March 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

Smaller Company Auditor Attestation Requirement Extension Proposed
The SEC proposed to extend for one year the Sarbanes-Oxley Act Section 404(b) auditor attestation requirement for smaller companies. Under the proposal, the Section 404(b) requirements would apply to smaller public companies beginning with fiscal years ending on or after December 15, 2009. The SEC also announced that the staff has begun a cost-benefit study of the effects of the requirement on smaller companies. Release No. 33-8889 at ¶88,051 (ip access user).

SEC Proposes Amendments Affecting Foreign Private Issuers
The SEC will seek comment on a number of proposed rule amendments affecting the filings of foreign private issuers. The proposed amendments to Exchange Act Rule 12g3-2(b) will eliminate certain paper filing requirements if foreign private issuers publish their non-U.S. disclosure documents in English on an ongoing basis on an Internet web site or through an electronic information delivery system similar to EDGAR. Release No. 34-57350 at ¶88,068 (ip access user).

Southern District of New York Rejects Selective Privilege Waiver
"I conclude that selective waiver is not in the long-term best interests of the government, the adversarial system, or litigants," wrote U.S. District Judge Shira Scheindlin of the Southern District of New York. Judge Scheindlin ordered Credit Suisse Securities (USA) LLC to turn over to private plaintiffs documents that were prepared in an internal investigation and previously revealed to the SEC and U.S. Attorneys.

The company's general counsel began an internal investigation into alleged misconduct concerning the allocation of shares in IPOs, and the company employed outside counsel to interview employees and prepare written summaries of their investigation. Credit Suisse disclosed the documents to the U.S. Attorney and the SEC pursuant to confidentiality agreements. Documents were also discussed with officers of NASDR and disclosed to some former employees in an arbitration proceeding. The court initially found that the documents did qualify as "fact" work product, such as investigative data, which is generally afforded a lower level of protection than "legal" work product, including analysis and legal theories. However, the court found that Credit Suisse had waived any such privilege.

Judge Scheindlin found the company's claim that it shared "common interests" with the U.S. Attorneys and the SEC to be "baseless," as the government entities were investigating potential wrongdoing and "Credit Suisse disclosed the Memoranda to escape or limit liability." In addition, the mere fact that a confidentiality agreement existed did not establish the disclosures as a selective waiver, and the company showed no special circumstances to negate a waiver finding. Judge Scheindlin concluded that "[a]ny confidentiality that may have existed between Credit Suisse and its attorneys has been abandoned." According to the court, "[p]rotection of the Memorandum would serve Credit Suisse's strategic purposes, not any societal interest in fostering communications between attorneys and their clients." In re Initial Public Offering Securities Litigation (SD NY) is reported at ¶94,580 (ip access user).

"Strong Inference" Standard Applied to Section 14(a) Negligence Claims
A district court (DC Kan) examined claims against a company in light of the pleading standards recently set forth by the U.S. Supreme Court. The court had previously denied a motion to dismiss on the grounds that the shareholders' allegations satisfied the pleading requirements of the Private Securities Litigation Reform Act, as interpreted by the 10th Circuit. This case was the first in which this court applied the pleading standards articulated by the U.S. Supreme Court in Tellabs v. Makor Issues & Rights, Ltd., Inc. (¶94,335 (ip access user)).

The court found that Tellabs raised the pleading standards for scienter in the 10th Circuit, so it was appropriate to re-examine the allegations in the complaint. Initially, the court stated that the standard for pleading scienter laid out in the 10th Circuit in Pirraglia v. Novell, Inc. (2002-2003 CCH Dec. ¶92,478 (ip access user)) was "substantially similar" to the standard adopted by the Supreme Court in Tellabs, as the court held that all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs, must be considered. According to the district court, this 10th Circuit precedent "clearly required long before Tellabs that a district court engage in a comparative evaluation of all inferences to be drawn from the complaint" and "the 10th Circuit accurately predicted the holding in Tellabs by awarding the draw to the plaintiff when there are equally strong inferences for and against scienter."

