SEC to Vote July 10 to Lift U.S. Ban on Hedge-Fund AdvertisingDave Michaels
U.S. securities regulators are set to vote next week to lift an 80-year-old rule that prohibits companies and private funds from advertising to raise capital outside of a public offering.
The Securities and Exchange Commission is required to remove the advertising ban under a 2012 law that sought to ease regulations on financing for startups and small businesses. In a nod to complaints from critics who say the change will open the door to more fraud, the SEC will also propose a separate rule during the July 10 meeting to add some investor protections and make it easier for the agency to monitor the change.
The package of rules will allow the SEC to finish an overdue assignment from Congress, while seeking to assuage critics such as consumer groups and state securities regulators who decried the SEC’s initial plan for lifting the ban last year.
“From a strategy perspective, you are not stopping the rulemaking to address those concerns,” said Keir D. Gumbs, a parter at Covington & Burling LLP who has worked for the SEC. “This will give Congress what it has required but also address the other part of the SEC’s mission which is capital formation.”
A third rule scheduled for a vote the same day would block felons and others found culpable of securities-law violations from marketing such deals, which are more lightly regulated than public offers of stock or debt.
The rule to allow advertising was controversial under former SEC Chairman Mary Schapiro, whose decision last year to abandon a fast-track plan was blasted by Republicans, including Commissioner Daniel M. Gallagher, who said it made him “furious,” according to e-mails released last year by House Republicans. Gallagher and Troy A. Paredes, a fellow Republican commissioner, have said the rule should be adopted as it was written last year.
The prohibition was designed to protect small investors from taking inappropriate risks. Private offerings of securities are exempt from the requirement to publicly report financial results as long as companies don’t advertise or sell to less sophisticated investors. Only “accredited investors,” or those with annual incomes exceeding $200,000 and a net worth higher than $1 million, qualify to invest in such deals.
Hedge funds have become some of the most active entities lobbying to shape the rule. The change will allow them to pitch securities to qualified investors through print publications, television, radio and the Internet for the first time. The Managed Funds Association and representatives of Maverick Capital Ltd. and Tudor Investment Corp. discussed the rule last week with new SEC Chairman Mary Jo White, according to an SEC notice.
Taking a final vote would relieve congressional pressure on White, who promised at her March Senate confirmation hearing that such rules were her top priority. House Republicans have continued to press White to finish the rule, which is required under the 2012 Jumpstart Our Business Startups Act.
Adopting last year’s plan while proposing new protections sets up a two-step process that is different from what the SEC’s own Investor Advisory Committee recommended last year. The committee said the commission should rewrite the rule to include new protections, such as changing the criteria for deeming investors sophisticated or wealthy enough to participate in such deals.
In a notice issued today, the SEC said the new proposal would address how investment companies use sales literature and seek changes to a form that companies file when they raise money in a private sale of securities.
SEC Commissioner Luis A. Aguilar, a Democrat, also has called for the plan to be rewritten because it was an “aggressive effort to exclude pro-investor initiatives.” State securities regulators say private placements were the most common product leading to enforcement actions in 2011.
The initial proposal also didn’t outline clear methods to verify that a person was qualified to invest, sparking complaints from consumer groups and hedge funds. Last year’s plan left the door open to specifying such methods, one element that stakeholders say they would like to see written into the final rule next week.
“Unless there is something the commission includes that provides some assurance they will come back and deal with the investor protections in the future, this could just be an empty gesture,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
A. Heath Abshure, president of the North American Securities Administrators Association, said the SEC should have included more investor protections in the rule. Introducing a new proposal triggers a public-comment period and doesn’t guarantee the commission will adopt the provisions, he said.
“‘It’s just counter-intuitive for the SEC to say we are going to allow advertising and then we’ll tell you later what the rules are and how you’d get in trouble,” Abshure said in a phone interview.