Claiming that “investors have been stripped of a traditional American right,” Luis Aguilar, a member of the Securities and Exchange Commission, criticized the agency yesterday for not taking an opportunity to expand shareholder rights. His statement came after the SEC submitted a congressionally mandated report reacting to a 2010 Supreme Court decision that prevents investors from using U.S. securities laws to sue companies over securities transactions that occur outside the country.

Aguilar saw the report as a chance for the SEC to encourage Congress to broaden the antifraud provision of the Securities Exchange Act of 1934 and expand investors’ right to sue businesses that sell them securities from overseas. Instead, the commission did not take a particular stance in its report, issued on Wednesday; rather, it laid out various findings and issues Congress “might want to consider.”

Expressing his “strong disappointment” in the SEC’s report, Aguilar criticized the agency yesterday in a “dissenting statement,” published on the SEC’s website soon after the commission released its study. A Democrat and former securities lawyer, Aguilar has been an outspoken member of the commission since his tenure began nearly four years ago. Earlier this year, for example, he recommended that the SEC require companies to disclose their political contributions.

In 2010, Supreme Court justices unanimously decided in favor of a financial institution in Morrison v. National Australia Bank. They said Section 10-b of the Securities Exchange Act applies only to the purchase or sale of a security conducted in the United States. Plaintiffs in the case had argued that even though the investments occurred outside the United States, the alleged fraud had a ripple effect on the prices of securities in this country.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandated the recent SEC study and gave the commission and the Department of Justice the right to bring action in such cases, stopped short of reversing the 2010 decision altogether. Instead, lawmakers asked the SEC to look into whether Congress should make a legislative change.

The SEC’s report, totaling more than 70 pages, did note a possible downside if Congress decides not to make further legal changes in light of the Morrison decision. “Absent legislation, lower federal courts in particular will likely be called upon to resolve myriad novel and difficult issues” in light of the new criteria set out by the Supreme Court, according to the commission’s report.

Aguilar argues the study was “incomplete” and should have been more supportive of private rights of action. Most disturbing to him was the SEC’s suggestion that Congress could consider taking no action on this issue at all. A new standard, in his view, would not lead to a “flood of litigation in U.S. courts” since securities class actions against foreign companies made up, on average, 9.7% of securities class actions filed between 1996 and 2009.


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