June 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

Changes to Eligible Portfolio Company Definition Adopted
The SEC adopted an amendment to a rule under the Investment Company Act to more closely align with congressional intent the definition of an eligible portfolio company and the investment activities of business development companies. The amendment expands the definition of eligible portfolio company to include certain companies that list their securities on a national securities exchange. The amendments to Rule 2a-46 will expand the definition of eligible portfolio company to include exchange-listed companies that have less than $250 million in market capitalization. Release No. IC-28266 is reported at ¶88,211 (ip access user).

Cross-Border Tender Offer Changes Proposed
A proposal would modify the SEC’s rules concerning cross-border tender offers. These changes are designed to provide protection for U.S. investors while facilitating cross-border business combinations and other transaction. The proposal would change the method for calculating U.S. ownership in both negotiated and hostile transactions, including using the announcement date as the basis for the calculations and allowing offerors to calculate U.S. ownership as of a date within a 60-day range before announcement. Many of the proposed rule changes would codify existing interpretive positions and exemptive orders in the cross-border area. The proposing release also included interpretive guidance concerning the treatment of foreign target security holders in tender offers generally, including those for U.S. target companies and of bidders’ ability to exclude foreign target security holders. Release No. 33-8917 is reported at ¶88,204 (ip access user).

SEC Proposes Mandatory Use of Interactive Data Tags in Filings
The SEC proposed rules that would require companies to provide the financial data in their SEC filings using interactive data. The proposal contemplates a three-year phase-in of the mandatory data tagging, starting with the largest companies that comply with U.S. GAAP whose mandatory interactive data filings would include fiscal years ending on or after December 15, 2008. Under the proposal, the first companies to be phased in would be those with a worldwide public float of over $5 billion, which would include approximately the 500 largest companies. Companies that use international financial reporting standards as issued by the International Accounting Standards Board would be the last to be phased in under the proposal. Companies would be required to post the information on their Web sites in addition to providing the information as exhibits to their annual and quarterly reports and registration statements. The proposing release will be published in a forthcoming report.

Substantive Liability Standard of Section 20(a) Not Changed By Reform Act
A panel of the Eleventh Circuit Court of Appeals held that proportionate liability under Exchange Act Section 21D(f) does not trump a controlling person's derivative liability under Section 20(a). Section 21D(f), enacted as part of the Private Securities Litigation Reform Act, provides for joint and several liability for damages only if a knowing violation of the securities laws has been committed. The question before the court was whether, and to what extent, the proportionate liability provisions of Section 21D(f) amended the joint and several liability provisions of Section 20(a). The court looked to the language and legislative history of Section 21D(f) to conclude that the PSLRA did not change the standard of liability created by the Exchange Act. The court pointed out that the statute itself indicates that "nothing in the proportionate liability provisions of the PSLRA displaces in any way the `standard of liability' created by the Securities Exchange Act, including section 20(a) controlling person liability." The court explained that while Section 21D(f) did not modify the standard of substantive liability under the securities laws, it did change the allocation of damages. In short, "Section 20(a) provides the standard of liability for controlling persons; if they are liable under that standard, the proportionate liability sections of the PSLRA provide their responsibility for damages." LaPerriere v. Vesta Insurance Group, Inc. (11thCir) is reported at ¶94,712 (ip access user).

11th Circuit: Sarbanes-Oxley Did Not Revive Stale Claims
A panel of the Eleventh Circuit Court of Appeals affirmed a district court's (MD Ala) dismissal of a claim as barred by the statute of limitations. The claims were filed in 2003, and the securities at issue had been purchased in 1998. The district court dismissed the action as barred by the three-year statute of limitations that controlled such claims at that time. On appeal the shareholders argued that the five-year limitations period of the Sarbanes-Oxley Act, which took effect in 2002, applied retroactively to revive their expired claims. The panel affirmed the dismissal, noting that every circuit court considering the issue had rejected the argument that the Sarbanes-Oxley Act's statute of limitations revives previously expired securities claims. Berman v. Blount Parrish & Co., Inc. (11thCir) is reported at ¶94,702 (ip access user).

