Last week, NVCA attended a ceremony held in the White House East Room to announce the members of the President's Export Council and to highlight the Administration's commitment to boosting American exports, growing the economy, and supporting new American jobs.

At the event, the President commented on the importance of clean energy projects that will strengthen our global leadership. He gave the example of how just eighteen months ago, American companies commanded just 2 percent of the global capacity for advanced battery technology. Thanks to federal support which has helped leverage substantial private investments, President Obama expects America's capacity to reach 20 percent of the global market by 2012– and as high as 40 percent in 2015. Commerce Secretary Gary Locke and Jim McNerney, Chairman, President & CEO of The Boeing Company and Chair of the President's Export Council also spoke at the event.

With clean energy as a major component of the Administration's export initiative, the event showcased how clean energy manufacturing and technologies can support the goal of doubling exports and creating several million new jobs over five years.

Nearly a year after proposing its rule aimed at pay to play practices at public pension funds, the Securities and Exchange Commission (SEC) issued a final rule last week.  Most of the new prohibitions, penalties and disclosure requirements will go into effect the first quarter of 2011.  The new rules apply equally to all “investment advisers,” whether registered with the SEC or not.  The SEC’s official statement can be viewed here.  There are two provisions in this ruling that impact venture capital firms:

Total Placement Agent Ban Avoided

As many NVCA member firms have been or soon will be in the market to raise a new fund, the Association thought it was critical to share concerns when the SEC originally put forth last summer an outright ban on the use of placement agents for firms seeking state and local pension money.  We engaged in the rule making process during the comment period by sending a letter to the SEC which advocated against a complete ban of third-party placement agents for venture capital.  Fortunately, this concern was addressed in the final rule.  The negative effects of a total ban should be largely avoided with the SEC’s decision to allow the use of placement agents who are registered with the SEC or FINRA.  The new rule, which will take effect in approximately 14 months months will continue to allow venture capital firms to use registered placement agents in the U.S.  There continues to be uncertainty regarding U.S. venture firms’ ability to use placement agents in Europe and the NVCA is engaged in these discussions with the EU.

Political Contributions to State Officials / Candidates

Another provision in the ruling restricts political contributions to state and local officials and candidates by pension fund advisers and the penalties are drastic.  There is a mandatory two-year time out for any adviser who makes a contribution, directly or indirectly, to any official or candidate who could influence the choice of public pension fund investments. This restriction applies to members of venture capital firms. 

This ruling is consistent with guidance the NVCA has been providing members.  It is now even more important to have a firm-wide policy against political contributions to these officials / candidates.  This restriction does NOT include political contributions to candidates running for federal office (U.S. House of Representatives, U.S. Senate, U.S. President) nor does it include contributions to the NVCA PAC, which only gives to federal candidates. 

As with other such “prophylactic” rules, the SEC tried to anticipate efforts to circumvent.  The rule defines all the key terms very broadly, e.g., “contribution,” “official,” “solicit” as to who, what and how.  There is a six-month look-back period for new hires.  Bundling of contributions and solicitation of political money for influential officials in prohibited also.  Finally, the provision bars advisers from arranging contributions through family members or affiliates.

De minimus contributions (up to $350 or $150 based on whether adviser can vote for the candidate) are permitted, and there is provision for curing certain inadvertent violations; however, these exceptions are far from generous and fitting within them will require care and oversight.  Naturally, all this comes with new recordkeeping and disclosure requirements, at least for SEC-registered advisers. 

The full rule release is available here.   

Even in this very condensed legislative environment carried interest may still come into play and NVCA will be working throughout the period to keep up the drumbeat that venture capital creates jobs at a time when there are precious few other sources of job creation. We will call on the membership as needed to contact specific Senators and Representatives.

Please let us know throughout the Summer if you will be meeting with any policymakers and we will update you on the latest dynamics.

In the current environment of fiscal constraint in which all government programs must be paid for, carried interest taxes remain highly vulnerable as pay-for options. Congress could choose to pass separate pieces of the larger tax extenders bill, using carried interest as a revenue raiser for certain provisions. Alternatively, carried interest could be used as a "pay for" in the future for other provisions. It is currently unclear as to the path Congress will take.

What is clear is that when the issue does arise again in a matter of days, weeks or months, we will continue to pursue legislative language that reflects the spirit of the current Senate bill -- language that offers a more meaningful tax differential for longer term investment. We believe that tax policy should continue to encourage this type of investment if we want to build jobs and foster innovation in the US. As always we will keep you abreast of major developments in this regard.

Proposed European Commission rules could mean headaches for US venture funds -- and not just those seeking European LP money. Proskauer Rose has issued an alert and commentary that describes the issue and implications well.  This proposed rule has a significant impact on EU-based firms as well as US based firms seeking to raise money from EU LPs. More important, this could be interpreted as requiring governing entities in the U.S. to cooperate with EU regulations for any U.S. firm to raise EU dollars.

Some background per Proskauer Rose:

The Parliament and the Council of the European Union have recently approved their separate compromise draft proposals of the Alternative Investment Fund Manager (AIFM) Directive originally proposed by the European Commission in April 2009. All three proposals contain provisions that have caused concern within the global fund management industry.

Why should U.S. fund managers care? The proposals could limit or prohibit the ability of U.S. fund managers to market interests in their funds to European investors. Compliance by a U.S. fund manager with the AIFM Directive may not even be sufficient unless the U.S. government agrees to cooperate with the EU in connection with the regulation.

What are the key dates? A compromise draft is expected to be voted on in early July 2010, although that could be pushed back to Autumn 2010 or early 2011. If passed, it is expected that EU member states will be required to implement the AIFM Directive under their national laws within 24 months.

What can US fund managers do now? At this point the U.S. Treasury Department is engaged and directly expressing concerns to the EU. The NVCA is monitoring those diplomatic discussions and will keep our community informed of developments and next steps.  Please stay tuned.

Update:  It has been reported that the Parliament's plenary vote on the AIFMD (originally scheduled for July 6) is now postponed to September 2010, allegedly due to the inability of Parliament and Council to agree on the third country provisions. You can read more here.

The Institute of Medicine (IOM), which is the independent, non-profit health arm of the National Academy of Sciences, recently assembled a committee to study FDA's 510(k) clearance process for medical devices.    

The Committee will focus on two key questions: 1) Does the current 510(k) process optimally protect patient and promote innovation in support of public health? 2) If not, what legislative, regulatory, or administrative changes are recommended to optimally achieve the goals of the 510(k) process? The IOM Committee is expected to issue its report in mid-2011. 

As part of the Committee's study, on June 14-15 the IOM held a public workshop on the public health effectiveness of the FDA 510(k) clearance process.  Josh Makower, Consulting Association Professor of Medicine, Stanford University Biodesign Program, Founder & CEO, ExploraMed Development, LLC and NEA Venture Partner, was invited to make a presentation on the Structure of the Med Tech Innovation Ecosystem.

NVCA will continue to follow the actions of the IOM Committee reviewing the FDA 501(k) process.  The FDA Center for Devices and Radiological Health (CDRH) is also doing its own study on how to improve the regulatory process and plans to release their recommendations in September.  The NVCA has been meeting with CDRH senior staff and participating in stakeholder meetings, offering suggestions on how to improve the process.

We hope that a comprehensive review of the 510(k) framework may alleviate some of the current innovator frustration with the medical device review process.  NVCA believes that our recommendations will stimulate innovation and the development of novel technologies without compromising the safety or effectiveness of cleared or approved devices.