(Article from Securities Law Alert, April 2017)
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On March 28, 2017, the District of Utah held that Section 929P(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) permits the SEC to bring extraterritorial securities fraud actions under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act provided the “conduct and effects” test is satisfied.[1] SEC v. Monsoon, 2017 WL 1166333 (D. Utah 2017) (Parrish, J.). The court determined that the transactional test for the extraterritorial application of Section 10(b) set forth in Morrison v. National Australia Bank, 561 U.S. 247 (2010)[2]—issued a month prior to the enactment of the Dodd-Frank Act—does not apply to SEC claims brought under Sections 10(b) and 17(a).
Section 929P(b) Supersedes Morrison Even Though It Does Not Explicitly Overturn Morrison’s Transactional Test
The court rejected defendant’s contention that “Section 929P(b) left the Morrison transaction test in place” because “the plain language of Section 929P(b) did not explicitly overturn the core holding of Morrison.” The court emphasized that Morrison was issued on the last day the Dodd-Frank conference committee met and five days before the committee published a final version of the bill. While “courts generally presume that Congress is familiar with the precedents of the Supreme Court when it enacts legislation,” the District of Utah found “the close proximity between the date when Morrison was issued and the date when the language of Dodd-Frank was finalized, greatly undermines this presumption.” The court determined “the more reasonable assumption is that Morrison was issued too late in the legislative process to reasonably permit Congress to react to it.” The court stated that it did not “presume that Congress intended Section 929P(b) to be a nullity.”
Congress Intended the “Conduct and Effects” Test to Apply to SEC Claims Brought Under Sections 10(b) and 17(a)
The District of Utah explained that “the judicial presumption against the extraterritorial application of a statute may be rebutted by referring to all available evidence about the meaning of a statute.” Here, the court found that “the text of Section 929P(b), the legal context in which this amendment was drafted, legislative history, and the expressed purpose of the amendment all point to a congressional intent that, in actions brought by the SEC, Sections 10(b) and 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.” The court held “these clear indications that Congress intended Sections 10(b) and 17(a) to be applied to foreign transactions are sufficient to overcome the presumption against extraterritorial application” of Sections 10(b) and 17(a) in actions brought by the SEC.
[1] The court explained that “Section 929P(b) of [the Dodd-Frank Act] added the following language to both Section 22 of the Securities Act and Section 27 of the Exchange Act:
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 [either Section 10(b) of the Securities Exchange Act or Section 17(a) of the Securities Act] 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.”
[2] Please click here to read our prior discussion of the Morrison decision.