September 2008


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.

To view past issues of the Securities Update, please visit http://business.cch.com/updates/securities

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

 

CCH Federal Securities Law Reporter

SEC Issues Guidance on the Use of Company Websites and Soft Dollar Arrangements
The SEC issued guidance in response to developments in technology that have raised new questions about the application of the securities laws to information disclosed on company Web sites. The guidance addresses when information that is posted on a company’s Web site will be deemed public for purposes of Regulation FD and also addresses the liability issues surrounding third-party hyperlinks, summary information and interactive Web sites. The soft dollar guidance is intended to assist boards of directors of registered investment companies in fulfilling their oversight responsibilities with respect to portfolio securities trading by their funds’ investment advisers. The guidance focuses on the board’s oversight of investment advisers’ obligation to seek the best execution for trades and addresses the conflicts of interest in connection with the use of soft dollars. Release Nos. 34-58288 and 58264 at ¶88,253 (ip access user) and ¶88,251 (ip access user).

Municipal Securities Disclosure Amendments Proposed
The SEC proposed amendments affecting municipal securities disclosure. The proposed changes would require a broker, dealer or municipal securities dealer to determine that an issuer or obligated person has agreed to provide certain information to the Municipal Securities Rulemaking Board rather than the current submissions to multiple nationally recognized municipal securities information repositories and state information depositories. The information must be provided in an electronic format using the Electronic Municipal Market Access system, which will enable investors to access information free of charge as they do through the SEC’s EDGAR system. Release No. 34-58255 at ¶88,252 (ip access user).

SROs Propose Consolidation of Insider Trading Surveillance Duties
The SEC has published for comment an agreement among the self-regulatory organizations for the allocations of regulatory responsibilities with respect to insider trading. Each equity exchange is currently responsible for the surveillance of its own market and for any investigations and enforcement actions against its members. Under the plan, NYSE Regulation, Inc. and FINRA will assume those responsibilities. The plan will eliminate duplication in the surveillance for insider trading in the equity markets. Release No. 34-58350 at ¶88,254 (ip access user).

Federal Appeals Court Upholds Constitutionality of PCAOB
A split federal appeals court panel has ruled that the creation of the Public Company Accounting Oversight Board was constitutional and rejected the claims of an audit firm inspected by the board that the SEC rather than presidential selection of board members violated the appointments clause of the constitution. The appeals court concluded that board members are "inferior officers" of the United States within the meaning of the appointments clause and are properly appointed by the SEC. The Sarbanes-Oxley Act's limitation on the SEC's authority providing that board members can only be removed for cause did not elevate board members to the status of principal officers of the United States requiring a presidential appointment. Despite the "for cause" removal provision, the panel said the act gave the SEC comprehensive and pervasive control of the PCAOB, including the approval of the board's budget

The appointments clause empowers the president to appoint officers of the United States, while allowing Congress to vest the appointment of inferior officers with heads of departments. The audit firm argued that PCAOB members are not inferior officers since they are neither appointed nor supervised on a daily basis by principal officers directly accountable to the president. The appeals court rejected this argument, holding that the SEC is a department, the commissioners are heads of a department under the appointments clause and that PCAOB members are inferior officers subject to appointment and removal by the SEC. Accordingly, the Sarbanes-Oxley Act provisions creating the PCAOB did not violate the appointments clause.

The audit firm's argument that the SEC is not a constitutional department of the federal government capable of appointing board members was also rejected. The court said that the Commission was "cabinet-like" because it exercises executive authority over a major aspect of government policy and its principal officers are appointed by the president with the advice and consent of the Senate. The SEC is not a subordinate body attached to an executive department, the court said, but is an independent division of the executive branch with certain independent duties and functions. The commissioners are heads of a department under the appointments clause because, as a group, they exercise the same final authority as that vested in a single head of an executive department. Congress gave the SEC rulemaking, investigative and adjudicatory authority. The court emphasized that Congress can authorize multi-member commissions to appoint inferior officers.

