April 2007


From the editors of CCH Federal Securities Law Reporter, CCH Blue Sky Law Reporter and the securities publications of Aspen Publishers, this update describes important developments covered in these publications, as well as timely topics of interest generally to federal and state securities practitioners.

If you have questions or comments concerning the information provided below, please contact me at elena.eyber@wolterskluwer.com.

CCH Federal Securities Law Reporter

Commission Unanimously Approves Deregistration Rules for Foreign Issuers
The SEC voted to adopt a new rule that will enable foreign private issuers to use a trading volume benchmark, rather than a headcount of U.S. shareholders, to determine their eligibility to deregister a class of equity securities and terminate their Exchange Act reporting obligations. New Rule 12h-6 will permit a foreign private issuer to deregister if the U.S. average daily trading volume of the subject class of securities has been no greater than five percent of its worldwide average daily trading volume for a recent 12-month period, assuming that the issuer meets all other conditions of the rule. Release No. 34-55540 at ¶87,785.

Changes to Broker-Dealer Rules Proposed
 The SEC proposed amendments to its rules regarding broker-dealers. The amendments would modify the SEC’s customer protection, books and records and notification rules for broker-dealers. The proposed rules would also update the financial responsibility rules and make certain technical amendments. Release No. 34-55431 at ¶87,766.

SEC and Financial Regulators Propose Model Privacy Notice Form
The SEC and the financial regulatory agencies have proposed a model form for privacy notices that would satisfy the disclosure requirements under Regulation S-P. According to the agencies, the proposed model form is easier to understand than most privacy notices currently being used. The proposed form includes instructions on how to use the new form in order to obtain a safe harbor. Release No. 34-55497 at ¶87,785.

Technical Changes Made to Regulation S-T
The SEC amended Regulation S-T with respect to mandated electronic submissions. The amendment is intended to clarify that a filing submitted on an electronic filing system other than the EDGAR system is not a “mandated submission” under Regulation S-T and will clarify that filers who submit forms on EDGAR for Division of Market Regulation review are subject to Regulation S-T requirements. Release No. 34-55502 at ¶87,778.

SEC Charges 14 Individuals with Insider Trading
The SEC brought insider trading charges against 14 defendants in connection with two related insider trading schemes in which Wall Street professionals serially traded on material, nonpublic information tipped, in exchange for cash kickbacks, by insiders at two major financial services firms. The complaint alleged that in the first scheme, in operation since 2001, at least eight securities industry professionals, three hedge funds, two broker-dealers and a day-trading firm, made thousands of illegal trades and millions of dollars in illicit profits using inside information misappropriated by a brokerage firm executive to trade ahead of the firm's analyst recommendations. The complaint alleged that in the second scheme, several securities industry professionals and a hedge fund made dozens of illegal trades and hundreds of thousands of dollars in illicit profits using inside information misappropriated by an attorney at the second firm to trade ahead of corporate acquisition announcements. Collectively, the complaint alleges, the defendants made at least $15 million in illicit profits from these two insider trading schemes. SEC v. Guttenberg, Litigation Release No. 20022 is reported at ¶87,763 .

American Stock Exchange Former Head Charged
The SEC issued a settled cease and desist order against American Stock Exchange LLC for failing to enforce compliance with the securities laws and rules and failing to comply with its recordkeeping obligations. In the order, the Commission found that from at least 1999 through June 2004, the exchange failed adequately to monitor for violations of order-handling rules by members and failed to keep and furnish surveillance and other records. The Commission also instituted contested administrative proceedings against the exchange's former chairman and chief executive officer, alleging that he failed to enforce compliance with federal securities laws and exchange rules by exchange members and associated persons. Release Nos. 34-55507 and 34-55508 will be published April 4, 2007 at ¶87,872 and ¶87,873.

