Dodd Bill Peculiarities: The SEC's Reg D Preemption Gets Hammered
Yesterday, the Senate Banking Committee voted along party-lines, 13-10, to send Senator Dodd's reform bill to the Senate floor. As noted in this NY Times article, the Committee's Republicans decided not to offer amendments during the bill's markup, preferring instead to seek changes before the full Senate vote.
As I imagine exists in every Congressional bill - particularly ones that weigh over five pounds - there is some weird stuff in the Dodd bill. One of the odder ones for me is Section 926 which would qualify the Regulation D preemption. Although this Section doesn't quite reach the level of "complete deletion" of the preemption, it allows the SEC, by rule, to disqualify certain offerings from the preemption - and then any other Reg D offering that the SEC does not review within 120 days after filing loses the preemption.
My reaction when reading this was "What issue is Congress chasing? I can't think of any problems that seemly caused the financial crisis to warrant this?" I pondered possible answers to these queries - perhaps fraud in the private offerings and hidden shaddy deals that don't ordinarily get reviewed? Payment of fees to unregistered brokers? None of these really rung a clear bell (but I guess NASAA is behind it per this article).
Anyways, this Section 926 would be a substantial rewrite of Section 18(b)(4)(D) of the '33 Act (unlike the simple repeal in Section 928 of Dodd's original draft bill back in November) by:
(1) requiring the SEC to designate certain Rule 506 offerings as not qualifying as "covered securities," considering the size of the offering, the number of States in which the security is being offered, and the nature of the offerees;
(2) requiring that the SEC review any filing made with regard to a Rule 506 offering within 120 days, and that any filing which is not reviewed within the 120 day period would no longer be a covered security unless a state securities commissioner determines that (a) there's been a good faith and reasonable attempt by the issuer to comply with all applicable terms, conditions and requirements of the filing, and (b) any failure to comply with such terms, conditions and requirements "are [sic] insignificant to the offering as a whole";
(3) permitting states to impose notice filing requirements "substantially similar to filing requirements required by rule or regulation under section 4(4) that were in effect on September 1, 1996"; and
(4) requiring the SEC to implement procedures not later than 180 days after enactment of the Act, after consultation with the States, to promptly notify the States upon completion of its review of Rule 506 filings.
Alan Parness of Cadwalader adds these thoughts on Section 926:
- Condition (2) would result in total uncertainty as to the covered security status of a claimed Rule 506 offering for 120 days or more while the SEC and the states mull over the filing, is ambiguous as to whether only one state securities commissioner need determine that the offering qualifies as "covered securities" if the SEC fails to act, is unclear as to when the state's determination must be made, and doesn't address the consequences if the offering is determined not to constitute "covered securities." Thus, does this condition mean that an offering which doesn't pass muster as "covered securities" could be unwound under applicable Blue Sky laws as a sale of unregistered securities, in the absence of another exemption from registration?
- In Condition (3), the reference to Section 4(4) is incorrect (as of 9/1/96, any state filing requirements for Rule 506 offerings were governed solely by the relevant Blue Sky law, not federal law). Also, what if state filing requirements were imposed by law, and not by "rule or regulation"? And does this mean that a state couldn't impose a filing fee for a Rule 506 notice filing substantially in excess of what was charged as of 9/1/96?
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An "Office of Investor Advocate" for the SEC? They Already Have Thousands
Since the SEC was born back in 1934, its mission statement has been the protection of investors. And having worked there twice, I can tell you that the Staffers believe in that mission - even when there sometimes are politically-appointed Chairs and Commissioners who believe otherwise.
So the notion of a new "Office of Investor Advocate" - which would be created under Section 914 of the Dodd bill - seems redundant to me since the entire SEC is supposed to essentially be part of that office already. Creating this new Office just adds another layer of middle-management complexity - and won't really do anything to check a SEC Chair with an anti-investor viewpoint since the SEC Chair appoints the head of this new Office under the Dodd bill. This is a bad idea, plain and simple.
Congress and Its Study-a-Palooza
As noted in this NY Times article recently, both the Dodd bill and its House counterpart call for dozens of studies. The article correctly notes this is a common technique to punt an issue into oblivion. Maybe I'll print some T-shirts that say, "I voted for my Congressman and all I got was this lousy study"...
- Broc Romanek