SEC Proposes Rules to Register Hedge Fund and Private Equity Fund Advisers. The SEC approved the issuance of two proposals to implement the Dodd-Frank Act provisions that are intended to close the regulatory gap for hedge funds and private equity funds. Under the proposals, many of the advisers to hedge funds and private equity funds will be required to register with the SEC. Funds that qualify for exemptions from registration will have to file reports with the SEC about their business activities. The Dodd-Frank Act also increased the asset threshold for advisers that must register with the SEC. The Commission proposed rules to reflect that higher threshold and to facilitate the transition of certain SEC-registered advisers to state registration. The Dodd-Frank Act eliminated the exemption that allowed advisers to private funds to avoid registering with the SEC if they had fewer than 15 clients. These advisers will now be subject to the same registration requirements and regulatory oversight that apply to other SEC-registered investment advisers.

The proposal would require hedge fund and other investment advisers to report basic operational information about the funds they manage such as the amount of assets held by the fund. Five categories of gatekeepers would have to be identified: auditors, prime brokers, custodians, administrators and marketers. The proposal includes exemptions from registration for advisers that provide their services solely to venture capital funds, advisers that provide their services solely to private funds with less than $150 million in assets under management in the U.S., and certain foreign advisers that do not have a place of business in the U.S. The exempt advisers would be required to file and periodically update reports with the SEC using the same registration form as registered advisers, but with more limited disclosure. 

The SEC proposed a definition of venture capital fund for purposes of the exemption from registration under the Investment Advisers Act. The proposal defines a venture capital fund as a private fund that represents itself to investors as being a venture capital fund; invests only in equity securities of private operating companies primarily to provide operating or business expansion capital, or in U.S. Treasury securities with a remaining maturity of 60 days or less, or cash; is not leveraged and its portfolio companies may not borrow in connection with the fund's investment; offers to provide a significant degree of managerial assistance or controls its portfolio companies, and does not offer redemption rights to its investors. The SEC also proposed a grandfathering provision for existing funds that make venture capital investments and hold themselves out as venture capital funds, recognizing the difficulty it would pose for existing funds to conform to the new definition. Release No. IA-3110 (registration) will be reported at ¶89,246, and Release No. IA-3111 (exemptions) will be reported at ¶89,247.

 

SEC Adopts Market Access Rule. The SEC adopted a rule to prohibit broker-dealers from providing customers with unfiltered or "naked" access to an exchange or an alternative trading system based on concerns that bypassing broker-dealer risk controls could disrupt financial markets. Rule 15c3-5 will require broker-dealers with market access to establish risk management controls and supervisory procedures reasonably designed to limit their financial exposure and ensure compliance with regulatory requirements. It will also require broker-dealers who are members of an exchange or who subscribe to an ATS, or broker-dealer operators of an ATS that provide access to trading securities directly on their ATS to a person other than a broker-dealer, to implement certain risk management controls and supervisory procedures which would effectively eliminate unfiltered or naked sponsored access. These broker-dealers would also have to establish, document and maintain a system of risk management controls and supervisory procedures that are reasonably designed to manage the financial, regulatory and other risks related to market access, including access on behalf of sponsored customers. Release No. 34-63241 at ¶89,236 (IntelliConnect) (IRN) (ip access user).

 

SEC Proposes Rules for Security-Based Swap Repositories and Transaction Reporting. The SEC proposed rules to require security-based swap data repositories to register with the SEC and to outline the swap transaction-related information that must be reported and publicly disseminated. he purpose of the repositories is to retain complete records of swaps transactions and give regulators access to the records. The data collected by repositories will assist regulators in preventing manipulation, fraud and other market abuses. It will enable them to monitor for the build-up and concentration of risk exposures and to resolve issues if an institution fails. The proposed rules outline the registration process, core principles and duties of a repository. A new Form SDR will be used to register with the SEC. Under the proposal, repositories would accept transaction data and maintain it for at least five years after the expiration of the applicable swap. Repositories would be required to make certain disclosures to market participants prior to accepting any security-based swap data from the participants.

