SEC Faces A Swarm Of Legal Issues In Considering The Investor Advisory Committee’s Recommendations Concerning General Solicitation

The SEC’s Investor Advisory Committee held another meeting last week with Elisse B. Walter making her first public appearance as SEC Chairman. She and Commissioner Luis A. Aguilar had many kind words for the Committee’s recommendations with respect to lifting the ban on general solicitations in Rule 506 offerings. The insouciance of their remarks, however, was in sharp contrast with the missed deadlines and many legal issues swirling around the Committee and its recommendations.

First, the SEC has failed to meet the deadline established by the Jumpstart Our Business Startups (JOBS) Act for revising its rules to eliminate the prohibition on general solicitation in Rule 506 offerings when all purchasers are accredited investors. The SEC was supposed to have done so by last April. Yet, it didn’t even propose rules until August. It has yet to adopt final rules.

Second, the Committee’s recommendations were the product of a deeply flawed process. The public was given only 3 days’ notice of the meeting at which the Committee considered the recommendations. In a truly Kafkaesque move, the Committee invited public comment on the proposed recommendations, but did not make the recommendations public. Neither the Committee nor the SEC has explained how the public could be expected to comment on unseen recommendations.

Third, the Committee’s submitted its recommendations to the SEC after the close of the officially noticed comment period. Indeed, the Committee did not even meet to consider the recommendations until after the comment period had ended. Nonetheless, both Chairman Walter and Commissioner Aguilar indicated that they would consider these recommendations even thought neither the SEC’s rules nor its notice of proposed rule changes provide for the consideration of late-filed comments. More importantly, the Committee’s recommendations included significant matters not covered in the SEC’s proposed rule.

Fourth, the SEC failed to comply with Congress’ requirement that each time the Committee submits a recommendation, the SEC promptly issue a public statement (i) assessing the finding or recommendation of the Committee; and (ii) disclosing the action, if any, the SEC intends to take with respect to the finding or recommendation. 15 U.S.C. § 78pp(g). The Committee’s recommendations were submitted more than three months ago and the SEC has still failed to issue the required public statement. Note that this is an obligation imposed on the Commission, not the staff.

Fifth, the Committee and the SEC have each ignored recommendations that the Committee adopt procedures that, at a minimum, require disclosure of potential conflict of interests among members of the Committee. Based on publicly information, it appears that members of the committee are affiliated with organizations that have significant business relationships. Without this disclosure, neither the public nor the Commission has any assurance that the Committee’s recommendations are the product of the independent judgment of the Committee members.

Sixth, the SEC has permitted an employee of an issuer to chair the Committee even though Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act expressly provides that the chairman of the Committee must not be an employer of an issuer. Notwithstanding the unambiguous command of Congress, the Committee is chaired by an employee of the State of California, which is the issuer of many millions of dollars in securities. In fact, California’s Controller lists the chairman as the state’s third most highly paid employee in 2011, with a compensation exceeding $519,000.