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April 2013


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. This update includes a preview of IPO Vital Signs, an advanced IPO research analysis tool, for IPO professionals and pre-IPO companies and a preview of RBsource, a new all-in-one online securities law resource, powered by the Securities Redbook. Finally, please see the “Hot Topic of the Month,” for research tips and references to CCH and Aspen source material on point.

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Securities Regulation Daily

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Securities Regulation Daily subscribers get special copyright permissions to forward information to colleagues or clients; the option to customize your daily email by topic and/or jurisdiction; the ability to receive breaking news email alerts; time-saving mobile apps for iPhone®, iPad®, BlackBerry®, or Android®; access to all links to cases and other referenced primary source content without being prompted for user name and password; and a searchable archival database.


Financial Reform Resources



CCH Federal Securities Law Reporter

SEC Proposes Regulation SCI in Response to Technology Failures. The SEC has issued a 377-page rule proposal containing new Regulation Systems Compliance and Integrity (Reg SCI), which is intended to help protect investors from technology systems failures that have troubled the markets in recent years. These events include the May 6, 2010, flash crash, problems with the initial public offerings of Facebook in May 2012 and BATS Global Markets in March 2012, Knight Capital Group’s $440-million trading loss in August 2012, cyber attacks on NASDAQ’s systems, and Hurricane Sandy, which shut down the markets on October 29 and 30 of 2012. The proposed regulation would codify the SEC’s Automation Review Policy and provide a safe harbor for entities and individuals who meet certain requirements.

Proposed Regulation SCI would apply to “SCI entities,” defined to include FINRA, MSRB, the registered national securities exchanges, and registered clearing agencies. It would also apply to alternative trading systems that exceed specified volume thresholds, disseminators of market data under certain National Market Systems plans, and certain clearing agencies exempt from SEC registration.

The proposal would add Rule 242.1000, which would require SCI entities to establish written policies and procedures reasonably designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that they operate in the manner intended. It would also require scheduled testing of the operation of business-continuity and disaster-recovery plans, including backup systems, and require the entities to coordinate testing with other SCI entities.

The proposal would also add Form SCI, which would require five separate types of filings. The five types of filings refer to subsections of Rule 242.1000: (1) “SCI events” or “(b)(4)” filings, for notifications regarding systems disruptions, systems compliance issues, or systems intrusions; (2) “(b)(6)” filings, for notifications of planned material systems changes; (3) “(b)(8)(i)” filings, for reports of SCI reviews; (4) “(b)(8)(ii)” filings, for semi-annual reports of material systems changes; and (5) “(b)(9)(iii)” filings, for notifications of designations and standards under Rule 1000(b)(9) .

The rule includes a safe harbor for both SCI entities and individuals. An entity would meet the requirements of the safe harbor if it: (1) tested all SCI systems prior to implementation; (2) did periodic testing of systems; (3) established a system of internal controls over changes to the systems; (4) monitored the functionality the systems; (5) assessed system compliance with applicable federal securities laws and regulations; and (6) reviewed systems design, changes, testing, and controls to detect and address actions that do not comply with applicable federal securities laws and regulations.

A safe harbor is provided for individuals if the person has reasonably discharged their duties and obligations and had no reasonable cause to believe that the policies and procedures were not being complied with in any material respect. Release No. 34-69077 is reported at ¶80,249.

Fraud Class Action May Be Certified Without Proof of Materiality. The United States Supreme Court held that proof of materiality is not a prerequisite to certification of a securities fraud class action seeking money damages for alleged violations of Exchange Act’s antifraud provisions. The 6-3 decision resolves a split among the circuits.

Connecticut Retirement Plans and Trust Funds filed a class-action complaint in district court alleging that Amgen, Inc. made misrepresentations and omissions regarding the safety, efficacy, and marketing of two drugs. The complaint invoked the fraud-on-the-market reliance theory that in efficient markets, the share price reflects all publicly available information; Amgen conceded that the market for its securities was efficient. The district court certified the class; on interlocutory appeal, the Ninth Circuit Court of Appeals affirmed. The Supreme Court granted certiorari to resolve a circuit split as to whether district courts must require plaintiffs to prove materiality and allow defendants to present rebuttal evidence prior to certifying a securities fraud class action.

