|
|
|
|
|
|
|
February 2010 |
|
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. Also included is a “Hot Topic of the Month,”
with research tips and references to CCH and
To view past issues
of the Securities Update, please visit http://business.cch.com/updates/securities.
If you have
questions or comments concerning the information provided below, please contact
me at rodney.tonkovic@wolterskluwer.com.
CCH Federal Securities Law Reporter
Proxy
Changes Require TARP Shareholder Vote on Pay. The SEC amended its proxy rules pursuant
to the Emergency Economic Stabilization Act requirement that Troubled
Asset Relief Program (TARP) recipients provide a separate shareholder advisory
vote to approve the compensation of executives. The amended rules will
require this separate shareholder vote when TARP recipients solicit proxies
while they have any outstanding obligations from TARP financial assistance if
the solicitation relates to the election of directors at an annual meeting. The
shareholder vote is advisory, and will not overrule any board decision or
create any additional fiduciary duty of the board. Those companies subject to
the vote provision must disclose in their proxy statements the requirement to
provide such a vote and to briefly explain the general effect of the vote. The
SEC also amended its proxy rules so that TARP recipients are not required to
file a preliminary proxy statement as a consequence of providing the required
vote on executive compensation. The statutory provision requiring
CD&A disclosure does not change its rules for smaller reporting companies
that are TARP recipients concerning CD&A disclosures. Release No. 34-61335
at ¶88,842 (IntelliConnect)
(IRN)
(ip
access user).
New PCAOB Standard on
Engagement Quality Reviews Approved. The SEC approved the
adoption of a new auditing standard by the Public Company
Accounting Oversight Board. Auditing Standard No. 7 requires an engagement
quality review and approval of issuance for every audit engagement and
engagement to review interim financial information. The engagement
quality reviewer is required to "evaluate the significant judgments made
and related conclusions reached by the engagement team in forming the overall
conclusion on the engagement and in preparing the engagement report" and
requires the performance of "certain procedures designed to focus
the reviewer on those judgments and conclusions." The reviewer does not
perform any audit work and is not required to review all of the engagement
documentation, but rather is responsible for reviewing the engagement by
holding discussions with the engagement team, reviewing documentation and
determining whether he or she can provide concurring approval of issuance. If
additional audit work is required, the engagement team is responsible for
performing the work. Release No. 34-61363 at ¶88,846 (IntelliConnect)
(IRN)
(ip
access user).
Court Rejects
Media Defense in Bank of
As part of its defense, Bank of America argued that shareholders already knew
as a result of widespread media report, that Merrill was expected to pay
billions of dollars in year-end bonuses. The bank submitted expert testimony on
the materiality of the disclosures and other questions that was substantially
based on media coverage of the acquisition. The SEC moved to exclude the media
reports and the related expert testimony because the proxy statement expressly warned
shareholders not to rely on such extrinsic information. According to the bank,
however, even if the warnings rendered the reports irrelevant to the issue of
shareholder reliance, the evidence would still be a relevant part of the mix of
information that determined whether the alleged misrepresentations were
material. As described by Judge Rakoff, the fact that the media predicted that
Merrill would in fact pay bonuses "is entirely irrelevant to any aspect of
this issue, for the alleged falsehood consisted of representing as a
contingency what was in fact an agreement already reached, and it does not
appear that virtually any of the media reports disclosed that agreement."
Furthermore, wrote the court, "even if the media reports of Merrill's
likelihood of paying bonuses could otherwise somehow be said to bear indirectly
on the question of how material was the bank's alleged failure to disclose that
it had in fact already approved the payment of such bonuses when it purported
to represent that it had not given such approval, the warnings in the proxy
statement totally changed the relevant mix of information for assessing
materiality."
