August 2009


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. Also included is a “Hot Topic of the Month,” with research tips and references to CCH and Aspen source material on point. Finally, this update includes a preview of IPO Vital Signs, an advanced IPO research analysis tool, for IPO professionals and pre-IPO companies.

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 Proposes Money Market Fund Amendments. The SEC voted to issue proposed amendments to Investment Company Act Rule 2a-7 that would enhance the regulation of money market funds. The Commission also agreed to solicit feedback on several questions regarding the funds, including whether they should, like other types of mutual funds, effect transactions at the market-based net asset value rather than maintaining a stable $1 net asset value. The proposed rules would enhance the risk-limiting requirements of Rule 2a-7 by establishing new liquidity requirements for money market funds, so that funds are required to hold a certain percentage of their assets in cash or highly liquid securities. The proposed change would put funds in a better position to redeem investors’ shares on a short-term basis. The proposals also are designed to enhance the quality of money market fund investments by strengthening the credit quality and portfolio maturity requirements of Rule 2a-7. The weighted average maturity limits for money market fund portfolios would be shortened from 90 days to 60 days. Funds also would be required to stress test their portfolios periodically to determine whether they can withstand market turbulence. Release No. IC-28807 at ¶88,645 (ip access user) (IntelliConnect).

Enhanced Pay, Faster Vote Results Disclosures Proposed. The SEC proposed a broad package of corporate disclosure improvements and proxy solicitation enhancements designed to provide shareholders with access to important information about company compensation policies and procedures and their impact on risk-taking, director qualifications, and compensation consultants. The proposals would also remove impediments to the solicitation of proxy authority to improve shareholder communication. The proposals are also designed to improve the reporting of annual stock and option awards to company executives and directors as well as to require quicker reporting of election results. Under the proposal, the SEC would broaden the required disclosure in the Compensation Discussion and Analysis so that a company would discuss its overall actual compensation practices for employees generally, including non-executive officers, if the risks arising from those compensation policies or practices may have a material effect on the company. The SEC would also require companies to disclose for each director and any nominee for director selected by the company, or another proponent, the particular experience, qualifications, attributes or skills that qualify that person to serve as a director of the company, and as a member of any committee that the person serves on, as well as information about past directorships. Release No. 33-9052 at ¶88,655 (ip access user) (IntelliConnect).

SEC Proposes Enhancements to Municipal Securities Disclosure. The SEC voted to propose amendments to Exchange Act Rule 15c2-12 to expand its reach to variable rate demand obligations and to widen the categories of events that must be disclosed. The proposed amendments would require the disclosure of events that could adversely affect a bond’s tax exemption, including the issuance by the Internal Revenue Service of proposed and final decisions about whether a bond can be taxed. The proposed amendments would also eliminate the materiality determination before the reporting of certain events and require that those events always be disclosed. The proposed amendments would increase the number of events to be disclosed, including tender offers; bankruptcy, insolvency or similar proceedings; mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination, and the appointment of a successor or an additional trustee or the change of the name of a trustee, if material. The proposed amendments would require that notices of these events be disclosed within 10 business days. Release No 34-60332 at ¶88,658 (ip access user) (IntelliConnect).

District Court: Deposition Testimony Did Not Waive Privilege. Individual defendants in a class action suit against Sprint Corp. did not waive the attorney-client privilege by partially disclosing legal advice during their depositions. A magistrate judge of the U.S. District Court for the District of Kansas found that the individuals did not testify as to the substance of any legal advice.

The court noted that the burden of showing that the privilege has not been waived remains with the party claiming the privilege. Testimony constituting a waiver of the attorney-client privilege, the court explained, must disclose "the substance of privileged communications." Revealing the "general topic of discussion between an attorney and client does not waive the privilege, unless the revelation also reveals the substance of a protected communication," added the court. Warren Batts, a director defendant, testified in his deposition concerning tax shelter issues for the senior officers and the involvement of the company's audit firm that "I think it was sort of this amorphous mass that we might have a problem, and --but what precisely we discussed at that meeting I don't remember." He added in response to a question concerning who advised him that "God, I wish I remember it. I am sure it was one of the legal counsel." According to the court, Mr. Batts did not clearly disclose the substance of any privileged communication and made no waiver of the privilege. Another director, Irvine O. Hockaday, testified in a deposition concerning conflicts of interest between the company's senior officers and the audit firm that "no, we looked at that, we got legal advice on that." Again, the court rejected the plaintiffs' claim of waiver because the director "merely stated they got legal advice on the issue of Ernst & Young's independence...[a] statement that advice was received regarding a certain issue does not reveal the substance of a protected communication," concluded the court.

