January 2008


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 Expands Form S-3, F-3 Eligibility, Mandates Form D Electronic Filing
The SEC voted unanimously to amend the eligibility requirements of Forms S-3 and F-3 to allow companies that do not meet the current public float requirements to register primary offerings of their securities on these forms. Corporation Finance Director John White said that expanding the eligibility of Forms S-3 and F-3 will allow smaller companies to benefit from the efficiency and flexibility of the short form registration statements. Commissioner Kathleen Casey estimated that 1,400 new companies will be eligible to use the forms. The adopted rules contain several conditions, as well as two significant changes from the proposal released in the summer. The first change is that in order to be eligible to use the forms, a company must have at least one class of common equity securities listed on an exchange. Daniel Greenspan of the Division of Corporation Finance staff said that this change was intended to provide additional protections for investors in the form the exchange's listing rules. The second change in the adopted rules is that to be eligible to use the forms, a company may not sell more than the equivalent of one-third of its public float during any 12-month period. The staff had originally proposed a threshold of 20 percent, but commenters overwhelmingly favored a larger amount, Director White said. Commissioner Casey applauded the change, saying it balances greater access to capital with investor protection. A shell company is not eligible to use the forms, nor is a company that has been a shell company within the preceding 12 months. In addition, companies must be timely in their filings with the SEC to be able to use Forms S-3 and F-3 under the amendments.

The Commission also adopted amendments to mandate the electronic filing of Form D, starting in March 2009. Form D is a notice required to be filed by companies that have sold securities without Securities Act registration based on a claim of exemption under Regulation D or Securities Act Section 4(6). Form D filings are also required by most states. The Commission receives 28,000 of the filings on paper each year, and dedicates three full-time staff members to opening and reviewing the mailed filings. The amendments provide that Form D should be filed electronically effective September 15, 2008. The Commission will provide a six-month phase-in period, and electronic filing of Form D will become mandatory March 16, 2009. Mr. White said that the phase-in period would act as a test for the new electronic filing system. One important element of the system, according to Director White, is a possible link to the North American Securities Administrators Association. The staff hopes to be able to create a one-stop filing system where companies can file their Form D with the SEC and with state regulators at the same time, he said. The remaining issues related to creating that system have to do with NASAA's resources, he noted. Among other things, the association is trying to determine how they will finance the system since it is not in the group's budget.

SEC Codifies Status Quo on Director Elections
In a split vote, the commissioners amended Exchange Act Rule 14a-8(i)(8) to codify the longstanding interpretation of the rule which allows companies to exclude from their proxy statements proposals that would result in an election contest or would set up a process for conducting an election process in the future. Commissioner Annette Nazareth voted against the amendment, which she has termed the "non-access proposal," because she believes it stands in the way of shareholders' rights to elect directors for the companies they own.

Chairman Christopher Cox explained that the proposal to codify the SEC's longstanding interpretation was the only proposal that would gain the three votes necessary for adoption. To do nothing in the aftermath of the AFSCME v. AIG decision (2ndCir ¶93,942 (ip access user)), which called that interpretation into question, would open the door to a potential end-run around the proxy and antifraud rules, he said. The result of the majority vote will be no change to the way the rule was enforced for the last 17 years, according to the chairman. Chairman Cox noted that he has tried for a year to improve the proxy access process in light of the decision in AFSCME, but said it required a willingness to think anew and to go beyond party lines. There is no consensus among the commissioners on this issue. He also noted that he has received numerous requests to wait until there is a full Commission to act, but he believes that doing nothing would put all investors at risk. He pledged to use the time between now and the next proxy season to do something other than maintain the status quo. The only legal question the SEC had to clarify was the meaning of its 30 year old rule, according to Chairman Cox. The court advised that the SEC had only to explain itself with respect to the rule's interpretation, and the chairman said there was no excuse not to do so. He thanked Ms. Nazareth for her contribution to the final amendment even though she did not support the rule. John White, the director of the Division of Corporation Finance, said it was important to the operation of the shareholder proposal rule to codify the election exclusion for the upcoming proxy season. The codification will enable the staff to return to providing responses on whether proposals are properly excludable under the rule rather than offering no opinion as it did last proxy season. The amendment will take effect 30 days after publication in the Federal Register.

