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January 2013


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.


Financial Reform Resources



CCH Federal Securities Law Reporter

Allegedly Secret “Put” Option Was Unambiguously Disclosed In Offering Documents. In a ruling by summary order and without precedential effect, the Court of Appeals for the Second Circuit affirmed a district court (SD NY) judgment. The appeal arose from the latest decision in the multidistrict litigation concerning Merrill Lynch, Pierce, Fenner & Smith's (Merrill Lynch) practices with respect to auction rate securities (ARS). The complaint alleged that Merrill Lynch had made misrepresentations and omissions related to ARS suitability, liquidity, and safety. The plaintiff, Iconix Brand Group Inc., argued in particular that Merrill Lynch failed to disclose that it placed support bids at ARS auctions in order to prevent auction failure and conceal the illiquidity of the securities.
The district court dismissed Iconix’s Exchange Act fraud claims with prejudice. According to Chief Judge Preska, in prior cases Merrill Lynch had asserted that it made disclosures on its website that relieved it of liability for misstatement and market manipulation claims based on purchases made after the website disclosure was posted, and the claims in this action were analogous to those in the earlier proceedings, which had been dismissed. The judge concluded further that Iconix had made no new arguments regarding the sufficiency of the disclosures or with respect to the other elements of a fraud claim.
On appeal, Iconix contended that the district court erred by failing to consider its allegations that Merrill Lynch misrepresented the collateral for the contested ARS issuance. Specifically, Iconix argued that Merrill Lynch made representations about the ARSs collateral but failed to disclose that the issuer retained a "put" option allowing it to liquidate the highly-rated collateral, receive the proceeds of that liquidation, and substitute its own preferred equity.
The appellate court declined to consider this argument because it was raised for the first time on appeal. Even if it were to consider the claim, the panel found that it would fail for lack of reasonable reliance. According to the panel, the allegedly secret "put" option was unambiguously disclosed on the first page of the relevant offering memorandum and then explained in greater detail in other parts of that document. "Reviewing the offering memorandum would have warned any minimally diligent investor of the risk that the auction rate securities could be transformed into preferred equity of the issuer and thus that the securities might be unsuitable for that reason," the panel stated. The panel then found Iconix's other arguments to be without merit and affirmed the judgment of the district court. Iconix Brand Grp. Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc. (2ndCir) is reported at ¶97,223.

Scienter Allegations Against Jewelry Company and Officers Insufficient. Shareholders of jewelry retailer Zale Corporation saw their fraud claims dismissed after the Fifth Circuit U.S. Court of Appeals affirmed a district court’s finding that scienter was not sufficiently pleaded against the company and its officers. Shareholders brought suit after improper accounting resulted in a restatement of net income. The shareholders alleged that erroneous accounting resulted in an overstatement of income by approximately $19.6 million between November 16, 2006, and October 29, 2009. The lower court dismissed the case after finding that the shareholders failed to plead with sufficient particularity facts to show that company officers were actually aware of accounting errors at the time of the alleged misstatements. The opinion is unpublished and not precedent.

The lead plaintiff, a union pension fund, argued that the complaint sufficiently pleaded scienter by alleging that the officers wanted to inflate earnings due to a change in the company’s warranty program, claimed to have carefully examined advertising expenses in addition to signing Sarbanes-Oxley certifications, and received bonuses based on the earnings. After their claims were dismissed in federal district court, the shareholders filed an amended complaint that incorporated facts alleged in a complaint filed by the SEC against the company’s vice president of marketing at the time. On appeal the Fifth Circuit rejected the shareholders’ argument that the restatement of net income itself supported a strong inference of scienter, or that any of the other allegations were sufficient to support a scienter finding. Even if the officers were aware that the financial statements were false, the court said, there was no showing that they would have realized how advertising expenses were being accounted for.

The court also rejected the shareholders’ argument that public statements made during the class period, where officers asserted that they were focused on "expense reduction" and "financial rigor and discipline," and a "culture of cost discipline and accountability," showed that the company and the officers ignored overstated profits. The court said the statements reasonably suggested that the company wished to reduce costs and be more efficient, not that the company intended to double-check accounting figures submitted by high-level executives for accuracy. Pipefitters Local No. 636 Defined Benefit Plan v. Zale Corporation (5thCir) is reported at ¶97,215.

