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W1: Introduction to the Field of Securities Regulation 33 Act 2(a)(11)

security excludes derivatives (eg futures), which are governed by (1) CFTC

(be/c CEA makes it illegal to enter into futures K unless standardized & governed

by CFTC), whose jx preempts & excludes SEC; (2) state insurance (but CDS

unregulated and dont net out) & (3) gambling agencies be/c 2000 CFMA said

neither CFTC or SEC could regulate them so long as entered into be/w

sophisticated parties & customized/bespoke. Includes options (S-8 for 701

compensatory continuous shelf; 4(2)/506 for warrants) so need to register or get

exemption.

SEC divisions: (1) corp fin; (2) enforcement (only one w/ local offices be/c

need to sue locally); (3) investment mgmt (40 + Advisers Act); (4) trading &

markets (broker-dealers & exchanges)

Retail (equity) vs professionals (debt) but debt dwarf equity & 2 trading

dwarf 1 (issuances) markets.

The Rise of Derivatives:1999 GLBA (repealed Glass-Steagall & formed huge

global financial firms that play in all fields including unreg deriv space) 2000

CFMA (handcuffed CFTC in that deriv provided were negotiated & be/w

sophisticated parties were officially unregulated) 2010 Dodd-Frankalso hasnt

done much for deriv but only says CFTC & SEC will make rules.

Overview of the Major Securities Regulatory Statutes

33 Securities Act: governs issuances of securities (offerings& resales). Rule

405 definitions.

2(a)(1) security: any investment but excludes currencies. But 2A of33

Act & 3A of 34 Act exempt swaps from definition.

3 exempted securities: govt securities and per 3(a)(2) insurance Ks and

3(a)(8) also says insurance is not an investment K; 4 exempted txns: 4(1):

txns by any person other than an issuer, UW or dealer [permits 2 trading];

4(2) txns by an issuer not involving any public offering [fundamental private

placement exemption, also good for warrants = rule 506]; 5 (drives

fundamental structure): 5(c)no offerunless reg filed; covers up to filing;

QP5(a)no sale unless reg statement is effective; post-effectiveand

5(b) reqts that kick in at filing and continue through & beyond effectiveness;

WP; usually 60 days: 5(b)(1) must satisfy 10 disclosure reqts

(prospectus reqts), and 5(b)(2) cant deliver security after sale unless

accompanied by prospectus but has been liberalized via rule 172 (need not

deliver hard copy once filed w/ SEC).

o During QP pre-filing, nothing; during WP post initial filing amendments

are made and bankers go on roadshow w/ prelim prospectus (lacks

pricing but soft circle) permissible to make offers but sales can only be

made once reg goes effective.

6 reg then fee to file 7 info reqd in reg statement (bare minimum is that

reqd per SchedA to the 33 Act)8 effective date of reg statement: 20th day

after filing or such earlier date as SEC says (nobody relies on 20 days and so

everyone files a delaying statement)10 info reqd in prospectus (keys

back to 5 but basically whatever SEC requires)11 & 12 liabilities to

purchasers (but note UWs not purchasers though UWs are separately liable to

purchasers under 11(a)(5))18 fed preemption/exemptions from state

securities laws regs (no state quals for covered securities)27A safe-harbor for forward-looking statements (1995 PSLRA) leading to boilerplates

in all 10Qs & 10Ks advising no reliance 28 broad rulemaking authority

granted to SEC

o Rule 701 employee stock option plans (only for employees, even if

unaccredited)

34 Exchange Act: Rule 12b-2 definitions. Public reporting reqts for IPOd

companies; antifraud, insider trading (10b-5) & broker-dealer regulations.

Governs broader terrain than 33 Act; sets up continuous disclosure system for

public companies; also governs tender offers (takeover bids where bidder

contacts SHs directly) & 10b-5 insider trading.

Typical disclosure cycle (w/ 8-Ks peppered throughout): (1)12/31 end of

fiscal period: shortly hereafter have earnings release, then file 10-K w/

exhibit (which contains (i)annual reportto SHs w/ financials & MD&A +

(ii)proxy statementper Sched 14A w/ detailed disclosures on exec comp,

corp governance, directors, SH proposals and things on which Im asking for

votes)(2)3/31 earnings release + 10-K(3)6/30(4)9/30.

