September 20, 2022

Enforcement: SDNY Says Reg FD Passes 1st Amendment Muster

Remember the SEC’s Reg FD enforcement proceeding against AT&T?  Well, a SDNY judge recently rejected AT&T’s bid to dismiss the SEC’s case against it. Among other things, the defendants contended that Reg FD is a content-based restriction on speech that must be narrowly tailored to advance a compelling governmental interest or, alternatively, compelled speech subject to strict 1st Amendment scrutiny. The judge rejected those claims, and this excerpt from Cydney Posner’s blog on the case summarizes his reasoning:

With respect to the contention that Reg FD compels speech, the Court determined that it is not political speech or opinion, subject to strict scrutiny, but rather is “more akin to the interest in avoiding consumer deception that underlies numerous statutory and regulatory disclosure requirements. These historically have been upheld provided they are reasonably related to preventing the deception of consumers.” The SEC contended that Reg FD was instead comparable to compelled commercial speech—“expression related solely to the economic interest of the speaker and its audience,” and subject to rational-basis review under SCOTUS’s decision, Zauderer v. Office of Disciplinary Counsel (1985). . .

However, although there were similarities, according to the Court, “case law to date has stopped short of equating the two.” While the commercial speech doctrine was a “closer fit,” in the Court’s view, it has “centered on advertisements or speech otherwise proposing a commercial transaction,” and is thus “ultimately also a mismatch for the speech covered by Reg FD.” Reg FD involves broader communications, the Court said, and rejected the SEC’s invocation of compelled commercial speech cases as “inapposite” or only “lightly instructive.” The Court concluded that “Reg FD’s idiosyncratic quality makes it an imperfect fit for any existing familiar First Amendment framework.”

The Court instead applied an intermediate scrutiny standard to Reg FD and the blog points out that it concluded that the “asserted government interest in combatting selective MNPI disclosures was substantial and directly advanced the government interest asserted—market integrity and protection of investors.” It’s worth noting that this is just one of the issues addressed in the Court’s 129-page opinion, and if you’re interested in reading more about the case, check out Cydney’s blog, which takes a deep dive into the decision.

John Jenkins