Fifth Circuit Rules Investment Banks Owed No Duty to Enron Shareholders
Under a ruling by the 5th U.S. Circuit Court of Appeals, shareholders of Enron Corp. will be unable to recover damages from investment banks that allegedly engaged in transactions that allowed Enron to misstate its financial condition. Secondary actors such as investment banks and accountants who act in concert with public companies in schemes to defraud investors cannot be held liable as primary violators of Rule 10b-5, concluded the court, unless they 1) directly make public misrepresentations, 2) owe the shareholders a duty to disclose or 3) directly manipulate the market for the company's securities through practices such as wash sales or matched orders. Regents of the University of California v. Credit Suisse First Boston (USA), Inc. (5thCir) is reported at ¶94,173.

District Court Rules PCAOB is Constitutional
A federal district judge has ruled that the Public Company Accounting Oversight Board is constitutional, rejecting the claim that the appointment of PCAOB members violated the appointments clause of the Constitution. This provision authorizes the president to appoint "officers" of the United States, while allowing Congress to delegate the appointment of inferior officers to "heads of departments." Free Enterprise Fund v. Public Company Accounting Oversight Board (DC DofC) will be published April 4, 2007 at ¶94,183.

2nd Circuit Affirms No Private Action Under Fund Provisions
Concluding that "the text and the structure of the ICA reveal no ambiguity about Congress's intention to preclude private rights of action to enforce Sections 34(b), 36(a), and 48(a)," a 2nd Circuit panel affirmed the dismissal of investor claims under these provisions against a family of mutual funds and their affiliated entities. Because "Congressional intent is the keystone as to whether a federal private right of action exists for a federal statute," the court concluded that the investor claims were not actionable. Bellikoff v. Eaton Vance Corp. (2ndCir) will be published April 4, 2007 at ¶94,184.

State Registration Claim Not Preempted
A federal appeals panel (6thCir) found that summary judgment on a state law claim had been improperly granted on preemption grounds. The district court had held that Section 18(a) of the Securities Act, which exempts "covered securities," including those offered pursuant to an exemption for sales to qualified purchasers, from state registration requirements, precluded the state action. According to the district court, preemption applied if "the filing had been entered under the rubric of a federal exemption" without regard to the question of whether the exemption was applicable. The appellate panel rejected this notion, however. Under such an interpretation, stated the court, "state registration requirements could be avoided merely by adding spurious boilerplate language to subscription agreements suggesting that the offerings were "covered," or by filing bogus documents with the SEC." The court concluded that Section 18 preempted state regulation "with respect only to those offerings that actually qualify as "covered securities" according to the regulations that the SEC has promulgated." The panel also found summary judgment inappropriate because the applicability of the Rule 506 in question could not be established as a matter of law. Brown v. Earthboard Sports USA, Inc. (6thCir) will be published April 4, 2007 at ¶94,182.

Appellate Panel Vacates Contempt Order
The 7th U.S. Circuit Court of Appeals vacated a contempt order entered by a federal district judge with regard to a fraud defendant's violations of a temporary restraining order and a preliminary injunction prohibiting him from distributing unregistered securities or engaging in any penny stock offering, whether registered or unregistered. The appellate panel agreed with the district judge that the defendant had violated the orders, but questioned the structure of the relief granted. As described by the appellate court, the order differed from a typical rescission order because 1) the stock would be cancelled rather than returned to the seller and 2) the defendant's obligation to disgorge the proceeds was unconditional, even if some investors preferred to keep their shares. The unconditional nature of the order might result in the characterization of the sanctions as punitive rather than remedial. Because the district judge's opinion did not explain why the shares were cancelled rather than refunded, or why the order was unconditional, the appellate panel vacated the order and remanded the matter to the district court for further consideration. SEC v. McNamee (7thCir) is reported at ¶94,172.

2nd Circuit Finds Primary Liability for Auditors Under Section 10(b)
The 2nd U.S. Circuit Court of Appeals held that an auditor may be primarily liable for violations of 10(b) and Rule 10b-5 "when the auditor makes a statement in its certified opinion that is false or misleading when made, subsequently learns or was reckless in not learning that the earlier statement was false or misleading, knows or should know that potential investors are relying on the opinion, yet fails to take reasonable steps to correct or withdraw its opinion." The holding stemmed from an appeal of a district court's (SD NY) order dismissing investors' securities fraud claims with prejudice for failure to plead a viable theory of primary liability against an accountant engaged in auditing a broker-dealer's financial statements. Overton v. Todman & Co. (2ndCir) is reported at ¶94,160 .

