After once looking like a done deal, controversy and uncertainty is now swirling around a new rule allowing U.S. hedge funds to advertise.
The Securities and Exchange Commission formally proposed the rule in August, but it still requires a final vote by the commission. And the only one of the five members of the regulator to vote against proposing the rule is now blasting that process while the commission's outgoing chairman's motives for delaying the rule have been called into question.
Luis Aguilar, one of three Democrats on the SEC, said after an accounting conference that "it was very disconcerting to me that on the night before the Wednesday vote, that Tuesday evening, that proposal had stripped from it much of the dialogue and discussions that one would consider pro-investor initiatives."
Aguilar said at the time that he believed the proposal needed investor protections and that, as written, it would increase fraud. Outgoing Chairman Mary Schapiro seemed to agree, but moved forward anyway, citing the "narrow mandate that Congress placed upon us" in April's JOBS Act, which required the removal of an 80-year-old ban on general solicitation by private funds.
But Schapiro may have been seeking to undermine the rule, anyway, according to The Wall Street Journal. The newspaper alleges that Schapiro delayed the rule—the JOBS Act gave the SEC 90 days to implement it, a deadline that Schapiro called impossible to meet—after a last-minute intervention by a consumer lobbyist, in part to protect her legacy at the agency.
According to internal e-mails provided to Congress, SEC staff initially recommended an interim final rule to immediately end the ban in August. But after the Consumer Federation of America's Barbara Roper e-mailed the SEC to express "strong objections" to imposing the rule without a comment period, Schapiro backtracked.
In an e-mail to several at the SEC, including Elisse Walter, set to take over from Schapiro this month, Schapiro wrote that the CFA's concerns "are making me very worried." In another e-mail to the head of the division writing the rule—headed "Please don't forward"—she suggested that if consumer groups "feel this strongly, it seems like we should give them a comment period."
Schapiro also told Meredith Cross, "I don't want to be tagged with an anti-investor legacy" that "wouldn't be fair."
In the wake of Schapiro's decision, Republican Commissioner Daniel Gallagher told her, "I am furious."
"Chairman Schapiro strongly believes that protecting investors should be the desired legacy of all SEC chairmen," the agency said. "It is part of our mission and should inform our decisions at all times. She also believes that the agency should not consider investors—or the groups that represent them—to be special interests."
The Journal suggests that with Schapiro's exit, the fate of the rule hangs in the balance. It's unclear whether this is true: Walter and the two Republican commissioners voted to propose the rule, and Walter has not said she would block its final adoption. The incoming chairwoman said that she does believe the SEC should add investor protections to the rule.
For his part, Aguilar said that the proposed rule, on the eve of its proposal, included a number of investor protection measures. But they were removed "at the chairman's request."
Aguilar also suggested that one of the possible new protections would be a redefinition of "accredited investor." While hedge funds will be allowed to advertise publicly, the new rule does not change requirement that only the well-off invest in hedge funds.