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December 2013


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 and a preview of RBsource, a new 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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Securities Regulation Daily

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Financial Reform Resources



CCH Federal Securities Law Reporter

SEC proposes regulatory framework for crowdfunding offerings. The SEC commissioners have unanimously approved a proposed regulatory framework for offerings conducted under the crowdfunding provisions of the JOBS Act. The JOBS Act created an exemption to permit securities-based crowdfunding without registering the offerings with the SEC. The proposal is intended to facilitate capital raising by small businesses while at the same time providing investor protection measures. The comment period will be open for 90 days.

The proposal will permit companies to raise up to $1 million through crowdfunding offers during any 12-month period. Investors would be permitted to invest during any 12-month period up to $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000. Investors may invest up to 10 percent of their annual income or net worth, whichever is greater, if either is equal to or more than $100,000. Investors would not be permitted to purchase more than $100,000 of securities during any 12-month period through crowdfunding.

Companies that conduct crowdfunding offerings must file certain information with the SEC and make it available to investors and to the intermediary that is used to facilitate the offering. The offering documents must include information about officers, directors, and holders of more than 20 percent of the issuer’s securities. The disclosure would include a business description, a description of the use of the proceeds from the offering, and the price of the securities being offered.

SEC Chair Mary Jo White said that because of the impact the crowdfunding rules may have on the market, the staff has been directed to develop a work plan to review and monitor the use of the crowdfunding exemption. If the rules are adopted, the staff will proceed with the work plan, under which it will evaluate the types of issuers that use the crowdfunding exemption, compliance with the rule, and whether the exemption is promoting capital formation and effectively protecting investors. White acknowledged that there is a great deal of excitement about the crowdfunding exemption. She said the SEC wants this market to thrive in a manner that is safe for investors. Release No. 33-9470 is reported at ¶80,407.

SIPC proposes change to Rule 400. The SEC has released for comment a proposal by the Securities Investor Protection Corp. (SIPC) to amend SIPC Rule 400, which relates to the satisfaction of customer claims for standardized options under the Securities Investor Protection Act of 1970 (SIPA). The SEC published the proposed rule change because SIPC rules have the force and effect as if promulgated by the Commission.

SIPC proposes to amend Rule 400 to provide trustees appointed under SIPA with greater flexibility in the distribution of standardized options upon the commencement of a liquidation proceeding. The proposal also would modify the definition of "standardized options" to include an option that is a "security" under SIPA and is issued by an SEC-registered securities clearing agency or a foreign securities clearing agency (an OTC option). The proposed amendments create an alternative to closeout by allowing the SIPA trustee, with SIPC’s consent, to transfer some or all of the standardized options positions to another SIPC member for the accounts of customers. Release No. SIPA-171 is reported at ¶80,416.

Issue of fact existed as to whether interests were overvalued. A 2nd Circuit panel has remanded an action to the district court in order to consider a defendant’s scienter argument. The panel found a triable issue of fact as to whether the plaintiffs suffered a direct injury when they purchased an interest in a hedge fund at fraudulently inflated prices. The court also affirmed the dismissal of the plaintiffs’ state laws claims and vacated the dismissal of the plaintiffs’ Exchange Act fraud claims.

This action arose from the collapse of a hedge fund, Lipper Convertibles, L.P. (Lipper) The securities in which Lipper invested largely consisted of convertible preferred stocks and convertible bonds for which there were no publicly available valuations. Lipper determined the fair value of the fund’s securities based on available market quotations in the form of bid and asked price quotes from broker-dealers. Between 1996 and 2000, Lipper retained PricewaterhouseCoopers LLP (PwC ) as its outside auditor.

In January 2002, the trader primarily responsible for valuing the fund’s securities, Edward Strafaci, left Lipper. In early 2002, Lipper announced that it would be revaluing the securities and, later, that the portfolio valuation had declined by nearly half in 2001. Lipper then announced that it would be dissolved and the remaining assets distributed to the limited partners.

