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August 2012


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. New this month is a preview of RBsource, an 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.

 To view past issues of the Securities Update, please visit

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Financial Reform Resources



CCH Federal Securities Law Reporter

SEC Adopts Rules for Review of Security-Based Swaps. The SEC has issued a final rule specifying the process for a registered clearing agency’s submission for review of any security-based swap that the clearing agency plans to accept for clearing. The rule implements Dodd-Frank Act Section 763(a), which mandates that security-based swap transactions must be cleared through a clearing agency unless an exception applies. Security-based swap submissions and advance notices will be filed electronically on existing Exchange Act Form 19b-4. The rules specify the manner of notice the clearing agency must provide to its members of the submission and the procedure by which the Commission may stay the requirement that a security-based swap is subject to mandatory clearing. The Commission also specified that when a security-based swap is required to be cleared, the submission of the security-based swap for clearing must be for central clearing to a clearing agency that functions as a central counterparty. The Commission additionally adopted rules defining and describing when notice of proposed changes to rules, procedures or operations are required to be filed by designated financial market utilities under Dodd-Frank Section 806(e) and setting forth the process for filing those notices with the Commission. Release No. 34-67286 is reported at ¶80,110.

Definitions of Mortgage-Related and Small Business-Related Securities. The SEC issued interpretive guidance, effective July 20, 2012, with respect to the definitions of mortgage-related security and small business-related security. Dodd-Frank Act Section 939(e) eliminated from those definitions the references to credit ratings issued by nationally recognized statistical rating organizations and inserted new text which requires that a security meet standards of creditworthiness established by the SEC. The SEC needs additional time to develop standards of creditworthiness for the purposes of the definitions so has provided the transitional interpretation until it establishes final rules. The SEC is also seeking comments on potential standards of creditworthiness to replace the use of NRSRO ratings in the definitions of mortgage-related security and small business-related security. Before the Dodd-Frank Act was enacted, Exchange Act Section 3(a)(41) defined a mortgage-related security as one that was rated in one of the two highest rating categories by at least one NRSRO. Section 3(a)(53)(A) defined a small business-related security as one that was rated in one of the four highest rating categories by at least one NRSRO. The Act struck that text and replaced it with the standards of creditworthiness as established by the SEC.  Release No. 34-67448 is reported at ¶80,117.

SEC Adopts Rules to Define Dodd-Frank Act Title VII Terms. The SEC has unanimously approved final rules and interpretations that define the key terms in Dodd-Frank Act Title VII. The Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets. The act requires that the SEC and the Commodity Futures Trading Commission, in consultation with the Federal Reserve Board, further define the terms “swap,” “security-based swap,” and “security-based swap agreement,” and that the SEC and the CFTC jointly establish regulations regarding “mixed swaps.”

Under the final rules, insurance products will not be considered swaps or security-based swaps if they meet any of three provisions. One provision, for example, applies to existing insurance agreements, contracts, or transactions entered into before the effective date of the final rules and that were provided by a person or entity that satisfies the “provider test.” Security forwards also fall outside the definitions of swap and security-based swap. This includes the treatment of mortgage-backed securities that are eligible to be sold in the “to-be-announced” market. The interpretations describe the way in which certain consumer and commercial transactions fall outside the definitions of swap and security-based swap.

Narrow-based security indexes and issuers of securities in a narrow-based security index are defined for purposes of determining the status of index credit default swaps as either swaps or security- based swaps. The SEC also adopted rules and interpretations regarding the definition of a security index and the evaluation of Title VII instruments based on security indexes that migrate from broad-based to narrow-based and vice versa. The SEC also addressed the scope of the mixed swap category and adopted rules and interpretations that mixed swaps will remain subject to the SEC and CFTC regulatory regimes, but for bilateral uncleared mixed swaps entered into by at least one dually-regulated swap and security-based swap dealer or major swap and security-based swap participant, certain regulatory requirements would apply. Release No. 33-9338 is reported at ¶80,118

Investors Were Not “Customers” Under SIPA. A federal judge denied an SEC request to compel the Securities Investor Protection Corporation (SIPC) to file an application for a protective decree and commence a liquidation proceeding in relation to the fraudulent activities of Robert Allen Stanford. A federal court jury had convicted Stanford of conspiracy, wire fraud, mail fraud, obstruction of justice and money laundering in connection with the sale of fraudulent CDs issued by a foreign bank that was not a SIPC member and marketed by a broker-dealer which was a SIPC member. The court found that the bank CD purchasers were not customers of the broker-dealer within the meaning of the Securities Investor Protection Act (SIPA).