1939 Trust Indenture Act: if selling bonds to public, must have indenture (trustee

who acts on behalf of bondholders & interfaces w/ issuer). 1940 Investment

Company Act (40 Act): regulated mutual funds but w/ big exceptions (one is

hedge funds). 1940 Investment Advisers Act (Advisers Act): sought not to

regulate investment advisers so much as to keep track of who is in industry

(registration reqts w/ SEC for those using mails to conduct investment counseling

business). 2002 SOX (Public Co Accounting Reform and Investor Protection

Act): heavy criminal provisions & invaded realms of corp law & governance. Set

new or enhanced standards for all US public company boards, mgmt & public

acct firms. N/A to private co. SEC under SOX created PCAOB charged w/

overseeing, regulating, inspecting & disciplining accounting firms in their roles

as auditors of public companies.

Blue sky regs: KS 1st copied England in 1911; used to require lots of disclaimers

and had to comply w/ merit regs (PA) so needed both state & fed exemptions

until National Securities Markets Improvement Act (1996) partially preempted

state securities laws & increased SEC jx. NSMIA also said if doing a private

placement under 4(2)/506 then can just file your Form D w/ the state but states

then imposed 5 day window and some made it felony if fail (KS) others

fingerprint signatories (NH, AL) now file form D in 15 days (but NY still need

to file form99). In CA 25102.1 ~ rule 506.

o 33 Act 18(b)(4)(D) is fed preemption of state blue sky laws but only if

you sell pursuant to SEC rules & regs aka506(only case where they

are covered securities and thus preempted)! notif doing caselaw 4(2)

W2: What Is a Security?Generally any txn used to obtain long term capital

(even exotic vehicles like franchise agmts, rental condos & LPs but notGPs). Its

where you expose something riskless to risk in order to turn a profit.

(1) stock(equity) always but see Forman NY co-op outlier was stock;

Landreth (if called stock its a security);

(2) bonds/debentures/notes (debt). Reeves (1990) family resemblance test

presumes notes are securities but can be rebutted via 4 factors: (1)motivation

for txn (if profit, probably a security), (2) existence of risk reducing factor

(eg, another regulatory framework), (3) reasonable expectations of the

investing public, (4) plan of distribution (trading?). But generallylook @

economic reality of txn if resembles this family of (short-term financing, or

collateralized) txns then not a security: notes in a consumer financing, short-

term notes secured by a mortgage, short-term notes secured by a lien on a

small business or some of its assets, notes evidencing a character loan to a

bank customer, short term notes secured by an assignment of A/R, notes

which formalize an open acct debt incurred in ordinary course of business,

notes given in connection w/ loans by commercial banks. Holder & its

sophisticationalso helpful: [commercial bank loan] promissory note (retail)

nota security but bond & debenture sold to professional investor is.

(3) investment Ks (other) will include PSHPs & LLCs.Howey (orange grove

interests were securities) seminal case; mere offer = s ecurity and ct imported

blue sky laws jx over capital-raising for profits, saying these leasebacks

were investment Ks; test: (1)investmentof $ (2) due to expectation of profits

arising from (3) a common enterprise(4) and such profits derive solely

predominantly from efforts of promoter or 3 rd pty. Thus under this def txns

involving real, personal property, metals, franchises have been deemed

investment Ks. But see Marine Bank v Weaver (there may still be an

exception for privately-negotiated txns)

o prong 3 common enterprise split: SEC v Life Partners Inc holding that

viatical settlements were notsecurities be/c no common enterprise since

minimal to no post-purchase efforts but see Mutual Benefits (11 th 2005

saying they were securities; agrees w/ LPI Wald dissent)

o 3rd prong common enterprise: (1) horizontal (expenses, profits shared) &

(2) vertical:individual investors profit is tied to (i) efforts of promoter

(broad; looks like last prong of reliance on others and if satisfied wipes

that category out) or (ii) profits/returns to promoter (strictvertical). SEC

says any works (wants broad jx so favors vertical) but cts disagree saying

need horizontal interdependency among investors (tightening prong 3)

but loosening prong 4 (solely became predominantly derived from

efforts of others to find investment K) see Koscot (profits inextricably

tied to promoters involvement so franchising agmt is a security) focus

on verticalitybut but for promoters efforts test ; some cts willing to

go w/ just vertical.

