September 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 Moves to Further Ease Section 404 Compliance Burden
The SEC extended the date for compliance with the Sarbanes-Oxley Section 404 auditor attestation requirement for foreign private issuers that are accelerated filers (but not large accelerated filers) until fiscal years ending on or after July 15, 2007. It also proposed to extend the date by which smaller companies must provide a report on management’s assessment of internal controls to fiscal years ending on or after December 15, 2007 and the date by which non-accelerated filers must comply with the auditor’s attestation requirement to December 15, 2008. In addition, the SEC proposed a transition period for new public companies so that a company would not be required to provide these reports until it has previously filed one annual report. Release Nos. 33-8730 and 33-8731 are reported at ¶87,618 and ¶87,619.

SEC Provides Guidance on Stock Option Grant Disclosure
The SEC’s final rule adopting new executive compensation disclosure provisions includes guidance on the types of information that must be disclosed about stock option grants. The new rules include tabular disclosure on the full grant date fair value and a new Compensation Disclosure and Analysis section where companies will be required to discuss options-related compensation, particularly as it relates to the timing and pricing of stock option grants. Release No. 33-8732 is reported at ¶87,620.

$600 Million Settlement Announced in Market Timing Case
Prudential Equity Group has been ordered to pay $600 million as part of a global civil and criminal settlement of charges of market timing misconduct. As alleged, the firm’s registered representatives defrauded mutual funds by concealing their identities and those of their customers to evade mutual fund prospectus limitations on market timing. The settlement was reached between Prudential and the SEC, U.S. Attorney’s Office, the Massachusetts Securities Division, NASD, the New Jersey Bureau of Securities, the New York Attorney General’s Office and the New York Stock Exchange.

Ebbers Conviction Upheld, Stewart Settles Civil Claims
The Second U.S. Circuit Court of Appeals upheld the criminal conviction former WorldCom CEO Bernard Ebbers, concluding that the evidence showed that he “either actually knew or was aware of the high probability that the financial statements were false.” In another high-profile case, the SEC announced that it had reached an agreement to settle insider trading charges against Martha Stewart and Peter Bacanovic relating to the sale of ImClone Systems stock in December 2001. Stewart agreed to pay approximately $195,000 in disgorgement and penalties and will limit the scope of her service as an officer or employee of a public company, as well as a five-year bar on serving as a director of a public company. U.S. v. Ebbers is reported at ¶93,921.

Pension Reform Act Allows Employees to Obtain Investment Advice
Congress passed pension reform legislation allowing companies to provide their employees with access to professional investment advice under fiduciary and disclosure safeguards. The Pension Protection Act includes a comprehensive investment advice provision allowing employers to provide rank-and file workers with access to a qualified investment adviser who can inform them of the need to diversify and to help them choose appropriate investments.

SEC Staff Advises in Wake of Hedge Fund Adviser Ruling
Buried in a no-action letter response is important interpretive guidance from the SEC staff on matters that arose when a federal appeals court struck down the SEC’s hedge fund adviser registration rule (see Goldstein v. SEC, at ¶93,890). In the wake of Goldstein, which the SEC will not appeal, the staff provided broad guidance to the advisory community through the vehicle of responding to a request from the American Bar Association. The staff advised that it will not recommend enforcement action if a hedge fund adviser that registered as a result of the SEC's rules withdraws its registration in reliance on the exemption provided by Section 203(b)(3), regardless of whether the adviser held itself out to the public while it was registered and had more than 14 clients, counting each private fund as a single client, while it was registered. American Bar Association (8-15-06) is reproduced at ¶79,254.

CCH Publishes Law & Explanation Book on the SEC’s New Executive Compensation and Related-Party Disclosure Rules
The SEC has completed the most sweeping overhaul of executive compensation and related party transaction disclosure in fourteen years. The revision puts in place a principles-based disclosure regime designed to give investors the information they need on executive compensation to make informed investment decisions and demystify any related transactions between executives and their companies. The new rules also enhance and consolidate into one item director independence and related corporate governance disclosure requirements. In addition, changes to Form 8-K will facilitate the ability of investors to access timely disclosure of executive compensation events that are unquestionably material by requiring this disclosure only for compensatory agreements with specified executive officers. The SEC also revised the beneficial ownership reporting rules to require the disclosure of pledged securities in an effort to improve the disclosure of the shareholdings of directors and executive officers.

A law and explanation book has mailed to FSLR subscribers. The book contains a detailed explanation of the new executive compensation and related party transaction disclosure regime. It also reproduces the text of the rule changes, and includes a table of relocated items in Regulations S-K. The book is available for QPs and additional orders at http://onlinestore.cch.com.

