Wednesday, February 22, 2012

In Letter to SEC, House Members Reaffirm that Volcker Rule Restrictions Were Not Intended for Venture Capital Funds

Congress did not intend for the Volcker Rule restrictions in the Dodd-Frank Act to apply to venture capital funds, according to fifteen House Members. In a letter to the SEC and banking agencies, the House Members noted that Congress treated venture capital funds different than hedge and private equity funds in the legislation because of the unique characteristics of their investment model. Consistent with this intent, the House Members urged the SEC and other regulators to use the flexibility in the Dodd-Frank Volcker Rule provisions to avoid restricting access to venture capital funds and other types of illiquid funds.

Venture capital funds are uniquely different from hedge funds and private equity funds. They are not highly leveraged, have set fund terms, said the House Members, and are usually invested in private companies. These characteristics mean that investment in venture capital funds do not pose a danger to safety and soundness or create systemic risk.

Section 619 of Dodd-Frank, the codified Volcker Rule, limits financial institutions from investing in or sponsoring hedge funds and private equity funds. But Congress clarified that these statutory restrictions were not intended for venture capital funds. The text of the statute refers solely to hedge funds and private equity funds, specifically leaving out venture capital funds. The House Members reminded that the fact that Section 619 was not intended to apply to venture capital funds was affirmed by a colloquy between Senator Chris Dodd (D-CT) and Senator Barbara Boxer (D-CA) that took place as the Senate was debating the Dodd-Frank Act conference committee report.

According to then Senate Banking Chair Chris Dodd, the purpose of the Volcker Rule is to eliminate excessive risk taking activities by banks and their affiliates while at the same time preserving safe, sound investment activities that serve the public interest. It prohibits proprietary trading and limits bank investment in hedge funds and private equity for that reason. The colloquy between Chairman Dodd and Senator Boxer revealed that properly conducted venture capital investment will not cause the harms at which the Volcker rule is directed. (Cong. Record, July 15, 2010, S 5904-5905).

Section 619 explicitly exempts small business investment companies from the rule, and because these companies often provide venture capital investment, the intent of the rule is not to harm venture capital investment. In the event that properly conducted venture capital investment is excessively restricted by the provisions of Section 619, Chairman Dodd expects the appropriate federal regulators to exempt it using their authority under Section 619 (d)(1)(J).

Senator Boxer noted the crucial and unique role that venture capital plays in spurring innovation, creating jobs and growing companies. She said that it is not the intent of Congress that the Volcker rule should cut off sources of capital for technology startups, particularly in this difficult economy.