The International Reach of Rule 10b-5: The Myth of Congressional Silence

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Sachs, Margaret V.
Securities Law
article description
This article challenges the conventional wisdom that in adjudicating the international reach of rule 10b-5 courts begin with a blank legislative slate. The history of the securities laws demonstrates that this conventional wisdom is erroneous in two important respects. First, the securities markets of the 1920's were highly international, as Congress was well aware when it enacted the 1933 and 1934 Acts. Second, Congress nevertheless chose to protect only those investors whose trades occur inside the United States-“domestic traders” -- regardless of whether the securities traded are domestic or foreign. As a result, foreign traders lack standing to sue under rule 10b-5, no matter what connections to the United States their transactions might otherwise possess. Foreign traders are therefore disenfranchised by the principle, long established by the Supreme Court, that the only plaintiffs with standing to maintain implied actions are the statutory beneficiaries.Current case law regarding the international reach of rule 10b-5 is flawed not only in its disregard of legislative history and Supreme Court precedent but also in its reliance on policy judgments as to which Congress has never concurred. Courts should therefore abandon their balancing test in favor of simply limiting standing under rule 10b-5 to domestic traders. There is nothing outmoded about defining federal statutory beneficiaries on the basis of territorial boundaries, as the reach of many federal statutes is either expressly or impliedly restricted to the United States.Part I of this article identifies three propositions underlying current rule 10b-5 case law: that the 1933 and 1934 Acts say nothing about the international reach of rule 10b-5; that this silence resulted from Congress's failure to anticipate that securities markets would become international; and that the Acts implicitly sanction a wide international reach. These propositions are, of course, mutually inconsistent: extraterritoriality cannot have been endorsed if it was never considered in the first place. Part II demonstrates the falsity of the propositions set forth in Part I, beginning with a brief discussion of the principle that only Congress's chosen beneficiaries can maintain implied actions. The application of this principle cannot be avoided on the theory that international securities markets exceeded Congress's imagination. During the 1920's, securities markets had become increasingly international in scope, as the Congress that enacted the 1933 and 1934 Acts was well aware. Part II argues that the statutory beneficiaries of the 1933 and 1934 Acts are domestic traders, regardless of whether their securities are domestic or foreign in origin.Part II also shows that the statutory beneficiaries probably were intended to be United States citizens as well, although this matter is not clear. Courts should resolve the issue in favor of allowing domestic traders to sue regardless of whether they are United States citizens, since distinguishing among domestic traders on the basis of alienage would violate principles of equal protection.Part III examines statutory and constitutional arguments that run counter to the conclusions reached in Part II. Part III concludes that these arguments are not persuasive.