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1
FOREIGN REGULATION OF
CORPORATE GOVERNANCE:
EXTRATERRITORIAL APPLICATION OF
SECURITIES LAWS
By
Baiba Tora
Simonetta Simmons
Brandon Taylor
Overview
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1.
2.
3.
4.
Main Issues
Morrison v. National Australia Bank
Dodd-Frank Act
Policy Proposal
Securities Laws
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
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

Securities Act (1933)
Securities Exchange Act (1934)
Investment Company Act (1940)
Investment Advisor Act (1940)
Sarbanes-Oxley Act (2002)
Dodd-Frank Wall Street Reform and Consumer
Protection Act (2010)
Main Issues
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
Congressional action regarding extraterritorial
reach vs. court interpretation
Application of U.S. law to foreign actors and
foreign transactions
Transparency and fairness in the financial markets
across sovereign territories
Affect on foreign investment in the U.S., and harm to
U.S. investors from foreign actions
Importance of Securities Regulations
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Growing number of foreign IPOs in the U.S.
Increasing value of IPOs globally
Investor confidence in U.S. markets
Confidence in companies (domestic or foreign) listed
on U.S. stock exchanges
Complex financial innovations
Interconnections between international markets
IPO Value ($Billions) YTD as of 4/12/12
U.S.
China
Netherlands
Hong Kong
Switzerland
Thailand
Philippines
U.K.
South Korea
Singapore
India
Japan
0
6
1
2
3
4
5
6
Source: www.renaissancecapital.com
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Number of IPOs
U.S.
China
Hong Kong
U.K.
France
India
Japan
Netherlands
Philippines
Singapore
South Korea
Swizterland
0
7
5
10
15
20
25
Source: www.renaissancecapital.com
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Source: Financial Times, 12/28/11
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Court Interpretation of Extraterritoriality
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(1) For cases with foreign actors and foreign transactions,
(2) And if Congress is silent or vague about extraterritorial
jurisdiction for a particular statute.
First test applied: “presumption of territoriality”
•
•
•
•
the court assumes the statue is limited to domestic matters
“rooted in principles of comity, non-intervention, and sovereign
equality” (Desautels-Stein)
in many cases, successful arguments can be made w/o invoking
extraterritorial transactions, but by focusing on domestic
activity.
exceptions to the principle rely on the “subject matter” of the
case, e.g. cases dealing with fraud
Beyond the Presumption of Territoriality
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In the past, If courts recognized extraterritorial jurisdiction for
a vague or silent statute, certain tests were applied:
•
•
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Conduct Test – “whether the wrongful conduct occurred in
the U.S.”
Effects Test – “whether the wrongful conduct had
a
substantial effect in the U.S.”
Reasonableness Test – component of international law that
defines “reasonable” factors that should be confirmed
Taken together, the use or interpretation of any of these
principles was “unpredictable.”
Morrison v. National Australia Bank (2010)
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Was a significant departure from previous
interpretation of extraterritorial jurisdiction.
Most prominent example of a “foreign-cubed”
class-action case. This case involved:
1.
2.
3.
Foreign plaintiffs (Morrison)
Foreign company (NAB)
Foreign Stock Exchange transactions
(Australian Stock Exchange)
Morrison v. NAB: the Plaintiff’s Claim
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U.S.-based HomeSide
employees knowingly
inflated asset values
HomeSide sent the
inflated values to
NAB Execs in
Australia
NAB issued financial
disclosure reports in
Australia
Asset values were
discovered to be
inaccurate
NAB’s share price fell
on the Australian
Stock Exchange
Investors who
purchased NAB
shares had a capital
loss
Note: HomeSide was the U.S. Mortgage Servicer for National Australia Bank
Morrison v. NAB: Ruling
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Southern District of New York found no “subject
matter” to establish jurisdiction under Section 10(b)
of the Exchange Act
Second Circuit Court agreed
Supreme Court agreed, but on different grounds:
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2.
3.
“no clear indication” that the statute applies
extraterritorially
The “conduct” and “effect” tests are too vague
Claims ought to depend on the locality of the
“transaction”
Morrison v NAB: Consequences
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
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Fraud committed by HomeSide was effectively
overlooked
The Supreme Court has made a “clear intention to
limit the extraterritoriality of section 10(b).” And
lower courts have followed this ruling
The once vague tests applied to securities fraud
cases involving foreign actors and foreign
transactions are now more limiting
Any prior intent in the law to have extraterritorial
jurisdiction will need to be addressed by Congress
Dodd-Frank Act
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

