate securities-related information to investors, thus explaining the importance of these anti-fraud and mandatory disclosure rules.
First, securities represent “credence” goods, as their value cannot be assessed through traditional means like inspection before, or experience after, purchase. Securities law helps fill the especially pronounced informational asymmetries between the buyers and sellers of credence goods by requiring the sellers of securities to disclose information about their companies. Second, securities differ even from other credence goods because of the governance rights and responsibilities that accompany securities’ purchase, like electing a corporation’s board of directors or approving or disapproving mergers and acquisitions. Mandatory disclosures enable shareholders to evaluate the performance of a company’s managers, empowering those dissatisfied with that performance to exercise exit (by selling shares) or voice (through corporate governance).
Third, investors rarely make a simple yes-or-no decision about whether to invest in a single company but instead frequently choose among numerous investment options. Accurate, standardized disclosures provide comparable information about competing opportunities and thus help investors distinguish well-managed companies from poorly-managed ones. Finally, investors use different methods for assessing securities’ value and risk. Some investors, moreover, are interested not only that a company generates profits but they’re also interested how a company generates profits. Mandatory disclosures seek to provide diverse investors with data they find relevant.
Securities law thus regulates speech to address the informational asymmetries between buyers and sellers in this market where accurate securities-related information is critical to investors as listeners. The rest of this post explains how this regulatory framework aligns with First Amendment theory and doctrine.
Securities-Related Speech as a Category of Speech Unprotected by the First Amendment
Over time, the Supreme Court has identified several categories of speech as unprotected by the First Amendment, including threats, incitement to imminent illegal action, fighting words, obscenity, and child pornography. Such an approach requires a methodology for determining which categories of speech should be treated as unprotected. For decades, the Court described its approach in ways reminiscent of cost-benefit analysis—in other words, as balancing contested expression’s First Amendment value against the harms threatened by that expression. But the 21st-century Court now insists that its methodology for identifying categories of unprotected speech turns entirely on whether the regulation of speech within that category has historically been treated as exempt from First Amendment scrutiny. To be sure, the Court’s methodological turn in identifying categories of unprotected speech has received plenty of criticism on both descriptive and normative grounds—and deservedly so. Nevertheless, because the Court has made clear that historical analysis now controls its understanding of the categories of speech unprotected by the Free Speech Clause, here I work within this doctrine. (Other scholars have undertaken similar projects concerning the Court’s application of history and tradition in other constitutional settings.)
When identifying certain specific categories of unprotected speech, the 21st-century Court also noted that other categories of speech might have historically been treated as unprotected even though the Court’s case law has yet to recognize them as such. And indeed, we can identify a category of unprotected speech that describes speech by securities issuers and dealers on matters related to their securities that has been historically regulated, without triggering First Amendment scrutiny, to inform and protect investors. While the Court has yet to wrestle squarely with the First Amendment implications of securities law, in occasional 20th-century dicta, it indicated that the First Amendment poses no bar to regulating securities-related speech.
At its best, historical tradition reflects the thoughtful and time-tested reflections of “many minds over many years” about what to value and fear. In the Free Speech Clause context, historical tradition can reveal the assessments of many minds over a long time about the categories of speech that do little to advance First Amendment values while threatening significant harm. But too rigid or narrow an application of historical analysis (like insisting that only uncomplicated traditions have constitutional value) denies the possibility of a community’s growth and development with time and discredits policymakers’ evolving responses to complex problems. In my view, the better approach is to start by focusing on why the government has long regulated speech in a particular category: in other words, what functions have the government sought to achieve? I then suggest that we define the relevant category of unprotected speech as that which has long been regulated to serve those functions.
Under this approach, we look to see whether contemporary speech regulations serve the same functions (like protecting public health and safety through required warnings) as those served by longstanding regulations—even if they regulate risks that were unrecognized decades or centuries ago (say, the health dangers of asbestos or fentanyl). A functional approach to defining the requisite regulatory tradition permits policymakers to learn from time and experience when responding to stubborn problems of long standing and thus remains attentive to democratic self-governance as a core Free Speech Clause value. When we consider the functions long served by securities law, we see that the contemporary securities law framework continues a lengthy regulatory tradition responsive to securities markets’ unique vulnerability to information asymmetries: New Jersey, for instance, required a variety of securities disclosures in 1846; Kansas in 1911 enacted the first in a wave of state “blue sky” laws that require companies to provide necessary disclosures; and a century ago Congress first enacted federal securities law.
