July 2007


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 Votes to Amend Short Sale Rules, Regulation M
The SEC voted to adopt amendments to the Commission’s short sale rules that will eliminate a grandfather provision on fails to deliver and remove the tick test of Rule 10a-1. The Commission also voted to repropose amendments that would eliminate or modify the options market maker exception to the short sale rules. In a separate meeting, the Commission voted to adopt amendments that would strengthen Rule 105 of Regulation M. Rule 105 is intended to help prevent abusive short selling and market manipulation. The releases will be published in a forthcoming Report.

SEC Requests Additional Comment on Auditing Standard No. 5
The SEC has requested comments on specific issues involving Auditing Standard No. 5, which the PCAOB recently adopted as part of a coordinated effort between the SEC and PCAOB to reform the internal control reporting mandates of Section 404 of Sarbanes-Oxley. Issues on which the Commission is seeking further comments include the use of the work of others, whether the new standard will reduce audit costs, and if the standard of materiality provides sufficient guidance for auditors. Release No. 34-55912 at ¶87,914.

Electronic Proxy Access Rules Adopted
The SEC voted to adopt amendments to require companies to post their proxy materials on the internet following the “notice and access” model that was first adopted as a voluntary measure. Issuers and other soliciting persons must post their materials on an Internet Web site and send a notice to shareholders advising them of the availability of the materials. The release will be published in a forthcoming Report.

Supreme Court Endorses Strict Pleading Standard for Private Securities Fraud Actions
The Supreme Court held that the requirement that investors in a private securities fraud action state facts that the defendants acted with a strong inference of scienter means that the fraud claim will survive only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged. The court’s ruling clarified a provision of the Private Securities Litigation Reform Act providing that plaintiffs must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. The court held that such allegations must also be considered collectively. Tellabs, Inc. v. Makor Issues & Rights, Ltd. (US Sup Ct) at ¶94,335.

Supreme Court Rules on Antitrust Preemption
Antitrust class actions against investment banks that acted as underwriters in initial public offerings were precluded by the federal securities laws, the Supreme Court ruled. The court found that the antitrust suits threatened serious harm to the efficient functioning of the securities markets. The court concluded that the securities laws are clearly incompatible with the application of the antitrust laws in this context because IPOs are an area of conduct squarely within the “heartland” of securities regulations. Credit Suisse Securities (USA) LLC v. Billing (US Sup Ct) at ¶94,334 (ip access user).

Loss Causation Showing Needed for Reliance Presumption
The U.S. Circuit Court of Appeals for the 5th Circuit vacated a class certification that was based on a presumption of reliance under the fraud on the market theory. The appellants successfully argued that the investors did not prove loss causation between its allegedly false statements and the loss to the investors from a lower stock price. The court rejected the district court’s conclusion that the class certification stage was not the proper time for the defendants to rebut the lead plaintiffs’ fraud on the market presumption. Oscar Private Equity Investments v. Allegiance Telecom, Inc. (5th Cir) at ¶94,317.

Tippee Guilty on Substantive Offenses
The U.S. Circuit Court of Appeals for the 7th Circuit upheld the fraud conviction of a defendant who was acquitted of conspiracy to commit the underlying crimes. The lower court found that both the tippee and tipper were not guilty of conspiracy, but also found the tippee guilty of the underlying charges of securities fraud and insider trading. The tippee argued that because the jury failed to find a conspiracy between himself and the tipper, he could not be guilty as a tippee. The appellate court affirmed the district court’s judgment that the conspiracy acquittals did not necessarily decide issues that precluded convictions on the substantive charges because the jury could have found that the government failed to prove an agreement, while still finding that the circumstances met all required elements necessary to prove that the securities laws were broken. U.S. v. Evans (7th Cir) at ¶94,325 (ip access user).

CCH Blue Sky Law Reporter

Oklahoma Amends Investment Adviser Custody and Recordkeeping Requirements and Administrative Hearing Rules
Investment adviser custody and recordkeeping requirements were amended, effective July, 1, 2007. The custody requirements follow the NASAA Model Rule, and the recordkeeping requirements are expanded to define an "advisory representative," and provide the recordkeeping requirements for investment advisers whose investment advice is not given as part of their primary business and for investment advisers that have custody of their clients' funds or securities. The administrative rules on hearings, pre hearings, subpoenaing witnesses, records in proceedings and final orders were also amended. ¶46,418 (ip access user), ¶46,419 (ip access user), ¶46,420 (ip access user), ¶46,421 (ip access user), ¶46,423, ¶46,424, ¶46,425 (ip access user), ¶46,484 (ip access user), ¶46,489B (ip access user).

Administrative Subpoena Violated Constitutional Privacy Protections
The Supreme Court of Washington held that an administrative search of personal banking records violated the privacy protections of the Washington Constitution. Reversing a ruling below, the state high court concluded that provisions of the Securities Act of Washington were invalid to the extent that they authorized the Division of Securities to issue administrative subpoenas to third parties for otherwise private information. The state high court concluded that the appellant’s private bank records fell within the scope of constitutionally protected privacy interests because of the sensitive personal information they potentially revealed. The subpoena was issued without authority of law because the statute lacked the protections afforded by the judicial warrant or subpoena process. State v. Miles is reported at ¶74,636 (ip access user).