Following these announcements, Lipper retained an accountant to determine how to distribute its assets. The accountant’s report revalued Lipper’s securities from January 1995 and November 2001 at prices lower than those reported at the time by Lipper. The accountant based its values on pricing information provided by independent pricing services. In February 2004, a state lower court, with the support of the plaintiffs, ordered the distribution of Lipper’s remaining assets in accordance with accountant’s the analysis. In August 2004, Strafaci pleaded guilty to one count of securities fraud based on his fraudulent overvaluations of the fund’s securities.

In their complaint before the district court, the plaintiffs alleged that they were fraudulently induced to invest in Lipper based on PwC’s annual auditor opinion letters. The district court granted PwC’s motion for summary judgment, finding that the plaintiffs lacked standing because their claims were derivative in nature due to their failure to show any injury distinct from that suffered by the fund itself. The court dismissed all of the plaintiffs’ claims without addressing any of PwC’s alternative arguments.

The district court relied on an expert’s affidavit asserting that the damages claimed by the plaintiffs were derivative in nature because they were a share of the partnership losses. On appeal, PwC conceded that, if the fair value of the plaintiffs’ interests was fraudulently overstated at the time of purchase, the plaintiffs would have a direct claim.

The court concluded that PwC failed to satisfy its burden of showing that there was a genuine dispute as to whether the plaintiffs’ interests were overvalued when they were purchased. First, Strafaci’s guilty plea, in which he admitted assigning higher values to the securities than were appropriate, appears to be direct evidence that the securities were overvalued. This was sufficient to create a triable issue of fact as to whether the plaintiffs suffered a direct injury.
The accountant’s report also indicated that the interests were consistently overvalued. The district court discounted the report on procedural and substantive grounds, but the panel found that the report was properly before the court as evidence of inflated prices. The panel also concluded that a jury could reasonably infer that the report’s valuations were both reliable and reflected contemporaneous pricing. The court noted further that the expert’s affidavit relied on by the lower court did not repudiate the report’s valuations. The report, in combination with Strafaci’s admission of overvaluation, the court found, was sufficient to create a triable issue of fact.

PwC argued in the alternative that there was no genuine dispute as to whether it acted with scienter. This argument was not addressed by the district court, and the panel concluded that the question would best be addressed in the first instance by the district court on remand. CILP Associates, L.P. v. Pricewaterhouse Coopers LLP (2ndCir) is reported at ¶97,726.

Freddie Mac’s troubles were public before “corrective disclosures.” In a ruling by summary order, a 2nd Circuit panel has affirmed a district court judgment dismissing a fraud action brought against the Federal Home Loan Mortgage Company. The panel agreed with the district court’s conclusion that the complaint, which alleged that Freddie Mac concealed its true financial situation and its exposure to subprime mortgages, failed to plead loss causation. The panel also held that the district court did not abuse its discretion in denying leave to amend.

Central States, Southeast and Southwest Areas Pension Fund represented purchasers of Freddie Mac’s equity securities as the lead plaintiffs in this action against Freddie Mac and three of its former officers, Richard Syron, Anthony S. Piszel, and Patricia L. Cook. Central States alleged that following the disclosure of a $2 billion loss in November 2007, Freddie Mac materially misrepresented its exposure to risky subprime mortgages, the sufficiency of its capital, and the accuracy of its financial reporting. Central States asserted that these misrepresentations inflated Freddie Mac’s stock prices, which then fell as the truth about its financial condition leaked out through a series third-party news articles and analyst reports beginning in early July 2008. Freddie Mac was placed into conservatorship in September 2008.

