The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), which was signed into law on 21 July 2010, amended the US Securities Act of 1933, the US Securities Exchange Act of 1934 and the US Investment Advisers Act of 1940 to grant jurisdiction to US federal district courts over actions instituted by the US Securities and Exchange Commission ("SEC") or the US Department of Justice relating to certain anti-fraud violations involving conduct within the US that constitutes significant steps in furtherance of the violation or conduct occurring outside the US that has a foreseeable substantial effect within the US.
The Dodd-Frank Act did not alter the decision in Morrison v National Australia Bank Ltd, in which the Supreme Court of the US held that the principal anti-fraud provisions of the Exchange Act provide no private right of action for non-US plaintiffs suing non-US defendants for misconduct in connection with securities traded on non-US exchanges. However, with the Morrison case in mind, the Dodd-Frank Act clarified and restated the scope of jurisdiction available in actions by the SEC and US Department of Justice (which were not addressed in Morrison) and further directed the SEC to solicit comments and subsequently conduct a study to determine the extent to which private rights of action under the anti-fraud provisions of the Exchange Act should be extended to cover:
- conduct within the US that constitutes a significant step in furtherance of the violation (even if the transaction occurs outside the US and involves only non-U.S investors) and
- conduct occurring outside the US that has a foreseeable substantial effect within the US.
Depending on the SEC's evaluation of the extraterritorial extension of US anti-fraud provisions in private rights of action (and the legislative response), the developing post-Morrison caselaw declining the exercise of jurisdiction might be reversed. As a result, a non-US investor purchasing securities on a non-US exchange might be permitted to bring an action alleging anti-fraud violations in the US courts if a substantial portion of the alleged fraud occurred in the US. For example, if the issuer's share price were to fall as a result of material accounting irregularities in its US subsidiary, non-US security holders could seek redress in US courts, where they may perceive their remedies to be greater.
Further information on the Morrison case and its effect is available on our website.
To what extent is the London market concerned about this issue? Judging from the reaction to the Morrison decision, there will be great interest in the SEC's conclusions. In Morrison, Hogan Lovells filed an amicus brief supporting the Supreme Court's decision, on behalf of EADS and five other major European companies, that was cited by the Court. It is likely that companies whose securities are held by US persons, investment banks and other interested parties will want to express their views to the SEC.
The SEC solicited comments on 25 October 2010. Comments must be received by the SEC on or before 18 February 2011, and the SEC must submit its report no later than 21 January 2012.
The SEC Study on Extraterritorial Private Rights of Action - Request for Comments is available here. Comments will be made available on the SEC's website.