Jurisdictional choice for securities regulation

Cite this Article
Larry Ribstein, Jurisdictional choice for securities regulation, Truth on the Market (September 28, 2010), https://truthonthemarket.com/2010/09/28/jurisdictional-choice-for-securities-regulation/

We usually think about jurisdictional choice for corporate law as applying to state business association laws, not the federal securities laws.  But this distinction has never been clear given global securities markets, and it’s less true now than it used to be.

The WSJ discusses the securities bar’s and regulators’ lamentations over last summer’s Morrison v. National Australia Bank holding that that foreign plaintiffs who transacted in foreign shares on a foreign exchange (i.e., “f cubed”) could not bring a 10b-5 action.  The article notes that the ruling seems to be helping foreign-based companies like BP and Toyota that are facing investor suits over non-disclosure of risks that turned into big liabilities. It says  judges have been barring U.S. suits even by U.S. investors who bought shares on foreign exchanges (i.e., “f squared”).

Plaintiffs’ securities lawyers and some state officials are trying to get Congress to reverse the decision because, according to the article, “in a global marketplace in which U.S. capital increasingly flows into foreign stock exchanges, it is unfair to deprive U.S. investors of the protection of domestic law because they purchased stock overseas.”

But as I pointed out when the Morrison decision came down, the ruling “promotes globalized securities markets . . . by adopting a test that enables investors to choose the applicable regulation by deciding where to trade.”  In other words, investors may not want to be “protected” by U.S. law because it’s better for plaintiffs’ securities lawyers than for investors.   The exchange-based test gives investors clear notice of when they’re protected and when not.

At the same time, foreign firms can more easily choose, just by deciding which exchange to trade on, whether the extra credibility they get from the application of U.S. law is worth the extra costs.  As I’ve written, this may be less likely the case after federal laws like SOX (and now Dodd-Frank), which try to impose U.S. governance norms on foreign firms.

In other words, a true “global marketplace” depends at least in part on jurisdictional choice, and not necessarily on the application of the same law everywhere.