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From Securities Regulation Daily, March 29, 2013

Broker-Dealer Registration Provisions Do Not Apply Extraterritorially

A magistrate judge has concluded that the Exchange Act's broker-dealer regulation provisions do not apply extraterritorially. This opinion dealt with a count in a complaint charging certain of the defendants with having acted as brokers or dealers in connection with foreign stock sales without having been registered with the SEC. The SEC claimed that the defendants took part in an international boiler room scheme that took in approximately $44 million from penny stock sales to foreign investors (SEC v. Benger, March 28, 2013, Cole, J.).

The Morrison decision. Based on the Supreme Court's decision in Morrison v. National Australia Bank Ltd., the defendants argued that, because their activities did not involve domestic sales of stock, they were not required to register under Exchange Act Section 15(a). Magistrate Judge Jeffrey Cole explained that the Court held in Morrison that the Exchange Act Section 10(b) and Rule 10b-5 did not have extraterritorial effect, even if part of the fraud occurred in the United States. Congress’ regulatory objectives were focused on domestic securities transactions, the judge elaborated, so whether a transaction is subject to Section 10(b) depends on whether it was a domestic or foreign transaction.

Section 15(a). The defendants maintained that, because the regulatory purpose of Section 15(a) is "virtually the same" as that of Section 10(b), registration is only required where a broker or dealer is engaged in a domestic transaction. The Commission, on the other hand, contended that Section 15 focuses on the registration and regulation of brokers and that "anyone who facilities any stock transaction through conduct in the United States must register with the SEC under Section 15(a) even if, as occurred in this case, the transaction is not domestic and does not occur on a national securities exchange."

The court noted that Section 15(a)'s title, as well as the text of the section, reveals a focus on national exchanges. This, the judge continued, "is consistent with the primacy of the domestic exchanges under the Act’s comprehensive statutory scheme." Moreover, there is nothing in the Exchange Act's prologue to suggest a concern with or intent to require registration to regulate brokers involved in foreign transactions on foreign exchanges, Judge Cole wrote.

The SEC argued that the "primary purpose" of the registration provisions is registration and regulation, not the underlying transactions. The judge disagreed, stating that "the requirement of registration is not an end in itself," and that "registration is merely a subordinate component of the Exchange Act’s broader statutory scheme and exists to achieve the overarching purpose of the Act." The judge remarked that it was consequently difficult to see a valid regulatory interest in requiring registration of a broker who is only effecting foreign purchases or sales.

Section 30. The judge also rejected the Commission’s argument based on Section 30 of the Exchange Act. Section 30(b) covers persons transacting business outside of the United States, but the Court held in Morrision that this provision was directed at actions concealing a domestic violation, which did not apply here. The Commission's argument that Section 30 could cover brokers conducting business in the United States in connection with foreign securities on foreign exchanges was conclusory and unsupported by case law, the judge stated. Moreover, under Morrison, where a statute provides for some extraterritorial application, such as Section 30’s express regulation of brokers in the United States where the security on the foreign exchange is from a U.S. issuer, the presumption of non-extraterritoriality limits the provision to its terms, the judge stated.

The judge concluded that Morrison governed the failure-to-register count in this case. The defendants' motion to dismiss was accordingly granted.

The case is No. 09 C 676.

Attorneys: Jonathan Stephen Polish for the SEC. Howard J. Stein for Stefan H. Benger and SHB Capital, Inc. Jason B. Meyers, pro se. Philip T. Powers, pro se. Peter B. Shaeffer for Frank I. Reinschreiber and Global Financial Management, LLC. James Arthur McGurk (Law Offices of James A. McGurk, P.C.) for CTA Worldwide Services, SA and Stephan von Hase. Linda M. Perry (Law Office of Linda M. Perry) for Pamela Benger.

Companies: CTA Worldwide Services, SA; Global Financial Management, LLC; SHB Capital, Inc.

Attorneys: Jonathan Stephen Polish for the SEC. Howard J. Stein for Stefan H. Benger and SHB Capital, Inc. Jason B. Meyers, pro se. Philip T. Powers, pro se. Peter B. Shaeffer for Frank I. Reinschreiber and Global Financial Management, LLC. James Arthur McGurk (Law Offices of James A. McGurk, P.C.) for CTA Worldwide Services, SA and Stephan von Hase.

Companies: International Capital Financial Resources, LLC.; Global Financial Management, LLC.; CTA Worldwide Services, SA.

MainStory: TopStory Enforcement FraudManipulation IllinoisNews

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