April 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 elena.eyber@wolterskluwer.com.

CCH Federal Securities Law Reporter

SEC Proposes to Streamline Exchange-Traded Funds Approval Process
The SEC proposed new rules that would eliminate the need for certain exchange-traded funds to seek individual exemptive relief before going to market. The proposed ETF rules would codify most of the exemptions that have previously been granted to index-based ETFs and more recently to several actively managed ETFs. Under the rules, an ETF could go to market without seeking exemptive relief as long as its portfolio is transparent and it trades through a national securities exchange that discloses trading prices throughout the day. Release No. 33-8901 at ¶88,079 (ip access user).

Proposed Rule Would Target Abusive Naked Short Sales
The SEC proposed a new antifraud rule that would consider it a manipulative or deceptive device if a person, when submitting an order to sell a security, deceives a broker-dealer, a participant of a registered clearing agency, or a purchaser about its intention or ability to deliver securities on the due date or fails to deliver the security on the due date. Chairman Christopher Cox said that the proposed rule would provide teeth to Regulation SHO. Release No. 34-57511 at ¶88,081 (ip access user).

Commission Proposes Changes to Regulation S-P
Amendments to Regulation S-P were proposed by the Commission in order to reflect a number of changes in Internet technology since its adoption in 2000. Regulation S-P outlines the privacy obligations of entities that are regulated by the SEC. The proposed amendments would provide more detailed standards for information security programs and would permit the limited disclosure of personal information when representatives move from one broker-dealer or investment adviser to another. Under the proposal, SEC-regulated entities would be subject to more stringent requirements for safeguarding information and for responding to information security breaches. Release No. 34-57427 at ¶88,078 (ip access user).

10th Circuit Panel Orders New Trial for Former Qwest CEO
A panel of the U.S. Court of Appeals for the 10th Circuit reversed and remanded for a new trial the conviction for insider trading of the former CEO of Qwest Communications International, Inc. The court found that the improper exclusion of an expert witness merited a new trial and reversed and remanded the case to be heard before a new judge.

The District Court for the District of Colorado convicted the former CEO of 19 counts of insider trading, sentenced him to prison and ordered him to pay a fine and forfeiture. On appeal, the CEO argued that the evidence was insufficient to convict him, that the jury was not properly instructed and that the trial judge incorrectly excluded evidence important to the defense.

The circuit court agreed that the improper exclusion of an expert witness merited a new trial, but concluded that the evidence before the district court was sufficient for the government to try the CEO again without violating the double jeopardy clause. The circuit court found that a properly-instructed jury could have found the CEO guilty of insider trading. According to the court, proper instructions were given to the jury on each legal issue related to the insider trading charges: materiality, scienter and the connection of the inside information to the trades. Furthermore, the evidence introduced at trial for each issue was sufficient for the government to try the CEO a second time. U.S. v. Nacchio (10thCir) will be published in Report 2321 at ¶94,603.

3rd Circuit: SLUSA No Bar to Aiding, Abetting Claims by Trust
The Securities Litigation Uniform Standards Act did not preclude a trust from bringing state law claims for aiding and abetting breaches of fiduciary duties, concluded a 3rd Circuit panel. In addition, the trustees could bring claims, as assignees of individual investors in the bankrupt enterprise, against foreign entities under foreign law for aiding and abetting money laundering.

The case arose from the failure of a software company after some of its officers and directors allegedly ran a "pump and dump" scheme, and then attempted to conceal their actions by channeling funds through sham entities and accounts with the assistance and knowledge of foreign banks. After the issuer filed for bankruptcy, the reorganization plan assigned the corporation's claims to a state law trust, as did individual purchasers of the company's securities. The trustees filed suit in federal court alleging that the foreign banks aided and abetting breaches of fiduciary duties and violated Swiss money-laundering laws. The district court (DC NJ) dismissed the claims under the Uniform Standards Act. First, the court rejected the trustees' claims that the trust should be considered one "person" under the Uniform Standards Act because the trust was formed for the primary purpose of pursuing causes of action and recovering damages for shareholders. The trust was actually acting as a shareholder representative, pursuing the litigation on behalf of a class of 6,000 people, held the district court.

On appeal, the 3rd Circuit initially held that the damages resulting from the pump and dump scheme accrued to the corporation. The panel noted that the fact that the company "no longer exists does not convert its corporate claims into direct shareholder claims; rather, the corporate nature of the claims endures, and ownership of the claims" passed to its successor, the trust. The court then disagreed with the trial court's finding that the trust entity should be disregarded and the stock purchasers should be counted for Uniform Standards Act purchases. With regard to the Swiss banking law claims, the panel concluded that the Uniform Standards Act, which applies to claims "based upon the statutory or common law of any State," did not preclude actions for foreign law violations. Initially, the court rejected the banks' claim that Congress intended to preempt such foreign law claims. The court cited language that "[i]t is not our job to speculate upon congressional motives; our job is to hew as closely as possible to the meaning of the words Congress enacted." Because Congress could have defined a state to include foreign jurisdictions, and had done so in other legislation, the court declined to extend the definition in this case. The claims also did not arise from or incorporate state law claims, and were not dependent on state law, including New Jersey's choice of law provisions. To conclude that, within the intendment of SLUSA, those claims are "based upon the . . . law of New Jersey would require attributing to Congress a subtlety of such exquisite reach as to have no place in the legislative process," stated the court. LaSala v. Bordier et Cie (3rdCir) is reported at ¶94,597 (ip access user).

