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Outgoing SEC Chair Schapiro Delayed JOBS Act Rulemaking Over Legacy Worries

Outgoing SEC Chair Schapiro Delayed JOBS Act Rulemaking Over Legacy Worries

Outgoing Securites and Exchange Commission chair Mary Schapiro opted to slow down the process of implementing Title II of the JOBS Act at the last minute over concerns about her legacy at the SEC and after receiving pressure from a lobbyist.

That's the accusation laid out in a strongly worded letter from Representative Patrick McHenry (R-NC) sent to Schapiro on Friday and posted to the SEC's website with other public comments on the JOBS Act.

The JOBS Act signed in to law in the spring called for swift implementation, including a July 4th deadline for putting place the provisions in Section 201, which removes the ban on general solicitation and advertising for issuers of certain offerings.  The lifting of the ban is critical for other parts of the JOBS Act, including crowdfunding, to move forward.

According to McHenry's letter, internal SEC documents reveal that staff and legal counsel were in agreement as early as May that "an interim final rule was the most practical, responsible, and legally appropriate means of implementing Section 201."

An interim final rule is a bureacratic means of expediting the rule-making process that skips public notice and comment procedures. 

McHenry charges that the SEC moved forward -- under Schapiro's direction -- on preparing an interim final rule throughout June and July and as late as August 6, was still planning to annouce the rule on August 22 at its open meeting.

Then, on August 7, Schapiro's office received an e-mail from Barbara Roper, lobbyist for the Consumer Federation of America. According to McHenry, Roper demanded that a notice and comment period be added to the process or CFA and aligned groups would be "quite aggressive in voicing our concerns."

Schapiro informed fellow commissioner and friend Elisse Walter about the email, and almost immediately fired off an e-mail to an SEC staffer under the subject line "Please don't forward" that McHenry cites:

"... I have 2 worries- one is that if these guys (CF A, et al) feel this strongly, it seems like we should give them a comment period. Its not really asking for much ... The other is that I don't want to be tagged with an Anti-Investor legacy. In light of all that's been accomplished, that wouldn't be fair but it is what will be said given how high emotions run on anything related to the JOBS Act. Doesn't seem worth it for an extra 45 days of process."

Over the next few weeks, the SEC switched gears, dropped the interim final rule, and instead moved forward with opening a public comment period on lifting the solicitation ban that began in late August.

The change also elicited a strong response from SEC commissioner Daniel Gallagher, who wrote in an email to Schapiro with subject line "I am furious" on August 8:

I just got word about the latest change to general solicitation. It is not acceptable. I have been operating in good faith, reviewing the multiple proposals sent to me for consideration this month, and I continue to find shifting sands. A "proposal" on general solicitation could have been done months ago, and indeed should have been done years ago. Meredith and Lona made it crystal clear to me on Monday that there is no need for a proposal because we know what the comments will be. And so, I spent hours working on how to accommodate your desire for a study within an interim final rule, and we did so --just to find out now that you have changed your mind again.

Rep. McHenry ends his letter to Schapiro by noting that the public comment period ended on October 5th, and requests that Schapiro finalize the rules for Section 201 before stepping down on December 14th.

This weekend, Schapiro released a statement through the SEC's press office responding to McHenry's charge that her decisions regarding Section 201 had been motivated by special interests and concerns over her personal legacy:

“Chairman Schapiro strongly believes that protecting investors should be the desired legacy of all SEC Chairmen,” John Nester, the agency’s spokesman, said in a statement. “It is part of our mission and should inform our decisions at all times. She also believes that the agency should not consider investors — or the groups that represent them — to be special interests.”

All this puts incoming SEC Chair Elisse Walter's comments at the recent SEC small business forum in strong support of lifting the general solicitation ban into context.  

With Schapiro out of the picture (she had been a vocal opponent of the crowdfunding portion of the JOBS Act even before it was signed into law), perhaps the timeline for equity crowdfunding could begin to accelerate in 2013, even with implementation now far behind the deadlines mandated by Congress. 

Unfortunately for platforms and others getting ready to crowdfund, the delays already imposed -- apparently at the hands of Schapiro and a few lobbyists alone -- amount to time and money wasted. 

