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August 2010 |
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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. Also included is a “Hot Topic of the Month,”
with research tips and references to CCH and
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.
Financial Reform Resources
CCH Federal Securities Law Reporter
In reviewing the history of the honest services doctrine, the court noted that
beginning in the 1940s, the circuit courts interpreted
the mail fraud statute's prohibition of any scheme or artifice to defraud
to include deprivations not only of money or property, but also of intangible
rights. The court stopped the development of the intangible-rights doctrine in McNally
v.
The court rejected the government's argument that the court should hold that
Section 1346 pertains to another category of conduct, the undisclosed
self-dealing by a public official or a private employee. Observing that McNally
did not concern a non-disclosure of a conflict of a financial interest but involved
a classic kickback scheme, the court said that reading the statute to proscribe
bribes and kickbacks and nothing more, satisfied Congress' desire to reverse McNally
on its facts. The government's argument that the pre-McNally conflict of
interest cases constituted core applications of the honest services doctrine
did not sway the court, which noted that while the Circuit courts upheld honest
services convictions for some conflict of interest schemes in the pre-McNally
cases, they reached no consensus on which schemes qualified. Given the relative
infrequency of these prosecutions and the inconsistencies they produced among
the circuits, the court concluded that a reasonable limiting construction of
Section 1346 should exclude this amorphous category of cases. The court said
that if Congress wishes these categories to be covered it "must speak more
clearly than it has." Skilling v.
Prohibitions
Against Adviser "Pay to Play" Practices Adopted. The SEC adopted new Investment Advisers Act
Rule 206(4)-5, which is intended to curtail "pay to play" practices
by investment advisers. Pay to play refers to the practice of making
contributions to elected officials to attempt to influence the awarding of contracts
for the management of public pension plan assets and other government
investment accounts. The new rule provides that an investment adviser that
makes a political contribution to an elected official in a position to
influence the selection of the adviser would be barred for two years from
providing advisory services for compensation, either directly or through a
pooled investment vehicle.
Under the new rule,
an advisory firm and certain executives and employees are prohibited from
soliciting or coordinating campaign contributions from others, a practice known
as "bundling," for an elected official who is in a position to
influence the selection of the adviser. The rule extends to the solicitation
and coordination of payments to political parties in the state or locality
where the adviser is seeking business. Rule 206(4)-5 also prohibits an adviser
from paying a third party, such as a solicitor or placement agent, to solicit a
government client on behalf of the investment adviser, unless that third party
is an SEC-registered investment adviser or broker-dealer subject to similar pay
to play restrictions. Release No. IA-3043 at ¶ 89,052 (IntelliConnect)
(IRN)
(ip
access user).
SEC Proposes
Measures to Improve Regulation of Fund Distribution Fees. The SEC voted unanimously to replace
Investment Company Act Rule 12b-1. Since 1980, mutual funds have been able
under Rule 12b-1 to use fund assets to pay for the cost of promoting sales of
fund shares. The rule changes would continue to allow funds to bear promotional
costs within certain limits, and would also preserve the ability of funds to
provide investors with alternatives for paying sales charges. Unlike the
current Rule 12b-1 framework, however, the proposed rules would limit the
cumulative sales charges each investor pays, no matter how they are imposed.
The Commission also
proposed rules to require more transparent disclosure about all sales charges
in fund prospectuses, annual and semi-annual reports to shareholders, and in
investor confirmation statements. As proposed, funds and their underwriters
would also have the option of offering classes of shares that could be sold by
dealers with sales charges set at competitively established rates. Currently
all broker-dealers who sell shares in a fund must sell those shares under terms
established by the fund and disclosed in its prospectus. Release No. 33-9128
will be published in a forthcoming Report at ¶89,069.
Form ADV Changed
to Provide Narrative Information on Advisers. The SEC adopted amendments to Part 2 of Form ADV. Commonly
referred to as the "brochure" this document explains the advisers'
qualifications, investment strategies, and business practices. The amendments
replace the current check-the-box, fill-in-the-blank approach with a narrative,
plain-English discussion. As amended, advisers will have to provide new and
prospective clients with narrative brochures that are organized in a
consistent, uniform manner and that include plain English disclosures of the
adviser's business practices, fees, conflicts of interest, and disciplinary
information. Advisory firms also must provide "brochure supplements"
to clients containing information about the employees who will provide the
advisory services to that client. Advisers must deliver the brochure to a
client before or at the time the adviser enters into an advisory contract with
the client. In addition, advisers must provide each client an annual summary of
material changes to the brochure and either deliver a
complete updated brochure or offer to provide the client with the updated
brochure.
