November 2007


From the editors of CCH Federal Securities Law Reporter, CCH Blue Sky Law Reporter and the securities publications of Aspen Publishers, this update describes important developments covered in these publications, as well as timely topics of interest generally to federal and state securities practitioners.

If you have questions or comments concerning the information provided below, please contact me at elena.eyber@wolterskluwer.com.

CCH Federal Securities Law Reporter

PCAOB Changes Firm Inspection Rules
The Public Company Accounting Oversight Board adopted rule amendments concerning inspections of registered firms. The changes eliminate the requirement that the board regularly inspect each registered public accounting firm that plays a substantial role in the preparation or furnishing of an audit report but does not issue an audit report. The amendments do not affect the inspection cycles for larger firms or for firms that regularly issue audit reports. PCAOB Release No. 2007-009 is reported at ¶87,956 (ip access user).

SEC Publishes Staff Report on Executive Compensation Disclosure
The SEC staff published a report discussing the principal themes that emerged from its initial review of the disclosure of 350 public companies for compliance with the Commission’s new executive compensation and related disclosure. The staff determined that two themes emerged from these reviews. First, companies should provide more focused disclosure of how and why they made specific executive compensation decisions. Second, the manner of presentation is important, and companies can use it to provide more direct, specific, clear and understandable executive compensation disclosure. The staff report is reported at ¶87,954 (ip access user).

11th Circuit: Bond Insurer Had No Standing to Sue Underwriter
 The 11th U.S. Circuit Court of Appeals held that an insurer of municipal bonds who became the owner of those bonds upon default did not have standing to pursue a securities fraud action against the underwriter. In this case, a county established an authority to construct and operate a waste management facility. The facility issued bonds insured by the plaintiffs, and the authority subsequently defaulted on their obligations. According to the insurer, it had standing to bring the action because 1) as the true party at risk in this transaction, it was effectively the purchaser of the bonds, 2) it was entitled to standing as a guarantor of the bonds, 3) it actually purchased the securities pursuant to the terms of the insurance policy and 4) it was fully subrogated to the rights of the individual bondholders and therefore entitled to bring suit based on their purchases. The court held that although the insurer acquired the bonds upon default, they were no longer "securities" as required for standing under Rule 10b-5. Neither the insurer's acting as a guarantor, its assumption of risk in the bond transaction, nor its status as a subrogee provided it with standing to sue.

As stated by the court, the insurer was "mistaken, however, in interpreting the purchaser-seller requirement to entail a functional, and not a formal, inquiry." The panel added that although the Supreme Court discussed the functional aspects of the rule in its reasoning, the Court deliberately endorsed a standing rule that would not be subject to "endless case-by-case erosion" by courts employing a functional analysis to every new group of potential plaintiffs. The court rejected the insurer's claims that it acquired a contingent interest in the bonds through its insurance policy. The court concluded that, at the time of transfer, the bonds were no longer securities as required for standing. Because the insurer acquired no right to receive past or future payments under the terms of the insurance policy, had no voting rights, and generated no profit from the bonds, the bonds were not securities "because they failed to satisfy the definitions of either an "investment contract," "stock," or "note" as articulated by the Supreme Court. Financial Security Assurance, Inc. v. Stephens, Inc. (11thCir) is reported at ¶94,399 (ip access user).

Secondary Claim Survives Dismissal of Primary Claim
A claim under Section 20A was properly upheld despite the underlying Section 10(b) claim being time-barred, concluded the Ninth Circuit Court of Appeals. The district court (CD CA) had dismissed the class' Section 10(b) claim as being time-barred but denied the motion to dismiss the Section 20A insider trading claim. The circuit court affirmed, concluding that to maintain a claim under Section 20A, a plaintiff need not plead an actionable predicate violation. The plain meaning of the term "violates" in Section 20A does not require that the predicate claim be filed within its own period of limitations. Johnson v. Aljian (9thCir) is reported at ¶94,417.

