September 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 Adopts Affiliate Marketing Rules. The SEC adopted Regulation S-AM to implement the affiliate marketing provisions of Section 624 of the Fair Credit Reporting Act. The final rules implement the requirements of Section 624 with respect to investment advisers and transfer agents registered with the Commission, as well as brokers, dealers and investment companies. Regulation S-AM and allows a consumer, in certain situations, to block affiliates of a person that the consumer does business with from using certain “eligibility information," such as information regarding the consumer’s account history or information from consumer reports or applications, to make marketing solicitations unless the consumer has been given notice of the potential marketing use of the information and the consumer has not opted out of such uses. Compliance will be mandatory as of January 1, 2010. Release No. 34-60423 at ¶88,667 (ip access user) (IntelliConnect).

SEC Seeks Comment on Alternative Uptick Rule. The comment period on proposed changes to Regulation SHO concerning short sales has been extended for 30 days so that the public may comment on an alternative approach to short selling price test restrictions. In April 2009, the Commission proposed two approaches to restricting short selling. One approach would apply on a market-wide and permanent basis, and would implement short sale restrictions based on either the last sale price or the national best bid. The other approach, considered a “circuit breaker," would apply only to a particular security during severe declines in the price of that security. The alternative approach on which the SEC is now seeking comments would allow short selling only at an increment above the national best bid. This alternative uptick rule would not require monitoring of the sequence of bids to determine whether the current national best bid is above or below the previous national best bid. The comment period on the alternative uptick rule ends on September 21, 2000. Release No. 34-60509 at ¶88,673 (ip access user) (IntelliConnect).

SEC Issues Guidance on FASB’s Accounting Standards Codification. The SEC has published interpretive guidance regarding the release by the Financial Accounting Standards Board of its Accounting Standards Codification. FASB Statement of Financial Accounting Standards No. 168 establishes the FASB codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The SEC issued guidance because the FASB release affects certain Commission rules, regulations, releases and staff bulletins referring to specific standards under GAAP. Therefore, as of August 25, 2009, references in the Commission’s rules and staff guidance to specific standards under U.S. GAAP should be understood to mean the corresponding references in the FASB codification. Release No. 33-9062A at ¶88,677 (ip access user) (IntelliConnect).

Loss Causation Remains Major Hurdle in 5th Circuit. A 5th Circuit panel continued that circuit's narrow view of securities class action pleading. Initially, the court rejected claims that the Supreme Court's Stoneridge decision effectively overruled the 5th Circuit's 2007 decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc. In the 2007 Oscar case, the appeals panel, in an interlocutory appeal, vacated a class certification that was based on a presumption of reliance under the fraud on the market theory. According to the majority opinion in Oscar, "[e]ssentially, we require plaintiffs to establish loss causation in order to trigger the fraud-on-the-market presumption." The panel rejected the district court's conclusion that the class certification stage was not the proper time for the defendants to rebut the lead plaintiffs' fraud on the market presumption. In effect, the 5th Circuit in Oscar reversed the burden of proof involved with the fraud on the market presumption. Rather than requiring the defendant to rebut the presumption, plaintiffs were required to prove by a preponderance of the evidence the existence of a sufficient and specific causal link.

The panel in the present case found nothing in Stoneridge that invalidated its Oscar holding, noting that "when the Supreme Court discusses a general legal standard and cites its earlier caselaw on point, it does not necessarily overrule intervening decisions of the lower courts." The case involved alleged misstatements by the officers of the publisher of the Dallas Morning News concerning the paper's circulation numbers. The company issued a press release stating that an internal investigation had revealed irregularities in the circulation numbers. The press release also stated that the circulation declines were "coupled with" losses previously announced and with circulation declines anticipated due to overall industry weakness.

The 5th Circuit noted that when there are several negative statements absorbed by the markets that fraud plaintiffs must show at this initial state of the litigation that "it is more probable than not that it was this negative statement, and not other unrelated negative statements, that caused a significant amount of the decline." The court found that the plaintiffs' expert witness and other evidence did not establish a sufficient connection between the disclosure of the alleged fraud and the stock price drop. Fener v. Belo Corp. (5thCir) is reported at ¶95,315 (ip access user) (IntelliConnect).

