Update on Department of Labor Fiduciary Rule and Regulatory Relief for Smaller VC Funds

On March 15, 2018, the Fifth Circuit Court of Appeals vacated the Department of Labor’s (“DOL’s”) Fiduciary Rule, holding in a 2-1 decision that the DOL exceeded its regulatory authority in passing the rule. The decision struck down the new fiduciary advice definition and denied the attorneys-general of California, New York, and Oregon, as well as the interest group AARP, the opportunity to intervene in the lawsuit. The elimination of the rule removes certain significant restrictions on the participation of employee benefit plans and IRA accounts in private investment funds and certain separately managed accounts.

Several state legislatures have passed or introduced bills requiring advisers or broker-dealers to be subject to a fiduciary standard notwithstanding any action taken regarding the DOL’s Fiduciary Rule. The Governor of Nevada recently signed a bill requiring broker-dealers, sales representatives and investment advisers to be subject to a fiduciary standard, and new regulations have recently been proposed. The Governor of Connecticut signed a bill to expand its fiduciary duty requirements. Legislatures in New York, New Jersey and Massachusetts have introduced similar bills, and the California State Senate introduced a resolution to the effect that, if the Fiduciary Rule is repealed, the legislature will pursue its own fiduciary standard. On February 22, 2018, Maryland state senate proposed a statewide fiduciary rule. The state senate bill would extend the fiduciary duty to brokers in order to “better align the duties of all financial advisors.”

Smaller Venture Capital Fund Managers

There is new regulatory relief for smaller venture capital fund advisers. On May 24, 2018, new amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act were enacted. One of the amendments modified Section 3(c)(1) of the Investment Company Act of 1940 (the “1940 Act”) to increase from 100 to 250 the number of investors below which a “qualifying venture capital fund” (namely, a venture capital fund that has no more than $10 million in aggregate capital contributions and uncalled committed capital) would be excluded from the definition of “investment company.” Prior to this enactment, a venture capital fund would typically be required to have less than 100 investors, or (under Section 3(c)(7) of the 1940 Act) have exclusively “qualified purchasers” as investors, a much higher standard than “accredited investor.” We believe this is a welcome development for many smaller venture capital funds.