Financial reform has some in the venture investment community feeling uneasy–namely Silicon Valley Bank, which has launched a publicity campaign against a potential interpretation that could threaten investments made by “banking entities.”
“Section 619 of the Dodd-Frank Act, commonly referred to as the ‘Volcker Rule,’ strictly limits banking entities’ ability to sponsor and invest in hedge funds and private equity funds,” writes Silicon Valley Bank’s legal counsel, Mary Dent. “Congress wanted to stop banks from engaging in highly risky activities. At the same time, it did not want to stifle other types of activities, such as venture capital investing, that are not risky and are critical to our nation’s economic health… However, because of the way a definition was drafted, venture investments are at risk of also being swept up in the rule.”
Banking entities, including Silicon Valley Bank, account for about seven pecent of the total capital invested in venture capital funds, according to research firm Preqin. Silicon Valley Bank services and invests in startups in the Bay area, New York and around the world.
The bank is worried that overly vague legislation may lead to the unintended curbing or banning of banks making venture investments. Regulators and lawmakers say they don’t intend to use the Volcker rule in that manner, but according to Silicon Valley Bank the law is drafted in language that could make banks’ venture investment activities much more difficult.
A 300-page long and complex part of the Dodd-Frank Act, the Volcker rule explicitly restricts commercial banks from using their own profits to trade financial instruments and limits their investments in hedge funds and private equity funds. The bill, drafted in the aftermath of 2008 financial crisis, was designed to limit excessive risk-taking.
Silicon Valley Bank is so concerned about the potential impact when the law becomes effective on July 21 that they’ve submitted a statement for the record for an upcoming hearing in the House of Representatives.
“Banning banks from sponsoring and investing in venture funds could mean a loss of approximately $1-2 billion annually in venture investment nationally,” the statement said. The startup-friendly bank has called for an exemption for venture investments in the Volcker rule.
While the general consensus among regulators, lawmakers and industry insiders is that the law is not meant to target banks’ venture investments, Silicon Valley Bank and other parties who have a stake in the issue want to be certain that their venture investments aren’t swept up with other types of proprietary trading.
But Silicon Valley Bank may be losing more sleep than it needs to. Former Democratic Senator from Connecticut and current MPAA Chairman Chris Dodd, for whom the bill was named, said on record that responsible venture capital investing should not be covered by the Volcker rule. Congressman Barney Frank (D-Mass.), whose name is also on the bill, has called for clarification of definitions to avoid unintended consequences. The Financial Stability Oversight Council deemed this potential snag “significant” issue and encouraged regulators to “carefully evaluate” the language as it reads now. The public has until Feb. 13 to comment on the record, but Silicon Valley Bank may have already said enough for all of us.