May 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

“Covered Security” Definition Amended in Exemptive Rule
The SEC adopted an amendment to designate certain securities listed on the Nasdaq Stock Market as covered securities for purposes of the exemption from state law registration requirements. Nasdaq requested that the SEC determine that its listing standards for securities listed on the Nasdaq Capital Market are substantially similar to those of the previously designated markets. Release No. 33-8791 will be published May 2, 2007 at ¶87,791.

Comment Period on Regulation SHO Changes Re-Opened
The SEC re-opened the comment period on its proposed amendments to Regulation SHO, the short sale rules. Proposed in July 2006, the original comment period expired on September 19, 2006. ¶87,614 (ip access user).

Technical Changes Made to Broker Forms
The SEC made technical amendments to Forms BD and BDW, the uniform broker-dealer registration and withdrawal forms. The changes update the current list of self-regulatory organizations and government jurisdictions and make conforming changes to the definition of “jurisdiction.” Release 34-55643 will be published May 2, 2007 at ¶87,792.

Court Strikes Down Fee-Based Broker Exemptive Rule
A split panel of the District of Columbia Circuit Court of Appeals vacated an SEC rule exempting brokers who receive fee-based compensation for incidental advisory services from regulation under the Investment Advisers Act. The panel ruled that the SEC exceeded its authority and flouted six decades of consistent understanding when it broadened the existing statutory exemption for brokers. It said that legislative intent does not support an exemption for brokers that is broader than the statutory exemption and that the SEC cannot expand the exemption beyond the specific persons that Congress identified in the statute. Financial Planners Association v. SEC (DCCir) at ¶94,185 (ip access user).

Analyst Recommendations Did Not Cause Losses
A panel of the 7th U.S. Circuit Court of Appeals ruled that investors failed to show loss causation with regard to claims against an institutional broker and a brokerage firm. According to the panel, the investors did not show that the claimed fraudulent reports caused their losses or that the stock price declined when the market learned about the deception. The court found that the investment lost value due to market forces rather than any claimed misrepresentations and concluded that the plaintiffs only described transaction causation rather than loss causation. Ray v. Citigroup Global Markets, Inc. (7thCir) at ¶94,203 (ip access user).

Claim Based on Insurance Rider Not Preempted
According to a panel of the 2nd U.S. Circuit Court of Appeals, state claims against an insurance company were not preempted because a term rider, which was not by itself a “covered security” under the Securities Litigation Uniform Standards Act, did not become a covered security subject to removal and dismissal under the Uniform Standards Act because it was attached to a variable life insurance policy. The court held that the rider and the underlying policy must be considered separately. Ring v. AXA Financial, Inc. (2ndCir) at ¶94,197 (ip access user).

SEC Decision on Subpoena Not Reviewable as “Order”
A decision by the SEC not to permit Commission employees to testify in a private civil suit in response to subpoenas served by the defendant was not subject to immediate review by a federal appeals court because the determination not to comply with the subpoena was not an “order” and any disputes over the subpoena must commence at the district court. Watts v. SEC at ¶94,195 (ip access user).

CCH Blue Sky Law Reporter

California Eliminates Non-IARD Filing Procedures for Investment Advisers/IA Reps
Rule provisions allowing investment advisers and investment adviser representatives to file applications, fees or other documents without using the Investment Adviser Registration Depository (IARD) were repealed by the California Department of Corporations. These rule provisions are now outdated because the Department of Corporations mandates investment advisers and representatives to electronically file through the IARD. Another change allows a successor investment adviser to amend it's predecessor adviser's Form ADV, Uniform Application for Investment Adviser Registration, instead of filing a Form ADV-W, Notice of Withdrawal from Registration as an Investment Adviser, and a new Form ADV, provided the succession is based solely on a change in the predecessor's date or state of incorporation, form of organization, or composition of a partnership. ¶12,210 (ip access user), ¶12,211 (ip access user), ¶12,211B (ip access user), ¶12,216A (ip access user), ¶12,216B (ip access user), ¶12,226 (ip access user), ¶12,229 (ip access user).

Kentucky Allows Electronic Delivery of Prospectuses
Prospectuses can be delivered to investors electronically as well as on paper if the disclosures provide investors with the material information necessary to make an informed decision and do not contain false or misleading statements. ¶27,603 (ip access user).

Massachusetts Proposes Rules Prohibiting BD Agents/IA Reps
From Using Certain Professional Designations that State Specialized Knowledge of Senior Investors' Financial Needs. Massachusetts-registered broker-dealer agents and investment adviser representatives would be prohibited from using certain professional designations that state or imply specialized knowledge of the financial needs of senior investors, under rule changes proposed 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 proposed rules would deem the use of these "senior designations" by a broker-dealer agent or investment adviser representative to be a fraudulent, unethical practice. Only those professional designations attained through prescribed training offered by a nationally recognized accredited institution would be approved professional designations by order of the Massachusetts Secretary of State. The Securities Division would define a "senior" as someone 60 years of age or older. Division requests written comments on these proposed regulations. Interested persons should e-mail their written comments by Friday, April 27, 2007 to: securitiesregs-comments@sec.state.ma.us. ¶31,454 (ip access user), ¶31,455 (ip access user).

