Tuesday, December 04, 2012

In Letter to SEC Chair Schapiro, House Oversight Chair Asks that Regulations Implementing JOBS Act Ending of Reg. D Ban on General Solicitation Be Finalized by Dec. 14

Rep. Patrick McHenry (R-NC), Chair of the TARP and Financial Services Subcommittee of the House Oversight Committee, urged SEC Chair Mary Schapiro to complete the final regulations implementing Section 201 of the JOBS Act by the end of her chairmanship on December 14, 2012. In a November 30, 2012 letter to Chairman Schapiro, Chairman McHenry said that the SEC’s delay in implementing Section 201 is a significant obstacle to capital formation and economic recovery. The House oversight Chair also said that documents provided by the SEC to the Committee implied that Chairman Schapiro intervened to delay implementation of Section 201 in an effort to appease special interest groups and out of concern for her legacy as SEC Chair.

The SEC has proposed regulations eliminating the prohibition on general solicitation in offerings conducted under Rule 506 of Regulation D so long as all of the purchasers are accredited investors. The proposal implements Section 201 of the Jumpstart Our Business Startups (JOBS) Act, which removes the restriction on general solicitation for private offerings in an effort to assist companies in attracting investors and raising capital. The SEC proposes to require issuers that use general solicitation to take reasonable steps to verify that all of the purchasers are accredited investors. 

While the JOBS Act required the SEC to implement  Section 201 by July 4, 2012, noted Chairman McHenry, the SEC did not propose the implementing regulations until August 29. The SEC’s decision to propose a rule eliminating the Regulation D ban on general solicitation as directed by Section 201, rather than adopt an interim final rule, added extraordinary delay to the effectuation of this critical reform, said Rep. McHenry, and was also against the advice of career professional staff. Documents submitted to the Committee revealed that as early as May of 2012 the professional underwriting staff in the Corporation Finance Division, with the advice of the Office of General Counsel, had concluded that an interim final rule was the most practical, responsible, and legally appropriate means of implementing Section   201.

The SEC staff continued to refine the interim final rule with plans to place the release for the interim final rule on the SEC’s open meeting agenda for August 22, 2012. A sudden turnaround to proceed with proposed regulations rather than an interim final rule was troubling to Chairman McHenry in this context since it reflected a decision to override the long-held conclusions of Corp Fin staff and the Office of General Counsel. The possibility that Section 201 will not be implemented in 2012 compounds the potential impropriety of this decision.

Documents also clarified that SEC Commissioners and SEC staff believed that a proposed period for comment would be of limited substantive value and that the decision to override the recommendations of the staff disrupted the ability of the Commission to function collegially and cooperatively. In Chairman McHenry’s view, the draft release being circulated by SEC staff was informed, professional and meritorious and warranted the immediate implementation of an interim final rule.

The comment period for the proposed regulations closed on October 5, 2012, noted the House leader, and the SEC staff have had almost two months to consider and respond to submitted comments. He emphasized that further delay in implementing Section 201 is unacceptable.

In a letter of August 16, 2012 to Chairman Schapiro, Rep. McHenry noted that the SEC’s decision to propose a rule eliminating the Regulation D ban on general solicitation as directed by Section 201 of the JOBS Act, rather than adopt an interim final rule, means that the Commission is unlikely to finalize the rule until next year. By ``kicking the can down the road,’’ noted Chairman McHenry, the SEC is abdicating its responsibility under the law and ignoring the will of Congress and the President.

In that earlier letter, Chairman McHenry requested the following information from the SEC by August 30: all documents and communications between or among SEC Commissioners and staff referring or relating to potential SEC action to implement Section 201 of the JOBS Act; all communications between SEC Commissioners or staff and any outside party referring or relating to potential SEC action to implement Section 201; all documents, including legal memorandum, prepared by the SEC’s Office of the General Counsel, referring or relating to potential SEC action to implement Section 201.


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