The law of securities regulation:
Gespeichert in:
| 1. Verfasser: | |
|---|---|
| Format: | Buch |
| Sprache: | English |
| Veröffentlicht: |
St. Paul, Minn.
Thomson/West
2006
|
| Ausgabe: | Rev. 5. ed. |
| Schriftenreihe: | Hornbook series
|
| Schlagworte: | |
| Online-Zugang: | Inhaltsverzeichnis |
| Beschreibung: | XXXVII, 927 S. |
| ISBN: | 0314172459 9780314172457 |
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Datensatz im Suchindex
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| adam_text | Summary of Contents
Page
Preface v
Westlaw Overview xi
Chapter
1. The Basic Coverage of the Securities Act — 1
2. Registration Requirements of the Securities Act of 1933 67
3. The 1933 Act Registration Process and Disclosure 110
4. Exemptions From 1933 Act Registration 160
5. The Theory of Säle: Corporate Recapitalizations, Reorganizations
and Mergers Under the 1933 Act 252
6. IPO Practices: Manipulation, Stabilization and Hot Issues — 270
7. Liability Under the Securities Act of 1933 286
8. State Blue Sky Laws 329
9. Securities Exchange Act of 1934—Registration and Reporting Re¬
quirements for Publicly Traded Companies 335
10. Shareholder Suffrage—Proxy Regulation — 367
11. Tender Offer and Takeover Regulation 399
12. Manipulation and Fraud—Civil Liability; Implied Private Remedies;
SEC Rule 10b 5; Fraud in Connection With the Purchase or Säle
of Securities; Improper Trading on Nonpublic Material Informa¬
tion 463
13. Insider Reporting, Short Swing Trading, and False SEC Filings 573
14. Market Regulation; Broker Dealers 603
15. Arbitration of Broker Dealer Disputes 699
16. Operation of the Securities and Exchange Commission ~ 704
17. Jurisdictional Aspects 725
19. Debt Securities and Protection of Bondholders—The Trust Inden
ture Act of 1939 735
20. Federal Regulation of Investment Companies—The Investment
Company Act of 1940 — 747
21. Investment Advisers Act of 1940 788
22. Special Problems and Overview of Related Laws — 808
Appendix: Westlaw Research — 827
Table of Cases 847
Index — 891
*
xiii
Table of Contents
Page
Preface v
Westlaw Overview xi
Chapter 1. The Basic Coverage of the Securities Act — 1
See.
1.0 Overview of Treatise; Sources of Securities Law; Overview of this
Chapter 1
1.0[l] Overview of Treatise 1
1.0[2] Sources of Securities Law — 2
1.1 Overview of the Securities Markets and Their Operation 9
1.1[1] Securities Markets and Regulation in Context 9
1.1[2] The Securities Markets 10
1.1[3] The Securities Industry — — ~ 14
1.1[4] The Regulatory System — 14
1.2 History, Scope, and Coverage of Federal and State Securities
Regulatory Schemes — — 17
1.2[1] The Antecedents of Securities Regulation in the United
States 17
1.2[2] The Regulatory Era Begins—State Securities Laws 20
1.2[3] The New Deal and Federal Regulation — 21
1.2[3][A] The Securities Act of 1933 — 22
1.2[3][B] The Securities Exchange Act of 1934— 22
1.2[3][C] The Securities and Exchange Commission— 24
1.2[3][D] Other Federal Securities Laws — 24
1.2[3][E] Federal Preemption of State Law— — 27
1.3 The Securities and Exchange Commission; Structure of the SEC— 28
1.3[1] The SEC Commissioners — 28
1.3[2] The Divisions of the Commission — 29
1.4 The Work of the SEC 31
1.4[1] Overview of SEC Authority 31
1.4[2] SEC Rulemaking .— 31
1.4[2][A] Delegated Rulemaking 31
1.4[2][B] Interpretative Rulemaking— 32
1.4[2][C] Safe Harbor Rules 32
1.4[3] SEC Interpretive Releases; Staff Legal Bulletins 32
1.4[4] SEC No Action Letters — — 33
1.4[5] SEC Oversight and Regulatory Authority 34
1.4[6] SEC Enforcement Authority— 35
1.5 The SEC s Subject Matter Jurisdiction; The CFTC SEC Division
of Regulatory Authority; Financial Services — —. 36
1.5[1] Jurisdictional Concerns— 36
1.5[5] Index Participations and Other Hybrids as Securities or
Commodities 37
xv
Page
See.
1.5[6] Registration of Exchanges 38
1.5[7] Financial Services 38
1.6 Definition of Security 39
1.6[1] Statutory Definition of Security 39
1.6[2] Judicial Interpretation of Investment Contract —The
Howey Test 41
1.6[2][A] The Investment ofMoney 42
1.6[2][B] In a Common Enterprise 43
1.6[2][C] With an Expectation of Profit — 44
1.6[2][D] From the Efforts of Others 45
1.6[3] Alternative Interpretation of Investment Contract —
Risk Capital Analysis— 47
1.6[4] Leasing Programs as Securities — 48
1.6 [5] Franchises and Distributorships—Pyramid Scheines as
Securities 48
1.6[6] Commodities and Managed Accounts as Securities 49
1.6[7] Employee Benefit Plans as Securities — 50
1.6[8] Variable Annuities as Securities — — 51
1.6[9] Real Estate Interests as Securities 52
1.6[10] Partnership Interests as Securities 53
1.6[11] Limited Liability Company Interests as Securities 54
1.6[12] Beneficial Interests in Business Trusts and Real Estate
Investment Trusts as Securities ~ 55
1.6[13] Stock as a Security 55
1.6[14] Notes as Securities 57
1.6[15] Certificates of Deposit as Securities 61
1.7 Derivative Investments: Stock Options, Index Options, and Fu
tures 62
1.7[1] Derivative Investments: An Overview 62
1.7[5] New Exotics —Swaps and Other Hybrids — 63
1.7[6] Unregulated Over the Counter Derivatives 64
1.7[7] Security Futures Products 66
Chapter 2. Registration Requirements of the Securities Act of
1933 67
See.
2.0 Overview of 1933 Act Registration 67
2.1 The Underwriting Process 67
2.1[1] Direct Offerings 68
2.1 [2] Nature and Varieties of Underwriting Arrangements 69
2.1[2][A] Strict Underwriting 70
2.1[2][B] Firm Commitment Underwriting 71
2.1[2][C] Best Efforts Underwriting _. 72
2.1[2][D] Underwriting byAuction — 72
2.1[3] Underwriters Compensation; NASD Review — 73
2.2 The Operation of Section 5 of the Securities Act of 1933 73
2.2[1] Operation of Section 5—Overview _ 73
2.2[2] Operation of Section 5—The Basic Prohibitions of the
Pre Filing, Waiting, and Post Effective Periods 75
2.2[3] Impact of Technology and the Internet on the Operation
of Section 5 80
I
Page
See.
2.2[3][A] Online Offerings .— 80
2.2[3][B] Electronic Delivery of Written Materials 81
2.2[3][C] Electronic Road Shows 82
2.3 The Pre Filing Period 83
2.3[1] Basic Prohibitions of the Pre Filing Period 83
2.3[2] What is an Offer to Seil?: Generating a Buying Interest 86
2.3[3] Safe Harbor for Permissible Pre Filing Announce
ments—SEC Rules 135, 168 and 169— 89
2.3[4] Exchange Offers and Business Combinations Subject to
the Exchange Act 91
2.3[5] The Impact of Exchange Act Reporting Requirements
and Other Disclosure Obligations on the Pre Filing
Quiet Period 91
2.4 The Waiting Period 92
2.4[1] Prohibitions During the Waiting Period 92
2.4[2] Permissible Offers to Seil During the Waiting Period 95
2.4[2][A] Oral Offers to Seil 95
2.4[2][B] The Tombstone Advertisement and Oth¬
er Identifying Statements 96
2.4[2][C] The Preliminary ( Red Herring ) Prospec
tus — — 96
2.4[2][D] The Summary Prospectus 97
2.4[2] [E] The Free Writing Prospectus 97
2.4[2][F] Safe Harbors for Factual Information and
Forward Looking Statements by 1934
Act Reporting Companies; Rules 168 and
169 99
2.4[3] Limited Statements After Public Announcement of Ten¬
der Offer or Business Combination ~ 100
2.4[4] Broker Dealer Recommendations 100
2.4[5] Suspension of Prospectus Delivery Requirements for
Certain Transactions by Dealers 100
2.4[6] Broker Dealer Standard of Conduct With Regard to
Prospectus Delivery Requirements 101
2.5 The Post Effective Period 101
2.5[1] Prohibitions During the Post Effective Period 101
2.5[2] Supplementary Sales Literature ( Free Writing ) 102
2.5[3] Updating the Registration Statement and Prospectus
During the Post Effective Period — 103
2.5[4] Effect of Prospectus Delivery Requirements 104
2.5[6] Exemption From Prospectus Delivery Requirements for
Dealer Transactions 106
2.5[7] Broker Dealer Compliance With Prospectus Delivery
Requirements 108
2.5[8] Broker Dealer Recommendations 109
Chapter 3. The 1933 Act Registration Process and Disclosure — 110
See.
3.1 The Decision to Go Public 110
3.1[1] Process of Going Public—Overview 110
3.1[2] Advantages of Going Public 111
Page
See.
3.1[3] Consequences, Disadvantages, and Costs of Going
Public 112
3.1[4] Contingent Public Offerings 114
3.2 Preparation of the Registration Statement — — 115
3.3 Information Required in the Registration Statement and the
Statutory Prospectus; Schedule A — 122
3.4 Registration Forms and Integrated Disclosure 124
3.4[1] Overview of 1933 Disclosure Requirements 124
3.4[2] Materiality ...—.—— — 125
3.4[3] Integrating 1933 Act Disclosure With the 1934 Act — 126
3.4[4] 1933 Act Registration Forms ..—... 127
3.4[4][A] One Size Fits All Long Form Disclosure—
Form S l .. . 127
3.4[4][B] Former Form S 2 for Public Companies 128
3.4[4][C] Form S 3 for Seasoned Issuers 128
3.4[4][D] Forms for Small Businesses _ 129
3.4[4][E] Offerings to Employees 131
3.4[4][F] Securities Issued in Coiinection with a
Merger or Other Corporate Reorganiza
tion—Form S 4 —— 131
3.4[5] Disclosure Guides and Procedures—Regulations S K, S
B, S X — —— 132
3.4[5][A] Regulations S K, S B, and S X Distin
guished — — 132
3.4[6] EDGAR .. . 132
3.6 SEC Statutory Procedures—Section 8— — 132
3.6[1] Statutory Waiting Period— — — 132
3.6[2] Acceleration of the Effective Date — — — 134
3.6[3] SEC Refusal Orders 135
3.6[4] SEC Investigations and Stop Orders —... 135
3.6[5] Withdrawal of the Registration Statement 136
3.7 Processing the Registration Statement After Filing — — 136
3.7[1] Law versus Lore: What Really Happens—Informal Pro¬
cedures 136
3.7[2] SEC Review Practices 138
3.7[3] SEC Policies On Acceleration Requests . .. 138
3.8 Frequent Deficiencies in Registration Statements and Other Dis
closures; The Piain English Requirement 140
3.8[1] Frequent Deficiencies ...—... 140
3.8[2] Piain English Requirements—Overview —....—. 143
3.9 Common Disclosure Problems—Dilution of the Püblic s Invest¬
ment, Business Risks, Transactions With Controlling Persons,
and Projections 143
3.9[1] Overview . ... 143
3.9[2] Dilution of the Püblic s Investment, Business Risks 143
3.9[3] Transactions of Controlling Persons, Management Sta
bility and Integrity, Secondary Sales 146
3.9[4] Projections and Soft Information — 149
3.9[5] Statutory Safe Harbor for Forward Looking Statements 151
3.9[6] The Bespeaks Caution Doctrine — 153 i
1
Page
See.
3.9[7] Management Discussion and Analysis 154
3.9[8] Duties to Correct and Update 156
3.10 Presentation of Disclosure; Piain English 156
3.10[2] The Piain English Requirements — 156
3.11 Delayed and Continuous Offerings—Shelf Registrations 157
Chapter 4. Exemptions From 1933 Act Registration 160
See.
4.1 Securities and Transactions Exempt From the 1933 Act s Regis¬
tration Requirements—Sections 3 and 4 of the 1933 Act 161
4.1[1] Overview of Exemptions 161
4.1[3] Establishing an Exemption; Consequences of Failure to
Do So 162
4.1 [4] Exempt Securities: Section 3 of the 1933 Act 162
4.1 [5] Exempt Transactions: Section 4 of the 1933 Act 163
4.1 [6] General Exemptive Authority: Section 28 of the 1933
Act: Exemption by SEC Rule or Regulation 164
4.1[7] Applicability of State Securities Laws 165
4.3 Securities of Governments, Banks, Insurance Companies, and
Qualified Pension Plans—Section 3(a)(2) 165
4.3[1] Government and Municipal Securities 166
4.3[1][A] Scope of Exemption — 166
4.3[2] Bank Securities— 166
4.3[3] Pension Plans 167
4.4 Short Term Commercial Paper—Section 3(a)(3) 167
4.5 Securities of Eleemosynary Organizations—Section 3(a)(4).. — 167
4.6 Securities of Building and Loan Associations, Farmers Coopera
tives and the Like—Section 3(a)(5) 168
4.8 Certificates Issued Under the Bankruptcy Act by Receivers and
Trustees—Section 3(a)(7) — 168
4.9 Insurance Policies and Annuity Contracts—Section 3(a)(8) 169
4.10 Securities Exchanged Exclusively With Existing Security Hold
ers—Section 3(a)(9) — 170
4.11 Securities Issued in Judicially or Administratively Approved Reor
ganizations—Section 3(a)(10) 170
4.12 The Exemption for Purely Intrastate Offerings—Section 3(a)(ll);
SEC Rule 147 171
4.12[1] Intrastate Offerings—The Statutory Exemption—Sec¬
tion 3(a)(9) — 171
4.12[2] Intrastate Offerings—The SEC s Safe Harbor —Rule
147 — 174
4.15 The Small Issue Exemptions 177
4.16 Qualified Exemptions for Small Issues; Sections 3(b), 4(6), and
3(c) — — 180
4.16[1] Limited Offerings—Section 3(b) 180
4.16[2] Limited Offerings Solely to Accredited Investors—Sec¬
tion 4(6) 182
4.17 Regulation A—Qualified Exemption for Offerings Up to
$5,000,000 Per Year 182
4.17[1] Overview of Regulation A 182
4.17[2] Issuers Eligible for Regulation A 184
Page
See.