Amgen contended that to satisfy Federal Rule of Civil Procedure 23(b)(3) — that common questions of law or fact predominate over questions affecting individual class members — Connecticut Retirement must prove, rather than merely plead, materiality before the class can be certified. The majority opinion, authored by Justice Ginsburg and joined by Justices Roberts, Breyer, Alito, Sotomayor, and Kagan, held that proof of materiality is not a prerequisite to class certification as "Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class" (emphasis in original). "Because materiality is judged according to an objective standard," Justice Ginsburg continued, "…the alleged misrepresentations and omissions, whether material or immaterial, would be so equally for all investors composing the class."

The Court held that proof of materiality is not needed to ensure that common questions of law or fact will "predominate over any questions affecting only individual members" for two reasons. First, materiality is a common question because it can be proved through evidence common to the class. Second, because materiality is an essential element of a Rule 10b-5 claim, "there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating"; the failure of proof would end the case for all class members, leaving "no claim … in which individual reliance issues could potentially predominate." For this reason, the Court rejected Amgen’s argument that, because other fraud-on-the-market predicates must be proven before class certification under the Court’s Halliburton decision, so must materiality. The Court distinguished materiality from issues of market efficiency and publicity because a failure of proof on materiality ends the case and thus does not leave any possibility of individual questions overwhelming common ones.

Similarly, the court did not err in refusing to consider Amgen’s rebuttal evidence because the evidence attempted to show that the statements were immaterial, but immateriality is not a barrier to finding that common questions predominate for class certification purposes. "[J]ust as a plaintiff class’s inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class"

Amgen also argued that policy considerations merited requiring proof of materiality prior to certification: because certification puts pressure on the defendant to settle, the issue of materiality may never be decided. The Court rejected this argument, noting that in that respect, materiality is no different from other elements of a Rule 10b-5 claim that need not be adjudicated before certification, such as falsity and loss causation. The Court also noted that Congress has addressed settlement pressures through other means, notably through the PSLRA, during the enactment of which it rejected calls to do away with the fraud-on-the-market reliance presumption.

Justice Alito joined in the majority opinion but wrote a one-paragraph concurring opinion to note that, while the petitioners did not ask the Court to revisit the fraud-on-the-market presumption, the presumption may rest on a faulty economic premise, and it may be appropriate to reconsider it.

Justice Thomas filed a dissenting opinion, in which Justice Kennedy joined and Justice Scalia joined in part, arguing that materiality must be proved prior to class certification. Materiality is a necessary element of the fraud-on-the-market presumption which, in turn, is a necessary predicate to class certification because, without the reliance presumption, individual reliance issues predominate over common ones. "The failure to establish materiality [on the merits] retrospectively confirms that fraud on the market was never established, that questions regarding the element of reliance were not common under Rule 23(b)(3), and, by extension, that certification was never proper," the dissent stated. Justice Scalia filed a separate dissenting opinion arguing that the Basic decision "envisions a demonstration of materiality not just for substantive recovery but for certification." Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (US Sup Ct) is reported at ¶97,300.

Supreme Court: No Discovery Rule for SEC. The United States Supreme Court has held that the SEC was not entitled to invoke the discovery rule under 28 U.S.C. Section 2462 in a civil penalty case against individuals who allegedly violated the Investment Advisers Act. Chief Justice John G. Roberts, Jr., writing for a unanimous Court, said that adding a discovery rule to this civil penalty limitations period would be contrary to the provision’s legislative history and also unnecessary because the SEC’s mandate is to investigate fraud on an ongoing basis.

The case arose from an enforcement action by the SEC against Bruce Alpert, COO Gabelli Funds, LLC, and Marc Gabelli, portfolio manager of Gabelli Global Growth Fund (GGGF). Specifically, the SEC alleged that Mr. Alpert and Mr. Gabelli violated the Investment Advisers Act’s antifraud provisions by not disclosing to investors that they had arranged to permit Headstart Advisers, Ltd. to engage in "market timing" in GGGF if Headstart invested in a hedge fund run by Mr. Gabelli. The alleged misconduct occurred while Gabelli Funds barred market timing by others and told investors it would disallow this conduct.

The SEC brought an enforcement action against Mr. Alpert and Mr. Gabelli seeking to impose civil penalties against them for aiding and abetting Advisers Act violations. The SEC also claimed that the fraud discovery rule allowed it to overcome the five-year limitations period in Section 2462, which states:

Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.

According to the Supreme Court, this provision was last revised in 1948, but can be traced to 1839. Section 2462 has broad application and is not exclusive to securities regulation.