SIPC declined to file an application for a protective decree for the brokerage firm customers in the federal court, concluding that these customers were not covered by SIPA because the broker-dealer did not perform a custody function for the customers who purchased the bank CDs. The SEC delivered a formal analysis to SIPC arguing that the broker-dealer failed to meet its obligations to customers that were in need of the protections of the SIPA, and that SIPC should seek to commence a liquidation proceeding. SIPC advised the SEC that it considered the SEC Analysis, that it disagreed with the SEC, and that it would not seek to commence a liquidation proceeding. Hence, the SEC sought an order from the court compelling SIPC to commence such a liquidation proceeding.

The SIPA statute provides protection, under certain specified circumstances, to the customers of SIPC members. Thus, in the view of Judge Wilkins, the key issue in dispute was whether the persons who purchased the bank CDs were customers of the broker-dealer within the meaning of SIPA, because if they were, then SIPC had refused to act for their protection and the SEC’s application should be granted. On the other hand, if they were not customers, then the application must be denied. According to the court, the critical aspect of the customer definition in SIPA is the entrustment of cash or securities to the broker-dealer for the purposes of trading securities. The customer definition has therefore been described as embodying the common-sense concept that investors are entitled to compensation from the SIPC only if they have entrusted cash or securities to a broker-dealer who becomes insolvent. Investors that have not so entrusted cash or securities are not customers, reasoned the court, and therefore not entitled to recover from the SIPC trust fund. To prove entrustment, the claimant must prove that the SIPC member actually possessed the claimant’s funds or securities.

The SEC could not show that the broker-dealer ever physically possessed the investors’ funds at the time that the investors made their purchases. The CD investors wrote checks that were deposited into bank accounts and/or filled out or authorized wire transfer requests asking that money be wired to the bank for the purpose of opening their accounts at the bank and purchasing CDs. The investors’ checks were not made out to the broker-dealer and were never deposited into an account belonging to the broker-dealer. Accordingly, said the court, under a literal construction of the statute, the investors who purchased bank CDs are not customers of the broker-dealer within the meaning of SIPA. The court refused to broaden the scope of SIPA liability well beyond the plain meaning of the statutory term deposited. Courts have consistently held that the "customer" definition in SIPA should be construed narrowly.

As a threshold issue, the court had first concluded that preponderance of the evidence was the proper standard to be applied to the request. Thus, the SEC had the burden of proving, by a preponderance of the evidence, that SIPC has refused to commit its funds or otherwise to act for the protection of customers of any member of SIPC. SIPA specifies that generally SIPA should be construed as if it were an amendment to and included as a section of the Exchange Act. This interpretative guidance is noteworthy, said the court, because the Exchange Act contains a specific provision that authorizes the SEC to file an application for an order that commands a person or entity to comply with the Exchange Act. This provision is found in Section 21(e) of the Exchange Act. Such an application, commanding a person to comply with the Exchange Act, bears a remarkably close resemblance to an application by the SEC, pursuant to SIPA, requiring SIPC to discharge its obligations under SIPA. The similarity between the two provisions is quite significant since SIPA is meant to be construed as if it were part of the Exchange Act.

The DC Circuit Court of Appeals has held that the preponderance of the evidence standard is the appropriate burden of proof when the Commission seeks a permanent injunction pursuant to the Exchange Act. Thus, said the court, in the DC Circuit, the SEC must prove a violation of the Exchange Act by a preponderance of the evidence to obtain a permanent injunction. This compels the conclusion that the preponderance standard was the appropriate burden for the Commission to bear to obtain the relief sought here. This result seems particularly sound, the court explained, not only because Congress has directed that SIPA be construed as if it were a part of the Exchange Act, but also because of the preference for the preponderance standard in civil litigation generally.

In addition, the court noted that SIPC, a corporate body, is entitled to due process in the present proceeding even if the SEC is considered to be its plenary supervisor under the SIPA statutory scheme. It was quite clear, said the court, that the initiation of a SIPA liquidation would potentially involve tens of thousands of claimants and entail millions of dollars in administrative costs, even if all of the claims were ultimately denied. Such a cost would place a great burden upon SIPC that is not eliminated by the SEC offer to loan funds to SIPC, reasoned the court, since SIPC ultimately would have to repay any such loan to the SEC, resulting in costs that would be ultimately borne by SIPC members rather than the SEC. SEC v. Securities Investor Protection Corporation (DC DofC) is reported at ¶96,931.