 

CCH Blue Sky Law Reporter

California Proposes Broker-Dealer Recordkeeping and BD/IA Financial Reporting Amendments
Broker-dealer books and records requirements that pertain to purchase and sale documents, customer records, associated person records and customer complaint records were proposed for amendment by the California Department of Corporations to conform to SEC 2001 amendments to Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934 following adoption of the National Securities Market Improvement Act of 1996. In addition, financial statement requirements for broker-dealers and investment advisers were proposed for clarification. Interested persons have until November 19 to comment on these proposals. ¶12,222 (ip access user), ¶12,224 (ip access user).

California Proposes Changes to Investment Adviser Exemption Involving Hedge Funds
A rule exempting from registration those investment advisers with fewer than 15 clients and more than $25 million in assets under management was proposed for change by the California Department of Corporations because the existing rule does not adequately address the broadening market for, or fraud in connection with, hedge funds. As proposed, the exemption from investment adviser registration would be available for persons who: (1) do not hold themselves out generally to the public as investment advisers; (2) are exempt from registration under the federal Investment Advisers Act of 1940; and (3) provide investment advice to only venture capital companies, as defined. Interested persons have until November 26 to comment on this proposed rule change. ¶12,167D (ip access user).

Securities Exchange Act preempted claims against clearing agencies
The Securities Exchange Act of 1934 (Act) preempted state law claims involving the clearing and settlement of securities transactions, the Supreme Court of Nevada held in Nanopierce Technologies, Inc. v. Depository Trust and Clearing Corp. The state high court concluded that the Nevada laws upon which the appellants based their claims of securities fraud and market manipulation posed an obstacle to Congressional objectives with respect to the regulation of a national system for clearing and settlement. Section 17A of the Act preempted the appellants’ claims, therefore, because it would be impossible for the respondent clearing agencies to comply with both state and federal requirements concerning the operation of their Stock Borrow Program. The decision is reported at ¶74,659 (ip access user).

New Smart Chart Added: Investment Adviser Registration and Post-Registration Requirements
This new chart provides for each jurisdiction the registration and post-registration requirements for investment advisers.

Aspen Federal Securities Publications

Regulation of Money Managers: Mutual Funds and Advisers, by Tamar Frankel and Ann Taylor Schwing
The 2008 Supplement (ip access user) is now live on the Investment Management Integrated Library on IRN. This comprehensive four-volume treatise on investment management regulation covers federal and state statutes, their legislative history, common law, judicial decisions, rules and regulations of the SEC, staff reports, and other publications dealing with investment advisers and investment companies. The 2008 Supplement includes an expanded discussion of nationally recognized statistical rating organizations and discussion of the registration and regulatory program established for them in the Credit Rating Agency Reform Act of 2006; a discussion in light of the Financial Services Regulatory Relief Act of 2006 and the Military Personnel Financial Services Protection Act; an analysis of new Financial Crimes Enforcement Network regulations, as well as amended and other new regulations affecting investment companies and investment advisers; and addition of numerous new court decisions, SEC no-action letters, and law review articles, and updating of the existing court decisions and regulations.

Sarbanes-Oxley Act: Planning and Compliance, by Diane E. Ambler, Lorraine Massaro, and Kristen L. Stewart
The 2008 Supplement (ip access user) is now live on the IRN Corporate Governance Integrated Library. This comprehensive resource provides practical guidance to help ensure compliance with all Sarbanes-Oxley rules and regulations. It provides a veritable blueprint for an effective corporate compliance program. The 2008 Supplement includes a discussion on the evolution of Section 404 reporting; further discussion on standards for audit committees of listed companies; addition of audit committee pre-approval for internal control non-audit services by independent accountant; update on SEC disclosure rules; discussion of changes in certain PCAOB Standards; discussion of changes in governance requirements of the national securities exchanges, in particular, requirements relating to board member independence; updates of excerpts from the AMEX Company Guide, the Nasdaq Rules, and the NYSE Listed Company Manual regarding corporate governance; excerpts from PCAOB’s Auditing Standard No. 5; and excerpts from the SEC’s Interpretive Guidance on Section 404.