oInvestment can existeven if just fixed returns (Edwards) but involuntary

non-contrib employee plan w/o choice is not(Daniels exempting co

bonus plans).

o LP/LLC interests (rely on GP for profits) security but GP not. But

seeWilliamson v Tucker (5th 1981) JV interests in parcel of

underdeveloped real estate were securities and GP/JV not a shield from

securities laws (if claim GP/JV notinv K, must show dependence on

promoter/3rd pty such that unable to exercise control over PHSH). Look

to control.

2(a)(3) sale broadly defined as any offer to sell a security/interest for value,

including options but excluding discussions w/ UWs 33 Act 2(a)(3) includes

for value whereas 34 Act 3(a)(14) excludes it (broader).

W3: 33 Act Registered Offerings

11 fraud liability on reg statement: 11(a)broad in post effective period; can sue

anyone who signed the reg statement (CEO, directors, CFO) even 11(a)(3) those

about to become directors, 11(a)(4) accountants and even lawyers and 11(a)(5)

every UW. exemptions via affirmative defenses (but n/a to issuer). (e) limits UW

liability to value of securities sold; 11(f) J&S; 11(g) liability cap on price of

securities sold

11(b)(3)(A) if they had reasonable ground to believe the info (UW due

diligence defense); (B) if expertized and had believed reasonably after his due

diligence; (C) if relied on an expert

12 broad liab to prospectus & oral communications; 14 cant K out of

securities laws; 15 liab of controlling persons under 11-12 J&S liable; 17

govt uses to prosecute: 17(c) says 3 exemptions (for classes of securities) n/a

so antifraud applies irrespective of kind of securities; 20 SEC equipped w/investigative, subpoena, 8A cease & desist orders, can order disgorgement,

impose D&O bar.

Gun-jumping: offers during QP (pre-reg); normally can trigger 12(a)(1)

rescission right but well-known-seasoned-issuers (WKSIs) $700M market

cap exempt (also applies to final UW agmt). But see Loeb, Rhoades

egregious gun-jumping (cant whip up fake interest during QP; applies even

to news or anything that might condition the market); but exception to QP

in Chris-Craft/Rule 135 announcements that are permissible and wont rise

to offer level (2nd cir agreed w/ dark horse acquirer in that must comply w/

5(c) & Rule 135, saying issuer can disclose intent to make a public offering,

type of security, manner and purpose but not price or UWs).

Pre-QP rules: 163A applies to issuers & agents only and exempts issuer

communications > 30 days before filing reg statement (that dont refer to offers)

QP (no offers per 5(c)) rule s/excep tions : 135 (written w/ legend sans price)

only applies to written communications and only invoked as a shield during QP;

163 (WKSIs can gun-jump but must file; so WKSIs can use FWPs at any time);

168 (reporting issuers & certain seasoned foreign private issuers not most IPOs exempted from factual business info or forward looking statements / MD&A /

guidance); 169 (IPO issuer to customers & suppliers; does notcover forward

looking info; limitedsafe harbor forpreviously-released info). But note once

5(c) satisfied can make oral offers subject to 5(b) (requires comply w/10(b)

prospectus disclosure)

Regulating broker-dealers during registration: 133 (cant use research to

market a deal); 137 (but if not in syndicate of banks can publish research);

138 (applies only to reporting companies - if will participate can continue to

publish research about diff classes of securities that wont convert into those

offered); 139 (BDs can report on and even publish recommendations on large

cap issuers).

During WP (while amending reg statement; offers & prelim prospectus red

herring per 10(b) OK but no sales) exceptions: 134 (tombstone); 164 + 433

(FWP defined Rule 405 definitions = other form of written communication other

than prelim prospectus; aka writing that constitutes offer outside prelim

prospectus during WP but in 2005 SEC said permissible if satisfied 10(b)

along w/ rest of securities offering reform release which downsized QP = all

rules in 160s) 2(a)(10) prospectus broad. 460 (distribution of prelim

prospectus); 461 (acceleration of effective date)

10(a) final prospectus (w/ price & UW names) + 10(b) red herring (pre-

effectiveness of reg statement; omits price)

During WP SEC permits: oral offers; tombstones per 2(a)(10)(b)or

identifying statement per 134; prelim prospectus that meets 430/430A;

prelim summary prospectus prepared by issuer in compliance w/431;

brokers card under 134(d).

