SEC Releases Dodd-Frank Mandated Study on Private Right of Action under Section 10(b) of the Exchange Act | Practical Law

SEC Releases Dodd-Frank Mandated Study on Private Right of Action under Section 10(b) of the Exchange Act | Practical Law

The SEC released a study mandated by Section 929Y of the Dodd-Frank Act on whether and to what extent the private right of action under the Section 10(b) of the Exchange Act should be extended extraterritorially. Section 929Y was part of Congress' response to the US Supreme Court's decision in Morrison v. National Australia Bank.

SEC Releases Dodd-Frank Mandated Study on Private Right of Action under Section 10(b) of the Exchange Act

by PLC Corporate & Securities
Published on 12 Apr 2012 • USA (National/Federal)
The SEC released a study mandated by Section 929Y of the Dodd-Frank Act on whether and to what extent the private right of action under the Section 10(b) of the Exchange Act should be extended extraterritorially. Section 929Y was part of Congress' response to the US Supreme Court's decision in Morrison v. National Australia Bank.
On April 11, 2012, the SEC released a study mandated by Section 929Y of Title IX of the Dodd-Frank Act. The study examines whether and to what extent the private right of action under Section 10(b) of the Exchange Act should apply extraterritorially. Dodd-Frank mandated this study as part of its response to the US Supreme Court's June 2010 holding in Morrison v. National Australia Bank.
Morrison held that Section 10(b) and Rule 10b-5 of the Exchange Act do not have extraterritorial application and therefore only apply securities fraud in connection with the purchase or sale of a security listed on a US stock exchange, and the purchase and sale of any other security in the US (for a further discussion, see Practice Note, In Dispute: Morrison/National Australia Bank).
The holding ran counter to precedent from the Second Circuit and other circuit courts, which maintained that Section 10(b) and Rule 10b-5 pertained to securities fraud involving significant conduct in the US or substantial foreseeable effects occurring to investors or markets in the US. This standard is known as the "conduct and effects" test.
In response to Morrison, Congress passed Section 929P(b)(2) of the Dodd-Frank Act, explicitly stating that federal courts have jurisdiction over Section 10(b) action brought by the SEC and Department of Justice (DOJ) that involve conduct:
  • In the US that constitutes significant steps in furtherance of the violation (even if the securities transaction occurs abroad or involves only foreign investors).
  • Outside the US that has substantial effect in the US.
Congress also mandated the Section 929Y study to determine whether to similarly extend the corresponding private right of action extraterritorially by applying the conduct and effects test to it.
The study does not provide a definitive recommendation, but rather provides options for consideration by Congress. These included:
  • Enacting a similar conduct and effects test for Section 10(b) private actions as Congress had created for the SEC and DOJ enforcement actions.
  • Narrowing the conduct and effects test, as argued by the SEC in the Morrison case, where the plaintiff would have to show that the injury resulted directly from conduct by the foreign issuer in the US.
  • Enacting a conduct and effects test for US resident investors only to limit potential conflict between US and foreign law while still protecting US investors and the US market.
  • Supplementing the transactional test set out in the Morrison decision to allow US investors to bring a Section 10(b) private action:
    • if the securities bought on the foreign exchange are of the same class of securities that are registered in the US;
    • against securities intermediaries that engage in fraud while purchasing or selling foreign securities to US investors; and
    • if the US investor can show that they were fraudulently induced to engage in the transaction while in the US, regardless of where the transaction actually took place.
  • Clarifying that under the transaction test, a transaction takes place in the US if either the party to the sale or purchase of securities were in the US at the time the offer was made.
  • Taking no action at this time.
SEC Commissioner Luis Aguilar released a statement dissenting from the study. Commissioner Aguilar argues that the study is incomplete and does not satisfy the request from Congress. Commissioner Aguilar believes that the study should have recommended a standard for private rights of action that is identical to the Dodd-Frank Section 929P standard for the SEC and DOJ actions.