August 2008


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.

To view past issues of the Securities Update, please visit http://business.cch.com/updates/securities

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

 

CCH Federal Securities Law Reporter

SEC Issues Emergency Order to Stop Naked Short Selling
In an effort to end naked short selling that has contributed to the disruption in the securities markets, the SEC issued an emergency order requiring all persons to borrow or arrange to borrow the securities identified in certain issuers prior to effecting an order for a short sale of those securities. The Commission subsequently amended the order to provide that the borrow and arrangement to borrow requirements of the order do not apply to certain bona fide market makers. The settlement date delivery requirement of the order will apply to these market makers, however. The exemption applies to registered market makers, block positioners or other market makers obligated to quote in the over-the-counter market that are selling short as part of bona fide market making and hedging activities of the securities of the issuers named in the order. The SEC also released a FAQ to respond to questions about the emergency order. Release Nos. 34-58166, 34-58190 and the Commission's Guidance at ¶88,247 (ip access user), ¶88,248 (ip access user) and ¶88,249 (ip access user).

Commission Report Describes Credit Rating Agencies' Shortcomings
The SEC issued a report detailing its findings from an extensive 10-month examination of three major credit rating agencies. The report uncovered significant weaknesses in ratings practices and advocated the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors. The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities and collateralized debt obligations deals since 2002 and that none of the rating agencies examined had specific written comprehensive procedures dealing with those types of instruments. The report also detailed deficiencies in disclosure processes and conflicts of interest. Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies at ¶88,244 (ip access user).

Comment Period on Proposed Amendments to Reg
SHO Re-Opened. The SEC re-opened the comment period on its proposed amendments to Regulation SHO, the short sale rules. Originally proposed in July 2006 and re-proposed in August 2007, the comment period expired on September 13, 2007. The amendments are intended to further reduce the number of persistent fails to deliver in certain equity securities by eliminating the options market maker exception to the close-out requirement of Regulation SHO. The comment period, which was extended to August 13, 2008, was re-opened to share with the public data obtained by the Commission regarding fails to deliver and the options market maker exception, and to provide an opportunity to comment on the new data. Release No. 34-58107 at ¶88,242 (ip access user).

5th Circuit Affirms Jurisdiction, Preemption in Enron Suits
A panel of the 5th U.S. Circuit Court of Appeals affirmed the dismissal of a group of investors' claims as preempted by the Securities Litigation Uniform Standards Act. The appeal involved 10 cases brought by former Enron investors, nine of which had been filed in state court. All ten cases were filed by the same law firm. The nine cases filed in state court were removed to the federal courts under "related to" bankruptcy jurisdiction and then consolidated; the tenth case was filed in federal court. When the complaint in the case filed in federal court was amended to allege only violations of state law, and the other nine sought to amend similarly, the district court (SD Tex) dismissed all ten cases, finding that they were preempted by the Uniform Standards Act.

The questions before the appellate court were whether the district court had bankruptcy jurisdiction at the time it dismissed the investors' claims, and whether the investors' claims were preempted. The panel first found that the district court had bankruptcy jurisdiction at the time the claims were dismissed. The investors argued that the court's subject matter jurisdiction ceased to exist when Enron's bankruptcy plan was confirmed, but the panel disagreed, stating that plan confirmation does not divest "a district court of bankruptcy jurisdiction over pre-confirmation claims based on pre-confirmation activities that properly had been removed pursuant to "related to" jurisdiction." Having found subject matter jurisdiction, the court went on to find that the district court properly dismissed with prejudice all of the investors' claims as preempted by the Uniform Standards Act. According to the court, the only dispute was whether the claims fell within the definition of "covered class action," and, in this case, they did because the cases were "proceeding as a single action." The court explained that all of the cases were pending in the same court, and that the plaintiffs had acted "in unison," including being represented by the same attorneys, filing nearly identical complaints and using the same experts. In re Enron Corp. Securities, Derivative & ERISA Litigation (5thCir) is reported at ¶94,774 (ip access user).