Non-Disclosure Was “In Connection With” Purchase of Securities
The dismissal of state law claims brought by beneficiaries of trust accounts as preempted by the Securities Litigation Uniform Standards Act was affirmed by a panel of the 8th U.S. Circuit Court of Appeals. The complaint alleged claims under federal securities laws as well as state law claims of unjust enrichment and breach of fiduciary duties. The district court dismissed the federal claims on the merits and dismissed the state law claims on Uniform Standards Act preemption grounds. The district court found that misrepresentations and omissions of material facts were central to the plaintiffs’ state-law claims. The court further held that, regardless of the plaintiffs’ status as trust beneficiaries and not purchasers or sellers, the alleged misrepresentations and omissions were made “in connection with the purchase or sale of a covered security.

The appeals court recognized the existence of a “tension between the federal interest of protecting investors in nationally traded securities and the practical need to protect normal business activity from vexatious litigation." On appeal, the question before the court was whether the Uniform Standards Act preempted the beneficiaries’ state-law claims that a bank purchasing securities as a trustee breached its fiduciary duty by failing to disclose conflicts of interest in its selection of nationally-traded investment securities. The appellate panel stated that for policy reasons, the “in connection with" requirement should be “construed flexibly, not technically or restrictively." Accordingly, the court rejected the state plaintiffs’ claim that the Uniform Standards Act should not apply because the alleged non-disclosure did not relate to a decision whether to purchase a security. Quoting the U.S. Supreme Court in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit (2005-06 CCH Dec. ¶ 93,723), the 8th Circuit stated that “it is enough that the fraud alleged ‘coincide’ with a securities transaction—whether by the plaintiff or by someone else."

According to the court, the action was a “covered class action," the mutual fund interest was a “covered security" and the bank’s non-disclosure was “in connection with" the bank’s purchase of shares in a mutual fund. The court therefore concluded that the Uniform Standards Act applied and affirmed the district court’s dismissal. The court also affirmed the district court’s denial of leave to amend on grounds of futility. Siepel v. Bank of America, N.A. (8thCir) is reported at ¶94,733 (ip access user).

CCH Blue Sky Law Reporter

New Smart Chart added
A new smart chart was created providing each jurisdiction's initial and renewal notice filing requirements for investment companies and unit investment trusts under Section 18(b)(2) of the Securities Act of 1933 [the National Securities Markets Improvement Act of 1996]. NOTE: The comment column contains the required fee amounts.

Maine Proposes to Adopt NASAA Model Custody Rule for 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 proposed for Maine by the Office of Securities under the Department of Professional and Financial Regulation. ¶29,414B (ip access user)

Missouri Proposes Adding Senior Provisions to List of Unethical Practices for Broker-Dealers, Agents, IAs and IA Reps
Missouri-registered broker-dealers, agents, investment advisers and investment adviser representatives would be prohibited from using certain professional designations that state or imply specialized knowledge of the financial needs of senior investors. The use of these "senior designations" by a broker-dealer, agent, investment adviser or investment adviser representative would be a fraudulent, unethical practice. Only those professional designations attained through prescribed training offered by a nationally recognized accredited institution would be approved professional designations by the Missouri Office of the Secretary of State. ¶35,447 (ip access user), ¶35,447B (ip access user)

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; references to the Financial Industry Regulation Authority would replace references to the National Association of Securities Dealers; and references to the American Stock Exchange Emerging Company Marketplace would be eliminated 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), ¶38,450M (ip access user), ¶38,450N (ip access user), ¶38,450O (ip access user), ¶38,450P (ip access user), ¶38,476A (ip access user)

Washington Proposes Amendments to "Holding Out" Rules for Financial Planners and Investment Counselors
Persons who use the terms "financial consultant," "investment consultant," "money manager," "investment manager," "investment planner," or "chartered financial consultant" would be holding themselves out as a "financial planner" or "investment counselor" requiring them to register as investment advisers. Persons who use terms or abbreviations in a way that leads a reasonable person to believe these persons are holding themselves out as a financial planner or investment counselor would be holding themselves out as a financial planner or investment counselor requiring them to register as investment advisers. Exceptions from investment adviser registration. Exceptions from the investment adviser registration requirement would apply to persons not in the business of providing investment advice related to the purchase or sale of securities or to persons not directly or indirectly receiving a fee for providing investment advice. Other exceptions would be specified. ¶61,622A (ip access user), ¶61,622B (ip access user)

