June 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

PCAOB Adopts New Standard on Internal Controls
The Public Company Accounting Oversight Board adopted Auditing Standard No. 5 to replace current Auditing Standard No. 2 in governing the audits of internal control over financial reporting. The key changes from the proposed standard include the alignment of terms with the SEC's guidance for management in preparing reports on internal control and the relocation of the section on the detection of fraud to the front of the standard. The standard is effective for audits performed during fiscal years ending on or after November 15, 2007, but auditors may comply with the new standard once it is approved by the SEC. PCAOB Chairman Mark Olson also announced that the board will adjust its inspection program to ensure that it is consistent with the new standard. Auditing Standard No. 5, Release No. 2007-005 (PCAOB) is reported at ¶87,903 (ip access user).

SEC Adopts Guidance for Management On Internal Controls
SEC Chairman Christopher Cox advised at the SEC's recent open meeting that there will be no additional postponement of the requirement for smaller public companies to comply with the Section 404 internal control requirement since the guidance for management has been adopted in time to affect the 2007 fiscal year financial statements. Smaller companies still have an additional year before they must comply so will be able to "watch and learn." In addition to adopting the interpretive guidance, the commissioners voted to adopt rule amendments to ensure that companies which perform their internal control evaluations in accordance with the guidance will satisfy the annual evaluation required by Exchange Act Rules 13a-15 and 15d-15. The SEC also amended its rules to define a "material weakness" and will seek comments on a definition of a significant deficiency. The SEC also amended Regulation S-X to require a single opinion on the effectiveness of internal control over financial reporting by the auditor in its attestation report. The SEC also adopted final rules for the oversight of credit rating agencies that are nationally recognized statistical rating organizations, and proposed a number of rules to modernize and improve the disclosure requirements and capital raising efforts of smaller public companies. The proposals responded to a number of recommendations submitted to the SEC by the Advisory Committee on Smaller Public Companies in its final report. The releases and SEC guidance will be published in a forthcoming Report.

SRO Sanctions Against Trader Upheld
An SEC order upholding SRO sanctions against an options trader was affirmed. According to a federal appeals panel (7thCir), the Commission did not abuse its discretion in approving the SRO sanctions. This opinion was issued as "nonprecedential." Ho v. SEC (7thCir) is reported at ¶94,308 (ip access user).

6th Circuit: Suitability Claims Properly Dismissed
A panel of the 6th U.S. Circuit Court of Appeals found that fraud claims based on broker recommendations of unsuitable securities were properly dismissed. As alleged, the brokerage firm and its representatives recommended and sold a particular class of mutual fund shares to individuals and entities investing $50,000 or more in the funds even though the defendant knew that these investors would pay more fees and earn less profit than if they had chosen another class of shares. The appellate court found that the complaint failed to show the firm "was encouraging its brokers to recommend Class B shares to investors regardless of their investment objectives" and that the complaint showed at most a motive and opportunity to commit securities fraud. The Robert N. Clemens Trust v. Morgan Stanley DW, Inc. is reported at ¶94,304 (ip access user).

CCH Blue Sky Law Reporter

ARIZONA Amends MJDS Rule
A Multijurisdictional Disclosure System offering declared effective with the SEC on Form F-7, F-8, F-9 or F-10 is an exempt security in Arizona if before an offer is made in the state a specified prospectus or offering circular is filed with the Arizona Corporation Commission and a $100 fee is paid. Effective 7-1-2007. ¶9541 (ip access user).

FLORIDA Amends Dealer, Investment Adviser, Federal Covered Adviser and Associated Person Registration/Notice Filing Procedures, Redefines “Branch Office,” and Sets Forth Canadian Dealer Application Requirements
Dealer, investment adviser, federal covered adviser and associated person registration/notice filing requirements were amended by the Florida Office of Financial Regulation. A new branch office definition was created along with amended registration requirements; Canadian dealer application requirements were set forth; the percentage of beneficial interest or ownership certain trusts and corporations must have to be excluded from the count of purchasers for the limited offering exemption was relaxed; and GAAP standards mean United States generally accepted accounting principles. Effective 5-15-2007. ¶17,411 (ip access user), ¶17,422 (ip access user), ¶17,426 (ip access user), ¶17,431 (ip access user), ¶17,433 (ip access user), ¶17,444 (ip access user), ¶17,451 (ip access user), ¶17,451A (ip access user), ¶17,452 (ip access user), ¶17,454 (ip access user), ¶17,456 (ip access user), ¶17,459 (ip access user), ¶17,459A (ip access user), ¶17,459B (ip access user), ¶17,459C (ip access user), ¶17,464 (ip access user), ¶17,475 (ip access user).