Personal Promissory Note Constituted a Security
The Court of Appeals of Wisconsin held in State v. McGuire that a promissory note issued to one investor qualified as a “security” within the meaning of the Wisconsin Blue Sky Law. The issuer of the note had appealed a judgment that convicted him of securities fraud after he failed to disclose a prior felony conviction and bankruptcy to the investor, with whom he had a romantic relationship. Applying the “family resemblance test,” the appellate court concluded that the note did not closely resemble the categories of instruments that courts have held not to be securities. The appellate court reasoned that the personal relationship between the parties to the transaction did not alter the fact that the seller was motivated by raising money for his business venture, while the buyer sought to make a substantial profit. The case is reported at ¶74,637 (ip access user).

Smart Charts Added
There are now a number of smart charts in IRN on current popular topics among Blue Sky practitioners:

  • Rule 506—Provides each jurisdiction’s filing and fee requirements for making a Rule 506 offering in that jurisdiction. This is currently the most popular Blue Sky transaction.
  • Rule 701—Provides each jurisdiction’s compensatory benefit plan exemption under SEC Rule 701.
  • Limited private offering exemption—Provides each jurisdiction’s limited offering (de minimis) exemption requirements.
  • Finders—Sets forth the provisions on finders or introducing broker-dealers and/or investment advisers for those jurisdiction’s that have them.

Topical Index Revised
The Topical Index to Blue Sky Laws and Regulations is completely revised and contains entries and links to full text for each topic in the Blue Sky Law Reporter. Each topic entry can be accessed either under the state or topic name.

WK Forms Available
Each Blue Sky state-specific and uniform federal form can be filled out and printed from the WK Forms product on the PP3 platform. The forms product is available as an add-on product for an additional fee.

Aspen Federal Securities Publications

Financial Reporting Handbook, by Michael Young
The latest release, Release 15, published in June and is now live on the IRN 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.

Investment Management Law and Regulation, Second Edition, by Harvey E. Bines and Steve Thel
The 2007 Cumulative Supplement is now live on the IRN Investment Management Library. The update includes discussion of the continuing controversy over the SEC’s efforts to require independent board chairs for mutual funds; the judicial rejection of the requirement that hedge fund managers register as investment advisers as well as the SEC’s response; legislative and administrative developments concerning the regulation of banks as brokers; and ERISA reforms enacted in the Pension Protection Act of 2006, including greater leeway for the investment of plan assets in pooled accounts including hedge funds, safe harbors for the provision of investment advice to 401(k) plan participants, and provisions permitting participants in defined benefit plans to dispose of employer securities.

Meetings of Stockholders by Jesse A. Finkelstein, R. Franklin Balotti, and Gregory P. Williams
The 2007 Supplement will publish and be live on the IRN Corporate Governance Library in early July. Over the years, the SEC has increasingly used proxy rules as a mechanism for implementing policies and adjusting the rights of shareholders and management. This notion was especially true in 2006 and early 2007 with the Commission’s adoption of amendments to the disclosure rules for executive and director compensation and new rules establishing a voluntary “notice and access” model allowing companies to furnish proxy materials to shareholders using the Internet. These and other relevant developments are discussed in the appropriate chapters and sections of this publication.

Hot Topic of the Month

This month’s hot topic is internal controls. The term refers generally to processes designed to give reasonable assurance that a company’s financial reporting is reliable. Sarbanes-Oxley Section 404 requires that management assess the effectiveness of the company’s internal control over financial reporting, and that an independent auditor report on and attest to management’s assessment. In 2004, the Public Company Accounting Oversight Board (PCAOB) issued Auditing Standard No. 2, which prescribed at great length the auditor’s reporting and attestation responsibilities.

In response to industry push-back due to the high cost of AS 2 compliance, the PCAOB recently issued AS 5, which replaces the old standard with a streamlined, principles-based approach. Concurrently, the SEC issued principles-based guidance for management designed to reduce compliance costs further, e.g., by raising the threshold for what constitutes a material weakness. The Commission, which oversees the PCAOB, has not yet approved AS 5 and last week opened the standard up for public comment — raising the possibility of further changes — even though the PCAOB has urged companies to begin following AS 5 immediately.

We publish internal controls information in a wide range of resources (e.g., FSLR, PCAOB Reporter, Insights, SEC Today, Securities Regulation - Loss & Seligman, etc.), and document types (laws, regulations, releases, guidance, speeches, newsletter articles, treatise discussion). For example:

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 plus IPO Underwriters’ Representations)

Review First Half 2007 IPO law firms by...

· IPO Law Firm

· Combined IPOs (Count, Percentage)

· Combined IPO Offering Amount (Aggregate, Percentage)

· Issuer's Law Firm (IPOs, Aggr. Offer Amt.)

· Underwriters’ Law Firm (IPOs, Aggr. Offer Amt.)

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. Click a blue number to drill down and see more details. In the Drill Down you can also re-sort data by clicking on column headings.