Utah Amends Uniform Securities Act
Senate Bill 277, effective April 30, 2007, (1) removes the requirement that a broker-dealer notify the division of the failure to settle certain securities transactions occurring on or after October 1, 2006; (2) addresses liability for failure to file a notice including waiver of penalties or amounts owed for reasonable cause; (3) addresses liability for certain persons if the broker-dealer fails to give the required notice; (4) modifies definitions; (5) addresses causes of action created by the Utah Uniform Securities Act; and (6) makes technical and conforming changes. ¶57,135 (ip access user), ¶57,143 (ip access user), ¶57,159 (ip access user).

New Smart Chart Added: Decisions Involving Corporate Takeover Laws (Tender Offers)
This new Smart Chart includes decisions involving tender offers for equity securities of "target companies," as well as decisions involving the preemption of state tender offer statutes by the federal Williams Act.

Content of Books and Records Raised a Triable Issue of Fact
The Supreme Court of Idaho held that a trial court improperly granted summary judgment for the defendant sellers on fraud claims when it failed to consider whether the books and records provided to the purchaser would have revealed the alleged misrepresentations. The purchaser claimed that the sellers provided him with a misleading financial statement in order to induce him to invest in an economically unviable close corporation. Although the purchaser was given an opportunity to conduct an independent investigation of the corporation's books and records, the state high court concluded that an issue of material fact existed as to whether the alleged discrepancies and omissions were actually disclosed in the information that the sellers provided. Mannos v. Moss is reported at ¶74,621 (ip access user).

Texas Securities Act Governed a Worldwide Class Action
The Supreme Court of Texas held in Citizens Insurance Company of America v. Daccach that the Texas Securities Act (Act) applied to a worldwide class action alleging a failure to comply with the Act's registration requirements. The class representative, a resident of Colombia, had alleged that the defendants sold securities from Texas to purchasers in over thirty-five countries without registering as securities dealers. A majority of the state high court concluded that no choice of law question was presented because, under principles of statutory interpretation, the resident defendants' actions constituted conduct that the state legislature intended to regulate. The decision is reported at ¶74,622 (ip access user).

Damages Award Upheld Where Securities Were Not Recoverable
In Guarino v. Interactive Objects Inc., the Court of Appeals of Washington ruled that the defrauded sellers were entitled to money damages under the Washington Securities Act because the securities in the case were not recoverable. The defendant purchasers had been found liable in an earlier proceeding for failing to disclose material information concerning a pending corporate merger that significantly affected the value of the shares. The appellate court concluded that substantial evidence supported an award of damages, rather than rescission, because the record indicated that the securities had either been retired or resold by the defendants prior to the commencement of the suit. The decision is reported at ¶74,623 (ip access user).

Filing Insufficient to Establish Federal Preemption Claim
The United States Court of Appeals for the Sixth Circuit held that summary judgment was improper where the defendants failed to establish that the securities sold were federal “covered securities” that warranted preemption from state law. The appellate court ruled that federal law preempts state registration requirements only with respect to securities that actually qualify as “covered securities” under the National Securities Markets Improvement Act of 1996. Although the issuer had filed for an exemption from federal registration under Rule 506 of Regulation D, a genuine issue of material fact existed as to whether the offering met the rule's other conditions with respect to either integration or offers to unaccredited investors. Brown v. Earthboard Sports USA, Inc. is reported at ¶74,624 (ip access user).

Promissory Note Payment Did Not Constitute a Sale
In Kinney v. Cook, the Supreme Court of Washington held that payment on a judicially reinstated promissory note that was secured by stock did not involve the “sale” of a security under the Securities Act of Washington. The payment had satisfied a debt that the plaintiffs were legally obligated to pay as a result of a judgment in their favor restoring their interest in a business owned by the parties to the note. As the note had been executed seven years prior to the judgment, the state high court concluded that the plaintiffs owned the stock before they made the payment. Any alleged fraud by the holder of the note in inducing payment, therefore, was not in connection with the sale or offer to sell a security. The decision is reported at ¶74,625 (ip access user).

Aspen Federal Securities Publications

Broker-Dealer Law and Regulation, Fourth Edition, by Norman S. Poser and James A. Fanto
The new Fourth Edition is now on both the IRN Investment Management (ip access user) and the Exchanges & SROs Libraries (ip access user). The Fourth Edition of Broker-Dealer Law and Regulation represents a very substantial reorganization and expansion from the prior edition, reflecting the growth of the securities industry and of its regulation, in both size and complexity, during the first years of the twenty-first century. The most important change in the Fourth Edition is the greatly increased emphasis that it gives to regulation and compliance. Among other things, this publication has vastly expanded its coverage of broker-dealer registration and the registration process, recordkeeping and reporting, and examination requirements; exemptions from broker-dealer registration for banks and other financial institutions; privacy and anti-money laundering rules applicable to the firms; and financial and capital regulation. In addition, new chapters have been added on the structure of the securities markets, the regulation of broker-dealers in public offerings, and SEC and SRO enforcement; and new sections have been added on margin regulation, regulation of hypothecation and lending of securities, and voidable contracts.

Financial Reporting Handbook, by Michael Young
The latest Release 14 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.

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