November 2006

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

SEC Issues Guidance on Quantifying Financial Statement Misstatements
The SEC's Office of the Chief Accountant and the Divisions of Corporation Finance and Investment Management issued Staff Accounting Bulletin No. 108 to address the diversity of approaches used to quantify financial statement misstatements. The staff has concluded that the exclusive reliance on either the rollover or the “iron curtain” approach does not appropriately quantify all misstatements that could be material to users of financial statements. Staff Accounting Bulletin No. 108 (SEC) appears at ¶75,575.

Company May Not Omit Executive Compensation Proposal
The SEC's Division of Corporation Finance has advised Sara Lee Corp. that if certain revisions are made to a shareholder proposal relating to executive compensation, it may not be omitted from the company's proxy materials. The proposal urged the board to permit shareholders to vote on an advisory resolution to approve the company's compensation committee report, similar to the practice that is permitted in the United Kingdom. Sara Lee Corp. (SEC) is reported at ¶79,272.

Commission Gives Advice on Filing Review Process
At the Practising Law Institute's recent directors' institute on corporate governance, SEC Corporation Finance Director John White urged companies to view the staff's comment letters as a valuable resource. These comments frequently go to the heart of key issues that warrant the attention of board members, he explained. White also encouraged companies to review two of his recent speeches for guidance on complying with the newly adopted executive compensation disclosure rules. The better companies understand the new rules, the better they will be able to provide investors with high quality disclosure, he said. White's prepared remarks were posted on the SEC's Web site. Staff comment letters are available in the CCH Internet Research Network.

Cox Pledges Adoption of Bank Broker Exception in Six Months
SEC Chairman Christopher Cox, in remarks to the Financial Services Roundtable, said that he plans to complete work this year on a proposed rulemaking to implement the provisions of the Gramm-Leach-Bliley Act and to adopt a final rule within six months. Cox said that seven years from the enactment of the legislation without the adoption of a bank broker exception reflects a disappointing record of indecision and inaction. The modernization of financial services for consumers, business and the economy are at stake, according to Cox. He advised that he has been chairing meetings with senior representatives of the federal banking agencies for the past six months in order to work out details of the bank broker exception that is needed to fully implement the legislation.

Stock Conversion Not Subject to Short-Swing Liability
A stock reclassification that converted the insider's preferred stock into common shares could not properly be matched against a sale to give rise to liability for short-swing trading. The 2nd Circuit panel held that Rule 16b-7 prevented short-swing liability in this case. Bruh v. Bessemer Venture Partners III L.P. (2ndCir) is reported at ¶93,948.

New Explanation of Executive Compensation Rules Set for Publication
An explanation of the far-reaching executive compensation rules will be published at ¶71,048.

CCH Blue Sky Law Reporter

NASAA Annual Conference Concluded
The annual fall conference of the North American Securities Administrators Association (NASAA) just concluded. It ran from September 16 to 18. Panel discussions consisted of efforts by NASAA to work with the Securities and Exchange Commission and the National Association of Securities Dealers, among other industry groups, to curb securities fraud aimed at senior citizens, outreach efforts to educate and, hence, make all investors more financially literate, enforcement priorities for the coming year, and the success with using the Web-based Central Registration Depository and Investment Adviser Registration Depository to register and collect disciplinary history information on broker-dealers, agents, investment advisers and investment adviser representatives. The out-going NASAA President, Patty Struck, the Securities Administrator for Wisconsin, made the senior issue the focus of her term by emphasizing that the first wave of baby boomers are near retirement, have already been approached by unregistered representatives and in some cases have become the victims of unscrupulously unsuitable investments resulting in large losses to their life savings.

A roundtable of paralegals, as well as the State Securities Subcommittee of the American Bar Association met at NASAA to discuss the laws and regulations adopted by the states over the past year, together with the issues the paralegals and ABA members were having with their securities filings in the various jurisdictions. Two types of instruments that became a focus at these meetings and in the panel discussions were hedge funds and variable annuities. The hedge fund issue came up in response to a recent relaxing of some of the federal hedge fund rules by the SEC. The variable annuity issue came up in connection with why a number of states have failed to adopt the Model Uniform Securities Act of 2002. The model act considers a “variable annuity” to be a security but the insurance industry in the states that did not finally adopt the Act after consideration had lobbied hard to prevent the annuities from appearing in the Act, thus keeping regulation of the variable annuities solely with the insurance industry and not also with the securities industry. Similarly, the banking industry lobbied to kill the Act in these states by preventing a Model Act provision requiring broker-dealer registration for banks that sell securities from going forward.

Ohio Securities Act Amended
House Bill 301, effective October 11, 2006 makes changes to Title 17-Corporations-Partnerships. Highlights include:

• Definitions. Changes made to Salesman, Registration by Coordination, and Securities Act of 1933 definitions. ¶45,101
• Control bids made pursuant to tender offer or request or invitation for tenders. New provisions have been added at subsections (A)(5) through (A)(7) pertaining to the regulation of control bids. ¶45,105
• Regulation of dealers. New section 1707.142 has been added requiring that every dealer licensed under section 1707.14, comply with all broker and dealer capital, custody, margin, financial responsibility, record-making, record-keeping, bonding, financial reporting, and operation reporting requirements contained in sections 15 and 17 of the federal Securities and Exchange Act of 1934 and the rules of the SEC promulgated under those sections. ¶45,116B
• Rules, forms, orders of division - immunity for good faith compliance. A new provision has been added at subsection (A)(2) allowing the division to incorporate into its rules any federal statute or rule, regulation, or form promulgated by the SEC or other federal agency in a manner that incorporates all future amendments to the statute, rule, regulation, or form. Subsection (E)(2) has been added, providing that, no liability, penalty, sanction, or disqualification imposed by R.C. 1707.01 to 1707.45 applies to an act done or omitted in good faith in conformity with certain provisions. ¶45,122
• Prohibitions. The second sentence in subsection (L) has been removed. ¶45,147
  

Oklahoma Added Four Administrative Orders
The first order grants an exclusion from the definition of “investment adviser” for professional geophysicists, engineers and petroleum landmen engaged in the ongoing business of exploring for and producing oil, gas or minerals only when they give advice, analysis or interpretations related to the interests in oil, gas or mineral leases. ¶46,676. The last three grant exemptions from licensing for issuer-agents who sell securities that are exempt from registration under the Oklahoma private placement (¶46,677), Regulation D (¶46,678) or accredited investor exemptions (¶46,679).

