December 2006

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

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

CCH Federal Securities Law Reporter

SEC Grants Regulation NMS Exemptions
The Commission granted limited exemptions to Rules 611 and 612 of Regulation NMS. The Commission exempted trading centers from the requirement in Rule 611(a) to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent sub-penny trade-throughs when: (1) the price of the protected quotation that is traded through is $1.00 or less; and (2) the price of the trade-through transaction is less than $0.01 away from the price of the protected quotation that was traded through. See Release No. 34-54678 (¶87,705).

In addition, the Commission exempted national securities exchanges from the Rule 612 prohibition on displaying and executing orders priced in sub-penny increments. The exemption allows such orders provided that they are immediately executed against each other. See Release No. 34-54714 (¶87,709).

SEC Issues Proposal Regarding Section 18 Covered Securities
The Commission also proposed a rule to designate certain securities listed on Nasdaq as covered securities for purposes of Section 18 of the Securities Act. Covered securities are exempt from state law registration requirements. See Release No. 33-8754 (¶87,710).

FSLR Issues “SEC Administrative and Enforcements Developments” Section
A new "SEC Administrative and Enforcement Developments" section devoted to covering enforcement actions and administrative rulings has been introduced into the FSLR report letter. In addition to expanded coverage in the report letter, headnoted full-text publication of enforcement documents has been significantly increased.

Class Action Dismissed, Heightened Pleading Standards Not Met
The 11th U.S. Circuit Court of Appeals affirmed a district court’s order dismissing a class action complaint. The court held that allegations of channel stuffing were not plead with sufficient detail to show scienter. The court also stated that a Sarbanes-Oxley certification is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements, and that since the officers had no reason to believe or know that the certification contained false information, the signing did not meet the level of scienter required under the heightened pleading standards of the Private Securities Litigation Reform Act. The court also stated that the allegations against the auditors were not pleaded with particularity and were not sufficient under PSLRA. See Garfield v. NDC Health Corporation (¶93,976).

Advertisements Not Afforded Absolute Immunity
The 11th U.S. Circuit Court of Appeals affirmed a district court’s denial of absolute immunity to the National Association of Securities Dealers and Nasdaq in an action alleging that the two SROs issued advertisements touting stock in order to profit from resulting increases in trading volume on the Nasdaq exchange. The court held that because the advertisements were issued to promote Nasdaq’s own business by enticing investors to buy stock listed on its exchange, the advertisements did not “fall under the aegis” of the SROs’ delegated disciplinary or regulatory authority. See Weissman V. NASD, Inc. (¶94,109).

SEC Announces Agenda for December Meetings
The SEC will be considering several matters in open meetings on December 4 and December 13. Issues on the December 4 agenda include whether to propose new rules addressing the criteria for natural persons to be considered "accredited investors" for purposes of investing in certain privately offered investment vehicles and prohibiting advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds. It will also consider whether to propose amendments to Regulations M and SHO. At the December 13th open meeting, the Commission will consider recommendations regarding Section 404 of the Sarbanes-Oxley Act, foreign private issuer deregistration, internet availability of proxy materials, and shareholder proxy initiatives.

CCH Blue Sky Law Reporter

California Extends Comment Period on Proposal to Amend Compensatory Benefit Plan Regulations (that Involve SEC Rule 701)
The Comment period on the proposal to amend compensatory benefit plan regulations (that involves SEC Rule 701) was extended. Interested persons may submit written comments about the proposed regulations to Karen Fong, Office of Law and Legislation, Department of Corporations, 1515 K Street, Suite 200, Sacramento, California 95814-4052. Written comments may also be emailed to Karen Fong at regulations@corp.ca.gov or faxed at (916) 322-5875. Comments must be received by 5:00 p.m. on December 18, 2006 [Originally the comment period ran to November 27, 2006]. ¶11,858, ¶11,892, ¶11,893, ¶11,896, ¶11,897

Florida Adopts New IA Custody Requirements and Amends Recordkeeping, Dealer Prohibited Practice and IA Unethical Practice Rules New custody requirements for investment advisers were adopted by the Florida Office of Financial Regulation. Also, unethical practice and recordkeeping rules for investment advisers and dealers were amended. ¶17,463, ¶17,463A, ¶17,463B, ¶17,464

Vermont Retains Effectiveness of Past Administrative Orders/Policy Statements Following Adoption of New Securities Act
An administrative order by the Vermont Securities Division retains the effectiveness of past regulations, bulletins, policy statements and administrative orders until new rules can be adopted, following adoption of the Vermont Uniform Securities Act on July 1, 2006. ¶58,473

New Smart Chart Added: Rule 701
Rule 701 is divided into three charts. Chart I provides each state's exemption for securities or transactions in securities issued in connection with a compensatory benefit plan. Chart II provides each state’s exclusions from the definition of "agent" and "broker-dealer" for persons who offer or sell securities under a compensatory benefit plan to company officers, directors and/or employees. Chart III provides the SEC Rule 701 exemption for those states that have one.

