House Republicans have pressed the SEC to finish the rule, using a hearing last week to ask Commissioner Elisse B. Walter, 63, why it wasn’t done yet.
Last year, the SEC’s proposal sparked internal fireworks because its staff had recommended adopting the rule immediately without seeking public comment. Doing so would have allowed the SEC to finish the rule on the time frame prescribed by Congress.
Former Chairman Mary Schapiro backed away from that approach after receiving complaints from Roper and others, and worrying she would be “tagged with an anti-investor legacy,” according to internal SEC e-mails published by the House Oversight and Government Reform Committee. The switch angered Commissioner Daniel M. Gallagher, a Republican appointee, who said he was “furious” about the change.
An SEC advisory committee composed of investors unanimously recommended in October that conditions be added to the proposal. For example, the committee said the rule should outline how companies verify an investor is wealthy enough to participate in these types of less regulated investments. Those steps could include relying on information from brokers, banks or accountants, the committee said.
The JOBS Act gave the SEC the authority to include in the rule “reasonable steps” to verify an investor is qualified. The SEC’s August proposal would give companies flexibility to determine those steps and didn’t prescribe a uniform method that would shield companies from legal actions.
The American Bar Association supports that approach. The Managed Funds Association, which lobbies for hedge funds, has urged the SEC to adopt a way to verify an investor’s level of sophistication, such as requiring them to have a minimum of $500,000 invested in financial assets.
Aguilar, 59, who voted against the SEC’s August proposal, has called for the SEC to start over and include more protections for small investors.
“A re-proposal that allows for a real discussion of reasonable alternatives is the only path forward that will adequately address investor protection issues,” Aguilar said on April 16.
White has said internally that rewriting the rule would take too long, according to one of the people. One compromise she has offered would involve asking the commission to pass a “concept release” seeking outside views on how to bolster protections without obligating the SEC to implement them.
Gallagher and Commissioner Troy A. Paredes support passage of the current proposal. It’s unclear how Walter, who said last week that the rule could lead to more fraud, will vote on it.
“The important thing to do here is to analyze the investor protection issues that are present and see if some of them can be addressed,” Walter told the House committee last week. “They really do revolve mostly around who the investors are, rather than how they are solicited.”
In a letter posted this week on the SEC’s website, Roper and two other investor advocates cautioned White against moving ahead with the current rule proposal. The letter was signed by Roper, Lisa Donner of Americans for Financial Reform and Brandon Rees of the AFL-CIO’s Office of Investment.
“Some have suggested that the commission could implement the general solicitation rule based on the current proposal and pursue comment on the appropriate investor protections separately,” the letter states. “Think of the precedent that would set -- rushing forward with the aspects of the rule supported by industry while offering the faint possibility that the commission might one day get around to addressing the concerns raised by investors.”