The second proposal establishes how the swap transactions would be reported and disseminated. Under proposed Regulation SBSR, parties to a security-based swap transaction would be required to report information about the transaction to a registered repository. The repository would be required to publicly disseminate certain information in a timely manner. The proposed rules specify the categories of information that must be reported to a repository in real time and publicly disseminated. The information would include a description of the asset class of the swap and the underlying security; the price, notional amount, time of execution and effective date, and the scheduled termination date. Certain information would be reported to a repository but would not be publicly disseminated. Repositories would have to establish and maintain policies and procedures for reporting and disseminating the transaction data and would have to register with the SEC as securities information processors. Release No. 34-63347 (registration) at will be reported at ¶89,245, and Release No. 34-63346 (reporting) will be reported at ¶89,244.

 

Commission Proposes Rules on Security-Based Swaps. The SEC voted to propose for comment a rule to prohibit fraud, manipulation and deception in connection with the offer, purchase or sale of any security-based swap. Proposed Rule 9j-1 responds to the Dodd-Frank Act's framework for the regulation of over-the-counter swaps which divides regulatory authority over swaps between the SEC and the CFTC. The SEC has authority over security-based swaps, which are swaps that are based on a single security or loan, or a narrow-based group or index of securities relating to a single issuer or issuers of securities in a narrow-based security index. The new rule would address misconduct in connection with ongoing payments and deliveries under a security-based swap. It would prohibit persons from using fraudulent or manipulative devices or schemes, making untrue statements or omitting material facts, or engaging in conduct that would operate as a fraud or deceit on another person in connection with security-based swaps. Release No. 34-63236 at ¶89,233 (IntelliConnect) (IRN) (ip access user).

 

SEC Proposes Whistleblower Rules Under Dodd-Frank Act. The SEC has proposed a rule to define and outline the scope of the whistleblower program and the procedures for applying for awards. The Dodd-Frank Act requires the SEC to implement a whistleblower program. The Act expanded the protections available to whistleblowers and created significant incentives for those with knowledge of any federal securities law violations to come forward with the information. The SEC's proposed program is aimed at rewarding individuals who act early to expose violations and help the SEC bring successful cases. To be considered for a reward, the whistleblower must voluntarily provide information to the SEC, a self-regulatory organization or the PCAOB. The information must be based on the whistleblower's independent knowledge or analysis. The information also must lead to a successful enforcement of a federal court or administrative action by the SEC. Information will be deemed to have led to a successful enforcement action if it results in a new examination or investigation being opened and significantly contributes to the outcome, or if the conduct was already under investigation when the information was submitted but it is essential to the success of the action and would not otherwise have been obtained. The monetary sanction in the action must exceed $1 million. Release No. 34-63237 at ¶89,234 (IntelliConnect) (IRN) (ip access user).

 

Law Firm's Participation in Scheme Too Indirect for Liability. A 5th Circuit panel affirmed a district court's dismissal with prejudice of a securities fraud action brought against a law firm. The complaint alleged that an accounting firm had marketed transactions involving "European-style digital options" as legitimate investment vehicles with tax-avoidance benefits when, in reality, the transactions were considered by the IRS to be an abusive tax shelter and led to the investors being investigated and penalized. The investors asserted, among other claims, that they were deceived as to the validity of the scheme through representations that the scheme had been approved by "major national law firms." The plaintiffs had settled with all of the defendants, with the exception of the law firm, which issued two tax opinion letters supporting the validity of the tax savings products. The district court found that the investors had failed to sufficiently plead the elements of reliance and scienter.

The panel first found that the court correctly dismissed the investors RICO claim as barred by the Private Securities Litigation Reform Act. According to the panel, the ownership interests were "securities" as defined by the securities laws, so the RICO claims were barred as conduct actionable as fraud in the purchase or sale of securities. The panel then agreed that the investors had failed to show reliance because their reliance on the law firm's participation in the scheme was too indirect for liability. Explicit attribution is required to show reliance under Section 10(b), and the panel found that the investors failed to claim that they had any knowledge of the law firm's role prior to their investment. Affco Investments 2001 LLC v. Proskauer Rose L.L.P. (5thCir) is reported at ¶95,948 (IntelliConnect) (IRN) (ip access user).

