Wednesday, October 27, 2010

SEC Seeks Comments in Aid of Dodd-Frank Mandated Study on Extraterritorial Reach of Federal Securities Laws

The SEC has requested, Release No. 34-63174, public comments to help it conduct a Dodd-Frank Act mandated study to determine the extent to which private rights of action under the antifraud provisions of the Securities Exchange Act should be extended to cover transnational securities fraud. Congress ordered the study in the wake of this year’s US Supreme Court ruling that Rule 10b-5 does not provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. The antifraud rule reaches the use of a manipulative or deceptive device only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States. When a statute gives no clear indication of an extraterritorial application, it has none. Since there is no affirmative indication in the Exchange Act that §10(b) applies extraterritorially, the Court concluded that it does not. The Court adopted a transactional test of whether the purchase or sale is made in the United States, or involves a security listed on a domestic exchange. (Morrison v. National Australia Bank, Ltd, US Sup. Ct., Fed. Sec. L. Rep. ¶95,776).

In what is perhaps the first foreign-cubed case to ever reach the US Supreme Court, the Court said that the fact that many difficult to apply judge-made tests on the extraterritorial aspects of the federal securities laws have developed over the years demonstrates the wisdom of the presumption against extraterritorial application of Rule 10b-5. Rather than guess anew in each case, the Court said that it would apply the presumption in all cases, preserving a stable background against which Congress can legislate with predictable effects.

In the Dodd-Frank Act, Congress addresses the extraterritorial reach of the federal securities laws in two sections. Section 929P, sponsored by Rep. Paul Kanjorski, authorizes the SEC and the Justice Department to bring civil or criminal enforcement actions involving transnational securities fraud and Section 929Y directing an SEC study of private securities fraud actions in transnational situations.

The legislative history of Dodd-Frank reveals that 92P is intended to rebut the recently announced US Supreme Court presumption against extraterritorial application of the federal securities laws enunciated by the Supreme Court in Morrison.

In floor comments on the day the House passed the Dodd-Frank Act, Rep. Kanjorski, said that the Act’s provisions concerning extraterritoriality of the federal securities laws are intended to rebut that presumption by clearly indicating that Congress intends extraterritorial application in cases brought by the SEC or the Justice Department. More specifically, the Chair of the Capital Markets Subcommittee explained that the purpose of the language of section 929P, which he authored, is to clarify that in actions and proceedings brought by the SEC or the Justice Department, the specified provisions of the Securities Act, the Exchange Act and the Investment Advisers Act may have extraterritorial application, and that extraterritorial application is appropriate, irrespective of whether the securities are traded on a domestic exchange or the transactions occur in the U.S., when the conduct within the United States is significant or when conduct outside the U.S. has a foreseeable substantial effect within the United States. Cong Record, June 30, 2010, p. H5237

Section 929Y provides that the SEC must study the scope of such a private right of action, including whether it should extend to all private actors or be limited to institutional investors, the implications a private right of action would have on international comity; and the economic costs and benefits of extending a private right of action for transnational securities frauds.

In addition to these mandated statutory topics, the SEC also asks comment on whether it should matter if the security was issued by a U.S. company or by a foreign company or whether the security was purchased or sold on a foreign stock exchange. Commenters are also asked to identify any cases that have been dismissed as a result of Morrison or pending cases in which a challenge based on Morrison has been filed, as well as any cases brought prior to Morrison that likely could not have been brought or maintained after Morrison.

More subjectively, the SEC wants input on the degree to which investors buying securities know whether the order will take place on a foreign stock exchange or on a non-exchange trading platform or other alternative trading system outside the US. And, more broadly, the SEC will analyze the implications on international comity and international relations of allowing private investors to pursue Rule 10b-5 securities fraud claims in cases of transnational securities fraud. Concomitantly, the Commission wants to know what remedies outside of the United States would be available to U.S. investors who purchase or sell shares on a foreign stock exchange if their securities fraud claims cannot be brought in U.S. courts.

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