4.17[3] Regulation A—Disqualifikation Provisions 185
4.17[4] Regulation A—Limitations on Dollar Amount of the
Offering 186
4.17[5] Integration With Other Offerings 187
4.17[6] Regulation A—Filing and Notification Requirements 187
4.17[7] Regulation A—Testing the Waters 188
4.18 Rule 701—Exemption for Employee Compensation Plans of Is
suers Not Subject to Exchange Act Periodic Reporting Require¬
ments 189
4.18[1] Overview of Rule 701 189
4.18[2] Issuer Qualification for Rule 701 189
4.18[3] Rule 701—Qualifying Compensation Plans 190
4.18[4] Limitation on Dollar Amount of Rule 701 Offering 190
4.18[5] Integration Doctrine Not Applicable to Rule 701 Offer¬
ings 191
4.18[6] Restrictions on Resale Following Rule 701 Offerings 191
4.19 Coordination of the Small Issue and Limited Offering Exemp
tions: Regulation D—An Overview 191
4.19[1] Regulation D in Context 191
4.20 Regulation D: Definitions, Conditions, and Filing Requirements—
SEC Rules 501, 502, and 503 192
4.20[l] Overview of Regulation D 192
4.20[2] Regulation D—Definitions — — 193
4.20[3] Conditions of Regulation D Offerings 194
4.21 Regulation D s Exemption for Small Issues of $1,000,000 or
Less—SEC Rule 504 199
4.22 Regulation D s Exemption for Limited Offerings Not Exceeding
$5,000,000—SEC Rule 505 202
4.23 The Statutory Exemption for Limited Offerings to Accredited
Investors —Section 4(6) 204
4.23[1] Scope of Section 4(6) 204
4.24 Exemption for Issuer Transactions Not Involving a Public Offer¬
ing ( The Private Placement Exemption )—Section 4(2) 205
4.24[1] Scope of the Section 4(2) Exemption 205
4.25 Safe Harbor for Private Placements Under Section 4(2)—SEC
Rule 506 — 211
4.26 An Overview of Transactions by Persons Other Than Issuers,
Underwriters, and Dealers: Section 4(1); Unsolicited Brokers
Transactions—Section 4(4) 215
4.26[1] Section 4(1)—The Exemption for Nonprofessionals—Ba¬
sic Definitions 216
4.26[2] Section 4(4)—Unsolicited Brokers Transactions 218
4.27 Who Is an Underwriter?—Section 2(a)(ll) 219
4.27[1] The Underwriter Concept—Section 2(a)(ll) and Appli¬
cable SEC Rules 219
4.27[2] Case Law Developments—Inadvertent Underwriters 222
4.27[3] Investment Intent—The Holding Period 224
4.27[4] Saleson Behalf of Controlling Persons 226
4.29 The Safe Harbor Exemption for Secondary Transactions—SEC 1
Rule 144 _ 229 i
Page
See.
4.30 The Section 4(1%) Exemption for Downstream Sales; Rule 144A 234
4.30[l] Basis for the Section 4(1%) Exemption— —. 235
4.30[2] Elements ofthe Section 4(1%) Exemption 237
4.30[4] The Safe Harbor for Certain Sales to Qualified Institu
tional Buyers—SEC Rule 144A — 238
4.31 The Exemption for Certain Dealers Transactions—Section 4(3) — 239
4.33 Exemption for Certain Offshore Transactions in Securities of
United States Issuers—Regulation S 242
4.35 The SEC s General Exemptive Authority 244
4.36 Integration of Transactions 245
4.36[1] Overview ofthe Integration Doctrine 245
4.36[2] The Integration Doctrine Explained and Defmed 246
4.36[2][A] Explanation of the Integration Doctrine— 246
4.36[2][B] The Highly Factual Nature of Integration
Questions — 247
4.36[2][C] Issuer Integration— 248
4.36[3] Safe Harbors for Avoiding Integration— 248
4.36[4] Integrating Nonpublic and Public Offerings — 249
4.36[4][A] Successive Offerings 249
4.36[4][B] Discontinued Offerings 250
Chapter 5. The Theory of Säle: Corporate Recapitalizations,
Reorganizations and Mergers Under the 1933 Act 252
See.
5.0 Overview of Chapter—Definition of Säle in Context 252
5.1 1933 Act Application to Unconventional Transactions—Section
2(a)(3) s Definition of Säle; Gifts, Bonus Plans, and Pledges;
Effectof State Law — 252
5.1[1] Statutory Definition of Säle — — 252
5.1[2] Gifts and Bonus Plans — 253
5.1[3] Employee Compensation Plans 255
5.1[4] Convertible Securities — — 256
5.1[5] Pledges 256
5.1[6] Installment Sales 257
5.2 Corporate Recapitalizations, Reorganizations, and Mergers Under
the 1933 Act: Rule 145 257
5.2[1] Reorganizations Exempt From 1933 Act Registration— 257
5.2[2] Rule 145 258
5.2[3] Rule 145 and Downstream Sales — — 260
5.3 Section 2(a)(3) s Definition of Säle: Warrants, Employee Stock
Plans, Stock Dividends, and Spin Offs Under the 1933 Act 262
5.3[1] Warrants, Conversion Rights, Options, and Security Fu
tures Products — 262
5.3[2] Stock Dividends — — 263
5.3[3] Exchanges of Securities 264
5.3[4] Spin Off Transactions 264
5.4 Periodic Payments; The Investment Decision Doctrine 269
Page
Chapter 6. IPO Practices: Manipulation, Stabilization and Hot
Issues — — 270
See.
6.1 Manipulation: An Overview 270
6.2 Manipulation and Price Stabilization Involving Public Offerings — 271
6.2[1] Manipulation in Public Offerings 271
6.2[3] Regulation M—Scope of Rule 101 — — 273
6.2[4] Regulation M—Exclusions and Exemptions From Rule
101 s Prohibitions 274
6.2[5] Regulation M—Scope of Rule 102 275
6.2[7] Regulation M—Scope of Permissible Stabilizing Activity 275
6.2[8] Regulation M—Manipulative Short Sales, Rule 105 276
6.3 Aftermarket Activities, IPO Practices, Hot Issues, Workout Mar
kets, and Controlled Markets 277
Chapter 7. Liability Under the Securities Act of 1933 286
7.1 Consequences of Deficient Registration Statements—Administra¬
tive Action, Criminal Sanctions, SEC Injunctive Relief, and
Private Remedies 286
7.2 Civil Liability for Failure to Comply With Section 5 s Require
ments—Section 12(a)(l) s Private Remedy 289
7.2[1] Overview of Section 12(a)(l) 289
7.2[2] Who is Liable Under Section 12(a)(D? 291
7.3 Liability for Misstatements and Omissions in the Registration
Statement—The Private Remedy Under Section 11 of the 1933
Act 293
7.3[2] Who Can Sue; Nature of Suit Under Section 11 293
7.3[3] Permissible Defendants in a Section 11 Suit 294
7.3[4] Absence of Reliance Requirement in Section 11 294
7.3[5] Tracing Securities to the Registration Statement 294
7.3[8] MeasureofDamages Under Section 11 295
7.3[9] Statute of Limitations — 296
7.3[10] Defenses to Section 11 Claims — 297
7.4 Defenses Under ll(b)—Due Diligence, Reliance on Experts, and
Reasonable Investigation 299
7.4[1] Whistle Blowing Defense 299
7.4[2] Due Diligence Defenses 299
7.5 Damages in Actions Under Section 11 308
7.5[1] The Statutory Formula 308
7.5[2] The Section HDamage Calculus 309
7.5[2][A] Determination of Value 310
7.5[2][B] The Negative Causation Defense 311
7.6 Section 12(a)(2)—Liability for Material Misstatements or Omis¬
sions by Seilers of Securities 311
7.6[1] Elements of Section 12(a)(2) Claim 311
7.6[2] Judicially Imposed Limits on Section 12(a)(2)—The Pub¬
lic Offering or Batch Offering Limitation 315
7.6[2][A] Evolution of the Public Offering Limitation 315
7.6[2][B] Criticismof the Public Offering Limitation 315
7.6[2][C] The Gustafson Decision _. 316 j
7.6[2][D] Remaining Questions on the Public Offer j
ing Limitation 317 j
Page
See.
7.11 The Securities Act s General Prohibition on Material Misstate
ments and Omissions—Section 17 317
7.12 Multiple Defendants—Joint and Several Liability; Liability of
Controlling Persons 319
7.13 Multiple Defendants—Aiding and Abetting 322
7.13[1][A] Aiding and Abetting s Demise 322
7.14 Multiple Defendants—Indemnification Agreements 323
7.17 Special Rules and Procedures for Securities Class Actions 325
7.17[1] Private Securities Litigation Reform Act of 1995— 326
7.17[2] Securities Litigation Uniform Standards Act of 1998—
Preemption —. 327
Chapter8. State Blue SkyLaws 329
8.1 State Blue Sky Laws: Their Origins, Purpose, and Basic Coverage 329
8.1[1] State Blue SkyLaws— 329
Chapter 9. Securities Exchange Act of 1934—Registration and
Reporting Requirements for Publicly Traded Companies 335
See.
9.1 The Securities Exchange Act of 1934—Overview 335
9.2 Registration of Securities Under the Securities Exchange Act of
1934 337
9.2[1] Registration Requirements 337
9.2 [2] Exemptions From 1934 Act Registration Requirements 339
9.2[5] SEC s General Exemptive Authority — 340
9.3 Annual, Periodic, and Continuous Reporting Requirements for
Public Companies — 340
9.3[2][A] CEO and CFO Certification of SEC Filings 345
9.3[2][B] Periodic Review of Company Filings — 346
9.3[2][C] Executive Officer Loans Prohibited 346
9.3[2][E] Forfeiture of Certain Bonuses and Profits — 347
9.4 Disclosure Guidelines—Regulations S K and S B 347
9.4[1] Background of Regulation S K 347
9.4[2] Overview of Regulation S K and Regulation S B 349
9.4[3] Structure of Regulation S K — 349
9.6 Accounting and Auditing Requirements 350
9.6[1] Accounting Requirements 350
9.6[1][A] Financial Matters Generally 350
9.6[ 1] [B] Non GAAP Financial Measures 352
9.6[2] Audit Requirements 353
9.7 Corporate Governance and the Federal Securities Laws; Codes of
Ethics, Compensation Limitations, and Listing Standards 357
9.7[1] Overview of Corporate Governance Provisions 357
9.7[2] Codes of Ethics 357
9.7[3] Audit Committees; Financial Experts 359
9.7[4] Executive and Director Compensation; Prohibition on
Certain Loans to Executives; Extraordinary Payments 360
9.8 Controls on Attorney Practice — 361
9.8[1] Regulating Administrative Practice of Attorneys; The
Sarbanes Oxley Lawyer Conduct Rules 361
Page
See.
9.8[3] SEC Rule 102 362
9.8[4] Role of Lawyers in SEC Practice 362
9.8[6] Increasing Attorney Accountability—Sarbanes Oxley
Section 307 and its Background— 364
9.8[7] The SEC Rules—Climbing the Corporate Ladder— 364
ChapterlO. Shareholder Suffrage—Proxy Regulation 367
See.
10.1 The Regulation of Shareholder Suffrage Under the Exchange
Act—Section 14 and the Proxy Rules: Introduction; Regulation
ofVotingRights 367
10.2 Füll Disclosure in the Solicitation of Proxies 370
10.2[l] Overview of Proxy Disclosure Requirements 370
10.2[2] Proxy Solicitations: Nature of the Regulation 371
10.2 [3] Proxy Solicitations: Required Disclosures — 372
10.3 Rule 14a 9 and the Implied Remedy for Material Misstatements
and Omissions in Proxy Materials; Standing to Sue; Scienter vs.
Negligence; Attorneys Fees — 377
10.3[l] The Implied Private Remedy for Material Misstatements
in the Solicitation of Proxies 377
10.3[2] Standing to Sue Under Rule 14a 9 377
10.3[3] Is Scienter Required Under Rule 14a 9? 379
10.3[4] Materiality Under Rule 14a 9 A Preview 380
10.3[5] Causation Under Rule 14a 9 380
10.3[6] Relief Other Than Damages in Actions Under Rule 14a
9 382
10.7 Security Holders Access to the Proxy System: Right to Informa¬
tion; Shareholder List 382
10.8 Security Holders Access to the Proxy System: Shareholder Pro
posals and the Shareholder Proposal Rule 383
10.8[2] Grounds for Exclusion—Impropriety Under the Law of
the State of Incorporation 386
10.8[2][A] State Law Generally 386
10.8[3] Grounds for Exclusion—Impropriety Under Law Gener¬
ally _ 388
10.8[4] Grounds For Exclusion—Materially Misleading Propos
als, Proposais in Violation of The Proxy Rules, and
Overly Vague Proposais 388
10.8[5] Grounds for Exclusion—Personal Grievance 389
10.8[6] Grounds for Exclusion—Not Significantly Related to the
Issuer s Business 389
10.8[7] Grounds for Exclusion—Beyond the Issuer s Power 390
10.8[8] Grounds for Exclusion—Ordinary Business— 390
10.8[9] Grounds for Exclusion—Proposais Relating to Election
to Office 394
10.8[10] Grounds for Exclusion—Shareholder Proposais Contra
dicting Management Proposais — 394
10.8[ll] Grounds for Exclusion—Mootness 394
10.8[12] Grounds for Exclusion—Duplicative Proposais 395
10.8[13] Grounds for Exclusion—Resubmissions 395
10.8[14] Grounds for Exclusion—Relating to Dividends 395 |
Page
See.
10.8[15] Consequences of Excluding Shareholder Proposais; Prac
tical Considerations 396
10.9 Disclosure in Lieu of Proxy Solicitation—Section 14(c) 397
10.10 Securities Held in Street Name; Broker Dealers and Federal
Proxy Regulation—Section 14(b) 397
Chapter 11. Tender Offer and Takeover Regulation 399
See.
