February 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 Publishes E-Proxy Final Rules and Proposed Amendments
The SEC published rules adopted in December that provide an alternative method for issuers and other persons to furnish proxy materials to shareholders by posting them on a Web site and providing shareholders with notice of the availability of proxy materials. The final amendments put into place processes that will provide shareholders with notice of, and access to, proxy materials while taking advantage of technological developments, and at the same time lowering costs of proxy solicitations and shareholders’ costs of engaging in proxy contests. The SEC’s proposed rules would make the furnishing of proxy materials through the internet mandatory. Release Nos. 34-55146 and 34-55147 at ¶87,745 and 87,746. A CCH explanation of the rules has been updated at ¶24,030.

SEC Issues Executive Compensation Guidance
The SEC staff has issued a series of questions and answers relating to the executive compensation disclosure required by Regulation S-K Item 402 and has provided interpretive responses with respect to particular situations that may arise. The January 2007 guidance replaces the Item 402 interpretations in the staff's telephone interpretation manual. The updated "Telephone Interpretations Manual" publication on IRN will be available shortly. The chief accountant in the SEC's Division of Corporation Finance, also issued filing guidance for companies that must restate their previously-issued financial statements to correct accounting errors relating to the issuance of stock option grants. The guidance will allow companies to restate in one filing for a number of years rather than separately amending all of the previously filed reports. By reporting all of the information in one filing, companies believe it will more clearly reflect the impact of the restatement. Interpretive Guidance on Restatements for Errors in Accounting for Stock Option Grants at ¶79,438.

Commission Tables Proxy Access
The SEC removed consideration of shareholder access to company proxy materials at its December meeting. In a no-action letter to be published in next week's report, the SEC staff expressed no opinion on the question of whether a company could exclude a proposal to amend its bylaws to require that the company include the name, along with certain disclosures and statements, of any person nominated for election to the board by a stockholder who has beneficially owned three percent or more of the company's outstanding common stock for at least two years. Hewlett-Packard Co.

Regulation NMS Compliance Dates Extended
The SEC extended for a limited period of time three future compliance dates for Regulation NMS Rules 610 and 611. The rules provide for a new regulatory framework regarding public access to quotations, limits on access fees, and policies to prevent the execution of trades at prices inferior to protected quotations displayed by other trading centers. The new compliance dates will give automated trading centers additional time to complete the rollout of their new or modified trading systems. Release No. 34-55160 at ¶87,747.

PCAOB Reports on Implementation of Fraud Detection Standards
The PCAOB issued a report discussing the observations of auditors’ implementation of standards relevant to an auditor’s responsibility for detecting and considering fraud. The report stemmed from observations PCAOB inspectors made regarding auditors’ consideration of fraud while engaged in audits. The main areas discussed by the PCAOB included the auditors’ overall approach to the detection of fraud, brainstorming sessions and fraud related inquiries, auditors’ response to fraud risk factors, financial statement misstatements, risk of management override of controls, and other areas to improve fraud detection. PCAOB Release No. 2007-001 at ¶87,744.

Regulators Issue Statement on Complex Structured Finance Activities
The SEC and four federal banking agencies issued a final statement on the complex structured finance activities of financial institutions. The statement describes the types of internal controls and risk management procedures that should help financial institutions identify, manage, and address the heightened legal and reputational risks that may arise from certain complex structured finance transactions. The final statement takes a risk-based and principles-based approach to addressing the risks that these transactions pose to institutions and focuses on those transactions that may present elevated levels of legal or reputational risk to institutions. Release No. 34-55043 at ¶87,738.

Supreme Court Takes Scienter Pleading Case
The U.S. Supreme Court agreed to tackle the question of "whether and to what extent, a court must consider or weigh competing inferences in determining whether a complaint asserting a claim of securities fraud has alleged facts sufficient to establish a `strong inference' that the defendant acted with scienter, as required under the Private Securities Litigation Reform Act" in granting a petition for certiorari in Tellabs Inc. v. Makor Issues & Rights, Ltd. (7thCir, ¶93,642). In that case, arising from allegations that a fiber optic cable manufacturer misrepresented the availability of and demand for its new products, the 7th U.S. Circuit Court of Appeals observed that "while the PSLRA did not impose a more stringent substantive scienter standard, it did unequivocally raise the bar for pleading scienter." The 7th Circuit had concluded that "the best approach was for courts to examine all of the allegations in the complaint and then to decide whether collectively they establish such an inference." It also stated that the strong inference requirement did not mandate that "only the most plausible of competing inferences were sufficient." Instead a complaint was sufficient if it alleged facts from which a reasonable person could infer that the defendant acted with the required scienter.