However, the district court concluded that "Pirraglia leaves open the possibility that an inference of scienter could be deemed sufficiently "strong" to survive a motion to dismiss even if an innocent inference tips the scales ever so slightly," which "would be a result that is impermissible under Tellabs." Because Tellabs raised the pleading standard for scienter, it was appropriate for the court to reconsider the allegations in the amended complaint. Upon re-examination, the allegations were found to be sufficient to permit a reasonable person to draw an inference of scienter that was cogent and at least as compelling as any opposing inference. Next, while the court found that the shareholders' proxy claims were pleaded in negligence and did not sound in fraud, the "strong inference" pleading standard articulated in Tellabs was applied. The court held that Tellabs is not limited to cases in which the state of mind is scienter. In this case, the shareholders adequately pleaded with particularity facts giving rise to a strong inference of negligence. State of New Jersey v. Sprint Corp. (DC Kan) is reported at ¶94,576 (ip access user).

CCH Blue Sky Law Reporter

Indiana Recognizes Toronto Stock Exchange As Approved Exchange
The Toronto Stock Exchange is recognized by the Indiana Secretary of State and Securities Commissioner as an approved exchange for the exemption for securities listed on stock exchanges. ¶24,712 (ip access user)

Iowa Amends Investment Adviser Financial Reporting and Minimum Net Capital Requirements
Financial reporting and minimum net capital requirements for investment advisers were amended by the Iowa Securities Bureau, along with certain financial reporting requirements for broker-dealers. Provisions were added granting an exam waiver for agents and setting forth fraudulent practice provisions for investment advisers to pooled investment vehicles. ¶25,410 (ip access user), ¶25,412 (ip access user), ¶25,415 (ip access user), ¶25,440 (ip access user), ¶25,443 (ip access user), ¶25,502 (ip access user)

Court Declines to Enjoin Order Sanctioning Hedge Fund Communications
In Bulldog Investors General Partnership v. Galvin, the Superior Court of Massachusetts denied a motion to preliminarily enjoin an order of the Massachusetts Securities Division that sanctioned Internet communications concerning unregistered hedge funds. The court ruled that the plaintiffs were not likely to succeed on the merits of their claim that the administrative action violated their rights to freedom of speech under the First Amendment to the United States Constitution. The court concluded that the administrative order was reasonably proportional to the state’s interest in protecting the health of the capital markets by requiring full disclosure and prohibiting the public offering of unregistered securities. The decision is reported at ¶74,681 (ip access user).

New Smart Chart Added: Registration Requirements for Agents of Broker-Dealers
This new smart chart provides the links to full text of the pertinent requirements for registering agents of broker-dealers.

New Smart Chart Added: Registration of Securities
This new smart chart provides the links to full text of the various types of securities registrations adopted in the 54 jurisdictions.

Aspen Federal Securities Publications

Broker-Dealer Law and Regulation, Fourth Edition, by Norman S. Poser and James A. Fanto
The 2008 Supplement will be live on both the IRN Investment Management and the Exchanges & SROs Integrated Libraries in early March. The 2008 Supplement includes a discussion of the U.S. Supreme Court’s decision in Stoneridge Investment Partners v. Scientific Atlantic; an expanded discussion of the risks posed to broker-dealers by their dealings with hedge funds; a new section on the current debates concerning the threats to the primacy of U.S. capital markets as a result of market regulation; an expanded discussion of the regulation of financial conglomerates, which have a broker-dealer subsidiary, and enhanced regulatory concerns about these institutions; a discussion of the U.S. Supreme Court’s decision in Credit Suisse Securities v. Billing; an in-depth analysis of new Regulation R, the new rule defining the exemption from broker registration for banks; a discussion of the consolidation of the regulatory functions of the NYSE with those of the NASD (now FINRA), which has become virtually the sole private sector regulatory agency for broker-dealers doing business with the public; a new section on the FINRA rules on gifts and business entertainment, as well as enforcement actions arising out of violations of the rule; a new section on FINRA regulation of distributions of investment company securities; a new section on broker-dealer responsibilities in proxy voting for beneficial owners of securities; new sections on final FinCEN anti-money laundering rules on special correspondent accounts of certain foreign banks, FinCEN rules on a broker-dealer’s sharing of information about customers with law enforcement agencies, and Treasury Department regulations on certain prohibited foreign parties; current developments in the financial regulation of broker-dealers; an analysis of current SEC enforcement actions on PIPEs transactions involving registered broker-dealers; coverage of recent FINRA and SEC enforcement actions against broker-dealers; and a discussion of the U.S. Supreme Court’s decision in Tellabs v. Makor Issues & Rights, setting a high standard for plaintiffs to avoid dismissal of securities fraud cases.