Complaint Failed to Show Company Knew of Firing's Impact. A 1st Circuit panel affirmed a district court's dismissal of a complaint brought against a manufacturer of medical devices. According to the investors, the company made misrepresentations or failed to disclose information regarding unlawful sales practices and a consequent reduction in staff within a group selling cardiac rhythm management devices, a significant source of the company's net sales. The alleged fraud led to the artificial inflation of the company's stock price. The investor's fraud complaint arose out of the investigation and dismissal in late 2009 of sales personnel for the violation of the company's ethical policies in relation to sales expense reports. The internal audit and resulting dismissals were not publicly disclosed until February 2010, and in public statements before this time, the company continued to make encouraging statements about both the product's sales prospects and the stability and experience of the sales force. The company later revealed that the disciplinary actions and other, unrelated factors led to $16 million in lost sales for the first quarter of 2010. The district court held that the company's positive statements were not materially false or misleading, and that allegations of scienter as to the statement regarding its sales force were inadequate.

The appellate court agreed that there was insufficient basis to find materiality as to all but one of the statements or to infer scienter. The panel found that the company's late 2009 statements predicting a "positive but mixed" outlook and discussing the sales force were not material. Statements made before the audit was finished were not misleading because its outcome was still uncertain, and those being investigated represented only a small portion of the sales force. Statements made after the completion of the audit were not misleading because the company had not yet decided to fire anyone, and the panel noted that the possible discharge of a few sales personnel in a global company with over 25,000 employees did not reach the level at which other cases had found omissions to be material. Finally, statements made after the employees had been discharged, and which did not disclose the firings, were not misleading because the numbers were not material, and the consequences, such as the terminated employees being hired by a competitor, were not plainly foreseeable.

The panel then found that the complaint failed to allege facts giving rise to a strong inference of scienter regarding statements favorable statements about the company's sales made in early 2010. By this time, the investors argued, all of the firings had occurred, and that some of the fired employees had been hired by a competitor, but no mention of these facts was made. First, the panel assumed to be correct the district court's finding that the failure to disclose was material. The panel then found that the complaint failed to plead any direct evidence that the executive making the statements was aware that vital information was being withheld. According to the panel, the fired personnel represented less than one percent of the cardiac rhythm management sales team and even less of the overall sales force. It was also unknown at the time how much business the fired personnel might take with them to the competitor. Even if the executive knew of the hirings by the competitor, the panel continued, this was marginally material, which defeated the inference that the information was deliberately withheld and did not allow a finding of extreme recklessness. Additionally, because the company's losses were modest in relation to revenues and partially attributable to an unrelated cause, there was no basis to infer scienter when looking at the allegations holistically. In re Boston Scientific Corporation Securities Litigation (1stCir) is reported at ¶96,935.

Auditors Were Legitimately Unable to Detect Madoff Fraud. Addressing two appeals in tandem, a 2nd Circuit panel issued a summary order affirming a district court's dismissal of the actions for their respective failure to adequately plead scienter. The actions were brought separately, but made substantially similar allegations that auditors failed to conduct audits of funds that fed into Bernard L. Madoff Investment Securities, LLC in accordance with generally accepted accounting standards and that they knowingly issued false audit opinions. Both actions alleged violations of the federal securities laws as well as common law fraud and negligence.

The district court dismissed the actions after finding that their similar allegations that the auditors ignored red flags pointing to Madoff's fraud and inadequately audited the funds were insufficient to support a strong inference of scienter. The appellate court agreed that the complaint failed to plead facts giving rise to an inference of scienter that was as compelling as competing nonfraudulent inferences. Here, the investors failed to show fraud that would "approximate an actual intent to aid in the fraud being perpetrated by the audited company" and instead alleged "fraud by hindsight."