Fundamentals of Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes
The 2008 Supplement will be live on the IRN Investment Management Integrated Library in early November. This compendium reviews the most significant aspects of securities regulation and provides essential information covering a wide array of topics concerning securities law. The most recent supplement includes discussion of the SEC’s proposed amendments to Rules 144 and 145; the SEC’s Concept Release to address § 404; the PCAOB’s adoption of Audit Standard No. 5; the SEC’s adoption of confirming amendments in Rules 13a-15(c) and 15d-15(d) and Item 308 of Regulations S-B and S-K, as well as the adoption of amendments to Regulation S-X, most significantly 1-02(p), which contains a new definition of material weakness; the SEC’s adoption of amendments to the proxy rules that permit issuers and other persons to furnish proxy materials to shareholders by posting them on an Internet Web site and notifying shareholders of the availability of the proxy materials; the U.S. Supreme Court’s reversal of the Second Circuit in Credit Suisse Sec. (USA) LLC v. Billing; the SEC’s rescission of Rule 10a-1 and addition of Rule 201 to Regulation SHO to eliminate the possibility that any price test, including any SRO price test, apply to short selling in any security; a related amendment was made to Rule 200(g) of Regulation SHO to remove the requirement that a broker-dealer mark a sell order of an equity security as short exempt if the seller is relying on an exemption from the price test of the former Rule 10a-1 or any SRO price test; the U.S. Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., in which the majority articulated the Court’s approach to pleading standards under the Private Securities Litigation Reform Act; and other new legislative, regulatory, and case law developments.

Corporate Finance and the Securities Laws, Fourth Edition, by Charles J. Johnson, Jr. and Joseph McLaughlin
The most recent supplement will be available on the Securities Integrated Library on IRN in early November. Written in plain English by two top experts in the field, this “go to” resource explains the mechanics of corporate finance together with the statutes that govern each type of deal. The latest supplement includes discussion of Google’s transferable stock options; proposed changes to S-3 and F-3 eligibility standards; effects of SEC’s posting of comment letters on its website; short selling in advance of public offerings: Rule 105 amendments; merger of NYSE and NASD member firm regulatory units; private placement reform proposals—SEC action taken and to be taken; private placement trading platforms (PORTAL, GSTRueE, and others); shelf takedowns after a late or omitted 1934 Act filing; new SEC deregistration rules for foreign companies; proposed abolition of reconciliation requirement for IFRS filers; and developments in modified Dutch auction self-tenders.

Hot Topic of the Month

This month’s hot topic is Regulation R - bank broker rules. Ending eight years of stalled negotiations, the SEC and the Federal Reserve Board adopted rules that finally implement the bank broker provisions of the Gramm-Leach-Bliley Act of 1999. The joint rules, codified as Regulation R, are designed to accommodate the business practices of banks while protecting investors. The rules are expressly designed to ensure that banks may continue to conduct securities transactions for customers as part of their banking activities, thereby achieving the broad, historic goals of Gramm-Leach-Bliley of promoting competition and efficiency in the markets for financial services, while recognizing the functional regulatory structure in place for banks.

The Gramm-Leach-Bliley Act repealed the blanket exemption banks had historically enjoyed from the Exchange Act definition of “broker” and replaced it with a set of limited exemptions that allow the continuation of traditional activities performed by banks. Thus, a bank will be considered a broker under the Exchange Act and subject to the full panoply of SEC regulation if it engages in the business of effecting transactions in securities for the accounts of others. However, at the same time, the Act carves out a number of exemptions from the definition of broker.

The joint SEC-Fed rules implement GLB’s removal of the blanket exemption from SEC registration for banks that engage in securities activities. The exemptions embrace a number of activities and transactions traditionally performed by banks and those involving identified excepted banking products. If a bank limits its brokerage activities to those described in the exceptions, the bank will not be subject to broker-dealer registration.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, Insights – Amy L. Goodman, Securities Regulation - Loss & Seligman, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

IPO Vital Signs

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#336 - Countries of IPO Incorporation

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