Appellate Court Upholds Dismissal of Securities Act Claims. The U.S. Court of Appeals for the Second Circuit has affirmed the judgment of the federal court in New York City dismissing a Securities Act fraud complaint for failure to state a claim. The appellate court’s decision is a summary order and has no precedential effect. Plaintiffs Ahmed Arfa and Westend Group had alleged violations of Securities Act Section 11 against Mecox Lane Limited as the issuer, numerous individual defendants as signers of Mecox Lane’s registration statement, and two underwriters. The plaintiffs also alleged controlling person violations under the Securities Act.

In affirming the district court, the Second Circuit first held that plaintiffs’ failed to show that Mecox Lane did not disclose known trends or uncertainties regarding material changes in the relationship between costs and revenues under Item 303(a)(3)(ii) of Regulation S-K or that Mecox Lane failed to make required disclosures under Securities Act Rule 408 to ensure that its offering statements were not misleading. This allegation could not withstand scrutiny because the relevant data had been disclosed in the registration statement and thus was not material because it could not alter the total mix of information available to investors. The court found no material relationship between allegedly misleading financial data and Mecox Lane’s proprietary management system. Similarly, a published article describing Mecox Lane’s online advertising methods did not contradict Mecox Lane’s statements.

Additionally, the Second Circuit characterized as "false" an allegation that Mecox Lane’s registration statement implied a strategy to add high margin, directly-operated stores. By contrast, the court found that the registration statement disclosed a strategy for total store growth that involved converting some directly-operated stores to franchises. These plans were depicted in a chart in the registration statement. The court also found insufficient a related allegation that the registration statement failed to disclose the departure of a Mecox Lane executive because the management change did not alter Mecox Lane’s plans for its physical stores. Lastly, the court upheld the dismissal of controlling person claims because the complaint failed to state an underlying securities law violation. Arfa v. Mecox Lane Limited (2ndCir) is reported at ¶97,214.

CCH Blue Sky Law Reporter  

Massachusetts Clarifies Bonding Policy for IAs with Discretionary Authority Over Client Funds. Massachusetts-registered investment advisers located in the state and with discretionary authority over their clients’ funds or securities must maintain a minimum $10,000 bond from a Massachusetts-qualified bonding company. The Massachusetts Securities Division staff will review advisers’ books and records during routine examinations to ensure compliance with the requirement. An adviser is exempt from the bonding requirement if: (1) the adviser’s contract with the client explicitly states the adviser does not have trading discretion; (2) the adviser obtains permission or clears each and every trade before and on the same day the adviser issues the order to buy or sell; and (3) the adviser puts all clearances in a written format, e.g., email, log or journal, and maintains the documents for five years from the transaction date. Advisers registered in another state and whose principal place of business is maintained in that state are subject solely to that state’s bonding and recordkeeping requirements. ¶31,665

Michigan Releases Q/A on Crowdfunding for Investors. A memorandum answering frequently asked questions about crowdfunding was released for investors by the Michigan Securities Division, with the caveat that companies may not issue securities via crowdfunding under Title III of the JOBS Act until the SEC adopts final rules. The type of crowdfunding referred to in the Q/A involves issuers receiving funding by selling small amounts of equity to a large number of investors. The Q/A answers questions such as how Title III of the JOBS Act affects Michigan investors, how crowdfunding differs from traditional investing, how much money can be raised through crowdfunding, and what the requirements are for broker-dealers and funding portals. ¶32,672

Texas Adopts Accredited Investor, Finder and Successor Registration Changes…Amendments to the exemption for individual accredited investor sales, and to the application procedures for finders and for successor entity securities dealers and investment advisers were adopted by the Texas Securities Board. ¶55,591C, ¶55,591J, ¶55,595C, ¶55,720E

…And Proposes Private Fund Adviser Exemption. An exemption from investment adviser registration for private fund advisers was proposed by the Texas State Securities Board, along with amendments to the investment adviser financial institution/institutional investor exemption, investment adviser brochure rule, and to a contested case practice rule. ¶55,525, ¶55,556, ¶55,595J, ¶55,720L

