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February 2014


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

The law changes every day. The tools you use need to change with it. Introducing Wolters Kluwer Securities Regulation Daily — a daily news service created by attorneys for attorneys — providing same-day coverage of breaking news and developments for federal and state securities — including the latest securities-related rulemaking, no-action letters, SEC staff comment letters, updates on litigation, and a wealth of other SEC activity, plus a complete report of the daily securities law news that affects your world.

Securities Regulation Daily subscribers get special copyright permissions to forward information to colleagues or clients; the option to customize your daily email by topic and/or jurisdiction; the ability to receive breaking news email alerts; time-saving mobile apps for iPhone®, iPad®, BlackBerry®, or Android®; access to all links to cases and other referenced primary source content without being prompted for user name and password; and a searchable archival database.

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Financial Reform Resources



Federal Securities Law Reporter

SIPC rule change on options in broker-dealer liquidations approved. The SEC has approved a proposal by the Securities Investor Protection Corp. (SIPC) to amend SIPC Rule 400. Rule 400, entitled “Rules Relating to Satisfaction of Customer Claims for Standardized Options,” relates to the satisfaction of customer claims for standardized options under the Securities Investor Protection Act of 1970 (SIPA). The rule change is effective 30 days after the date of publication in the Federal Register.

The amendments to Rule 400 will provide trustees appointed under SIPA with greater flexibility in the distribution of standardized options upon the commencement of a liquidation proceeding. According to SIPC, the amendments will provide clear authority for a SIPA trustee to transfer, with SIPC’s consent, standardized options positions to another brokerage in lieu of an automatic closeout. Based on the experience and knowledge gained from the liquidation of Lehman Brothers, Inc., SIPC believes customers generally are better served by having their options positions transferred with their other securities to accounts at their new broker-dealer. This greater flexibility in the treatment of open positions could potentially limit the harm to customers or the markets that could be caused by the forced liquidation of open positions. Release No. SIPA-172 is reported at ¶80,457.

Regulators provide Volcker Rule relief for TruPS CDOs. The federal bank, thrift, securities, and commodities regulators have adopted an interim final rule responding to financial industry complaints about the effect that the Volcker Rule regulations will have on investments in collateralized debt obligations (CDOs) that are backed by trust-preferred securities (TruPS). The interim rule will permit banking entities to retain some investments made before December 10, 2013, the date the final Volcker Rule was issued, and will not permit additional investments to be made. To ease compliance burdens, the banking agencies issued a non-exhaustive list of issuers that meet the requirements of the interim final rule.
To carry out congressional intent to grandfather certain older CDOs, the regulatory agencies adopted an interim final rule that will allow market making activities and permit a bank to retain an interest in, or to sponsor, entities that issued affected CDOs, provided that:

  • the issuer was established before May 19, 2010;
  • the bank reasonably believes that the proceeds of the offering were invested primarily in qualifying collateral; and
  • the bank’s investment in the issuer was made before December 10, 2013, or was acquired by a merger or acquisition.

Release No. BHCA-2 is reported at ¶80,461.

SEC delays compliance with municipal advisor registration rules. The SEC has delayed the effective date for compliance with the municipal advisor registration rules at the request of market participants. Market participants asked for additional time to adapt their policies and procedures to the new rules, develop supervisory practices and internal controls, adapt their account and investment tracking systems, develop recordkeeping procedures, adapt their business models and practices, educate their personnel, and develop training programs.

The SEC temporarily stayed Rules 15Ba1-1 through 15Ba1-8, and Rule 15Bc4-1, along with Forms MA, MA-1, MA-W, and MA-NR until July 1, 2014, the date on which the first set of municipal advisors will be required to register under the final rules. The SEC also made conforming, non-substantive amendments to Rule 15Ba1-8 to conform the recordkeeping requirement dates to the new compliance date. Release No. 34-71288 is reported at ¶80,458.

SEC revises rules and forms to remove references to credit ratings. The SEC has adopted amendments to remove references to credit ratings in certain rules and one form relating to broker-dealer financial responsibility and confirmations of securities transactions, and to a rule and three forms under the Investment Company Act (Act). The amendments implement a provision of the Dodd-Frank Act that required federal agencies to review their regulations, modify them to remove any references or requirements of reliance on credit ratings, and substitute other standards of creditworthiness, as each agency deems appropriate.