The court concluded that because the bank itself warned investors not to rely
on the media, it would be unreasonable for a shareholder to consider the media
pronouncements to be part of the relevant mix of information. "In
effect," stated Judge Rakoff, "the bank is arguing that, even though
it expressly warned its shareholders to disregard the media, it can now defend
itself by asserting that a reasonable shareholder would have disregarded these
warnings and, by consulting the media, perceived that the bank's alleged lies
were immaterial." He emphasized that "even a zealous advocate might
perceive that such an argument hints at hypocrisy." SEC v. Bank of
America Corp. (SD NY) is reported at ¶95,564 (IntelliConnect)
(IRN)
(ip
access user).
Dismissal of
Backdating Complaint Affirmed. An
11th Circuit panel affirmed a district court dismissal of a complaint for
failure to meet the heightened pleading standards of the Private Securities
Litigation Reform Act. The action was brought on behalf of a putative class of
investors in an electronics design company. In a 2006 article, the Wall
Street Journal had identified the company's CEO as a possible recipient of
backdated option grants, and the SEC initiated an informal inquiry into its
stock option practices. The company then issued a restatement, explaining that
the options had been misdated rather than backdated and, shortly thereafter,
released improved projections for an upcoming quarter. The investors alleged
that they had suffered financial losses due to the company's violations of the
securities laws, but the district court dismissed the complaint with prejudice.
The panel found that, taken together, the allegations in the complaint did not
create an inference of scienter that was at least as probable as a non-fraudulent
explanation. First, the complaint's fraud claims based on the financial
restatements failed because they did not sufficiently allege scienter.
According to the panel, the investors failed to plead any facts indicating that
any individual executive knew about any accounting irregularities or accounting
standards were violated during the class period. "The shareholders are
correct to insist that the inference of scienter be aggregated from all of the
complaint's allegations," stated the panel, "but we simply have no
substantial allegations to aggregate." Similarly, the complaint's fraud
claims based on insider trading failed because they also did not sufficiently
allege scienter. The panel agreed with the district court's conclusion that the
investors "fail[ed] to state which defendant knew what information and why
the information was material" and added that the complaint failed to make
any particularized allegation that any individual executive knew about
accounting errors or other problems that would result in the failure to meet
projections when the trades were made.
The panel concluded that the company's earnings projections were
forward-looking statements protected by the safe harbor provision of the
Private Securities Litigation Reform Act because the projections were
accompanied by meaningful cautionary language. Regarding claims of proxy
violations, the panel found that the investors failed to show a link between
alleged misstatements or omissions in proxy statements and the investors' loss.
The harm to the investors was indirect because it was not a result of the
policies approved in the proxy, but rather by management's failure to follow
the policies. In conclusion, the panel affirmed the order dismissing the entire
complaint, finding that the investors failed to adequately allege any
actionable securities law violations. Edward J. Goodman Life Income Trust v.
Jabil Circuit Inc. (11thCir) is reported at ¶95,576 (IntelliConnect)
(IRN)
(ip
access user).
Restitution
Order Not Based on Reasoned Decisionmaking. A District of Columbia Circuit panel reviewed an SEC order and
denied in part a registered representative's challenges to the order but
vacated the SEC's judgment ordering full restitution. The NASD found that the
representative had violated NASD conduct rules by engaging in private
securities transactions on behalf of his clients without providing prior written
notice to his employer and by making unsuitable recommendations. The
representative was fined and given two concurrent suspensions. On appeal to the
NASD's National Adjudicatory Council (NAC), the findings were affirmed, and the
representative was ordered to pay restitution to his clients and serve the
suspensions consecutively. The SEC affirmed this decision, and the
representative appealed.
On appeal, the representative's principal argument was that the SEC's upholding
of the award of restitution was an abuse of discretion because the Commission
failed to properly assess the cause of the clients' losses. The panel agreed,
finding that the SEC's decision failed to articulate why restitution was
appropriate. In ordering the payment of restitution, the NAC and SEC relied on
Principle 5 in the NASD's Sanction Guidelines, which states that restitution
may be ordered where there is a causal connection between a broker's misconduct
and a client's loss; the required level of causation, noted the panel, is unclear.
