U.S. legislation that would roll back securities disclosure and governance rules in the name of job creation is being attacked by consumer advocates and former regulators as an evisceration of investor protections in place since the 1930s.
The package of bills awaiting Senate action after receiving broad bipartisan support in a House vote last week would destroy safeguards dating as far back as the laws that created the Securities and Exchange Commission, according to Lynn E. Turner, a former SEC chief accountant.
“It won’t create jobs, but it will simplify fraud,” Turner said in an interview last week. “This would be better known as the bucket-shop and penny-stock fraud reauthorization act of 2012,” he said, referring to practices banned under securities law.
The Republican-led House, in a show of election-year comity, voted 390-23 to approve measures that would among other things undo a ban on closely held firms soliciting investments, increase the number of investors such firms can have and exempt newly public companies with less than $1 billion in revenue from some reporting requirements of the Dodd-Frank and Sarbanes-Oxley laws. President Barack Obama has backed the legislation as a way to help spur job creation, and Senate Democrats have said they will move quickly on their own version.
“What we’re trying to do is to regain the confidence of the people that sent us here,” House Majority Leader Eric Cantor, a Virginia Republican, said after the March 8 vote.
Supporters including the U.S. Chamber of Commerce, and New York-based exchange operators Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext say the bill targets rules that have impeded economic growth by making it harder for companies to raise capital or conduct initial public offerings. That view has won support from Democrats including Senator Charles Schumer of New York.
“I do think Congress has an ongoing obligation to ask whether the policy framework for public offering is striking the right balance between facilitating capital formation on the one hand, and attempting to protect the investors on the other,” Schumer said at a March 7 Senate hearing, citing a “drastic decline” in the number of U.S. IPOs since the 1990s. “That’s always a needle we have to thread.”
Opponents, including former SEC Chairman Arthur Levitt and Barbara Roper, director of investor protection for the Consumer Federation of America, say the approach is wrong-headed because it will hurt investors without achieving the stated goal.
“You don’t increase jobs growth by rolling back regulatory protections, and it’s frankly bewildering that the Democrats have been so willing to buy into the traditional Republican argument,” Roper said in an interview.
SEC Chairman Mary Schapiro “believes that portions of the legislation either unnecessarily eliminate important investor protections or are not balanced with sufficient safeguards,” John Nester, an agency spokesman, said in a statement.
The SEC, which reviewed ideas similar to the legislative proposals after Obama directed federal agencies to remove impediments to business growth, will work with Congress try to correct problems, including a provision that de-regulates analyst research in a way that “could take us back to the conflicted practices of the dot-com bubble,” Nester said in a statement yesterday
The House bill includes a provision that would permit so- called crowdfunding, allowing companies to raise capital by soliciting and pooling investments online. An SEC small-business advisory committee that reviewed some of the legislative ideas rejected crowdfunding last month, saying it could foster fraud.
Another proposal -- giving companies with less than $1 billion in revenue an easier “on ramp” to SEC registration -- would represent a “fundamental reduction in the level of transparency and regulation for companies going public,” said Turner, who is managing director of Litinomics Inc., an economic and legal consulting firm based in Mountain View, California.
The so-called emerging growth companies taking advantage of the on ramp would avoid audits of their financial condition for up to five years and would file no more than two years of audited financial statements in order to register.
“A billion dollars in gross revenue is nearly everybody,” Roper said. “You’re talking about allowing most companies that go public to go public without meeting these basic standards.”
Levitt, who ran the SEC from 1993 to 2001, said there is “nothing magical” about the small and emerging companies that have been the focus of bipartisan support for the legislation.
“Ninety percent of restatements are with these small companies,” Levitt said March 8 in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” “They’re the ones that need the protections of internal audits.” said Levitt, who is a member of the board of Bloomberg LP, the parent of Bloomberg News.
Representative John P. Sarbanes of Maryland, one of 23 Democratic opponents in the House, warned colleagues in a letter that the bill could lead to an “Enron-Type fraud,” invoking the accounting scandal that led Congress to enact the law named for his father, former SenatorPaul Sarbanes.
Senate Democrats, who have been meeting to craft their version of the bill, have said they will address some of the concerns raised by Levitt, Roper and others -- many of them echoed by senior lawmakers such as Senators Jack Reed of Rhode Island and Carl Levin of Michigan.
Schumer, who has pushed a Senate version of the IPO on-ramp measure, said his chamber’s version “will have more consumer and investor protections.”
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