The SEC removed credit rating references from Rule 15c3-1, which requires broker-dealers to maintain more than a dollar of highly liquid assets for each dollar of liabilities to ensure that if a broker-dealer fails, it will have sufficient liquid assets to cover its liabilities. The SEC also removed credit rating references from Rule 15c3-3, which prohibits broker-dealers from using customer securities and cash to finance their own businesses. In addition, the SEC removed the references from Rule 10b-10, a confirmation rule that requires broker-dealers that effect transactions for customers in securities other than U.S. savings bonds or municipal securities to provide customers with a written notification of the terms of the transaction at the time of or before the transaction is completed.

The SEC removed references to credit ratings from Investment Company Act Rule 5b-3, a rule that permits funds to look through repurchase agreements to the underlying collateral securities for certain counterparty limitation and diversification purposes as long as the collateral meets certain credit quality standards. It also removed the references from Forms N-1A, N-2, and N-3. Release No. 34-71194 is reported at ¶80,449, and Release No. 33-9506 is reported at ¶80,450.

Fraud allegations not particularized, state claim improperly dismissed. A 6th Circuit panel has affirmed the dismissal of fraud claims against Community Central Bank Corp. (CCB) based on statements in a private placement memorandum (PPM) and accompanying activities. According to the court, the district court correctly found that the plaintiffs failed to state viable claims under the antifraud provisions of the federal securities laws.

On July 16, 2009, CCB issued a PPM in order to raise proceeds a bank in a private stock offering. In March 2010, the Michigan Office of Financial and Insurance Regulation identified alleged violations by CCB, and CCB reported over $10 million in losses for the fourth quarter of 2009, in large part attributable to a “valuation allowance” on CCB’s net deferred tax assets. CCB entered into a consent order with regulators, agreeing to certain remedial actions. In April 2011, the bank failed and was placed into receivership.

The plaintiffs filed suit against individual CCB officers and directors alleging violations of the Exchange Act and the Michigan Uniform Securities Act, as well as state claims for breach of fiduciary duty and silent fraud. According to the plaintiffs, the PPM did not accurately disclose CCB’s financial condition, and management “painted a ‘rosy picture’” in public statements that material omissions made inaccurate and misleading. Specifically, the plaintiffs alleged that the defendants knew or should have known, but failed to disclose, that CCB intended to take the valuation loss and that the bank was engaged in continuing violations. The defendants moved to dismiss the claims, and the district court granted the motion, holding that plaintiffs failed to allege, with the requisite specificity, facts that would support a finding of falsity, a duty to disclose, or a strong inference of scienter.

On appeal, the plaintiffs argued that the PPM’s statement that state and federal laws require maintenance of adequate levels of capital “indicates” that CCB was actually doing so, a statement rendered false by CCB’s failure to disclose that the valuation allowance would be taken. The court rejected this contention, finding that the plaintiffs alleged no facts to demonstrate that the defendants had prior knowledge of the valuation allowance. “It is hard to imagine a clearer example of alleging ‘fraud by hindsight,’” the court stated.

The court also rejected the plaintiffs’ argument that statements in the PPM and SEC filings that the bank was “well capitalized” were false or misleading because the defendants did not disclose that they were engaged in the “risky business practices” that were the subject of an investigation. The term “well capitalized” is a term of art under federal banking regulations, the court noted. “[I]f the bank meets the regulatory criteria to be “well capitalized,” then it cannot be false or misleading for it to so describe itself,” according to the court, and the plaintiffs have not alleged that the bank failed to meet regulatory standards at the time the statements were made.

In addition, the court found no merit to the plaintiffs’ contention that the statement in the PPM that the bank is subject to extensive federal and state regulation was designed to mislead them because the defendants failed to disclose their violations and the ensuing investigation. The statement only says that the bank is “subject” to laws and regulations, and makes no assertion as to whether it was in fact in compliance with the provisions, the court explained. Finally, because the plaintiffs did not sufficiently allege fraud claims against the defendants, their controlling person claims were also properly dismissed, the court concluded. Dailey v. Medlock (6thCir) is reported at ¶97,790.

Broker failed to conduct reasonable inquiry into lack of restrictive legends. A 9th Circuit panel has denied review of an SEC order upholding fines and sanctions imposed by FINRA for the sale of unregistered securities. World Trade Financial Corporation had been fined by FINRA for trading unregistered securities, and the Commission upheld FINRA’s findings and sanctions. The judges concluded that substantial evidence supported the Commission’s findings of violations and deferred to its discretionary determination as to the appropriate fines and sanctions.

