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March 2014


From the editors of Federal Securities Law Reporter, 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 sample of RBSource, an 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.

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Financial Reform Resources



Federal Securities Law Reporter

SEC raises fee rate paid by exchanges. The fee rate that the SEC charges national securities exchanges and national securities associations for covered sales transactions will go up to $22.10 per million dollars on March 18. The rate is currently set at $17.40 per million dollars, which is the rate that has been effective since May 25, 2013, when it was lowered from $22.40 per million dollars. The Section 31(d) assessment on security futures transactions remains unchanged at $0.0042 per round turn transaction.

The fee must be adjusted annually under the Exchange Act to a rate that is reasonably likely to produce fee collections equal to the regular appropriation to the SEC for the fiscal year. The Consolidated Appropriations Act of 2014, signed by President Obama on January 14, 2014, appropriated $1.35 billion to the SEC for fiscal year 2014. Release No. 34-71550 is reported at ¶80,474.

SEC extends exemptions for security-based swaps. The SEC has amended the expiration date of its interim final rules providing exemptions for security-based swaps that were security-based swap agreements and became defined as "securities" under the Dodd-Frank Act. The interim final rules were extended to February 11, 2017, and the amendments become effective upon publication in the Federal Register.

In July 2011, the SEC adopted the interim final rules, Securities Act Rule 240, Exchange Act Rules 12a-11 and 12h-1(i), and Trust Indenture Act Rule 4d-12, to exempt offers and sales of security-based swap agreements that became security-based swaps from the provisions of the Securities Act, the registration provisions of the Exchange Act, and the indenture provisions of the Trust Indenture Act in order to allow them to continue to trade and be cleared as they were before the Dodd-Frank Act, provided certain conditions are met. The interim final rules allow market participants to continue to use trading platforms to publish quotes for security-based swaps and enter into transactions involving security-based swaps that are the subject of individual negotiation without concern that such activities will not comply with the federal securities laws.

The changes were designed to prevent disruptions and costs to market and to allow the Commission to further consider the definitions of the terms "security-based swap" and "eligible contract participant" and evaluate the implications for security-based swaps as securities as well as determine whether other regulatory action is appropriate. The interim final rules were previously extended in February 2013 to February 11, 2014, and the SEC noted that it does not expect to complete its evaluation before that date.

The SEC also issued an order extending temporary exemptive relief, set to expire on February 11, 2014, in connection with the revision of the Exchange Act definition of "security" to encompass security-based swaps. For those expiring temporary exemptions not directly linked to pending security-based swap rulemakings, the Commission is extending the relief until the SEC issues determines whether continuing exemptive relief is appropriate for security-based swap activities with respect to the Exchange Act provisions or three years following the order’s effective date, whichever is earlier. For any exemption related to pending rulemakings, the Commission is extending expiration until the compliance date for the specific, related rulemaking (Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of "Security" to Encompass Security-Based Swaps, and Request for Comment, Release No. 34-71485, February 5, 2014). The extension is intended to facilitate a timely phased-in determination regarding the application of the Exchange Act provisions relevant to security-based swaps and to prevent market disruption. Release No. 33-9545 is reported at ¶80,471.

Disgorgement can be based on profits not personally gained by insider. A panel of the Second Circuit Court of Appeals said the district court’s inclusion of profits gained due to trades executed by a fund manager on behalf of the fund could be used in the calculation of disgorgement for insider trading, even though those profits did not personally accrue to the manager.

Joseph Contorinis, a former managing director at Jefferies and Co., was convicted on seven counts of securities fraud and one count of conspiracy for his role in an insider-trading scheme. Contorinis was accused of using inside information received from a UBS employee to trade for a fund he co-managed. The UBS employee tipped Contorinis about an acquisition involving supermarket chain Albertsons. Contorinis used that information to trade in Albertsons’ stock on behalf of not himself, but on behalf of the Jeffries Paragon Fund. As a result, the Paragon Fund realized profits of over $7.3 million and avoided losses of over $5.3 million.

