One of the single most important developments in private securities litigation in 2010 for foreign issuers, and US issuers that raise capital in foreign markets, was undoubtedly the Supreme Court's decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010) (See Legal update, Congress acts quickly to curtail the impact of the Supreme Court's recent decision barring the extra-territorial application of US securities laws.) In that case, the Supreme Court held that the anti-fraud provisions of the US securities laws, like Section 10(b) of the Securities Exchange Act of 1934, apply only to:

Consequently, investors who purchased securities on foreign exchanges may no longer seek damages in US courts under the US securities laws.

Since June 2010, when the Supreme Court issued its opinion, plaintiffs' attorneys have struggled to re-interpret Morrison to create a loophole that allows investors in foreign securities to assert fraud claims under US securities laws in spite of the Supreme Court's bright-line test. To date, all of the courts that have ruled on these arguments thus far have rejected them. (See Legal update, Plaintiff's attempts to re-write Morrison to apply Section 10(b) to foreign securities encounter resistance from US judges.)

In 2011, it is likely that plaintiffs' attorneys will continue to seek ways around Morrison. In the latest decision to interpret Morrison, the Court dismissed Section 10(b) claims based on swap agreements referencing foreign-traded securities that were executed in the United States and governed by New York law. (See Elliot Associates v. Porsche Automobil Holding SE, Civ. Action No. 10-4155, slip. op. at 8-13 (Dec. 30, 2010)), (Elliot Associates 2010). The Court was concerned not with the place where the parties entered into the swaps or the law they chose to govern their agreement, but with the underlying nature of the transaction at issue. Because it found that the swaps were the "functional equivalent" of trading in the underlying securities on a foreign exchange, the Court determined that they were beyond the reach of Section 10(b) (Elliot Associates 2010).

But other efforts to circumvent Morrison are expected, and in some cases, already underway. First, investors likely will seek to bring claims under foreign law in US courts. Plaintiffs will also attempt to assert claims in state court under state law. Finally, plaintiffs in some instances will abandon US courts altogether and asset their claims in foreign courts under foreign law. For example; on 10 January 2011, two US plaintiffs firms issued a press release announcing that they had filed a civil action in Utrecht Civil Court on behalf of a specially formed foundation comprised of investors from the US, Europe and elsewhere in connection with the collapse of Belgium-based financial services company, Fortis NV. (See PR Newswire: International investors join forces, 10 January 2011) (Newswire, 10 Jan 2011) The firms touted the foundation's action as " an important new avenue for pursuing international securities claims in the wake of last year's US Supreme Court decision in Morrison and "a valuable template for investor recoveries outside the US." (Newswire, 10 Jan 2011) These investors had previously brought a securities fraud class action in US court, but their claims were dismissed because the Court found that they had no meaningful connection to the US.

In the coming year, the Supreme Court has agreed to review three additional cases, each of which concerns important questions whose resolution promises to have a substantial impact on the landscape of private securities litigation:

2010 was a transformative year for the Securities and Exchange Commission (SEC). At the beginning of the year, the SEC announced a series of reforms designed to substantially strengthen its ability to police the markets. The Enforcement Division was also re-tooled when it was given new mechanisms intended to afford it the type of leverage previously reserved for criminal law enforcement agencies, such as the ability to enter into cooperation, deferred prosecution and non-prosecution agreements. (Legal update, The 'new' SEC takes an aggressive stand on insider trading) According to the Director of Enforcement, the newly-minted cooperation initiative was a "potential game-changer" for the agency. Reinvigorated, the SEC also adopted an aggressive posture towards insider trading cases, many of which targeted foreign nationals and conduct abroad. (Legal update, The 'new' SEC takes an aggressive stand on insider trading) However, at that time, there was a serious question as to whether the SEC would have the resources necessary to effectively prosecute its new campaign.

Midway through last year, Congress came to the aid of the agency. As part of the Dodd-Frank Act, Congress enacted a series of laws designed to give incentives and protections to whistleblowers who voluntarily provide original information to the SEC, expand the reach of the agency's authority to prosecute claims against aiders and abettors, and authorise the SEC to seek more stringent penalties against all defendants in administrative proceedings. (Legal update, Congress empowers the 'new' Securities and Exchange Commission)

By the end of the year, the SEC had taken several significant steps towards meeting its enforcement objectives:

In 2011, the SEC will likely continue to use its new cooperation tools and coordinate with other domestic and foreign regulators in order to maximize its ability to police the US securities markets.

The discrimination rules for self-insured plans prohibit discrimination in favour of highly compensated individuals with respect to eligibility and benefits. (Generally, a highly compensated individual is either a 10% shareholder or one of the five highest paid officers or highest paid 25% of all employees.) Whether a plan discriminates as to eligibility is determined either by:

Whether a plan discriminates as to benefits depends on whether the plan provides benefits to highly compensated individuals that it does not provide to all other participants. To comply with the benefits test under the current rule, the plan document must not permit discrimination in benefits in favour of highly compensated individuals and the plan must not actually discriminate in favour of such individuals in operation. While the regulations implementing the rule for self-insured plans do not define the term "benefits", they suggest that the term is to be broadly construed. In the case of both the eligibility and benefits tests, the regulations for self-insured plans raise a number of questions and issues concerning the application of the discrimination rule that are yet unresolved.