The court finally concluded that the individuals did not have waive the privilege by affirmatively placing "reliance on counsel" at issue in the litigation. The defendants did not specifically raise reliance on counsel as an affirmative defense. Their testimony also was insufficient to act as an implicit waiver. Plaintiffs' counsel solicited the testimony through their questioning, and the testimony did not indicate that the individuals intended to use advice of counsel to justify any conduct on their part, noted the court. The court noted that it could re-visit this issue if a defendant would "affirmatively and voluntarily inject the reliance of counsel issue at trial." State of New Jersey v. Sprint Corp. (DC Kan) will is reported at ¶95,273 (ip access user) (IntelliConnect).

9th Circuit: Annuities Were Securities, Foundation Not Exempt. A 9th Circuit panel affirmed a district court's judgment that charitable gift annuities were investment contracts and therefore securities under federal law. Investors purchased the annuities from a foundation in return for a promised lifetime income stream with the remaining money directed to a charity after the investor's death. The foundation, however, was a Ponzi scheme, and collapsed after five years.

On appeal, the foundation asserted that the annuities were not "investments of money" because they were meant to be charitable donations. The panel rejected this argument, noting that the annuities were marketed in a way that emphasized their value as investments and that the marketing was directed to persons "likely to be attracted by the Foundation's promises of periodic payment of income and tax benefits." For similar reasons, the panel also found that the investors expected to profit from their purchase.

The panel then rejected the foundation's argument that it was exempt as a charitable organization from the broker-dealer registration provisions. The panel explained that the sellers were ineligible for an exemption available to charitable organizations because commissions were received for the sale of the foundation's charitable gift annuities. The panel also examined the statutory language and found that the annuities at issue were not exempt. Warfield v. Alaniz (9thCir) is reported at ¶95,262 (ip access user) (IntelliConnect).

District Court Applied Incorrect Standards. A 5th Circuit panel reversed a district court's grant of summary judgment in a putative securities fraud class action and vacated the denial of class certification. An institutional investor brought the action, alleging that the officers of a manufacturer of flow-control products had misrepresented the company's financial condition by making false statements regarding earnings forecasts, past financial performance, integration costs related to the acquisition of two companies and debt-covenant compliance.

On appeal, the investor claimed that the district court applied an incorrect standard of loss causation, resulting in an erroneous application of the predominance requirement to the reliance element of the investor's fraud claims. The court had applied a theory in which a fraud caused a loss only if the loss followed a corrective statement that specifically revealed the fraud, while the investor argued that loss causation results when the true financial condition of a company becomes known. The panel agreed that the district court failed to apply the proper standard, but stated that neither theory was correct and that the investor needed to show by a preponderance of the evidence that the disclosed information reflected part of the "relevant truth" obscured by the fraudulent statements.

The panel then held that the grant of summary judgment was erroneous. As the panel noted in its discussion of certification, the district court had failed to apply the proper legal standard for assessing loss causation to the Exchange Act claims. Plus, a genuine issue of material fact existed in relation to the element of loss causation because a trier of fact could conclude that the company statement caused some of the loss after the truth began to leak out to the market. The panel then held that the district court erroneously placed the burden of proving loss causation for the Securities Act claims on the investor. The panel explained that once a prima facie case is established under the Securities Act, loss causation is presumed, but a defendant may rebut the presumption. The judgment was vacated because further proceedings could lead to a better determination of each defendant's culpability. Alaska Electrical Pension Fund v. Flowserve Corp. (5thCir) is reported at ¶95,255 (ip access user) (IntelliConnect).

CCH Blue Sky Law Reporter

Various States Issue Policy Statements Setting Forth Electronic Form D Filing Procedures. Effective March 16, 2009 with the SEC’s mandate that securities issuers federally file Form D electronically, various states have issued policy statements or administrative orders setting forth their own coordinating requirements. Typically, the states require issuers making a Regulation D offering whether under Rule 504, 505 or 506 to file a paper copy of the Form D filed electronically with the SEC, together with a fee in a specified amount. In addition, some states still require a Form U-2, Uniform Consent to Service of Process, even though the SEC-adopted Form D release incorporates Form U-2 into the Form D filing. Issuers making a Rule 506 offering must submit the notice no later than 15 days after the first sale of the securities in the state while the dates for filing Form D for Rule 504 or 505 offerings are specified by the individual states. States also set forth requirements for submitting amendments and, in some states, paying late filing fees. The following states have recently posted electronic Form D filing procedures on their websites:

