The public regulation of global securities markets has become more effective in recent years as a result of improved cooperation among national regulators, (1) as well as increased harmonization of disparate legal rules. (2) The private enforcement of securities law, by contrast, remains an area of dissensus. This is due in part to the practice in the United States of applying U.S. antifraud rules liberally to cases involving significant foreign elements. Such extraterritorial application of law often creates conflict with other regimes whose substantive and procedural rules differ from ours.
Historically, courts determined the reach of U.S. antifraud law--that is, its applicability to securities fraud claims with foreign elements--by applying the "conduct" and "effects" tests. (3) On that analysis, U.S. law governed claims arising out of fraudulent conduct that either occurred within the United States or caused significant effects within the United States. These tests were not invented in the securities area: they are simply instantiations of the broader international jurisdictional principle that a country has the authority to apply its law to particular acts only if those acts have a recognized jurisdictional nexus with the country (for instance, in the form of conduct, effects, or the actor's nationality). (4) As such, the tests called for case-by-case examination of whether the appropriate jurisdictional nexus was present in any given dispute. As applied in securities litigation, they have yielded some fairly unpredictable, and also somewhat expansive, results. The conduct test, in particular, was used to support the application of U.S. law to claims that seemed quite far removed from any U.S. regulatory interest--including claims brought by foreign investors who had purchased securities of a foreign issuer on a foreign exchange. (5)
In 2010, the Supreme Court for the first time addressed the extraterritorial reach of Exchange Act section 10(b). (6) In Morrison v. National Australia Bank Ltd., (7) the Court rejected the long-standing conduct and effects tests in favor of a single transactional-nexus approach. Concluding that "the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States," (8) it held that section 10(b) applies to fraud only in connection with "transactions in securities listed on domestic exchanges, and domestic transactions in other securities." (9) The test therefore has two prongs: the first covers transactions that take place on U.S. securities exchanges, and the second covers non-exchange-based transactions made within U.S. borders. (10) The investment transactions at issue in Morrison had taken place on a foreign securities exchange, and the Court therefore concluded that section 10(b) did not govern the plaintiffs' claims. (11)
The Morrison lawsuit raised particularly thorny issues that counseled against application of U.S. law. First, it was a "foreign-cubed" case: the claims were brought by foreign investors against a foreign issuer, and arose out of foreign investment transactions. In such cases, the application of U.S. law would serve not the core regulatory interest of protecting U.S. markets and investors, but only the substantially weaker interest of preventing the United States from becoming a "launching pad" for fraud directed elsewhere. (12) The foreign regulatory interest, by contrast, was particularly strong. (13) Second, it was a class action, and the claims therefore invoked group litigation processes under U.S. procedural law that are themselves the subject of significant criticism in many other countries. (14) Finally, the plaintiffs in Morrison used the fraud-on-the-market theory to establish presumptive reliance; (15) in most countries, however, investors are required to prove actual reliance on misleading information in order to sustain a fraud claim. …