These laws continue an even more extended Anglo-American regulatory tradition. As early as the 18th century, legal historian Stuart Banner explains, the “perceived differences between securities and older kinds of property, especially the enhanced ability of sellers to manipulate prices and otherwise deceive buyers, led English and then American regulators gradually to develop special statutory schemes targeted only at the transfer of securities.” He concluded that much of today’s regulatory framework was “tried or at least suggested in the eighteenth and early nineteenth centuries.” In other words, today’s securities laws address problems that are far from new, and they deploy a set of solutions to those problems that are also far from new. The threads that stitch this regulatory tradition together are the functions it has long sought to achieve: informing and protecting investors (functions that also serve broader public-regarding interests in market stability, capital formation, and corporate accountability).
This regulatory tradition is necessarily speaker-based and content-based: it regulates specific speech by certain speakers precisely because those distinctions are relevant to the expression’s potential for harm and value. And securities law remains consistent with this lengthy regulatory tradition—and in my view, thus regulates within a category of unprotected securities-related speech—when it recognizes that the risks to investors change over time. This tradition encompasses disclosures that inform investors about risks and methodologies that were unknown to, or unrecognized by, past generations—think again of asbestos and fentanyl, and now climate change and cybersecurity. That new risks to investors will arise (as well as new investor approaches to evaluating those risks) is foreseeable, even if the specific content of those risks and methodologies is not.
An Alternative: Securities-Related Speech as Commercial Speech
My paper also considers the possibility that the Court will turn instead to an entirely separate doctrine for considering the constitutionality of securities law: the very different rules that apply to the government’s regulation of commercial speech.
Here too, securities regulation’s listener-centered functions do important First Amendment work. Soon after it held for the first time that the First Amendment provides some protection for commercial speech, the Supreme Court explained in Central Hudson Gas & Electric Corp. v. Public Service Comm’n that commercial expression’s constitutional value turns on its ability to further, or instead frustrate, listeners’ interests in informed decision-making. The Court held that the First Amendment does not protect commercial speech that is false, misleading, or related to illegal activity because such speech offers no constitutional value to listeners. The Court contrasted accurate speech about legal commercial activity (like accurate speech about prescription drug prices) as generally valuable to its listeners and thus applied intermediate scrutiny to the government’s regulation of such speech.
The Central Hudson Court thus divided the universe of commercial speech into two types. First, commercial actors’ speech that frustrates listeners’ interests (i.e., commercial speech that is false, misleading, or related to illegal activity) is unprotected by the First Amendment. Second, all other commercial speech usually serves listeners’ informational interests, and its regulation thus triggers intermediate scrutiny. Shortly after, the Court added a third type: commercial actors’ compelled disclosures about their goods and services. In Zauderer v. Office of Disciplinary Counsel, the Court distinguished the government’s requirement that commercial actors disclose accurate information to consumers from the government’s restriction of those actors’ speech. It applied a more deferential test to the former than to the latter because accurate disclosures about available goods and services generally serve listeners’ information interests. For this reason, the government’s required disclosures of factual, noncontroversial information need only be reasonably related to consumers’ interests so long as the required disclosures are neither unjustified nor unduly burdensome.
Examples of “commercial speech” include commercial advertising and other speech that proposes the terms and conditions of commercial transactions. Although the Court has never considered whether securities-related speech constitutes commercial speech for First Amendment purposes, lower courts have occasionally treated securities-related speech as a species within the genus of commercial speech. Much of the securities law framework can satisfy scrutiny under commercial speech doctrine so long as courts continue to tether their understanding of commercial expression’s value (and thus its First Amendment protection) to that expression’s capacity to inform listeners’ decision-making.
Securities laws’ anti-fraud rules would thus remain insulated from First Amendment review under the Court’s commercial speech doctrine, which treats false or misleading commercial speech as entirely unprotected by the First Amendment because it frustrates listeners’ interests. But the contemporary antiregulatory turn in First Amendment law includes greater judicial skepticism of mandatory commercial disclosures, skepticism that takes several doctrinal forms.
First, contemporary courts are quicker to describe the government’s compelled disclosures as involving something other than “factual and uncontroversial matters,” thus applying Central Hudson intermediate scrutiny rather than more deferential Zauderer review. When we put listeners first, however, Robert Post reminds us that “[p]lainly a mandated disclosure cannot become controversial merely because a speaker objects to making it . . . .” Think of federal law that requires food manufacturers to disclose their products’ nutritional information even though some would rather not do so: that the disclosure may not be flattering to the product detracts neither from its value to consumers nor from manufacturers’ ability to promote their products’ positive attributes. The same is true of mandatory securities disclosures that require companies to disclose accurate information to investors about their performance. Under a listener-centered focus, the disclosures required by securities law are thus best understood as “factual and uncontroversial,” thus triggering Zauderer deference.
