Backroom Maneuvering on the JOBS Act

When does normal regulatory procedure become scandalous? When a federal agency fails to expedite the implementation of an influential congressman’s pet idea.

The congressman is Patrick McHenry (R-N.C.), and the idea is the mass marketing of private stock offerings, as authorized by the Jumpstart our Business Startups (or JOBS Act). In a November 30 letter, McHenry took outgoing SEC chairman Mary Schapiro to task for declining to institute a rule immediately and deciding to give the public a chance to comment first. McHenry’s complaint was soon picked up by the media, most notably by the Wall Street Journal, which, in a feverish editorial embracing all of McHenry’s talking points, accused Schapiro of having “blocked a rule” due to the influence of a “well-placed lobbyist” representing a “special-interest group.”

What’s wrong with this indictment? Every point in it. First, there’s the inconvenient fact that Schapiro, far from blocking a rule, was following customary rule-making procedure. Second, the “well-placed lobbyist” in question, Barbara Roper of the Consumer Federation of America, was actually one of scores of interested parties – including consumer and investor groups, state securities law regulators, and even a few hedge fund and private equity fund representatives – making the same general argument. Third and perhaps most important, the “special interest” that Schapiro was faulted for looking after – the community of investors – is the interest that her agency was created to protect.

And investors will need the SEC’s protection, for this is a case in which a carelessly drafted rule could open the door to all manner of flimflam. “Let the scams begin” is how Public Citizen summed up the danger. To compound matters, the Commission’s draft rule lumps hedge funds and private equity funds in with the conventional business startups that were the law’s intended beneficiaries. A Bloomberg editorial imagined the likely result: “Underperformers will flog their funds on the airwaves, on websites and in the pages of the financial press, aiming at unsophisticated investors eager to get the same fabulous returns as the Wall Street elite.”

Our coalition, like the CFA, strongly opposed the JOBS Act. It was rushed through Congress on the dubious premise that rolling back long-standing investor protections would promote job growth, and with disregard for the time-tested truth that, in Bloomberg’s words, “Markets benefit when smart oversight enhances transparency and promotes integrity.”

Yet it is important to note that neither Roper nor the law’s other critics now question the duty of the SEC, as the law directs, to lift the long-standing ban on the general solicitation of private offerings. AFR acknowledged as much in our October 5 comment letter, jointly submitted with the AFL-CIO. As we went on to note, however, the SEC “retains both the authority and the responsibility to craft a rule to implement that requirement that incorporates appropriate safeguards to protect investors and promote market integrity.”

That’s what we have been advocating – openly, not furtively – since the JOBS Act was enacted. The only undue influence brought to bear here was that of Representative McHenry and other legislators seeking to prod the SEC into ill-considered action. If these “well-placed lobbyists” could muster a bit of patience, the Commission could go about the task of crafting a balanced rule that follows the intent of the law while seeing to it that vulnerable investors aren’t hurt.