The court noted at the outset that on the same day it reported the $2 billion loss, Freddie Mac issued a supplement to its annual report disclosing its increased involvement in "nontraditional mortgage markets" and the associated credit risks. From that date until the day before Central States alleged that the truth about Freddie Mac’s financial condition began to leak out, Freddie Mac’s stock price declined by 57 percent. In this context, which coincided with the housing bubble burst, the court concluded that Central States could not plausibly allege that it was not on notice of Freddie Mac’s troubles before July 2008.
First, Freddie Mac made extensive disclosures about its investments and internal controls throughout the class period. While Central States claimed that the third-party disclosures revealed the falsity of Freddie Mac’s statements, the court found that Central States did not show how the alleged corrective disclosures revealed any new information. At most, the court said, the cited articles and reports expressed negative opinions about Freddie Mac’s solvency based on publicly-available information, which was not "corrective" for the purpose of pleading loss causation.

Even if there were some facts in the articles that contradicted what Freddie Mac was saying, the court continued, the complaint failed to allege that this resulted in a significant drop in share price. The complaint itself alleged that Freddie Mac’s stock price fluctuated before July 2008 due to speculation about its solvency and cited articles from this period discussing Freddie Mac’s problems. Central States thus failed to plausibly allege a causal link between the alleged corrective disclosures and the drop in share price.

Next, Central States argued that since the defendants manipulated Freddie Mac’s financial statements, it was not apparent to investors that it was at risk of insolvency and conservatorship. The court observed that the article that Central States cited in support of its position disclosed no information that was not already available to investors. The fact of the conservatorship, the court added, was also not a corrective disclosure because the reasons behind it had previously been revealed to the market.

Finally, the court found that Central States failed to adequately plead a relationship between Freddie Mac’s subprime mortgage exposure and the stock price drop. The alleged price drop was related to disclosures about the government takeover of Freddie Mac, the court stated, and Central States did not allege any connection between the takeover and the subprime holdings. Central States, Southeast and Southwest Areas Pension Fund v. Federal Home Loan Mortgage Corporation (2ndCir) is reported at ¶97,724.

Claims against Lehman Brothers time-barred. A 2nd Circuit panel affirmed the dismissal of multidistrict litigation against Lehman Brothers stemming from alleged disclosure failures in seven offerings of Lehman debt securities between November 2005 and November 2007. Eight investors in the offerings attempted to add claims to their consolidated amended complaint alleging that Lehman used undisclosed repo transactions in an attempt to remove billions of dollars of liabilities from its balance sheet and materially misled investors about its risk management practices. The court said the new claims were barred by both the statute of limitations and the statute of repose in Securities Act Section 13.

The investors originally claimed that the company failed to disclose in its prospectuses that Lehman owned hundreds of millions of dollars of collateralized debt offerings or had a 30:1 gross leverage ratio. The leverage information was disclosed in numerous SEC filings, according to the court, including an October 11, 2005, 10-Q and a February 13, 2006, 10-K. The court addressed the allegation as it was modified in the amended complaint, which alleged that the leverage ratio was inaccurate because of the repo transactions.

The court said the claims were time-barred unless it was determined that the claims related back to the original complaint, after ruling out tolling under American Pipe. The court cited its decision in Police & Fire Ret. Sys. v. IndyMac MBS, Inc., where it held that American Pipe’s tolling rule did not apply to the three-year statute of repose in Section 13.

The court also ruled that the new claims did not relate back to the original complaints filed by the investors. The court said the consolidated amended complaint "reverses course" and bases its claims on "an entirely new theory encompassing different conduct." The consolidated amended complaint alleges that, because of the repo transactions, the leverage ratios were materially misstated in SEC forms that were incorporated by reference into the offering documents. It did not claim that the failure to include the leverage ratio in the prospectuses was a material omission. "Neither this accounting treatment nor any other accounting practice allegedly causing a misstatement as to the leverage ratio is to be found in the original complaints," wrote the court. The court also dismissed a three-paragraph allegation regarding Lehman’s alleged failure to disclose its exposure to billions of dollars of CDOs as conclusory and insufficiently pleaded. Caldwell v. Berlind (2ndCir) is reported at ¶97,718.

