SEC’s White Said to Push for Lifting Ban on Hedge-Fund AdsDave Michaels and Joshua Gallu
U.S. Securities and Exchange Commission chairman Mary Jo White is pushing to adopt a rule allowing hedge funds to advertise in a move consumer advocates say could fail to protect unsophisticated investors, according to two people familiar with the matter.
White, who became SEC chairman on April 10, has suggested the commission pass the existing plan without major changes and add additional protections later, said the people, who declined to be identified because the deliberations are private. The approach would placate congressional Republicans who have complained the SEC has slow-walked the rule, which was required to be completed by July 2012.
Approving the regulation would allow White to make good on a promise she made in her Senate confirmation hearing to prioritize rules mandated by the Jumpstart Our Business Startups Act, which was designed to boost capital-raising and job creation. At the same time, it could anger advocates for small investors and at least one Democratic commissioner.
“It would be a very bad sign -- a cause for grave concern about the substance of the issue and process of how investor protection concerns are addressed,” Barbara Roper, director investor protection at the Washington-based Consumer Federation of America, said in a phone interview. Roper said she discussed the rule with White and other SEC officials on April 23.
John Nester, an SEC spokesman, declined to comment on White’s plans.
The SEC’s five-member commission has been divided on the rule since last year. The two Republican commissioners have said the proposed rule should be completed as written. Democratic Commissioner Luis A. Aguilar said this month that a rewrite is needed because the proposal was an “aggressive effort to exclude pro-investor initiatives.”
The rule would lift the ban on “general solicitation,” or using advertising to market investments in hedge funds, startups and other firms. The ban dates to the passage of the first federal securities laws in 1933, said Brian J. Lane, a partner at Gibson, Dunn & Crutcher and former director of the SEC’s corporation finance division.
The prohibition was designed to protect small investors from taking inappropriate risks. Only more sophisticated investors, or people with annual income greater than $200,000 and net worth greater than $1 million excluding their home value, can make such investments.
These types of investments are exempt from the requirement to file financial results with the SEC. They raised $905 billion in 2010, surpassing the amount of capital raised by any other type of offering, including public debt, according to a February paper by SEC economists. Sixteen percent were done by hedge funds, 15.3 percent by technology companies and 9.8 percent by health care firms, according to the SEC.
State securities regulators say such offerings were the most common product leading to enforcement actions in 2011.
White’s plan would allow the commission to dispatch with a rule she has described as a first priority. “The SEC needs to get the rules right, but it also needs to get them done,” she told the Senate Banking Committee last month.
Taking a final vote also would alleviate congressional pressure. In August, the SEC approved an initial plan 4-1, with Aguilar voting against it. The full commission has to vote again on the final proposal for it to take effect.
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 conflict because 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 for complying with the regulation.
The American Bar Association supports that approach. The Managed Funds Association, which lobbies for hedge funds, has urged the SEC to consider a person qualified to participate if he or she invests a minimum of $500,000.
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.”