WASHINGTON, DC - U.S. Senator Jack Reed (D-RI) strongly opposed today’s Senate passage of a capital formation bill that weakens investor protections, loosens standards for taking a company public, and lowers safeguards for protecting the public from investment fraud.  The bill (H.R. 3606) will allow large companies with up to $1 billion in revenues per year to avoid financial transparency and auditing requirements.

“This capital formation bill is fundamentally flawed and should not become law in its present form.  It undercuts and dilutes investors protections.  Theoretically, this bill is supposed to promote the flow of capital to emerging businesses.  But in practice it would likely promote the flow of big fees to investment bankers.  It could give insiders more ways to manipulate the market while average investors are left out in the cold,” said Reed.

Earlier this week, in an effort to balance market transparency and investor protection with improving small business's access to capital, Reed, along with Senators Mary Landrieu (D-LA) and Carl Levin (D-MI), offered a substitute amendment known as the INVEST in America Act, which would have opened up new opportunities for small businesses and entrepreneurs to grow their businesses while still protecting investors; provided financing so businesses can expand and hire more workers; and encouraged U.S. companies to export and compete in a global marketplace.

Reed’s amendment to strengthen the bill won 54 votes, however, 60 votes were needed to overcome a Republican filibuster and the amendment was blocked.

Today, Reed offered another amendment to require the SEC to include “beneficial owners” when tallying the shareholders of record in a company – so that all companies count their shareholders accurately and cannot use gimmicks to avoid periodic reporting requirements.

According to the Associated Press, Reed’s amendment “tightens the definition of "shareholder" so that large companies can't ignore the thousands of beneficial owners — the people who have the power to sell and vote on shares — to stay under the SEC threshold for filing information.  Reed said that under the House bill, companies can count only record holders — such as brokers who sell the stock to thousands of beneficial owners — in order to stay under the shareholder limit, set to rise from 500 to 2,000, for SEC registration.”

Reed’s efforts to help prevent financial fraud and abuse were backed by a strong coalition of consumer advocacy groups, including: the North American Securities Administrators Association (NASAA); state regulators; auditors; financial analysts; pension fund managers; the Consumer Federation of America, and AARP.               

However, Reed’s amendment was defeated by a voice vote and the underlying bill, which could open up the spigot to unsuspecting Americans getting solicited by unscrupulous brokers, passed on a vote of 73-26.

Speaking today on the floor of the U.S. Senate, Reed warned: “By stripping away auditing standards and giving the investing public less information in almost every setting, sophisticated players and investment banks will have all the advantages.

“The average investor will be operating in much more challenged circumstances.  Middle-class Americans will be particularly affected.

“As an article in USA Today noted, “Banks that manage IPOs will be able to use inside access to past financial results to dominate research on new companies, with incentives to promote their firms’ banking clients.”

“The American people want big banks and large companies to play fair and comply with the basic rules and responsibilities that go with being a public company.

“That is not too much to ask.

“I believe history will judge this misnamed bill quite harshly.

“Instead of rushing to pass this bill, we should be working together to protect the interests and economic well-being of the American people.  We should be focused on creating jobs and helping working families.  This bill does not in my estimate do that, and indeed it could potentially harm our constituents – and shatter their faith in the market, rather than increase their faith in the market.

“I believe we are capable of writing legislation that will improve access to capital, without sacrificing important investor protections, and I am disappointed that my colleagues across the aisle rejected the effort to do just that when they voted down the Reed-Landrieu-Levin amendment.”