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February 2012


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. New this month is a preview of RBsource, an 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.

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Financial Reform Resources



CCH Federal Securities Law Reporter

Customer Agreement Was Not Deceptive. A 2nd Circuit panel affirmed a district court’s dismissal of an action for failure to plead deceptive conduct. The action was brought by investment companies who were former customers of a securities brokerage firm and alleged that the firm had rehypothecated or otherwise used securities and other property held in customer brokerage accounts. The customers held securities in non-discretionary securities brokerage accounts with the firm pursuant to a standard agreement, and the securities were commingled in a fungible pool, a common practice in the brokerage industry. Under the agreement, the firm had the right to “rehypothecate”, or use, the securities as, for example, collateral. The complaint alleged that the firm sold customer assets without authorization and improperly used the proceeds to make loans and fund the business operations of affiliates. The complaint alleged further that this practice was approved by, and known to, the firm’s entire senior management but was not adequately disclosed. The district court dismissed the claims for lack of standing and failure to allege deceptive conduct.

The panel held that the customers had no remedy under the securities laws because they failed to sufficiently allege that they were misled by their agreements with the company or that the company did not intend to comply with the agreements when they were made. The panel noted at the outset that the gravamen of the customers’ Section 10(b) claim was for breach of contract, which may constitute fraud if the breaching party never intended to perform its contractual obligations. In this case, there were no particularized allegations supporting an inference of deceptive intent at the time the agreements were executed.

The panel then looked at the agreement itself and found that the firm’s rehypothecation of securities, even though they were not deemed collateral, was not so inconsistent with the agreement’s provisions that the agreement itself was deceptive. The panel concluded that the agreement unambiguously warned the customers that the firm intended to exercise full rehypothecation rights as to the customers’ excess margin securities. The panel then found that the firm had no implied duties to the customers because the agreement explicitly disclosed the rehypothecation rights and the firm’s status as an offshore unregulated entity; there was no suggestion that the firm was registered with the SEC or that it would comply with federal securities regulations. Capital Management Select Fund Ltd. v. Bennett (2ndCir) is published at ¶96,708.

Petition for Review of SEC Order Denied. In an unpublished opinion, an 11th Circuit panel denied a petition to review a decision of the SEC. A former president of a clearing broker petitioned the court to review a Commission order sustaining a FINRA disciplinary action against him that resulted in a fine and six month suspension from serving in any principal securities capacity. FINRA found that the president had violated NASD conduct rules by failing to reasonably supervise the firm’s back office operations, which were suffering operational breakdowns following a problematic conversion to new software for preparing required books and records that had created, and would continue to create, widespread errors in the firm’s fundamental operations. The Commission found that a preponderance of the evidence supported FINRA’s findings of violation and affirmed both the findings of violations and the sanctions imposed.

The officer first argued that there was no substantial evidence supporting the Commission’s finding that he failed to exercise reasonable supervision. The panel found that substantial evidence supported the Commission’s finding that the president failed to act with “vigor, decisiveness, and vigilance” in addressing known deficiencies, and to prevent the occurrence of future regulatory violations. Next, the officer argued that he was denied due process of law by the Commission’s denial of his request to compel the broker to produce certain documents that would have shown that he was involved in fixing the problems at issue. The court concluded that their was no denial of due process because the respondent was afforded a meaningful opportunity to be heard during the disciplinary proceedings, and failed to satisfy FINRA rule requirements for a request to compel production. The administrative record, continued the panel, also contained other competent evidence showing the measures taken by the president to address the operational difficulties.

The officer then argued that he was singled out for prosecution based on his criticisms of FINRA and the securities industry. The respondent, the panel found, failed to present clear evidence of discriminatory effect or discriminatory purpose. According to the panel, the respondent failed to present evidence that FINRA’s prosecution was based on an impermissible motive instead of customer complaints and operational violations. Finally, the officer asserted that the SEC abused its discretion in sustaining FINRA’s sanctions. The panel found that the Commission did not abuse its discretion and that the sanctions were consistent with FINRA’s sanction guidelines. Busacca v. SEC (11thCir) is reported at ¶96,617.

