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May 2013


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. This update includes a preview of IPO Vital Signs, an advanced IPO research analysis tool, for IPO professionals and pre-IPO companies and a preview of RBsource, a new 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.

 To view past issues of the Securities Update, please visit

 If you have questions or comments concerning the information provided below, please contact me at


Securities Regulation Daily

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Financial Reform Resources



CCH Federal Securities Law Reporter

SEC Adopts Identity Theft Rules. The SEC voted unanimously to adopt joint rules with the CFTC to help protect individuals from identity theft. The Dodd-Frank Act amended the Fair Credit Reporting Act to transfer responsibility for identity theft rules and the enforcement of the rules from the Federal Trade Commission to the SEC and the CFTC with respect to the entities they regulate. The SEC and the CFTC jointly proposed rules in February 2012, which largely mirrored the rules of the FTC and the other federal agencies that adopted identity theft rules under the Fair Credit Reporting Act. The SEC’s and the CFTC’s adopting release includes examples and guidance to help entities comply with the rules.

The SEC’s rules apply to regulated entities that meet the definition of a financial institution or a creditor under the Fair Credit Reporting Act, which may include broker-dealers, mutual funds, and investment advisers. The CFTC’s rules will apply to entities such as futures commodity merchants, commodity trading advisers, and commodity pool operators. These entities must adopt policies and procedures that are designed to detect and respond appropriately to identity theft red flags. They must periodically update their identity theft programs and provide staff training. Entities that issue debit or credit cards will be required to take certain precautionary actions when they receive a request for a new card after receiving notification of a change of address for a consumer’s account. Release No. 34-69359 is reported at ¶80,256.

SEC Amends Exchange Act Rule 19b-4. The SEC issued a final rule that clarifies the proposed rule change process for SROs regarding dually-registered clearing agencies and non-security products. Specifically, the SEC’s release amends Exchange Act Rule 19b-4(f)(4)(ii) and the general instructions to Form 19b-4. The amended rule broadens the types of non-security products for which proposed rule changes can become immediately effective. Rule 19b-4(f)(4)(ii) is amended to state that an SRO’s proposed rule change that affects a registered clearing agency’s existing service is effective under Rule 19(b)(3)(A) if it primarily affects the clearing agency’s clearing operations for products that are not securities (i.e., futures, swaps, and forwards that are not security futures, security-based swaps or mixed swaps, or security forwards) and either (1) has no significant effect on securities clearing operations or (2) does significantly affect securities clearing operations but is necessary to maintain fair and orderly markets for non-securities products. The SEC’s final rule contains an appendix that amends Form 19b-4 to implement the changed text of Rule 19b-4(f)(4)(ii). Release No. 34-69284, is reported at ¶80,254.

Companies May Use Social Media for Announcements If Investors Are Alerted. The SEC has announced that companies may use social media to make announcements so long as investors are alerted about which social media will be used. The announcement is the result of an investigation into whether Netflix, Inc. (Netflix) and its CEO, Reed Hastings violated Regulation FD and Exchange Act Section 13(a) by making company announcements on Facebook. The Commission determined not to pursue an enforcement action. The Report found that the disclosure of material, nonpublic information on the personal social media site of an individual corporate officer is unlikely to qualify as an acceptable method of disclosure under the securities laws unless investors receive advance notice that the site may be used for this purpose. "Personal social media sites of individuals employed by a public company," the Commission observed, "would not ordinarily be assumed to be channels through which the company would disclose material corporate information," The report concluded that adequate notice would give all investors the ability to gain access to material information at the same time. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69279, is reported at ¶80,253.

SEC Immune From Suit for Madoff Oversight; Court Rebukes SEC. The Second Circuit has issued a per curiam decision upholding a district court’s dismissal of an action that tried to hold the SEC liable for missing key storm warnings about the Bernard Madoff Ponzi scheme. The court found that the SEC was immune under the discretionary-function exception to the Federal Tort Claims Act (FTCA) government-liability provision. The court also held that the district court did not abuse its discretion when it denied the plaintiffs’ requests for relief from the judgment and for jurisdictional discovery.

The plaintiffs were investors in Bernard L. Madoff Investment Securities LLC who lost money when Madoff’s Ponzi scheme unraveled. These investors sought to hold the SEC liable for its alleged negligence in investigating Madoff over many years. The district court had dismissed these claims because the SEC is immune from suit for its policymaking, discretionary acts.