Alaska ¶8575 (ip access user) (Intelliconnect); Colorado ¶13,666U (ip access user) (Intelliconnect); District of Columbia ¶16,766 (ip access user) (Intelliconnect); Illinois ¶23,232 (ip access user) (Intelliconnect); Kansas ¶26,640 (ip access user) (Intelliconnect); Nebraska ¶37,485 (ip access user) (Intelliconnect); New Mexico ¶41,600O (ip access user) (Intelliconnect); North Carolina ¶43,519 (ip access user) (Intelliconnect); Tennessee ¶54,517 (ip access user) (Intelliconnect); Texas ¶55,830E (ip access user) (Intelliconnect); Washington ¶61,811D (ip access user) (Intelliconnect).

Georgia Issues Administrative Orders to Coordinate with New Securities Act. Administrative orders were issued by the Georgia Commissioner of Securities to coordinate with the newly adopted Georgia Uniform Securities Act on July 1, 2009. The 13 administrative orders, also effective July 1, 2009, pertain to federal covered securities (investment company securities offerings under Section 18(b)(2) of the Securities Act of 1933 and Rule 506 offerings under 18(b)(4)(D) of the 1933 Act); post-registration requirements for broker-dealers and investment advisers including financial statement, net capital and recordkeeping requirements; examination requirements for broker-dealer agents and investment adviser representatives; securities registration fee; de minimis exemption for investment advisers; exemption for Canadian broker-dealers and agents; and broker-dealer definition exclusion in connection with certain employee benefit plans. ¶18,531 (ip access user) (Intelliconnect) through ¶18,543 (ip access user) (Intelliconnect).

Indiana Modifies USA 2002 Act-Proposed Rule Text. The text of proposed rule amendments, repeals and new rules coordinating with the Indiana Securities Act that took effect July 1, 2008 was modified by the Indiana Securities Division. The proposals pertain to federal covered securities, exemptions, registrations of securities, broker-dealers, agents, investment advisers, investment adviser representatives and administrative hearing procedures but a substantial portion of the existing rule text would remain unchanged. Instead, most of the rules would be nonsubstantively amended to add the correct numerical references to the new Indiana Securities Act and proposed rules, provide the official citations to federal securities acts such as the Securities Exchange Act of 1934 and the Investment Company Act of 1940, change NASD references to FINRA, remove or replace the word "said" and such" with "the" or "these" as appropriate, and would be nonsubstantively amended to make certain provisions applicable to both "he" and "she" or "his" and "her." Public hearing: The proposed rules are subject to a public hearing on September 22, 2009 at 1 p.m. at the Indiana Government Center South, 402 West Washington Street, Conference Center Room D in Indianapolis.¶24,571 (ip access user) (Intelliconnect) et. seq.

Kentucky Increases Certain Investment Company Notice Filing Fees. The fee for investment companies registered under the 1940 Act whose notice filings are made or become due for renewal on or after June 1, 2009 is increased to $1,000 (from $500) if the notice filing contains more than one fund, portfolio, class or series. NOTE: The fee for investment companies registered under the 1940 Act whose notice filings are made or become due for renewal on or after June 1, 2009 remains at $500 if the notice filing does not contain more than one fund, portfolio, class or series. The notice filing fee for unit investment trusts remains unaffected at $300. ¶27,608 (ip access user) (Intelliconnect).

Montana Sets Forth Rules on Senior Specific Certifications and on Requesting a Transactional Exemption. Rules making the use of senior specific certifications by securities industry persons an unethical practice, together with a rule setting forth the procedure for requesting a transactional exemption, were implemented by the Montana Securities Department. ¶36,421 (ip access user) (Intelliconnect) et. seq.

New Hampshire Provides Guidance on Terminating Rule 506 Offering. To terminate a Rule 506 offering in connection with new SEC Form D, issuers need to create a cover letter identifying the offering and indicating the termination date of sale, the total number of sales in New Hampshire, the dollar amount sold in New Hampshire and the total number of sales nationwide. Issuers must file with the New Hampshire Securities Bureau a copy of any federally-filed amendment to Form D (just to indicate that they filed it) but otherwise there is no need to file a final Form D in New Hampshire. NOTE: The above information is not contained in an official document of the New Hampshire Bureau of Securities Regulation. Instead, please contact Peter Zis at the Securities Bureau, (603) 271-1463 ext. 114.