Delaware Supreme Court Addresses Shareholder Proposal Questions
The SEC's Division of Corporation Finance has advised CA, Inc. that it may omit a shareholder proposal from its proxy materials based on the Delaware Supreme Court's decision on the questions of law that were raised by the proposal. The court responded to the first certification request submitted by the SEC under a 2007 amendment to Delaware's constitution. The staff advised CA that it could omit the proposal submitted by the AFSCME Employees Pension Plan because the implementation of the proposal would cause CA to violate state law

AFSCME sought shareholder approval of an amendment to CA's bylaws that would require the board to reimburse reasonable expenses incurred in the nomination of one or more candidates in a contested election of directors. CA's bylaws and certificate of incorporation do not have a provision that addresses the reimbursement of proxy expenses. The SEC sought a determination from the court because it was confronted with two conflicting legal opinions on Delaware law. The court acted promptly to settle the question since CA planned to file its definitive proxy materials with the SEC on or about July 24, 2008 in connection with its annual meeting.

In response to the first certified question, the court stated that the bylaw was a proper subject for shareholder action since it would regulate the process for electing directors. The election of directors is a subject in which shareholders have a legitimate and protected interest, the court advised, and shareholders have the right to participate in the selection of contestants for election. The fact that the proposal would require the expenditure of corporate funds would not in and of itself make the bylaw an improper subject for shareholder action, the court added. The second question was whether the proposed bylaw, if adopted, would cause CA to violate Delaware law. The court concluded that the bylaw, as drafted, would violate the prohibition against contractual arrangements that commit a board to a course of action that would preclude it from fully discharging its fiduciary duties to the corporation and its shareholders. The bylaw fails to reserve the directors' full power to exercise their fiduciary to decide whether it is appropriate in a specific case to award reimbursement, according to the court. In this respect, the bylaw would violate the Delaware law. CA, Inc. (SEC) and CA, Inc.(Recon.) are reported at ¶79,917 (ip access user) and ¶79,928 (ip access user). CA, Inc. v. AFSCME Employees Pension Plan (Del.) will be published in an upcoming Report.

Purchaser Entitled to Jury Trial on Issue of Reliance
A panel of the District of Columbia Circuit Court of Appeals affirmed in part and reversed and remanded in part a district court's (DC DofC) grant of summary judgment in favor of securities fraud defendants. The plaintiff-appellant purchased a communications company allegedly without knowledge, due to certain alleged misstatements and omissions by the appellees, of the extent of a lawsuit pending against the company by one of its former employees. On appeal, the court reversed the district court's grant of summary judgment in favor of the appellees on the fraud claims, finding that a reasonable jury could find that the purchaser had reasonably relied to its detriment on the alleged misstatements and omissions. However, the court affirmed the district court's grant of summary judgment in favor of the appellees as to one theory of damages.

The court found the purchaser's claim that it would have negotiated a lower purchase price had it known of the extent of the lawsuit implausible in light of a concession by the purchaser that the lawsuit would not have affected the negotiations if the seller had provided a full indemnification. Further, the court found that an alleged oral agreement between the parties requiring the seller to act in good faith in exchange for a higher purchase price did not support the damages theory, as any such agreement was negated by the terms of the written agreement between the parties. Media General, Inc. v. Tomlin (DofCCir) is reported at ¶94,762 (ip access user).

CCH Blue Sky Law Reporter

New smart chart: A new smart chart has been created on legends required for private placement memorandums
This Smart Chart is comprised of three sub charts, each answering a specific question for each of the 54 jurisdictions about legend requirements in private placement memorandums ("PPM's"): (1) Is a legend required when the securities are subject to registration under the Securities Act of 1933 and state securities law?; (2) Is a legend required when the securities aren't subject to registration under the 1933 Act but are subject to a filing requirement under the state securities law?; and (3) Is a legend required when the securities are exempt under a state limited offering exemption or Rule 506?

Alabama Exempts Secondary Trading of ADRs
An exemption from registration for any nonissuer transaction in an outstanding security by a registered dealer "if the security is listed for trading on a foreign securities exchange and has been trading for at least six months and continues to trade on such exchange, and the aggregate market value of shares, the ownership of which is unrestricted, is not less than $500,000,000" includes the American Depository Receipts ("ADRs") representing the underlying securities, by administrative order of the Alabama Securities Commissioner. ¶7577 (ip access user)

Georgia Adopts Uniform Securities Act of 2008
Georgia adopted a new Act entitled the “Georgia Uniform Securities Act of 2008” that replaces the existing Georgia Securities Act, and is effective July 1, 2009. The enacted version of SB 358 can be found at http://www.legis.state.ga.us/. ¶18,125 (ip access user), ¶18,126 (ip access user), ¶18,127 (ip access user), ¶18,128 (ip access user), ¶18,129 (ip access user), ¶18,130 (ip access user), ¶18,131 (ip access user)

