SEC committee mulls broker-dealer regulations, perspectives on crowdfunding

Frustration peaked over perceived inaction on setting standards for broker-dealer regulation during an SEC meeting devoted to small business issues.

Patrick Reardon, who sits on the SEC’s committee on small and emerging companies, criticized Stephen Luparello, the agency’s director of trading and markets, at a meeting at the commission’s headquarters in Washington.

“We’re asking questions after 16, 19 years,” Reardon told Luparello. “You should know all the answers to the questions by now.”

{mosads}He said he tipped off the commission to unlicensed broker-dealers in his native Texas that have stolen from his clients, and he’s frustrated as a lawyer and a taxpayer about what he called the commission’s inaction.

“What I think is Congress is going to have to step in here and do this because y’all have had plenty of time to do all this,” Reardon said.

Luparello said he supports filing cases against people who violate the SEC’s broker-dealer registration rules, even though, “they aren’t the sexiest cases in the world.”

“Unregistered broker-dealer cases, despite the fact that they’re not terribly exciting, have become a much greater priority,” Luparello said. “There are a lot more cases in the last couple of years than there have been historically.”

Luparello became the director of trading and markets in February 2014.

Crowdfunding growing pains. 

The committee discussed ways to better educate small business owners about the ways they can generate capital, whether through online training modules or smaller, in-person question and answer sessions. This conversation follows the implementation of rules in May that allow members of the public to receive compensation for investing in small businesses through crowdfunding campaigns.

The shift was spurred by President Obama signing the Jumpstart Our Businesses Act in 2012, though the SEC did not approve rules governing the crowdfunding until October 2015.

For committee co-chair Sara Hanks, who is the co-founder and chief executive officer of a disclosure and compliance service company for online capital formation, things have been off to a rocky start from a compliance standpoint.

“The compliance is really fairly bad,” she told The Hill Extra. “I can’t speak for the SEC, but I think one of the things that they are going to be focusing on is the fact that intermediaries are maybe going to have to do a little bit more” to ensure compliance. 

Hanks said it wouldn’t surprise her if the SEC issued guidance telling intermediaries they have to do more to ensure their clients comply with existing rules and regulations.

“They already have this obligation,” she said. “I think it’s just an issue of them doing it more.”

Despite the initial bumps, Hanks said the program will help businesses in the future.

“What we’re doing is introducing a level of regulatory complexity much earlier in a company’s life than was ever the case before,” she said. “Just because there is a few roadblocks at first doesn’t mean it’s not going to be a very useful thing for companies in the future, and I really think it will be.”

Smooth sailing for users. 

While there may be some issues with crowdfunding in terms of compliance, fundraisers are taking advantage of the new way to raise capital.

“Yes, people are using it,” said Jenny Kassan, a member of the committee who owns her own consulting company. “I’m actually raising money myself right now under Title III of the JOBS Act.”

She said the crowdfunding rules are “relatively easy to use,” since the issuer can rely on the platform to ensure compliance.

“The one part that is a little challenging is the financials that you have to have,” Kassan told The Hill Extra, adding that most businesses may not realize they are not compliant with generally accepted accounting principles. “I’d say it’s one of the easiest ways to raise money in terms of the chances that you’re going to make a mistake are low,” because of the third-party intermediary.

“I actually wrote some op-eds a few years ago really critical of this law, but now that I’m using it and my clients are using it, I’m pretty pleased,” she said.  

See more exclusive content policy and regulatory news on our subscription-only service, The Hill Extra.