World Trade is a registered broker-dealer and FINRA member since 1998. World Trade’s supervisory manual contains a list of procedures for the sale of unregistered stock that can be traded under the nonexclusive safe harbor provided by Securities Act Rule 144, including obtaining current information on the terms under which a stock should be sold. In practice, however, World Trade’s employees simply looked to see whether or not a stock certificate bore a restrictive legend.

In November 2004, shell company Camryn Information Services, Inc. entered into a reverse merger with iStorage, a development-stage company. At the time, iStorage had only four shareholders, all of whom had been shareholders in Camryn. At the request of three of these shareholders, who each owned 12.5 percent of the outstanding shares, a law firm issued an opinion letter incorrectly stating (because these shareholders had held their shares within the previous three months) that the shares did not need restrictive legends. The restrictive legends were removed, and the shareholders were left with 5.2 million shares in iStorage represented by unlegended certificates. Three stock promoters employed by the shareholders opened accounts with World Trade. Subsequently, World Trade sold more than 2.3 million shares of iStorage stock between December 2004 and March 2005.

A World Trade representative acknowledged that he made no inquiries into the status or origin of these shares despite a number of red flags, including iStorage’s short operating history and recent merger. World Trade’s principals believed that the transfer agent and issuer were responsible for investigating the stock’s status. FINRA found that World Trade violated Securities Act Sections 5(a) and 5(c), as well as NASD Rules 2100 and 3010, and the SEC affirmed FINRA’s findings, fines, and sanctions.

World Trade argued that the “broker’s exemption” in Securities Act Section 4(a)(4) applied to the transactions at issue. World Trade argued further that it was up to the SEC to show that the exemption was inapplicable due to the presence of a statutory underwriter. The court remarked that “this interpretation is contrary to established law.” Exemptions to registration requirements are construed narrowly, the court explained, and once FINRA established a prima facie violation, the burden was on World Trade to show the applicability of the exemption.

The panel stated that it agreed with the position held by both the SEC and the D.C. Circuit: a broker must conduct a “reasonable inquiry” before claiming an exemption under Section 4(a)(4). What form this inquiry takes depends on the circumstances, the court said, but, where, as in this case, there are numerous red flags, “a more searching inquiry is required,” and World Trade failed to satisfy its duty. The court also concluded that this same duty to investigate showed the inadequacy of World Trade’s supervisory system.

The court then rejected World Trade’s argument that its reliance on third parties conformed to industry practice. The judges stated that World Trade failed to show that such a practice existed, and, even if it did, “it would only be suggestive of reasonableness and would not absolve Petitioners of liability.” Brokers, the court continued, rely on third parties “at their peril.”

Finally, the panel rejected World Trade’s argument that the Commission’s sanctions were excessive and punitive. In this case, the sanctions were in the mid-range of FINRA’s guidelines, and the evidence supported the conclusion that World Trade’s violations were egregious. The panel accordingly concluded that World Trade violated Sections 5(a) and 5(c), that it could not claim the Section 4(a)(4) exemption, and that the sanctions were reasonable and commensurate with World Trade’s breaches of the duties owed to the investing public. World Trade Financial Corporation v. SEC (9thCir) is reported at ¶97,791.

Kodak execs were misguided in their optimism, but lacked fraudulent intent. A 2nd Circuit panel has affirmed a district court judgment dismissing a securities fraud complaint brought against former executives of the Eastman Kodak Company. The panel found that Brett S. Jones failed to plead securities fraud against the defendants with the required particularity. The ruling is by summary order and is without precedential effect.

The complaint, brought by Jones on behalf of a putative class of purchasers of Kodak securities between July 26, 2011, and January 19, 2012, alleged that Kodak executives made false and misleading statements about Kodak’s financial condition in the period leading up to its bankruptcy filing. The district court found that the complaint failed to allege adequately that the executives acted recklessly. The more compelling inference, the district court concluded, was that the defendants properly disclosed relevant information to the public while Kodak was struggling to avoid bankruptcy, but their best efforts did not materialize.

