December 2007


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 Proposes Electronic Submission of Investment Company Applications
The SEC is seeking comment on proposed amendments to require the electronic submission of applications for orders under the Investment Company Act and Regulation E filings by small business investment companies and business development companies. The electronic filing of applications will make them more quickly accessible to the public and will improve the SEC's processing of applications. The proposed amendments would include within the mandatory electronic filing provisions any applications for orders under any section of the Investment Company Act.

The SEC's proposed amendments to Rule 0-2 would eliminate the notarization requirement for verifications of applications and statements of facts that are made in connection with applications. The notarization is unnecessary in the context of an electronic filing, in the SEC's view. The amendments would also eliminate the requirement that applicants include draft notices as exhibits. The exhibits are of limited value, according to the SEC's release, because the staff prefers to draft its own notices of applications.

A third amendment would make the temporary hardship exemption unavailable for the submission of applications under the Investment Company Act. The SEC noted that there is no submission deadline, so the hardship exemption should not be needed. Applicants could still request a date adjustment in the unlikely event that one is needed, according to the release. Release No. 33-8859 (SEC) is reported at ¶88,001 (ip access user).

SEC Proposes Summary Fund Prospectus, Adopts Small Business Rules
 The SEC proposed a short summary mutual fund prospectus that can be delivered to investors electronically or on paper at the investor's option. The summary will include key information about a fund's top 10 portfolio holdings, investment advisers, portfolio managers and purchase procedures. Under the proposal, multi-fund prospectuses will have to present information separately for each fund.

Separately, the SEC adopted three of the six reform measures proposed to modernize the disclosure requirements for smaller companies. The final rules reflect one significant change from the proposing release, which is the removal of the tolling provision to suspend the Rule 144 holding period for the length of time that a holder of restricted securities engages in hedging activities. The revisions to Rule 144 shorten the holding period for restricted securities from one year to six months if the issuer has been subject to the Exchange Act reporting requirements for at least 90 days before the sale of the securities. The one-year holding period remains for restricted securities of nonreporting companies. The revisions also simplify Rule 144 compliance for a shareholder who is not an affiliate of the issuer. The adopting release also codifies several Rule 144 interpretive positions. White reported that the division has published a booklet, written in a question-and-answer format, to assist smaller companies in complying with the amended rules.

The adopting release for the mutual fund proposal will be published in Report 2305 at ¶88,017. The final small business disclosure rules have not yet been made available, and will be published in a forthcoming Report.

Comments Sought on Web Tool on State Sponsors of Terrorism
The SEC is seeking comments about whether to develop mechanisms to facilitate greater access to companies' disclosures concerning their business activities in or with countries designated as state sponsors of terrorism. The Commission has temporarily suspended a Web site feature providing direct access to company disclosures in annual reports on the topic of activities in or with state sponsors of terrorism. The construction and operation of the Web tool generated many comments, both positive and negative, based on exceptionally high traffic. The SEC noted in particular the concerns about the lack of more current data than that linked via the most recent annual report as well as concerns about possible negative connotations that could attach to a company. The Commission acknowledged that more recent disclosure could include the termination of the activities in the listed countries, which would be material to a complete understanding of the information disclosed in the annual report. Noting that information that companies provide regarding their business activities in or with state sponsors of terrorism is currently available in various public filings made with the SEC, the Commission seeks public comment on whether easier access to this information is appropriate.

The Commission also seeks additional comment regarding how to address shortcomings in the prototype Web tool. The initial approach of including company disclosure of business activities regardless of their materiality, nature, or legality raised concerns that being listed on the Web site regardless of the appropriateness of the activity created a negative impression that could harm the listed company's reputation. The Commission seeks to address this and other concerns related to the Web tool and the available information. Also under consideration is the use of interactive data tags that companies could apply to disclose this information without using the Web tool. The companies themselves would be authorized to use the data tags to determine how their disclosures would be called up in response to Web-based searches. Release No. 33-8860 is reported at ¶88,012 (ip access user).

Statements on NASDAQ Listing False and Material
The 9th U.S. Circuit Court of Appeals concluded that statements in a merger prospectus concerning listing on NASDAQ were false. The statements were also material, concluded the panel. The case arose from a merger in which the letter to shareholders accompanying the initial prospectus stated that the listing of the shares of the post-merger company on NASDAQ or a national securities exchange was "a condition to the merger." NASDAQ notified the company that its shares were approved for listing. The final prospectus omitted the express listing condition found in the initial prospectus, and the company's securities were never listed on NASDAQ. Following adverse financial results, the price of the company's stock dropped significantly, and the company was taken private with investors receiving a small percentage of the stock's initial value.

The district court (CD Cal) found for the defendants on the Securities Act claims after a three-day bench trial. As described by the appellate panel, the district court found that the "representations in the Final Prospectus were 'literally true,' in that they did not promise that Thane International shares would actually be listed on the NASDAQ...[r]ather, they merely represented that the shares would be or already had been approved or qualified for NASDAQ listing." The lower court noted that the initial prospectus contained an explicit condition that the merger would be completed only if the company listed its shares on NASDAQ, but that condition had been omitted from subsequent versions of the prospectus, including the final prospectus. The district court concluded that dropping this condition demonstrated that the company did not actually promise to list its shares on NASDAQ because "if a condition to list is eliminated, a reasonable investor would infer that there was no promise to list." In the alternative, the district court held that even if the final prospectus contained false statements, those statements were not material. After expert testimony, the district court concluded that because the stock did not depreciate immediately following listing on the OTC bulletin board, the failure to list on NASDAQ was not material.

