SEC Commissioner Opposes "Fair Fund Distribution Plan" that Includes Investors on Foreign Exchanges

SEC Commissioner Hester Peirce dissented from the agency’s decision to approve a "Fair Fund distribution plan" that includes compensation to investors who traded on foreign exchanges.

In 2022, a global investment bank settled SEC charges for selling securities in excess of the number of shares registered under a shelf registration by, among other things, offering rescission to investors who had purchased the unregistered shares. While the rescission offer made whole the purchasers of the unregistered shares, the SEC found that additional investor losses occurred when the disclosure of the registration failures caused the bank's share prices to drop in the secondary market. To address those losses, the SEC created a $200 million Fair Fund and approved, a Plan of Distribution to compensate investors who traded on either the New York Stock Exchange and the London Stock Exchange.

Commissioner Peirce stated that she does not support the distribution to purchasers on the London Stock Exchange, calling it misguided to compensate investors for trades made on foreign exchanges. She argued that those who choose to trade abroad shouldn't expect the protection of US securities laws. She warned that extending coverage beyond domestic markets risks is outside the SEC’s core mission and does not further US policy interests.

She further argued that the Commission exceeded its legal authority by approving foreign payouts under Sarbanes-Oxley Act ("SOX") section 308(a). She based her analysis on the Supreme Court’s two-step test for extraterritoriality from Morrison v. National Australia Bank and RJR Nabisco v. European Community. She said the statute fails the first step because the Section contains no clear statement that Congress intended it to apply outside the United States. She explained that under the second step, the relevant conduct occurred outside the United States as to the trades on the London Stock Exchange.

She rejected the Commission’s claim that paying money to investors "confers a benefit" and avoids legal concerns. She said that such reasoning misunderstands the purpose of the presumption against extraterritoriality. She stated that the Supreme Court has made clear that the rule applies broadly, regardless of whether there is a conflict with foreign law. She warned that compensating foreign trades not only stretches the statute beyond its limits but also comes at the expense of US taxpayers.