[Federal Register Volume 75, Number 209 (Friday, October 29, 2010)]
[Notices]
[Pages 66822-66824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27357]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63174; File No. 4-617]
Study on Extraterritorial Private Rights of Action
AGENCY: Securities and Exchange Commission.
ACTION: Request for Comments.
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SUMMARY: Section 929Y of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') directs the Securities and
Exchange Commission (the ``Commission'') to solicit public comment and
thereafter conduct a study to determine the extent to which private
rights of action under the antifraud provisions of the Securities
Exchange Act of 1934 (the ``Exchange Act'') should be extended to cover
transnational securities fraud. The Commission is soliciting comment on
this question and on related questions.
DATES: The Commission will accept comments regarding issues related to
the study on or before February 18, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
Send an e-mail to [email protected]. Please include
File Number 4-617 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number 4-617. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov). Comments are also available for
Web site viewing and printing in the Commission's Public Reference
Room, 100 F Street, NE., Washington, DC 20549, on official business
days between the hours of 10 a.m. and 3 p.m. All comments received will
be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: John W. Avery, Office of the General
Counsel, at (202) 551-5107, or Robert Peterson, Office of International
Affairs, at (202) 551-6696, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
In a recent decision in Morrison v. National Australia Bank, 130 S.
Ct. 2869 (2010), the Supreme Court significantly limited the
extraterritorial scope of Section 10(b) of the Exchange Act. In the
Dodd-Frank Act, Congress restored the ability of the Commission and the
United States to bring actions under Section 10(b) in cases involving
transnational securities fraud. Congress further directed the
Commission to conduct a study to determine whether, and to what extent,
private plaintiffs should also be able to bring such actions.
Consideration of the Morrison decision and of extending the
extraterritorial scope of the antifraud provisions of the Exchange Act
to private actions raises important questions touching on the
Commission's mandate to protect investors, to maintain fair, orderly
and efficient markets, and to facilitate capital formation. It also
raises issues regarding international comity and the respect that
governments afford each other regarding their decisions on regulation
of their home markets. Exploration of these issues will also help
inform how the Commission can best protect investors and the integrity
of U.S. markets in an environment in which a significant volume of
securities transactions are conducted across borders.
II. Background
In Morrison, the Supreme Court considered ``whether Sec. 10(b) of
the Securities Exchange Act of 1934 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 Exchange Act had been silent as to the transnational reach of
Section 10(b). In a decision issued on June 24, 2010, the
[[Page 66823]]
Supreme Court said: ``When a statute gives no clear indication of an
extraterritorial application, it has none.'' Morrison, 130 S. Ct. at
2878. ``[T]here is no affirmative indication in the Exchange Act that
Sec. 10(b) applies extraterritorially,'' the Court found, ``and we
therefore conclude that it does not.'' Id. at 2883. Thus, the Court
concluded, ``it is in our view only transactions in securities listed
on domestic exchanges, and domestic transactions in other securities,
to which Sec. 10(b) applies.'' Id. at 2884 (footnote omitted). The
Court summarized the test as follows:
Section 10(b) reaches the use of a manipulative or deceptive
device or contrivance only in connection with the purchase or sale
of a security listed on an American stock exchange, and the purchase
or sale of any other security in the United States.
Id. at 2888.
The Morrison decision rejected long-standing precedents in most
Federal courts of appeals that applied some variation or combination of
an ``effects'' test and a ``conduct'' test to determine the
extraterritorial reach of Section 10(b) of the Exchange Act. See, e.g.,
Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir. 1991); Itoba Ltd v. LEP
Group PLC, 54 F.3d 118, 121-22 (2d Cir. 1995). The effects test
centered its inquiry on whether domestic investors or markets were
affected as a result of actions occurring outside the United States.
Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London,
147 F.3d 118, 125 (2d Cir. 1998). See also Psimenos v. E.F. Hutton &
Co., 722 F.2d 1041, 1045 (2d Cir. 1983). By contrast, the conduct test
focused ``on the nature of [the] conduct within the United States as it
relates to carrying out the alleged fraudulent scheme.'' Psimenos, 722
F.2d at 1045.
On July 21, 2010, less than a month after the decision in Morrison,
President Obama signed the Dodd-Frank Act. Section 929P of the Dodd-
Frank Act amended the Exchange Act to provide that the United States
district courts shall have jurisdiction over an action brought or
instituted by the Commission or the United States alleging a violation
of the antifraud provisions of the Exchange Act involving:
(1) 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; or
(2) Conduct occurring outside the United States that has a
foreseeable substantial effect within the United States.\1\
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\1\ With respect to U.S. Government and Commission actions, the
Dodd-Frank Act largely codified the long-standing appellate court
interpretation of the law that had existed prior to the Supreme
Court's decision in Morrison by setting forth an expansive conducts
and effects test, and providing that the inquiry is one of subject
matter jurisdiction. The Dodd-Frank Act made similar changes to the
Securities Act of 1933 and the Investment Advisers Act of 1940.