The panel found "entirely unacceptable" the SEC's assertion that it
would decide whether to impose restitution based on "an analysis of all
the relevant facts and circumstances" because this failed to provide a
"reasonable construction of the causation requirement under Principle
5" because it did not explain the degree of causal connection required and
the measure of the substantiality of that connection. "The SEC's decision
in this case," continued the panel, "clearly fails for want of
reasoned decisionmaking."
The panel went on to discuss the lack of controlling precedent supporting the
SEC's order. In this case, noted the panel, the parties were wealthy,
sophisticated and aware of the speculative nature of the investment. Moreover,
the representative did not profit from his misconduct and was fined and
suspended. According to the panel, the SEC has never ordered restitution in a
similar situation, and, in any case, restitution had been ordered only when
causation was clear. The panel vacated the restitution order, finding an abuse
of discretion in the SEC's failure to analyze the extent of the relationship
between the losses and misconduct. The panel then denied the representative's
challenges to the findings that he violated the conduct rules and to the
imposition of fines and suspensions. The panel noted that the representative
admitted not reviewing the offering documents before conveying them to the
clients. It was also clear, based on the evidence, that the representative
recommended the investment to his clients. The panel also found that the
Commission reasonably addressed the representative's mitigating and aggravating
circumstances in considering sanctions. Finally, the panel agreed with the
SEC's imposition of consecutive suspensions was not punitive in nature but
rather served to protect the public from two fundamentally different types of
harms: unsupervised sales and unsuitable recommendations. The panel concluded
that it was not an abuse of discretion for the SEC to find that the adjudicatory
council's imposition of consecutive sanctions was not excessive or oppressive. Siegel
v. SEC (DofCCir) is reported at ¶95,567 (IntelliConnect)
(IRN)
(ip
access user).
CCH Blue Sky Law Reporter
Arizona Proposes
Increase in Salesman Fee.
The fee to register and transfer a salesman would increase to $45, from $40, by
proposed order of the Securities Division of the Arizona Corporation Commission.
(no CCH par. no.)
Hawaii 2009 Reduced Fees Stay Reduced in 2010. Hawaii's 2009 reduced
fees for dealer, salesperson, investment adviser, and investment adviser
representative registration applications, and for investment company initial
and renewal notice filings, will remain at the 2009 reduced amounts throughout
2010, subject to regulatory approval. ¶20,567 (IntelliConnect)
(IRN)
(ip
access user)
Michigan Issues
Third Transition Order Following Adoption of New Act. A third transition order affecting three
securities transaction exemptions, as well as broker-dealers, agents,
investment advisers and investment adviser representatives, was issued by the
Michigan Office of Financial and Insurance Regulation in connection with
adoption of the new Michigan Uniform Securities Act on October 1, 2009. ¶32,665
(IntelliConnect)
(IRN)
(ip
access user)
Mississippi
Issues Temporary Rules to Align with New Act. Temporary rules pertaining to broker-dealers, agents,
investment advisers, investment adviser representatives and federal covered
investment advisers, and to federal covered securities, registration of
securities and exemptions from securities registration, were issued by the
Mississippi Securities Division, effective January 1, 2010, to coordinate with
the new Mississippi Uniform Securities Act that took effect on January 1, 2010.
¶34,403 (IntelliConnect)
(IRN)
(ip
access user) et seq.
New Mexico
Adopts Rule Revisions to Align with New 2010 Securities Act. Rule amendments were adopted by the New
Mexico Securities Division to align the rules with adoption of the new New
Mexico Uniform Securities Act that took effect January 1, 2010. The rule
changes likewise became effective on January 1. Many of the changes are
nonsubstantive, updating rule references to reflect the correct section and
subsection numbers of the new Act, lower-casing certain words like
"director" and the first letter of the first word of certain
subsections. A number of the substantive amendments are being made to the
investment adviser rules. Please note that upon adoption a fair amount of CCH
paragraph numbers will shift to attach to different rules than the rules they
previously attached to. ¶41,571G (IntelliConnect)
(IRN)
(ip
access user) et seq.
