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An Abortion of Business

An Abortion of Business

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Published by Noel
An article on how over-regulation by the federal government is strangling the U.S. economy.
An article on how over-regulation by the federal government is strangling the U.S. economy.

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Published by: Noel on Feb 24, 2012
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 An Abortion of Business
I never took Securities Regulation in my final semester of law school law school expecting to get fired upabout the SEC’s disclosure requirements on corporations. Nevertheless, I have found the topic to beintriguing to say the least. My past treatment in this blog of federal regulatory bodies has beenless thanfawning. I am not, however, an anarchist ideologue.I believe that the government should act to penalize businesses that perpetrate frauds on their customers. Ido not believe, however, that outright federal regulation of business, as we know it today, is warranted byany need to “protect consumers” or prevent businesses from acting against the “public interest,” nor do Ibelieve that such federal regulation is authorized by theCommerceClauseof theU.S. Constitution, despite the prevailing legal view to the contrary. A proper “original meaning” understanding of the Constitution pointsto a system of government regulation under which substantially less government regulation of business thanwe have today would be authorized.In my readings for Securities Regulation, this week, I read
“Acceleration” Under the Securities Act of 1933 – A Comment on the A.B.A.’s Legislative Proposal 
, Gadsby, Edward N. and Garret, Jr., Ray, 13 Bus.Lawyer 718 (1958). In that article, the authors write:
Under the proposed amendment if a registration statement were filed without stating theoffering price, such information could be supplied by amendment on the 19th day and thestatement would become effective on the 20 
day without requiring any action by theCommission. On the other hand, under the present wording of the statute, such a statement would not become effective until the 39
day after the original filing unless the Commission“accelerated” its effective date. As a practical matter since an underwriter is seldom willing tobe committed to a price for any substantial length of time prior to the public offering, issuersnormally request “acceleration” by the Commission. The Section’s report asserts that this places in the hands of the Commission a “club” over the issuer, a power which the proponentsof the statutory amendment believe the Commission should not have, even though they doadmit that the “power is not being used in a manner which seriously hampers the investment banking industry.” 
I know some of that might be confusing. Please let me explain a little.The parties the authors are talking about are a proposed Issuer of Securities, the Securities Exchange Commission, and the Underwriters.(Securities Act of 1933, Rule 405. Definitions of Terms.) The Actrequires issuers of securities to disclose material facts regarding theoffering of a security. The U.S. Supreme Court, in
TSC v. Northway 
,opined that a fact is material if “a reasonable shareholder wouldconsider it important” in making an investment decision or if there is “asubstantial likelihood that the disclosure of the omitted fact would havebeen viewed by the reasonable investor as having significantly alteredthe ‘total mix’ of information made available.”
By statute, every time an issuer files an amendment to a registration of a proposed issuance of securities, the filing resets the 20-day statutoryperiod that must lapse before the registration becomes effective. This isa problem, as the authors pointed out, above, because underwriters don’t want to be “locked in” to a certainprice for a security, because the securities market changes rapidly. To solve this problem, the SEC hasadopted the practice of “accelerating” the effective date, upon request by the issuer, when the Commissionfinds the registration (including amendments filed) to be satisfactory. Acceleration is a kind-of informalpractice adopted for purposes of administrative expediency, because it would be administratively difficult,and extraordinarily burdensome on business to actually comply with the statute as written.The problem for issuers is that the decision to accelerate or not accelerate the effective date of aregistration is within the sole, unappealable discretion of the SEC, and if the SEC just wants to make lifedifficult for an issuer, they can drag their feet on the acceleration until the underwriters throw in the towel or the statutory period lapses, whichever comes first. This is not the only weapon in the SEC’s arsenal, but it isa powerful one.My readings also include
“Acceleration” Under the Securities Act of 1933 – A Reply to the Securities and Exchange Commission
, by Mulford, John, 14 Bus.Lawyer 156 (1958). Mulford writes, in relevant part:
[The SEC's attack] was based … on the fact that the amendment would remove one weaponfrom the arsenal used by the Commission to force changes in the substantive features of  public offerings of securities. They contend that this weapon (the power to deny accelerationon the filing of a price amendment and thus to prohibit particular public offerings) wasintended by the Congress to be granted to the Commission. The relevant decisions of thecourts and the legislative history of the 1940 amendment to the Securities Act which inserted the language relied on by the Commission are to the contrary.” 
