Another great article in the Harvard law School Forum of Corporate Governance and Financial Regulation. Contributor George Conway’s post, Extraterritoriality After Dodd-Frank, explains why now is a great time for “interested parties—such as the many amici curiae, foreign governments, who so emphatically urged the Supreme Court to reject extraterritoriality in National Australia—to make their views known once again, this time to the SEC.”
As we wrote in an earlier post, the Court in Morrison v. National Australia Bank Ltd., No. 08-1191 (U.S. June 24, 2010), held that Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 do not apply to securities transactions that take place outside the United States. The SEC filed its own amicus curiae brief in that case and it’s worth a read.
The Dodd-Frank Provisions
Just when we thought the debate on securities extraterritoriality was winding down, a new law passed by Congress revived the issue. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama earlier this month, contains two provisions, Sections 929P(b) and 929Y, that concern the territorial scope of the federal securities laws. Significantly, neither provision overturns National Australia Bank, and neither should extend the substantive reach of the securities laws extraterritorially at all.
It has been widely assumed that Section 929P(b) would give extraterritorial effect to proceedings brought by the SEC and the Department of Justice. This assumption was not misplaced.
Just take a look at the Congressional Record from June 30, 2010 and the words of the Bill’s primary drafter, Congressman Paul Kanjorski:
Thus, the purpose of the language in Section 929P(b) is to make clear that in actions and proceedings brought by the SEC or the Justice Department, … provisions of the Securities Act, the Exchange Act, and the Investment Advisers Act may have extraterritorial application.
However, if you look at the wording of Section 929P(b), there is no extraterritorial effect. The provision specifically refers only to the “jurisdiction” of the “district courts of the United States” to hear cases involving extraterritorial elements. It is clear from the language that the provision does not give extraterritorial effect to any substantive regulation.
As Conway points out, that is a critical and likely fatal, omission. But that may not be the end of the argument. Given Congressman Kanjorski’s June 30, 2010 statements on the floor of the House, some judges may be tempted to find substantive extraterritorial reach in Section 929P(b). Congress may even choose to amend the Bill to give it the intended extraterritorial effect.
Section 929Y addresses private litigation, but does not change the extraterritoriality standards set out in National Australia. The new provision merely directs the SEC to “solicit public comment” and to “conduct a study to determine the extent to which private rights of action” under the Exchange Act should extend extraterritorially. The SEC must then report the results of its study to Congress within 18 months.
As Conway commented, the prospect of this study “scares a…number of foreign capitals,” which “fear seeing the United States become” a global “financial policeman” through class-action lawsuits.
Extraterritoriality: Still a Reality?
While no one can know what the results of the SEC study will be or whether Congress will seriously consider changing the law as it now stands in regards to the extraterritorial reach of securities laws, anyone with any interest in the matter should start bombarding the SEC with whitepapers, green papers or whatever color of paper will get the agency’s attention.
With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the debate over the extraterritorial reach of U.S. securities laws is far from over.
What do you think?