Hawaii Adopts Securities Rule Amendments to Conform to New Act
New rules and existing rule amendments concerning federal covered securities and exemptions; registration of securities; and regulation of broker-dealers, agents, investment advisers and investment adviser representatives were adopted by the Hawaii Department of Commerce and Consumer Affairs to conform to the new Hawaii Uniform Securities Act that took effect July 1, 2008. See ¶20,401-¶20,543

Nevada Defines "Institutional Buyer," Adds Transfer Agents as Licensees; And Incorporates FINRA References
An institutional buyer is defined; transfer agents are added to the list of licensees conducting business in Nevada; references to the Financial Industry Regulation Authority replace references to the National Association of Securities Dealers; and references to the American Stock Exchange Emerging Company Marketplace are eliminated under rule changes adopted by the Securities Division of the Office of the Secretary of State. ¶38,431Y - ¶38,476A

Virginia And Washington Add Senior Provisions to List of Unethical Practices for Broker-Dealers, Salespersons and Investment Advisers
Virginia and Washington-registered broker-dealers, salespersons, investment advisers and federal covered investment advisers are prohibited from using certain professional designations that state or imply specialized knowledge of the financial needs of senior investors. The use of these "senior designations" by a broker-dealer, salesperson, investment adviser or federal covered investment adviser is a dishonest, unethical business practice. Only those professional designations attained through prescribed training offered by a nationally recognized accredited institution are approved professional designations by the Virginia Corporation Commission or the Washington Department of Financial Institutions. Separately in Virginia, investment advisers and federal covered investment advisers are required to electronically file forms and fees through the Investment Adviser Registration Depository (IARD). [Virginia links] ¶60,426 (ip access user), ¶60,458A (ip access user), ¶60,458XX (ip access user) [Washington links] ¶61,617F (ip access user), ¶61,618H (ip access user), ¶61,633 (ip access user), ¶61,634 (ip access user), ¶61,635 (ip access user), ¶61,636 (ip access user), ¶61,637 (ip access user), ¶61,638 (ip access user), ¶61,639 (ip access user).

Wisconsin Announces Notice of Proposed Rulemaking
A notice of rulemaking is announced by the Wisconsin Securities Division to propose new rules and amendments and/or repeals of existing rules to conform the rules to Wisconsin's adoption of the Model Uniform Securities Act of 2002 that takes effect January 1, 2009.

Virginia Supreme Court Rejects "Sale of Business" Doctrine
In Andrews v. Browne, the Supreme Court of Virginia held that the Virginia Securities Act (Act) governed a sale involving all of the shares of a closely held corporation. The defendants, sellers of a health club facility, had argued that Virginia's securities laws did not regulate a transaction involving the sale of a business to a small group of active purchasers. The state high court concluded, however, that the corporation's stock fell within the definition of "security" under the Act because it: (i) bore the label "stock"; and (ii) had all of the characteristics of traditional stock under the Landreth stock characterization test. Reasoning that the Act is intended to protect investors from fraud in the securities markets, regardless of whether control of a business is changing hands, the court ruled that the "sale of business" doctrine does not apply in Virginia. Accordingly, the court reversed the grant of summary judgment in favor of the defendants and remanded the case for further proceedings. The decision is reported at ¶74,711 (ip access user).

Aspen Federal Securities Publications

Investment Management Law and Regulation, Second Edition, by Harvey E. Bines and Steve Thel
The 2008 Cumulative Supplement (ip access user) is now live on the IRN Investment Management Library. The update contains developments in reforms initiated in the Pension Protection Act of 2006, including: new rules implementing provisions for default enrollment in individual plans; greater leeway for the investment of plan assets in pooled accounts, including hedge funds; safe harbors for the provision of investment advice to 401(k) plan participants; provisions permitting participants in defined benefit plans to dispose of employer securities; and statutory prohibited transaction exemptions substantially revising regulation of security trading and facilitating trading by parties in interest. The update also includes discussion of the rejection of the SEC’s attempt to exempt broker-dealers offering nondiscretionary advice on an asset-based or fixed fee basis, and the SEC’s response, including safe harbor for principal trades and interpretative guidance on definition of investment advisers; discussion of the SEC’s response to judicial rejection of the requirement that hedge fund managers register as investment advisers; developments in the regulation of banks as brokers; and an analysis of the new prudent-investor provisions of the recently promulgated Uniform Prudent Management of Institutional Funds Act (UPMIFA), which supersedes the Uniform Management of Institutional Funds Act (UMIFA).

