July 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.

To view past issues of the Securities Update, please visit http://business.cch.com/updates/securities

If you have questions or comments concerning the information provided below, please contact me at rodney.tonkovic@wolterskluwer.com.

 

CCH Federal Securities Law Reporter

Interactive Data Tags for Fund Risk-Return Summaries Proposed
The SEC proposed amendments that would require mutual funds to file their risk-return summary information in interactive data format starting with their initial registration statements and any post-effective amendments that change the summary information. The information would also have to be posted on the funds’ websites if they maintain one. The information would supplement rather than replace the current electronic filing formats. Release No. 33-8929 at ¶88,221 (ip access user).

Legal Bulletin Clarifies Registration Exemption for Reorganizations
In the first staff legal bulletin in almost three years, the SEC staff has clarified the registration exemption for securities issued in reorganizations. The exemption, found in Section 3(a)(10) of the Securities Act, is available when the securities are issued in exchange for other securities, not for cash, and the fairness of the exchange is approved by a court or governmental entity. The fairness hearing must be open to everyone to whom securities would be issued in the proposed exchange. Staff Legal Bulletin No. 3A will be published in and upcoming Report at ¶60,003.

Revisions to EDGAR Filer Manual Adopted
The SEC adopted revisions to the Electronic Data Gathering, Analysis, and Retriever System Filer Manual to reflect updates to the EDGAR system. The revisions were made to address the removal of rescinded EDGAR submission types, the addition of XBRL Standard Taxonomies, and the inclusion of new Links for USGAAP XBRL Taxonomies. The Commission also amended Rule 301 of Regulation S-T to provide for incorporation by reference of the revisions into the Code of Federal Regulations. Release No. 33-8926 is reported at ¶88,219 (ip access user).

SEC Seeks Comment on New Credit Rating Agency Rules
The SEC proposed new rules for credit rating agencies which, if adopted, would further regulate conflicts of interest and enhance disclosure. The proposed rules would prohibit a credit rating agency from issuing a rating on a structured product unless information on the underlying assets is available. The agencies would not be permitted to structure the same products they rate. Credit rating agencies would be required to make all of their ratings and subsequent rating actions publicly available so that their performance could be compared with the other credit rating agencies. The rules would prohibit the receipt of gifts from those who receive ratings to those who rate them in excess of $25. Credit rating agencies would be required to publish performance statistics for one, three and ten years by category to facilitate comparisons among competitors. Release No. 34-57967 will be published in an upcoming Report.

Advisory Fees For Market, Not Judges, To Decide
A panel of the Seventh Circuit Court of Appeals affirmed a judgment in an action brought by shareholders in mutual funds. The shareholders claimed that the investment adviser's fees were excessive in violation of the Investment Company Act. The district court (ND Ill) disagreed and granted summary judgment in favor of the adviser.

The precedent followed by the district court relied on market prices as the benchmark for reasonable fees. The circuit court rejected this approach, noting that Investment Company Act Section 36(b) "does not say that fees must be "reasonable" in relation to a judicially created standard. It says instead that the adviser has a fiduciary duty." The court analogized advisory fees to compensation in business corporations or rates charged by lawyers. Competition, stated the court, determines the fee, and while competitive processes are not perfect, they "remain superior to a "just price" system administered by the judiciary." The existence of a fiduciary duty, continued the court, does not call for judicial price setting. Because there was no breach of fiduciary duty, the court affirmed the district court's judgment. Jones v. Harris Associates, L.P. (7thCir) is reported at ¶94,749 (ip access user).

Interests in Film Companies Were Securities
A panel of the Second Circuit Court of Appeals remanded for resentencing a securities fraud action brought against the marketers of investment interests in film companies. The appellants had been convicted of securities fraud and conspiracy to commit securities and mail fraud for their role in the alleged scheme. The companies selling the interests were structured as limited liability companies selling "investment units," and the government's charges in the case centered around the failure to disclose accurately the sales commission that the appellants would be taking on the investment units.

The question before the court on appeal was whether the investment units were "investment contracts" that constituted securities under the federal securities laws. According to the court, while the company's organization documents were structured in a way that provided too much investor control to allow the jury to conclude that the units were securities, in practice, the investors played an extremely passive role in the management and operation of the companies. The court noted that "the vast majority of investors in both companies did not actively participate in the venture, exercising almost no control." The court concluded that the jury could have determined that the companies sought passive investors, "and therefore the interests that they marketed constituted securities." The court accordingly affirmed the convictions. The court also affirmed the district court's inclusion of a "no ultimate harm" chargze in the jury instructions, finding that any error in the jury instructions was harmless. Finally, the court reviewed the district court's loss calculations made while sentencing and concluded that the district court erred in measuring the loss amount as the entire cost of the total shares sold. According to the court, the securities obtained by the investors had some value, so the district court erred in not deducting from the purchase price the actual value of the instruments. Accordingly, the court vacated the sentences and remanded for resentencing. U.S. v. Leonard (2ndCir) is reported at ¶94,746 (ip access user).