No Private Action Under Sarbanes-Oxley Section 304
The U.S. District Court for the Northern District of Ohio found no private right of action under Section 304 of the Sarbanes-Oxley Act. This provision allows for the disgorgement of bonuses and profits by a corporation's chief executive or financial officer when material noncompliance with reporting requirements and misconduct require the restatement of a corporation's financial statements. The court initially noted that the provision would not apply in any instance to most of the alleged wrongdoing, which occurred before the statute's enactment, and then rejected the plaintiffs' argument that the legislative history and purpose of Section 304 favored the finding of an implied private right of action. In re Goodyear Tire & Rubber Co. Derivative Litigation at ¶94,142.

2nd Circuit Affirms Order of Restitution, Member Firm Ban
The United States Court of Appeals for the Second Circuit affirmed the SEC's order barring a securities representative from associating with any NASD firm in any capacity. The SEC also ordered the representative to pay restitution to former customers. The order stemmed an SEC finding that representative violated Exchange Act Section 10(b) and Rule 10b-5 promulgated thereunder when he recklessly made material misrepresentations to customers when soliciting them to invest according to a certain trading strategy. Abbondante v. SEC (2ndCir) at ¶94,133.

CCH Blue Sky Law Reporter

ARIZONA Amends Custody Requirements for Investment Advisers
The NASAA Model Rule on custody was adopted by the Securities Division of the Arizona Corporation Commission. Under the new rule, investment advisers that take or have custody of their clients' funds or securities are in violation of Arizona's fraudulent practice provisions unless the investment advisers notify the Corporation Commission in writing on Form ADV of the custody, and have their clients' funds and securities maintained by a qualified custodian in separate accounts for each client under that client's name or in one account for all clients of a particular investment adviser under the investment adviser's name as agent or trustee. The investment advisers must notify their clients in writing of the qualified custodian's name, address and the manner in which the funds or securities are maintained, and when the account is opened, and after any changes are made to account information. ¶9570, 9585.

KANSAS Adopts Securities Registration, Exemption and Federal Covered Security Rule Amendments to Coordinate with Kansas Uniform Securities Act of 2005
New rules and changes to existing rules affecting securities registration, exemptions from securities registration and federal covered securities were adopted by the Office of the Securities Commissioner to align requirements with the newly adopted Kansas Uniform Securities Act of 2005. The exemptions affected are the exemptions for isolated nonissuer transactions, accredited investors, agricultural cooperatives, Internet communications, solicitations of interest, standard securities manuals, exchange listings, oil and gas, Rule 505 offerings transactions effected by Canadian broker-dealers and Kansas venture capital transactions. The federal covered securities provision affected is Section 18(b)(2) of the Securities Act of 1933 for investment companies and unit investment trusts. The fee for filing a notice to claim the accredited investor, agricultural cooperative or Rule 505 transactional exemption or to request a no-action letter was increased to $250, from $100. The NASAA Statements of Policy adopted for incorporated by reference in Kansas were set forth. Lastly, the requirements for registering securities by coordination or qualification and for registering small company offerings were amended, along with a rule on tombstone advertisements. ¶26,401-26,410.

MASSACHUSETTS Amends Policy on When IA/IA Rep
Registrations are Deemed “Filed.” Investment adviser and investment adviser representative registration applications are considered “filed” with the Massachusetts Securities Division when all required forms, fees, affidavits and proof of meeting exam and minimum financial requirements have been received by the Division either directly or through the Investment Adviser Registration Depository (IARD) and/or the Central Registration Depository (CRD). ¶31,656.