According to the appellate court, most of the purported red flags showed risks inherent to Madoff and not the fund manager defendant. Further, the panel continued, these risks were disclosed not only in the funds' offering materials, but also to the investors and auditors of other Madoff feeder funds, and to the SEC. None of these parties, the panel observed, was able to discover the Madoff scheme. The panel accordingly concluded that the more compelling inference was that the fraud went undetected due to Madoff's ability to cover up the scheme and to deceive the SEC. This failure to adequately allege scienter was similarly fatal to the investors' common law fraud claims. Meridian Horizon Fund, LP v. KPMG (2ndCir) is reported at ¶96,934.


CCH Blue Sky Law Reporter  

Maryland and Virginia Adopt Private Fund Adviser Exemptions. An exemption from investment adviser registration for private fund advisers was adopted in both Maryland and Virginia. ¶30,659 and ¶60,458YA.

North Dakota Proposes to Incorporate NASAA Policy Statements. Statements of policy of the North American Securities Administrators Association (NASAA) would be applied to registered and exempt securities offerings in North Dakota as appropriate, as proposed by the North Dakota Securities Department. The following policy statements would be incorporated: Asset-Backed Securities, Cattle-Feeding, Church Bonds, Church Extension Funds, Commodity Pool Programs, Corporate Securities Definitions, Debt Securities, Equipment Programs, Health Care Facility Offerings, Impoundment of Proceeds, Loans and Other Material Affiliated Transactions, Mortgage Programs, Oil and Gas Programs, Direct Participation Programs—Omnibus Guidelines, Options and Warrants, Preferred Stocks, Promoter’s Equity Investment, Promotional Shares, Real Estate Investment Trusts, Real Estate Programs, Risk Disclosure Guidelines, Specificity in Use of Proceeds, Underwriting Expenses and Underwriter’s Warrants, Unequal Voting Rights, Uniform Disclosure Guidelines for Cover Legends and Unsound Financial Condition. ¶44,450A.

Texas Adopts Expedited Review of Registration for Qualified Military Spouses… Qualified military spouses whose applications are delayed more than five days after submission may file Texas Form 133.4, Military Spouse Request for Expedited Review, requesting immediate review by a staff member of the Texas Securities Board’s registration division followed by written notification of the reasons for the applications’ pending or deficient status. ¶55,591Q, ¶55,595Q, and ¶55,688D.

…And Proposes Accredited Investor, Finder and Successor Registration Changes. Amendments to the exemption for individual accredited investor sales, and to the application procedures for finders and for successor entity securities dealers and investment advisers were proposed by the Texas Securities Board. ¶55,591C, ¶55,591H, ¶55,591J, ¶55,595C, and  ¶55,720E.

Texas: Conviction Did Not Require Knowledge That Oil Well Venture Interests Were Securities. In Hays v. State, the state was not required to prove that the defendant knew that interests in an oil well venture were securities or that they must be registered with the Texas Securities Board in order to obtain a conviction for the sale of unregistered securities under the Texas Securities Act (Act). Although the defendant argued that he had been held strictly liable for the charged offense, the Texas Court of Appeals held that the statute does not require a culpable mental state as to the circumstances of the offense. Rather, it was the nature of the defendant’s conduct which was criminalized under the statute. As the Act prohibits the knowing sale of investments that happen to be unregistered securities, and there was sufficient evidence that the defendant knowingly engaged in the prohibited conduct, the defendant’s conviction was affirmed.

The defendant had also claimed that there was insufficient evidence to prove the transactions with four of the investors that were alleged in the indictment. Specifically, the defendant claimed that the investors only testified that they spoke to the defendant or someone representing himself to be the defendant on the telephone, and that there was no other evidence to connect him to the sales. Documentary evidence, however, designated the defendant as an officer of the issuer and connected him to the oil well venture at issue. Moreover, the defendant was identified in open court, and it was noted that the defendant made the calls soliciting the sales. Accordingly, sufficient evidence connected the defendant to the charges. Hays v. State will be reported at ¶74,983.