The Second Circuit noted that the discretionary-function exception is actually an exception to the FTCA’s exception to government immunity. Here, the court found that the plaintiffs had not met their initial burden of showing that their claim was not barred.

The Second Circuit further observed that the discretionary function exception is inherently unfair because it is truly about government power. According to the court, even though the plaintiffs’ losses may derive from the SEC’s alleged failure to detect the Madoff fraud, they still cannot recover.

Said the court, "[d]espite our sympathy for Plaintiffs’ predicament (and our antipathy for the SEC’s conduct), Congress’s intent to shield regulatory agencies’ discretionary use of specific investigative powers via the DFE is fatal to Plaintiffs’ claims." Molchatsky v. United States (2ndCir) is reported at ¶97,379.

Goldman Director Who Tipped Rajaratnam Not a Beneficial Owner. A member of Goldman Sachs’ board of directors was not a "beneficial owner" of Goldman Sachs shares under Exchange Act Section 16(b), a 2nd Circuit panel concluded. The per curiam opinion also declined to extend the definition of "beneficial owner" to encompass "tippers" who provide insider information in exchange for payment to another party who then engages in short-swing trading.

The plaintiff alleged that the defendant, James Mercer, was a statutory insider of Goldman Sachs who realized short-swing profits from Goldman Sachs shares. While it was uncontested that Mercer, as a board member, was a statutory insider, the parties disputed whether he beneficially owned shares of Goldman Sachs.

The plaintiff alleged that Mercer beneficially owned shares that Raj Rajaratnam short-swing traded through the Galleon Group hedge funds that Rajaratnam founded and controlled. According to the complaint, Mercer called Rajaratnam after learning information affecting Goldman's share price. After these calls, Galleon would engage in short-swing trading of Goldman Sachs shares. The complaint alleged further that Mercer was a director of a Galleon master fund and that he knew that Rajaratnam paid another party in exchange for insider information.

The plaintiff asserted that Mercer was a beneficial owner because Rajaratnam made quid pro quo payments to Mercer in exchange for insider information, Mercer was a director of, and had a financial interest in the Galleon fund, and Mercer had the "opportunity to profit" in Galleon. The district court held that the plaintiff failed to plausibly allege that Mercer was a beneficial owner under Section 16(b) and Rule 16a-1 and dismissed the action.

The panel agreed with the district court’s order and rejected the plaintiff’s arguments for the same reasons. The allegations in the complaint regarding the quid pro quo payments did not rise above mere speculation, and, even if Rajaratnam paid Mercer, such payments would not amount to a pecuniary interest under Section 16, which requires the realization of profits from short-swing transactions. The plaintiff failed to adequately allege that Mercer received profits from Goldman Sachs shares as opposed to payment for insider information, the panel concluded.

Next, the plaintiff failed to allege that Mercer had investment control over the Galleon fund. While Mercer may have known that his inside information may have influenced the fund’s investment decisions, this is not the same as the control required by Rule 16a-1, the panel stated. Finally, Mercer's business dealings with Rajaratnam and "opportunity to profit," without more, did not suffice to establish beneficial ownership.

The ultimate issue in this case, the panel stated, was whether "beneficial ownership" encompassed the relationship between Mercer, as tipper, and Rajaratnam, as tippee. "It is clear," wrote the panel, "that Section 16(b) does not apply perforce to tippees," absent any indication from Congress to the contrary. The panel noted the section’s "narrowly drawn limits" and considered it significant that Congress considered and rejected language that would have created a provision applicable to tippees. Mercer v. Gupta (2ndCir) is reported at ¶97,375.

2ndCir: UBS Met Exchange Act Margin Disclosure Duties. The U.S. Court of Appeals for the Second Circuit has held that a broker-dealer did not violate Exchange Act Section 10(b) and Rule 10b-16 when it disclosed general in-house margin policies to customers but not more detailed information about how margin is calculated. The broker-dealer also was not required to notify its customers before changing its in-house margin rules. But the court did not decide if Rule 10b-16 allows private suits.

