March 2007


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 Approves Rule Changes in NYSE-Euronext Merger
The SEC approved New York Stock Exchange rule changes related to a proposed business combination between Euronext N.V. and NYSE Group, Inc. The rule changes will enable the businesses of NYSE and Euronext to be wholly owned subsidiaries of NYSE Euronext, a new publicly-traded holding company. Their respective businesses and assets will continue to be held as they are currently held. The business combination would be a cross-border transaction that fits within the framework the SEC has developed in connection with other transactions involving SROs. Release No. 34-55294 at ¶87,755.

SEC Proposes Fund Data Tagging
The SEC voted to propose for comment rule amendments to permit mutual funds to voluntarily submit risk-return summary information using interactive data tags. The risk-return summary appears at the front of every mutual fund prospectus and contains information about the fund’s investment objectives, risks, costs and historical information. Current information is largely narrative; once properly tagged, an investor could sort for the type of fund in which they wish to invest. Release No. 33-8781 at ¶87,754.

SEC Proposes Credit Rating Agency Rule
The SEC proposed rules to implement the Credit Rating Agency Reform Act of 2006. The new rules would require approval or disapproval of an application for nationally recognized statistical rating organization status within 90 days. Other proposed rules relate to recordkeeping and auditing requirements, conflict disclosure, and the prohibition of coercive and abusive acts. Release No. 34-55231 at ¶87,753.

Company May Exclude Shareholder Proposal on Compensation Report
The staff agreed that a company could exclude a shareholder proposal on the voting procedure for approval of a compensation committee report in reliance on Rule 14a-8(i)(3). The rule allows the exclusion of shareholder proposals that contain materially false, vague or misleading statements. The proposal recommended an annual shareholder vote for a resolution that would ratify the report. The company represented that the proposal was misleading because it gave the impression that the shareholders would be voting on the comprehensive policy information in the company's "Compensation Discussion and Analysis" when the vote related only to the recommendations and limited information in the CD & A disclosure section. Burlington Northern Santa Fe Group (SEC) is reported at ¶79,459.

Staff Expresses No Opinion on Shareholder Proposal
The SEC staff expressed no opinion on the question of whether a company could exclude a proposal to amend its bylaws to require that the company include the name, along with certain disclosures and statements, of any person nominated for election to the board by a stockholder who has beneficially owned three percent or more of the company's outstanding common stock for at least two years. The staff cited the recent 2nd U.S. Circuit Court of Appeals decision on the scope of Rule 14a-8(i)(8) (American Federation of State, County and Municipal Employees, Employees Pension Plan v. American International Group, Inc., ¶93,942), which, according to the staff, "disagreed with certain prior staff interpretations upon which you have relied as precedent." Because the company assumed that another circuit would be the applicable jurisdiction for purposes of this request, the staff was "unable to dispute or concur in this assumption" and expressed no view on excludability. Hewlett-Packard Co. (SEC) is reported at ¶79,443.

Foreign Corrupt Practices Act Claims Settled
The SEC issued a cease and desist order in a Foreign Corrupt Practices Act case. As alleged, a company violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act through numerous improper payments made by a subsidiary to Indian government officials. The payments were not accurately reflected in the company's books and records, and its system of internal accounting controls failed to prevent the payments. The company reported the violations, conducted an internal investigation and restructured its global compliance program. The company also hired an independent consultant to review and assess its FCPA compliance program. In determining to accept the settlement, the Commission considered the remedial acts and the cooperation afforded the Commission staff. Release No. 34-55281 is reported at ¶87,757.

Former Enron Accounting Officer Barred
The SEC suspended a former Enron chief accounting officer from practice before the agency under Rule 102(e). The SEC had previously obtained a civil judgment against the accountant and he had pleaded guilty to criminal charges. As alleged, the officer, along with others, engaged in a wide-ranging scheme to manipulate Enron's publicly-reported earnings through a variety of devices designed to produce materially false and misleading financial results. The claimed violations alleged improper uses of off-balance-sheet special purpose entities, manipulations of Enron's business segment reporting to conceal losses and expense and reserve manipulations. Release No. 34-55310 is reported at ¶87,759.

SEC Upholds Most NASD Findings in Research Report Case
The SEC sustained the NASD's findings of violations a former NASD member firm, its former president and two former registered representatives for preparing and disseminating fraudulent research reports. The agency sustained the sanctions against the firm, its former president and one of the representatives, but vacated and remanded the sanction imposed on the other representative because it could not determine from the record whether the bar order was excessive or oppressive. Release No. 34-55313 is reported at ¶87,761.

FSLR Updates Explanations of Proxy Rules and Sarbanes-Oxley Act Attorney Reporting Rules
An updated explanation of the proxy rules, including the e-proxy provisions, appears at ¶24,030 and an explanation of the Sarbanes-Oxley Act attorney reporting rules appears at ¶66,572.

CCH Blue Sky Law Reporter

California Updates Federal Covered Securities Release
A release on federal covered securities issued in 1997 was updated to reflect current requirements. The Section numbers below are from the California Securities Law of 1968.

  • Section 25100.1(b). Investment company securities. Issuers file a notice on Form NF, Uniform Investment Company Notice Filing.
  • Section 25101.1(a). Reporting company securities. Persons relying on Section 25101.1(a) exclusion are not required to file any documents (notice filing or consent to service of process).
  • Section 25101.1(c). Section 3(a) transactions. Persons relying on Section 25101.1(c) exclusion are not required
    to file any documents (notice filing or consent to service of process).
  • Section 25102.1(d). Rule 506 transactions. Persons relying on Rule 506 must file a notice on SEC Form D, Notice
    of Sale of Securities Pursuant to SEC Regulation D. The notice must be accompanied by a consent to service of process (or a statement that the issuer is a California corporation or already has a consent to service of process on file with the Corporation's Commissioner), and a $300 filing fee. The notice must be filed within 15 days of the first sale in California. NOTE: No notice must be filed if none of the offered securities are sold in California. ¶12,663.