The district court dismissed the SEC’s case on limitations grounds. However, the Second Circuit reversed because it said the discovery rule applies to claims sounding in fraud. The Supreme Court then reversed the Second Circuit but did not reach the SEC’s equitable and disgorgement claims that were outside of Section 2462 nor did the Court decide tolling claims the SEC chose not to pursue.

The Supreme Court held that the SEC may not invoke the fraud discovery rule because it is a government agency charged with investigating fraud at all times. The SEC had argued that it was no different than private plaintiffs, who may invoke the discovery rule. The Court, however, rejected the SEC’s view in favor of the "most natural reading" of Section 2462: the five-year limitations period runs from the time of the alleged fraud.

According to the Court, the standard rule states that a claim accrues when the plaintiff has a complete case. The standard limitations period ensures that enterprising plaintiffs may not revive stale claims. Historically, the discovery rule has been an exception to the standard rule that may be invoked by private plaintiffs in cases of alleged self-concealing fraud.

Here, the Court said, the SEC was not in the same position as a private plaintiff. For one, the SEC is charged with investigating fraud and other misconduct on an ongoing basis. That means the SEC is always on alert for suspicious conduct, whereas private plaintiffs need the discovery rule because they are not similarly on constant alert for those who would harm their interests.

The Court also said there was no historical basis for extending the fraud discovery rule to government enforcement actions. In fact, the Court said it found no instance where the discovery rule was applied to these actions. The Court noted that the solicitor general, on the SEC’s behalf, had cited no applicable precedent earlier than 2008 for the government’s view. Similarly, the Court found the government’s reliance on Exploration Co. v. U.S. inapt because the government in that case was the fraud victim, and the matter was not an enforcement action.

As a result, the SEC may not rely on the discovery rule in its pursuit of alleged fraudsters in an enforcement action seeking to impose civil penalties. Said the Court: "[c]harged with this mission and armed with these weapons, the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect."

The Supreme Court also noted that an SEC enforcement action seeks to punish alleged wrongdoers rather than to obtain compensation. The Court asked rhetorically, "… when does "the Government" know of a violation? Who is the relevant actor?" The Court was concerned that persons subject to government enforcement actions with a discovery rule would lack certainty about how long the government may pursue them.
Citing its Merck opinion, the Court observed that a private plaintiff must exercise reasonable diligence to discover fraud. However, the Merck standard, said the Court, would be difficult to apply in the context of government enforcement actions. For one, there are issues of agency priorities, the allocation of scare resources, and the challenge to identify the government official who is to be charged with knowledge. Also, federal laws that permit the government, as the victim seeking compensation (not punishment), to invoke the discovery rule also ensure absolute repose. Judicially-crafted discovery rules typically have no explicit repose period. Gabelli v. SEC (US Sup Ct) is reported at ¶97,299.

3rd Circuit Adopts “Reasonable Belief” Standard for Whistleblower Cases. In a 2-1 ruling, a 3rd Circuit panel held that corporate whistleblowers are protected under the Sarbanes-Oxley whistleblower provision if they demonstrate a "reasonable belief" that securities laws are being violated. The court reversed in part the dismissal of federal whistleblower claims brought by a former employee of an electronics company. Tyco Electronics Corporation's (Tyco) motion to dismiss the federal whistleblower claims was granted by the district court for the Eastern District of Pennsylvania. The appellate court concluded that the district court was too stringent in requiring that the employee allege that his communications to his supervisors "definitively and specifically relate to" an existing violation of a particular antifraud law.

The action was brought by Jeffrey Wiest, who had worked in Tyco's accounting department for approximately thirty-one years until being terminated in April 2010. Wiest's office had been under "a high level of audit scrutiny" for nearly ten years due to a scandal involving Tyco's former parent company. Wiest had "established a pattern of rejecting and questioning expenses" that did not satisfy accounting standards or securities and tax laws.

In 2008, Wiest questioned expenditures for several events and conferences that Tyco held at various resorts. For example, an event was held at a Bahamian resort that was similar to a corporate party under the parent company's management that had drawn significant criticism. Wiest sent an email to his supervisor expressing his opinion that the event's costs were extravagant and inappropriately charged entirely as advertising expenses instead of being charged as income to attending employees. Tyco ultimately treated the event as income. Wiest also questioned other events between 2007 and 2009, including a "lavish" holiday party.