Misrepresentations in Filings Allowed Scheme to Continue. In an unpublished opinion, an 11th Circuit panel affirmed a district court’s findings of liability and its disgorgement order. The district court found that an individual who controlled a business scheme was “the moving force” behind misrepresentations and omissions in a company’s SEC filings. The court found that the defendant was liable for five counts of securities law violations and ordered disgorgement of $10.017 million, plus interest.

The defendant argued on appeal that the factual underpinnings of the court’s liability determinations were erroneous due to insufficient evidence. The panel found no clear error or abuse of discretion. According to the panel, the court’s findings that the defendant reviewed and approved the filings and was responsible for their misrepresentations and omissions were plausible. The panel also affirmed the defendant’s liability as a controlling person. The defendant additionally claimed that the court abused its discretion because its disgorgement order relied on erroneous findings of fact and improperly applied the law. The panel concluded that the court made a reasonable approximation of the ill-gotten gains and adequately supported its finding that the material misrepresentations and omissions in the SEC filings played a critical role in allowing the scheme to continue. Further, since the fraud was pervasive, the panel could not say it was an abuse of discretion to order that the profits associated with the scheme be disgorged. SEC v. Huff (11thCir) is reported at ¶96,701.


CCH Blue Sky Law Reporter  

California Readopts De Minimis Exemption by Emergency. California’s de minimis exemption for certain investment advisers with fewer than 15 clients is being readopted by emergency for an additional 90 days, from January 18, 2012 through April 18, 2012, with some amendments to the text, while the Department of Corporations proposes an entirely new rule on private fund advisers for public comment. The exemption as readopted covers any person who: (1) does not generally hold itself out to the public as an investment adviser; (2) has had fewer than 15 clients during the preceding 12 months; (3) does not act as an investment adviser to any investment company registered under Title I of the Investment Company Act of 1940, or a company that has elected to be a business development company under Section 54 of the Title I of the Investment Company Act of 1940 and has not withdrawn its election; and (4) either has assets under management of not less than $25 million or provides investment advice only to venture capital companies.  ¶12,167D.

California Simultaneously Proposes New Exemption for Private Fund Advisers. An exemption from investment adviser registration was proposed for private fund advisers by the California Department of Corporations. The exemption, if adopted, would replace the currently effective de minimis exemption that has been extended by emergency for 90 days from January 18, 2012 and anticipated to become inoperative on June 28, 2012. As proposed, private fund advisers would be exempt from investment adviser registration requirements if neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions or a denial, revocation or suspension order, and the advisers electronically file through the IARD the SEC-filed reports and amendments required for exempt reporting advisers by Rule 204-4 of the Investment Advisers Act of 1940, as well as the $125 fee for adviser registration. The exemption would take effect for one calendar year when the reports and fee are filed and accepted by the IARD on the State’s behalf, assuming the exemption’s other conditions are met. ¶12,167D.

Hawaii Investment Company and Advisory Fees Remain Reduced in 2012. The 2012 reduced fees for investment adviser, investment adviser representative and investment company security filings will remain at the 2011 reduced fee amounts throughout 2012. Broker-dealer and agent fees were removed from the reduced fee schedule for 2012, having returned to their pre-reduced amounts of $200 and $50, respectively, for initial and renewal registration. ¶20,567.

Missouri Advisory Release Alerts People to U.S. Congress Crowd-Funding Bills. The Missouri Secretary of State issued an advisory release alerting readers about two bills in the United States Congress, the Entrepreneur Access to Capital Act (H.R. 2930) and the Democratizing Access to Capital Act of 2011 (S.1791). The legislation covers crowd-funding, raising the Reg A exemption cap, and raising the 500 shareholder threshold. The crowd-funding provision allows general solicitation and advertising to be used for Rule 506 offerings, so long as the purchasers are accredited investors. While the Secretary of State might agree that the bills are capital raising measures necessary to create jobs, she wants to ensure that the legislation does not reduce the state securities regulators’ authority to protect investors. ¶35,600D.