Following his conviction, Contorinis was sentenced to six years in prison and ordered to pay over $12.6 million in criminal forfeiture penalties, an amount equal to the combined value of the Paragon Fund’s realized profits and avoided losses. On appeal, the Second Circuit vacated the criminal forfeiture amount because criminal forfeiture penalties are usually based on the defendant’s actual gain. On remand, the district court ordered forfeiture of the amount of Contorinis’s compensation from his trading activities, less than half-a-million dollars.

Following Contorinis’s criminal conviction, the SEC moved for summary judgment in its parallel civil action. The district court ordered Contorinis to disgorge $7.2 million (less any amount paid pursuant to the criminal forfeiture) and to pay $2.5 million in pre-judgment interest on the disgorgement amount. Contorinis was also ordered to pay a civil penalty of $1 million and to be permanently enjoined from violating the securities laws. Contorinis appealed.

On appeal, Contorinis argued that ordering him to disgorge the entire amount gained through his insider trading was a misapplication of the disgorgement principle because he never personally controlled the profits that accrued to the Paragon Fund. A majority of the appellate panel disagreed, likening his role in the scheme to that of a tipper. The panel noted that insider traders have been ordered to disgorge benefits that accrue to third parties whose gains can be attributed to the wrongdoer’s conduct, such as when a tipper passes on inside information to a friend, colleague, or family member. It would be inconsistent, in the panel’s view, to deny a district court the discretion to impose the same liability for conduct such as Contorinis’s. In fact, in this situation, Contorinis had even more control over the Paragon Fund’s illegal profits than a tipper would in a typical tipper-tippee situation, the panel observed. "The amount a court may order a wrongdoer to disgorge may not exceed the total amount of gain from the illegal action, but that does not entail that the gain must personally accrue to the wrongdoer," the panel stated.

Contorinis also argued that the Second Circuit in his criminal case had limited the extent of his criminal forfeiture to his personal gain and that the same principle should apply to disgorgement. The panel again disagreed, noting that the two remedies reflect different characteristics and purposes. Where disgorgement is an equitable remedy designed to prevent unjust enrichment, criminal forfeiture is a statutory penalty that imposes punishment. Because criminal forfeiture is punitive, it would be "irrational" to impose it upon "innocent third parties," according to the panel. In contrast, disgorgement’s purpose of preventing unjust enrichment would be thwarted if insider traders were allowed to "pass their illicit gains to affiliates," the panel reasoned.

The majority of the panel concluded that the district court did not abuse its discretion in ordering Contorinis to disgorge the profits that accrued to the Paragon Fund through his illegal actions. It also found that there was no abuse in discretion in ordering pre-judgment interest on that disgorgement amount.

Judge Chin disagreed with his colleagues that the disgorgement ordered was not an abuse of discretion. By ordering Contorinis to "disgorge funds he never had and to pay back profits he never received," the district court was effectively punishing him, and disgorgement is not intended to be punitive, but remedial, he observed. He, like Contorinis, also found the majority’s position to be inconsistent with the Second Circuit’s prior holding in the criminal case that he could not be required to forfeit the profits earned by the Paragon Fund’s from his illegal activity.

In addition, Judge Chin took issue with his colleague’s analogizing the relationship between Contorinis and the Paragon Fund to the relationship between a tipper and a tippee. In the later situation, the judge explained, the tipper breaches a fiduciary duty by disclosing the information to the tippee, who trades on the information, and the tipper obtains some benefit from the disclosure. Here, Contorinis was not a tipper and there was no evidence that the Paragon Fund knew that he had breached a fiduciary duty. The Fund did not act in concert with Contorinis and he never possessed or controlled its profits. As the profits made by the Fund were improperly included in the disgorgement calculation, Judge Chin stated that, in his view, the disgorgement amount was an abuse of discretion by the district court. SEC v. Contorinis (2ndCir) is reported at ¶97,822.

