After 11 months of cringing and waiting for surely-unpleasant anti-money laundering legislation to roll out of Washington, most, if not all, venture funds appear to have been granted exemptive relief from conforming to the proposed regulations. The amendments to the Bank Secrecy Act won’t be finalized until after a 60-day comment period has expired, according to a proposal released Sept. 18 by the Treasury Department.
The new rules would apply only to companies that permit investors the right to redeem their interests within two years, which is much quicker than the illiquid nature of venture investing. Industry-advocate National Venture Capital Association, for which this decision represents a policy victory, assisted the Treasury Department as it was drafting the proposals.
“Over the summer, we were able to provide [the Treasury Department] with more information and perspective, and in particular, we were able to educate them on the liquidity issues,” says Brian Borders, an attorney with Mayer, Brown, Rowe & Maw, who also provided counsel to the NVCA on this issue.
He says that in addition to the difficulty of redemption of VC interests, the Treasury Department was also influenced by the unpredictable timing in which a venture fund draws capital from its investors.
“We’re pleased with the way Treasury has drawn the line,” says Jennifer Dowling, the NVCA’s vice president for federal policy. “From my conversations with the industry and my conversations with counsel, we expect that most [venture funds] don’t allow redemption within two years.” While every venture fund is unique and some venture funds may allow redemption, Dowling says she has not personally spoken with a fund that does.
Borders says he doesn’t think the secondary market poses a threat to this exemption, because limited partners can often only sell their positions with the consent of the general partner, and it represents an opportunity to redeem rather than a right to redeem. He adds that the regulation is up for interpretation until the comment period expires.
“We’ll have to work with the Treasury to ensure that the regulations will apply to [limited partnership] agreements that provide certain limited [redemption] exceptions that are granted to certain ERISA funds and in special circumstances,” Borders says.
Private Equity Week first reported the NVCA’s efforts in its April 29 issue, which was a few days after the Treasury Department’s original deadline for releasing these rules. On the day before the deadline, the Treasury Department had postponed its decision.
The anti-money laundering regulations were part of the USA PATRIOT Act, which was designed to curb terrorist activities. The regulations are intended to prevent terrorists from shuffling money through American financial institutions, which include everything from traditional investment companies to casinos and pawn shops.
At the time, Paul Brownell, who was the NVCA’s vice president for public policy, said while he had been trying to educate Treasury Department officials on the improbability of venture funds being used to that end, the NVCA for patriotic reasons had refrained from heavy lobbying. Brownell has since left the NVCA to become a lobbyist for Dell.
Financial institutions that allow redemption within two years and meet the regulation’s other criteria will have to implement a four-part money laundering program, which includes establishing program guidelines, appointing an anti-money laundering compliance officer and ongoing employee education.
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