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SEC Proposes Offering Reform Measures, Adopts Hedge Fund Adviser Registration

The SEC commissioners yesterday unanimously endorsed a proposal to reform the securities offering process but adopted on a split vote a new requirement that hedge fund advisers register with the SEC under the Investment Advisers Act. Alan Beller, the director of the Division of Corporation Finance, said the proposal to reform the securities offering process builds on the work of his predecessors, former directors Linda Quinn, Brian Lane and David Martin. Commissioners Cynthia Glassman and Paul Atkins voted against the adoption of the hedge fund adviser rule and plan to file a written dissent, just as they did when the proposal was approved for comment on a three-to-two vote.

Securities Offering Reform

Like the previous securities offering reform initiatives, this is one is a complicated proposal, according to Beller. The 1934 Act reforms that were undertaken to implement the mandates of the Sarbanes-Oxley Act, such as the CEO/CFO certification and disclosure controls, provide a framework that helps bolster the proposed 1933 Act reforms. The proposal addresses communications related to securities offerings, procedural restrictions in the offering and capital formation process, and the timeliness of the delivery of information to investors.

The SEC's proposal would create a new class of issuers referred to as well-known seasoned issuers, which include those eligible to use Forms S-3 or F-3 that have either $700 million of public common equity float or have issued $1 billion of registered debt in the previous three years. Most of the revised communication rules would apply to these issuers. Well-known seasoned issuers could engage in oral or written communications at any time, including a new free-writing prospectus. These issuers could also continue to publish regularly released business information and forward-looking information during the period that is currently prohibited.

The proposal includes an interpretation with respect to liability timing issues. It would modernize the shelf registration process and reform the prospectus delivery process. Accelerated filers would be required to include in their annual reports any material written staff comments that were issued more than 180 days prior to the end of the fiscal year that remain unresolved.

Beller said the proposal will free up resources since the staff will focus on the annual reports, rather than the securities offerings of well-known seasoned issuers. The cost savings for issuers should be significant and is estimated in the range of $195 billion, according to Beller.

Hedge Fund Advisers

Paul Roye, the director of the Division of Investment Management, described the staff recommendation to adopt rules to require the registration of hedge fund advisers and attempted to respond to arguments against the proposal. He said the staff had considered the alternatives that had been proposed during the comment process but none met the goal of the rulemaking -- to permit the SEC to exercise its examination authority, which he views as vital to deterring and detecting fraud in the hedge fund industry.

Chairman William Donaldson said that he had tried to evaluate the objections to the proposal, both personally and professionally. With respect to arguments that the SEC does not have the resources to examine hedge funds, he pointed to its new risk-based approach to examinations and inspections. He disagreed that registration would be construed as a kind of good housekeeping seal of approval and that the SEC had not done enough studying of the initiative before going forward. As for the SEC's authority to act, general counsel Giovanni Prezioso granted that assurance.

Commissioners Glassman and Atkins characterized the proposal as rushed and unwise given the views of other regulators that serve on the President's Working Group on the Capital Markets. Commissioner Roel Campos, who supported the final rule, said he believes it provides significant accommodations for the industry, including an effective date that is over a year away.

Donaldson has appointed a task force to create a risk-based examination model which is to be completed by the time the rules are effective. Glassman said it would have been useful to have appointed the task force to study the examination process prior to issuing the rule proposal, as she had suggested over a year ago.

In closing remarks, Donaldson said that if all of the decisions the commissioners are asked to make were easy, there would be no need to have five people serving on the panel. He thanked his colleagues for their insight and observations before calling for the vote.