Blue Sky Law Reporter  

Maryland beneficial ownership exemption expands “local issuer” definition to include LLCs and partnerships. The Maryland Securities Division issued an order expanding the “local issuer” definition for its local issuer (beneficial owner) exemption to include any corporation, limited liability company, partnership, or other entity that: (1) is organized under the laws of Maryland or another state and is qualified to do business in Maryland; (2) has its principal place of business in Maryland; and (3) reasonably believes, both immediately before and after the sale of securities under the exemption, that it has no more than 50 beneficial owners based on the exemption’s calculation provision. ¶30,660.

Texas proposes private fund adviser exemption. A new registration exemption for private fund advisers and changes to an existing registration exemption for investment advisers advising financial institutions and institutional investors were proposed by the Texas State Securities Board, along with an exemption for charitable organizations assisting economically disadvantaged clients, a licensing exemption for military spouses, military service members and military veterans, and the incorporation of an SEC release into a Texas Rule. ¶55,556, ¶55,563, ¶55,591Q, ¶55,595Q, ¶55,688D, ¶55,720L, and ¶55,720M.

Life settlements constituted securities under Texas law. In Arnold v. Life Partners, Inc., the Texas Court of Appeals held that the life settlements sold by the defendants constituted securities under the Texas Securities Act (Act). The life settlements at issue were "investment contracts," and thus securities, as a matter of law because the promoter’s pre-sale activities in selecting, purchasing and monitoring the underlying life insurance policies represented significant efforts in determining the success of the enterprise. The profits that the plaintiffs expected to realize from their investments depended almost entirely upon the promoter’s expertise in choosing the policies, estimating life expectancy, negotiating an advantageous price, and monitoring the policy to keep it in force. As the promoter’s efforts had a significant effect on the success or failure of the enterprise, these activities, even though pre-sale, were sufficient to classify the transaction as an investment contract. Accordingly, the trial court erred in granting summary judgment for the defendants as it related to the life settlement claims that were not excluded by the Act’s statute of limitations. The decision is reported at ¶75,049.


Aspen Federal Securities Publications  

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes. The new Fifth Edition of Volumes I and XI (Finding Devices) of the cornerstone Securities Regulation treatise will soon be available online. This Fifth Edition volume fully incorporates the large number of legislative, regulatory, and case law changes since Securities Regulation, Fourth Edition was published.

Regulation of Money Managers: Mutual Funds and Advisers, by Tamar Frankel and Ann Taylor Schwing. The 2014 Supplement 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 2014 Supplement contains recent developments including: discussion of recent rules, proposed rules and amendments to rules generally and specifically as arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Jumpstart Our Business Startups Act of 2012 discussion of a recent rule, a proposed rule, and guidance by the Financial Stability Oversight Council and the Federal Reserve Board, arising from the Dodd-Frank Act (see § 1.05[F]); encouragement of distribution of crowdfunding securities by a safe harbor from registration under the Securities Act of 1933 and a safe harbor from registration under the Securities Exchange Act of 1934 for certain intermediaries in crowd-funded offerings (see § 4.04[B]); discussion of the SEC revision of Rule 506, as required by the JOBS Act of 2012 (see § 6.04[B]); summary of the SEC and CFTC Rules and guidelines requiring investment companies and advisers to establish identity theft prevention programs (see § 9.05[I]); guidance on the use of expert networks by investment advisers (see § 14.05[D]); expanded discussion of proposals for money market fund reform (see § 31.02[A][13]); and an expanded discussion of exchange traded funds (see § 31.02[G]).