WC Capital Management, LLC (WCCM) is the general partner and manager of Willow Creek Capital Partners, L.P. (WCCP) and Willow Creek Short Biased 30/130 Fund, L.P. (WCSB), both long-short funds that invest in companies that have less than $1 billion in market capitalization. UBS Securities, LLC became WCCM’s prime broker in 2007. The UBS-WCCM client account agreement provided that UBS would hold WCCM securities and cash and make margin loans to WCCM. UBS could demand additional collateral at any time. UBS also issued a separate document that said UBS in-house margin policies are stricter than the minimum requirements imposed by the Federal Reserve Board and FINRA. The UBS document also said that UBS can raise house margin maintenance levels without telling WCCM in advance.

The WCCM-UBS relationship was cordial until WCCM’s funds’ performance slipped in 2008. After WCCM met a $6.5 million margin call, UBS sent WCCM a new margin level disclosure document that detailed increased margin requirements. WCCM then had to meet a second $13 million margin call in February 2009. As before, UBS followed up by sending WCCM a margin levels document that raised WCCM’s needed collateral.

WCCM brought suit contesting the adequacy of UBS’s margin disclosures. WCCM said it had lost $25 million due to UBS’s margin demands, of which it did not get advance notice. WCCM ultimately took its prime brokerage business elsewhere. The district court held for UBS, and the Second Circuit affirmed.

The Second Circuit found that Rule 10b-16(a) requires disclosure of general factors which may lead to increased margin, but not detailed information about how in-house margin requirements are calculated. The court noted that the rule furthers the antifraud goals of Exchange Act Section 10(b) and implements Congress’ recommendation in the Truth in Lending Act that the SEC adopt similar rules for broker-dealers. The court also noted that the SEC’s adopting release said that Rule 10b-16 is a disclosure rule only.

Moreover, the court credited the SEC’s views, reiterated in its amicus brief, that because broker-dealers’ internal margin rules change frequently, they need only disclose general information that states the factors considered in fixing internal margin requirements. The SEC said that broker-dealers could inadvertently lead customers to rely on old margin rules if they were required to provide frequent, detailed disclosures. According to the SEC, the best practice under Rule 10b-16(a) is to disclose the factors that affect margin determinations and issue a warning that margin requirements can change at any time.

Here, UBS described the factors that impact calculation of margin in its initial disclosure to WCCM. The court said these factors were sufficient to let WCCM know of the future circumstances in which UBS may demand additional margin. The court also distinguished the D.C. Circuit’s Liang v. Dean Witter & Co. decision, in which that court held that a broker-dealer’s margin disclosure was inadequate, because in that case the broker-dealer never disclosed its "actual" margin policy, whereas here UBS made all required disclosures.

Lastly, although holding against WCCM, the court found that WCCM had Article III standing to sue UBS because WCCM had alleged that it sustained an injury of $25 million that flowed from UBS’s alleged failure to disclose its margin policies. UBS had challenged WCCM’s right to challenge its margin policies in court.

The Second Circuit, agreeing with the SEC’s amicus brief, said that Rule 10b-16(b) requires 30 days’ prior notice of credit terms but not of revised margin policies. The court said that advance notice of margin polices is not required because these policies are not "credit charges." The court also noted that the SEC has twice reiterated this position when it initially approved a NASD rule and again when it reapproved the equivalent FINRA rule.

The SEC, in reply to the Second Circuit’s request for its views, had urged the court to find that Exchange Act Rule 10b-16 allows private suits. Similarly, UBS had asked the court to affirm the district court’s dismissal of WCCM’s suit on the ground that no Rule 10b-16 private right of action exists. Because the district court did not address the issue, the Second Circuit avoided the question by finding that the lower court correctly ruled that WCCM failed to state a claim.

The Second Circuit, however, noted the Rule 10b-16 private suit question is open to debate within the circuit. But the court also observed that no courts have ruled on this question since the Supreme Court further limited private suits under Exchange Act Section 10(b) in its 2008 Stoneridge opinion. WC Capital Management, LLC v. UBS Securities, LLC (2ndCir) is reported at ¶97,365.

CCH Blue Sky Law Reporter  

Massachusetts Proposes Criminal Background Check for IA Rep. Applicants. Individuals registering as investment adviser representatives in Massachusetts would be subject to criminal background checks as proposed by the Securities Division; other proposals would amend the registration/post-registration and notice filing requirements for investment advisers and federal covered advisers, respectively, and update section references including a reference in the “institutional buyer” definition. Written comments and public hearing. Interested persons may mail written comments about the proposals to the Office of the Secretary of the Commonwealth, Attn: Proposed Regulations, Massachusetts Securities Division, One Ashburton Place, Room 1701, Boston MA 02108. Comments may, instead, be faxed to (617) 248-0177 or emailed to Comments must be received by 5:00 p.m. on Wednesday, May 15, 2013. A public hearing on the proposals will be held at 10:00 a.m. on Wednesday, May 15, 2013 at One Ashburton Place, 17th Floor, Boston MA 02108. ¶31,455.

