SECURITIES LITIGATION | 2026-09-30
How Far Do U.S. Securities Laws Reach? The Transactional Test of Morrison v. National Australia Bank
The federal antifraud rule does not follow investors around the globe. Under Morrison, Section 10(b) reaches only transactions on a U.S. exchange or purchases and sales that occur in the United States.
California is home to global investors, cross-border companies, and funds that trade securities all over the world. When fraud touches a security with foreign connections, a threshold question arises before anything else: does the U.S. antifraud law — Section 10(b) of the Securities Exchange Act and
Whether U.S. securities-fraud law applies to a transaction with foreign elements is not a detail — it is frequently the whole case.
The Old Approach: Conduct and Effects
Before 2010, federal courts (led by the Second Circuit) decided the reach of Section 10(b) through a two-part “conduct and effects” test: U.S. law could apply if wrongful conduct in the United States furthered the fraud, or if the fraud had a substantial effect on U.S. investors or markets. The test was flexible but unpredictable, producing fact-intensive disputes about how much domestic conduct or effect was enough.
Morrison v. National Australia Bank
In Morrison, foreign investors who bought a foreign company’s shares on a foreign exchange (so-called “foreign-cubed” claims) sued in U.S. court over alleged misstatements. The Supreme Court rejected the conduct-and-effects test entirely, grounding its decision in the presumption against extraterritoriality — the principle that federal statutes are presumed to apply only domestically unless Congress clearly indicates otherwise. Finding no such indication in Section 10(b), the Court held that the statute does not reach foreign transactions merely because of domestic conduct or effects.
The Transactional Test
In place of the old inquiry, Morrison announced a transactional test. Section 10(b) applies only to:
- transactions in securities listed on a domestic (U.S.) exchange; and
- domestic transactions in other securities — that is, purchases or sales that occur in the United States.
The focus is where the transaction takes place, not where the deception was hatched or where its effects were felt. If the transaction is neither on a U.S. exchange nor otherwise domestic, Section 10(b) does not apply — full stop.
What Makes a Transaction “Domestic”
For securities not listed on a U.S. exchange, courts ask whether the purchase or sale was domestic. Lower courts (notably the Second Circuit in Absolute Activist) have looked to where irrevocable liability was incurred — where the parties became bound to the transaction — or where title passed. A U.S. residence, a U.S. broker, or a purchase order placed from the United States is not, by itself, automatically sufficient; the analysis centers on where the binding transaction occurred.
Why It Matters for California Investors and Funds
Morrison has practical consequences for anyone with cross-border holdings:
- Foreign-listed shares. A California investor who buys a foreign company’s shares on a foreign exchange generally cannot bring a U.S. 10(b) claim, even if the company’s executives made statements from, or the harm was felt in, the United States.
- American Depositary Receipts (ADRs) and dual-listings. Whether a claim survives can turn on the specific instrument traded and where the trade occurred, making the choice of security and venue important.
- Off-exchange and private transactions. The domesticity of the purchase or sale — where irrevocable liability attached — becomes the battleground.
Enforcement Actions Are Different
Morrison addressed the reach of the private right of action under Section 10(b). In response to the decision, Congress addressed the jurisdiction of U.S. courts over SEC and DOJ enforcement actions involving significant U.S. conduct or foreseeable domestic effects in the Dodd-Frank Act. Investors and issuers should not assume that the limits on private suits map onto the government’s enforcement reach — the two tracks are analyzed differently.
Frequently Asked Questions
What did Morrison decide?
That Section 10(b) applies only to transactions on a U.S. exchange or to other domestic (U.S.) purchases and sales — replacing the older conduct-and-effects test with a transactional test.
Why did the Court change the rule?
Because of the presumption against extraterritoriality: federal statutes are presumed domestic unless Congress clearly says otherwise, and Section 10(b) contains no such clear statement.
Can a California investor sue over foreign-listed shares?
Generally not under Section 10(b) if the shares were purchased on a foreign exchange, even with U.S. conduct or effects — the transaction is not domestic.
What makes a transaction “domestic”?
Courts look to where irrevocable liability was incurred or where title passed — not merely the investor’s residence or broker location.
Does Morrison limit SEC enforcement?
No — Congress addressed the reach of government enforcement actions separately in Dodd-Frank; the limits on private suits do not necessarily apply to the SEC or DOJ.
Are there alternatives when U.S. law does not reach?
Possibly — claims may exist under the securities laws of the country where the security trades, so cross-border investors should evaluate foreign remedies.
Related Securities & Governance Guides
Talk to a Securities Attorney About Cross-Border Fraud
If your losses involve a security with foreign connections, whether U.S. law applies is the threshold question. Trembach Law Firm advises California investors and issuers on the extraterritorial reach of the securities laws. Call (818) 514-7680.
Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.
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