Aspen Federal Securities Publications  

Meetings of Stockholders by Jesse A. Finkelstein, R. Franklin Balotti, and Gregory P. Williams. The 2012 Supplement is now available online. Over the years, the SEC has increasingly used proxy rules as a mechanism for implementing policies and adjusting the rights of shareholders and management. This latest supplement to Meetings of Stockholders reflects statutory, case law, and other developments in the area of stockholders’ meetings and contains updates to many of the discussions regarding these meetings including: Selection of the Meeting and Record Dates and Notice of the Meeting has been updated to include discussion of Goggin v. Vermillion, Inc. and selection of the meeting date, and selection of the record date (see Chapter 2); Preparation of Proxy Materials has been revised and updated to include discussion of new developments relating to directors, executive officers and board committee information, say-on-pay, relationship with independent accountants, electronic disclosure of proxy materials, electronic shareholder forums, electronic voting and shareholder meetings, and practical considerations, among others (see Chapter 4); Institutional Investors and Shareholder Activism has been updated to include discussion of issues at the shareholder's meeting and examination of likely future developments (see Chapter 5); and The Voting Process has been updated to include discussion of quorum (see Chapter 9).

Corporate Financial Disclosure Answer Book, by Steven Mark Levy. The 2012 Supplement is now available online. Federal law requires public companies to disclose financial and other information in accordance with strict standards, including thousands of SEC, FASB, PCAOB, and stock exchange pronouncements. Disclosure must be in a prospectus, as well as in annual and quarterly reports and proxy statements filed with the SEC. Corporate Financial Disclosure Answer Book is your guide to this vital subject. The convenient Q&A format is ideal for beginners seeking a general understanding of a topic, as well as seasoned professionals grappling with critical issues. The 2012 Supplement provides three new sections, covering PCAOB inspections from the point of view of the audit committee (Chapter 16); the PCAOB accounting support fee (Chapter 24); and new PCAOB procedures for inspections related to broker-dealer audits (Chapter 26). It also updates and expands the publication on a wide range of other timely topics. Highlights include: What is the importance of auditor skepticism to the auditing process, and how can it be ensured; What role did auditors play in the 2008 financial crisis; How do large audit firms gain a competitive advantage in the global economy, as well as liability protections, through use of audit networks; What is the significance of emphasis paragraphs in the audit report; How would the SEC staff's “condorsement” proposal (convergence + endorsement) lead to incorporation of IFRS into the U.S. financial reporting system; Is the auditor required to perform procedures on the interactive data file as part of the financial statement audit; What MD&A disclosure is required regarding European sovereign debt holdings; Does the statutory protection for forward-looking information immunize deliberately false statements; How should the company describe the say-on-pay vote on its proxy card; Does Regulation G apply to a company whose obligation to file periodic reports is suspended automatically by Section 15(d) (because it has fewer than 300 shareholders) but that continues to file reports voluntarily; What is the procedure for challenging an allocation of the PCAOB accounting support fee; What is an audit failure, and what are the weighty consequences; What new PCAOB inspection procedures apply with respect to audits of broker-dealers; and What is the PCAOB's authority to issue temporary cease-and-desist orders while enforcement proceedings are pending.


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Should Counsel Include That New Risk Factor?
Drafting & Due Diligence:  Easily identify issuers disclosing a particular Risk Factor by reviewing our lists of topic sentences taken from the Risk Factors sections of recent IPO prospectuses.   

Also create a check list of risk factors disclosed by IPO issuers with similar characteristics to review against your company’s potential risk factors.

#733 - Risk Factors Section
List of Risk Factors
Review Lists of Risk Factors by:

  • Issuer 
  • SIC Code 
  • Offer Date   
  • Length of Risk Factors Section (pages)   
  • No. of Risk Factors in Section   
  • List of Risk Factors Disclosures 
  • Offer Amount 
  • Lead Manager 
  • Issuer’s / Underwriters’ Law Firm



Tip! Compare disclosures by 1) clicking the boxes in the 6th column to select IPO disclosures for comparison, and 2) clicking the [COMPARE] button at the top of the column.

Search for specific text in the Disclosure Compare window by striking [CTRL] + [F] keys to access the "Find" function. Enter a word or text string and click the [Find Next] button.

To help select comparables (e.g. SIC Code, IPO Law Firm, or Lead Manager), re-sort the table by clicking column headings.



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.

Legislative Update

On July 9, 2012, President Obama signed into law the Church Plan Investment Clarification Act (P.L. 112-142, 126 Stat. 989). The Act amends Securities Act Section 3(a)(2) to make a technical correction in order to harmonize this section with other securities laws previously amended to allow church pension plans to invest in collective trusts. In the absence of the Securities Act amendment, collective trusts declined church plan investments.

SEC Rulemaking Activity

  • 34-67480Order Extending Temporary Conditional Exemption in Connection With the Effectiveness of the Definition of Eligible Contract Participant (July 20, 2012).

