CORRECTED-Groups pan SEC plan to lift advertising ban on private offerings

(Corrects third paragraph to show groups using arguments ofindustry)

* Advocates, state regulators say plan is fatally flawed * Some say they won't rule out suing SEC if changes not made * Groups point to earlier shoddy cost-benefit analyses * Lifting of the advertising ban was required by JOBS Act * Groups urge SEC to completely re-draft the rule By Sarah N. Lynch

WASHINGTON, Oct 9 (Reuters) - Investor advocates on Tuesdaycalled on the Securities and Exchange Commission to scrap aproposal that would lift a ban on general advertising in privateplacements, saying it is fatally flawed and fails to address thedangers it poses to investors.

In a telephone press conference, representatives fromseveral of groups including the Consumer Federation of Americaand the North American Securities Administrators Association(NASAA) said they won't rule out taking the SEC to court if theagency refuses to go back to the drawing board with a new planthat deals with their concerns.

Some of the groups lashed out at the SEC, using the kinds ofarguments often used by business and industry groups to defeatSEC regulations, including whether the SEC had adequatelyweighed the costs and benefits of the rule.

"It would be a very, very unique circumstance for NASAA tofile a lawsuit against the SEC to somehow stop, slow down, throwa wrench into this rulemaking," said Heath Abshure, thepresident of NASAA, who also serves as the Arkansas securitiescommissioner. "However ... if I felt it was the necessary thingto do, I'd propose it to my board. I mean, I wouldn't say no. Atsome point, business is business."

Tuesday's press conference, which also included executivesfrom the AFL-CIO and the AARP, was convened in response to theSEC's recent proposal to lift mass marketing restrictions onprivate placements.

The proposal pertains to several kinds of offerings,including those made under what is known as "Rule 506" ofRegulation D.

That rule allows companies to raise an unlimited dollaramounts from accredited investors who meet certain income orasset thresholds.

The rule is mandated by the Jumpstart Our Business Startups(JOBS) Act, a bipartisan bill signed into law earlier this yearthat eases securities regulations to help spur small-businessgrowth and capital formation.

The SEC has already missed a congressional deadline toimplement the rule, which was first proposed at the end ofAugust and put out for public comment.

Although the law compels the SEC to act, the groups arguethat the SEC still has the leeway to make some adjustments thatwill give investors more protections from fraudsters.

They want to see changes such as amending the definition of"accredited investor" to make sure unsophisticated people arenot captured and tweaking the filing rules so the commission cancollect data on solicitation practices to help it police themarketplace.

The groups emphasized that it is premature to talk aboutfiling a lawsuit and they remain hopeful their concerns can beaddressed through the SEC's standard rulemaking process.

But Barbara Roper, the director of investor protection forthe Consumer Federation of America, said the cost-benefitanalysis for the SEC's rule was shoddy, adding that it fails toweigh the costs posed to investors versus the benefits oflifting the ban.

Poor cost-benefit analysis has helped lay the groundwork inthe past for successful legal challenges to SEC rules, althoughin all of those cases the fights were waged by industry andbusiness groups like the U.S. Chamber of Commerce.

Just last year, a federal appeals court in Washington tossedout the SEC's rule allowing shareholders to nominate directorsto corporate boards because of flawed analysis.

Earlier this year, the SEC issued new guidelines oncost-benefit analysis to help avert future legal challenges.

But Roper said those guidelines were not applied in thisrulemaking, and that the SEC only seems to deploy them when it'sweighing the impact of costs on business as opposed to theimpact of new regulations on ordinary investors.

"I think it's hard to imagine a more slam-dunk case thanthis one," she said.

(Editing by Steve Orlofsky)