11.1 Federal Control of Tender Offers—The Williams Act; The Termi
nology of Takeovers 399
11.1[1] The Terminology of Takeovers — 400
11.1 [2] Overview of the Regulation Imposed by the Williams Act 401
11.2 Filing Requirements for Acquisition of More Than Five Percent of
Equity Securities of an Exchange Act Reporting Company—
Section 13(d) — — 404
11.2[1] Section 13(d) Filing Requirements 404
11.2[2] Who Must File Under Section 13(d); Formation of a
Group 405
11.2[4] Exemptions From Section 13(d) Filing Requirements 406
11.3 Reports of Institutional Investment Managers—Section 13(f) 406
11.4 Definition of Tender Offer — — 406
11.5 Filings, Disclosures and Procedures for Tender Offers—Section
14(d) and Regulation 14D — 411
11.5[1] Overview of Filing and Disclosure Requirements 411
11.5[2][B] ScheduleTO 413
11.5 [3] Other Requirements Imposed by Regulation 14D 414
11.5[3][A] Bidders Right of Access to Target Compa
ny s Shareholders— — 415
11.5[3][B] Shareholders Withdrawal of Tendered Se¬
curities — 415
11.5[3][C] Pro Rata Acceptance of Tendered Shares;
Extensions of the Tender Offer 416
11.5[3][D] The All Holders Requirement 417
11.5[3][E] The Equal Treatment and Best Price Re¬
quirements 417
11.5[3][F] Prompt Payment for Shares Tendered 419
11.5[3][G] Post Tender Offer Extensions of Time for
Tendering — 420
11.5[3][I] Exemptions From Regulation 14D 420
11.5[3][J] Unregulated Mini Tender Offers 420
11.6 Unlawful Tender Offer Practices—Section 14(e) and Regulation
14E 421
11.6[1] Section 14(e)—Antifraud and SEC Rulemaking 421
11.6[2] Regulation 14 and Other Tender Offer Regulations 423
11.6[2][A] Durationof Tender Offer 423
11.6[2][B] Target Company s Management Response
to a Third Party Tender Offer — 424
11.6[2][C] Insider Trading Prohibited 425
11.6[2][D] Prohibition of Contemporary Purchases
During Tender Offer — 425
Page
See.
11.6[2][E] Short Tendering and Hedged Tendering
Prohibited 426
11.6[2][F] Two Tiered Tender Offers Permitted 427
11.6[2][G] Exemption for Closed End Investment
Companies 427
11.6[2][H] Roll Up Transactions 428
11.6[2][I] Prohibition Against False Statements of In
tent to Make Tender Offer 428
11.6[2][J] Target s Defensive Tactics Not Prohibited 428
11.7 Arrangements Affecting Director Turnover in Connection With a
Tender Offer—Section 14(f) 429
11.8 Issuer Purchases of Its Own Stock—Section 13(e) and the Going
Private Rule; Issuer Self Tender Offers 429
11.8[1] Issuer s Share Repurchases 429
11.8[1][A] Issuer Share Repurchases in Response to
Someone Eise s Tender Offer 429
11.8[1][B] Manipulation in Connection With Issuer
Repurchases 430
11.8[2] The Going Private Rule 431
11.8[2][A] Rule 13e 3 Filings 431
11.8[2][C] Can the SEC Require Substantive Fairness? 432
11.8[3] Issuer Self Tender Offers— 432
11.9 Private Remedies Under the Williams Act—Remedies for Viola
tions of Sections 13(d), 13(e), 14(d) — 433
11.10 Private Remedies Under the Williams Act—Is There an Implied
Remedy Under Section 14(e)? ~ 436
11.11 Responses to Tender Offers: Anti Takeover Moves and Defensive
Tactics 439
11.11[1] Responding to a Tender Offer or Other Takeover At
tempt 439
11.11 [2] Varieties of Defensive Tactics and State Law Regulation 441
11.12 State Regulation of Tender Offers 444
11.12[1] State Tender Offer Regulation—Overview 444
11.12[2] Scope of State Tender Offer Regulation 445
11.12[3] First Generation State Tender Offer Statutes 446
11.12[3][A] Typesof First Generation Statutes 446
11.12[3][B] The Highly Dubious Vitality of First Gener¬
ation State Tender Offer Statutes 447
11.12[4] Second Generation State Takeover Statutes 448
11.12[5] Third Generation Takeover Statutes 449
11.12[6] Evaluation of State Takeover Legislation 452
11.13 Validity of State Tender Offer Statutes—The Commerce Clause
and the Preemption Problem; SEC Rule 14d 2(b) 452
11.13[1] Preemption Challenges to State Takeover Statutes 453
11.13[2] Commerce Clause Challenges to State Takeover Legisla¬
tion _ 454
11.13[2][A] The Early Cases 454 I
11.13[2][B] The MITE Decision 456 1
11.13[2][C] The CTS Decision 460 |
Page
Chapter 12. Manipulation and Fraud—Civil Liability; Implied
Private Remedies; SEC Rule 10b 5; Fraud in Connection
With the Purchase or Säle of Securities; Improper Trading
on Nonpublic Material Information 463
See.
12.1 Market Manipulation and Deceptive Practices—Sections 9, 10,
14(e), 15(c) 464
12.1[3] Manipulative and Deceptive Acts and Practices—Section
10; Section 15(c) 467
12.1[3][A] Overview of Anti Manipulation Provisions 467
12.1[3][C] Manipulation Rules Under Section 15 of
the Exchange Act ~~ 469
12.1[4] Manipulation: Private Remedies 471
12.1[4][A] Manipulation of Exchange Listed Securi¬
ties—Section 9(e) s Express Remedy 471
12.1[4][B] Manipulation: Implied Remedies 472
12.2 Implied Remedies in the Federal Courts 472
12.2[1] The Trend Limiting Implied Remedies — 472
12.3 Section 10(b) and the Evolution of the Implied Remedy Under
SEC Rule 10b 5 474
12.3[1] The Statutory Context — 474
12.3[2] History of Rule 10b 5 — 475
12.3[3] The Development of the Implied Rule 10b 5 Remedy 476
12.4 Rule 10b 5 Overview; Summary of the Principal Elements 478
12.5 In Connection With the Purchase or Säle of Any Security 481
12.6 Purchase or Säle —Identifying Purchases and Sales Under Rule
10b 5 — 483
12.6[1] Definitions of Purchase and Säle — 483
12.6[2] Rights to Purchase or Seil 485
12.6[4] Convertible Securities 485
12.6[6] Pledges of Securities 485
12.6[7] Gifts 485
12.6[8] Periodic Payments; The Investment Decision Doctrine ~. 486
12.7 Standing to Sue Under SEC Rule 10b 5 486
12.7[1] The Purchaser/Seller Requirement 486
12.7C2] Standing to Seek Injunctive Relief 488
12.7[3] Variations on the Purchaser/Seller Requirement 488
12.7[3][A] Forced Seilers 488
12.7[3][B] Would be Purchasers and Seilers; Deferred
Seilers 489
12.7[4] Rights and Options — 490
12.8 Rule 10b 5 and the Scienter Requirement; Section 17(a) and Rule
14a 9 Compared 490
12.8[1] Rule 10b 5 s Scienter Requirement; Section 17(a) Com¬
pared 490
12.8[2] Rule 10b 5 s Scienter Requirement; The Proxy Rules
Compared — — 491
12.8[3] Recklessness as Scienter — —.. 492
12.8[4] Pleading and Proving Scienter .— — 494
Page
See.
12.9 Materiality in Rule 10b 5 Actions 495
12.9[1] Materiality in Context 495
12.9[2] Factual Nature of Materiality 496
12.9[3] Materiality Defined 496
12.9[4] Immateriality of Vague Statements; Sales Talk and
Puffing ; Statements of Opinion and Intent. — 498
12.9[5] Materiality of Contingent Events 499
12.9[6] Materiality of Merger Negotiations 500
12.9[7] Predictions, Projections, and Other Soft Information;
Management Discussion and Analysis — 501
12.9[7][B] Management Discussion Analysis 502
12.9[7][C] Safe Harbor for Forward Looking State¬
ments — 503
12.9[7][D] Analysts Opinions and Estimates 503
12.9[8] The Bespeaks Caution Doctrine and Materiality 505
12.9[9] Materiality In Financial Statements; Accounting Issues 507
12.9U0] DutytoCorrector Update 507
12.10 Reliance in Rule 10b 5 Actions; Fraud on the Market 508
12.11 Causation in Actions Under Rule 10b 5 514
12.12 The Measure of Damages in Rule 10b 5 Actions — — 517
12.13 Pleading Fraud With Particularity — —~ 520
12.15 Securities Class Actions; Litigation Reform 521
12.15[0] Overview — 521
12.15[1] Private Securities Litigation Reform Act of 1995 521
12.15[1][A] QualificationsofLeadPlaintiff — 522
12.15[1][B] SelectionofLeadCounsel 522
12.15[1][C] Attorneys Fees — —. 523
12.15[1][D] Pretrial Motions and Pretrial Discovery 523
12.15[1][E] Projections and Forward Looking State¬
ments 524
12.15[1][F] Enhanced Pleading Requirements Regard
ing Defendants State of Mind 524
12.15[1][G] Notice of Class Action Settlements 524
12.15[1][H] Security Deposit 525
12.15[1][I] Review of Proceedings for Possible Sanc
tions 525
12.15[1][J] Calculation of Damages 526
12.15[1][K] Impactof the 1995 Reform Act — — 526
12.15[2] Securities Litigation Uniform Standards Act of 1998 527
12.16 Statutes of Limitations in Rule 10b 5 Actions 528
12.16[1] Overview 528
12.17 Insider Trading and Rule 10b 5 530
12.17[1] Overview — 530
12.17[2] The Basis of the Prohibition: The Development of Rule
10b 5 in Insider Trading Cases 532
12.17[3] Causation in Insider Trading Cases— Use Versus
Possession ~ _ 534
12.17C4] Refining Rule 10b 5 s Insider Trading Prohibitions; De
velopments in the Supreme Court and Elsewhere—
The Misappropriation Theory 537 §
Page
See.
12.17[5] Insider Trading—Passing on Non Public Information—
Tipper and Tippee Liability 543
12.17[6] Insider Trading in Advance of Tender Offers: Rule 14e 3 545
12.17[7] Insider Trading: Private Remedies Under Rule 10b 5;
Enhanced SEC Sanctions 546
12.17[7][A] Enhanced Remedies and Penalties—The In¬
sider Trading Sanctions Act of 1984 547
12.17[7][B] Controlling Person Liability; Private Reme¬
dies—Insider Trading and Securities
Fraud Enforcement Act of 1988 547
12.17[9] Summary—The Need for Clarification — 549
12.18 Liability for Material Misstatements and Omissions of Fact in
Documents Filed With the SEC—Section 18(a) of the Exchange
Act 550
12.19 Corporate Affirmative Disclosure Obligations and Accountability 551
12.19[1] Affirmative Disclosure Obligations 551
12.19[2] Respondingto Market Rumors— 554
12.19[3] Adoption of and Entanglement With Statements by
Third Parties 556
12.19[4] SEC Regulation FD—Prohibition on Selective Disclosure 557
12.19[5] Company Web Sites 557
12.20 Corporate Mismanagement, Rule 10b 5 and the Deception Re
quirement 559
12.20[l] When Corporate Mismanagement Can be Securities
Fraud — 559
12.21 The Effect of Plaintiff s Conduct on Implied Civil Liability; Due
Diligence; In Pari Delicto — 562
12.22 Is There an Implied Remedy Under Section 17(a) of the 1933 Act? 563
12.23 Waiver of Claims; Voiding of Contracts in Violation of the Securi¬
ties Laws — 564
12.23[1] Waiver of Claims 564
12.23[2] Voiding of Contracts Waiving Compliance with the Secu¬
rities Laws — 564
12.24 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Controlling Person Liability 565
12.24[1] Controlling Person Liability Defined 565
12.24[2] What Constitutes Control? — 565
12.25 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Aiding and Abetting Liability 568
12.25[1] The Decline of Aiding and Abetting Liability 568
12.26 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Joint and Several and Proportional Liability 569
12.27 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Contribution and Indemnity 570
Chapter 13. Insider Reporting, Short Swing Trading, and False
SECFilings 573
See.
13.1 Reporting Requirements for Insiders and Their Transactions in
Shares—Section 16(a) 573
13.1[1] Overview of Section 16 Filing Requirements — 573
Page
See.
13.1[2] Who Must File Section 16 Reports 576
13.1[2][A] Officers and Directors 576
13.1[2][B] Ten Percent Beneficial Owners 577
13.1[2][C] Definition of Equity Security 579
13.1[2][D] Treatment of Derivative Securities 580
13.1 [3] Exemptions From Section 16 Filing Requirements 580
13.2 Disgorgement of Insider Short Swing Profits—Section 16(b) 581
13.2[1] Overview of Section 16(b) 581
13.2[2] Issuers Covered 582
13.2[3] Securities Covered 582
13.2[4] Procedural Aspects; Standing; Demand Requirement;
Right to Jury Trial; Statute of Limitations 582
13.2[5] Jurisdictional Aspects 584
13.2[6] Section 16(b) Timing (the Short Swing )Timing (the
Short Swing ) 584
13.2[7] Determination of Profit 585
13.2[8] Actual Use of Inside Information Not Necessary 586
13.2[9] Equitable Defenses Rejected 587
13.2[10] Exemptions From 16(b) s Disgorgement Provisions 587
13.2[11] No Indemnification for Liability Under Section 16(b) — 590
13.3 Who Is Subject to Sections 16(a) and (b)? When Does Insider
Status Attach? — 590
13.3[1] Officers and Directors 590
13.3[1][A] Deputization as the Basis of Insider Status 592
13.3[1][B] Family Relationships 593
13.3[1][C] Timing and Director or Officer Liability;
Effect of Resignation 593
13.3[2] Ten Percent Beneficial Ownership 594
13.3[2][A] Who is a Ten Percent Beneficial Owner? — 594
13.3[2][B] Group Theory and Beneficial Ownership —. 595
13.3[2][E] Convertible Securities 596
13.4 The Definition of Purchase and Säle and the Pragmatic
Approach Under Section 16(b) 596
13.5 Prohibitions Against Short Sales by Insiders—Section 16(c) 599
Chapter 14. Market Regulation; Broker Dealers 603
See.
14.1 Market Regulation—An Overview 603
14.1[1] How The Markets Operate—An Overview 604
14.1[2] Options Trading and Other Derivatives 607
14.1 [3] Market Regulation—History, Background, and Overview 608
14.1[3][A] Background 608
14.1 [3] [B] Nature of Broker Dealer Regulation 609
14.1[3][C] Seif Regulation 610
14.1 [8] Regulation of Online Trading and Day Trading 613
14.1[9] Antitrust Laws and Market Regulation 613
14.3 Regulation of Broker Dealers—The SEC, Seif Regulatory Organi
zations, National Exchanges, and the NASD 614 l
14.3[1] Nature of Market Regulation 614 }
14.3[2] State Regulation of Broker Dealers—Limited Preemp j
tion 615 I
Page
See.