9th Circuit Allows SOX Whistleblower Claim to Go Forward. A Sarbanes-Oxley whistleblower suit brought by two former in-house attorneys may proceed, ruled a unanimous 9th Circuit panel. The case arose from the merger of companies that made gaming equipment and involved the alleged failure to disclose information concerning the viability of certain key patents. Circuit Judge Jay Bybee wrote that the fired lawyers need not prove that the company actually committed fraud to maintain their action. Judge Bybee stressed that "we wish to make absolutely clear that we are not suggesting" that there was actual wrongdoing. The plaintiffs only needed to show that they reasonably believed that there might have been fraud and were fired for suggesting further inquiry.

The panel disagreed with the lower court holding that no reasonable jury could find that one of the dismissed lawyers subjectively believed that shareholder fraud had occurred. The trial judge based this conclusion on her response of no to a deposition question concerning whether she had "reached a conclusion one way or another as to fraud." Judge Bybee reasoned that "to require an employee to essentially prove the existence of fraud before suggesting the need for an investigation would hardly be consistent with Congress's goal of encouraging disclosure."

The court also rejected the employer's state law arguments. Illinois law did not preclude former in-house counsel from bringing this federal action, and the trial judge could effectively manage the litigation to avoid any conflicts with conversations protected by the attorney-client privilege. Van Asdale v. International Game Technology (9thCir) is reported at ¶95,314 (ip access user) (IntelliConnect).

9th Circuit: Investors Could Not Rely on Market Integrity. The Affiliated Ute Citizens v. U.S. and fraud on the market reliance presumptions were unavailable to a plaintiff class making market manipulation claims, according to a 9th Circuit panel. The court also found no error in the decision by the district court not to recognize a presumption of reliance based on manipulations that allegedly destroyed the efficiency of the market and the reliability of the market's price. In the absence of a reliance presumption, the class could not be certified because individual reliance claims would predominate.

The action, more than seven years old and still at the class certification stage, alleged an elaborate scheme in which broker-dealers used securities loan transactions to conceal their manipulative activities to drive up the price of an OTC-traded stock. In a per curiam opinion, the court found that the Affiliated Ute presumption applied to omissions cases rather than market manipulation claims. A fraud on the market presumption was also not available because the company's securities did not trade in an efficient market.

The investors posited an argument described by the appeals court as "novel" to establish a presumption of reliance on "the integrity of the market" in the context of manipulation cases when other presumptions are unavailable. The appellate panel found that no authority required the district court to recognize such a presumption and the lower court did not abuse its discretion in refusing to do so. Desai v. Deutsche Bank Securities Ltd. (9thCir) is reported at ¶95,300 (ip access user) (IntelliConnect).

CCH Blue Sky Law Reporter

Kentucky Revises Rule 506 Filing Requirements In Light of Electronic Form D. Issuers making a securities offering in Kentucky under Rule 506 of federal Regulation D must submit within 15 calendar days after the first sale in the State a Form D, a Form U-2, Uniform Consent to Service of Process, a statement from an authorized official that a federal filing was made or will be made contemporaneously and a $250 fee. Issuers filing Form D electronically with the SEC are not required to file either Form U-2 or the "statement from an authorized official." Issuers are requested to voluntarily send the Kentucky Securities Division a copy of all offering materials distributed to offerees that include the Private Placement Memorandum, current issuer financial statements [including audited balance sheet, if required], executive summaries and all other documents provided to offerees. A $250 fee in addition to the initial offering fee of $250 will be assessed for late filings, and the Kentucky Commissioner of Securities may issue a stop order suspending the offer or sale to protect investors. Form D amendments must be sent to the Division of Securities including final amendments reporting closed offerings and total sales on the appendix pages. ¶27,606 (ip access user) (IntelliConnect).

