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November 2012


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. New this month is a preview 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.

 To view past issues of the Securities Update, please visit

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Financial Reform Resources



CCH Federal Securities Law Reporter

SEC Adopts Clearing Agency Standards Rule. The SEC has adopted Exchange Act Rule 17Ad-22 to govern the activities of registered clearing agencies that provide central counterparty services. The Commission issued the rule pursuant to its authority under Exchange Act Section 17A and Dodd-Frank Act Sections 763 and 805. The release defines clearing agencies’ risk standards, sets recordkeeping obligations, and clarifies disclosure obligations.

Exchange Act Rule 17Ad-22 governs registered clearing agencies that provide central counterparty services. “Central counterparty” means a clearing agency that interposes itself between counterparties to securities transactions and functionally acts as buyer to each seller and seller to each buyer. “Central securities depository services_ include services of a clearing agency that is a securities depository under Exchange Act Section 3(a)(23)(A). The release observed that the Exchange Act broadly defines “clearing agency.”

Rule 17Ad-22(b) directs a registered clearing agency that provides central counterparty services to maintain written policies and procedures that are reasonably designed to meet stated risk management goals. Clearing agencies must measure their credit exposures to participants at least once daily. Registered clearing agencies also must use margin requirements to limit credit exposures to participants under normal market conditions. Entities subject to the new rule must also have the financial resources to survive a default by the participant family to which it has the largest exposure in extreme but plausible market conditions. They are additionally required to provide for the annual validation of margin model performance by a qualified person who is free of influence from those who created or operate the models. Lastly, clearing agencies must allow persons with at least $50 million net capital to become members.

Exchange Act Rule 17Ad-22(c) requires clearing agencies to retain important records. Generally, a registered clearing agency must at fiscal quarter end (or upon SEC request) calculate the financial resources necessary to meet Exchange Act Rule 17Ad-22(b)(3) and keep records of this determination under Exchange Act Rule 17a-1. A clearing agency must retain sufficient documentation to explain its computational methods. Additionally, each registered clearing agency must post its audited annual financials on its website within 60 days after its fiscal year end. Release No. 34-68080 is reported at ¶80,164.

SEC Issues Legal Bulletin on Proof of Ownership Under Rule 14a-8. The Division of Corporation Finance has issued Staff Legal Bulletin No. 14G (CF) to provide guidance on proof of ownership issues under Exchange Act Rule 14a-8. Specifically, the bulletin contains information regarding the parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal; the manner in which companies should notify proponents of a failure to provide proof of ownership; and the use of website references in proposals and supporting statements

The bulletin first addresses the parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8. If a shareholder is a beneficial owner whose securities are held in book-entry form through a securities intermediary, Rule 14a-8(b)(2)(i) provides that the documentation can be in the form of a written statement from the record holder of the securities.

Next, the staff stated that it would not concur in the exclusion of a proposal under Rules 14a-8(b) and 14a-8(f) on the basis that a proof of ownership does not cover the one-year period unless the company specifically addresses how the proof is deficient. The notice of defect must identify the specific date on which the proposal was submitted and explain that to cure the defect, the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including the submission date.
Website references have been addressed in previous bulletins, and this bulletin contains additional guidance on their use. If a proposal or supporting statement refers to a website, a shareholder reading the proposal or supporting statement should be able to understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information provided on the website. If the shareholder has to review the information on the website to understand the proposal, the proposal would raise concerns under Rule 14a-9 and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite, the staff explained. Staff Law Bulletin No. 14G is reported at ¶60,014G.

SEC Proposes Capital, Margin and Segregation Requirements. The SEC, by a unanimous vote, has approved the issuance of proposed rules to govern the capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants. The proposed rules outline the amount of capital that dealers in security-based swaps must hold, when and how they must collect collateral or margin to protect against losses from counterparties, and how to segregate and protect funds and securities held for customers.