14.3[3] Self Regulation: The National Association of Securities
Dealers and the National Exchanges 615
14.3[4] Substance of Seif Regulation 619
14.3 [4] [A] Seif Regulatory Disciplinary Authority 619
14.3[4][B] Broker Dealer Operations 620
14.3[4][C] Potential Conflicts of Interest and The Chi¬
nese Wall (or Fire Wall ) Requirement 621
14.3[4][D] Maintaining an Orderly Securities Market 622
14.3[4][E] Large Trader Reporting — 622
14.3 [4] [F] Broker Dealer Registration Requirements 623
14.3[4][G] Government and Municipal Securities Deal¬
ers 624
14.3[4][H] Banking and the Securities Laws — 624
14.3[4][I] Money Laundering Provisions ~ 624
14.3[5] SEC Administrative Sanctions for Broker Dealers 625
14.3[6] Prohibitions Against Deceptive and Manipulative Con
duet — 626
14.3[6][A] Prohibited Practices Generally 626
14.3[6][B] Wash Sales, Fictitious Trades, Matched Or¬
ders, and Cross Trades 627
14.3[6][C] Other Manipulative Practices: High Pres
sure Sales, Deceptive Recommendations,
Excessive Commissions, Order Execution
Obligations, Parking 629
14.4 Broker Dealer Registration; Definitions and Exemptions 631
14.4[1] Broker Dealer Registration: Definitions — 631
14.4[1][A] Definitions of Broker and Dealer 631
14.4[1][B] Banks and Subsidiaries of Banks 632
14.5 Broker Dealer Registration Requirements 633
14.5[1] Broker Dealer Registration Generally 633
14.5[2] Registration of Foreign Broker Dealers 634
14.6 Municipal Securities Dealers 634
14.7 Regulation of Government Securities Dealers — 635
14.8 Broker Dealer Net Capital and Reserve Requirements 637
14.8[1] Net Capital Requirements — 637
14.8[2] Customers Funds and Securities: The Customer Protec
tion Rule and the Reserve Requirements 638
14.9 The Margin Rules and Extension of Credit for Securities Transac
tions 638
14.9[1] Margin Transactions Explained — 638
14.9[2] Limitations on the Extension of Credit for Securities
Transactions 641
14.9[3] Margin Maintenance Requirements — 643
14.9[4] Margin Disclosure Requirements; Suitability — 644
14.9[5] Remedies for Violations of the Margin Rules 644
14.10 Market Makers in the Over the Counter Markets 645
14.10[l] Market Making in Context — 645
14.10[2] Mechanics of Market Making Activities—Some Basic
Concepts 646
14.10[3] Maintaining an Orderly Market 648
Page
See.
14.10[4] Premise of NASD Regulation of Market Makers 648
14.10[5] Market Makers Conflict of Interest; Disclosure Obli¬
gations 649
14.10[6] Market Makers and Manipulation 651
14.11 Trading on Stock Exchanges; The Specialist System 653
14.11[1] Trading by Exchange Members 653
14.11[1][A] Exchange Trading Generally — 653
14.11[1][B] Floor Trading and Off Floor Trading 653
14.11[1][C] Specialists — 654
14.11[1][D] Block Positioning 656
14.12 Multiservice Brokerage Firnis; Information Barriers; The Chinese
Wall or Fire Wall 657
14.13 Execution of Customer Orders 658
14.13[1] The Best and Prompt Execution Obligations 658
14.13[2] Exchange Trading—Floor Broker Obligations 660
14.14 Brokerage Commissions—Disclosure, Payment for Order Flow,
Excessive Mark Ups 662
14.14[1] Disclosure of Broker Dealer Commissions 662
14.14[2] Payment for Order Flow 663
14.14[3] Excessive Mark Ups 664
14.14[3][A] Mark Ups Generally 664
14.14[3] [B] The Five Percent Mark Up Policy 666
14.14[4] Recommendations Induced by Commissions or Other
Incentive 667
14.15 Broker Dealers and Fiduciary Obligations; The Shingle Theory 668
14.15[1] Effect of Arbitration on the Law of Brokers Obligations 668
14.15[2] Fiduciary Obligations of Securities Brokers— 668
14.15[3] The Shingle Theory — 670
14.16 A Broker s Obligation to Customers With Regard to Recommenda¬
tions: The Know Your Security, Suitability, and Know Your
Customer Obligations 672
14.16[1] Recommendations and Suitability Generally 672
14.16[1][A] Recommendations Generally 672
14.16[1][B] Suitability Generally 673
14.16[2] Suitability: Online Trading and Day Trading 675
14.16[3] Special Suitability Problems Associated With Low Priced
Securities 675
14.16[4] Suitability and Mutual Fund Sales Practices — 675
14.16[5] Suitability and Investment Advisers 676
14.16[6] Recommendations and Conflicts of Interest; Analysts
Recommendations — 676
14.17 Scalping 679
14.18 High Pressure Sales Tactics: Boiler Room Operations 681
14.19 Penny Stock Regulation; Microcap Fraud 685
14.19[1] Penny Stock Regulation _ 685
14.19[3] Microcap Fraud _.. 686
14.20 Excessive Trading in Securities—Churning 687
14.20[l] Basis ofViolation 687 j
14.20[2] Establishing a Churning Claim 688 f
14.20[3] Measure of Damages in Churning Cases 689 I
Page
See.
14.21 Unauthorized Trading 689
14.22 Regulation of Short Sales 690
14.23 Parking 694
14.24 Broker Dealer Bankruptcy—The Securities Investor Protection
Act 694
14.25 Private Remedies Against Exchanges and the NASD for Damages
Resulting From Nonenforcement of Their Own Rules 696
14.26 Private Remedies Against Market Professionals; Secondary Liabil
ity 697
Chapter 15. Arbitration of Broker Dealer Disputes 699
See.
15.1 The Enforceability of Arbitration Agreements in Federal and
State Securities Cases — 699
15.1[1] Enforcement of Broker Dealer Arbitration Agreements 699
15.1[1][A] The Riseof the Wilko Doctrine 700
15.1[1][B] The Declineof the Wilko Doctrine 700
15.1[2] The Federal Arbitration Act: Policies Favoring Arbitra¬
tion 701
15.1[8] WaiverofRighttoArbitrate 701
15.1[9] Other Factors Affecting Enforcement of Predispute Ar¬
bitration Agreements 702
15.1 [ 10] Judicial Review of Arbitration Decisions 703
Chapter 16. Operation of the Securities and Exchange Commis
sion — 704
See.
16.2 Civil and Criminal Enforcement: SEC Injunctions, Investigations,
Parallel Proceedings; Administrative Hearings and Disciplinary
Sanctions 704
16.2[1] SEC Administrative Hearings 705
16.2[2] SEC Injunctions 706
16.2[2][A] Power to Seek Injunctive Relief 706
16.2 [2] [B] Preliminary Injunctive Relief 707
16.2[4] Ancillary Relief in SEC Injunction Actions 708
16.2[4][A] Varietiesof Ancillary Relief 708
16.2[4][B] Disgorgement of Profits 709
16.2 [4] [D] Civil Penalty Under the Insider Trading
Sanctions Act of 1984 (ITSA) 711
16.2[5] Civil Penalties in Other SEC Enforcement Actions — 712
16.2[6] Bar Orders — 713
16.2[7] SEC Investigations 714
16.2[8] Parallel Civil and Criminal Proceedings 715
16.2[10] Section21(a) Reports 716
16.2[11] Section 15(c)(4) Orders 717
16.2[12] Cease and Desist Authority 718
16.2[13] SEC Administrative Proceedings — — 718
16.2[14] Civil Penalties in Administrative Actions 720
16.2[15] Administrative Proceedings and Double Jeopardy 721
16.2[16] Collateral Estoppel Effect of SEC Proceedings 721
Page
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16.2[18] Suspension of the Right to Practice Before the Commis
sion—SEC Rule 102(e) 722
16.2[19] SEC Oversight Authority 724
Chapter 17. Jurisdictional Aspects 725
See.
17.1 Exclusive Federal Jurisdiction Under the Exchange Act; Concur
rent Jurisdiction Under the 1933 and Other Securities Acts 725
17.1[1] The Jurisdictional Mosaic 725
17.1 [2] Exclusive Federal Jurisdiction Under the Exchange Act 727
17.1 [4] Federal Supplemental (or Pendent) Jurisdiction Over
State Claims 728
17.1 [6] Preemption of State Jurisdiction in Securities Class Ac
tions 728
17.2 Subject Matter Jurisdiction—Use of the Jurisdictional Means 728
17.4 Extraterritorial Application of the Securities Laws; Their Rele
vance to Foreign Issuers and to Transactions in Foreign Mar
kets; Antifraud Provisions 730
17.4[1] Extraterritorial Jurisdiction Under the Antifraud Provi¬
sions . 730
17.4[2] 1933 Act Registration and 1934 Act Reporting Require
ments for Foreign Issuers 731
17.4[3] Offshore Offerings of United States Securities—Regula¬
tion S — 733
17.4[6] Multijurisdictional Disclosure System for Canadian Is¬
suers 733
17.4[7] Rule 144A—A Secondary Domestic Market for Unregis
tered Securities of Foreign Issuers 734
Chapter 19. Debt Securities and Protection of Bondholders—
The Trust Indenture Act of 1939 — 735
See.
19.1 Introduction to the Trust Indenture Act of 1939 735
19.2 Operation of the Trust Indenture Act of 1939; Exemptions 737
19.3 Qualification Under the Trust Indenture Act 740
19.4 Trustee Qualifications 741
19.5 Qualification of the Indenture; Required Provisions — . 744
19.6 Duties of Trustee When the Issuer Defaults 744
19.7 Enforcement of the Act; Remedies for Trustees Breaches of
Duties _.. 745
19.8 Overview of the Trust Indenture Act s Registration and Disclo¬
sure Requirements 745
Chapter 20. Federal Regulation of Investment Companies—The
Investment Company Act of 1940 747
20.1 The Investment Company Act of 1940: Background and Scope 747
20.2 The Relationship Between Investment Companies, Investment f
Advisers, and Underwriters 751 J
20.3 The Definition of Investment Company ; The Problem of the f
Inadvertent Investment Company 753 |
Page
See.
20.4 Companies Covered by the Investment Company Act—Statutory
Defmitions, Exemptions and Classification 754
20.4[3] Classiflcation of Investment Companies 754
20.5 Regulating the Distribution and Pricing of Investment Company
Shares — 756
20.5[l] Distribution and Pricing of Closed End Investment
Company Shares; Repurchases of Its Own Shares 757
20.5[2] Distribution and Pricing of Open End Investment Com¬
pany Shares 758
20.5[3] Secondary Markets for Investment Company Shares 760
20.5[4] Improper Trading and Pricing Practices 761
20.5[4][A] Late Trading 761
20.5[4][B] Market Timing 762
20.5[4][C] Breakpoint Pricing of Investment Company
Shares 763
20.6 Fiduciary Duties; Independent Investment Company Directors — 764
20.6[l] Composition of an Investment Company s Board of Di¬
rectors ~ 765
20.6[2] Duties of Investment Company Directors 767
20.6[3] Approval of the Advisory Contract 768
20.6[4] Other Investment Company Board Obligations 770
20.6[5] Enhanced Fiduciary Obligations; Investment Adviser
CodeofEthics 771
20.7 Transactions Between an Investment Company and Affiliated
Persons 772
20.8 Registration and Disclosure Requirements; Civil Liability 776
20.8[l] Investment Company Name — 776
20.8[2] Registration Requirements — 777
20.8[3] Reporting Requirements 778
20.8[5] Investment Company Sales Literature 780
20.8[6] Civil Liability; Applicability of Antifraud Provisions 780
20.9 Limitations on Advisory Fees; Transfers of Control—The Säle
of Investment Advisory Contracts 781
20.9[l] Investment Advisory Fees 781
20.9[2] Modification or Assignment of the Avisory Contract 783
20.10 Private Causes of Action and Civil Liability for Violations of the
Investment Company Act 784
20.10[l] Implied Remedies Under the Investment Company Act . 784
20.10[3] Standing to Sue Under Section 36(b); Right to Jury
Trial ~ 787
20.10[4] Damages in Actions Under Section 36(b) 787
Chapter 21. Investment Advisers Act of 1940 — 788
See.
21.1 Regulation of Investment Advisers; Terms and Conditions in
Advisory Contracts 788
21.2 Who Is Subject to the Advisers Act—Definitions, Exclusions, and
Exemptions 790
21.2[1] Definition of Investment Adviser— 790
21.2 [2] Exclusions From the Definition of Investment Adviser — 793
Page
See.
21.2[2][A] Exclusions Generally; Exemptions Distin
guished 793
21.2[2][B] Exclusion for Broker Dealers 793
21.2[2][C] Financial Planners 794
21.2[2][D] Exclusion for Publications Rendering Im¬
personal Investment Advice 794
21.2[3] Exemptions from the Investment Advisers Act 796
21.3 Investment Adviser Registration and Reporting Requirements 798
21.3[1] Federal Registration and Reporting Requirements 798
21.3 [2] Division of Federal and State Jurisdiction— 800
21.4 Prohibited Practices; Sanctions and Penalties 801
21.4[1] Prohibited Investment Adviser Practices — 801
21.4[1][A] Fraudulent Practices — 801
21.4[1][B] Fraudulent Advertising 803
21.4[1][C] Limitations on Cash Referral Fees 804
21.4[1][D] Limitations on Advisory Fees 805
21.4[1][E] Investment Advisers and Misuse of Non
public Information 805
21.4[1][F] Investment Adviser Supervisory Obli¬
gations 806
21.4[2] Absence of Implied Remedy for Fraud but Recognition of
Implied Right of Rescission 806
Chapter 22. Special Problems and Overview of Related Laws ~~ 808
See.