Indiana May Compel Production of Financial Institution Records on Individuals
Financial institutions' books and records on individuals may be subpoenaed. The Securities Division will then reimburse the financial institutions for reasonable costs incurred according to a specified fee schedule. ¶24,708.

Ohio Expands Compensatory Benefit Plan Exemption to Include Welfare Plans
The exempt transaction for sales of securities made in accordance with compensatory benefit, pension, stock, and profit-sharing plans is expanded by the Ohio Securities Division to include securities sold under a contributory employee welfare benefit plan and trust qualified under Section 501(c)(9) of the Internal Revenue Code of 1986. ¶45,523.

Public Policy Prohibited Enforcement of a Forum Selection Clause
A federal district court (E.D. Cal.) held that California law and public policy prohibited enforcement of a forum selection clause in a lawsuit involving allegations of securities fraud visited on a California corporation. The stock purchase agreement between the parties had provided that any action under the agreement was to be brought exclusively in New York and determined in accordance with New York law. The court concluded, however, that California's strong public policy in providing additional statutory remedies to protect the public from securities violations militated against enforcement of the clause. Nutracea v. Langley Park Investments PLC is reported at ¶74,611.

"Prudent Investor" Standard Did Not Apply to an Investment Management Account
The Court of Appeals of Washington held in Hatheway v. U.S. Trust Co. that a trustee's fiduciary responsibility could not be imposed on an investment manager in the context of a personal investment account. The appellate court ruled that the "prudent investor" standard codified in Washington's probate and trust law did not apply because, according to the account agreement's own terms, the investment manager was an agent of the investor, and not a trustee. Additionally, although the defendant did owe a fiduciary duty to the investor, the appellate court declined to adopt a specific standard of care for investment managers beyond that for general fiduciaries. The decision is reported at ¶74,612.

Appellate Court Upholds State Anti-Fraud Authority under NSMIA
The Court of Appeal of California held that the National Securities Markets Improvement Act of 1996 (NSMIA) did not preempt a state enforcement action for fraud against the investment adviser and the wholesale broker-dealer of a federal covered security. The Attorney General of California had pursued injunctive relief and penalties against Capital Research and Management Company and American Funds Distributors, Inc. for allegedly failing to disclose their participation in "shelf-space" agreements with other broker-dealers in connection with the distribution of American Funds shares. The appellate court ruled that, although NSMIA preempted the state from regulating the offering documents of a federal covered security, NSMIA's savings clause was sufficiently broad to permit an action challenging broker-dealer conduct in the sale of that security. Capital Research and Management Co. v. Brown is reported at ¶74,613.

Indiana Court Of Appeals Dissolves Sua Sponte Preliminary Injunction
In Squibb v. State ex rel. Davis, the Court of Appeals of Indiana held that a trial court abused its discretion in issuing, on its own motion, a preliminary injunction that prohibited the defendant from disposing of any substantial asset without the authorization of the court. The State of Indiana had filed an administrative complaint against the defendant and her husband, alleging that the pair issued unregistered securities in violation of the Indiana Securities Act. The appellate court concluded, however, that Indiana law was well established that a trial court lacked the authority to issue a preliminary injunction absent a party’s specific request. As the state had not filed a motion requesting such relief, the appellate court remanded the case with instructions to dissolve the injunction. The decision is reported at ¶74,616.

Minnesota Securities Act Claim Sounded in Fraud, Required Particularized Pleading
A federal district court (D. Minn.) held in Trooien v. Mansour that a plaintiff investor was required, but failed, to plead with particularity his claim under § 80A.01 of the Minnesota Securities Act. The plaintiff alleged that he had made substantial investments in a software company, based on the defendant officers’ alleged misrepresentations and failure to disclose material facts about the company’s financial health. The court determined that the plaintiff’s claim sounded in fraud because, as the state law analogue to federal Rule 10b-5, the Minnesota statute required the same substantive elements as Rule 10b-5, including scienter. As the plaintiff’s conclusory allegations were insufficient to plead a claim for fraud under Rule 9(b) of the Federal Rules of Civil Procedure, the court dismissed the complaint. The decision is reported at ¶74,617.

Aspen Federal Securities Publications

EDGAR Filer Handbook, by Charles H. Rider
The latest release, 2007-1 Supplement, will be live on the IRN Corporate Governance Library in early March. This update includes discussions of several important changes to the EDGAR system. These changes were implemented to support the amended rules and forms adopted by the Commission and are necessary to: (1) remove the capability from the EDGAR Filing web site to create “new” Series and Classes as this feature was intended only to register Series and Classes in existence before February 6, 2006; (2) implement “EDGARLite” for generation of Forms TA–1, TA–2, and TA–W as XML filings by transfer agents; (3) add six new EDGAR forms for Transfer Agents; (4) add six new forms for foreign issuers; (5) add new Accelerated Filer Status indicator for Forms 10–K and 20–F; and (6) add new Duty to File Reports Remains indicator for Forms 15 and 15F.

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:

#328 - Headquarters of IPO Issuers

Use IPO Vital Sign #328 to...

  • Review the percentage of companies going public in each state
  • Analyze trends over time
  • Locate specific IPO issuers in your area

Tip! Click column headings to rank the table in ascending order, pause and click again to rank in descending order. Click on blue numbers to drill down for more information.