SEC Chief Delayed Rule Over Legacy Concerns

From The Wall Street Journal
By Jean Eagleshan and Telis Demos
December 2, 2012

In one of her last acts as chairman of the Securities and Exchange Commission, Mary Schapiro delayed a rule potentially affecting hundreds of billions of dollars of private offerings by companies, in part because of concerns about her personal legacy, according to previously unpublished documents.

Internal SEC emails, released to a congressional panel and reviewed by The Wall Street Journal, appear to show how a last-minute intervention by a consumer lobbyist might have helped persuade Ms. Schapiro to change her mind and delay one of the centerpiece measures of the Jumpstart Our Business Startups, or JOBS, Act.

The decision provoked backlash from one of the SEC’s Republican commissioners, according to the emails. The delay also could leave the proposed rule in limbo after Ms. Schapiro steps down Dec. 14. The SEC then will be run by two Democrats and two Republicans, who appear from their statements to be at loggerheads over this issue.

The delayed rule is one of the most contentious changes in the JOBS Act, which is designed to make it easier for small companies to raise capital. The act set a July 4 deadline for ending the ban on companies advertising unregistered securities, investments that are subject to less-rigorous regulatory controls than public offerings.

Lifting the so-called general solicitation ban would allow the securities to be advertised widely, rather than simply offered to the relatively wealthy investors who are legally allowed to buy them…

After the JOBS Act went into effect in April, the SEC drew up plans to fast-track the abolition of the ban. The newly released emails show that rather than put out a proposal for consultation, the SEC staff on May 23 recommended to the commissioners issuing an “interim final rule” in August, a move that would have immediately ended the ban.

This plan was upended Aug. 7, after a senior official at the Consumer Federation of America sent an email to Ms. Schapiro’s chief of staff. Barbara Roper, director of investor protection at the consumer organization, wrote that it had “strong objections” to the idea of issuing a final rule, with no consultation period. She added that investor groups were “prepared to be quite aggressive in voicing our concerns.”

The email was forwarded to Ms. Schapiro, who promptly sent it on to her inner circle of advisers and Democratic Commissioner Elisse Walter, saying “they are making me very worried.” Ms. Walter is scheduled to take over for Ms. Schapiro as SEC chief this month.

Within an hour of getting the consumer group’s email, Ms. Schapiro sent Meredith Cross, the head of the SEC division with responsibility for writing the rule, a message headed: “Please don’t forward.”

The email said Ms. Schapiro had “2 worries.” The first was that if the investor groups “feel this strongly, it seems like we should give them a comment period.” The second concern: “I don’t want to be tagged with an Anti-Investor legacy.”

Such a legacy “wouldn’t be fair,” she wrote, “but it is what will be said given how high emotions run on anything related to the JOBS Act.”

The SEC said in a statement that “Chairman Schapiro strongly believes that protecting investors should be the desired legacy of all SEC Chairmen. 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.”

The chairman’s decision angered supporters of the JOBS Act measure. Daniel Gallagher, one of the Republican commissioners, sent Ms. Schapiro an email Aug. 8 headed simply “I am furious.” Mr. Gallagher declined to comment.

Mr. McHenry said in a statement that he was disappointed the “pro-growth” measure had been delayed as “a direct result of pressure from one special interest group and the personal agenda of the chairman.”

But state regulators who have expressed concerns over ending the ban said the departing SEC chief was being unfairly criticized. Heath Abshure, president of the North American Securities Administrators Association, said it was “crazy” that Ms. Schapiro had “taken heat because she didn’t bypass” the normal rule-making process of allowing time for comments. Mr. Abshure is due to meet Ms. Schapiro and Ms. Walter on Wednesday to lobby over JOBS Act measures.

The row over what might seem a dry procedural issue is an example of how fraught Ms. Schapiro’s reign has become, according to SEC watchers. During her near four-year tenure, the chairman battled mounting pressure from Republican lawmakers and increasing divisions among her other four commissioners.

Ms. Schapiro faced an increasingly “difficult” political landscape that “every time it moved, was shifting against her, not in her favor,” said Cornelius Hurley, a law professor at Boston University…

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