WASHINGTON (Reuters) - A Republican in the House of Representatives questioned on Wednesday whether federal securities regulators still have the legal authority to enforce a longtime ban on general advertising for private placements that was to have been lifted last summer.
Representative Patrick McHenry, of North Carolina, who chairs the House Financial Services oversight panel, said he believes the Securities and Exchange Commission lost its ability to enforce the ban after Congress passed legislation repealing it.
The repeal was included in the 2012 Jumpstart Our Business Startups (JOBS) Act, a measure designed to encourage capital raising and economic growth.
The act instructed the SEC to act by July 4, 2012, to lift the ban on advertising the sale of securities without SEC registration; the SEC has not yet done so.
“The SEC’s current broad ban on general solicitation is not authorized by statute,” McHenry said during a hearing. “The JOBS Act has changed the law. It would appear to me that with this change, the SEC lost the authority to enforce its ban on general solicitation.”
SEC Commissioner Elisse Walter, a Democrat, who testified before the panel Wednesday, disagreed with McHenry’s legal interpretation, and said the SEC is working toward a final rule.
“As the JOBS Act was written, the ban on general solicitation was not automatically lifted,” she told lawmakers. “On day 91, the ban on general solicitation would remain in effect.”
McHenry’s comments marked the latest attempt by House Republicans to apply pressure on the SEC to hurry up and finalize rules required by the 2012 JOBS Act.
The law relaxes a variety of securities laws in an effort to help small businesses raise capital and eventually go public.
Much of the law went into effect immediately, but some of its provisions require rulewriting.
Among the most controversial, is the provision lifting the longtime advertising ban for private offerings, a change that will make it easier for hedge funds and other firms to reach new investors.
Proponents of the measure say it will help spur capital-raising, but investor advocates say it could open the doors for fraud.
At Wednesday’s hearing, McHenry pointed to e-mails that Congress had obtained as evidence that the SEC has no authority to enforce the ban after the 90-day deadline.
In one e-mail dated May 9, 2012, the SEC’s corporation finance chief counsel, Thomas Kim, wrote about his meeting with some other agency lawyers who had raised concerns to him about whether the SEC could enforce the ban “on day 91” if the agency failed to meet the deadline.
“I think they are dubious as to whether we could,” Kim wrote.
Walter downplayed the e-mail in her testimony, saying staff concerns were strictly over whether the SEC would have enforcement authority to sue people who violate the ban.
Walter said she stood by the agency’s action to seek comments before finalizing a rule, in light of the concerns raised about investor protection.
Some Democrats on the House panel defended the SEC’s decision.
“I believe that the public and investors should have an opportunity to comment,” said New York Democrat Carolyn Maloney.
It is unclear when the SEC will finalize the rule. The agency last week swore in its new chairman, Mary Jo White, whose views on the matter are still unknown.
Moreover, another SEC commissioner, Democrat Luis Aguilar, has publicly called for scrapping the current proposal and starting from scratch amid concerns the draft fails to address protections for investors.
“In all my time at the commission, I’ve never seen a more aggressive effort to exclude pro-investor initiatives,” Aguilar said in a speech on Tuesday.
“Because of the decision to ignore the recommendations by investors and other regulators, I consider the commission’s proposal to be fatally flawed.”
Reporting by Sarah N. Lynch; Editing by Leslie Adler