Posts Tagged ‘Securities and Exchange Commission’

Regulating Venture Capital: Off the Hook Now But “Very Far From the Finish Line”

October 21, 2009

Earlier this year, Silicon Valley freaked out when U.S. Treasury Secretary Timothy Geithner told Congress that large venture capital firms should be declared as systemic risks and put under tight restrictions as part of the broader re-regulation of financial firms.

Such regulations would force VCs to register with the Securities and Exchange Commission, and submit regular reports on their investors and portfolios, costing firms up to $1 million. Data collected by the SEC would then be shared with a new risk regulator to ensure that VCs aren’t “a threat to financial stability.”

But techies breathed a sigh of relief earlier this month when Financial Services Chairman Barney Frank proposed draft legislation rejecting the Treasury plan, carving out an exemption for VCs from the “Private Fund Investment Advisers Registration Act of 2009.” (see draft below)

That was good news for innovation. VCs do not pose a systemic risk to the economy, as Gordon Crovitz pointed out in this astute column in the Wall Street Journal. The venture capital industry is small compared to other capital markets. VCs do not use debt, so that sharply limits their risk. And they are not tightly interconnected with other financial firms, like AIG or Lehman Brothers.

But they do represent an incredibly important part of the economy that helps generate significant wealth and job creation–a unique economic pillar the Treasury Dept. should be strengthening, not weakening.

But National Venture Capital Association President Mark Heesen says the VC industry is not out of the woods yet. “We are very far from the finish line, but in a better place than many expected at this point,” Heesen wrote me in an email. “There is still no House or Senate bill, but House Chairman Frank’s comments certainly are encouraging.”

Financial reform hinges on, you guessed it, the passage of health care reform. “Many Senators sit on both Committees of jurisdiction so can’t focus of financial reform until they see how health care proceeds,” added Heesen.

To make sure VC regulation does not reappear in future versions of financial reform legislation, Heesen says the NVCA is continuing to work with the Administration and members of the House and Senate “to make certain Venture capitalists do not have to register under the 40 Act while giving the government the assurances they need to understand we do not pose a systemic risk to the economy.”

Discussion Draft of the Private Fund Investment Advisors Registration Act

SEC Opens Inquiry Into Apple and Steve Jobs

January 21, 2009

This morning, Bloomberg reported that the Securities & Exchange Commission is reviewing disclosures about Apple Chief Executive Officer Steve Jobs’s health problems to ensure investors weren’t misled.

Later today, the Wall Street Journal followed up with a story reporting that the SEC “has opened an inquiry into Apple Inc.’s disclosures about Chief Executive Steve Jobs’s health.”

I am not surprised that the SEC has opened an inquiry, if it has. Last week, I wrote a story questioning the actions of the Apple board with respect to this issue, based on interview with corporate governance experts. Many experts said that Jobs and the Apple board, of which Jobs is a member, have not been forthcoming enough about the health of Jobs and the company’s succession plan.

I reiterated these thoughts on an interview with Fox News in which I criticized the actions of the Apple board. I thought it seemed a bit dodgy that Apple and Jobs could have changed their view of his health problems so drastically within one week. In my blog, I questioned the first letter that Jobs wrote. “The letter should have been much more measured in its presentation and tone, indicating that the cause of Jobs’s health problems was not totally clear,” I wrote.

Then again, it’s entirely possible that the board did nothing wrong, as Stanford law professor Joe Grundfest noted. If board members believed Jobs was going to be fine, they may not have seen a big need to be more forthcoming about his health or future, he notes. “One of the hallmarks of a complex medical condition is a diagnosis can change over time,” Grundfest says. “If the board has told the truth, then they’ve handled it best as they could.”

These are the issues the SEC will be looking into. What did the board know before the first letter was written? And what did they learn after it was written?

Admittedly, this is a very difficult situation for Apple. And I hope the company is cleared of any wrongdoing. But this is an inquiry that needs to happen in order to protect the shareholders of Apple and any other company that may find itself in a similar situation.