New Mexico Sets Forth Electronic Form D Filing Requirements for Rule 505 and 506 Offerings. Beginning March 16, 2009, issuers making a Rule 505 or 506 offering in New Mexico must file an authenticated paper copy of the Form D filed electronically with the SEC, along with a manually signed Form U-2, Uniform Consent to Service of Process, and a $350 fee. The 505 notice must be filed with the New Mexico Securities Division at least 5 days before the first offering in New Mexico; the 506 notice must be filed no later than 15 calendar days after the first sale of the federal covered security in New Mexico or, if the last day for filing falls on a Saturday, Sunday or holiday, then the first business day following. ¶41,600O (ip access user) (IntelliConnect).

Virginia Adopts Securities Rule Changes. Rule revisions were adopted by the Virginia Division of Securities and Retail Franchising. One amendment eliminates the Form U-2 filing requirement for Rule 505 and 506 offerings but mandates issuers to submit as their notice to the Division the same Form D filed with the SEC. Other changes adopt NASAA's Model Custody Rule 102(e)(1)-1 and the NASAA policy statement on corporate securities definitions, require additional information on investment adviser and federal covered investment adviser registration applications, amend the examination and termination requirements for agents and investment adviser representatives, and allow agents terminating employment with registered broker-dealers because of retirement or disability to continue to receive compensation after termination if certain conditions are met. ¶60,404 (ip access user) (IntelliConnect), ¶60,411 (ip access user) (IntelliConnect), et seq.

Wisconsin Announces Annual Rules Revision. Wisconsin's 2009 annual rules revision is partly to make nonsubstantive changes to statutory cross references to align the rules with the new Wisconsin Securities Act that took effect January 1, 2009, along with proposing more substantive rule changes. The date of the public hearing is September 21, 2009. The more significant changes in the proposed rules include amending Form D filing requirements for Rule 506 offerings to provide an electronic filing alternative to the existing hardcopy notice filing provision in light of the SEC's Form D electronic filing mandate that began for securities issuers at the federal level on March 16, 2009; repealing the definition of "institutional investor" because it duplicates the definition in the Wisconsin securities statute; repealing two government securities exemptions, a corporate merger transactional exemption connected to the Internal Revenue Code, and a compensatory benefit plan transactional exemption because of the difference in language and scope of these exemptions in the Wisconsin securities statute; providing specific recognition of electronic prospectus delivery modes that comply with federal requirements; providing in a broker-dealer/agent registration rule that applicants receiving an exam waiver from taking one of the general securities business exams are not required to take and pass those exams again, but also provides that applicants receiving a waiver from taking the general securities business examinations are still required to pass one of the state law exams, i.e., the Uniform Securities Agent State Law Examination (Series 63) or the Uniform Combined State Law Examination (Series 66); separating two waiver concepts in a preceding examination provision for investment advisers and investment adviser representatives to eliminate a conflict with the succeeding examination provision; providing an exemption from registration for supervised persons of noticed federal covered investment advisers if the supervised persons do not have a place of business in Wisconsin, to comply with federal law requirements; and repealing two investment adviser/investment adviser representative forms as no longer necessary, Form IAR (WI), Application for Renewal of Investment Adviser and Investment Adviser Representative Registration, and Form IAUSR (WI), Acknowledgment of Understanding of Supervisory Responsibilities of Investment Adviser Under Wisconsin Statutes and Administrative Code. ¶64,502 (ip access user) (IntelliConnect), ¶64,511, (ip access user) (IntelliConnect), et seq.

Municipality Was Not Immune from Securities Fraud Claims. In a case of first impression, a federal district court (N.D. Cal.) has ruled that a municipality was not immune from suit under California law for its own fraud and misrepresentations in the offer and sale of securities. The plaintiffs alleged that the municipality violated various provisions of the California Corporate Securities Law of 1968 (Corporate Securities Law) in offering and selling municipal revenue bond anticipation notes. Although observing that governmental liability is limited under California law to exceptions specifically set forth by statute, the court reasoned that the Corporate Securities Law explicitly includes governments and their political subdivisions within its definition of "person." The subsequent enactment of the Corporate Securities Law suggested, therefore, that the legislature intended to overcome the earlier governmental immunity rule and impose liability on public agencies for fraudulent and prohibited conduct in the sale or purchase of securities. Moreover, the municipality acted as a party in a securities transaction, rather than in a discretionary fashion.