CCH Blue Sky Law Reporter

Kansas Adopts Rules on Broker-Dealers and Investment Advisers
Kansas is the most recent state to bring its rules in line with its newly adopted Uniform Securities Act modeled after the Uniform Securities Act of 2002. The Kansas Act was adopted in 2005 and the Securities Commission’s office has undertaken the task of proposing new and amended rules in three batches. It adopted the first batch of rules on broker-dealers and investment advisers August 18, 2006. Highlights include:

• The Central Registration Depository (CRD) became authorized to receive and store filings, and collect fees, from broker-dealers and agents. ¶26, 403A
• Dishonest and unethical practices for broker-dealers and agents were listed with specificity. ¶26,403E
• Registration requirements for broker-dealers and agents were clarified. ¶26,403, 26,403A
• For broker-dealer registrants, supervision, net capital, financial reporting and books and records requirements were set forth. ¶26,403, 26,403A
• The Investment Adviser Registration Depository (IARD) became authorized to receive and store filings, and collect fees from investment advisers while the CRD became authorized to receive and store filings, and collect fees from investment adviser representatives. ¶26,403, 26,403A
• Dishonest and unethical practices for investment advisers and investment adviser representatives were listed with specificity and apply to federal covered investment advisers to the extent permitted by federal law. ¶26,414E
• Registration requirements for investment advisers and investment adviser representatives, and notice filing requirements for federal covered investment advisers, were clarified. ¶26,414, 26,414A, 26,414F
• The NASAA Model Rule 102(e)(1)-1 on custody of client funds was adopted for investment advisers in Kansas. Rules on minimum net worth, bonding, financial reporting, recordkeeping, supervision, and brochure disclosures were clarified. ¶26,414C, 26,414H, 26,414I
  

New Smart Chart Added: Payment of Fees
A new Payment of Fees chart has been added to the list of Blue Sky Smart Charts this month. Where fees under the blue sky laws are payable to the state, the chart lists the state office or official to whom payment should be made and the type of payment which is acceptable. Paragraph numbers to the rule or regulation authorizing payment to the state are provided.

New Smart Chart Added: Decisions on Exempt Securities
This new Smart Chart, the first concerning cases found in the Blue Sky Law Reporter, provides summaries of decisions that involve the issuance of securities by banks, insurance companies, governmental entities, and other organizations or institutions that are generally exempt from registration under the blue sky laws of the various states.

"Online Shopping Malls" Constitute Securities
In TriVectra v. Ushijima, the Supreme Court of Hawaii upheld a determination by the Commissioner of Securities that interests in "online shopping malls" constituted securities under the Hawaii Uniform Securities Act. The Court concluded that the appellants' Internet-based business product was an investment contract and hence subject to the provisions of the Act. The decision is reported at ¶74,588.

California Privacy Statute Applied to the Recording of Telephone Conversations by a Georgia Broker-Dealer
The Supreme Court of California held in Kearney v. Salomon Smith Barney, Inc., that the California Invasion of Privacy Act applied to the recording of telephone conversations by an Atlanta branch office of Salomon Smith Barney. The Court ruled that the appellant investors should be permitted to seek injunctive relief to prohibit the broker-dealer from recording telephone conversations with its clients in California without first obtaining the consent of all of the parties to the conversation. The decision is reported at ¶74,586.

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 will publish 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.

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 will publish in September. 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.

Investment Adviser’s Legal and Compliance Guide, by Terrance J. O’Malley
The 2006 Supplement, which published in August, reflects the most recent changes to the Advisers Act and applicable SEC guidance. Part of the Investment Management Integrated Library on IRN, the supplement includes a new compliance calendar to assist investment advisers in meeting their various regulatory deadlines; information about the SEC examination process; expanded guidance with respect to the valuation of portfolio securities and the calculation of advisory fees; and the latest version of the Advisers Act, the rules, and Form ADV.

Raising Capital: Private Placement Forms & Techniques, by J. Robert Brown and the late Herbert B. Max
The 2006 Supplement, which published in August, expands the two-volume work, which provides an overview of how private placement of securities relates to the federal securities laws. Part of the Securities Integrated Library on IRN, this supplement completely revises and updates the chapter on warrants and options. Included with the supplement is an electronic version of the book on CD-ROM, which includes all the forms in Rich Text Format.

Equity Finance: Venture Capital, Buyouts, Restructurings and Reorganizations, by Joseph W. Bartlett
The 2006 Supplement, which published in August, updates the three-volume set to account for new legislation, important IRS rulings and regulations, current case law, and significant state law developments.

Securities Act Handbook (Release 230) and RED BOX—Rules and Regulations of the Securities Exchange Commission (Release 93) each contain the text of the Rules the Securities and Exchange Commission adopted regarding the requirements for disclosure of executive compensation.