October 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

SEC Adopts Regulation R to Implement Bank Broker Provisions
The SEC unanimously approved Regulation R, which implements the bank broker provisions of the Exchange Act. Banks will have an 18-month transitional exemption before complying with Regulation R. The regulation was developed jointly with the Federal Reserve Board. Release Nos. 34-56501 and 34-56502 will be published in Report 2296 at ¶87,950 and ¶87,951.

Temporary Rule Adopted in Response to Court Decision
The SEC adopted a temporary rule in response to the DC Circuit’s opinion in Financial Planning Association v. SEC (¶94,185). Under temporary rule 206(3)-3T, advisers would be in compliance with Advisers Act Section 206(3) with respect to nondiscretionary advisory accounts if they provide written prospective disclosure about any conflicts that may arise from principal trades. They must obtain written, revocable consents from their clients authorizing them to enter into principal transactions and make certain disclosures prior to each principal transaction. The SEC also proposed amendments to reinstate three interpretive positions of the rule that were vacated by the court. Release Nos. IA-2653 and IA-2652 will be published in Report 2296 at ¶87,953 and ¶87,952.

Commission Approves FINRA Rule on Deferred Variable Annuities
The SEC approved a new Financial Industry Regulatory Authority rule that is intended to enhance broker-dealer sales practices with respect to purchases and exchanges of deferred variable annuities. The SEC also issued an exemptive order allowing FINRA members to hold customer funds for no more than seven business days while completing the required principal review under the new rule without becoming fully subject to Exchange Act Rule 15c3-3 and being required to maintain higher levels of net capital in accordance with Rule 15c3-1. Release Nos. 34-56375 and 34-56376 are published at ¶87,947 (ip access user) and ¶87,948 (ip access user).

SRO Did Not Have Absolute Immunity
A national securities exchange and self-regulatory organization did not have absolute immunity from issued advertisements touting stock in specific companies in order to increase trading volume. In an en banc opinion, the 11th U.S. Circuit Court of Appeals held that because the advertisements were made to serve the organizations' own business by enticing investors to buy stock listed on its exchange, the advertisements did not fall under the organizations' delegated disciplinary or regulatory authority pursuant to the Exchange Act. Weissman v. National Association of Securities Dealers, Inc. (11thCir) is reported at ¶94,384 (ip access user).

5th Circuit Interprets Fraud Pleading Ruling
Interpreting the U.S. Supreme Court's recent ruling on scienter pleading in a securities fraud class action (Tellabs, Inc. v. Makor Issues & Rights, Ltd., ¶94,335 (ip access user)), a 5th Circuit panel rejected a reading that would allow the drawing of a strong inference of scienter from the fact that the senior executive and financial officers signed a Sarbanes-Oxley Act Section 302 certification. Investors were unable to explain the link between the certification statement concerning internal controls and the actual accounting and reporting problems. Investors filed a securities fraud class action against the company, its CEO and two CFOs who served at different times. They alleged that a number of false statements by the company regarding its financial condition caused an artificial inflation in the market price of the company's securities. Under Section 302, the senior executive and financial officers have to sign the certification. The appeals court rejected a reading of Tellabs that would allow a strong inference of scienter from the Sarbanes-Oxley Act certification alone. If this interpretation were accepted, the court said that scienter would be established in every case where there was an accounting error or an auditing mistake made by a publicly traded company, which would eviscerate the pleading requirements for scienter set forth in the Private Securities Litigation Reform Act. Central Laborers' Pension Fund v. Integrated Electrical Services, Inc. is reported at ¶94,378 (ip access user).

CCH Blue Sky Law Reporter

CALIFORNIA Proposes Amendments to Investment Adviser IARD, Advertising Custody, Recordkeeping and Unethical Practice Rules
Investment adviser rules requiring Form ADV to be filed with the IARD and involving advertising, custody, recordkeeping and unethical practices were proposed for amendment by the California Department of Corporations. Additionally, new rules on written disclosures, misuse of material nonpublic information, soft dollars for brokerage and research services, solicitation payments, and business continuity plans were proposed. ¶12,211 (ip access user), ¶12,214 (ip access user), ¶12,215D (ip access user), ¶12,217 (ip access user), ¶12,218A (ip access user), ¶12,225 (ip access user), ¶12,219A (ip access user), ¶12,219B (ip access user), ¶12,219C (ip access user), ¶12,219D (ip access user), ¶12,219 (ip access user).

OREGON Proposes to Add NSMIA Provisions for Variable Annuities and Adopt New Rule for Licensees Selling or Advising about Securities on Financial Institution or Trust Company Premises
As proposed, federal covered security notice filing rules would be expanded to provide requirements for offering and selling variable annuities, and a new rule would set forth the requirements for broker-dealers, salespersons, investment advisers and investment adviser representatives to sell or advise about securities on the premises of financial institutions or trust companies. A hearing on the proposals by the Oregon Division of Finance and Corporate Securities of the Department of Consumer and Business Services was held on September 28, 2007. ¶47,556N (ip access user), ¶47,556P (ip access user), ¶47,619A (ip access user).