In rejecting this conclusion, the appellate court stated that it was improper to attribute knowledge of the preliminary prospectus to the shareholders. In addition, the frequent references to NASDAQ listing in the final prospectus were statements that asserted the company would do "nothing short of actual listing on the NASDAQ." The appeals panel also found that "the district court erred when it considered the movement in share price of a stock that did not trade on an efficient market to determine materiality." The appeals court remanded the case with instructions to enter judgment in favor of the plaintiffs. The lower court was ordered to address the issue of loss causation, which it had not dealt with in its previous ruling. Miller v. Thane Int'l, Inc. (9thCir) will be published in Report 2305 at ¶94,525.

CCH Blue Sky Law Reporter

FLORIDA Proposes to Change Fingerprint Processing Fee for Associated Persons
As proposed, the fingerprint processing fee for associated persons would be decreased to $42.25 from $47. Also, the associated person licensing fee amount would be removed from the rules so that it only appears in the Florida Securities and Investor Protection Act. ¶17,452 (ip access user), ¶17,456 (ip access user).

MISSISSIPPI Proposes to Clarify Federal Covered Securities Rules
As proposed, issuers filing SEC Form D to make a Rule 506 offering would need to include Section E (state signature page) and the Appendix. The list of offerings that, upon completion, would require filing a notice of completion of the offering, sales report and $50 fee would include federal covered securities offerings under Section 18(b)(2) and 18(b)(4)(D) of the Securities Act of 1933. A sales report on Form NF or Form D and a $50 fee would be filed for a federal covered securities offering under Section 18(b)(2) or 18(b)(4)(D) that is not completed within 12 months of the date of initial notice filing. ¶34,429H (ip access user), ¶34,430 (ip access user), ¶34,435 (ip access user).

WEST VIRGINIA Grants Exemption for Investment Grade and Foreign Securities
Exemptions from securities registration and advertising filing requirements apply to nonissuer transactions by or through a West Virginia-registered or exempt broker-dealer in: (1) a security of a foreign issuer that is a margin security defined in rules adopted by the Board of the Governors of the Federal Reserve System; and (2) in a security that is either rated (at the time of the transaction) by a nationally recognized statistical rating organization in one of its four highest rating categories or has a fixed maturity or fixed interest or dividend, provided specified conditions are present. ¶63,637 (ip access user).

Martin Act did not Bar Common Law Securities Fraud Claim
The Appellate Division of the Supreme Court of New York ruled that the Martin Act (Act) did not bar a cause of action for common law fraud in connection with an offering of real estate securities. Although affirming that the Act permits no private rights of action, the appellate court held that the statute does not preclude a private party from bringing an otherwise valid common law claim. Purchasers of condominium and cooperative interests and other securities may thus sue sellers for common law fraud, the appellate court concluded, even where the Act would also entitle the Attorney General to seek relief against the sellers for the same alleged conduct. Kramer v. W10Z/515 Real Estate LP is reported at ¶74,666 (ip access user).

New Smart Chart Added: Broker-Dealer Registration and Post Registration Requirements
This new chart provides for each jurisdiction the registration and post-registration requirements for broker-dealers.

Aspen Federal Securities Publications

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes
The 2008 Cumulative Supplement (ip access user), which published in November, updates the cornerstone Securities Regulation treatise. Part of the Securities Integrated Library on IRN, the supplement fully incorporates the large number of legislative, regulatory, and case law changes in the past year, including the SEC’s Concept Release to address § 404; the PCAOB’s adoption of Audit Standard No. 5; the SEC’s adoption of new rules permitting termination of a foreign private issuer’s registration of a class of securities under § 12(g) and the duty to file reports under § 13(a) or § 15(d) of the 1934 Act; the SEC’s adoption of amendments to the proxy rules that permit issuers and other persons to furnish proxy materials to shareholders by posting them on an Internet Web site and notifying shareholders of the availability of the proxy materials; NASD firms’ approval of bylaw amendments to consolidate NASD and the NYSE into a single SRO; the United States Supreme Court reversal of the Second Circuit in Credit Suisse Sec. (USA) LLC v. Billing; the SEC’s rescission of Rule 10a-1 and addition of Rule 201 to Regulation SHO; the SEC’s adoption of amendments to Rule 105 of Regulation M; and the U.S. Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd.

Corporate Secretary’s Answer Book, by Cynthia Krus
The 2008 Supplement (ip access user) published in November and is part of the IRN Corporate Governance Integrated Library. The supplement adds extensive guidance of the new e-proxy rules; discusses trends in shareholder proposals, including mandatory bylaw amendments and shareholder access; discusses the issues surrounding back dating of stock options; includes developments regarding majority voting policies; and adds the latest corporate governance developments. A significant number of new questions are added such as: Are there any new rules regarding mandatory 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?

