Friday, December 23, 2011

Rep. Schweikert Urges SEC and Bank Regulators to Exclude Venture Capital Funds from Volcker Rule or Classify Them as Dodd-Frank Permitted Activity

A leading member of the House Financial Services Committee urges that the final regulations implementing the Volcker Rule provisions of Dodd-Frank exclude venture capital funds or classify them as a permitted activity under Section 619 (d)(l )(J), which is a catch all allowing the regulators to permit an activity promoting safety and soundness and financial stability. In a letter to the SEC and banking regulators, Rep. David Schweikert said that Congress did not intend for the Volcker Rule, as codified by Dodd-Frank, to cover venture capital investing because it does not promote excessive risk and is critical to job creation and continued economic growth. Properly conducted venture capital investing does not carry the types of risk that threaten the safety and soundness of the U.S. financial system, said the Congressman, and is limited in scale, does not use leverage and is long term in nature.

He noted that the Financial Stability Oversight Council underscored these points in a report released in January. The Council identified concerns that noted venture capital funds are fundamentally different from other funds as significant, and recommended that the implementing agencies carefully consider whether it is appropriate to narrow the statutory definition by rule in some cases, including to exclude venture capital funds.

Rep. Schweikert is disappointed that the proposed regulations do not take a position on the question of how to treat venture capital funds. The draft acknowledges that the agencies have the discretion to refine the definition of covered funds, as proposed in some limited cases for bank owned life Insurance vehicles, asset-backed securitization vehicles, and corporate organizational vehicles, and that an exemption for venture capital funds under Section 619 (d)(l )(J) might be warranted. But the draft did not contain any definitive clarification on the treatment of venture capital funds.