The court also rejected the municipality's argument that it was immune from suit because the California Government Code provides public entities with immunity from liability for misrepresentations by their employees. The court noted that the alleged securities fraud resulted from the implementation of an official policy of the municipality, and not the actions of a single employee. As government entities can only act through their employees, application of the immunity rule would render nugatory the language in the Corporate Securities Law that imposes liability on government entities, the court ruled. Accordingly, the municipality's motion to dismiss was denied. The court permitted the municipality to renew its argument at a future date, however, if it could make a further showing on the issue. Bernard Osher Trust v. City of Alameda is reported at ¶74,783 (ip access user) (IntelliConnect).

Aspen Federal Securities Publications

The Business Judgment Rule: Fiduciary Duties of Corporate Officers, Sixth Edition by Stephen A. Radin. The Sixth Edition is available online on the Corporate Governance Integrated Library. The expanded Sixth Edition explores developments in the law in Delaware and all other jurisdictions that have addressed business judgment rule and related corporate governance issues, as well as recent cases exploring the breadth and limits of the business judgment rule. Meticulously researched and expertly analyzed by Stephen A. Radin, partner at Weil, Gotshal & Manges, LLP, and one of the most respected and experienced practitioners in the field, this highly regarded resource is an invaluable research tool. The author seamlessly combines cases, statutory provisions, and commentary to help the reader make sense of the constantly changing body of law, even as the courts struggle to adapt the rule in new contexts. The Business Judgment Rule, Sixth Edition spotlights such vital areas as: duty of care issues; duty of loyalty issues; disinterestedness and independence issues; the emerging good faith doctrine; oversight and the Caremark doctrine; compensation; stock option backdating; controlling shareholder transactions; special committees; disclosure obligations; appraisal; financially troubled companies and the zone of insolvency; defensive measures; deal protection measures; shareholder derivative litigation; the pre-litigation demand requirement; Section 220 demands; and indemnification of directors and officers.

Meetings of Stockholders by Jesse A. Finkelstein, R. Franklin Balotti, and Gregory P. Williams. The 2009 Supplement (ip access user) (IntelliConnect) is now available online on the Corporate Governance Integrated Library. 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 contains updates to many of the discussions regarding these meetings including: three new chapters that provide a review of the contested meeting from the perspective of the proxy solicitation firms who advise on strategy and follow the process through any post-meeting challenges, and contain insight into how the contested meeting can be successfully conducted, from identification of stockholder profiles, to proxy solicitation, and finally to any review by Inspectors of Election as well as useful sample forms, including rules, procedures and ballots; a new chapter describing the requirements of two new sections of the Delaware General Corporation Law: Section 112, Access to Proxy Solicitation Materials, and Section 113, Proxy Expense Reimbursement; discussion of the recently amended DGCL Section 213, which now provides that the board may select a different record date for stockholders entitled to vote than the record date for stockholders entitled to notice of the meetings; discussion of relevant recent cases including Dabah v. Children’s Place, Accipiter Life Sciences Fund v. Helfer, and Mercier v. Inter-Tel; recent trends and statistics relating to shareholder activities such as shareholder resolutions filed, majority voting proposals, and advisory votes on executive compensation; discussion of how the many players in the corporate governance debate affect shareholder activism; discussion of the recent case Portnoy v. Cryo-Cell International in which the Court of Chancery addressed alleged breaches of fiduciary duty, including claims of vote-buying, relating to a contested election of directors; discussion of the recent case Dubroff v. Wren Holdings, which addressed the issue of the scope of notice under DGCL Section 228(e) of action by less than unanimous written consent to stockholders who did not consent in writing; and discussion of Optima International of Miami v. WCI Steel in which the Court of Chancery rejected the plaintiffs’ challenge to a merger agreement that was adopted by written consent only one day after the target board had authorized it.