The capital requirements for security-based swap dealers are designed to accommodate dealers that are dually registered as broker-dealers and those that are not. The minimum capital requirements would distinguish between the two and would also depend on whether the SEC has approved a firm’s internal models in calculating its regulatory capital. Next, swap dealers would be required to take a capital charge for the full amount of any unsecured receivable, including any current exposure to derivatives counterparties that is not collateralized. Brokers that use internal models to compute capital charges and are subject to an alternative capital regime and broker-dealers that are not dually registered that use models, would be subject to less severe model-based credit charges for uncollateralized exposures to commercial end users. The proposal also sets risk management standards which require swap dealers to comply with Rule 15c3-4. Major security-based swap participants would have to maintain a positive tangible net worth and would have to comply with Rule 15c3-4 with respect to their security-based swap activities.

Under Rule 18a-3, a security-based swap dealer would have to collect margin collateral from counterparties to non-cleared transactions to cover current exposure and potential future exposure, unless an exemption applies. The proposed segregation rule for security-based swap dealers establishes additional requirements for cleared and non-cleared swaps that would allow the collateral of counterparties to be commingled and segregated on an omnibus basis. Rule 18a-4 would require security-based swap dealers to maintain possession and control of all excess securities capital that has been provided by customers. Any excess securities collateral could not be used to finance a dealer’s own business. Release No. 34-68071 is reported at ¶80,162.

Rule Governing Principal Trades With Advisory Clients Extended. The SEC has proposed an amendment to Investment Advisers Act Rule 206(3)-3T to extend the sunset from December 31, 2012 to December 31, 2014. Rule 206(3)-3T is a temporary rule that provides an alternative means for registered investment advisers to meet the requirements of Section 206(3) when they act in a principal capacity in transactions with certain of their advisory clients. The comment period will be open for 30 days.

Rule 206(3)-3T was originally intended to sunset on December 31, 2009, but instead, it was adopted as a final rule with a sunset date of December 31, 2010. That sunset was subsequently extended while the SEC completed a study required by the Dodd-Frank Act and while it more broadly considered the regulatory requirements for broker-dealers and investment advisers. Since the staff completed the Dodd-Frank study, it has worked to obtain data and economic analysis on the standards of conduct and enhanced regulatory harmonization of broker-dealers and investment advisers to determine whether to engage in future rulemaking. The staff will not complete its consideration of those issues before the current December 31, 2012 sunset date for Rule 206(3)-3T. Release No. IA-3483 is reported at ¶80,160.

“Patchwork Quilt of Evidence” Did Not Rise to Inference of Scienter. A motion for summary judgment brought by Franklin D. Raines, the former Chairman of the Board and Chief Executive Officer of Federal National Mortgage Association (Fannie Mae) was granted by a federal district court. Upon review of all the evidence, the court concluded that the plaintiffs failed to put forth sufficient evidence from which a jury could find that Raines acted with scienter. The plaintiffs’ evidence showed at best that Raines acted negligently in his role as CEO and negligently in his representations about Fannie Mae’s accounting and earnings management practices, the court said.

The action was brought by a class of parties represented by an institutional investor. During the relevant period (April 17, 2001 through December 22, 2004) Fannie Mae’s stock was traded on NYSE, and it was regulated by the Office of Federal Housing Enterprise Oversight (“OFHEO”). Raines was Fannie Mae’s CEO and Chairman of the Board from January 1999 through December 2004. This action arose out of an OFHEO investigation of Fannie Mae’s accounting policies and internal controls. According to OFHEO’s report, released in September 2004, Fannie Mae had misapplied certain Generally Accepted Accounting Principles relating to its amortization of price changes on securities and loans and to its use of hedge accounting (FAS 91 and FAS 133). OFHEO also raised concerns over Fannie Mae’s internal controls and audit reviews. The findings of noncompliance with GAAP were confirmed by an SEC review of Fannie Mae’s accounting. Acting on the SEC’s advice, Fannie Mae announced that it would restate its 2001-2004 financial results concerning its FAS 91 and FAS 133 accounting, and the restatement was issued in 2006.

The first complaints in this action were filed after OFHEO issued its 2004 report. The separately-filed cases were eventually consolidated into this multi-district litigation action, and a class consisting of approximately 1 million investors was later certified. The investors alleged that Fannie Mae and the individual defendants violated the antifraud provisions of the Exchange Act by intentionally manipulating earnings and violating GAAP, thus causing losses to investors. Regarding Raines, the investors alleged that he knowingly made false statements about the soundness of Fannie Mae’s accounting and internal controls and recklessly disregarded a deficient corporate governance structure. The investors alleged further that Raines misled them about his approval of and participation in earnings management strategies designed to meet quarterly earnings-per-share targets to maximize bonuses and about Fannie Mae’s hedge accounting policy that implemented FAS 133.