HAWAII Extends Reduction of Certain Fees
In Hawaii until November 1, 2007 the following fees remain reduced to $100, from $200: Dealer initial and renewal application filings; Investment company securities initial filing remain reduced to $50, from $100; Investment adviser initial and renewal application filings. The following fees remain reduced to $25, from $50; Salesperson initial and renewal application filings investment adviser representative initial and renewal application filings; Investment company securities renewal filing. The Rule 506 offering fee remains reduced at $100, from $200. The Rule 506 offering fee remains reduced at $100, from $200. The fees will automatically readjust to the statutory fees on November 1, 2007. ¶20,564 (ip access user).

INDIANA Adopts Uniform Securities Act of 2002
Indiana adopted a new Act entitled the “Indiana Uniform Securities Act” that replaces the existing Indiana Securities Act, and is effective July 1, 2008. The enacted version of House Bill 1555 can be found at http://www.indiana.gov/. Although differences occur, this new Act adopts a large part of the Uniform Securities Act of 2002 verbatim, and addresses: (1) General Provisions; (2) Exemptions from Registration of Securities; (3) Registration of Securities and Notice Filing of Federal Covered Securities; (4) Broker-Dealers, Agents, Investment Advisers, Investment Adviser Representatives and Federal Covered Investment Advisers; (5) Fraud and Liabilities; (6) Administration and Judicial Review; and (7) Transition. ¶24,129–24,135 will be published June 8, 2007.

IOWA Proposes Rule Changes to Conform with Uniform Securities Act of 2002
New rules were proposed by the Iowa Securities Bureau, along with amendments to, and repeals of, existing rules, to conform to the Uniform Securities Act of 2002 adopted in Iowa in 2005. Many of the rules would remain unchanged but be renumbered. The rule changes involve post licensing requirements and dishonest/unethical practice prohibitions for broker-dealers, agents, investment advisers, investment adviser representatives, and federal covered advisers; NASAA statements of policy; federal preemption (late fee added for Rule 506 offerings); exemptions from registration (i.e., the nonprofit organization securities exemption) and definition of terms. A public hearing on the proposals was held May 15th and public comments on the proposals were due May 16th. ¶25,401 (ip access user), ¶25,403 (ip access user), ¶25,410 (ip access user), ¶25,416 (ip access user), ¶25,438 (ip access user), ¶25,439 (ip access user), ¶25,440 (ip access user), ¶25,441 (ip access user), ¶25,442 (ip access user), ¶25,443 (ip access user), ¶25,444 (ip access user), ¶25,467 (ip access user), ¶25,482 (ip access user), ¶25,488 (ip access user), ¶25,502 (ip access user), ¶25,503 (ip access user).

KENTUCKY Clarifies Its Incorporation of NASAA Church Bond/Extension Fund Policy Statements
The North American Securities Administrators Association Statement of Policy Regarding Church Bonds applies for a one-time offering of securities by a church or other nonprofit organization. The NASAA Statement of Policy Regarding Church Extension Funds applies for a continuing offering of securities by a church or other nonprofit organization. Effective 4-6-2007. ¶27,417 (ip access user).

MASSACHUSETTS Prohibits BD Agents/IA Reps. From Using Certain Professional Designations that State Specialized Knowledge of Senior Investors' Financial Needs
Masachusetts-registered broker-dealer agents and investment adviser representatives are prohibited from using certain professional designations that state or imply specialized knowledge of the financial needs of senior investors, under rule changes adopted by the Massachusetts Securities Division. The Division has noticed a marked increase in broker-dealer agents and investment adviser representatives using financial designations such as "Certified Elder Planning Specialist" (CEPS) to target investors with pre-retirement concerns and those persons looking to supplement their fixed income. The Division has been particularly concerned about designations that falsely convey a certain expertise in matters dealing with seniors and their financial needs. The use of these "senior designations" by a broker-dealer agent or investment adviser representative is a fraudulent, unethical practice. Only those professional designations attained through prescribed training offered by a nationally recognized accredited institution are approved professional designations by order of the Massachusetts Secretary of State. The Securities Division defines a “senior” as someone 65 years of age or older. Effective 6-1-2007. ¶31,454 (ip access user), ¶31,455 (ip access user).

