Tuesday, August 09, 2011

In Comments to SEC, Foreign Governments Oppose Extraterritorial Application of US Securities Regulations and Praise Morrison Ruling

Responding to an SEC request for comments in aid of a Dodd-Frank mandated study on the extraterritorial scope of Rule 10b-5, foreign governments have endorsed the US Supreme Court’s recent Morrison decision and, citing principles of sovereignty and international comity, opposed extraterritorial application of US securities regulations. In Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), the Supreme Court ruled that the private right of action under Rule 10b-5 applies only to transactions in securities listed on domestic exchanges and domestic transactions in other securities.

Dodd-Frank did two things. First, in Section 929P, it provided for the extraterritorial application of US securities regulations to SEC and US government actions involving conduct within the US constituting significant steps in furtherance of the violation even if the securities transaction occurs outside the US and involves only foreign investors. Second, in Section 919Y, it required the SEC to conduct a study and make recommendations regarding the extraterritorial application of US securities laws to private actions.

The SEC has solicited public input regarding this issue. The SEC must report its recommendations to Congress by January 21, 2012.

In a comment letter to the SEC, the Federal Republic of Germany emphasized that the extraterritorial application of Rule 10b-5 private rights of action could potentially interfere with Germany's sovereignty and affect German governmental interests in a way that would be unacceptable. Germany deliberately shaped its legal position towards combating securities fraud in such a way that the rights other countries are compromised as little as possible. This explains why in order for German law to apply to securities fraud, there must be clear and strong evidence of links to Germany. The expansion of extraterritorial private rights of action could potentially seriously hamper Germany's proven and internationally well-balanced regulatory system.

Writing for the Federal Republic, Germany’s Consul General noted that U.S. citizens can avail themselves of effective legal protection in Germany in cases involving securities fraud. Their rights would not be limited in any way if the U.S. Government decided not to introduce extraterritorial private rights of action. The Federal Republic of Germany, just like the US, has established an effective system of securities markets supervision as well as effective legal protection of individuals by the national courts.

German regulations on international jurisdiction, private international law and on substantive law of compensation ensure that investors can enforce their rights simply and efficiently before the German courts in cases involving securities fraud displaying clear and strong links with Germany. Both German and U.S. nationals who are the victims of securities fraud are entitled to file an action. Moreover, the German law of compensation makes no distinction between nationality or the principal place of residence of the victims of securities fraud. In addition, German proceduraI law provides all plaintiffs with the same fair process guarantee as U.S. law. Importantly, under German law relating to the enforcement of court judgments, international creditors are treated exactly the same as national creditors.

Against this backdrop, in Germany's opinion, the Morrison decision and Section 929P of the Dodd Frank Act fully articulate the U.S.'s vested interest in strictly and effectively combating transnational securities fraud. At the same time, it sensibly avoids, by and large, any conflict with Germany's governmental interest in having an equally effective, independent regulation in this area. This balance would be disturbed if private rights of action were also to be introduced.

In its comment letter, the Australian Government urged the SEC to give appropriate weight to the principle of international law that each state is equally entitled to prescribe laws and to adjudicate claims regarding persons within its territory. Where jurisdiction is claimed by more than one state, any state exercising extraterritorial jurisdiction should act in a way that is compatible with the exercise of jurisdiction by other states. Overly broad assertions of extraterritorial jurisdiction may infringe upon the rights of another state to regulate matters that take place within its territory.

The Australian Government praised the Morrison transactional test as soundly based and adapted for consistent application, as well as providing certainty for both foreign firms and investors. It ensures that Section 10(b) of the Exchange Act is not applied expansively for private actions, which brings the attendant risk of interference with securities regulation and compensation rules in other countries.

The Australian Government is opposed to extending the scope of private rights of action under the antifraud provisions of the Exchange Act to cases involving the type of conduct specified in Section 929P of Dodd-Frank. Taking such a step would essentially reinstate the position as it was prior to Morrison and generate a new wave of the foreign-cubed securities class actions to which the Australian Government objects, as a matter of international law and comity. The Australian Government considers that the principle of comity should preclude the Commission from recommending a return to the position that existed prior to Morrison in relation to private actions based on an expansive application of US securities antifraud regulations.

Similarly, the French Republic said that the extraterritorial application of U.S. securities regulations to transactions that take place outside the United States is not consistent with principle of international law. In its comment letter, France noted that such application would conflict with the principle of international comity, because it would be unreasonable for the U.S. to exercise jurisdiction over securities transactions that take place on foreign markets between foreign parties.

Foreign nations have a primary interest in protecting their citizens and residents, punishing their wrongdoers, and regulating their exchanges. Application of U.S. law to foreign securities transactions would undermine those interests and conflict with the regulatory policies and legal systems of other nations. The Government of France believes that the transactional test established in Morrison is in accordance with the principles of comity and international law.

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