Disgorgement for disclosure violations not an abuse of discretion. A 3rd Circuit panel rejected an appeal by a defendant who allegedly amassed an ownership share in a company without filing required disclosure forms of his beneficial ownership. The admission of his guilty plea for insider trading at his civil trial for disclosure violations was not an abuse of discretion, the panel held. The panel also rejected the defendant’s arguments that the SEC had introduced insufficient and false evidence at his trial. In addition, the panel upheld the district court’s calculation of disgorgement, which was based on the profits gained by the defendant from the insider trading scheme.

Alfred Teo, a businessman and investor, used several brokerage accounts and a trust controlled by him to buy stock in Musicland starting in 1997. Musicland’s poison pill would be activated when an individual or group reached 17.5 percent ownership of the company’s stock. Triggering the poison pill enabled shareholders to purchase stock at a lower price to dilute the holdings of the hostile buyer. While Teo’s initial purchases of Musicland stock were properly disclosed on SEC Schedule 13D, later investments in Musicland were not properly disclosed, including disclosure that his ownership in Musicland exceed the reporting threshold. His beneficial ownership in Musicland eventually amounted to 35 percent.

During this period, Teo made requests for himself and his associates to be put on Musicland’s board of directors. He also worked with three investment banks on plans to take Musicland private. None of these activities was disclosed on Schedule 13D. Best Buy announced in December 2000 an all-cash tender offer of all Musicland shares. Teo sold his shares, the trust’s shares, and the shares held in accounts controlled by Teo, netting him a profit of $21 million. The SEC brought a civil action against Teo, and a jury concluded that he had violated numerous SEC laws and regulations relating to his failure to disclose his beneficial ownership of Musicland stock.

In 2006, Teo pleaded guilty to insider trading, admitting that he had received advanced information of the Best Buy tender offer and that he knew he was prohibited from acting on it or disclosing it to others. The SEC introduced the allocution from his guilty plea at trial. On appeal, Teo argued that the insider trading conduct was irrelevant to the civil trial because it was subsequent to the acts underlying the issues in the civil trial.

The appellate panel disagreed, noting that not only did some of the conduct overlap, but both the civil and criminal misconduct were connected to Teo’s failure to comply with the securities laws vis-à-vis his Musicland holdings. Under FRCP Rule 404(b), “evidence of a crime may not be used to prove a person’s character, but may be used to prove intent, knowledge, absence of mistake, or lack of accident.” The panel, observing that the allocution would be probative of virtually all the permissible reasons, held that the district court therefore did not abuse its discretion in admitting the allocution.

The district court had denied Teo’s motion for a new trial. Teo had argued that the SEC had provided false evidence to the jury. This consisted of a “marked-up” draft to a Schedule D filing that was never faxed, which was attached to a cover sheet that had been faxed to Teo. While acknowledging that there is no evidence that counsel ever gave the marked-up draft to Teo, the appellate panel also noted that Teo never disputed that he reviewed a document that was “substantially similar” to the document introduced at trial. While the exhibit “theoretically” could have created confusion, the defendant did provide evidence that it did, the panel observed. Even if the cover sheet/marked-up document exhibit confused the jury, there was no indication that it would have prejudiced the outcome of the trial. The panel concluded that the district court did not abuse its discretion in denying Teo’s motion for a new trial on this basis.

Teo had also argued that the SEC had provided insufficient evidence that he had made “concrete plans and proposals” toward an “extraordinary corporate transaction” that should have been disclosed on a Schedule 13D, and he moved for a new trial. The appellate panel cited numerous activities undertaken by Teo that were cited by the district court as evidence of his plans for Musicland. These included conversations with Musicland representatives requesting that he or his associates be put on the board of directors, as well as multiple meetings with three different investment banks about taking Musicland private. Even though Teo’s privatization efforts were unsuccessful, the panel agreed with the district court that the record contained sufficient evidence that Teo planned an “extraordinary corporate transaction,” and a new trial was not warranted.

