Emory Law Journal


Radley Gillis


Born to combat the market effects of the Great Depression, the Securities Exchange Act of 1934 protects American investors and maintains American confidence in the U.S. securities market. These objectives are largely accomplished through the imposition of liability from Section 10(b) of the Securities Exchange Act and the SEC’s Rule 10b-5. These federal laws impose civil and criminal penalties for domestic insider trading and securities fraud violations. Because Section 10(b) and Rule 10b-5 only apply domestically, when securities violations occur both within the United States and abroad, the reach of federal law becomes questionable, leaving federal courts with a complex issue.

To resolve this issue, the Second Circuit created a Conduct and Effects test that left federal courts with a subpar solution to determine when Section 10(b) may apply extraterritorially. The test developed for over forty years and was widely accepted until the Supreme Court, in Morrison v. National Australia Bank, Ltd., brought Section 10(b)’s extraterritorial reach to a screeching halt in 2010. Ushering in a fundamental shift in securities law, Justice Scalia abrogated the Second Circuit’s Conduct and Effects test and purported to provide a clear Transactional test that avoided interference with foreign securities regulation. But the Court missed the mark, and instead created two new issues for the circuit courts of appeals. First, the Transactional test created an ambiguity that resulted in a sharply divided split among the First, Second, Third, and Ninth Circuit Courts. Second, the simultaneous enactment of the Dodd-Frank Act prompted a question of whether Congress partially abrogated the Court’s decision in Morrison and reinstated the Conduct and Effects test.

In the wake of this circuit split comes uncertainty among the lower courts, threats to stare decisis, plaintiffs avoiding a defendant-friendly Second Circuit by forum shopping, and strains on international comity. To resolve the split, this Comment sets forth a factor-balancing test that determines whether the foreign elements of a transaction overcome the domestic elements to render Section 10(b) inapplicable to the conduct. This Spectrum test provides a flexible, but narrowly tailored, framework that can adapt to a rapidly evolving and globalizing securities market. It provides courts with a workable and consistent analysis that will facilitate the development of Section 10(b) jurisprudence.