Corporate Secretary’s Answer Book, Fifth Edition, by Cynthia Krus. The 2014 Supplement is now available online. Corporate Secretary’s Answer Book addresses issues vital to corporate secretaries and shares a wealth of practical experience, providing tips, strategies, and forms to assist in the day-to-day planning and implementation of the corporate secretarial function. This publication gives any corporate secretary, from the newly appointed to the more experienced, the answers he or she needs. The 2014 Supplement includes discussion and analysis of the following new questions: If challenged, will courts enforce exclusive forum provisions included in the certificate of incorporation? (See Chapter 1); Can corporations use bylaw amendments as a takeover strategy? (See Chapter 2); Do amendments to the bylaws need to be disclosed publicly? (See Chapter 2); Should companies consider holding electronic stockholder meetings? (See Chapter 3); How has recent litigation expanded the application of Rule 14a-4 with respect to bundling proxy proposals? (See Chapter 4); What are the recent changes in the key metrics used by Institution Shareholder Services (ISS) and Glass Lewis to determine their respective proxy voting recommendations? (See Chapter 5); Will recent litigation challenging the conflict minerals rules affect issuers’ duties to comply with the final rules? (See Chapter 6A); How has the increase in the use of technology affected the quantity of information provided in board materials? (See Chapter 9); Should a CEO’s personal life be a matter of concern for the nominating and corporate governance committee? (See Chapter 12); How is independence defined under the NYSE and NASDAQ corporate governance rules and what other eligibility requirements must compensation committee members satisfy? (See Chapter 13); What constitutes “providing advice” to a compensation committee? (See Chapter 13); What is the board’s role regarding the end-user exception to mandatory clearing under the Dodd-Frank Act? (See Chapter 14A); Are members of Congress, congressional employees, and federal officials exempt from insider trading rules? (See Chapter 18); When can a stockholder challenge dilutive stock issuances under Delaware law? (See Chapter 19); Should companies review policies and procedures to take into account using social media accounts? (See Chapter 21); and What disclosure and securities law issues are raised when employees use social media outlets? (See Chapter 22). In addition, two new appendixes have been added: “Questions for Auditors in Connection with PCAOB Inspection Process” (see Chapter 14) and “Heads-up: the SEC Gives a Qualified Green Light to Social Media Disclosure” (See Chapter 22).

Securities Litigation Under the PSLRA by Michael A. Perino. Release #25 is now available online. This publication analyzes litigation under the Private Securities Litigation Reform Act (Reform Act or PSLRA). Since passage of the Act, courts have struggled to interpret its various provisions and have attempted to reconcile legislative history that often seems internally inconsistent or at odds with the statutory text. The story of litigation under the PSLRA is also the story of how attorneys have adapted their litigation strategies in innovative and surprising ways to deal with the statute’s procedural changes. Indeed, one of those adaptations—a shift of litigation from federal to state courts as a means of evading the PSLRA—prompted Congress to pass the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Release #25, prepared by John F. Buckley, provides essential new information about the latest legal developments, including: The Supreme Court’s decision to grant petitions for certiorari in three cases related to the “in connection with” requirement under SLUSA for preemption of state law based securities claims (see Chapter 11); recent cases from the Second Circuit on the lead plaintiff standard and Rule 23 requirements (see Chapter 2); and recent decisions from several circuits on the strong inference standard (see Chapter 3).

Corporate Criminal Defense: Compliance Investigation, and Trial Strategies by Eric W. Sitarchuk, Mark A. Srere, and Kelly Moore. The 2014 Supplement is now available online. This publication is your complete resource to identifying the specific areas that leave your corporation open to legal actions and designing programs to avoid points of risk. Prevention is key, but this resource also provides guidance on how to handle a governmental investigation as well as formulate an effective defense if an action does occur. It provides expert guidance—practice tips and warnings, checklists, strategic commentary, and primary law interpretation—plus sample forms, letters, motions, and agreements—on elements, policies, training, auditing, and structure of a compliance program; voluntary disclosure to authorities; dealing competently with the DOJ and SEC; legal representation of employees, officers, and directors; and trial issues unique to corporate criminal defense. The 2014 Supplement incudes a discussion of the scope of investigation in reserving privilege protection in conducting internal investigations (Chapter 3); analysis of Supreme Court case Florida v. Jardines, dealing with Fourth Amendment rights and drug-sniffing dogs (Chapter 7); discussion of In re U.S. for Historical Cell Site Data, a Fifth Circuit case that took a narrow view of digital privacy (Chapter 7); analysis of cases dealing with the records exemption to the exclusionary rule (Chapter 7); revisions to the HHS Self-Disclosure Protocol (Chapter 5); update to accounting rules related to loss contingencies (Chapter 12); discussion of guidance some courts have issued specifically addressing electronically stored information in criminal proceedings (Chapter 10); Department of Justice procedures, government information sharing in parallel civil and criminal procedures (Chapter 13); and discussion of SEC’s disclosure requirements under its antifraud rule (Chapter 2).