Teo appealed the district court’s calculation of disgorgement because the profits to be disgorged resulted solely from the sale of Musicland shares under Best Buy’s tender offer. Teo argued that his profits from the tender offer were an intervening cause and that the SEC had not demonstrated that the disgorged profits “proceed[ed] directly and proximately from the violation.” The appellate panel advised that while causation is a required element for disgorgement, policy considerations must inform an approach to causation in SEC actions compared to tort actions because the objectives are different. In tort, liability is assigned to deter harmful conduct and to redress personal injury, while in SEC actions, the goal is “not to compensate for losses but to deprive the wrongdoer of his ill-gotten gain,” according to the panel.

With these policy distinctions in mind, the panel was not persuaded that the SEC must do more than prove “but-for” causation for a reasonable approximation of profits. The SEC had argued that Teo intentionally misrepresented his beneficial ownership share in Musicland, which allowed him to amass over 35-percent ownership of the company that, upon selling, netted him nearly $21 million. The SEC had “presumptively demonstrated” a reasonable approximation of the profits arising from transactions tainted by his violations, and Teo has done “virtually nothing” to rebut that presumption, the panel concluded.

Judge Jordan, while agreeing with the bulk of the panel’s opinion, dissented from its conclusions about the method of calculating disgorgement. While he accepted his colleagues’ analysis that a “but-for” standard of causation would suffice in this case, he disagreed with how they shifted the burden. He agreed that the SEC met its initial burden to establish that a plausible relationship exists between Teo’s securities violations and the profits gained, but did not account for the Best Buy tender offer as an independent cause. “The Best Buy tender offer is clearly an independent and intervening event. It bears no relationship to [Teo’s] securities violations,” Judge Jordan wrote. The premium offered by Best Buy created a causal break, and by awarding disgorgement on the profits related to the Best Buy transaction, the district court abused its discretion, he concluded. SEC v. Teo (3rd Cir) is reported at 97,814.

Goldman Sachs not liable as a statutory insider when call options expired. The 2nd Circuit Court of Appeals has held that The Goldman Sachs Group, Inc., was not required to disgorge short-swing profits where the company was a statutory insider only when the call options at issue were written, but not when they expired. Although ruling that the expiration of a call option within six months of its writing constitutes a "purchase" by the option writer, and thus must be matched against a "sale" occurring when the option was written, the appellate court ruled that Goldman Sachs lacked insider status at the time of purchase because the firm no longer held 10 percent of the issuer’s shares when the options expired. Accordingly, the Second Circuit panel affirmed the dismissal of the plaintiff’s derivative action.

The plaintiff, a shareholder in Leap Wireless International, Inc., (Leap) had filed a derivative suit seeking to hold Goldman Sachs and a subsidiary liable under Exchange Act Section 16(b) and Rule 16b-6(d) for their failure to disgorge "short-swing profits" derived from writing call options on Leap stock. Although Goldman Sachs owned over 10 percent of Leap’s equity shares when it wrote the call options, and thus was a statutory insider under Section 16(b), Goldman Sachs owned less than 10 percent when the unexercised options expired less than six months later. Concluding that the expiration was a "purchase," but that the defendants were not statutory insiders at the time of the "purchase," the district court held that Goldman Sachs was not required to disgorge any profits and dismissed the suit.

The plaintiff had argued that Goldman Sachs’s writing of a short call option constituted a simultaneous sale and purchase under the statute, based on a theory that the writer commits to a subsequent purchase of the underlying stock at the instant it takes a short position on a call option. Because Goldman Sachs was a statutory insider when the options were written, the plaintiff contended, the fact that Goldman Sachs was not a statutory insider at the time of the option’s expiration was of no consequence.

