There Should Be No Reliance in the "Blue Sky"

I. INTRODUCTION Since the Uniform Securities Act1 (Uniform Act) was adopted by the National Conference of Commissioners on Uniform State Laws in 1956, much confusion has persisted concerning the issue of whether reliance should be a required element in a cause of action for securities fraud under the Uniform Act. Perhaps this confusion exists because reliance is an indispensable element of common law fraud and is necessary to establish a causal link between the alleged fraud and the injury suffered.2 Likewise, in the specific area of federal securities fraud, the implied civil right of action based on Rule lOb-53 also requires a showing of reliance.4 Despite the importance of reliance in these two areas, however, it should not be a required element of a fraud action under the Uniform Act. The clear language of the Uniform Act, which has been substantially adopted by most jurisdictions,5 does not include an element of reliance in the explicit cause of action, and the Draftsmen's Commentary expressly states an intent to exclude it as an element. Furthermore, a reliance requirement is contrary to the sound policy of the Uniform Act in favor of protecting the investor and deterring fraud in the purchase and sale of securities. In spite of this reasoning, the issue of whether reliance is an element of state securities fraud actions that are based on the Uniform Act continues to be raised in litigation.6 Many of the jurisdictions that have addressed this issue have correctly determined that reliance is not required,7 but there are conflicting opinions that would impose some element of reliance into the otherwise clear statute.8 The opinions that suggest that reliance should be required tend to improperly confuse the policies and requirements of the Uniform Act with those found in other areas of fraud.9 In light of the clear language of the Uniform Act, coupled with the drafters' comments and the important policies underlying the Uniform Act, it is time to clearly resolve the reliance issue and to restrain those jurisdictions and judges inclined to impose an element of reliance. This Comment argues that the Uniform Act does not require reliance as an element for a state securities fraud cause of action. Part II provides some background on the issue of reliance as an element of state securities fraud, with particular emphasis on the purpose of state securities regulation to protect investors from fraud. This background is essential to gain an understanding of the policies against importing a reliance element into state securities fraud. Part III analyzes the language and objectives of the Uniform Act, revealing that reliance should not be a required element of state securities fraud causes of action based on the Act. Part III also responds to anticipated criticisms from they who would argue that reliance should be required by the Uniform Act. This Comment concludes that only when all jurisdictions that have adopted the Uniform Act properly find that reliance is not required will the goals of uniform application, deterrence of fraud and increased investor protection be fully accomplished. II. BACKGROUND TO STATE SECURITIES LAWS One of the primary purposes of the "anti-fraud securities laws and rules is to equalize the bargaining power of parties to securities transactions and provide equal access to all material information that could affect the value of the securities being sold."lo Although the federal antifraud provisions administered by the Securities and Exchange Commission (the SEC) are probably more commonly recognized, state statutes on the subject existed long before the Federal Securities Act of 1933.11 State legislation in securities fraud is commonly broader in its scope and application than federal legislation in order to further the purposes of securities regulation.12 Although Kansas is often credited with enacting the first "blue sky law" in 1911,la Massachusetts regulated all chartered railroad companies and established filing requirements in 1852. …