Vermont Adopts Private Fund Adviser Exemption. Private fund advisers are exempt from investment adviser registration requirements if neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of federal Regulation A, and the advisers electronically file through the IARD the SEC-filed reports and amendments required for exempt reporting advisers in accordance with Form ADV instructions, along with a $250 fee. The exemption takes effect when the reports and amendments are filed and accepted by the IARD on the State’s behalf, assuming the exemption’s other conditions are met. NOTES: (1) Investment adviser representatives employed by or associated with exemption-eligible investment advisers are, themselves, exempt from investment adviser representative registration if they do not otherwise act as investment adviser representatives; (2) Investment advisers that become ineligible for the private fund adviser exemption must, within 90 days following their ineligibility, register or notice file as investment advisers (as applicable) in Vermont; and (3) Federal covered investment advisers, i.e., private fund advisers registered with the SEC, are ineligible for the exemption and, therefore, must comply with Vermont notice filing requirements. ¶58,475.

Washington Decides Advisory Client Service Awards are False Advertisements/Testimonials. The Securities Division of the Washington Department of Financial Institutions (Division) determined that two third-party awards advertised by persons in the state contained testimonials or were otherwise false or misleading in violation of investment adviser/investment adviser representative provisions of the Washington Securities Act and rules. Both awards were advertised in magazines, e-mail signatures, letterhead, business cards, websites, informational materials and office displays. The Division prohibited both awards because they were given to persons holding themselves out as “financial planners” or “wealth managers” in violation of the Washington Securities Act unless those persons were registered as investment advisers or investment adviser representatives, exempt from registration, or excluded from the “investment adviser” definition. The Division flatly prohibited the Five Star Wealth Manager: Best in Client Satisfaction award (Best in Client award), granted before 2012, for containing a testimonial and being false or misleading, while only prohibiting the Five Star Wealth Manager award (Wealth Manager award), granted beginning in 2012, for being false or misleading until sufficient disclosures about the award process and program are provided. ¶61,811I.

Arizona Securities Act Did Not Authorize Action for Aiding and Abetting Fraud. Overruling more than 30 years of its own precedent, the Arizona Supreme Court has held that the Arizona Securities Act does not authorize a cause of action for secondary liability based on aiding and abetting securities fraud. Although originally recognizing such claims in 1979, based on federal law that subsequently changed, the state high court concluded that aiding and abetting claims are no longer viable under Arizona law in light of the later holding by the United States Supreme Court in Central Bank of Denver v. First Interstate Bank of Denver (1994).

The court noted that the legislature did not expressly authorize secondary liability for aiding and abetting in either the sections setting forth the types of actionable fraudulent practices under the Act or the sections prescribing the civil remedies and potential parties who may be sued for securities fraud. Moreover, no provision of the Act mentions the terms “aiding” or “abetting,” while the legislature has expressly recognized aiding and abetting liability in other statutes, such as those pertaining to insurance fraud and welfare fraud. Accordingly, the state high court affirmed the trial court’s grant of summary judgment in favor of the defendants. Sell v. Gama is reported at ¶75,024.

Aspen Federal Securities Publications  

Practicing Under The U.S. Anti-Corruption Laws, by Joseph P. Covington and Iris E. Bennett. The 2013 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 2013 Supplement expands the scope of the publication to provide essential new information including: the joint issuance by the Department of Justice and the SEC of a Resource Guide to the FCPA, which is featured throughout the content; a revised chapter discussing the use of federal statutes and regulations other than the FCPA, including the money laundering laws, mail and wire fraud statutes, the Travel Act, and various regulatory requirements to address foreign bribery-related conduct; recent cases on criminal liability as well as a revised section on the Model Penal Code approach; updated information concerning SEC enforcement of the FPCA including recent statistics on whistleblower awards; and expanded analysis of efforts by various countries, including China, India, and Mexico, to stem corruption. Also included in this revision are updated exhibits: Exhibit 1A: DOJ Opinion Procedure Releases; Exhibit 7A: FCPA Cases by Year; Exhibit 8A: Exchange Act Release No. 44969; Exhibit 8C: Sanctions Against Corporations in Recent FCPA Cases; and Exhibit 8D: Sanctions Against Individuals in Recent FCPA Cases.