The appellate court, however, granted deference to the SEC’s interpretation of Section 16(b). The appellate court observed that the SEC had adopted Rule 16b-6(d) to eliminate the potential that an insider writing options could generate profits by knowing, by virtue of inside information, that the option would not be exercised within six months. For this reason, the SEC determined that in the case of an expiration of a short option position, the expiration will be treated as the purchase of the option. Accordingly, the court held that, for purposes of Section 16(b), the expiration of a call option within six months of its writing is to be deemed a "purchase" by the option writer to be matched against the "sale" deemed to occur when that option was written. Because Goldman Sachs was no longer a statutory insider at the time the options expired, the company was not liable to disgorge short-swing profits under the statute. Roth v. Goldman Sachs Group, Inc. (2ndCir) is reported at ¶97,800.


Blue Sky Law Reporter  

California adopts new IA custody rule. A new custody rule for investment advisers that incorporates the SEC’s custody rule adopted under the Investment Adviser Act of 1940, as well as NASAA’s model custody rule, was adopted by the California Department of Business Oversight, effective April 1, 2014. ¶12,217.

Texas adopts private fund adviser exemption. A new registration exemption for private fund advisers, as well as changes to an existing registration exemption for investment advisers advising financial institutions and institutional investors were adopted by the Texas State Securities Board. The Securities Board also adopted an exemption for charitable organizations assisting economically disadvantaged clients, and a licensing exemption for military spouses, military service members and military veterans. Lastly, the Securities Board incorporated an SEC release into a Texas Rule affecting Rule 506 offerings. ¶55,556, ¶55,563, ¶55,591Q, ¶55,595Q, ¶55,688D, ¶55,720L, ¶55,720M.

Texas proposes incorporating NASAA policy statement amendment references. The Texas State Securities Board would adopt by reference certain May 6, 2012 updates to North American Securities Administrator Association, Inc. (NASAA) policy statements on asset-backed securities, commodity pool programs, equipment programs and oil and gas programs. ¶55,590D.

Bankruptcy Petition Did Not Create Inquiry Notice as a Matter of Law. In Hernandez v. Vasquez, the California Court of Appeal held that a defendant’s filing of a bankruptcy petition did not put investors on inquiry notice of their securities fraud claims under the California Corporations Code as a matter of law. Inquiry notice was not an appropriate basis on which to sustain the defendants’ demurrer because a resolution of the issue involved questions of fact, such as whether the defendant’s bankruptcy petition was a sufficient storm warning to alert a reasonable person to the likelihood of fraud. Accordingly, the trial court’s judgment was reversed with respect to the fraud claims of all plaintiffs except for those who had demonstrated actual notice by filing a complaint for nondischargeability against the defendant with the bankruptcy court.

The appellate court held, however, that the plaintiffs’ causes of action for the sale of unqualified securities and the unlicensed sale of securities were barred by the respective two-year and three-year statutes of limitations provided by Corporations Code. Even assuming that the exchange by some plaintiffs of their original investment contracts constituted a new "sale" for which the defendants could be found liable, their causes of action were time barred before they filed their complaint. Although the plaintiffs contended that an additional tolling period applied due to the so-called "discharge injunction" under Bankruptcy Code Section 524, the discharge injunction permits an action against a discharged debtor to fix the liability of the debtor’s insurers. As the plaintiffs had stated in the bankruptcy stipulation that they were pursuing the action to recover from the proceeds of any applicable insurance policy, an additional tolling period did not apply. The decision is reported at ¶75,057.