Suitability
Analysis Was Required Before Obtaining Customer Consent. The Supreme Court of Montana has held that
a salesperson who obtained customer consent on securities transaction forms
before completing a suitability analysis committed an unethical business
practice in violation of the Securities Act of Montana (Act). Reversing the
decision below, the state high court upheld as reasonable the Securities
Commissioner's interpretation that the Act's regulations require a suitability
analysis once a prospective new client indicates a desire to make a securities
transaction. Although the salesperson contended that he had met his ethical
responsibility by making recommendations prior to the completion of the
transaction, the state high court reasoned that having a prospective client
provide written consent to a transaction before analyzing whether a transaction
would even be suitable frustrates the Act's purpose of protecting
investors. As suitability analyses were required, and the ones that were
provided were untimely, the Commissioner properly concluded that the salesperson
violated the Act by omitting material facts and engaging in a course of conduct
and practice that operated as a fraud or deceit. Knowles
v. State ex rel. Lindeen is reported at
¶74,805 (IntelliConnect) (IRN) (ip access user).
Aspen Federal Securities Publications
Derivatives
Regulation, by Philip McBride Johnson, and Thomas Lee Hazen. The 2010 Cumulative Supplement (IntelliConnect)
(IRN)
(ip
access user) is now available online.
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 2010 Cumulative Supplement includes: developments with
respect to security futures, i.e., listing requirements, evaluation of the
security futures market, and impact of the Commodity Futures Modernization Act;
developments with respect to other equity derivatives; developments in
identifying a futures contract; developments in jurisdiction over credit
default swaps and other over the counter derivatives; hedging “event” risk; the
applicability of the commodities laws to forex dealers; a new subsection on
swap transactions; and antifraud developments.
Regulation of
Securities: SEC Answer Book, Third Edition, by Steven Mark Levy. The 2010-1 Supplement (IntelliConnect)
(IRN)
(ip
access user) is now 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 contains a completely rewritten Chapter 9, Tender Offers, with
expanded coverage of fraud, insider trading, issuer repurchases, security
holder protections, pre-commencement communications, dissemination of Schedule
TO information, the all-holders and best-price rules, cross-border
transactions, mini-tender offers, state anti-takeover legislation, and board
fiduciary duties when responding defensively to a hostile takeover. The 2010-1
Supplement also includes a complete rewriting of sections in Chapter 11 dealing
with Regulation FD (Fair Disclosure) and Regulation G (disclosure of non-GAAP
financial measures). Other updates include a wide range of additional timely
topics, including: federal preemption of state regulation with respect to securities
offerings made pursuant to Regulation D exemptions; guidance for determining
whether an acquisition of securities qualifies as “in the ordinary course of
business” for purposes of filing Schedule 13G; criteria for excluding a
shareholder proposal that would have the board amend the articles of
incorporation; procedures for requesting a retention copy of an SEC formal
order of investigation; making the most of the Wells process in an SEC
investigation as a means to induce the staff to pursue lesser violations, seek
milder penalties, or even drop the matter altogether; control person liability
for corporate securities violations; and the workings of the Fair Fund program
for compensating injured investors.
Capital Markets
Handbook, Edited by John C. Burch, Jr. and Bruce S. Foerster. The 2010 Supplement (IntelliConnect)
(IRN)
(ip
access user) is now is available online.
This supplement includes new information regarding the highlights (or
low-light) of the sub-prime melt down of 2007; the panic of September 2008; the
global credit squeeze/freeze of 2008-2009; IDEA (Interactive Data Electronic Applications)
an eventual successor to EDGAR; complete update to the Capital Formations
Alternatives Chart; an expanded treatment of “At the Market Offerings”; changes
in the Qualified Independent Underwriter/Conflicts Rule; FINRA Rule 5190
regarding notification requirements under Regulation M; a new trading platform
for Rule 144A securities; amendments to Rule 415 allowing smaller companies
quicker access to the capital markets by permitting them to register primary
offerings on Form S-3/F-3; Regulation FD issues in PIPE Offerings; amendments
to Rule 144 affecting holding periods for non-affiliates; additions and updates
to the credit-ratings agency appendix; additions to the compendium of service
marked derivative securities; and an amended and expanded Glossary.