Eventually, Wiest alleged, Tyco's management become frustrated with his challenges, and he was later informed by human resources employees that he was being investigated over allegations of failing to report gifts, sexual harassment and having an improper relationship with another employee. Wiest's health declined, and he went on medical leave due to stress over the investigation. He was terminated seven months later.

Wiest sued Tyco in 2010, claiming that he was discharged in retaliation for his reports of improper expenditures in violation of Sarbanes-Oxley Section 806. The district court examined the e-mails Wiest sent to his supervisors and concluded that they failed to "definitively and specifically" convey an "objectively reasonable" belief that any fraudulent activity had occurred or was ongoing. Additionally, the refusal to process the expenditures was not a protected activity because Wiest did not explain to his supervisors that his refusal was related to concerns about potential fraud.
Judge Vanaskie, writing for the court, noted that the district court relied on a 2006 decision by the U.S. Department of Labor Administrative Review Board (ARB), Platone v. FLYI, Inc. Under Platone, a communication must "definitively and specifically" relate to a violation of a statute or rule listed in Section 806. However, in 2011, in Sylvester v. Parexel Int’l LLC, the ARB overruled Platone's standard in favor of a "reasonable belief" standard. The ARB, the court explained, recognized that the SOX whistleblower provision expressly enumerates the laws to which it applies and that the "definitive and specific" standard potentially conflicts with the statutory language of Section 806, which prohibits retaliation against employees for expressing a reasonable belief that a violation is occurring. The ARB interpreted the "reasonable belief" as requiring that a plaintiff have a subjective belief that the conduct violates a provision listed in Section 806 and that the belief would be objectively reasonable to a person with the same training and experience.

The appellate court concluded that the ARB's rejection of the Platone standard was entitled to Chevron deference. An employee, therefore, must establish "a subjective, good faith belief that his or her employer violated a provision listed in SOX" and also "that his or her belief was objectively reasonable." Applying the reasonable belief test, the court determined that the district court applied too stringent a standard and thus erred in requiring that an employee's communication reveal the elements of securities fraud. The district court also erred in concluding that a communication must implicate "a reasonable belief of an existing violation" to constitute protected activity. An employee need only reasonably believe that a violation is likely to happen, the panel stated.""
The court then determined that Wiest pleaded adequate facts to show that his communications relating to two of the events were protected activity under Section 806. The court determined that the allegations in the complaint supported an inference that Wiest subjectively believed that Tyco's conduct may have violated a provision listed in Section 806, and it was also plausible that his belief would be objectively reasonable to a person in his position. These communications were therefore protected activity under Section 806. The dismissal as to these communications was reversed.

Wiest, however, was unable to establish that his communications related to other matters were protected, and their dismissal was affirmed. These events included a holiday party, a team meeting that did not break out entertainment and meal expenses, and a baby shower for an employee. While the complaint showed that Wiest subjectively believed that these expenses could have violated a provision in Section 806, his belief was not objectively reasonable.

Judge Jordan dissented, stating that he believed that the District Court properly determined that Wiest failed to establish that he communicated an objectively reasonable belief that Tyco officials constituted a violation of a provision referenced in Section 806. According to Judge Jordan, the majority focused on a complainant's frame of mind and ignored the need for the employer "to actually perceive that a whistle has been blown."

The dissent characterized the Sylvester standard as "impossibly vague," that "open the door to whistleblower relief to anyone with vague feelings of unease or even specific discomfort with something other than that which is identified in § 806." A SOX whistleblower, the judge continued, must do more than criticize undesirable corporate conduct. A whistleblower is "required to demonstrate that his protected communication concerned a "violation" of one of the listed statutes or of an SEC rule or regulation or other Federal law relating to fraud on shareholders."

The dissent also argued that the court has adopted an internally inconsistent test by requiring objective reasonableness while rejecting the requirement of a reasonable belief that each element of a listed anti-fraud law is satisfied. The majority stated that it did not believe that Congress intended "such a formalistic approach" and that the intent of the statute is to protect whistleblowers. Employees should not be unprotected from reprisal if they lack knowledge sufficient to form an objectively reasonable belief that a listed anti-fraud law had been violated, the majority said.