If a self-insured plan does not satisfy the discrimination requirements, the value of the discriminatory benefit is taxable to the highly compensated individuals. In contrast, under the Act, if an insured plan does not comply with the comparable discrimination rule, the sponsoring employer may be subject to monetary penalties of up to US$100 per day per employee discriminated against (capped at the lesser of US$500,000 and the amount paid for the plan by the employer in the preceding year). In addition, under the Act, employees may also have a private right of action to enforce the rule. It would appear that a participant who is not a highly compensated individual in an insured plan would have the right to file a lawsuit under the US Employee Retirement Income Security Act (ERISA) to compel the sponsoring employer to provide non-discriminatory benefits.

The Act potentially excludes two types of medical arrangements from the new rule, although it is likely that the scope of these exceptions will be clarified by future regulation:

Where one of the limited exceptions under the Act is not available for an insured plan, the sponsoring employer will need to consider if the plan complies with the new discrimination requirements and, if it does not, how to achieve compliance with the Act's requirements. As potential discrimination issues frequently arise in connection with employment agreements or other executive severance arrangements, a first step to identifying potentially non-compliant arrangements is to review executive severance arrangements that provide for post-employment medical benefits to highly compensated individuals. Where benefits are found in an employment agreement or severance agreement with a highly compensated individual, the nature of the agreement may require the individual’s consent to any change. For this reason, even in advance of the effective date of the new rule, employers should give special attention to new arrangements or renewals of existing arrangements to ensure that they do not introduce or preserve discriminatory benefits that may require correction at a later date.

In addition, requirements affecting the taxation of deferred compensation plans under the US Internal Revenue Code may, in certain instances, limit an employer's ability to amend existing arrangements. In particular, where an employer intends to replace a potentially discriminatory benefit with one that complies with the discrimination rules, the employer will need to consider if the replacement is an acceleration or deferral of the payment of deferred compensation that would not be permitted under the Code.

For more information about the discrimination rule and deferred compensation requirements under the Code, please see our memorandum entitled Shearman & Sterling: Post-employment medical benefits for executives after health care reform.

The so-called Volcker Rule provisions of the Act instruct the US federal financial agencies to prohibit US banking institutions and non-US banks with US banking operations from:

In addition, the Volcker Rule places a cap, of 10% of financial industry "liabilities", on M&A related growth for banking institutions and large financial groups operating in the United States.

The US federal financial agencies (including the OCC, FDIC and Federal Reserve) are tasked with establishing parameters for the several important exceptions to the Volcker Rule prohibitions and the Federal Reserve is charged with implementing the Volcker Rule compliance timetable within the boundaries set by the Act. The outcome of rulemakings will have an enormous impact on matters such as the extent to which non-US banks, whether or not operating in the United States, may have a relative advantage over US banking organisations in terms of trading and funds-related profits.

Section 171 of the Act (the "Collins Amendment") tightens minimum leverage and risk-based capital requirements for US bank holding companies (including those controlled by non-US parent companies) and certain large US banks. The Collins Amendment also effectively eliminates "Tier 1" regulatory capital treatment for trust preferred securities issued by US bank holding companies.

On 15 December 2010, the OCC, FDIC and Federal Reserve jointly proposed a rule that would implement the Collins Amendment's requirement that the federal banking agencies establish leverage and risk-based capital requirements for large financial groups that are quantitatively no less than those that currently apply to insured US depository institutions, regardless of their size. The proposed rule asks for industry feedback (due on 28 February 2011) on questions including:

Under Title I of the Act, the Federal Reserve is responsible for adopting stricter prudential standards for US bank holding companies that hold US$50 billion or more in consolidated assets (for example; stricter than those standards that apply to smaller institutions). In addition, the Federal Reserve and the FDIC are required to issue joint rules requiring these institutions to periodically submit plans for their rapid and orderly resolution (resolution plans or living wills). The Federal Reserve is authorised to apply several of these stricter standards/rules to non-US banking groups operating in the United States with greater than US$50 billion in consolidated assets.

Title II of the Act authorises the FDIC to write regulations and policies to implement its resolution authority (referred to as the "orderly liquidation authority") over failing financial companies that could pose a significant threat to US financial stability (for example; systemically important US bank holding companies). On 19 October 2010, the FDIC proposed a rule to clarify the rights of creditors of institutions subject to the orderly liquidation authority.

For a detailed discussion and analysis of these as well as other areas addressed by Dodd-Frank, please see our memorandum entitled: Landmark financial regulatory reform legislation passed by US Congress.

Shearman & Sterling LLP has also published separate client alerts regarding the Volcker Rule. Please see the latest memorandum entitled: Financial regulatory reform update: The Volcker Rule continues to garner outsized attention in the wake of passage of financial reform legislation.