Document Type

Article

Disciplines

International Law

Abstract

American investment and trading in foreign securities have both increased dramatically in the past twenty years.' Primarily attracted to the relatively higher returns expected on these investments, American investors also look to foreign securities for lower portfolio risk through diversification.' While Americans are trading more in foreign securities both abroad and on United States exchanges, foreigners are trading over $160 billion in American stocks each year on United States markets.3 The globalization of the world's securities markets has accelerated with the increase in linkages connecting stock exchanges of different nations, with the expansion of major financial institutions and securities firms which are opening foreign offices, with corporations issuing stock simultaneously on domestic and foreign markets and with public companies seeking access to foreign capital.

With this increasing internationalization of the world's securities markets, a controversy has emerged over the extraterritorial application of the antifraud provisions of the Securities and Exchange Act of 1934 [Exchange Act],' particularly section 10(b) and Rule lOb-5 promulgated thereunder. United States courts have attempted to fashion standards and have employed various rationales in applying the statute in a number of cases involving fraud in transnational securities transactions. Generally, the courts have asserted subject matter jurisdiction over extraterritorial conduct that produces substantial effects within the United States and over conduct that occurs in the United States and directly causes losses to investors outside this country.

This comment reviews the international and United States standards for extraterritorial jurisdiction and the legislative history and jurisdictional mandate of section 10(b) of the Exchange Act, traces the development of the standards employed by the courts in determining subject matter jurisdiction in such cases and discusses and evaluates the standards for the extraterritorial application of section 10(b) embodied in the American Law Institute's proposed Federal Securities Code 7 and in its recently completed Restatement of the Law (Third), Foreign Relations Law of the United States [Third Restatement].

The comment also explores the concerns implicit in the exportation of United States law and policy in this area of securities regulation. It concludes that the jurisdictional approach developed by United States courts in applying section 10(b) and Rule lOb-5 to predominantly foreign transactions allows for both predictability and fairness while assuring the protection of legitimate United States interests.

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