Judge Jordan stated that applying a test of objective reasonableness in this case reveals Wiest's communications to be "a bookkeeper's sensible inquiries about proper accounting for expenses, not allegations of fraud." If a complainant's reasonable belief is not measured against the elements of securities fraud, the dissent stated, "then virtually any internal questioning of an accounting mistake or a judgment call turns the questioner into a SOX whistleblower, and that cannot be right." Wiest v. Lynch (3rdCir) is reported at ¶97,330.


CCH Blue Sky Law Reporter  

Missouri Adopts Private Fund Adviser Exemption. Private fund advisers are exempt from investment adviser registration requirements if neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of federal Regulation A, and the advisers electronically file through the IARD the SEC-filed reports and amendments required for exempt reporting advisers by Rule 204-4 of the Investment Advisers Act of 1940. The exemption takes effect when the reports and amendments are filed and accepted by the IARD on the State’s behalf, assuming the exemption’s other conditions are met. ¶35,448.

Rhode Island Adopts Investment Company and Rule 506 Offering Exemptions. Federal covered securities exemptions for issuers making investment company or Rule 506 offerings were adopted by the Rhode Island Securities Division. In addition, rules setting forth broker-dealer and investment adviser exemptions, broker-dealer licensing provisions, investment adviser/representative written examination requirements and an Internet advertising exemption for all industry persons were nonsubstantively amended. Lastly, a duplicative Internet advertising exemption rule was repealed. ¶50,409BB and ¶50,409BC.

Court Erred in Dismissing Claims Sua Sponte on Statute of Limitations Grounds. In Carlson v. Baker & Hostetler, L.L.P., the Ohio Court of Appeals held that the trial court erred in dismissing the plaintiffs’ fraud claims under the Ohio Securities Act (Act) on statute of limitations grounds without first giving the parties notice and an opportunity to respond. As the trial court dismissed the claims sua sponte and without notice, the record contained insufficient evidence to facilitate appellate review of whether all of the plaintiffs’ claims arose from alleged misrepresentations made with respect to the sale and purchase of securities. Moreover, although it was conceivable that either the Act’s two or five-year statute of limitations periods may have expired prior to the filing of the complaint, the record did not permit a determination of when the statute of limitations expired because the complaint did not allege when the plaintiffs became aware of the alleged fraud, nor did it allege the exact date of the sale of the promissory notes at issue. Accordingly, the trial court erred when it dismissed the plaintiffs’ complaint sua sponte. Carlson v. Baker & Hostetler, L.L.P. will be reported at ¶75,021.


Aspen Federal Securities Publications  

Raising Capital: Private Placement Forms & Techniques, Third Edition, by J. Robert Brown, Jr., The Late Herbert B. Max. The 2013 Supplement is now available online. This unique resource provides practice-tested forms and up-to-date expert guidance for successfully launching private placement investment transactions. The authors illustrate a variety of proven techniques for raising capital and explain ways to accommodate the investor’s demands for protection while maintaining the flexibility necessary for efficient operation and growth in today’s business and regulatory environment. This latest update features expanded coverage and analysis of different topics. The discussion and many of the forms in Exemptions from Registration Under the Securities Laws: Regulation D (Chapter 19), are updated to reflect (1) relevant developments under the Jumpstart Our Business Startups (“JOBS”) Act, including discussion of requirements relating to “emerging growth companies,” “testing-the-waters” communications, and “crowdfunding,” and also (2) the change to the accredited investor standard in Section 413 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). The chapter now provides 30 relevant forms, such as questionnaires, certificates, agreements, legends, representations and warranties, risk factors, and sample contract clauses. In addition, in Resales (Chapter 20), the discussion on resales of securities has been updated for recent relevant developments relating to the Securities Act “Section 4(1½),” Rule 144, Rule 144A, and Regulation S, including changes wrought by the JOBS Act and the Dodd-Frank Act. The chapter now contains 42 forms, such as agreements, representation letters, legends, representations and warranties, and sample contract clauses and provisions.