And even if courts were instead to apply more skeptical Central Hudson scrutiny, the government’s appropriately-crafted regulation satisfies that review so long as we attend to listeners’ informational interests. The Court has required “a fit that is not necessarily perfect, but reasonable; that represents not necessarily the single best disposition but one whose scope is ‘in proportion to the interest served,’ that employs not necessarily the least restrictive means but . . . a means narrowly tailored to achieve the desired objective.”
Second, courts that have struck down compelled commercial disclosures as unduly burdensome often focus on whether the required disclosure crowded out the commercial actor’s speech in settings with limited space available to communicate to consumers. Think of billboards, print advertising, and packaging. Along these lines, the Ninth Circuit invalidated a city’s requirement that health warnings about sugared beverages take up 20% of the space used for advertising those products, concluding that it unduly restricted the advertiser’s own message when record evidence showed that a 10% space allotment would also successfully deliver this warning to consumers. Courts also increasingly reject disclosures they perceive as requiring the commercial actor to condemn itself. Consider National Ass’n of Manufacturers v. SEC, where the D.C. Circuit invalidated the agency’s conflict minerals rule that, in the court’s view, required companies to convey their moral responsibility for the humanitarian crisis in the Democratic Republic of the Congo (DRC). There the court held that the required disclosure failed Central Hudson intermediate scrutiny (and failed even Zauderer as unduly burdensome) because less burdensome regulatory options remained available, like allowing companies to use their own language to describe their products’ relationship (if any) to conflict in the DRC or requiring the SEC to post on its website a list of products that the agency itself had (or had not) confirmed to be DRC conflict free.
Here too, securities-related speech differs from speech related to other goods and services in constitutionally relevant ways. The disclosures required by securities law do not crowd out—and thus do not unduly burden—companies’ speech because they do not appear on billboards, packaging, or in other settings where the available space is limited. Instead, securities law requires companies to disclose through registration statements to the SEC (which are then made available to the public) and prospectuses and proxy statements delivered to investors and shareholders. Nor do the disclosures required by securities law require stigmatizing language of the sort described above, and they leave companies free to provide additional texture and nuance through voluntary disclosures of their own.
Finally, courts skeptical of the evidentiary connection between a required disclosure and the government’s informational objectives may find those disclosures to fail Zauderer deference (as unjustified) or Central Hudson scrutiny (as insufficiently justified). From a listener-centered perspective, these evidentiary requirements ensure that disclosure informs listeners about matters relevant to their decision-making. While some courts are increasingly skeptical of the justifications underlying the government’s compelled disclosures, others credit studies, expert testimony, history, anecdotes, and “common sense” to find it “self-evident” that disclosures provide information relevant to listeners’ decision-making. Consider American Meat Institute v. USDA, where meat producers challenged federal requirements that their packaging disclose their products’ country of origin. Applying Zauderer scrutiny to those “factual and uncontroversial” disclosures, the court found the disclosures justified given consumers’ longstanding interest in protecting American enterprise. In so doing, the D.C. Circuit recognized that various matters apart from traditional quality measures, cost, and safety can and do inform consumers’ decisions.
SEC disclosure requirements can thus satisfy even increasingly skeptical commercial speech review when courts maintain a listener-centered focus. Such disclosures serve listeners’ interests when they inform investors (and their diverse methodologies) about longstanding and emerging risks.
Conclusion
When we consider the crease between securities law and constitutional law, we can see the constitutional barriers that contemporary free speech law now poses to longstanding economic regulation, as well as the importance of identifying principled limits on this antiregulatory turn. Attending to listeners’ interests provides one such limit. As we have seen, securities regulation’s multiple listener-centered functions explain its alignment with First Amendment law as a category of unprotected speech long regulated to inform and protect investors as listeners—or, in the alternative, as commercial speech regulable to further listeners’ interests.
Helen Norton is a University Distinguished Professor and the Rothgerber Chair in Constitutional Law at the University of Colorado School of Law.
This post was adapted from her paper, “What 21st-Century Free Speech Law Means for Securities Regulation,” available on SSRN.