 

Sarbanes-Oxley Protection Limited to Documents Prepared for PCAOB. Sarbanes-Oxley Act provisions protecting PCAOB-auditor documents from disclosure are expressly limited to materials that an audit firm prepared specifically for the board, ruled a federal judge (ND Ill), and do not protect from discovery documents related to or concerning the board's inspection process. Indeed, the plain language of Section 105(b)(5)(A) makes clear that Congress did not create a blanket privilege regarding the PCAOB inspection process. Thus, in a securities fraud action alleging that a company failed to disclose the effect of significant financial transactions in violation of GAAP and SEC rules, the outside auditor was ordered to produce all documents on the accounting and disclosure of the transactions that were not prepared specifically for the PCAOB. In addition, the audit firm must give the investors a privilege log describing the nature of any documents that it has withheld pursuant to Section 105(b)(5)(A).

Section 105(b)(5)(A) is a clear and unambiguous provision that protects from disclosure only materials that an accounting firm prepared specifically for the board. Since there is no ambiguity in this statutory provision, noted the court, there was no need to look any further than the text of the statue in order to resolve the discovery issue. Inclusion of the phrase "specifically for the Board" makes clear that the statute is applicable to only a portion of any information or documents that may derive from, refer to, or relate to a PCAOB inspection. The court rejected KPMG's assertion that the statutory protection includes any documents related to or concerning the PCAOB inspection process since to accept the firm's premise would extend interpretation of the provision beyond its plain language and render meaningless the phrase "specifically for the Board."

The court similarly rejected an assertion set forth by the Center for Audit Quality in its amicus brief that internal KPMG documents relating to the inspection process are prepared specifically for the board because absent the inspection they would never have been created in the first place. If Congress intended the privilege to protect all materials related to a board inspection, reasoned the court, the text of Section 105(b)(5)(A) would reflect that intention. Instead, the statute limits the protection to materials prepared specifically for the board. Despite arguments by KPMG and CAQ regarding the legislative history of Sarbanes-Oxley, the court said that it did not need to consider legislative history because the plain language of the statute is clear and there was no need to judicially look beyond its text.

The court also rejected KPMG's contention that documents relating to the PCAOB's inspection of the firm's audit practice are irrelevant to this litigation because violations of accounting and auditing standards are generally insufficient to support a securities fraud claim. Because the defendants have placed their accounting at issue by contending that the company acted in conformance with GAAP, noted the court, they have necessarily placed KPMG's communications regarding the corporate transactions directly at issue. Given that the PCAOB conducted an investigation of KPMG to determine whether its audits complied with professional standards, and that the PCAOB made specific findings regarding deficiencies associated with the firm's auditing procedures of the transactions, continued the court, these documents are directly relevant to this litigation. Also rejected was the firm's assertion that the requests for the documents were unduly burdensome. The audit firm has already produced documents in this litigation, noted the court, and the requests at issue are limited in time and scope. In addition, the investors agreed to reimburse the firm for reasonable production and copying costs and only requested to take the depositions of two KPMG professionals. Silverman v. Motorola, Inc. (ND Ill) will be reported at ¶ 95,956.

  

CCH Blue Sky Law Reporter  

 

Alaska, Connecticut And Maine Adopt New Form ADV Part 2 for IA Use in 2011.

Alaska. State investment advisers applicants. Persons applying to register as investment advisers for the first time in any state may between October 12, 2010 and December 31, 2010 electronically file with the IARD an old Part II or new Part 2 of Form ADV. Beginning January 1, 2011 persons applying to register as investment advisers for the first time in any state or for initial registration in a new state must electronically file new Part 2 with the IARD. ¶8576 (IntelliConnect) (IRN) (ip access user).

Connecticut. Investment adviser applicants filing an initial Form ADV, Uniform Application for Investment Adviser Registration, may between October 12, 2010 and January 1, 2011 submit electronically through the IARD or file in paper format directly with the Securities and Business Investments Division of the Connecticut Department of Banking either current Part II or new Part 2 of Form ADV. Beginning January 1, 2010 investment adviser applicants must electronically file new Part 2 with the IARD as part of their Form ADV application.

Connecticut-registered investment advisers between October 12, 2010 and January 1, 2011 may submit Form ADV amendments electronically through the IARD or in paper format directly to the Securities and Business Investments Division using either current Part II or new Part 2 of Form ADV. Investment advisers registered in Connecticut on or before December 31, 2010 should update their information on current Part II by filing new Part 2 between January 1 and June 1 of 2011 (no later than June 1, 2011). All Connecticut-registered investment advisers starting January 1, 2011 must electronically file with the IARD any Form ADV amendments using new Part 2. CAUTION: Connecticut does not require investment advisers to file an annual updating amendment but mandates that Form ADV be amended to reflect material information changes [see Rule 36b-31-14e(a) at ¶14,460 (IntelliConnect) (IRN) (ip access user)] and specifies annual delivery of the brochure or an offer to deliver it to their clients [see Rule 36b-31-5c(d)(1) at ¶14,406 (IntelliConnect) (IRN) (ip access user)].