CCH Blue Sky Law Reporter

Nevada Proposes to Define "Institutional Buyer," Add Transfer Agents as Licensees; And Incorporate FINRA References
An institutional buyer would be defined; transfer agents would be added to the list of licensees conducting business in Nevada; and references to the Financial Industry Regulation Authority (FINRA) would replace references to the National Association of Securities Dealers (NASD) under rule changes proposed by the Securities Division of the Office of the Secretary of State. ¶38,431Y (ip access user), ¶38,434 (ip access user), ¶38,434A (ip access user), ¶38,435A (ip access user), ¶38,435B (ip access user), ¶38,436A (ip access user), ¶38,436B (ip access user), ¶38,436C (ip access user), ¶38,437 (ip access user), ¶38,439B (ip access user), ¶38,440 (ip access user), ¶38,441 (ip access user), ¶38,442 (ip access user), ¶38,443 (ip access user), ¶38,444 (ip access user), ¶38,445A (ip access user), ¶38,449A (ip access user), ¶38,450B (ip access user), ¶38,450M (ip access user), ¶38,450N (ip access user), ¶38,450O (ip access user), ¶38,450P (ip access user).

Texas Changes NASD References to FINRA
References to the NASD were changed to FINRA to reflect the merger of the National Association of Securities Dealers with the member regulation, enforcement and arbitration functions of the New York Stock Exchange to become the Financial Industry Regulatory Authority. Texas Form 133.7, Registration of Securities, eliminated the requirement that a corporate applicant provide a certificate regarding Texas franchise taxes [the certification is no longer required under the Texas Business Corporation Act]. Texas Form 133.1, Texas Open Records Request, was retitled "Texas Public Information Request" to reference "public information" in place of "open records." ¶55,542 (ip access user), ¶55,591 (ip access user), ¶55,591A (ip access user), ¶55,591B (ip access user), ¶55,591C (ip access user), ¶55,591D (ip access user), ¶55,595A (ip access user), ¶55,595B (ip access user), ¶55,688A (ip access user), ¶55,688G (ip access user).

Washington Updates NASAA Policy Statement Rule References
References in a Washington rule to the date that NASAA policy statements and guidelines for asset-backed securities, church extension funds, commodity pool programs, cover legends, direct participation programs, equipment programs, mortgage programs, oil and gas programs, real estate investment trusts and real estate programs were last amended, were changed to reflect the latest date of amendment made to those policy statements and guidelines by the North American Securities Administrators Association. ¶61,582B (ip access user).

Expungement Award Did Not Require Specific Findings by Arbitrator
In Kay v. Abrams, the Supreme Court of New York (County of New York) confirmed an arbitration award that expunged from the records of the Central Registration Depository all references to a stockbroker's involvement in the arbitration of a customer dispute. The Attorney General of New York had contended, inter alia, that the court lacked authority to direct expungement because the NASD arbitrator did not conduct a proper factual hearing. The court ruled, however, that NASD rules did not mandate that the arbitrator make any specific findings or state the reasons for the award. Moreover, NASD rules did not alter the provisions of the Federal Arbitration Act with respect to judicial confirmation. The decision is reported at ¶74,689 (ip access user).

Aspen Federal Securities Publications

The Regulation of Corporate Disclosure, Third Edition, by J. Robert Brown, Jr.
The latest release, 2008-2 Supplement (ip access user), published in March and is now live on the IRN Corporate Governance Library. 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 recent update includes the latest cases interpreting the lead plaintiff and scienter requirements of the PSLRA; an analysis of recent Supreme Court cases, including Tellabs v. Makor; enhanced discussion of legal exposure for officers and directors, including the remedies employed by the Securities and Exchange Commission; discussion of state law reforms with respect to the rights of beneficial owners; discussion of proposed reforms before the Securities and Exchange Commission concerning the communication process with street name owners.

Financial Reporting Handbook, by Michael Young
The latest release, Release 18, will be live on the IRN Corporate Governance Library in early April. 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 Exchange Act Rule 10b-5 Trading Plans. Rule 10b5-1 provides that, for purposes of insider trading liability, a person trades "on the basis" of material nonpublic information if he or she is aware of the information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. These exceptions permit persons to trade in specified circumstances where it is clear that the information is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-1(c)(1), for example, allows persons to plan securities transactions in advance, at a time when they are not aware of material, nonpublic information, and then complete those pre-planned transactions at a later time, even if they subsequently learn of material, nonpublic information. To raise the Rule 10b5-1(c) defense successfully, a person must establish three elements. First, he or she must demonstrate the existence of a prior contract, instruction, or plan concerning the securities in question. Second, the person must show that the preexisting contract, instruction, or plan meets certain conditions. Finally, the person must show that the trade occurred "pursuant to" the preexisting contract, instruction, or plan. The person raising an affirmative defense must also satisfy a separate good faith requirement.

While 10b5-1 plans have not been subject to any enforcement actions to date, in October 2007, SEC Enforcement Director Linda Chatman Thomsen noted that recent academic studies suggest that insiders may be abusing the rule. If executives are trading on inside information and using a plan for cover, Thomsen said the plan will not provide a defense. Thomsen advised that the staff is looking at the disclosures surrounding Rule 10b5-1 plans.

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:

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.

To see how an IPO Vital Sign works click on the Vital Sign title below:

#398 – IPO Legal Fees

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