The appeals panel also rejected the argument that the legislative creation of the PCAOB violated the separation of powers doctrine by directly encroaching on the executive branch's appointment, removal or decision-making authority. The court said that the double for-cause limitation on removal of board members did not constitute an excessive attenuation of presidential control of the board. Although the level of presidential control over the board reflects Congress's intention to insulate the board from partisan forces, the court said this statutory scheme preserves sufficient executive influence over the board through the Commission so as not to render the president unable to perform his or her constitutional duties. Free Enterprise Fund v. Public Company Accounting Oversight Board (DofCCir) will be published in a forthcoming Report at ¶94,812.


9th Circuit: State Claims Against Clearing Agencies Preempted
A 9th Circuit panel found that the federal securities laws preempted state law fraud claims against Depository Trust and Clearing Corp., Depository Trust Co. and the National Securities Clearing Corp. The claims arose from the stock borrow program created by NSCC to deal electronically with temporary short term fails-to-deliver. As alleged by an issuer, the stock borrow program facilitated naked short selling and artificially depressed the price of its stock by creating more electronic shares in the marketplace than were reflected in paper stock certificates.

The appeals court found that Congress did not intend to preempt the entire field of regulating the clearing and settlement of securities transactions. So-called "field preemption" was inapplicable because "an examination of the statutory framework of the Exchange Act does not reveal the comprehensiveness necessary to infer that Congress intended" for federal regulation to completely occupy the field. However, the court concluded that "conflict preemption" applied because the state claims to either the existence or the operation of the program "would conflict with Congressional directive, as set forth under Section 17A."

The SEC previously expressed its support for such a conclusion in an amicus brief filed in similar litigation. In 2006, the SEC asserted that the "plaintiffs' theory of liability would open up any Commission-approved SRO rule to challenges under similar theories, namely that the Commission erred in approving the rule because it misapprehended the rule's consequences, and that the SRO then committed state-law fraud by failing to disclose the facts that establish the Commission's error. Of course, any state law that created this result would make uniform regulation impossible, and would impermissibly stand as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress in creating the Exchange Act's self-regulatory regime, including the portion of that regime applicable to registered clearing agencies under Section 17A." Whistler Investments, Inc. v. The Depository Trust and Clearing Corp. (9thCir) will be published in a forthcoming Report at ¶94,814.

9th Circuit: Suit Against Drug Maker Showed Loss Causation
A fraud complaint adequately pleaded loss causation against a pharmaceutical company, concluded an appeals panel (9thCir). The appellate court found that the investors identified a specific loss in stock value following a press release revealing overstocks of the company's new drug and reduced demand levels for the product. The panel reversed a district court decision to dismiss the case on the grounds that investors had failed to prove that their losses were related to off-label sales and to alleged false statements the company made about the drug.

In discussing the lower court opinion, the 9th Circuit panel observed that "[p]erhaps what truly motivated the dismissal was the district court's incredulity" with regard to loss causation claims. The court stated, however, that "a district court ruling on a motion to dismiss is not sitting as a trier of fact." While trial courts need not "accept as true conclusory allegations, nor make unwarranted deductions or unreasonable inferences," the appellate panel held that "[s]o long as the complaint alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6) dismissal is inappropriate." In re Gilead Sciences Securities Litigation (9thCir) is reported at ¶94,799 (ip access user).

CCH Blue Sky Law Reporter

Maine Adopts NASAA Model Custody Rule for Investment Advisers
Model Rule 102(e)(1)-1 of the North American Securities Administrators Association (NASAA) for investment advisers taking custody of their clients' funds or securities was adopted for Maine by the Office of Securities under the Department of Professional and Financial Regulation. ¶29,414B (ip access user).

Wisconsin Proposes Rules/Rule Changes to Conform to Newly Adopted USA 2002
New rules, together with amendments to, and repeals of, existing rules were proposed by the Wisconsin Securities Division to conform to the newly adopted Wisconsin Uniform Securities Act that takes effect January 1, 2009. Public comments and hearing. Written comments regarding the proposed rules were to be directed to, and received by, the Administrator by August 20, 2008, the date of the hearing. It is anticipated that the new rules will be finalized concurrent with the effectiveness of the legislation. See ¶64,502 - ¶64,651.