5th Circuit: No Section 13(d) Money Damages Remedy for Issuers
A 5th Circuit panel followed the lead of earlier decisions from the 2nd and 11th Circuits and found that no private cause of action for money damages existed for violations of Exchange Act Section 13(d). The case arose from a failed attempt by Highland Capital Management, an investment fund, and its affiliates, to take over Motient Corp., an Illinois-based wireless communications company. The litigation in federal court on the 13(d) violations was one of several actions involving Motient and James Dondero, the principal of the investment fund group and a Motient director. As alleged, the investment group filed Schedule 13D amendments "containing false, incomplete, and misleading information about the company, its management, and its board." Motient sought a declaratory judgment, an order that the investment group immediately amend the Schedule 13D amendments, injunctive relief preventing the buyers from taking further actions to purchase or sell Motient securities or solicit shareholder votes, and compensatory damages.

The appellate panel agreed with the district court's finding that the claims for money damages were not actionable. The court observed that "[t]he Williams Act was enacted to protect shareholders who are forced to make decisions between bidders and management. Since any material misstatement or omission to an investor who purchases or sells the security and actually relies on that information gives rise to a private cause of action under Section 18(a) of the Exchange Act." This section, concluded the court, "provides the sole basis for a private right of action for damages resulting from a violation of Section 13(d)" and "Motient provides no compelling reason for recognizing a private right of action in favor of issuers for money damages." The court also concluded that the requests for equitable relief were moot because the proxy fight was over and the investment fund had sold its Motient securities. "We decline to issue an advisory opinion forbidding Highland from soliciting shareholder votes for a tender offer or engaging in a contest for control, on the assumption that such activity might take place in the future," concluded the court. Motient Corp. v. Dondero (5thCir) is reported at ¶94,737 (ip access user).

CCH Blue Sky Law Reporter

Nebraska Issues Policy on Agent/IA Rep
Certifications on Business Cards, Stationery and Advertisements. Certifications or designations of a broker-dealer agent's or investment adviser representative's qualifications on his or her business cards, stationery or advertising materials are prohibited unless the certifications or designations are from a prescribed list of designations or certifications approved by the Nebraska Department of Banking and Finance. The list of approved designations include the Certified Financial Planner (CFP) and Personal Financial Specialist (PFS) substitutions for the exam requirements, as well as a number of other specified certifications and designations the Department will review on a quarterly basis for their continued approval ¶37,484 (ip access user).

New Jersey Proposes BD, Agent, IA and IA Rep
Changes. Changes clarifying application and post-registration requirements, increasing fees and adding dishonest, unethical practice provisions for broker-dealers, agents, issuer-agents, investment advisers and investment adviser representatives were proposed by the New Jersey Bureau of Securities. Other amendments would clarify the investment company renewal notice requirement, update statutory references in certain exemption rules, provide the correct web sites for obtaining particular forms online, modify nomenclature and delete outdated phrases. Public comments on the rule proposals were to be received by June 20, 2008. ¶40,401 (ip access user), ¶40,401A (ip access user), ¶40,402 (ip access user), ¶40,404 (ip access user), ¶40,407 (ip access user), ¶40,408 (ip access user), ¶40,410 (ip access user), ¶40,421 (ip access user), ¶40,423 (ip access user), ¶40,424 (ip access user), ¶40,425 (ip access user), ¶40,426 (ip access user), ¶40,430 (ip access user), ¶40,430A (ip access user), ¶40,431 (ip access user), ¶40,432 (ip access user), ¶40,437 (ip access user), ¶40,438 (ip access user), ¶40,442 (ip access user), ¶40,445 (ip access user), ¶40,452 (ip access user), ¶40,453 (ip access user), ¶40,461 (ip access user), ¶40,462 (ip access user), ¶40,463 (ip access user), ¶40,471 (ip access user), ¶40,475 (ip access user), ¶40,477 (ip access user), ¶40,479 (ip access user), ¶40,520B (ip access user), ¶40,520G (ip access user), ¶40,520H (ip access user), ¶40,522 (ip access user), ¶40,525 (ip access user), ¶40,551 (ip access user).

Washington Proposes to Adopt NASAA Model Custody Rule for Investment Advisers
Model Rule 102(e)(1)-1 of the North American Securities Administrators Association (NASAA) for investment advisers taking custody of their clients' funds or securities was proposed for Washington by the Department of Financial Institutions. ¶61,620 (ip access user), ¶61,626 (ip access user), ¶61,626A (ip access user), ¶61,626B (ip access user), ¶61,626C (ip access user), ¶61,626D (ip access user), ¶61,629 (ip access user).

Statute of Repose Violated the Ohio Constitution
In Metz v. Unizan Bank, a federal district court (N.D. Ohio) ruled that the five-year statute of repose contained in the Ohio Blue Sky Law violated the right-to-remedy clause of the Ohio Constitution. The court concluded that the provision was unenforceable because it would have barred the prosecution of claims arising from a sale of securities that occurred prior to the expiration of the limitations period, even though the plaintiffs were unaware of their injury until after the period had expired. As the two-year statute of limitations remained in effect under the severability clause of the Ohio Revised Code, however, a question of fact existed as to when the plaintiffs knew or had reason to know that the defendants had engaged in the alleged wrongful acts. Accordingly, the court denied in part the defendants' motion to dismiss. The decision will be published in an upcoming Report.

