Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, August 22, 2008

SEC Post Agenda for August 27 Open Meeting

The SEC posted its agenda for its next Open Meeting, scheduled for August 27, 2008 at 10:00 a.m.  The subject matter of the Open Meeting will be:

The Commission will consider whether to adopt amendments to its rules regarding the circumstances under which a foreign private issuer is required to register a class of equity securities under Section 12(g) of the Exchange Act.

The Commission will consider whether to adopt amendments to the forms and rules applicable to foreign private issuers that are intended to enhance the information that is available to investors.

The Commission will consider whether to adopt revisions to the current exemptions for cross-border business combination transactions and rights offerings to expand and enhance the usefulness of the exemptions, and to adopt changes to the beneficial ownership reporting rules to permit certain foreign institutions to file reports on a shorter form. The Commission also will consider whether to publish interpretive guidance on issues related to cross-border transactions.

The Commission will consider whether to propose a Roadmap for the potential use by U.S. issuers for purposes of their filings with the Commission of financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. As part of the Roadmap, the Commission will also consider whether to propose amendments to various rules and forms that would permit early use of IFRS by a limited number of U.S. issuers.

August 22, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

D.C. Circuit Holds that Creation of PCAOB was Constitutional

In Free Enterprise Fund v. PCAOB (D.C. Cir. Aug. 22, 2008), the D.C. Circuit, with one Judge dissenting, held that Title I of the Sarbanes-Oxley Act (which created the Public Company Accounting Oversight Board) was constitutional and did not violate the appointments clause and separation of powers because it does not permit adequate Presidential control of the Board.  The majority stated:

We hold, first, that the Act does not encroach upon the Appointment power because, in view of the Commission’s comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President.  Second, we hold that the for-cause limitations on the Commission’s power to remove Board members and the President’s power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates. Accordingly, we affirm the grant of summary judgment to the Board and the United  States.

Judge Kavanaugh, in dissent, described the case as "the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years."  Both opinions are lengthy, and much of the majority opinion is spent in refuting the dissent's arguments.Download PCABO_DCopinion.pdf

August 22, 2008 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Enters Preliminary Settlement with Merrill Lynch over ARSs

Today the SEC's Division of Enforcement today announced that a preliminary settlement in principle has been reached with Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) about auction rate securities (ARSs), a day after New York, Massachusetts and NASAA announced settlements.  The settlement would enable investors who purchased auction rate securities from the firm to receive a total of up to $7 billion to restore their losses and liquidity.  In addition to helping individual investors, small businesses, and charities who were ARS customers of Merrill Lynch, the preliminary settlement also would require Merrill Lynch to use its best efforts to provide liquidity for approximately $1.5 billion worth of ARS purchased through Merrill Lynch by other business and institutional customers. The terms of the settlement are subject to finalization, review and approval by the Commission.

Under the terms of the agreement in principle:

No later than Oct. 1, 2008, Merrill Lynch will offer to liquidate at par all ARS from individual, charitable, and small business investors with account values up to $4 million who purchased ARS from Merrill Lynch prior to the collapse of the ARS market in mid-February 2008. This offer will include investors who held ARS in their Merrill Lynch account as of Feb. 13, 2008, but who subsequently transferred the account to another firm. The offer will remain open until Jan. 15, 2010, and investors may accept it at any time before that date.

No later than Jan. 2, 2009, Merrill Lynch will offer to liquidate at par all ARS from remaining individual and charitable investors, and from small businesses with account values up to $100 million who purchased ARS from Merrill Lynch prior to the collapse of the ARS market in mid-February 2008. This offer will include investors who held ARS in their Merrill Lynch account as of Feb. 13, 2008, but who subsequently transferred the account to another firm. The offer will remain open until Jan. 15, 2010, and investors may accept it at any time before that date.

Until Merrill Lynch actually provides for the buy back of ARS on the schedule set forth above, Merrill Lynch will provide certain investors no cost loans that will remain outstanding until the ARS are repurchased or until an investor declines Merrill Lynch's offer to repurchase the securities at par.

Merrill Lynch will reimburse customers for costs incurred under any prior loan programs the firm provided to its ARS investors.

Merrill Lynch will make whole any losses sustained by any of the investors described above who sold ARS after Feb. 13, 2008, at a loss.

To the extent that any of the investors described above has incurred consequential damages due to the loss of liquidity in the customer's ARS holdings, Merrill Lynch will participate in a special arbitration process that the investor may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Merrill Lynch will not contest liability for its misrepresentations and omissions concerning ARS.

Merrill Lynch will use its best efforts to provide liquidity to its ARS institutional customers and business customers with accounts of more than $100 million by the end of 2009.

Merrill Lynch will not liquidate its own inventory of a particular ARS before it liquidates investors' holdings in that security.

Merrill Lynch will provide notice to all of its ARS investors of the settlement terms and will establish a telephone assistance line to respond to questions from investors concerning the settlement.

Merrill Lynch will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.

Merrill Lynch faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. A determination as to the amount of the penalty, if any, will take into account, among other things, the extent of Merrill Lynch's misconduct in marketing and selling ARS, an assessment of whether Merrill Lynch has satisfactorily completed its obligations under the settlement, and the costs incurred by Merrill Lynch in meeting those obligations, including penalties incurred and the cost of remediation.

August 22, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, August 21, 2008

Three More Firms Settle with States over ARSs

The Wall St. Journal reports that state regulators have entered into settlements with three more securities firms to buy back "billions" of dollars of auction rate securities from retail investors, small businesses and charities.  In addition, Merrill Lynch will pay a $125 million penalty, Goldman Sachs will pay a $22.5 million penalty, and Deutsche Bank will pay a $15 million penalty.  The Journal also reports that Merrill Lynch entered a separate settlement with the Massachusetts Attorney General to buy back illiquid ARSs from retail customers.  (As of 6:40 p.m. today, there are no announcements on the websites of NASAA, the New York AG, or the Massachusetts Secretary of State.  Meanwhile, a check of the SEC's website the last few days shows that it has been busy suspending trading in stocks that haven't made the requisite filings.)  WSJ, Auction-Rate Securities Accords Between Banks, States Continue.

August 21, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 19, 2008

Former SEC Chair Pitt Assists Alabama in Short-Sales Investigation

Harvey Pitt, formerly the SEC Chair, has been appointed a deputy AG of the state of Alabama, to assist it in its investigation into naked short-selling and negative rumors about Colonial BancGroup.  InvNews, Pitt to work with Alabama on naked shorting .

August 19, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces IDEA, EDGAR's Successor

I just went to the SEC website, as I frequently do, and I have to say, it was a little scary.  To announce the successor to EDGAR, called IDEA, the SEC's website starts off with electronic sound and a deep voice stating, ominously, "Information in the digital era should never be static."  At first I thought some spam ad had taken over the site, but no -- it's just the fanfare.  Here's the boring part:

The new system is called IDEA, short for Interactive Data Electronic Applications. Based on a completely new architecture being built from the ground up, it will at first supplement and then eventually replace the EDGAR system. The decision to replace EDGAR marks the SEC’s transition from collecting forms and documents to making the information itself freely available to investors to give them better and more up-to-date financial disclosure in a form they can readily use.

Currently, most SEC filings are available only in government-prescribed forms through EDGAR. Investors looking for information must sift through one form at a time, and then re-keyboard the information — a painstaking task. With IDEA, investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way they choose.

IDEA will ensure that both the SEC and the investors who rely upon the financial reporting the agency demands are ready for the new world of financial disclosure that will soon arrive when financial information is presented in interactive data format. The SEC has formally proposed requiring U.S. companies to provide financial information using interactive data beginning as early as next year, and separately has proposed requiring mutual funds to submit their public filings using interactive data.

Interactive data relies on computer “tags,” similar in function to bar codes, which identify individual items in a company’s financial disclosures. With every number on an income statement or balance sheet individually labeled, information about thousands of companies contained on thousands of forms could be easily searched on the Internet, downloaded into spreadsheets, reorganized in databases, and put to any number of other comparative and analytical uses by investors, analysts, journalists, and financial intermediaries.

The ease with which interactive data will make financial information available also is expected to generate many new Web-based services and products for investors.

Investors and others who currently use EDGAR will be able to continue doing so for the indefinite future. During the transition to IDEA, investors will be able to take advantage of new interactive, IDEA-like features that will be grafted onto EDGAR in the short run. This will make it possible for investors to tap IDEA’s advanced search capabilities, and to use the information from EDGAR within spreadsheets and analytical software – something that was never possible with EDGAR. The EDGAR database also will continue to be available as an archive of company filings for past years.

August 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)