North Carolina Uses Electronic Filing System for Investment Company Notice Filings. The BlueExpress electronic system for investment company notice filings is being used by the North Carolina Securities Division as an alternative to paper filing (paper filings will continue to be accepted). BlueExpress transfers investment company notice filing data from a filer’s computer to the state. ¶43,523.

Asset Purchase Agreement and Additional Earnout Were Not Securities. A federal district court (WD Wash.) has ruled that neither an agreement to purchase corporate assets nor an additional earnout under the agreement fell within the definition of a “security” under the Washington State Securities Act (Act). The plaintiffs, a corporation and its individual shareholders, alleged that the defendants had violated the Act by providing false or misleading financial projections and revenue calculations used in acquiring the corporation’s assets. The asset purchase agreement and the additional earnout did not meet the definition of either an “investment contract” or a “risk capital investment,” however, and thus were not securities, because two of the plaintiffs immediately joined the acquiring corporation as executive officers and made significant contributions to the firm’s management. Accordingly, the defendants were entitled to summary judgment on the plaintiffs’ claim under the Act. Aventa Learning, Inc. v. K12, Inc. (WD Wash) will be reported at ¶74,956.


Aspen Federal Securities Publications  

U.S. Regulation of the International Securities and Derivatives Markets, Tenth Edition, by Edward F. Greene, Alan L. Beller, Edward J. Rosen, Leslie N. Silverman, Daniel A. Braverman, Sebastian R. Sperber and Nicolar Grabar, is now available online. This resource provides the only available comprehensive analysis of the application of U.S. securities and commodities laws to participants and transactions in securities and derivatives in the international capital and financial markets. The publication provides in-depth analysis of the legal framework for all types of securities offerings—from registered IPOs to Rule 144A offerings and from common stock to highly structured instruments.  It also offers guidance on U.S. regulations governing securities brokers and dealers, foreign banks, investment companies and investment advisers, as well as futures commission merchants, dealers in swaps and security-based swaps, major participants in swaps and security-based swaps, commodity pool operators and commodity trading advisors. The new Tenth Edition reflects the many changes in the law and other developments since publication of the Ninth Edition, including: the Dodd-Frank Act’s significant, extensive changes to the regulatory framework applicable to bank and non-bank financial institutions, including the “Volcker Rule”; Title VII of the Dodd-Frank Act, which overhauls the regulation of over-the-counter derivatives, and the rulemaking to date to implement it; Title IV of the Dodd-Frank Act, which will, among other things, require many advisers to hedge funds and private equity funds to register with the SEC as investment advisers, impose significant new reporting requirements on advisers to private funds and venture capital funds and shift regulation of many smaller advisers from SEC oversight to oversight by the states; the investor-protection provisions of the Dodd-Frank Act, including proposed new disclosure requirements and rules adopted by the SEC to implement the Dodd-Frank Act’s whistleblower program; amendments adopted in 2008 to Rule 12g3-2(b), an important exemption from the reporting requirements under the Securities Exchange Act of 1934 for foreign issuers, which is available to a foreign issuer that has not made a public offering in the United States and does not have a U.S. listing; disclosure requirements adopted in 2008 applicable to foreign issuers that conduct public offerings in the United States or that are subject to the reporting obligations under the Securities Exchange Act of 1934; and recent trends in the enforcement of the U.S. securities laws, including (i) the increasing number of actions brought under the U.S. Foreign Corrupt Practices Act and (ii) the Supreme Court’s decision in Morrison v. National Australia Bank, which limits the extraterritorial reach of one of the securities laws’ primary antifraud rules, and the legislative response of Congress in the Dodd-Frank Act.

