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SEC delays loosening of securities ad limits

by Ira Teinowitz in Washington | Published August 20, 2012 at 3:15 PM

Securities and Exchange Commission Chairwoman Mary Schapiro has decided against moving forward right away with an interim easing of its rules for securities advertising. The commission was expected to relax the rules at a meeting scheduled for Wednesday, Aug. 22, but consumer advocates argued that moving forward with an interim rule without giving the public a chance to comment could invite a legal challenge and delay the changes from taking effect anyway.

Instead, the commission is set to propose revised rules, but then seek comment. Final changes wouldn't take effect until after the commission responds to the comments received, a process that could take several months.

SEC spokesman John Nester announced the delay. "The chairman believes it is important for the general solicitation rule to be proposed for public comment, as is our typical practice in rulemaking," he said. "This transparent process will provide the opportunity for feedback from companies, investors and market participants who may be impacted by the final rule."

The new advertising rules are expected to dramatically change securities marketing, opening the door to Internet marketing and perhaps radio and TV commercials for securities that have typically been advertised in tombstone newspaper ads.

Congress mandated the changes in a bid to make it easier for businesses to raise capital as part of the Jumpstart Our Business Startups Act, signed by President Obama in April.

It required the SEC within 90 days to ease rules for securities advertising aimed at so-called accredited investors. The SEC defines accredited investors as those whose net worth is at least $1 million or those who have made $200,000 in each of the past two years ($300,000 for families).

In light of the unusually short time Congress provided, the SEC had been considering moving forward with an interim easing of the advertising rules.

Consumer advocates, worried that some marketers could target less sophisticated investors and make scams easier, warned the SEC last week against moving forward too swiftly. They suggested the agency needs to take steps to ensure marketers in fact target and reach accredited investors.

"We urge you in the strongest possible terms to abandon this rushed approach which puts investors at risk," said a letter sent Aug. 15 from 20 consumer and labor groups as well as former SEC Chief Accountant Lynn Turner. It warned of "the very real risk of an upsurge in abusive private equity and hedge fund advertising" based on misleading performance claims.

A second letter from the North American Securities Administrators Association took a similar view.

"Given the complexity of the issues involved, plus the enormous impact those changes will have on how these risky investments will be offered, we strongly urge the Commission to follow its normal course of publishing the proposed rule for public comment before it becomes effective," it said.

Nester said that Schapiro recognizes Congress' desire for quick action, but that the timetable isn't realistic.

"While we recognize the importance of the statutory mandate and are committed to acting expeditiously, as Chairman Schapiro previously stated, the 90-day deadline did not provide a realistic time frame for the drafting of a new rule, the preparation of an accompanying economic analysis, the proper review by the commission, and an opportunity for public input," he said.

"In addition, failure to provide this opportunity for comment could subject the rule to challenge that could delay the implementation of the statutory mandate."

The SEC's decision to delay immediate implementation on Monday drew a condemnation from Rep. Patrick McHenry, R-N.C., who heads the House Committee on Oversight and Government Reform's subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs. "By kicking the can down the road, you are abdicating your responsibility to follow the law, failing to fulfill your sworn commitment to this subcommittee, and ignoring the will of Congress and the president of the United States," McHenry said in a letter to Schapiro. McHenry said he was "deeply troubled" by the delay.

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