The panel found that the complaint failed to permit an inference of scienter. Jones, the panel said, acknowledged that the public knew about Kodak’s difficulties in making the transition to digital products. Jones also did not challenge the accuracy of any of Kodak’s financial disclosures. While the defendants were more optimistic than others who viewed the same publicly available information, misguided optimism does not support an inference of fraud, the panel said. The panel agreed with the district court’s assessment that the defendants properly disclosed the relevant information while struggling, but ultimately failing, to avoid bankruptcy.

Jones claimed that during a July 26, 2011, investor conference call, the defendants misled investors by saying that they were “comfortable” with Kodak’s current and projected cash position. The assertion that the defendants' “comfort” was unreasonable because they should have known about Kodak’s liquidity crisis was too conclusory and speculative to raise an inference of fraud, the panel found. If the executives held a more optimistic view than others did, that fact alone was not sufficient to establish recklessness.

Next, on September 30, 2011, Kodak issued a press release stating that it had “no intention to file for bankruptcy.” Jones argued that this was an attempt to mislead investors into believing that there was no possibility of filing bankruptcy. The panel found that this statement was a forward-looking statement identified as such and accompanied by appropriate cautionary language. Moreover, viewed in the context of statements made by the executives during that period, it was clear that the release indicated that Kodak had no plans to file bankruptcy at that time.

Other allegations also failed to support an inference of scienter. At most, the panel said, the statements at issue confirmed what was already well-known: that parts of Kodak’s business were underperforming and that Kodak’s poor financial condition was hampering the sale of its patents. Scienter could not be inferred from the downplaying of Kodak’s liquidity problems because “it would defy economic reason for Kodak to make statements that would accelerate a bankruptcy filing,” the panel wrote.

Finally, the panel found that Jones failed to allege that Kodak’s CEO, Antonio M. Perez, made knowing or reckless statements during a conference call on November 3, 2011. Here, Perez was discussing his confidence that Kodak would be able to transfer to digital and to sell its patents. There were no allegations that supported the inference that Perez did not genuinely believe what he was saying or that the statement had no basis in fact, the panel found. Jones v. Perez (2ndCir) is reported at ¶97,777.


Blue Sky Law Reporter  

California requires social security or federal taxpayer identification numbers from broker-dealer, agent and investment adviser applicants. The California Department of Business Oversight requires broker-dealer, agent and non-sole proprietor investment adviser licensing applicants to include their social security or federal taxpayer identification numbers on application Forms BD, U-4 and ADV, respectively. While the federal Privacy Act of 1974 prohibits state agencies from denying individuals any legal rights, benefits or privileges because they refuse to disclose the numbers, their applications may, nevertheless, be denied because of failure to do so. ¶12,168, ¶12,169, ¶12,170, and ¶12,211.

Massachusetts requires criminal background check for IA rep. applicants. Individuals registering as investment adviser representatives in Massachusetts are subject to criminal background checks, by rule amendment adopted by the Massachusetts Securities Division. Other changes amended the registration/post-registration and notice filing requirements for investment advisers and federal covered advisers, respectively, and updated section references including a reference in the “institutional buyer” definition. ¶31,455.

Virginia issues policy on agent compensation disclosure. The Virginia director of the Securities and Retail Franchising Division (Division) issued a policy statement on a Virginia unethical practice rule provision adopted on June 3, 2013. The provision prohibits Virginia-registered broker-dealers from failing to disclose to their customers, both at the times of solicitation and sale confirmation, any transaction-related compensation paid to the broker-dealer’s agent such as commissions, sales charges, or concessions.  The policy states that until the unethical practice provision is amended the Division will not require Virginia-registered broker-dealers or broker-dealer agents to comply with the written disclosure requirement. Broker-dealers and their agents may continue to make compensation disclosures, consistent with SEC rules, on sales confirmations for specific securities transactions. ¶60,488.

Terminated Agent’s Fraud Conviction Upheld, Registration Conviction Reversed. In Commonwealth v. Selewach, the Appeals Court of Massachusetts affirmed a terminated agent’s conviction for operating a Ponzi scheme in violation of the Massachusetts Uniform Securities Act (Act). Although the defendant argued that his conduct did not violate the Act because no actual security ever existed, the sweep of the statute prohibits fraudulent offers as well as fraudulent sales or purchases. As the defendant had, at a minimum, offered to purchase an “evidence of indebtedness” from third parties on behalf of his clients, his conduct fell within the scope of the Act. Accordingly, the evidence supported the defendant’s securities fraud conviction.

