SEC Investor Advocate Submits Inaugural Report to Congress

Rick FlemingThe Office of Investor Advocate (IA), a new role mandated by Dodd-Frank, has submitted its inaugural report to Congress.  In February of this year, SEC Chair Mary Jo White appointed Rick A. Fleming as the first Investor Advocate for the SEC. Fleming, a well known figure in the halls of the SEC, was previously counsel at the North American Securities Administrator Association (NASAA).  Fleming reports directly to the SEC Chair.

Some of the responsibilities of the IA include reporting on Commission responsiveness, along with Self Regulatory groups, in regards to investor concerns.  The objectives for fiscal year 2015 include working with the Investor Advisory Committee (IAC), review rulemaking and “build momentum” for reforms that benefit investors.

The actual statute is synthesized as follows:

By statute, the Investor Advocate shall perform the following functions:

  • assist retail investors in resolving significant problems such investors may have with the Commission or with SROs;
  • identify areas in which investors would benefit from changes in the regulations of the Commission or the rules of SROs;
  • identify problems that investors have with financial service providers and investment products;
  • analyze the potential impact on investors of proposed regulations of the Commission and rules of SROs; and
  • to the extent practicable,propose to the Commission changes in the regulations or orders of the Commission and to Congress any legislative, administrative, or personnel changes that may be appropriate to mitigate problems identified and to promote the interests of investors.

SEC Investor AdvocatesThe report incorporates the recommendations from the IAC.  This segment of the document addresses IAC opinion on investment crowdfunding directly stating;

At its meeting on April 10, 2014, the IAC adopted a package of six recommendations for the SEC to strengthen its proposed rules to implement the crowdfunding provisions of the JOBS Act.81 The Committee stated that its recommendations would better ensure that investors under­ stand the risks of crowdfunding and avoid unaffordable financial losses. Among other things, the Committee recommended that the SEC:

At its meeting on April 10, 2014, the IAC adopted a package of six recommendations for the SEC to strengthen its proposed rules to implement the crowdfunding provisions of the JOBS Act.81 The Committee stated that its recommendations would better ensure that investors under­ stand the risks of crowdfunding and avoid unaffordable financial losses. Among other things, the Committee recommended that the SEC:

  • Adopt tighter limits on the amount of money that investors could invest in crowdfund­ing;
  • Strengthen the mechanisms for the enforcement of the investment limits in order to bet­ter prevent errors and evasion;
  • Clarify and strengthen the obligations of crowdfunding intermediaries to ensure that issuers comply with their legal obligations; clarify the requirements for background checks; clearly affirm the right of portals to “curate” offerings; and consider a tiered regulatory structure based upon factors such as the size of offering, investment limits, and participation by individuals with a record of securities law violations;
  • Enhance the effectiveness of educational materials for investors;
  • Replace the proposed definition of electronic delivery with a stronger definition that, at a minimum, requires disclosure of a specific URL where required disclosures can be found; and
  • Replace its proposal to eliminate application of the integration doctrine with a narrower approach.

These recommendations relate to proposed rules that are still under consideration.82 Accord­ ingly, it is anticipated that the SEC’s response to the IAC recommendations will be reflected in the adopting release for the final rule.

SEC Headquarters in DCThe document tackles Title II of the JOBS where general solicitation was allowed for private placements.  This is investment crowdfunding for accredited investors.  In brief the IAC position, something that has been previously outlined, is as follows:

In summary, the IAC recom­mended that the SEC:

  • Require all issuers who utilize general solicitation to file a new form or a revised version of Form D;
  • Require that all solicitation material be furnished to the SEC;
  • Adopt a safe harbor that provides clea rand enforceable standards for verification of accredited investor status, and promote reliance on regulated third parties for verification;
  • Make the filing of Form D a condition for relying on the exemption,while avoiding undue penalties for inadvertent violations by small, unsophisticated issuers.
  • Ensure that any performance claims in solicitation materials are based upon appropriate performance reporting standards;
  • Amend the natural persons prong of the accredited investor definition to better reflect a population that has the financial sophistication to analyze the risks in private offerings and/or the wealth to withstand potential losses; and
  • Disqualify “bad actors” from the use of Rule 506,as required by Section 926 of the Dodd-Frank Act and as previously proposed by the Commission.96

SECOn July 10, 2013, the SEC took three related actions. First, the Commission adopted a final rule permitting general solicitation and advertising in Rule 506 offerings.97 Second, it adopted a final rule disqualifying offerings involving felons and other bad actors.98 Third, it proposed an addi­ tional rule to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise once the ban is lifted.99 The Com­ mission has twice sought public comment on the rule proposal, but the proposal has not yet been adopted. Taken together, the two final rules and the proposed rule generally reflect consideration of the IAC recommendations.100

The entire report is embedded below for your review.