The court found that the investors failed to put forth sufficient evidence of Raines’ scienter. According to the court, there was no direct evidence that Raines intended to deceive Fannie Mae’s investors, nor was there evidence that he even knew his statements were false. Moreover, the court observed, the investors conceded these points at oral argument.

The court characterized the investors’ showing as a “patchwork quilt of evidence” that simply did not rise to an inference of scienter and was insufficient to withstand Raines’ motion for summary judgment. The court stated that Raines identified significant and undisputed evidence that was inconsistent with the requisite scienter, such as evidence indicating that he believed that Fannie Mae’s accounting was GAAP compliant and that he was unaware of any weaknesses in internal controls. Such substantial evidence negates any possible inference of scienter, said the court.

The court then detailed how the investors’ claims were inadequate to establish the scienter required for securities fraud. First, at the heart of the case against Raines were allegations that he was aware of, or complicit in an earnings management scheme to increase executive bonuses. The court concluded that the investors failed to show that Raines made any statements with an intent to deceive or without a reasonable basis. The investors additionally failed to show that certain of the transactions at issue were improper or that Raines was involved in or had knowledge of them. The investors also failed to show that statements they specifically identified as misstatements were false. The court explained that the investors “merely carve[d] up Raines’ statements to fit their story” and ignored the statements’ context.

Regarding Fannie Mae’s FAS 133 and FAS 91 accounting, the court concluded that the investors failed to identify any evidence that Raines knew, or had reason to know, that Fannie Mae’s accounting violated GAAP or that he intentionally misled investors regarding these accounting policies. Raines, the court stated, relied in good faith on the judgment of Fannie Mae’s internal and external accounting and auditing personnel, and there was no evidence that he was notified or should have known that the accounting policies violated GAAP. Summary judgment on this claim was therefore warranted.

Next, the investors failed to show that Raines misrepresented Fannie Mae’s internal controls. The only evidence the investors presented, the court noted, failed to establish the point for which it was offered and was mischaracterized. The investors did not dispute that Raines was reassured by Fannie Mae’s executives that everything was in order, and any evidence of scienter was negated by substantial evidence that Raines acted in good faith. There was no evidence that Raines’ reliance on Fannie Mae’s internal reporting and certification process was reckless, even when examined in the light most favorable to the investors.

The plaintiffs also failed to establish scienter through a motive and opportunity theory. The court observed that Raines increased his stock holdings during the class period and did not sell any shares or exercise any options, actions which are inconsistent with fraudulent intent. Finally, the court rejected the investors’ use of the magnitude of the fraud to shore up their case. Without any actual evidence supporting Raines’ scienter, the court wrote, the magnitude of Fannie Mae’s restatement was insufficient to preclude summary judgment. In re Federal National Mortgage Association Securities, Derivative, and “ERISA” Litigation (DC DofC) is reported at ¶97,020

Short-Swing Trading Causes Injury Sufficient for Article III Standing. A 2nd Circuit panel concluded that short-swing trading in an issuer’s stock by a 10-percent beneficial owner in violation of Exchange Act Section 16(b) causes injury to the issuer sufficient for constitutional standing. A district court had awarded the plaintiff, an investor suing on behalf of an issuer, the short-swing profits realized by defendants from trading in the issuer’s stock in violation of Section 16(b). On appeal, the company that traded the shares argued that the proscribed trading caused no actual injury to the issuer as required to establish a genuine case or controversy under Article III of the U.S. Constitution.

According to the complaint, the company, while beneficially owning almost 15 percent of the issuer’s common stock, purchased and then sold 200,000 additional shares on the open market, realizing a profit of $85,491.00 in a short-swing trade in violation of Section 16(b). The investor requested that the issuer sue the company and later filed suit for disgorgement. The company moved to dismiss for lack of constitutional standing, but the district court denied the motion, holding that issuers have a legally-protected interest in proscribed short-swing profits and that a shareholder plaintiff’s ongoing financial interest in recovering short-swing profits pursuant to Section 16(b) is sufficient to satisfy the injury-in-fact requirement. Judgment was entered against the company in the amount of the alleged short-swing profits.

