By Simon Johnson
As it currently stands, the “JOBS” bill now before the Senate would gut investor protection in the United States. The title of the bill is a complete misnomer – anything that weakens investor protection makes it more risky to invest in companies and increases the cost of capital to honest entrepreneurs. (For more background on the bill and links, see this piece.)
Much of the 1930s-era Securities legislation, which served us well for more than 70 years, is about to be repealed in a moment of bipartisan madness.
Almost all attempts to amend the House version of this legislation – and to make it more favorable to investors – have now failed in the Senate, and the “cloture motion” received more than 60 votes (so the bill cannot be filibustered). But Senator Jack Reed (D., Rhode Island) is leading one last charge to make the Senate version more reasonable.
Here is the issue with H.R. 3606 (as the House version of the bill is known), from Senator Reed’s website:
“The SEC requires public companies to disclose meaningful financial information to the public. This provides a common pool of knowledge for all investors to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate public information can people make sound investment decisions. The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to our nation’s economy. H.R. 3606 would roll back key investor protections, denying the public critical information that is essential to make sound judgments and would ultimately not lead to the proposed goal of the bill: providing for access to capital, particularly for small emerging companies.”
The “JOBS” bill would permit even very large companies to avoid all public disclosures.
Amazingly, it would also exempt these companies from having to comply with the federal regulation regarding mergers and acquisition. Private equity firms would even be able to manipulate the market while making a tender offer for shares – the kind of behavior that has really been taboo (and illegal) since the 1930s.
Senator Reed has put forward an amendment, #1931, that will at least partially retain some of our existing investor protections and disclosure requirements.
Specifically, Senator Reed’s amendment would close or limit a major loophole that will allow large companies to avoid registering with the SEC (and therefore escape much regulation). The Reed Amendment would clarify how to define “shareholders” for the purpose of determining if a business is so widely owned that it must register with the SEC. Under the Amendment, the count should be based on beneficial owners of the shares, i.e., real people. The goal is to prevent evasion of the SEC registration threshold through “nominal” owners holding the shares for large numbers of beneficial owners.
Big companies like H.R. 3606 – they will be regulated less and if the cost of capital rises for start-ups, that actually helps them. The Chamber of Commerce, the American Bankers’ Association, and the Independent Community Bankers of America have all weighed in heavily against the Reed Amendment – the idea of escaping SEC scrutiny greatly appeals to them.
The Chamber of Commerce’s letter against the Amendment to Senators closes with this statement – or you might call it a threat (bold and underlining in the original):
“The Chamber strongly opposes this amendment and may consider including votes on, or in relation to, this amendment in our How They Voted scorecard.”
Under Senate rules, the Reed Amendment would need just 51 votes today in order to pass. But against this kind of corporate firepower, does this entirely reasonable Amendment have any chance?