FWP 433 (cant contradict anything in reg statement): WKSIs ( $700M cap)

can use anytime but must file; seasoned (can use S-3; $75M float) need not

precede or accompany w/ copy of prelim but must have legend; non-

reporting/unseasoned (cant use S-3) must either file reg statement or

precede/accompany FWP w/ copy of prelim prospectus (but can hyperlink);

UWs must also file FWPs they use (unless memo to limited group of

institutional investors) and roadshows count as FWPs but reg FD exempts

some things so issuer need not disclose everything in roadshow but ifaccessible broadly, graphic, electronic or in any way written (405) its an

FWP (+433 must file). 164 post-filing FWP (including those of UWs).

Delivery during WP: 34 Act Rule 15c2-8 (pelim prospectus must be widely-

distributed in order to be declared effective so print enough!); 15c2-8(b) for

IPO issuers then says must deliver prospectus w/in 48 hours of purchase.

Post-effective period: 430A (permits reg statement to go effective w/o pricing,

hence how sequence changed to effective, then pricing amendment filed per

424(b)) but limit: cant cut back offering volume by 20%; notwithstanding

5(b)(2) (cant deliver securities unless accompanied by final prospectus), 172

(access = delivery).

W4: 33 Act Registered Offerings: the reg statement itself

Form D (Reg D) precedes S1 (default form); ignore reg A forms (req offering

circ); S3 multipurpose but for seasoned & shelf reg; S4 for M&A securities when

offered as consideration for target; S8options & shares to be acquired; other

forms for exemptions per Reg D or 144.

S1 info reqd per Item 501 in Reg S-K (lays out 33 Act reporting reqts): (1) plain

English per rule 421(d) of reg C; (2) front cover pg must have delaying statement

legend per Rule 473; (3) limit outside cover pg of prospectus/red herring (which

is maj of reg statement) to include name, title & amount of the securities, offering

price, market for securities, risk factors. Item 2 points to info reqd per item 502 of

reg S-K. Item 503 summary info, risk factors but must be meaningful, withexamples and not boilerplate per Easterbrook 7th, ratio of earnings to fixed

charges. Item 303 MD&A forward-looking statements requiring granular

discussion of financials and what drove movements therein but immunizedper

27A of 33 Act & 21B of 34 Act (from PSLRA). Item 504 use of proceeds. Item

506 dilution. Items 301-8 financials (signed accountants report, balance sheet,

earning statement, cash flows, footnotes to the financials, table of exhibits,

signatories).

W5: 34 Act Filings by Public Co: note reg issuance (txn-specific) vs. class

12(a) reg reqts; 12(b) procedure for registration without w/ cant effect a

securities txn on an exchange per 12(a). Then 13(a) covers what must be filed

w/ SEC (13a-1 annual report, 13a-13 10-Qs and 13a-11 8-Ks). Need to file per

13 - if you have class listed per 12(g) (exchange listed; basically concerns 500

holders) or 12(b) non-exchange listed but this refers only to a ministerial

finding of incorp docs. 12g5-1(b)(3)looks through ~ 48(a)40 Act hence FB

should have filed.

Form 10-Kend of fiscal yr reporting: WKSIs (60 days), accelerated/seasoned

( $75M public float & public for 1yr; 75 days) and all others 90 days reps

made must be accurate as of filing. 12(b)(20) works in addition to Rule 10b-5liab in case theres info that isnt c overed by risk factor line items but must still

be disclosed. Instruction D signed by registrant principal officer & maj BOD (still

req paper!). Instruction G the other annual report and per Part III incorporate by

ref from proxy (to be filed w/in 120 days) but note annual report need not be filed

in toto w/ SEC though must file 10-K + proxy. Part I cites item 101 reg S-K (the

business, risk factors). Part II requires MD&A (item 7), financials (item 8),

accounting changes (item 9), controls & procedures (item 9A), exec comp (item

10). Part III calls for stuff from proxy statement.