It was undisputed that the investor had adequately alleged a claim under Section 16(b) against the company and that the investor was authorized to file such a claim under the statute. The company argued, however, that there was no case or controversy affording standing to sue because there was no “injury in fact.” Specifically, the company maintained that the investor could not show any injury to the issuer from the alleged violation because the issuer was not a party to the trades and lacked any “fiduciary, contractual or confidential relationship” with the company.

The appellate court rejected the company’s argument as without merit. Section 16(b)’s strict liability for an entire class of transactions, Circuit Judge Raggi wrote, effectively makes beneficial owners fiduciaries and short-swing transactions by such persons breaches of trust. Section 16(b) therefore created a fiduciary duty on the part of the company not to engage in any short-swing trading and conferred upon the issuer the right to expect beneficial owners to refrain from short-swing trading. Depriving the issuer of this right, the judge continued, establishes Article III standing.

The judge went on to observe that, pursuant to Section 16(b), a 10-percent beneficial owner becomes a corporate insider and a fiduciary. At this point, the judge explained, “injury depends not on whether the Section 16(b) fiduciary traded on inside information but on whether he traded at all.” Section 16(b), then, “created legal rights that clarified the injury that would support standing, specifically, the breach by a statutory insider of a fiduciary duty owed to the issuer not to engage in and profit from any short-swing trading of its stock.” Because such an injury was satisfactorily alleged in this case, the panel rejected the standing challenge as without merit. The judgment of the district court was affirmed. Donoghue v. Bulldog Investors Gen. Partnership (2ndCir) is reported at ¶97,041.

CCH Blue Sky Law Reporter  

Missouri Analyzes Switch of 62 Mid-Size Advisers From Federal to State Registration. The process and results from switching 62 mid-size advisers from federal to Missouri registration by the June 28, 2012 “switch deadline” were analyzed by the Missouri Securities Commissioner and Division staff in an IA switch report. The report summarized the Division’s outreach efforts leading up to the switch, provided data about mid-size advisers new to state registration, and outlined the Division’s audit schedule for mid-size advisers that transitioned to Missouri registration. The Division’s audit unit will conduct a routine field audit of each Missouri-based mid-size adviser within the next ten months, prioritizing the audits based on an adviser’s disciplinary history, whether the adviser has custody of its clients’ funds or securities, the outside business activities of the IA firm’s representatives and the date of the firm’s last regulatory examination. ¶35,600K

Florida: Arbitration Award Provided Sufficient Basis to Deny Registration Application. A FINRA arbitration award provided the Florida Office of Financial Regulation (OFR) with a sufficient basis to deny a stockbroker’s application for registration as an associated person of a securities dealer. In Wojnowski v. State, the Florida Court of Appeal held that a FINRA arbitrator’s finding that the appellant fraudulently sold unregistered securities satisfied the requirements of the Florida Securities and Investor Protection Act, which authorizes the OFR to deny registration to a person who has been the subject of a national securities association decision involving a violation of state securities law. Accordingly, the appellate court affirmed the OFR’s order on appeal.

The appellant had submitted an application to the OFR on Form U-4 requesting registration in Florida as an associated person of a New York securities firm. Based on information contained in the Form U4, the OFR determined that the appellant was one of seven named respondents in a 2010 FINRA arbitration that had resulted in findings that the respondents, among other things, violated Florida law through misrepresentations and sales of unregistered securities. The arbitrator awarded the claimants $100,000 in compensatory damages and $40,000 in punitive damages, for which all seven respondents were jointly and severally liable. A Florida circuit court subsequently rendered a final judgment confirming the arbitration award.