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Under section 929Y of the Dodd-Frank Act, the Commission is
required to conduct a study to determine whether private rights of
action should be similarly extended. The report of the study must be
submitted and recommendations made to the Committee on Banking,
Housing, and Urban Affairs of the Senate and the Committee on Financial
Services of the House not later than January 21, 2012.
III. Request for Comments
Section 929Y(a) of the Dodd-Frank Act directs the Commission to
solicit public comment on whether the scope of the antifraud provisions
of the Exchange Act in cases of transnational securities fraud should
be extended to private rights of action to the same extent as that
provided to the Commission by Section 929P, or to some other extent.\2\
Section 929Y(b) directs that the study shall consider and analyze,
among other things--
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\2\ Section 929Y(a) of the Dodd-Frank Act provides that the
Commission ``shall solicit public comment and thereafter conduct a
study to determine the extent to which private rights of action
under the antifraud provisions of the Securities Exchange Act of
1934 (15 U.S.C. 78u-4) should be extended to cover: Conduct within
the United States that constitutes a significant step in the
furtherance of the violation, even if the securities transaction
occurs outside the United States and involves only foreign
investors; and conduct occurring outside the United States that has
a foreseeable substantial effect within the United States.''
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(1) The scope of such a private right of action, including whether
it should extend to all private actors or whether it should be more
limited to extend just to institutional investors or otherwise;
(2) What implications such a private right of action would have on
international comity;
(3) The economic costs and benefits of extending a private right of
action for transnational securities frauds; and
(4) Whether a narrower extraterritorial standard should be adopted.
Accordingly, we request comment on these issues and questions. We also
encourage commenters to:
Propose the circumstances, if any, in which a private
plaintiff should be allowed to pursue claims under the antifraud
provisions of the Exchange Act with respect to a particular security
where the plaintiff has purchased or sold the security outside the
United States. Does it make a difference whether the security was
issued by a U.S. company or by a non-U.S. company? Does it make a
difference whether the security was purchased or sold on a foreign
stock exchange or whether it was purchased or sold on a non-exchange
trading platform or other alternative trading system outside of the
United States? Does it make a difference whether the company's
securities are traded exclusively outside of the United States?
If you disagree with extending the test set forth in
Section 929P to private plaintiffs, what other test would you propose?
Should there be an effects test, a conduct test, a
combination of the two, or another test?
Address whether any such test should be limited only to
certain types of private plaintiffs, such as United States citizens or
residents, or such as institutional investors. How would such investors
be defined?
Identify any cases that have been dismissed as a result of
Morrison or pending cases in which a challenge based on Morrison has
been filed. Describe the facts of the case.
Identify any cases brought prior to Morrison that likely
could not have been brought or maintained after Morrison. Describe the
facts of the case.
In Morrison, the Supreme Court held that in the case of
securities that are not listed on an American stock exchange, Section
10(b) only reaches the use of a manipulative or deceptive device or
contrivance in connection with the purchase or sale of a security in
the United States. Address the criteria for determining where a
purchase or sale can be said to take place in various transnational
securities transactions. Discuss the degree to which investors know,
when they place a securities purchase or sale order, whether the order
will take place on a foreign stock exchange or on a non-exchange
trading platform or other alternative trading system outside of the
United States.
What would be the implications on international comity and
international relations of allowing private plaintiffs to pursue claims
under the antifraud provisions of the Exchange Act in cases of
transnational securities fraud? Identify any studies that purport to
show the effect that the extraterritorial application of domestic laws
have on international comity or international relations.
Discuss the cost and benefits of allowing private
plaintiffs to pursue claims under the antifraud provisions of
[[Page 66824]]
the Exchange Act in cases of transnational securities fraud, including
the costs and benefits to domestic and international financial systems
and securities markets. Identify any studies that have been conducted
that purport to show the positive or negative implications that such a
private right of action would have.
What remedies outside of the United States would be
available to U.S. investors who purchase or sell shares on a foreign
stock exchange, or on a non-exchange trading platform or other
alternative trading system outside of the United States, if their
securities fraud claims cannot be brought in U.S. courts?
What impact would the extraterritorial application of the
private right of action have on the protection of investors? On the
maintenance of fair, orderly and efficient markets in the United
States? On the facilitation of capital formation?
Address any other considerations commenters would like to
comment on to assist the Commission in determining whether to recommend
changes to the extraterritorial scope of the antifraud private rights
of action under the Exchange Act.
By the Commission.
Dated: October 25, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-27357 Filed 10-28-10; 8:45 am]
BILLING CODE 8011-01-P