"Willful" Registration Violations Required Knowledge of Illegal Conduct
In State v. Casper, the Tennessee Criminal Court of Appeals held that the state failed to prove beyond a reasonable doubt that the defendant "willfully" violated registration provisions of the Tennessee Securities Act (Act). The defendant had been convicted at trial of fifteen counts of selling securities as an unregistered broker-dealer or agent through his business, an unchartered "trust company" that received finders fees for sales of preferred stock while marketing living trusts and estate planning services to seniors. In reversing the decision below, the appellate court concluded that the distinction in the Act between civil and criminal violations reflected the intent of the legislature to only criminalize the selling of securities by an unregistered broker-dealer when the person is aware that his or her conduct is prohibited by law. Although the state had adduced evidence that the defendant had previously been the subject of a cease and desist order involving viatical settlements, the appellate court reasoned that the knowledge that selling one type of security was forbidden did not translate into complete omniscience regarding other types of securities. Accordingly, the defendant's convictions were dismissed for insufficient evidence. The decision is reported at ¶74,721 (ip access user).

Aspen Federal Securities Publications

Securities Regulation, by the late Louis Loss, Joel Seligman & Troy Paredes
The new Fourth Edition of Volumes III and XI (Finding Devices) of the cornerstone Securities Regulation treatise published in late August. 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.

The Regulation of Corporate Disclosure, Third Edition, by J. Robert Brown, Jr.
 The latest release, 2009-1 Supplement, will be live on the IRN Corporate Governance Integrated Library in mid-September. 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 most recent update includes the latest cases interpreting the lead plaintiff and scienter requirements of the PSLRA; analysis of recent Supreme Court cases, including the Court’s discussion of the reliance requirement in Stoneridge v. Scientific Atlanta; updates to the discussion of materiality under the securities laws; and various updates to the discussion of Electronic Communications, including a new subsection on “Issuer and Shareholder Sponsored Forums.”

Offerings of Asset-Backed Securities, by John Arnholz and Edward E. Gainor
The latest update will be live on the IRN Commodities and Derivative Integrated Library in mid-September. 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 update includes the effect of the credit crisis on ABS offerings, including legislative and regulatory developments, loan modifications, lender bankruptcies, disclosure issues, and tax and ERISA issues; SEC staff guidance regarding 10-K filings; and developments in the student loan and reverse mortgage markets.

Hot Topic of the Month

This month's hot topic is the Public Company Accounting Oversight Board. The PCAOB is a regulatory body subject to SEC supervision that is independent of the accounting industry. The board, funded through fees imposed on public companies, has broad powers to set auditing, quality control, and ethics standards for accounting firms that audit those companies. The board also has authority to inspect, investigate, and bring disciplinary proceedings against such firms. Established by the Sarbanes-Oxley Act, the new oversight board was intended to bring together various issues and responsibilities that had previously been handled by the accounting profession.

The process for naming the members of the PCAOB recently withstood constitutional challenge under the appointments clause and separation of powers. A district court found that Board members are inferior officers not required to be appointed by the President because they are subject to direction and supervision of the Commission. Second, the creation of the PCAOB did not violate separation of powers because the for-cause limitations on the Commission's power to remove Board members and the President’s power to remove Commissioners do not strip the President of sufficient power to influence the Board.

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:

SEC Today

Federal Securities Law Reporter

PCAOB Reporter Online (e.g., Volume 6, Issue 16, 8-19-08 (ip access user)

Insights – Amy L. Goodman (e.g., “The Public Company Accounting Board: One Year Later” (November 2003) (ip access user)

Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 2.D.3e (ip access user))

Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/) (e.g., 8-22-08)

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:

#717 - Days in IPO Registration

Gauge how long it could take to go public based on:

  • SIC Code
  • Issuer's HQ Country/State
  • SEC Form Filed
  • Offer Amount
  • Issuer’s Law Firm

Hint! Click on any of the column headings to re-sort the entire table of data. Then scroll down the list to find relevant SICs, locations, filing forms, ranges of offer amounts, and IPO issuer’s law firms.

Click on blue numbers to drill down for more information. Click Column headings to re-sort the table’s data.