This month’s hot
topic is the Electronic Data Gathering, Analysis, and Retrieval system, or EDGAR.
The Commission began developing an electronic disclosure system in 1983. By the
fall of 1984, a pilot system was opened for volunteers filing with both the
Division of Corporation Finance and the Division of Investment Management. On
July 15, 1992, the operational EDGAR system was made available to those filers,
still on a voluntary basis. In early 1993, the Commission began to mandate
electronic filings through EDGAR. EDGAR, the Electronic Data Gathering,
Analysis, and Retrieval system, performs automated collection, validation,
indexing, acceptance, and forwarding of submissions by companies and others who
are required by law to file forms with the Securities and Exchange Commission.
Its primary purpose is to increase the efficiency and fairness of the
securities market for the benefit of investors, corporations, and the economy
by accelerating the receipt, acceptance, dissemination, and analysis of
time-sensitive corporate information filed with the agency.
The cornerstone of
the EDGAR rules is Regulation S-T,
a separate regulation containing rules prescribing requirements for filing
electronically and the procedures for making such filings. Regulation S-T
supersedes a number of the procedural requirements set forth in the
Commission's rules and forms, for example, requirements relating to paper size
and number of copies. The Commission amended its rules and forms as necessary
to make references to specific electronic filing provisions. Electronic filers
that obtain an exemption from the electronic filing provisions of Regulation
S-T continue to file in paper in accordance with the paper filing requirements.
In addition, the rules permit or require certain filings to be submitted in
paper. Instructions for electronic filing, including technical formatting
requirements, are set forth in the EDGAR Filer Manual.
In October 2006, SEC Chairman Christopher Cox announced
plans to replace EDGAR with an interactive data system based on eXtensible
Business Reporting Language (XBRL). The SEC also announced that it has
committed $5.5 million to complete the project of writing XBRL taxonomies that
will permit companies in all industries to file their financial reports. The
chairman indicated that EDGAR will likely be renamed in the future.
We publish
information in a wide range of resources (e.g., Federal Securities Law
Reporter, SEC Today, Securities Regulation - Loss & Seligman, etc.), and
document types (cases, laws, regulations, newsletter articles, treatise
discussion). For example:
- Federal Securities Law Reporter
·
Report letter,
"Revisions to EDGAR Filer Manual Adopted"
(11-4-09) (IntelliConnect)
(IRN)
(ip
access user)
·
Regulation S-T, at ¶67,001, et seq. (IntelliConnect)
(IRN)
(ip
access user)
·
Release
No. 8924: Interactive Data to Improve Financial Reporting, ¶88,216
(IntelliConnect)
(IRN)
(ip
access user)
·
CCH
Explanations (e.g., ¶401 (IntelliConnect)
(IRN)
(ip
access user))
- Insights – Amy L. Goodman (e.g., "SEC's Mandatory
XBRL Financial Data Initiative" (July 2008) (IntelliConnect)
(IRN)
(ip
access user)
- SEC Today
·
SEC
Proposes Extension of Rule Governing Static Pool Disclosure (10-27-09) (IntelliConnect)
(IRN)
(ip
access user); SEC Proposes Mandatory Use of Interactive Data Tags in Filings (5-15-08)
(IntelliConnect)
(IRN)
(ip
access user)
- Securities Regulation – Loss & Seligman (e.g., Chapter
2.C.6 (IntelliConnect)
(IRN)
(ip
access user))
- Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/
(e.g. 2-18-07))
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:
|
|
|
|
|
|
|
An interactive table that lists every
company to file an initial IPO registration statement. Use IPO Vital Sign
#1000 to... ·
Locate
comparable IPO issuers by SIC code, lead manager, issuer's law firm, etc., ·
Analyze
IPO professional activity in terms of number of IPOs filed |
Tip! Change
the date range by clicking on For
the period in the upper left hand corner of the
IPO Vital Sign. Use the drop down boxes to select new Start and End Dates.
Click the [REFRESH] button to obtain the new date range’s data.