Although the appellant argued that the OFR could not rely on the findings of a single arbitrator to deny his registration application, the appellate court ruled that the appellant had waived his opportunity to challenge the facts supporting the OFR’s action when he failed to request a timely hearing. Moreover, the OFR’s conclusions of law were not erroneous because: (1) the FINRA arbitration award constituted the type of “decision” contemplated by the statute; (2) the appellant clearly was the subject of the decision, having been a named respondent in the proceeding and found liable to the claimants for damages; and (3) the arbitration award included findings that the appellant had violated Florida law by selling unregistered securities and by misrepresenting information in the course of a securities transaction. Thus, the arbitration award satisfied the Florida statutory requirements on which the OFR properly relied to deny the appellant’s registration application. Wojnowski v. State is reported at ¶74,999.


Aspen Federal Securities Publications  

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes. The 2013 Cumulative Supplement, soon available online, updates the cornerstone Securities Regulation treatise. The supplement fully incorporates the large number of legislative, regulatory, and case law changes in the past year, including Congressional enactment of the JOBS Act of 2012; Congressional enactment of the STOCK Act of 2012; and several rule adoptions and amendments required by the Dodd-Frank Act, including: amendments to Securities Act Rules 134, 138, 139, 168, Forms S-3, S-4, F-3, and F-4, as well as Schedule A to remove references to reliance on security ratings, adoption of Rule 14a-21 to require an advisory shareholder vote to approve the compensation of named executive officers, rescission of Form F-9, amendments to Rules 501(a)(5) and 215 to revise the accredited investor standards, amendments to Rule 15d-22 to eliminate the automatic suspension of the duty to file for asset-backed securities, adoption of Rule 13h-1 to assist the Commission in obtaining trading information on large traders, additional and proposal of several new rules addressing security swaps, amendments to Rule 19b-4 to expand the list of categories that qualify for summary effectiveness for proposed rule changes made by registered clearing agencies with respect to specified futures clearing operations, the Financial Stability Oversight Council’s adoption of criteria to designate Financial Market Utilities, adoption of Rule 204(b)-1 to require investment advisers registered with the SEC that advise one or more private funds and have at least $150 million in private funds assets under management to file Form PF with the Commission, adoption of Rule 202(a)(11)(G)-1 to define family offices that will be excluded from the definition of investment adviser under the Investment Advisers Act, amendments to Rule 205-3 to permit investment advisers to charge performance based compensation to qualified clients and to inflation adjust the Rule dollar standards, and a complex and controversial proposal to implement the Volcker Rule provision of Dodd-Frank, which was jointly proposed for comment by the SEC, Comptroller of the Currency, Federal Reserve System, and FDIC. Other topics addressed in this update are the Commission’s approval of NYSE, NYSE Amex, and Nasdaq rule amendments creating additional listing requirements for a company that becomes a 1934 Act reporting company by combining with a public shell, whether through a reverse merger, exchange offer, or otherwise; the Commission’s approval of amendments to the FINRA Discovery Guide used in FINRA arbitration cases; Second Circuit decisions in Fiero v. FINRA, Lehman Bros. Mortgage-Backed Sec., and SEC v. Citigroup Global Markets, Inc.; and U.S. Supreme Court decision in Credit Suisse Sec. (USA) LLC v. Simmonds.

