If the Court decided that the EPA overstepped its regulatory authority and instead was required to be more detailed, then it could be that more agencies, such as those regulating financial advisors, might need to be more specific in their overly broad regulations as well.
The Supreme Court’s summer term in 2024 may be one of the most memorable in decades. But that doesn’t mean it’s time to look away. Three cases set for argument in October of 2024 could have impacts for financial advisors and investment professionals. The first of these cases, Facebook v. Amalgamated Bank, addresses risk disclosures in securities offerings and the standard of fraud. The other two cases, Wisconsin Bell v. US, ex rel Heath and San Francisco v. EPA, involve agencies similar to those that regulate financial advisors and investment activities.
Facebook vs. Amalgamated Bank may be the case with the most direct impact on financial advisors. In that case, the court has been tasked with evaluating two issues concerning disclosure of risk in securities offering. Currently, the various federal court circuits are split on whether a company must “disclose that a risk materialized in the past if the company knows that event will harm the business.”[1] The impact of the case is potentially quite large. Due to that, industry groups such as the US Chamber of Commerce have filed friend of the court briefs, called amicus briefs, presenting additional information on the side of the petitioner Facebook.[2]
This case is likely to be very instructive as the issue is a definite one: whether a risk named in a forward-looking statement is a statement on which an investor can rely or whether such a statement can be the premise of liability if the risk has materialized, and it was known that the risk would have a negative impact on the business.[3] This case is scheduled for oral argument before the Court on November 6, 2024.
More tangentially related to the daily business of financial advisors concerns a regulatory set up somewhat similar to how FINRA operates. In Wisconsin Bell v. US, Ex Rel Heath, the Court has been presented with a question of whether claims made for reimbursement to a private non-profit corporation that administers a government program can be a claim under the False Claims Act.[4] The court filings allege that the non-profit corporation, Wisconsin Bell, sought the highest rates possible from the participants in the FCC program, rather than implementing a sliding scale, as required by the regulatory agency. The Act at issue, the False Claims Act, allows private citizens to sue on the government’s behalf when a government contractor has caused funds allocated to be used improperly. Some legal analysts believe that this case could impact any private entity that acts in place of a regulatory body.[5] This case is scheduled for oral argument on November 4, 2024.
Lastly, the case San Francisco v. EPA may tangentially relate to whether regulatory agencies, such as the SEC or DOL, can create prohibitions that are unduly vague. As court filings indicate, the Clean Water Act requires that the EPA prescribe specific limits on pollutants in the permits they issue tied to articulated goals for surface water.[6] In San Franscisco v. EPA, the Court will consider whether the EPA can impose generic prohibitions on permits which could cause fines when exceeded. If the Court decided that the EPA overstepped its regulatory authority and instead was required to be more detailed, then it could be that more agencies, such as those regulating financial advisors, might need to be more specific in their overly broad regulations as well. This could, in an overly broad manner, provide another strike against an overbroad fiduciary duty rule. This case is scheduled for argument October 16, 2024.
[1] https://www.supremecourt.gov/qp/23-00980qp.pdf
[2] https://www.uschamber.com/cases/capital-markets-and-corporate-law/facebook-inc-v-amalgamated-bank
[3] https://www.mofo.com/resources/insights/240612-supreme-court-to-address-whether-risk-disclosures
[4] https://www.supremecourt.gov/qp/23-01127qp.pdf
[5] https://www.nixonpeabody.com/insights/alerts/2024/07/16/wisconsin-bell-and-the-false-claims-act
[6] https://www.supremecourt.gov/qp/23-00753qp.pdf
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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