Securities Regulation in Cyberspace, by Howard M. Friedman
The 2008 Supplement (ip access user) published in November and is now live on the IRN Securities Integrated Library. This treatise analyzes the interweaving of technology and the securities laws, providing in-depth review of the tremendous impact technological advancements such as the Internet have had, and will continue to have, on securities regulation. The 2008 Supplement includes discussion of two sets of SEC rules expanding electronic delivery of proxy material; the SEC’s expanded use of XBRL; the SEC approval of electronic filing by transfer agents and proposal of electronic filing of Form D; the development of machine-readable financial news releases; SRO’s proposed new guidance on supervision of electronic communications by brokers; the continued evolution of market centers and the launching of a combined SRO for Nasdaq and NYSE; the NASD’s BrokerCheck’s movement to a fully online form; the rise in fraudulent account intrusion schemes; the European Union Directive on shareholder online participation at meetings; and an update of relevant websites including numerous additional securities law blogs.

Derivatives Regulation, by Philip McBride Johnson, and Thomas Lee Hazen
The 2008 Cumulative Supplement (ip access user) published in November and is live on the IRN Commodities and Derivatives Integrated Library. Derivatives Regulation comprehensively covers the Commodity Exchange Act along with all other relevant aspects of the regulation of securities that have an impact on the derivatives markets. It covers the full range of emerging regulatory, reporting, and legal issues surrounding derivatives and related instruments. The 2008 Cumulative Supplement includes: developments with respect to security futures, i.e., listing requirements; evaluation of the security futures market; impact of the Commodity Futures Modernization Act; applicability of the commodities laws to forex dealers; exchange traded funds and Commodity Pool Operators (CPO) regulation; developments regarding hedge funds, i.e., exclusions from the CTA and CPO provisions, and the new antifraud rule under Section 206(4) of the Investment Advisers Act; and developments relating to SEC jurisdiction, rulemaking procedures, enforcement, and investigations, as well as discussion and analysis of manipulative sales practices in securities.

Hot Topic of the Month

This month’s hot topic is Shareholder Access. A highly controversial issue surrounding shareholder proxy proposals is whether and how shareholders should have access to the proxy to nominate candidates for election to the board of directors. In AFSCME v. American Int’l Group, Inc. (2006), the Second Circuit ruled that a shareholder proposal seeking to amend a company's bylaws to establish a procedure for including shareholder-nominated candidates on the corporate ballot did not relate to an election within the meaning of Rule 14a-8(i)(8) and, therefore, could not be excluded from proxy materials. This ruling called into question the SEC staff’s longstanding position that companies may exclude proposals of this nature. Following the AFSCME decision, the Commission undertook a thorough review of the proxy process. That review, including three roundtables on the topic, led the SEC to propose competing amendments to its proxy rules in July 2007: one set of changes would institute greater shareholder access; the other would codify the staff’s longstanding interpretation. On November 28, the SEC voted to take the latter route.

In a split vote, the Commission adopted an amendment to Rule 14a-8(i)(8) to codify the longstanding interpretation that companies may exclude from their proxy statements proposals that would result in an election contest or would set up a process for conducting an election process in the future. Commissioner Annette Nazareth opposed the amendment, which she has termed the "non-access proposal," because she believes it impedes shareholders' rights to elect directors for the companies they own. Chairman Christopher Cox defended the change as the only one that would gain the three votes necessary for adoption. To do nothing in the aftermath of AFSCME v. AIG, which called that staff position into question, would open the door to a potential end-run around the proxy and antifraud rules, he said. The result of the majority vote will be no change to the way the rule was enforced for the last 17 years, according to Cox. He also noted that he has received numerous requests to wait until there is a full Commission to act, but believes that doing nothing would put all investors at risk. He pledged to use the time between now and the next proxy season to do something other than maintain the status quo.

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

— SEC Codifies Status Quo on Director Elections (11-28-07)

— PLI Panelists Discuss the Shareholder Agenda in the 2008 Proxy Season (11-23-07)

— Banking Committee Chair Advises and Cautions SEC on Shareholder Access (11-8-07)

— SEC Proposes Alternative Approaches for Shareholder Access to Proxy (7-27-07)

— Campos Calls for Moderate Shareholder Access Measure (2-21-07)

— Atkins Urges Solution to Bring Clarity to Shareholder Access Issue (1-25-07)

  • Federal Securities Law Reporter

— Exchange Act Rule 14a-8(i)(8), at ¶24,012 (ip access user)

— Release Nos. 34-56160, at ¶87,935 (ip access user); 34-56161, at ¶87,934 (ip access user); 34-48626, at ¶87,101 (ip access user)

— AFSCME v. American International Group, Inc. (2nd Cir. 2006), at ¶93,942 (ip access user)

— Hewlett-Packard Co. (1-27-07), at ¶79,443 (ip access user)

— Report letter (11-26-07) (ip access user); (11-13-07) (ip access user)

— CCH Explanations (e.g., ¶24,030.070 (ip access user))

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