The issue in this case is whether an action for civil damages may lie under §10(b) of the Securities Exchange Act of 1934 (1934 Act), * * *, and Securities and Exchange Commission Rule 10b–5, * * * in the absence of an allegation of intent to deceive, manipulate, or defraud on the part of the defendant.

Petitioner, Ernst & Ernst, is an accounting firm. From 1946 through 1967 it was retained by First Securities Company of Chicago (First Securities), a small brokerage firm and member of the Midwest Stock Exchange and of the National Association of Securities Dealers, to perform periodic audits of the firm’s books and records. In connection with these audits Ernst & Ernst prepared for filing with the Securities and Exchange Commission (Commission) the annual reports required of First Securities under §17(a) of the 1934 Act. It also prepared for First Securities responses to the financial questionnaires of the Midwest Stock Exchange (Exchange).

Respondents were customers of First Securities who invested in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. * * * 

This fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as ‘‘spurious.’’ Respondents subsequently filed this action for damages against Ernst & Ernst in the United States District Court for the Northern District of Illinois under §10(b) of the 1934 Act. The complaint charged that Nay’s escrow scheme violated §10(b) and Commission Rule 10b–5, and that Ernst & Ernst had ‘‘aided and abetted’’ Nay’s violations by its ‘‘failure’’ to conduct proper audits of First Securities. As revealed through discovery, respondents’ cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize ‘‘appropriate auditing procedures’’ in its audits of First Securities, thereby failing to discover internal practices of the firm said to prevent an effective audit. 

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Federal regulation of transactions in securities emerged as part of the aftermath of the market crash in 1929. The Securities Act of 1933 (1933 Act), [citation] was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing. [Citation.] The 1934 Act was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges. [Citation.] Although the Acts contain numerous carefully drawn express civil remedies and criminal penalties, Congress recognized that efficient regulation of securities trading could not be accomplished under a rigid statutory program. As part of the 1934 Act Congress created the Commission, which is provided with an arsenal of flexible enforcement powers. [Citations.]

Section 10 of the 1934 Act makes it ‘‘unlawful for any person * * * (b) [t]o use or employ, in connection with the purchase or sale of any security * * * any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.’’ [Citation.] In 1942, acting pursuant to the power conferred by §10(b), the Commission promulgated Rule 10b–5. 

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Although §10(b) does not by its terms create an express civil remedy for its violation, and there is no indication that Congress, or the Commission when adopting Rule 10b–5, contemplated such a remedy, the existence of a private cause of action for violations of the statute and the Rule is now well established. [Citation.] During the 30- year period since a private cause of action was first implied under §10(b) and Rule 10b–5, a substantial body of case law and commentary has developed as to its elements. Courts and commentators long have differed with regard to whether scienter is a necessary element of such a cause of action, or whether negligent conduct alone is sufficient. 

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Although the extensive legislative history of the 1934 Act is bereft of any explicit explanation of Congress’ intent, we think the relevant portions of that history support our conclusion that §10(b) was addressed to practices that involve some element of scienter and cannot be read to impose liability for negligent conduct alone. 

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The section was described rightly as a ‘‘catchall’’ clause to enable the Commission ‘‘to deal with new manipulative [or cunning] devices.’’ It is difficult to believe that any lawyer, legislative draftsman, or legislator would use these words if the intent was to create liability for merely negligent acts or omissions. Neither the legislative history nor the briefs supporting respondents identify any usage or authority for construing ‘‘manipulative [or cunning] devices’’ to include negligence.

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The Commission argues that Congress has been explicit in requiring willful conduct when that was the standard of fault intended. * * *

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The structure of the Acts does not support the Commission’s argument. In each instance that Congress created express civil liability in favor of purchasers or sellers of securities it clearly specified whether recovery was to be premised on knowing or intentional conduct, negligence, or entirely innocent mistake. [Citations.] For example, §11 of the 1933 Act unambiguously creates a private action for damages when a registration statement includes untrue statements of material facts or fails to state material facts necessary to make the statements therein not misleading. Within the limits specified by §11(e), the issuer of the securities is held absolutely liable for any damages resulting from such misstatement or omission. But experts such as accountants who have prepared portions of the registration statement are accorded a ‘‘due diligence’’ defense. In effect, this is a negligence standard. An expert may avoid civil liability with respect to the portions of the registration statement for which he was responsible by showing that ‘‘after reasonable investigation’’ he had ‘‘reasonable ground[s] to believe’’ that the statements for which he was responsible were true and there was no omission of a material fact. §11(b)(3)(B)(i). See, e.g., Escott v. BarChris Const. Corp. [citation]. The express recognition of a cause of action premised on negligent behavior in §11 stands in sharp contrast to the language of §10(b), and significantly undercuts the Commission’s argument. 

We also consider it significant that each of the express civil remedies in the 1933 Act allowing recovery for negligent conduct, see §§11, 12(2), 15, [citations] is subject to significant procedural restrictions not applicable under §10(b). * * * 

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We have addressed, to this point, primarily the language and history of §10(b). The Commission contends, however, that subsections (b) and (c) of Rule 10b–5 are cast in language which—if standing alone—could encompass both intentional and negligent behavior. These subsections respectively provide that it is unlawful ‘‘[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading * * *’’ and ‘‘[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person * * *.

Viewed in isolation the language of subsection (b), and arguably that of subsection (c), could be read as proscribing, respectively, any type of material misstatement or omission, and any course of conduct, that has the effect of defrauding investors, whether the wrongdoing was intentional or not. 

We note first that such a reading cannot be harmonized with the administrative history of the Rule, a history making clear that when the Commission adopted the Rule it was intended to apply only to activities that involved scienter. More importantly, Rule 10b–5 was adopted pursuant to authority granted the Commission under §10(b). The rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law. Rather, it is ‘‘‘the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.’’’ [Citations.] 

* * * When a statute speaks so specifically in terms of manipulation and deception, and of implementing devices and contrivances—the commonly understood terminology of intentional wrongdoing—and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of the statute to negligent conduct. 

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 The judgment of the Court of Appeals is reversed.