Why Did Austin Ventures Hire A Chief Compliance Officer?
It was the sigh of relief heard ‘round the PE world last summer, when Congress exempted venture firms from having to register with the SEC as investment advisers. So why did Austin Ventures announce today that it has hired a general counsel and chief compliance officer?
Kim Hughes, director of communications at Austin Ventures, wasn’t able to arrange an interview with executives by my deadline, although she e-mailed saying that hiring Stephanie Lucie, who previously held management positions with Entorian Technologies, Cirrus Logic and Compaq Computer Corp., was not a “compliance-driven event.” Still, take a look at a letter filed with the SEC this January by John Dirvin, chief operating officer for the firm.
Responding to rules proposed by the SEC in November as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (IA-3110), Dirvin wrote that “we are very troubled” by the filing and ongoing reporting requirements proposed for exempt advisers (yes, exempt advisers), and the fact that, just like registered advisers, Austin Ventures would be subject to SEC examinations.
In his letter dated Jan. 21, Dirvin wrote:
“We have spent what we consider to be a large sum of money on an expert to advise us on actions we would need to take under the proposed requirements, and if enacted, we will need to hire personnel to handle the required filings, work necessary to respond to an SEC examination, as well as other work that will be required. As a result, there are substantial costs with corresponding few benefits, as proposed.”
(I am still trying to determine if Austin Ventures, which manages an estimated $3.9 billion across 10 funds, is or plans to become a registered investment adviser, a development that also would explain its hiring a chief compliance officer.)
In mid-November the SEC proposed a fresh set of rules that would amend the Investment Advisers Act of 1940 along lines required by Dodd-Frank. The rulemaking noted that Dodd-Frank exempts venture firms from SEC registration, as well as advisers to private funds that have less than $150 million under management. However, the commission also said that, under Dodd-Frank, it requires ongoing record-keeping by exempt advisers, “which we have the authority to examine.” Exempt advisers also would have to submit reports deemed by the SEC “necessary or appropriate in the public interest.”
The proposal goes on to describe an amended Form ADV that exempt advisers would have to submit and periodically update. The scaled-backed form, available to the public, would include seven items. The items include basic contact information, details on other businesses the firm and its affiliates are engaged in, as well as the disciplinary history of the adviser and its employees, such as whether an officer of the firm has ever been convicted of fraud or other crimes or gotten into hot water with regulator agencies.
In his letter to the SEC, Dirvin took particular exception to the fact such information would be made public under the proposal. “It is one thing to require disclosure of certain limited information confidentially to the SEC…” he wrote. “It is another thing entirely to require public disclosure of the proposed information, which is unnecessary and intrusive, and we believe diametrically opposed to Congressional intent.”
With the hiring of Lucie, Dirvin now has some additional help to do battle with the SEC, and meet whatever requirements the commission settles on when final rules are issued. The question now for other venture firms is whether, in their relief over being exempted from the SEC registration requirement, they downplayed what could turn out to be significant ongoing record-keeping and filing obligations.
Not to mention the possibility of an examination by the SEC.
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Loren Busby said on June 9, 2011
I believe that the rules states venture firms are only exempt if they do not use leverage AND the portfolio company does not borrow in connection with the VC investment.