The amended form
requires advisers to describe their advisory business, including the types of
advisory services offered and the amount of client assets under management.
Advisers must describe how they compensated, and provide a fee schedule. The
investment adviser must also describe the types of other fees or expenses, such
as brokerage fees, custody fees, and fund expenses that clients may pay in
connection with the services provided. Release No. IA-3060 will be
published in a forthcoming Report at ¶89,075.
SEC Approves
Issuance of Concept Release on Proxy Voting Infrastructure. The SEC commissioners approved the issuance
of a concept release on the proxy voting system. The concept release represents
the culmination of a staff review of the proxy voting system and seeks investor
and industry views about concerns regarding the accuracy, reliability,
transparency, accountability and integrity of the voting process. The proxy
voting system has not undergone a comprehensive review in 30 years. Since that
time, there have been significant changes in technology, the nature of stock
ownership and the increased use of proxy service providers. The concept
release explores the issue of over-voting and under-voting in which a
broker-dealer or another securities intermediary may cast more or fewer votes
than it holds due to the way securities transactions are cleared and settled.
Another topic that
is explored by the concept release is the lending of shares by institutional
investors. Shares that are on loan cannot be voted. The staff noted that
lenders may not have enough notice of matters to be voted on to recall their
shares in time to vote on matters of interest. The concept release seeks views
on whether shareholder meeting agendas should be disclosed earlier to provide
enough time for lenders to decide whether to recall their shares in order to
vote on matters of interest. The staff is also interested in views on whether
mutual funds and closed-end funds should disclose the number of shares voted at
a meeting in addition to how the shares are voted. In addition, the staff is
seeking views on whether the stock exchanges should revise their fee schedules
or whether the fee schedules should be eliminated altogether and allow market
forces to determine the appropriate fees. The SEC will also consider whether to
adopt new rules to accommodate dual record dates to reflect recent changes to
state laws. Release No. 34-62495 is reported at ¶89,062 (IntelliConnect)
(IRN)
(ip
access user).
2nd Circuit:
"Willfulness" Does Not Encompass Knowledge of Illegality. A 2nd Circuit panel vacated and remanded for
a new trial an action brought against a former high-level executive at U.S.
Food Services. The government alleged that the executive had engaged in a
conspiracy to commit securities fraud, to make false filings with the SEC and
to falsify books and records. A second count charged that he had committed
securities fraud and had made false SEC filings. According to the complaint,
the executive had made fraudulent misrepresentations regarding the financial
condition of U.S. Food Services, and, later, the company which had acquired it.
Specifically, the government alleged that the executive had lied to auditors in
order to hide the existence of promotional allowance agreements and the
inflated income from their prepayments. The jury convicted the executive on all
five counts, and he was sentenced to a prison term and fined.
On appeal, the panel first found that the district court erred in instructing
the jury on the issue of conscious avoidance because the instruction did not
contain the required "high probability" or "actual belief"
language. Because this error affected the executive's substantial rights, the
court ordered a new trial. The court then addressed the other issues raised on
appeal to provide guidance to the district court on remand. Among other
arguments, the executive asserted that the court had erroneously instructed the
jury on the "willfulness" element of securities fraud because the
instructions did not state that willfulness required knowledge of illegality.
The panel affirmed the instructions on willfulness, finding that the language
of Exchange Act Section 32(a) criminalizes only "willful" violations
and "does not encompass the requirement that a defendant knew he was
violating the law." The panel also found no error in the district court's
admission of evidence and hearsay testimony. Because the panel found that the
trial was flawed, it did not reach the executive's challenges to his
sentencing.
Strong
Inference of
The panel found that the complaint failed to name a material misstatement or
omission and affirmed the dismissal without considering the other elements of
an Exchange Act Section
10b-5 claim. According to the panel, the statements made about the sales
force during the conference call in question were not materially different than
those made in later reports and conference calls. The panel agreed with the
district court's conclusion that a reasonable investor would not have received
"a materially different impression of [the company's] state of affairs had
the company used the language from the April 5 or May 7 press releases to
describe the sales shortfalls in its January 31 statements."