Aspen Federal Securities Publications  

Broker-Dealer Law and Regulation, Fourth Edition, by Norman S. Poser and James A. Fanto. The 2014 Supplement is now available online. This is an authoritative, analytical and practical guide for advising clients on their rights, duties, and liabilities under today’s complex securities regulations. It provides reliable guidance on the latest federal and state law governing private litigation and arbitration between broker-dealers and their customers, as well as regulation by the SEC and the SROs. The 2014 Supplement includes: an exploration of the efforts by FINRA and other SROs to deal with extraordinary market volatility; a discussion of FINRA’s recent proposal that would require a broker-dealer to disclose to a customer the recruiting compensation that it pays to a broker who is moving to a new firm and who wishes to bring his or her clients along; an update on proposed FINRA Rule 4330(b)(2), which would require that a member firm, prior to engaging in a securities borrowing with a customer, determine that the transaction is suitable for the customer and provide the customer with a written notice of potential risks; a discussion of a fraud case, in which the U.S. Supreme Court has agreed to review the lower court’s decision arising from the Stanford Financial Ponzi scheme; an expanded discussion of FINRA Rule 2111, which replaced NASD Rule 2310, making important changes to the suitability requirements; and a summary of a recent U.S. Supreme Court case, Gabelli v. SEC, concerning the effect of the statute of limitations on the right to bring suit under the express liability provisions of the federal securities laws.

Practicing Under The U.S. Anti-Corruption Laws, by Joseph P. Covington and Iris E. Bennett. The 2014 Supplement is now available online. Practicing Under The U.S. Anti-Corruption Laws is designed to assist practitioners and company counsel to comply with the Foreign Corrupt Practices Act (FCPA) and all major U.S. anti-corruption laws. It discusses a wide range of issues relevant to counseling and defending companies and individuals with respect to U.S. anti-corruption laws and how they impact the conducting of business in the international marketplace. The 2014 Supplement expands the scope of the publication to provide essential new information including: a revised chapter on global anti-corruption efforts, with a special focus on China, Germany, India, Mexico, and Nigeria; a new section on personal jurisdiction, including a discussion of two recent cases that help to define the circumstances in which a non-U.S. national, operating outside the territory of the United States, may nevertheless be subject to FCPA charges in a U.S. court; recent cases involving the FCPA’s books and records provisions; a new section concerning the meaning under the Money Laundering Control Act of 1986 of transactions that are “designed to conceal” unlawful proceeds and also a discussion of the U.S. Supreme Court’s ruling in United States v. Cuellar on this topic; a new section analyzing who is a “foreign official” for purposes of DOJ enforcement; discussion of four recent DOJ enforcement actions against companies, two of which (Ralph Lauren and Diebold) were the result of voluntary disclosures, and two others (Parker Drilling and Total) which were not; an analysis of both DOJ’s and SEC’s non-prosecution agreements with Ralph Lauren Corp.; and new sections focused on (1) insurance that specifically responds to FCPA exposures and (2) preserving rights to insurance at the point of claim. Also included in this revision are updated exhibits: Exhibit 8C: Sanctions Against Corporations in Recent FCPA Cases; Exhibit 8D: Sanctions Against Individuals in Recent FCPA Cases.


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:

 #298 IPO Aftermarket Performance
by SIC Code (Aggregated)
 How are IPO industry groups performing under current market conditions? 

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Click on IPOs with a Trade Date Betweento change the date range for IPOs and select an aftermarket price as of date. Use the drop down boxes to
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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

  • 33-9545—Extension of Exemptions for Security-Based Swaps (February 5, 2014).

The SEC issued an interim final temporary rule extending the expiration dates of prior interim rules for security-based swaps and said that these dates may change yet again if the Commission adopts more related rules. This latest rule extends the relevant expiration dates from February 11, 2014 to February 11, 2017.

  • 34-71485—Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment (February 5, 2014).

This exemptive order lengthens the time during which the SEC will maintain the “status quo” for certain pre-Dodd-Frank Act instruments while implementing the Act’s revised definition of “security,” which includes security-based swaps. Subject to some exceptions, he period has been extended from February 11, 2014 until the earlier of three years after this order becomes effective or the date the SEC issues an order regarding renewed time extensions.

  • 34-71550—Order Making Fiscal Year 2014 Annual Adjustments to Transaction Fee Rates (February 12, 2014).