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes. The new Fourth Edition of Volumes X and XI (Finding Devices) of the cornerstone Securities Regulation treatise will soon be available online. This Fourth Edition volume fully incorporates the large number of legislative, regulatory, and case law changes since Securities Regulation, Third Edition was published.

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:


#336 - Countries of IPO Incorporation
Use IPO Vital Sign #336 to…

  • Review the number and percentage of companies going public from each country of incorporation
  • Analyze trends over time 
  • Identify characteristics of IPOs incorporated in different countries

Tip! Click on blue numbers to drill down for more information. Once in the drill down, click column headings to sort the data in an order more useful for answering your questions.


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

  • 34-69359—Identity Theft Red Flags Rules (April 10, 2013).

The SEC and CFTC jointly adopted rules to help firms implement programs to detect identity theft. These final rules are effective May 20, 2013, while compliance is required by November 20, 2013.

  • 34-69284—Amendment to Rule Filing Requirements for Dually-Registered Clearing Agencies (April 3, 2013).

The Commission affirmed certain amendments recently made to Exchange Act Rule 19b-4 in light of additional public comments. The SEC also revised Form 19b-4 to improve rule filing procedures.

  • 34-69281—Order Temporarily Exempting Certain Broker-Dealers from the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 under the Securities Exchange Act of 1934 (April 3, 2013).

The release temporarily extended the compliance date for Exchange Act Rule 13h-1 Phase II broker-dealer recordkeeping requirements from May 1, 2013 to November 1, 2013. The SEC acknowledged industry letters stating that longer than expected Phase I compliance times also could be expected in Phase II.

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.

On May 1, 2013, the SEC is scheduled to hold an open meeting to consider proposing rules and interpretive guidance for cross-border securities-based swaps. The Commission also may re-propose Regulation SBSR. Additional matters include whether to seek more public comments on existing securities-based swaps proposals and policy statements.

Although the SEC did not state a time frame for adopting final rules, the securities-based swap space should be watched as the year progresses and the SEC and CFTC begin to roll-out a full complement of Swaps rules. Swaps also are the subject of numerous Congressional bills that would revise Dodd-Frank Act requirements, especially regarding end-users.


Hot Topic of the Month

This month's hot topic is short-swing profits. Exchange Act Section 16(b) permits issuers to recover short-swing profits made by insiders who trade in the company's securities. "Short-swing" profits are profits realized by officers, directors, and substantial shareholders from the purchase and sale of their own company's securities within a six-month period. Section 16(b) permits the issuer to recover such profits in an action for disgorgement.

Section 16(b) imposes strict liability. The statute, in other words, does not require proof that the insider actually used or possessed inside information. This differentiates the statute from other provisions applicable to insider trading, such as Exchange Act Sections 10(b), 14(e), and 21A, which prohibit only those transactions in which a corporate insider trades on material nonpublic information without first disclosing the information publicly. In contrast, the Section 16(b) short-swing recovery provisions constitute an absolute bar against profit on successive insider transactions within a given six-month period.

Congress passed Section 16(b) to prevent the unfair use of information obtained by certain insiders through their relationship to the issuer. Company officers, directors, and principal shareholders often have access to company information that is not available to the investing public. By trading on this information, these insiders may reap profits at the expense of less well-informed investors.

The 2nd Circuit has recently held that beneficial ownership does not encompass the relationship between a tipper and the tippee. Section 16(b), the court concluded, does not apply perforce to tippees absent any indication from Congress to the contrary. The panel noted the section's “narrowly drawn limits" and considered it significant that Congress considered and rejected language that would have created a provision applicable to tippees.

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
    • Exchange Act Section 16(b), at ¶26,081
    • Exchange Act Rule 16a-1, ¶26,002
    • CCH Explanations (e.g., ¶26,101.010)
    • Mercer v. Gupta (2ndCir) is reported at ¶97,375
    • Report letters (e.g., 4-17-13, "Goldman Director Who Tipped Rajaratnam Not A Beneficial Owner")