Note on federal covered investment advisers. Federal covered investment advisers filing a notice in Connecticut need only submit Part 2 of Form ADV if requested by the Securities and Business Investments Division, according to the instructions for filing new Part 2, as stated by Cynthia Antanaitis, the Assistant Director for the Division. ¶14,623 (IntelliConnect) (IRN) (ip access user).

Maine. Investment adviser applicants filing an initial Form ADV, Uniform Application for Investment Adviser Registration, and investment adviser licensees filing amendments to Form ADV Part II may, between October 12, 2010 and January 1, 2011, use either current Part II or new Part 2, although Maine’s Office of Securities encourages using new Part 2 as soon as possible. Applicants and licensees will be required, starting January 1, 2011, to electronically file their initial applications, amendments and annual updating amendments, respectively, using new Part 2. The annual updating amendment to Form ADV (Parts 1 and 2) must be submitted within 90 days of the investment advisers’ fiscal year-end but investment advisers with a December 31 fiscal year-end have until March 31, 2011 to submit this filing. Licensed investment advisers must annually either: (1) deliver to each client within 120 days of the advisers’ fiscal year-end a free updated brochure that includes a summary of material changes or is accompanied by a summary of material changes; or (2) deliver to each client a summary of material changes including an offer to provide a copy of the advisers’ updated brochure and information on how a client may obtain it. The Office of Securities encourages investment advisers to follow the new Form ADV Part 2 instructions on the distribution and delivery schedule of the new brochure and brochure supplement. ¶29,570 (IntelliConnect) (IRN) (ip access user).

 

Colorado Reduces Licensing Fees for BDs, Sales Reps., IAs and IARs. The licensing fee was reduced to $60, from $69 for FINRA, non-FINRA and mortgage broker-dealers; and for SEC and state investment advisers. The licensing fee was reduced to $10, from $14 for FINRA, non-FINRA and mortgage sales representatives; and for SEC and state investment adviser representatives. ¶13,551 (IntelliConnect) (IRN) (ip access user).

 

Hawaii Nonsubstantively Amends Dealer Waiver of Annual Report of Condition. The following interpretive order from 2003 was amended only nonsubstantively to replace the name of the “NASD” organization with the current “FINRA” name of the organization and to substitute outdated section numbers with the new numbers to reflect the nomenclature of the Hawaii Uniform Securities Act of 2008. To reiterate the interpretive order, Hawaii-registered dealers also registered with the SEC and members of FINRA may waive the Business Registration Division’s annual report of condition, provided the dealers: (1) submit their most current annual audited financial reports to FINRA; (2) notify the Hawaii Commissioner in writing within 24 hours of the dealers’ net capital falling below the State’s required minimum amount; (3) send financial information, in writing, to the Commissioner within 24 hours of its request; and (4) execute the prescribed “Waiver Eligibility Certificate.” ¶20,561 (IntelliConnect) (IRN) (ip access user).

 

Iowa Adopts Broker-Dealer, Agent and Investment Company Rule Changes. Rule changes adopted by the Iowa Securities Bureau include amending broker-dealer registration requirements, increasing agent fees and mandating investment companies to submit their notice filings electronically. ¶25,401 (IntelliConnect) (IRN) (ip access user), ¶25,410 (IntelliConnect) (IRN) (ip access user), ¶25,412 (IntelliConnect) (IRN) (ip access user), ¶25,418 (IntelliConnect) (IRN) (ip access user) and ¶25,460 (IntelliConnect) (IRN) (ip access user).

 

Maryland and Massachusetts Set Time-Table for Mandating New Part 2 of Form ADV.

Maryland. Applicants for initial investment adviser registration in Maryland must, starting October 12, 2010, submit New Part 2 of Form ADV as part of their application or amended electronic filing of Form ADV through the IARD. Persons registered or pending registration as a Maryland investment adviser on October 12, 2010 may submit necessary Form ADV amendments between October 12, 2010 and December 31, 2010, by filing either the old Part II or the new Part 2 of Form ADV. Registrants on January 1, 2011 or after must electronically submit through the IARD the new Part 2 of Form ADV, by no later than the registrant’s next filing of an amendment or annual update amendment, whichever filing comes first. ¶30,656 (IntelliConnect) (IRN) (ip access user).

