Multinational Enforcement of U.S. Securities Laws: The Need for the Clear and Restrained Scope of Extraterritorial Subject-Matter Jurisdiction

Article excerpt

Despite the usual presumption for the territorial application of securities laws, U.S. courts have applied domestic antifraud provisions extraterritorially to transactions in other countries, justifying its actions as necessary to protect U.S. investors and the integrity of U.S. markets. The current approaches of U.S. courts, however, have some problematic features. The scope of federal jurisdiction is inconsistent and expansive, and this results in conflicts with other countries and the potential for redundant and unnecessarily costly systems of overlapping regulations. Because courts are not well suited to analyze the various delicate issues related to the application of antifraud rules, this Article affirms the proposition that Congress should grapple with the issue of extraterritoriality and provide the judiciary with clear guidance as to the proper reach of the anti-fraud provisions. Moreover, believing that the current effects and conduct tests of the courts give us practical approaches to decide the reasonable scope of extraterritoriality, this Article makes some recommendations for the scope of extraterritorial subject-matter jurisdiction by suggesting modified and narrowed effects and conduct tests.

INTRODUCTION

As securities markets have become increasingly globalized in recent years, the growth of transactions in cross-border securities raises an issue of the regulation of transnational securities fraud. Although surging capital across jurisdictional boundaries seems to suggest that national borders are artificial constructs, this circumstance does not comport with regulatory reality. It is an internationally recognized principle that the power to prescribe and enforce securities laws is territorial,1 and most modern securities markets are regulated on a national basis.2 The securities regulations of most countries, in fact, reach only some transactions and not others, and the same may be said of U.S. securities laws.3 Viewed differently, however, securities laws are hardly territorial at all because no country formulates the content of its securities laws without considering the practices of its sister countries and the extraterritorial effects of their laws.4 In regard to the limits of a nation's power to unilaterally regulate conduct that occurs outside of its borders, there is general agreement that laws may have some extraterritorial reach.5

Enforcement of U.S. securities laws against securities fraud produces special problems when persons alleged to have violated the laws are foreign or when securities transactions that are allegedly tainted with fraud are foreign in nature.6 While the U.S. Securities and Exchange Commission (the "SEC" or "Commission") has taken a number of steps to define the scope of disclosure requirements with respect to foreign companies and conduct that occurs primarily abroad,7 the extraterritorial reach of the antifraud provisions remains a matter for the courts to resolve.8 Despite the usual presumption for the territorial application of securities laws,9 U.S. courts have applied domestic antifraud provisions extraterritorially to transactions in other countries, justifying its actions as necessary to protect U.S. investors and the integrity of U.S. markets.10 The current approaches of U.S. courts, however, have some problematic features. The scope of federal jurisdiction is inconsistent and expansive, and this results in conflicts with other countries and the potential for redundant and unnecessarily costly systems of overlapping regulations. Given the possibility of being sued based on the extraterritorial application of U.S. antifraud provisions, participants in cross-border transactions need an identifiable standard to guide their actions.

Based on these problematic features of the current extraterritorial subject-matter jurisdiction, this Article reassesses the current approaches of U.S. courts and seeks to determine what U.S. policy should be toward the regulation of cross-border securities fraud. …