Friday, April 23, 2010

Senate Reform Bill Section 926 Hotly Contested at State Level

Section 926 of the Senate reform bill, added March 15 by Senator Dodd, has become the most hotly contested provision, to date, to affect the states, with both the state securities regulators under the North American Securities Administrators Association (NASAA) and private industry opposing it, but for different reasons.

Section 926 concerns Rule 506 of federal Regulation D, currently the most widely used exemption that became federally preempted from state regulation when the NSMIA Act was adopted in 1996. A belief held by current NASAA President Denny Crawford that a large number of Rule 506 offerings, because they were unregulated at the federal and state level, ultimately led Senator Dodd to draft Section 926.

Section 926 requires the SEC to: (1) conduct a rulemaking within 120 days after the Act’s enactment to determine if the covered securities status of certain Rule 506 offerings should be removed based on the offering size, number of offering states and the nature of the offerees, thereby giving those offerings back to the states to regulate; (2) review any Rule 506 filing within 120 days and remove its covered security status if the SEC fails to review the filing in the 120-day period, unless the issuer made a good faith effort to comply with the terms of the offering, and the terms not complied with are insignificant as compared to the whole offering; and (3) implement procedures not later than 180 days after the Act is passed and after consulting with the states to promptly notify them after completing its review of Rule 506 offerings.

NASAA opposes Section 926 because it doesn’t give exclusive regulation of Rule 506 offerings back to the states by outright repealing Section 18(b)(4)(D) of the NSMIA Act. Blue Sky attorneys oppose Section 926 because it’s premised on an unrealistic expectation that the SEC will review particular Rule 506 offerings to determine their covered securities status.

For Section 926, please see pages 816-819 here.