It was naive to think that the startup world could change the financial industry as quickly as it wanted to.
The Securities and Exchange Commission and FINRA — the two organizations tasked with implementing the JOBS Act — are unlikely to meet Congress’ end of the year deadline, according to multiple sources familiar with the situation.
Over the course of a multi-day investigation, PandoDaily has spoken with multiple sources with direct knowledge of the implementation of the JOBS act, and they all corroborate the same story. Unless something changes, the JOBS Act is stuck in political quicksand. What’s worse, everyone saw this coming, but nobody did anything about it.
Our sources are involved in the technological, legal, political, and regulatory sides of the discussion. Three of our sources wished to remain anonymous, citing the ongoing nature of the discussions, and out of a desire to not ruffle any feathers inside the SEC or FINRA.
The key problem is that the JOBS act was rushed and overly optimistic, meaning that the bill is going to be implemented much later than original expectations. If it’s implemented at all. There are two culprits to the delay: The SEC and FINRA. Let’s take the SEC first.
Congress originally tasked the SEC to implement changes to the financial regulatory system within 270 days, which is a monumental task when considering the scope of the JOBS Act.
It now appears that the situation is much more complicated. There is a fear that the SEC will only implement the parts of the bill that it agrees with. As a result, the SEC is stalling for time to see how much of the bill it can neuter. This means that even if the bill is implemented, the earliest signs of the JOBS Act will appear at the beginning of 2014, with the most optimistic estimates being mid-to-late 2013. This is well past the end-of-the-year deadline imposed by Congress.
The SEC was unavailable to comment on these matters. However, according to one source with an intimate understanding of how the SEC operates, it is “standard operating procedure” for the SEC to drag its feet on changes in regulation that the SEC disagrees with. There are already signs that this is happening. That being said, there are some indications that the SEC isn’t totally against the bill, with a number of smaller provisions having been implemented. In addition, the people in charge of implementing it are seen as being pro-crowdfunding.
This situation isn’t unprecedented. The Dodd-Frank Act, which became the law as of July 21, 2010, was initially scheduled to be enforced no later than April 15, 2011. Now, over a full year after the deadline, there’s little sign that the Dodd-Frank Act is going to be enforced anytime soon. Every person that we spoke to mentioned the Dodd-Frank Act as evidence that the JOBS Act timeline was overly optimistic, and in fact, unrealistic.
According to our source on the legal side of the implementation discussions, the bill was rushed to signing so quickly by Congress, that the bill didn’t receive enough input from the legal and financial spheres. For such a comprehensive bill, this means that there are apparent contradictions that the SEC needs to sort out. According to our source, the legal world was well aware of this, but the Hill wanted a bipartisan win before the election occurred, so it was rushed.
The SEC delays are bad enough on their own. But there is a bigger threat to the enactment of the JOBS act, in the form of the Financial Industry Regulatory Authority, or FINRA. FINRA is what is known as a self-regulatory organization, or SRO. In the simplest terms, an SRO is a private organization that oversees the regulation of an industry. Similar organizations are the American Medical Association, for medicine, and the National Association of Realtors, for realty brokers. FINRA is tasked with the securities market, in cooperation with the SEC.
SROs like FINRA aren’t directly beholden to Congress, though, which means that FINRA can essentially ignore its mandate. In regards to the JOBS act, it means that FINRA can completely ignore the deadline, so long as it looks like it is working on it.
It’s not surprising for those that follow the financial industry, though, as normal FINRA procedure dictates long periods of contemplation. FINRA has customary waiting, commenting and trial periods. It’s the financial regulation system, so it understandably takes a long time.
What’s not normal, though, is that there are reports that FINRA is delaying the implementation of the bill for direct financial gain. FINRA hasn’t confirmed this, but we heard it from two of our sources.
To understand why, look at FINRA’s business model. FINRA is privately run, which means that its money comes from brokers and firms in the financial world, who pay annual dues to FINRA. And broker-dealers are exactly the industry that the crowdfunding act is looking to disrupt. This conflict of interest is a big concern for those at the negotiating table.
When FINRA does nail down the implementation of the JOBS Act, it will want to test the regulations with a small pool of participants. The most likely candidates are existing broker-dealers that pay dues to FINRA. These firms will likely be given a leg-up in the crowdfunding market, as newer entrants to the market will be unable to compete for the first few months during the trial period. It will eventually open up to the wider market, but for the very beginning, it will be locked down to FINRA-approved and FINRA-friendly firms.
This is upsetting to companies who rely on the crowdfunding business model, but not everyone is sounding alarm bells yet. “As long as the delay is just until later this summer I don’t think it should have too much of an impact,” says Microventures CEO Bill Clark, who runs the FINRA-approved, crowdfunding equity platform. “But the comments from the Chairman of the SEC indicate that other parts of the bill, including the crowdfunding section, might be delayed as well, which will have even larger implications on raising money and creating jobs.”
One possible solution to this problem is the inclusion of an additional SRO. With a competing financially-focused SRO, FINRA would need to stay competitive, which means moving quickly. But that’s an unlikely solution. The last time an SRO was introduced was in the 1930s, and that was when financial SROs were first introduced by Congress. So suffice it to say, we’re stuck with FINRA, and FINRA can do whatever it wants, at whatever speed it wants.
This hasn’t been a big surprise for anyone that has been involved in the negotiations over the regulatory changes, but what has surprised people involved is how little the SEC and FINRA seem to care about what happens. According to one source, SEC and FINRA have held exactly zero official meetings to discuss the JOBS act following the signing of the bill in April. There have been unofficial meetings, but nothing on the books that has pushed things forward. This was as of two weeks ago.
Due to the delays, there is a lot of frustration in Congress over the implementation of the bill. We reached out to the offices of Sens. Scott Brown, Patrick McHenry, and Jeff Merkley, but they either didn’t get back to us at the time of publication or declined to comment on the delays. Despite the silence, we’ve heard that the above Senators are very frustrated with the glacial pace of the SEC.
The final touch on this long list of problems is the actual methodology behind the deadlines and the introduction of the JOBS Act. The deadlines were essentially “pulled out of thin air,” with little regard to how easy or even how possible it would be for the bill to be implemented, according to two sources. That means the SEC and FINRA can effectively declaw the act, making it null and void.
If you thought the uphill battle was getting the JOBS Act passed, you were wrong. The real challenge is getting it implemented. And the earliest that’s going to happen is the beginning of 2014.