NASD Arbitration Panel Did Not Manifestly Disregard the Law in Awarding Punitive Damages
A federal district court confirmed an arbitration award of punitive damages under the Massachusetts Uniform Securities Act. The court determined that, although the NASD panel misapplied Massachusetts law, the plaintiffs failed to educate the arbitrators that Massachusetts law does not permit an award of punitive damages to securities investors. Citigroup Global Markets, Inc. v. Salerno is reported at ¶74,589.

Broker-Dealer Was Not Liable to Repay Misappropriated Public Funds
The Supreme Court of Missouri held in Christian County v. Edward D. Jones & Co. that a broker-dealer was not liable to repay county funds that were deposited and later misappropriated by the county treasurer. The Court ruled that the account was void from the beginning because the county did not follow the statutory requirements for the transfer and investment of public funds. Moreover, the county lacked any remedy because the broker-dealer had already returned the funds when it paid them out to the treasurer in his capacity as the county’s statutory agent. The decision is reported at ¶74,591.

Delaware Choice of Law Provision in a Merger Agreement Precluded Tort Claims under Illinois Law A Delaware choice of law provision in a merger agreement precluded the plaintiff from making claims under the Illinois Securities Law. The court held that, because the choice of law clause mandated the application of Delaware law to all aspects of the agreement, it encompassed not only the merger transaction but also the plaintiff's claims for fraud and misrepresentation under state securities law. Organ v. Byron is reported at ¶74,592.

Joint Operating Agreement for Oil Exploration Involved a Security
The Court of Appeals of Colorado held in People v. Pahl that sufficient evidence existed for a jury to find that a joint operating agreement for oil exploration involved a security. As reasonable jurors could find that the agreement was a security, the appellate court ruled, there was sufficient evidence to sustain the defendant's conviction for securities fraud. The decision is reported at ¶74,593.

Aspen Federal Securities Publications

Securities Regulation, by the late Louis Loss, Joel Seligman & Troy Paredes
The new Fourth Edition of Volumes I and XI of the cornerstone Securities Regulation treatise published in late September. Part of the Securities Integrated Library on IRN, this Fourth Edition volume fully incorporates the large number of legislative, regulatory, and case law changes since Securities Regulation, Third Edition was published. Troy Paredes, Professor of Law at Washington University School of Law in St. Louis has been added as a new as co-author on the Fourth Edition.

Regulation of Securities: SEC Answer Book, by Steven Mark Levy
The 2007 Supplement, which published in September, is a comprehensive guide, using a question and answer format embraced by the SEC, to understanding and complying with the day-to-day requirements of the federal securities laws. This update contains a timely new chapter devoted to Exchange Act disclosure items. This new chapter covers non-GAAP financial measures; management’s discussion and analysis; off-balance sheet arrangements; internal control over financial reporting (Sarbanes-Oxley Section 404); audit committee financial experts; executive compensation; issuer disclosure of insider reporting delinquencies; codes of ethics; and risk factor disclosure. Other topics discussed in the 2007 Supplement include the SEC’s new rules governing the registration, offering, and communications processes under the Securities Act, the workings of the Pink Sheets market, the first auditing standards adopted by the PCAOB, the SEC’s newly revised accelerated filer scheme, new rules making Regulation FD inapplicable to certain issuer disclosures in connections with a registered securities offering, and much more!

Securities Litigation After The Reform Act, by Michael A Perino
The latest release, Release 11, published in September and contains the latest case law and discussion relating to the Private Securities Litigation Reform Act.

Offerings of Asset-Backed Securities, by John Arnholz and Edward E. Gainor
The 2007 Supplement, which will publish in October, is the first supplement to a title new last year. This update expands on the current book, adding relevant information such as additional guidance regarding the disclosure requirements of Regulation AB; analysis of the SEC’s telephone interpretations and other guidance on disclosure and reporting; a unique collection of information on developing ABS market practices under Regulation AB and the securities offering reform rules; concise summary of filing requirements for free writing prospectuses; concise summary of reporting requirements for ABS issuers under the Exchange Act; practitioners’ tips for addressing disclosure problems under Regulation AB; and a new Appendix on ERISA Underwriting Exemptions.

Corporate Finance and the Securities Laws, Fourth Edition, by Charles J. Johnson, Jr. and Joseph McLaughlin
The new Fourth Edition, now in a looseleaf binder format, is fully updated and is now available. Part of the Securities Integrated Library on IRN, this new Fourth Edition includes coverage of the SEC’s Securities Offering Reform; The SEC’s adoption of Regulation AB; and WorldCom and its influence on underwriters’ due diligence practices and syndicate arrangements.

Securities Act RED BOX—Rules and Regulations of the Securities Exchange Commission (Release 93) contains the text of the Rules the Securities and Exchange Commission adopted regarding the requirements for disclosure of executive compensation.