Regulation of Securities: SEC Answer Book, Third Edition, by Steven Mark Levy. The 2013-1 Supplement is now available online. This practical guide aids the reader in understanding and complying with the day-to-day requirements of the federal securities laws that affect all public companies. Using a question-and-answer format similar to that which the SEC has embraced, this guide provides clear, concise, and understandable answers to the most frequently asked securities compliance questions. The 2013-1 Supplement features an extensively rewritten Chapter 1, “Understanding Securities Regulation,” to reflect new developments, including reforms introduced by the Jumpstart Our Business Startups Act (JOBS Act) of 2012 helping small and medium-sized businesses raise capital, go public, and hire employees. The chapter also includes expanded discussion of Securities Act registration exemptions, and a new section describing procedures for going public and conducting an initial public offering. The 2013-1 Supplement also includes a variety of other timely topics, including: Does Item 303 of Regulation S-K (MD&A) create an independent private right of action (Q 4:36)? What reduced executive compensation disclosure applies to emerging growth companies (Q 4:83.5)? What specialized disclosure provisions of importance to petroleum and mining companies were added by the Dodd-Frank Act (Q 4:119.25)? Must a private party suing for injunctive relief to enforce Section 13(d) (beneficial ownership disclosure) satisfy traditional equitable requirements (Q 5:61.5)? How are hybrid derivative securities treated for purposes of Section 16(b) short-swing profit liability (Q 7:18.5)? Are emerging growth companies subject to say-on-pay requirements (Q 9:13.5)? How should the company describe the say-on-pay vote on its proxy card (Q 9:15.5)? How was Rule 144A liberalized by the JOBS Act to permit general solicitation and general advertising (Q 15:2.5)? Can the SEC establish insider trading through purely circumstantial evidence (Q 18:34.5)? Do the insider trading prohibitions apply to members of Congress and other federal officials (Q 18:41)? What is the scope of the duty of confidentiality and trust owed by members and employees of Congress concerning nonpublic information (Q 18:42)? Does the law bar federal officials from special access to initial public offerings (Q 18:45)? Does the law regulate firms that gather “political intelligence” for hedge funds and other investors (Q 18:46)? Are investment advisers restricted from obtaining business from government entities in return for political contributions (Q 23:41.5)? Under what circumstances may investment advisers charge performance-based compensation to clients (Q 23:42.5)?

Securities Litigation Under the PSLRA by Michael A. Perino. Release #23 is now available online. This publication analyzes litigation under the Private Securities Litigation Reform Act (Reform Act or PSLRA). Since passage of the Act, courts have struggled to interpret its various provisions and have attempted to reconcile legislative history that often seems internally inconsistent or at odds with the statutory text. The story of litigation under the PSLRA is also the story of how attorneys have adapted their litigation strategies in innovative and surprising ways to deal with the statute’s procedural changes. Indeed, one of those adaptations—a shift of litigation from federal to state courts as a means of evading the PSLRA—prompted Congress to pass the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Release #23 provides essential new information about the latest legal developments, including: New authoritative publications and cases concerning bringing a class action case; recent cases on the issue of discovery stays; new cases on pleading and proof requirements; recent decisions on securities fraud damages; and new cases on when SLUSA applies, forcing litigation into federal court by preempting state court class actions involving nationally traded securities and giving federal courts the power to stay proceedings in parallel state court actions.

A Practical Guide to Section 16: Reporting and Compliance, Fourth Edition, edited by Stanton P. Eigenbrodt. The 2013 Supplement is now available online. This publication contains complete information on reporting and filing procedures to comply with the complex shareholder, SEC, public disclosure, and stock exchange requirements. This latest update includes significant revisions to provide updated information in a variety of areas including: Updated Chapter 3, The Reporting Scheme; an update to Chapter 10, Tax Implications, to discuss proposed revisions to the regulations under the U.S. Internal Revenue Code; significant revisions to Chapter 11, Merger and Acquisition Implications; and updates to the Appendices.

IPO Vital Signs

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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.

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#766 - IPO Issuer Legal Proceedings
An interactive table highlighting legal proceedings disclosures as they appear in final IPO prospectuses.
Use IPO Vital Sign #766 to...

  • Identify comparable IPO issuers based on type of legal proceedings, SIC code and issuer’s law firm,
  • Determine if the legal proceedings in which your company or client company are involved should be disclosed,
  • Analyze the frequency of inclusion and content of corresponding risk factors. 

Tip! Scroll down to the type of legal proceeding you are interested in researching and click any or all of the blank boxes in the column just left of the Legal Proceedings Disclosure column. Once you have checked the comparable disclosures you want to read in full, click the [COMPARE] button in the Legal Proceedings Disclosure column heading.



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

  • 34-68080—Clearing Agency Standards (October 22, 2012).

The final release adds Exchange Act Rule 17Ad-22 to implement Dodd-Frank requirements for clearing agencies’ risk management procedures and controls.

  • 33-9364—Adoption of Updated EDGAR Filer Manual (October 4, 2012).

This final release implements changes to allow emerging growth companies and certain foreign private issuers to submit confidential, draft registration statements for SEC staff review via EDGAR.

  • 34-68071—Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers (October 18, 2012).