Institutional Investor Could Not Establish Justifiable Reliance on Misrepresentations. A federal district court has held that an institutional investor in a private placement could not establish the justifiable reliance necessary to prevail on a misrepresentation claim under the Ohio Securities Act against the offering’s placement agent. In In re National Century Financial Enterprises, Inc., Investment Litig., the plaintiff, a private equity fund, had purchased preferred stock in an issuer that subsequently filed for bankruptcy after committing a massive fraud on investors. Although the plaintiff alleged that the placement agent had knowledge of the material aspects of the issuer’s fraud and had misrepresented in offering materials how the issuer conducted its operations, the court ruled that an institutional investor such as the plaintiff could not have justifiably relied on the alleged misrepresentations and omissions as a matter of law. Among other things, the record showed that the plaintiff had conducted extensive due diligence, communicated directly with the issuer’s management, and met with management in person during a site visit. Additionally, a letter agreement with the placement agent, which was the product of negotiations between the parties, stated that the plaintiff was a sophisticated institutional investor who was relying exclusively on its own due diligence investigation, its own sources of information, and its own credit analysis in deciding to invest. Accordingly, the clear language of the letter agreement and the surrounding factors rendered any claim of reliance by the plaintiff unjustifiable. In re National Century Financial Enterprises, Inc., Investment Litig. is reported at ¶75,006.


Aspen Federal Securities Publications  

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes. The new Fourth Edition of Volumes IX and XI (Finding Devices) of the cornerstone Securities Regulation treatise is now available online. This Fourth Edition volume fully incorporates the large number of legislative, regulatory, and case law changes since Securities Regulation, Third Edition was published.

Regulation of Money Managers: Mutual Funds and Advisers, by Tamar Frankel and Ann Taylor Schwing. The 2013 Supplement is now available online. This comprehensive treatise on investment management regulation covers federal and state statutes, their legislative history, common law, judicial decisions, rules and regulations of the SEC, staff reports, and other publications dealing with investment advisers and investment companies. The 2013 Supplement contains recent developments including: discussion of recent rules, proposed rules and amendments to rules generally and specifically arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act (JOBS Act); new subsection discussing the “Volcker Rule”; discussion of recent SEC staff positions regarding registration requirements of certain entities related to an adviser; encouragement of distribution of crowdfunding securities by a safe harbor from registration under the Securities Act of 1933 and a safe harbor from registration under the Securities Exchange Act of 1934 for certain intermediaries in crowd-funded offerings; discussion of the requirement in the JOBS Act that the SEC revise Rule 506; updated discussion of various Investment Advisers Act rules, rule amendments, and exemptions that were promulgated under the Private Fund Investment Advisers Registration Act of 2010; addition of new subsections on reporting of proxy votes on executive compensation, and the Treasury reporting requirements on cross-border ownership for “funds and investment managers” and Bureau of Economic Analysis reporting requirements on certain cross-border investments and transactions; addition of new SEC rules and policies and updating of changes in the SEC rules published and the addition of numerous new court decisions, SEC no-action letters, secondary sources and law review articles, and updating of the existing court decisions and regulations throughout the treatise.

Offerings of Asset-Backed Securities, Second Edition, by John Arnholz and Edward E. Gainor. The 2013 Supplement is now available online. The Second Edition helps 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 the Second edition, the authors address what is effective, proposed and, in certain cases, what might be expected. As before, this content is 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 2013 Supplement include: new section discussing the Volcker Rule; analysis of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act); new section analyzing the Basel III Rules, in which the banking agencies proposed new risk-based capital regulations (the “Proposed Rules”) incorporating certain of the revised Basel II (known as Basel II.5) and Basel III provisions; new section that describes how, as a result of Dodd-Frank developments, most ABS offerings utilizing a swap may now be treated as a “commodity pool” under the Commodity Exchange Act; discussion of the ASF's Market Guide to Questions Regarding Implementation of SEC Rule 15Ga-1, which is included in Appendix 7; and updated Appendix 6, ERISA Underwriter Exemptions.