15(d) is the alternative to 13 becoming a public reporting company (high yield

debt securities not traded on an exchange).

Form 10-Q: WKSIs (40 days after fiscal quarter), accelerated/seasoned (40).

Form 8-K: due w/in 4 business days and per item 1.01 need to disclose any

material deal other than in ordinary course. Item 6.01 requires certain things

as exhibits to your reports (copies of material agmts) and + 1.01(b) define

materiality as per 6.01(b)(10) insider txn (D/O are parties), substantially

dependent on the txn, acquisition/sale of PPE 50% assets, material lease but per

6.01(1)(iii)(C)need not file compensatory stuff. Material means something

avg businessperson will rely upon to make an investment decision (total mix ofinfo), but includes: geographic scope of licenses, unexpected termination of a K

(1.02), acquisition/disposition of assets (2.01 made need to report twice at

signing acquisition agmt & at closing). Item 2.01(f) if co is a shell trying to go

public through backdoor still need to file form 10. Item 2.02 results of ops is the

8-K triggered by the earnings release but per 2.02(b) none reqd for the conference

call (so long as occurs w/in 48 hrs + broadly accessible). Item 2.03 off-balance

sheet obligations must also be disclosed even if only contingently liable (Enron).

2.04 triggering events w/r/t off balance sheet. 2.05 costs associated w/

exit/disposal activities. 2.06 where board concludes need to make a material

impairment charge. 3.01 receipt of notice that will be delisted. 3.02 unreg sale sof

securities. 3.03 mods to rights of securities holders (entering into high yield

facility that limits dividends pmts). 4.01 change accountants or procedures. 4.02

non-reliance on previously-issued financials (notice that will do a financial

restatement) and under 4.02(b) if you dont figure it out but your accts do you

have to report that too. 5.01 changes in control. 5.02 D/O coming/going.

Proxy Statement per reg 14A : allows voting SHs to vote by proxy; recall WKSI

10-K due w/in 60 days incorporating everything from (i) annual report + (ii)

proxy statement (filed within 120 days). Proxy card vs proxy statement (big

disclosure doc about stuff will be voting on + info re: co). Idea is everytime

soliciting proxy auth, need to disclose to SEC (& SHs). Reg 14A definitions:

proxy; solicit very broadly defined (i. request for proxy, ii. Request not to

execute proxy, iii. Influencing others to vote certain way on proxy) but carveouts

allow SHs to talk: (14a-1(e)(2)(iv)(A))press releases; (14a-2(b)(1))proxy rules

dont apply to affiliates of issuer who arent actually seeking proxy auth; (14a-

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2(b)(v)) those voicing opposition to M&A; (14a-2(b)(vi))small SHs not seeking

to vote anyone elses shares but note Sched 13D group defined 13d-5b picks up

5% active SHs/13G passive & group but distinct from proxy; (14a-2(b)(2))

solicitation made on behalf of registrant not for its direct benefit unless solicit >

10 ppl (so registrant can evade by calling chief voting officer @ Fidelity, who

then calls others); (14a-2(b)(6))can also talk so long as not w/in 2 mos SH mtg.

Rule 14a-3 basic rule requiring delivery of the proxy statement (meeting 14A

reqts); 14a-3(h) requires each proxy statement preceded w/ annual report to SHs

if it relates to an annual mtg @ which directors will get elected and must include

10-K financials designed to protect large SHs who otherwise wouldnt vote on

nonroutine matters via broker nonvote (but routine matters cut back so more

discretionary vote opportunity).Rule 14a-4 reqts as to what proxy looks like

(separate items for voting; anything substantive must be run by SH

discretionary auth). Rule 14a-6 filing reqts (plain vanilla for BOD elections, acct

ratification, SH proposals per 14a-8; approval of equity comp plan or

sale/merger/amend charter docs in which case must file w/in 10 calendar days).