The appellate court reversed, however, the defendant’s conviction for transacting business as an unregistered broker. Even viewed in the light most favorable to the state, the evidence that the defendant had assisted his former clients by participating in a conference call with his former broker-dealer and giving explicit instructions for liquidating and transferring the accounts did not rise to the level of conduct required for a registration violation, as the defendant’s activities amounted to no more than would be permitted to any individual in the liquidating of a personal brokerage account. Accordingly, the judgment of the trial court was reversed with respect to that count. The decision is reported at ¶75,054.


Aspen Federal Securities Publications  

2014 Handbook for Preparing SEC Annual Reports and Proxy Statements, by Lawrence D. Levin, Adam R. Klein. The 2014 Edition is now available online. This excellent sourcebook is for all those who have responsibility for preparing and reviewing the following annual disclosure documents for public companies: the annual report on Form 10-K, the annual meeting proxy statement, and the annual report to shareholders. In addition to a comprehensive analysis of the various rules and forms that apply to these documents, this publication contains practical guidance based on the authors’ own experiences and those of their colleagues in representing various public companies over the years. Where appropriate, it references informal SEC guidance from its Interpretive Releases and its Division of Corporation Finance’s Compliance and Disclosure Interpretations. Various examples have been included to assist the user in complying with the complicated federal securities laws and preparing proper disclosure. The authors have also highlighted where relevant the interplay among the SEC rules and those of the national securities exchanges and state corporate law.

Capital Markets Handbook, Edited by John C. Burch, Jr. and Bruce S. Foerster. The 2014 Supplement is now available online. This supplement includes an expanded discussion of the financial crisis of 2008 and the resulting Dodd-Frank Wall Street Reform and Consumer Protection Act and its impact on new issue capital raising; enhanced coverage of the Jumpstart Our Business Startups Act of 2012 and the dramatic changes this legislation brings to capital raising for so-called “emerging growth companies;” revised and updated Capital Formation Alternatives chart; expanded treatment of due diligence; expanded Appendix L for pertinent Op-eds, articles, and open letters; and updated underwriting and pricing statistics.

Investment Management Law and Regulation, Second Edition, by Harvey E. Bines and Steve Thel. The 2014 Cumulative Supplement is now available online. This definitive guide helps you to adapt profitably to today’s new and changing conditions and anticipate tomorrow’s regulatory response. Highlights include: a new subsection discussion the regulatory developments affecting undisplayed executions since adoption of Regulations ATS and NMS; further developments in the implementation of the Dodd-Frank Act; the Jumpstart Our Business Startups Act and the elimination of the general solicitation prohibition in Rule 506 offerings; new reporting requirements for large investment advisers; a new subsection discussing the new reporting requirements for municipal advisers; proposed changes requiring money market funds to adopt floating net asset values or liquidity fees; and proposed changes in the definition of “best execution” for advisers.

Derivatives Regulation, by Philip McBride Johnson, and Thomas Lee Hazen. The 2014 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 2014 Cumulative Supplement includes, throughout the supplement, developments implementing the massive reforms introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act; new sections outlining the treatment of retail foreign exchange and retail commodity transactions, the margin requirements for uncleared and cleared swap transactions, the swap reporting regime for swap dealers and major swap participants, the recordkeeping requirements for swap dealers and major swap participants, the application of the CFTC’s swap regulatory regime to cross-border swap activities, and the CFTC’s disruptive trading authority; summary and analysis of new CFTC rules relating to registration of swap dealers and major swap participants, requirements for approval of contract markets, core principles for derivatives clearing organizations, external business conduct requirements for swap dealers, major swap participants, and futures commission merchants, internal business conduct requirements for swap dealers, major swap participants, and futures commission merchants, including designation of a chief compliance officer, and registration of and core principles for swap execution facilities; and coverage of new developments relating to the mandatory trading and clearing of swaps and exceptions or exemptions therefrom, the Treasury Secretary’s determination on foreign exchange swaps and forwards, the new cleared swaps segregation requirements, and commodity pool operator registration requirements and obligations.


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:

#1000 - IPO Filings 
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.


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

  • BHCA-2—Treatment of Certain Collateralized Debt Obligations Backed Primarily by Trust Preferred Securities with Regard To Prohibitions and Restrictions on Certain Interests in, And Relationships with, Hedge Funds and Private Equity Funds (January 17, 2014).

