NVCA Today

TAX & CAPITAL FORMATION ISSUES

Carried Interest Continues To Be A Concern

Although tax policy debates are currently taking a back seat to energy and health care concerns, the controversy around carried interest continues to percolate just below the radar screen. As promised during the campaign, the Obama Administration included a carried interest proposal for all partnerships in its budget submitted to Congress earlier this year. Fortunately, neither the House nor the Senate included a carried interest component in their respective budgets. While that does not preclude the tax committees from taking up this issue at a later date, it does at least signal that there was not a broad consensus to include the proposal as a revenue raising measure. With the reintroduction of his carried interest legislation, Congressman Sandy Levin (D-MI) has set down a marker that he intends to continue his push for policy reform in this area.

NVCA continues to educate all Members of Congress about the importance of carried interest and capital gains tax incentives for our industry and about the far-reaching impact on economic growth that the industry has historically enabled. We encourage any NVCA member with contacts in the Administration or in Congress to work with the association in delivering these messages. For more information, contact Jennifer Connell Dowling at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Systemic Risk Regulation - Impact on Venture Community

Bills targeting hedge funds registration have been introduced in both the House and Senate, and both measures, if enacted as currently written, would sweep the venture community into the same regulatory basket. However, as problematic as those bills are individually, the greater challenge for our industry will be legislation that overhauls the entire US financial system regulatory structure to create a systemic risk regulator. That legislation is almost certain to also include some form of registration component. Staff of the House Financial Services Committee are meeting regularly with Administration officials to craft this new paradigm, but the policy question of whether to include or exclude venture and other entities is still open. On March 26^th, Treasury Secretary Tim Geithner outlined the Administration's plan to overhaul the regulatory structure for the financial services industry. Unfortunately, in his written statement to the House Financial Services Committee, the Secretary mentioned the venture capital industry as also being brought into the regulatory fold, along with private equity firms and hedge funds. Geithner argued for greater insight into the interconnection and potential risk to financial stability posed by these pools of capital in order to increase investor protection.

Fortunately, that was the Secretary's only reference to the venture industry in the entirety of his testimony and in multiple hours of questioning from the committee. Treasury officials have indicated that they have not determined the threshold that would trigger registration requirements. The Treasury's plan, which seems to depend on size, complexity and interconnection of a fund to other counterparties, potentially offers the best avenue to distinguish venture funds from large private equity funds and hedge funds. We have already gathered data about the size of our industry and assets under management compared to other industry sectors that we will be presenting to the Administration, House Financial Services Committee and Senate Banking Committee.

While this education effort is critical, it is important to realize that the registration language is one piece of a very complex proposal to dramatically restructure financial services regulation that is unlikely to move quickly through both the House and Senate.