But just when I was feeling good about the Securities and Exchange Commission, I learned that consumer advocates are not happy with a rule proposed by the SEC that allows hedge funds for the first time to publicly advertise private placements to average investors. This is the SEC’s first rulemaking effort following the April 5th passage of the Jumpstart Our Business Startups Act. Public Citizen’s Bartlett Naylor had this to say about the proposed rule:
The SEC failed to propose concrete solutions that would prevent average investors from being duped by hedge fund managers and other issuers of private securities.
Transactions involving private offerings already result in more enforcement actions and investigations than any other kind of financial transaction, according to the North American Securities Administrators Association. The number of actions grew to 410 in 2011, a 60 percent increase from 2010. Naylor said further:
Private offerings are so risky that, to date, hedge funds and other firms could only offer these high-risk deals to proven, ‘sophisticated’ investors, such as professional money managers with whom they have an ongoing business relationship. The JOBS Act permits advertising such deals to the public. One of the very few investor safeguards from Congress is the requirement that firms offering private securities have to take “reasonable steps” to ensure that the investor is sophisticated and has a net worth of $1 million or $200,000 in annual income. Significantly, the SEC’s proposed rule fails to adequately define these “reasonable steps” a hedge fund is required to take before it can categorize a prospective client as sophisticated. This is a grave oversight.
SEC Commissioner Luis Aguilar opposed the proposed rule. Another opponent, Senator Carl Levin (D-Michigan), said that with the proposed rule, the SEC “began undermining significant investor protections and putting ordinary Americans’ investments at risk.” He added:
Just a few years after the financial crisis, it is disappointing that the SEC is proposing a rule that ignores years of experience and the law. The SEC rule should require those who advertise private deals to take specific steps to ensure that investors have the wherewithal and expertise to make these risky investments. And it should require that the content of the advertising meets some minimum standards, such as those that mutual funds are subject to today. The proposed rule does neither.
Hopefully, there will be enough opposition to the proposed rule, making the Commissioners revisit this issue. If that happens, I believe they will make significant improvements. The first action by the SEC after the reform legislation should be strong protection for investors. If this one is as weak as is indicated by the opposition, it should be changed.
Source: The Corporate Crime Reporter
Contact us today for a free legal consultation with an experienced attorney.
Fields marked *may be required for submission.
If you would like to subscribe to the Jere Beasley Report digital edition, simply visit our Subscriptions page and provide the necessary information or call us at 800-898-2034.
Attorney Advertising - Prior results do not guarantee a similar outcome.