CCH Blue Sky Law Reporter

California Proposes Further Changes to Proposed Compensatory Benefit Plan Regulations (that Involve SEC Rule 701)
Compensatory benefit plan security rules that act as prequalification guidelines to achieving the statutory 25102(o) exemption for plan securities exempt under SEC Rule 701 were proposed for amendment by the Department of Corporations. The proposals would relax the rules currently viewed as burdening businesses trying to create jobs and expand operations in California and as unduly restricting employees', officers', directors' and consultants' ability to participate in compensatory benefit plans. Further proposed changes would add flexibility to the transferability of options, allow greater flexibility in obtaining shareholder approval of a compensatory benefit plan, more closely align some provisions to Rule 701 of the Securities Act of 1933, and permit an issuer greater flexibility in structuring a repurchase feature upon the termination of employment. ¶11,858, ¶11,892, ¶11,893, ¶11,896, ¶11,897

Florida Proposes to Amend Dealer, Issuer-Dealer, Investment Adviser, Federal Covered Adviser and Associated Person Registration/Notice Filing Procedures, Redefine "Branch Office" and Set Forth Canadian Dealer Application Requirements
Dealer, issuer-dealer, investment adviser, federal covered adviser and associated person registration/notice filing requirements would be amended under rule changes proposed by the Florida Office of Financial Regulation. In addition, a new branch office definition would be created along with amended registration requirements; Canadian dealer application requirements would be set forth; the percentage of beneficial interest or ownership certain trusts and corporations must have to be excluded from the count of purchasers for the limited offering exemption would be relaxed; net capital would be defined; and GAAP standards would specifically mean United States generally accepted accounting principles. ¶17,411, ¶17,422, ¶17,426, ¶17,431, ¶17,433, ¶17,444, ¶17,451, ¶17,451A, ¶17,452, ¶17,454, ¶17,456, ¶17,459, ¶17,459A, ¶17,459B, ¶17,459C, ¶17,464, ¶17,466, ¶17,475

Kentucky Proposes Clarifying Its Incorporation of NASAA Church Bond/Extension Fund Policy Statements
The North American Securities Administrators Association Statement of Policy Regarding ChurchBonds would be applied for a one-time offering of securities by a church or other nonprofit organization. The NASAA Statement of Policy Regarding ChurchExtension Funds would be applied for a continuing offering of securities by a church or other nonprofit organization. ¶27,417

Missouri Emergency Adopts and Simultaneously Proposes Exemption for Investment Advisers to Pooled Funds
 An exemption from Missouri investment adviser registration requirements was adopted by emergency and simultaneously proposed for permanent adoption, for certain investment advisers to pooled investment vehicles. To qualify, investment advisers must be exempt from Section 203(b)(3) of the Investment Advisers Act of 1940 and must be engaged in the business providing investment advice to no more than 15 clients. The terms “Assets under management” and “client” are defined. ¶35,448

Oklahoma Proposes to Amend Investment Adviser Custody and Recordkeeping Requirements and Administrative Hearing Rules
Investment advisers that take or have custody of their clients' funds or securities would be in violation of Oklahoma's fraudulent practice provisions unless the investment advisers notify the Administrator in writing on Form ADV of the custody, and have their clients' funds and securities maintained by a qualified custodian in separate accounts for each client under that client's name or in one account for all clients of a particular investment adviser under the investment adviser's name as agent or trustee. The investment advisers would notify their clients in writing of the qualified custodian's name, address and the manner in which the funds or securities are maintained, and when the account is opened, and after any changes are made to account information. ¶46,489B

IA Recordkeeping
The recordkeeping requirements for investment advisers would be expanded to define an "advisory representative," and set forth books and records requirements for investment advisers whose investment advice is not part of their primary business and for investment advisers having custody of their clients' funds or securities. ¶46,484
Hearings. Rules on hearings, prehearings, subpoenaing witnesses, records from oral proceedings and final orders would be amended. ¶46,418, ¶46,419, ¶46,420, ¶46,421, ¶46,423, ¶46,424, ¶46,425

