The Supreme Court’s attempt to limit the extraterritorial application of the Securities Exchange Act of 1934 (34 Act) in Morrison v. National Australia Bank may have backfired. Justice Antonin Scalia’s opinion for the majority critiqued decades of vague and unwarranted “extraterritorial” application of the act and set forth a new test. Attempting to limit the number of securities lawsuits brought by foreign investors in the United States, the court concluded that section 10(b) of the act never applies extraterritorially; it applies “only to transactions in securities listed in domestic exchanges, and domestic transactions in securities.”
Unfortunately, the court did not explain the meaning of “domestic transactions in securities.” Several courts have seized on this ambiguity and have essentially undone the intent behind Morrison by creating various conflicting applications of the transactional test. The U.S. Court of Appeals for the Second and Eleventh circuits, in particular, have held that the only relevant factor for determining whether section 10(b) of the act applies is whether securities were exchanged or transferred on United States soil.
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