On Wednesday, the SEC staff released a study that examines whether investors should be able to bring lawsuits over transnational securities fraud.

Under Section 929Y of the Dodd-Frank Act, Congress directed the SEC to study this issue following the U.S. Supreme Court’s Morrison v. National Australia Bank (2010) ruling that significantly limited the ability of investors to sue foreign companies in American courts. 

Prior to Morrison, most U.S. courts had applied more permissive “conduct and effects” test that allowed investors to sue over allegedly fraudulent conduct that occurred in the United States or overseas conduct that caused “foreseeable and substantial harm” to U.S. interests. In the Morrison decision, the justices adopted a stricter “transactional test” whereby investors may only sue over “the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”

Since that ruling, lower courts have thrown out claims by U.S. and foreign investors who purchased their shares on non-U.S. exchanges. To diversify their holdings, many U.S.-based institutions own equities that were purchased overseas because only a limited number of foreign issuers sell American depositary receipts.  

The SEC received 72 comment letters from institutional investors, companies, corporate lawyers, and foreign governments. An international coalition of pension funds, most of whom have limited legal rights in their home countries, argued that U.S. and foreign shareholders should be able to sue over transnational fraud in American courts.

The 106-page SEC study detailed various options that Congress should consider, but did not advise lawmakers to enact legislation to overturn Morrison and reestablish the “conducts and effects” test. 

In an unusual display of dissent, Commissioner Luis Aguilar criticized the staff study for failing to make such a recommendation. “The Study falls far short of providing Congress with an informed recommendation and falls far short in fulfilling the Commission’s mission to protect investors,” Aguilar wrote in a statement. “I am particularly astonished that the Study states (at pages 58-59) that an option ‘would be for Congress to take no action’ and, thus, would continue to deny American investors who have been harmed by fraud the ability to seek redress in court.”