The SEC issued its latest fee schedule revisions in this release applicable to fiscal year 2014.

  • 33-9552—Re-Opening of Comment Period for Asset-Backed Securities Release (February 25, 2014).

The Commission has reopened the comment period for two related asset-backed securities proposals to get more information about expected asset-level data rules. Public comments on Release Nos. 33-9117 and 33-9244 are now due to the SEC by March 28, 2014.

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.

SEC Chair Mary Jo White recently reiterated the Commission’s worries about having adequate financial resources to perform its enforcement duties. She said increased Congressional funding is a top priority and noted that the SEC is deficit neutral because its funding comes from fees paid by self-regulatory organizations. She also outlined a regulatory agenda that includes finishing Dodd-Frank Act and JOBS Act rules, and which could expand to include disclosure reform as the SEC staff presses market participants for more feedback on existing public company disclosure reform ideas. The disclosure update effort will likely focus on modernizing Regulation S-K and the SEC’s forms.


Hot Topic of the Month
This month's hot topic is insider trading. While the antifraud provisions of the Exchange Act do not mention "insiders" or explicitly require persons with material inside information to disclose that information in a securities transaction, the courts and the SEC nonetheless consider trading on inside information a type of prohibited deceptive conduct. Analysis of Rule 10b-5 insider trading liability, however, differs significantly from that applicable to a traditional Rule 10b-5 fraud case. Although the essential elements of Rule 10b-5 liability also apply in the context of insider trading, the analysis of insider trading liability places particular emphasis on the defendant's status and on the breach of a duty.

Generally, a person is liable under Rule 10b-5 for insider trading if he or she: (1) is an "insider," a "tippee," or a non-insider who misappropriates inside information; and (2) directly or derivatively breaches a fiduciary duty by trading on or tipping material, nonpublic information. An insider is someone who possesses material information concerning securities that is not possessed by others trading in the securities, and a tippee is someone who receives a tip from an insider and subsequently trades in securities to which the tipped information relates.

Liability for insider trading under the "classical theory" is based on the defendant's corporate position, such as officer, director, or controlling shareholder, or on a temporary insider's receipt of information in the course of performing a service for the company. Under the "misappropriation theory" of liability, non-insiders who misappropriate material, nonpublic information for securities trading purposes in breach of a duty of loyalty and confidentiality to the source of the information are liable under Rule 10b-5. Also, liability as a tipper or tippee is based on the flow of information from a person who breaches a fiduciary duty to a person who has knowledge of the breach.

In 2000, the Commission adopted Rule 10b5-1 to clarify the issue of when insider trading liability arises in connection with a trader's "use" or "knowing possession" of material nonpublic information. Rule 10b5-1 provides that, for purposes of insider trading liability, a person trades on the basis of material nonpublic information if a trader is aware of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. Rule 10b5-2 was adopted to address the issue of when a breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading. Finally, Section 20A provides a private right of action for persons who sold or purchased a security at the time that a defendant violated an Exchange Act provision or rule by purchasing or selling a security while in possession of material, nonpublic information

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
  • Insights – Amy L. Goodman (e.g., “The Mark Cuban Verdict and What it Means for Misappropriation and Insider Trading Law” (11-30-13); "The Spotlight Shines on Rule 10b5-1 Plans" (1-31-13))
  • SEC Today (e.g., "SEC and FINRA Officials Discuss Insider Trading Cases" (1-16-14); "PLI Briefing Highlights Concerns With Insider Trading and Rule 10b5-1 Plans " (1-25-13))
  • SEC Compliance and Disclosure Interpretations (e.g., ¶14,040)
  • Securities Regulation – Loss, Seligman & Paredes (e.g. Chapters 9.B.1 and 9.B.5)
  • Regulation of Securities: SEC Answer Book – Levy (e.g., Question 18:1, et seq.)
  • SEC Topic Navigator
  • Jim Hamilton’s World of Securities Regulation