Regulation of Securities: SEC Answer Book, Third Edition, by Steven Mark Levy
The 2009 Supplement (ip access user) is live on the IRN Securities Integrated Library. This practical guide aids the reader in understanding and complying with the day-to-day requirements of the federal securities laws that affect all public companies. Using a question-and-answer format similar to that which the SEC has embraced, this guide provides clear, concise, and understandable answers to the most frequently asked securities compliance questions. In this latest update, Chapter 13, Selling Restricted and Control Securities under Rule 144, has been completely rewritten to take into account major amendments by the SEC. Chapter 13 also adds a new section on business combination transactions under Rule 145. In addition, The Public Company Accounting Oversight Board section in Chapter 1 has been thoroughly revised and expanded to reflect the growing importance of this post-Enron regulatory body and to incorporate its most recent auditing standards. This latest update also brings you current on a wide array of other compliance issues, including: understanding the role of underwriting firms in an initial public offering (IPO) of a company’s securities; terminating foreign company Exchange Act reporting obligations; certifying that significant deficiencies and material weaknesses have been communicated to the company’s audit committee and external auditors; understanding the less stringent, “scaled” disclosure requirements applicable to smaller reporting companies now found in Regulation S-K; meeting the annual requirement under Section 404 for evaluating the effectiveness of the company’s internal control over financial reporting in a manner consistent with the new safe harbor provisions of Rules 13a-15(c) and 15d-15(c); ensuring that communications by electronic shareholder forum participants are exempt under new Rule 14a-2(b)(6) from proxy solicitation regulations; delivering proxy materials to shareholders under the SEC’s new, dual-option scheme; understanding the differences between the notice only option and the full set delivery option; using amended Rule 14a-8(i)(8) to exclude a shareholder proposal that could result in a contested director election; determining which secondary actors can be held accountable in a private Rule 10b-5 action under a “scheme liability” theory after the Supreme Court’s controversial decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.; avoiding potential liability under the securities laws for participation in electronic shareholder forums; and understanding the updated version of Nasdaq’s PORTAL Market for trading unregistered securities under Rule 144A.

Corporate Legal Compliance Handbook, edited by Frederick Z. Banks and Theodore L. Banks
The 2008 Supplement will soon be live on the IRN Corporate Governance Integrated Library. This publication contains expert analysis of leading practitioners on key compliance subjects to enable the reader to develop an effective compliance program for their company. The latest update includes discussion of a wide variety of subjects including: how good corporate governance practices are good business benefits; how courts treat the Sentencing Guidelines after Booker; updates to records management guidance reflecting refinement of judicial treatment of electronic records; understanding the interface between compliance and internal controls; how the reporting relationship of the Chief Compliance Officer may have an impact on the effectiveness of the compliance program; how failure to abide by corporate integrity agreements can give rise to penalty actions by the government as well as actions by shareholders; the FTC’s proposal of Online Behavioral Advertising Privacy Principles; the use of iPods for compliance training; protection of privacy and personally identifiable data as part of a compliance program; and tightening of reporting requirements for lobbying activities.

Hot Topic of the Month

This month's hot topic is "naked" short selling. A short sale is defined as any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. In a naked short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period and then fails to deliver the security when delivery is due. Naked short selling is considered to be an abusive practice that can have negative effects on the market.

The SEC has recently issued an emergency order in an effort to end naked short selling that it contends has contributed to disruption in the securities markets. The order applies to 19 major financial firms, including Freddie Mac and Fannie Mae, and prohibits making short sales unless the seller borrows the securities prior to effecting the order and then delivers them at settlement. The Commission issued the order based on the conclusion that false rumors can lead to a loss of confidence in the markets and a loss of confidence can also lead to panic selling which, in turn, may be further exacerbated by naked short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process. If significant financial institutions are involved, this chain of events can threaten market disruption.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, Insights – Amy L. Goodman, Securities Regulation – Loss, Seligman & Paredes, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

SEC Today

Federal Securities Law Reporter

Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 8.B.3 (ip access user))
Insights – Amy L. Goodman (e.g., “SEC Revamps Provisions Governing Short Sales” (November 2004) (ip access user)
Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com) (e.g. 7-16-08)

IPO Vital Signs

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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.

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#175 - IPO Lead Managers

Review First Half 2008 IPO lead managers by...

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