Offerings of Asset-Backed Securities, Second Edition, by John Arnholz and Edward E. Gainor, is now available online. This Second Edition was written to help practitioners understand and make sense of the many new regulatory and legislative initiatives that have profoundly changed the process of offering and structuring asset-backed securities (ABS). Practices that underwriters and issuers have followed for years have been scrapped; very little that had become commonplace has been retained in the new world. To add to the confusion, while many rules have been finally adopted, many are still merely in proposed form. In this new edition, the authors address what is effective, proposed and, in certain cases, what might be expected. As before, this is a book for practitioners—the authors have provided advice on how to get deals done based on their experience. New and updated legislative, regulatory, and case law developments analyzed in the new edition include: a new chapter discusses regulations which for the first time have been written to substantively regulate ABS, the proposal to require issuers to retain an economic interest in each ABS offering, the FDIC’s controversial Safe Harbor for ABS, and the SEC’s brand new conflicts of interest proposed rules mandated by Dodd-Frank.

Derivatives Regulation, by Philip McBride Johnson, and Thomas Lee Hazen. The 2012 Cumulative Supplement 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 2012 Cumulative Supplement includes: additional updates relating to the massive reforms introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act (see, e.g., § 1.19; § 1.12A; § 3.02[14a]); developments with respect to security futures, i.e., listing requirements, evaluation of the security futures market, and impact of the Commodity Futures Modernization Act of 2000; Congressional revocation of many exclusions and exemptions created in the CFMA and their replacement with CFTC registration and other regulatory requirements; developments with respect to other equity derivatives; the new regulatory regime for swap transactions; developments in identifying a futures contract; developments in jurisdiction over credit default swaps and other over-the-counter derivatives, including changes mandated by the Dodd-Frank Act; hedging “event” risk; updates to new sections on the regulation of swap transactions, swap dealers, and major swap participants; updates to new sections on retail foreign currency exchange (forex) dealers; antifraud developments, including CFTC rulemaking regarding manipulative and deceptive practices; and developments relating to SEC jurisdiction, rulemaking procedures, enforcement, and investigations, as well as discussion and analysis of manipulative sales practices in securities.

Investment Adviser’s Legal and Compliance Guide, by Terrance J. O’Malley. The 2012 Supplement is now available online. This title reflects the most current discussion of legal and compliance topics for investment advisers, including fundamental issues arising under the Advisers Act, and incorporates the latest SEC guidance provided in rule releases, policy statements, no-action letters, and SEC staff speeches. This 2012 update includes: information about new registration requirements for advisers to hedge funds and other types of “private funds,” as well as related changes to Part 1 of Form ADV (see § 1.01 and § 6.02[A]); a description of new Form 13H under the Exchange Act that requires reporting by “large traders,” including those adviser with investment discretion whose equity securities transactions exceed (i) 2 million shares or $20 million during any calendar day or (ii) 20 million shares or $200 million during any calendar month (see new § 1.03[D]); information about updated requirements for charging performance fees to “qualified clients” and related amendments proposed by the SEC (see § 3.02[E]); additional information for hedge fund advisers, including with respect to registration and performance fees (see § 6.02[A] & [C]), and unique recordkeeping requirements (see new § 6.02[F]); updated record retention chart, including new requirements related to ‘large traders”, private fund advisers and the revised Form ADV (see Appendix B), and related updates to the compliance requirements summary chart and the compliance calendar (see Appendix A and Appendix B.1, respectively); the latest version of the Form ADV, the Advisers Act and the rules (see Appendix C, Appendix N and Appendix O, respectively).

