Annual Survey of International & Comparative Law


The U.S. Supreme Court in Morrison held that Section 10(b) of the Exchange Act did not apply extraterritorially, lacking a clear indication by Congress of the intent to do so. In reaching this conclusion, it clarified that the reach of Section 10(b) is a merits question, not a question of subject matter jurisdiction and stated that the focus of the statute was upon purchases and sales of securities in the United States while articulating a bright-line transactional test to determine whether extraterritorial application was appropriate. The transactional test completely rejected the conduct/effects tests, which had been used by courts for over four decades. It is now the location of transaction, not the location of the fraudulent conduct or its harmful effects, that supports a claim in post-Morrison cases.

One month later, Congress responded to Morrison and drafted Section 929P(b) of the Dodd-Frank Act, which aimed to codify the conduct/effects tests in proceedings brought by the SEC/ DOJ. The legislation was drafted in jurisdictional language, resulting in confusion over whether this enactment had any effect since Morrison concluded that courts already have jurisdiction over violations under the Exchange Act and that a clear indication by Congress of extraterritorial application was needed, none of which Dodd-Frank demonstrated.

The solution would be to amend the statute to include a clear indication of congressional intent to apply Section 10(b) extraterritorially. But even if congressional intent was clear, does the jurisdictional wording of 929P(b) render that intent meaningless? Absolutely. The intent has no effect since a jurisdictional statute can do no more than confer jurisdiction. It appears the solution would be not only to address the congressional intent but also to redraft the language of the statute to geographically reach the substance of the transaction. But what would we be left with? – the conduct/effects tests that have been urged as unpredictable, poorly formulated, arbitrary, and confusing. Thus, the optimal solution is a statutory amendment to 929P(b) that includes a clear indication and an alternative standard.

This study promotes a new approach, a reformulated standard for determining the extraterritoriality of U.S. federal securities laws: the sustainable-domestic-integrity standard. This standard will (1) substantively reach the antifraud provisions of the Exchange Act; (2) guide courts with a clear indication of congressional intent; (3) provide a private cause of action for U.S. claimants; and (4) vest the SEC/DOJ with the responsibility of initiating enforcement proceedings against any defendant (domestic or foreign) with conduct/effects in the United States for injury reasonable likely upon U.S. investors, U.S. capital markets, or the integrity of the territory of the United States. This approach serves to preserve international comity and promote global cooperation in securities regulation.

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