Illustration: Aïda Amer/Axios

Venture capital funds soon will be eligible for a huge new pot of Wall Street money, after federal regulators yesterday weakened rules that were put in place after the financial crisis.

Driving the news: Many banks had been banned from balance sheet investing in venture capital funds due to the Volcker Rule, which was part of the Dodd-Frank financial reform package passed in 2010. That prohibition will now expire on Oct. 1, based on an announcement from a group of agencies that included the SEC and FDIC.

An argument in favor of this deregulation is that the Volcker Rule disproportionately hurt smaller, regional venture capital funds that had relied on local banks for fund capital.

An argument against this deregulation is that venture capital hasn't lost any of its high risk profile.

  • Other changes: Banks now will be allowed to invest in credit funds and make certain types of equity co-investments on private equity transactions (despite recent SEC criticism of PE co-investment practices). They remain prohibited from balance sheet investing in private equity funds and hedge funds.

Context: This move comes just weeks after the Labor Department loosened rules to allow defined contribution plans like 401(k)s to invest in alternative asset funds like private equity and venture capital.

The bottom line: The Volcker Rule was never fully implemented as Volcker and other advocates wanted and has been consistently watered down over time.

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Updated Jun 30, 2020 - Axios Events

Watch: A conversation on inequity in venture capital

On Tuesday, June 30 Axios hosted a conversation on the impact of Black Americans' underrepresentation in venture capital with Axios business editor Dan Primack and chief technology correspondent Ina Fried featuring Precursor Ventures Managing Partner Charles Hudson, Cleo Capital Managing Director Sarah Kunst and Bessemer Venture Partners' Partner Elliott Robinson.

Sarah Kunst discussed the importance of having racial and ethnic diversity at the decision-making level in venture capital firms and how that drives financial returns.

  • On underrepresentation for Black people in venture capital: "Obviously the funds haven't done a good job hiring diverse candidates even though they're there...Venture just hasn't made that leap to make it a priority in recruiting...It's easy to hire what we know."
  • On how racial and ethnic diversity drive diverse opinions and insights that yield better results: "You're more likely to spot ideas that aren't going to work, and more likely to spot ideas that will work but aren't exactly in your wheelhouse."

Bessemer Venture Partners' Partner Elliott Robinson highlighted title inflation and how it allows firms to appear diverse without giving people real power.

  • On what he calls "diversity theater": "I've lived it...for both black and brown investors as well as female investors. We'll give you an 'investing role' but we won't let you touch things like carry real check writing, sitting on boards, and the like."

Precursor Ventures Managing Partner Charles Hudson discussed what is critical in making systemic change in the industry.

  • On what a lack of diversity signals to potential partners: "When you look at a firm's web page or you look at an industry where you see almost no one who looks like me, I think it can send a pretty strong signal to founders that perhaps I'm not welcome here."
  • On what needs to change in venture capital: "We're an industry that really only hires people from a very narrow set of backgrounds — whether it's academic or professional...As long as we're focused on what's perceived to be low-risk pedigree hiring, we're not going to change anything."

Thank you Cooley LLP for sponsoring this event.

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