Aspen Federal Securities Publications

Raising Capital: Private Placement Forms & Techniques, Third Edition, by J. Robert Brown, Jr., The Late Herbert B. Max
The 2008 Supplement (ip user access) is live on the IRN Securities Integrated Library. This unique resource provides practice tested forms and up-to-date expert guidance for successfully launching private placement investment transactions. The authors illustrate a variety of proven techniques for raising capital and explain ways to accommodate the investor’s demands for protection while maintaining the flexibility necessary for efficient operation and growth in today’s business and regulatory environment. This latest update contains a revised chapter on participation and intercreditor agreements, including agreements such as a Collateral Participation Agreement, Participation Agreement (One Participant), Participation Agreement: Leased Property, Non-Recourse Loan Participation Agreement, Intercreditor and Subordination Agreement (Lenders and Borrower), Intercreditor Agreement (Among Lenders), and numerous additional sample clauses; a revised and expanded chapter on exemptions from registration under the federal securities laws: Regulation D, to address recent developments, including 23 relevant forms, questionnaires, certificates, agreements, legends, representations and warranties, and sample contract clauses; and an updated chapter on resales to reflect recent relevant developments, including the December 2007 amendments that relaxed restrictions under Rule 144, providing 35 forms and clauses including relevant legends, representation letters, covenants, bylaws, sample contract clauses and provisions, and certificates.

Financial Reporting Handbook, by Michael Young
The latest release, Release 19 (ip access user), published in June and is live on the 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.

Securitization of Financial Assets, Edited by Jason H. P. Kravitt
The 2008 Supplement (ip access user) is live on the IRN Commodities and Derivates Integrated Library. This work provides a series of portals through which the authors enable the user to enter any particular issue, acquaint the user with its general terms, and provide the user with the intellectual foundation and appropriate sources with which to pursue the issue, or related issues, on his or her own. Part One consists of a series of issue-spotting and structuring chapters designed to enable the user to enter the substantive law chapters in Part Two, fully oriented to the broad significance of any particular legal or accounting issue or groups of legal issues, as well as the relation of this issue or issues to other issues and to particular structures. Part Two contains more detailed discussions of substantive law issues. The most recent update contains complete chapter revisions on a variety of subject areas including the Uniform Commercial Code; tax issues; securities laws; bank and savings and loan association regulatory considerations; certain corporate law aspects of establishing a bankruptcy remote special purpose vehicle; contracts; and accounting issues.

Investment Adviser’s Legal and Compliance Guide, by Terrance J. O’Malley
The 2008 Supplement will soon be live on the IRN Investment Management Integrated Library. This title reflects the most current discussion of legal and compliance topics for investment advisers, including fundamental issues arising under the Adviser Act, and incorporates the latest SEC guidance provided in rule releases, policy statements, no-action letters, and SEC staff speeches. This update includes information about the potential impact of the SEC’s proposal to adopt changes to Form ADV Part II; updated information under the custody rule for advisers who inadvertently receive client funds or securities; new discussion concerning the SEC’s recently adopted Rule 206(3)-3T that provides a limited exemption to the principal transaction notice and consent requirements for advisers that are dually registered as broker-dealers; expanded and in-depth information about securities valuations; updated information about insider trading; new information about the SEC’s anti-fraud rule for fund managers; and new discussion about the SEC examination process, including how the SEC targets advisers for examination and conducts its reviews.

Hot Topic of the Month

This month's hot topic is beneficial ownership disclosure. A person is a beneficial owner of a security if the person has the power to vote the security or to direct the voting of the security or investment power, which includes the power to dispose of the security or to direct its disposition through any contract, arrangement, understanding, or relationship.

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

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

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, Insights – Amy L. Goodman, Securities Regulation – Loss, Seligman & Paredes, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

Federal Securities Law Reporter

Insights – Amy L. Goodman (e.g., “When an Acquisition "Plan or Proposal" Requires a Schedule 13D Amendment” (August 2005) (ip access user)

SEC Today

Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 6.D.2 (ip access user))

Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com)

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:

#1001 IPO Offerings

Evaluate IPO professional firms (“IPO Team Members”) by IPO activity for 2008.
Review IPO Team Members by fourteen characteristics

  • Offer Date
  • SIC Code
  • Ticker Symbol
  • Exchange
  • Offer Price
  • Number of Shares
  • Gross Spread
  • Offer Amount
  • Market Capitalization
  • Revenue
  • Net Income
  • Net Worth
  • Days in Registration
  • Estimated Out-of-Pocket Expenses

Tip! Scroll left to right, and re-sort the table of data by clicking a column heading.
Re-arrange a "professional" column in alphabetical order and scroll to see a particular firm’s activity.