The Dodd-Frank Extraterritorial Jurisdiction Provision

The following post comes to us from Richard W. Painter, the S. Walter Richey Professor of Corporate Law at the University of Minnesota. This post is part of a series discussing articles appearing in the inaugural issue of the Harvard Business Law Review, which is published in partnership with the Harvard Law School Program on Corporate Governance.

In The Dodd-Frank Extraterritorial Jurisdiction Provision: Was It Effective, Needed or Sufficient?, an article published in the inaugural issue of the Harvard Business Law Review, I discuss the Dodd-Frank Act’s cursory treatment of a critically important issue in global capital markets law: the extraterritorial application of Section 10(b) of the Exchange Act.

In Morrison v. National Australia Bank, the U.S. Supreme Court ruled in June 2010 that securities fraud suits could not be brought under Section 10(b) of the Exchange Act against foreign defendants by foreign plaintiffs who bought their securities outside the United States (so called “f-cubed” securities litigation). The Court held that, while federal courts have jurisdiction over all of these suits, Section 10(b)’s substantive prohibition reaches only fraud 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.” Congress responded to Morrison with Section 929P of the Dodd-Frank Act, which gives federal courts jurisdiction over some cases involving foreign securities transactions if the suits are brought by the SEC or the Department of Justice (DOJ). Private suits remain subject to Morrison, although Congress ordered an SEC study of whether changes should be made there as well.

This article discusses several problems with the Dodd-Frank Act’s approach to extraterritoriality, including poor draftsmanship in Section 929P, lack of clarity as to its scope, and most important a failure to clarify when a derivative transaction such as a security based swap is inside the United States for purposes of Morrison. This last issue is critically important when private plaintiffs bring lawsuits in United States courts over derivatives as did several hedge funds in a case against the German car manufacturer Porsche that is currently pending in the Second Circuit.

First, the article addresses Section 929P. The article discusses alternative explanations for why Congress used extraterritorial jurisdiction language in Section 929P instead of directly addressing the reach of Section 10(b) on the merits, and whether as a result Section 929P does nothing more than confer jurisdiction on federal courts that the Morrison opinion already recognized courts have over all Section 10(b) cases. The article also discusses whether Section 929P reinstates for SEC and DOJ suits some of the case law in the courts of appeals that was overturned by Morrison, and if so how that case law is to be applied (the circuits had different versions of the so called “conduct and effects tests” which measured the extent the alleged conduct either occurred in the United States or had an effect here even though the transaction occurred somewhere else). The article also discusses whether Section 929P is retroactive, and how Section 929P likely will be used by the SEC and DOJ in insider trading and other cases. Finally, this article discusses whether Section 929P was necessary given the SEC’s already expansive enforcement authority under Section 10(b).

Turning to broader post-Morrison concerns with private rights of action, the article argues that Congress needed to give firm guidance on where a transaction shall be deemed to take place after the Supreme Court decided that the location of a transaction is the single most important factor in determining whether Section 10(b) applies. The Morrison test is relatively easy to apply for exchange traded securities, but not for security based swap agreements and other derivatives where the parties may be in two different locations and the transaction may clear in a third. The article discusses specific statutory language that could have resolved this issue. The article also points out that the SEC may be able to add some clarity on this issue through rule making that limits the scope of Rule 10b-5.

The article is available for download on SSRN here and on the Harvard Business Law Review website here.

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