Corporate Legal Compliance Handbook, edited by Frederick Z. Banks and Theodore L. Banks. The 2009 Supplement will soon be available online on the Corporate Governance Integrated Library. This publication contains expert analysis of leading practitioners on key compliance subjects to enable the reader to develop an effective compliance program for their company. The latest update includes discussion of a wide variety of subjects including: a new section devoted to key concerns about compliance in times of financial stress; a new chapter covering hotlines and how to use the information obtained from employee reporting systems; information regarding evidence that companies that adopt compliance and governance programs perform better financially; the Justice Department’s new guidelines on corporate prosecution that purport not to go after privileged material (or work product) any more; the increased tendency to find corporate officers or directors personally liable for compliance violations by the corporation as the courts, politicians, and the public are looking for people to blame for compliance problems; why compliance should be part of annual performance reviews; information on how the new model antitrust jury instructions treat compliance programs; what can be done to ensure the security of electronic records; how to create an internal records management program that will not confuse the employees; new enforcement guidance in the area of behavioral advertising; enhanced penalties and increased requirements relating to consumer product safety as the result of new 2008 legislation; proposed model codes of conduct by trade associations in the health care industry to address certain behaviors that are considered unethical; the rules regarding background checks of employees; and specific guidance regarding compliance programs implemented for government contractors

Securitization of Financial Assets, Edited by Jason H. P. Kravitt. The 2009 Supplement will soon be available online on the Commodities and Derivates Integrated Library. This work provides a series of portals through which the authors enable the user to enter any particular issue, acquaint the user with its general terms, and provide the user with the intellectual foundation and appropriate sources with which to pursue the issue, or related issues, on his or her own. Part One consists of a series of issue-spotting and structuring chapters designed to enable the user to enter the substantive law chapters in Part Two, fully oriented to the broad significance of any particular legal or accounting issue or groups of legal issues, as well as the relation of this issue or issues to other issues and to particular structures. Part Two contains more detailed discussions of substantive law issues. The most recent update contains complete chapter revisions and updates on a variety of subject areas including rating agencies and structured finance credit ratings; the addition of a section discussing the Emergency Economic Stabilization Act of 2008 in the chapter pertaining to tax issues; real estate concerns; and eligibility for investment.

Hot Topic of the Month

This month’s hot topic is clearing agencies. A "clearing agency" is an entity acting as an intermediary in making payments or deliveries (or both) in connection with transactions in securities. The definition also includes an entity that provides facilities for the purposes of comparing data with respect to the terms of settlement of securities transactions, reducing the number of settlements or allocating securities settlement responsibilities. Certain entities are excluded from the definition including those that would be otherwise classified as clearing agencies solely by reason of functions performed as part of their customary activities, such as banks, brokers and dealers, building and loan, savings and loan, and homestead associations, and cooperative banks

Clearing agencies are subject to Section 17A of the Exchange Act which deals with the particular registration and other requirements applicable to clearing agencies and transfer agents. Clearing agencies register with the SEC by filing an application in required form that contains the rules of the clearing agency and such documents as the SEC may prescribe. The SEC may exempt an entity from registration if the SEC finds that the exemption is consistent with the public interest, the protection of investors, and the purposes of Section 17A, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds. For example, as a result of the recent financial crisis, the SEC temporarily exempted LCH.Clearnet Ltd. from the requirement to register as a clearing agency so that it could perform clearing agency functions for certain credit default swap transactions.

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

Federal Securities Law Reporter


SEC Today

Securities Regulation – Loss & Seligman (e.g., Chapter 7.E.2 (ip access user) (IntelliConnect))
Securities Regulation in Cyberspace – Friedman (e.g., Chapter 6.06(a) (ip access user) (IntelliConnect)
Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/)

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:

#336 - Countries of IPO Incorporation

Use IPO Vital Sign #336 to…

  • Review the number and percentage of companies going public from each country of incorporation
  • Analyze trends over time
  • Identify characteristics of IPOs incorporated in different countries

Tip! Click on blue numbers to drill down for more information.
Once in the drill down, click column headings to sort the data in an order more useful for answering your questions.