The House Financial Services Committee held a JOBS Act implementation hearing last week at which Republican members expressed their outrage that the Securities and Exchange Commission (SEC) had allowed itself to be swayed by the concerns of investors and state securities regulators in its consideration of rules to implement that law.
That's not quite how they put it, of course. In their version, a powerful Washington lobbyist and JOBS Act opponent (that would be me) intimidated then SEC Chairman Mary Schapiro into abandoning her plan to remove the ban on general solicitation in private offerings through an interim final rule. (You can read the infamous email here to see whether you think it exerted undue pressure or left Chairman Schapiro quaking in her boots.)
There is a scandal here, but it is not the one House Republicans have seized on. It is: first, that the Commission ever allowed itself to be pressured by JOBS Act supporters into circumventing the legally required notice and comment process in writing a rule that fundamentally redraws the line between public and private markets; and second, that when the Commission did put out a proposed rule, it failed to incorporate or even request comment on any of the investor protections that had been recommended.
You'd think that members of Congress who make a fetish out of criticizing the agency for its failure to adequately assess the economic impact of its rules would be more concerned that the Commission didn't even put up a good pretense of assessing this particular rule's economic consequences. It's almost as if they think economic analysis is only required for rules they or the business community oppose and can be ignored entirely when investors are the ones raising concerns.
Ironically, all this heat is being generated over an issue where the proposed investor protections are not, in and of themselves, particularly controversial. After all, the SEC's Investor Advisory Committee - which is made up of members appointed by both Republican and Democratic commissioners (and of which I am a member) - gave unanimous approval last fall to a set of recommendations to incorporate investor protections in any final rule lifting the ban on general solicitation. Even members of the committee who represent financial services firms that would be affected by the rules were able to support the recommendations.
There is every reason to believe then that, had the Commission followed normal rulemaking procedures from the outset and proposed a rule that incorporated investor protections along these lines, a compromise could have been reached and a final rule could have been adopted months ago.
It strikes us as no coincidence that House Republicans have chosen this moment to heat up their rhetoric. Mary Jo White has recently been installed as SEC Chairman, and in light of the other commissioners' apparently divided views, the decision on how to move forward on the general solicitation rule is likely to rest with her. She is left with an uncomfortable choice:
- If she gives in to the congressional critics and moves forward with a final rule based on the existing legally deficient rule proposal, she will leave investors in private offerings vulnerable to abuse and send the troubling message that investors' concerns can be easily overridden by a little carefully applied political pressure.
- If she does the right thing and re-proposes a rule that incorporates basic investor safeguards, she will end up on the receiving end of the considerable ire congressional Republicans inevitably direct at any regulator who stands up for market integrity and investor protection.
Unfortunately for Chairman White, there is no middle ground. Of course, no one said this job was going to be easy. How she handles this early, difficult test will tell us a lot about what we can expect from the SEC under her leadership.