At press time, financial regulatory reform legislation had stalled for a third time in the US Senate. Points of contention include consumer protection powers and the regulation of derivatives. Noticeably absent from internal debates as well as politicians’ public rhetoric, however, is a provision exempting private equity and venture capital fund managers from registering as investment advisors with the Securities and Exchange Commission.
Senator Christopher Dodd introduced the exemption in his initial draft of the legislation, and it hasn’t been removed since.
“Our understanding is that [Dodd] has remained very firm that venture capital is not a systemic risk,” said Mark Heesen, president of industry trade association the National Venture Capital Association.
Once the Senate does approve some version of the legislation, it will have to be reconciled with a version passed by the House of Representatives last year. The House version exempts venture capital, but not private equity.
Heesen said he doesn’t believe the exemptions will be a major issue in conference. He said he would guess the Senate version of the legislation would take priority on this issue.
But another source close to the legislators cautioned that private equity is not in the clear yet. Senator Jack Reed has said that he plans to introduce an amendment that would remove the exemptions, and instead require all fund managers with more than $30 million in assets under management to register. This amendment would bring the Senate legislation in line with the House version.
The source said that the amendment could be introduced any time, even as the two bills are reconciled in committee. The source gave the odds of the exemptions’ survival in the final version at roughly “50-50”.
No matter which version of the bill passes into law, it seems likely that the SEC will be tasked with drawing up bright line tests for differentiating among hedge funds, private equity funds, and venture capital funds.