TEXAS Changes Designated Exchange
The National Market System of the NASDAQ stock market is defined to include the NASDAQ Global Select Market, NASDAQ Global Market and NASDAQ Capital Market. A reference to the Midwest Stock Exchange being renamed the Chicago Stock Exchange is deleted because the Chicago Stock Exchange is now named in Section 6F of the Texas Securities Act at ¶55,106. ¶55,572.

WASHINGTON Amends Multijurisdictional Registered Securities Rule
The period of time a multijurisdictional securities registration statement must be on file before it becomes automatically effective is reduced from ten full business days to three days. Once a multijurisdictional offering has been declared effective by the SEC, a nonissuer transaction in any class of an issuer's securities is exempt from registration, whether or not the transaction is effected through a broker-dealer. ¶61,536.

Insider Trading Violation Did Not Require a Breach of Fiduciary Duty
The California Court of Appeal affirmed a judgment that a corporate director violated the insider trading provisions of the California Corporations Code when he purchased shares of the corporation's stock in a private sale while possessing information about an imminent public offering of its securities. The director contended that liability did not attach because the material facts about the public offering were generally available to the public. Uncontradicted testimony established, however, that the director knew confidential information about both the offering's target date and target price through his relationship with the issuer. The appellate court determined that this evidence supported the jury's findings that the director possessed material information that would significantly affect the price of the stock that was unknown to the seller. Wang v. Xue is reported at ¶74,607.

Proof of Loss Causation Not Required in Rescission Action
In Grand v. Nacchio, the Court of Appeals of Arizona concluded that a purchaser was not required to prove loss causation in order to establish its claims in an action for rescission. As rescission is not a measure of damages, the appellate court stated, the general loss causation requirement for private securities actions seeking damages did not apply. Additionally, although the purchaser was required to establish loss causation in order to recover rescissory damages under the Arizona Blue Sky Law, it need not prove proximate cause for rescissory damages under its common law and consumer fraud claims if it could show a sufficient equitable reason for having the tender requirements waived. The decision is reported at ¶74,608.

Court of Appeals Remands Case Involving Payphone Sales
The Court of Appeals of Indiana held in Keesling v. Beegle that a genuine issue of material fact existed as to whether parties who received override commissions on payphone sales “controlled” the sales representatives for purposes of the Indiana Securities Act (Act). The defendants’ lack of an employer-employee relationship with the sales representatives was not dispositive, the appellate court ruled, and federal precedent suggested that a party who receives commissions on a salesperson’s transactions may be found to be in control of that person under federal securities law. Additionally, a genuine issue of material fact existed regarding whether the defendants, as unregistered broker-dealers, “materially aided” in the sales representatives’ conduct for purposes of the Act. Keesling v. Beegle is reported at ¶74,609.

NSMIA Did Not Preempt State Regulation of Failed Rule 506 Offerings
The Court of Appeals of Ohio held that the National Securities Markets Improvement Act of 1996 (NSMIA) did not preempt the enforcement of the Ohio Blue Sky Law against offerors who had filed notice on Form D claiming exemption from state registration requirements. The securities would have qualified for the exemption for federal “covered securities,” the appellate court concluded, only if the offerings had actually satisfied the conditions imposed by federal Rule 506. As the offerors violated the prohibitions against conducting general solicitations or advertisements, however, the securities were disqualified from the Rule 506 exemption and hence subject to state regulation. The decision is reported at ¶74,610.

Aspen Federal Securities Publications

EDGAR Filer Handbook, by Charles H. Rider
The latest release, 2007-1 Supplement, will publish in February and will be live on the IRN Corporate Governance Library in mid-February. This update includes discussions of several important changes to the EDGAR system. These changes were implemented to support the amended rules and forms adopted by the Commission and are necessary to: (1) remove the capability from the EDGAR Filing web site to create “new” Series and Classes as this feature was intended only to register Series and Classes in existence before February 6, 2006; (2) implement “EDGARLite” for generation of Forms TA–1, TA–2, and TA–W as XML filings by transfer agents; (3) add six new EDGAR forms for Transfer Agents; (4) add six new forms for foreign issuers; (5) add new Accelerated Filer Status indicator for Forms 10–K and 20–F; and (6) add new Duty to File Reports Remains indicator for Forms 15 and 15F.