The release extends the temporary conditional exemption from Exchange Act Section 6(l) until 60 days after publication in the Federal Register of the Product Definitions Adopting Release (See Release No. 33-9338).

  • 33-9338Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping (July 18, 2012).

The SEC and CFTC jointly adopted definitions to further implement the Dodd-Frank Act Title VII derivatives provisions. For example, the term “narrow-based security index” determines regulatory jurisdiction: if the underlying reference of an instrument is a narrow-based index, the instrument is a security-based swap under SEC jurisdiction; by contrast, if the underlying reference is a broad-based index, the CFTC’s rules apply. Mixed swaps involve joint SEC/CFTC jurisdiction.

  • 34-67457Consolidated Audit Trail (July 18, 2012).

The Commission adopted Exchange Act Rule 613 to require the national securities exchanges and associations (collectively the self-regulatory organizations or SROs) to submit a national market system (NMS) plan to establish a consolidated audit trail to track NMS securities from order inception through routing, cancellation, modification, or execution. The SROs, under Rule 613(a)(1), must jointly file a NMS plan on or before 270 days from the date of publication of the adopting release in the Federal Register.

  • 34-67448—Commission Guidance Regarding Definitions of Mortgage Related Security and Small Business Related Security (July 17, 2012).

The SEC has issued guidance for complying with the terms “mortgage related security” and “small business related security” set forth in Exchange Act Sections 3(a)(41) and (53)(A), as amended by Dodd-Frank Act Section 939(e). The guidance provides for a transitional interpretation until final rules are adopted, and seeks comment on potential creditworthiness standards.

  • 33-9337Notification of Technical Amendments to Securities Act Industry Guides (July 13, 2012).

The Commission made technical amendments to Industry Guides 3 and 7 to conform U.S. GAAP references to the FASB Accounting Standards Codification.

  • 34-67405Extension of Interim Final Temporary Rule on Retail Foreign Exchange Transactions (July 11, 2012).

The release extended the expiration of the interim final temporary rule on retail foreign exchange (forex) transactions from July 16, 2012 to July 16, 2013. Specifically, the extension affects Exchange Act Rule 15b12-1T, which permits broker-dealers to engage in retail forex business temporarily despite the ban set forth in the Dodd-Frank Act.

  • 34-67286Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations (June 28, 2012).

The Commission’s final release implements provisions in Dodd-Frank Act Titles VII and VIII regarding the clearing of security-based swaps. Specifically, the release added new Exchange Act Rules 3Ca-1 and -2 providing for the clearing of security-based swaps. The release also made conforming amendments to Exchange Act Rule 19b-4.

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.

August 2012 SEC Rulemakings.—The SEC has scheduled an open meeting for August 22, 2012 to consider whether to adopt final rules to implement the Dodd-Frank Act conflict minerals and resource extraction issuer provisions, and to implement Title II of the Jumpstart Our Business Startups (JOBS) Act.

Dodd Frank Act Section 1502 amended Exchange Act Section 13(p) to require issuer disclosure of due diligence efforts regarding the source, chain of custody, and manufactured products related to conflict minerals that originate in the Democratic Republic of the Congo. “Conflict mineral” means columbite-tantalite (coltan), cassiterite, gold, wolframite, their derivatives, or any other mineral determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.

Under Exchange Act Section 13(q), as amended by Dodd-Frank Act Section 1504, the Commission must adopt rules that require resource extraction issuers to disclose annually any payment made by the issuer (or a subsidiary or entity under its control) to the federal government or to a foreign government to commercially develop oil, gas, or minerals.

The JOBS Act, which became law April 5, 2012, requires the Commission to engage in several rulemakings. The Title II rules were due by July 4, 2012. Title II directs the Commission to remove the ban on general solicitation or general advertising stated in Securities Act Rule 502(c) of Regulation D for offers and sales of securities made under Rule 506. Title II also requires the Commission to amend Securities Act Rule 144A(d)(1) to provide that securities sold under the revised exemption may be offered (including by general solicitation or advertising) to persons who are not qualified institutional buyers (QIBs). Although the JOBS Act expanded the range of persons to whom certain securities can be marketed, the buyers of these securities must be either accredited investors or QIBs.

The SEC has not indicated the specific action it may take regarding JOBS Act Title II. The Commission may propose rules, adopt final rules (possibly with a request for additional comments), or it may adopt interim temporary final rules.

