By Bill Myers, Regulatory Compliance Watch
Banks would be allowed to invest in several different kinds of private funds, including VC, under a massive new set of reforms being considered by Washington regulators.
If the proposed changes are adopted, banks will be allowed to sponsor or invest in venture capital funds, credit funds, family wealth management vehicles and so-called “customer facilitation vehicles,” funds created solely at a single customer’s request.
Sec. 13 of the Bank Holding Company Act—better known as the Volcker Rule—has long prevented banks from investing in private equity or hedge funds for fear that the higher risk might drag people’s savings into the abyss. But Republican regulators have argued that the funds detailed in their new rulemaking notice weren’t the focus of the Volcker Rule.
The rulemaking notice is a joint project of the SEC, the CFTC, the Federal Reserve Board, the FDIC and the Treasury Department’s Office of the Comptroller of the Currency. The proposed rules represent a victory for SEC staff, who convinced their colleagues to adopt the Commission’s definition of “private funds” to cover venture capital.
The DELETE key
“The amendments the Commission has adopted today draw on the Volcker Rule agencies’ collective experience in implementing the rule and overseeing compliance in our complex marketplace over a number of years,” SEC Chairman Jay Clayton said in a Jan. 30 statement.
It’s the second major overhaul of the Volcker Rule in the past six months (RCW, Nov. 14, 2019).
Republican SEC Commissioners Elad Roisman and Hester Peirce issued a joint statement hailing the reforms as a necessary step, but not a sufficient one.
“While our preference in amending the Volcker Rule might have been simply to lean on the ‘DELETE key,’ we recognize the legislative mandate and appreciate the more surgical and careful approach reflected in this proposal,” they said. “Since its adoption, the Volcker Rule has impeded banks’ and their affiliates’ abilities to perform these financing functions through fund structures. Many banks, particularly regional banks, have been forced to cut back on certain of their investment activities or cease them entirely.”
Democratic regulators dissented against the rulemaking. SEC Commissioner Allison Herren Lee, the Commission’s last Democrat standing, said the Commission was marching “toward effective repeal of the Volcker Rule.”
CFTC Commissioner Rostin Benham was even more emphatic.
“When the agencies approved the changes on proprietary trading in September, the late Paul Volcker himself sent a letter to the Chairman of the Federal Reserve stating that the amended rule ‘amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis,’” Benham said.
“I can imagine that he would say something very similar about the further changes that we propose today, particularly the erosion of the existing protections regarding conflicts of interest. I fear that, if we continue to roll back the Volcker Rule, we will soon reach a stage where, sadly, there is nothing left,” Benham added.