22.1 Related Laws—Introduction — — —. 808
22.1[1] Relationship of Federal Securities Law to State Law and
How the Sarbanes Oxley Act Altered the Balance 808
22.1[1][A] Differing Coverage of State Corporate Law
and Federal Securities Law 808
22.1[1][B] The Sarbanes Oxley Act of 2002 809
22.1[2] Related Federal Regulatory Laws—Overview — 810
22.2 The Foreign Corrupt Practices Act 812
22.2[1] Substantive Prohibitions of the Foreign Corrupt Prac¬
tices Act — 813
22.2[2] Internal Controls and Disclosure Obligations 814
22.3 Securities Fraud and the Racketeer Influenced and Corrupt Or
ganizations Act (RICO) 815
22.3[1] RICO: An Overview 815
22.3[2] RICO Predicate Acts 815
22.6 The Intertwining of Financial Services: Commercial Banks, In¬
vestment Banking, and Investment Services 815
22.6[1] Repeal of Former Barriers to Intertwining of Financial
Services 815
22.7 Derivatives Regulation Under the Commodity Exchange Act 816
22.7[1] Overview of Commodities Markets and Regulation 816
22.7[2] Commodities Trading Professionals 821
22.7[3] Investor Remedies Under the Commodity Exchange Act 822 j
Appendix: Westlaw Research 827 I
Table of Cases 847 1
Index ggj I
|
| adam_txt |
Summary of Contents
Page
Preface v
Westlaw Overview xi
Chapter
1. The Basic Coverage of the Securities Act — 1
2. Registration Requirements of the Securities Act of 1933 67
3. The 1933 Act Registration Process and Disclosure 110
4. Exemptions From 1933 Act Registration 160
5. The Theory of Säle: Corporate Recapitalizations, Reorganizations
and Mergers Under the 1933 Act 252
6. IPO Practices: Manipulation, Stabilization and Hot Issues — 270
7. Liability Under the Securities Act of 1933 286
8. State Blue Sky Laws 329
9. Securities Exchange Act of 1934—Registration and Reporting Re¬
quirements for Publicly Traded Companies 335
10. Shareholder Suffrage—Proxy Regulation — 367
11. Tender Offer and Takeover Regulation 399
12. Manipulation and Fraud—Civil Liability; Implied Private Remedies;
SEC Rule 10b 5; Fraud in Connection With the Purchase or Säle
of Securities; Improper Trading on Nonpublic Material Informa¬
tion 463
13. Insider Reporting, Short Swing Trading, and False SEC Filings 573
14. Market Regulation; Broker Dealers 603
15. Arbitration of Broker Dealer Disputes 699
16. Operation of the Securities and Exchange Commission ~ 704
17. Jurisdictional Aspects 725
19. Debt Securities and Protection of Bondholders—The Trust Inden
ture Act of 1939 735
20. Federal Regulation of Investment Companies—The Investment
Company Act of 1940 — 747
21. Investment Advisers Act of 1940 788
22. Special Problems and Overview of Related Laws — 808
Appendix: Westlaw Research — 827
Table of Cases 847
Index — 891
*
xiii
Table of Contents
Page
Preface v
Westlaw Overview xi
Chapter 1. The Basic Coverage of the Securities Act — 1
See.
1.0 Overview of Treatise; Sources of Securities Law; Overview of this
Chapter 1
1.0[l] Overview of Treatise 1
1.0[2] Sources of Securities Law — 2
1.1 Overview of the Securities Markets and Their Operation 9
1.1[1] Securities Markets and Regulation in Context 9
1.1[2] The Securities Markets 10
1.1[3] The Securities Industry — — ~ 14
1.1[4] The Regulatory System — 14
1.2 History, Scope, and Coverage of Federal and State Securities
Regulatory Schemes — — 17
1.2[1] The Antecedents of Securities Regulation in the United
States 17
1.2[2] The Regulatory Era Begins—State Securities Laws 20
1.2[3] The New Deal and Federal Regulation — 21
1.2[3][A] The Securities Act of 1933 — 22
1.2[3][B] The Securities Exchange Act of 1934— 22
1.2[3][C] The Securities and Exchange Commission— 24
1.2[3][D] Other Federal Securities Laws — 24
1.2[3][E] Federal Preemption of State Law— — 27
1.3 The Securities and Exchange Commission; Structure of the SEC— 28
1.3[1] The SEC Commissioners — 28
1.3[2] The Divisions of the Commission — 29
1.4 The Work of the SEC 31
1.4[1] Overview of SEC Authority 31
1.4[2] SEC Rulemaking .— 31
1.4[2][A] Delegated Rulemaking 31
1.4[2][B] Interpretative Rulemaking— 32
1.4[2][C] Safe Harbor Rules 32
1.4[3] SEC Interpretive Releases; Staff Legal Bulletins 32
1.4[4] SEC No Action Letters — — 33
1.4[5] SEC Oversight and Regulatory Authority 34
1.4[6] SEC Enforcement Authority— 35
1.5 The SEC's Subject Matter Jurisdiction; The CFTC SEC Division
of Regulatory Authority; Financial Services — —. 36
1.5[1] Jurisdictional Concerns— 36
1.5[5] Index Participations and Other Hybrids as Securities or
Commodities 37
xv
Page
See.
1.5[6] Registration of Exchanges 38
1.5[7] Financial Services 38
1.6 Definition of "Security" 39
1.6[1] Statutory Definition of "Security" 39
1.6[2] Judicial Interpretation of "Investment Contract"—The
Howey Test 41
1.6[2][A] The Investment ofMoney 42
1.6[2][B] In a Common Enterprise 43
1.6[2][C] With an Expectation of Profit — 44
1.6[2][D] From the Efforts of Others 45
1.6[3] Alternative Interpretation of "Investment Contract"—
Risk Capital Analysis— 47
1.6[4] Leasing Programs as Securities — 48
1.6 [5] Franchises and Distributorships—Pyramid Scheines as
Securities 48
1.6[6] Commodities and Managed Accounts as Securities 49
1.6[7] Employee Benefit Plans as Securities — 50
1.6[8] Variable Annuities as Securities — — 51
1.6[9] Real Estate Interests as Securities 52
1.6[10] Partnership Interests as Securities 53
1.6[11] Limited Liability Company Interests as Securities 54
1.6[12] Beneficial Interests in Business Trusts and Real Estate
Investment Trusts as Securities ~ 55
1.6[13] Stock as a Security 55
1.6[14] Notes as Securities 57
1.6[15] Certificates of Deposit as Securities 61
1.7 Derivative Investments: Stock Options, Index Options, and Fu
tures 62
1.7[1] Derivative Investments: An Overview 62
1.7[5] "New Exotics"—Swaps and Other Hybrids — 63
1.7[6] Unregulated Over the Counter Derivatives 64
1.7[7] Security Futures Products 66
Chapter 2. Registration Requirements of the Securities Act of
1933 67
See.
2.0 Overview of 1933 Act Registration 67
2.1 The Underwriting Process 67
2.1[1] Direct Offerings 68
2.1 [2] Nature and Varieties of Underwriting Arrangements 69
2.1[2][A] Strict Underwriting 70
2.1[2][B] Firm Commitment Underwriting 71
2.1[2][C] Best Efforts Underwriting _. 72
2.1[2][D] Underwriting byAuction — 72
2.1[3] Underwriters'Compensation; NASD Review — 73
2.2 The Operation of Section 5 of the Securities Act of 1933 73
2.2[1] Operation of Section 5—Overview _ 73
2.2[2] Operation of Section 5—The Basic Prohibitions of the
Pre Filing, Waiting, and Post Effective Periods 75
2.2[3] Impact of Technology and the Internet on the Operation
of Section 5 80 \
I
Page
See.
2.2[3][A] Online Offerings .— 80
2.2[3][B] Electronic Delivery of "Written" Materials 81
2.2[3][C] Electronic Road Shows 82
2.3 The Pre Filing Period 83
2.3[1] Basic Prohibitions of the Pre Filing Period 83
2.3[2] What is an Offer to Seil?: Generating a Buying Interest 86
2.3[3] Safe Harbor for Permissible Pre Filing Announce
ments—SEC Rules 135, 168 and 169— 89
2.3[4] Exchange Offers and Business Combinations Subject to
the Exchange Act 91
2.3[5] The Impact of Exchange Act Reporting Requirements
and Other Disclosure Obligations on the Pre Filing
Quiet Period 91
2.4 The Waiting Period 92
2.4[1] Prohibitions During the Waiting Period 92
2.4[2] Permissible Offers to Seil During the Waiting Period 95
2.4[2][A] Oral Offers to Seil 95
2.4[2][B] The "Tombstone Advertisement" and Oth¬
er Identifying Statements 96
2.4[2][C] The Preliminary ("Red Herring") Prospec
tus — — 96
2.4[2][D] The Summary Prospectus 97
2.4[2] [E] The Free Writing Prospectus 97
2.4[2][F] Safe Harbors for Factual Information and
Forward Looking Statements by 1934
Act Reporting Companies; Rules 168 and
169 99
2.4[3] Limited Statements After Public Announcement of Ten¬
der Offer or Business Combination ~ 100
2.4[4] Broker Dealer Recommendations 100
2.4[5] Suspension of Prospectus Delivery Requirements for
Certain Transactions by Dealers 100
2.4[6] Broker Dealer Standard of Conduct With Regard to
Prospectus Delivery Requirements 101
2.5 The Post Effective Period 101
2.5[1] Prohibitions During the Post Effective Period 101
2.5[2] Supplementary Sales Literature ("Free Writing") 102
2.5[3] Updating the Registration Statement and Prospectus
During the Post Effective Period — 103
2.5[4] Effect of Prospectus Delivery Requirements 104
2.5[6] Exemption From Prospectus Delivery Requirements for
Dealer Transactions 106
2.5[7] Broker Dealer Compliance With Prospectus Delivery
Requirements 108
2.5[8] Broker Dealer Recommendations 109
Chapter 3. The 1933 Act Registration Process and Disclosure — 110
See.
3.1 The Decision to Go Public 110
3.1[1] Process of Going Public—Overview 110
3.1[2] Advantages of Going Public 111
Page
See.
3.1[3] Consequences, Disadvantages, and "Costs" of Going
Public 112
3.1[4] Contingent Public Offerings 114
3.2 Preparation of the Registration Statement — — 115
3.3 Information Required in the Registration Statement and the
Statutory Prospectus; Schedule A — 122
3.4 Registration Forms and Integrated Disclosure 124
3.4[1] Overview of 1933 Disclosure Requirements 124
3.4[2] Materiality .—.—— — 125
3.4[3] Integrating 1933 Act Disclosure With the 1934 Act — 126
3.4[4] 1933 Act Registration Forms .—. 127
3.4[4][A] One Size Fits All Long Form Disclosure—
Form S l . . 127
3.4[4][B] Former Form S 2 for Public Companies 128
3.4[4][C] Form S 3 for Seasoned Issuers 128
3.4[4][D] Forms for Small Businesses _ 129
3.4[4][E] Offerings to Employees 131
3.4[4][F] Securities Issued in Coiinection with a
Merger or Other Corporate Reorganiza
tion—Form S 4 —— 131
3.4[5] Disclosure Guides and Procedures—Regulations S K, S
B, S X — —— 132
3.4[5][A] Regulations S K, S B, and S X Distin
guished — — 132
3.4[6] EDGAR . . 132
3.6 SEC Statutory Procedures—Section 8— — 132
3.6[1] Statutory Waiting Period— — — 132
3.6[2] Acceleration of the Effective Date — — — 134
3.6[3] SEC Refusal Orders 135
3.6[4] SEC Investigations and Stop Orders —. 135
3.6[5] Withdrawal of the Registration Statement 136
3.7 Processing the Registration Statement After Filing — — 136
3.7[1] Law versus Lore: What Really Happens—Informal Pro¬
cedures 136
3.7[2] SEC Review Practices 138
3.7[3] SEC Policies On Acceleration Requests . . 138
3.8 Frequent Deficiencies in Registration Statements and Other Dis
closures; The Piain English Requirement 140
3.8[1] Frequent Deficiencies .—. 140
3.8[2] Piain English Requirements—Overview —.—. 143
3.9 Common Disclosure Problems—Dilution of the Püblic's Invest¬
ment, Business Risks, Transactions With Controlling Persons,
and Projections 143
3.9[1] Overview . . 143
3.9[2] Dilution of the Püblic's Investment, Business Risks 143
3.9[3] Transactions of Controlling Persons, Management Sta
bility and Integrity, Secondary Sales 146
3.9[4] Projections and Soft Information — 149
3.9[5] Statutory Safe Harbor for Forward Looking Statements 151
3.9[6] The Bespeaks Caution Doctrine — 153 i
1
Page
See.
3.9[7] Management Discussion and Analysis 154
3.9[8] Duties to Correct and Update 156
3.10 Presentation of Disclosure; Piain English 156
3.10[2] The Piain English Requirements — 156
3.11 Delayed and Continuous Offerings—Shelf Registrations 157
Chapter 4. Exemptions From 1933 Act Registration 160
See.
4.1 Securities and Transactions Exempt From the 1933 Act's Regis¬
tration Requirements—Sections 3 and 4 of the 1933 Act 161
4.1[1] Overview of Exemptions 161
4.1[3] Establishing an Exemption; Consequences of Failure to
Do So 162
4.1 [4] Exempt Securities: Section 3 of the 1933 Act 162
4.1 [5] Exempt Transactions: Section 4 of the 1933 Act 163
4.1 [6] General Exemptive Authority: Section 28 of the 1933
Act: Exemption by SEC Rule or Regulation 164
4.1[7] Applicability of State Securities Laws 165
4.3 Securities of Governments, Banks, Insurance Companies, and
Qualified Pension Plans—Section 3(a)(2) 165
4.3[1] Government and Municipal Securities 166
4.3[1][A] Scope of Exemption — 166
4.3[2] Bank Securities— 166
4.3[3] Pension Plans 167
4.4 Short Term Commercial Paper—Section 3(a)(3) 167
4.5 Securities of Eleemosynary Organizations—Section 3(a)(4). — 167
4.6 Securities of Building and Loan Associations, Farmers Coopera
tives and the Like—Section 3(a)(5) 168
4.8 Certificates Issued Under the Bankruptcy Act by Receivers and
Trustees—Section 3(a)(7) — 168
4.9 Insurance Policies and Annuity Contracts—Section 3(a)(8) 169
4.10 Securities Exchanged Exclusively With Existing Security Hold
ers—Section 3(a)(9) — 170
4.11 Securities Issued in Judicially or Administratively Approved Reor
ganizations—Section 3(a)(10) 170
4.12 The Exemption for Purely Intrastate Offerings—Section 3(a)(ll);
SEC Rule 147 171
4.12[1] Intrastate Offerings—The Statutory Exemption—Sec¬
tion 3(a)(9) — 171
4.12[2] Intrastate Offerings—The SEC's "Safe Harbor"—Rule
147 — 174
4.15 The Small Issue Exemptions 177
4.16 Qualified Exemptions for Small Issues; Sections 3(b), 4(6), and
3(c) — — 180
4.16[1] Limited Offerings—Section 3(b) 180
4.16[2] Limited Offerings Solely to Accredited Investors—Sec¬
tion 4(6) 182
4.17 Regulation A—Qualified Exemption for Offerings Up to
$5,000,000 Per Year 182
4.17[1] Overview of Regulation A 182
4.17[2] Issuers Eligible for Regulation A 184
Page
See.
