Venture capital funds face increased federal government oversight under a financial regulatory plan unveiled by President Obama on Wednesday, and the quickly announced its opposition.
"The National Venture Capital Association understands the need for these important reforms for investment managers that could pose significant systemic risk to the stability of our financial system,” said Jennifer Connell Dowling, vice president of federal policy at the NVCA, in a statement.
“However, we strongly assert that the venture capital industry does not pose such risks and therefore should not be swept into regulation intended for other investment vehicles.”
Mike Elliott, general partner at Noro-Moseley Partners, reiterated the NVCA’s view.
"We understand the need to consolidate and rationalize regulatory oversight in the broader financial industry; however, as even the smallest U.S. businesses compete globally, we think it is the wrong time to burden U.S. venture investors, and thus capital flow to innovative entrepreneurs, with regulation that is not needed nor desired by investors in VC funds – especially when this industry poses no systematic risks to the market," he told Local Tech Wire.
Elliott is a member of the NCVA board.
The Obama administration released an 88-page plan titled that Obama called a “sweeping overhaul.”
The proposal groups hedge funds and venture funds among “private pools of capital” that would have to register with the Securities and Exchange Commission.
“The venture capital industry operates in the private market, building companies,” Dowling said. “It does not utilize leverage on a significant scale nor does it trade stocks or derivatives in the financial markets. Investors in venture capital do not rely on their invested funds for short term liquidity. Lastly, the size of the entire venture capital industry is relatively inconsequential when compared to other asset classes being considered for regulation.
“For these reasons, we believe that the entrepreneurial risk associated with the venture capital industry is not relevant to the systemic risks which the Administration is hoping to mitigate with this reform. In fact, maintaining an environment that supports entrepreneurial risk is critical to economic growth for the nation as a whole. Although critical details such as the threshold level for registration are still emerging, sweeping venture capital into this proposed plan, could place an undue burden on smaller venture firms which should be directing their resources towards identifying and building new companies and growing jobs. The current regulatory disclosure requirements are sufficient and have worked effectively for decades. We look forward to working with Members of Congress and the Administration on preserving an appropriate environment for venture activity as this process moves forward."
The Obama plan as it deals with venture funds and others reads as follows:
“Require Hedge Funds and Other Private Pools of Capital to Register
“All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold should be required to register with the SEC under the Investment Advisers Act. The advisers should be required to report information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability.
“In recent years, the United States has seen explosive growth in a variety of privately owned investment funds, including hedge funds, private equity funds, and venture capital funds. Although some private investment funds that trade commodity derivatives must register with the CFTC, and many funds register voluntarily with the SEC, U.S. law generally does not require such funds to register with a federal financial regulator. At various points in the financial crisis, de-leveraging by hedge funds contributed to the strain on financial markets. Since these funds were not required to register with regulators, however, the government lacked reliable, comprehensive data with which to assess this sort of market activity. In addition to the need to gather information in order to assess potential systemic implications of the activity of hedge funds and other private pools of capital, it has also become clear that there is a compelling investor protection rationale to fill the gaps in the regulation of investment advisors and the funds that they manage.
“Requiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes.
“We further propose that all investment funds advised by an SEC-registered investment adviser should be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements. The SEC should conduct regular, periodic examinations of such funds to monitor compliance with these requirements. Some of those requirements may vary across the different types of private pools. The regulatory reporting requirements for such funds should require reporting on a confidential basis of the amount of assets under management, borrowings, off-balance sheet exposures, and other information necessary to assess whether the fund or fund family is so large, highly leveraged, or interconnected that it poses a threat to financial stability. The SEC should share the reports that it receives from the funds with the Federal Reserve. The Federal Reserve should determine whether any of the funds or fund families meets the Tier 1 FHC criteria. If so, those funds should be supervised and regulated as Tier 1 FHCs.”