Rule 14a-8 federal intervention/preemption that permits SH proposals. Rule 14a-

9 false/misleading statements/antifraud for proxies. Rule 14a-13 when co doesn't

know SHs contacts ADP/Broadbridge to send them proxies. Rule 14a-16

accommodation to web so that everytime do proxy must also be online. Sched

14A is the actual proxy form.

W6: Exempt Offerings: Caselaw 4(2): Ralson Purina only case to have

interpreted 33 Act 4(2) exemption (txns by issuer not involving public offering)

otherwise private offering not statutorily defined even though 10b-5 still applies

to them. # offerees is not what 4(2) turns on; rather(1)sophisticatedinvestors +

(2)access to all the info & principals, and employees lacked access. Sine qua non

is access & 2 ways to get it (deliver info or access=disclosure). But caselaw 4(2)

hard to do be/c hard to prove delivery or access andmust prove all offerees not

just purchasers had access. Ralston only applied if not doing 4(2).

Doran addressed sophistication(LLP interests refunded even though oil expert),

saying also need access; heldcan have public offering even to just one person.

Also see Kenton (advertised 3750% returns). Here sold sans reg statement, which

is prima facie violation but 4 factors relevant for exemption: (1) # offerees &

relationship to issuer, (2) # units offered, (3) size of offering, (4) manner of

offering (no ads). But even if all offerees insiders, exemption not guaranteed(be/c need access).

Reg D:Rule 506 (safe harbor under 4(2) per Reg D) is the umbrella (caselaw

4(2) is outlier). 3 main exemptive rules: Rules 504 (

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Johnson nabbed for not resigning or ratting client out, bad press release w/r/t

liquidity management agmt contingency obligations, issuer sending SH letter

against counsels advice & behind C&Js back, inadequate disclosure of LMP in

8-K; held counsel duty to corp & SHs so failure to advise BOD is itself an A&A

violation, and counsel cant help client in conduct lawyer knows is illegal = cant

draft bad disclosure). SEC on A&A: (i) independent securities law violation

committed by some other party, (ii) A&A knowingly and substantially assisted in

the conduct, violation, and (iii) A&A was aware or knew his role was part of

activity that was improper or illegal. Also see Fehn (core of A&A is substantial

assistance; A&A liability begins @ recklessness not reasonableness).

Criminal liability (1) Reyes (CEO of SV VC firm) indictment on options

backdating for (i) deprivation of right to honest service (this is under s ome

constitutional attack & cloud (Skilling part convicted for this but then this was

reversed); (ii) 18 USC 371 conspiracy; (iii) 10b-5 securities & mail fraud; (iv)

false SEC filing; (v) 13b2-2 falsifying books & records [classic SEC ligation

workhorse]; (vi) false statement to accountants. (2) Collins (outside counsel to

Refco, big NY deriv trading house that was hiding liabilities via related pty

roundtrip loan wash txns = shell game recall Stoneridge 10b-5): watch for

separate letters of guarantee, side letters, agmts that change terms of txns in some

way not disclosed in closing docs. (3) Brooks (outside directors who ran audit

committee of major supplier of body armor to US military DHB nabbed for

ignoring red flags; cofailing to have proper internal controls andBOD in bed w/

accountants compromised audit firm independence. Charges: 10b-5; 14a-9 bad

disclosure in proxy; 12b-20 (bad SEC doc like 10b5); 13a-1 and 13a-11; and 13a-

13 (these are basically filing false financials via 10K, 8K, 10Q). Note per reg S-T

cant file until get sig pages back. (Acct) opinion shopping also improper.

W12: Corporate Governance, Shareholder Proposals and 34 Act Rule 14a-8

34 Act Rule 14a-8 designed for SHs and tells you how to do a proxy statement

(most significant invasion of state corp law) but tool for big institutional

investors/SHs to affect corp governance. SEC flipped reqt that if unrelated to

business need not be in proxy now required anything socio-political-religious

(now deemed material) to be included in proxy and ordinarycourse of business

stuffneed notgo into the proxy statement. Now issue orgs (church groups) buy

shares just to introduce SH proposals and use 14a-8 to compel companies to put

these into proxy statements and vote on them at SH meetings. Must own $2K

shares for 1 yr (particular shares must be owned continuously) and there are

substantive bases for exclusion, including: where proposals deemed improper

under state law (so precatory proposals ensued in bylaws be/c proper). SEC also

enacted rule 452 that prevents brokers from casting votes of small retail clients as

broker sees fit for director elections (so only ppl voting shares today are big

institutions). SEC adopted new rule 14a-11 (2010) that says if 1 or a group of

SHs collectively has 3% of shares, they get to force company to put at least one

candidate (or up to 25% of BOD open seats) onto the ballot as op o candidates

(opposition candidates) and exchanges adopted listing rules too including

independent nominating committee reqt [see below]