Loan Participation Agreement between Banks did not Constitute a Security
The Minnesota Court of Appeals held that the misrepresentations allegedly made by an originating bank about a loan participation agreement did not violate the Minnesota Regulation of Securities Act because the agreement was not a security. The appellant bank had challenged summary judgment on its claims that the respondent bank had committed fraud under the Act because it had misrepresented the contents of the application for the underlying loan. Applying the "family resemblance" test, the appellate court concluded that the loan participation agreement did not satisfy the statutory definition of a "note" which is a security. Signature Bank v. Marshall Bank is reported at ¶74,599.

Demutualization Plan Involved the Purchase of a Covered Security under SLUSA
The United States Court of Appeals for the Eighth Circuit held that a plan to demutualize an insurance company involved the purchase of a covered security under the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The appellant policyholder had raised state law claims for fraud, breach of fiduciary duty, and unjust enrichment against an insurance company and its related entities. The policyholder argued that the insurance company had wrongfully used the demutualization to recapture settlement benefits that it had paid out in a class action prior to the transaction. As SLUSA applied to preempt state-court jurisdiction, the appellate court affirmed the trial court's ruling that denied the policyholder's motion to remand and dismissed the complaint. Sofonia v. Principal Life Insurance Co. is reported at ¶74,600.

"Cherry-picking" Claim Fails to Survive Summary Judgment
In Moross Limited Partnership v. Fleckenstein Capital, Inc., the United States Court of Appeals for the Sixth Circuit held that a plaintiff's speculative evidence concerning the "cherry-picking" of short sale trades was insufficient to withstand a motion for summary judgment. The plaintiff, a shareholder in a private investment fund, alleged that the fund's investment adviser violated the Michigan Uniform Securities Act by improperly allocating profitable trades to the adviser's personal account. The appellate court concluded, however, that the plaintiff failed to either articulate the precise nature of its cherry-picking claim or explain the mechanism through which the adviser allegedly manipulated the trades. The case is reported at ¶74,601.

Aspen Federal Securities Publications

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes
The 2007 Cumulative Supplement, which publishes in early December, updates the cornerstone Securities Regulation treatise. Part of the Securities Integrated Library on IRN, this supplement volume fully incorporates the large number of legislative, regulatory, and case law changes in the past year, including the SEC’s 2006 overhaul of executive compensation disclosure requirements; the SEC’s 2005 public offering reforms; the Supreme Court’s decision in Dura Pharmaceuticals v. Broudo concerning loss causation and subsequent cases citing Dura; the regulatory framework implementing § 404 of Sarbanes-Oxley; the PCAOB’s rules promoting the ethics and independence of accounting firms; the SEC’s amendments to its accelerated filer deadlines for large accelerated filers; the SEC’s amendments to the penny stock rules; the Supreme Court’s opinion in Merrill Lynch, Pierce, Fenner & Smith v. Dabit concerning SLUSA preemption of state law class actions in “holding” cases; and the SEC’s approval of the application of the Nasdaq to become a national securities exchange.

Corporate Secretary’s Answer Book, by Cynthia Krus
The 2007 Supplement published in November and is part of the IRN Corporate Governance Library. The supplement adds a new chapter on executive compensation based on the SEC’s new rules. In addition, the supplement includes new analysis of trends in shareholder proposals, including mandatory bylaw amendments; the issues surrounding back dating of stock options; developments regarding majority voting policies; and the latest corporate governance developments. A significant number of new questions are added such as: Are there any new rules regarding electronic proxy delivery? Can shareholders or parties other than the issuer solicit proxies electronically? What is the difference between a majority voting standard and a plurality voting standard? What are the current SEC disclosure requirements regarding nominating committees? Do compensation committees have to provide any report that is included in the public company’s reports with the SEC? How does the recent Securities Offering Reform interact with Regulation FD? Who should be involved in the development of a document retention policy?

Capital Markets Handbook, Edited by John C. Burch, Jr. and Bruce S. Foerster
The 2007 Supplement published in December and will be live on the International Business Integrated Library on IRN in mid-December. This supplement includes new information relating to the SEC’s Securities Offering Reform; amendments to the Analyst Rules (NASD Rule 2711 and NYSE Rule 472); proposals to amend Regulation M; prospectus delivery and the new free writing prospectus; changes in underwriting documents; domestic stock and options markets update; credit ratings agencies update; and an expanded glossary and additions to the significant dates section.

Regulation of Money Managers: Mutual Funds and Advisers, by Tamar Frankel and Ann Taylor Schwing
The 2007 Supplement, published in November and now live on the Investment Management Library on IRN. This comprehensive four-volume treatise on investment management regulation covers federal and state statutes, their legislative history, common law, judicial decisions, rules and regulations of the SEC, staff reports, and other publications dealing with investment advisers and investment companies. The 2007 Supplement includes an expanded discussion of Rule 202(a)(11) under the Advisers Act; analysis of the FinCen rule requiring mutual funds to establish due diligence programs for their correspondent accounts for foreign financial institutions as part of the mutual funds’ anti-money laundering programs; discussion of SEC Release 34-52635; and a new section analyzing redemption fees—specifically the SEC’s adoption of Rule 22c-2 under the 1940 Act.