Friday, July 09, 2010

Dodd-Frank Provision Rebuts Supreme Court Presumption Against Extraterritorial Application of the Federal Securities Laws

According to Rep. Paul Kanjorski, section 929P of the Dodd-Frank Act authorizing the SEC and the Justice Department to bring civil or criminal enforcement actions involving transnational securities fraud is intended to rebut the recently announced US Supreme Court presumption against extraterritorial application of the federal securities laws. In Morrison v. National Australia Bank, Dkt. No. 08-1191, the Court ruled, in a private securities fraud action, that section 10(b) of the Exchange Act applies only to transactions in securities listed on United States exchanges and transactions in other securities that occur in the United States. In this case, the Court also said that it was applying a presumption against extraterritoriality. Cong Record, June 30, 2010, p. H5237.

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

Rep. Kanjorski explained that transnational securities frauds are those in which not all of the fraudulent conduct occurs within the United States or not all of the wrongdoers are located domestically. The Dodd-Frank Act creates a single national standard for protecting investors affected by transnational frauds by codifying the authority to bring proceedings under both the conduct and the effects tests developed by the federal courts regardless of the jurisdiction of the proceedings. Under the effects test, courts inquire whether the wrongful conduct had a substantial effect in the U.S. or upon U.S. citizens, while the conduct test asks whether the wrongful conduct occurred in the United States. Cong Record, June 30, 2010, p. H5237.