Ms. Nazareth argued that if the amendment was truly a temporary measure, it would have included a sunset provision, but it does not. She disagreed that the AFSCME decision created a state of uncertainty or an accelerating state of uncertainty. The non-access proposal was a last minute alternative to the shareholder access proposal which was flawed, she said. She believes the proposal showed an internal resistance to proxy access. Ms. Nazareth said the action denied shareholder rights simply to put this matter behind the Commission for the time being. The AFSCME decision placed the access issue squarely before the Commission and it took a step backward, in her view. She hopes that Chairman Cox's pledge to revisit the issue is successful. Release 34-56914 is reported at ¶88,023 (ip access user).

Venue Dismissal of Criminal Charges Reversed
A panel of the 4th U.S. Circuit Court of Appeals reversed a dismissal of criminal securities fraud charges on venue grounds. The appellate court rejected claims that the electronic transmission of a fraudulent document to a computer server in Alexandria, Virginia, did not constitute a "venue-sustaining act," and that the defendant could not have reasonably foreseen that the form filed on EDGAR would be transmitted to the Eastern District of Virginia. According to the court, "this process was part of the SEC's normal course of business...as all such documents are filed, stored, and disseminated to the public through the EDGAR website in Alexandria, Virginia." The appeals panel concluded that "[b]ecause a material act that constituted the violation occurred in the Eastern District of Virginia, namely the transmission of a fraudulent Form 10-Q into the district, the Eastern District is a proper venue." U.S. v. Johnson (4thCir) will be reported at ¶94,539.

SEC Fails to Show Recklessness
On review of an SEC order, a Ninth Circuit panel found that the Commission erred in finding that securities professionals acted with scienter. The two professionals were sanctioned for violating Section 10(b), Rule 10b-5 and NASD Conduct Rule 2120. The court held that the SEC failed to show that the professionals acted recklessly. Also, the Commission's order was phrased in terms of what a reasonable securities salesperson should have known rather than what the salespeople must have known. The court remanded to address whether the professionals acted with scienter. Gebhart v. SEC (9thCir) is reported at ¶94,524 (ip access user).

CCH Blue Sky Law Reporter

Oregon Adds Enforcement Provisions to Securities Act
The state of Oregon has added a new section authorizing the Attorney General, with the consent of the Director of the Department of Consumer and Business Services (DCBS), to investigate and prosecute violations of the Oregon Securities Law. The Attorney General will be able to: (1) conduct private or public investigations within or outside the state; (2) require a person to file a statement under oath; (3) administer oaths and affirmations, subpoena witnesses, take evidence and require the production of books, papers, correspondence, memoranda, agreements or other documents or records that the Attorney General considers relevant or material to an investigation; and (3) bring suit on behalf of the state of Oregon. The Attorney General will also be able to take action in connection with alleged violations in certain instances. ¶47,148A (ip access user).

Oregon Adds NSMIA Provisions for Variable Annuities and Adopts New Rule for Licensees Selling or Advising about Securities on Financial Institution or Trust Company Premises
Federal covered security notice filing rules were expanded to provide requirements for offering and selling variable annuities, and a new rule sets forth the requirements for broker-dealers, salespersons, investment advisers and investment adviser representatives to sell or advise about securities on the premises of financial institutions or trust companies. ¶47,556N (ip access user), ¶47,556P (ip access user), ¶47,619A (ip access user).