Investment Management Law and Regulation, Second Edition, by Harvey E. Bines and Steve Thel. The 2013 Cumulative Supplement is now available online. This update includes an exhaustive study of judicial and regulatory developments relating to the regulation of investment management, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other new legislation and court decisions, and regulatory action under ERISA and state and federal banking and securities laws. Other highlights include: discussion of the implementation of the Dodd-Frank Act by the SEC and other regulatory bodies; numerous updates pertaining to the Investment Advisers Act of 1940, such as changes in the definition of “accredited investors” for private placements exempt from registration under the Securities Act, standards for the use of designations such as “financial planner,” developments relating to the requirement that hedge fund managers register as investment advisers under the Investment Advisers Act and the SEC’s exemptions for venture capital managers, small private fund managers and foreign managers, amendments to rules governing Form ADV, the SEC staff Study on Investment Advisers and Broker-Dealers, and the exclusion of family offices from regulation as investment advisers; the exemption of fixed indexed annuities from registration under the Securities Act; changes in standards governing the suitability of investments; restrictions on pay-to-play practices in government pension management; excessive-fee and revenue-sharing litigation relating to employee-directed pension plans; Department of Labor requirements for fee and expense disclosure to ERISA plan fiduciaries and participants in participant-directed individual account plans; SEC regulation of money market funds; and SEC regulation of principal trades between brokers and customers under fee-based accounts.

Corporate Legal Compliance Handbook, Second Edition, Edited by Theodore L. Banks, Frederick Z. Banks. The 2013-1 supplement is now available online. In this publication, leading experts on key compliance subjects share their expertise to enable attorneys—both in-house and outside the corporation—to develop an effective compliance programs for the companies they advise. The latest update includes discussion of a wide variety of subjects: a revised chapter on using technology for compliance training and monitoring; expanded chapter on environmental compliance; revised chapter on e-compliance for the Internet era; updated chapter on communications and crisis management; new developments in the chapter on using hotlines to report wrongdoing; and new discussions in the chapter on the use of the “dramatization” in compliance training.

The Regulation of Corporate Disclosure, Third Edition, by J. Robert Brown, Jr. The latest release, 2013-1 Supplement, is available online. This complete and up-to-date handbook on the issue of corporate disclosure covers the impact of the federal securities laws on both informal communications and the process of communicating with shareholders. The 2013-1 Supplement includes case law updates in Chapter 1, relating to aspects of pleading requirements and scienter and secondary liability; further updates to Chapter 2 on the regulatory environment for corporate disclosures, including analysis of recent cases relating to reliance and third parties, fraud on the market, and loss causation; refines the Chapter 2B discussion of the use of disclosure by the SEC in the area of corporate governance, including disclosures relating to independence of board members, and the recent SEC rules on required disclosures relating to conflict minerals and resource extraction issues; adds a new subsection on disclosures required by the Iran Threat Reduction and Syria Human Rights Act; updates the discussion relating to duty to disclose in Chapter 3, includes a new subsection on SRO disclosure obligations and the antifraud provisions; updates the case law on “puffery” and the discussion of materiality; updates the discussion on disclosures/communications while a company is “in registration,” addressing the “blackout period” and safe harbors and the JOBS Act § 105; and enhancements to the discussion of “primary liability” of officers and directors, including analysis of Janus Capital Group, Inc. v. First Derivative Traders.

Derivatives Regulation, by Philip McBride Johnson, and Thomas Lee Hazen. The 2013 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 2013 Cumulative Supplement includes: additional updates relating to the massive reforms introduced by Dodd-Frank Wall Street Reform and Consumer Protection Act; developments with respect to security futures, evaluation of the security futures market, and impact of the Commodity Futures Modernization Act; Congressional revocation of many exclusions and exemptions created in the Commodity Futures Modernization Act of 2000 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; hedging “event” risk; new section on the regulation of swap transactions, swap dealers, and major swap participants; two new sections outlining CFTC rulemaking regarding swap dealers, major swap participants, and eligible contract participants and SEC rulemaking regarding security-based swap dealers, major security-based swap participants, and eligible contract participants; new section on retail foreign currency exchange dealers; in light of the reorganization of the CFTC Division of Clearing and Intermediary Oversight pursuant to the Dodd-Frank Act, two new subsections addressing the establishment of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight; antifraud developments; developments relating to SEC jurisdiction, rulemaking procedures, enforcement, and investigations, as well as discussion and analysis of manipulative sales practices in securities; and inclusion of a chart, created by the Futures Industry Association, summarizing CFTC final and proposed rules for 2011-2012 (as of Sept.19, 2012) (see Appendix A).