The panel also agreed with the district court's holding that the alleged
misstatements regarding earnings fell within the PSLRA safe harbor. According
to the panel, the company's revenue projections were accompanied by meaningful
cautionary language. Additionally, the panel rejected the investors
argument for a reading of the safe harbor provision "under which a
sufficiently strong inference of actual knowledge would overcome a claim of
safe harbor protection even for statements identified as forward-looking and
accompanied by meaningful cautionary language." The panel stated that this
approach not only "ignores the plain language of the statute" but
also has been rejected by every court that has considered it. Cutera
Securities Litigation (9thCir) is reported at ¶95,788 (IntelliConnect)
(IRN)
(ip
access user).
CCH Blue Sky Law Reporter
Utah Adopts
Changing Dishonest Practice Rule to Include IA Reps. The advisory practices considered dishonest
or unethical for investment advisers also apply to investment adviser
representatives under an amendment adopted by the Utah Securities Division.
Other amendments add to the list of prohibited practices a broker-dealer’s
sharing of commissions with an unlicensed agent, an investment adviser
representative’s compensating a customer for losses in the customer’s account
without the customer’s or employing investment adviser’s prior written
authorization, an investment adviser’s failure to comply with the Securities
Division’s reasonable requests for information or testimony, and the use of
certifications or designations that mislead people. ¶57,403 (IntelliConnect)
(IRN)
(ip
access user).
Administrative
Fine Did Not Trigger Double Jeopardy.
The Utah Court of Appeals has held that the imposition of an administrative
fine did not constitute a prior criminal punishment so as to implicate double
jeopardy and preclude a defendant's criminal prosecution for violations of the
Utah Uniform Securities Act (Act). The defendant had contended that his entry
into a consent order with the Division of Securities triggered the Double
Jeopardy Clause of the Fifth Amendment to the United States Constitution and
thereby prevented a subsequent criminal prosecution for the same acts that gave
rise to the administrative action. The appellate court concluded that the fine
did not constitute a prior criminal punishment, however, because: (1) the
legislature intended that administrative sanctions under the Act be deemed
civil in nature when it authorized the Division of Securities, an agency, to
administer them; and (2) the administrative sanctions were not so punitive in
effect so as to override the legislature's intent and transform them into
criminal penalties. Accordingly, the defendant's criminal convictions were not
barred by double jeopardy. State v. Bushman is reported at ¶74,848
(IRN)
(ip
access user).
Aspen Federal Securities Publications
Regulation of
Securities: SEC Answer Book, Third Edition, by Steven Mark Levy. The 2010-2 Supplement (IntelliConnect)
(IRN)
(ip
access user) is now available online. 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. This latest update contains two completely written chapters. Chapter
5, “Reporting Beneficial Ownership Under Sections
13(d) and 13(g),” incorporates recent major judicial statements on the
regulatory risks in beneficial ownership reporting, as well as new SEC
compliance and disclosure interpretations. This chapter includes new sections
on the scope of beneficial ownership, formation of a group, initial Schedule
13D and 13G filings, prompt amendments, SEC enforcement action, and private
party enforcement. Chapter 15, “Going Private Under
Rule 13e-3,” includes the latest SEC staff guidance on becoming a non-reporting
company and providing the necessary information to shareholders. It includes
new and expanded sections on the scope of Rule 13e-3, subject persons,
exceptions to Rule 13e-3, Schedule 13E-3, fairness disclosure, dissemination
requirements, and liability. The 2010-2 Supplement brings you current on
a wide array of other compliance and regulatory issues, including: how the
Madoff fraud led to reforms within the SEC; the role of nationally recognized
statistical rating organizations; updated SEC staff guidance on submitting
interactive data files and correcting errors; new SEC staff guidance on Form
8-K triggering events; new SEC rules addressing executive compensation
disclosure, including excessive risks created by compensation practices, and
fees paid to compensation consultant; how environmental climate change may
trigger an obligation to disclose; guidance on transactions exempt from the
reporting requirements of Exchange Act Section 16(a); the latest court
decisions interpreting the “fraud on the market” presumption of reliance under
Rule 10b-5; new SEC compliance and disclosure interpretations, and recent
enforcement action, regarding selective disclosure under Regulation FD; and how
the SEC rewards those who help its investigations, and how it evaluates
cooperation by companies and by individuals.
