Supreme Court SEC Disclosure Ruling Confusing for Courts, Markets

The safeguards in the Securities Act of 1933 and the Securities Exchange Act of 1934 have spurred the US economy to become the strongest in the world. But the US Supreme Court’s ruling in Macquarie Infrastructure Corp. v. Moab Partners April 12 diminished a key component of those safeguards—disclosure regulations—that could impact US capital markets.

Item 303 of SEC Regulation S-K outlines the requirements for issuers’ quarterly and annual statements. It requires companies narrate the risks and trends management sees as potentially affecting the company’s performance. Item 303 is one of the most important nonfinancial disclosures because it allows investors to view the company through managers’ eyes and provides context to their financial statements.

Yet the Supreme Court has diminished critical Item 303 disclosures by immunizing noncompliance from private lawsuits. In Macquarie, the court unanimously held that an issuer’s omission of a known material trend—despite the statutory and regulatory obligation to disclose it—can’t alone support a claim for securities fraud under Section 10(b) and Rule 10b-5, the Exchange Act’s most sweeping anti-fraud tools.

The court’s decision that only “half-truths” are actionable whereas “pure omissions” aren’t means that investors, lawyers, and judges now must analyze Item 303 violations carefully to categorize them.

If that supposedly bright-line distinction evades the average reader, the justices provided a quaint analogy: “The difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.”

The ruling doesn’t acknowledge that, because Item 303 requires disclosing known trends, an omission is a half-truth that implies all known trends have been disclosed (or that there are no known trends). Or, to take the court’s analogy, if the parents ask their child what dessert he or she ate and the child doesn’t respond, any parent will agree the child’s silence was an attempt to mislead.

It stands to reason that the same analysis was used by sophisticated investors who trusted that issuers fully complied with their affirmative disclosure obligations.

The opinion fails to discourage noncompliance with Item 303: While an incomplete disclosure of known trends can support a claim of securities fraud, omitting all known trends is immune from private suit.

The Supreme Court rejected this concern, reasoning that the Securities and Exchange Commission could still enforce compliance with Item 303, ignoring the arguments of former senior SEC officials who told the court that private enforcement was necessary to the SEC’s enforcement efforts, given the commission’s limited resources.

Issuers who entirely omit a known trend or risk will be sheltered from private lawsuits. But the court was clear that private parties could still bring claims based on “misleading half-truths.” Proving whether an Item 303 violation was a pure omission or a half-truth will vex courts in years to come.

Courts historically have recognized that investors’ faith in accuracy of reporting is central to investor confidence, price formation, and integrity of the country’s securities markets. If investors can’t rely on these reports and disclosures, they are less likely to invest, and the market suffers.

Only time will tell whether the current Supreme Court has opened a large loophole for plainly fraudulent conduct, undermining a century of disclosure that has made the US stock market the envy of the world.

The case is Macquarie Infrastructure Corp. v. Moab Partners, LP, U.S., No. 22-1165, 4/12/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John G. Moon is a former SEC branch chief and enforcement attorney and partner at Olshan Frome Wolosky.

Lori Marks-Esterman is chair of Olshan Frome Wolosky’s litigation practice and represents investors and other stakeholders in capital markets matters.

The authors represented Moab Partners, LP in the case.

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