Massachusetts. Massachusetts-registered investment advisers may continue to use old Part II of Form ADV to electronically file material amendments with the IARD until their next annual updating amendment is required, within 90 days of a registrant’s fiscal year-end. At the time of the next annual updating amendment, investment advisers must: (1) electronically file with the IARD a new Form ADV that includes new Part 2; and (2) deliver or offer to deliver new Form ADV Part 2 to their existing, new and prospective advisory clients. Investment advisers need to also consider the new SEC custody rule incorporated by reference in Massachusetts Rule 950 CMR 12.205 (5) at ¶31,455 (IntelliConnect) (IRN) (ip access user) and ¶31,660 (IntelliConnect) (IRN) (ip access user).

 

Michigan Issues Fifth Transition Order Following Adoption of its 2009 New Securities Act . The nonprofit organization exemption for securities, previous Act-exempt broker-dealers, Canadian broker-dealers and their agents, and senior-specific designations are the provisions covered in the fifth transition order of the Michigan Office of Financial and Insurance Regulation following adoption of the State’s new uniform securities act on October 1, 2009. ¶32,667 (IntelliConnect) (IRN) (ip access user).

 

Missouri Clarifies FINRA Exam Requirement for Issuer-Agents. Issuer-agents offering or selling securities in Missouri must meet a written exam requirement by taking and passing either the Uniform Securities Agent State Law Examination (Series 63) or the Combined State Law Examination (Series 66), as well an applicable FINRA exam. There are currently no applicable FINRA exams for issuer-agents to take to satisfy the “applicable FINRA exam” part of the exam requirement but the Missouri Securities Commissioner cautions that this position can change at any time. ¶35,599A (IntelliConnect) (IRN) (ip access user).

 

Montana Mandates Investment Company Filings at the Class Level. Investment company and similar issuers must, starting January 1, 2011, register or notice file their securities in Montana at the class rather than at the previously-required portfolio level. Beginning January 1, 2011, new and renewing issuers must submit a new application for each class previously incorporated in a portfolio filing of multiple classes. NOTES: (1) Notification of registration of each class included in a prospectus containing more than one class is required by the Montana Securities Department unless the issuer undertakes to “sticker” the prospectus indicating the classes not available to Montana investors; and (2) Issuers are encouraged to file their Consent to Service of Process with the Department at the trust level. ¶36,524 (IntelliConnect) (IRN) (ip access user).

 

Note Used as a Conduit for Equity Investment Constituted a “Security.” In Nye Capital Appreciation Partners, L.L.C. v. Nemchik, a federal district court (N.D. Ohio) held that a promissory note issued in exchange for cash used to fund a corporation’s capital needs constituted a security within the meaning of the Ohio Blue Sky Law. Although the purchasers characterized the transfer of funds to the corporation as a "loan," documentary evidence showed that the transaction was intended as a conduit for the purchasers to make an investment of cash in exchange for a repayment in corporate stock. In addition, the note qualified as a security under the Reves "family resemblance" test because: (1) the parties were motivated by investment considerations; (2) the private placement memorandum used to market the equity interest disavowed any reasonable expectation of return; (3) the purchasers expected the cash infusion to be converted into equity; and (4) the defendants failed to show that another regulatory scheme existed to reduce the risk of investment. Accordingly, the court concluded that the note lacked characteristics that would weigh in favor of adding the note to the list of instruments deemed to be non-securities under the family resemblance test.  Nye Capital Appreciation Partners, L.L.C. v. Nemchik is reported at ¶74,873 (IntelliConnect) (IRN) (ip access user).

