I join the Chairman in thanking the Division of Corporation Finance and the other divisions and offices that have contributed to the proposal under consideration today.
As required by Sec. 926 of the Dodd-Frank Act, we are proposing rules that would disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on the safe harbor from Securities Act registration provided by Rule 506 of Regulation D.
Unfortunately, however, I am not able to support this proposing release, because the proposed rules would apply retroactively by disqualifying transaction participants from engaging in Rule 506 offerings for conduct occurring prior to enactment of the Dodd-Frank Act.
I want to emphasize at the outset that I do not disagree, as a policy matter, with disqualifying so-called “bad actors” from Rule 506 offerings. Moreover, notwithstanding my own opinions about the policies underlying some of the mandates of Dodd-Frank, I have supported — and will continue to support — our proposed and final rulemakings that are appropriately tailored to implement clear mandates of that Act.
Contrary to today’s proposal, however, I do not believe that Sec. 926 clearly mandates that our rules disqualify persons from reliance on Rule 506 for conduct that predated the Dodd-Frank Act.
Our jurisprudence has a long, well-established legal presumption against interpreting statutes to have retroactive effect, and the Courts have laid out an analytic framework for considering issues of impermissible retroactivity. In general, where Congress has not clearly expressed its intent to apply a provision retroactively, agency rules that implement the provision in a way that attaches new legal consequences to events completed before enactment of the statute cannot stand.
The Supreme Court has underscored why the anti-retroactivity principle is so crucial to a free society: “Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted.”
Sec. 926 will apply to a large number of private offerings, and disqualification is triggered by a wide range of events. The release notes that, in the year ended September 30, 2010, over 17,000 initial filings on Form D, or approximately 93% of all such filings for Regulation D transactions, claimed a Rule 506 exemption. Furthermore, events requiring disqualification include all of the matters that currently disqualify a person from Regulation A transactions, as well as certain final orders issued by state and federal regulators.
Because of the significance of the consequences of the proposed rules for affected persons, I believe the Commission should be particularly cognizant of concerns about fairness and settled expectations. Where, as here, the statute and jurisprudence do not, in my view, support retroactive application of these rules, it would be more appropriate to apply our rules prospectively, and/or seek from Congress a technical amendment to the statute to clarify that these provisions should be applied retroactively if that was indeed Congressional intent.
I also note that the release requests comment on possible additional amendments to apply the same disqualification provisions that we propose today for Rule 506 transactions to the Rule 504 exemption, and to amend the disqualification provisions for exemptions under Rule 505, Regulation A and Regulation E to make them uniform with the Rule 506 disqualification provisions.
Notably, Rule 504 — the so-called “seed capital” exemption — has never been subject to disqualification provisions for bad actors.
These potential amendments are not required by the Dodd-Frank Act. Rather, the Commission requests comment to determine whether it would be beneficial to investor protection, and whether it would promote clarity and simplicity and reduce regulatory costs, to apply these disqualification provisions on a more uniform basis to other exemptions from Securities Act registration.
Clearly, because these additional potential amendments are discretionary, any disqualification as a result of these amendments from reliance on the Rule 504, Rule 505, Regulation A or Regulation E exemptions on the basis of conduct that pre-dates the final rules would raise substantially heightened retroactivity concerns.
I look forward to hearing commenters’ views on today’s release, particularly relating to the potential costs and benefits of applying these disqualification rules, for the first time, to Rule 504 transactions.
I have no questions for the staff at this time.