Broker-Dealer Law and Regulation, Fourth Edition, by Norman S. Poser and James A. Fanto. The 2013 Supplement is now available online. This is an authoritative, analytical and practical guide for advising clients on their rights, duties, and liabilities under today’s complex securities regulations. It provides reliable guidance on the latest federal and state law governing private litigation and arbitration between broker-dealers and their customers, as well as regulation by the SEC and the SROs. The 2013 Supplement includes: review of regulatory actions to implement enhanced activities and capital regulation of financial institutions as a result of Dodd-Frank; review of the SEC’s study on “decimalization” as mandated by Dodd-Frank and its establishment of a “consolidated audit trail”; review of the results of the GAO study on the SEC’s oversight of FINRA; discussion of the potential for new financial intermediaries, “funding portals,” made possible by the JOBS Act; continuing updates on the regulation of security-based swap dealers; analysis of FINRA’s new rules on customer communications and a review of current regulatory examination priorities; discussion of joint CFTC and SEC “Identity Theft Red Flag Rule” and FINRA’s final Rule 3230 on telemarketing; extensive review of noteworthy FINRA and SEC supervision cases and current issues of interest of the joint SEC/FINRA guidance on branch inspections, and of supervisory issues associated with compliance officers; discussion of the easing of public capital raising for “emerging growth companies” effected by the JOBS Act, including activities of research analysts; discussion of Judge Rakoff’s failure to accept SEC/Citigroup settlement; discussion of new FINRA Rule 5310 on best execution; overview of FINRA actions addressing suitability violations for the sale of exotic and complex products; discussion of FINRA guidance on the new suitability rule; identification of concern over being a “tippee” of a government official covered by the Stop Trading on Congressional Knowledge (STOCK) Act of 2012; and review of the Second Circuit debate over what constitutes “substantial assistance” in aiding-and-abetting.


IPO Vital Signs

IPO Vital Signs, an advanced IPO research analysis tool, assists IPO professionals and pre-IPO companies satisfy their most challenging research needs and answers hundreds of mission critical questions for all the players in the IPO process. IPO Vital Signs’ tabular data analyses focus on issues surrounding client advisement, deal negotiation, and prospectus disclosure.

IPO Week in Review, a weekly e-newsletter to keep professionals up to date with recent filing and going public activity, is an important element of the IPO Vital Signs system or is available by separate subscription. Coverage includes a monthly feature article on recent trends in going public in the U.S.

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


#324 – SIC Codes
Use IPO Vital Sign #324 to…

  • Review the number and percentage of companies going public in each SIC Code
  • Analyze trends over time

and drill down into the different SIC Codes to see

  • IPO issuers’ company names and business descriptions
  • Review “Prospectus Summary” first paragraphs (Final Prospectus business descriptions)
  • Issuers’ headquarters by country and state
  • Offer amounts
  • Offer dates


Tip! Click on blue numbers to drill down for more information.
Select a number of issuers’ final prospectus business descriptions by clicking in boxes of those you wish to review in the third column (placing a check-mark in each box), and clicking the [COMPARE] button at the top of the fourth column.

A new research tool powered by the Securities Redbook (Securities Act Handbook), RBsource offers you securities laws, rules, regulations and forms together with related SEC guidance and interpretations. With RBsource, you will have SEC guidance related to a specific law, regulation or rule at your fingertips without the need of further searching or browsing. RBsource uniquely associates related content, going beyond the limits of standard searching making research more streamlined and productive. This intuitive research tool will drastically reduce your research time and provide the unparalleled confidence expected from the trusted Securities Act Handbook.

SEC Rulemaking Activity

  • 34-69060—Order Granting a Temporary Exemption Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 from the Filing Deadline Specified in Rule 613(a)(1) of the Exchange Act (March 7, 2013).

The SEC temporarily extended the deadline for SROs to submit a NMS plan for the creation of a consolidated audit trail and central repository under Rule 613(a)(1) from April 28, 2013 to December 6, 2013.

  • 34-69013—Duties of Brokers, Dealers, and Investment Advisers (March 1, 2013).

The SEC requested that interested parties help inform the Commission’s review of alternative standards of conduct for broker-dealers and investment advisers by submitting quantitative comments. An appendix to the request specifies how commenters should present this data. Comments are due 120 days after publication in the Federal Register.

  • 34-69077—Regulation Systems Compliance and Integrity (March 8, 2013).

The SEC proposed Regulation Systems Compliance and Integrity (Regulation SCI) to bring an expanded list of “SCI entities” within the SEC’s Automation Review Policy. The proposal also would make conforming amendments to Regulation ATS. The comment period closes May 24, 2013.

The Road Ahead

Upcoming rulemaking activity will continue to reshape the securities regulation landscape. The items below are a selection of expected near-term regulatory actions. The SEC’s schedule is subject to change at any time. RBsource includes daily updates to securities regulations affected by final Commission action.

