Earlier this month, new Securities and Exchange Commission Chair Mary Jo White testified for the first time before the House Financial Services Committee and showed herself to be everything we would expect from a lawyer of her caliber - articulate, self-confident, and careful, even guarded, in her answers. But 45 minutes into the hearing, in response to a question from Rep. Scott Garrett (R-NJ) about whether she considers the agency's guidelines for economic analysis to be binding on SEC staff, she gave a rare unequivocal answer. "Yes," she said, "and I fully support it, and my understanding is that it is being followed since my predecessor issued the guidance to the staff."
Unfortunately for Chair White, her predecessors' mishandling of the JOBS Act rulemaking to lift the ban on general solicitation in private offerings has left her with an uncomfortable choice between speeding implementation of that rule and ignoring her commitment to follow the economic analysis guidelines, or following those guidelines, which would require re-proposal of the rule and thus further implementation delays. Because the fact is that, in proposing this general solicitation rule, the staff made little pretense of conducting a meaningful economic analysis. For example:
- The SEC guidelines require the agency to provide a baseline of information against which the proposed regulation and alternative regulatory approaches are to be measured in order to determine their relative costs and benefits. Among the information the eight-sentence "baseline" in the proposed rule does not provide is information on the issuers who rely on private offerings, the characteristics of investors who invest in these offerings, the practices that issuers currently use to ensure that they sell only to accredited investors, short-comings in the SEC's oversight of this market, and evidence of fraud and abuse under the existing regulatory framework. The agency provided far more information on these topics to its Advisory Committee on Small and Emerging Companies than it included in the "economic analysis" of its proposed rule.
- The SEC guidelines also require the agency to consider and request comment on all reasonable alternatives to its proposed regulatory approach. Although numerous such alternatives had been submitted to the agency by state regulators and investor advocates among others, the Commission chose to ignore these suggestions. Not only did it not incorporate them in its proposed approach, it didn't even include any questions in its rule proposal regarding these alternatives. Commissioner Luis Aguilar cited this failure to consider regulatory alternatives to better protect investors as the reason behind his vote against proposing the rule.
Investor advocates have been critical of the economic analysis guidelines, arguing that they place more emphasis on costs to business than they do on benefits to investors and will inevitably result in rules too weak and ineffective to rein in the abuses that led to the 2008 financial crisis. One thing worse than making these industry-friendly guidelines binding on the SEC staff, however, would be to apply them only when the Commission is considering rules that would strengthen investor protections, and thus are likely to be opposed by Wall Street, and to ignore them when the agency is proposing industry-supported rules to roll back investor safeguards. If the Commission goes down that road, its ability to operate as an investor protection agency will be completely compromised.
Chair White did not create this mess, but the decision over how to respond now rests largely with her. And, while she may not have intended it, Chair White put both her own credibility and the credibility of the agency on the line with her response to Rep. Garrett's question about her commitment to economic analysis. If she is to keep her commitment, the only route open to her is to re-propose the JOBS Act general solicitation rule. To meet the standard she herself has embraced, any such re-proposal must be based on a thorough economic analysis that includes consideration of the reasonable regulatory alternatives that have been proposed, chief among them the recommendations adopted unanimously by the SEC's Investor Advisory Committee. Break that commitment and she risks both the SEC's credibility as an investor protection agency and her own reputation as a straight shooter.
But this situation includes not only a threat but also an opportunity for Chair White. By re-proposing the rule, she has an opportunity to show that she can produce a balanced general solicitation rule that can win the broad support of investors and industry groups alike. That would be good for investors, good for capital formation, and good for the integrity of the regulatory process.