NSMIA Did Not Preempt Order Barring Offers of Joint Venture Interests
In Consolidated Management Group, LLC v. Department of Corporations, the California Court of Appeal held that the National Securities Markets Improvement Act of 1996 did not preempt issuance of a desist and refrain order that prohibited offers of joint venture interests in leasing oil and gas equipment. The appellate court ruled that NSMIA's plain language requires that a security must actually be a "covered security" before federal preemption applies. As the securities were offered through general solicitations in contravention of the federal rules for private offerings, the Department of Corporations possessed jurisdiction to bring an enforcement action for registration violations. The appellate court also rejected the promoter's argument that the interests did not constitute securities under the California Corporations Code. Although the ventures were structured as general partnerships under Kansas law, the appellate court held that the interests satisfied the test for a security set forth in Williamson v. Tucker. The appellate court reasoned that the evidence supported a finding that the investors generally lacked the knowledge of the oil and gas industry to exercise effectively the managerial powers conferred on them by the joint venture agreements. Moreover, it was reasonable to find that the investors relied for the success of the enterprise on the unique abilities of the managing venturer, which had engaged in significant pre-purchase activities involving the selection and pricing of the equipment. The decision is reported at ¶74,701 (ip access user).

Aspen Federal Securities Publications

Meetings of Stockholders by Jesse A. Finkelstein, R. Franklin Balotti, and Gregory P. Williams
The 2008 Supplement will publish and be live on the IRN Corporate Governance Integrated Library in mid-June. Over the years, the SEC has increasingly used proxy rules as a mechanism for implementing policies and adjusting the rights of shareholders and management. This latest supplement to Meetings of Stockholders reflects statutory, case law, and other developments in the area of stockholders’ meetings and includes updates to many of the discussions regarding these meetings, including updates to the discussion of the “notice and access” framework for delivery of proxies; a new section on electronic shareholder forums; a discussion of Rule 14a-12(c) disclosure requirements for those engaging in a counter solicitation for a competing slate of directors; an expanded discussion of the statute of limitations for fraud claims; an update to the chapter on Institutional Investors and Shareholder Activism to reflect recent trends and statistics relating to shareholder activities such as shareholder resolutions filed, majority voting proposals, and advisory votes on executive compensation; an updated discussion of the e-proxy notice and delivery rules; an expanded discussion of Rule 14a-8, recently amended by the SEC, which allows companies to exclude shareholder-proposed bylaws concerning director nominating procedures; and a discussion of a Delaware Court of Chancery case illustrating Delaware law’s strict requirement for having consents dated at the time of signing (H-M WexfordLLC v. Encorp., Inc.).

Hot Topic of the Month

This month's hot topic is federal preemption. Exchange Act Section 28(f), added by the Securities Litigation Uniform Standards Act (SLUSA) makes federal court the exclusive venue for most securities fraud class actions. The purpose of the Act was to prevent class action plaintiffs from circumventing the federal requirements of the Private Securities Litigation Reform Act by filing the action in state court, where essentially none of the Reform Act's protections against abusive litigation were available.

SLUSA preempts any covered class action based on state law, whether filed in state or federal court, that alleges fraud or deception in connection with the purchase or sale of a covered security. The statute defines "covered class action" to include actions brought on behalf of more than 50 persons, actions brought by named parties seeking to recover damages on behalf of themselves and similarly situated unnamed parties and so-called mass actions in which a group of lawsuits filed in the same court are joined or otherwise proceed as a single action. The Act defines "covered security" to include nationally-traded securities, such as those listed by the NYSE or Nasdaq, as well as securities issued by registered investment companies, but excludes from the definition privately-placed debt securities.

Class actions improperly maintained in state court are removable to federal court. Under Section 28(f)(2), any covered class action brought in state court involving a covered security is removable to the federal district court in which the action is pending, and will be subject to Section 28(f)(1). Congress intended this provision to prevent a state court from inadvertently or improperly maintaining jurisdiction over a preempted action.

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:

Federal Securities Law Reporter

Insights – Amy L. Goodman (e.g., “Merrill Lynch v. Dabit: The Supreme Court Forecloses State Law "Holders" Claims” (May 2006) (ip access user)

SEC Today

Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 11.B.10 (ip access user))

Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/) (e.g. 3-12-08)

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