Corporate Finance and the Securities Laws, Fourth Edition, by Charles J. Johnson, Jr. and Joseph McLaughlin. The most recent supplement will soon be available online. Written in plain English, this “go to” resource explains the mechanics of corporate finance together with the statutes that govern each type of deal. The latest supplement includes a new Chapter 15 that covers Insurance-Linked Securities, including recent innovations such as “catastrophe bonds” and “life insurance-linked securities.” The latest supplement also includes discussion of JOBS Act’s “IPO On-Ramp” (see § 3.02[I]); research analyst participation in EGC road shows (see § 3.04[A]); new SEC rules permitting general solicitation in Rule 506(c) private placements (see § 7.07[A]); new SEC rules extending “bad actor” disqualifications to Rule 506 offerings (see § 7.07[F]); disclosure requirements for “grandfathered” Rule 506 disqualifications (see § 7.07[F]); proposed new Rule 506 disqualification for failure to file Form D (see § 7.07[F]); recent crowdfunding developments (see § 7.07[A]); early termination of IPO lockup agreements (see § 2.03[I]); underwriter loans to affiliates of IPO candidates (see § 3.01);  NYSE and Nasdaq competition for IPO listings (see § 3.02[B]); smaller companies and larger “tick size” (see § 3.02[H]); virtual currencies as securities (see § 1.05[B]); “chat” messaging networks (see § 1.05[D]); due diligence on emerging disclosure topics (see § 5.04[P]); Morrison implications for remedies other than Rule 10b-5 (see § 5.01[C]); split in Circuits re statements of opinion in Section 11 cases (see § 5.01[A]); tracing requirements in ABS litigation under Section 11 (see § 5.01[A]); status of U.S. covered bond legislation (see § 11.11[B]); and “Rule 14e-1’’ opinions in tender offers and consent solicitations (see § 13.02[I]).


IPO Vital Signs

IPO Vital Signs, an advanced IPO research analysis tool, assists IPO professionals and pre-IPO companies satisfy their most challenging research needs and answers hundreds of mission critical questions for all the players in the IPO process. IPO Vital Signs’ tabular data analyses focus on issues surrounding client advisement, deal negotiation, and prospectus disclosure.

IPO Week in Review, a weekly e-newsletter to keep professionals up to date with recent filing and going public activity, is an important element of the IPO Vital Signs system or is available by separate subscription. Coverage includes a monthly feature article on recent trends in going public in the U.S.

To see how an IPO Vital Sign works click on the Vital Sign title below:



#161 — IPO Lawyers
Who are the leading IPO lawyers??
Review IPO lawyer activity based on

  • Number of IPOs (combined)
  • Issuer's/Underwriters’ Representations
  • Aggregate IPO Offer Amount

Hint! 1) Click a blue number to see more details on the IPOs represented, and 2) click a column heading to re-sort the table to see leadership in different categories (click once to rank ascending, twice for descending). 


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.

SEC Rulemaking Activity

  • 34-70919—Order Extending Temporary Conditional Exemption for Nationally Recognized Statistical Rating Organizations from Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934 and Request for Comment (November 22, 2013).

