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Republicans Angry That SEC Allowing Public Comment Period for a Rule Change

Normally you would attack a regulator for corruption on their way in the door, not on their way out. But Patrick McHenry (R-NC) claims that SEC Chair Mary Schapiro, in one of her final acts, burnished her legacy by delaying a rule that would allow companies trying to go public to solicit donations through public advertising.

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.”

So Congress would have gotten away with it if it weren’t for that meddling consumer lobbyist, is the theory here. Because consumer lobbyists traditionally have so much clout.

Regardless of the political implications, the policy of letting companies run advertising for capital sounds really terrible. Indeed, gullible and unsophisticated investors almost certainly WILL get duped by such a scheme. Indeed, the entire JOBS Act is anti-investor. And indeed, Schapiro would have to live with that when the inevitable scandals ensued. The tension here comes from Congress passing a law that clearly eviscerates investor protections, paired with a regulatory agency who has that as its mission.

But understand what took place here. Congress created tight deadlines in the JOBS Act for rule promulgation, ones which would have made a public comment period impossible. A director in the corporate finance division of the SEC – you might as well call it the “industry capture” division – said that, given the deadlines (as if a regulatory agency never blew past a deadline before), public comment would be “impracticable, unnecessary and contrary to the public interest.” Investor groups sought the opportunity to make their case, said they would take the SEC to court to ensure that, and Schapiro ultimately decided to follow the normal course of action with a public comment period. So McHenry is mad that the public gets to weigh in, as per usual, on the terrible ripping up of investor protection laws envisioned by the JOBS Act.

McHenry’s goal is to get the rule finalized before Schapiro leaves on December 14. This is actually one case where the 2-2 partisan split on the SEC after Schapiro’s departure would work to the possible benefit of investors, if it results in a lack of functioning for the board. That’s what’s got McHenry so hopping mad.

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David Dayen

David Dayen

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