Signed July 21, 2010
Purposes of law
 “To promote the financial stability of the United States by
improving accountability and transparency in the financial
system
 To end ‘too big to fail’
 To protect the American taxpayer by ending bailouts
 To protect consumers from abusive financial services
practices and for other purposes.”
Dodd-Frank Act (cont.)
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
Financial Stability Oversight Council
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Securities and Exchange Commission Whistleblower Program
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provide, for the first time, comprehensive monitoring to ensure the stability of our nation's financial
system. The Council is charged with identifying threats to the financial stability of the United States;
promoting market discipline; and responding to emerging risks to the stability of the United States
financial system.
Assistance and information from a whistleblower who knows of possible securities law violations can be
among the most powerful weapons in the law enforcement arsenal of the SEC. Through their knowledge
of the circumstances and individuals involved, whistleblowers can help the Commission identify possible
fraud and other violations much earlier than might otherwise have been possible.
Consumer Financial Protection Bureau
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
Supervision Program” over “larger participants” within markets for consumer financial
products or services
Ultimate goal: “CFPB will have the authority to supervise non-depository institutions
identified as larger participants in certain markets – including by requiring reports and
conducting examinations – to ensure” their compliance with Federal consumer financial
law. (This is in addition to applicable federal and state law)
Dodd-Frank - Extraterritoriality
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
Dodd Frank reversed in part Morrison v. National Australia
Bank Ltd., and confirmed Congress’ intent that in proceedings
brought by SEC or United States government the securities laws
will have extraterritorial effect.

Extraterritorial scope – financial regulations to restore
transparency and stability to the global derivatives market.

Dodd-Frank applies across jurisdictions so long as the U.S.
has a vested interest in the derivatives transactions. Section
722(d)
Dodd-Frank Extraterritoriality (cont.)
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
Section 722(d) aligns with the U.S. Constitution and
satisfies the due process under the 5th and 14th
amendments of the U.S. Constitution.

722 (d) provides that the provisions of the Act shall not apply to
activities outside the United States unless those activities:
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Have a direct and significant connection with activities in, or effect
on, commerce of the U.S.
contravene such rules or regulations as the Commission may
prescribe or promulgate as are necessary or appropriate to prevent
the evasion of any provision of this Act.
Asahi Metal industry Co. v. Superior Court of California
and International Shoe Co. v. Washington
Dodd-Frank Extraterritoriality (cont.)
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
Section 929P of Dodd-Frank amends the following regulations:

Section 22 of the Securities Act of 1933 (15 U.S.C. 77v(a))

Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. 78aa)

Section 214 of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 14)
by adding at the end the following new subsection:
‘‘(b) EXTRATERRITORIAL JURISDICTION —The district courts of the United States and the
United States courts of any Territory shall have jurisdiction of an action or proceeding
brought or instituted by the Commission or the United States alleging a violation of the
antifraud provisions of this title involving—
‘‘(1) conduct within the United States that constitutes significant steps in furtherance of
the violation, even if the securities transaction occurs outside the United States and involves
only foreign investors; or
‘‘(2) conduct occurring outside the United States that has a foreseeable substantial
effect within the United States.’’.
Whistleblowers - Extraterritoriality
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Under Dodd-Frank, whistleblowers are entitled to anywhere from 10% to
30% if the monetary sanctions recovered in eligible SEC or related actions
arising from the information provided by the whistleblower. The information
need not be related to illegal practices within the US by US entities; it can
pertain to any activities of the US entity or its business partners anywhere in
the world.
Dodd-Frank also expands the existing Sarbanes-Oxley Act (SOX)
whistleblower anti-retaliation provision.
However - there is no evidence that Congress intended to broaden whistleblower retaliation
protections either under SOX or under the new Dodd- Frank anti-retaliation causes of action to
individuals employed by overseas subsidiaries of U.S. companies. To the contrary, the text and
structure of the Act suggest the opposite.
Policy Proposal
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
Congress should pass, and the President should sign, legislation
that clarifies the extraterritorial jurisdiction of securities laws
and the extent to which regulators can apply that reach to
existing and future rules. The legislation should be thorough,
addressing any gaps or vagueness in the existing statutes.

