
[Federal Register: October 29, 2010 (Volume 75, Number 209)]
[Notices]               
[Page 66822-66824]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc10-143]                         

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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 rule-comments@sec.gov. 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

