Which Markets and Investors?: Statement on the Notice of Proposed Plan of Distribution and Opportunity for Comment with respect to Barclays PLC and Barclays Bank PLC

In accordance with a vote taken before January 20, the Commission today published a Notice of Proposed Plan of Distribution and Opportunity for Comment for a Fair Fund created from the $200 million civil penalty imposed in a settled administrative proceeding against Barclays PLC and Barclays Bank PLC.[1] Under the Proposed Plan, the Commission would "use a single claims process to compensate investors who purchased or acquired ADRs on a U.S. exchange and ordinary shares/common stock on a foreign exchange, and were harmed by a violation of the federal securities laws." Specifically, the Fair Fund proposes to compensate investors for the "Recognized Loss[es]" incurred from trading during the "Relevant Period" in Barclays ADRs on the NYSE and in "Barclays ordinary shares traded on the [London Stock Exchange] ("LSE")."[2] This proposed plan-to use a Fair Fund to compensate investors who purchased securities of a foreign issuer on a foreign exchange-is somewhat novel. I have both legal and policy concerns regarding the novel proposal.

First, the Notice's discussion of extraterritoriality misapplies the presumption against extraterritoriality. In discussing the Commission's statutory authority under Section 308(a) of the Sarbanes-Oxley Act of 2002, the Notice argues that because "SOX 308(a) does not regulate conduct but rather confers a benefit," it therefore does not "implicat[e] the sovereignty of foreign nations-one of the core animating principles" underpinning the presumption against extraterritorial, and on that basis concludes that the presumption against extraterritoriality does not apply to SOX 308(a). The Supreme Court, in explaining the various reasons for the presumption, has noted that it "serves to avoid the international discord that can result when U.S. law is applied to conduct in foreign countries."[3] However, the Court likewise instructed that "the presumption applies regardless of whether there is a risk of conflict between the American statute and a foreign law."[4] The Court further has explained that its precedents

reflect a two-step framework for analyzing extraterritoriality issues. At the first step, we ask whether the presumption against extraterritoriality has been rebutted-that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially. We must ask this question regardless of whether the statute in question regulates the conduct, affords relief, or merely confers jurisdiction. If the statute is not extraterritorial, then at the second step we determine whether the case involves domestic application of the statute, and we do this by looking to the statute's "focus." If the conduct relevant to the statute's focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory. (emphasis added)[5]

The Notice did not reach the best conclusion under the Court's two-step framework. At the first step, it is clear that SOX 308(a) lacks any language that "gives a clear, affirmative indication" that Congress meant for the statute to have extraterritorial application, and the Notice does not contend otherwise. Moving to the second step, the relevant conduct that is the focus of the Fair Fund-compensation for losses incurred during the relevant period-involves conduct occurring both domestically (ADR transactions on NYSE) and in a foreign country (common stock transactions on the LSE). The former "involves a permissible domestic application." By contrast, the latter, applies the statute to conduct occurring in a foreign country and thus appears to "involve[] an impermissible extraterritorial application" of SOX 308(a). The presence or absence of implications for the sovereignty of foreign nations does not change the result of this two-step analysis.

Second, from a policy perspective, does it make sense for the Commission to provide compensation to investors who chose to transact in Barclays' common stock on the LSE rather than purchasing the economically equivalent ADRs on NYSE?[6] The Commission understandably is concerned with the fair and efficient operation of the United States capital markets. Compensating investors who traded on domestic exchanges and incurred losses that have a causal connection to the violation of the United States' securities laws and regulations furthers the Commission's mission to protect investors and maintain fair and efficient markets. The Commission does not have a similar interest in the fair and efficient operation of the LSE and in protecting investors trading thereon. When people choose to go outside the United States to trade, they do not get the protection of the Securities and Exchange Commission. They are opting out of U.S. securities laws and into another set of laws and regulations.

Moreover, given that penalty money not paid out to investors through a Fair Fund is deposited into the United States Treasury, compensating the foreign investors who traded on foreign exchanges comes at a cost to American taxpayers. The Commission should reallocate funds from American taxpayers to foreign investors only when there is clear authorization or instruction from Congress to do so, something that appears lacking on the face of SOX 308(a).

For those reasons, I question whether the Commission's Proposed Plan of Distribution is consistent with the text of SOX 308(a) or an appropriate exercise of discretion even if it is allowable under the statute. I look forward to hearing from commentors. To aid the Commission in its consideration of the Proposed Plan of Distribution, I welcome comment on the following:

1. Is the Commission's conclusion that the presumption against extraterritoriality does not apply to SOX 308(a) because the statute confers a benefit and does not conflict with foreign law correct?
2. Does the Notice correctly construe and apply the Supreme Court's precedents regarding the presumption against extraterritoriality?
3. Is the Commission's proposal to compensate foreign investors for losses incurred trading on foreign exchanges consistent with its mission to further fair and efficient markets and to protect investors?