SEC head dragged her feet on new rule at urging of lobbyist, GOP lawmaker says


Outgoing SEC Chairman Mary L. Schapiro, pictured in November. (Alex Wong/Getty Images)
December 1, 2012

Republican Rep. Patrick T. McHenry accused the outgoing chairman of the Securities and Exchange Commission of dragging her feet on a regulation to “appease” special-interest groups that opposed it and to “protect” her legacy.

In a recent letter to SEC Chairman Mary L. Schapiro, McHenry (N.C.) said Schapiro slowed the progress of a regulation that would allow companies seeking to sell securities in private offerings — such as hedge funds or start-ups — to solicit money from the general public through advertisements.

An advertising ban has been in place since the 1930s for fear that fraudsters would dupe unsophisticated investors. But earlier this year, Congress called on the SEC to lift the ban as part of a broader measure designed to jump-start the economy by lowering regulatory hurdles for small businesses and start-ups.

McHenry’s letter, posted on the SEC Web site late Friday, said Schapiro initially planned to put the advertising regulation on fast-track for approval. But she changed her mind after hearing from a lobbyist at the Consumer Federation of America, Barbara Roper, who objected to the rule and demanded that the commission gather public comment before proceeding.

“It appears that one late communication from a well-placed lobbyist effectively stalled the implementation of the rule,” wrote McHenry, chairman of a House Oversight and Government Reform subcommittee, which obtained internal SEC e-mails regarding this issue. “ . . . It appears that third-party evaluations of your legacy and the ‘strong feelings’ of a special interest group were prioritized over the faithful implementation of the law.”

After Schapiro’s office received the e-mail from Roper, who promised to galvanize opponents against the regulation if it moved forward too quickly, Schapiro informed her top advisers that she was “very worried,” McHenry said, quoting from one internal e-mail to her chief of staff. In another e-mail to an SEC director, she said the group wasn’t “really asking for much” and “I don’t want to be tagged with an Anti-Investor legacy.”

On Saturday, Schapiro defended her decision as being in line with the SEC’s mission.

“Chairman Schapiro strongly believes that protecting investors should be the desired legacy of all SEC Chairmen,” John Nester, the agency’s spokesman, said in a statement. “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 commission typically seeks public comment before finalizing a regulation. But the legislation that mandated lifting the advertising ban imposed tight deadlines, and the SEC’s professional staff recommended expediting the regulation without seeking public comment or taking other customary steps.

Meredith Cross, director of the SEC’s corporate finance division, explained in a draft release cited by McHenry that adopting the usual procedure in this case would be “impracticable, unnecessary and contrary to the public interest,” noting that Congress’s directions were “clear and straightforward.”

As the SEC pressed forward on the expedited rule, many investor advocacy groups publicly urged the agency to slow down and gather more information. Among them were  the Investment Company Institute, which represents mutual funds, and the Council of Institutional Investors. The North American Securities Administrators Association, which represents securities regulators at the state level, also called for more time.

On Saturday, the SEC said the high level of interest from investor groups ultimately persuaded Schapiro to change the timing. There was also the threat of legal challenges from opponents of the regulation if the agency had not sought public comment, said Nester. The SEC has been sued at least once recently over regulations it crafted as part of the sweeping Dodd-Frank financial overhaul measure.

Congress directed the SEC to have the regulation in place by July 4. The agency had broken the deadline and was working to finalize the rule by late August, until Schapiro’s office heard from Roper on Aug. 7 and the timing changed. At least one commissioner — Republican Daniel Gallagher — was seething when he heard about the delay.

“I am furious,” read the subject line of an e-mail he sent to Schapiro on Aug. 8. Gallagher went on to accuse Schapiro of failing to act in good faith. Public comments could have been gathered months, or even years ago, he said. “It is not acceptable,” Gallagher’s e-mail said. “ . . . I continue to find shifting sands.”

On Aug. 29, the commission adopted the proposal, kicking off the public comment period that ended in early October. In his letter, McHenry said his subcommittee wants the rule to be finalized before Schapiro steps down as chairman Dec. 14.

Dina ElBoghdady covers housing policy for The Washington Post.
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