California Corporations Code Amended
Provisions have been added to state securities law stating that: (1) it is unlawful for any person to knowingly make false statements to the commissioner during the course of licensing, investigation, or examination, with the intent to impede, obstruct, or influence the administration or enforcement of any other provision in the division; (2) it is unlawful for a person to knowingly alter, destroy, mutilate, conceal, cover up, falsify, or make a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the administration or enforcement of the division; and (3) the court may prohibit, in any proceeding under Section 25530, conditionally or unconditionally, and permanently or for a period of time as determined, any person who violated Section 25401 from acting as an officer or director of any issuer that has securities qualified pursuant to Section 25110, or that has securities or a transaction exempt from qualification pursuant to Section 25100, 25102, or 25103, if the person's conduct demonstrates unfitness to serve as an officer or director of the issuer. Other nonsubstantive changes have been made without altering the substance of the act. ¶11,275 (ip access user), ¶11,301A (ip access user), ¶11,394K (ip access user), ¶11,394P (ip access user).

Good Faith Belief Provided Defense to Registration Violations
In People v. Cole, the California Court of Appeal held that a good faith belief that a broker-dealer license was not required provided an affirmative defense to charges that the defendants sold securities without a license. The appellate court ruled that the unlawful sale of securities without a license is a general intent crime, and not a strict liability offense. An unlicensed broker-dealer can defend himself, therefore, on the basis of a reasonable and good faith belief that he was excluded from either the licensing requirement or the statutory definition. As a result, the trial court's failure to instruct the jury on this defense required reversal of the defendants' convictions on those counts on which they met their initial burden of proof. The decision is reported at ¶74,672 (ip access user).

New Smart Chart Added: Investment Adviser Representative Registration Requirements
This new chart provides investment adviser representative registration requirements for each jurisdiction.

Aspen Federal Securities Publications

Capital Markets Handbook, Edited by John C. Burch, Jr. and Bruce S. Foerster
The 2008 Supplement (ip access user) published in December and is now live on both the Securities Integrated Library and the International Business Integrated Library on IRN. This supplement includes new information relating to newly established NASD fees for Well Known Seasoned Issuers (WKSIs) as applied to automatically effective S-3/F-3 registration statements; new regulations defining the scope of securities activities that a commercial bank may conduct without registering with the SEC as a securities broker; amendments to NYSE Rule 472 and NASD Rule 2711 establishing different “quiet periods” for IPOs and follow-on offerings as well as 25-day “quiet periods” for all underwriting participants including managers and co-managers; investor attempts to avoid prohibitions under Rule 105 of Regulation M banning the cover of short sales with offered securities and a new provision prohibiting purchase of offered securities by investors that have shorted offered securities during the Regulation M restricted period; expanded treatment of Rule 144A and the PORTAL market, including launch of competitive platforms by Goldman Sachs and by Morgan Stanley; SEC concerns about frequent users of PIPE transactions and about large PIPE offerings; liberalized rule for foreign private issuers to de-register securities and terminate their ‘34 Act reporting obligations; and accession of Japanese ratings agencies to Nationally Recognized Statistical Rating Organization (NRSRO) status.

Financial Reporting Handbook, by Michael Young
The latest release, Release 17 (ip access user), published in December and is now live IRN Corporate Governance Integrated 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.

Hot Topic of the Month

This month’s hot topic is Rule 144. On November 15, the SEC adopted amendments to Securities Act Rules 144 and 145. The changes are intended to enable smaller companies to raise capital more easily and to improve reporting and disclosure requirements by making the rules easier to understand and apply. The revisions to Rule 144 shorten the holding period for restricted securities from one year to six months if the issuer has been subject to the Exchange Act reporting requirements for at least 90 days before the sale of the securities. The one-year holding period remains for restricted securities of non-reporting companies. The revisions also simplify Rule 144 compliance for a shareholder who is not an affiliate of the issuer. In addition, the adopting release codifies several Rule 144 interpretive positions. The SEC also eliminated the presumptive underwriter provision in Rule 145, except for transactions involving a shell company, and revised the resale requirements in Rule 145(d).

The final rules reflect one significant change from the proposing release, which is the removal of the tolling provision to suspend the Rule 144 holding period for the length of time that a holder of restricted securities engages in hedging activities. The staff stated that a reintroduction of the tolling provision would unnecessarily complicate Rule 144, as securities holders and intermediaries would incur significant costs to monitor hedging activities to comply with the provision. The staff noted that there is no strong evidence that hedging activities have resulted in abuses in the Rule 144 context.

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