JOBS Act: Implications for Investor Marketing and Equity Research
It has been quite a week for the SEC in taking steps to write the rules governing how companies will use the JOBS Act. Yesterday the commissioners, by a four-one vote, approved the release of a proposed rule that would ease the “general solicitation” ban on private offerings — or how companies can promote securities offerings to investors.
The vote — and the discussion that preceded it — came a week after the SEC had delayed its decision on whether to lift the longstanding ban on general advertising for private securities offerings. The SEC had already missed a 90-day deadline for implementing the rules, as required by JOBS Act, which was signed into law last spring. This change in strategy was disappointing to Commissioners Paredes and Gallagher, who called out SEC Chairman Mary Schapiro for changing course from a planned interim final rule to a proposal open for public comment, particularly given that the 90-day rule-making deadline had passed.
Commissioner Aguilar also expressed discontent by voting against the recommendation. He indicated the advancement of such changes “presents a framework that is not balanced and that fails to address the acknowledged increased vulnerability of investors.”
Investors Need “Deliberate and Unrushed Process”
In explaining the SEC strategy, Chairman Schapiro stated that those who had previously commented on the JOBS Act proposal voiced concern about not having ample opportunity to provide the same level of feedback typically afforded to industry participants during the SEC rule-making process.
Clearly a unanimous decision by the SEC commissioners is unlikely when the final rules are approved.
CFA Institute, which has closely monitored JOBS Act developments, in a recent comment letter to the SEC encouraged a “deliberate and unrushed process” for creating rules implementing the JOBS Act. Our other recommendations addressed possible changes that “are needed to safeguard markets and investors everywhere.” CFA Institute will review the current proposal and provide comments to the SEC reflecting the need to maintain the integrity and effectiveness of capital markets.
Separation of Research and Investment Banking Activities
Earlier in August, the SEC Division of Trading and Markets issued an FAQ to provide guidance on recurring questions regarding research activities related to the JOBS Act. The Act appeared to prohibit a rule that bars investment firms from providing research on emerging companies during the IPO registration period. The CFA Institute comment letter identified the possible conflicts of interest that may arise if a research division of an offering underwriter were once again allowed to issue research reports on companies it’s representing.
A common theme of the FAQ was the need for affected firms to continue to meet their obligations under the 2003 Global Settlement. Any changes to activities allowed or prohibited by the firms covered under the Settlement would require appropriate court review and approval.
Other aspects of the JOBS Act may allow new flexibility for non-Global Settlement firms. One such item is the joint attendance at meetings with management by both investment banking and research team members. The intention of the Act in allowing this activity is to ease the burden on the management of emerging companies to hold separate meeting during this busy time.
All firms interested in offering research coverage on JOBS Act companies must abide by all applicable rules and regulations. The challenge for them is to ensure all conflicts of interest are addressed and managed to maintain the trust of their investors. The CFA Institute Research Objectivity Standards may be a useful tool for these organizations, as it recommends practices for achieving objectivity and independence in research reports.