4.17[3] Regulation A—Disqualifikation Provisions 185
4.17[4] Regulation A—Limitations on Dollar Amount of the
Offering 186
4.17[5] Integration With Other Offerings 187
4.17[6] Regulation A—Filing and Notification Requirements 187
4.17[7] Regulation A—Testing the Waters 188
4.18 Rule 701—Exemption for Employee Compensation Plans of Is
suers Not Subject to Exchange Act Periodic Reporting Require¬
ments 189
4.18[1] Overview of Rule 701 189
4.18[2] Issuer Qualification for Rule 701 189
4.18[3] Rule 701—Qualifying Compensation Plans 190
4.18[4] Limitation on Dollar Amount of Rule 701 Offering 190
4.18[5] Integration Doctrine Not Applicable to Rule 701 Offer¬
ings 191
4.18[6] Restrictions on Resale Following Rule 701 Offerings 191
4.19 Coordination of the Small Issue and Limited Offering Exemp
tions: Regulation D—An Overview 191
4.19[1] Regulation D in Context 191
4.20 Regulation D: Definitions, Conditions, and Filing Requirements—
SEC Rules 501, 502, and 503 192
4.20[l] Overview of Regulation D 192
4.20[2] Regulation D—Definitions — — 193
4.20[3] Conditions of Regulation D Offerings 194
4.21 Regulation D's Exemption for Small Issues of $1,000,000 or
Less—SEC Rule 504 199
4.22 Regulation D's Exemption for Limited Offerings Not Exceeding
$5,000,000—SEC Rule 505 202
4.23 The Statutory Exemption for Limited Offerings to "Accredited
Investors"—Section 4(6) 204
4.23[1] Scope of Section 4(6) 204
4.24 Exemption for Issuer Transactions Not Involving a Public Offer¬
ing ("The Private Placement Exemption")—Section 4(2) 205
4.24[1] Scope of the Section 4(2) Exemption 205
4.25 Safe Harbor for Private Placements Under Section 4(2)—SEC
Rule 506 — 211
4.26 An Overview of Transactions by Persons Other Than Issuers,
Underwriters, and Dealers: Section 4(1); Unsolicited Brokers'
Transactions—Section 4(4) 215
4.26[1] Section 4(1)—The Exemption for Nonprofessionals—Ba¬
sic Definitions 216
4.26[2] Section 4(4)—Unsolicited Brokers' Transactions 218
4.27 Who Is an Underwriter?—Section 2(a)(ll) 219
4.27[1] The Underwriter Concept—Section 2(a)(ll) and Appli¬
cable SEC Rules 219
4.27[2] Case Law Developments—Inadvertent Underwriters 222
4.27[3] Investment Intent—The Holding Period 224
4.27[4] Saleson Behalf of Controlling Persons 226 \
4.29 The Safe Harbor Exemption for Secondary Transactions—SEC 1
Rule 144 _ 229 i
Page
See.
4.30 The Section "4(1%)" Exemption for Downstream Sales; Rule 144A 234
4.30[l] Basis for the Section 4(1%) Exemption— —. 235
4.30[2] Elements ofthe Section 4(1%) Exemption 237
4.30[4] The Safe Harbor for Certain Sales to Qualified Institu
tional Buyers—SEC Rule 144A — 238
4.31 The Exemption for Certain Dealers' Transactions—Section 4(3) — 239
4.33 Exemption for Certain Offshore Transactions in Securities of
United States Issuers—Regulation S 242
4.35 The SEC's General Exemptive Authority 244
4.36 Integration of Transactions 245
4.36[1] Overview ofthe Integration Doctrine 245
4.36[2] The Integration Doctrine Explained and Defmed 246
4.36[2][A] Explanation of the Integration Doctrine— 246
4.36[2][B] The Highly Factual Nature of Integration
Questions — 247
4.36[2][C] Issuer Integration— 248
4.36[3] Safe Harbors for Avoiding Integration— 248
4.36[4] Integrating Nonpublic and Public Offerings — 249
4.36[4][A] Successive Offerings 249
4.36[4][B] Discontinued Offerings 250
Chapter 5. The Theory of Säle: Corporate Recapitalizations,
Reorganizations and Mergers Under the 1933 Act 252
See.
5.0 Overview of Chapter—Definition of Säle in Context 252
5.1 1933 Act Application to Unconventional Transactions—Section
2(a)(3)'s Definition of Säle; Gifts, Bonus Plans, and Pledges;
Effectof State Law — 252
5.1[1] Statutory Definition of Säle — — 252
5.1[2] Gifts and Bonus Plans — 253
5.1[3] Employee Compensation Plans 255
5.1[4] Convertible Securities — — 256
5.1[5] Pledges 256
5.1[6] Installment Sales 257
5.2 Corporate Recapitalizations, Reorganizations, and Mergers Under
the 1933 Act: Rule 145 257
5.2[1] Reorganizations Exempt From 1933 Act Registration— 257
5.2[2] Rule 145 258
5.2[3] Rule 145 and Downstream Sales — — 260
5.3 Section 2(a)(3)'s Definition of Säle: Warrants, Employee Stock
Plans, Stock Dividends, and Spin Offs Under the 1933 Act 262
5.3[1] Warrants, Conversion Rights, Options, and Security Fu
tures Products — 262
5.3[2] Stock Dividends — — 263
5.3[3] Exchanges of Securities 264
5.3[4] Spin Off Transactions 264
5.4 Periodic Payments; The Investment Decision Doctrine 269
Page
Chapter 6. IPO Practices: Manipulation, Stabilization and Hot
Issues — — 270
See.
6.1 Manipulation: An Overview 270
6.2 Manipulation and Price Stabilization Involving Public Offerings — 271
6.2[1] Manipulation in Public Offerings 271
6.2[3] Regulation M—Scope of Rule 101 — — 273
6.2[4] Regulation M—Exclusions and Exemptions From Rule
101's Prohibitions 274
6.2[5] Regulation M—Scope of Rule 102 275
6.2[7] Regulation M—Scope of Permissible Stabilizing Activity 275
6.2[8] Regulation M—Manipulative Short Sales, Rule 105 276
6.3 Aftermarket Activities, IPO Practices, Hot Issues, Workout Mar
kets, and Controlled Markets 277
Chapter 7. Liability Under the Securities Act of 1933 286
7.1 Consequences of Deficient Registration Statements—Administra¬
tive Action, Criminal Sanctions, SEC Injunctive Relief, and
Private Remedies 286
7.2 Civil Liability for Failure to Comply With Section 5's Require
ments—Section 12(a)(l)'s Private Remedy 289
7.2[1] Overview of Section 12(a)(l) 289
7.2[2] Who is Liable Under Section 12(a)(D? 291
7.3 Liability for Misstatements and Omissions in the Registration
Statement—The Private Remedy Under Section 11 of the 1933
Act 293
7.3[2] Who Can Sue; Nature of Suit Under Section 11 293
7.3[3] Permissible Defendants in a Section 11 Suit 294
7.3[4] Absence of Reliance Requirement in Section 11 294
7.3[5] Tracing Securities to the Registration Statement 294
7.3[8] MeasureofDamages Under Section 11 295
7.3[9] Statute of Limitations — 296
7.3[10] Defenses to Section 11 Claims — 297
7.4 Defenses Under ll(b)—Due Diligence, Reliance on Experts, and
Reasonable Investigation 299
7.4[1] "Whistle Blowing" Defense 299
7.4[2] Due Diligence Defenses 299
7.5 Damages in Actions Under Section 11 308
7.5[1] The Statutory Formula 308
7.5[2] The Section HDamage Calculus 309
7.5[2][A] Determination of "Value" 310
7.5[2][B] The Negative Causation Defense 311
7.6 Section 12(a)(2)—Liability for Material Misstatements or Omis¬
sions by Seilers of Securities 311
7.6[1] Elements of Section 12(a)(2) Claim 311
7.6[2] Judicially Imposed Limits on Section 12(a)(2)—The Pub¬
lic Offering or Batch Offering Limitation 315
7.6[2][A] Evolution of the Public Offering Limitation 315
7.6[2][B] Criticismof the Public Offering Limitation 315
7.6[2][C] The Gustafson Decision _. 316 j
7.6[2][D] Remaining Questions on the Public Offer j
ing Limitation 317 j
Page
See.
7.11 The Securities Act's General Prohibition on Material Misstate
ments and Omissions—Section 17 317
7.12 Multiple Defendants—Joint and Several Liability; Liability of
Controlling Persons 319
7.13 Multiple Defendants—Aiding and Abetting 322
7.13[1][A] Aiding and Abetting's Demise 322
7.14 Multiple Defendants—Indemnification Agreements 323
7.17 Special Rules and Procedures for Securities Class Actions 325
7.17[1] Private Securities Litigation Reform Act of 1995— 326
7.17[2] Securities Litigation Uniform Standards Act of 1998—
Preemption —. 327
Chapter8. State Blue SkyLaws 329
8.1 State Blue Sky Laws: Their Origins, Purpose, and Basic Coverage 329
8.1[1] State Blue SkyLaws— 329
Chapter 9. Securities Exchange Act of 1934—Registration and
Reporting Requirements for Publicly Traded Companies 335
See.
9.1 The Securities Exchange Act of 1934—Overview 335
9.2 Registration of Securities Under the Securities Exchange Act of
1934 337
9.2[1] Registration Requirements 337
9.2 [2] Exemptions From 1934 Act Registration Requirements 339
9.2[5] SEC's General Exemptive Authority — 340
9.3 Annual, Periodic, and Continuous Reporting Requirements for
Public Companies — 340
9.3[2][A] CEO and CFO Certification of SEC Filings 345
9.3[2][B] Periodic Review of Company Filings — 346
9.3[2][C] Executive Officer Loans Prohibited 346
9.3[2][E] Forfeiture of Certain Bonuses and Profits — 347
9.4 Disclosure Guidelines—Regulations S K and S B 347
9.4[1] Background of Regulation S K 347
9.4[2] Overview of Regulation S K and Regulation S B 349
9.4[3] Structure of Regulation S K — 349
9.6 Accounting and Auditing Requirements 350
9.6[1] Accounting Requirements 350
9.6[1][A] Financial Matters Generally 350
9.6[ 1] [B] Non GAAP Financial Measures 352
9.6[2] Audit Requirements 353
9.7 Corporate Governance and the Federal Securities Laws; Codes of
Ethics, Compensation Limitations, and Listing Standards 357
9.7[1] Overview of Corporate Governance Provisions 357
9.7[2] Codes of Ethics 357
9.7[3] Audit Committees; Financial Experts 359
9.7[4] Executive and Director Compensation; Prohibition on
Certain Loans to Executives; Extraordinary Payments 360
9.8 Controls on Attorney Practice — 361
9.8[1] Regulating Administrative Practice of Attorneys; The
Sarbanes Oxley Lawyer Conduct Rules 361
Page
See.
9.8[3] SEC Rule 102 362
9.8[4] Role of Lawyers in SEC Practice 362
9.8[6] Increasing Attorney Accountability—Sarbanes Oxley
Section 307 and its Background— 364
9.8[7] The SEC Rules—Climbing the Corporate Ladder— 364
ChapterlO. Shareholder Suffrage—Proxy Regulation 367
See.
10.1 The Regulation of Shareholder Suffrage Under the Exchange
Act—Section 14 and the Proxy Rules: Introduction; Regulation
ofVotingRights 367
10.2 Füll Disclosure in the Solicitation of Proxies 370
10.2[l] Overview of Proxy Disclosure Requirements 370
10.2[2] Proxy Solicitations: Nature of the Regulation 371
10.2 [3] Proxy Solicitations: Required Disclosures — 372
10.3 Rule 14a 9 and the Implied Remedy for Material Misstatements
and Omissions in Proxy Materials; Standing to Sue; Scienter vs.
Negligence; Attorneys' Fees — 377
10.3[l] The Implied Private Remedy for Material Misstatements
in the Solicitation of Proxies 377
10.3[2] Standing to Sue Under Rule 14a 9 377
10.3[3] Is Scienter Required Under Rule 14a 9? 379
10.3[4] Materiality Under Rule 14a 9 A Preview 380
10.3[5] Causation Under Rule 14a 9 380
10.3[6] Relief Other Than Damages in Actions Under Rule 14a
9 382
10.7 Security Holders' Access to the Proxy System: Right to Informa¬
tion; Shareholder List 382
10.8 Security Holders' Access to the Proxy System: Shareholder Pro
posals and the Shareholder Proposal Rule 383
10.8[2] Grounds for Exclusion—Impropriety Under the Law of
the State of Incorporation 386
10.8[2][A] State Law Generally 386
10.8[3] Grounds for Exclusion—Impropriety Under Law Gener¬
ally _ 388
10.8[4] Grounds For Exclusion—Materially Misleading Propos
als, Proposais in Violation of The Proxy Rules, and
Overly Vague Proposais 388
10.8[5] Grounds for Exclusion—Personal Grievance 389
10.8[6] Grounds for Exclusion—Not Significantly Related to the
Issuer's Business 389
10.8[7] Grounds for Exclusion—Beyond the Issuer's Power 390
10.8[8] Grounds for Exclusion—Ordinary Business— 390
10.8[9] Grounds for Exclusion—Proposais Relating to Election
to Office 394
10.8[10] Grounds for Exclusion—Shareholder Proposais Contra
dicting Management Proposais — 394
10.8[ll] Grounds for Exclusion—Mootness 394
10.8[12] Grounds for Exclusion—Duplicative Proposais 395 \
10.8[13] Grounds for Exclusion—Resubmissions 395 \
10.8[14] Grounds for Exclusion—Relating to Dividends 395 |
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10.8[15] Consequences of Excluding Shareholder Proposais; Prac
tical Considerations 396
10.9 Disclosure in Lieu of Proxy Solicitation—Section 14(c) 397
10.10 Securities Held in Street Name; Broker Dealers and Federal
Proxy Regulation—Section 14(b) 397
Chapter 11. Tender Offer and Takeover Regulation 399
See.
11.1 Federal Control of Tender Offers—The Williams Act; The Termi
nology of Takeovers 399
11.1[1] The Terminology of Takeovers — 400
11.1 [2] Overview of the Regulation Imposed by the Williams Act 401
11.2 Filing Requirements for Acquisition of More Than Five Percent of
Equity Securities of an Exchange Act Reporting Company—
Section 13(d) — — 404
11.2[1] Section 13(d) Filing Requirements 404
11.2[2] Who Must File Under Section 13(d); Formation of a
"Group" 405
11.2[4] Exemptions From Section 13(d) Filing Requirements 406
11.3 Reports of Institutional Investment Managers—Section 13(f) 406
11.4 Definition of Tender Offer — — 406
11.5 Filings, Disclosures and Procedures for Tender Offers—Section
14(d) and Regulation 14D — 411
11.5[1] Overview of Filing and Disclosure Requirements 411
11.5[2][B] ScheduleTO 413
11.5 [3] Other Requirements Imposed by Regulation 14D 414
11.5[3][A] Bidders' Right of Access to Target Compa
ny's Shareholders— — 415
11.5[3][B] Shareholders' Withdrawal of Tendered Se¬
curities — 415
11.5[3][C] Pro Rata Acceptance of Tendered Shares;
Extensions of the Tender Offer 416
11.5[3][D] The "All Holders" Requirement 417
11.5[3][E] The Equal Treatment and "Best Price" Re¬
quirements 417
11.5[3][F] Prompt Payment for Shares Tendered 419
11.5[3][G] Post Tender Offer Extensions of Time for
Tendering — 420
11.5[3][I] Exemptions From Regulation 14D 420
11.5[3][J] Unregulated Mini Tender Offers 420
11.6 Unlawful Tender Offer Practices—Section 14(e) and Regulation
14E 421
11.6[1] Section 14(e)—Antifraud and SEC Rulemaking 421
11.6[2] Regulation 14 and Other Tender Offer Regulations 423
11.6[2][A] Durationof Tender Offer 423
11.6[2][B] Target Company's Management Response
to a Third Party Tender Offer — 424
11.6[2][C] Insider Trading Prohibited 425
11.6[2][D] Prohibition of Contemporary Purchases
During Tender Offer — 425
Page
See.
