House Reform Legislation Provides International Reach to Federal Securities Laws

The rapid globalization of financial markets in recent years has cast into stark relief issues surrounding the international reach of US securities laws. Since the federal securities laws are silent on their international reach, federal courts have developed tests, including the conduct test, which focuses on the nature of the conduct within the US as it relates to carrying out the alleged fraudulent scheme

As part of a sweeping overhaul of US financial regulation, the House has passed legislation authorizing the SEC and the United States to bring civil and criminal law enforcement proceedings involving transnational securities frauds, which are securities frauds in which not all of the fraudulent conduct occurs within the United States and not all of the wrongdoers are located domestically. Specifically, the Wall Street Reform and Consumer Protection Act, HR 4173, would amend the Securities Act and the Exchange Act to provide that US district courts have jurisdiction over violations of the antifraud provisions that involve a transnational fraud if there is conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors.

Heeding the G-20’s advice to prevent regulatory arbitrage, the part of legislation providing for the federal regulation of derivatives calls for international harmonization by requiring foreign boards of trade to share trading data and adopt speculative position limits on contracts that trade U.S. commodities similar to U.S.-regulated exchanges. The SEC and CFTC are also directed to consult and coordinate with foreign regulators to create consistent international standards with respect to the regulation of derivatives.

The SEC and CFTC are authorized to engage in information sharing arrangements with foreign regulators consistent with the public interest and the protection of investors and counterparties. In addition, the SEC and CFTC are authorized to prohibit a foreign entity from participating in the US in any swap or security-based swap activities upon determining that the regulation of derivatives in the entity’s foreign jurisdiction undermines the stability of the US financial system.

In the part of the Act creating a new systemic risk regulator, the Financial Services Oversight Council, the legislation directs the Council to monitor international accounting developments and identify any developments that may conflict with the policies of the US or place US financial services firms or US financial markets at a competitive disadvantage. The Council must also advise Congress on financial domestic and international regulatory developments, including accounting developments.

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