The Impact of Sarbanes-Oxley and Dodd-Frank on Securities Regulation

and Corporate Governance. Over the years 1968 Williams Act, 1995-6 PSLRA

& NSMIA, 1998 ISTFEA (Insider Trading and Securities Fraud Enforcement

Act) Congress has done things to tweak se curities laws but really the big

structural change was 1933, then SOX. Dodd-Frank similar impact.

SOX: Fundamental objectives: (1) Remake accounting profession; lawyers in

congress wanting to oversee accountants; (2) place restrictions on corp

management; (3) ensure proper reporting and speed up rate at which they need to

report; (4) massively jack up criminal penalty structure so were taken seriously.

Many are general application laws not restricted to public companies. 2(a)(7)

defines issuerbe/c SOX mostly applies to public companies, and captures any

public reporting co. TITLE IPUBLIC COMPANY ACCOUNTING

OVERSIGHT BOARD built up BOD audit committee and acct industry cant

self-regulate anymore via FASB & AICPA. PCAOB must pre-approve all

services by auditors (whod expanded into non-audit advisory businesses) and

made up of5 members, maj not even accountants - private-sector, non-profit

corporation to oversee auditors of public companies. But see Free Enterprise

Fund challenging its constitutionality so amended such that directors serve at

pleasure of Pres (can be fired anytime).

Moreover SEC pressured NYSE & Nasdaq to pass listing rules, which it then

approved + SOX reqts

[Internal Audit Comm.] SOX indep NYSE.Nasdaq

Audit Comm. X (separate from

NYSE/Nasdaq

reqts)

X

Comp Comm. X? X

Nominating Comm. X? X

AC: everyone on it is independent; runs financials & legal compliance. CC: pure

independents. NC: decides wholl be up for election next yr so mgmt w/o control.

Maj of BOD must also be independent but significant carveouts (co charter w/

dual-class voting structure like Googles ensuring Brin & Page have full control;

grandfathering clause).

TITLE IIAUDITOR INDEPENDENCE white glove rules201(g):

prohibited activities include (1) bookkeeping or other services related to the

accounting records or financial statements of the audit client; (2) financial

information systems design and implementation; (3) appraisal or valuation

services, fairness opinions, or contribution-in-kind reports; (4) actuarial services;

(5) internal audit outsourcing services; (6) management functions or human

resources; (7) broker or dealer, investment adviser, or investment banking

services; (8) legal services and expert services unrelated to the audit; and (9) any

other service that the Board determines, by regulation, is impermissible. 202.

Audit Committee must preapprove auditors andany non-audit services including

tax services. 203. Audit partner rotation. 204. Audit reports to audit committee

on major judgment calls. 205. Anti-revolving door (unlawful for public acct

firm to perform for issuer an audit if CEO/CFO/controller/CAO was employed by

that audit firm & participated in the audit within 1 yr preceding the start of the

proposed audit. TITLE IIICORPORATE RESPONSIBILITY 301. Public

company audit committees.301(m)(1)(A)AC responsibilities: appointment,

comp & oversight over the work of any audit firm, including resolving

disagreements between auditing firm & management; auditing firm shall report

directly to AC; independence:AC member independence prohibits

(i) accepting any consulting, advisory, or other compensatory fee from the issuer;

& (ii) being an affiliated person of the issuer or any subsidiary thereof. 301(m)

(4) public co anonymous complaints hotline; also can have outside counsel

review them for extra prudence to avoid conflicts of interest. AC free to engage

its own advisors. 302 enhancements to reporting structure. Corporate

responsibility for financial reports must sign & rep. Also classic 10b-5/12b-20

liab attaches but see 906 (broader than 302).303. Improper influence on

conduct of audits extends to outside counsel. 304. Forfeiture of certain

bonuses and profits = clawbackbut seeDodd-Frank(predicated on strict liab!).