11.6[2][E] Short Tendering and Hedged Tendering
Prohibited 426
11.6[2][F] Two Tiered Tender Offers Permitted 427
11.6[2][G] Exemption for Closed End Investment
Companies 427
11.6[2][H] Roll Up Transactions 428
11.6[2][I] Prohibition Against False Statements of In
tent to Make Tender Offer 428
11.6[2][J] Target's Defensive Tactics Not Prohibited 428
11.7 Arrangements Affecting Director Turnover in Connection With a
Tender Offer—Section 14(f) 429
11.8 Issuer Purchases of Its Own Stock—Section 13(e) and the Going
Private Rule; Issuer Self Tender Offers 429
11.8[1] Issuer's Share Repurchases 429
11.8[1][A] Issuer Share Repurchases in Response to
Someone Eise's Tender Offer 429
11.8[1][B] Manipulation in Connection With Issuer
Repurchases 430
11.8[2] The Going Private Rule 431
11.8[2][A] Rule 13e 3 Filings 431
11.8[2][C] Can the SEC Require Substantive Fairness? 432
11.8[3] Issuer Self Tender Offers— 432
11.9 Private Remedies Under the Williams Act—Remedies for Viola
tions of Sections 13(d), 13(e), 14(d) — 433
11.10 Private Remedies Under the Williams Act—Is There an Implied
Remedy Under Section 14(e)? ~ 436
11.11 Responses to Tender Offers: Anti Takeover Moves and Defensive
Tactics 439
11.11[1] Responding to a Tender Offer or Other Takeover At
tempt 439
11.11 [2] Varieties of Defensive Tactics and State Law Regulation 441
11.12 State Regulation of Tender Offers 444
11.12[1] State Tender Offer Regulation—Overview 444
11.12[2] Scope of State Tender Offer Regulation 445
11.12[3] First Generation State Tender Offer Statutes 446
11.12[3][A] Typesof First Generation Statutes 446
11.12[3][B] The Highly Dubious Vitality of First Gener¬
ation State Tender Offer Statutes 447
11.12[4] Second Generation State Takeover Statutes 448
11.12[5] Third Generation Takeover Statutes 449
11.12[6] Evaluation of State Takeover Legislation 452
11.13 Validity of State Tender Offer Statutes—The Commerce Clause
and the Preemption Problem; SEC Rule 14d 2(b) 452
11.13[1] Preemption Challenges to State Takeover Statutes 453
11.13[2] Commerce Clause Challenges to State Takeover Legisla¬
tion _ 454
11.13[2][A] The Early Cases 454 I
11.13[2][B] The MITE Decision 456 1
11.13[2][C] The CTS Decision 460 |
Page
Chapter 12. Manipulation and Fraud—Civil Liability; Implied
Private Remedies; SEC Rule 10b 5; Fraud in Connection
With the Purchase or Säle of Securities; Improper Trading
on Nonpublic Material Information 463
See.
12.1 Market Manipulation and Deceptive Practices—Sections 9, 10,
14(e), 15(c) 464
12.1[3] Manipulative and Deceptive Acts and Practices—Section
10; Section 15(c) 467
12.1[3][A] Overview of Anti Manipulation Provisions 467
12.1[3][C] Manipulation Rules Under Section 15 of
the Exchange Act ~~ 469
12.1[4] Manipulation: Private Remedies 471
12.1[4][A] Manipulation of Exchange Listed Securi¬
ties—Section 9(e)'s Express Remedy 471
12.1[4][B] Manipulation: Implied Remedies 472
12.2 Implied Remedies in the Federal Courts 472
12.2[1] The Trend Limiting Implied Remedies — 472
12.3 Section 10(b) and the Evolution of the Implied Remedy Under
SEC Rule 10b 5 474
12.3[1] The Statutory Context — 474
12.3[2] History of Rule 10b 5 — 475
12.3[3] The Development of the Implied Rule 10b 5 Remedy 476
12.4 Rule 10b 5 Overview; Summary of the Principal Elements 478
12.5 "In Connection With" the Purchase or Säle of Any Security 481
12.6 "Purchase or Säle"—Identifying Purchases and Sales Under Rule
10b 5 — 483
12.6[1] Definitions of Purchase and Säle — 483
12.6[2] Rights to Purchase or Seil 485
12.6[4] Convertible Securities 485
12.6[6] Pledges of Securities 485
12.6[7] Gifts 485
12.6[8] Periodic Payments; The Investment Decision Doctrine ~. 486
12.7 Standing to Sue Under SEC Rule 10b 5 486
12.7[1] The Purchaser/Seller Requirement 486
12.7C2] Standing to Seek Injunctive Relief 488
12.7[3] Variations on the Purchaser/Seller Requirement 488
12.7[3][A] Forced Seilers 488
12.7[3][B] Would be Purchasers and Seilers; Deferred
Seilers 489
12.7[4] Rights and Options — 490
12.8 Rule 10b 5 and the Scienter Requirement; Section 17(a) and Rule
14a 9 Compared 490
12.8[1] Rule 10b 5's Scienter Requirement; Section 17(a) Com¬
pared 490
12.8[2] Rule 10b 5's Scienter Requirement; The Proxy Rules
Compared — — 491
12.8[3] Recklessness as Scienter — —. 492
12.8[4] Pleading and Proving Scienter .— — 494
Page
See.
12.9 Materiality in Rule 10b 5 Actions 495
12.9[1] Materiality in Context 495
12.9[2] Factual Nature of Materiality 496
12.9[3] Materiality Defined 496
12.9[4] Immateriality of Vague Statements; Sales Talk and
"Puffing"; Statements of Opinion and Intent. — 498
12.9[5] Materiality of Contingent Events 499
12.9[6] Materiality of Merger Negotiations 500
12.9[7] Predictions, Projections, and Other "Soft" Information;
Management Discussion and Analysis — 501
12.9[7][B] Management Discussion Analysis 502
12.9[7][C] Safe Harbor for Forward Looking State¬
ments — 503
12.9[7][D] Analysts' Opinions and Estimates 503
12.9[8] The "Bespeaks Caution" Doctrine and Materiality 505
12.9[9] Materiality In Financial Statements; Accounting Issues 507
12.9U0] DutytoCorrector Update 507
12.10 Reliance in Rule 10b 5 Actions; Fraud on the Market 508
12.11 Causation in Actions Under Rule 10b 5 514
12.12 The Measure of Damages in Rule 10b 5 Actions — — 517
12.13 Pleading Fraud With Particularity — —~ 520
12.15 Securities Class Actions; Litigation Reform 521
12.15[0] Overview — 521
12.15[1] Private Securities Litigation Reform Act of 1995 521
12.15[1][A] QualificationsofLeadPlaintiff — 522
12.15[1][B] SelectionofLeadCounsel 522
12.15[1][C] Attorneys' Fees — —. 523
12.15[1][D] Pretrial Motions and Pretrial Discovery 523
12.15[1][E] Projections and Forward Looking State¬
ments 524
12.15[1][F] Enhanced Pleading Requirements Regard
ing Defendants' State of Mind 524
12.15[1][G] Notice of Class Action Settlements 524
12.15[1][H] Security Deposit 525
12.15[1][I] Review of Proceedings for Possible Sanc
tions 525
12.15[1][J] Calculation of Damages 526
12.15[1][K] Impactof the 1995 Reform Act — — 526
12.15[2] Securities Litigation Uniform Standards Act of 1998 527
12.16 Statutes of Limitations in Rule 10b 5 Actions 528
12.16[1] Overview 528
12.17 Insider Trading and Rule 10b 5 530
12.17[1] Overview — 530
12.17[2] The Basis of the Prohibition: The Development of Rule
10b 5 in Insider Trading Cases 532
12.17[3] Causation in Insider Trading Cases—"Use" Versus
"Possession" ~ _ 534
12.17C4] Refining Rule 10b 5's Insider Trading Prohibitions; De \
velopments in the Supreme Court and Elsewhere— \
The Misappropriation Theory 537 §
Page
See.
12.17[5] Insider Trading—Passing on Non Public Information—
Tipper and Tippee Liability 543
12.17[6] Insider Trading in Advance of Tender Offers: Rule 14e 3 545
12.17[7] Insider Trading: Private Remedies Under Rule 10b 5;
Enhanced SEC Sanctions 546
12.17[7][A] Enhanced Remedies and Penalties—The In¬
sider Trading Sanctions Act of 1984 547
12.17[7][B] Controlling Person Liability; Private Reme¬
dies—Insider Trading and Securities
Fraud Enforcement Act of 1988 547
12.17[9] Summary—The Need for Clarification — 549
12.18 Liability for Material Misstatements and Omissions of Fact in
Documents Filed With the SEC—Section 18(a) of the Exchange
Act 550
12.19 Corporate Affirmative Disclosure Obligations and Accountability 551
12.19[1] Affirmative Disclosure Obligations 551
12.19[2] Respondingto Market Rumors— 554
12.19[3] Adoption of and Entanglement With Statements by
Third Parties 556
12.19[4] SEC Regulation FD—Prohibition on Selective Disclosure 557
12.19[5] Company Web Sites 557
12.20 Corporate Mismanagement, Rule 10b 5 and the Deception Re
quirement 559
12.20[l] When Corporate Mismanagement Can be Securities
Fraud — 559
12.21 The Effect of Plaintiff s Conduct on Implied Civil Liability; Due
Diligence; In Pari Delicto — 562
12.22 Is There an Implied Remedy Under Section 17(a) of the 1933 Act? 563
12.23 Waiver of Claims; Voiding of Contracts in Violation of the Securi¬
ties Laws — 564
12.23[1] Waiver of Claims 564
12.23[2] Voiding of Contracts Waiving Compliance with the Secu¬
rities Laws — 564
12.24 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Controlling Person Liability 565
12.24[1] Controlling Person Liability Defined 565
12.24[2] What Constitutes Control? — 565
12.25 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Aiding and Abetting Liability 568
12.25[1] The Decline of Aiding and Abetting Liability 568
12.26 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Joint and Several and Proportional Liability 569
12.27 Multiple Defendants in Actions Under the Securities Exchange
Act of 1934: Contribution and Indemnity 570
Chapter 13. Insider Reporting, Short Swing Trading, and False
SECFilings 573
See.
13.1 Reporting Requirements for Insiders and Their Transactions in
Shares—Section 16(a) 573
13.1[1] Overview of Section 16 Filing Requirements — 573
Page
See.
13.1[2] Who Must File Section 16 Reports 576
13.1[2][A] Officers and Directors 576
13.1[2][B] Ten Percent Beneficial Owners 577
13.1[2][C] Definition of Equity Security 579
13.1[2][D] Treatment of Derivative Securities 580
13.1 [3] Exemptions From Section 16 Filing Requirements 580
13.2 Disgorgement of Insider Short Swing Profits—Section 16(b) 581
13.2[1] Overview of Section 16(b) 581
13.2[2] Issuers Covered 582
13.2[3] Securities Covered 582
13.2[4] Procedural Aspects; Standing; Demand Requirement;
Right to Jury Trial; Statute of Limitations 582
13.2[5] Jurisdictional Aspects 584
13.2[6] Section 16(b) Timing (the "Short Swing")Timing (the
"Short Swing") 584
13.2[7] Determination of "Profit" 585
13.2[8] Actual Use of Inside Information Not Necessary 586
13.2[9] Equitable Defenses Rejected 587
13.2[10] Exemptions From 16(b)'s Disgorgement Provisions 587
13.2[11] No Indemnification for Liability Under Section 16(b) — 590
13.3 Who Is Subject to Sections 16(a) and (b)? When Does Insider
Status Attach? — 590
13.3[1] Officers and Directors 590
13.3[1][A] Deputization as the Basis of Insider Status 592
13.3[1][B] Family Relationships 593
13.3[1][C] Timing and Director or Officer Liability;
Effect of Resignation 593
13.3[2] Ten Percent Beneficial Ownership 594
13.3[2][A] Who is a Ten Percent Beneficial Owner? — 594
13.3[2][B] Group Theory and Beneficial Ownership —. 595
13.3[2][E] Convertible Securities 596
13.4 The Definition of "Purchase" and "Säle" and the Pragmatic
Approach Under Section 16(b) 596
13.5 Prohibitions Against Short Sales by Insiders—Section 16(c) 599
Chapter 14. Market Regulation; Broker Dealers 603
See.
14.1 Market Regulation—An Overview 603
14.1[1] How The Markets Operate—An Overview 604
14.1[2] Options Trading and Other Derivatives 607
14.1 [3] Market Regulation—History, Background, and Overview 608
14.1[3][A] Background 608
14.1 [3] [B] Nature of Broker Dealer Regulation 609
14.1[3][C] Seif Regulation 610
14.1 [8] Regulation of Online Trading and Day Trading 613
14.1[9] Antitrust Laws and Market Regulation 613
14.3 Regulation of Broker Dealers—The SEC, Seif Regulatory Organi
zations, National Exchanges, and the NASD 614 l
14.3[1] Nature of Market Regulation 614 }
14.3[2] State Regulation of Broker Dealers—Limited Preemp j
tion 615 I
Page
See.