VIRGINIA Proposes BD and IA Recordkeeping and Unethical Practice Rule Amendments
Broker-dealer and investment adviser recordkeeping and unethical practice rules would be proposed for change by the Virginia Division of securities & Retail Franchising. A rule allowing brokerage services to be performed on financial institution premises would be modified. ¶60,404 (ip access user), ¶60,411A (ip access user), ¶60,426 (ip access user), ¶60,430A (ip access user), ¶60,458G (ip access user), ¶60,458U (ip access user), ¶60,458XX (ip access user).

Expert Testimony Admissible Regarding Investment Contracts
Affirming a decision of the trial court, the Court of Appeals of Wisconsin held in State v. LaCount that expert testimony regarding the nature of investment contracts was admissible in a criminal action for securities fraud. Even if the expert impermissibly testified as to state law or was overbroad in his definition, the appellate court stated, the defendant failed to establish how the testimony prejudiced him when the trial court properly instructed the jury on what constitutes an investment contract. State v. LaCount is reported at ¶74,626 (ip access user).

Rule 506 Offering Subject to State Anti-Fraud Authority
The Superior Court of Connecticut held that the National Securities Markets Improvement Act of 1996 (NSMIA) did not preempt the state's authority to enforce the anti-fraud provisions of the Connecticut Uniform Securities Act with respect to an offering of a federal "covered security." The court concluded that NSMIA preserved the Banking Commissioner's authority to find a statutory violation based on a general partner’s failure to disclose a personal bankruptcy in connection with the sale of limited partnership interests. The court rejected the general partner’s contention that the Commissioner lacked authority to find violations for the omission of material facts that did not require disclosure under federal law. Papic v. Burke is reported at ¶74,627 (ip access user).

Evidentiary Hearing Required for Class Certification of Fraud Claims
In Duncan v. Hopkins, the Court of Appeals of Ohio held that a motion for class certification required an evidentiary hearing where the claims of securities fraud involved oral misrepresentations. Reversing a decision of the trial court, the appellate court ruled that the pleadings were not so unequivocal as to lead to a determination that a class action was the superior method of resolving the plaintiffs' claims. As there was no written record of the representations made, there was no clear indication that they were similar enough among members of the class to satisfy the typicality and predominance requirements under the Ohio Rules of Civil Procedure. The case is reported at ¶74,628 (ip access user).

Investor Sophistication was a Factor in Deciding Reasonable Reliance
The Court of Appeals of Washington held that a finder of fact may consider an investor's sophistication as a nondispositive factor in deciding if the investor reasonably relied on representations or omissions in connection with the sale of a security. The appellants, a class of investors in a defaulted municipal bond offering, sought to hold a selling broker-dealer liable for the alleged misstatements and omissions in the official statement used to market the bonds. In affirming the judgment on the verdict in favor of the broker-dealer, the appellate court held that the trial court correctly instructed the jury that it could consider the sophistication and expertise of the investors in financial and securities matters when determining reasonable reliance under the Securities Act of Washington. Trimble v. Holmes Harbor Sewer District is reported at ¶74,629 (ip access user).

Aspen Federal Securities Publications

The Regulation of Corporate Disclosure, Third Edition, by J. Robert Brown, Jr.
The latest release, 2007-2 Supplement, published in May and is on the IRN Corporate Governance Library. 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. This latest update includes a discussion of judicial decisions relating to pleading requirements and scienter; a discussion of recent SEC requirements relating to use of plain English in making disclosures; a discussion of management’s internal control reporting requirement; an overview of the use of disclosure by the SEC in the area of corporate governance; an overview of new Item 407 of Regulation S-K; an overview of disclosure requirements concerning the resignation of directors; and a review of enforcement proceedings that address corporate governance issues.

Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance, by Steven Mark Levy
The 2007 Supplement will publish and be live on the IRN Investment Management Library in mid-June. In this update, Chapter 22, which covers conspiracy to commit money laundering, is completely revised with expanded coverage of venue, the rule of consistency, overt acts, unlawful objectives, knowledge, intent, willful blindness, the Pinkerton Rule, and double jeopardy. The 2007 Supplement also expands coverage on a variety of other topics, including assessing whether a foreign entity would be a securities broker-dealer, futures commission merchant, or mutual fund if located in the U.S. for purposes of determining whether the entity’s correspondent accounts are subject to due diligence; laundering money through international trade transactions, including invoice manipulation and trade diversion schemes; and the role of the Internal Revenue Service in collecting and storing Bank Secrecy Act data and conducting BSA compliance examinations. Forms throughout this publication are also updated.

