On April 11, 2012, as required by the Dodd-Frank Act, the SEC released its study of cross-border private securities litigation, entitled “Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934” (here). This Commission study considers possible alternative approaches to the question of cross-border private securities litigation. It also provides a useful and detailed over view of the ways in which the lower courts have been approaching these issues in the wake of the U.S. Supreme Court’s decision in the Morrison v. National Australia Bank case.


By way of background, the Supreme Court in the Morrison case found that the ’34 Act itself did not expressly apply extraterritorially but rather applied only to transactions on domestic exchanges and domestic transactions in other securities.  Shortly thereafter, in connection with its passage of the Dodd-Frank Act, Congress supplied an extraterritorial reach to the Exchange Act in connection with actions brought by the SEC and the DoJ. Section 929P(b)(2) provide extraterritorial effect for these types actions when certain defined types of conduct take place in the United States or when it takes place outside the United States with a foreseeable effect in the U.S.


Section 929Y of the Dodd Frank Act directed the SEC to solicit public comment and then conduct a study to consider whether there should be an extension of a private right of action on the same basis as for the regulators, or in some other manner. This same statutory provision required the SEC to consider the potential implications on international comity and the potential economic costs and benefits of extending the cross-border scope of private actions.


The SEC’s April 11 report, weighing in at 106 pages including indexes and appendices, represents the Commission’s response to this statutory requirement. The report carefully lays out the history of Morrison as well as the lower court case law that has developed since the Supreme Court released its opinion. The report also carefully catalogues all of the various comments the SEC received with respect to the statutory mandate to produce this study.


The report is detailed, interesting and informative. Nevertheless, the SEC could have saved itself a lot of effort (not to mention a lot of paper) if it had just bypassed all of the intervening steps and admitted that  its position has not changed since it filed, in collaboration with the Solicitor General, its amicus brief in connection with the Morrison case, when it was before the U.S. Supreme Court.


After all of the preliminary review, the Commission lays out the available alternatives. The Commisoin does not take a position on the question of whether or not Congress shoudl overturn Morrison. Indeed, the report specifically states that an option woudl be for Congress "to take no action." 


However, in reviewing the alternatives that Congress might take, it leads with the position it advocated before the Supreme Court, which is to preserve some form of the “conduct and effects test” that prevailed prior to the Supreme Court’s decision in Morrison, but with the test narrowed so that “a private plaintiff seeking to base a Section 10(b) private action on it must demonstrate that the plaintiff’s injury resulted directly from conduct within the United States.”  The report notes that the direct injury requirement “could serve as a filter to exclude claims that have a closer connection to another jurisdiction.”


The Commission noted that this was the position it took with the SG before the Supreme Court, adding that “the Commission has not altered its view in support of this standard.”  Indeed, in the study, the SEC takes the opportunity to reiterate in the report the arguments that it raised in support of this position before the U.S. Supreme Court.


The report does, however, note that even the narrow direct injury test could nonetheless pose challenges to international comity when litigants are able to seek and obtain remedies that would not be available in their own country. The direct injury test could require a fact-intensive inquiry that could result in burdensome costs both for U.S. courts and foreign corporations.


The report also suggest, in addition to some form of the conduct and effects test, four options to “supplement and clarify the transactional test.” First, the report suggests the possibility that investors would be permitted to pursue a Section 10(b) claim in connection with the purchase or sale of any securities that are of the same class of securities registered in the United States, regardless of the location of the transaction. A second non-exclusive option is to allow private rights of action against broker-dealers and other intermediaries that engage in securities fraud while purchasing or selling securities overseas for U.S. investors or otherwise providing services to U.S. investors.


A third option is to permit a private right of action if investors can show they were fraudulently induced while In the U.S. to enter a transaction, regardless of where the transaction took place. Fourth, it could be clarified that an off-exchange transaction takes place in the U.S. if either party made or accepted the offer to purchase or sell the security while in the U.S.


Congress did ask for this report. But it is really hard to know what if anything Congress is likely to do with it. There is a sense in reading this report that the SEC is energetically fighting the last war, right up to and including repeating the arguments that the Commission made to  (and that were rejected by) the U.S. Supreme Court. It is probably important to keep in mind that Congress asked for this report before the extensive body of case law was built up in the lower courts interpreting the Morrison decision. But now that the case law has developed, you do have to wonder whether Congress is really prepared to set all of that aside to start tinkering on its own with these issues.


To be sure, Congress has shown a remarkable willingness to tinker with the securities laws. Congress has been willing to pass the Sarbanes-Oxley Act, the Dodd-Frank Act, and the JOBS Act, all just in the last ten years, and before that there was the PSLRA, SLUSA, and even CAFA. So I guess we should never assume that Congress won’t take up these issues. However, I am guessing that this will not be a high priority item. Especially in the wake of the JOBS Act, I just don’t see Congress taking any actions that would likely increase the amount of private securities litigation.


All of that said, I do think there is one issue we could all use a little help with; that is, when the Supreme Court articulated the transaction test, the Court specified that the U.S. securities laws apply  not only to transactions on domestic exchanges but also  to “domestic transactions in other securities.” The Supreme Court did not explain what it mean in this so-called second prong of the transactions test, but it has given the lower court fits and it has the potential to cause a lot of mischief. The lower courts are trying to piece together a coherent interpretation of the second prong, but until there is either a uniform lower court consensus on this standard or where get further guidance from the U.S. Supreme Court, lower courts are going to struggle with this. While that is probably OK in the long run, it wouldn’t be a bad thing if Congress could clarify when the U.S. Supreme Court applies to non-exchange transactions.


One final note, on April 11, 2012, SEC Commissioner Luis Aguilar filed a dissenting statement regarding the SEC’s report, in which he states among other things " I write to convey my strong disappointment that the study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that resulted and that will continue to result due to Morrison v. National Australia Bank, Ltd." Aguilar advocates the enactment for private litigants of a standard that is identical to that for the SEC and the DoJ in Section 929P of the Dodd Frank Act.