WASHINGTON Investor advocates on Tuesday called on the Securities and Exchange Commission to scrap a proposal that would lift a ban on general advertising in private placements, saying it is fatally flawed and fails to address the dangers it poses to investors.
In a telephone press conference, representatives from several of groups including the Consumer Federation of America and the North American Securities Administrators Association (NASAA) said they won't rule out taking the SEC to court if the agency refuses to go back to the drawing board with a new plan that deals with their concerns.
Some of the groups lashed out at the SEC for using the kinds of arguments often used by business and industry groups to defeat SEC regulations, including whether the SEC had adequately weighed the costs and benefits of the rule.
"It would be a very, very unique circumstance for NASAA to file a lawsuit against the SEC to somehow stop, slow down, throw a wrench into this rulemaking," said Heath Abshure, the president of NASAA, who also serves as the Arkansas securities commissioner. "However ... if I felt it was the necessary thing to do, I'd propose it to my board. I mean, I wouldn't say no. At some point, business is business."
Tuesday's press conference, which also included executives from the AFL-CIO and the AARP, was convened in response to the SEC's recent proposal to lift mass marketing restrictions on private placements.
The proposal pertains to several kinds of offerings, including those made under what is known as "Rule 506" of Regulation D.
That rule allows companies to raise an unlimited dollar amounts from accredited investors who meet certain income or asset thresholds.
The rule is mandated by the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill signed into law earlier this year that eases securities regulations to help spur small-business growth and capital formation.
The SEC has already missed a congressional deadline to implement the rule, which was first proposed at the end of August and put out for public comment.
Although the law compels the SEC to act, the groups argue that the SEC still has the leeway to make some adjustments that will give investors more protections from fraudsters.
They want to see changes such as amending the definition of "accredited investor" to make sure unsophisticated people are not captured and tweaking the filing rules so the commission can collect data on solicitation practices to help it police the marketplace.
The groups emphasized that it is premature to talk about filing a lawsuit and they remain hopeful their concerns can be addressed through the SEC's standard rulemaking process.
But Barbara Roper, the director of investor protection for the Consumer Federation of America, said the cost-benefit analysis for the SEC's rule was shoddy, adding that it fails to weigh the costs posed to investors versus the benefits of lifting the ban.
Poor cost-benefit analysis has helped lay the groundwork in the past for successful legal challenges to SEC rules, although in all of those cases the fights were waged by industry and business groups like the U.S. Chamber of Commerce.
Just last year, a federal appeals court in Washington tossed out the SEC's rule allowing shareholders to nominate directors to corporate boards because of flawed analysis.
Earlier this year, the SEC issued new guidelines on cost-benefit analysis to help avert future legal challenges.
But Roper said those guidelines were not applied in this rulemaking, and that the SEC only seems to deploy them when it's weighing the impact of costs on business as opposed to the impact of new regulations on ordinary investors.
"I think it's hard to imagine a more slam-dunk case than this one," she said.
(Editing by Steve Orlofsky)