Noting press reports that the SEC plans to adopt an interim final or temporary rule at its August 22 meeting lifting the ban on general solicitation and advertising in private offerings as required by the Jumpstart Our Business Startups (JOBS) Act, former SEC Commissioner Bevis Longstreth and Chief Accountant Lynn Turner expressed strong opposition to any such circumvention of the public comment process for this rulemaking. In a letter to SEC Chair Mary Schapiro, also signed by former Acting SEC Chief Accountant Jane Adams and a number of consumer groups, they urged the SEC to abandon this rushed approach which, in their view puts vulnerable investors at risk. The SEC should instead conduct a fully transparent rulemaking process based on careful consideration of the significant potential harm to investors that is likely to result from eliminating the general solicitation ban and the best ways to eliminate or minimize those risks.
In the past year, the letter continues, the Commission has appeared to be all but paralyzed by the obligation to perform cost-benefit analysis in support of rulemakings required under the Dodd-Frank Act. As a result, the Commission has fallen far behind schedule in fulfilling its financial reform rulemaking responsibilities, with many rulemakings now more than a year past their statutory deadline, including a Dodd-Frank mandated rulemaking that, like the JOBS Act, requires amendments under Rule 506, but the deadline for this rulemaking passed more than one year ago.
In light of this, said former Commissioner Longstreth and Chief Accountant Turner and the other signatories, it is unseemly for the SEC to rush ahead with JOBS Act rulemaking to the point of circumventing the requirements of the Administrative Procedures Act, while its responsibilities under Dodd-Frank remain unfulfilled.
Moreover, the signatories pointed out that the SEC staff recently outlined its interpretation of the agency’s responsibility to consider the full range of cost and benefits in rulemaking, even when that rulemaking is subject to a congressional mandate. While the signatories to the letter do not agree with the scope of the obligations implied by the SEC staff’s recent memorandum, and are particularly concerned that it over weights quantifiable costs to industry, such as compliance costs, in comparison with benefits to investors and the securities markets, they do believe that any policy the Commission adopts with regard to cost benefit analysis must at a minimum be applied equitably.
In the view of the former SEC senior officials, the Commission cannot apply a less rigorous approach when analyzing the potential harm to investors and the markets from weakening investor protections, as this regulation would do, than it applies when considering the cost of regulations to strengthen investor and market protections, such as those required under the Dodd-Frank Act. On the contrary, they noted, protecting investors and promoting market integrity remain the primary responsibilities of the agency. Moreover, a careful analysis is particularly important in the current circumstance, as Section 201(a)(1) of the JOBS Act requires a profound change in the regulation of nonpublic offerings, which necessitates a careful, thorough analysis by the Commission of the significant costs to investor protection and the integrity of the securities markets that abolishing the general solicitation ban may cause.
According to the signers of the letter to Chairman Schapiro, adopting an interim rule in the current circumstances would violate the spirit and letter of the Administrative Procedures Act. Proposed rules must be published for at least thirty days to allow for public notice and comment. The Commission may adopt an interim rule or temporary rule or interim final rule without prior notice only if it for good cause finds that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.
In this instance, emphasized the signers of the letter, there is no conceivable basis on which the Commission could show good cause to disregard notice and comment requirements. The ban on general solicitation in Rule 506 offerings has been in place for decades, they noted, and thus it cannot reasonably be maintained that some emergency or special circumstances require that the ban be suspended during the 30-day or longer pendency of the comment period. If Congress had wanted to obviate compliance with the APA, they reasoned, it would have done so through legislation. Instead, Congress chose to submit the general solicitation provision to the rulemaking process, which Congress undoubtedly expect to be conducted consistent with applicable law.
Nor can it be reasonably argued that Section 201(a)(1) constitutes adequate notice under the APA. Abandoning the general solicitation ban raises a myriad of issues that belie any reasonable claim that affected parties are on constructive notice as to what the resulting rule will entail. The SEC’s recent record in APA challenges where affected parties had the benefit of notice and comment counsels against adopting rules without providing any notice period at all.
Moreover, relying on an interim rule suggests that the Commission plans to come back and adjust the rule at a later date after it has had the benefit of public comment. The former SEC Commissioner and Chief Accountants described this as a risky practice under the best of circumstances. The political pressure that has been placed on the Commission to rush to adopt this regulation and other JOBS Act regulations would make it difficult, if not impossible, for the SEC to backpedal on any interim forms of general solicitation that, after considering public comments from all affected parties, it decides should not be permitted, but that issuers may have begun to engage in.
The signatories to the letter also contended that it would simply not be possible for the Commission to adequately consider by August 22 the potential adverse impact of eliminating the ban on general solicitation, including the risk of an upsurge in abusive private equity and hedge fund advertising and marketing practices based on misleading performance claims. Similarly, the effect of other regulatory changes made pursuant to the JOBS Act, such as the broker-dealer exemption for private offering platforms, must be thoroughly considered in relation to the operation of Rule 506 before amending the rule.
They noted that for decades the Commission has included the ban in Rule 506 offerings for good reason. General solicitation and advertising present special risks for investors and the integrity of the securities markets, they said, especially in light of the inadequacy of the current accredited investor standard. All of these issues must be reexamined in light of the heightened risks that result from eliminating that ban.
More broadly, the former SEC officials and consumer groups emphasized that the JOBS Act was drafted and adopted with little or no consideration of the significant harm it could inflict on investors and on their confidence in the integrity of the capital markets. For much of the Act, there is relatively little the Commission can do through rulemaking to minimize that harm. But this particular rulemaking is an exception, said the signatories, where the rulemaking approach adopted by the Commission can either afford investors substantial and much needed protections or leave them vulnerable to devastating harm. The signatories cautioned that for the SEC to conduct rulemaking in this area through an interim final or temporary rule, without adequate consideration of the potential impact on investor protection and market integrity, and without a meaningful opportunity for public comment on its proposed regulatory approach, would be a further ``slap in the face’’ for investors whose concerns were ignored during the legislative process.
Finally, in a direct appeal to Chairman Schapiro, the signatories urged the Chair to show the same leadership she demonstrated when she spoke out against the JOBS Act’s rollback of vital investor protections during Senate consideration of the legislation, to stand up against pressure to move forward with rulemaking in a hasty and reckless fashion, and to demand a full opportunity for public comment and full consideration of the potential impact on investors before proceeding with rulemaking in this area.