As part of the Dodd-Frank Act mandate to ban proprietary trading, the SEC and related federal regulators adopted an interim final rule to modify provisions in the Volcker rule to ease the compliance burden for smaller community banks.

  • 34-71288—Registration of Municipal Advisors; Temporary Stay of Final Rule (January 13, 2014).

The SEC temporarily stayed Exchange Act Rules 15Ba1-1 through 15Ba1-8 and Rule 15Bc4-1 and Forms MA, MA-I, MA-W, and MA-NR until July 1, 2014. The SEC also made date-conforming, non-substantive amendments to Rule 15Ba1-8.

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’s 2013 rulemaking year ended with the adoption of the long-awaited final Volcker rule. Likewise, one of the SEC’s most significant early 2014 rulemakings involved working with federal banking regulators to reduce the Volcker rule’s impact on certain investments commonly held by community banks.

In a recent speech, SEC Chair Mary Jo White reiterated her priorities for 2014 rulemakings. High priority rulemakings include money market mutual fund reform and credit risk retention in asset-backed securities transactions. JOBS Act rulemakings on crowdfunding and Regulation A are also priorities. The public comment periods for these proposals will close February 3 and March 24 of this year, respectively. Disclosure reform is yet another area to watch for possible rulemaking.


Hot Topic of the Month

This month's hot topic is shareholder proposals. A shareholder proposal is a shareholder's recommendation that the company and/or its board of directors take an action, which the shareholder intends to present at a shareholder meeting. Exchange Act Rule 14a-8 dictates when a company must include shareholder proposals in its proxy materials issued before an annual or special shareholder meeting. A registrant that receives a shareholder proposal within the prescribed time before the solicitation must include the proposal in its proxy statement, identify the proposal in the form of proxy, and give recipients of the proxy material a means by which to vote on the proposal, if the proposing shareholder meets the eligibility conditions and if the proposal does not fall within any enumerated ground for exclusion.

Rule 14a-8 enumerates thirteen substantive grounds on which management may exclude proposals. Exclusion is proper, for example, if the proposal: would require the registrant to violate state, federal, or foreign law; concerns the election of directors; violates any of the SEC's proxy rules, including the anti-fraud rule; concerns the redress of a personal claim or grievance against the company; or concerns matters that relate to the registrant's ordinary business operations. The company has the burden of showing that it is entitled to exclude the proposal and must submit to both the SEC and the proponent copies of the proposal, an explanation of the reasons why the company believes that exclusion is proper and a supporting opinion of counsel, in the case of grounds based on state or foreign law. A company that includes a shareholder proposal in its proxy materials may elect also to include a statement opposing the proposal.

There are also procedural and eligibility grounds on which a company may rely to exclude proposals. At the time a proposal is submitted, the proponent must demonstrate his or her eligibility. A proponent must be a record or beneficial owner of at least one percent or $2,000 in market value of securities entitled to be voted at the meeting on the proposal. Additionally, the proponent must have held the securities for at least one year before submission and must continue to hold those securities through the date of the meeting. A shareholder may submit only one proposal to a company for a given shareholder meeting, and the proposal and any supporting statement cannot exceed 500 words. Finally, the proponent, or a qualified representative must attend the meeting to present the proposal. If a proponent fails to comply with the above procedural or eligibility requirements, the company may exclude the proposal under Rule 14a-8(f).

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
    • Exchange Act Rule 14a-8, at ¶24,012
    • No-Action Letters (e.g., Exelon Corp. at ¶77,604 and General Electric Co.  at ¶77,605)
    • CCH Explanations (e.g., ¶24,030.070 and ¶24,151.065)
    • Report letters (e.g., 1-30-15, “SEC refuses request to exclude proposal on executive dividends”)
  • SEC Staff Legal Bulletin No. 14 at ¶60,014
  • SEC Staff Legal Bulletin No. 14B at ¶60,014B
  • SEC Today, Shareholder Pay Ratio Proposal May Not Be Omitted if Redrafted as a Recommendation (1-7-14)
  • Insights – Amy L. Goodman (e.g., “The SEC and Sustainability Shareholder Proposals” (12-31-13)
  • Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 6.C.4, Contested Solicitations and Security Holder Proposals)
  • Regulation of Corporate Disclosure – Brown (e.g., §2.02[1][a])
  • Regulation of Securities: SEC Answer Book – Levy (e.g., Q11:3, “How does the shareholder proposal process work in general?”