In recent years, state securities regulators have done an admirable job as “the securities cops on the local beat.” Not only have they led the way in dealing with local frauds but they have played a significant role in addressing broader based national frauds. The truth is that they play an essential role in the securities regulatory process. Federal regulators and self regulatory organizations simply do not have ample resources to deal with the number of fraudulent schemes that have proliferated in the last decade.
For these reasons, state securities regulators should be given the tools with which to protect the public. In recent congressional hearings, state securities regulators have asked Congress to grant the states’ expanded powers to review private placement offerings, including those made under Regulation D. Reg D offerings are generally limited to wealthy investors and cannot be marketed to the general public. They are popular among hedge funds and small businesses seeking capital from private investors. State Regulators pointed out that the SEC’s hands-off approach to Reg D offerings can be exploited by fraudsters. Stanford Group Companies Stanford International Bank, Ltd. of Antigua, West Indies, for example, raised money for its Certificates of Deposit through Reg D offerings.
Prior to 1999, the states had significant authority over Reg D offerings, but that authority was revoked when Congress passed the National Securities Market Improvement Act of 1996 (NSMIA). Regulators are now pushing to regain the ground they have lost in the last 10 years.
Bolstering the state’s case is a March 31, 2009 report from the Inspector General of the Securities and Exchange Commission, which confirms what state regulators have been saying. According to that report, the SEC does not review more than 20,000 Reg D filings that it receives every year and has done little or nothing to follow up on questionable offerings. The SEC Inspector General’s report says that the commission “has never brought a single action against a company for not filing a Form D,” a form that must be filed in order for an offering to proceed under the regulation. That report also lamented that the Commission relies upon “the honor system” for issuers to comply with Regulation D.
According to James Ropp, Securities Commissioner for the State of Delaware, as quoted in the April 20, 2009 Investment News, “we think these forms should be reviewed routinely.” Ropp is the head of the enforcement section for the North American Securities Administrators Association (NASAA). “If federal regulators don’t have the manpower to do it,” Ropp continued, “then the states should.” Just last month, NASAA and Colorado Securities Commissioner Fred Joseph asked the U.S. Senate Banking Committee for the same authority. According to Joseph, a “steady and significant rise in [Reg D deals] that are later discovered to be fraudulent” is a direct result of passage of NSMIA in 1999.
The Inspector General’s report recommended that the SEC consider approving a proposed rule that would let the SEC prevent repeat violators from participating in Reg D offerings, a power the states used to possess.
We submit that it is time for Congress to support the efforts of state regulators to fill the voids that currently exist in the regulatory process. The recent periods of lax enforcement have amply demonstrated why change is needed.
Page Perry and its attorneys has experience representing investors in Regulation D and other securities-related matters. The firm has over 125 years of collective experience representing investors in investment-related litigation and arbitration. For further information, please contact us.