New SEC rules impact a16z, Sequoia, other big VC firms

Many of the nation’s largest venture capital firms must adhere to new rules adopted today by a divided U.S. Securities and Exchange Commission.

VC firms that are Registered Investment Advisors — including Andreessen Horowitz, Battery Ventures, Bessemer Venture Partners, General Catalyst Partners and Sequoia Capital — now have 60 days from the end of each quarter to report GP-led secondaries deals, the removal of a general partner, investor-led liquidations or other “termination events” under the new rules for Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds.

The new rules will also require registered private funds with at least $2 billion in assets under management to report any GP or limited partner clawbacks at least once per year and to provide more information about their fund strategies and debt loads on the revised Form PF, according to an SEC statement.

The vast majority of venture firms are Exempt Reporting Advisers, so they do not have to adhere to the new SEC rules. At least 18 of the firms on the VCJ 50 — a ranking of the largest venture firms worldwide — are RIAs. (See our list of VCs that are RIAs.)

The new private fund rules had been pending since early last year. In some ways, they offer compromises with the industry: the proposal had originally put set some hedge fund reporting deadlines at “one business day,” had defined “large” private equity funds as those with at least $1.5 billion in AUM, and had proposals for reporting by large liquidity funds. Those proposals didn’t make the final rule. In another way, though, the SEC isn’t backing off any of the broader principles behind the rulemaking notice. Commission officials say they need better visibility into the $25 trillion private funds industry to ward off systemic risks.

“The commission’s experiences with recent market events,” regulators said in a fact sheet accompanying the rules, referring to the collapse of Silicon Valley Bank and its knock-on effects, “have highlighted the importance of receiving current and robust information from market participants.”

‘The power of more’

The new Form PF rules are merely the beginning. Still pending is yet another Form PF overhaul, in partnership with the Commodity Futures Trading Commission, and a huge rulemaking notice that would ban a host of private fund fees. SEC Chairman Gary Gensler has said repeatedly his reforms have two goals: the first is to shrink investment adviser fees; the second is to protect the millions of ordinary Americans whose pension funds prop up the private fund industry.

“Look, history is replete with times when one corner of the financial system… spills out into the broader economy,” Gensler said in voting for the new rules. “And when that happens, everyday Americans – bystanders on the highway of the economy – get hurt. Private funds also have evolved significantly in their business. Private funds today are ever more interconnected with the markets. It makes the visibility into these funds ever more important.”

The vote result drew criticism from lobby group the Managed Funds Association, with president and chief executive Bryan Corbett saying it was disappointing the SEC did not move both Form PF proposals together to help reduce the implementation burden on managers.

“While alternative asset managers do not pose systemic risk, we are sympathetic to efforts seeking to monitor risk throughout the financial system,” Corbett said in statement. “We appreciate that the SEC has incorporated some of our suggestions, but we are concerned this final rule has the potential to exacerbate stress on funds, harm investors, and increase market volatility without commensurate benefit.”

The new rules came over the objection of the SEC’s Republican Commissioners. “This expansion of Form PF data collection is another demonstration in the Commission’s belief in the benevolent power of more,” Hester Peirce said in voting against the rules. “More is not always better. Private fund managers should spend their time focusing on their risks, not filling out SEC forms.”

Most of the new rules are scheduled to take effect 180 days after they’re published in the Federal Register.

Lawrence Aragon contributed to this story