The Volcker Rule.—Dodd-Frank Act Section 619 (commonly known as the Volcker rule) amended the Bank Holding Company Act to prohibit banks from engaging in proprietary trading and from making other investments in hedge funds and private equity funds. A critical component of the forthcoming final rule will be the definition of “market making-related activities” and “risk-mitigating hedging activities.” These terms are just two of several key provisions that must be finely calibrated to allow certain permitted activities while barring prohibited ones. The U.S. Treasury (Office of the Comptroller of the Currency), SEC, CFTC, Federal Reserve, and Federal Deposit Insurance Corporation must jointly adopt the Volcker rule. The proposed rule was issued in October 2011; the CFTC separately proposed its version of the rule in February 2012. Dodd-Frank Act Section 619 (adding Bank Holding Company Act Section 13(b)), takes effect on the earlier of 12 months after final rules are issued or two years after the date of enactment. The Dodd-Frank Act was enacted on July 21, 2010.

Hot Topic of the Month

This month's hot topic is International Financial Reporting Standards ("IFRS").  The SEC has long studied and supported the adoption of a single set of globally accepted accounting standards and has been working to incorporate IFRS into the U.S. financial reporting system. The Commission's goal in this position is to improve financial reporting in the U.S. and to reduce country-by-country disparity in financial reporting. It is the Commission's view that the establishment of mutually acceptable international accounting standards would reduce regulatory impediments to cross-border transactions resulting from differing national standards.

In February 2010, the Commission issued a statement in support of the convergence of global accounting standards and directed the staff to develop a work plan to determine the areas and factors that must be considered in connection with a transition to IFRS and to position the Commission to make a determination regarding incorporating IFRS into the financial reporting system for U.S. issuers. If the SEC mandates the adoption of IFRS, it would likely recognize the International Accounting Standards Board, the successor to the committee which developed the core standards, as the standard setter for U.S. issuers. Since 2002, the IASB and FASB have been working towards the convergence of U.S. GAAP and IFRS. In the same year, the Commission also sought comment on whether to incorporate international financial reporting standards into the U.S. financial reporting system and the impact of that action on issuers and investors.

The SEC Office of the Chief Accountant recently issued a final report on the incorporation of IFRS into the US financial reporting system. The staff report said that the IASB has made significant progress in developing a comprehensive set of accounting standards, including recent efforts, in concert with the FASB, to improve the standards related to the convergence projects, such as revenue recognition and lease accounting. However, the staff noted areas in IFRS that are still underdeveloped and noted additional concerns around the independence of IASB funding and the robustness of the IFRS interpretations mechanism. The SEC emphasized that publication of the staff report does not imply that the Commission has made any policy decision as to whether IFRS should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to occur, should be implemented. Additional analysis of whether transitioning to IFRS is in the best interests of U.S. securities markets and investors is necessary before any decision by the SEC concerning the incorporation of IFRS into the US financial reporting system can occur.

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:

  • SEC Today
    • "SEC Staff Issues Report on Incorporating  IFRS Into U.S. Financial Reporting System"  (7-17-12
    • "Panelists Discuss U.S.'s Possible Move to IFRS" (4-30-12)
    • "SEC Staff Publishes Analysis of IFRS in Practice" (11-28-11)
  • Federal Securities Law Reporter
    • SEC Form 20-F, at ¶29,701
    • Release No. 33-9133: Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers, at ¶89,083
    • Release No. 33-9134: Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers, at ¶89,084
    • Release No. 33-9109: Commission Statement in Support of Convergence and Global Accounting Standards, at ¶88,871
    • Report letters (e.g., "SEC Staff Examines IFRS, Audit Rotation and Auditor Judgment at AICPA Conference" (12-28-11)
  • Insights – Amy L. Goodman (e.g., "Opening Up Our Markets to European Issuers" (4-30-12); "A Tough Road Ahead: The SEC's Work Plan for Assessing IFRS Adoption by U.S. Public Companies" (May 1, 2010
  • Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 2.E.2)
  • U.S. Regulation of the International Securities and Derivatives Markets - Greene, Beller, Rosen, Silverman, Braverman & Sperber (e.g., Chapter 8.09)
  • Jim Hamilton’s World of Securities Regulation (e.g., 7-16-12; 7-15-12)