The SEC extended the temporary conditional exemption delaying NRSROs’ compliance with Rule 17g-5(a)(3) for covered transactions until December 2, 2014. This is the fourth extension since the Commission’s May 2010 order that granted NRSROs a conditional exemption from compliance until December 2, 2010.

The Commission again requested comment on Rule 17g-5(a)(3). Prior commenters noted the rule’s possible extra-territorial impact and the potential for disruption of local securitization markets. Some commenters asked the SEC to make the conditional exemption permanent.

  • Updated Compliance & Disclosure Interpretations—The SEC staff issued eleven new C&DIs to address questions that have arisen regarding the Commission’s removal of the ban on general advertising and solicitation for some Rule 506 and 144A offerings. The SEC removed the ban as required by the Jumpstart Our Business Startups (JOBS) Act.

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.

The SEC in 2013 continued to implement portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the JOBS Act. Areas to watch at this year’s end and early next year include regulators’ efforts to issue a final Volcker Rule, complete derivatives rules, and finish implementation of the JOBS Act. The SEC also could adopt final money market mutual fund reforms in 2014.


Hot Topic of the Month

This month's Hot Topic is Exchange Act Rule 10b-5 Trading Plans. Rule 10b5-1 provides that, for purposes of insider trading liability, a person trades on the basis of material nonpublic information if a trader is aware of the material nonpublic information when making the purchase or sale. As in all Rule 10b-5 fraud cases, insider trading liability under Rule 10b-5 requires a showing of scienter. Rule 10b5-1 was adopted to clarify the "use requirement" employed by some courts before the adoption of the rule.

Prior to the rule's passage, the 11th Circuit held that an insider could rebut charges of insider trading by introducing evidence that inside information was not actually utilized when making the trades at issue. This standard was referred to as the "use" test. The 9th Circuit endorsed this approach in a criminal case, holding that  a use requirement is consistent with the language of Rule 10b-5, which emphasizes manipulation, deception and fraud, and disagreed with the SEC's contention that the requisite intent to defraud is inherent in the act of trading while in possession of insider information. Noting that scienter is a necessary element of an insider trading violation, the court reasoned that the knowing possession standard advocated at the time by the SEC could not be strictly limited to those situations actually involving intentional fraud. In the release adopting Rule 10b5-1 concerning the use of inside information, the SEC confirmed that the rule did not alter the scienter requirement.

The rule also sets forth several affirmative defenses or exceptions to liability. These exceptions permit persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith. Rule 10b5-1(c)(1), for example, allows persons to plan securities transactions in advance, at a time when they are not aware of material, nonpublic information, and then complete those pre-planned transactions at a later time, even if they subsequently learn of material, nonpublic information.

To raise the Rule 10b5-1(c) defense successfully, a person must establish three elements. First, he or she must demonstrate the existence of a prior contract, instruction, or plan concerning the securities in question. Second, the person must show that the preexisting contract, instruction, or plan meets certain conditions. Finally, the person must show that the trade occurred "pursuant to" the preexisting contract, instruction, or plan. The person raising an affirmative defense must also satisfy a separate good faith requirement.

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:

  • Federal Securities Law Reporter
  • Exchange Act Rule 10b5-1, at ¶22,775D
  • CCH Explanations (e.g., ¶22,778.020)
  • U.S. v. Smith (9th Cir 1998), at 1998 CCH Dec. ¶90,274
  • SEC v. Adler (11th Cir 1998), 1998 CCH Dec. ¶90,177
  • Insights – Amy L. Goodman (e.g., “The Spotlight Shines on Rule 10b5-1 Plans" (Jan. 31, 2013))
  • SEC Today (e.g., "PLI Briefing Highlights Concerns with Insider Trading and Rule 10b5-1 Plans" (Jan. 25, 2013))
  • Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 9.B.4)
  • Regulation of Securities: SEC Answer Book – Levy (e.g., Q18:20, et seq.)
  • SEC Compliance and Disclosure Interpretations, at ¶8660, et seq.