SECURITIES REGULATION-CIVIL LIABILITY UNDER RULE X-10B-5 FOR FRAUD IN THE PURCHASE OR SALE OF SECURITIES

On May 21, 1942 the Securities and Exchange Commission, pursuant to section 10(b) of the Securities Exchange Act of 1934, promulgated rule X-10B-5.2 The purpose of the new rule was apparently to close a loophole in the then existing pattern of regulation of the purchase and sale of securities. The loophole resulted from a gap between section 17(a) of the Securities Act of 1933, which prohibits the use of fraud in the sale of securities by any person, and section 15(c)(1) of the Securities Exchange Act of 1934, which prohibits the use of fraud in the sale or purchase of securities by brokers and dealers. The two sections, while overlapping in part, do not cover the purchase of securities by "any person." Rule X-10B-5 merely repeats the language of section 17(a), but extends the prohibition to the purchase as well as the sale of securities. The broad language of X-10B-5, coupled with the development by the courts of the concept of implied liability under the various sections of both the Securities Act of 1933 and the Securities Exchange Act of 1934, offered to defrauded sellers of securities a bright and promising hook upon which to hang their claims for legal relief.

It is the purpose here to discuss briefly the present condition of this somewhat nebulous legal peg.