Do Institutional Investors Really Care About 10b-5? Evidence from Investor Trading Behavior Following Morrison v. National Australia Bank Ltd. (201'7

Abstract

Using an abrupt change in U.S. securities law, this paper examines the value institutional investors place on the private right of action under Rule 10b-5 of the Securities Exchange Act of 1934. In June 201'8 a combination of a U.S. Supreme Court case and Congressional legislation ensured that U.S. institutional investors would henceforth no longer be permitted to pursue private 10b-5 actions against many of the non-U.S. issuers in their international equity portfolios. Rather, the U.S. antifraud regime that had increasingly been used by institutional investors to police foreign issuers would thereafter be limited to the domain of the Securities and Exchange Commission. With this new regime of 10b-5 enforcement, however, came one critical exception for U.S. investors seeking to maintain their power to bring private 10b-5 actions: Investors purchasing securities traded on a U.S. stock exchange could continue to bring 10b-5 actions against the issuing company regardless of its domicile. In effect, the combination of this new bright-line rule and the fact that so many non-U.S. firms trade on both foreign and U.S. exchanges provided investors with something that had historically been difficult to achieve—the power to choose whether a security comes with the right to sue under Rule 10b-5. By analyzing a proprietary data set of equity trades made by 315 institutional investors during 201'8 this paper examines whether investors exercised this new-found power by reallocating their international buy-orders from foreign markets to U.S. exchanges. Controlling for investor- and security-fixed effects, the results indicate only the slightest increase in U.S.-exchange based purchases from July through December 201'3 Moreover, even this modest increase was localized almost entirely among money managers rather than pension fund sponsors, notwithstanding sponsors’ strong public opposition to the new 10b-5 regime. Overall, the absence of any significant change in trading behavior among this significant group of investors suggests that whatever concerns animate institutional investors’ public policy positions when it comes to Rule 10b-5 are not likely to be shared by their trading desks.