305. O&D bars. 306. Pension fund blackout periods requires uniformly

applying policies so bigwigs cant sell as in Enron. 307: Rules of professional

responsibility for attorneys report material violations of securities laws.TITLE

IVENHANCED FINANCIAL DISCLOSURES 401. Disclosures in periodic

reports if use non-GAAP must translate and present side-by-side.402.

Prohibits personal loans to execs.403. 16 reporting D/O if change holdings

in stock must be reported w/in 2 days! 404. Management assessment ofinternal

controls (doubledaudit costs).406. Code of ethics for s enior financial officers.

407. Audit committee must have a financial expert. 409. Real time issuerdisclosures.TITLE V ANALYST CONFLICTS OF INTEREST (i-bank

internal walls). TITLE VIIIcriminal liab stuff 802. Criminal penalties for

altering documents grabs you even before pendency, imminence or threat! 20 yr

felony to destroy, alter, modify, cover up, make a false entry in any tangible

record w/ the intent to impede proper administration of any matter under the jx of

any federal agency (codified under 18 USC 1519 obstruction of justice statute).

Not limited to public companies. Dont delete docs/emails!803. Debts non-

dischargeable cant get out of convictions through bankruptcy. 804. S/L

securities fraud extended. 805. Fed sentencing guidelines enhanced. 806.

Protection for whistleblowers others are 302 anon hotline, 1107 10-yr felony

for retaliation & D-F bounty program.807. 25 yr criminal penalty for securities

fraud & deliberately left it undefined to ensure broad prosecutorial discretion.

TITLE IXWHITE-COLLAR CRIME PENALTY ENHANCEMENTS 902.

Attempt & conspiracy same penalties as primary crime.903. Criminal penalties

for mail and wire fraud up 5 20 yrs, including any false statement!904.

ERISA felony 1 10 yrs.905. Amendment to sentencing guidelines relating to

certain white-collar offenses.906. Corporate responsibility for financial reports

(CEO/CFO certifications reqd).TITLE XICORPORATE FRAUD ANDACCOUNTABILITY 1102. Tampering w/ the record (20 yr) looks like SOX

802. 1103. Gives SEC temp freeze auth to prevent money from moving. 1104.

Amendment to the Federal Sentencing Guidelines.1105. SEC auth for D&O

bars.1106. Felony & penalty provisions under 34 Act 32(a) up to 20 yrs if

willfully violate an SEC rule.1107. Retaliation against informants.

Dodd-Frank. Objectives: regulate derivatives; create consumer protection agency;

some limited provisions relate to corp gov and our c ourse. Subtitle BIncreasing

Regulatory Enforcement and Remedies 922: whistleblower incentivizing

provision. 929M. A&A punished to fill extent of the underlying crime if SEC

brings actions under 33 Act 20(b) or 20(d), 48 or 40 Act (codifying

Stoneridge (that although there is no private right of action for A&A violations of

10(b), SEC enforcement powers are live). 929N. ditto for 209 Advisers Act.

929O. Aiding and abetting standard of knowledge satisfied by recklessness.

Subtitle EAccountability and Executive Compensation 951. Shareholder vote

on executive compensation disclosures say on pay votes every 3 yrs. 952.

Compensation committee independence (in addition to AC). 953. Executive

compensation disclosures. 954. Recovery of erroneously awarded comp

spanning 3 yrs preceding date issuer was reqd to prepare acct restatement. 955.

Disclosure regarding employee and director hedging (SEC will make rules).

956. Enhanced compensation structure reporting prohibits certain comp

arrangements = Congressional wage controls!. 957. Voting by brokers (brokers

dont get to cast discretionary vote idea ratified; nor do they have a say on SH

pay votes). Subtitle GStrengthening Corporate Governance 971. Proxy access

(giving SEC auth to institute SH proxy access). 972. Disclosures re: why issuer

chose to either have same or diff person serve as chair of BOD or not to do so

(many SH activists say CEO should not be chair of BOD).