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  • Julio Spinelli Julio Spinelli Dec 02, 2012 07:52 pm GMT

    Sad to hear the BAN will not be lifted. What does it mean in practice? It means that if you have a great idea, some hedge fund or VC fund or vulture fund will get 99.9% of the value you create. If you have dealt with a VC investor and think otherwise, please let us know whom you dealt with. In my case, all of the ones I dealt with or know people who have are one worse than the other. Vultures don´t even begin to describe them. I asked one of our lawyers, who was not telling me the truth except when I played stupid and forced him to put his advise in writing: ¨How come anybody would sign this contract¨, and he said: ¨Most entrepreneurs are not like, they don´t read the hundreds of pages of small print, they just sign anything to get the money they need and realize the consequences of what they gave up later¨. With Linkedin, faceboo, twitter, etc. we could bypass all these people and get funded by the people that know us and trust us (or not). In that way they would trust us more or less depending on our successes, very quickly the net will know what is good and who is bad managing his-her friends money, and the vulture funding network and their managers (who make 2% of the capital they manage plus 30% of the gains above a prearrenged threshold, usually 25%) would be looking for new jobs writing blogs about how to select good investments using the net. Sad that Mrs. Shapiro has been coerced into delaying dropping the BAN on investing by people without millions in their net worth. Oh, yes, if you have millions they you are allowed to make more, if you don´t you can´t participate at all. It is currently forbidden to let you invest. Thus forcing small entrepreneurs to give away their ideas to the large vulture funds.

    Julio C. Spinelli, PhD

  • Eric Mack Eric Mack Dec 03, 2012 12:33 pm GMT

    The ban on general solicitation likely will still be lifted - it's the law of the land under the JOBS Act, we're just waiting on the codification process, which is now clearly taking longer than Congress stipulated in the bill.

  • Paul Spinrad Paul Spinrad Dec 04, 2012 07:18 am GMT

    Here's some related slime from the CFA: On March 5, just before the House vote on JOBS Act, CFA and Americans for Financial Reform sent a letter opposing the legislation to all House members:

    Here's how things are apparently done in DC: The second sentence of the letter reads, "We are writing on behalf of the Consumer Federation of America and Americans for Financial Reform (“AFR”) to express our strong opposition to this ill-conceived legislation." If you skip down to the end of the letter, there's a long list of what appear to be signatories, including Common Cause, Consumers Union, CREDO Mobile, Move On, and many labor unions and PIRGs. It looks like all of these trusted orgs oppose the JOBS Act.

    But read the fine print, and you see that they aren't signatures -- it's just a list of the AFR's partners, and that "Not all of these organizations [...] have signed on to every statement."

    The only two real signatures on the letter are the CFA and AFR themselves. Therefore, in the words of these two organizations, they wrote the letter "on behalf of" themselves (and no one else), which is a strange way to word things in an otherwise clear letter. Then they listed all of their partners, signature style, at the end.

    "The unavoidable conclusion," to use McHenry's money-shot phrase, is that this letter was crafted to mislead our representatives and their staffs just before a big vote, figuring that many of them would scan the first sentences to get the gist, then skip down to see who signed it.

    Is this tactic common in DC? Do AFR's partners know that the AFR is using their names this way? How do the lawyers at the Consumers Union (for example), who fiercely protect the way their organization's name is used, feel about the AFR's publishing an apparent CU endorsement to support a lobbying effort aimed at subverting federal law?

  • Maxine Horn Maxine Horn Dec 05, 2012 06:19 pm GMT

    Good grief what protectionist shenanigans

    Those that most often stand in the way of progress, particularly progress that benefits individuals and small business over the corporates and financial sector are those that fear change will upset their own commercial apple carts.

    And government departments fear risk and legacy reputation over doing what is right to enable progress

    However, they cannot stop the digital world that is giving individuals a stronger voice and an easier means to cut out the middlemen who earn off of the back of others. Their slice of the action is most often loaded in a non-equitable way, preying off of the vulnerability and at times desperation of those who need financial support to move forward.

    Here's hoping the JOB Act is only subject to a few months delay and does not get over-turned in favour of an investor market that have had it all their own way for far too long.

    If the Act does get de-railed Ms. Schapiro, a long term supporter of the JOBS Act, could end up with a legacy of inadvertently holding back progress, innovation, job creation and so forth, due to fear of rattling the investors cages.

    Fingers cossed it won't come to that.

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