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:




#160 - IPO Counsel (IPO Issuer's Representations plus IPO Underwriters' Mandates) 
Review 2012 IPO law firms by...

  • IPO Law Firm 
  • Combined IPOs
    • Count 
    • Percentage of Total 
  • Combined IPO Offering Amount 
    • Aggregate 
    • Percentage of Total 
  • Issuer's Law Firm 
    • Number of IPOs
    • Aggregate IPO Offering Amount
  • Underwriters’ Law Firm
    • Number of IPOs
    • Aggregate IPO Offering Amount


Tip! Click on blue numbers to drill down for more information. Click Column headings to re-sort the table’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

  • IA-3522—Temporary Rule Regarding Principal Trades With Certain Advisory Clients (December 20, 2012).

The SEC amended Investment Advisers Act Rule 206(3)-3T(d) to extend the rule’s sunset date from December 31, 2012 to December 31, 2014.

  • 34-68357—Extension of Dates for Certain Requirements of Rule 19b-4(n)(1) and Rule 19b-4(o)(2) and Amendment of Form 19b-4 (December 5, 2012).

The SEC extended the dates on which designated clearing agencies supervised by the SEC file advance notices and clearing agencies file security-based swap submissions electronically to the SEC’s dedicated email addresses from December 10, 2012 to December 10, 2013. The change will ensure that the filing system is capable of accepting these submissions.

  • 34-68433—Order Granting Conditional Exemptions under the Securities Exchange Act of 1934 in Connection with Portfolio Margining of Swaps and Security-Based Swaps (December 14, 2012).

The SEC’s order provides that, subject to conditions, a clearing agency dually registered under Exchange Act Section 17A and as a derivatives clearing organization under CEA Section 5b is exempt from Exchange Act Sections 3E(b), (d), and (e), and applicable rules only for purposes of acting as a clearing agency for CDS under a program to commingle and portfolio margin cleared CDS for customer positions. A BD/FCM is similarly exempt from these provisions and from Exchange Act Section 15(c)(3) and Rules 8c-1, 15c2-1, and 15c3-3 regarding the requirement to treat an affiliate as a customer for purposes of a program to commingle and portfolio margin customer positions in CDS under CEA Section 4d(f) and related rules.

  • 34-68419—Order Granting Exemptions from Certain Rules of Regulation SHO Related to Hurricane Sandy (December 12, 2012).

The SEC’s order temporarily exempts broker-dealers from the locate requirement and short sale price test of Regulation SHO regarding short sale orders in vault securities. The order also exempts participants of registered clearing agencies from the close-out and penalty box requirements of Regulation SHO for fail to deliver positions resulting from the sale of vault securities. The exemptive order expires February 1, 2013.

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.

Looking ahead to 2013, the SEC’s rulemaking to-do list is quite long. The SEC, Treasury, and FSOC seek to craft potential money market mutual fund reforms. The SEC, CFTC, and the banking regulators must finalize the Volcker rule. Many other Dodd-Frank rulemakings also must still be finalized. Moreover, the SEC has yet to finalize the proposed removal of the ban on general solicitation under JOBS Act Title II. The Commission also is due to propose crowdfunding rules under JOBS Act Title III. Reliance on the crowdfunding exemption is illegal pending final SEC rules.

These and other matters will occupy the time of new SEC Chairman Elisse B. Walter and the other commissioners in 2013. The question now is what impact personnel changes atop the SEC and the departure of key SEC divisional staff will have on rulemakings that are in-progress or yet to be started. Until a fifth commissioner is confirmed to fill the SEC’s open seat, any SEC action must overcome a potential tie vote. As of publication, the now four-member Commission had unanimously approved draft final rules to require broker-dealers to search for lost holders of securities pending review by the Office of Management and Budget (OMB) under the Small Business Regulatory Enforcement Fairness Act. The SEC will issue the final version of the rule release after OMB review. RBsource will include any changes once the SEC has published the final rule release.