  

Aspen Federal Securities Publications  

 

Fundamentals of Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes. The 2011 Supplement will soon be available online. This compendium reviews the most significant aspects of securities regulation and provides essential information covering a wide array of topics concerning securities law. The most recent supplement includes extensive discussion and analysis of the Dodd-Frank Wall Street Reform and Consumer Protection Act; SEC’s adoption of amendments to Rule 2a-7 of the Investment Company Act; SEC’s 2010 Statement in Support of Convergence and Global Accounting Standards; SEC’s approval of amendments to NYSE Rule 452 and Listed Company Manual’s 402.08 to eliminate broker discretionary voting for director elections, whether contested or not, with an exception for companies registered under the Investment Company Act; completely updated Chapter 7, §A, discussing the structure of the securities markets; SEC’s adoption of Rule 201 to Regulation SHO, a circuit breaker combined with the alternative uptick rule; SEC’s adoption of Rule 206(4)-5 and amendments to Rules 204-2 and 206(4)-3 of the Investment Advisers Act; a detailed discussion and timeline of the Bernard Madoff and R. Allen Stanford Ponzi schemes; and discussions of the United States Supreme Court’s decisions in Free Enterprise Fund v. PCAOB, Jones v. Harris Assoc., L.P., Merck & Co., Inc. v. Reynolds, Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., Rent-a-Center W., Inc. v. Jackson, Skilling v. United States, and Morrison v. National Australia Bank.

 

Regulation of Money Managers: Mutual Funds and Advisers, by Tamar Frankel and Ann Taylor Schwing. The 2011 Supplement (IntelliConnect) (IRN) (ip access user) is now available online. This comprehensive 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 2011 Supplement includes extensive discussion and analysis of the Dodd-Frank Wall Street Reform and Consumer Protection Act; addition of numerous new court decisions, SEC no-action letters, secondary sources and law review articles, and updates of the existing court decisions and regulations; revision of the exemptions from registration under the Investment Advisers Act, including elimination of the general exemption for advisers to private funds; discussion of the Supreme Court decision in Jones v. Harris Associates L.P.; discussion of recent amendments to the regulation of money market funds; and a new subsection 13.04[B]: Use of Consumer Financial Information in Marketing Solicitations.

 

Regulation of Securities: SEC Answer Book, Third Edition, by Steven Mark Levy. The 2011-1 Supplement will soon be 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 covers key provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that affect all public companies. These include shareholder votes on executive compensation (“say on pay”); shareholder access to the proxy; compensation committee independence and authority; “clawbacks” of erroneously awarded compensation; new mandatory compensation and governance disclosure requirements; beneficial ownership reporting provisions; and expanded SEC regulatory authority and enforcement powers. Other updates include: expansion of the definition of “security” under both the Securities Act and the Exchange Act to include “security-based swaps”; controversial new limitations on the SEC’s obligation to disclose its nonpublic records in response to requests under the Freedom of Information Act; why some major companies are finding Pink OTC Markets an appealing alternative to established stock exchanges; the Supreme Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, upholding the constitutionality of the PCAOB; when and how companies may utilize Rule 12h-3 to suspend their Section 15(d) reporting obligations; whether and when the securities laws require disclosure of merger negotiations; new provisions permanently exempting non-accelerated filers from the auditor attestation requirement of Sarbanes-Oxley Section 404(b); how companies can implement exculpatory clauses to shield directors from personal monetary liability; Dodd-Frank and Sarbanes-Oxley protections for people who “blow the whistle” on corporate wrongdoing; the role—and conflicts of interest—of proxy advisory firms; the Supreme Court’s decision in Morrison v. National Australia Bank Ltd.; the discovery obligations of federal prosecutors, and how at times these obligations are violated; what constitutes an effective corporate compliance program under the federal sentencing guidelines; and how the government uses social networks to gather information.

 

Investment Management Law and Regulation, Second Edition, by Harvey E. Bines and Steve Thel. The 2010 Cumulative Supplement will soon be available online. The update discusses the new requirement that hedge fund managers register as investment advisers and exceptions for venture capital managers and family offices; new SEC authority to impose fiduciary duties on broker-dealers; changes in the rules governing the allocation of responsibility for regulating investment advisers between state regulators and the SEC; the exemption of fixed indexed annuities from registration under the Securities Act; the SEC study of the duties of broker-dealers and investment advisers to their customers; changes in standards governing the suitability of investments; developments in the law governing investment-management fees, including the Supreme Court’s decision in Jones v. Harris Associates; changes in the definition of “accredited investors” for private placements exempt from registration under the Securities Act; restrictions on pay-to-play practices in government pension management; standards for the use of designations such as “financial planner”; new ERISA standards for fee disclosure by service providers to pension plans; excessive-fee and revenue-sharing litigation relating to employee-directed pension plans; and proposals to prohibit the use of performance history in computer models used as the basis for investment advice provided to participants in employee-directed pension plans.