Mergers & Acquisitions In The United States:  A Practical Guide For Non-U.S. Buyers, by Elliot J. Feldman (Editor).The 2012 Supplement is now available online. This title is a comprehensive examination of legal concerns for non-U.S. decision-makers contemplating investments in the United States.  Twenty-eight Baker & Hostetler LLP lawyers have collaborated to provide practical advice in the post-9/11 world of heightened national security and more vigilant market regulation, and to emphasize where being foreign makes a difference in U.S. law.  The 2012 Supplement includes an entirely new chapter in the due diligence section of the treatise, Chapter 10A Doing Business With The U.S. Government:  Being Foreign Makes A Difference by partner Hilary S. Cairnie, in addition to other substantive updates throughout the book, including:  on alternative dispute resolution, reports on a 2011 Supreme Court decision, AT&T Mobility v. Concepcion; updates on employee benefits, including updates on IRS Code references, new information on ERISA, changes in employee pension plans legislated in 2010, some recent relevant case law, and new information about the 2010 health care reform; case law updates in a number of chapters; updates through 2010 to statistics on national security reviews and outcomes; reports on the introduction of electronic processing for the Visa Waiver Program, and new trends in H-1B visas;  new 2011 examples have been introduced concerning penalties and enforcement (i) of export controls; and (ii) for OFAC violations, and the Commerce Country Control List has been updated.

Financial Reporting Handbook, by Michael Young. The latest release, Release 33, is now available online in the Corporate Governance Library. This reference provides quick access to critical aspects of financial reporting. In addition to covering the Sarbanes-Oxley Act, SEC rules and regulations, standards of the Independence Standards Board and the AICPA and requirements of the New York Stock Exchange, NASDAQ, and the American Stock Exchange,the Financial Reporting Handbook tackles important underlying themes such as the centrality of the audit committee, the individual responsibility of executives, and the integrity of the outside auditor. Release 33 adds (i) technical amendments to Regulation S-K related to the FASB’s Accounting Standards Codification, and (ii) Speech by SEC Staff: Remarks by Sean X. McKessy, Chief, Office of the Whistleblower, at Georgetown University.

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:



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#1000 - IPO Filings 

An interactive table that lists every company to file an initial IPO registration statement.
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Hot Topic of the Month

This month’s hot topic is beneficial ownership disclosure. A person is a beneficial owner of a security if the person has the power to vote the security or to direct the voting of the security or has investment power, which includes the power to dispose of the security or to direct its disposition. A person is a beneficial owner of a security if the person has one or both of these powers through any contract, arrangement, understanding, or relationship. Beneficial ownership for the purposes of Regulation 13D-G is not determined by the traditional economic interests in securities, that is, the right to receive dividends and the right to receive proceeds of sale. Beneficial ownership may be based on a shared power. To illustrate, Section 13(d)(3), provides that when two or more persons act as a group for the purpose of acquiring, holding or disposing of securities, the group will be deemed a person under Section 13.

Under Exchange Act Section 13(d), a person whose acquisitions of securities result in beneficial ownership of more than five percent of a class of equity security must disclose specified information on Schedule 13D, the basic acquisition disclosure statement,  within ten days of the acquisition. The statement must disclose, among other things: the purchaser’s background and identity, the source and amount of funds or other consideration used to make the purchase, the purpose of the acquisition (including any plans to liquidate the issuer, sell its assets to or merge it with any other persons, or to make any other major change in its business or corporate structure), and the number of shares beneficially owned.

Unlike Section 13(d), which focuses on the acquisition of beneficial ownership, Section 13(g) looks to the status of ownership and requires persons who meet the five percent threshold to file ownership statements, regardless of when the person acquired the securities; this ownership disclosure appears on Schedule 13G. Under Regulation 13D-G, certain persons otherwise exempt from filing Schedule 13D who are or become beneficial owners of more than five percent of a class must file Schedule 13G.

The purpose of Section 13(d)’s disclosure requirements is to alert the market to large, rapid accumulations of a class of equity securities by persons who have the potential ability to change or influence control of the issuer. Access to this information will enable the market to adjust accordingly its evaluation of the issuer’s worth, and will protect shareholders and the investing public against undisclosed shifts in corporate control.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example: