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August 2008 Published by RR Donnelley Editorial Content by LegalWorks Blake A. Bell, Editor in Chief In This Issue:
SEC I: Charges Two Ex-Credit Suisse Brokers with Defrauding Their Customers by Making More Than $1 Billion in Unauthorized Purchases of Auction-Rate Securities
The Commission alleges that the two men misled customers into believing that auction rate securities being purchased in their accounts "were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds". Instead, according to the SEC, the securities purchased for customers were backed by subprime mortgages, collateralized debt obligations, and other non-student loan collateral. The Complaint alleges that the former brokers either sent or directed sales assistants to end e-mail purchase confirmations in which the terms "St. Loan" or "Education" were added to the names of non-student loan securities purchased for the customers. References to "CDO" or "mortgage" were also "routinely deleted" from the names of such securities in such e-mails. The criminal indictment charges the pair with criminal misconduct for the distribution of such emails. 
SEC II: SEC Chairman Proposes a "Roadmap Toward IFRS"
Under the proposal, the Commission will decide in 2011 whether to move forward with International Financial Reporting Standards for U.S. issuers. If it decides to move forward, the transition will begin in 2014. The release sets forth a series of milestones to be achieved before the Commission makes its final decision in 2011. A critical milestone calls for resolution of issues involving the accountability and funding of the International Accounting Standards Committee Foundation. The Commission has been working with other national securities regulators and with IOSCO) to establish the so-called "Monitoring Group" to "enhance" the accountability of the IASC Foundation. With regard to funding, the Commission has made clear that it will only proceed with mandating IFRS in the U.S. if the IASC Foundation reaches the goal of securing a "stable funding mechanism". Another important milestone involves having the two accounting standard setters, the FASB and the IASB, improve accounting standards so that U.S. issuers will report their financial information using the highest quality accounting standards possible. The two boards currently are working to complete a joint work plan addressing the accounting standards issue (estimated to be completed in 2011). Another important milestone involves the education and training necessary to ready the investor community and securities markets for the transition of U.S. issuers from U.S. GAAP to IFRS reporting. As noted by Commissioner Elisse B. Walter, "[t]hree years is not a very long time, and I believe that the Commission must do everything it can to educate investors and support the training of accountants, auditors, and others involved in preparing and using IFRS financial statements."
SEC III: SEC Reopens Comment Period on Proposal to Improve Mutual Fund Disclosure
The Commission approved rule amendments to eliminate requirements for foreign companies without SEC-registered securities to submit paper disclosures, and instead give investors instant electronic access to foreign company disclosure documents, in English, on the Internet. According to the Commission's announcement of its actions, "[a]fter a period of transition, foreign reporting companies also will be required to file their annual reports with the SEC two months earlier, making those submissions more timely and therefore more useful to investors. The rule amendments also facilitate the ability of U.S. investors to participate in cross-border tender offers and other business combinations."
SEC IV: SEC Announces "IDEA" -- The Successor to its EDGAR Database
Initially, IDEA will supplement the EDGAR database. Eventually, however, it is intended to replace the EDGAR system which will become an archive of SEC filings made prior to what the Commission describes as "the new era of financial reporting in interactive data format". (The SEC has formally proposed requiring U.S. companies to provide financial information using interactive data beginning as early as 2009, and separately has proposed requiring mutual funds to submit their public filings using interactive data.) In its announcement of the development, the Commission claims: "The decision to replace EDGAR marks the SEC’s transition from collecting government-prescribed forms and documents to making the information itself freely available to investors in a user-friendly format they can readily use. Instead of sifting through one form at a time in EDGAR and then re-keyboarding the information to analyze it, investors will be able to utilize interactive data to instantly search and collate information to generate reports and analysis from thousands of companies and forms through IDEA."
SEC V: SEC and Other Regulators Announce Major Series of Settlements Involving Sales of Auction-Rate Securities
Problems arose early this year when the market for auction-rate securities froze up due to turmoil in the credit markets. Many investors claimed that they had been misled into buying the securities based upon representations that they were safe investments that were as liquid as the "cash" held in money market funds. The recent settlements with large Wall Street firms typically require the large firms to buy back such securities from retail, but not institutional, investors who purchased them and to pay civil penalties of some sort. The settlements now total in the tens of billions of dollars. Recently, however, wide-ranging criticism has arisen as hundreds of thousands of individuals who bought the same products from mid-sized and online brokerage firms have realized that they are not covered by the announced settlements. The mid-sized and online brokerage firms contend that they were not the underwriters of the securities and, thus, should not be required to buy them back. Hundreds of thousands of investors whose funds remain frozen and inaccessible now are pressing regulators and lawmakers to force repurchase of their auction-rate securities by firms such as Oppenheimer, Fidelity Investments, Northern Trust and many others. Stay tuned.
PCAOB I: Court of Appeals for the D.C. Circuit Upholds Constitutionality of PCAOB
In the case, the plaintiffs alleged that Title I of the Sarbanes-Oxley Act violates the Appointments Clause of the United States Constitution and the principle of separation of powers because it does not permit adequate Presidential control of the PCAOB. The majority recognized that Congress made the Board’s exercise of its duties subject to the comprehensive control of the SEC. It further noted that under Sarbanes-Oxley, the Commission is empowered to set Board rules and procedures, to overturn any sanction proposed by the Board, and to limit or relieve the Board of its powers. Additionally, the Commission also may remove members of the Board for cause. Members of the Commission, in turn, are appointed by the President with the advice and consent of the Senate and subject to removal by the President for cause; its chairman is selected by and serves at the pleasure of the President. The opinion rejects the view that this statutory scheme vests PCAOB members “with far reaching executive power while completely stripping the President of the authority to appoint or remove those members or otherwise supervise or control their exercise of that power" holding that to hold otherwise would ignore "the entirety of the statutory scheme and run afoul of the Supreme Court’s instruction regarding the nature of the President’s constitutional relationship with independent administrative agencies. Supreme Court precedent as we have it does not support appellants’ singular focus on removal powers as the be-all and end-all of Executive authority, but rather compels a more nuanced approach that examines the myriad means of Executive control." Accordingly, the ruling holds: "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."
PRACTICAL GUIDANCE: Courtesy of RealCorporateLawyer.com RealCorporateLawyer.com provides its readers with free access to a very large collection of law firm memoranda providing practical guidance on current hot topics. Readers are encouraged to visit the frequently-updated "Emerging Legal Issues" area of the home page for such current memoranda, as well as the Expert Analysis: SEC Reform Portal section containing hundreds of other such memoranda. Recent additions include:
COMINGS AND GOINGS: Who's Doing and Saying What and Where? August was a quiet month for "comings and goings". The principal speaking activity was at the Commission's August 27 open meeting. There, Commissioner Elisse B. Walter spoke regarding a "Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards from U.S. Issuers". During the same meeting, Chairman Christopher Cox spoke regarding "Proposing a Roadmap Toward IFRS" and delivered a statement on "Modernizing Disclosure Requirements for Foreign Issuers" (Windows Media Player Format). Several Commission staffers spoke at the same meeting. Christina Chalk, Senior Special Counsel, Division of Corporation Finance, delivered "Opening Remarks" regarding disclosure requirements for foreign issuers. Conrad Hewitt (Chief Accountant), John White (Director, Division of Corporation Finance) and Paul Dudek (Chief of the Office of International Corporation Finance) delivered "Opening Remarks" regarding the proposed roadmap toward IFRS. Elliot B. Staffin, Special Counsel in the Office of International Corporation Finance, delivered "Opening Remarks" regarding disclosure requirements for foreign issuers. Felicia H. Kung, Senior Special Counsel in the Office of International Corporation Finance, also delivered "Opening Remarks" regarding disclosure requirements for foreign issuers. On August 11, John W. White also spoke before the ABA Section of Business Law regarding "Corporation Finance in 2008 - A Year of Progress". Finally, on August 7, the SEC's Director of the Division of Enforcement, Linda Chatman Thomsen, delivered a "Statement at News Conference Announcing Citigroup Preliminary Settlement" regarding sales of auction-rate securities.
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©2008 RR Donnelley This free E.Zine is provided for informational purposes only and does not constitute legal advice. RR Donnelley & Sons Company is not engaged in rendering legal or other professional services. Publication on this E.Zine is not intended to create, and the information contained hereon does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent professional counsel. The RR Donnelley Financial Services Group provides a range of solutions to address all of your business communications needs. We offer financial printing services to the capital and investments markets, as well as judgment-based outsourcing and real estate services. Through our integrated global network, we file more than 50,000 documents annually with the SEC and produce many of the critical documents for regulatory compliance and financial transactions. Our BPO services leverage an on-site/offshore delivery model, leading subject matter experts and state-of-the-art, global operations to assume functions of our clients' business. We add value through highly personalized and around-the-clock service, single-source solutions, Venue virtual data rooms, worldwide regulatory and industry expertise, and insight that comes from over 140 years of experience and achievement. For more information, visit us at www.financial.rrd.com or www.RealCorporateLawyer.com , a reference resource site for corporate and securities lawyers.
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