New Mexico Increases Sales Rep. and IA Rep. Licensing Fees. The licensing fee for sales representatives and investment adviser representatives is increased to $50, from $40, under a rule change adopted by the New Mexico Securities Division.
¶41,507 (ip access user) (Intelliconnect).

Utah Increases Mutual Fund and Rule 506 Fees. The mutual fund/unit investment trust notice fee is increased to $600, from $500, and the Rule 506 notice filing fee is increased to $100, from $60, for filings received by the Utah Securities Division on or after July 1, 2009. ¶57,517 (ip access user) (Intelliconnect).

Day Trading Trainers Did Not Qualify for "Teacher" Exception. Affirming a decision of the district court, a federal appellate panel (5th Cir.) has held that providers of training on the day trading of stocks did not fall within the "teacher" exception to the definition of "investment adviser" contained in the Texas Securities Act (Act). In S&D Trading Academy, LLC v. AAFIS Inc., the district court had concluded that the plaintiffs, who were to receive compensation based on the trading volume and profits generated by the trainees, required registration as investment advisers under the Act because their training activities included dispensing advice, for compensation, with respect to the purchase of securities. Although observing that no authority has construed the teacher exception available under Texas law, the appellate panel looked to no-action letters of the U.S. Securities and Exchange Commission which have concluded that an identical provision in the federal securities laws generally covers only professional teachers associated with accredited educational institutions who are offering the instruction as part of a regular program of study. As the plaintiffs did not qualify for the teacher exception and did not register as investment advisers under the Act, the appellate court ruled that they were precluded from recovering compensation for their services under the oral agreement between the parties. S&D Trading Academy, LLC v. AAFIS Inc. is reported at ¶74,776 (ip access user) (Intelliconnect).

Aspen Federal Securities Publications

Regulation of Securities: SEC Answer Book, Third Edition, by Steven Mark Levy. The 2009-2 Supplement (ip access user) (IntelliConnect) is available online on the Securities Integrated Library. 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. In this latest update, Chapter 2, which is completely rewritten and renamed Electronic Filing, expands and updates the discussion on preparing and transmitting documents electronically, obtaining a temporary or continuing hardship exemption, making modular submissions and segmented filings, and providing financial statements to the SEC and on the company’s Web site in interactive data format using XBRL. Chapter 4, Audit Committee, has also been completely rewritten to address the demanding role of the audit committee in protecting the interests of shareholders, and includes new material on administering the accounting engagement, complying with audit committee proxy statement disclosure rules, communicating with the auditor about critical accounting policies and alternative disclosure treatments within GAAP, disclosing financial expert information, establishing procedures for handling reports of corporate wrongdoing, guarding against fraudulent interference with the work of the independent auditor, and understanding the liability risks for audit committee members and how to reduce them. Chapter 12, which is rewritten and renamed Using the Internet, explains the role of the company Web site as a supplement or alternative to EDGAR, and adds new material on the format and readability of information appearing on the Web site, document delivery through electronic media, the SEC’s “access equals delivery” rule for the final prospectus, Web site posting of proxy materials, Regulation FD—Fair Disclosure—considerations, electronic shareholder forums, Web site solicitation of offshore securities transactions, Web site posting of interactive data, and the company’s potential liability for Web site content. Other updates to the treatise include: discussion of the status of derivatives as “securities;” the status of the SEC’s reputation for competence in light of failures in its oversight of Bear Stearns, Bernard Madoff, and others who figure in the current financial crisis; key considerations for establishing disclosure controls and procedures in order to ensure that all financial and other information required to be disclosed is gathered, analyzed, and passed along in a timely manner to employees who prepare disclosures and top executives who certify them for truthfulness; eligibility of foreign institutions to be considered qualified institutional investors for purposes of filing Schedule 13G; revised securities law exemptions that apply to cross-border transactions in order to entice bidders and issuers in such transactions to permit U.S. security holders to participate in the same manner as other security holders; protections from liability for forward-looking statements; and revisions to the definition of a Rule 13e-3 going private transaction.