Additionally, securities professionals should watch the 113th Congress. A bi-partisan Dodd-Frank corrections bill is possible in light of over two-year’s experience implementing the Act. Bills already passed by the House in the 112th Congress may drive this effort if they are reintroduced in the 113th Congress. These bills would clarify the municipal adviser registration requirements, exempt inter-affiliate swaps from some Title VII requirements, and clarify the derivatives end-user exemption. Congress may require independent federal agencies, such as the SEC, to engage in further cost-benefit analysis of significant proposed and final rules subject to review by the Office of Information and Regulatory Affairs. The 113th Congress also may reintroduce a bill to merge the SEC and CFTC.


Hot Topic of the Month

This month's hot topic is recent developments concerning the whistleblower provisions of the securities laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") repealed a former Exchange Act provision authorizing monetary rewards for information leading to the recovery of civil penalties for insider trading violations, and created a broader program for making monetary awards to whistleblowers. Under new Section 21F, the Commission may use funds collected as sanctions in judicial or administrative proceedings to pay rewards for original information about a violation that leads to a successful enforcement action.

The Commission adopted final rules implementing the program that became effective in August 2011. The rules define a "whistleblower" as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing or is about to occur. Original information must be based upon the whistleblower's independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources. Under these rules, whistleblowers also receive greater protections from retaliation. A whistleblower who provides information to the Commission is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur.

In its annual report on the Dodd-Frank Whistleblower Program for the Fiscal Year 2012, the Commission revealed that the Office of the Whistleblower received 3001 tips during the 2012 fiscal year and paid one whistleblower approximately $45,000. Approximately half of the tips received by the Office related to corporate disclosures, offering fraud, or manipulation. The SEC made its first award under the whistleblower program in August 2012. The whistleblower received the maximum payout — 30% of the amount collected in the enforcement action — which amounted to approximately $45,000 during the fiscal year. During the fiscal year the office posted 143 notices of covered action involving sanctions exceeding the statutory threshold of $1 million, and it continues to review and process applications for awards.

The District Court for the Northern District of Illinois recently held that Section 806 does not protect employees of privately held subsidiaries prior to the enactment of Dodd-Frank. Under the plain language of the pre-Dodd-Frank version of Section 806, the court wrote, only employees of publicly traded companies are protected individuals, and federal courts have consistently reached this interpretation. Congress extended SOX’s regulations to privately held subsidiaries in some parts of the act, but not in Section 806.

Further, the court rejected the plaintiff’s argument that the Dodd-Frank Act’s provisions amending SOX applied retroactively to save his retaliation claim. The court concluded that Dodd-Frank Section 929A alters, rather than clarifies, SOX Section 806 and thus does not apply retroactively. Prior to Dodd-Frank, the language of Section 806 was seen as unambiguously applying only to employees of publicly traded companies, and the conclusion that Dodd-Frank is not inconsistent with Section 806 cannot be reached without disregarding Section 806’s plain language, the court wrote.

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, Insights – Amy L. Goodman, etc.). For example:

  • Federal Securities Law Reporter
    • Exchange Act Section 21F at ¶26,423ZA
    • Dodd-Frank Act Section 929A at ¶58,176
    • Sarbanes-Oxley Act Section 806 at ¶62,907
    • Mart v. Gozdecki, Del Giudice, Americus & Farkas LLP (ND Ill) is reported at ¶97,201
    • CCH Explanations (e.g., ¶62,991.093)
    • Report letters (e.g., 11-28-12, "Whistleblower Officer Received 3,000 Tips, Paid Out $45,000 on One Tip")
  • Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis (e.g. ¶4060)
  • SEC Today (e.g., "Panelists Discuss Regulators' Concerns and Defense Strategies at ALA-ABA Conference" (9-20-12)
  • Jim Hamilton’s World of Securities Regulation (e.g. 7-24-12, (discussing SDNY case in which court concluded that Section 929A applied retroactively))