Pursuant to Dodd-Frank, the SEC has proposed to create margin and capital requirements for security-based swap dealers and major security-based swap participants. Segregation and notice requirements also would apply to these dealers and participants. Additionally, the Commission seeks to amend the net capital rules for broker-dealers using the alternative internal model-based method to calculate net capital.

  • IA-3483—Temporary Rule Regarding Principal Trades with Certain Advisory Clients (October 9, 2012).

The SEC proposed to amend Adviser’s Act Rule 206(3)-3T to extend the rule’s sunset from December 31, 2012 to December 31, 2014.

SEC Guidance

  • Staff Legal Bulletin No. 14G (CF) (October 16, 2012)—New SLB 14G clarifies the Division of Corporation Finance’s views on certain aspects of shareholder proposals. Specifically, SLB 14G describes how parties can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8, how companies should notify proponents of a failure to provide proof of ownership for the one-year period required under Rule 14a-8(b)(1), and provides guidance on the use of website references in proposals and supporting statements.

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.

The SEC still must adopt many Dodd-Frank rules and begin to implement numerous JOBS Act items. One of the more significant forthcoming rulemakings will implement the JOBS Act crowdfunding provisions. Other regulatory activity may address money market mutual fund reforms. Earlier this year, the Commission was unable to muster enough votes for a proposal, but the significance of this topic makes it a potential area for SEC action if a majority of commissioners can agree on what approach to take.


Hot Topic of the Month

This month’s hot topic is attorney-client privilege. The attorney-client privilege protects from disclosure of confidential communications between the client and his attorney made when the client is seeking legal advice. Courts have held that good faith reliance on the advice of an attorney is a factor in the defense to scienter in securities fraud cases. To rely on the advice of counsel, a party must show a complete disclosure to counsel, that advice from counsel was sought, that the advice was that the conduct was legal, and that the advice was relied on in good faith. A party intending to rely on the advice of counsel must make a full disclosure during discovery, and failure to do so is a waiver of the advice-of-counsel defense.

In a recent action brought by the Commission, defendants in an enforcement action were entitled to rely on an advice of counsel defense. In this case, the plaintiffs were advised by two firms: one advised on securities law matters and the other on bankruptcy. The Commission asserted that the defendants should have disclosed advice they received from the second firm regarding bankruptcy. The court rejected this argument, stating that the Commission cited no public statements by the defendants that implicated bankruptcy law and concluded that any bankruptcy advice obtained from the second firm was “simply irrelevant” to public communications and transactions at issue. The court accordingly found that the defendants did not waive their attorney-client privilege as to the bankruptcy advice

The Commission also argued that the defendant should not have relied on advice received from the first firm because it was not disinterested due to a conflict of interest resulting from its representation of a mutual fund. The court determined that the Commission offered no argument as to why the defendants’ interests and the fund’s interests would have clashed with respect to the relevant public communications.

Finally, the production of legal memoranda was denied. The Commission contended that the work-product privilege as to these documents was waived when the producing firm shared them with another which was allegedly adverse to the defendants at the time. The court cited the “common interest rule” which states that courts generally find no waiver of the work-product privilege where the disclosing and receiving parties share a common interest. At the time the memos were shared, the two firms were working together in the defense of the defendants

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
    • CCH Explanations (e.g., ¶22,781.040)
    • In re The Reserve Fund Securities and Derivative Litigation (SD NY 2012), at  ¶97,012
    • In re Initial Public Offering Securities Litigation, (SD NY 2008), ¶94,580
    • Report Letters (e.g. “Court Allows Reliance on Advice of Counsel Defense” (9-26-12) and “Court Sustains SEC’s Objection to Production of Redacted Memorandum” (7-11-12)
  • Insights – Amy L. Goodman (e.g., “The Attorney-Client Privilege and Work Product Doctrine in Government Investigations” (June 1, 2007))
  • Enforcement Manual, Securities and Exchange Commission Division of Enforcement (e.g., §4.0, “Privileges and Protections”)
  • Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 13.B.2, at fn.73)
  • Regulation of Securities: SEC Answer Book – Levy (e.g., Q21:15, “What privileges may be asserted in an SEC investigation?”)
  • Jim Hamilton’s World of Securities Regulation (e.g., 9-2-08)