EDGAR Filer Handbook, by Charles H. Rider
The latest release, the 2008 Supplement, will be live on the IRN Corporate Governance Integrated 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) add the new indicator “Smaller Reporting Company” as a required field in 33 EDGAR Form types; (2) deactivate fourteen EDGAR Form types for small businesses on a scheduled basis from January 14, 2008 through March 16, 2009 and will not be accepted after the deactivation date; (3) add a new category “Regulation E Filings” with six new EDGAR Form types under Regulation E for Small Business Investment Companies and Business Development Companies; (4) add a new category “Applications for Orders” with six new EDGAR Form types for Investment Management Companies under the 1940 Investment Company Act; (5) modify the EDGARLink software and submission templates to incorporate the changes required for the addition and deletion of these EDGAR Forms; (6) upgrade of the Java Runtime Environment component of the EDGARLink software to Version 5.0, Update 10. In addition, when EDGARLink is installed on your computer, you must accept the vendor’s license agreement for both the ICS Viewer and the Java Runtime Environment.

Hot Topic of the Month

This month's hot topic is attorney-client privilege. The waiver of attorney-client privilege in connection with enforcement actions has been the subject of ongoing debate. SEC Commissioner Paul Atkins recently noted that the SEC is re-examining its policies and procedures with respect to the practice of requiring companies to waive their attorney-client protections as a condition of receiving credit for cooperating with SEC investigations. The American Bar Association has urged the Commission to stop the practice, and legislation is currently pending which would stop the SEC and other federal agencies from conditioning a company's cooperative efforts on waiving the attorney-client and work privileges.

In a letter to the SEC, the ABA said that it believes that current policies contribute to what it called a "culture of waiver" that could lead to "profoundly negative consequences." In particular, the ABA asked the SEC to revise its Seaboard report which outlines the factors the SEC will consider when deciding whether to grant credit for cooperation. In the ABA's view, the policies set forth by the SEC contain language that could erode the protection afforded by the attorney-client privilege. In practice, the ABA said, companies have no choice but to waive the privilege when encouraged or requested to do so because the risk of being labeled uncooperative will have a great effect not just on the Commission's enforcement action decisions, but also on the company's image and stock price.

The House has already passed H.R. 3013, the Attorney-Client Privilege Protection Act, and a companion bill in the Senate, S.186, is in committee. These bills prohibit federal agencies from pressuring companies to waive their privileges or from taking punitive actions against their employees as conditions to receiving cooperation credit during investigations. The bills specifically preserve the ability of prosecutors and other federal officials to obtain the important nonprivileged factual material they need to punish wrongdoers.

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

SEC Docket

  • Release No. 34-44969: Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (the "Seaboard" report) (ip access user)

Insights – Amy L. Goodman (e.g., “Attorney-Client Privilege and Work Product Doctrine in Government Investigations” (June 2007) (ip access user)

Regulation of Securities: SEC Answer Book – Levy (e.g., Chapter 16 Q 16:50 (ip access user))

Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/) (e.g., 2-4-08)

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:

#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 at the top of the fourth column.