NSMIA, Rule 10b-10 did not preempt state enforcement action
The Court of Appeal of California held in People v. Edward D. Jones & Co. that neither the National Securities Markets Improvement Act of 1996 (NSMIA) nor the disclosure requirements of federal Rule 10b-10 preempted a state enforcement action against a broker-dealer for failing to disclose adequately "shelf-space" agreements with certain preferred mutual funds. The appellate court concluded that NSMIA's savings clause expressly preserves the authority of state agencies to investigate and bring enforcement actions with respect to fraud, deceit, or unlawful conduct by broker-dealers in connection with securities or securities transactions. The appellate court also ruled that no conflict existed between Rule 10b-10 and California's action because the federal rule is not determinative of what a broker-dealer must disclose in a particular securities transaction. The decision is reported at ¶74,649 (ip access user).

Aspen Federal Securities Publications

The Regulation of Corporate Disclosure, Third Edition, by J. Robert Brown, Jr
The latest release, 2008-1 Supplement, will be live on the IRN Corporate Governance Library in early October. This complete and up-to-date handbook on the issue of corporate disclosure covers the impact of the federal securities laws on both informal communications and the process of communicating with shareholders. This latest update includes the new SEC rule on Internet disclosure of proxy materials; case law analyzing the application of primary liability to vendors, investment banks and other third parties, including In re Charter, which is pending before the Supreme Court; SEC actions enforcing the new certification requirements for CEOs and CFOs; SEC actions requiring changes to a company’s corporate governance provisions; an update on cases addressing the group pleading doctrine; and an update on SEC actions and interpretations governing audit committees of the board of directors.

Offerings of Asset-Backed Securities, by John Arnholz and Edward E. Gainor
The latest supplement will be live on the IRN Commodities and Derivative Integrated Library in early October. This comprehensive resource offers information on how to do asset-backed deals from a very practical perspective. It focuses on real-world know-how, delivering: a step-by-step approach to spotting issues and solving problems; practical, transaction-oriented advice from the perspective of experienced practitioners; insights into specific issues that frequently arise in transactions; and solutions to common problems. Offerings of Asset-Backed Securities also includes “issue-spotting” checklists and other formatting tools to ensure that this resource serves as a reliable, quick reference. This latest update includes updated guidance regarding the disclosure and reporting requirements under Regulation AB; lessons learned during the 2007 10-K filing season; insights into developing ABS market practices under Regulation AB and the securities offering reform rules; and updated treatment of ERISA issues in securitization to reflect recent legislative changes.

Financial Reporting Handbook, by Michael Young
The latest release, Release 16, will be live on the IRN Corporate Governance Library in mid-October. This reference provides quick access to critical aspects of financial reporting. In addition to covering the Sarbanes-Oxley Act, SEC rules and regulations, standards of the Independence Standards Board and the AICPA and requirements of the New York Stock Exchange, NASDAQ, and the American Stock Exchange, the Financial Reporting Handbook tackles important underlying themes such as the centrality of the audit committee, the individual responsibility of executives, and the integrity of the outside auditor.

Hot Topic of the Month

This month’s hot topic is sub-prime mortgage lending crisis – regulation and risk management. The SEC is investigating the exposure of market participants to subprime mortgages and related products to help it determine whether a regulatory response is appropriate. Although the Commission does not directly regulate the origination and sale of mortgage loans, it does have a role when the mortgages are sold to securitization vehicles and when securities are backed by the loans. The default by homeowners with subprime credit on mortgage obligations has had a broad impact, including a direct effect on securities that reference pools of subprime mortgages. More broadly, as default levels rose, market participants began to question the value of a variety of financial products. As those valuations came into doubt, liquidity in the products have fallen sharply, further complicating the task of valuing particularly complex instruments.

In this environment, the Commission has undertaken several initiatives, including outreach to market participants to understand their exposure to subprime mortgages and to evaluate the operational and liquidity issues. The staff also is continuing to work with other regulators in the President's Working Group on Financial Markets, including the Treasury Department, Federal Reserve Board and CFTC, to analyze and discuss market conditions. In addition, the SEC is responding through its oversight of investment companies, some of which may invest in securities backed by subprime mortgages such as collateralized debt obligations and asset-backed commercial paper. Following the emergence in mid-July of significant turbulence in the subprime market, the staff contacted fund representatives and pricing agents to determine the effect on funds in terms of pricing their portfolio holdings and maintaining sufficient liquidity to meet redemptions.

The SEC has also turned attention to rating agencies, which have faced criticism over the accuracy of their ratings of residential mortgage-backed securities (“RMBS”). Critics fault the rating agencies for not taking rating action sooner on those securities as the performance of underlying assets deteriorated, and for not maintaining independence from the issuers and underwriters of those securities. Accordingly, the Commission has begun a review of the policies and procedures of Nationally Recognized Statistical Rating Organizations regarding ratings of RMBS and collateralized debt obligations.

We publish information on the subprime mortgage crisis, including both regulatory and risk management aspects, in a range of securities law resources, noted below. Coverage of the banking regulatory aspects is available elsewhere, in various banking titles (e.g., Federal Banking Law Reporter).

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:

#1001. IPO Offerings

Evaluate IPO professional firms (“IPO Team Members”) by IPO activity for 2007.
Review IPO Team Members by fourteen characteristics

  • Offer Date
  • SIC Code
  • Ticker Symbol
  • Exchange
  • Offer Price
  • Number of Shares
  • Gross Spread
  • Offer Amount
  • Market Capitalization
  • Revenue
  • Net Income
  • Net Worth
  • Days in Registration
  • Estimated Out-of-Pocket Expenses

Tip! Scroll left to right, and re-sort the table of data by clicking a column heading. Re-arrange a "professional" column in alphabetical order and scroll to see a particular firm’s activity.