14.3[3] Self Regulation: The National Association of Securities
Dealers and the National Exchanges 615
14.3[4] Substance of Seif Regulation 619
14.3 [4] [A] Seif Regulatory Disciplinary Authority 619
14.3[4][B] Broker Dealer Operations 620
14.3[4][C] Potential Conflicts of Interest and The Chi¬
nese Wall (or "Fire Wall") Requirement 621
14.3[4][D] Maintaining an Orderly Securities Market 622
14.3[4][E] Large Trader Reporting — 622
14.3 [4] [F] Broker Dealer Registration Requirements 623
14.3[4][G] Government and Municipal Securities Deal¬
ers 624
14.3[4][H] Banking and the Securities Laws — 624
14.3[4][I] Money Laundering Provisions ~ 624
14.3[5] SEC Administrative Sanctions for Broker Dealers 625
14.3[6] Prohibitions Against Deceptive and Manipulative Con
duet — 626
14.3[6][A] Prohibited Practices Generally 626
14.3[6][B] Wash Sales, Fictitious Trades, Matched Or¬
ders, and Cross Trades 627
14.3[6][C] Other Manipulative Practices: High Pres
sure Sales, Deceptive Recommendations,
Excessive Commissions, Order Execution
Obligations, Parking 629
14.4 Broker Dealer Registration; Definitions and Exemptions 631
14.4[1] Broker Dealer Registration: Definitions — 631
14.4[1][A] Definitions of Broker and Dealer 631
14.4[1][B] Banks and Subsidiaries of Banks 632
14.5 Broker Dealer Registration Requirements 633
14.5[1] Broker Dealer Registration Generally 633
14.5[2] Registration of Foreign Broker Dealers 634
14.6 Municipal Securities Dealers 634
14.7 Regulation of Government Securities Dealers — 635
14.8 Broker Dealer Net Capital and Reserve Requirements 637
14.8[1] Net Capital Requirements — 637
14.8[2] Customers' Funds and Securities: The Customer Protec
tion Rule and the Reserve Requirements 638
14.9 The Margin Rules and Extension of Credit for Securities Transac
tions 638
14.9[1] Margin Transactions Explained — 638
14.9[2] Limitations on the Extension of Credit for Securities
Transactions 641
14.9[3] Margin Maintenance Requirements — 643
14.9[4] Margin Disclosure Requirements; Suitability — 644
14.9[5] Remedies for Violations of the Margin Rules 644
14.10 Market Makers in the Over the Counter Markets 645
14.10[l] Market Making in Context — 645
14.10[2] Mechanics of Market Making Activities—Some Basic
Concepts 646
14.10[3] Maintaining an Orderly Market 648
Page
See.
14.10[4] Premise of NASD Regulation of Market Makers 648
14.10[5] Market Makers' Conflict of Interest; Disclosure Obli¬
gations 649
14.10[6] Market Makers and Manipulation 651
14.11 Trading on Stock Exchanges; The Specialist System 653
14.11[1] Trading by Exchange Members 653
14.11[1][A] Exchange Trading Generally — 653
14.11[1][B] "Floor Trading" and "Off Floor Trading" 653
14.11[1][C] Specialists — 654
14.11[1][D] Block Positioning 656
14.12 Multiservice Brokerage Firnis; Information Barriers; The Chinese
Wall or Fire Wall 657
14.13 Execution of Customer Orders 658
14.13[1] The Best and Prompt Execution Obligations 658
14.13[2] Exchange Trading—Floor Broker Obligations 660
14.14 Brokerage Commissions—Disclosure, Payment for Order Flow,
Excessive Mark Ups 662
14.14[1] Disclosure of Broker Dealer Commissions 662
14.14[2] Payment for Order Flow 663
14.14[3] Excessive Mark Ups 664
14.14[3][A] Mark Ups Generally 664
14.14[3] [B] The Five Percent Mark Up Policy 666
14.14[4] Recommendations Induced by Commissions or Other
Incentive 667
14.15 Broker Dealers and Fiduciary Obligations; The Shingle Theory 668
14.15[1] Effect of Arbitration on the Law of Brokers'Obligations 668
14.15[2] Fiduciary Obligations of Securities Brokers— 668
14.15[3] The Shingle Theory — 670
14.16 A Broker's Obligation to Customers With Regard to Recommenda¬
tions: The Know Your Security, Suitability, and Know Your
Customer Obligations 672
14.16[1] Recommendations and Suitability Generally 672
14.16[1][A] Recommendations Generally 672
14.16[1][B] Suitability Generally 673
14.16[2] Suitability: Online Trading and Day Trading 675
14.16[3] Special Suitability Problems Associated With Low Priced
Securities 675
14.16[4] Suitability and Mutual Fund Sales Practices — 675
14.16[5] Suitability and Investment Advisers 676
14.16[6] Recommendations and Conflicts of Interest; Analysts'
Recommendations — 676
14.17 Scalping 679
14.18 High Pressure Sales Tactics: Boiler Room Operations 681
14.19 Penny Stock Regulation; Microcap Fraud 685
14.19[1] Penny Stock Regulation _ 685
14.19[3] Microcap Fraud _. 686
14.20 Excessive Trading in Securities—Churning 687 \
14.20[l] Basis ofViolation 687 j
14.20[2] Establishing a Churning Claim 688 f
14.20[3] Measure of Damages in Churning Cases 689 I
Page
See.
14.21 Unauthorized Trading 689
14.22 Regulation of "Short Sales" 690
14.23 Parking 694
14.24 Broker Dealer Bankruptcy—The Securities Investor Protection
Act 694
14.25 Private Remedies Against Exchanges and the NASD for Damages
Resulting From Nonenforcement of Their Own Rules 696
14.26 Private Remedies Against Market Professionals; Secondary Liabil
ity 697
Chapter 15. Arbitration of Broker Dealer Disputes 699
See.
15.1 The Enforceability of Arbitration Agreements in Federal and
State Securities Cases — 699
15.1[1] Enforcement of Broker Dealer Arbitration Agreements 699
15.1[1][A] The Riseof the Wilko Doctrine 700
15.1[1][B] The Declineof the Wilko Doctrine 700
15.1[2] The Federal Arbitration Act: Policies Favoring Arbitra¬
tion 701
15.1[8] WaiverofRighttoArbitrate 701
15.1[9] Other Factors Affecting Enforcement of Predispute Ar¬
bitration Agreements 702
15.1 [ 10] Judicial Review of Arbitration Decisions 703
Chapter 16. Operation of the Securities and Exchange Commis
sion — 704
See.
16.2 Civil and Criminal Enforcement: SEC Injunctions, Investigations,
Parallel Proceedings; Administrative Hearings and Disciplinary
Sanctions 704
16.2[1] SEC Administrative Hearings 705
16.2[2] SEC Injunctions 706
16.2[2][A] Power to Seek Injunctive Relief 706
16.2 [2] [B] Preliminary Injunctive Relief 707
16.2[4] Ancillary Relief in SEC Injunction Actions 708
16.2[4][A] Varietiesof Ancillary Relief 708
16.2[4][B] Disgorgement of Profits 709
16.2 [4] [D] Civil Penalty Under the Insider Trading
Sanctions Act of 1984 (ITSA) 711
16.2[5] Civil Penalties in Other SEC Enforcement Actions — 712
16.2[6] Bar Orders — 713
16.2[7] SEC Investigations 714
16.2[8] Parallel Civil and Criminal Proceedings 715
16.2[10] Section21(a) Reports 716
16.2[11] Section 15(c)(4) Orders 717
16.2[12] Cease and Desist Authority 718
16.2[13] SEC Administrative Proceedings — — 718
16.2[14] Civil Penalties in Administrative Actions 720
16.2[15] Administrative Proceedings and Double Jeopardy 721
16.2[16] Collateral Estoppel Effect of SEC Proceedings 721
Page
See.
16.2[18] Suspension of the Right to Practice Before the Commis
sion—SEC Rule 102(e) 722
16.2[19] SEC Oversight Authority 724
Chapter 17. Jurisdictional Aspects 725
See.
17.1 Exclusive Federal Jurisdiction Under the Exchange Act; Concur
rent Jurisdiction Under the 1933 and Other Securities Acts 725
17.1[1] The Jurisdictional Mosaic 725
17.1 [2] Exclusive Federal Jurisdiction Under the Exchange Act 727
17.1 [4] Federal Supplemental (or Pendent) Jurisdiction Over
State Claims 728
17.1 [6] Preemption of State Jurisdiction in Securities Class Ac
tions 728
17.2 Subject Matter Jurisdiction—Use of the Jurisdictional Means 728
17.4 Extraterritorial Application of the Securities Laws; Their Rele
vance to Foreign Issuers and to Transactions in Foreign Mar
kets; Antifraud Provisions 730
17.4[1] Extraterritorial Jurisdiction Under the Antifraud Provi¬
sions . 730
17.4[2] 1933 Act Registration and 1934 Act Reporting Require
ments for Foreign Issuers 731
17.4[3] Offshore Offerings of United States Securities—Regula¬
tion S — 733
17.4[6] Multijurisdictional Disclosure System for Canadian Is¬
suers 733
17.4[7] Rule 144A—A Secondary Domestic Market for Unregis
tered Securities of Foreign Issuers 734
Chapter 19. Debt Securities and Protection of Bondholders—
The Trust Indenture Act of 1939 — 735
See.
19.1 Introduction to the Trust Indenture Act of 1939 735
19.2 Operation of the Trust Indenture Act of 1939; Exemptions 737
19.3 Qualification Under the Trust Indenture Act 740
19.4 Trustee Qualifications 741
19.5 Qualification of the Indenture; Required Provisions — . 744
19.6 Duties of Trustee When the Issuer Defaults 744
19.7 Enforcement of the Act; Remedies for Trustees' Breaches of
Duties _. 745
19.8 Overview of the Trust Indenture Act's Registration and Disclo¬
sure Requirements 745
Chapter 20. Federal Regulation of Investment Companies—The
Investment Company Act of 1940 747
20.1 The Investment Company Act of 1940: Background and Scope 747
20.2 The Relationship Between Investment Companies, Investment f
Advisers, and Underwriters 751 J
20.3 The Definition of "Investment Company"; The Problem of the f
Inadvertent Investment Company 753 |
Page
See.
20.4 Companies Covered by the Investment Company Act—Statutory
Defmitions, Exemptions and Classification 754
20.4[3] Classiflcation of Investment Companies 754
20.5 Regulating the Distribution and Pricing of Investment Company
Shares — 756
20.5[l] Distribution and Pricing of Closed End Investment
Company Shares; Repurchases of Its Own Shares 757
20.5[2] Distribution and Pricing of Open End Investment Com¬
pany Shares 758
20.5[3] Secondary Markets for Investment Company Shares 760
20.5[4] Improper Trading and Pricing Practices 761
20.5[4][A] Late Trading 761
20.5[4][B] Market Timing 762
20.5[4][C] Breakpoint Pricing of Investment Company
Shares 763
20.6 Fiduciary Duties; Independent Investment Company Directors — 764
20.6[l] Composition of an Investment Company's Board of Di¬
rectors ~ 765
20.6[2] Duties of Investment Company Directors 767
20.6[3] Approval of the Advisory Contract 768
20.6[4] Other Investment Company Board Obligations 770
20.6[5] Enhanced Fiduciary Obligations; Investment Adviser
CodeofEthics 771
20.7 Transactions Between an Investment Company and Affiliated
Persons 772
20.8 Registration and Disclosure Requirements; Civil Liability 776
20.8[l] Investment Company Name — 776
20.8[2] Registration Requirements — 777
20.8[3] Reporting Requirements 778
20.8[5] Investment Company Sales Literature 780
20.8[6] Civil Liability; Applicability of Antifraud Provisions 780
20.9 Limitations on Advisory Fees; Transfers of Control—The "Säle"
of Investment Advisory Contracts 781
20.9[l] Investment Advisory Fees 781
20.9[2] Modification or Assignment of the Avisory Contract 783
20.10 Private Causes of Action and Civil Liability for Violations of the
Investment Company Act 784
20.10[l] Implied Remedies Under the Investment Company Act . 784
20.10[3] Standing to Sue Under Section 36(b); Right to Jury
Trial ~ 787
20.10[4] Damages in Actions Under Section 36(b) 787
Chapter 21. Investment Advisers Act of 1940 — 788
See.
21.1 Regulation of Investment Advisers; Terms and Conditions in
Advisory Contracts 788
21.2 Who Is Subject to the Advisers Act—Definitions, Exclusions, and
Exemptions 790
21.2[1] Definition of Investment Adviser— 790
21.2 [2] Exclusions From the Definition of Investment Adviser — 793
Page
See.
21.2[2][A] Exclusions Generally; Exemptions Distin
guished 793
21.2[2][B] Exclusion for Broker Dealers 793
21.2[2][C] Financial Planners 794
21.2[2][D] Exclusion for Publications Rendering Im¬
personal Investment Advice 794
21.2[3] Exemptions from the Investment Advisers Act 796
21.3 Investment Adviser Registration and Reporting Requirements 798
21.3[1] Federal Registration and Reporting Requirements 798
21.3 [2] Division of Federal and State Jurisdiction— 800
21.4 Prohibited Practices; Sanctions and Penalties 801
21.4[1] Prohibited Investment Adviser Practices — 801
21.4[1][A] Fraudulent Practices — 801
21.4[1][B] Fraudulent Advertising 803
21.4[1][C] Limitations on Cash Referral Fees 804
21.4[1][D] Limitations on Advisory Fees 805
21.4[1][E] Investment Advisers and Misuse of Non
public Information 805
21.4[1][F] Investment Adviser Supervisory Obli¬
gations 806
21.4[2] Absence of Implied Remedy for Fraud but Recognition of
Implied Right of Rescission 806
Chapter 22. Special Problems and Overview of Related Laws ~~ 808
See.
22.1 Related Laws—Introduction — — —. 808
22.1[1] Relationship of Federal Securities Law to State Law and
How the Sarbanes Oxley Act Altered the Balance 808
22.1[1][A] Differing Coverage of State Corporate Law
and Federal Securities Law 808
22.1[1][B] The Sarbanes Oxley Act of 2002 809
22.1[2] Related Federal Regulatory Laws—Overview — 810
22.2 The Foreign Corrupt Practices Act 812
22.2[1] Substantive Prohibitions of the Foreign Corrupt Prac¬
tices Act — 813
22.2[2] Internal Controls and Disclosure Obligations 814
22.3 Securities Fraud and the Racketeer Influenced and Corrupt Or
ganizations Act (RICO) 815
22.3[1] RICO: An Overview 815
22.3[2] RICO Predicate Acts 815
22.6 The Intertwining of Financial Services: Commercial Banks, In¬
vestment Banking, and Investment Services 815
22.6[1] Repeal of Former Barriers to Intertwining of Financial
Services 815
22.7 Derivatives Regulation Under the Commodity Exchange Act 816
22.7[1] Overview of Commodities Markets and Regulation 816
22.7[2] Commodities Trading Professionals 821
22.7[3] Investor Remedies Under the Commodity Exchange Act 822 j
Appendix: Westlaw Research 827 I
Table of Cases 847 1
Index ggj I |
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| discipline | Rechtswissenschaft |
| discipline_str_mv | Rechtswissenschaft |
| edition | Rev. 5. ed. |
| format | Book |
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| illustrated | Not Illustrated |
| index_date | 2024-07-02T16:48:48Z |
| indexdate | 2024-07-09T20:54:00Z |
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| title | The law of securities regulation |
| title_auth | The law of securities regulation |
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| title_short | The law of securities regulation |
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