Raising Capital: Private Placement Forms & Techniques, Third Edition, by J. Robert Brown, Jr., The Late Herbert B. Max. The 2009 Supplement (ip access user) (IntelliConnect) is available online on the Securities Integrated Library. This unique resource provides practice tested forms and up-to-date expert guidance for successfully launching private placement investment transactions. The authors illustrate a variety of proven techniques for raising capital and explain ways to accommodate the investor’s demands for protection while maintaining the flexibility necessary for efficient operation and growth in today’s business and regulatory environment. This latest update contains a revised chapter on Subchapter S Corporations, which includes agreements such as a Shareholders Agreement, Stock Purchase Agreement for Acquisition of Subchapter S Corporation, Stock Purchase and Transfer Restriction Agreement, Shareholders Purchase Agreement, Trust Supplement to Shareholders Agreement, and a Merger Agreement Between a C Corporation and an S Corporation, and also includes a variety of covenants, warranties, and resolutions relating to S corporations; an updated chapter on Small Business Investment Companies (SBIC), including relevant forms and provisions such as SBIC Management Assessment Questionnaire and License Application, Agreement and Plan of Merger Involving SBIC, provision providing SBIC covenants, provision providing for regulatory compliance cooperation, and bylaws of SBIC corporation; and a revised chapter discussing partnerships and their tax and securities law implications, which chapter now contains 60 forms including agreements, certificates, and sample contract clauses.

Hot Topic of the Month

This month’s hot topic is Form 8-K disclosure. Form 8-K is the general form of current report required by Rule 15d-11. Reports on Form 8-K are used to provide material information concerning certain specified events encompassing the registrant's business and operations, financial information, securities and trading markets, matters related to accountants and financial statements, corporate governance and management, asset-backed securities, Regulation FD and other events including voluntary reports informing security holders of other matters that may be of interest.

In response to the "real time issuer disclosure" mandate in Section 409 of the Sarbanes-Oxley Act, the SEC made significant amendments to Form 8-K in 2004. These amendments expanded the number of events reportable on Form 8-K. In addition to the enhanced disclosure requirements, the amendments reorganized the Form 8-K items into topical categories and accelerated the Form 8-K filing deadline for most items to four business days after the occurrence of an event triggering the disclosure requirements of the form. The changes were intended to provide investors with more comprehensive and timely disclosure of important corporate events. The form was also amended in August 2006 in connection with the executive compensation disclosure rulemaking.

We publish information in a wide range of resources (e.g., Federal Securities Law Reporter, Insights – Amy L. Goodman, Securities Regulation - Loss & Seligman, etc.), and document types (cases, laws, regulations, newsletter articles, treatise discussion). For example:

Federal Securities Law Reporter

  • Report letter (4-16-08) (ip access user) (IntelliConnect)
  • Exchange Act Rule 15d-11, at ¶25,147 (ip access user) (IntelliConnect)
  • Form 8-K, at ¶31,001 (ip access user) (IntelliConnect)
  • Release No. 8400, at ¶87,158 (ip access user) (IntelliConnect)
  • CCH Explanations (e.g., ¶23,591.010 (ip access user) (IntelliConnect))

 

SEC Today

  • Division of Corporation Finance Revises Form 8-K Guidance (4-10-08) (ip access user) (IntelliConnect)


Insights – Amy L. Goodman (e.g., "Accelerated and Expanded Form 8-K Reporting of Management Compensation" (May 2005) (ip access user) (IntelliConnect); "A Form 8-K Checklist" (August 2004) (ip access user) (IntelliConnect))
SEC Compliance and Disclosure Interpretations, (e.g., Chapter 15, Form 8-K (ip access user) (IntelliConnect)
Securities Regulation – Loss & Seligman (e.g., Chapter 6.B.1 (ip access user) (IntelliConnect))
Regulation of Corporate Disclosure – Brown (e.g., §2A.02 (ip access user) (IntelliConnect)
Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/ (e.g., 7-2-09))

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:

#324 – SIC Codes

Use IPO Vital Sign #324 to…

  • Review the number and percentage of companies going public in each SIC Code
  • Analyze trends over time
  • and drill down into the different SIC Codes to see
  • IPO issuers’ company names and business descriptions
  • Review “Prospectus Summary” first paragraphs (Final Prospectus business descriptions)
  • Issuers’ headquarters by country and state
  • Offer amounts
  • Offer dates

Tip! Click on blue numbers to drill down for more information.

Select a number of issuers’ final prospectus business descriptions by clicking in boxes of those you wish to review in the third column (placing a check-mark in each box), and clicking the [COMPARE] button a the top of the fourth column.