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 late June. 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.

Investment Management Law and Regulation, Second Edition, by Harvey E. Bines and Steve Thel
The 2007 Cumulative Supplement will publish and be live on the IRN Investment Management Library in late June. 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.

Hot Topic of the Month

This month’s hot topic is stock options backdating. We do not have a publication devoted exclusively to this issue. However, we do publish options backdating information in a wide range of resources (e.g., FSLR, Insights, SEC Today, PCAOB Reporter, SEC Tracker Daily, Corporate Secretary’s Answer Book), and document types (no-action letters, releases, cases, speeches, newsletter articles, treatise discussion).

There is no SEC rule that speaks explicitly to the problem. The SEC brings enforcement actions against most violators under the general antifraud statutes (1933 Act §17 and 1934 Act §10(b)), and against attorneys and accountants under SEC Rule 102(e). In 2002, Sarbanes-Oxley accelerated Form 4 reporting of management transactions to two days, which has greatly reduced backdating opportunities. Consequently, the issue today is largely a matter of enforcing pre-Sarbanes violations.

If you target FSLR and search for “backdating and option” you will get 19 hits; the same search of the SEC Releases and Other Materials publication will yield 23 hits; in SEC Today, 62 hits; in PCAOB Reporter, 14 hits; in SEC Tracker Daily, 62 hits; in Insights, 16 hits. Below are some recent examples:

Interpretative and no-action letter guidance:

· FSLR ¶79,438 (ip access user), Interpretive Guidance on Restatements for Errors in Accounting for Stock Option Grants (January 16, 2007)

Enforcement actions

· FSLR ¶87,770 (ip access user), In re Steven J. Landmann. Exchange Act Release No. 55432. March 9, 2007 (March 9, 2007)
· FSLR ¶73,609 (ip access user), Release No. 2472, SECURITIES AND EXCHANGE COMMISSION v. Jacob (“Kobi”) Alexander, David Kreinberg, and William F. Sorin, United States District Court for the Eastern District of New York, Civil Action No. 06-CV-3844 (GJ) (E.D.N.Y. August 9, 2006). Litigation Release Nos. 19796; AAER-2472; August 9, 2006
· SEC-REL, SEC-DOCKET, In the Matter of MYRON F. OLESNYCKYJ, ESQ. Respondent. Release Nos. 34-55587 (ip access user); AAER-2593; Administrative Proceeding File No. 3-12609

Court decisions:

· FSLR ¶94,206 (ip access user), In re CNET Networks, Inc. Shareholder Derivative Litigation (April 11, 2007)

Insights – Amy L. Goodman
· March 2007, Delaware Court Issues Two Significant Stock Options Decisions
· September 2006, Options Backdating: A Practical Guide to the Controversy

SEC Today:

· SEC Today Online, Volume 2006-216, Wednesday, November 8, 2006, SEC Enforcement Director Reports on Options Backdating and Advocates Defined Process
· SEC Today Online, Volume 2006-132, Tuesday, July 11, 2006, Atkins Supports Business Judgment in Options Grants

FSLR Report Letter:

· Federal Securities Report Letter #2236 (ip access user) (July 26, 2006), SEC Files Stock Option Back-Dating Case
· Federal Securities Report Letter #2236 (ip access user) (July 26, 2006), Retirement Funds Recommend More Disclosure About Option Grants

Corporate Secretary’s Answer Book – Cynthia M. Krus
· Q 26:53 What is “backdating”?
· Q 26:57 What are some of the issues raised by backdating?
· Q 26:59 What actions have been taken by various governmental agencies regarding backdating?

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:

#282. IPO Auditors: Professional Office Rankings

Which Accounting Firm Offices Have Recently Completed IPOs?

Since Sarbanes-Oxley and other reforms, accounting for IPOs has changed. Which accounting offices have completed IPOs in the brave new world of public accounting?

Rearrange the table on a geographical basis to analyze activity by office (state/city location).*

Drill down for:

• IPO Issuers
• Offer Dates
• SIC Codes
• Issuers' Headquarters
• Offer Amount
• Revenue
• Net Income
• Estimated IPO Accounting Fees

* Tip! For a geographic view 1) click the Office Location (State/City) column heading to arrange by location in alphabetical order, and 2) scroll down to locate cities near you.

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.