Having read relevant cases, myself, I am convincedMulford is right. As I look at the relevant case law, itseems to me that the Commission appears to have – andoccasionally to use – its (perhaps unconstitutionallybroad) discretion to penalize some proposed issuers of securities. Without more information than I have, it wouldbe mere speculation to allege that the Commission mightpenalize some proposed issuers for political reasons, or even, in some cases, out of spite that may arise betweenagents of the SEC and some proposed issuers. Thedanger, however, is very real that such abuses couldoccur, even if they do not in fact occur as a matter of course.Very apropos are the
Remarks of Harold Marsh, Jr. InPanel Discussion on Disclosure in Registered Security Offerings
, 28 Bus.Lawyer 505, 531-32 (1973).
 Assuming that the criticisms of the usefulness of the type of disclosure presently found in most Registration Statements have some validity, and I think that few securities lawyers would assert that they are totally without foundation, the question arises as to where we went wrong.I think that this can be pinpointed with some precision. The story has often been told as tohow the official in charge of the processing of 1933 Act registrations was presented withrecommendations from his Staff that stop order proceedings be instituted against every singleone of the more than 100 statements that were initially filed. Instead of following theserecommendations, he invented the letter of comment procedure whereby the issuers weregiven an opportunity to rewrite their Registration Statements in the way that the SEC Staff wanted them written.There was, however, another clear choice which he had and presumably rejected, other thaninstituting over 100 stop order proceedings, and that was to inform his Staff in connection with95% to 99% of their comments that if they ever made any more asinine comments like that,they would be fired. In my opinion, the development of disclosure in registered offerings would unquestionably have been different, and very probably more useful, if the SEC Staff had 
stayed out of it.It is still not too late to retrieve that error. All that it would take is an act of will on the part of the Commission to permit the Securities Act of 1933 to operate in the manner in which it was originally written and a public announcement that the SEC Staff would never again read a Registration Statement for the purpose of issuing a “letter of comment,” but would make every Registration Statement effective at any timerequested by the issuer and underwriter unless a prior notice of stop order proceedings had been issued. For 39 years the Securities Bar and the SEC Staff have been attempting jointly to write prospectuses and, if Judge Weinstein and Professor Kripke are to be believed, all they have produced is an abortion.Isn’t it time we tried another way?
 Apparently, federal regulators and other people whodemonstrate their ignorance of common senseeconomic principlesdon’t think so. Even now, despitethe immeasurable suffering that Marxism has wroughton the world, socialist agitators including “unions,prominent big-government advocates, and socialistgroups are joining the ‘Occupy Wall Street’demonstrationsin New York and ‘solidarity’ protestsnationwide.” According toThe New American, “The trend has someanalysts very concerned — particularly after reportsclaimed union bossestied to the Obamaadministrationwere plotting to bring about chaos. Andwhile the protests which began on September 17 maybe small now, supporters and critics alike say this maybe only the beginning of something much bigger.” As SEC oversight of issuers’ financial adviserscontinues to expand under massive new federallegislation and regulations continue to pile up, thepotential for abuse increases. The bond markets arealready suffering asissuers and banks worrythat the changing definition of who is actually a financialadviser over whom the SEC has oversight authority may be too broad. The concern is that whenever abroker-dealer discusses the structure of a possible securities investment, they may be deemed an “adviser,”and subject to cumbersome regulatory oversight.
Click for Video
:Marxist Revolutionary Van Jones Threatens America With “October Offensive”While American businesses struggle to tread water with the federal government’s regulatory elephantstrapped to their back,radical Marxist revolutionaries threaten to bring about an “American Fall” theycompare to the “Arab Spring”in which“revolutions of ‘hope’” have given way to “a cascade of sectarianconflicts.”In this hostile climate, how can anyone expect businesses to prosper, the economy to improve, or obs to be created? The barbarians are gathered at the gates, and inside those gates, our self-appointed“liberators,” mere barbarians in disguise, threaten to bring us into a period fraught with social unrest, if notoutright open conflict that would be likely to break down alongclassandraciallines.  As the American economy struggles through the pains of recession to give birth to recovery, the parallelefforts of both the federal regulatory environment and Marxist revolutionaries to unsustainably increase theregulation of business seem likely to result in the abortion of business growth, economic growth, job growth,or any other symptom of the prosperity that arises from the liberty to conduct business without the jackbootof government crushing the life out of industry. The only way to avoid collapse is to immediately reversecourse, shrink the size of the federal government, balance the federal budget, reduce the national debt, anddemonstrate a commitment to long-term fiscal integrity and responsibility. Quite frankly, I don’t see thathappening, unless the American people elect a majority of not just Republican butlibertariancandidates in2012.Related posts:

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