This month's hot
topic is mutual fund distribution fees. On July 21, 2010 the SEC voted
unanimously to replace Investment Company Act Rule 12b-1. Rule
12b-1, adopted in 1980, permits mutual funds to pay for the distribution of
their shares with fund assets if the funds comply with procedural safeguards.
Because of the possible conflicts of interest involved in a fund's use of
assets to distribute additional shares in the fund, the Commission required
funds to follow procedures similar to those required by the Investment Company
Act for the approval of an investment advisory contract.
The rule changes
would continue to allow funds to bear promotional costs within certain limits,
and would also preserve the ability of funds to provide investors with
alternatives for paying sales charges. Unlike the current Rule 12b-1 framework,
however, the proposed rules would limit the cumulative sales charges each investor
pays, no matter how they are imposed. The new rule and amendments would
continue to allow funds to bear promotional costs within certain limits and
would also preserve the ability of funds to provide investors with alternatives
for paying sales charges. The Commission also proposes to require clearer
disclosure about all sales charges in fund prospectuses, annual and semi-annual
reports to shareholders, and investor confirmation statements and to give funds
and their underwriters the option of offering classes of shares that could be
sold by dealers with sales charges set at competitively established rates.
The rule and the
concept of "12b-1 plans" has been somewhat controversial, and the
continuing viability of Rule 12b-1 plans came under question, including in an
SEC staff study in 2004 which cast doubt on the benefit of Rule 12b-1 plans to
mutual fund shareholders. Chair Mary Schapiro described how the SEC adopted
Rule 12b-1 during a period when funds were losing investor assets faster than
they were attracting new assets. Self-distributed funds were also emerging at
that time, and needed a way to pay for necessary marketing expenses. According
to Ms. Schapiro, 12b-1 fees were seen as a short-term solution to the problem
of shrinking fund assets, but evolved into a permanent form of compensation, or
sales load, paid to intermediaries selling fund shares. She stated that
"the rule has led to confusion, lack of understanding, and in some cases,
some investors paying proportionately more than other investors." The
proposing release noted that slightly less than half of all households own
mutual funds, and most investors buy through intermediaries. The proposals will
have a 90-day comment period.
We publish
information in a wide range of resources (e.g., Federal Securities Law
Reporter, SEC Today, Securities Regulation - Loss & Seligman, etc.), and
document types (cases, laws, regulations, newsletter articles, treatise
discussion). For example:
- Federal Securities Law Reporter
o
Exchange
Act Rule 12b-1, at ¶48,162 (IntelliConnect)
(IRN)
(ip
access user)
o
Release
No. 33-9128: Mutual Fund Distribution Fees; Confirmations, at ¶89,069
o
No
action letters (e.g., E-TRADE Securities, LLC. at ¶79,123 (IntelliConnect)
(IRN)
(ip
access user)
o
Report
letters (e.g., "Donohue Discusses Variable Products, Rule 12b-1 Fees"
(6-11-08 (IntelliConnect)
(IRN)
(ip
access user))
o
SEC
Docket, Release No. 33-6254: Bearing of
Distribution Expenses By Mutual Funds, at ¶82,678 (IntelliConnect)
(IRN)
(ip
access user)
o
CCH
Explanations (e.g., ¶48,165.010 (IntelliConnect)
(IRN)
(ip
access user))
- SEC Today
o
SEC
Proposes Measures to Improve Regulation of Fund Distribution Fees (7-22-10) (IntelliConnect)
(IRN)
(ip
access user)
o
Cox
Predicts Repeal of Rule 12b-1
(5-5-08) (IntelliConnect)
(IRN)
(ip
access user)
- Securities Regulation – Loss, Seligman
& Paredes (e.g., Chapter 10.F.2.b (IntelliConnect)
(IRN)
(ip
access user))
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
To
see how an IPO Vital Sign works click on the Vital Sign title below:
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Use IPO Vital Sign #398 to… ·
Review
the range of estimated IPO legal fees ·
Tally
the number of IPOs within a particular fee range, and the percentage of IPOs
that fall within that range ·
Analyze trends
over time and drill down into the different fee
ranges to see ·
IPO issuers’ law firm name and office
location ·
Review the estimated legal fees for
each IPO ·
Issuer’s name, SIC Code and
headquarters by country and state ·
Offer amounts ·
Offer dates |
Tip!
Click on blue numbers to drill down for more
information.