SEC’s Aguilar Laments Slow Adoption of Reg D Protections

‘Investors face greater harm’ every day the SEC fails to adopt these proposals, Aguilar said

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Securities and Exchange Commissioner Luis Aguilar told consumer advocates Thursday that every day the agency fails to adopt its proposals regarding Rule 506 private offerings under Regulation D is “another day that investors face greater harm.”

“Unfortunately, notwithstanding the 'real-world' evidence, we have recently seen a focus on legislation — such as the JOBS Act  —that seems to prioritize making 'capital-raising' quicker and cheaper, while often overlooking what is required for real capital formation,” Aguilar told attendees at the Consumer Federation of America’s financial services conference in Washington. “The clearest example of this is the new general solicitation provisions in Rule 506 of Regulation D, which were enacted without including the investor protections that many investors, academics and state regulators recommended.”

He said the risks of Rule 506, which allows general advertising of private offerings, were “well documented,” citing recent statistics by the North American Securities Administrators Association that found Rule 506 offerings were “still the most frequent source of enforcement cases conducted by state securities regulators.”

General solicitation, Aguilar continued, “simply exacerbates this problem by enabling potential fraudsters to cast a wider net.” He said that he agreed with NASAA’s prediction that scam artists were likely to use general solicitation under Regulation D “to their advantage.”

Said Aguilar: “Like NASAA and many others, I am concerned that removing the prohibition on general solicitation, without strengthening investor protections, puts investors at risk.”

When the commission adopted the amendment to Rule 506, the agency directed the SEC staff to execute a comprehensive work plan to review and analyze the use of the new exemption. The work plan includes, among other things:

  • Assessing whether availability of the new exemption actually facilitates new capital formation;
  • Monitoring the market for increased risks of fraud;
  • Incorporating an evaluation of Rule 506(c) offering practices in staff examinations of registered broker-dealers and registered investment advisors; and
  • Coordinating with state securities regulators on information sharing.

However, “for this work plan to be successful, the commission needs access to timely and useful information regarding the use of the Regulation D exemptions,” Aguilar said.

He noted the rule amendments that the SEC adopted at the same time the agency adopted the rule permitting general solicitation and advertising.

The proposed amendments would require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation, and would provide for the filing of a closing amendment to Form D after the termination of any Rule 506 offering. Also, they would require written general solicitation materials to include certain legends and other disclosures, extend the antifraud guidance contained in Rule 156 to the sales literature of private funds, and disqualify issuers that fail to make required filings under Rule 506 from using that exemption for future offerings, for at least a year.

“It is now almost five months since those proposals were issued for public comment,” Aguilar said. “I urge the Commission to move forward promptly to adopt the proposed rules.”

But Aguilar told CFA attendees that adoption of these amendments wouldn’t likely be seen in “the next month or two.”

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