Private-placement debate now public — and very ugly — feud

Fur still flying over SEC's delay in allow advertising for Reg D offerings and the like

Dec 10, 2012 @ 4:40 pm

By Dan Jamieson

One thing we can look forward to in the new year is continued vitriol over how the Securities and Exchange Commission is implementing (or not) the Jumpstart Our Business Startups Act, aka the JOBS Act. And that feuding may spark a lawsuit against the SEC.

The most heated issue is a proposal to allow issuers of private securities, e.g., hedge funds, to publicly advertise and solicit accredited investors, as mandated by the law. Tempers flared last August when SEC Chairman Mary Schapiro delayed the controversial rule change to allow for a public comment process on the proposal through Oct. 5.

The Wall Street journal stirred up that pot again this month when it reported that Ms. Schapiro delayed the rule due in part to concern about her “legacy” at the commission.

The story led to a nasty WSJ editorial last week claiming that Ms. Schapiro was taking orders from consumer advocate Barbara Roper, head of investor protection at the Consumer Federation of America. Ms. Roper then shot back, calling the editorial “absurd.”

The mudslinging no doubt will continue, despite fairly widespread agreement that rules covering private placements were long due for an overhaul, including “advertising” rules that limit what hedge funds can say publicly.

Rep. Patrick McHenry, R-N.C., chairman of a House oversight subcommittee, last month urged Ms. Schapiro to get on with implementing the change before she leaves the agency this Friday, noting in a letter that the SEC has had nearly two months to consider comments. He added that soon-to-be SEC Chairman Elisse Walter recently voiced concerns about the rule change.

Meanwhile, stay tuned for a lawsuit when the SEC does act on the proposal.

Consumer groups said as much in their comment letters. “A rule adopted pursuant to this proposing release would be highly vulnerable to legal challenge,” Ms. Roper wrote then, citing a 2011 legal case that has been widely cited by industry interests to stop SEC rule makings based on lack of cost-benefit analysis.

The threat fits with the pattern of consumer groups' making louder noises about how they, too, can use the cost-benefit argument in stopping industry-favored rules. The SEC's proposal “makes a mockery of cost-benefit analysis,” Mercer Bullard, founder of Fund Democracy Inc., wrote in a comment letter that reads like a legal brief in waiting.

Oh yeah — can't wait.

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