SEC’s Retroactive Approach to Its Proposed Reg D ‘Bad Actor’ Rule Draws Criticism From Law Firms

In comment letters sent to the Securities and Exchange Commission, numerous law firms wrote that the retroactive approach taken in a proposed rule to bar “bad actors” from Regulation D private offerings under the 1933 Securities Act sets up a number of fairness issues. The law firms also cautioned that the Dodd-Frank Wall Street Reform and Consumer Protection Act, which calls for the rulemaking, doesn’t require retroactivity.

The proposed rule would keep recidivist violators and felons from taking part in private offerings under Rule 506 of Reg D. Determining who is barred would be based on disqualifying events, including ones that occurred before the Dodd-Frank statute was passed. Some law firms have even said that a retroactive application would disrupt already negotiated administrative and civil settlements while chancing the “unwarranted disruption to private capital formation.” However, not all lawyers disapprove of applying the proposed Reg D ‘Bad Actor’ Rule retroactively. Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd said, “What kind of attorney thinks it is inherently unfair to ‘bar felons and recidivist violators from participating in private offerings’ of securities sold to the public? Stand in front of a mirror and say that to yourself out loud.”

SEC has been divided about the proposed application of the rule and
Commissioners Troy Paredes and Kathleen Casey, who are both Republicans, strongly oppose it. SEC Chairman Mary Schapiro, however, has said that the retroactive approach should help protect investors, which is part of Dodd-Frank’s intent.

Meantime, the New York City Bar Association’s securities regulation committee has said that “inherent fairness” requires a “prospective application” of any rule that would penalize a party on the basis of a past settlement or adjudication. The committee also cautioned that should the SEC move forward with its proposal, so many “waiver requests” might come in that this could place a further strain on the Commission’s already taxed staff resources.

Rule 506 of Regulation D under the 1933 Securities Act
Per the proposed Rule 506 of Regulation D under the 1933 Securities Act, recidivist violators that are subject to specific sanctions and proceedings and parties with felonies or misdemeanors involving the buying or selling of a securities would be barred from the sales and offerings of securities. They also wouldn’t be allowed to seek the benefits of the safe harbor act’s Rule 506. The rule, which allows issuers to get around the 1933 Act’s reporting requirements, also comprises some 93% of private securities offered under Reg. D.

The proposal also wouldn’t allow a private placement to avail of the rule if the person or issuer covered by the rule had a disqualifying event (restraining order, criminal conviction, court injunction, USPS false representation order, certain commission disciplinary orders, commission “stop orders” to suspend exemptions, expulsion or suspension from belonging to an SRO or associating with an SRO member, and/or final orders of insurance, credit union regulators, or state securities banking.)

Related Web Resources:

Attorneys Decry Retroactive Approach Of SEC’s Reg D ‘Bad Actor’ Rule Proposal, BNA Securities Law Daily, July 21, 2011
Comments on Disqualification of Felons and Other “Bad Actors” From Rule 506 Offerings,

More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investor Securities Blog, May 29, 2011
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011
FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011
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