Aider Liability Required Subjective Knowledge of Wrongdoing
A federal district court (N.D. Tex.) held that the plaintiff investors failed to state a claim for aider liability under the Texas Securities Act where they did not allege that the defendants were subjectively aware of the primary violator’s improper activities. The plaintiffs, a group of retired airline pilots, claimed that Rydex Investments (Rydex) materially aided an investment adviser representative in soliciting the plaintiffs to invest retirement assets in excessively volatile mutual funds managed and distributed by Rydex. Although the complaint stated that Rydex representatives had spoken at investment seminars hosted by the investment adviser representative, the plaintiffs failed to allege that Rydex was aware of a risk that the adviser was acting improperly in recommending the Rydex funds to them. Bagby v. Rydex Investments is reported at ¶74,619.

Rescission Unavailable to an Inadvertent Short Seller
In Wachovia Securities, LLC v. Joseph, the Supreme Court of New York held that a seller was not entitled to rescind an inadvertent short sale of securities on the basis of unconscionability where it failed to exercise reasonable care in ordering the transaction. Wachovia Securities, LLC (Wachovia) alleged that a group of investors had used the confusion in the marketplace concerning both the new price and ticker symbol of shares of a pink sheet security in order to set a trap for market participants who were unaware that the stock had undergone a 1000-for-one reverse split. The complaint established, however, that Wachovia had mistakenly sold short the security merely in an attempt to close out its own open position, and not as a result of any inducement by the investors. The decision is reported at ¶74,618.

Aspen Federal Securities Publications

Broker-Dealer Law and Regulation, Fourth Edition, by Norman S. Poser and James A. Fanto
The new, Fourth Edition, is now on both the IRN Investment Management and the Exchanges & SROs Libraries. The Fourth Edition of Broker-Dealer Law and Regulation represents a very substantial reorganization and expansion from the prior edition, reflecting the growth of the securities industry and of its regulation, in both size and complexity, during the first years of the twenty-first century. The most important change in the Fourth Edition is the greatly increased emphasis that it gives to regulation and compliance. Among other things, this publication has vastly expanded its coverage of broker-dealer registration and the registration process, recordkeeping and reporting, and examination requirements; exemptions from broker-dealer registration for banks and other financial institutions; privacy and anti-money laundering rules applicable to the firms; and financial and capital regulation. In addition, new chapters have been added on the structure of the securities markets, the regulation of broker-dealers in public offerings, and SEC and SRO enforcement; and new sections have been added on margin regulation, regulation of hypothecation and lending of securities, and voidable contracts.

Financial Reporting Handbook, by Michael Young
The latest release, Release 14, published in March and is now live on the IRN Corporate Governance Library. This reference provides quick access to critical aspects of financial reporting. In addition to covering the Sarbanes-Oxley Act, SEC rules and regulations, standards of the Independence Standards Board and the AICPA and requirements of the New York Stock Exchange, NASDAQ, and the American Stock Exchange, the Financial Reporting Handbook tackles important underlying themes such as the centrality of the audit committee, the individual responsibility of executives, and the integrity of the outside auditor.

IPO Vital Signs

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To see how an IPO Vital Sign works click on the Vital Sign title below:

#175 - IPO Lead Managers

Review First Quarter 2007 IPO lead managers by...

  • Investment Bank
  • IPOs
    • Count
    • Percentage of Total
  • IPO Offering Amount
    • Aggregate
    • Percentage of Total
  • IPO Discount
    • Aggregate
    • Percentage of Total

** equal credit joint underwriting mandates **

Tip! Click on For the period at the top of the table to open a calendar function and use the drop down boxes to select a date range, then click the [REFRESH] button to update the Vital Sign table of data. After the table is updated you can click [CLOSE] to close the calendar function and maximize the viewable area. Click on blue numbers to drill down for more information. Click Column headings to re-sort the table’s data.