Too Little, Too Late Department: SEC Offers Mea Culpa on Madoff Flop

December 17, 2008

Yesterday morning, I posted a story saying that the Bernard Madoff scandal represented a new low point for the U.S. Securities and Exchange Commission, underscoring the need for fresh leadership at this small yet critical federal agency.

Last night, I was happy to see that the leader of the agency, chairman Christopher Cox, has recognized the failures of his leadership and of the organization he leads by putting out a press release with the bland title, “Statement Regarding the Madoff Investigation.” It should have been titled, “Statement Regarding Our Failure and Abdication of Our Responsibility.”

“The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action,” wrote chairman Cox. “I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.”

Although it’s too little and too late, chairman Cox has now ordered a “full and immediate review of past allegations regarding Mr. Madoff and his firm and the reasons they were not found credible, to be led by the SEC’s Inspector General.”

One potentially explosive issue is that the SEC may have reined in its investigation of Madoff due to a serious conflict of interest. One of the SEC’s investigative teams was led by a lawyer named Eric Swanson–the husband of Shana Madoff, a niece of Bernard Madoff and daughter of his brother Peter Madoff, the firm’s chief compliance officer. A New York Times story delves into the issue.

This may explain why the SEC NEVER used its subpoena power to obtain information about Madoff. Rather, it relied on information voluntarily produced by Madoff and his firm, information we now know that was full of lies.

Trying to understand your mistakes makes sense because it may help you avoid making the same mistakes in the future. But instead of making such a big stink about investigating past failures, I think the public would be better served if the SEC told us it was putting most of its power and resources behind uncovering the next big fraud–or making sure another one doesn’t happen.

Sub-Prime Boomerang: The Danger of Over-Regulation

April 1, 2008

Over the last two days, the Bush Administration and U.S. Secretary of the Treasury Henry Paulson have outlined their proposals to overhaul the financial regulatory structure of the U.S. Ordinarily, this is the kind of topic that puts people to sleep. But thanks to the Sarbanes-Oxley laws passed after the last financial scandal, techies know that financial regulation can be a very dangerous thing.

Was there a need to reform our accounting and governance laws after the the blow-ups and fraud at Enron/WorldCom? Of course there was. Was the regulatory response appropriate? Not really. Whether it was unintended consequences or just plain ignorance, Sarbanes-Oxley has made it much more expensive and difficult for small companies to raise money in U.S. capital markets. See Henry Blodget’s rant on this topic–it’s spot-on.

Now, we are faced with another similar situation. Is there a need to overhaul our financial regulatory regime? Of course there is. But lawmakers should move more deliberately and carefully this time around. For one, the financial system is already self-correcting its problems. Second, remember that this crisis exploded in one of the most regulated parts of the economy-the banking sector. Third, the U.S. is facing increasing competition in this new multipolar world. Our financial markets have been a source of strength and competitive advantage the last 60 years. We can’t afford to screw this up.

Any reform should be guided by two principles. One, better oversight of the home lending market. Since the basis of this latest scandal was poor lending standards to home-owners, which are leading to record foreclosures, policy makers should focus their efforts om improving oversight of this sector. As a purchaser of two homes, I know that mortgage brokers are some of the most unscrupulous people who often screw over customers and provide them with inaccurrate or incomplete information.

Second, the government should focus on improving transparency in financial markets. As my colleague Mike Mandel wrote yesterday, “the most striking thing about the current problems is just how much money the banks and the investment banks have lost. They apparently had no idea of how risky their own exposure was. The supposedly smart guys were simply stupid.

For me, the main lesson from this debacle is that both banks and investment banks must be required to fully report what securities they are holding, both directly and indirectly. No more off-the-book special purpose vehicles, no more hiding derivatives under the table. If a bank or an investment bank is holding a security, they have to publish the amount and the basic characteristics.”

This is a great suggestion–and one that dovetails with the mission of the Securities and Exchange Commission. One of the smartest aspects of our securities laws is their focus on transparency through the required filing of regular financial reports. Lawmakers can not legislate away greed or a recession, nor should they try. But they can and should force commercial and investment banks to disclose all of the investments they make in a clear and concise manner. That way, investors and consumers and regulators can make their own informed decisions on how they want to deal with these assets.

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