Statement Summary
In September 2022, Barclays resolved claims regarding the sale of unregistered securities by offering a rescission to affected investors. Despite this, the SEC identified remaining investor losses following a drop in Barclays’ share prices upon disclosure. To address these losses, the SEC established a Fair Fund from a $200 million penalty paid by Barclays, approved to distribute in two stages: to ADR investors first, and then to ordinary share investors. However, the SEC faces policy and legal challenges in compensating investors on foreign exchanges. Concerns include the application of U.S. law beyond domestic markets, and that this could incur costs for American taxpayers without clear congressional authority. The decision has generated debate on the extraterritorial application of U.S. laws and the responsibilities of investors trading internationally.
Original Statement
In a September 2022 administrative proceeding, Barclays PLC and Barclays Bank PLC (collectively, “Barclays”) resolved claims arising from selling securities in excess of what it had registered with the Commission by way of a shelf registration. When it disclosed the over-issuance, Barclays made a rescission offer covering all securities offered and sold in excess of its shelf registration. This rescission offer remediated the harm to investors who purchased the unregistered shares; however, the Commission nonetheless concluded that quantifiable investor losses remained because the price of Barclays’ ordinary shares trading on the London Stock Exchange (“LSE”) and its American Depository Receipts (“ADRs”) trading on the New York Stock Exchange (“NYSE”) declined by 3.7% and 3.4%, respectively, when Barclays disclosed the over-issuance and made the rescission offer.
To remediate that harm, the Commission created a Fair Fund from the $200,000,000 civil penalty paid by Barclays and invited comment on a Proposed Plan of Distribution. The Commission today issued an Order Approving Plan of Distribution that approves the previously proposed plan without any modification. The approved Plan of Distribution will distribute the Fair Fund in two stages: “First, funds will be allocated to Recognized Losses on ADRs. Second, the remaining Net Available Fair Fund will be allocated to Recognized Losses on ordinary shares.” The Recognized Loss for each type of security—the ADRs traded on the NYSE and the ordinary shares traded on the LSE—is the sum of the per-transaction loss for shares purchased or acquired for a defined time period, as calculated in accordance with a price inflation schedule created by the Commission’s Division of Economic and Risk Analysis.
If funds remain in the Net Available Fair Fund after payment of all Recognized Losses, then the Commission staff has discretion to pay reasonable interest on the losses. Funds remaining after payment of Recognized Losses and reasonable interest go to the United States Treasury.
Policy and Legal Concerns
As noted when the Commission proposed this Plan of Distribution, using a Fair Fund to compensate investors who purchased securities of a foreign issuer on a foreign exchange raises significant and interrelated policy and legal concerns. From a policy standpoint, it makes little practical sense for the Commission to compensate investors who suffered losses from transactions in Barclays’ ordinary shares on the LSE. When investors choose to trade on foreign markets, they should not expect to fall under the protection of the laws and regulations of the United States, including the securities laws enforced by the Commission, regardless of whether the investor is based in the United States or in a foreign country.
In contrast, the Commission’s interest in protecting investors trading on domestic exchanges is manifest. Protecting investors and maintaining fair, orderly, and efficient domestic markets are two mainstays of the Commission’s three-part mission. Compensating investors who, while trading on domestic exchanges, incur losses attributable to violations of the federal securities laws and regulations, serves the Commission’s mission. Compensating investors who choose to opt out of the United States securities laws to trade on foreign exchanges, even for losses with some arguable link to a violation of United States law, does not.
My legal concern with the Plan of Distribution reinforces the policy concern. As the Supreme Court explained:
“It is a basic premise of our legal system that, in general, United States law governs domestically but does not rule the world. This principle finds expression in a canon of statutory construction known as the presumption against extraterritoriality: Absent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.”
When it published the Proposed Plan of Distribution, the Commission suggested that the presumption against extraterritoriality was not an obstacle to distributing the Fair Fund to investors to compensate losses incurred trading on a foreign exchange because paying money “confers a benefit” and therefore does not “implicat[e] the sovereignty of foreign nations—one of the core animating principles” underpinning the presumption against extraterritoriality. This justification confuses the reason for the rule.
The Supreme Court has made clear that the rule—statutes are presumed to apply only domestically—applies to all statutes “regardless of whether there is a risk of conflict between the American statute and a foreign law.” The Court’s precedents set out “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.
The Commission’s analysis fails to apply the two-step process when construing the relevant statutory language. At the first step, nothing in the language of SOX 308(a) “gives a clear, affirmative indication” that Congress meant for the statute to have extraterritorial application. Moving to the second step, the relevant conduct that is the focus of the Fair Fund provision—compensation for losses incurred during the relevant period—here involves conduct occurring both domestically (ADR transactions on NYSE) and in a foreign country (ordinary share 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—transactions on the LSE—and thus “involves 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.
Lastly, given that penalty money not paid out to investors through a Fair Fund is deposited into the United States Treasury, compensating investors who traded on foreign exchanges comes at a cost to American taxpayers. The Commission should reallocate funds from American taxpayers to investors trading on foreign exchanges only when there is clear authorization or instruction from Congress to do so, something that is lacking on the face of SOX 308(a). For all those reasons, I cannot support the Plan of Distribution for this Fair Fund.