 

Offerings of Asset-Backed Securities, by John Arnholz and Edward E. Gainor. The latest update will soon be available online. This comprehensive resource offers information on how to do asset-backed deals from a very practical perspective. It focuses on real-world know-how, delivering: a step-by-step approach to spotting issues and solving problems; practical, transaction-oriented advice from the perspective of experienced practitioners; insights into specific issues that frequently arise in transactions; and solutions to common problems. Offerings of Asset-Backed Securities also includes “issue-spotting” checklists and other formatting tools to ensure that this resource serves as a reliable, quick reference. This latest update discusses the continued fallout from the financial crisis; a special report on the re-regulation of the asset-backed securities markets; financial regulatory reform legislation; the FDIC’s securitization safe harbor; implications for liability under the federal securities laws; the new accounting rules for securitization; and tax and bankruptcy developments.

 

 

Hot Topic of the Month

 

This month's hot topic is the PSLRA discovery stay. To prevent "fishing expeditions," Exchange Act Section 21D(b)(3) requires courts to stay all discovery pending a ruling on a motion to dismiss in securities law cases, unless exceptional circumstances exist where particularized discovery is necessary to preserve evidence or to prevent undue prejudice to a party. To ensure that relevant evidence will not be lost, it is unlawful for any person, upon receiving actual notice that names that person as a defendant to willfully destroy or otherwise alter relevant evidence.

To avoid the automatic stay of discovery, a plaintiff must produce more than generic allegations of risk of lost evidence or undue prejudice. Circumstances qualifying for exception to the stay of discovery might include, for example, the terminal illness of an important witness. The legislative history indicates that such circumstances would justify deposing the witness prior to the ruling on a motion to dismiss. In one case, finding no undue prejudice, a district court ordered a stay of discovery against a company alleging violations of Exchange Act Section 13(d) by nominees to be the company's directors. The "undue prejudice" exception was unavailable because the company could seek post-election remedies and because there was no showing of a legal right to the information sought in discovery. The court noted that the standard for obtaining an undue prejudice exception from the mandatory stay of discovery is "improper or unfair detriment," something less than irreparable harm. The court also indicated that time pressures inherent in a contest for corporate control do not constitute undue prejudice.

To ensure that relevant evidence will not be lost, subparagraph 21D(b)(3)(C) makes it unlawful for any person, upon receiving actual notice that names that person as a defendant, willfully to destroy or otherwise alter relevant evidence. This provision prohibits only the willful alteration or destruction of evidence relevant to the litigation and does not impose liability where parties inadvertently or unintentionally destroy what turn out later to be relevant documents. Although this prohibition expressly applies only to defendants, legislative history indicates that the willful destruction of evidence by a plaintiff would be equally improper.

Subparagraph 21D(b)(3)(D), authorizes a federal court to stay discovery proceedings in any private state court action as necessary in aid of its jurisdiction or to protect or effectuate its judgments. Congress intended to prevent plaintiffs from circumventing the Reform Act's stay of discovery by filing a state court action and conducting discovery there. Under this provision, federal courts may stay discovery in state court proceedings regardless of whether there exists a parallel federal court action or whether the state court proceedings commenced before, concurrently with, or after, the federal action.

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

• Federal Securities Law Reporter
  • Report letters (e.g., "Motion to Lift Discovery Stay Denied" (1-26-10 (IntelliConnect) (IRN) (ip access user))
  • Exchange Act Section 21D(b)(3) at ¶26,421K (IntelliConnect) (IRN) (ip access user)
  • Medical Imaging Centers of America, Inc. v. Lichtenstein, at 1995-96 CCH Dec., ¶99,033 (IntelliConnect) (IRN) (ip access user)
  • CCH Explanations (e.g., ¶26,422Y.060 (IntelliConnect) (IRN) (ip access user); ¶22,790,020 (IntelliConnect) (IRN) (ip access user))
• Insights – Amy L. Goodman (e.g., "Erosion of Discovery Stay Provisions of PSLRA and SLUSA" (January 2005) (IntelliConnect) (IRN) (ip access user)
• Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 11.D.4 (IntelliConnect) (IRN) (ip access user))
• The Regulation of Corporate Disclosure – Brown (e.g., §1.04[5]  (IntelliConnect) (IRN) (ip access user))
• Jim Hamilton’s World of Securities Regulation