The SEC’s future course has now become somewhat clearer, but many uncertainties remain. Key topics to watch in the coming weeks include the Senate’s vote on Mary Jo White’s nomination to lead the SEC, Dodd-Frank corrections legislation, and several key items on the Commission’s agenda.

White confirmation. On March 19, 2013, the Senate banking committee, by a 21-1 vote, favorably reported Mary Jo White’s nomination to be the next SEC chairman to the full Senate. Only Sen. Sherrod Brown (D-Ohio) opposed Ms. White because he worried that she may be too close to the Wall Street firms she will regulate as chairman, but he did not doubt her qualifications. The Senate has not yet scheduled a vote on Ms. White’s nomination.

Dodd-Frank corrections. The House agriculture committee recently approved a raft of Dodd-Frank corrections bills: (1) Inter-Affiliate Swap Clarification Act (H.R. 677); (2) Swap Jurisdiction Certainty Act (H.R. 1256); (3) Swaps Regulatory Improvement Act (bank swaps push-out provision) (H.R. 992); (4) Swap Data Repository and Clearinghouse Indemnification Correction Act of 2013 (H.R. 742); and (5) Business Risk Mitigation and Price Stabilization Act of 2013 (non-financial end-users) (H.R. 634).

The agriculture committee showed bi-partisan support for these bills by approving them by voice vote, except for H.R. 992 (approved 31-14). The House bills also have numerous Senate companions. Still other legislative proposals would require the SEC and CFTC to conduct cost-benefit analyses of rulemakings or would subject these rulemakings to further review if they meet economic impact thresholds.

Priority regulations. Although the Commission has just four members (pending Ms. White’s confirmation), it still may do significant business if the commissioners can agree on routine matters and overcome any tie votes on more controversial ones. Priority items include money market mutual fund reforms, unfinished Dodd-Frank Act rules, JOBS Act rules, and newly proposed Regulation SCI.


Hot Topic of the Month

This month's hot topic is materiality. Exchange Act Rule 10b-5 applies only to statements or omissions of facts that are material. The concept of "materiality" refers to the importance and relevance to the investing public of particular corporate information. In general, if reasonable investors would consider a fact significant in making an investment decision, that fact is material. If a fact is not material, however, a person ordinarily may withhold or even misrepresent it without incurring fraud liability or breaching a disclosure obligation.

Determining whether a fact is material requires consideration of all the surrounding circumstances. There is no "bright line" test for what a reasonable investor would consider significant in making an investment decision. Because of its fact-intensive nature, therefore, the determination is notoriously difficult. The Supreme Court has held that information generally is "material" if a reasonable investor would consider it important in making an investment decision. Materiality therefore depends on the significance that a reasonable investor would place on the withheld or misrepresented information. There must be a substantial likelihood that, under all the circumstances, that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

The United States Supreme Court recently held that proof of materiality is not a prerequisite to certification of a securities fraud class action seeking money damages for alleged violations of Exchange Act’s antifraud provisions. The 6-3 decision resolved a split among the circuits as to whether district courts must require plaintiffs to prove materiality and allow defendants to present rebuttal evidence prior to certifying a securities fraud class action. The majority opinion held that Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class. Because materiality is judged according to an objective standard, the alleged misrepresentations and omissions, whether material or immaterial, would be so equally for all investors composing the class.

The Court held that proof of materiality is not needed to ensure that common questions of law or fact will predominate over any questions affecting only individual members for two reasons. First, materiality is a common question because it can be proved through evidence common to the class. Second, because materiality is an essential element of a Rule 10b-5 claim, there is no risk that a failure of proof on the common question of materiality will result in individual questions predominating. The Court distinguished materiality from issues of market efficiency and publicity because a failure of proof on materiality ends the case and thus does not leave any possibility of individual questions overwhelming common ones.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

  • Federal Securities Law Reporter
    • Exchange Act Section 10(b) at ¶22,721
    • Exchange Act Rule 10b-5 at ¶22,725
    • Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (US Supt Ct) is reported at ¶97,300
    • Matrixx Initiatives Inc. v Siracusano (US Sup Ct) is reported at ¶96,249
    • Connecticut Retirement Plans and Trust Funds v. Amgen, Inc. (9th Cir) is reported at ¶96,580
    • CCH Explanations (e.g. ¶22,774.010)
    • Report letters (e.g., (3-6-13), "Fraud Class Action May Be Certified Without Proof of Materiality"; 11-16-11, "9th Circuit Holds Materiality Is a Merits Issue")