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Statutes must show clear Congress' intent to give the statute
extraterritorial scope (as argued under Morrison )
Provisions of statute shouldn't be ambiguous left for Court's
interpretation
Pros & Cons
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
Pros:
 Constitutional
authority to regulate foreign commerce
returned to the Congress
 Clarity
of extraterritorial reach will reduce uncertainty
and bolster confidence for investors
 Stability
in securities regulations will encourage foreign
issuers to deal more with U.S. markets
Pros & Cons (cont.)
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
Cons:

Despite the attempt to clarify extraterritorial reach, the
added and modified provisions could make securities law
more complicated

Chamber of Commerce refers to the SEC as a “disclosure regime
that is burdensome and difficult to comply with”
If improperly applied, the fear of “Shangri-la of class
action” may become true, leading to foreign nationals
exploiting the more favorable U.S. laws
 Current bilateral agreements may be sufficient to handle
cross-border transactions, and do not challenge a countries
sovereignty
 Reduces competition for U.S. financial institutions

Impacts on Foreign Securities Policies
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So far, foreign regulators have not suggested that
they would apply their domestic restrictions on U.S.
banks operating in the U.S.
The European Investment Bank (EIB) and ECB have
threatened to cease trading OTC swaps if subject to
Dodd-Franks clearing and collateral requirements.
E.U. Financial Services Commissioner argued that “it
is not acceptable that U.S. rules have such a wide
effect on other nations.”
Counterarguments
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The increasing complexity and interconnectedness of
financial markets requires that U.S. legislation be
updated to handle new challenges.
The expansion of bilateral and multilateral
agreements among nations makes the financial
system all the more complex. A unified message
from the U.S. would help.
As the largest economy, the world will still want to
do business with the U.S., and will appreciate the
clarity and transparency of its regulations.
Sources
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De Pue, John. “Fundamental Principles Governing Extraterritorial Prosecutions–Jurisdiction and Venue.”
United States Attorneys’ Bulletin. United States Department of Justice. Vol. 55, No. 2. March, 2007.
Frankel, David et al. “Dodd-Frank’s Impact on Securities Enforcement and Litigation.” The Metropolitan
Corporate Counsel. October, 2010.Page 12.
Giuffra, Robert Jr. et al. “The Territorial Reach of U.S. Securities Laws After Morrison v. National Australia
Bank.” The Harvard Law School Forum on Corporate Governance and Financial Regulation. October 13,
2011.
Greenberger, Michael. “The Extraterritorial Application of the Dodd-Frank Act Protects U.S. Taxpayers from
Worldwide Bailouts.” University of Maryland Francis King Carey School of Law.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029063
Noked, Nome. “The Dodd-Frank Extraterritorial Jurisdiction Provision.” The Harvard Law School Forum on
Corporate Governance and Financial Regulation. August 5, 2011.
Sources (cont.)
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Protess, Ben. “Unearthing Exotic Provisions Buried in Dodd-Frank.” The New York Times. July 13, 2011.
“SEC and CSRC Announce Terms of Reference for Enhanced Dialogue.” Securities Exchange Commission.
May 2, 2006. www.sec.gov/news/press/2006/2006-63.htm
Schwartz, Jason et al. “The Extraterritorial Application of the Dodd-Frank Whistleblower Provisions.”
Employment Law Strategist, Volume 19, Number 4, August 2011,
http://gibsondunn.com/publications/Documents/SchwartzJohnson-ExtraterritorialApplicationofDoddFrank.pdf