A Call for Legislative Reform: Expanding the Extraterritorial Application of the Private Rights of Action Under Federal Securities Law While Limiting the Scope of Relief Available

When the Supreme Court of the United States issued its opinion in Morrison v. National Australia Bank Ltd. on June 24, 2010, the Court took a narrow view of the extraterritorial application of federal securities regulation and held that a general presumption exists against the extraterritorial application of federal securities law. Speaking for the majority, Justice Scalia wrote, “Rather than guess anew in each case [involving the extraterritorial application of federal securities law] we apply the presumption [against the extraterritorial reach] in all cases, preserving a stable background against which Congress can legislate with predictable effects.” Remarkably, Congress immediately at least in part took up this charge to legislate. When President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, Congress clarified the scope of the SEC’s extraterritorial jurisdiction by adopting a conduct and effects approach in section 929P of the Act. Moreover, Congress demonstrated a willingness to consider extending the extraterritorial application of the private rights of action under the Securities Exchange Act of 1934 by mandating a study of the issue by the United States Securities and Exchange Commission. When the SEC issued its study in April 2012, however, it failed to make a definitive recommendation to Congress regarding the extraterritorial application of the private rights of action under the Exchange Act. Commissioner Luis Aguilar even went so far as to release a dissenting statement arguing that the SEC had failed to meet its Congressional mandate under Section 929Y to provide a recommendation regarding the extraterritorial application of the private rights. The SEC’s reluctance to provide such a recommendation is understandable. Considering the controversy surrounding the private rights of action, especially the implied private right of action under Section 10(b) and Rule 10b-5, the SEC took a cautious approach hoping that Congress would finally provide some actual legislative guidance on this murky area of federal securities law. Congress, however, still has not acted on this issue. This Article suggests that the best solution would be to allow broad extraterritorial application of the private rights of action under the Securities Act and Exchange Act in regard to issuers seeking injunctive relief, rather than those seeking monetary damages. Such an approach would promote greater disclosure while limiting the nuisance litigation that has plagued the private rights of action under federal securities law. Such an approach is not without precedent. For example, even after the adoption by the United States Court of Appeals for the Second Circuit of the purchaser-seller requirement for standing to bring a private cause of action under section 10(b) and Rule 10b-5, which was later adopted by the Supreme Court of the United States in Blue Chip Stamps v. Manor Drug Stores, many courts adopted an exception to the purchaser-seller requirement for private parties seeking only injunctive relief under section 10(b) and Rule 10b-5. In that context and in the context of the extraterritorial application of the private rights of action under federal securities law, allowing availability of injunctive relief supports the underlying purpose of the federal securities laws to promote full and fair disclosure, while at the same time controlling nuisance litigation that can impede the efficient functioning of the capital markets. Such an approach will help to police and stabilize securities markets both domestically and abroad.