SEC Seeks Comment on Study of Extraterritorial Reach of Federal Securities Laws

The SEC has issued a release seeking comments on the extent to which private rights of action under the antifraud provisions of the 1934 Act should be extended to transnational securities fraud. The comments will help assist the SEC in the preparation of a study required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Comments should be submitted by February 18, 2011. The SEC must submit its study, along with any recommendations, to the Senate Banking Committee and the House Financial Services Committee by January 21, 2012.

The genesis of the study is the Supreme Court decision in Morrison v. National Australia Bank, (2010 CCH Dec. ¶95,776), in which the Court significantly limited the extraterritorial scope of Exchange Act Section 10(b). The Dodd-Frank Act restored the SEC’s ability to bring actions under Section 10(b) in cases involving transnational fraud. Congress directed the SEC to conduct the study to determine whether, and to what extent, private plaintiffs should be able to bring such actions.

In Morrison, the Supreme Court considered whether Section 10(b) provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. The text of the 1934 Act was silent with respect to the transnational reach of Section 10(b). The Court said that when a statute gives no clear indication of an extraterritorial application, it has none.

The decision rejected long-standing precedents in most federal courts of appeals that applied some variation of an “effects” test and a “conduct” test to determine the extraterritorial reach of Section 10(b), according to the release. The effects test focused on whether domestic investors or markets were affected as a result of actions occurring outside the U.S. The conduct test focused on the nature of the conduct within the U.S. as it related to carrying out an alleged fraudulent scheme.

The Dodd-Frank Act amended the 1934 Act to provide that U.S. district courts will have jurisdiction over an action brought or instituted by the SEC or the U.S. alleging a violation of the antifraud provisions involving conduct within the U.S. that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the U.S. and involves only foreign investors; or conduct occurring outside the U.S. that has a foreseeable substantial effect within the U.S. The Dodd-Frank Act made similar changes to the 1933 and Investment Advisers Acts, which largely codify the long-standing appellate court interpretation of the law that existed prior to the Morrison decision.

The SEC is asking commenters to consider the scope of a private right of action, including whether it should extend to all private actors or whether it should be limited to institutional investors; the implications of a private right of action on international comity; the economic costs and benefits of extending a private right of action for transnational securities frauds; and whether a narrower extraterritorial standard should be adopted.

□ Release No. 34-63174 (SEC) will be published in a forthcoming Report.